Iran banking on foreign capital

In an effort to reduce the impact of sanctions, the Islamic republic has allowed foreign investors to own a greater share in Iran's banking sector. But observers doubt whether many of them will be keen on taking the opportunities.

Iran has amended the banking law to boost its economy. Above, a money changer.

TEHRAN // Foreign investors can now own a greater share in Iranian banks as the government seeks to stave off the pressure of economic isolation.

The change in the banking law is the latest in a series of measures adopted to attract much needed foreign investment in Iranian banks and to boost the economy. But analysts say international pressure from the United States and its allies, and the threat of government interference, will still deter banks and investors from operating in the Islamic republic. Previously, Iran's 2009 banking law only allowed a single domestic or foreign investment company or bank to own just 10 per cent of the shares in any Iranian bank. Individuals could only own five per cent.

An amendment made by the parliament in May removes the limit for foreign investors but does not alter the status of Iranian investment companies or individuals. The law, which remains ambiguous, does not allow complete ownership by foreign investors. According to the official government website, the president, Mahmoud Ahmadinejad, signed the amendment and communicated it to government bodies on June 27.

The move comes after a third round of UN sanctions were agreed upon last month over Iran's nuclear programme. The measures included asset freezes and travel bans for Iranian officials. On June 24 the US Congress increased the pressure further by banning access to the US financial system to any bank that does business with major Iranian banks or its Revolutionary Guards Corps, or assists its nuclear programme or oil and gas industry.

The presence of foreign banks could ease problems for Iran in helping it conduct business with the outside world. Analysts say in the face of the increasing impact of these sanctions, and possible further European Union sanctions in the near future, it is doubtful whether foreign investors will still be keen to take the opportunities offered by the Iranian government. "Considering the risk involved, it is very unlikely that foreign investors will be interested in investing in Iranian banks, or foreign or international banks in opening branches here to conduct normal banking operations such as receiving deposits," said an economist in Tehran who asked not to be named.

"The banks will be reluctant no matter what incentives are offered, but it is possible that the US and its western allies allow a couple of trusted banks to open branches here through which Iran can conduct legitimate business with other countries. These have to be banks that can be easily monitored by them to assure Iran is not bypassing sanctions," he said. "What these banks will really be after is providing a means for exerting strict supervision and control over Iran's deals but there will obviously be profit for such banks if they operate here. Such banks will serve like safety valves that can be closed anytime the need is felt to increase pressure on Iran".

Iran has also tried in the past few years to bring back foreign and international banks which it banned constitutionally from the time of the Islamic Revolution of 1979. In 2008, some exceptions to the provisions of the Constitution were made by new laws to liberalise the state-controlled economy. But this liberalisation of the banking sector has been very slow and the government still dictates loan and savings interest rates to private and government-owned banks alike. This, analysts say, will be another factor in dissuading foreign investment in Iranian banking. Beside official sanctions that have affected some major Iranian banks, the US has managed to convince many European, Asian and international banks to drastically limit, or stop altogether, their dealings with Iran. The unofficial sanctions have made the country's foreign transactions very difficult and nearly impossible in some cases.

So far, no major foreign investment has been made in any Iranian bank and although, according to Central Bank of Iran officials, several foreign banks have been given permission to open branches in Iran, only one, the German registered Iran-Europe Commercial Bank (EIHBank), has set up a branch on the Iranian mainland. EIHBank, which is majority-owned by Iran's Bank of Industry and Mines, opened its Tehran branch in May 2008 and only engages in routine banking activities in hard currency. The bank also has an offshore branch on Kish Island, a free trade zone.

The minimum investment for establishing a branch of any foreign bank in Iran is ?5 million (Dh23m). Two more banks, Bahrain's Future Bank and Standard Chartered, have branches on Kish Island but none in the mainland yet. The offshore branches conduct normal business functions. One economic analyst, who also asked to remain anonymous, said major foreign and international banks and investors would not be prepared to accept government interference which seriously undermines the independence of banks.

"Coupled with sanctions, this will at the best leave some small foreign banks, those from Pakistan or Thailand for example, as the only likely candidates for limited operation or investment in the Iranian banking system," the economist said. [e-mail]