The Central Bank of Iran is planning to help municipalities tap a new supply chain finance mechanism for urban development.
Asghar Abolhassani, the CBI vice governor made the announcement at a “Conference on Investment Opportunities in Tehran” on Wednesday, IRNA reported.
Funding for urban development would mainly cover expansion of transportation, water, sewer, fire and law enforcement.
Back in January, the CBI unveiled a supply chain finance (SCF) program to help improve lending and navigate bank resources toward production sectors, among other things.
SCF is a set of solutions that aim to lower financing costs and improve business efficiency for buyers and sellers in a sales transaction.
SCF methodologies work by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under this paradigm, buyers agree to approve supplier invoices for financing by a bank or other outside financier.
As one of the main components of SCF, Abolhassani pointed to the Productive Credit Certificate, known by its Persian acronym “Gam”.
“We have decided to use Gam for the services sector after successful implementation in the auto and home appliances industries,” he was also quoted as saying.
The CBI earlier updated rules governing Gam to fine-tune it with the SCF program. Gam is a market-oriented financial instrument that can be traded in money and capital markets. Lenders assist reliable businesses by offering tradable credit certificates similar to LCs. The certificate can be given to suppliers of raw materials, machinery and equipment.
Like bonds, these certificates have maturity dates. The supplier can cash the certificate by selling it in the stock market. Money does not change hands between the beneficiaries.
Regarding merits of Gam, Abolhassani said “it makes lending transparent, cuts cost and renders projects economically viable”.
A Step Forward
The SCF scheme has been welcomed by senior banking and economic officials as a turnaround in financing and lending procedures. Earlier Ali Salehabadi said “the SCF program will shoulder the burden of funding manufactures by 50%”, adding that it is potentially capable of replacing conventional financing methods.
It is said that the new credit finance program helps in minimizing diversion of bank resources from flowing into non-productive and speculative markets because it monitors the funding process through all stages.
Based on what is known about the plan, the new lending procedure so far has been used for a limited number of big economic enterprises. Later it will be extended to SMEs, farmers, distribution networks, households and end consumers.
Banking and financial experts opine that this mechanism can and should go a long way in easing the pressure on banks and help control money supply.
