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Difference in Mainland & FTZ Banking
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| Amir H.
Tayyebi Fard |
After Iran’s Revolution of 1979 and
ratification of the Law on Nationalization of Banks in June 1980, all of the
private banks existing in Iran, either owned by Iranian persons or with the
participation of Iranian and foreign persons, were nationalized and had their
governors appointed by the government. Following the approval of the Iranian
Constitution in January 1980, the economic system of Iran was based on three
sectors: Public (under the control of the Government), Cooperative and
Private, and banking operations were categorized in public sector;
consequently, private sector was barred from undertaking banking operations in
Iran. As a result of nationalization of banks, as well as broad interpretation
of Article 81 of the Constitution, Foreign banks were and still are forbidden
to establish branches in the Iranian mainland. Currently, they are only
authorized to establish representative offices, which are basically liaison
offices and barred from doing any banking transactions.
According to the recent laws and
regulations passed in Iran (which shall be described below), the Iranian
private sector have been permitted to get authorization from Central Bank of
Iran (CBI) in order to establish credit institution and/or private bank and
also foreigners have been allowed to establish and/or participate in banks and
credit institutions in Iranian free zones.
Regulations
Governing Iranian FTZs:
By virtue of Note 19 of
the First Five-Year Plan (1989), the Government was authorized to establish,
at the maximum, three Free Trade-Industrial Zones (FTZs) in the country’s
borderlands. Subsequently, in 1993, the Parliament by virtue of "the Law on
the Mode of Administration of FTZs of Iran", determined the following three
borderlands as free zones: Kish, Qeshm and Chabahar, and authorized the
Government to administer them.
In July 1999, the Expediency Council
amended the Law on the Mode of Administration of FTZs of Iran. According to
the amendment approved by the Expediency Council, the legal rights of the
foreign investors have been guaranteed and in case of nationalization or
expropriation of their investments, for a public purpose, the Government shall
be obliged to pay a fair compensation. Moreover, foreign investment in Iranian
banks incorporated in Iranian FTZs would be allowed.
Following the above referred amendment
in July 1999, the Board of Ministers approved an implementing regulation on
the "Monetary and Banking Operations in FTZs of Iran" on November 30, 1999
(hereinafter shall be referred to as "the Implementing Regulation"). The
Implementing Regulation governs on the establishment, the minimum capital,
qualifications and liabilities of the directors and mode of operations of
private banks and credit institutions, as well as foreign exchange system
prevailing in Iranian FTZs.
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The banks/credit institutions established and registered
in each of the FTZs, while their head offices are located therein, are
considered Iranian, whether Iranians or foreigners incorporate them. |
The following laws and regulations
govern private banks and credit institutions in the FTZs:
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The Law on the Mode of Administration
of FTZs of Iran (1993) as amended;
-
Implementing Regulation of the
Monetary and Banking Operations in FTZs of Iran (1999);
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The Money and Credit Council (MCC)’s
Directive on the Monetary and Banking Operations in FTZs of Iran (2000);
-
Usury-Free Banking Operations Law
(1983) and the Implementing Regulations and Directives issued in compliance
with it, on the objectives and functions of the banking system, granting
facilities in the framework of usury-free Islamic contracts and regulating
the terms and conditions which must be included in those contracts;
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The other laws and regulations, such
as Directives of CBI, Commercial Code and Criminal Code of Iran.
1.
Establishment:
Establishment of a bank/credit
institution as well as a bank/credit institution branch, whether Iranian or
foreign, shall be determined upon the relevant Free Zone Organization’s
proposal and obtaining CBI’s authorization7. The articles of
association of banks/credit institutions and the future amendments thereto
should be approved by MCC, after the proposal of the relevant Free Zone
Organization.
The banks/credit institutions
established and registered in each of the FTZs, while their head offices are
located therein, are considered Iranian, whether Iranians or foreigners
incorporate them.
Iranian or foreign bank/credit
institution’s representative office shall be established in the FTZs upon the
approval of the relevant Free Zone Organization and registration therein.
Representative offices are not authorized to do banking operations.
The establishment of off-shore banking
units in Iran (either in the form of an off-shore bank or an off-shore credit
institution), for the first time was anticipated in the Implementing
Regulation. According to the said Implementing Regulation, off-shore banking
units are only authorized to do banking operations with foreign currencies,
but not with Iranian currency. They are required to use the word of
"Off-shore", after their names.
The banks/credit institutions shall be
established in the FTZs in the legal form of private or public joint stock
companies, with registered shares. According to Iranian Commercial Code, there
should exist at least three shareholders in a private joint stock company, and
the minimum shareholders in a public joint stock company are five
shareholders.
After depositing 100% of the required
capital with CBI, the necessary authorization for registration of the banking
units (including private banks, credit institutions and their branches and/or
representative offices, whether Iranian or foreign) in the relevant FTZ, shall
be issued by CBI. This authorization is not transferable, and the validity
period of which is six months from the date of issuance; hence, it should be
registered in the same FTZ prior to the end of the said period.
2. Capital:
Up to 100% of capital of
the banks/credit institutions in the FTZs may belong to Iranians and/or
foreigners (citizens of governments recognized by the Iranian Government).
Foreign legal entities, including banks and companies which shall fund the
capital of banks/credit institutions, should have been registered in the
country the government of which is recognized by the Iranian Government and it
should have at least three years record of operations.
The minimum capitals for the
establishment of a bank, credit institution and a foreign bank/credit
institution’s branch are respectively as follow: Iranian Rial 35, 15 and 10
billion, 100% of which shall be deposited with CBI, in cash.
The foreign nationals or foreign legal
entities who wish to establish or fund a bank/credit institution or a
bank/credit institution branch, should change their currencies into Rial
through one of the banks/credit institutions established in the relevant FTZ.
Otherwise, CBI shall not issue the necessary authorization for the
establishment of the banking unit.
The minimum capital for the
establishment of an off-shore bank, off-shore credit institution and also an
off-shore foreign bank/credit institution branch are respectively USD 10, 5
and 3 million, 100% of which shall be deposited with CBI, in cash.
CBI is authorized to increase the
minimum capitals mentioned above.
Throughout the operation, the
bank/credit institution should maintain the minimum capital required. In the
likelihood of losses, the bank/credit institution established in the FTZ(s),
shall be funded, within six months, so that its capital, shall not fall below
the minimum mentioned above.
Transferring of more than 10% of the
share capital of a bank/credit institution to other persons requires prior
approval of CBI.
The legal rights of a foreign investor,
whose capital has been imported with the permission of the Board of Ministers,
shall be protected. In case of nationalization and/or expropriation, the
Government shall compensate the said foreign investor. In this respect,
reference should be made to Foreign Investment Promotion and Protection Act (FIPPA)
enacted in April 2002 and its implementing regulation which was approved in
2002.
3. Board of
Directors and Managing Director:
CBI should approve the
professional qualification of the members of the Board of Directors, the
Managing Director and the members of the Executive Board as well as the
managers of branches of Iranian and foreign banks/credit institutions
established in FTZs. CBI should also approve any changes in the members of
Board of Directors, Executive Board, the Managing Director and Vice-Managing
Director of the banks/credit institutions.
The Implementing
Regulation does not define the professional qualification necessary for
assuming the responsibility of a bank/credit institution in the FTZs. However,
MCC’s Directive provides that: "Those convicted, whether as principal offender
or as abettor of theft, corruption, embezzlement, breach of trust, fraud,
forgery, drawing of check without honoring it, culpable or fraudulent
bankruptcy, whether in Iran or abroad, shall not be permitted to have any
position in the banks/credit institutions of the FTZs".
4. Mode of
Operations:
Except representative offices
which are not authorized to proceed with banking operations, since the
functions and mode of operation of the banks/credit institutions and the
off-shore banks/credit institutions are different, they will be discussed
separately:
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Banks/credit institutions: All of the
banking operations and transactions in Iranian currency, shall be subject to
Islamic banking laws, including Usury-Free Banking Operations Law. However,
if they would have obtained the necessary authorization from CBI to engage
in foreign exchange operations, their operations on foreign currencies shall
be governed by international banking rules and they shall be authorized to
receive/pay fixed rate profits from/to their customers. The open market
shall determine the rates of the profits and fees. Any way, the credit
institutions shall not be authorized to open current account for their
customers, whether in Iranian currency or in foreign currency.
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Off-shore banks/credit institutions
shall only be authorized to do banking operations on foreign currencies, but
not on Iranian currency. They are authorized to follow the rules and
regulations prevailing in international banking; hence, they may receive/pay
fixed rate profits from/to their customers.
Nevertheless, the banks/credit
institutions established in the FTZs, are prohibited to do the following
operations:
1. Sale of goods for business purposes;
2. Sale of real estates (immovable
properties), except for the banks/credit institutions established for this
purpose, in excess of the limits prescribed by CBI;
3. Buying stocks and share capital of
companies and/or other securities in excess of the amount prescribed by CBI;
4. Granting facility(ies) to their
managing director and members of the board of directors and the companies that
they have any share(s) therein, in excess of the amounts prescribed by CBI;
5. Granting facility(ies) to the members
of the board of directors, the directors of the relevant Free Zone
Organization as well as the directors and inspectors of CBI, in excess of the
amounts determined by CBI.
All of the banks/credit institutions in
the FTZs shall be under supervision of CBI and shall be required to provide
the CBI, any document or information that CBI deems necessary. They are also
required to deposit with CBI the legal deposit at the rate as determinable by
CBI. CBI shall pay a profit for the currency, at a rate which may be
determined at its own discretion.
Buying and selling foreign currencies
and transferring thereof from FTZs to abroad and vice-versa is authorized. The
open market shall determine the exchange rate therein.
5. Termination
of Operations:
By virtue of Article 33 of the
Implementing Regulation, the dissolution and bankruptcy of the banking units
in the FTZs shall be subject to the Monetary and Banking Law (1972). According
to the afore-said law, in the following cases, on the recommendation of the
Governor of CBI, the confirmation of MCC, and approval of a board composed of
the Vice-President, the Minister of Economic Affairs and Finance, and the
Minister of Justice, CBI may undertake the management of a bank/credit
institution, or another arrangement may be made for the management thereof, or
the granted authorization may be annulled:
1. When the competent authorities of a
bank/credit institution requests so;
2. When a bank/credit institution
unjustifiably stops its operations, for a period exceeding one week;
3. When a bank/credit institution
violates and contravenes Monetary and Banking Law and the implementing
regulations relating thereto, as well as the directives of CBI, issued on the
basis of Monetary and Banking Law and the implementing regulations pertaining
thereto, or its own articles of association;
4. When a bank/credit institution is at
the threshold of insolvency or becomes insolvent.
As soon as the
authorization of a bank is annulled, it shall be managed as per instructions
issued by CBI.
Conclusion:
For making competition
among the banks and attracting private sector's investment, some of the
Iranian legal scholars proposed a new interpretation from Article 44 of the
Constitution; so that banking operation is and will remain under supervision
of the Government but it may be delegated to private persons to engage in
banking operations. Of course, private banking is an aspect of the general
policy of privatization pursued by Iranian Parliament in the Third Five-Year
Plan (2001), just the same as private insurance in Iran. However, considering
the whole circumstances of the country, it seems the recent rules and
regulations on private banking in Iranian free zones are more stable than the
Iranian mainland. |
