Loan Covenants in Iraqi Transactions
What Banks and Borrowers Must Know? Loan covenants define the ongoing obligations a borrower must satisfy throughout the life of a credit facility. In Iraqi transactions, covenants operate at the intersection of Iraqi civil and commercial law, CBI regulatory requirements, and where international lenders are involved internationally recognised documentation standards developed by bodies such as the Loan Market Association (LMA). Getting covenants right is critical: covenants that are too tight will lead to technical defaults; covenants that are too loose will fail to provide lenders with adequate early warning. This article examines how loan covenants work in Iraqi transactions and what both lenders and borrowers need to know. The Legal Basis for Covenants Under Iraqi Law Under the Iraqi Civil Code, loan agreements are binding contracts governed by general principles of contract law. Covenants whether financial, positive, or negative constitute contractual obligations of the borrower. Breach of a covenant that constitutes a material term of the loan agreement entitles the lender to treat the agreement as terminated and demand immediate repayment, in accordance with Articles 177 and 178 of the Iraqi Civil Code on breach and termination. The Iraqi Civil Code also recognises the principle of good faith in contract performance a principle that can be relevant when assessing whether a lender’s exercise of covenant enforcement rights is proportionate and commercially reasonable. Financial Covenants in Iraqi Lending Practice Financial covenants are periodic tests of the borrower’s financial health. In international lending, they are typically measured against audited or management accounts. In Iraqi transactions, the following financial covenants are commonly used: leverage ratio total debt to EBITDA, typically tested semi-annually against the borrower’s financial statements; debt service coverage ratio cash flow available for debt service divided by total debt service payments, critical in project finance transactions; minimum net worth requiring the borrower to maintain a minimum level of shareholders’ equity; and maximum capital expenditure limiting investment spending to protect liquidity. A key practical issue in Iraqi transactions is the quality and timeliness of financial reporting. CBI requirements mandate that licensed banks produce financial statements in accordance with IFRS, but non-bank corporate borrowers in Iraq may not produce IFRS-compliant accounts, creating challenges in defining and testing financial covenants. Positive Covenants — Iraqi Regulatory Requirements Positive covenants in Iraqi loan agreements typically include: an obligation to maintain all licences, permits, and authorisations required to carry on business in Iraq including licences issued by the Companies Registry, sector-specific regulators, and the CBI where applicable; an obligation to comply with all applicable Iraqi laws and regulations, including the AML Law No. 39 of 2015 and CBI instructions; an obligation to provide the lender with annual audited financial statements, quarterly management accounts, and immediate notification of any event of default or potential default; and an obligation to maintain insurance over charged assets at levels acceptable to the lender. Negative Covenants — Key Restrictions in Iraqi Transactions Negative covenants restrict the borrower from taking certain actions without lender consent. Standard negative covenants in Iraqi loan agreements include: a prohibition on incurring additional financial indebtedness above agreed thresholds; a negative pledge restricting the creation of security over the borrower’s assets in favour of other creditors; restrictions on disposal of material assets including real property registered in Iraq; restrictions on changes to the borrower’s corporate structure including mergers, demergers, and changes in the composition of the board of directors; and restrictions on distributions to shareholders where financial covenants are not met. In Iraqi practice, lenders must pay particular attention to Companies Law No. 21 of 1997 restrictions on distributions and capital reductions, which may interact with loan covenant restrictions. CBI Requirements Relevant to Covenants CBI lending instructions impose their own requirements that effectively function as regulatory covenants. Banks must include in their loan agreements: provisions requiring borrowers to maintain their primary banking relationship with the lending bank; provisions requiring notification of any material adverse change in the borrower’s business or financial position; provisions allowing the bank to conduct periodic reviews of the borrower’s financial condition; and provisions allowing the bank to demand additional collateral if the value of existing security falls below agreed thresholds. These CBI-mandated provisions must be incorporated into loan documentation alongside any commercially negotiated covenants. International Standards — LMA Covenant Approach Where international lenders participate in Iraqi transactions whether as lead arrangers, participants in syndicated facilities, or bilateral lenders LMA documentation standards are typically applied. LMA covenant provisions are detailed and highly negotiated. Key features of the LMA approach relevant to Iraqi transactions include: the distinction between maintenance covenants (tested periodically) and incurrence covenants (tested only when the borrower takes a specific action); equity cure rights allowing shareholders to remedy a financial covenant breach by injecting equity; and EBITDA definitions that must be adapted to reflect Iraqi accounting practices and the absence of standardised IFRS reporting among Iraqi corporates. Negotiating Covenants in Iraqi Transactions Borrowers in Iraqi transactions should focus on the following when negotiating covenants: ensuring financial covenant levels include adequate headroom above projected performance typically 20-30% cushion; negotiating cure periods of at least 30 days for covenant breaches before an event of default is triggered; seeking equity cure rights for financial covenant breaches; obtaining carve-outs from negative covenants for ordinary course transactions and existing indebtedness; and ensuring that financial covenant definitions align with the borrower’s actual accounting practices under Iraqi GAAP or IFRS as applicable. How Etihad Law Firm Assists Etihad advises corporate borrowers and lenders on the negotiation and drafting of loan covenants in Iraqi transactions, reviewing proposed covenant packages against CBI requirements and international standards, advising on covenant breaches and waiver negotiations, and representing clients in disputes arising from alleged covenant violations. We have particular experience in bridging Iraqi law requirements with international lender expectations.
What Banks and Borrowers Must Know?
Lending Regulations in Iraq: What Banks and Borrowers Must Know Lending in Iraq sits at the intersection of domestic banking law, Central Bank of Iraq (CBI) regulatory instructions, and internationally recognised prudential standards. Whether you are an Iraqi bank extending credit, a corporate borrower seeking financing, or a foreign institution considering participation in Iraqi lending markets, understanding this framework is not optional, it is the foundation of every credit decision. This article examines the full regulatory landscape governing lending in Iraq, from the primary legislative framework to international standards that Iraqi banks are increasingly expected to meet. The Primary Legislative Framework Lending in Iraq is principally governed by the Banking Law No. 94 of 2004, which establishes the legal foundation for the licensing, operation, and supervision of banks in Iraq. The law grants the Central Bank of Iraq broad supervisory powers over all licensed banks and financial institutions, including the authority to issue binding instructions on lending practices, capital requirements, and risk management. Complementing Banking Law No. 94 is the Iraqi Civil Code, which governs the contractual aspects of loan agreements including formation, validity, performance, and default. Articles 695 to 707 of the Civil Code address loan contracts specifically, establishing rules on interest, repayment, and the rights of creditors upon default. The Companies Law No. 21 of 1997 (as amended) is also relevant for corporate borrowers, governing the authority of company directors and officers to enter into borrowing arrangements on behalf of their entities. Central Bank of Iraq — Regulatory Instructions The CBI exercises its supervisory mandate through a series of binding instructions issued to licensed banks. Key CBI regulatory requirements affecting lending include: credit concentration limits restricting the maximum exposure a bank may have to a single borrower or group of connected borrowers, typically set at a percentage of the bank’s capital base; loan classification and provisioning instructions requiring banks to categorise their loan portfolios into performing, substandard, doubtful, and loss categories, with corresponding provisioning requirements; collateral valuation instructions governing the types of collateral acceptable for secured lending and the methodology for valuing such collateral; and lending to related parties restrictions imposing strict limits on banks’ ability to extend credit to their own shareholders, directors, and affiliates. The CBI also requires banks to establish formal credit policies approved by their boards of directors, covering underwriting standards, credit approval authorities, and portfolio concentration limits. Capital Adequacy — Basel III in the Iraqi Context The CBI has committed to implementing Basel III capital adequacy standards, bringing Iraqi banking regulation into alignment with international prudential norms. Under Basel III as adopted by the CBI, Iraqi banks are required to maintain: a minimum Common Equity Tier 1 (CET1) ratio, a Tier 1 capital ratio, and a total capital ratio calculated against risk-weighted assets. The capital conservation buffer and countercyclical capital buffer requirements are also being phased in. For borrowers, Basel III has a direct practical impact: higher capital requirements mean banks face greater constraints on their lending capacity, particularly for higher-risk credit exposures. Understanding how your lending transaction will be risk-weighted under the CBI’s Basel III framework affects both your ability to obtain financing and its pricing. Relevant Iraqi Regulatory Bodies The CBI has committed to implementing Basel III capital adequacy standards, bringing Iraqi banking regulation into alignment with international prudential norms. Under Basel III as adopted by the CBI, Iraqi banks are required to maintain: a minimum Common Equity Tier 1 (CET1) ratio, a Tier 1 capital ratio, and a total capital ratio calculated against risk-weighted assets. The capital conservation buffer and countercyclical capital buffer requirements are also being phased in. For borrowers, Basel III has a direct practical impact: higher capital requirements mean banks face greater constraints on their lending capacity, particularly for higher-risk credit exposures. Understanding how your lending transaction will be risk-weighted under the CBI’s Basel III framework affects both your ability to obtain financing and its pricing. Relevant Iraqi Regulatory Bodies Several Iraqi authorities play roles in the lending environment. The Central Bank of Iraq is the primary prudential regulator of all licensed banks and has authority to issue, amend, and enforce lending regulations. The Anti-Money Laundering and Countering Financing of Terrorism Office (AMLCFT Office) oversees compliance with AML Law No. 39 of 2015 as it applies to lending transactions particularly the requirement to conduct customer due diligence on borrowers. The Companies Registry Directorate is relevant for verifying the legal status and authorised signatories of corporate borrowers. The Board of Supreme Audit has oversight over lending by state-owned banks. For lending in the Kurdistan Region, the relevant regulatory authority coordinates with the CBI but has certain additional local requirements. Key Compliance Requirements for Iraqi Banks Iraqi banks extending credit must satisfy the following core compliance requirements: conducting thorough credit assessment of borrowers including financial analysis, purpose of credit, and repayment capacity; registering any security interests over movable property through the available registration systems; complying with AML customer due diligence obligations including verification of the borrower’s identity, beneficial ownership, and source of funds; obtaining CBI approval for certain categories of large exposures or related-party transactions; maintaining loan files with complete documentation including credit applications, financial statements, approval memoranda, and executed agreements; and reporting non-performing loans to the CBI within specified timeframes. International Standards — What Iraqi Banks Are Expected to Meet Beyond CBI requirements, Iraqi banks seeking correspondent banking relationships and participation in international financing transactions are expected to demonstrate alignment with: the FATF 40 Recommendations on AML and CFT critical given Iraq’s status on the FATF monitoring list; the Wolfsberg Group Principles on correspondent banking and financial crime compliance; Loan Market Association (LMA) documentation standards for any participation in syndicated transactions with international banks; and IFRS 9 financial instrument accounting standards for loan classification and expected credit loss provisioning. Foreign banks extending credit in Iraq or to Iraqi borrowers will typically require compliance with their own home jurisdiction standards as well as Iraqi law. Practical Implications for Borrowers Corporate borrowers in Iraq should understand that the regulatory
Iraq Mandates Certified Accountants for All Private Companies
Iraq Mandates Certified Accountants for All Private Companies The Registrar of Companies in Iraq has announced new mandatory requirements compelling all limited and private companies to appoint a certified accountant registered with the Association of Accountants and Auditors, effective for fiscal year 2026. KEY IMPACT Companies must appoint a certified accountant to prepare annual financial statements. Accounts prepared by unregistered accountants will be rejected by the Companies Registry Directorate. WHAT COMPANIES MUST DO Accountant appointment must be linked to the company’s founding document or an official appointment minutes. Any change of accountant requires prior approval from the Association of Accountants and Auditors. The appointment must align with Retirement and Social Security Law No. 18 of 2023. Non-compliant accounts will not be processed by the registry. HOW ETIHAD LAW FIRM ASSISTS Etihad Law Firm guides businesses through the accountant appointment process, drafts compliant appointment minutes, and liaises with the Association of Accountants and Auditors on behalf of clients.
New Anti-Corruption Measure for Company Transactions
New Anti-Corruption Measure for Company Transactions The Iraqi Ministry of Trade’s Companies Registration Department today announced a significant new integrity measure aimed at increasing transparency and combating corruption. Effective 15 Mar 2026, all companies and their legal representatives must submit a formal pledge confirming the authenticity and accuracy of all invoices related to their transactions. This new directive requires that any transaction submitted for registration must include a declaration from the applicant, confirming that the associated invoices are correct, fully paid, and contain information that matches the company’s official records, including the name of the authorized director, shareholders, and headquarters. Under this new policy, the authorized director will be held legally responsible for the validity of all submitted information. The Companies Registration Department will conduct service-level checks to verify the authenticity of the information provided in the invoices. Any discrepancies or false information discovered will result in legal accountability for the company and its representatives. Impact on Iraq’s Business Environment This initiative is a critical step in the Ministry’s ongoing efforts to enhance the integrity of the business environment in Iraq. By holding company leadership directly accountable, the Ministry aims to create a more transparent and trustworthy market.
Change in Security Check Period
Change in Security Check Period The Iraqi Companies Registration Department announced a significant update to the mandatory security audit period for all companies operating in Iraq. This change follows a directive from the Office of the Prime Minister. Effective immediately, the period for security audits for all companies will be thirty (30) days. Impact on Businesses: This new measure is designed to streamline administrative processes and facilitate a more efficient business environment while upholding necessary security protocols. The shortened timeframe is expected to expedite company registration and operational approvals, allowing businesses to become fully compliant and operational more quickly. This change aims to reduce the delays and encourage investment by making the process more predictable and timely. How We Can Assist: Etihad provides legal and regulatory advisory services to banks, financial institutions, and businesses, supporting compliance with applicable laws, regulations, and regulatory guidance issued by any competent authorities. All companies registered in Iraq are instructed to take note of this official change and ensure their compliance with the updated 30-day security audit period.
Bankruptcy Procedures in Iraq
Bankruptcy in Iraq Bankruptcy is a court-supervised legal process initiated when a company or individual is no longer able to meet financial obligations. Under Iraqi law, bankruptcy leads to the liquidation of assets and structured distribution to creditors based on statutory priority. Bankruptcy is typically pursued when restructuring, settlement, or negotiated workouts are no longer viable. Mechanisms Court declaration of bankruptcy Appointment of trustee or liquidator Asset inventory and valuation Liquidation and sale of assets Verification and ranking of creditor claims Priority distribution to secured and unsecured creditors Closure and dissolution of the entity Reasons Persistent inability to pay debts as they fall due Accumulated liabilities exceeding asset value Final cessation of business operations Creditor petitions demanding liquidation Failed restructuring, settlements, or renegotiations Impact on Creditors and Stakeholders Bankruptcy procedures protect creditor interests by ensuring transparent liquidation, equitable distribution, and compliance with statutory priority rules. Secured creditors benefit from collateral rights, while unsecured creditors receive distributions according to available proceeds. How Etihad Can Assist Etihad provides legal and regulatory advisory services to banks, financial institutions, and businesses, supporting compliance with applicable laws, regulations, and regulatory guidance issued by any competent authorities.
Free Zone Iraq
Free Zone & Investment Vehicle Establishment Iraq’s Free Zones offer foreign and domestic investors a favorable business environment with customs, tax, and regulatory incentives to support trade, industrial activities, and service operations. Companies established in Free Zones may operate with increased flexibility in import/export activities, and can serve both regional and international markets. Legal Framework Free Zones in Iraq are regulated by the Free Zones Law No. 3 of 1998 and its implementing regulations, under the supervision of the General Commission for Free Zones. The law permits full foreign ownership, profit repatriation, and simplified procedures for licensing and project registration. Permitted Activities Trade and commercial activities Import and export operations Warehousing and logistics Industrial and manufacturing projects Maintenance and repair operations Service and consulting activities Establishment Requirements Submit an application for project approval Provide business plan or activity description Register the company or branch entity Obtain zone-specific operating license Open local bank account (when required) Comply with security and customs regulations Customs & Trade Treatment Goods entering the Free Zone are not subject to customs duties unless released into Iraq’s local market, in which case standard customs tariffs apply. Goods exported outside Iraq may leave without customs duties. Investor Considerations Type of activity (industrial, commercial, service) Licensing requirements Customs interaction for dual-market operations Payroll and staffing needs (local vs foreign) Zone infrastructure and logistics capabilities How Etihad Can Assist Etihad provides legal and regulatory advisory services to banks, financial institutions, and businesses, supporting compliance with applicable laws, regulations, and regulatory guidance issued by any competent authorities.
Establishing Companies – Oil & Gas
Establishing Companies for Oil & Gas The establishment of companies operating in the oil and gas sector in Iraq is governed by the Iraqi Companies Law No. 21 of 1997 (as amended) and subject to additional sector-specific regulations issued by the Ministry of Oil and its affiliated national oil companies. Oil and gas activities are treated as strategic activities and therefore require special approvals, technical qualifications, and compliance with Iraqi licensing procedures. Legal Basis & Regulatory Authorities Company Establishment (Corporate Law) Foreign companies may register a branch or incorporate an LLC Local companies may operate as LLC or JSC Registration occurs with the Registrar of Companies Social Security and Tax Authority registrations are mandatory post-establishment Sector Licensing & Approvals (Oil & Gas Law & Ministry Regulations) Ministry of Oil Basra Oil Company (BOC) North Oil Company (NOC) Oil Projects Company (SCOP) Iraqi Drilling Company (IDC) Companies performing technical or operational activities must obtain approval to perform work with these national oil companies (NOCs) and may need to be listed in their Approved Vendor Lists. Sector-Specific Regulatory Requirements ✔ Licensing & Qualification Technical capability and experience evidence HSE certifications (ISO, IADC, OSHA when applicable) Iraqi staff employment commitments Space & logistical capability in Iraq ✔ Commercial Registration Obligations General Commission for Taxes General Social Security Department Chamber of Commerce Ministry of Oil (for technical approvals) when applicable ✔ Local Content Requirements Companies must employ Iraqi nationals in certain roles Training & capability programs may be requested Certain subcontracting may require Iraqi participation Common Activities Authorized Under Iraqi Regulation EPC contracting Well drilling & services Oilfield services & maintenance Field logistics & chemical supply Engineering & technical consultancy HSE & training services How Etihad Can Assist Etihad provides legal and regulatory advisory services to banks, financial institutions, and businesses, supporting compliance with applicable laws, regulations, and regulatory guidance issued by any competent authorities.
Ongoing Corporate Compliance
Ongoing Corporate Compliance & Reporting Requirements Companies in Iraq must maintain ongoing compliance with reporting, tax, employment, and corporate governance requirements. Proper compliance reduces legal and financial risk, supports credibility, and ensures readiness for audits or inspections. Compliance Areas Annual shareholders’ and board meetings Financial statements and audit reports Tax filings and declarations Social security and payroll reporting Contractual and sector-specific reporting Renewal of licenses or registrations Benefits of Compliance Management Avoids penalties and operational disruption Supports business continuity and tender eligibility Enhances investor and customer confidence Facilitates market expansion and financing How Etihad Can Assist Etihad provides legal and regulatory advisory services to banks, financial institutions, and businesses, supporting compliance with applicable laws, regulations, and regulatory guidance issued by any competent authorities.
Capital Increases of Corproates
Capital Increases Under Iraqi Companies Law No. 21 of 1997 (as amended), companies may increase their capital to onboard new investors, strengthen financial capacity, expand operations, or meet regulatory or contractual requirements. Capital increases require corporate approvals, amendments to registration documents, and filings with the Iraqi Registrar of Companies. Legal Procedures Shareholder Resolution approving the capital increase Amendment of the Articles of Association to reflect the new capital value and share allocation Subscription and Payment of the new capital by existing shareholders or new investors Submission to the Registrar of Companies for approval and registration Issuance of Updated Corporate Documents showing the amended capital Publication Notice for transparency and third-party notification Tax and Social Security Updates reflecting the amended capital for compliance purposes Strategic Reasons Funding expansion or new projects Satisfying regulatory capital adequacy requirements Onboarding strategic investors or joint venture partners Restoring capital adequacy after losses Preparing for mergers, listing, or restructuring events How Etihad Can Assist Etihad provides legal and regulatory advisory services to banks, financial institutions, and businesses, supporting compliance with applicable laws, regulations, and regulatory guidance issued by any competent authorities.