A Bid for CBI Independence

EghtesadOnline: I ndependence of the Central Bank of Iran lies at the heart of a new set of regulations known as Central Bank Bill, says the head of the Majlis Economic Commission.

News ID: ۷۴۶۳۳۸

15 December 2018

The bill is part of wider reforms known as the Comprehensive Banking Bill aimed at overhauling the ailing banking system.

“CBI independence from government is the ‘punch line’ of the new central bank law” Mohammad Reza Pour-Ebrahimi was quoted as saying by Tasnim News Agency.

Pour-Ebrahimi pointed to the positive effects of the bill on the economy saying that it has been finalized in the economic commission and will be debated in the chamber this week, according to Financial Tribune.

A report released by the Majlis Research Center earlier had called for the regulator to strive for a more autonomous role in setting monetary policies and stabilizing the market.

The bill was sent to the Majlis in tandem with another bill named as the ‘Banking Reform Bill’ a year ago with the aim of updating banking regulations. It has undergone multiple modifications and revisions since and has created controversy among lawmakers.

Improving the independence of the CBI, enhancing monetary policymaking and enforcing CBI supervision over the money market are among its key goals.

Compound Interest Eliminated

Parliament recently voted to eliminate compound interest on bank loans and deposits and the ratified bill was sent to Guardian Council – a body that ensures compliancy of laws with Sharia and the Constitution – Pour-Ebrahimi said.

Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is earned on the principal sum plus all of the accumulated interest of previous periods of a deposit or loan.

This will make a sum grow at a faster rate than simple interest that is calculated only on the principal amount.

“Previous compound interest law stipulated that if a borrower was granted a loan of say 1,000 points, they had to repay 4,000 points after four years “he said. In the new law, the initial contract is considered as the base for banks and repaying loan in the fifth or tenth year will be part of the initial contract.

In the new method the overdue charges are dropped and the annual interest rate figures are revised which should cut the four-fold borrower’s obligations to banks to half.

“Implementing this law should help clear bad debts and ease lending procedures for businesses facing cumbersome bank rules”, the MP said.