Iran Banking and Globalization
Banking Industry Iran: current status, opportunities and threats
In 2001, 57 branches of private and governmental Iranian banks were active in foreign countries. The number fell to 49 in 2005, and following sanctions all overseas branches were closed. Post the implementation of the JCPOA, more than 50 branches of Iranian commercial banks are expected to restart their activities in foreign countries. Considering the capacity of current Iranian banks, it is anticipated that Saderat, Melli, Sepah, Mellat and Tejarat have the greatest potential to increase their international exposure with other global banks, regaining their position within international markets. Furthermore, Saderat, Mellat and Tejarat are among the private banks with the biggest potential at the global level.
The answer to whether Iran has really been readmitted to the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system is complicated: The reconnection process to SWIFT has been physically established, however, few major foreign banks have decided to engage with Iran at this point. The banks that were actively trading even during the sanctions era continue to maintain their business, although nothing has so far changed for the bigger banks.
In fact, the nuclear deal says non-U.S. banks may resume trading with Iran, however because Washington retains sanctions against Iran that predate the nuclear crisis and were imposed over other issues such as human rights, bankers are uncertain of the legal basis for business and worry they could still be targeted by U.S. officials.
Conversely, after sanction relief, many foreign banks are keen to operate in Iran. Before the sanctions banks had demanded to establish branches in Iran (especially in free zones), those demands were met with the allowance for limited operations of some joint branches between foreign and Iranian banks.
There are now several requests from European banks, including Austrian, Italian and Lebanese banks, to start official activities in Iran. Further, ICBC China, the largest bank in the world, has requested to establish several branches in Iran. Belgium’s KBC and Germany’s DZ Bank both confirmed that they have started handling transactions on behalf of European clients doing business in Iran. Austria’s Erste Bank is also preparing to do so.
In theory, remaining sanctions (US sanctions applied for alleged terrorism and human rights violations) do not prevent international financial institutions from engaging with Iran, however there is still uncertainty for European banks that create unwanted ambiguity.
Despite these ambiguities, Iranian officials emphasize that there is no problem for international banks to receive permission for activity in Iran, and claim that it is not a time-consuming procedure.
On the other hand, Iranian banks are worried about the global competition. Most of them are far from the international standards and they have concerns on their ability to compete with big international banks in a global competitive atmosphere.
Based on the Iran Foreign Investment Promotion Act, foreign banks are allowed to hold a 40% share of Iranian banks and according to the Iranian Central Bank. The necessary initial capital for foreign investors to establish a bank in Iran is at 5 million EUR.
Iranian officials are trying to pass a number of laws to foster the establishment of foreign banks in Iran. As an example being that the Iranian government has prepared a bill that allows foreign banks to operate in Iran under 100% ownership.
The minimum capitalization for establishing a foreign bank branch in Iran is EUR 5 million. A handful of foreign bank branches and representative offices in the country were allowed to undertake administrative and coordination activities but were not permitted to open customer accounts inside the Iranian mainland territory, receive deposits or extend normative facilities.
In 2010, the Iranian government lifted a cap on the percentage ownership in Iranian banks that can be held by a foreign individual or company. The original law, which applied to both Iranians and foreigners, restricted the amount of shares in a bank that a single entity could own to 10% and an individual to 5%. According to the new rules, only the Iranian government has the authority to form joint banks with foreign entities.
According to the CBI, in 2016 five foreign banks have started operating in Tehran and Kish free trade zone.(Free Trade Zones and Special Economic Zones are designed to promote investment in the country. Free Trade Zones have their own legal regime and aren’t subject to the laws and regulations of mainland Iran.)
Whilst still complying with Islamic Banking Laws, there are few other restrictions on activities of foreign banks in Iranian free economic zones. Additionally, the government has provided a number of incentive schemes to encourage investment including:
They may also open branches and representative offices in the mainland or hold 40% shares of an independent unit.