CENTRAL BANK

Since 2001 the Iranian Government has moved toward liberalizing the banking sector, although progress has been slow. In 1994 Bank Markazi (the central bank) authorized the creation of private credit institutions, and in 1998 authorized foreign banks (many of whom had already established representative offices in Tehran) to offer full banking services in Iran's free-trade zones. The central bank sought to follow this with the recapitalization and partial privatization of the existing commercial banks, seeking to liberalize the sector and encourage the development of a more competitive and efficient industry. State-owned banks are considered by many to be poorly functioning as financial intermediaries. Extensive regulations are in place, including controls on rates of return and subsidized credit for specific regions. The banking sector in Iran is viewed as a potential hedge against the removal of subsidies, as the plan is not expected to have any direct impact on banks.

 

Demand for investment banking services is currently limited. The economy remains dominated by the state; mergers and acquisitions are infrequent and tend to take place between state players, which do not require advice of an international standard. The capital markets are at an early stage of development. "Privatization" through the bourse has tended to involve the sale of state-owned enterprises to other state actors. There is also a lack of sizeable independent private companies that could benefit from using the bourse to raise capital. As of 2009, there was no sizeable corporate bond market. Electronic banking in Iran is developing rapidly. The needed $70 million initial capital for the opening of each electronic bank as approved by the Money and Credit Council compares with $200 million required to establish a private bank in the country.