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Iran's central bank must regulate unlicensed actors

The Central Bank of Iran’s failure to regulate a major segment of the financial sector is putting the country’s economic and social well-being at risk.
Iranians check economic diagrams on their laptops while monitoring a stock market activity board at the stock exchange in the capital Tehran on July 27, 2015. Iran's central bank chief said that Iran has assets of $29 billion in overseas banks that could be unlocked under a nuclear deal struck on July 14, far less than reported estimates of over $100 billion. AFP PHOTO / BEHROUZ MEHRI        (Photo credit should read BEHROUZ MEHRI/AFP/Getty Images)

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.

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