Summary: There is an interval of 2400 years between the establishment of the first modern Iranian bank and the old Iranian banking system. The Achaemenid banks started with the establishment of Morashu Azinp-Pour Sons' Institute and Ajibi Bank but modern banks started to flourish from 1925 with the establishment of Sepah Bank. Although private banks which played their natural role during the years 1949-1979 were nationalized after the victory of Islamic Revolution but modern banks emerged since 1990 in the form of credit or development banks.

TEXT: From ancient times the Iranian people were known to be gifted in handling money. Since the last 3000 years the Iranians knew how to accept deposit or grant loans and since the sixth century BC they learned to print bank notes.

Money exchange and banking was popular in Iran from ancient times and the country underwent different periods of economic stagnation or bloom according to conditions of the time. Historical records point to banking and credit operations by money exchangers in old times. Perhaps one may say that the Morashu Azinp-Pour Sons' Institute and Ajibi bank were the first banks that were formed in Iran during the Achaemenid period. However, the modern banking system is not old in Iran and dates back to the Qajar era.

PERIOD OF FOREIGN BANKS' OPERATION

From the beginning of the 19th century onward two colonialist powers i.e. Russia and England dominated the Iranian economy and politics. The weakness of Qajar kings and the expansionist desires of these two colonialist powers turned Iran into a field of competition for these powers. Procurement of cheap agricultural stuff and minerals for the development of their industries was one reason for England and Russia to dominate the Iranian market.

After Amir Kabir's assassination (a great Iranian politician of Qajar era in 1268 lunar hejira) and

specially from 1863 to 1914, many concessions were granted by the Iranian government to Russian and British governments for exploitation or monopolization of raw materials and development of infrastructure industries in the country. During these years over 80 contracts and treaties were signed with foreign countries offering vast monopoly rights to them.

Along with these concessions, Russia and Britain expanded their politico-economic influence in Iran and gradually increased their domination over the country's economy.

By concluding many contracts and offering many concessions to foreign powers, the political, economic and cultural independence of the country was badly endangered and foreign entrepreneurs appeared in the scene of the country's commercial, industrial, mining, fiscal and banking systems.

With the growth of trade, the country's market was opened to western finished products and naturally the number of Iranian merchants was increased. At this juncture a number of moneychangers flourished in different parts of the country and dominated the money market. Although these scattered moneychangers did their work in an unprofessional manner, they were able to provide various facilities and credits to merchants and exchange money between the country and abroad.

With the growth of such activities, foreign banks decided to take the initiative in the Iranian economy by exercising political power and acquiring concessions from Iran. Thanks to extensive political influence, an English bank known as "The New Orient Bank" started banking operations in Iran without obtaining permission from the Iranian government. One year after its establishment, the Iranian government offered concession for the establishment of Bank Shahnshahi of Iran (BSI or Royal Bank of Iran) to an English national. This bank was charged to do banking operations and exploit iron, copper, quicksilver, coal, manganese and oil. The Royal Bank was given exclusive right to issue bank notes and control the state treasury. After that Iran granted concession to a Russian national in 1890 to establish Bank Esteqrazi Iran (Iranian Mortgage Bank).

After this measure, England set up BSI to modernize the Iranian economy with the assistance of Regie Co. and a road building company as it desired. Based on this concession BSI received exclusive right to print bank notes which should have been done by the Iranian government.

EXERTION TO ESTABLISH A NATIONAL IRANIAN BANK

In 1879 or a decade before start of foreign banking operations in Iran, one influential moneychanger suggested to the government to establish a bank with government and private capital but this offer was turned down. After the victory of the constitutional revolution it was suggested that a national bank with Iranian capital be established to stop foreign banks from interfering in the country's economy. The program for the establishment of a national bank in order to control banking operation in the country, provide capital for establishing of government factories, rescue the country from foreign debt and issue bank notes, was the most important mandate of the constitutional revolution. This idea was debated hotly in the First National Consultative Assembly (Majlis) and when the government asked the Majlis to permit it to loan from foreign countries, the deputies strongly objected and protested to the move and called for

establishment of an Iranian bank. After the government was assured by wealthy merchants and moneychangers to join the new bank, permission was granted for the establishment of a national bank on 9 December 1906 and the news was spread in the country and received with jubilation. The bank, however, was not set up.

From the moment of opening of foreign bank branches in the country in 1890 until the establishment of Iranian banks at the beginning of the 20th century, foreign nationals dominated money exchange and banking operations in Iran and their banks followed the regulations of their own country. Due to lack of established banking regulations, failure by the government to support merchants, incorrect investment policies of merchants, the scattered system of moneychangers and the obstacles created by Royal (BSI) and Mortgage banks, the moneychangers not only failed to be converted into banks but also they gradually went bankrupt and BSI emerged as the only bank which dictated the country's monetary policies.

At the end of the 19th century and beginning of the 20th century, big commercial companies such as Isfahan Opium, Amineh, Fars Trading, Masoodieh Isfahan, Aramian and Mahmoodieh were established in the country. The increase in foreign trade gave boost to money exchange and several big money exchanging companies were formed. Many companies handled commerce and money exchange together and the companies established at those times handled money exchange, foreign trade and even producing raw materials for export.

EMERGENCE AND EXPANSION OF IRANIAN GOVERNMENT-OWNED BANKS

After the First World War, as a result of occupation of the country and lack of efficient executives, the country fell into chaos and part of it remained under the domination of the British government. National solidarity was destroyed, and poverty, insecurity and corruption was rampant. The disintegration of the Ottoman Empire and change of government in Russia once

more raised keen interest towards Iran among the world politicians. A British- sponsored coup in 1921 put an end to Qajar rule and helped Reza Khan to ascend the throne. As dictated by foreign powers, the new government decided to modernize the country's social and economic system and under such a policy Iran moved towards a single product economy and became more and more dependent on foreign countries. Employment in the agricultural sector remained unchanged, the services sector was engrossed and the industry achieved unbalanced growth.

Since the monetary system of each country forms an important part of its economy, shapes the economy and consolidates government power, in line with the modernization of the army and administrative branches, Reza Khan paid special attention to banking and money exchange and established the first series of banks with government capital.

As a whole, the years 1921 to 1941 were years during which modern state-owned banks were established in the country.

In 1925, the "Pahlavi Army Bank" or "Sepah Bank" was established with an initial capital of rls four million out of the army retirement funds to regulate the army's monetary affairs. Then in 1926 the Iranian Mortgage Institute was established out of the government employees' retirement fund. Following this attempt Majlis approved a law which permitted the government to set up Bank Melli Iran (National Bank of Iran) on 4 May, 1927 in order to promote commerce, agriculture and industry. This led to the emergence of the first Iranian bank in its modern sense. The establishment of National Bank became a basis for expansion of banks and banking activities in the country.

The National Bank was inaugurated on 8 September 1928 and immediately after that it started to manage and control the country's banking activities. In 1930 the concession granted to Royal Bank to print bank notes was canceled and awarded to the National Bank.

In 1938 the National Bank's articles of association was prepared and approved and more power was vested to the bank. It was given permission to maintain the value of domestic currency, preserve the balance of trade, formulate state credits and supervise other banks. In fact the duties of a central bank and the management of a major part of the country's economy was vested on the National Bank. This helped the Bank to preserve its current status as a commercial bank and at the same time in practice turn to the central bank of the country.

From 1928 to 1941, the country's banking network was greatly expanded and the number of banking branches and agencies were increased to 180 and that of foreign banks to 20. The capital of all Iranian banks and branches were paid by the Iranian government mostly out of oil revenues or other government revenues because the companies and/or merchants that could convert money exchange institutes into banks had gone bankrupt one after the other.

EMERGENCE OF PRIVATE BANKS

In 1949, the first 7-year-development plan of the country was ratified and put into action. Simultaneously with this plan, the need for private banks became crucial because expansion of industries, development activities and promotion of foreign trade called for a strong banking network - which enjoys ample monetary and credit power.

This changed the country's banking system from the 40's until the 60's and the private sector showed willingness to establish banks and invest in the country.

Although no objection was made to the establishment of private banks in Iran and despite expansion of the National Bank, Sepah Bank and foreign banks no private banks were set up in the country until the end of 40's. With the start of the first 7-year development plan in 1949, the government formed the Industrial Credit Bank to provide money to the production sector. In the same year, the government set up the Iranian Commercial Bank with the assistance of the private

sector. This bank was actually the first private commercial bank in Iran.

Following the establishment of the Iranian Commercial Bank, during the years 1951 to 1971 more private, state-owned and joint private and combination of government/private banks were set up in the country including the Construction Bank, Commercial Insurance Bank, Pars Bank, Iran Export Promotion Bank, Tehran Bank, Iranian Exports and Industrial Bank, Industrial Development Credit Bank, Iran Credit Bank, Iranshahr (Guild) Bank, Anglo-Iranian Bank, Iran-Holland Commercial Bank, Foreign Trade Bank of Iran, Labor Bank, Cooperatives Credit Bank, Iranian Economic Bank, Iran-West Bank, Iran- Middle East Bank, Iranian Bank, Iran-Japan International Bank, Iran Industrial & Mining Development Bank, Labor Welfare Bank, Iran Agricultural Development Bank, Darius Bank, Iran Investment Promotion Bank, Shahriar Bank, Iran International Bank, Azarbaijan, Khazar and Khuzestan development banks as well as Farhangian Bank.

ESTABLISHMENT OF CENTRAL BANK OF IRAN (CBI)

The rapid developments in banking system and its increasingly important role in regulating money, capital and the economy in the country caused statesmen to draft a comprehensive banking and fiscal code in 1951 to control banking and fiscal operations throughout the country. Meanwhile, due to the contrast of duties of the National Bank which functioned both as a commercial bank and a central bank, establishment of an independent institute was taken into

consideration to protect the value of the currency, regulate credits, print bank notes, mint coins and supervise the banking operation in the country. Thus, the Central Bank of Iran (CBI) was established for the following reasons:

1. The National Bank was the biggest commercial bank in the country and the major rival of other commercial banks in the country. Thus it was not able to establish a healthy and neutral relationship with other banks because before any government decision was communicated to other banks, the National Bank was informed of it. Also the National Bank had exclusive

right to print bank notes and control the treasury. This made competition between the National Bank and other banks unfair and it become necessary to set up a neutral bank to accumulate information about banks, inspect banks and communicate government policies and decisions.

2. The National Bank was delegated with two contradictory duties. In other words, the National

Bank was charged to increase its credits (capital) and in the meantime protect public interest. The distinction between these two duties was not easy because at times the conditions were such that it was necessary for the government to reduce bank profits in order to protect public interest. As a result it was necessary to separate the profit-generating and non-profit-generating activities of the bank and delegate them to two separate ones.

3. The National Bank had grown to an extraordinary size and had opened over 200 branches and besides directly supervising the Employment Bank and National Reserve Fund, was a shareholder in several government-owned companies, controlled the government's accounts, regulated the country's foreign exchange policy, superintended other banks, helped the government to draft contracts with other countries, published economic indices such as the living costs and retail prices indices, controlled the state balance of payments and predicted the country's revenues. Thus it became compulsory for the government to divide the bank into two separate ones. This led to the ratification of the State Monetary and Banking Code on 28 May, 1960. Based on this law, the Central Bank of Iran was established on 9 August, 1960 with

an initial capital of rls 3.6 billion and all the exclusive and supervising duties of the National Bank were transferred to CBI.

FORMATION OF ASSOCIATION OF BANKS

The Association of Banks was established in December 1960 with 12 member banks in order to improve healthy relations between banks, support their lawful rights and profits, and contribute to the nation's banking operations. This Association received official sanction in 1961. Gradually, as a result of the satisfactory performance of the Association, the number of member banks increased. In 9 July 1972 the State Monetary and Banking Code was approved and all

the banks became members of the Association. In December 1972 the Council of Money and Credit ratified the articles of Association of Banks, but after ten years on 3 March, 1980, the Islamic Revolution's Council dissolved it.

NATIONALIZATION OF BANKS

After the victory of the Islamic Revolution due to various factors such as transfer of deposits to

foreign countries, lack of public trust and unpaid dues to banks, many private banks were on the verge of bankruptcy despite CBI assistance. Under such circumstances in 1980, laws covering nationalization of banks and nationalization of insurance and credit institute were ratified by the Islamic Revolution's Council and 28 banks, 16 deposit and housing loaning companies and 2 investment companies were taken over by the government.

Before nationalization, the country possessed 36 banks of which seven were discharging private service, 26 conducting commercial activities and three were regional banks. These banks were either state-owned banks, private banks with 100 percent Iranian capital or a mixture of Iranian and foreign banks. As a result of unbridled growth of banks from 1973 to 1979 it was much difficult for the government to supervise the correct operation of banks or improve monetary and

credit policies. As we said the private and state-owned banks had grown too wide which led to many difficulties and shortcomings including:

- Increased manpower and administrative costs;

- Waste of money and manpower;

- Deficit registered by a number of banks and acquisition of foreign loans to fill the deficit at

very high interest rates;

- Difficulty in implementation of correct monetary and credit policies because of their large number and lack of coordination among them.

This impelled the Islamic Revolution's Council to ratify the code governing administration of banks and merger of banks on October 1979. Despite the shortcomings in this code it was enforced on December that year and the number of banks in the country were reduced from 36 banks to 9 state-owned banks.

CHANGE IN BANKING OPERATION MECHANISM

After the victory of the Islamic Revolution and establishment of the Islamic Republic the government started to initiate a series of changes in social, political and economic fields. Meanwhile, a number of steps were taken to implement the Islamic law including establishment of interest-free funds and gradual elimination of usury (high interests) in the banking system.

These changes in banking system became effective in 1979. Scattered studies were conducted to change the profit-generating system in banks to adapt them to Islamic teachings. Under Note 54 of the budget act dated 1981 Majlis called on the government to take steps to abolish usury in the banks. After serious consultations, in the end a bill was drafted by the government to abolish interest and adapt banking operation with Islamic codes. This bill was approved by the Majlis on 30 May, 1983 and was endorsed by the Guardian Council two days later.

A series of executive directives were prepared in keeping with the above code and communicated to banks and the new code went into effect as of March 1984.

With these steps, much change was made in banking operation in the country and modern international banking techniques were introduced to the system. Naturally every change has its advantages and disadvantages which surface during implementation. Moreover, the interest-free banking code was put into operation at a time that other regulations such as the civil code, the commercial code, the money and banking code had remained unchanged. This led many to believe that banks should perform as in the past because the monetary and banking codes had remained unchanged and the code governing administration of banks after nationalization only supervised the management of banks and their relationship with the government. As a result of these confusions, our banks are faced with a large volume of regulations which are at times contrasting and/or outdated. On the other hand, the volume of deposits and lack of trust in banks,

necessitated a change in the money markets. In the meantime, the heavy duties imposed on baking system led to a series of ambiguities about the future of the banking system. Therefore, adapting the interest-free banking code with the willingness of banks to collect more private deposits and investing them in proper branches can help the banks to increase their presence in money markets and prove the superiority of interest-free banking system.

MONETARY POLICIES AND BANKING INTEREST RATES

The interest-free banking code emphasizes the following measures:

- While the monetary and fiscal policies should conform with each other, they must be separate and distinct and each branch must be managed by its relevant official.

- The interest-free banking code must be enforced in all branches including: in the relation between the depositors and banks, payment of credits, calculation and acquisition of interest, payment of interest to depositors, etc.

- Since turning banks into competitive institutes is an essential monetary policy as underlined in the interest-free banking code, the management of banks must be mended in a manner to allow banks to continue to remain state owned but be able to compete with each other.

- CBI's supervising power must be increased to ensure correct implementation of interest-free banking code.

ESTABLISHMENT OF NON-BANKING CREDIT INSTITUTES

According to paragraph E of Article 31 of State Monetary and Banking Code dated 1972, credit and banking institutes are organizations which do not use the title of bank and operate as a medium between applicants and receivers of credit and regulate such affairs under the supervision of CBI.

From the 1960s to the 1970s, some 16 deposit and housing loan companies were established in the country in keeping with the housing encouragement code and operated as expert institutes in the housing sector. After the victory of the Islamic Revolution according to the law covering the nationalization of insurance and credit institutes dated 1980 and following the merger of banks, all credit institutes were merged into the Housing Bank. But gradually non-banking credit institutes were formed and their number increased in the country.

From 1985 onward, the range of duties of non-banking credit institutes and their licensing became a very popular issue in the monetary circles of the country.

In 1992, the Money and Credit Council ratified the regulations covering the activities of non-banking credit institutes and modified it in 1994 and the Guardian Council endorsed it and announced that it did not contradict the Constitution. With the ratification of the above code, CBI started to register applications for establishment of non-banking credit institutes as of June 21, 1994. On 12 December 1995, the first non-banking credit institute received license for establishment from CBI and started to operate as of 6 September 1997.

In an interview in 1996 regarding the role of such institutes, the CBI governor said: "Banks cannot become private because it is contrary to the Constitution of the Islamic Republic of Iran, but there is no problem in the formation of non-banking credit institutes whose legality has been endorsed by the Guardian Council provided they receive a license from CBI. We hope that these institutes can operate successfully and we will be able to encourage their operation. We are glad that the private sector is conducting a healthy competition with banks in keeping with the Constitution."

Also other CBI officials have said that the main reasons for permitting credit institutes was to

respond to the country's economical needs, offer rapid and timely fiscal operation, regulate free money market, excite competition among banks and increase their efficiency and create grounds for privatization of money and credit affairs. The most important objectives behind establishment of non-banking credit institutes are as follows:

- Attracting private deposits and reducing economic problems resulting from excessive liquidity.

- Encouraging public participation in various branches of the economy and boosting employment and production.

- Correcting use of credit resources.

- Offering efficient service and easy loans to clients.

- Preparing grounds for healthy competition among banks and ultimately improving banking operations.

- Encouraging people to deposit their savings in the credit institutes.

- Assisting the government financially to provide credits to various economic sectors.

- Using the professional expertise and management of the private sector.

- Making use of advanced scientific procedures and experiences of veterans in banking affairs.

- diversifying the country's investment.

In keeping with the State Monetary and Banking Code dated 1972, CBI permits only such non-banking credit institutes to operate which possess license from CBI and operate within the framework specified by the Money and Credit Council, but the fact is that a number of these institutes have been registered in the Registration Bureau of Companies without holding licenses from CBI.

The Monetary and Credit Institute of the Mostazafan and Janbazan Foundation, Development Credit Institute, Economic Regulating Credit Institute and Employment Generation Credit Institutes are the only credit institutes in the country which hold CBI licenses.

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