Islamic Banking Services Guide

Central Bank of Iraq Banking Supervision Department Islamic Banks Supervision Section Instructions and Regulations Branch 2020

Praise be to Allah, the Lord of the Worlds, and may peace and blessings be upon our Prophet Muhammad, the bearer of revelation and message, and upon his family and companions.

This awareness guide aims to clarify the framework and nature of Islamic banking services in Iraq, ensuring alignment with Sharia principles. It covers various financial institutions and aims to standardize practices, enhance transparency, and ensure compliance with regulatory frameworks. The guide is designed as a comprehensive reference for Islamic banking services, updated regularly to align with international standards. We hope this work achieves its objectives.

The Working Team 2020/9/6 Head of the Banking Supervision Department

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Chapter One: General Obligations

Islamic banking services are defined as financial activities conducted in accordance with Sharia principles, covering various types of Islamic banking and financial institutions. These services are subject to regulatory oversight by the Central Bank of Iraq, in coordination with relevant authorities.

The guide outlines the general obligations for Islamic banks and financial institutions regarding Sharia compliance, regulatory reporting, and operational standards.

1. Islamic Banks

The Central Bank of Iraq oversees the activities of Islamic banks, ensuring they operate within Sharia-compliant frameworks and comply with regulatory directives.

2. Financial Institutions

Financial institutions are subject to the same Sharia compliance and regulatory reporting requirements as Islamic banks, with specific provisions tailored to their operational models.

3. Regulatory Authorities

Regulatory oversight is conducted by the Central Bank of Iraq in coordination with relevant authorities, including:

• The Sharia Supervisory Board (AAOIFI)
• The Islamic Financial Services Board (IFSB)
• The Center for Islamic Banking and Insurance Research, Training and Consultancy (CIBAFI)

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Chapter Two: Sharia Standards

The guide details the application of international Sharia standards, including those issued by AAOIFI, IFSB, and CIBAFI. These standards provide the foundational framework for Islamic banking operations, risk management, and accounting treatments.

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Chapter Three: Murabaha and Murabaha to the Purchaser

Sharia Criteria

• The contract must be valid under Sharia law.
• The asset must exist and be owned by the seller at the time of sale.
• The price and profit margin must be clearly specified.
• Delivery and payment terms must comply with Sharia principles.

Operational Steps

1. The customer requests a Murabaha facility from the bank.
2. The bank purchases the requested asset.
3. The bank sells the asset to the customer at a marked-up price, payable in installments or lump sum.
4. The contract is executed and registered according to regulatory requirements.

Accounting Treatment

• Murabaha is recorded as a financing asset on the bank's balance sheet.
• Profit recognition follows the accrual basis over the contract period.

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Chapter Four: Ijarah and Ijarah Muntahia Bittamleek (Lease Ending with Ownership)

Operational Steps for Ijarah

1. The bank acquires the leased asset.
2. The bank leases the asset to the customer for a specified period and rental fee.
3. Ownership remains with the bank during the lease term.
4. Rental payments are recognized as income on an accrual basis.

Operational Steps for Ijarah Muntahia Bittamleek

1. The bank acquires the asset and leases it to the customer.
2. A promise is made by the lessee to purchase the asset at the end of the lease term.
3. Ownership transfers to the lessee upon fulfillment of payment obligations.
4. The contract is structured to ensure Sharia compliance throughout the lease and transfer phases.

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Chapter Five: Salam (Forward Sale)

Conditions of the Salam Contract

1. The contract must be valid under Sharia law.
2. The price must be paid in full at the time of contract.
3. The commodity must be clearly specified and deliverable.
4. Delivery terms must be explicitly stated.
5. The contract is binding and cannot be unilaterally canceled.

Operational Steps

1. The bank pays the full price to the supplier for a specified commodity.
2. The bank records the Salam contract as an asset on its balance sheet.
3. Delivery of the commodity is verified and transferred to the bank or end customer.
4. Profit recognition follows the accrual basis over the delivery period.

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Chapter Six: Istisna'a and Istisna' al-Mawsuf (Manufacturing/Construction Contract)

Operational Steps

1. The customer requests an Istisna'a facility from the bank.
2. The bank contracts with a manufacturer or contractor to produce or construct an asset.
3. The bank pays the manufacturing/construction costs in installments as agreed.
4. Upon completion, the asset is delivered to the customer or sold to a third party.
5. Profit recognition follows the accrual basis over the manufacturing/construction period.

Sharia Compliance

• The contract must specify the asset, specifications, price, and delivery terms.
• Risk allocation between the bank and contractor must comply with Sharia principles.

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Chapter Seven: Sales Contract (Bay')

Conditions of the Sales Contract

1. The contract must be valid under Sharia law.
2. The subject matter must exist and be owned by the seller.
3. The price must be clearly specified and payable.
4. Delivery terms must comply with Sharia principles.

Types of Sales Contracts

• Murabaha: Cost-plus sale with clearly specified profit margin.
• Musawama: Negotiated sale where the final price is agreed upon by both parties.
• Mudaraba: Profit-sharing partnership between the bank and customer.

Accounting Treatment

• Sales contracts are recorded as financing assets on the bank's balance sheet.
• Profit recognition follows the accrual basis over the contract period.

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This guide serves as a comprehensive reference for Islamic banking services in Iraq, ensuring regulatory compliance, Sharia alignment, and operational transparency.