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Iran: Banking and Monetary Policy
Country Study > Chapter 3 > The Economy > Fiscal and Monetary Policy > Banking and Monetary Policy

BANKING AND MONETARY POLICY


Structure of the Banking System

In 1960 the Central Bank of Iran (CBI, also known as Bank Markazi) was established as a banker for the government, with responsibility for issuing currency. In 1972 legislation further defined the CBI’s functions as a central bank responsible for national monetary policy. In the 1960s and 1970s, the expansion of economic activity fueled by oil revenues increased Iran’s financial resources, and subsequently the demand for banking services increased exponentially. By 1977, some 36 banks (24 commercial and 12 specialized) with 8,275 branches were in operation.

After the Revolution, the government nationalized domestic private banks and insurance companies. Bank law was changed under new interest-free Islamic banking regulations. The post-Revolution reduction in economic activity and financial resources required banks to consolidate. By 1982, this consolidation, in conformity with the Banking Nationalization Act, had reduced the number of banks to nine (six commercial and three specialized) and the number of branches to 6,581. Subsequently, the system expanded gradually.

The banking system in Iran plays a crucial role in transmitting monetary policy to the economic system. Each year, after approval of the government’s annual budget, the CBI presents a detailed monetary and credit policy to the Money and Credit Council (MCC) for approval. Thereafter, major elements of these policies are incorporated in the five-year economic development plan.

In 2005 the Iranian banking system consisted of a central bank, 10 government-owned commercial and specialized banks, and four private commercial banks. In 2004 there were 13,952 commercial bank branches, 53 of which were foreign branches. Specialized banks had 2,663 branches. The CBI is responsible for developing monetary policy, issuing currency, and regulating national clearing and payment settlement systems. 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.

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.

The Stock Exchange

The Tehran Stock Exchange is the main stock exchange of Iran. It began operation in 1968, dealing in shares from a small range of private banks and industries as well as government bonds and securities. The volume of transactions increased sharply during the 1970s as oil revenues grew, then shrank drastically after the Revolution’s nationalization of banks and enterprises in 1979, followed by the Iran–Iraq war of 1980–88. In the 1990s, limited economic reform and privatization spurred substantial growth, interspersed with temporary reversals. The early 2000s saw another rapid expansion. Between 1996 and 2007, the number of companies listed on the exchange increased from 164 to 364.

Nevertheless, ongoing tight state control, large-scale inefficiency in the economy, and the high risk associated with foreign investment in Iran continued to limit the growth potential of the Tehran Stock Exchange. In 2007 that exchange remained smaller (total valuation US$42 billion) and less broad than all the major world stock exchanges. More than half of the capitalization is from heavy industry enterprises (automotive, chemicals, and metals), and foreign participation is minor. The Tehran Stock Exchange is directly under the control of the Iranian government, by virtue of the fact that the chairman of its High Council is the governor of the state-owned Central Bank of Iran. The bank’s deputy governor also heads the exchange’s board of directors. In 2005 fewer than 0.1 percent of Iran’s registered companies were listed on the Tehran Stock Exchange, and fewer than 5 percent of Iranians owned stock. An ongoing modernization project aims at expanding the exchange’s listings and improving transparency, in order to increase foreign investment. A set of exchange laws, heretofore lacking in Iran, have been proposed.

Efforts to Control Prices and Inflation

In the late 1990s and early 2000s, inflation rates were high in Iran for several reasons: an increase in the volume of liquidity with respect to GDP growth, an increase in the level of imports and a decrease in the terms of trade, an increase in public and private spending, and fluctuations in oil export revenues. Since its establishment in 1960, the CBI has regularly published price indices on GDP deflators, consumer goods, and wholesale products. The price development indices published by the bank do not always reflect the true picture of price changes, because markets are regulated and controlled by other countries’ governments. The highest inflation, averaging 23 percent per year, occurred between FY 1977 and FY 1998. The inflation rate in FY 2006 was 15.8 percent.

Data as of 2008




Last Updated: January 2008


Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Iran was first published in 1987. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on Factba.se.

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