Events | Number 3, December 2003 | Traditional Banking in Iran

Traditional Banking in Iran

B Shahsavand

In the laws set down by Hammurabi, who ruled Babylon from 1704 to 1662 BC, as the 6th king of the 1st
Babylonian dynasty, all aspects of life are taken into account: there is criminal law, civil law, commercial law, rules on physicians’ services, on freight rates, porters’ fees… Also included in Hammurabi’s laws is a section that deals with money lending, and transactions in gold, silver and foreign exchange. This means that as early as 2000 BC some form of banking existed.

Clay tablets remaining from those days indicate that people borrowed from these “bankers”; bought from them and sold to them gold and silver; and deposited their precious objects in their safes. In Iran of pre-Achaemenid era, too, some form of primitive banking was practiced and was the monopoly of priests and princes. Later, when the Achaemenid kings (700-330 BC) brought peace and prosperity to the Persian Empire this form of early banking expanded and took on a more sensible form.

Indeed, there emerged many an eminent banker whose names we know today, men such as Egibi, a Jewish immigrant who practiced many forms of banking including giving loans, receiving deposits to which interest was
paid, mortgaging properties etc. Another prominent banker of those days was Murashi who even made investment in supply of water for farmers and in fishing and hunting. So, banking – at least in its traditional form
– seems to have a very long history in Iran.

Naturally trade and therefore banking prosper at times of peace and tranquility and the Safavid Era (1502-1736 AD) – one of the brightest Iran has ever had – brought great wealth and prosperity to the Iranian nation that had previously suffered badly at the hands of the Mongols and Tatars. As trade with the outside world, Europe in particular, prospered, gradually the banking system became increasingly sophisticated and transfer of money from Iran to European countries or vice versa, became easy and safe. Gradually, banking developed
and expanded across the world.

Towards the end of the 19th century, the world’s major cities that enjoyed adequate banking services were London, Paris, Moscow, Vienna, Istanbul, Beirut, Bombay, Marseille, Baghdad, Basra, Baku, Odessa, Herat, and Hong Kong. Within Iran the major cities that had effective banking services were Tabriz, Mashhad, Tehran,
Isfahan, Shiraz and the port of Bushehr.

As there was no major trade center in any Iranian city, banking was highly complicated such that, for instance, to settle an account from Shiraz with Bombay, the banker would have to carry out repeated operations with Isfahan, Tehran, Tabriz, Odessa and London, before settling the account. This is why the rate of discounting was high, in rare cases as high as 6%.

Traditional banking in Iran was based on two major operations:
(1) Drafts, with one person instructing a banker to pay a certain sum to someone else against and on the submission of the draft; and
(2) what is still known in Iran as bijak.

Drafts were very important instruments in business and trade. Next to the draft was a bill known as bijak which term is probably derived from an Indian word. This was something between a draft and a banknote. It preceded the banknote in Iran and became so popular that when paper money (equivalent of the banknote) was issued by
the Iranian government people still chose to use the bijaks. In the 18th and 19th century, the East India Company became very active in Asia and, as it became more and more active, it induced the emergence of the
Bank of the East.

At about the same time and in order to meet the needs of an expanding multinational trade, a number of prominent Iranian bankers developed somewhat modern banking units capable of performing larger banking
operations, larger both in variety and in the extent of geographic area as banking with the Far East on the one hand and Europe and USA on the other, developed:
1- Toomanians Trading House: Toomanians was one of the most active and influential traders who first went into banking in 1891. The House also exported dry fruits and nuts, and silk from Iran, and imported many products notably steel. Toomanians opened bank accounts for his clients and offered a 6% interest on the
balance of the accounts. The family enjoyed the attention and protection of the court and one of its members, called Vartan, was later appointed as Ahmad Shah’s adjutant.
2- Jamshidian Trading House: This house was established in 1886 by a trader known as Arbab Jamshid. During the years 1891- 1911 it enjoyed great success with the main office in Yazd and branches in Shiraz and Kerman, and representatives in Baghdad, Bombay, Paris, and Calcutta. This house ceased to be active in 1916.
3- Jahanian Trading House: In 1895, Khosro Shah Jahan and his brothers Bahram, Parviz, Rostam and Goodarz opened a company that dealt in trade and banking, as well as farming. The company had branches in some of the major Iranian cities. Khosro also founded the Zoroastrian Society and was a supporter of the Constitutional
Movement. The family also established Iran’s first telephone company.
4- Ettehadieh Co: This company was established in 1897 in Tabriz by Haj Mehdi Koozeh Kanani and Seyed-Morteza brothers, to engage in banking. It secured the confidence and trust of merchants, soon becoming a
fierce competitor for Shahi Bank (British) and Bank Esteghraz (Russian).
5- Sherkat Omoomi Iran: This was founded by 17 bankers of Tehran and engaged in banking and road construction.
6- Fars Co: This company was set up in 1896 in Shiraz and soon opened offices in many major Iranian cities but its operation was put to an end by Bank Shahanshahi.
7- Massoudieh Company of Isfahan: This was established in Isfahan, by Haj Mohammad Hosseini Kazerooni and some associates but was only active for a short while. For a long time the only guarantee of good performance of a banker was his honesty, integrity and reputation and there was no legal force, no laws and regulations and no supervisory body to oversee the work of these one-man bankers.

Meanwhile, the British and the Russians opened banks in Iran which operated on the then modern banking principles and current international procedures. Then the Iranian state decided to provide the people with proper banking services through Iranian banks, not foreign.

From 1926 onwards Melli, Sepah and Shahanshahi banks were established by the Iranian state. The scope of activity of private individual bankers thus became narrower and narrower such that by the 1960s and 1970s
individual bankers only dealt in foreign exchange and small loans. However, some large and modern banks were now opened by the Iranian private sector, with branches in all the major cities and even abroad.

Then there was the Islamic Revolution and the war with Iraq that followed and all the banks were taken over by the state and private banking was banned. Therefore, during the 80s and 90s private bankers withdrew into a black market for foreign currency, because transfer of foreign exchange to outside of the country was now in most cases illegal. Then, for a short while, they were permitted to operate under government control but again this was banned after some time. Today, they are again lawfully engaged in free market transactions of foreign exchange and gold coins.