In Iran, the financing of industries and economic enterprises is mainly carried out through the banking system. This does not create a serious problem for large companies, but may not be suitable for the entire monetary and banking system of the country.
The banking system must spend the lion’s share of its resources on granting long-term loans to large enterprises, because of which small- and medium-sized enterprises (SMEs), as well as households, have fewer opportunities to take out small loans with short repayment periods, Kamran Nadri, an economist, prefaced an article for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
Little Appeal of Capital Market
The mandatory use of financing increases risks for financial and credit institutions. Banks should not pay long-term loans more than their credit capacity to large companies. In fact, the large sums given to major industries [which are unable to repay them at times], render the current financing model in the country ineffective.
Large companies usually provide their financial resources through the capital market. However, the necessary infrastructure for the issuance of debt bonds by these large companies have not been created in Iran and therefore they do not refer to the capital market. One of the reasons behind Iran’s bank-oriented financing system is that the interest rates in the Iranian economy are imposed by fiat.
Financing industries via banks has always been cheaper, because of the low interest rates in Iran’s banking system. In other words, the industries can receive their needed financial resources with negative real interest rates. On the other hand, there are complications in the shareholding structure as well as the management structure of banks; large industries hold sway here.
Therefore, these industries can get financial resources more easily and cheaply through banks and are not willing to refer to the capital market. Note that the capital market does not have the necessary and effective infrastructure for the issuance of debt securities for the development of companies and so banks have become very appealing.
Unfavorable Business Environment
The general situation of the country is not favorable for large investments by companies that want to be more profitable. Given the macroeconomic, political and social conditions, many companies do not want to make investment in Iran. As a result, directly or indirectly, banks belong to a group of large companies in a complicated way, meaning that these companies have influence and authority in the shareholding and managing of these banks; they can easily secure the loans they need with a very negative real interest rate and have no concern regarding their repayments.
When these companies issue debt bonds in the capital market, the obligation to repay on time at maturity becomes stronger. Bank financing creates rent-seeking opportunities that do not exist in the capital market. Therefore, the attractiveness of obtaining loans from banks is much higher than issuing debt securities in the capital market.
The current model of financing is flawed and unfair, and creates problems, especially in providing periodic loans to households and small businesses.
Underdeveloped Debt Market
The capital market in Iran is restricted to the stock market, but stocks are not a very efficient tools for financing companies.
The debt market in Iran has not developed properly; it has a lot of potential for growth if managed properly. The growth of debt market in recent years has been concentrated in government debt securities, and unfortunately, the debt securities market for large, listed companies has not been very prosperous because the needs of companies are mainly provided through the banking network.
If manufacturing companies intend to be competitively financed through the debt market, their credit rating should be determined first and the interest rate of their bonds in the debt market should be set according to their credit rating.
As a general rule, companies with lower credit rating must pay a higher interest rate. In doing so, the development of the capital market has been merely in the stock sector; we have yet to see a significant development of the debt market compared to the stock market.
Transactions in the financial derivatives market are minimal, given the fact that it is unknown to the general investors and there is little knowledge about this market. Therefore, the development of the capital market is one-dimensional and restricted to the stock market; the capital market is lagging behind in many areas compared with the advanced financial markets of the world. Financing and ultimately economic development, industrial development and growth through the stock market require the passage of time.
As long as the banking system is managed by the government and the interest rates are set by the government and controlled by large companies, there will be no other model of financing in the country except through banks.
