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Iran Banking
https://photius.com/countries/iran/economy/iran_economy_banking.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    Western-style banks and insurance came late to Iran, but protected and stimulated by the government and fed by expanding economic activity, banking became one of the fastest growing sectors of the economy in the 1960s. The insurance industry had barely started in 1960 and had a negligible role in the accumulation of funds to finance development, largely because insurance was not used by most of the population.

    Before the modern era in Iranian banking, which dates to the opening of a branch of a British bank in 1888, credit was available only at high rates from noninstitutional lenders such as relatives, friends, wealthy landowners, and bazaar moneylenders. In 1988 these noninstitutional sources of credit were still available, particularly in the more isolated rural communities. Institutional banking spread rapidly in the late 1960s; by 1988 almost all small towns were served by at least one bank. None of these operations were private because banks were nationalized in 1979.

    In 1960 Bank Markazi Iran was established as the central bank. Later legislation further defined its powers and responsibilities. The bank issued notes and acted as banker for the government, keeping accounts, marketing government securities, maintaining foreign exchange reserves, and overseeing international transactions. It also set standards for the supervised financial institutions, established credit and monetary policies, and took measures to enforce credit and monetary policies. The banking laws limited foreign participation to 40 percent in any banks operated in Iran (except the Soviet bank, which had been founded much earlier). Subsequently, the Central Bank limited foreign ownership in new banks to 35 percent.

    By 1977 the banking system consisted of the Central Bank, twenty-four commercial banks, twelve specialized banks, and three savings and loan associations (these numbers decreased after the Revolution). The commercial banks had more than 7,400 branches, including a few in other countries. The specialized banks focused mostly on a particular kind of lending (e.g., industrial or agricultural loans), although three regional banks specialized in financing local development projects. In addition, in 1977 approximately seventy foreign banks (primarily from the major industrial nations) had representative offices in Iran, but they conducted no local banking business. Their purpose was to facilitate trade relations.

    All domestic banks and insurance companies in Iran were nationalized in 1979. In 1980 the twenty-nine domestic banks remaining after the Revolution were consolidated into nine units. Foreign banks in Iran declined in number to thirty by 1987 and included the representative office of a small Soviet bank that financed trade. French banks were excluded from the Iranian market in 1983, leaving those of the Federal Republic of Germany (West Germany), as well as Swiss, Japanese, and British banks to finance about 30 percent of total trade.

    Immediately after the Revolution, the government called for the establishment of an Islamic banking system (which became law in March 1984) that would replace interest payments with profit sharing. In Islamic terms, this meant that profit (interest) was acceptable only if a lender's money were "not at risk." The introduction of Islamic banking procedures was gradual; confusion and delays disrupted the initial stages of implementation. In March 1985, the Islamic code was extended to include bank loans and advances. By late 1987, however, only certain banks were fully Islamicized, and only about 10 percent of private deposits were subject to Islamic rules.

    The Central Bank controlled the issuance of letters of credit. These were deferred payment instruments that relieved the cash-flow problem Iran experienced after oil prices began to decline in 1983. The government financed many imports with these high-interest letters of credit. Originally a letter of credit was to be repaid within 180 days, but by 1987 Iranian customers wanted 720 days' credit. Up to US$4 billion in letters of credit remained outstanding in early 1987, but the government did not include these supplier credits when assessing its foreign debt.

    The Central Bank established a good reputation in international banking circles in the 1980s. It had practically no long-term foreign debt in early 1987--only US$5 million--and was recognized as an international creditor. Between 1979 and 1984, the government paid cash for US$66 billion worth of imports, and it repaid immediately US$7 billion of existing debts. The Central Bank's reputation for honoring its financial obligations, however, did not change the attitudes of West European bankers, who, in a 1987 poll, expressed their unwillingness to lend money to Iran. To help relieve its cash-flow problem after 1983, the government sought repayment from several countries of money they borrowed from Iran during the reign of the Mohammad Reza Shah.

    In the first quarter of 1986, Iranian deposits in international banks fell by US$570 million, reducing Iran's holdings to US$7.1 billion. This reduction coincided with the continued fall in oil revenues, and foreign exchange deposits were expected to decrease further in the late 1980s.

    Data as of December 1987


    NOTE: The information regarding Iran on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Iran Banking information contained here. All suggestions for corrections of any errors about Iran Banking should be addressed to the Library of Congress and the CIA.

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