Valiollah Seif, Governor of the Central Bank of the Islamic Republic of Iran, in an interview with Financial Times, discussed issues of sanctions on the banking sector, Iranian banks' activities, non-licensed credit institutions, foreign investment in the banking sector, etc. Followings are some parts of his interview:

 What are the impacts of sanctions on Iranian economy? Could the government manage and monitor the negative impact of these sanctions?
Imposed sanctions have increased the cost of trade and caused foreign exchange rate volatility, but the government has managed to bring back stability to the foreign exchange market, brought down inflation from over 40 percent to 15.5 percent in less than two years, and stopped negative economic growth. This year's budget was formulated very realistically based on the fall in oil prices and with the assumption that sanctions will continue. The government's economic team has been planning for a post-sanctions environment and is mapping out strategies to channel funds and accelerate development of key sectors, including oil and gas, tourism, and IT. We are doing a lot of feasibility studies on investment environment in Iran. Of course, Iran's investment attractions are quite clear and we hope new investment is channeled into sectors that help Iran's economy. If sanctions are lifted this summer, it will not have a strong impact on the economy before the end of this Iranian year. There will be an impact in terms of expectations but we will begin to feel the result by the end of this year. We expect real economic growth to be between 2.5 and 3 percent in 1394. The government’s policy to bring down the inflation to single-digit rate will be strongly pursued. Our understanding is that economic and banking sanctions will be lifted as soon as the nuclear agreement is implemented. This may take a few months after the agreement is signed.

What is the ratio of non-performing loans? To what extent are the activities of Iranian banks congruent with the international standards?
Iran’s non-performing loans ratio is about 14.5 percent. Of course, an important reason for the high level of bad debt is that it is not written off from the books of banks and credit institutions, as it is customary in the West. Iran’s banking sector needs to be overhauled with fundamental reforms, capital injections, and management restructuring. Banks need to observe Basel II and III accords and improve corporate governance which is very important. The Central Bank has started working on defining standards and has adopted more strict measures to deal with banks to restore financial discipline.

 What is the situation of non-licensed credit institutions in Iran?
The competition between non-licensed credit institutions and banks is not based on economic realities. These institutions have taken big risks and are endangering people’s deposits. They give interest rates that run up at 28 percent when the inflation rate is 15.5 percent. The Central Bank has prohibited banks from offering interest rates above 20 percent on one-year deposits. Non-licensed credit institutions account for about 15 percent of the country’s banking activities which should be stopped. Those non-licensed credit institutions, which seek permission to act under the supervision of the Central Bank, handle around 10 percent of banking activities.

 How would you describe foreign investment in Iran? Are foreign banks allowed to make investments in your country?
Iran needs not only domestic investment and capital accumulation but also foreign investment which is highly needed. We welcome foreign investors especially if they bring the world’s latest technology and know-how to our country. Some European and Arab investors interested in the banking sector have already approached me and are asking whether they can get licenses to establish new banks, buy stakes in existing private banks, and whether they can open up branches. For all requests, we will review the background of the institutions in their home country and our relations with those countries will also be looked into. Based on our banking regulations, foreign banks are allowed to take a 40 percent stake in a local bank. However, the Central Bank is reviewing regulations to provide banks with easier terms in free trade zones. Under current circumstances, we do not see the need to change the 40 percent rule for new licenses in the mainland.

 ?How would you analyze previous banking policies in Iran
 The policies of the former government were formulated in a manner that led to budget deficit and undermined the independence of the Central Bank. However, the return of senior experts to the Central Bank and the new government has brought back calm and stability to the economy. As a result, inflation has been curbed, the economy has come out of recession, and the foreign exchange market has been experiencing a considerable stability. At the start of the new administration, the Central Bank was facing with a difficult situation because of the inappropriate financing of the massive
Mehr Housing Project. As a consequence, 45 percent of the nation’s monetary base was unwisely used for the financing of  project .