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Iran says set to accept foreign banks

By Mehrdad Balali

TEHRAN, Sept 11 (Reuters) - Iran on Monday invited applications from foreign banks and other financial institutions to operate in its free trade zones - the first such foreign involvement in Iran since the 1979 Islamic revolution.

Bahram Zarrin-Qalam, Central Bank director on banking affairs, said administrative regulations had been approved, paving the way for foreign banks and other financial institutions to operate in the special zones.

``We need a banking system in our free trade zones which can operate without any restrictions and provide efficient services. It has to be in tune with economic activities in the zones,'' he told Reuters in an interview.

``We want a financial system which is dynamically competitive, one which can compete with free trade zones in neighbouring countries,'' he said, in a reference primarily to nearby Dubai, in the United Arab Emirates.

Iran nationalised all private banks after the revolution and banned foreign financial activities throughout the country.

After the 1980-1988 war against Iraq and facing economic downturn, it set up free trade zones on its Gulf islands of Kish and Qeshm and the southeastern port of Chahbahar to attract investment and technology and boost non-oil exports.

More recently, the country has allowed private banking in the mainland for greater efficiency.


But business has not picked up as expected in these areas. Despite tax breaks and cheap labour, the free zones have failed to draw considerable foreign investment.

After a long internal struggle, and despite constitutional limits, Iran last year passed a law allowing foreign banks and insurance firms to operate out of its free trade zones and to have up to a 100 percent stake in any venture.

Iran said last month it had started accepting applications from foreign and local private insurance firms to set up in its free trade zones for the first time since the revolution.

The developments are designed to encourage greater foreign investment in the zones and to pull them out of stagnation.

Zarrin-Qalam said any foreign entity interested in starting a bank in Iranian free trade zones would have to come up with initial capital of at least $10 million.

The figure for non-banking credit institutions is $5 million and for branches of existing foreign banks $3 million.

They start by submitting a business plan to the local administration in one of the zones and leaving at least half of the required amount as collateral with the Central Bank, the official said.

The Central Bank will review the permits after running background checks.

Zarrin-Qalam said off-shore financial institutions were required to do business only in hard currency. But they would be exempt from most banking regulation, including limits on interest rates.

The new regulations would also liberalise currency exchange transactions at the new banks. Cash could be freely transferred in an out of free trade zones but not into the mainland.


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