Banking and insurance in Iran

Banking and insurance in Iran — BrandWiki

Islamic banking

In theory, Iranian banks use "provisional" interest-based transactions but retain the accounting standards of conventional banking.[8] In 2009, Iranian banks accounted for about 40 percent of total assets of the world's top 100 Islamic banks. Three of the leading four Islamic banks are based there; Bank Melli Iran, with assets of $45.5 billion came first, followed by Saudi Arabia's Al-Rajhi Bank, Bank Mellat with $39.7 billion and Bank Saderat Iran with $39.3 billion. “Iranian banks are still the predominant Islamic banking players, holding seven out of the top 10 ranks and 12 of the 100,” the Asian Banker research group reported. According to CIMB Group Holdings, Islamic finance is the fastest-growing segment of the global financial system and sales of Islamic bonds were predicted to rise by 24 percent to $25 billion in 2010.[12]

Commercial banks

Commercial banks are authorized to accept checking and savings deposits and term investment deposits, and they are allowed to use promotional methods to attract deposits. Term investment deposits may be used by banks in a variety of activities such as joint ventures, direct investments, and limited trade partnerships (except to underwrite imports). However, commercial banks are prohibited from investing in the production of luxury and nonessential consumer goods. Commercial banks also may engage in authorized banking operations with state-owned institutions, government-affiliated organizations, and public corporations. The funds received as commissions, fees, and returns constitute bank income and cannot be divided among depositors.[13] According to the Central Bank of Iran, the financial sector has about $260 billion of liquidity, or 65% of the GDP of Iran's economy.

Derivatives market

As of 2009, the Iranian oil bourse was a spot market for petrochemical products mainly, with plans to introduce sharia-compliant futures contracts for crude oil and petrochemicals in the future. Trading takes place through licensed private brokers registered with the Securities and Exchange Organization of Iran. With help of Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association, global standards for Islamic derivatives were set in 2010. The “Hedging Master Agreement” provides a structure under which institutions can trade derivatives such as profit-rate and currency swaps.[12][14] While the standards of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) are widely followed around the world, they are not enforced in Iran.[8]

Banking assets and liabilities

Bank Melli, Saderat and Sepah are Iran's three largest banks.[24] The government plans to clear government arrears, recapitalize banks and strengthen supervisory powers (2016). IMF estimates public debt could be as high as 40% of GDP once government arrears to the private sector are recognized.[25]

Debts to the Central Bank of Iran

Since 2002, the government has been barred from borrowing from the central bank directly (e.g. to finance budget deficits). Instead, it is allowed to borrow from the commercial banks who in turn, borrow from the central bank, and inflate their own balance sheets.[26]

The total debt of 11 state-run banks 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 (aka National Bank of Iran), with nearly $9 billion, had the biggest debt followed by Bank Sepah, Iran's oldest, with about $4.8 billion. Bank Maskan, Bank Keshavarzi, 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).

Debts of banks to the central bank stood at 836.1 trillion rials ($27.3 billion at the official exchange rate) by the end of the fiscal year that ended in March 2016. Private banks debts amounted to $4.06 billion. Five specialized bank, all state-run, accounted for $18.7 billion (or 68.5 percent) of the banking sector debts to the central bank by March 2016.[27]

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).[28] Plan to inject about $13 billion to recapitalize the banking sector (2008).[29] Ninety individuals have managed to secure collective facilities totaling $8 billion from Iranian banks, with previous $27 billion unpaid loans (2009).

In October 2009, Iran's General Inspection Office informed that Iranian banks have some US$38 billion of delinquent loans, while they are only capitalized at US$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. Non-performing loans peaked at 17 percent of total loans in 2013, representing almost 10 percent of non-oil gross domestic product, according to the IMF.[8]

Regarding corruption and cronyism in the banking sector, Tehran Prosecutor General Abbas Jafari Dowlatabadi said in 2016:[30]

Summary of the assets and liabilities of the banking system

In FY 2004 the balance sheet of the banking system showed that total assets and liabilities were US$165 billion, an increase of 226 percent since 1976. In that year, bank assets were divided as follows: private debt, 34 percent; government debt, 16 percent; and foreign assets (90 percent foreign exchange), 22 percent. Liquidity funds (money and quasi-money) accounted for more than 39 percent of total liabilities.[13] The loan-to-deposit ratio was 100.8% in 2011.[31] In 2014 non-performing loan ratio was reported to be around 18%.[32] By 2017, the government is required to pay $12.5 billion to domestic banks to settle debts.[33]

(1) Excludes commercial banks’ branches abroad. As of March 2010, Bank Saderat Iran, Bank Mellat, Tejarat Bank, and Refah Kargaran Bank have been classified as private banks.

As of September 2014,

Assets: The banks and financial institutions, total claims on the public sector (government and governmental institutions) amounted to 929 trillion IRR ($34.8 billion), and total claims on the non-public sector amounted to 5412 trillion IRR ($203 billion).

Capital ratios

The average capital adequacy ratio of Iranian banks is 4%, whereas according to international financial soundness indicators, the standard of capital adequacy ratios in Basel II and Basel III are above 8% and 12%, respectively.[37] According to the IMF in 2016:[25] "'Where such tests identify shortfalls in capital or risk management practices, [Iranian] banks should be required to present and implement time-bound plans to remedy these shortfalls. Any bank that is not viable after such a process should be resolved.'"

In 2025, Iranian banks' average capital adequacy ratio (CAR) rose from 1.36 percent to about 5 percent.[38]

Bond market

Participation papers

An important development for the Iranian capital markets was the opening of a fixed income market for the first time in 2009 with the issuance of term deposit certificates (traded OTC). The only type of tradable Islamic bond in Iran is the "Participation Paper". These are typically short term bonds (1–3 years) and have the same economic characteristics as fixed-rate conventional corporate bonds. For participation loans (known as Musharakat (in Persian) or Musharakah (in Arabic)) the interest rate charged by the banks is dependent on the profitability of the project for which financing is required (as in project finance). In April 2011, the government's plan was to limit the maximum rate at 20%.[45]

Profit and awards accrued to participation papers are tax exempt.[18] The Central Bank must obtain approval from the Majlis in order to issue participation papers.[3] As at 2012, regulations for fixed income instruments oblige that a market maker always buys back the papers from the sellers in the secondary market at par value if there are no other buyers present.[46]

For up-to-date amounts and list of issuing agencies, see CBI's annual review(s) here.

Bank Mellat's June 2010 offering of bonds worth 250 million euro overseas is considered the third stage of offering a total of one billion euro in bonds designed to help finance development of phases 15-18 of Iran's South Pars natural gas. The bond has a maturity of three years and an interest rate of eight percent.[47]
New issues in July 2010 included $300 million of papers by the Tehran Municipality and $100 million of participation papers by the Ministry of Energy. The vast majority of these participation papers pay coupon rates of 2-3% above bank rates.[48]
Also in July 2010, Iran & Shargh Leasing Co. (the first non-bank entity to list a fixed income product on the OTC market) listed $8 million worth of participation papers.[48]
In August 2010, Iran sold about $500 million worth of bonds for the first development phase of the gas deposit. The three-year bonds, yield 16 percent.[49]

Sukuk

Sukuk[53] is an Islamic fixed income instrument, which is similar to an asset-backed debt instrument. As of July 2011 and for the first time since the law was passed three years ago, Iranian companies such as Mahan Airlines and Saman Bank have respectively issued $30 million and $100 million worth of this type of bonds.[54] Iran will also issue $15 billion in sukuk (Islamic Sharia-based) bonds in 2012 to be invested in the domestic oil industry.[51] Trading of Islamic bonds using the salam format, a deferred sale contract, was disallowed by AAOIFI in 2007. But in Iran's debt market, salam is a common form of sukuk.[8] Mortgage Backed Security (MBS) is allowed in Iran's secondary market (e.g. Farabourse). According to AAOIF, main structures of sukuks are:[55]

Foreign banks

According to CBI, five offices of foreign banks[88] (as of May 2012) operate in Tehran and Kish free trade zone.

Article 44 (fifth clause) of the Iranian Constitution Law had heretofore placed banking activities exclusively in the hands of government. In tandem with, these two measures effectively blocked foreign banking operations from conducting business in mainland Iran. In 2009 the Constitution was to be amended to allow foreign banks to operate normally in mainland Iran.

As of 2015, there is no limitation for the activities of foreign banks in Iranian free economic zones. They may also open branches and representative offices in mainland or hold 40% shares of an independent unit.[89]

Foreign branches

The minimum capitalization for establishing a foreign bank branch in Iran is euro 5m. A handful of foreign bank branches and representative offices extant in the country were allowed to undertake administrative and coordination activities but were not permitted to open customer accounts inside the territory of mainland Iran, receive deposits or extend normative facilities.

According to the new rules, only the Iranian government has the authority to form joint banks with foreign entities.[90] Foreign entities can now hold over ten percent of the shares in joint banks with Iran but their shares cannot exceed more than 49 percent. Under the same provisions, foreign individuals and entities that have at least 51 percent Iranian ownership shall be considered Iranian companies.[90]

Mainland activities

In 2008, Bank Markazi (the central bank) formally officiated over the opening of Iran's first foreign bank branch in the capital, Tehran. The Iran-Europe Commercial Bank, which is registered in Hamburg, Germany, but is majority owned by the Bank of Industry and Mines of Iran. The second foreign bank to be created in Iran was the joint Iranian-Venezuelan bank.

In 2009, four US banks, including Citibank and Goldman Sachs applied for opening a branch in Iran. The banks made a formal request to the Central Bank of Iran (CBI) to establish a branch. If the Majlis and CBI approve their request, these four banks will set up a temporary branch in an Iranian free trade zone. And if they can work according to the Iranian banking law (i.e. usury-free banking ), they will also be allowed to open branches in Tehran and other cities.[91]

In 2010, Tehran Times reported [instead?] that the banks filing the requests for working in Iran were from "states in the Persian Gulf and the Middle East regions as well as Asia".[92]

Free trade zones

Minimum capitalization for a bank operating in Iran's FTZ is $100 million (2016). Foreign banks could operate in Iran's free trade zone areas for many years and there are three such banks on Iran's Kish Island in the Persian Gulf (2012). Iran's Majlis (parliament) has ratified the bill for the establishment of domestic-foreign joint banks and insurance companies in free trade zones.[93]

Sanctions

The United States has attempted to isolate Iran from the international financial and commercial system in an effort to promote policy change in Iran regarding its nuclear program and purported terror financing.[3]

In 2006, Swiss banks UBS and Credit Suisse as well as ABN AMRO and HSBC - decided to end their operations in Iran. UBS announced that it had stopped doing business with Iran because of the company's economic and risk analysis of the situation in the country. UBS stated that it will no longer deal with individuals, companies or state institutions such as the Central Bank of Iran.[94]

Bank Melli, Saderat and Sepah are Iran's three largest banks. They have been hit with

Insurance industry

The Central Insurance of Iran is in charge of regulating the insurance sector in Iran. 27 insurance firms dominate the sector, 26 of which are active in commercial insurance. The leading players are the Iran Insurance Company, the Asia Insurance Company, the Alborz Insurance Company and the Dana Insurance Company and more 22 private insurance companies that are offering service through agents and brokers. Export and investment insurance deals with foreign trade. Insurance companies Asia, Dana and Alborz will be listed on the stock exchange in 2009 after review and improvement in their financial accounts, internal regulations and organizational structure nationwide.[97]

In 2006 the market share for private insurance companies stood at 54% and 46% for governmental insurance companies.[98] At the end of 2008, there were 20 insurance firms active in the market, only 4 of which were state-owned (with a 75% market share). As of 2014, twenty-five insurance companies are active in Iran and all, except one, are privately owned.[99] Parsian Insurance became the largest privately owned company to be listed on the Tehran Stock Exchange in 2010. Parisan is the third largest insurance provider in Iran.[50]

In 2008, the total insurance premiums generated in Iran were $4.3 billion. This is less than 0.1% of the world's total, while Iran has approximately 1% of the world's population. The insurance penetration rate is approximately 1.4%, significantly below the global average of 7.5%. This underdevelopment is also evident in product diversity.

Approximately 60% of all insurance premiums are generated from car insurance. There are about 14 million vehicles in Iran and 90 percent of them are insured (2012).[100] Of the 10 million motorcycles that operate on Iran's roads only 2 million are insured.[100] Also, 95% of all premiums come from general insurance contracts and only 5% relate to life products (against the world average of 58% for life insurance in 2011).[98] One of the defining characteristics of the economy is entrenched high inflation (and expectations) thanks to persistent monetisation of fiscal deficits. This produces an environment in which no prudent person would enter into a long-term savings contract. According to Business Monitor International, unless and until economic policies in Iran change radically, the reality of the insurance sector will fall a long way short of its potential.[101]

Blood money was $67,500 in 2011, down from $90,000 a year before.[98][102]

Since 2012, Iran is insuring its own fleet of oil tankers because of international sanctions.[100]

Payout ratios have shown consistent growth over the years. Last year, the industry average payout ratio was 86%. Iran has 2 re-insurers. Insurance premiums come to just below 1% of GDP. This is partly attributable to low average income per head. In 2001/02 third-party liability insurance accounted for 46% of premiums, followed by health insurance (13%), fire insurance (around 10%) and life insurance (9.9%).[103]

The Central Insurance of Iran is currently in the process of implementing some deregulation within the industry and migrating from a tariff-based regulation regime to a prudential based one (such as the Solvency regime), which is in line with the internationally accepted standards.[43]

Insurance industry's payout ratio stood at 63.8% during the fiscal year ended in March 2016. Insurers' generated premiums totaled $6.5 billion during the said period. Iran Insurance Company, the only state-owned firm, accounted for 39.47% of the premium. Asia Insurance and Alborz Insurance trail by a big margin behind IIC, holding 10.15% and 7.56% of the market's share, respectively.[104]

Third-part auto liability accounted for 37.6% of insurance firms’ total generated premiums during the year ended in March 2016, with insurers selling about 19.18 million auto policies in the period.[105] As of 2014 total (non-life) market premium was 1.27% of GDP with only $69 per capita spent on insurance.[106]

As of 2016, Norway's Skuld (shipping), UK's Steamship Mutual and Standard Club (shipping), Protection and Indemnity (P&I) clubs (shipping), France's Coface (export guarantee agency), Italy's SACE (export credit agency), Germany's Hermes (export credit agency), Austria's OeKB (export credit agency) and Switzerland's SERV (export credit agency) are back doing business in Iran. Many large reinsurance companies are also considering returning to Iran (including Lloyd's, Allianz, Zurich Insurance, Hannover Re and RSA).[107]

Iranian clergy protests against interest based banking

Almost all of the major Shia Marjas in Iran have asked the establishment to ban interest based banking.[109]

Grand Ayatollah Javadi Amoli

In April 2018, Ayatollah Javadi Amoli said:

"The Qur'an calls Satan arrogant, but as far as I recall he has not been addressed as warrior against God in the Qur'an. Interest system of our banks is a war against Allah and His Messenger (PBUH). You may name a year as a year of production and prosperity (the Iranian leader named the previous year the Year of Resistant Economy: Production and Employment), as long as there is interest on loan in banking system, nothing will improve."[110]

Grand Ayatollah Makarem Shirazi

In February 2019, Ayatollah Nasir Makarem Sherazi said:

"Banks have created conditions that have made people's lives miserable. Instead of charging people a fixed fine of 4% on loan, they add 4% more to the fine each year, to the point that, at the end of the fifth year of repayment, the fine reaches the peak of 20%. Usury is being done in the name of interest-free-loan."[111]

Grand Ayatollah Noori Hamadani

In September 2018, Ayatollah Noori Hamdani said:

"It has been said many times that the money that our banks charge in the name of fines on the loans is interest and is impermissible. But the rulers either do not hear our voice, or they hear but do not bother to act."[112]

Ayatollah Ja'far Subhani

In February 2019, Ayatollah Ja'far Subhani said:

"People take loans from banks and banks charge them interest. Along with this interest, banks also penalize people for delaying repayment. All religious scholars have declared it impermissible. Follow the rulings of the scholars."[113]

Ayatollah Alavi Gorgani

In February 2019, Ayatollah Muhammad Alavi Gorgani said:

"Economic conditions are worse these days. In such circumstances, people are not able to even perform their religious duties. In this situation (banks) should not be in a rush to collect interest from them. We want banks in the Islamic system to be assistant, helpers and servers of the people. Please lower your interest rate a little to reduce the pressure on people. Or at least take interest according to the conditions, for example, when the economic conditions are better, there is no problem in collecting interest money, but when the wheel of the economy slows down, have mercy on the people and charge them less."[114]

Ayatollah Husayn Mazaheri

In January 2019, Ayatollah Husayn Mazaheri said:

"Unfortunately, taking and giving interest has become a habit. Some people use such excuses under the pretext of Shari'ah. Its like bathing a rat with clean water and then declaring it halal (permissible to eat). Similarly, taking and giving bribes has become an intrinsic part of our system of governance. Usually nothing works out without a bribe. No knot can be untied without a bribe, no file moves without money."[115]

History

Types of financial institutions

Islamic banking

Commercial banks

Derivatives market

Rates

Official "provisional" lending rate (aka "Mobadala")

Deposit rates

Banking assets and liabilities

Debts to the Central Bank of Iran

Overdue loans

Summary of the assets and liabilities of the banking system

Capital ratios

Laundering

Banking reserves

Sectoral allocation of banking facilities

Shetab Mir program

OTC market

Bond market

Participation papers

Sukuk

List of Iranian banks

Commercial government-owned banks

Specialized government-owned banks

Non-government-owned banks

Investment institutions

Credit agency

Presence abroad

Venture capital