Central Bank of Iraq

Financial Operations and Debt Management Department

Operating Manual for Product

Islamic Certificates of Deposit

(Murabaha Model)
2017

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Introduction:

Given the tremendous development in Islamic financial engineering, and the expansion of Islamic banking operations in financing and investment, alongside the widespread presence of Islamic banks and financial institutions in Iraq, and to achieve the Central Bank of Iraq's policies on controlling monetary policy and investing excess liquidity in Islamic banks, the Central Bank of Iraq has moved to issue Islamic Certificates of Deposit on the Murabaha model as an effective Islamic financial instrument. To achieve maximum efficiency for this instrument, a working team composed of Central Bank of Iraq personnel – Financial Operations and Debt Management Department – was formed to serve as the core for supervision and execution of Islamic Certificates of Deposit. Training and qualification agreements specific to this department were concluded, and programs for the Central Bank of Iraq were designed and updated to execute Islamic Certificate of Deposit operations in a smooth and modern scientific manner.

Definition:

Islamic Certificates of Deposit are defined as financing and investment instruments compliant with Sharia rulings and general principles, issued based on a legal contract, taking the form of units or financial certificates with fixed values and varying maturities according to central bank policies and banking needs. Returns are determined in the issuance prospectus or its specific auction, and they can be redeemed before maturity and transferred because they are tradable in the market depending on the certificate type.

The initial issuance of Islamic Certificates of Deposit will be for liquidity management, followed later by transition to other investment forms.

Approval:

The issuance of Islamic Certificates of Deposit and their instructions were approved and brought into effect pursuant to Board of Directors Resolution No. (95) of 2017.

Legal Framework:

Following the Central Bank of Iraq Law and its instructions, the Securities Market Law, the Islamic Banks Law and its instructions, and all relevant laws in the Republic of Iraq, as well as decisions of the Central Bank's Board of Directors and instructions issued by the Governor of the Central Bank, constitute the legal framework for Islamic Certificates of Deposit.

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Sharia Framework:

Fiqh academies, councils of Islamic banks and financial institutions, Sharia standards, and accounting/Sharia rulings issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), along with fatwas from Sharia supervision boards and specialized scientific conferences and seminars, constitute the Sharia framework for Islamic Certificates of Deposit.

Terms:

Central Bank: The Central Bank of Iraq established pursuant to Law No. 56 of 2004.

Islamic Bank: A financial institution whose core role is acting as a financial intermediary between those who possess surplus funds (surplus units) and those who require those funds (deficit units), providing banking, financing, and investment services, and generating entries in accordance with Sharia rulings. Here: Islamic banks regulated under the Iraqi Islamic Banks Law based on Law No. 43 of 2015.

Murabaha: A trust-based sale in Sharia, where the selling price is determined based on the cost of goods plus an agreed profit margin between seller and buyer in advance.

Purchase Order: A natural or legal person who expresses willingness to purchase goods via Murabaha.

Murabaha to the Purchase Order: An agreement between the bank and the client whereby the bank purchases goods and commits that the client will subsequently purchase them from the bank, with the bank committing to sell them at a marked-up price or a deferred price with a predetermined increase ratio over the purchase price. Here, the Central Bank acts on behalf of the client under an agency (wakalah) contract.

Contract: The meeting of two wills creating an obligation that takes effect in its subject matter. Here: the contract for purchasing goods on behalf of Islamic banks, the contract for selling them to the Central Bank, and the contract for selling them by the Central Bank to commercial intermediaries.

Profit Margin: The fixed return amount that will be determined by the bank and the Central Bank during the bidding process.

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Commodity Market: The real or virtual place where supply and demand operations are applied, facilitating interaction between sellers and buyers to trade goods for cash or money.

Maturity/Redemption of Certificates: Repayment of the nominal value of certificates plus the agreed profit margin from the auction for those to whom these certificates were issued.

Executive Procedures:

• Phase One: (Electronic Auction) where the Central Bank submits via electronic auction to selected banks, attached in the auction:

  • Type of commodity and its code.
  • Nominal value of the commodity.
  • Murabaha margin.
  • Certificate duration.

• Phase Two: Based on approval of the authorization/purchase order model, the Central Bank becomes authorized to purchase commodities from Islamic banks according to the specifications mentioned in the auction and under the same conditions.

• Phase Three: Based on authorization from Islamic banks to the Central Bank, the Central Bank purchases commodities in the auction according to specifications from the commodity market specified in the auction.

• Phase Four: The Central Bank notifies Islamic banks of transaction completion, agency execution, and that the commodities have become under the guarantee and ownership of the Islamic banks pursuant to the sale contract.

• Phase Five: The Central Bank submits an offer (bid) to the awarded Islamic banks that purchased commodities, requesting them to execute their promise to purchase the goods according to auction terms. A sale contract is formalized between Islamic banks and the Central Bank, with commodities under the guarantee of the Central Bank.

• Phase Six: Acting as the commodity owner, the Central Bank sells commodities in the commodity market based on a prior promise from a commercial intermediary for the nominal value, plus the sales fee.

• Phase Seven: The Central Bank settles the value of Islamic Certificates of Deposit (certificate maturity/redemption) to Islamic banks based on the auction agreement and according to the agreed duration.

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Forms and Contracts Used:

1. Purchase request form (Purchase Order) with promise (Electronic Auction) from the Central Bank, addressed to selected banks per each auction.
2. Authorization form for Islamic banks to the Central Bank to purchase commodities.
3. Commodity purchase contract from the commodity market by the Central Bank under agency on behalf of Islamic banks.
4. Commodity sale contract from Islamic banks to the Central Bank under the purchase request agreement (Auction), following agency execution and submission of the offer from the Purchase Order.
5. Commodity sale contract from the Central Bank in the commodity market.

Sharia Audit Procedures:

1. The commodity must be Sharia-compliant (halal).
2. Auction terms must align with Sharia rulings.
3. The commodity must be received in the first sale contract by the Central Bank on behalf of Islamic banks.
4. The commodity must be sold from Islamic banks to the Central Bank under a sale contract.
5. Executive operations must be free of any penalty clauses from Islamic banks to the Central Bank to avoid falling into Riba (interest).
6. The profit margin must be clearly defined and fixed upon auction closure.

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Dr. Mahmoud Mohammed Mahmoud Dagher
General Manager of Financial Operations and Debt Management Department 2018/1/