This article examines the governance framework that Iraqi banks are expected to maintain, with particular attention to the board of directors and its audit and risk committees. Governance is central to how the Central Bank of Iraq supervises banks. A bank with strong governance is better able to manage risk, comply with regulation and respond to supervisory findings. A bank with weak governance is more likely to suffer losses from concentrated or related-party lending and to face regulatory intervention.
Governance requirements for Iraqi banks derive from the Banking Law, the Companies Law and the Central Bank’s corporate governance guidance. Together, they set expectations for board composition, the qualifications and independence of directors, the role and composition of committees and the board’s responsibilities for strategy, risk and oversight of management. For investors, shareholders and directors, understanding these expectations is essential to discharging their responsibilities and avoiding regulatory criticism.
The Banking Law No. 94 of 2004 sets out requirements for bank administrators, including directors and senior managers, and their responsibilities. The Central Bank of Iraq Law No. 56 of 2004 provides the Central Bank’s supervisory powers. The Central Bank has issued corporate governance guidance for banks setting out detailed expectations. The Companies Law No. 21 of 1997, as amended, governs the board of joint stock companies generally. Islamic banks are also subject to the Islamic Banks Law No. 43 of 2015, which requires a Sharia supervisory board. Listed banks are subject to Iraq Securities Commission requirements.
Defining the board’s role
The board is responsible for the bank’s overall direction and oversight. Its key responsibilities typically include:
- Setting strategy and risk appetite. Approving the bank’s strategic plan and the level of risk it is willing to accept.
- Overseeing management. Appointing, monitoring and, where necessary, replacing senior management.
- Ensuring sound risk management and internal control. Approving key policies and monitoring their implementation.
- Overseeing compliance. Ensuring that the bank complies with laws, regulations and supervisory requirements.
- Managing conflicts of interest. Approving related-party transactions and ensuring that directors with conflicts abstain.
The board should distinguish its oversight role from management’s executive role. Boards that involve themselves in day-to-day decisions, such as individual credit approvals outside defined thresholds, may blur accountability.
Composing the board
The Central Bank expects boards to have members with the qualifications, experience and integrity needed to oversee a bank. Directors are subject to fit and proper assessment, and their appointment may require approval. Governance guidance also encourages independent directors, who are not connected with management or significant shareholders, to provide objective judgment. Corporate governance advice in Iraq can help assess board composition against current expectations.
Shareholders nominating directors should consider whether their nominees meet these requirements. A board dominated by representatives of a single shareholder group may struggle to oversee related-party exposures objectively.
Establishing the audit committee
The audit committee oversees financial reporting, internal audit and the relationship with external auditors. Its responsibilities typically include reviewing financial statements, approving the internal audit plan, receiving internal audit reports, monitoring management’s response to audit findings and assessing the independence of the external auditor.
The committee should be composed mainly of non-executive directors, with independent members and at least one member with financial expertise. Internal audit should report functionally to the committee, giving it independence from management. The committee should meet regularly and keep minutes of its deliberations and decisions.
Establishing the risk committee
The risk committee oversees the bank’s risk management framework. It reviews risk appetite, risk policies and risk reports, monitors exposures against limits and assesses emerging risks. The chief risk officer should have direct access to the committee.
The risk committee should understand the bank’s key risks, including credit concentration, related-party exposure, liquidity, foreign currency, operational and cybersecurity risks. It should challenge management where risk reports indicate breaches or deteriorating trends.
Considering other committees
Banks commonly have additional committees, such as a nominations and remuneration committee overseeing board and senior management appointments and pay, and a compliance or anti-money laundering committee. Credit committees may operate at board or management level. Each committee should have a written charter setting out its composition, responsibilities, authority and reporting to the board.
Overseeing related-party transactions
Related-party transactions are a frequent source of regulatory concern. The board should approve a policy setting out how related parties are identified, limits on exposures, approval requirements and disclosure. Directors with an interest should abstain from deliberation and voting. The audit or risk committee should review related-party exposures regularly. Commercial and regulatory advice in Iraq can help draft related-party policies consistent with Central Bank requirements.
Documenting board and committee activity
Minutes should record the information considered, the discussion, the decisions and any dissent. Supervisors reviewing governance will examine minutes to assess whether the board is exercising genuine oversight. Minutes that simply record approvals without discussion may suggest that the board is not engaging with the issues.
Evaluating governance effectiveness
The board should periodically evaluate its own effectiveness and that of its committees and members. Evaluations can identify gaps in skills, information or processes. Training should be provided to directors, particularly on regulatory developments and emerging risks.
Defining the relationship between the board and executive management
Effective governance depends on a clear relationship between the board and executive management. The board sets direction and oversees; management implements and reports. Problems arise when this relationship is blurred, either because the board involves itself in operational decisions or because management withholds information from the board.
Several practices support a healthy relationship:
- A delegation of authority. A board-approved document setting out which decisions management may take and which require board or committee approval.
- Quality of board papers. Papers that present relevant information, analysis and options, circulated in time for directors to prepare.
- Access to control functions. Direct access for the board and committees to the heads of risk, compliance and internal audit, including private sessions without executive management.
- Separation of roles. Separation of the chair and chief executive roles, where required or appropriate, to support independent oversight.
The Central Bank’s assessment of a bank’s governance will often focus on these practical matters. A board that receives poor information or cannot challenge management effectively will struggle to fulfil its responsibilities, however well its composition meets formal requirements.
Illustrative example. During an inspection, the Central Bank finds that an Iraqi bank’s audit committee consists of three directors representing the largest shareholder, meets twice a year and has not reviewed several internal audit reports identifying weaknesses in credit approval. The bank restructures the committee to include two independent directors with financial expertise, adopts a charter requiring quarterly meetings, has internal audit report directly to the committee and introduces a tracker for audit findings reviewed at each meeting.
Conclusion & how Etihad Law Firm can help
Strong governance is central to the soundness of Iraqi banks and to their relationship with the Central Bank. Boards and committees that are properly composed, clearly mandated and actively engaged in oversight help banks manage risk, comply with regulation and maintain regulatory confidence.
Etihad Law Firm advises Iraqi banks, shareholders and directors on governance frameworks, board and committee charters, related-party policies and regulatory expectations. We help clients design governance structures that meet Central Bank requirements and support effective oversight.