The Majlis Research Center says it welcomes provisions of a bill lawmakers are debating to reform the ailing banking sector.
It said the present rules were passed half a century ago, are imbued with flaws and for all practical purposes failed to protect the value of the national currency.
“While the CBI must safeguard the rial as per law, the currency has lost value 3,320 times compared to 1972 and the average inflation rate is much higher than the world average,” the parliamentary think-tank said in a report posted on its website.
The Majlis ratified outlines of the bill under the “Comprehensive Islamic Banking Bill” in December 2019 and MPs are to discuss it in full.
The comprehensive banking bill comprises three main parts: setting up a development bank, banking, and strong central bank governance.
Structure of the Central Bank is the most important aspect of the new legislation and the MPs are trying to improve it drawing on the experience of central banks in other countries.
“New rules give the central bank relatively more independence (compared to the current rules) from the government. It makes the bank more responsive, more transparent and more authority,” the research center said.
The center has often faulted the central bank for lack of proper supervision of banks and credit institutions and is cognizant of the fact that they are saddled with low capital adequacy ratio (CAR) and increasing number of bad debts and non-performing loans.
While banks are obliged to maintain their CAR above 8%, the ratio is negative in most private banks. The CBI is also grappling with excessive borrowing by banks, with lenders’ arrears to the regulator reaching 1,290 trillion rials last September.
Enumerating the deep flaws and other shortcomings of the central bank and its governance, the MRC called for reordering the CBI structure.
Delving into the new rules, it said the CBI like most of its peers has a duty to “maintain general stability in prices, control inflation, ensure transparency in the banking system and support economic growth”.
CBI Independence
To realize such lofty goals the CBI must be independent in the real sense of the term. On the need for increasing independence, the MRC castigated the government’s unending inclination to “misuse CBI from seigniorage” to plug its budget holes.
Seigniorage is the difference between the value of currency and the cost of producing it. It is essentially the profit earned by the government by printing money.
The central bank’s independence will also help improve financial discipline of the government and discourage it from asking for central bank money.
In the framework of changes regarding CBI governance, a ‘high council’ will be atop the central bank and replace the governor, who will be relegated to second position.
Members of the council will fall into two categories: executive and non-executive. The governor and vice governor will function as the executive members while the non-executive will include scholars in the banking, monetary, accounting, financial management and law fields.
The high council will replace the Money and Credit Council, the main monetary and banking policymaker.
Juxtaposing new and past rules, the MRC said members of both the MCC and the high council are selected by the government, either directly or otherwise. However, the members of the latter have to be chosen mainly from “financial and monetary experts”, not government members. This would reduce the government’s role and influence in CBI decision making.
The government cannot remove the non-executive members of the high council. When a new government takes office, the president is not allowed to replace the majority of high council in one go. “Replacing the council members would be gradual and over the four-year tenure of the government,” the MRC said.
Skepticism
While the rules are seen as positive in creating the long-delayed climate for CBI independence, the Majlis-backed bill, however, is criticized for unilateralism. Opponents are of the strong belief that the Majlis has not sought the views of banking experts and informed opinion makers
Proposed changes in the CBI management structure and the bank’s obligation to also open a new “development bank” are other points of contention between banks and the lawmakers.
Unlike what the MRC purports about CBI independence under new rules, opponents say, provisions of the bill that call for founding a “development bank”, is at odds with the CBI independence.
The bank is ostensibly planned to be a CBI affiliate. It will be managed by a board of trustees headed by the head of the government (president). Other members would be the minister of economy, head of the Plan and Budget Organization and the CBI governor.
The development bank will have two major tasks, namely offering long-term credit for macro development plans and supporting specialized development banks with cheap loans for manufactures.
