Central Bank of the Islamic Republic of Iran

Central Bank of the Islamic Republic of Iran

Type	Government owned
Headquarters	Tehran, Iran
Key people	Mahmoud Bahmani (2008-present)
Website	Official Site

The Central Bank of the Islamic Republic of Iran (CBI) (Persian: بانک مرکزی جمهوری اسلامی ايران, Bank Markazi Jomhouri Islami Iran) is the central bank of Iran. It is entirely government owned. Among its major purposes are: maintenance of the value of the national currency, balance of payments as well as facilitating trade transactions and contributing to the economic advancement of the country.^[1]

The Central bank is in charge of laying and implementing monetary and credit policies of the country. Laying exchange policies and determining exchange rates are among the functions of Bank Markazi. The importation of goods, issuance of documentary credits and registration of orders for documentary bills of exchange for imports are also done in accordance with the policies of the Central Bank.

Contents 1 History 2 Money and Credit Council 3 Governors of the Central Bank of Iran 4 Objectives 5 Islamic banking 6 Payment systems 6.1 Cheques 6.2 Debit/credit cards 6.3 Hawala 7 Anti-money laundering law 8 Key statistics 8.1 GDP growth 8.2 Money supply and inflation 8.3 Lending rates 8.4 Exchange rates 8.5 Banking balance sheets 8.6 Oil revenues 8.6.1 Oil Stabilization Fund (OSF) and National Development Fund 8.7 Foreign reserves 8.8 Foreign exposure and transactions 9 Inflation and monetary policy 10 Foreign relations 10.1 US sanctions 11 Significant buildings 12 Contacts 13 See also 14 References 15 External links

History

During the Achaemenid era, trade boomed and subsequently banking operation expanded to an extent that Iranians managed to learn the banking method from the people of Babylon.^[2]

The first attempt at introducing paper currency in Iran occurred during the Mongol Ilkhanate of the 13th century CE. The innovation, developed in Song Dynasty China, did not take hold in Iran, and paper currency did not return to Iran in any significant manner for several centuries.^[3]

In modern banking, the British first opened the Imperial Bank of Persia in 1889, with offices in all major cities of Persia and India. To compete with the British bank, Imperial Russia also opened the Russian Loan and Development Bank.^[4]

The first state owned Iranian bank, Bank Melli Iran was established in 1927 by the government of Iran.^[5] The bank's primary objective was to facilitate government's financial transactions and to print and distribute the Iranian currency (rial and toman). For more than 33 years, Bank Melli Iran was acting as the Central bank of Iran with the responsibility to maintain the value of Iranian Rial.

In August 1960, the Iranian government established the Central Bank of Iran (CBI) and separated all central banking responsibilities from Bank Melli Iran and assigned it to the newly formed central bank^[6].

The Central Bank of Iran was renamed to "the Central Bank of the Islamic Republic of Iran" immediately after the Islamic revolution and the overthrow of the Shah of Iran. Scope and responsibilities of the Central Bank of the Islamic Republic of Iran (CBI) have been defined in the Monetary and Banking Law of Iran.^[7]

CBI maintains a museum of historic and ancient jewelry owned and used by the ex-kings of Persia. This museum houses the Imperial Crown Jewels and is one of the most appealing tourist attractions in Iran.

Money and Credit Council

The Money and Credit Council (MCC) is the highest banking policy-making body of Bank Markazi. Its members include the CBI governor, the Finance and Economy minister and two lawmakers (MPs).^[8] The Iranian Central Bank needs more independence from the government in order to combat inflation, according to the country’s Parliament Research Center.^[9] As of 2010, Iran’s Central Bank, is not able to conduct a “proactive” monetary policy and has no control over the government’s fiscal policy. The Central Bank must obtain approval from the Majlis in order to issue participation papers.^[10]

Governors of the Central Bank of Iran

The governors of Central Bank of Iran are as follows^[11]:

Governor	Date
Ebrahim Kashani	1960
Ali Asghar Poor Homayoon	1961
Mahdi Samii	1964
Khodadad Farmanfarmayan	1969
Mahdi Samii	1970
Abdolali Jahanshahi	1971
Mohammad Yeganeh	1973
Hassan-Ali Mehran	1975
Yoosef Khoshkish	1978
Mohammad Ali Molavi	1979
Alireza Nobari	1979
Mohsen Nourbakhsh	1981
Majid Ghasemi	1986
Seyed Mohammad Hossein Adeli	1989
Mohsen Nourbakhsh	1994
Mohammad Javad Vahhaji (acting)	2003
Ebrahim Sheibani	2003
Tahmasb Mazaheri	2007
Mahmoud Bahmani	2008

Objectives

The objectives of the Central Bank of the Islamic Republic of Iran as per its charter and according to section 10 of the Monetary and Banking Law of Iran(MBAI) ^[7] are as follows:

• Maintaining the value of national currency
• Maintaining the equilibrium in the balance of payments
• Facilitating trade-related financial transactions
• Improving the growth potential of the country

To achieve the objectives as stated in the MBAI, CBI is endowed with the responsibility of fulfilling the following functions:^[12]

• Issuance of notes and coins
• Supervision of banks and credit institutions
• Formulation and regulation of foreign exchange policies and transactions
• Regulation on gold transactions
• Formulation and regulation on transactions and inflow/outflow of Domestic currency

Islamic banking

After the Islamic Revolution, the Central Bank was mandated to establish an Islamic banking law. In 1983 the Islamic Banking law of Iran was passed by the Islamic Majlis of Iran ^[13]. According to this law, Iranian banks can only engage in interest-free Islamic transactions (interest is considered as usury or riba and is forbidden by Islam and the holy book of Qur’an). These are commercial transactions that involve exchange of goods and services in return for a share of the assumed "profit".

Iran uses what are officially termed "provisional" interest rates, as rates paid to depositors or received from borrowers should reflect the profits or losses of a business.^[14] Under these rules, deposit rates, known as "dividends", are in theory related to a bank's profitability. In reality, however, these dividends have become fixed rates of return—depositors have never lost their savings because of losses made by the banks and almost never received returns larger than the provisional ex-ante profit rates. Interest charged on loans is presented as "fees" or a share of corporate profits.^[15]

All such transactions are performed through Islamic contracts, such as Mozarebe, Foroush Aghsati, Joale, Salaf, and Gharzol-hassane. Details of these contracts and related practices are outlined in the Iranian Interest-Free banking law and its guidelines. This law describes and authorizes an Iranian Shiite version of Islamic commercial laws. Iran’s banking system adheres to Islamic rules that prohibit earning or paying interest.

Critics believe that this law has simply created the context for legitimizing usury or riba. In reality all banks are charging their borrowers a fixed pre-set amount at a rate of interest that is approved by the Central Bank at least once a year. No goods or services are exchanged as part of these contracts and banks rarely assume any Commercial Risk. High value collateral items such as real estate, commercial paper, bank guarantees and machinery eliminate any risk of loss. In case of defaults or bankruptcies, the principle amount, the expected interest and the late fees are collected through possession and or sale of secured collaterals.^[15]

Shariah-compliant assets has reached about $400 billion throughout the world, according to Standard & Poor’s Ratings Services, and the potential market is $4 trillion.^[16][17] Iran, Saudi Arabia and Malaysia are at the top with the biggest sharia-compliant assets.^[18]

Payment systems

In 2005, the government obliged the Central Bank of Iran and the Iranian banks, mostly state owned, to set up all the necessary infrastructures (regulatory, hardware, software) for fully launching e-money in Iran by March 2005. While this plan has not yet fully materialised, local debit/credit cards are now commonplace and have removed the main obstacle to the growth of e-commerce (in the national scale) as well as the full roll out of e-government initiatives.^[19]

The Central Bank has developed the Real Time Gross Settlement System (SATNA) as the main center for settlement of Iranian banks' transactions in rial. Upon implementation of the first and second phases of this system in 2006/07, real time settlement through the interbank information transfer network (SHETAB) and interbank clearing house was started in the review year. Since 2007/08, bank-to-bank and customer-to-customer payments were also settled through SATNA. The Retail Funds Transfer System (SAHAB), launched at end-2006/07 for real time transfer of a large volume of payments of relatively small value, was further developed in 2007/08. Moreover, there are further plans to connect Iran's SHETAB to information transfer networks of other countries.

Cheques

As of January 21, 2010 account holders will no longer be allowed to withdraw more than $15,000 from Iranian banks but they can still write checks for larger amounts. The government wants people to use bank checks and electronic banking systems instead of cash transactions.^[20] The proportion of cheques bouncing has been rising to about 10.7 per cent - more than one in ten - in 2009.^[21]

Debit/credit cards

In 2007, Tetra-Tech IT Company announced that using VISA and MasterCard is now possible for online sales and in Iranian e-card terminals at shopping malls, hotels, restaurants, and travel agencies for Iranians and foreign tourists.^[22] Iran's electronic commerce will reach 10,000 billion rials ($1 billion) by March 2009.^[23]

Hawala

Many Iranian businesses and individuals also rely on hawala, an informal trust-based money transfer system that exists in the Middle East and other Muslim countries. Since the imposition of recent U.S. and U.N. financial sanctions on Iran, the use of hawala by Iranians reportedly has increased.^[24]

Anti-money laundering law

The Central Bank of Iran is enforcing the newly-passed Anti-Money Laundering law to curb possible crime. The minister of intelligence, the governor of the Central Bank of Iran (CBI) and several other ministers are among the members of the special committee in charge of the campaign against money laundering. In 2008, the Paris-based Financial Action Task Force (FATF) Watchdog praised the Islamic Republic's crackdown on money laundering. The 34-member financial watchdog congratulated Tehran on its commitment to seal money laundering loopholes.^[25] However in 2010, FATF, named Ecuador and Iran on a list of states that it says are failing to comply with international regulations against money laundering and financing terrorism.^[26]

Key statistics

As of 2010, major economic indicators will no longer be announced by the Central Bank but will instead be reported by the Statistical Center of Iran.^[27]

GDP growth

• GDP growth projection: growth to average 3.6% (2009-2010 to 2013-2014).^[28][29] This is substantially below an estimated 5.6% for previous 5 years.^[28] Latest projection by the Economist place Iran's nominal GDP at $701.9 billion in 2013.^[30]

Money supply and inflation

• Money supply: The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $71.7 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $153.6 billion. According to the CBI, the country's liquidity amounted to some $174 billion by April 2008^[32] and $197 billion by October 2009.^[33]

• Inflation: According to the Central Bank of Iran, inflation rate was 13.5% in 2009 and 25.6% in 2008.^[34]

Lending rates

• Commercial banks' lending rate: 12.0% (2007), 11.5% (2008), 12.0% (2009).^[35] Free market rate is 24-25 percent (Aug 2009).^[36]

Exchange rates

• Average exchange rates: rials per US dollar - 9,900 (2009), 9,143 (2008), 9,326 (2007), 9,246 (2006), 8,964 (2005), 8,885 (2004), 8,193 (2003)^[37]

note: Iran has been using a managed floating exchange rate regime since unifying multiple exchange rates in March 2002.

Pre-unification, rials per US dollar:

Market: 8,200 (2002), 8,050 (2001), 8,350 (2000)^[38]

Official: 6,906 (2002), 1,753 (2001), 1,764 (2000)^[39]

Banking balance sheets

• Debt: The government's and banks' debts to the central bank dropped from 905,926 billion Rials (about 90 billion Dollars) in November of 2008 to about 776,486 billion Rials (about 77 billion Dollars) in November of 2009. According to CBI reports, the value of its assets fell by 11.6 percent during the last 12 months to 1,137,455 Rials in November 2009.^[40] Meanwhile, the total debt of 11 state-run banks alone 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, with nearly $9 billion, had the biggest debt followed by Bank Sepah, Iran's oldest, with about $4.8 billion. Bank Maskan, Keshavarzi Bank, 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).^[41]

• Overdue loans: 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).^[42] Plan to inject about $13 billion to recapitalize the banking sector (2008)^[43] Ninety individuals have managed to secure collective facilities totaling $8 billion from Iranian banks, with previous $27 billion unpaid loans (2009).^[36] In October 2009, Iran's General Inspection Office informed that Iranian banks have some USD 38 billion of delinquent loans, while they are only capitalized at USD 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.^[44]

Oil revenues

• Oil revenues: Foreign currency proceeds from crude sales are managed by the Central Bank.^[45] According to Farda newspaper, the difference between President Ahmadinejad administration's revenues and the amount deposited with the Central Bank of Iran exceeds $66 billion dollars.^[46] This amount is broken down as follows:

1. $35 billion in imported goods (2005–2009),
2. $25 billion in oil revenues (2005–2008),^[47]
3. $2.6 billion in non-oil export revenues,
4. $3 billion in foreign exchange reserves.

This is a large number as it is equal one-tenth of Iran's total oil revenues since the 1979 revolution.

Oil Stabilization Fund (OSF) and National Development Fund

• Usage: Part of the reserves are held in the $23.3 billion (2006)^[48] Oil Stabilization Fund, designed for capital investment or for budget support if oil prices - Iran's main foreign exchange earner - fall perilously low.^[49]

• A new fund will replace the Oil Stabilization Fund in 2009 called the National Development Fund. The new fund is to extend 50% of its financial facilities to private, cooperative and non-governmental sectors in an effort to promote domestic and foreign investment.^[50][51]

Foreign reserves

• Reserves of foreign exchange & gold: $40 billion (2005) to $80 billion (2008) because of a sharp increase in the price of oil.^[52] Any surplus revenues from the sale of crude oil and gas are to be paid into the Oil Stabilization Fund (OSF).

• Composition: In 2007, 10% of the Reserves were held in Gold, 20% in US dollars (down from 40% in 2006), the rest mostly in Euro and other major currencies (i.e., Yen, British Pound and the Swiss Franc). In 2009, Iran's President Mahmoud Ahmadinejad ordered the replacement of the US dollar by the euro in the country's foreign exchange accounts because "it would help decouple Iran from the US banking system."^[53] (see also: U.S. sanctions against Iran)

Foreign exposure and transactions

• Iran's deposits in foreign banks: stand at $35 billion while its obligations amount to $25 billion (2007).^[54] In 2007, Iran had $62 billion worth of assets held abroad.^[55]

• Transactions: Foreign transactions with Iran amounted to $150 billion between 2000 and 2007 worth of major contracts and both private and government lines of credit.^[56] According to the Bank for International Settlements (BIS), the balance of Iran’s foreign exchange interactions in foreign banks and financial institutes during Q3 2008 stood above $24.3 billion.^[57]

Inflation and monetary policy

Double digit inflation rates have been a fact of life in Iran for the past 20 years. Between 2002 and 2006, the rate of inflation in Iran has been fluctuating between 12 and 16%^[31].

Monetary policy in Iran has not been successful in meeting the inflation and monetary targets set in the Iranian Five-Year Development Plans, owing mainly to the monetary impact of government spending out of oil revenue. Although the attainment of the inflation targets has improved somewhat recently, the objective of a gradual disinflation to single-digit levels has not been achieved. Moreover, the implicit intermediate target of monetary policy, money growth, has been systematically missed^[58].

The Central Bank is an extension of the Iranian government and as such it does not operate independently. Interest rate is usually set based on political priorities and not monetary targets. There is little alignment between fiscal and monetary policy.

The Central Bank assesses the inflation rate with the use of the prices of 395 goods and services in Iran's urban areas.^[59][60]

High levels of inflation have also been associated with a growth in Iran's money supply. The Central Bank's data suggest that the money supply growth has been about 40% annually. The rapid growth of money supply came from high demands for borrowing capital at the rate of 12% the banks offer, imposed by the Government to make credit accessible to average Iranians and small entrepreneurs. However, this rate is lower than the rate of inflation. This makes the cost of borrowing less than free market cost as determined by supply and demand, based on the inflation rate and investment risk.^[61]

Foreign relations

Iran is member of the Islamic Development Bank. As of August 2006, the World Bank has financed 48 development projects in the country for a total original commitment of US$3,413 million.^[62] World Bank loans to Iran come only from the International Bank for Reconstruction and Development (IBRD). Iran is a member of the World Bank's Multilateral Investment Guarantee Agency.^[63] Iran joined the International Monetary Fund (IMF) on December 29, 1945^[64]. CBI governors attend IMF's board discussions on Iran on behalf of the government. These meetings are usually held once a year in Washington D.C.^[65]. The Central Bank of Iran has an observer status at the annual meetings of the Bank for International Settlements (BIS) in Basel, Switzerland.

US sanctions

The US Treasury Department has also stepped up its attempt to restrict financing of foreign investment and trade with Iran. In January 2006, Swiss banks UBS and Credit Suisse announced separately that they were halting operations in Iran. In September 2006 the Treasury Department banned all dealings by Bank Saderat Iran with the US financial system, and in January 2007 it also blacklisted Bank Sepah and its British subsidiary, Bank Sepah International. In October 2007 the US Treasury blacklisted Bank Melli and Bank Mellat.

Under pressure from the US, 12 Chinese banks have reduced ties with Iranian banks since early September 2007, but five of them resumed commercial ties in mid-January 2008. In mid-February 2008, the US Treasury alleged that Bank Markazi (Iran’s central bank) helped the blacklisted banks evade US sanctions, by conducting transactions for them. The allegations could lead to sanctions and stiff penalties against Iran’s central bank, especially if US allies participate in them.^[66]

Significant buildings

• Mirdamad Building - 144 Mirdamad Boulevard, Tehran, Iran^[67]
• Ferdowsi Building - Ferdowsi Ave, Tehran, Iran
• Jewelry Museum - Ferdowsi Ave, Tehran, Iran^[68]

Contacts

• Official website
• Swift Address: BMJIIRTH
• Postal address: 144 Mirdamad Boulevard, Tehran, Iran

See also

References

External links

• (Persian) (English) Central Bank of the Islamic Republic of Iran official site (including statistics about Iran's economy)
  • Laws and regulations relating to finance and banking in Iran (CBI website)
• Iran's Banking System - Part I Part II Part III (free PressTV documentary)
• Annual Review (2008-09) - Report by the CBI by sector of activity, including marco-economic data.
• Islamic banking - 2007 Iran-Daily press article

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