Digital Bank - Eligibility & Ownership

Overview

The ownership and eligibility rules governing Iraq’s digital banks are among the most legally significant aspects of the licensing framework. They determine who may establish a digital bank, what proportion of the institution each investor may own, what categories of investor are subject to enhanced requirements, and what legal consequences flow from non-compliance with ownership obligations.

These rules are not merely administrative, they carry direct legal consequences, including the possibility of forced divestiture, restrictions on voting rights, and cancellation of the license itself. Any investor or founding group considering the establishment of a digital bank in Iraq must ensure that its proposed ownership structure is legally compliant before proceeding with any application.

This article sets out the principal ownership and eligibility requirements under Iraq’s digital bank regulatory framework, with particular attention to the Qualified Institutional Investor (QII) requirement, the definition and treatment of related parties, the conditions under which ownership thresholds may be exceeded, and the legal obligations that attach to founders and institutional investors during the pilot operation phase.

1. General Ownership Cap: 9.99% Rule

The foundational ownership rule under Iraq’s digital bank framework is that no individual or company including through interests held by related parties may hold a shareholding in a digital bank that exceeds 9.99% of the bank’s total shares.

This cap applies to both direct and indirect holdings. Where a prospective investor holds shares through related parties, those related party holdings are aggregated with the investor’s direct holding for the purpose of calculating compliance with the 9.99% limit.

The 9.99% threshold is therefore not assessed on an individual basis, it is assessed on a consolidated basis that encompasses the full network of related party interests. This aggregation rule has significant practical implications for corporate groups, family investors, and any structure involving multiple related entities or individuals.

What Constitutes a Related Party

The breadth of this definition means that investors with complex corporate structures, family groups with multiple members involved in the venture, or any party with political exposure must conduct a thorough related party analysis before determining their permissible ownership level.

Legal advisers should note that the related party analysis is not limited to formal legal relationships, it extends to de facto control, influence, and shared economic interests. The substance of the relationship, not merely its legal form, governs the analysis.

2. Exceeding the 9.99% Threshold

The framework provides a mechanism by which the 9.99% cap may be exceeded, subject to specific conditions and prior written approval from the CBI. This is not an automatic right, it is a discretionary approval that the CBI may grant or refuse.

Two levels of permitted excess are established:

Up to 20% General Investor

Any investor other than a Qualified Institutional Investor may apply to the CBI for approval to hold up to 20% of a digital bank’s shares. The investor must submit a written application to the CBI and must satisfy the CBI that the proposed holding is appropriate in the context of the bank’s ownership structure and governance.

A critical condition applies: the total aggregate shareholding of any single investor and their related parties must not exceed 20% at the time of submitting the application for increased ownership. This means that an investor who has already accumulated more than 20% through related party holdings cannot rely on this pathway.

Up to 40% Qualified Institutional Investor

A Qualified Institutional Investor (QII) may hold up to 40% of a digital bank’s shares. Where multiple QIIs are present in the ownership structure, and one seeks to exceed 20%, that QII’s shareholding must be larger than the shareholding of any other shareholder seeking the same exception.

The 40% ceiling for QIIs is also subject to CBI approval on a case-by-case basis, and the CBI retains an absolute discretion to refuse any application regardless of whether the formal criteria are met.

3. Qualified Institutional Investor Requirement

One of the most distinctive features of Iraq’s digital bank framework is the mandatory requirement for at least one Qualified Institutional Investor in the ownership structure of every digital bank. This is not optional, it is a condition of licensing.

3.1 The Mandatory QII Requirement

Every digital bank in Iraq must have at least one shareholder that qualifies as a QII. That QII must hold no less than 9.999% of the bank’s shares. Failure to maintain a QII with the required minimum shareholding is a breach of the licensing conditions.

3.2 Who Qualifies as a Qualified Institutional Investor

The framework sets out two categories of entity that may qualify as a QII, each subject to specific criteria:

Category A: Financial Institution

A financial institution qualifies as a QII if it satisfies all of the following conditions:

• It is licensed and not subject to any penalties, restrictions, or prohibitions, and is supervised by a financial regulatory authority in a jurisdiction that is not on the FATF grey list or black list
• It has operated as a financial technology company dealing directly with customers for a minimum of three years
• It has achieved annual revenues of not less than IQD 30 billion (or equivalent) in each of the three preceding financial years
• It has a minimum of 100,000 active users or customers

Category B: Investment Fund

An investment fund qualifies as a QII if it satisfies all of the following conditions:

• It manages an investment portfolio of not less than IQD 100 billion (or equivalent)
• It has a minimum operational track record of five years of active investments in financial technology companies dealing directly with customers, where those companies have at least 100,000 active users and annual revenues of not less than IQD 30 billion (or equivalent)
• It has sufficient experience in supervising companies within its investment portfolio, including fintech companies, through active board membership in those companies

The QII criteria are demanding. They are designed to ensure that every digital bank in Iraq has at least one substantial, experienced, and internationally credible institutional anchor investor, one that brings not only capital but operational expertise in financial technology and direct-to-customer banking.

Investors and founding groups should assess QII eligibility carefully before proceeding. Where a proposed QII does not clearly meet all criteria, the CBI will need to be satisfied through the application process, and there is no guarantee of approval.

4. Fit and Proper Requirement for Shareholders

All shareholders holding directly or through related parties, a stake of 1% or more in a digital bank are subject to Enhanced Due Diligence (EDD) assessments. This requirement applies to all shareholders without exception.

Where a shareholder is a corporate entity holding above the minimum threshold, the EDD assessment must be conducted both at the level of the corporate entity itself and at the level of the ultimate beneficial owners of that entity.

4.1 What Enhanced Due Diligence Covers

The EDD assessment is a comprehensive evaluation that must be conducted by an independent, CBI-approved firm. At a minimum, it must cover:

• A comprehensive mapping of the shareholder’s relationships and connections, including related party relationships with politically exposed persons up to the fourth degree, and connections with other shareholders in the bank through family, business, or political ties
• An assessment of the individual’s or entity’s reputation and integrity, including any allegations of fraud or connections to money laundering
• An assessment of the source of the shareholder’s wealth to identify any adverse information
• For corporate shareholders: assessment of sources of funds and financial position, governance and control mechanisms, business activities and sectoral risks, legal and regulatory compliance history, financial distress history, and tax compliance status

4.2 Timing and Process

New shareholders who meet the 1% threshold must undergo EDD within three months of acquiring their shareholding. The assessment must be conducted by an independent firm approved by the CBI, and the results submitted to the CBI.

The bank is responsible for ensuring that any shareholder who fails the EDD assessment does not retain their shareholding for more than six months following notification of failure, unless the grounds for failure have been remedied.

5. Restrictions on Founders and Institutional Investors During the Pilot Phase

During the pilot operation phase, the period between preliminary approval and the grant of a full digital bank license specific legal restrictions apply to the founding shareholders and institutional investors of a digital bank. These restrictions are significant and must be understood before any investment commitment is made.

5.1 Prohibition on Share Transfers and Exits

Founders and institutional investors in a digital bank are prohibited from selling any of their shares, reducing the number of shares they hold, or exiting their investment either fully or partially during the pilot operation phase. This prohibition applies regardless of the CBI’s discretion and is absolute for the duration of the pilot phase.

Only the entry of new investors and shareholders is permitted during the pilot phase. Existing founding shareholders cannot exit.

This restriction has profound implications for investment structuring. Any investor considering a position in a digital bank must be prepared to hold that position for the full duration of the pilot phase approximately two years without any right of exit. This should be reflected in term sheets, shareholder agreements, and investment committee approvals.

5.2 Public Share Offerings During the Pilot Phase

The framework permits a public share offering during the pilot phase only for the purpose of completing the final tranche of the bank’s paid-up capital. Public offerings to complete the first or second capital tranches are not permitted.

Any public share offering during the pilot phase requires prior approval from the CBI before the offering is opened to the public. A “public share offering” is broadly defined to include any offer, promotion, invitation to subscribe, or marketing of the bank’s shares to the general public or to an unspecified class of investors whether through public announcements, media campaigns, digital platforms, crowdfunding mechanisms, or any other form of wide distribution. This broad definition applies regardless of whether the offering is made through regulated capital markets or through private placement arrangements.

5.3 Shareholder Agreement Requirements

The framework requires that the bank’s shareholder agreement include specific provisions prohibiting hidden arrangements or concealed transactions. In particular, the shareholder agreement must:

• Contain provisions penalising undisclosed nominee arrangements, any arrangement under which a shareholder holds shares on behalf of an undisclosed third party with the penalty of share forfeiture to the bank’s treasury
• Contain provisions penalising share pledging arrangements, any arrangement granting a third party a right or claim over a shareholder’s shares with the same forfeiture consequence
• Include tag-along rights for all shareholders when any shareholder proposes to sell their shares
• Include rights of first refusal for all shareholders when any shareholder proposes to sell their shares

These shareholder agreement requirements are mandatory conditions of the licensing framework. A shareholder agreement that does not include these provisions will not satisfy the CBI’s requirements.

6. Single QII Minimum: A Structural Legal Requirement

As noted above, every digital bank must have at least one QII holding no less than 9.999% of its shares at all times. This is a continuing obligation not merely a condition at the point of initial licensing.

If a QII exits the ownership structure, or its shareholding falls below the 9.999% minimum, the bank will be in breach of its licensing conditions. The bank must notify the CBI immediately upon becoming aware of any circumstance that may affect its ability to maintain a compliant QII structure.

Investor groups and founding teams should ensure that their shareholder agreements include provisions that protect the continuing presence of at least one qualifying QII in the ownership structure, and that address the scenario in which the QII’s shareholding falls below the required minimum.