CBI Issues Directives, Modifies Regulations

As part of an overarching policy of reforming the banking sector, the Central Bank of Iran has issued two executive directives concerning capital adequacy and international conformity standards for credit institutions and formation of credit cooperatives.

The Directive for Calculating Capital Adequacy Ratio of Credit Institutions has been notified to the banking system with the aim of increasing the conformity of lenders with new international standards "with an eye on the country's special conditions ", according to the official news website of the central bank.

Inspired by regulations of a number of internationally accepted documents, namely IFSB-15, Basel II, Basel III, and regulations of other countries, the revised directive has been approved in the latest session of the Money and Credit Council.

IFSB-15 was published in 2013 and constitutes a revised capital adequacy standard for institutions offering Islamic financial services while the Basel standards are a comprehensive set of reform measures developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector.

The last such directive issued by CBI dates back to 2003, which was the basis of operation for Iranian lenders before the notification of the new regulations.

Adhering to the new regulations will gradually help Iran upgrade financial transparency and conform to modern banking standards, which will be a significant step for the country as it needs a better standing in intergovernmental institutions such as the Financial Action Task Force.

This will help reconnect the Iranian banking sector to the international system and encourage major lenders in reestablishing correspondent banking ties with their Iranian counterparts, the lack of which has currently been identified as the source of many of the nation's problems.

The new directive obligates banks to balance their resources based on various forms of risk, including credit risk, market risk and operational risk, and set their required capital for covering operational and market risks. Previously, their resources were strictly balanced based on credit risk.

On the other hand, because local methods of rating and independent rating institutions are absent in Iran, CBI has directed lenders to "employ a simple measure for calculating credit risk".

It also directs the banks to create a data system within six months containing information on their capital and risk ratio, which could be requested at will by the central bank at any given time.

The banks are now obligated to reach a certain level of capital within a timeframe provided in the directive and should they fail to do so, "CBI has defined preventive or punitive measures".

Organization of Credit Cooperatives

The Executive Directive for Establishing, Operating and Supervising Credit Cooperatives has been upgraded and communicated to cooperative offices affiliated to the Ministry of Cooperatives, Labor and Social Welfare.

It has been devised using experiences gathered as part of the previous directive and suggestions made by the ministry, and deals with existing and planned credit cooperatives.

Firstly, the directive states that in order to organize the monetary and banking system of the country and prevent the formation of unregulated and unsystematic credit cooperatives akin to the past, "credit cooperatives can henceforth be established as credit cooperatives of occupational groups".

Such cooperatives are established to fulfill the credit and financial needs of a particular occupation by collecting small investments from the members and lending it to other members. They provide money for workers, teachers and staffs of state bodies or private institutions.

Furthermore, "credit cooperatives have now been limited to accept deposits and allocate Qarzol-Hassanah (interest-free) loans".

The CBI directive also notes that any credit cooperatives of occupational groups, which are to be formed from now on, must have at least 50 members.

With this number of members, they must boast a minimum capital of 500 million rials ($13, 300) while for each additional member, 10 million rials ($266) will be added to their initial capital.

Cooperatives formed prior to the issuance of the directive have been instructed to adapt themselves to new guidelines within a year and obtain a new license of operation from the central bank. If they fail to get a permit, CBI will stop their activities.

Based on a memorandum of understanding signed by CBI and the Ministry of Cooperatives about two years ago, a total of 600 credit cooperatives will be authorized to operate in the money market.