CBI Enforces Decree on Usance L/Cs

The Central Bank of Iran has communicated to all banks and credit institutions the criteria for the implementation of a foreign exchange directive originally issued by First Vice President Es’haq Jahangiri regarding letters of credit.

The directive states that “for each case of imports, and outfitting of the assembly line of businesses, they are allowed to open  a usance L/C worth a maximum $50 million for three years at the most [if the bank decrees that it is feasible investment],” as reported by the official news website of the central bank.

As to reasons behind the directive, the central bank first points to Iran’s nuclear accord and opportunities created by it in terms of establishing correspondent banking relations with foreign banks, which has subsequently helped open L/Cs for imports.

The CBI notes that the directive was issued since L/Cs are “the most prevalent and safest instruments in international banking for undertaking foreign purchase deals” and Iran also used them frequently before the sanctions.

In his directive, Jahangiri–who is also the head of Resistance Economy Headquarters–set out a series of f conditions regarding L/Cs, first of which is that applicants must obtain a license from the corresponding ministry for the import of goods.

The next one dictates that applicants must adhere to directives regarding the review of their financial and credit status by the central bank.

Applicants will receive 10% of the total amount of the credit when opening the L/C, another 10% when they make the deal and the rest when the contract has materialized. Any advance payments will be made following a credible bank’s guarantee.

Referring to contracts with a maturity of over two years, the credit will be reimbursed in the currency that was registered at the beginning, but it can be changed into another currency of choice.

The directive also asserts that any attempt to put forward the maturity date of the contract will have to be approved by the central bank. It adds that applicants are also obligated to receive a registration certificate from CBI’s Foreign Exchange Supervision Department and register the information in the Foreign Exchange Management System.

If the applicant fails to pay back the rial or foreign exchange equivalent of the contract, the original amount and any potential interests or penalty will be followed up on and received in line with the terms of the contract and directives issued by the corresponding department of the central bank.

The CBI has authorized banks to deal in foreign exchange trading at a free-market rate, as authorities move toward unifying exchange rates and weaken the role of bureaux de change in forex transactions, which had become the new normal during the period of sanctions targeting Iran’s nuclear program.  

Iran operates two exchange rates, a free market rate of around 39,300 rials to the US dollar on Sunday and an official rate used for state transactions set by the central bank at around 32,370 rials.

In recent months, the central bank raised the official rate gradually to shrink the gap between the two. It said the goal is to unify the exchange rate, to make the economy more efficient and create a level field for private firms competing with state institutions with access to cheaper foreign exchange.