of oil revenues inevitably adds liquidity to the financial system. Certain banking reforms permitting an increase in financing are also responsible for higher rates of consumption and private investments.

Lending and deposit rates of state-owned banks are still set annually by the Monetary and Credit Council, but the portion of new credit that state-owned banks are allowed to allocate themselves is increasing, in line with the objectives set out in the prevailing Five Year Development Plan. This ratio currently stands at 45% with different ceilings for specific sectors.

The pre-revolutionary banking system in Iran was dominated by western patterns. By 1979, there were 37 banks operating in Iran including many international jointly owned banks.

Following the Islamic Revolution (1979), as a result of the transfer of deposits abroad, lack of public trust in banks and problems in collecting outstanding debt, most private banks were in a precarious position. Nationalization of all banks was announced to prevent a complete collapse of the banking industry.

The need for an effective administration of the nationalized banks, achieving uniformity in granting credit facilities and adopting a unified policy in other key areas, necessitated the grouping of the newly nationalized banks. Therefore, in early 1980 the 37 banks were merged into 9 banks comprising of 6 commercial banks and 3 specialized banks.

Concurrent with nationalization, studies were also being made on Islamization of the banking system, which culminated in the 'Law on Usury-Free Banking' ratified by the Parliament in 1983.

Today, Iran's banking system is dominated by 11 stateowned institutions, including seven commercial banks and four specialized banks, which jointly hold 90% of the Iranian banking sector. There are also six private banks, three private credit institutions and three branches of foreign banks in Kish Free Trade Zone. Presently, a major initiative is underway for privatization and modernization of the Iranian banking industry. Banks are in line with new macroeconomic policies of the government gradually reducing interest rates, introducing new banking services and expanding their international network.

Government’s debt to the banking sector is low, estimated at about 8% of GDP and 29% of budget revenues in 2005, most of which is domestic. All domestic debt is denominated in local currency. Interest payments are equivalent to about 1% of budget revenues with public enterprise debt at about 6% of GDP.

The growth of credit extended to the private sector is expected to remain strong, as it has been for several years, rising from 35% of GDP in 2001 to an estimated 51% of GDP in 2005. The inflow