Banks’ Investment Regulations Announced

The Central Bank of Iran has called on banks and credit institutions to cease any involvement in investment funds as well as the purchase of any kind of securities and bonds, which the regulator has deemed as "non-banking activity".

As per the CBI directive, the banking system's previous investments in areas now regarded prohibited should end by 2020.

The full text of the spreadsheet, published on CBI's website, states that banks and credit institutions must implement the regulations within a month of its issuance.

CBI has noted that the measures are meant to limit the risks and increase supervision over credit institutions' investment practices, leading them toward their original task of functioning as "financial intermediaries".

Back in 2015, Money and Credit Council– a decision-making body– had approved regulations for removing hurdles in the way of competitive production and promoting the financial system, obligating banks and their affiliate companies to quit non-banking activities (except incomplete projects that must be ceded within three years of launch).  

CBI is charged with determining if the activities of banks, credit institutions and their affiliate companies are considered standard banking ventures.

Affiliated companies are defined by CBI as companies whose over 50% of shares belong to a bank or a credit institution or those whose majority of board members is selected by a bank.

According to the directive, if a bank or credit institution takes measures to give up their non-banking activities but as a result of unexpected developments, the process does not succeed and is confirmed by the CBI, the directive's regulations won't apply.

Investment Limits

The directive also limited credit institutions' investments in banking areas as follows:

* Bank and credit institutions are allowed to invest by up to 20% of their base capital.

* The maximum limit of investment in other legal entities cannot exceed 5% of the bank or credit institutions' base capital.

* Banks and credit institutions are not allowed to own more than 1% of the shares of another credit institution.

* Credit institutions registered in free trade zones are not bound by the regulations of the directive.

* Investment in bonds issued or guaranteed by the government is excluded from this directive and will follow further CBI notifications.

As cited in CBI's directive, the auditing process of the credit institution's investments will be in line with Iran Audit Organization's standards and CBI regulations.

It is noted that all investments concerning this directive must be approved by the board of the credit institutions.

Banks, credit institutions and their affiliated companies are allowed to participate in establishing new companies or buy the shares of existing ones, if these entities only engage in banking activities.    

The directive allows banks and credit institutions to invest in foreign credit institutions and to own more than 50% of the shares of a domestic company, after obtaining the CBI authorizations and in line with aforementioned investment limits.

Penalties

* If a credit institution does not abide by these regulations, an amount equal to their level of over-investment will be reduced from their base capital as a precautionary measure.

* If a credit institution seizes stocks or bonds as compensation due to a breach of contract in defiance of the directive's regulations, it is obligated to comply with the rules within a year and report the reasons to CBI in a month.

* Further details of penalties will be in line with monetary and banking regulations.

As the directive dictates, all credit institutions that engage in investments related to this directive's regulations need to report their investments on a monthly basis in compliance with the CBI framework.