Iran: Achievements & Obstacles Of Iran's Banking System In Developing Ties With International Banks

Last Updated: 18 September 2017
Article by Shanda Consult Ltd

The Central Bank of Iran published a "service report" which outlined measures undertaken by CBI during the first term of President Hassan Rouhani in office and also after implementation of the JCPOA. According to the report, Iranian banking system has involved in foreign exchange transactions worth over $38 billion since January 2016 until March 2017. This amount includes of 17,900 letters of credit, 1,900 negotiable instruments and 80,200 payment orders which were issued by Iranian lenders.

Since banking sanctions had disrupted foreign trades due to fund transferring troubles, payment mechanism changed to Payment order, Letter of credit and Negotiable instruments.

During 2008-2010, the CBI had opened 281 foreign exchange accounts mostly in European countries in order to safeguard the foreign exchange income from sales of oil and gas. Since those revenues couldn't be transferred to Iran, were used to ease permitted trade between Iran and those countries, according to the CBI's report.

The report said that after the deal was implemented, $12 billion of the CBI's blocked assets as well as around $9.9 billion of the oil sales revenue were released.

Post-Sanctions' Recovery

The Central Bank of Iran is trying to reconstruct banking relations and to regulate the Iranian banking system to operate in line with the International standards, after the removal of international sanctions.  

Iranian banking system must put a lot of effort to adhere to International Financial Standards in order to establish constructive banking relations with other countries, Masoud Karbasian, economy minister of Iran, noted at the 28th Annual Islamic Banking Conference held in Tehran on Tuesday.

Since the international banking system is progressively warming up to reconstructing ties with Iran, the question that arises is that:

How much Iranian banking system is ready to engage in international banking relations?

In this respect, the Central Bank of Iran is trying to prepare Iranian banks to comply with international standards by setting up new directives regarding the financial reports in line with International Financial Reporting Standards and directing lenders to improve their capital assets along with Basel Committee Standards. 

Also, to combat money laundering and financing of terrorism measures, the CBI has provided necessary information to the banking network and persuaded banks to adhere to directives issued by the High Council on Anti-Money Laundering affiliated with the Ministry of Economic Affairs and Finance.

Since the international sanctions were mainly targeted the Iranian financial sector and resulted the isolation of Iranian lenders globally, the CBI had an important role to restore and develop the correspondent banking ties after the implementation of JCPOA.

One of the great measures of the CBI in line with its plans to create market stability and improving banking system, was regulating the Financial Credit Institutions and now there are no active illegal credit institutions in Iran, CBI's Governor, Valiollah Seif, pointed at the 28th Annual Islamic Banking Conference. To know more about CFIs in Iran and CBI's role to regulate them, please read our previous article.

Banking Ties

As a result of the Central Bank of Iran's measures to improve banking system and to prepare Iranian lenders for International banking relations, after the implementation of the JCPOA until the end of the previous Persian year (20 March 2017), 704 correspondent relations with 249 foreign banks have been established while this number was 50 before the JCPOA, in 2014 and it was 633 before the sanctions and in 2006, CBI reported.

CBI also noted that many of major Iranian banks activated their international branches in Germany, France, Italy and UK and were reconnected to "Target 2".

TARGET2 is the real-time gross settlement (RTGS) system owned and operated by the Eurosystem. TARGET2 is the second generation of TARGET.

According to the Ministry of Economy, from the implementation of the nuclear accord, many of the Iranian banks such as Bank Melli, Bank Tejarat, Bank Mellat, Bank Maskan and etc, established correspondent relations with foreign banks and some of them opened their branches in other countries. Tejarat Bank will open its branch in Norway (read more here), 22 Iranian banks have linked-up with Oberbank, one of Austria's largest banks (read more here), Middle East Bank and Sina Bank are to open branch in Munich (read more here), to name a few.

CBI Support of Economic Growth

The Central Bank of Iran also outlines efforts in supporting the banking system and improving the economy of the country.

According to CBI's report, during the previous fiscal year, banking system had been directed to allocate 5.48 quadrillion Rials ($146 billion) worth of loans. This amount is 31.4% more than the year before. As figures show, 64% of the loans were issued to small-medium sized enterprises to increase their working capital in production sectors.

CBI announced a list of measures undertaken to increase GDP growth of the country, to stabilize the foreign exchange market and to keep the rate of inflation at its current level of 10% (after reducing the 40% inflation rate of the last few years). To improve and maintain the above-mentioned factors, the following changes were applied:

  • Reducing of the banks' interest rate to support producers.
  • Raising banks' capital in order to upgrade the capital adequacy ratio.
  • Reducing the government's hold on banks.
  • Elimination of all illegal credit institutions.
  • To improve employment by investment in local projects and create job opportunities.

CBI officials are optimistic about the future of banking relations with foreign counties through their plans and measures for restructuring of the banking system.

Iran is to sign foreign finance deals worth about $30 billion, with Austria, Denmark, Italy and Japan by next months, Mohammad Khazaei announced at the 28th Annual Islamic Banking Conference. He pointed that while the US is still trying to exert pressure on Iranian banking system, banking relations with foreign countries is extremely substantial.

Source: Finacial Tribune

How we support?

Shanda Consult through its excellent network in Iran, cooperates with several Iranian banks and participates in many projects, co-managed by banks in Iran.
Shanda Consult assists in the preparation of proposals, execution of applications and licencing procedures for different purposes such as acquisition of foreign banks or establishment of branch in another country.

Shanda Consult is  assisting in bridging the communicative chasm between politics and the business world. For any consultation regarding your business needs, please contact  us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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