For all the sectarian violence gripping Iraq, Shari’ah-compliant banks operating in the nation see opportunities for growth.
Elaf Islamic Bank, the 14-year-old Baghdad-based lender, is targeting 28 per cent increase in profit this year, even as rival Cihan Bank said its income dropped last year as militants seized vast swathes of the country. Iraq’s cabinet approved a draft law yesterday regulating the Shari’ah-compliant banking industry, which will now move to the country’s parliament for passage.
Airlines cancelled flights to Baghdad yesterday after a United Arab Emirates passenger jet was shot at, highlighting the growing security threat in a country where Islamic State, the breakaway al-Qaeda group, has declared a caliphate. Amid the strife, at least eight Shari’ah-compliant lenders are operating, including Abu Dhabi Islamic Bank PJSC, seeking to tap a population of 36 million that has one of the lowest penetrations of formal banking in the Middle East.
“It’s a high-risk market, but at the same time there’s strong potential,” Montasser Khelifi, a Dubai-based senior manager at Quantum Investment Bank Ltd., said by phone from Dubai yesterday. “There is a huge population, it’s a big country with important oil resources. But the banking market is still not developed.”
About 11 per cent of Iraqis aged 15 years and older have accounts at formal banking institutions, according to World Bank data, compared with about 60 per cent in the U.A.E.
Elaf expects to grow its income to about $15 million this year from $11.7 million in 2014, according to Manjula Mathew, the bank’s executive director of research, investments and asset management. Kurdish International Bank’s profit increased five per cent to $36.7 million in 2014, according to Chief Executive Officer Bustam Al-Janabi. Cihan’s earnings fell 37 per cent to $22.6 million, said deputy CEO Naz Bajger.
Iraq’s Islamic banks are still in their early phase and “the challenges are acute, but the opportunities are enormous,” Mohieddine Kronfol, the Dubai-based chief investment officer for global Sukuk and MENA fixed-income at Franklin Templeton Investments Ltd., said by phone yesterday. “We find that Islamic banks, wherever they operate, they tend to grow faster than conventional in acquiring market share.”
Iraq’s lenders have been constrained by the dearth of legislation governing Islamic banks and advances by Islamic State, which threaten to drag the country into the worst sectarian conflict since 2007. The central bank said yesterday it will spend $4.2 billion to support economic activity and create jobs as the economy also grapples with oil prices close to the lowest in six years.
The yield on Iraq’s 2028 dollar bond rose 39 basis points this year to 8.3 per cent. That compares with a 25 basis-point decline through 26 January to 4.1 per cent in the average yield of Middle East bonds, according to JPMorgan Chase & Co. indexes.
Iraqi Prime Minister Haidar Al-Abadi said this month that the country’s economic recovery isn’t complete and the fight against Islamic State is far from over, more than a decade after the fall of Saddam Hussein.
“The challenges are huge,” he told Bloomberg TV’s Charlie Rose on 23 January. “Our economy cannot sustain two major spendings. One is to sustain our society and two is to sustain this awful war. We need help on this.”
Abu Dhabi Islamic Bank, the second-biggest Shari’ah compliant lender in the UAE, has been operating in Iraq since 2012 and is taking a long-term view of the country where it sees “great potential,” Nuhad Saliba, head of ADIB International Banking Group, said by e-mail on 13 January. Cihan Bank said its outlook improved toward the end of last year as the US began airstrikes on Islamic State.
“The last quarter of the year was better,” Bajger said by phone from Erbil on 19 January. “The first half of the year will be tough, but I can say that it would not be hard as the third quarter of 2014.”