Al Monitor | Bijan Khajehpour: Despite all modernization efforts, Iran is still a cash-based economy where banks and financial institutions play a significant role. Ever since the privatization of the banking sector in the early 2000s, the Central Bank of Iran (CBI) has had to deal with a phenomenon of non-bank credit institutions, which are more commonly referred to as credit and financial institutions (CFIs). The legal framework for these organizations was established in the country’s pre-revolutionary commercial code, but it had not been used in the first two decades of post-revolutionary Iran when all banks and financial institutions were nationalized.


In the early 2000s, Iranian authorities revived the framework to provide a legal platform so applicants for private banking licenses could establish a financial entity before issuing an initial public offering of a newly founded private bank and securing the needed license. However, a sizable segment of the Iranian financial sector has become dominated by mostly unlicensed CFIs. These are usually affiliated with religious foundations, which claim the financial institutions are an extension of the religious responsibility of their umbrella organizations to extend interest-free loans to applicants. For a long time, the CBI was unable to challenge these entities as they claimed they were not engaging in mainstream banking and financial activities.

In the original legal provisions, non-bank credit institutions were meant to be an additional instrument to offer loans to applicants under the supervision of the CBI. In a way, non-bank credit institutions represented an Iranian version of savings and loans associations. However, the post-revolutionary nationalization of banks derailed the original pre-revolutionary framework. Today, these non-bank credit institutions involve a massive network of branches across the country and even though they claim to engage in Islamic banking, they actually pay a higher interest on savings and also find ways to charge high fees on loans.

One interesting case study — the emergence and eventual bankruptcy of Mizan Credit and Financial Institute — sheds light on the framework of these entities. Mizan initially emerged as a cooperative fund, owned by the pensioners and employees of the judiciary branch in Razavi Khorasan province. In 2005, it received a conditional license to become a non-bank credit institution, and in 2010, when it met the financial preconditions, it received a permanent license from the Central Bank under the administration of then President Mahmoud Ahmadinejad. In 2013, after extending a 3.25 trillion rial ($100 million) loan to the Padideh Shandiz company, Mizan declared itself bankrupt. The announcement led to massive protests in Mashad and other cities in Razavi Khorasan province. After long deliberations, in May 2015, the government and the CBI agreed to dissolve Mizan and to transfer its remaining assets and liabilities to Bank Saderat. In the meantime, Padideh Shandiz also declared bankruptcy and has proven to be a massive embezzlement scheme involving 94 trillion rials ($2.9 billion). The corrupt economic elements within Mizan and other non-bank credit institutions leads one to believe that the individuals behind many such institutions are also involved in similar embezzlement schemes, which would explain why the organizations have mostly ended up with financial difficulties.

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