There is huge potential for Islamic finance in Iraq, banking officials said, and the country’s central bank said it was looking at ways to encourage the sector’s growth in response to demands from Islamic banks.
Islamic banks first opened in Iraq in the 1990s and seven of the country’s 42 banks are now Islamic, meaning they comply with Islamic laws prohibiting interest, the trading of debt and investment in some sectors, such as pornography and alcohol.
"There is a great demand for Islamic banks in Iraq. The problem is Iraqi banking law does not differentiate between regular and Islamic banks," Iraqi central bank senior advisor Mudher Kasim said in an interview this week.
"The central bank at the moment is studying a new law for Islamic banks," he added, giving no timeline.
Iraqi society has become more religious since the 1990s, and clerics and Islamist groups wield great influence.
Demand from the world’s 1.3 billion Muslims for investments that comply with their beliefs has soared and assets that comply with Islamic law are estimated to be worth up to $1 trillion.
The central bank’s move is in response to Islamic banks’ requests to loosen broader banking rules on the size and type of investments they can make relative to capital and cash reserves.
The rules are meant to ensure banks are solvent, but Islamic banks derive much of their profits from investments, which are distributed among account holders in place of interest.
Iraqi law restricts investment in real estate, where Islamic banks in the Middle East have concentrated much of their cash in recent years, to no more than 15 percent of capital, Kasim said. He said that was one area of Iraqi banking law under review.