Iran
- Population – 68.8m (2004)
- Average lending interest rate – 16.0% (2005)
- % change in consumer prices – 13.4% (2005)
- GDP at constant 1997/98 prices – IR404,334bn (2004)
- Agriculture sector as % of total GDP – 41% (2004)
All Iran’s banks were nationalised in the aftermath of the 1979 revolution, and the 37 pre-revolution institutions were merged to leave six commercial banks (Bank Refah, Bank Melli Iran, Bank Saderat, Bank Tejarat, Bank Mellat and Bank Sepah) and three specialised institutions (Bank Keshavarzi, Bank Maskan and Bank Sanat va Maadan). The structure of Iran’s banking system was reorganised to conform to the principles of Islam, which prohibits payment of riba (variously interpreted to mean interest or usury), and these changes were codified in 1983 in the Usury-Free Banking Law. Under this system, deposit rates, known as “dividends”, are in theory related to a bank’s profitability. In reality, however, these dividends have become fixed-rate returns offered at the same, often sub-inflation, rates by all the commercial banks. Interest charged on loans (often presented as “fees” or a share of corporate profits) can amount to as much as 30% a year for private-sector customers, although much lower rates are set for government agencies and parastatals. As a result of the banking reforms and the chaos of the post-revolution economic situation, growth in the assets of the banking system declined markedly. Stringent government controls on the expansion of credit further inhibited the banks’ scope for lending. High inflation for much of the post-revolution period has led to negative real rates of return on capital, and savings and deposits have weakened. The bulk of the commercial banks’ loan portfolio is taken up with low-return loans to state-owned enterprises and politically powerful “private” agencies such as the bonyad.
In recent years the government has moved towards liberalising the banking sector, although progress has been slow. In 1994 Bank Markazi authorised the creation of private credit institutions, and in 1998 authorised foreign banks (many of whom had already established representative offices in Tehran) to offer full banking services in Iran’s free-trade zones. Bank Markazi followed this with the recapitalisation of the existing commercial banks, and has pressed for partial privatisation, seeking to liberalise the sector and encourage the development of a more competitive and efficient industry. Although proposals for privatisation have been repeatedly blocked by the Guardian Council, Bank Markazi has been permitted to press forward with plans for the establishment of private banks to operate alongside the state-owned institutions. At the end of 2001 Bank Markazi approved licences for three credit institutions to become fully functioning private banks, with the first, Karafarin, beginning operations in 2002. These are required to comply with a strict Bank Markazi supervisory system, which includes maintaining liquidity ratios that exceed Bank for International Settlements criteria.
The impact of the private banks on Iran’s financial system, however, is likely to remain modest. Even by local standards the banks are extremely small. Their freedom to set market-determined “interest” rates is circumscribed by Bank Markazi’s insistence that they remain within 2 percentage points of those offered by the state-owned commercial banks. Meanwhile, liberalisation of the industry seems to have stalled. Following the election of a conservative-dominated Majlis, permission for foreign banks to set up full operations on the Iranian mainland, despite this being previously approved in principle, is unlikely to occur.
Source: The Economist Intelligence Unit
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