Encouraging the development of small and medium sized enterprises in Iraq
Khaled Saqqaf
Al Tamimi & Company
Baghdad
Khaled Saqqaf (Bio)
The growth of Iraq's economy and the continued development of its local market have been stagnated by decades of war and political unrest. To exacerbate matters further, the country's overwhelming dependence on oil revenues as well as its reliance on large nationalised industries, have severely stifled attempts by investors, particularly small and medium sized enterprises, to enter into the Iraqi market. Add to this, high start-up costs, ongoing power, water and electricity shortages, major security threats, and uncertainty regarding the future of Iraq, it comes as no surprise that the development of a truly competitive market in Iraq continues to face many hurdles.
In recent years, however, the Iraqi government and the relevant authorities introduced a number of measures which will greatly assist in encouraging investment in Iraq; and with the aim of creating a more stable economy, to be more in line with international commercial practices, help rebuild Iraqi infrastructure and create greater job opportunities.
These measures range from the introduction of a five year National Development Plan in 2010 and the adoption of the Investment Law No.13 of 2006 which provides various incentives and guarantees to potential investors to the Central Bank of Iraq (CBI) policy of maintaining interest rates at 6%.
This article focuses on the introduction of one such measure, introduced by the CBI, which will help to create such a market-based economy in Iraq; Ordinance to Regulate the Operations of Small and Medium Enterprise Financing Companies No.3 of 2010 (the Ordinance).
The Ordinance
Article 1 of the Ordinance allows, for the first time, the establishment of joint-stock or limited liability companies to finance small and medium sized enterprises (SMEs) and provided that the minimum capital of such companies, if joint-stock companies, is not less than ID2 billion (approximately $1.7 million); and not less than ID1 billion (approximately $855,000) if limited liability companies. Further, the Ordinance provides that such companies shall be placed under the supervision of the CBI and shall be licensed by the same. SME Financing Companies are entitled, in accordance with the provisions of the Ordinance and the related CBI Instructions, to grant loans and credit facilities to beneficiaries for the purpose of financing SMEs and to provide the limits and conditions for the same. Further, if established as a joint-stock company, the SME Financing Company is entitled to issue bonds not exceeding 50% of its share capital.
The Ordinance provides a number of vital guidelines to SME Financing Companies when providing such facilities:
(i) Grant loans to those customers who are committed to meet credit obligations and in accordance with the Financing Company's internal policies and procedures;
(ii) Refrain from extending credit to the Financing Company's board members, managing directors, stockholder board members and stockholder executive directors; and
(iii) Extend credit to Iraqi persons for projects which are economically beneficial, resulting in a decrease in unemployment and better standards of living and in accordance with the Financing Company's internal policies and procedures.
In addition, the Ordinance provides that the SME Financing Companies shall monitor the beneficiaries' utilisation of the loans granted, in the manner that ensures its repayment.
In regards to the conditions relating to the loans themselves, the Ordinance provides that the loans shall:
(i) have attractive interest rates to be specified in the loan agreement between the Financing Company, the bank and the beneficiary and in accordance with international best practices to cover their operational and financial expenses, reserves for loan losses and increase in their share capital;
(ii) facilitate repayment by providing grace periods and appropriate schedules as specified in the loan agreement and in accordance with the Financing Company's internal policies and procedures;
(iii) be used for the purposes specified in the loan agreement.
Finally, the Ordinance provides a number of provisions relating to the organisation and administration of the Financing Companies themselves. These include, without limitation, conditions relating to the financing, accounting and audit of such companies, the composition of its board members as well as the conditions relating to the competence and integrity of the same and of the authorised manager, as well as some guiding principles in the execution of their work, including the need to respect the confidentiality of information.
Conclusion
The majority of investors, both small and large, tend to face the same concerns in starting up and/or expanding their businesses; namely recourse to the funding necessary to achieve the same. In this regard, SMEs are at an acute disadvantage in trying to encourage investors to finance their projects, particularly in a country like Iraq, which relies heavily on oil and other such major industries; Abdul-Hussein Al-Anbaki, Economic Adviser to the Iraqi Prime Minister Nouri Al-Maliki, said that: "SMEs contributed very little to Iraq's GDP and had so far failed to attract much funding from the government due to the high cost of establishing projects." The new Ordinance, introduced in 2010, allays many of these concerns thereby helping to create a more competitive market in Iraq to better ensure the continued reconstruction of Iraq.