Banking and insurance in Iran

Commercial banks are authorized to accept checking and savings deposits and term investment deposits, and they are allowed to use promotional methods to attract deposits. Term investment deposits may be used by banks in a variety of activities such as joint ventures, direct investments, and limited trade partnerships (except to underwrite imports). However, commercial banks are prohibited from investing in the production of luxury and nonessential consumer goods. Commercial banks also may engage in authorized banking operations with state-owned institutions, government-affiliated organizations, and public corporations. The funds received as commissions, fees, and returns constitute bank income and cannot be divided among depositors.[11] According to the Central Bank of Iran, the financial sector has about $260 billion of liquidity, or 65% of the GDP of Iran's economy.

As of 2009, the Iranian oil bourse was a spot market for petrochemical products mainly, with plans to introduce sharia-compliant futures contracts for crude oil and petrochemicals in the future. Trading takes place through licensed private brokers registered with the Securities and Exchange Organization of Iran. With help of Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association, global standards for Islamic derivatives were set in 2010. The “Hedging Master Agreement” provides a structure under which institutions can trade derivatives such as profit-rate and currency swaps.[10][12] While the standards of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) are widely followed around the world, they are not enforced in Iran.[8]

12.0% (2007), 11.5% (2008), 12.0% (2009).[15] Free market rate is 24-25 percent (Aug 2009).

As of 2010, private banks have acquired 11 percent of the whole money market in Iran.[14]

* The range given covers the different interest rates offered by different banks. In 2010, for the first time in annual policies, the interest payable on bank deposits is similar for both state-owned and privately owned banks. For example, overnight deposits’ interest has been reduced from 12.5% last year to 9% this year. Similarly, 5-year term deposits will now earn 17.5% (per annum) interest, as opposed to 19% the previous year.[18]

As of April 2014, the maximum interest rate for deposits of 90 days or less is set at 10 percent, the maximum rate for deposits of more than 1 year is set at 22 percent, and for other maturities the cap is set at 14 to 18 percent.[19][20]

In April 2015, the Central Bank of Iran reduced the maximum interest rate to 20 percent.

In June 2016, bankers agreed to offer a maximum 15 percent interest on one-year deposits, down from the previous 18%. The rate for short-term deposits is set at 10 to 14 percent.[21]

Since 2002, the government has been barred from borrowing from the central bank directly (e.g. to finance budget deficits). Instead, it is allowed to borrow from the commercial banks who in turn, borrow from the central bank, and inflate their own balance sheets.[24]

The total debt of 11 state-run banks to the Central Bank of Iran has exceeded $32 billion in 2009, showing a 10-fold increase over the past four years. Bank Melli Iran (aka National Bank of Iran), with nearly $9 billion, had the biggest debt followed by Bank Sepah, Iran's oldest, with about $4.8 billion. Bank Maskan, Bank Keshavarzi, Bank of Industry and Mines and the Export Development Bank of Iran were next with the respective debts of $4.7, $4.1, $3.5 and $1.1 billion. Private sector banks had much lower debts. Bank Parsian, the largest private-run bank, owed about $421 million to the Central Bank. In addition, the collective debt of state-sector companies to the Central Bank has reached $25 billion (2009).

Debts of banks to the central bank stood at 836.1 trillion rials ($27.3 billion at the official exchange rate) by the end of the fiscal year that ended in March 2016. Private banks debts amounted to $4.06 billion. Five specialized bank, all state-run, accounted for $18.7 billion (or 68.5 percent) of the banking sector debts to the central bank by March 2016.[25]

According to unofficial figures, overdue loans have reached IR175,000bn ($17.8bn, €13.6bn, £11bn), an increase of 75 per cent over three years (November 2008).[26] Plan to inject about $13 billion to recapitalize the banking sector (2008).[27] Ninety individuals have managed to secure collective facilities totaling $8 billion from Iranian banks, with previous $27 billion unpaid loans (2009).

In October 2009, Iran's General Inspection Office informed that Iranian banks have some US$38 billion of delinquent loans, while they are only capitalized at US$20 billion. Current average for late debts of Iran's state banks is over 15 percent while the global standard is 3 to 5 percent. Non-performing loans peaked at 17 percent of total loans in 2013, representing almost 10 percent of non-oil gross domestic product, according to the IMF.[8]

Regarding corruption and cronyism in the banking sector, Tehran Prosecutor General Abbas Jafari Dowlatabadi said in 2016:[28]

"Banking has been a safe haven in all such cases for corruption to incubate, with high-ranking management turning a blind eye on the corruption underway in inner organizational levels and or actively participating to gain their illicit interests [..] 11 banks had paid a sum of $2.5bn, with 1287 individuals filing for insolvency; the deadlock to be solved requires three fundamental approaches; the first remains with banks to adapt stricter roles and criteria for granting loans; the bank directors should be in the frontline of the fight for corruption; no run of-the-mill entrepreneur should receive inordinate amounts without putting in stake enough guarantees; cronyism should be abolished and unqualified evidence should not be lent credence as individual’s credentials as receiving loans."

In FY 2004 the balance sheet of the banking system showed that total assets and liabilities were US$165 billion, an increase of 226 percent since 1976. In that year, bank assets were divided as follows: private debt, 34 percent; government debt, 16 percent; and foreign assets (90 percent foreign exchange), 22 percent. Liquidity funds (money and quasi-money) accounted for more than 39 percent of total liabilities.[11] The loan-to-deposit ratio was 100.8% in 2011.[29] In 2014 non-performing loan ratio was reported to be around 18%.[30] By 2017, the government is required to pay $12.5 billion to domestic banks to settle debts.[31] A new report shows the assets of Iranian banks increased by a whopping 40% in 2014.

In 2014, the total capital of Iranian banks reached the unprecedented figure of 13.3 quadrillion IRR ($480 billion), an increase of 3.8 quadrillion IRR ($138 billion) over 2013 (i.e. 17% increase over 2013). The deposits in Iranian banks for 2014 reached 5.9 quadrillion IRR ($214 billion) and the loans paid to the public totaled 5 quadrillion IRR ($183 billion). The deposits indicate a growth of 34% while the loans were up 22% compared to 2013.

(1) Excludes commercial banks’ branches abroad. As of March 2010, Bank Saderat Iran, Bank Mellat, Tejarat Bank, and Refah Kargaran Bank have been classified as private banks.

As of September 2014,

Assets: The banks and financial institutions, total claims on the public sector (government and governmental institutions) amounted to 929 trillion IRR ($34.8 billion), and total claims on the non-public sector amounted to 5412 trillion IRR ($203 billion). The ratio of the claims on the public sector to the claims on the non-public sector was 17.2% in September 2014, 15.6% one year before, and 13.4% two years before. This trend suggests that the government is using more bank resources than it was previously, and that banks are getting more dependent on the government's solvency.[34]

Liabilities: Deposits of the non-public sector amounted to 6245 trillion IRR ($234 billion) of which 78.4% is term deposits; this number was 74.5% one year before and 73% two years before. The trend is towards more term deposits and less sight deposits which could be a result of the higher cost of money, the downward trend in the inflation rate, and the stability in the economy. The breakdown of term deposits shows that 44 percent of term deposits are short-term and the rest are long-term. In line with these changes, taking a look at the yield curve for the last 5 years shows that the right side of the curve has moved upward significantly and the left side has become steeper, making long-term deposits more attractive.[34]

The average capital adequacy ratio of Iranian banks is 4%, whereas according to international financial soundness indicators, the standard of capital adequacy ratios in Basel II and Basel III are above 8% and 12%, respectively.[35] According to the IMF in 2016:[23]

"Where such tests identify shortfalls in capital or risk management practices, [Iranian] banks should be required to present and implement time-bound plans to remedy these shortfalls. Any bank that is not viable after such a process should be resolved."

An important development for the Iranian capital markets was the opening of a fixed income market for the first time in 2009 with the issuance of term deposit certificates (traded OTC). The only type of tradable Islamic bond in Iran is the "Participation Paper". These are typically short term bonds (1–3 years) and have the same economic characteristics as fixed-rate conventional corporate bonds. For participation loans (known as Musharakat (in Persian) or Musharakah (in Arabic)) the interest rate charged by the banks is dependent on the profitability of the project for which financing is required (as in project finance). In April 2011, the government's plan was to limit the maximum rate at 20%.[39]

Profit and awards accrued to participation papers are tax exempt.[16] The Central Bank must obtain approval from the Majlis in order to issue participation papers.[3] As at 2012, regulations for fixed income instruments oblige that a market maker always buys back the papers from the sellers in the secondary market at par value if there are no other buyers present.[41] With participation papers, at the end of the project the profit must be calculated and can then be distributed among the shareholders. During that time, dividends or interest can be paid.

Around nine billion euros worth of participation bonds in foreign currency and Iranian rials have been allocated for different projects in the Oil Ministry in 2010. Three billion euros will be allocated to the South Pars gas field and the rest will go to oil field development projects.

• Bank Mellat's June 2010 offering of bonds worth 250 million euro overseas is considered the third stage of offering a total of one billion euro in bonds designed to help finance development of phases 15-18 of Iran's South Pars natural gas. The bond has a maturity of three years and an interest rate of eight percent.[42]
• New issues in July 2010 included $300 million of papers by the Tehran Municipality and $100 million of participation papers by the Ministry of Energy. The vast majority of these participation papers pay coupon rates of 2-3% above bank rates.[43]
• Also in July 2010, Iran & Shargh Leasing Co. (the first non-bank entity to list a fixed income product on the OTC market) listed $8 million worth of participation papers.[43]
• In August 2010, Iran sold about $500 million worth of bonds for the first development phase of the gas deposit. The three-year bonds, yield 16 percent.[44]
• In November 2010, Iran will sell rial bonds worth $2.3 billion to finance the second development phase of its South Pars gas field.[44] The bonds will be sold through Bank Saderat Iran, Bank Melli Iran and Pars Oil and Gas Co. Previously, POGC had sold $1.5 billion worth of papers for the same purpose. These papers pay a coupon of 16% per annum and have a tenure of 4 years.[45]
• In November 2010 Keshavarzi Bank listed $100 million of one-year tradable certificate of deposit (CD's) with an annual interest rate of 15%.[45]
• Iran's national budget for 2012-13 has envisaged issuing €12.5 billion in bonds for financing domestic oil projects.[46]

For up-to-date amounts and list of issuing agencies, see CBI's annual review(s) here. Archived 2014-08-08 at the Wayback Machine

Sukuk is an Islamic Fixed income instrument, which looks similar to an asset-backed debt instrument. As of July 2011 and for the first time since the law was passed 3 years ago, Iranian companies such as Mahan Airlines and Saman Bank have respectively issued $30 million and $100 million worth of this type of bonds.[48] Iran will also issue $15 billion in sukuk (Islamic Sharia-based) bonds in 2012 to be invested in the domestic oil industry.[46] Trading of Islamic bonds using the salam format, a deferred sale contract, was disallowed by AAOIFI in 2007. But in Iran's debt market, salam is a common form of sukuk.[8] Mortgage Backed Security (MBS) is allowed in Iran's secondary market (e.g. Farabourse). According to AAOIF, main structures of sukuks are:[49]

1. Sukuk Ijara (leasing): “The transfer of ownership for an agreed upon consideration”
2. Sukuk Musharaka (joint venture): “A form of partnership between the Islamic bank and its clients whereby each party contributes to the capital of the partnership in equal or varying degrees to establish a new project or share in an existing one, and whereby each of the parties becomes an owner of the capital on a permanent or declining basis and shall have his due share of profits” (see "Participation papers" section above.)
3. Sukuk Istisna’a (manufacturing finance): "A contract of sale of specified items to be manufactured or constructed, with an obligation on the part of the manufacturer or builder (contractor) to deliver them to the customer upon completion”
4. Sukuk Al-Murabaha (cost plus "profit"): “Sale of goods with an agreed upon profit mark up on the cost” (used as basis to justify credit card industry)

Iranian consumers have little debt (2015).[65]

Iran does not have any special credit rating institute for customer's credibility rating but all Iranian banks are obligated to send statistics of bounced check to the Central Bank of Iran. However following-up on all bounced checks is a "difficult task".[66]

In 2010, "Iran Credit Rating Consulting Company" became Iran's first credit agency by decree of the CBI.[67]

A number of Iranian banks have established branches abroad, several of which have been subject to program of consolidation. Thus, in recent years, Bank Saderat has acquired the Iran Overseas Investment Bank (from Bank Mellat), and branches of Bank Melli and the Bank of Industry and Mines in London to form Saderat International. In addition, the London branches of Bank Tejarat and Bank Mellat merged to form Persia Bank. As of 2016, Bank Melli Iran branches in Hamburg and Paris, Bank Sepah Plc in London and Bank Sepah branches in Rome and Frankfurt are also among Iranian state-owned financial entities licensed to operate in Europe.[68]

The minimum capitalization for establishing a foreign bank branch in Iran is euro 5m. A handful of foreign bank branches and representative offices extant in the country were allowed to undertake administrative and coordination activities but were not permitted to open customer accounts inside the territory of mainland Iran, receive deposits or extend normative facilities.

Until now, foreign banks in Iran have acted as the bridge between foreign companies from the same mother country in the host country. Foreign companies learned of Iran's economic and investment opportunities through these foreign banks in the country.

In 2010, the Iranian government lifted a cap on the percentage of shares in Iranian banks that can be owned by a foreign individual or company. The original law, which applied to both Iranians and foreigners, restricted the amount of shares in a bank that a single company could own to 10 percent and an individual to 5 percent. Iranian ownership of banks is still subject to the limits.

According to the new rules, only the Iranian government has the authority to form joint banks with foreign entities.[86] Foreign entities can now hold over ten percent of the shares in joint banks with Iran but their shares cannot exceed more than 49 percent. Under the same provisions, foreign individuals and entities that have at least 51 percent Iranian ownership shall be considered Iranian companies.[86]

For the first time since the 1979 Islamic Revolution, Iran is set to allow foreign banks to establish branches in the country and engage in normal banking operations.

In 2008, Bank Markazi (the central bank) formally officiated over the opening of Iran's first foreign bank branch in the capital, Tehran. The Iran-Europe Commercial Bank, which is registered in Hamburg, Germany, but is majority owned by the Bank of Industry and Mines of Iran. The second foreign bank to be created in Iran was the joint Iranian-Venezuelan bank. As of 2010, similar projects exist with countries such as Russia, Belarus and Egypt.

In 2009, four US banks, including Citibank and Goldman Sachs applied for opening a branch in Iran. The banks made a formal request to the Central Bank of Iran (CBI) to establish a branch. If the Majlis and CBI approve their request, these four banks will set up a temporary branch in an Iranian free trade zone. And if they can work according to the Iranian banking law (i.e. usury-free banking Archived 2014-05-16 at the Wayback Machine), they will also be allowed to open branches in Tehran and other cities.[87]

In 2010, Tehran Times reported [instead?] that the banks filing the requests for working in Iran were from "states in the Persian Gulf and the Middle East regions as well as Asia".[88]

Minimum capitalization for a bank operating in Iran's FTZ is $100 million (2016). Foreign banks could operate in Iran's free trade zone areas for many years and there are three such banks on Iran's Kish Island in the Persian Gulf (2012). Iran's Majlis (parliament) has ratified the bill for the establishment of domestic-foreign joint banks and insurance companies in free trade zones.[89]

The United States is attempting to isolate Iran from the international financial and commercial system in an effort to promote policy change in Iran regarding its nuclear program and purported terror financing.[3]

In 2006, Swiss banks UBS and Credit Suisse as well as ABN AMRO and HSBC - decided to end their operations in Iran. UBS announced that it had stopped doing business with Iran because of the company's economic and risk analysis of the situation in the country. UBS stated that it will no longer deal with individuals, companies or state institutions such as the Central Bank of Iran.[90]

Bank Melli, Saderat and Sepah are Iran's three largest banks. They have been hit with UN and US sanctions over the past two years, over alleged links with Iran's nuclear and missile programmes (2008).[22] Malaysia and U.A.E are also cooperating with the United States in implementing international sanctions against Iran.[91]

On 8 October 2020, the US imposed further sanctions on Iran's financial sector, targeting 18 Iranian banks. The banks targeted are Amin Investment Bank, Bank Keshavarzi Iran, Bank Maskan, Bank Refah Kargaran, Bank-e Shahr, Eghtesad Novin Bank, Gharzolhasaneh Resalat Bank, Hekmat Iranian Bank, Iran Zamin Bank, Karafarin Bank, Khavarmianeh Bank, Mehr Iran Credit Union Bank, Pasargad Bank, Saman Bank, Sarmayeh Bank, Tosee Taavon Bank, Tourism Bank and Islamic Regional Cooperation Bank.[92]

In April 2018, Ayatollah Javadi Amoli said:

"The Qur'an calls Satan arrogant, but as far as I recall he has not been addressed as warrior against God in the Qur'an.  Interest system of our banks is a war against Allah and His Messenger (PBUH). You may name a year as a year of production and prosperity (the Iranian leader named the previous year the Year of Resistant Economy: Production and Employment), as long as there is interest on loan in banking system, nothing will improve."[106]

In February 2019, Ayatollah Nasir Makarem Sherazi said:

"Banks have created conditions that have made people's lives miserable.  Instead of charging people a fixed fine of 4% on loan, they add 4% more to the fine each year, to the point that, at the end of the fifth year of repayment, the fine reaches the peak of 20%. Usury is being done in the name of interest-free-loan."[107]

In September 2018, Ayatollah Noori Hamdani said:

"It has been said many times that the money that our banks charge in the name of fines on the loans is interest and is impermissible.  But the rulers either do not hear our voice, or they hear but do not bother to act."[108]

In February 2019, Ayatollah Ja'far Subhani said:

"People take loans from banks and banks charge them interest.  Along with this interest, banks also penalize people for delaying repayment.  All religious scholars have declared it impermissible. Follow the rulings of the scholars."[109]

In February 2019, Ayatollah Muhammad Alavi Gorgani said:

"Economic conditions are worse these days.  In such circumstances, people are not able to even perform their religious duties.  In this situation (banks) should not be in a rush to collect interest from the them. We want banks in the Islamic system to be assistant, helpers and servers of the people.  Please lower your interest rate a little to reduce the pressure on people.  Or at least take interest according to the conditions, for example, when the economic conditions are better, there is no problem in collecting interest money, but when the wheel of the economy slows down, have mercy on the people and charge them less."[110]

In January 2019, Ayatollah Husayn Mazaheri said:

"Unfortunately, taking and giving interest has become a habit.  Some people use such excuses under the pretext of Shari'ah. Its like bathing a rat with clean water and then declaring it halal (permissible to eat). Similarly, taking and giving bribes has become an intrinsic part of our system of governance.  Usually nothing works out without a bribe.  No knot can be untied without a bribe, no file moves without money."[111]