BBAC Iraq Central Bank Mandatory Reserves Coverage
Project Description
On June 28, 2019, MIGA issued guarantees of up to US$66.5 million covering BBAC’s branches in Iraq against the risk of expropriation of mandatory reserves held at the Central Bank of Iraq, for a period of up to 5 years.
Lebanon-based BBAC is one of the main commercial banks among Lebanese banks operating in Iraq. In this context, BBAC maintains a competitive position among Iraqi’s private sector banks, which it seeks to improve through the MIGA guarantee. BBAC’s foreign branches are required to maintain reserves at the central banks of their respective jurisdictions, based on the volume of customer deposits. Mandatory reserves affect BBAC’s overall risk-weighted assets (RWA) at the consolidated level, resulting in less headroom for other assets at a given level of capital.
Environmental Categorization
The project is a Category FI-2 according to MIGA’s Policy on Environmental and Social Sustainability (2013), given BBAC’s exposure to business activities that have potentially limited environmental and social (E&S) risks or impacts. BBAC mainly provides short- and medium-term loans to corporate clients as well as small and medium-sized enterprises (SMEs). MIGA has reviewed BBAC’s portfolio for types of transactions, size, tenor, and industry sectors. The highest sector exposures as of March 2019 in the Iraq portfolio are in contracting/construction (59%), wholesale and retail trade (35%), as well as exposure to agriculture/ agricultural processing (5%) and retail banking (<0.1%). The Bank does not engage in project finance (per the Equator Principles and MIGA definition). BBAC provides lending to corporates and SMEs, representing 86% and 14% respectively. Lending is predominantly short term; 92% of it is for less than 1 year.
Based on the E&S risks associated with the Branches’ portfolio, the applicable requirements will be to ensure that loans extended by them will be screened against (i) MIGA’s Exclusion List; (ii) applicable E&S national laws and regulations, and (iii) applicable MIGA’s Performance Standards (PSs). As a result of engagement with MIGA, BBAC has voluntarily integrated the MIGA Exclusion List in their updated Iraq Credit Risk policy as of December 2018. BBAC does not currently have E&S screening procedures in place, however, to ensure effective assessment and management of E&S risks, BBAC has committed to developing an Environmental and Social Management System (ESMS) and integrating additional E&S requirements in their loan review process in their Iraqi branches. BBAC will be required to develop and implement in their Iraqi branches an ESMS, in line with MIGA’s Performance Standard 1 (PS1): Assessment and Management of Environmental and Social Risks and Impacts and operate in a manner consistent with applicable elements of Performance Standard 2 (PS2): Labor and Working Conditions.
Based on MIGA’s review and applicable performance requirements, an Environmental and Social Action plan (ESAP) will be agreed with BBAC for implementation within an agreed timeframe. The ESAP will be expected to contain the following items: a) BBAC will appoint an officer as ESMS coordinator at Headquarters and Iraqi branches; b) develop and implement an ESMS in line with MIGA’s PS1 requirements; c) update the Human Resources procedures and policy in line with MIGA’s PS2 requirements; d) implement a training program for staff on E&S risk management; and e) conduct a life, fire and safety audit for Iraqi branches.
BBAC will submit an annual monitoring report to MIGA documenting the implementation of the ESMS as well as ongoing compliance with MIGA’s E&S requirements and the overall E&S performance of the portfolios in their Iraqi branches.
Development Impact
The aim of MIGA’s proposed guarantees is to help BBAC reduce the risk weight of some of its assets, which would lead to a reduction in the group’s RWA on a consolidated basis. The RWA capacity that is freed up is expected to be used by BBAC’s Iraqi branches to extend more credit in Iraq, thereby supporting private sector growth and employment in the country.
MIGA’s proposed coverage to BBAC is aligned with ongoing World Bank Group activities seeking to support the development of Iraq’s financial sector.
1The guarantee to BBAC S.A.L was cancelled on June 28, 2020..
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MIGA supports its clients (as defined in MIGA Policy on Environmental and Social Sustainability) in addressing environmental and social issues arising from their business activities by requiring direct investment clients to set up and administer appropriate grievance mechanisms and/or procedures to address complaints from Affected Communities. MIGA support to Financial Intermediary clients applying the Performance Standards are required to develop External Communications Mechanisms to receive and review inquiries or complaints from any interested party regarding the E&S risks and impacts of their operations as per the requirements of Performance Standards 1.
In addition, Affected Communities have unrestricted access to the Compliance Advisor/Ombudsman (CAO), the independent accountability mechanism for MIGA. The CAO is mandated to address complaints from people affected by MIGA-guaranteed business activities in a manner that is fair, objective, and constructive, with the goal of improving environmental and social project outcomes and fostering greater public accountability of MIGA.
Independent of MIGA management and reporting directly to the World Bank Group President, the CAO works to resolve complaints using a flexible, problem-solving approach through its dispute resolution arm and oversees project-level audits of MIGA’s environmental and social performance through its compliance arm.
Complaints may relate to any aspect of MIGA-guaranteed business activities that is within the mandate of the CAO. They can be made by any individual, group, community, entity, or other party affected or likely to be affected by the environmental or social impacts of a MIGA-guaranteed business activity. Complaints can be submitted to the CAO in writing to the address below:
Compliance Advisor/Ombudsman
International Finance Corporation
2121 Pennsylvania Avenue NW
Room F11K-232
Washington, DC 20433 USA
Tel: 1 202 458 1973
Fax: 1 202 522 7400
E-mail: cao-compliance@ifc.org