Despite all modernization efforts, Iran is still a cash-based economy where banks and financial institutions play a significant role. Ever since the privatization of the banking sector in the early 2000s, the Central Bank of Iran (CBI) has had to deal with a phenomenon of non-bank credit institutions, which are more commonly referred to as credit and financial institutions (CFIs). The legal framework for these organizations was established in the country’s pre-revolutionary commercial code, but it had not been used in the first two decades of post-revolutionary Iran when all banks and financial institutions were nationalized.
In the early 2000s, Iranian authorities revived the framework to provide a legal platform so applicants for private banking licenses could establish a financial entity before issuing an initial public offering of a newly founded private bank and securing the needed license. However, a sizable segment of the Iranian financial sector has become dominated by mostly unlicensed CFIs. These are usually affiliated with religious foundations, which claim the financial institutions are an extension of the religious responsibility of their umbrella organizations to extend interest-free loans to applicants. For a long time, the CBI was unable to challenge these entities as they claimed they were not engaging in mainstream banking and financial activities.
