Iraq’s banking sector operates a dual system: conventional interest-based banking alongside an Islamic banking sector that has grown significantly since the enactment of the Islamic Banking Law. For borrowers and lenders in Iraq, understanding how interest is regulated under both frameworks and the increasingly important role of Islamic finance structures is essential for structuring lending transactions correctly. This article examines the regulatory framework governing interest and profit rates in Iraqi lending, the legal basis for Islamic finance in Iraq, and the practical implications for financing arrangements.

Conventional Interest — The CBI Framework

In conventional banking, the CBI plays a central role in setting the benchmark for lending rates through its policy rate the rate at which the CBI lends to commercial banks. Commercial banks price their lending based on the CBI policy rate plus a spread reflecting the credit risk of the borrower and market conditions. The CBI monitors interest rate practices of licensed banks and may issue guidance on permissible lending rate ranges to ensure financial stability and prevent predatory lending practices. Under the Iraqi Civil Code, excessive or usurious interest provisions could be subject to challenge a consideration that lenders should bear in mind when structuring high-rate lending transactions.

Islamic Banking Law No. 43 of 2015

The Islamic Banking Law No. 43 of 2015 provides the legal foundation for Islamic banking in Iraq. The law permits banks to obtain a licence from the CBI to conduct banking business in accordance with Islamic Sharia principles meaning the bank does not charge or pay interest (riba), but instead uses profit-sharing, cost-plus financing, and leasing structures to generate returns. The Islamic Banking Law requires Islamic banks to establish a Sharia Supervisory Board to ensure that all products and transactions comply with Islamic law. The CBI has issued complementary instructions governing the licensing, operation, and supervision of Islamic banks in Iraq.

Key Islamic Finance Structures Used in Iraqi Lending

The most commonly used Islamic finance structures in Iraqi bank lending include: Murabaha a cost-plus sale arrangement where the bank purchases an asset and resells it to the customer at a marked-up price, with deferred payment; this is the most widely used structure for trade and asset finance. Ijara, a leasing arrangement where the bank purchases an asset and leases it to the customer, with ownership transferring at the end of the lease term; used for equipment and property finance. Musharaka a partnership arrangement where the bank and customer jointly invest in a project or asset, sharing profits and losses according to agreed ratios; used for project and business finance. Mudaraba a profit-sharing arrangement where the bank provides capital and the customer provides expertise and management, with profits shared according to agreed ratios.

AAOIFI Standards and Their Relevance in Iraq

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) publishes Sharia standards that are widely adopted by Islamic financial institutions globally. Iraqi Islamic banks are expected to align their products and practices with AAOIFI standards, which provide detailed guidance on the Sharia permissibility of specific transaction structures. The CBI’s instructions on Islamic banking reference AAOIFI standards as the benchmark for Sharia compliance. For foreign Islamic banks and Islamic finance investors considering transactions in Iraq, familiarity with AAOIFI standards is essential for assessing the Sharia compliance of Iraqi Islamic banking products.

The LIBOR Transition and Iraqi Banking

The global transition away from the London Interbank Offered Rate (LIBOR) completed at end of 2021 for most currencies has implications for Iraqi banks that reference international benchmark rates in their lending transactions, particularly for USD-denominated facilities. Iraqi banks involved in cross-border lending or participating in international syndicated facilities must ensure that their loan documentation incorporates the appropriate alternative reference rates primarily the Secured Overnight Financing Rate (SOFR) for USD transactions. Existing loan agreements referencing LIBOR should have been amended to incorporate fallback provisions and transition to SOFR or other relevant risk-free rates.

Practical Implications for Borrowers

Borrowers in Iraq choosing between conventional and Islamic finance should consider: the total cost of financing Islamic finance structures may have equivalent or higher effective costs than conventional lending depending on the structure and market conditions; the regulatory treatment certain CBI requirements apply differently to Islamic and conventional finance; tax implications the treatment of Islamic finance returns under Iraqi tax law should be verified; and documentation complexity Islamic finance transactions require additional Sharia compliance documentation including Sharia board approvals and fatwa opinions.

How Etihad Law Firm Assists

Etihad advises on both conventional and Islamic finance transactions in Iraq. We assist clients in structuring and documenting murabaha, ijara, musharaka, and mudaraba transactions compliant with CBI requirements and AAOIFI standards, review conventional loan agreements for interest rate provisions, and advise on the LIBOR transition implications for existing Iraqi loan documentation.