Why Iran’s Banking Shake-Up won’t be enough

By Navid Kalhor, for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

On July 24, Valiollah Seif, the governor of the Central Bank of Iran (CBI), unveiled the Central Bank and Usury-Free Banking Reform Bill, also known as the Banking Reform Bill, to support sustained acceleration in economic growth and broad expansion of the private sector, which is currently suffering from a credit crunch in the Iranian financial system. If approved by the government, the bill will then be sent to parliament.

Iran’s current banking laws are decades old and have never been comprehensively reviewed by any administration subsequent to the 1979 Islamic Revolution. Indeed, Seif said, the Central Bank Law was last revised in 1983 and before that in 1972.

Under President Mahmoud Ahmadinejad (2005-13), some efforts were made to begin revising the laws and regulations governing the sector — under the framework of the government’s broader Economic Development Plan — but nothing really became of it.

The objectives of the overhaul envisioned in the Banking Reform Bill involve enhancing the policymaking and supervisory role of the CBI, lowering the ratio of nonperforming loans (NPLs), raising capital requirements for banks and eventually paving the way for government debt owed to private contractors and banks to be securitized.

The CBI has taken important measures over the past year to restructure the myriad unlicensed credit and financial institutions (UFIs) and bring them under its supervision.

This is of particular significance given that UFIs are widely singled out as the most important source of instability in the financial sector, because they often ignore CBI directives on interest rate caps (presently at 15% for one-year rial deposits). The proposed banking reform includes the imposition of a number of added penalties to keep UFIs in check.

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