By Jack Roush
Key Takeaways:
- Iran is provincializing bank lending, accelerating bank divestment of corporate holdings, and facing greater political challenges to Central Bank authority amid intensified US sanctions.
- These steps may ease short-term credit access and shift blame but risk worsening loan quality, fragmenting oversight, and complicating wartime financial coordination.
- The reforms are unlikely to cause collapse yet may leave Iran less capable of managing scarce resources under prolonged external pressure.
On October 15, the US Treasury Department announced a new round of sanctions targeting financial institutions accused of facilitating transactions on behalf of Iran. Among the designated institutions was Iraq’s International Development Bank, which Washington alleged had helped Iran’s regime-owned Bank Melli access dollars following the closure of its Iraqi operations. This marked another step in the Trump administration’s Operation Economic Outcast, an extensive campaign intended to sever Iran’s remaining links with the global economy.
For the Islamic Republic, the mounting pressure comes at a particularly difficult moment. Iran’s financial sector has long been plagued by systemic corruption, political influence, and banks’ involvement in managing distressed assets. These problems have been exacerbated by the ongoing war and an expanding US campaign of economic pressure. However, Iranian officials have remained publicly confident in the country’s economic resilience. On October 14, Central Bank of Iran (CBI) governor Abdolnaser Hemmati dismissed claims that Iran’s economy was nearing collapse, arguing that the Islamic Republic had demonstrated considerable resilience despite the US campaign.
Behind these assurances, Iranian officials have pursued policy changes to decentralize Iran’s financial sector by expanding provincial lending powers and accelerating efforts to reduce banks’ corporate holdings. Meanwhile, parliamentarians and regulatory institutions are pressing for greater influence over monetary policy. President Masoud Pezeshkian outlined the rationale behind these decentralization efforts, arguing that such reforms could better position large banks and other financial institutions to identify and respond to economic challenges.
These developments have varying origins and objectives, but amid mounting US pressure they could reshape how the Islamic Republic manages its increasingly scarce financial resources. Even if they bring short-term benefits, these policy changes could ultimately aggravate structural weaknesses and create difficulties for Iran’s wartime economy.
Financial Provincialization
As part of its efforts to maintain economic resilience, the Islamic Republic has implemented measures to shift economic and financial management to the provincial level. The CBI has issued a directive instructing large regime-owned banks to allocate at least 50 percent of the deposits collected in each province toward lending solely within that province. The directive also encouraged banks to expand the authority of provincial branches to manage loans, considering local financing requirements and the effects of inflation. Last week, Pezeshkian’s administration also announced plans to introduce a new provincial revenue-and-expenditure system in the country, potentially granting local authorities greater discretion over spending priorities and locally generated revenues.
On paper, these steps toward provincialization bring clear advantages for the Islamic Republic’s war effort. Decentralizing banks and economic decision-making in this way could accelerate access to credit, improve liquidity, and prevent bureaucratic bottlenecks as local businesses and infrastructure face wartime disruption. Greater provincial autonomy could also provide Iranian businesses and financial institutions with additional flexibility to access foreign currency through alternative channels, potentially facilitating sanctions evasion by reducing reliance on centralized financial arrangements more vulnerable to international restrictions.
Perhaps most importantly, provincialization serves a political purpose by allowing the Islamic Republic to shift responsibility for the country’s deteriorating economic conditions onto local institutions and authorities. By delegating greater discretion over lending, public expenditure, and economic administration, the regime can shift blame for failures that might otherwise be attributed to central authorities and avoid resumed protests over economic concerns. Demonstrating this point, in October, one of Pezeshkian’s cabinet secretaries argued explicitly that the performance of individual provinces should not be generalized to Iran as a whole, emphasizing increased local accountability.
Nevertheless, these policy changes bring significant risks. Allowing regional bank branches greater discretion over lending could aggravate longstanding systemic problems with non-performing loans, corruption, and political interference. Provincial officials may face pressure to extend credit to struggling local enterprises, even when their prospects for repayment are limited. Moreover, requiring regime-owned banks to direct resources toward provincial lending could reduce their ability to allocate capital to regions or industries where it is most urgently needed for the war effort. This would be particularly problematic given the uneven economic circumstances facing Iran’s provinces and their differing exposure to wartime disruption. Expanding lending without addressing banks’ underlying financial weaknesses could also increase their dependence on emergency borrowing from the CBI, potentially complicating its longstanding efforts to restrain monetary growth and inflation. Rather than improving economic resilience, provincialization could therefore fragment financial oversight, reinforce existing banking imbalances, and undermine the Islamic Republic’s efforts to coordinate a coherent strategy in its economic warfare with the United States.
Getting Banks Out of Business
A separate element of Iran’s financial restructuring involves reducing banks’ direct ownership of commercial enterprises. For decades, Iranian banks have accumulated substantial holdings in industrial companies, property, and other non-banking businesses. In some cases, these investments were acquired as part of broader commercial strategies. In others, banks assumed ownership of distressed enterprises after borrowers failed to repay their debts. Such holdings have diverted resources away from conventional lending, exposing banks to commercial risks and tying up capital in assets that cannot be easily liquidated. Reducing ownership by large banks could also distribute commercial risks more broadly across the Iranian economy, improving the country’s economic resilience.
Iranian legislation has required banks to dispose of surplus assets and certain non-banking holdings since 2015, but implementation has been uneven. In recent months, policymakers have renewed efforts to accelerate this process. Economy Minister Ali Madanizadeh outlined plans to identify and dispose of banks’ non-banking investments, redirecting the proceeds toward strategically important economic projects. More forcefully, CBI regulators cautioned that banks delaying divestment from corporate holdings would face punitive measures.
There are signs of renewed activity, although completed sales remain another matter. Since the beginning of October, several banks have announced plans to sell off major corporate holdings through auction or the Tehran Stock Exchange, including Bank Melli, Bank Tejarat, and Bank Dey.
However, divestment from corporate ownership remains difficult. For example, Bank Melli’s proposed sale of its stake in a pharmaceutical company was halted by regulatory intervention and concerns surrounding the transaction’s valuation. Other banks have struggled to find private buyers or faced similar issues with manipulative valuation or a lack of transparency. This illustrates the challenges of converting corporate assets into usable liquidity. Even when transactions are completed, installment-based payments can limit the immediate financial benefits for large banks.
There is also a contradiction in the approach being taken by Iranian policymakers. If banks cannot successfully divest from corporate ownership, the CBI or other regime institutions may have to absorb these corporate entities directly as a matter of last resort, as has occurred over the past year with distressed assets. This seems to be a possibility the CBI is preparing for, as this month it established a new body to absorb and liquidate “excess” bank assets if necessary. Although such instruments could facilitate eventual sales, transferring ownership between regime-controlled institutions would not necessarily generate new value or reduce the economy’s structural vulnerabilities. It would also perpetuate the financial centralization these reforms are ostensibly intended to reduce. Therefore, unless these assets can be passed to independent purchasers, the government’s efforts to reduce banks’ concentration of corporate ownership may amount to little more than a redistribution of financial liabilities within the regime, rather than offering meaningful improvements to Iran’s economic resilience.
Redistributing Regulatory Authority
A third politically contentious development involves growing challenges to the CBI’s authority over financial and monetary regulation in Iran. Over the past month, Iranian parliamentarians have called for stronger legislative control over the country’s foreign-exchange policies. Others have proposed greater involvement of the parliamentary Planning and Budget Commission in coordinating monetary policy and supervising CBI personnel. Two other Iranian institutions, the Supreme Audit Court and the General Inspection Organization, have also intervened to scrutinize decisions made by the CBI. The former has alleged failures by the CBI in monitoring export earnings held through foreign financial intermediaries and called for more comprehensive judicial review. Meanwhile, the latter has demanded greater scrutiny of foreign-exchange allocation and the prioritization of essential imports.
These developments are partly driven by mounting dissatisfaction with the CBI’s seeming inability to contain the rial’s depreciation and inflation, which have become increasingly contentious amid wartime economic pressures. With foreign currency increasingly scarce, competing political institutions are also seeking greater influence over how the country’s remaining financial resources are managed and allocated.
These demands have not yet resulted in a formal redistribution of the CBI’s statutory authority, but challenges to its discretion are becoming more pronounced. Efforts to preserve the bank’s autonomy appear unable to dampen criticism from these competing institutions. It is possible that the CBI’s discretion over monetary and financial policy could erode in the coming months, even without legislative changes. Greater institutional oversight might improve accountability, particularly over the allocation of increasingly scarce foreign currency reserves. However, involving additional political and regulatory actors in these decisions could also introduce competing priorities and complicate the coordination of monetary policy.
Indeed, such developments risk undermining the CBI’s ability to respond effectively to wartime economic pressures. With foreign currency increasingly scarce, monetary authorities must balance competing demands for exchange-rate stability, essential imports, and financial support for struggling businesses. Greater parliamentary involvement could subject these decisions to additional political complications and Iran’s rampant legislative corruption. Meanwhile, increased judicial scrutiny could further slow or obstruct the allocation of financial resources, worsening issues identified under the current arrangement. This would be particularly damaging at a time when Iran requires rapid and consistent financial decision-making to withstand external economic pressure. Growing political interference in monetary policymaking could therefore undermine the flexibility that Iranian policymakers are seeking through their wider financial reforms.
Implications for Washington
The changes underway in Iran’s financial sector carry important implications for the economic campaign currently waged by the United States. Although Operation Economic Outcast has not brought the Islamic Republic to the brink of collapse, Iran’s efforts to restructure its financial institutions suggest that mounting external pressure has increased the urgency of addressing longstanding financial weaknesses and reconsidering how the country’s increasingly scarce financial resources are managed. These reforms may be intended to help the Islamic Republic sustain economic activity under sanctions and wartime disruption, but their effectiveness remains uncertain.
Indeed, the measures being pursued by Iranian policymakers contain significant contradictions. Provincializing banking operations could improve access to credit and distribute responsibility for economic failures, but it also risks aggravating financial imbalances and undermining coordination. Attempts to divest banks of commercial holdings could release much-needed capital yet may effectively transfer liabilities between regime-controlled institutions. Meanwhile, growing political pressure on the CBI threatens to complicate monetary policymaking and management of Iran’s wartime resources, even as its critics seek greater accountability and oversight. Instead of alleviating the structural weaknesses within the Iranian economy, these measures appear likely to expose or reinforce them.
These developments should not be mistaken for signs that Iran’s financial system is approaching collapse. Nevertheless, sustained US pressure could make existing structural problems more difficult to manage, particularly if competing political institutions and provincial authorities undermine Iran’s ability to coordinate financial policy and allocate increasingly scarce resources to its wartime needs. Iran’s efforts to strengthen its economic resilience may therefore leave it less capable of withstanding a prolonged confrontation with the United States.
