Iran's ailing banking system is still based on the Monetary and Banking Law of 1972, which itself is based on an eponymous law passed in 1960 with small changes, meaning that it has been close to six decades since the country has seen any meaningful changes to its banking system.
Two administrations and parliaments have been at it for close to a decade and failed at passing comprehensive reforms. President Hassan Rouhani's government also devised two bills: one for the banking system and one for the Central Bank of Iran, but as the process of presenting them to the Majlis took a long while, parliamentarians took matters into their own hands.
A total of 225 MPs last year passed a billed named Islamic Republic of Iran Banking, which prompted the government to fast track its own efforts. Instead of completing the two aforementioned bills, they presented a single bill called the Reformative Bill of the Monetary and Banking Law of 1972 that simply adds articles to the decades-old law, according to Financial Tribune.
The MPs used the government’s previous Central Bank Bill and added their own conditions, such that all parties are now scrambling to form a unified front that will create much-anticipated reforms in the banking system.
In its latest analytical report, Majlis Research Center has delved into the details of the administration’s proposed reforms, outlined its weaknesses and strengths, and delivered its verdict.
Added Reform Measures
According to MRC, the first part of the government’s reform bill deals with definitions and domains of inclusion, and the administration has sought to expand some of them cited in the original law.
The second part deals with money and, as MRC states, the government has only changed Iran’s official currency unit from rial to toman, which amounts to lopping off one zero for the sole purpose of added convenience for the general public that already uses toman on a daily basis.
In Dec. 2016, the Cabinet approved changing Iran’s monetary unit from rial to toman when ratifying its Central Bank Bill, but there has been no news on that front since. It seems that the administration is now trying to implement this measure through another channel.
In the next section of the bill dealing with the central bank, the government has apparently only removed the word “Iran” from the title “Iran Central Bank” and made no changes at all to the law that was passed several decades ago.
The main changes made by the government to the law come in the final section that deals with banking affairs.
As the Majlis research arm outlines, the government has added new sections on supervision, Iran Deposit Guarantee Fund and disciplinary regulations, as well as on preventing the bankruptcy and dissolution of banks.
IDGF was established in 2013 by the Central Bank of Iran to beef up its regulatory watch over monetary and banking operations. The fund’s assets are generated through the membership fees of banks and credit institutions plus 0.25% of bank deposits.
The section on supervision is entirely new and includes integrated CBI supervision over commercial banks, CBI’s duties in safeguarding professional secrets of financial institutions, CBI’s cooperation with oversight authorities of other nations and the duties of financial institutions, including disclosure of information, corporate governance and implementation of comprehensive risk management.
Other elements of the supervision section include regulations overseeing removal of board members and their period of service, violations of financial institutions and formation of a new association for the banks, its goals and responsibilities borne by each institution.
Disciplinary regulations pertain to overseeing the formation of committees within the CBI to deal with violations and the extent of their authority.
The section about IDGF explains the reason behind the fund’s establishment, how it operates, how its statute can be reformed and how its activities may be stopped and the fund may be dissolved. It also elaborates on the fund’s membership and the responsibilities of financial institutions following their membership, in addition to other details concerning the return of deposits to people and alleviation of potential disagreements.
Other changes detail methods based on which financial institutions may be dissolved, potential decisions of CBI concerning financial institutions in case of stoppage, ways of rebuilding institutions, including mergers and acquisitions, and responsibilities and duties of CBI and courts in case of bankruptcy of institutions.
Other changes added by the government to the law include conditions of accepting deposits from people, duties of CBI and state-owned entities regarding illegal credit institutions, forbidding advertisement or anything else that favors illegal credit institutions and appoints managers in financial institutions without gaining the approval of CBI.
Weaknesses, Strengths
As viewed by MRC, the strengths of the government’s proposed measures include articles that tackle some of the major challenges of the past two decades, namely “ineffectiveness of oversight processes, lack of deterrence of disciplinary regulations and increased financial stability because of unclear dissolution and bankruptcy conditions”.
However, even as some of the supervisory and disciplinary contents added by the government have been deemed important and necessary, the think-tank says they are outdated. There are “many gaps and problems” in terms of religious conformity, independence of CBI, monetary policymaking, banking oversight structure and process of resource allocation just to name a few, MRC said.
That is while according to the parliamentary entity, the administration’s measures lack “attention to progress and reforms in regulations of other countries” like those concerning banking supervision, electronic banking, payment systems, corporate structures, corporate governance and Islamic banking.
What is more, the think-tank believes that some of the contents of the reform bill “entail worse consequences than existing regulations”, such as an article that bounds the CBI’s supervisory authority to directives proposed by the Ministry of Economic Affairs and Finance, which were subsequently approved by the Cabinet, effectively undermining CBI independence.
Not reforming the Usury-Free Banking Law, a slew of uncertainties and unclear language in the proposed law, not paying attention to a number of fundamental concepts in banking and shortcomings in devising an integrated reform measure have been referred to by MRC as other weaknesses of the government’s measure.
MRC notes that “a majority of the proposed reforms are concentrated on limited articles” of the original 1972 law, and a number of key banking components are left unaddressed.
So, in conclusion, it proposes that the Majlis and the government should work closely to choose the best of what each have proposed and combine them to come up with an agreeable result.