The economy minister said the banking system needs a paradigm shift to improve its role in expanding the economy by engaging in supply chain finance.
Addressing the 31th Islamic Banking Conference on Tuesday at Central Bank of Iran, Ehsan Khandouzi underscored the need for financial inclusion allowing equality in access to banking resources.
“The role of banks role can change from ‘builders’ to ‘destroyers’ if they use resources in non-productive and speculative activity instead of focusing on entrepreneurship,” he was quoted as saying by the CBI website.
Echoing the concerns of economists and academia, he said banks’ resources had shifted away from funding the production sector due to poor corporate governance and lax supervision.
“Here are two questions. First, would banks be accountable if they don’t involve themselves in funding the manufacturing? Second, what happens when the regulator sees how lenders have allocated their resources?”
Khandouzi added that his ministry is currently preparing a bill to improve corporate governance, and added that the support of banks must not be limited to loans, emphasizing that “offering credit is more effective in funding the supply chain.”
Stressing the point, he said, “Banks need to move away from giving loans and receiving interest to offering credit and receiving lending fees.”
In banking parlance a loan and credit are two different ways that businesses and individuals can borrow. Loans have what's called a non-revolving credit limit, which means the borrower only has access to the amount loaned once, and they subsequently make principal and interest payments until the debt is paid off.
Credit works differently. The borrower receives a set credit limit, just like a credit card, and makes regular payments composed of both the principal and interest. But unlike a loan, the borrower has continuous and repeated access to the credit while it is active.
Financial Inclusion Emphasized
As for another key paradigm shift in the banking industry, the minister mentioned the role and significance of financial inclusion, saying this is has not been observed in Iran as people from different walks of life don’t have equal access to banks’ financial resources.
“Sharing banking resources is the function of collateral. The situation, so far, is that the rich are preferred over the poor and access to banking resources is limited for those in dire need [people at the lower-end of the economic ladder],” he rued.
This issue has received international attention as 70 countries are now implementing financial inclusion rules, the minister recalled, adding that similar rules are being drafted in the Economy Ministry.
Financial inclusion is not limited to banks but other financial institutions and insurance companies have to revisit their financial policies in this regard, Khandouzi was quoted as saying.
Expanding the Bond Market
The Governor of Central Bank of Iran Akbar Komijani told the meeting about CBI efforts to promote modern banking instruments in conformity with Islamic law.
The senior banker expressed concern about ways used to funding the government budget, stressing that selling bonds to compensate for budget deficit must gain pace.
The government sold 165 trillion rials ($600 million) in bonds in the past 13 weeks to fund its strained budget that is reportedly in deficit to the tune of 3,500 trillion rials ($13 billion).
Komijani said the government needs a change in approach to funding the budget and make concerted efforts to attract buyers to the bond market that has not had a stellar performance in recent months.
“Under the present conditions, the government needs to raise yields, diversify bonds and maturity dates and employ market markers [to boost liquidity of securities in the secondary market],” he said.
The maximum yield the Economy Ministry has so far offered for bonds is less than 22% for debt maturing in 2023. This apparently is not attractive for investors of fixed income bonds in an economy officially grappling with 50% inflation.
Komijani concurred that the existing banking rules are opaque and belong to the past. He called for a new set of modern and efficient regulations to lift the key banking sector long saddled with mismanagement along with unwanted bureaucracy.
Banking reforms are expected in the near future as both the government and Majlis work in tandem to find ways to improve the economy.
The Islamic Banking Conference has been held in the past 30 years and is considered one of the biggest event of its kind. The meeting is held annually to mark the passage of the Usury-Free Banking Law in 1983.
