Economy, Business And Markets

CBI Revamps FTZ Banking Laws

CBI Revamps FTZ  Banking Laws CBI Revamps FTZ  Banking Laws

Iran needs money. It needs cheap financing to develop its diversified industrial base and save it from recession. It also requires foreign exchange credit and bilateral trade deals to diversify its export revenues, away from petroleum. Thus, opening connections with the international banking system has taken one of the top spots on the central bank's agenda.

Long isolated from the international banking system due to financial sanctions—imposed by the United Nations, United States and the European Union—the Iranian banking system is busy, re-establishing its dusty networks and building new ones.

This bustling activity comes after Foreign Minister Mohammad Javad Zarif managed to negotiate a deal with the foreign ministers of the UN Security Council on July 14. The agreement will lead to the removal of sanctions after Iran cuts back its nuclear energy program.

So it is no surprise that minister level delegations from Germany, Italy and Japan have visited Iran after the deal. All three want to strengthen their financial ties with Iran. The central bank has urged their banks to open branches in Iran. "Foreign banks can actually start operation in Iran," the bank's governor, Valiollah Seif, told the press last week.

Overhauling FTZ Regulations

The central bank, however, has not stopped there. It has revised regulations for foreign bank ownership and activity. This is where Iran's free trade zones come into play.

These zones were created to act as gateways into the 80-million country four and a half times the size of Germany. However, poor economic planning has left these poor but lightly regulated parts of Iran.

Now, the central bank wants them to attract banking business. It communicated a new directive to Iran's state-owned and private commercial lenders about banking in free trade zones on Monday. The directive focuses on banking in foreign exchange in free trade zones, mostly key ports or islands in the Persian Gulf.

The central bank requires at least €25 million in capital for establishing banks and €15 million for credit institutions. However, if a foreign credit institution wants to open a branch in one of these areas, it only needs €5 million. The minimum capital can be in any currency accepted by the regulator. The bank can lower the minimum required capital if deemed necessary.

These institutions can only dabble in foreign exchange financing—what the central bank calls "offshore banking", but not to be confused banking services offered in Cayman Islands—and cannot provide services in rial.

The minimum capital has to be put as reserve in the central bank and in the case of bank branches can be redeemed upon the branch's closure.

Foreign entities can have full ownership of banks in free trade zones, "as the law is silent on the matter and directives do not forbid foreign ownership," Abdolmahdi Arjmandnejad, Director General of Banking Regulations, Licensing and Anti-Money Laundering at the central bank told Financial Tribune in a phone interview.

Not Quite So Alluring

As for foreign ownership of Iranian banks and banking in the mainland, current regulations allow foreigners to jointly hold a 40% stake in an Iranian bank. To buy a stake in existing Iranian banks or create a new bank with foreign ownership the central bank has to approve the purchase. The shares can be bought through the two Iranian stock markets—Tehran Stock Exchange and Iran Fara Bourse.

The recent moves by the central bank are signaling a never before seen change in its attitude towards foreign banks and its willingness to open up Iran's money markets.

But the bank has to offer far more favorable terms if it wants serious international players to forgo the risks of investing in Iran and bring their expertise to the country. Furthermore, it should speed up its push towards transparency in the banking system. It should also offer more closure about its own actions to attain the credibility required of a central bank.