Western-style banks and insurance came late to Iran, but protected
and stimulated by the government and fed by expanding economic
activity, banking became one of the fastest growing sectors of
the economy in the 1960s. The insurance industry had barely started
in 1960 and had a negligible role in the accumulation of funds
to finance development, largely because insurance was not used
by most of the population.
Before the modern era in Iranian banking, which dates to the
opening of a branch of a British bank in 1888, credit was available
only at high rates from noninstitutional lenders such as relatives,
friends, wealthy landowners, and bazaar moneylenders. In 1988
these noninstitutional sources of credit were still available,
particularly in the more isolated rural communities. Institutional
banking spread rapidly in the late 1960s; by 1988 almost all small
towns were served by at least one bank. None of these operations
were private because banks were nationalized in 1979.
In 1960 Bank Markazi Iran was established as the central bank.
Later legislation further defined its powers and responsibilities.
The bank issued notes and acted as banker for the government,
keeping accounts, marketing government securities, maintaining
foreign exchange reserves, and overseeing international transactions.
It also set standards for the supervised financial institutions,
established credit and monetary policies, and took measures to
enforce credit and monetary policies. The banking laws limited
foreign participation to 40 percent in any banks operated in Iran
(except the Soviet bank, which had been founded much earlier).
Subsequently, the Central Bank limited foreign ownership in new
banks to 35 percent.
By 1977 the banking system consisted of the Central Bank, twenty-four
commercial banks, twelve specialized banks, and three savings
and loan associations (these numbers decreased after the Revolution).
The commercial banks had more than 7,400 branches, including a
few in other countries. The specialized banks focused mostly on
a particular kind of lending (e.g., industrial or agricultural
loans), although three regional banks specialized in financing
local development projects. In addition, in 1977 approximately
seventy foreign banks (primarily from the major industrial nations)
had representative offices in Iran, but they conducted no local
banking business. Their purpose was to facilitate trade relations.
All domestic banks and insurance companies in Iran were nationalized
in 1979. In 1980 the twenty-nine domestic banks remaining after
the Revolution were consolidated into nine units. Foreign banks
in Iran declined in number to thirty by 1987 and included the
representative office of a small Soviet bank that financed trade.
French banks were excluded from the Iranian market in 1983, leaving
those of the Federal Republic of Germany (West Germany), as well
as Swiss, Japanese, and British banks to finance about 30 percent
of total trade.
Immediately after the Revolution, the government called for the
establishment of an Islamic banking system (which became law in
March 1984) that would replace interest payments with profit sharing.
In Islamic terms, this meant that profit (interest) was acceptable
only if a lender's money were "not at risk." The introduction
of Islamic banking procedures was gradual; confusion and delays
disrupted the initial stages of implementation. In March 1985,
the Islamic code was extended to include bank loans and advances.
By late 1987, however, only certain banks were fully Islamicized,
and only about 10 percent of private deposits were subject to
The Central Bank controlled the issuance of letters of credit.
These were deferred payment instruments that relieved the cash-flow
problem Iran experienced after oil prices began to decline in
1983. The government financed many imports with these high-interest
letters of credit. Originally a letter of credit was to be repaid
within 180 days, but by 1987 Iranian customers wanted 720 days'
credit. Up to US$4 billion in letters of credit remained outstanding
in early 1987, but the government did not include these supplier
credits when assessing its foreign debt.
The Central Bank established a good reputation in international
banking circles in the 1980s. It had practically no long-term
foreign debt in early 1987--only US$5 million--and was recognized
as an international creditor. Between 1979 and 1984, the government
paid cash for US$66 billion worth of imports, and it repaid immediately
US$7 billion of existing debts. The Central Bank's reputation
for honoring its financial obligations, however, did not change
the attitudes of West European bankers, who, in a 1987 poll, expressed
their unwillingness to lend money to Iran. To help relieve its
cash-flow problem after 1983, the government sought repayment
from several countries of money they borrowed from Iran during
the reign of the Mohammad Reza Shah.
In the first quarter of 1986, Iranian deposits in international
banks fell by US$570 million, reducing Iran's holdings to US$7.1
billion. This reduction coincided with the continued fall in oil
revenues, and foreign exchange deposits were expected to decrease
further in the late 1980s.
Data as of December 1987