FinTech Comparative Guide

• Published date: 07 April 2020
• Subject Matter: Finance and Banking, Technology, Financial Services, Fin Tech
• Law Firm: Aljad Law
• Author: Ms Lama Abou Ali and Malek Takieddine

1 Legal and enforcement framework

1.1 In broad terms, which legislative and regulatory provisions govern the fintech space in your jurisdiction?

This Q&A discusses the legal framework for fintech as applicable in Federal Iraq, with the exclusion of the Kurdistan Region of Iraq.

The fintech space is not subject to specific legislative and regulatory provisions in Iraq. However, fintech companies may be subject to specific laws and regulations applying to banks, financial institutions and insurance companies if they carry out such regulated activities.

The main laws and regulations that may apply to fintechs, depending on the types of activities that they carry out include the following:

Technology laws and regulations:

• E-signature and E-transactions Law (78/2012); and
• Electronic Payment Services System Regulation (3/2014);

Banking laws and regulations:

• Central Bank of Iraq Regulation (28/2/1994);
• Central Bank Law (56/2004);
• Banking Law (94/2004);
• Financial Investment Companies Regulation (6/2011);
• Central Bank of Iraq Regulation (611/14 of 2019); and
• Central Bank of Iraq Regulation (1/2018) as amended by Regulation 30/12/2019.

Other laws and regulations:

• Civil Code (40/1951);
• Penal Code (111/1969);
• Companies Law (21/1997);
• Capital Markets Interim Law (74/2004);
• Insurance Business Regulation (10/2005);
• Consumer Protection Law (1/2010); and
• Anti-money Laundering and Counter-Terrorism Financing Law (39/2015).

1.2 Do any special regimes apply to specific areas of the fintech space?

Iraq has not enacted a specific regime applying to the fintech space.

However, a special regime may apply to certain regulated activities carried out by fintech companies, such as the provision of electronic payment services. Based on the Electronic Payment Services System Regulation (3/2014), the providers of electronic payment services must obtain a licence from the Central Bank of Iraq (CBI).

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The main regulators responsible for enforcing the laws and regulations applicable to fintechs that conduct regulated activities are as follows:

• The CBI is responsible for granting licences to institutions that conduct banking operations and to electronic payment service providers;
• The Iraqi Insurance Diwan is responsible for granting licences to institutions that carry out insurance activities; and
• The Iraq Securities Commission is responsible for supervising the Iraq Stock Exchange and issuing laws relating to investment management activities and investment advice for brokers, banks and securities companies.

1.4 What is the regulators' general approach to fintech?

The CBI has taken a rather favourable approach to fintech, as reflected in its Decision 14/611 of 2019 on governance and institutional management of information and communication technology in the banking sector. This decision sets out certain criteria to be implemented by banks, financial institutions and other licensed institutions when dealing with cloud computing service providers. Moreover, the Electronic Payment Services System Regulation (3/2014) authorises non-bank payment service providers to provide electronic payment services, subject to a licence from the CBI.

However, the CBI's attitude to the use of cryptocurrency is not favourable. In a statement issued on 3 December 2017, it prohibited the use of cryptocurrencies, subject to sanctions under the Anti-money Laundering and Counter-Terrorism Financing Law.

The Iraq Securities Commission has not yet issued any fintech-related laws and regulations governing the licensing and operations of crowdfunding platforms.

Regarding insurtech, the Iraqi Insurance Diwan has not yet issued any laws or regulations authorising or prohibiting the same.

1.5 Are there any trade associations for the fintech sector?

There are no trade associations for the fintech sector in Iraq.

2 Fintech market

2.1 Which sub-sectors of the fintech industry have become most embedded in your jurisdiction?

The fintech industry in Iraq covers a limited range of sub-sectors, such as mobile and electronic payments and telecommunications; these are reportedly the only two competitive tech sectors in Iraq.

Other nascent tech areas that remain underdeveloped include online shopping, trading and electronic services, and smartphone applications.

Iraq is adopting fintech at a slow pace, and overall investment in fintech and the enactment of related regulations have been low, compared to other countries in the region. This is due to many factors, including:

• the large unbanked population - according to an analytical note entitled "Bringing Back Business in Iraq" published on 1 January 2019 by the World Bank Group, only 23% of Iraqi households have access to an account with a financial institution;
• the cost of internet and mobile services, relative to income, which limits demand for digital financial services; and
• the fact that Iraqis prefer cash on delivery in e-commerce transactions, due to concerns about security of online payments.

2.2 What products and services are offered?

While mobile and electronic payment services are increasing, they are not as widely used as in other countries in the region. The most common payment methods remain cash on delivery and bank transfer, with limited credit card use. E-commerce (food, real estate, shipping, transportation and travel services), e-banking and digital payments are reported as major underdeveloped sectors in Iraq.

Electronic payment services authorised in Iraq include managing deposits and cash withdrawals through automated teller machines and executing electronic debit and credit payments. Such electronic payments are made through any means of digital communication and information technology, or network operator acting as an intermediary between the user and the supplier of services, or any other recipient, through mobile phone transfers.

Electronic payment service providers licensed in Iraq may also facilitate access to loans from banks, disbursed directly to the user's credit card.

2.3 How are fintech players generally structured?

Electronic transactions are regulated in Iraq under the E-signature and E-transactions Law. However, online and technology businesses are not regulated as such in Iraq. This means that e-commerce sites and mobile applications are not legally considered as businesses, unless they have a physical office address in Iraq. Therefore, tech start-ups generally elect to register their businesses as 'bricks and mortar' companies for legal recognition.

Fintech services are also provided by banks that operate based on a licence from the Central Bank of Iraq (CBI).

2.4 How are they generally financed?

Financing options for fintech companies operating in Iraq are very limited.

Many start-ups in Iraq self-finance their fintech businesses or seek funding from family and friends. Other financing options may include donations, seed funds and grants from incubators. A less accessible option for fintech start-ups in Iraq is investment by angel investors; the terms of such investments are often unfavourable to fintech entrepreneurs, as angel investors often seek a majority stake in the start-up.

2.5 How are they positioned within the broader financial services landscape?

The lack of electronic payments makes the expansion of fintech companies challenging. Fintechs in Iraq do not yet constitute a competitive threat to institutions offering traditional financial services. Authorised electronic payment service providers rely on banks to facilitate client access to certain products, such as loans, which are credited by banks directly to customers' credit cards.

2.6 Do start-ups generally outsource back office functions and is there a developed market for them to access? What are the legal implications of outsourcing?

We believe that the most relevant outsourcing by fintechs in Iraq currently concerns cloud computing.

Banks, financial institutions, payment...