Awaiting Metamorphosis

Transparency in the bloated banks and their balance sheets, fiscal discipline and replacing outdated policies are among uncompromising measures long awaited by the friends of this country and the Rouhani administration, along with those wanting to see openness and responsibility in managing the large number of credit institutions.

In fact President Hassan Rouhani and his men had embarked on the tortuous terrain of stringent accounting and accountability soon after he took office in the summer of 2013. Given what the president had inherited in economic terms, the declared goal of promoting unvarnished profit and loss accounts of both state and private lenders turned out to be easier said than done.      

Planners and policymakers dealing with the banking system and credit institutions had long ago made it clear that patience was running out with the unrelenting financial behemoths and the unsavory and unregistered lenders. With regard to the opening of books, they stress that there should be no space for procrastinators and those involved with funny money working in and around banks and their financial instruments.

Regarding the undisclosed affairs of some state-owned banks and their dubious performance, fears of most economic experts were alas confirmed in late January and early February. Two key lenders, Bank Mellat and Bank Tejarat were exposed for what they are really worth.

Minutes after the ticker symbols of the two banks reopened at the Tehran Stock Exchange after a seven-month hiatus, the main index crashed. Translation: The banks’ financial statements showing multimillion-dollar ‘profits’ had been doctored.

The Central Bank of Iran and the Securities and Exchange Organization had frozen their trading symbols and that of Bank Saderat and Post Bank last July over strong suspicions that their books were cooked.

One clear case of fraudulent practice was that most loss-making banks had been announcing dividends to shareholders from resources that simply did not exist. In trying to remain afloat, the banks were indeed spending other people’s money.

This, however, is not to say that all the blame lies with the struggling banks and lending institutions. Rather the main culprits are those big fishes and vested interests who borrowed billions of dollars over the past two decades and never returned the money.

The sick banks piled up impaired loans and choked off credit to manufactures and companies in dire need of cash, especially at a time when recession and inflation were taking a high toll on the national economy and the lives of fixed-wage earners.

Iran has eight state-owned banks and 19 private lenders.

When the country reopens for business after the long Norouz holidays in the first week of April and all the accounts of government-owned companies come to the regulator, how much of the tsunami of bad loans, troubled credit and distressed debt is the function of state and government enterprises will become clearer.

Though Rouhani has not yet said publicly, it is apparent that he will seek a second term in the May election. Should he decide to run, and in light of the charged political atmosphere, his presidency will be defined by his ability to fix the broken banking system.

It must be said with clarity of purpose that this is exactly what the embattled president has set out to do and in this arduous task has the strong backing of perspicacious economists, honest businesses, Rouhani’s supporters, the free press and foreign companies interested in and pushing for normal economic ties to Iran.

Whether we like it or not, the banking industry plays a crucial role (most experts would like to see this role delegated to the capital markets) in our economy and in fostering growth. Their role in mobilizing savings and capital formation is abundantly clear.

This dominant role can be gauged from the fact that many small and medium-sized enterprises have been hurled on the sidelines for long because senior bankers who have fallen in love with the big players simply do not have time and money for the SMEs.

Our banks are on life support and will, sooner rather than later, need to close down or merge and set the record straight. Recognizing and reflecting facts in the balance sheets of banks, restructuring and recapitalization are required more than ever before. Minus this, all the above-mentioned problems will be here to stay and the pain of yesterday will be carried forward tomorrow and the day after.

True, on more occasions than one the International Monetary Fund has given post-sanctions Iran relatively good marks. The global lender also says that it is “impressed” by the small economic steps our government has taken in improving growth rates, reforming the financial system and changing global perceptions about doing business with our country. This is good but not enough.