Moody’s assigns first time ratings for Elaf Islamic Bank

Cyprus: Moody’s Investors Service (Moody’s) has assigned first time local and foreign currency long-term and short-term bank deposit ratings of Caa2/NP for Elaf Islamic Bank (EIB). At the same time, the rating agency has assigned a Baseline Credit Assessment (BCA) and Adjusted BCA of caa2, long-term and short-term Counterparty Risk (CR) Assessments of Caa1(cr)/ NP(cr), long-term local and foreign currency Counterparty Risk Ratings (CRRs) of Caa1, and short-term local and foreign currency CRRs of NP. The outlook assigned to the long-term deposit ratings is stable.

Ratings rationale

Elaf Islamic Bank (EIB) is a privately owned bank registered and incorporated in Iraq since 2001. The bank changed its name from Al Baraka Bank for Investment and Finance to Elaf Islamic Bank in 2007. EIB provides sharia-compliant banking and financial services through 16 branches inside Iraq. Paid up capital is 250 billion Iraqi dinars (IQD), equivalent to around $171 million.

EIB’s Caa2 long-term deposit ratings take into consideration the bank’s caa2 BCA and no uplift from the Government of Iraq (Caa1 stable), based on Moody’s expectation of a low probability of government support, given the bank’s relatively small size in the country’s banking system and the government’s track record of allowing private banks to fail.

Rationale for BCA

EIB’s caa2 BCA reflects Moody’s expectation that the bank will maintain adequate capital, low profitability and ample liquidity buffers. These are balanced by strained asset quality largely due to the bank’s impaired letter of guarantees (LGs) portfolio, claims of funds misappropriation by a previous board member which resulted in change of the board of directors in 2019, and sizeable balances with the Central Bank of Iraq (CBI) which closely links EIB’s credit profile to that of Iraqi government’s Caa1 issuer rating. In addition, the bank’s BCA is also constrained by the highly challenging operating environment in Iraq.