Questions for Request for Applications

Questions for Request for Applications Foreign Banking License **RFA Foreign Banking License Statistics** Microsoft Excel Spreadsheet Q1. I note that footnote (2) of the RAFBL is in conflict with the text of the Banking Law (Annex A to CPA Order 40). Article 4.6 limits the number of licenses to 6 prior to 31 December 2008 . As a permit is required to open a branch rather than a license (a distinction very clearly made in Article 4.1, Article 5 and Article 6), the number of permits for branches of foreign banks is unlimited according to the Banking Law. One possible interpretation of the Banking Law which would allow the wording of the RAFBL is to construe the definition of “subsidiary” in Article 4.1 as including a branch. However, as you state that a branch does not require $50bn dinars of capital, this interpretation is no longer available (see the third sentence of Article 4.1). If case of conflict between the Banking Law and the RAFBL, which is to have priority? A1. At present, the Central Bank of Iraq plans to issue only a limited number of licenses to open banks that are majority-owned by foreign persons or to issue permits to open a branch of a foreign bank. Persons wishing to be considered at this time for a license or permit must submit an application as set forth in the RFA. The Central Bank may issue additional licenses or permits in the future. Q2. Should I assume that an international bank wishing to open a branch needs to follow the procedure set out in Regulation 5 of 1989? If so, a Declaration of Iraqi Boycott is required (Article 4.7), which is contrary to US Export Administration Regulations. Further, the branch will operate under very restrictive regulation under Regulation 5. If Regulation 5 is not to apply, what is the process by which the branch will obtain independent legal personality in Iraq ? A2. Regulation 5 was superceded by Law No. 62 of 2002, “Arab Investment”. That law was replaced by CPA Order No. 39 of September 19, 2003 , which replaced all existing foreign investment law. Order No. 39 also established new foreign investment rules in sectors other than banking and insurance. Foreign investment rules in the banking sector are contained exclusively in the Banking Law. Q3. In footnote 4, you state that branches do not require capital. Therefore, is the word “bank” in Article 16.1 of the Banking Law to exclude branches? A3. Article 16.1 of the Banking Law does not apply to branches. Q4. Are there any plans to remove the requirement that companies involved in banking activities must be joint-stock companies (Article 10 of the Companies Law 1997)? Joint-stock companies must offer at least 49% of their shares to the public (Article 39 Companies Law 1997) which is unlikely to be acceptable to a foreign investor, especially as there is no functioning stock exchange. Further, a single shareholder can own a maximum 20% in a joint-stock company (Article 32 Companies Law 1997). Therefore, a consortium of three foreign shareholders is currently needed for an incorporated banking company to require a license. The fact that the intention is for the banking company to be a joint-stock company is indicated by the requirement for the bank to have a board of directors – Article 17 Banking Law. Only joint-stock companies have boards of directors in Iraq (Article 123 Companies Law 1997). A4. Article 4 of the Banking Law permits the establishment in Iraq of banks that are majority or wholly-owned subsidiaries of a foreign bank or bank holding company, and permits foreign banks to open branches in Iraq. Article 107.2 of the Banking Law provides that in case of inconsistency with a provision of any other law of Iraq, the Banking Law shall prevail. Since the Banking Law permits the establishment in Iraq of a bank that is wholly owned by a single foreign bank or bank holding company, any inconsistent provisions contained in the Companies Law are without effect. Q5. The Business Plan section of the RFA refers to Article 5, paragraph 2 (f) of the Iraq Banking Law. Upon reviewing this paragraph and the rest of the article, it appears that the relevant reference should be to Paragraph 2 (h) of article 5, which talks specifically about the business plan. Please clarify. A5. Article 5, paragraph 2 (h) describe criteria regarding the business plan. Please use this paragraph as a guideline for developing a business plan. This paragraph is not all-encompassing and applicants are encouraged to offer other relevant information in the business plan Q6. The RFA does not contain a requirement for submission of financial projections while Article 5, paragraph 2 (h) requires the applicant to submit projected balance sheets, profit and loss accounts and cash flow statements for the next three full financial years. Can you please clarify? A6. Applicants are requested to submit the information described in Article 5, paragraph 2(h). Q7. The Banking Law as well as the RFA does not quantify any capital requirement for branches. Please confirm that branches will not require capital in Iraq. A7. Foreign branches do not require capital in Iraq. Q8. There is a capital requirement of USD 25MM for subsidiaries. Can you please specify what the capital requirement is a function of (e.g. assets)? A8. The capital requirement of 50 billion dinars of capital is a minimum requirement. Refer to Article 16 of the Iraq Banking Law for other capital requirements. The CBI intends to promulgate regulations that provide additional guidance with respect to capital requirements by the end of 2004. Q9. What is the time frame set for application for non-fast track banking license applicants? (i.e., what is the envisaged timeframe and process for those foreign financial institutions that choose not to apply through the current RFA fast track process?) A9. At present, the Central Bank of Iraq plans to issue only a limited number of licenses to open banks that are majority-owned by foreign persons or to issue permits to open a branch of a foreign bank. The Central Bank may issue additional licenses or permits in the future. No time frame has been set for those additional licenses or permits. Q10. Are branch operations limited in scope by way of activities to be undertaken as compared to the subsidiaries or any other market entry options? A10. Article 27 explains the banking activities in which a bank (or those entities that obtain permits, like branches) may engage. Q11. In the case of a subsidiary, will the company/commercial laws also be applicable to the subsidiary. Please clarify. A11. Article 4 of the Iraq Banking Law permits the establishment in Iraq of banks that are majority or wholly-owned subsidiaries of a foreign bank or bank holding company, and permits foreign banks to open branches in Iraq. Article 107.2 of the Iraq Banking Law provides that in case of inconsistency with a provision of any other law of Iraq, the Iraq Banking Law shall prevail. Since the Iraq Banking Law permits the establishment in Iraq of a bank that is wholly owned by a single foreign bank or bank holding company, any inconsistent provisions contained in the Companies Law are without effect . Q12. Can you please confirm that Arabic translations are limited to the core 25 pages of the RFA Response? A12. Confirmed. Please note that the Arabic translation of the 25 pages of the core proposal is NOT limited to 25 pages. Please also keep in mind that if there are inconsistencies between the Arabic and English versions, the English will prevail. Information submitted in the Appendices that is already prepared in English need not be translated (e.g., annual report). Q13. If a foreign bank secures one of the six available licenses, will it retain the flexibility to either establish a wholly owned branch / local subsidiary or acquire a majority stake in a local bank? We are concerned that, given the short time frame available to submit to the bid, it is difficult to provide an unequivocal commitment to a specific course of action that may, in the latter case, be subject to other factors that are at this time outside our control. A13. As required in the RFA under the Format of Written Application section, Business Plan, the applicant should describe the legal structure it proposes. If there are any qualifications to the submission (e.g., the foreign bank would like to retain the flexibility as to legal structure), this should be stated. Note the Selection Criteria section, which states that the foreign banks selected will be those that are the most committed and best able to contribute to the development and modernization of the Iraqi banking system and the sound growth of the Iraqi economy. Q14. Would there be any restrictions preventing foreign banks that win licenses from "plugging into" their offshore mainframe IT server? (By doing this foreign banks would be able to proceed with the implementation of their business plans at a comparatively rapid pace.) A14. At this time there are no restrictions to transferring information cross border for operational efficiency. Q15. Are there any legal or other restrictions that might prevent a license winner from providing its Iraqi branch / subsidiary with a variety of business support services from an offshore location on an arms length basis? A15. No. However, due to the broad nature of the question, the CBI recommends that the foreign bank applicant include in its submission the business support services it proposes and the implications of these plans for the staffing and training of Iraqis. Q16. Would the expenses that the Iraqi branch /subsidiary incurs in procuring such services be deductible for tax purposes? Would Head Office charges, if levied on the Iraqi branch /subsidiary in a clear and transparent manner, also be tax deductible? A16. The tax structure for Iraq is currently being developed. To date, deductions for internal transfer pricing between branch and parent has not been explored. The CBI recommends that the applicants describe the business services that they would like to transfer price, as noted above to allow the CBI to make an informed decision as to this issues in the future. Q17. Any foreign bank that secures a new license will require access to appropriate telecommunications capabilities to ensure appropriate technological linkages. Will there be a VSAT link available for banks that attain a license to operate in Iraq? If so, are you able to provide any indicative costs associated with the use of such infrastructure? A17. Communications facilities in Iraq are currently limited. Even under the former regime, only 2% of the population had telephone service. A modern telecommunications infrastructure is under construction, but will take time. Three cellular service contracts have been awarded (one for northern Iraq, one for central Iraq and one for southern Iraq) and those services are expected to be operational by early 2004. These services are expected to be voice only through 2004. The cellular service provider for Baghdad will be Orascom. A central satellite gateway has been established, but landline connectivity to that gateway is still under construction. Banks are encouraged to factor into their plans the installation of their own VSAT link at their expense to provide both domestic and international data and voice communications through at least 2004. There is a very minimal VSAT licensing fee intended just to cover processing costs. Q18. In the event that no such VSAT linkage is available from a central authority would we be allowed to install our own VSAT under the existing telecoms law? Would there be a licensing cost involved and, if so, what would that be? A18. Banks are permitted and encouraged to establish their own VSAT link at their expense to provide both domestic and international data and voice communications. There is a very minimal VSAT licensing fee intended just to cover processing costs Q19. With respect to the minimum capital requirements, would the Central Bank view reserves as part of capital in determining whether a bank has met the minimum capital requirements? A19. The CBI’s capital regulation, required by Article 16 of the Iraq Banking Law, will not be written before the foreign bank licenses are granted. Reserves will likely be viewed as part of capital, as is the case with the 1988 Basel Capital Accord. However, the type of reserve and how it is treated for accounting purposes will be a factor in the determination. Q20. Moreover, would items such as the property revaluation reserve, if any, be considered part of capital for the purposes of this evaluation? A20. It is unlikely that property valuation reserves will be considered part of capital. Q21. Does the Central Bank of Iraq distinguish between Tier 1 capital (e.g. shareholder's equity) and Tier 2 capital (e.g. subordinated debt) in calculating whether a bank has met the minimum capital requirements? A21. Yes. Q22. Would a banking license granted by the Central Bank of Iraq permit an Iraqi subsidiary/branch to offer a comprehensive range of financial services products and services? Specifically, could such a bank offer, for example, Shariah compliant banking products, insurance products and investment (e.g. mutual funds, securities brokerage) products? A22. Banks may not underwrite or sell insurance products, but can act as a securities broker and act as a portfolio manager of securities. The Banking Law does not expressly prohibit or authorize Sharia compliant banking products as a defined class of products. Instead, all financial products are examined to determine whether they are compatible with the Banking Law. This applies to products designed to be compatible with Sharia law as well as others. Q23. Can a foreign bank that secures a license to operate in Iraq gain exemptions from, for example, normal single borrower limits, by providing a clear demonstration of parental support? A23. While the Iraq Banking Law does not address single borrower limits for foreign branches, the CBI will look to the parent foreign bank’s capital when applying such borrow limits. For new banks or subsidiaries, such exemptions must be applied for, and granted by the CBI as required by Article 30 of the Iraq Banking Law. Q24. Will the Central Bank of Iraq be imposing any restriction on the provision of wholesale banking services (e.g. structured finance, debt capital markets, project finance, corporate advisory etc.) from an offshore location? A24. At this time the CBI does not plan to impose restrictions on the provision of wholesale banking services from offshore. But any bank interested in providing such services should advise the CBI of the products it wishes to offer and the manner in which it proposes to do so. Q25(a). Will any Iraq based subsidiary / branch be free to place / lend surplus funds internationally? A25(a). Yes. Q25(b). If yes, would there be any rules / restrictions that apply? A(25b). No such restrictions exist currently, but banks should remain mindful of the provisions of Article 15 of the Banking Law. Q26(a). We note the importance that is being placed on the need for license applicants to provide commercial lending to small and medium sized enterprises. We would appreciate your clarification as to whether there is any existing or planned government guarantee scheme for small business lending? A26(a). No such Iraqi government sponsored scheme exists. There are existing programs and others likely to exist, supported by USAID (in South, Central and Northern Iraq) and the international financial institutions (IFC, World Bank Group). Q26(b). If such a scheme exists / is likely to exist, could you please provide details? A26(b). The CBI desires to expand SME lending programs beyond those that currently exist or are likely to exist and does not feel the details of those programs are relevant to the development of additional SME lending plans. Q27. Is the CBI likely to establish minimum lending to deposit ratios for locally incorporated subsidiaries of foreign banks? A27. The CBI does not plan to impose loan-to-deposit ratios at this time, but may do so in the future. Q28. Will foreign banks that submit a license application be expected, in either stage 1 or stage 2, to provide financial forecasts? A28. In Stage 1, Applicants are expected to submit the documents described in paragraph 7(f) of the “Format of Written Application” section of the RFA. Applicants selected to proceed to Stage 2 will be expected to submit, at a minimum, those documents described in Article 5.2.(h) of the Banking Law. Q29. Does the Central Bank of Iraq have money laundering legislation that license winners will need to comply with? If not, is such legislation planned and what would are the likely provisions of such legislation? A29. Please refer to the Iraq Banking Law Article 35, Suspicious Transactions. Anti-money laundering legislation is planned; however, it is not possible to say with certainty what the provisions of the law will be. The foreign bank applicant should anticipate that international best practices will be the CBI’s goal. Q30(a). Would banks that adopt their own stringent money laundering controls/ procedures have the right to refuse to open accounts for certain customers? A30(a). Yes. Any anti-money laundering requirements eventually established under Iraqi law will be minimum requirements that banks are free and encouraged to exceed. In addition, foreign banks will be expected to comply with the laws of their home country, which may require the bank to refuse to open accounts for certain customers. Q30(b). If so, are the circumstances under which such refusals can take place clearly determined by the law? A30(b). Iraqi law does not currently address this issue. Under Format for Written Application, Preliminary Due Diligence Information, the foreign bank applicant’s anti- money laundering policies and procedures should be described. Q31. We understand that Article 10 of the Iraqi Companies law 1997 requires all companies involved in banking activities to be joint-stock companies with at least 49% of the shares held by the general public. Has the 1997 Companies Law been amended on this point and, if not, is it likely to be amended in the near future? A31. Article 4 of the Iraq Banking Law permits the establishment in Iraq of banks that are majority or wholly-owned subsidiaries of a foreign bank or bank holding company, and permits foreign banks to open branches in Iraq. Article 107.2 of the Iraq Banking Law provides that in case of inconsistency with a provision of any other law of Iraq, the Banking Law shall prevail. Since the Iraq Banking Law permits the establishment in Iraq of a bank that is wholly owned by a single foreign bank or bank holding company, any inconsistent provisions contained in the Companies Law are without effect . Q32. The 26 November deadline for submissions of applications is likely to coincide with the first or second day of Eid. Most Middle East based banks will not have staff available to work on those days and it is our experience that DHL do not always provide an optimal service on such public holidays. Will some leeway be provided to Middle East based banks with respect to the dispatch of the bid submission? A32. The deadline has been extended to December 4 th . Q33. We are working towards submitting our proposal by 26 November 2003 as required by the RFA. However, we would like to bring to your attention that the due date is likely to fall during Eid holidays. Most of the regional governments and establishments are likely to be closed for Eid between 25 and 28 November 2003, both days inclusive. Please advise by email if it would be possible to extend the response deadline to 4 December 2003 . A33. The deadline has been extended to December 4 th . Q34. Proposal information and evaluation (page 2/3 of RFA) The RFA requires responses in English and Arabic. It also states that Appendices already prepared in English need not be translated. We interpret this to mean that the main proposal (the 25 page document) only needs to be submitted in both English and Arabic and Appendices could be submitted in English only. Please confirm. A34. Confirmed. Please note that the Arabic translation of the 25 pages of the core proposal is NOT limited to 25 pages. Please also keep in mind that if there are inconsistencies between the Arabic and English versions, the English will prevail. Information submitted in the Appendices that is already prepared in English need not be translated (e.g., annual report). Q35. The RFA requires that the electronic version of the proposal should reach the email address specified in the RFA for this purpose by 5.00 pm Baghdad time on 26 November 2003 . Given potential communication problems, what happens if there is a delivery failure or delay in delivery? Would delivery of hard copies to local office (port of origination) of DHL within the deadline be construed as submission by due date and time? A35. The RFA contemplates delivery failures. This is one reason applicants are requested to submit an electronic and hard copy. For example, in cases where there is a delivery failure for the electronic copy, the CBI will rely on the time stamp by DHL. Q36. Certain appendices, such as Annual Reports (glossy version) cannot be sent by email. Even if these documents could be made available by email, the size of the electronic proposal is likely to be extremely large possibly giving rise to delivery failures. Would it be acceptable if reference is made in the electronic version of the appendices that hard copy attachments are being couriered? A36. Yes. Respondent comment concerning unduly tight time-frame for Applications Even for institutions with a certain familiarity with conditions in and the future potential of Iraq , the three-week time-frame for preparing a meaningful and responsive Application is extremely and, arguably, unnecessarily tight. For instance, while the RFA and the new Banking Law explicitly allow a foreign bank-Applicant to seek to enter Iraq by acquiring majority control of an existing private-sector Iraqi bank, the deadline imposed simply does not afford sufficient time for considered identification and selection of a local bank which is likely to prove a suitable partner in a long-term relationship, let alone to formulate an appropriate modus operandi and business plan of such a revamped subsidiary. In addition, the happenance that the entire period allowed for submission of Applications is coinciding with – indeed, completely subsumed within – the holy month of Ramadan is seriously disadvantaging intending Applicants headquartered in the Middle East region, such as our own Bank. Proper and due observance of religious and cultural traditions during Ramadan necessarily lessens the flexibility, and time availability, which could otherwise have been marshaled to mitigate the tight time constraints. Q37. It is respectfully requested that, taking account of reasons cited above and others, the deadline for submitting Application be extended appropriately. Furthermore, any extension in the deadline date should be announced without delay. A37. The deadline has been extended to December 4 th . Respondent Comment Concerning Resume / CV Requirement The RPA stipulates, inter alia, “resumes for all key personnel” to be provided in the Application. It is clearly in the commercial self-interest of every Applicant, after being granted a license/permit, to dedicate whatever management and other key personnel as may be necessary to ensure the continuing commercial success of its operations in Iraq. The commitment to Iraq requiring demonstration is at the level of the Applicant as an institution , buttressed by its overall reputation and specific financial commitment. Selection and designation of individual officers at the time of Application submission appears unnecessary and perhaps even inappropriate, especially since, in any event, such key personnel will require clearance by CBI at the time of posting. Q38. It is requested that the requirement to submit resumes or C.V. of key personnel at the time of Application be removed. Of course, it will be incumbent on the Applicant to specify the skill and experience levels contemplated for holders of various key positions. A38. The requirement will not be waived. The submission should note if the proposed key personnel have not been designated (i.e., have not received final approval by the foreign bank applicant’s management to serve in the position). Q39. Are there any restrictions on connecting premises within the capital using Microwave and Laser technologies to facilitate data transfer and communication? A39. No. Q40. Are there any restrictions or customs fees on importing computer equipment into Iraq ? A40. No. Q41. Are there any restrictions or requirements related to Card services such as ATM, Visa, Master Card related to; Service Offering; Funds Transfer, Certification, or Infrastructure? A41. No. Q42. Who will determine what is a safe and suitable working environment; the CBI, CPA or the applicant bank? A42. The CBI recognizes that the working environment in Iraq is an important factor that potential respondents will consider in weighing whether to submit an application pursuant to the RFA. It is ultimately up to each applicant to decide for itself if the working environment in Iraq is sufficiently safe and suitable according to the standards of that applicant. Q43(a). With regard to Article 5.2 (f) of the Banking Law, kindly confirm whether an affidavit is required even if there are no convictions? A43(a).Yes. Q43(b). If so, kindly provide us with a text of the affidavit. A43(b). This is part of the Stage 2 process. Foreign banks selected to advance to Stage 2 will be provided standard text for such affidavit from the CBI, as required by Article 5.2 (f). Q44. Article 11 refers to licensing fees. Kindly clarify what type of fees. A44. The application fee has been waived for the initial foreign bank licenses that are to be granted after completion of Stage 2 referred to in the Appendix RFA. The CBI reserves the right to charge a fee for subsequent foreign bank applications. The annual maintenance fee referred to in Article 11 has not yet been established. This will likely not be decided before the foreign bank licenses are granted. As noted in Article 11, the purpose of the fees is to cover part of the CBI’s expenses associated with bank licensing and supervision. Q45. Please confirm if the minimum USD 25 million in capital is required only for subsidiaries and no minimum capital requirement is needed in case of the establishment of a foreign branch. A45. That is correct. Q46. What is the structure of interest rate (debit/credit) as well as commission structure for funded/unfunded facilities? A46. Interest rates are currently set by the CBI, but it is anticipated that interest rates will be liberalized in the new future and will vary depending on economic conditions. The rates currently in effect are: Interests on deposits Current deposits 3% Deposits for 6 mth 8% Deposits for 1y 9% Deposits for 2y 10% Interests on credit Short term 14% Medium term 15% Long term 16% Central Bank interests Treasury bills 6% Rediscount 14% Overdraft 4% Clearing overdraft 20% There is no commission structure for funded / unfunded facilities. Letters of credit are subject to a 0.2% duty stamp. Q47. Is it possible to maintain Paid up capital currency in foreign currency? A47. Currently, the CBI does not prohibit Paid In Capital in foreign currency; however, CBI regulations could impose such restrictions at a future date. Exceptions shall be applied for and granted by the CBI. Q48. Are there restrictions against lending in foreign currency in local markets? A48. No. Q49. Are there restrictions against placing foreign currency abroad? A49. No. Q50. What is the general compensation level for bankers? A50. Because this information varies among banks, foreign bank applicants should do their own research on this matter. Contact information for Iraq’s private bankers/banks can be found at www.coalitioniraq.org . Q51. What is the inflation rate in Iraq for year 2002, what is the forecasted inflation, devaluation/revaluation rates for the next 3 years? A51. The inflation rate had been 15-20% annually until the spring of 2003. It is believed to have slowed after this time; however, it is currently difficult to obtain reliable information on price movements. The CBI is in the process of developing mechanisms to gather reliable inflation data. The inflation rate is expected to improve as Iraq moves toward price stability. Q52. What is the average cost of local manpower in the banking sector, both for managerial positions and for other local staff? A52. Because this information varies among banks, foreign bank applicants should do their own research on this matter. Contact information for Iraq’s private banks can be found at www.coalitioniraq.org . Q53. We understand that there is no minimum capital requirement for branches of foreign banks in Iraq. Please confirm. A53. Foreign branches do not require capital in Iraq. Q54. What are the main aspects of the planned FX regime in Iraq? eg. fixed or floating currency, etc. A54. The CBI currently employs a managed float FX regime. Q55. Referring to Article 11 of Iraqi Banking Law, what will be the fee structure for application for permit and maintenance? A55. The application fee has been waived for the initial foreign bank licenses to be granted after completion of Stage 2 referred to in the Appendix RFA. The CBI reserves the right to charge a fee for subsequent applications. The annual maintenance fee referred to in Article 11 has not been established. This will likely not be decided before the foreign bank licenses are granted. As noted in Article 11, the purpose of the fees is to cover part of the CBI’s expenses associated with bank licensing and supervision. Q56. After Article 13-1(b) of Iraqi Banking Law, a banking permit or license may be revoked if "the bank has not made use of the license or permit within twelve months after the date of its effectiveness". In RFA, it is stated that a foreign bank is expected to begin operations no later than six months after being granted a license. Please clarify: a. Which one superimposes the other? b. If any extension is foreseen in case of a force majeure ? A56. Because one goal of the CBI in issuing the first foreign bank licenses is to introduce a foreign bank presence in Iraq as soon as practicable, the RFA establishes a requirement in to begin operations in a time period (six months) that is shorter than the one established under Article 13-1(b) of the Banking Law (twelve months). Applicants who anticipate needing more than six months to commence operations after they have been issued a license should not apply for a license under this RFA and should instead apply for one of the licenses that will be offered in the future by the CBI. The six month requirement may be extended by the CBI if necessary due to force majeure. Q57. What is the minimum reserve ratio for the liabilities of banks? A57. The CBI will be working with experts to review its reserve policy requirements to ensure best practices. The requirements will be set in a manner that is in the best interest of monetary policy. Q58. What is the limit for aggregate loan amount at any time? Please specify the weighing of cash and non-cash transactions. A58. Please refer to the Iraq Banking Law, Article 30, Large Exposure, for limits. The implementing regulations referred to have not been drafted. Q59. Is there any limitation on cash transactions, cross-border money transfers? Q59. No. Q60. Is there any limitation on cross-border government bond purchases? A60. N o. Q61. What is the expected interest rates on deposits and loans? A61. Interest rates are currently set by the CBI, but it is anticipated that interest rates will be liberalized in the new future and will vary depending on economic conditions. The rates currently in effect are: Interests on deposits Current deposits 3% Deposits for 6 mth 8% Deposits for 1y 9% Deposits for 2y 10% Interests on credit Short term 14% Medium term 15% Long term 16% Central Bank interests Treasury bills 6% Rediscount 14% Overdraft 4% Clearing overdraft 20% Q62. Please confirm that a foreign bank may own, directly or indirectly through a foreign company that is not a bank, 100% of the shares of (or interests in) an Iraqi bank. In other words, please confirm that there is no prohibition on interposing a foreign holding company between a foreign bank and an Iraqi bank subsidiary. A62. Article 4, paragraph 3, of the Banking Law permits the granting of licenses to Iraqi banks that are controlled by foreign persons only when the parent bank is subject to consolidated supervision by a supervising authority in the country in which the parent bank’s head office is located. In the event that a foreign holding company that is not a bank, but is owned by a foreign bank applies for a foreign bank license, CBI will have to satisfy itself that the corporate structure of the foreign bank and holding company does not prevent the foreign bank from being subject to effective consolidated supervision by the supervising authority in the country where the bank’s head office is located. Q63. Please confirm that a de novo bank, organized by a foreign bank, could take the form of a limited liability company under Iraqi law. We understand that the Companies Law No. 21 of 1997 authorized limited liability companies but only for Iraqi nationals or certain citizens of other Arab countries. We also understand that Coalition Provisional Authority Order Number 40 should suspend the nationality requirement, thus permitting foreign ownership of an Iraqi limited liability company. A63. The Banking Law (CPA Order Number 40) does not limit foreign ownership of a bank (whether LLC’s or not) to Arab Countries . Article 107, paragraph 2 of the Banking Law provides that in case of inconsistency with a provision of any other law of Iraq, the Banking Law shall prevail. Since the Banking Law permits the establishment in Iraq of a bank that is wholly owned by a single foreign bank (Arab or other) or bank holding company, any inconsistent provisions contained in the Companies Law are without effect. Q64. In the case of a foreign bank applying for a permit to open a branch, Article 6(1)(f) of the Banking Law permits the Central Bank of Iraq (CBI) to require the foreign bank to undertake to make available, on demand of the CBI, funds necessary to cover all obligations and liabilities incurred in the conduct of banking business under the permit. Please clarify whether such an undertaking is intended as a guarantee of the obligations of the branch or whether it is intended as a mechanism for insuring that the branch complies with the asset maintenance requirements of Article 15 of the Banking Law. (Hereinafter, citations to "Articles" refer to articles of the Banking Law.) A64. Article 6(1) (f) is intended as a mechanism for insuring that the branch complies with the asset maintenance requirements of Article 15 of the Iraq Banking Law. Since a branch is not a separate entity, it is understood without an express statement in the Iraq Banking Law that the foreign bank guarantees branch obligations. Q65. Please confirm whether the Article 15 asset maintenance requirement is to be applied on an aggregate basis for all Iraqi branches of a foreign bank. A65. Confirmed. Q66. Article 1 defines a "bank" as a person holding a license or permit, so that a "bank" would apparently include a foreign bank holding a branch permit. If so, it would appear that a foreign bank could be subject to the requirements of Articles 22 and 23, among others. Please clarify whether a foreign bank with a branch in Iraq would be deemed a "bank" for all purposes under the Banking Law, including Articles 22 and 23. A66. The CBI expects to address changes of control and mergers of the foreign parent in a separate regulation. The CBI expects, at a minimum, that it will: 1) require to be notified of the changes; 2) require that certain information be provided so the CBI can determine compliance with applicable provisions of the Iraq Banking Law (e.g., consolidated supervision); and, 3) provide an after-the-fact approval/denial of the change. The CBI reserves the right to revoke the ability of the new foreign bank to operate in Iraq if it does not meet the requirements for foreign branches operating in Iraq (e.g., subject to comprehensive supervision). Q67. Article 4(5) states that branches of banks owned by foreign persons are to be treated under the laws of Iraq in the same way as domestic banks. Many of the provisions of the Banking Law (for example, Article 16) do not appear to be applicable to branches of foreign banks. Article 26(6) states that the CBI shall issue regulations addressing the applicability of certain provisions of the Banking Law to domestic branches. Is there any preliminary guidance on which Articles will apply to domestic branches? A67. Article 4, paragraph 5, applies only insofar as the Banking Act does not distinguish between branches and subsidiaries. For example, the capital requirements contained in Section 3 are different for banks and branches. To the extent it is not already addressed in the Iraq Banking Law, not at this time. However, the CBI recognizes that it is critical for a foreign bank branch to know this information before it begins operations. Thus, the CBI will provide this guidance to the foreign bank branch before the licensing process is completed. Q68. Is there a mechanism or application procedure contemplated by which a foreign bank could convert a branch permit to a subsidiary license or vice versa? A68. A mechanism is not in place currently, but the CBI contemplates that a mechanism or application procedure will be put in place. Q69(a). The language of Article 4 appears to require an Iraqi subsidiary of a foreign bank to have a minimum capital of 50 billion dinars, while Article 14 requires that a domestic bank have a minimum capital of 10 billion dinars. The RFA indicates that the 50 billion dinars capital requirement is applicable to the foreign bank itself. Please clarify. A69(a). If a foreign bank buys a majority interest in a domestic bank, the resulting bank must meet the capital requirement found in Article 4 (i.e., 50 billion dinars). Q69(b). Further, based on Article 4(1), we understand that the capital of a bank subsidiary of a foreign bank need not be maintained in Iraq . Please confirm A69(b). The CBI will look more favorably on applications which contemplate that the capital of a foreign bank subsidiary will be kept in Iraq, but it is permissible to maintain the capital of a foreign bank subsidiary outside of Iraq. If this capital is not kept in Iraq, applications should detail where this capital will be maintained and under what circumstances the applicant would transfer the requisite capital to Iraq. Q70. Please confirm that a foreign bank that controls a bank subsidiary in Iraq is not required by the Banking Law to inject additional capital into the bank subsidiary other than to satisfy capital requirements under Article 14(1) (minimum capital requirements) and Article 16 (capital adequacy requirements). A70. This is not correct. See Article 4 of the Iraq Banking Law. A subsidiary of foreign owned banks are required to have 50 billion dinars of capital. Q71. Please confirm that the lending limits of Article 30, if applicable to a foreign bank's Iraqi branch(es), would be based on the foreign bank's worldwide capital. A71. While the Iraq Banking Law does not address single borrower limits for foreign branches, the CBI will look to the parent foreign bank’s capital when applying such borrow limits. Q72. Article 27(1)(k) could be read as requiring that "incidental" and other non-prohibited activities must be authorized by regulation of the CBI. Is there a mechanism by which banks will be able to obtain informal advice from the CBI as to what constitutes a permitted incidental activity? A72. Applicants are encouraged to list activities in which they wish to engage that are outside of the permitted activities noted in Article 27, thereby allowing CBI to develop appropriate policies and regulations. Q73. Does the authority of the CBI under Article 27(2) to require by regulation that certain banking activities be conducted through separate subsidiaries apply to activities that could be conducted by the branch of a foreign bank? A73. Yes, although it is not possible to say definitively at this time what specific activities of the foreign branch this would apply to. Q74. Does the CBI have the discretion to reduce the capital requirements for a subsidiary of a foreign bank should a suitably-worded letter of comfort be provided as support by the ultimate parent? A74. No, the minimum capital requirements are specified by law. Article 3, paragraph 3 provides limited waiver authority to CBI with respect to entities that do not carry on banking business on a scale which requires a commercially organized business undertaking. Q75. What are the plans of Central Bank of Iraq for reestablishing a functional, national payment system? A75. The CBI’s long term objectives include the establishment of a modern electronic funds transfer system. However, there is no estimate at the moment as to when such a system might be operational. Applicants should assume that such a system will not be established for at least two years. Q76. What regional branches does CBI have at the moment? What branch network does the CBI expect to establish within the coming 12 months? A76. CBI currently has operational control of two branches, in Mosul and Bahsra. The CBI is currently negotiating operational ties with two branches in Erbil and Sulemaniyah. There are currently no plans to establish additional CBI branches. Q77. We presume there are no foreign exchange controls currently in place or planned for the future? A77. There are no foreign exchange controls currently in place and there are no plans in process to establish such controls. Q78. The selection process for the senior management positions for our Iraq operations is currently underway. If the process is not completed, can we submit the name and profile of the senior manager after the closing day? A78. Applicants should submit who they are considering to make the application complete. The submission should note if the key personnel named have not been designated (i.e., have not received final approval by the foreign bank applicant’s management to serve in the position). The CBI understands that there might be management changes but the application should be as complete as possible. Q79. The following questions relating specifically to the Banking Law may not be directly relevant for immediate purposes. However, we believe they are potentially important for purposes of gaining an understanding of the general legal and regulatory environment. a. Please confirm that foreign banks are not required to follow the procedures set forth in Regulation 5 of 1989. A79(a). Regulation 5 was superceded by Law No. 62 of 2002, “Arab Investment”. That law was replaced by CPA Order No. 39 of September 19, 2003, which replaced all existing foreign investment law. Order No. 39 also established new foreign investment rules in sectors other than banking and insurance. Foreign investment rules in the banking sector are contained exclusively in the Banking Law. b. To what extent is the CBI required to maintain confidentiality of examination data? A79(b). Sections 8 and 9 of the Banking Law deal with confidentiality issues. Essentially, CBI and its employees are prohibited from disclosing examination data beyond what is required in the performance of their official duties. c. With respect to the definition of "deposit," please clarify how a bank will record its liability for a deposit for which the bank has no record. A79(c). Banks are required to create and maintain records of all deposit liabilities, and it is expected that they will do so. The reference in the definition to sums not evidenced in the bank's records merely reflects that in the unfortunate event that a bank's records are deficient, the existence of a liability may be demonstrated by extrinsic evidence. d. Please explain the scope Article 57(2) with respect to the jurisdiction of the penal courts. That is, does Article 57(2) apply only to actions for engaging in banking activities without a banking license or permit ? A79(d). Article 57, paragraph 2, refers to actions taken in violation of Article 57, paragraph 1, that is, engaging in banking activities as a business without a banking license or permit issued by the CBI. Q80. What is your view on the applicability of some Iraqi regulations, such as the Arab Boycott Law, which are problematic to a US applicant? A80. The Arab Boycott Law (a.k.a, the “Black List”) is no longer in effect in Iraq. Q81. The RFA requires description of the information technology (IT) plan of foreign banks submitting proposal. One of the most important factors that influence an IT strategy and plan is the communication infrastructure. Please provide the current state of communication infrastructure such as availability of landlines, cellular services, leased lines and satellite links as well as a broad outline of expected infrastructure developments to enable us to draw a practical plan. A81. Communications facilities in Iraq are currently limited. Even under the former regime, only 2% of the population had telephone service. A modern telecommunications infrastructure is under construction, but will take time. Three cellular service contracts have been awarded (one for northern Iraq, one for central Iraq and one for southern Iraq) and those services are expected to be operational by early 2004. These services are expected to be voice only through 2004. The cellular service provider for Baghdad will be Orascom. A central satellite gateway has been established, but landline connectivity to that gateway is still under construction. Banks are encouraged to factor into their plans the installation of their own VSAT link at their expense to provide both domestic and international data and voice communications through at least 2004. There is a very minimal VSAT licensing fee intended just to cover processing costs. Q82. It is requested for CPA, CBI, and any other Ministries with information of an economic or financial/banking nature which could be relevant to intending Applicants to make available (by dissemination via the Internet, for instance) as much of such information, and as early, as possible. It is further requested for CPA and CBI to consider allowing intending Applicants to contact and consult any section of those entities not directly involved in the functions of evaluating Applications and granting banking licenses / permits . A82. See attached data. The only persons Applicants may not communicate with are CBI personnel and members of the Selection Committee. Q83. It was said that telephone services (voice, fax and data) will be restored to a major part of the capital by November, has this been done? A83. See answer to question 82. Q84. What are the plans to get Iraq on the SWIFT network? A84. The CBI recognizes that it is important for Iraq to participate in SWIFT and intends to do so as soon as the telecommunications infrastructure so permits, hopefully by the end of 2004 . Q85. Are there anticipated CBI requirements for automatic check clearing? A85. Y es, but not for at least one year. Q86. Are there restrictions on foreign employment? A86. Yes. The specific laws and regulations concerning the employment of foreigners are still being prepared, but it is anticipated that in general foreign staff will be restricted to senior management and highly technical positions and that there will be a cap of approximately 10% on the portion of a foreign bank’s staff in Iraq which may be foreign. Q87. What is the availability of social security systems? A87. A new social security system for private sector employees is anticipated, but is still being designed and developed . Q88. Can we get updated data regarding deposits and credits (local/foreign) in the Iraqi market? A88. The latest data available is attached. Q89. What are the corporate and income tax rates in Iraq ? A89. Tax rates for 2004 and beyond have not yet been officially established. The current expectation is that the corporate tax rate will be 15% and the maximum income rate will be 15% (down from 40% under the previous regime). The personal allowance may be increased. An order is expected to be issued in approximately one month which will clarify the tax situation for 2004. Q90. Is there any tax immunity period for newly established business enterprises in banking sector in Iraq ? A90. No such immunity period is currently contemplated.