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EghtesadOnline: The Central Bank of Iran’s plan to launch a supply chain finance (SCF) mechanism is expected to help improve the allocation of funds across economic sectors, the bank’s SCF Department said.

Hamid Azmand added that the SCF will help banks lend to manufacturers in a target-oriented strategy effectively ending allocation of resources to non-productive and speculative sectors.  

SCF is a set of solutions that aim to lower financing costs and improve business efficiency for buyers and sellers. It functions by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. 

Under this paradigm, buyers agree to approve their suppliers' invoices for financing by a bank or another outside financier. 

“Given the increased efficiency of allotting banking resources to manufactures, we expect demand for loans to decline under the new mechanism,” Azmand said in a press release posted on the CBI website.

“This should help create a balance between banking resources and spending”. 

Furthermore, within the SCF framework funds will move in and around the production cycle and be used exclusively for manufacturing. “This will also ease pressure on banks and help  control money supply,” the official said.  

The new lending procedure for now is to be used for a limited number of businesses.  “In the initial phase the new lending mechanism will be for funding major economic enterprises,” Azmand was quoted as saying. 

Later it will be extended to SMEs, farmers, distribution networks, households and end consumers. 

Seven banks have joined the imitative and other lenders will come in gradually. The Bank of Industry and Mine, Bank Saderat Iran, Bank Melli Iran, Bank Mellat, Tejarat Bank, Parsian Bank and Bank Maskan will take part in the pilot phase.

The official said lenders can still lend directly as per existing rules, noting that the SCF program aims to ease procurement of working capital and will not substitute conventional lending procedures. 

As for other merits, the SCF will focus on “credit instruments” rather than direct borrowing, minimizing the diversion of bank resources to non-productive and speculative sectors and increase oversight of lending to the production companies.   

Based on the operational framework unveiled by the CBI, the SCF is geared to fostering economic growth by facilitating the funding process of manufacturing companies in non-inflationary ways.

In implementing the plan, the CBI will be policymaker and regulators and lenders executors. To this end, the CBI has developed new financing instruments and optimized existing ones, namely electronic negotiable instruments and the Productive Credit Certificate, known by its Persian acronym “Gam”. 

A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee. The document may also appear in electronic format.

Gam is a market oriented financial instrument traded in money and capital markets.  Through the instrument lenders interact with businesses by offering a tradable credit certificate similar to LCs.  

The certificate is submitted to suppliers of raw materials, machinery and equipment. Like bonds, certificates have maturity dates and the supplier can cash the certificate by selling it in the stock market.