Banking Alliance in Iraq

The Pivotal Role of Banks in the National Economy

There is undoubtedly a consensus that banks play a significant and major role in driving the wheel of development and ensuring the prosperity of the national economy for every state. They constitute an integral part of the economic fabric as a whole, influencing it and being influenced by it.

Banks are considered among the most prominent institutions and essential pillars within the commercial and economic environment of any country, due to the fundamental duties they perform:

Supporting the National Economy: They contribute effectively to financing development operations and stimulating economic movement.
Service Provision: They offer diverse activities and services to individuals and various institutions.
Impact of Failure: Conversely, the stumbling or failure of a bank to perform its functions leaves negative impacts on economic and commercial life.

Consequently, this reality imposes a necessity upon banks to adopt sound strategies that assist in investing their resources and capabilities in a manner that enhances their competitive position. This becomes increasingly important in a business environment characterized by:

High levels of competition.
The profound impact of continuous development within this sector.

Adapting to Global Business Changes and Strategic Expansion

With the transformation of the global business environment, the banking sector has begun to play an extremely critical role in the economy. Therefore, it has become essential for companies, including banks, to adapt to these changes to ensure their survival and the achievement of their objectives.

Facing the challenges that banks encounter requires them to diversify policies and expand the services they offer. Some of the means that guarantee companies their continued growth, profitability, and success include:

Mergers and Acquisitions (M&A).
Joint Ventures.

However, it must be noted that all these means will not be sufficient if the institution fails to pay adequate attention to its customers. Customers are the primary source of funding for institutions, whether they are:

Natural Persons: (Individuals).
Legal Persons: (Corporate entities or organizations).

The Emergence of the Banking Alliance in Iraq

In Iraq, the concept of the "Banking Alliance" has emerged as one of the modern methods aiming to enhance cooperation between banks and raise their efficiency levels to confront increasing economic and financial challenges.

Regulatory Framework and Legal Basis

This initiative was formalized through the issuance of the "Controls for Certificates of Deposit and Banking Investment Certificates" by the Central Bank of Iraq on March 17, 2020.

This regulatory framework relies on specific legal grounds:

Article (27/C) of the Banking Law No. 94 of 2004.
Article (5/Seventh) of the Islamic Banking Law No. 43 of 2015.

The Origins of the Banking Alliance

The Inception of the Concept (1913)

The concept of the banking alliance was pioneered by the Federal Reserve Board (FRB). Its origins date back to 1913, marking a significant turning point in financial history when:

American banks were granted permission to form alliances with international banks in Europe and the rest of the world.
Prominent financial institutions that formed alliances during this era included:
- Mercantile Bank of America
- American Foreign Banking Corporation
- Bank of Central and South America

Historical Evolution and Structural Development

From Club Banks to Consortia (1955–1964)

By 1955, the features of banking alliances began to manifest clearly through the "Club Bank" style. Subsequently, this evolved into the emergence of Syndicate or Consortium Financial Institutions.

In 1964, the first broad international banking alliance was formed under the name "Midland and International". This alliance was managed by Midland Bank and included:

Standard Bank of UK
Commercial Bank of Australia
Toronto Dominion Bank (Canada)

Following this milestone, a group of significant alliances emerged, most notably:

Abecor (Associated Banks of Europe)
Euro Partners
Euro Banking International Company
Inter-Alpha
Europe Finance Society

The Modern Era: Diversification and Technological Integration (1990s – 21st Century)

During the 1990s and the early years of the 21st century, a new aspect began to appear in the developmental stage of banking alliances.

The primary objective of these alliances shifted from mere international geographic expansion to the diversification of the service portfolio.

Expansion Beyond Financial Institutions

Alliances were no longer limited exclusively to financial institutions. They expanded to include institutions in various different sectors, particularly driven by the rapid development of Information and Communication Technology (ICT).

This shift was necessitated by several factors:

Financial institutions often cannot provide specialized modern services independently.
There is a crucial need to leverage the expertise of specialized non-banking institutions.

Key Areas of Cross-Sector Cooperation

Banks began collaborating with external experts, such as:

Banking Security Companies: To ensure the safety of assets and data.
Internet Service Providers (ISPs): To facilitate connectivity.

The ultimate goals of these modern alliances are to:

Provide safe and fast remote banking services.
Reduce operational costs.
Enhance and foster innovation.

The Concept of the Banking Alliance

After presenting an overview of the inception of this concept and its evolution, there is a pressing need to define the idea and subsequently elucidate its legal basis within Iraqi legislation, as detailed below:

First: Definition of the Banking Alliance

Strategic alliances are considered among the most common options for institutions in developed nations. This is due to the opportunities they provide for pooling the available resources of each party to proceed with joint work.

This collaborative approach:

Reduces the degree of risk that institutions would face if they operated in isolation.
Enhances the competitive advantages of the allies.
Represents a significant strategic direction for achieving effective competition by forming alliances with carefully selected competitors to realize the desired goals of the allied parties.

Defining the Strategic Alliance

Consequently, the concept of a strategic alliance can be defined as:

"Cooperative agreements between organizations that may be competitors. Strategic alliances range from cooperation agreements in the fields of marketing, advertising, research, and development, to joint ventures."

This definition implies that alliances are not limited to competing companies within the same activity; they can extend to alliances with non-competing companies in different activities.

Example of Cross-Sector Alliance:

If a financial bank allies with a company to provide electronic services:

The Bank: Desires to obtain services it cannot secure itself due to reasons related to financial resources, manpower, or precise knowledge in the field of technology.
The Electronic Services Company: Provides its services to the bank to achieve profit.

Operational Dynamics and Competitive Advantage

The strategic alliance has also been defined as:

"An agreement between two or more parties realized while each party to the alliance retains its particularities that distinguish it from other allies."

Under this alliance, the self-capabilities of each party are leveraged in a manner that allows the allied parties to:

Improve their competitive capabilities in their field of work.
Avoid the shortcomings that characterize the work of each entity individually.
Increase effectiveness, allowing for the reduction of production costs or the increase of market share within the sector they operate in.

Note: The alliance requires periodic evaluation with the intent of avoiding errors to improve performance. This alliance allows for bypassing the consequences resulting from "destructive competition." Instead of war between competitors in a specific field, the allies cooperate to achieve common goals.

Juristic and Academic Perspectives

Most definitions have viewed the commercial alliance from an economic perspective. However, given the multiplicity of definitions by jurists and commentators regarding commercial alliances, a segment of scholars has directed their focus specifically toward the Banking Alliance.

Contractual Definition: Some defined it as "a wide range of contractual relationships arising between competing institutions in different countries, seeking to achieve a specific goal."
Cooperative Definition: Others defined it as "replacing the competition that might lead to driving one of the parties out of the market, provided that the alliance leads to cooperation, control over risks and threats, and the sharing of profits and benefits among the parties."

Definition and Legal Framework of Banking Alliances

Operational Concept of Banking Alliances

The banking alliance has also been defined as a form of cooperation between a group of banks, aiming to coordinate efforts and exchange expertise and resources, without these banks losing their legal independence.

Typically, this alliance is formed to achieve common objectives, including:

Funding Major Projects: Pooling resources for large-scale endeavors.
Developing Banking Services: Innovating new solutions.
Risk Management: Confronting financial risks collectively.
Market Position: Achieving significant gains, enhancing competitive positions, and increasing the market shares of the alliance members.

The Legal Framework in Iraqi Legislation

On the level of Iraqi legislation, we do not find a law explicitly dedicated to regulating the issue of banking alliances. However, relevant provisions can be found in Competition and Anti-Monopoly Law No. 14 of 2010.

1. Competition and Anti-Monopoly Law Constraints

Article (9) of the aforementioned law addresses commercial practices, stating:

"Any merger between two or more companies, and any restrictive commercial practice, is prohibited if the merged or associated company or group of companies controls 50% or more of the total production of a specific good or service, or if it controls 50% or more of the total sales of a specific good or service."

Observations on this Article:

General Prohibition: Companies, regardless of their activity, are prohibited from entering into any commercial alliances, agreements, or consensuses in general policy if such practices lead to controlling 50% or more of the total production or sale of a specific good or service.
The Legal Threshold: This percentage represents the legally prohibited limit, as it constitutes a violation of legitimate competition.
Consequences of Monopoly: Exceeding this limit leads to monopoly, the effect of which is reflected in restricting the entry of new institutions into the markets controlled by those alliances.
Implication for Banks: Banking alliances can be established among banks within the same activity, provided that the control ratio of this alliance does not exceed the legally prohibited limit. Otherwise, they expose themselves to accountability according to the penalties prescribed in the law.

2. Central Bank of Iraq Regulations (2020)

In 2020, the Central Bank of Iraq issued the "Controls for Certificates of Deposit and Banking Investment Certificates" (Number 9/3/127 dated March 17, 2020).

Within these controls, the concept of the banking alliance was explicitly defined as:

"The cooperation of two or more banks to issue investment certificates with the aim of financing a specific project, and providing appropriate guarantees in exchange for their issuance, taking into consideration the specificity of Islamic banks."

Critique of this Definition:

Restriction of Parties: It limited the alliance to banks only, excluding other institutions.
Restriction of Scope: It reduced the alliance's purpose solely to financing projects and issuing investment certificates, ignoring other objectives.
Lack of Detail: It was devoid of an explanation regarding the nature of this cooperation and failed to mention other patterns of banking alliances.

Trends in Determining Alliance Parties

Based on the above, two trends have emerged regarding the identification of parties in a banking alliance:

The First Trend (Narrow Approach): Views the banking alliance as a cooperative relationship strictly between two or more banks. This trend confines the alliance solely to inter-bank relationships.
The Second Trend (Broad Approach): Expands the scope of the banking alliance regarding its parties, viewing it as a cooperative relationship between a group of banks and financial institutions.

The Necessity of Broadening the Scope

Given the preceding points, it is essential to expand the scope of the banking alliance regarding the parties involved and not restrict it to alliances between banks or between banks and financial institutions.

Economic Necessity:

Economic necessity may drive banks toward establishing commercial alliances with companies specialized in other activities. Examples include:

Technology Companies: A bank may ally with a company that possesses the technology the bank needs to expand and develop its activities or add a specific service.
Research Centers: There is a possibility of establishing alliances with centers for research and studies.

Conclusion

We find nothing to prevent the occurrence of an alliance in its broad sense between a bank and another company in a different activity, provided that:

The purpose of the alliance is legitimate.
It is not contrary to the law and public order.
It takes into consideration the provisions of Article (9) of the Competition and Anti-Monopoly Law No. 14 of 2010.

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