Ever since Iran’s Ministry of Finance and Economic Affairs announced that there were no problems in operating investment banks in Iran, three private banks (Eghtesade Novin, Karafarin and Saman Eghtesad) and a state bank (Melli) have taken steps to lure in foreign companies to set up joint investment banks. These banks will alleviate the chaotic situation initially experienced by the share market.

Hussein Abdu Tabrizi, the newly appointed director of the Tehran Stock Exchange and the the former-head of Bank Eghtesade Novin’s board of directors and an advisor to the Ministry of Finance and Economic Affairs, has said that establishing investment banks is included in their charter and they do not require a separate government permit. The private banks must only get government permission for receiving foreign investment if the contracts negotiated by them are finalized. These joint investment banks are one step leading to more foreign investment. If these institutions are endorsed, foreigners can begin trading shares in Iran’s stock market with greater ease.

It is foreseeable that Iran’s first investment bank will commence work before 2004 and Eghtesade Novin Bank has had fruitful negotiations with some European countries, but it appears that they may reach better agreements with Arab countries. There are whispers that Karafarin bank may have reached an agreement with a German investment bank. The details of this agreement have yet to be disclosed, but those in charge are hoping to iron out any inconsistencies by the end of this year.

These developments come at a time when the privatizing Banks Sepah, Mellat and Keshavarzi (by 2004) are on the government’s agenda, on the heels of the successful relinquishment of Bank Saderat to the public sector. It is predicted that in five years 50% of people’s savings will go to 10 private banks. Even though the existing private banks currently control a minor fraction of the country’s monetary markets, they have been relatively successful.

The change in the behavior of state banks is the most significant effect private banks have had on the monetary and banking institutions of Iran. The fact that a private bank can offer 200 million rial ($25,000) home loans brings under scrutiny some of the restrictions placed by government banks. Government banks need to keep the big picture of the country’s economy in view at all times and must allocate monetary reserves according to the social needs, but unfortunately the state banks allocation of credits is superficial.