Iran - Banking and securities

The Iranian fiscal year begins on 21 March and runs through 20 March of the following calendar year. Before the modern era in Iranian banking, which dates to the opening of a branch of a British bank in 1888, credit was available only at high rates from noninstitutional lenders such as relatives, friends, wealthy landowners, and bazaar money lenders. As recently as 1988 these noninstitutional sources of credit were still available, particularly in the more isolated rural communities. The Central Bank of Iran-Bank Markazil-established by the Monetary and Banking Law of 1960, issues notes, controls foreign exchange, and supervises the banking sector.

The revolutionary government nationalized all commercial banks shortly after taking office in 1979 and announced that banking practices would be brought in line with Islamic principles, which include a ban on interest payments. By 1993 there were five Islamic banks, which had incorporated the previous banks. Instead of paying interest, the new banks give "guaranteed returns" or commissions on loans; the commissions, which equal 4% of the loan's total, were introduced in 1984, and were known as "profit sharing." In Islamic terms, this meant that profit (interest) was acceptable only if a lender's money was "not at risk."

In 1991 measures to promote competition between banks, and to loosen Bank Markazi's control in order to encourage savings within the official banking sector were introduced. In 1994 Bank Markazi introduced reforms allowing private banking operations to register officially and offer most services in competition with the public sector. However, the raft of new currency and export regulations that followed the collapse of the rial in April 1995 put the recently legalized private sector under huge pressure because, for many of the bazaar traders, currency dealings represented a significant share of their total business. There is a basic lack of confidence in the banking system. Many informal banking operations are run from the bazaars. In addition, Iranians who are able to do so operate bank accounts outside the country, importing funds as needed rather than using the domestic system.

Bank Melli, which has acted for the central bank, handles most Iranian banking operations outside the country. The requirements to abide by Islamic principles were never imposed on Bank Melli. 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.

The Tehran Stock Exchange, locally known as the Bourse, was created in 1968. Three years later, the National Bank of Iran and the Industrial and Mining Development Bank of Iran joined with the US firm of Merrill Lynch, Pierce, Fenner and Smith to begin international brokerage activities in Iran. The exchange has stayed open since the revolution but did not play a significant role in the nation's business until the 1990s. Since 1989, the stock exchange has expanded continuously. A total of 344 companies were being traded and the capitalization of the exchange was reported to be nearly $26 billion in mid-2003.

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