Overview on New Regulatory Landscape for Electronic Payment Services in Iraq

New Regulatory Landscape for Electronic Payment Services in Iraq

In an era where digital transformation is reshaping financial services globally, Iraq is no exception. On April 29, 2024, the Iraqi Cabinet introduced a significant regulatory update for electronic payment services, aimed at enhancing the efficiency, security, and transparency of the nation's financial sector. This new regulation replaces the previous framework established in 2014 and introduces a comprehensive set of rules that impact all entities involved in electronic payment services. Concurrently, the Central Bank of Iraq (CBI) launched regulations for licensing digital banks, which are pivotal in revolutionizing the financial sector by offering innovative, convenient services to customers. This article delves into these regulatory updates, their implications for digital banks in Iraq, and key considerations for financial institutions navigating this evolving landscape.

The new regulation defines electronic payment services broadly, covering various activities related to the execution and management of both legal and non-prohibited financial transactions through electronic means. This includes fund transfers and different forms of electronic money payments facilitated by advanced technological systems and infrastructures.

Licensing and Compliance Requirements

Entities wishing to offer electronic payment services in Iraq must obtain a license from the CBI, adhering to stringent standards and regulations. These licenses are valid for ten years and can be renewed upon request and approval. The CBI maintains exclusive authority over the regulation, registration, and licensing of third-party-operated electronic payment systems. It is also responsible for supervising and monitoring compliance with legal frameworks and regulatory standards.

To ensure financial stability, service providers must furnish financial guarantees or easily liquidatable assets for the settlement of transactions as stipulated by the CBI. Additionally, both service providers and the CBI must keep records of all electronic payment transactions and related data for a minimum of five years, making them available for inspection and audit as necessary.

 Enforcement and Penalties

The regulation outlines strict penalties for non-compliance, including warnings, financial penalties, suspension, or revocation of licenses. The CBI is empowered to issue instructions, directives, and guidelines to enforce the regulation. Service providers are required to adjust their operations to comply within six months of the enforcement date. The anticipated impact of this regulation is positive, establishing a comprehensive legal framework to safeguard consumers and foster financial system stability in Iraq.

Regulatory Framework for Digital Banks

On March 28, 2024, the CBI issued regulations specifically for licensing digital banks. This move is seen as a pivotal step towards modernizing Iraq's financial sector by enabling the establishment of digital banks that offer innovative and convenient services to customers. However, the introduction of these digital banks comes with a need to navigate a complex regulatory framework.

Key Regulatory Requirements

Digital banks must comply with several regulatory requirements to operate in Iraq. These include obtaining a license from the CBI, meeting minimum capital requirements, and adhering to cybersecurity and data protection standards. The licensing process involves providing detailed information about the bank’s name, paid-up capital, country of origin, legal form of ownership, financial statements, organizational structure, and a financial feasibility study. Additionally, applicants must pay a non-refundable license application fee.

Foreign participation in digital banks is permitted but subject to limitations. Foreign shareholding must not exceed 49%, and there must be a contribution from a conventional bank of no less than 30% of the digital bank's shares, with CBI approval. The paid-up capital for foreign digital banks to start operations is set at 100 billion Iraqi dinars, to be met over five years.

Governance and Risk Management

Digital banks are required to establish transparent governance practices to ensure accountability and oversight. They must develop effective risk management frameworks to identify and mitigate operational and cybersecurity risks. Reporting requirements include notifying the CBI of any changes in senior management and adhering to anti-money laundering and counter-terrorism financing regulations.

To ensure compliance, digital banks must maintain accurate records, conduct regular audits, and stay updated on regulatory changes issued by the CBI. Board members and senior executives are personally responsible for ensuring compliance and disclosing relevant information.

Operational Requirements

Digital banks must establish robust information security and technology infrastructure, develop comprehensive organizational structures, and implement policies and procedures in accordance with CBI regulations. They must also provide specialized systems for researching international sanctions lists, combating money laundering, and monitoring daily transactions.

The CBI oversees digital banks by evaluating their infrastructure, governance procedures, and risk management practices. It may appoint independent entities to assess the adequacy and effectiveness of digital banks' operations, including their compliance with anti-money laundering and cybersecurity requirements.

Implications for Financial Institutions

The new regulatory framework presents both opportunities and challenges for financial institutions in Iraq. Understanding and adhering to these regulations is crucial for navigating the evolving landscape effectively and contributing to the growth of the banking sector.

Financial institutions must familiarize themselves with the licensing process outlined by the CBI for digital banks. This involves understanding capital requirements, shareholder composition, and other licensing conditions. Obtaining CBI approval before appointing individuals to leadership positions is also essential. Implementing robust governance and risk management frameworks is critical for ensuring compliance with the new regulations. Additionally, digital banks must prioritize cybersecurity measures to protect customer data and mitigate cyber threats.

Digital banks have a significant role in promoting financial inclusion by providing convenient and accessible banking services to underserved populations, including individuals in rural areas and marginalized communities. By leveraging digital channels and innovative technologies, digital banks can expand financial access and empower individuals to participate in the formal economy.

Addressing Operational Risks

Operating a digital bank in Iraq comes with potential risks, including cybersecurity threats, compliance failures, operational disruptions, and financial instability. Digital banks must adopt strong risk management practices and contingency plans to mitigate these risks and protect the interests of depositors, clients, and shareholders.

Conclusion

The new regulation on electronic payment services and the licensing of digital banks mark a significant step forward in modernizing Iraq's financial sector. These regulations aim to enhance the efficiency, security, and transparency of financial services while promoting innovation and financial inclusion. For financial institutions, understanding and adhering to these regulatory requirements is crucial for navigating the evolving landscape effectively and contributing to the growth of the banking sector in Iraq. By establishing robust governance practices, implementing effective risk management frameworks, and prioritizing compliance and cybersecurity, digital banks can thrive in this new regulatory environment. As Iraq continues to embrace digital transformation, these regulations will play a vital role in shaping the future of financial services in the country, ensuring stability, security, and growth in the sector.