Secured lending where the borrower provides collateral to the lender as security for repayment is fundamental to credit markets in Iraq. However, the Iraqi legal framework for taking, registering, and enforcing security presents significant practical challenges that lenders must understand before extending secured credit. The absence of a comprehensive, modern personal property security law, combined with court-dependent enforcement procedures, means that taking security in Iraq requires careful legal structuring from the outset. This article provides a comprehensive guide to secured lending in Iraq, examining each major category of collateral and the applicable legal framework.

The Iraqi Legal Framework for Security

Security interests in Iraq are primarily governed by the Iraqi Civil Code (Law No. 40 of 1951), which contains detailed provisions on mortgage (rahn) over real property in Articles 1287 to 1391, and pledge (rahn hiyazi) over movable assets. The Commercial Law No. 30 of 1984 contains supplementary provisions relevant to commercial security arrangements. There is currently no unified modern personal property security law in Iraq equivalent to Article 9 of the US Uniform Commercial Code or equivalent regimes in other jurisdictions, a gap that creates complexity for lenders seeking to take security over movable assets, receivables, and intangible property. Reform of the secured transactions framework has been under consideration, and lenders should monitor legislative developments.

Mortgage Over Real Property

Mortgage over real property is the most commonly used and most reliably enforceable form of security in Iraq. To be valid and enforceable against third parties, a mortgage over Iraqi real property must be: executed before a notary public; registered with the Real Estate Registration Directorate in the governorate where the property is located; and entered in the real property register. The mortgage grants the mortgagee priority over other creditors with respect to the mortgaged property. Enforcement of a real property mortgage requires a court order the lender cannot enforce by private sale without judicial involvement. The court-supervised enforcement process, while potentially time-consuming, provides a legally robust mechanism for realising security over real estate.

Pledge Over Movable Assets

Pledge over movable assets (rahn hiyazi) under the Iraqi Civil Code requires, in its traditional form, delivery of possession of the pledged asset to the pledgee or a third-party custodian. This possessory requirement creates obvious practical difficulties for operating businesses that need to continue using their assets. Non-possessory security over movable assets essential for financing inventory, equipment, and machinery is not clearly provided for under the existing legal framework, creating uncertainty about the validity and priority of such arrangements. In practice, lenders taking security over movable assets in Iraq typically combine formal pledge arrangements with contractual restrictions on disposal, and ensure that the security is acknowledged in the loan documentation.

Pledge Over Shares

Security over shares of Iraqi companies is an important form of collateral, particularly in acquisition finance and holding company structures. Under the Iraqi Companies Law No. 21 of 1997, shares in limited liability companies (sharikat mahduda al-masouliya) can be pledged as security. The pledge must be documented and for limited liability companies registered in the company’s share register and notified to the Companies Registry Directorate. Enforcement of a share pledge in Iraq requires careful legal analysis: transfer of shares may require approval from the Companies Registry, and in some regulated sectors, prior regulatory approval is required.

Assignment of Receivables and Contract Rights

Assignment of receivables the transfer of the borrower’s rights to receive payments from third parties as security is an increasingly used form of collateral in Iraqi project finance and infrastructure transactions. The Iraqi Civil Code permits assignment of rights under Articles 347 to 358, subject to notification to the debtor. For effective security over receivables, the assignment must be documented clearly, the assigned contracts must be identified, and the relevant debtors (e.g. government offtakers or project counterparties) must be notified of the assignment. In transactions involving Iraqi government counterparties, the assignability of government contracts should be specifically verified.

CBI Requirements for Collateral

The CBI’s lending instructions impose specific requirements on Iraqi banks regarding collateral. Banks must use CBI-approved collateral valuation methodologies and must have collateral independently valued by qualified professionals. The CBI specifies the loan-to-value ratios applicable to different categories of collateral for example, the percentage of a property’s value that may be advanced against a mortgage. Banks must also conduct periodic revaluations of collateral and increase provisions if collateral values decline below required coverage ratios. Under Basel III as implemented by the CBI, the recognition of collateral for capital relief purposes is subject to specific eligibility criteria and operational requirements.

Enforcement — Practical Considerations

Enforcement of security in Iraq requires navigating the Iraqi court system. Key practical considerations include: all enforcement of security over real property requires a court order from the competent court in the governorate where the property is located; the enforcement process involves valuation of the secured asset, public auction, and distribution of proceeds; the timeline for enforcement through Iraqi courts depends on whether the debtor contests the process and the workload of the relevant court; lenders should ensure their loan documentation includes express enforcement rights and waivers of notice to the extent permitted under Iraqi law; and lenders should obtain an Iraqi law legal opinion on the validity, perfection, and enforceability of security before relying on it for credit approval.

How Etihad Law Firm Assists

Etihad advises lenders on structuring and documenting security packages in Iraqi transactions, prepares and reviews mortgage and pledge documentation, advises on registration requirements and procedures, obtains Iraqi law legal opinions on security validity and enforceability, and represents lenders in security enforcement proceedings before Iraqi courts.