Iran Banking Industry
Banking Industry Iran: current status, opportunities and threats
Iran’s modern banking industry has a 95-year history. Modern banking in Iran was introduced and dominated by foreign banks up to the late 1920s. The foreign banks, despite their early contribution in introducing many financial innovations, did little to foster indigenous economic development. In 1960 the Iran central bank was established. Later legislation further defined its powers and responsibilities. The banking laws limited foreign participation to 40 percent in any bank operating in Iran (except the Soviet bank, which had been founded much earlier). Subsequently, the Central Bank limited foreign ownership in new banks to 35 percent.
In 1979, after the Iranian Islamic revolution, all banks along with a number of other financial and industrial establishments were nationalized, and the governor of the central bank was inaugurated. The nationalization and the subsequent consolidation of the banks paved the way for the launch of Islamic banking. Nowadays, Iran’s banking system is 100% Sharia compliant (The highest of any country), far exceeding that of Saudi Arabia, Kuwait and Brunei, which are all less than 50%.
Currently, there are 30 banks and 5 financial/credit institutions active in Iran, where banks are the main source of funding for development plans and companies. The Iranian banking industry makes up for 2.5% of GDP and has the second highest penetration rate in the MENA region.
20 Iranian banks have been listed on the Tehran Stock Exchange. Currently the government plans to expand the use of online banking and to modernize the banking systems that are at the moment far from international standards.
The following figure illustrates the hierarchical structure of Iran’s banking sector. As it is depicted, there are 3 different types of banks in Iran, and all of them are under the rule of the central bank.
Central Bank of Iran
There are many players in the Iranian banking industry, which can be categorized into 2 major groups, namely internal and external. The first group contains the direct players and the second is constituted of businesses related to the industry. Melli and Saderat are the banks with the largest number of branches and employees. According to the Industry Management Institute IMI100 2015 ranking (top one-hundred companies list announced by IMI every year), Melli Bank is the most valuable holding in the banking industry and the third among all industries in Iran.
Key Players in Iran’s Banking Industry
Number of Branches (per Bank)
Number of Employees (per Bank)
Islamic banks are those banks that follow Islamic Sharia (the body of Islamic law) in their business transactions. Among other things, Sharia prohibits dealing in interest and undertaking transactions with unknown fate, while it requires transactions to be lawful (halal). Abolishing interest from their dealings is the fundamental principle on which Islamic banks are based. Use of Riba (usury) violates the principle of social justice, which is very important in Islam, because it leads to rewarding people without them making an effort. Those who lend money on interest do not make an effort, nor do they participate in the risks of the projects financed, and such behavior is rejected by the teachings of Islam. Interest-based transactions allow lenders to receive the advantages associated with lending their money, while avoiding the risks and losses attached to ownership.(Based on Sharia law (resulting from Quran and the life of Prophet Mohammad) certain financial methods/tools are prohibited: e.g. riba (interest), gharar (uncertainty), and maisir (gambling))
|Conventional Banking||Islamic Banking|
|Money is a commodity besides medium of exchange and store of value. Therefore, it can be sold at a price higher than its face value and it can also be rented out.||Money is not a commodity though it is used as a medium of exchange and store of value. Therefore, it cannot be sold at a price higher than its face value or rented out.|
|Time value is the basis for charging interest on capital.||Profit on trade of goods or charging on providing service is the basis for earning profit.|
|Interest is charged even in case the organization suffers losses; Therefore, it is not based on profit and loss sharing.||Islamic bank operates on the basis of profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses based on the mode of finance used.|
|While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made.||The execution of agreements for the exchange of goods & services is a must. Islamic banking tends to create link with the real sectors of the economic system by using trade related activities.|
|Conventional banks use money as a commodity which leads to inflation.||Islamic banking tends to create link with the real sectors of the economic system by using trade related activities. Since, the money is linked with the real assets therefore it contributes directly in the economic development.|
Difference between Conventional and Islamic banking
Since 1983 Iran adopted the non interest banking system and applies Islamic principals to the financial industry. While there are differing views about its performance in Iran, all are agree that the industry needs improvement.