C O N F I D E N T I A L SECTION 01 OF 02 DUBAI 002012

SIPDIS

SIPDIS

E.O. 12958: DECL: 4/8/2016
TAGS: IR PGOV PINR ECON EFIN
SUBJECT: IRAN'S PRIVATE BANKS: STRICTLY REGULATED BUT PERCEIVED AS
UNRELIABLE


DUBAI 00002012 001.2 OF 002


CLASSIFIED BY: Jason L. Davis, Consul General, Dubai, UAE.
REASON: 1.4 (b), (d)



1.(C) Summary: Private banks in Iran are highly regulated,
especially when they want to open a new branch. While rates of
return on deposits are high compared to government banks,
consumer confidence in private banks in Iran is currently low.
This distrust of private banks is primarily the result of a
perceived lack of security of deposits and of the necessary
expertise and qualifications on the part of bank employees. The
government has lowered official lending rates. End summary.

Private Banks in Post-Revolutionary Iran - A New Phenomenon
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2.(C) Prior to the Islamic Revolution in 1979, there were 28
private banks in Iran. The government nationalized these banks
after the revolution, and private banks were not allowed again
until 2000, when the Majles ratified the Third Five-Year
Economic Development Plan. The plan authorized the establishment
of private banking and credit institutions. The Majles
restricted ownership of these banks to Iranian citizens who had
to meet the following requirements: 1) experience and knowledge
in the field of banking; 2) the ability to provide the necessary
capital; and 3) lack of any criminal record for either financial
or moral crimes.

3.(C) Western and Iranian press reports differ on when the first
private bank in post-revolutionary Iran was founded, but it was
sometime in 2001. According to the Economist Intelligence Unit,
the Central Bank issued the first license for a private bank to
Modern Economic Bank in August 2001. Other private banks in Iran
include Karfarin Bank, which received a license in December
2001, and Saman Bank, which was licensed in August 2002.
According to Iran Daily, there were four private banks in Iran
by the end of 2004. These banks reportedly had 76 branches
throughout the country and employed more than 1255 people. As of
20 March 2004, these banks had accumulated mo

re than 14 billion
rials ($1.5 million) in deposits and offered over 10 billion
rials ($1.1 million) in loans.


Private Banks are Strictly Regulated
--------------

4.(C) On March 9, Conoff interviewed an employee of the
regulatory office of the Central Bank of Iran for a visa. The
employee in question deals with the approval process for private
banks to open new branches. There are currently six private
banks operating in Iran. According to her, these banks are
carefully regulated. To open a new branch, private banks in Iran
must first demonstrate that they have a sufficient number of
employees who have the requisite qualifications, training, and
expertise to man the new branch. She provided no further
information on the documentation banks must provide in order to
establish the fulfillment of these requirements or what concerns
drive such close scrutiny by the Central Bank.

Private Banks Offer High Rates of Return
--------------

5.(C) Rates of return on savings and other interest bearing
accounts at private banks are much higher than those available
at government-owned banks. The Central Bank employee claimed,
however, that the rates of return on deposits vary widely
depending upon the private bank. Currently, some banks offer as
much as 18 percent interest on deposits, which she noted is much
better than the 2 percent available at most government banks.

But Consumer Confidence Low
--------------

6.(C) Consumer confidence in private banks is currently very
low, according to the Central Bank official. She said deposits
in private banks are not viewed as "safe" because it is believed
that employees are often unqualified and do not have sufficient
knowledge about banking matters, and that owners only seek
short-term profit. Another contact, a board member of an Iranian
investment company, told Conoff on 13 March that people are
putting their money in Islamic Republic of Iran savings bonds as
the "promised" return is 15.5 percent and relatively stable. He
claimed that the return rate was so high largely because
inflation in Iran was currently running at about 13 percent.
According to an Iranian press report, Ebrahim Sheibani, Iran's
Central Bank governor, stated in early March that although the
Central Bank supports private banks, they continue to suffer
from poor competition (perhaps a reference to the fact that
there are only six private banks in Iran).

DUBAI 00002012 002.2 OF 002



Iranian Government Drops Lending Rates
--------------

7.(C) According to Iranian press reports, Iran's Money and
Credit Council decided on March 11 to drop government bank
lending rates two percent from 16 to 14 percent. The government
is planning to regulate the lending rates charged by private
banks as well. This decision came after Ahmadinejad's
administration joined the Majles in calling for a reduction in
the rates and will be implemented in the new Iranian year (which
began March 21). Iran's Central Bank Governor Ebrahim Sheibani,
as quoted in an Iranian press report, noted on March 7 that
lending rates in Iran have dropped from 24 to 16 percent in the
past three years, stating that this decline is a huge success
for Iran's banking system. An Iranian American source claimed in
February that according to a contact of his who used to work in
the intelligence ministry, Ahmadinejad was trying to do two
things which -- if successful -- would allow him to stay in
power: 1) drop the interest rate for borrowers to single digits;
and 2) replace old guard officials throughout the government
with new (presumably ones who support Ahmadinejad).

Comment
--------------

8.(C) It is interesting to note that Iranians continue to view
private banks as unreliable, despite reported close scrutiny by
the Central Bank. Furthermore, despite the recent drop, the
interest rate on loans remains high -- a deterrent on investment
in an already depressed economy.
DAVIS