Banks and credit institution henceforth must submit a copy of the loan contract to borrowers, the Central Bank of Iran said.
The copy must bear the same legal value as the original the contract, the CBI said in a press release published on its website.
Obliging lenders to share details of loan contracts with borrowers is with the aim of improving transparency and exposing any potential misdeed, namely compound interest rates and penalties for defaulters.
The obligation is based on legislation passed earlier. It requires lenders to develop electronic platforms with the aim to ease access of borrowers to data about the provisions of their loan agreement and any changes thereto.
Loan agreements must also be easily accessible to the guarantors/mortgagors and include complete data about repayment guarantees, installments, deferrals and the like.
Lawmakers say the new rules should increase transparency in the normally complex process of lending and will be in the interest of borrowers.
Mohammad Hossain Hossainzadeh, a member of the Majlis Economic Commission, said the law in effect prevents banks from imposing compound interest on loans, which is not allowed as per Islamic sharia law.
“This will create an obligation on banks and end compound interest,” he was quoted as saying by the parliamentary news website ICANA.
Compound interest (or compounding interest) is calculated on the principal amount and includes all the accumulated interest on a deposit or loan.
While the Money and Credit Council had earlier prohibited compound interest on loans, the decision was never put into practice resulting in strong protestations by debtors, especially those who defaulted and were unable to meet their financial commitments (repayment of loans on time).
The decision should also help banks saddled with mountains of bad debts and NPLs, according to the head of the parliamentary commission, Mohammad-Reza Pour-Ebrahimi.
He said scrapping compound interest can and should benefit banks as they can recover a portion of the non-performing loans.
