Digital Bank - Pilot Operation Phase

Overview

The pilot operation phase is the period between the grant of a preliminary approval and the award of a full digital bank license. It is a legally distinct operational phase, the digital bank is authorized to operate, but its activities are subject to specific restrictions that would not apply to a fully licensed bank.

The pilot phase serves a defined regulatory purpose: it allows the CBI to monitor the bank’s real-world performance across governance, technology, financial management, and compliance before committing to a full, unrestricted license. For the digital bank, it is the period during which remaining licensing standards must be progressively satisfied.

This article sets out the legal framework for the pilot operation phase, the restrictions on deposits, credit, cards, and investments that apply during this period, the restrictions on share transfers and capital raising, the assessment cycles that govern the path to full licensing, and the legal consequences of non-compliance during the pilot phase.

1. Duration of the Pilot Phase

The pilot operation phase is planned to run for approximately two years from the date of preliminary approval. Based on the framework’s timeline, preliminary approvals are expected to be issued by September 2026, with the pilot phase running until approximately late 2028.

The framework contemplates two assessment cycles during the pilot phase, the first in the second half of 2027 and the second in the second half of 2028. Successful completion of the second assessment cycle is the gateway to the grant of a full license.

2. Restrictions on Deposit-Taking

During the pilot phase, a digital bank’s deposit-taking activities are subject to specific caps:

• Individual (retail) deposits: the maximum deposit that may be held by a single individual customer is IQD 30 million (thirty million Iraqi dinars)
• Corporate deposits: the maximum deposit that may be held by a single corporate customer is IQD 50 million (fifty million Iraqi dinars)

These caps are per-customer limits, not aggregate limits. The bank may accept deposits from an unlimited number of customers, but no individual customer’s total deposits may exceed the applicable cap.

These restrictions are lifted upon the successful completion of the pilot phase and the grant of a full license.

3. Restrictions on Credit and Lending

Credit activities during the pilot phase are significantly restricted. The framework imposes both product restrictions and a case-by-case approval requirement:

3.1 Permitted Credit Products

During the pilot phase, only small-value, short-term credit products are permitted. These products must be:

• Loans of small value and short maturity
• Limited to maturities of between three and six months
• Subject to CBI approval on a case-by-case basis before any credit product is offered

The case-by-case approval requirement means that the bank cannot simply design a credit product and offer it to customers, each product or product category requires specific CBI authorization before it can be launched. The approval is valid for six months and must be renewed by the CBI for the bank to continue offering the approved product.

3.2 Prohibited Credit Products

The following credit products are prohibited during the pilot phase:

• Complex credit services, including documentary letters of credit (LCs) and letters of guarantee (LGs)
• Credit cards, the issuance of credit cards is expressly prohibited during the pilot phase

3.3 Credit Limits

All credit extended during the pilot phase must be funded from the bank’s paid-up capital. The framework limits credit products to those consistent with the bank’s capital base, preventing over-extension during the establishment period.

4. Card Issuance: Permitted and Prohibited

During the pilot phase, card issuance is restricted to:

• Debit cards
• Prepaid cards

Credit card issuance is expressly prohibited during the pilot phase. International usage of permitted cards is subject to the controls established by the CBI.

An important legal condition applies to cards issued during the pilot phase: all cards issued during this period expire at the end of the pilot phase, unless renewed following the bank’s successful completion of the pilot phase. This means that if the bank fails to progress to a full license, all cards issued to customers become invalid at the end of the pilot period.

5. Investment Restrictions

During the pilot phase, the bank’s investment activities are significantly restricted. Permitted investments are limited to:

• Instruments issued or approved by the CBI, including CBI bills and government treasury instruments
• Instruments whose maturity does not exceed the duration of the pilot phase
• Deposit-type investments only, no equity or ownership investments are permitted

With the exception of these permitted instruments, the only investments permitted during the pilot phase are investments in technology development and the building of institutional capabilities and capacity. Capital and equity investments of any other kind are not permitted.

6. Restrictions on Share Transfers and Capital Raising

As examined in Article 2 of this series, the pilot phase imposes significant restrictions on the mobility of equity:

6.1 Prohibition on Founder Exits

Founders and institutional investors are prohibited from selling shares, reducing their shareholdings, or exiting their investment fully or partially during the pilot phase. Only the entry of new investors is permitted. This restriction applies regardless of the CBI’s discretion.

6.2 Public Share Offerings

Public share offerings during the pilot phase are restricted to the purpose of completing the final capital tranche only. Offerings to complete the first or second tranches are not permitted. All public offerings require prior CBI approval before the offering is opened.

7. The Assessment Cycles: Progressive Compliance

The path from preliminary approval to full license is structured around three assessment cycles, each of which evaluates compliance with a defined subset of the framework’s standards:

The framework specifies, standard by standard, what level of compliance is required at each assessment cycle. Some standards require full compliance from the outset; others permit partial compliance at the initial stage with full compliance required by a later cycle. Legal advisers and compliance teams should map the specific compliance requirements for each standard against the applicable assessment cycle.

7.1 CBI Notification Before Each Cycle

Before each assessment cycle, the CBI issues a formal letter specifying the timelines for submission of materials and the details of how the assessment cycle will be organized. Compliance with these formal notifications is a legal obligation.

7.2 Consequences of Non-Compliance with Assessment Timeline

The framework states explicitly that failure by the bank to comply with the detailed timeline at any point will result in cancellation of the license. This is an unqualified legal consequence, there is no discretionary element, and no provision for extensions or waivers in cases of non-compliance with the prescribed timeline.

8. Ongoing Obligations During the Pilot Phase

In addition to the specific operational restrictions described above, the digital bank is subject to the full range of ongoing legal obligations during the pilot phase. These include:

• Payment of the second capital tranche (IQD 35 billion) by the end of H2 2027
• Payment of the third capital tranche (IQD 35 billion) by the end of H2 2028
• Maintenance of the capital adequacy ratio of not less than 12.5% at all times
• Maintenance of the LCR and NSFR at not less than 100% at all times
• Compliance with all AML/CFT and sanctions obligations
• Submission to CBI examination and oversight
• Compliance with all reporting and notification obligations
• Progressive satisfaction of the remaining licensing standards within the prescribed timelines