Iraq: Interest-rate Caps in International Financing Transactions
1. Iraq: interest rate caps in international financing transactions
Iraq: interest-rate caps in
international financing
transactions
Interest-rate caps, which limit the amount
of interest that may be charged, can raise
significant issues in international financing
transactions. This article discusses the
applicable limitations on interest under Iraqi
law and their implications in transactions with
non-Iraqi lenders.
Caps on Interest
Article 172(1) of the Iraqi Civil Code (Law
No 40/1951) places an upper limit on interest
claims at a maximum of seven per cent.
This limitation applies to contractual interest
claims, such as interest on loans or for the
delay of payment:
‘The contracting parties may agree on
another rate of interest (other than those
mentioned in the preceding Article)
provided that it shall not exceed seven per
cent; where the parties agree on a higher
rate (of interest) it shall be reduced to
seven per cent and any amounts paid in
excess thereof must be refunded.’
Interest claims in excess of the seven per
cent cannot be enforced in court and will be
reduced accordingly.
It should be noted that the term ‘interest’
in Article 172(2) Civil Code is defined
broadly, to also include fees, service charges,
expenses and other costs not paid in
consideration of the provision of a specific
service by the lender:
‘Every commission or benefit of whatever
kind stipulated by the creditor, that when
added to the agreed interest the result will
exceed the aforementioned maximum rate,
will be deemed to be covert interest and
International Bar 26 Association Legal Practice Division
Iraq
Dr Kilian Bälz
Amereller Legal
Consultants, Cairo
kb@amereller.com
Dahlia Zamel
Amereller Legal
Consultants, Cairo
zamel@amereller
counterparty. The August Protocol is limited
to existing written agreements between the
parties, but parties can elect to have it apply
to undocumented swaps by entering into a
DF Terms Agreement. The March Protocol
allows parties to enter into an agreement to
apply selected compliance provisions to their
trading relationship for swaps that are not:
• governed by a written agreement, which
provides for, among other things, the terms
governing the payment obligations of the
parties; or
• agreed by the parties to be cleared by a
clearing organisation.
The architecture and process described
above is intended to address two fundamental
objectives: first, selective access to information
(which is effected by limiting access to certain
documents such as Questionnaires), and
secondly, flexibility (which is achieved by
allowing participants to specify any relevant
special status and to selectively choose which
provisions they wish to have applied). Note,
however, that conformed copies of Adherence
Letters (though in a standard form) are
uploaded and available for public viewing on
the ISDA website.
Conclusion
Many of the swap requirements mandated
by Dodd-Frank will not apply to occasional
Canadian swap market participants.
Nevertheless, such occasional market
participants are advised to familiarise
themselves with the Business Conduct Rules
and the August Protocol as they may well be
asked by protocol participants to adhere to
the August Protocol or otherwise provide the
information and representations mandated
by Dodd-Frank. Though, as noted, adherence
to the DF Protocols is not the only means of
complying with Dodd-Frank, the DF Protocols
do provide a vetted and standardised
mechanism by which to do so. A market
participant that has considered its options in
advance will be well-positioned to minimise
Dodd-Frank-related interruptions to its swap
relationships.
2. Iraq: interest rate caps in international financing transactions
Banking Law NEWSLETTER july 2013 27
may be reduced if it is established that said
commission or benefit is not consideration
for an actual service which the creditor has
rendered or any other lawful benefit.’
Finally, Article 174 prohibits compound
interest, that is, interest on interest, and
provides a further restriction by providing
that the aggregate amount of interest due
may not exceed the principal:
‘Interest may not be charged on the
outstanding interest and in no case may
the total interest received by the creditor
exceed the principal sum, in all cases
the foregoing is without prejudice to the
commercial rules of custom and usage.’
The respective provisions are inspired
by the rules of Islamic law (Sharia).
The predominant opinion in Islamic
jurisprudence holds that interest, paid on a
loan or in consideration for the deferral of a
debt, is unlawful.1 This general prohibition is
no longer upheld in the modern Arab Civil
Codes, which are mostly inspired by French
models. There nevertheless are repercussions
of Sharia law, and the prohibition of interest
has transformed into a cap on interest,
thereby prohibiting interest claims that the
legislature deems excessive.
Mandatory rules
Interest-rate caps are considered mandatory
rules. The parties cannot contract out of
them. Furthermore, Article 172(1) Civil
Code explicitly orders the judge to reduce
any contractual interest to the maximum
permissible limit of seven per cent.
Interest-rate caps also are applied to
agreements governed by foreign law. Under
Iraqi law, the parties are free to choose the
law applicable to an international financing
agreement. The choice of law, however, is
curtailed by the mandatory provisions of
Iraqi law (Article 25(1), 32 Civil Code). These
articles stipulate that notwithstanding a valid
agreement on governing law other than
Iraqi law, the provisions of a foreign law that
contravenes Iraqi public order or mandatory
rules may not be applied. Since it is generally
held that, from the Iraqi conflict of laws
perspective, interest rate caps are deemed
mandatory and that they also apply to financing
agreements governed by foreign laws, an
Iraqi court will still apply the mandatory rules
relating to interest to a contract that is governed
by foreign law. Finally, an Iraqi court is expected
to apply the interest rate caps when enforcing
foreign judgements and arbitral awards (to the
extent this is possible at all).2 This also means
that where the parties have agreed on a venue
or place of arbitration outside Iraq, the Iraqi
court will reduce the interest claim to the
maximum permissible seven per cent in the
enforcement proceedings.
Exemption of Iraqi banks
The Iraqi Banking Law (94/2004), which
regulates banking activities in Iraq, contains
an important exception in connection with
banks granting loans to customers. According
to Article 27(1) b) Banking Law:
‘A Bank may charge additional interest
on the interest and the aggregate
interest received by the Bank shall not
be limited to the principal amount of
the extended credit.’
This provision is understood to exempt banks
from interest rate caps and permits them to
charge interest at a higher rate, without being
subject to the seven per cent cap.
The application of the exemption in
Article 27(1)(b) Banking Law to international
transactions is not entirely clear. According
to a prevalent opinion in Iraqi practice,
however, the exemption only applies to Iraqi
regulated banks. This follows from the scope
of application of the Banking Law, which,
according to the present practice of the Iraqi
Central Bank, is limited to banks licensed
pursuant to the Banking Law with operations
in Iraq; so far, the Central Bank has been very
reluctant to subject financial institutions that
are only active in the cross-border business
to regulation in Iraq. If the exemption from
the interest rate cap is tied to being regulated
in Iraq, then it will not apply to such foreign
financial institutions, which are active in Iraq
only in cross-border transactions.
In addition, the exemption will only apply
to regulated financial institutions. Financing
providers that do not qualify as a financial
institution in the technical sense – such as an
equity investor granting a shareholder loan,
or a supplier extending a credit line to its
customer – do not fall under the exemption.
This means that regularly financing parties in
international transactions will not benefit from
the exemption granted by the Banking Law.
Application of Iraqi interest-rate caps by a
court or arbitration tribunal outside Iraq
Among the most controversial issues is
whether the interest-rate caps must also be
applied by a court or arbitration tribunal
3. Iraq: interest rate caps in international financing transactions
outside Iraq as mandatory rules which
restrict performance of the financing
agreement. If, for instance, an interest
claim is enforced in the courts of London,
New York or Frankfurt, will the respective
English or German court be bound by the
seven per cent limit in Article 172(1) of
the Iraqi Civil Code? Will the position be
different in arbitration? It should be noted
that debtors regularly invoke this defence,
and there is a number of more recent
English precedents where the courts had
to decide whether to consider an (alleged)
prohibition of or restriction on interest in
the jurisdiction of performance.3
The answer will depend on the conflict
of law rules applicable to each individual
case. This makes it impossible to provide
an answer in general terms. With regard to
the EU jurisdictions, the legal basis for the
application of overriding mandatory rules
is contained in Article 9 Rome I Regulation,
which provides under the title ‘Overriding
Mandatory Provisions’:4
1. Overriding mandatory provisions are
provisions the respect for which is
regarded as crucial by a country for
safeguarding its public interests, such
as its political, social or economic
organisation, to such an extent that they
are applicable to any situation falling
within their scope, irrespective of the
law otherwise applicable to the contract
under this Regulation. […]
2. Effect may be given to the overriding
mandatory provisions of the law of
the country where the obligations
arising out of the contract have to be
or have been performed, in so far as
those overriding mandatory provisions
render the performance of the contract
unlawful. In considering whether to give
effect to those provisions, regard shall be
had to their nature and purpose and to
the consequences of their application or
non-application.
This provision permits a court to apply
the overriding provisions of a jurisdiction
other than the jurisdiction of the forum in
case they qualify as ‘overriding mandatory
provisions’, render performance of
the contract unlawful at the place of
performance; and the court, in exercising its
discretion, decides to apply them.
With regard to interest rate caps as
contained in the Iraqi Civil Code, the
situation is not all that clear. We do, however,
take the view that interest rate caps are rather
not to be applied in an international forum.
This follows from the following deliberations:
• It is correct that from a conflict of law
perspective, the respective caps on
interest qualify as overriding mandatory
provisions. Legal commentators tend to
emphasise the need to restrict excessive
interest for the sake of consumer
protection and in the interest of the
economy at large.
• However, it is less clear whether the
respective interest rate caps render
performance unlawful, as far as interest in
excess of the cap is concerned. Normally,
an international financing agreement
will determine the bank’s seat as ‘place
of performance’. In addition, it can be
argued that the borrower is free to pay
interest at an amount exceeding the cap;
this is not a criminal offence, only the
respective claim is not enforceable in
court. This sets interest in excess of the
cap, apart from the violation of other
overriding mandatory provisions, such as
cartel laws, export control regulations or
currency exchange restrictions.
• Finally, Article 9(3) Rome I Regulation
provides the judge with a discretion to
apply the respective provision. Legal
commentators emphasise that a court
shall only apply foreign mandatory
provisions in case they are based on
‘shared values’, that is, if the court, after
considering their nature and purpose,
decides to apply them. When considering
the purpose and effect of applying
the provisions of the Iraqi Civil Code,
also the effect of the exemption under
the Banking Law must be taken into
consideration. The exemption, which
is limited to Iraqi regulated financial
institutions, is effectively a preferential
treatment of Iraqi (domestic) banks.
This preferential treatment is difficult to
justify as it effectively restricts the access
of foreign lenders to the Iraqi financial
market, and curtails the choices of Iraqi
borrowers. It is questionable as to whether
this is intended by the Civil Code rules.
As a result, we take the view that interest
rate caps are not normally ‘overriding
mandatory provisions’ in the sense of Article 9
Rome I Regulation, which a court of an EU
jurisdiction would have to apply irrespective
of the law governing the transaction.
International Bar 28 Association Legal Practice Division
4. Legal considerations in Nigeria’s banking sector’s strategic risk management
Legal considerations in
Nigeria’s banking sector’s
strategic risk management
Banking Law NEWSLETTER july 2013 29
Conclusion
Interest rate caps – even if not applied as
‘overriding mandatory principles’ in the
sense of Article 9 Rome I Regulation –
continue to provide challenges to financing
transactions with Iraqi borrowers. A choice of
law, and careful selection of venue respective
to the place of arbitration will only provide
a limited remedy since the interest rate
cap will be applied by an Iraqi courts in an
enforcement scenario of a foreign judgment.
In view hereof, international lenders are well
advised to seek additional comfort offshore,
for example, in the form of an interest
shortfall guarantee issued by, and enforceable
in a jurisdiction outside Iraq.
Notes
1 The Qur’an provides in Sura II:275: ‘God hath permitted
sale, but prohibited usury [ribâ]’. Based thereon, the
medieval Islamic jurists developed a complex doctrine
of prohibited usurious transactions. Principally, profit
derived from a trade in goods is deemed permissible,
whereas a return for lending money is unlawful. From
this, a general prohibition of interest was derived.
2 The legal framework for the recognition and
enforcement of court decisions is provided by Law No
30/1928. According to the provisions of the law, court
decisions are recognised and enforced on a reciprocal
basis. Reciprocity, however, must be confirmed by a
Decree issued by the Ministry of Justice. Where such a
confirmation is lacking, a foreign court decision cannot
be enforced.
3 See, eg, the discussion of the London High Court in
Islamic Investment Company of the Gulf (Bahamas) Ltd v
Symphony Gems NV (2002).
4 Rome I Regulation was adopted by the EU on 17 June
2008 and is applicable to all international contracts
subject to the Regulation concluded as from 17 December
2009. The Regulation establishes unified conflict rules
applicable to international contracts.
This article analyses the significant
dynamics of sustainable risk
management in Nigeria’s banking
sector drawing on relevant case law,
legislation, policy, domestic jurisprudence
and beyond. It concludes that every financial
institution ought to implement sound due
diligence and risk management strategies to
mitigate against the possibility of a run on the
banks, illiquidity, inadequate capital buffers
and reputational harm occasioned by legal
sanctions in criminal and civil courts et al.
Contextualising risk management
Analyses concerning the practical applications
of risk management and banking do
not instinctively strike a chord with most
people. Oftentimes, this is because strict risk
management is associated with empiricists
like engineers and nuclear physicists, to
mention just two cadres. The reality, however,
is that for centuries, banks have been versed
(albeit imperfectly) in the practice of risk
management. The overriding reason people
have kept (and still keep) their tangible
assets – money, precious gems, testamentary
dispositions, certificates of occupancy, etc. in
bank vaults is for insurance against theft, fire
or loss of any kind. Effectively, the necessity
to manage the risk against the loss of the
tangible asset underpins the desire to turn to
the banks for safe(r) custody.
There is no universally acceptable
definition of risk. It is, however,
incontrovertible that a risk is a determinable
indeterminable. For example, in banking it
could entail an occurrence with potentially
adverse consequences on access to capital,
weakened currency arbitrage, interest rate
uncertainties, sub-optimal levels of foreign
direct investments, bear markets driven
by sub-optimal investor confidence and
economic contraction. Blacks Dictionary
defines a risk as the ‘uncertainty of a result,
happening or loss’. Linked to that is risk
management. The latter entails the capacity
to access reliable, real-time information
about risks, smart decision-making processes
underpinned by a methodology of risk
Nigeria
Femi D Ojumu
Femi Ojumu & Co
Barristers and Solicitors,
Lagos
seniorpartner-lawyers@
femiojumu.com
