Abouzar Soroush, the deputy of supervision at the Central Bank of Iran outlined the measures to expand microloans.
“The measures include increasing the ceiling for interest-free loans, establishing a new criterion for the share of microfinancing in bank balance sheets, reducing the reserve requirement for microloans in banks, and updating the credit assessment system,” IBENA quoted Soroush as saying.
He said the CBI has created a system called "Banks' Share in Total Microfinance" in the balance sheets of banks to encourage small loans.
Setting a new criterion for raising the share of microfinance has been a significant step towards controlling the liquidity growth of banks, according to Soroush.
“The CBI has adopted criteria in order to encourage banks to microfinance. “Banks providing microfinance have the potential for greater balance sheet growth compared to those with less microfinance exposure.”
More Diligence
Usually microloans are less likely to add to bank non-performing loans…people tend to be more diligent in repaying microfinance installments compared to larger business who might be facing financial difficulties, the official added.
Regarding the reserve requirement for microloans in banks, he said, the CBI is looking at ways to reduce the reserve requirements for microfinance to the extent possible. “We hope to present this matter to the Money and Credit Council. If approved, this measure will be implemented.”
If all goes well on this front, it will drive more banks towards microfinance, he said, noting that some lenders may seek to control their costs in line with the regulatory framework for managing balance sheets. In this regard, the CBI allows banks with a greater share in microfinance and microfinance funding to have more room for healthy balance sheet growth.
“CBI measures, such as online account opening, electronic signature, and the use of electronic promissory notes, have contributed to the development and facilitation of microfinance.”
Improving Financial Inclusion
The CBI is more inclined towards Qarz-ol-Hassanah instruments to help enhance financial inclusion and improve financial services across the country. The government says it wants to expand the scale and scope of such financial institutions.
Regarding the development and promotion of Qarz-ol-Hassanah funds, the official said that regulations to this end were approved and communicated by the Money and Credit Council in September 2022. “We are in the process of establishing the necessary infrastructure for expanding Qarzol-Hassanah funding.”
“Negotiations have taken place with banks to encourage them to establish their own specific Qarz-ol-Hassanah funds. One bank has already taken the lead and others have now expressed interest in doing likewise.”
“If banks establish these funds, the Qarz-ol-Hassanah resources of the bank will be transferred to these funds. This policy will enhance transparency and facilitate the accessibility of usury-free lending,” he added.
Higher Caps
The Credit Commission of the CBI has agreed to raise the cap on Qarz-ol-Hassanah (interest-free microcredit) loans by 50%. The ceiling for such microloans has been raised to 3 billion rials ($6,200) from 2 billion rials.
This is the third time the regulator has increased interest-free microloans in less than a year. Last time, the Money and Credit Council (MCC), the top banking and monetary decision-making body, raised the ceiling from 500 million rials to 2 billion rials ($4,100) for each applicant.
Accordingly, the ceiling for small businesses and knowledge-based companies loans have been raised from 5 billion rials to 7.5 billion rials ($15,000).
Interest-free loans are given mostly to newlyweds and for employment needs to low-income households and people in the less privileged areas.
Furthermore, the CBI recently announced new guidelines based on which banks and credit institutions are allowed to issue credit cards holding up to 3 billion rials. As per the guidelines, the maximum repayment deadline has been extended from the previous 36 months to 60 months. Reimbursement could be done either in lump sum or in installments.
Iranian banks issue credit cards, debit cards and gift cards, though the first type is a rarity limited to VIPs. The CBI says it is trying to institutionalize the use of credit cards as a resourceful and accessible alternative to microloans.
The Central Bank of Iran required banks to allocate microloans only via their digital platforms from the beginning of the current fiscal year in March 2023.
The CBI reflected on its performance related to loans during the first quarter. The total amount of loans to the banking industry reached 9,213.5 trillion rials ($18.43 billion) – up 25.8% compared to the corresponding period in the previous year.
Out of the total lending during the period, 85.2% was allocated to businesses and 14.8% to the people (households). It should be added that 66.5% of the total loans during the period was for increasing working capital of manufactures.
