CBI Eases Leasing Regulations

The Central Bank of Iran announced on Tuesday that it has revised regulations regarding the operation of leasing companies, allowing lenders to offer their services at approximately 3% higher interest rate than those offered by the banking sector.

The measure is coming after successive complaints made by lenders over the Money and Credit Council’s imposition of an interest rate cap on lease contracts, which is 21% at present.

Leasing companies claim that the real cost of lease contracts ranges between 25-29%.

The MMC has allowed bankers to charge borrowers with approximately 18% interest.

Even though the new measure gives lenders more space for expanding their operations, it is still not what leasing firms were looking for.

 “We strongly oppose rate caps for lease contracts, as it goes against the nature of the leasing industry,” said Mohammad Hadi Moqei, secretary-general of the National Association of Leasing Companies, in a meeting with central bank officials earlier in September.

Lenders believe that there is no need to set rates for leasing companies, just as the CBI is not allowed to set conditions for goods and services offered to bank borrowers.

Leasing companies are not viewed in a positive way by most Iranians largely due to the very high interest rates they charge. This could be the reason behind CBI’s decision on setting rate caps for lease contracts.

Lenders are permitted to offer services only through rent-to-buy contracts.

 Other Issues

The revised rate cap is not the only issue addressed by the central bank. Lenders are barred from charging customers with any kind of hidden fees, which is a common trend at the moment.

“The operation license of leasing companies will be revoked, if they fail to provide borrowers with transparent invoices on three occasions,” the CBI said.

Currently, 29 leasing companies are licensed to operate, while thousands of companies are operating without the CBI license. A majority of registered leasing firms are either affiliated with banks or auto manufacturers.

The CBI has recently allowed leasing companies to lease housing units, which was banned during the previous administration. There are two sets of regulations for bank-affiliated leasing companies and those that are not affiliated with financial institutions.

“Bank-affiliated lenders should follow MMC’s regulations regarding rent-to-own homes and non-banks are permitted to finance approximately 70% of a residential unit’s price,” the announcement reads.

The MMC has allowed banks to offer loans to homebuyers, covering approximately 80% of a housing unit’s price.

The CBI has set new restrictions for leasing companies’ resources, in terms of the volume of the money borrowed from the banking sector and the maximum amount lenders can lend to a single applicant.

The new directive also bars banks from holding shares in more than one leasing company.

Almost all of the banks in Iran have an affiliated leasing company. Bank Pasargad Iran and Bank of Industry and Mine each reportedly have two affiliated leasing companies. Some experts believe banks should be banned from owning leasing companies, as it is a non-banking business.

Leasing companies have reported another major obstacle in their operations, namely value-added tax. The inefficiency of the VAT system is a major challenge for lenders, as they dissuade borrowers who are forced to pay double taxes.

This is one of the issues making lease contracts unattractive to both customers and lenders, as in most cases it’s the customer who has to bear the brunt of both taxes.

The CBI, as the regulator of the leasing industry, has not addressed the issue in its new reforms.