Iran central bank proposes two major banking reform bills

Iran central bank proposes two major banking reform bills
The Haghani Expressway in front of the National Library of Iran and the main building of the Central Bank of Iran. / Photo: Creative Commons
By bne IntelliNews July 26, 2016

The governor of the Central Bank of Iran (CBI) announced that two new bills will be submitted to the Iranian parliament in the next few weeks, a “Central Bank Reform Bill” and the “Interest-Free Banking Bill (National Banking Reform Bill)".

The new bills are likely to radically shake up certain procedures in doing banking and business in Iran. Banks have lobbied for the changes in recent years as the rules no longer meet international standards, including the upcoming Basel II regulations, which are likely to be implemented in Iran soon.

Valliolah Seif, the CBI governor, said on the matter, “Two new different bills under the names CB Reform bill and the Banking Reform Bill – are now being finalized and will be sent to parliament if approved by the government,” the parliament’s news service ICANA reported.

The current banking bills in Iran are a leftover from pre-revolutionary days, only being adjusted to do away with un-Islamic things like interest.

To illustrate that several of the rules and regulations for the industry need overhauling, the governor noted that the Central Bank Law was last revised in 1972 and 1983 respectively.

The new bills covers such areas as CBI independence from government pressure, giving the organisation more authority over monetary policy-making, and also giving it further control over the money markets, including possibily exclusively setting forex rates in that country.

This is not the first time the bank has proposed reform. A new banking reform bill was circulated in 2011 under the previous Ahmadinejad administration, but it didn't get very far because of the economic crisis then.

Parliamentary opposition

Iran’s parliament, which intends to examine the proposals after its summer recess, could block any progress when it goes to a vote in early August.

Since the parliamentary elections in April this year, no significant law has been put before the new lawmakers. Foreign-based analysts suggest that the new bills could be rejected or held up as ammunition against President Hassan Rouhani in the run up to the next presidential elections in 2017.

Rouhani faced significant challenges in the previous parliament with several ministers impeached and laws blocked by conservative assembly members prior to this year's election and the current government doesn't want a repeat of that.

Long time coming

In June this year Ali Divandari, the director of Iran’s Monetary and Banking Research Institute (MBRI),  said that special attention has been given to the promotion of Islamic finance in the new version of the bill.

“In this bill prominence has been given to the expectations of the public and the banking industry in interest-free banking,” Divandari noted. 

The Banking Reform Bill defines the duties of banks and non-bank credit institutions and decrees that they must obtain a working license from the CBI, something which many murky credit institutions did not do so until very recently.

The new law explains all banking operations and services, sets regulations for the establishment of branches in reference to foreign banks and sets limits to their investments in Iran’s current banking brands.

Clearly defining banking contracts and the legal status of the newly-formed Association of Banks, launching credit rating institutions and detailing lending and capital adequacy capacities are among the other articles of the new bill, according to the official.

The law also forces credit institutions to provide information, puts in place a professional set of criteria for choosing new top-tier executives and board members and makes provision for setting up internal risk and auditing committees, according to Tehran's Tribune.