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Fitch: Iran Bank Reform Bills Carry Clout

Fitch: Bank Reform Bills Carry Clout Fitch: Bank Reform Bills Carry Clout

Fitch Ratings, the international ratings agency, has said in a report that Iran's banking supervisory authority will benefit from two bills sent by President Hassan Rouhani to parliament to push banking reforms.  
In its Banking & Financial Services Report for Q4 2018, Fitch referred to the positive impact of the bills but added that underlying problems are likely to exert pressure on the sector. 
"In August 2017, President Hassan Rouhani sent a banking reform bill and a central bank bill to parliament for approval. Once approved, the bills will pave the way for much-needed reforms to the structure and regulation of the financial sector," the Fitch report said. 
Majlis Speaker Ali Larijani said earlier this month that the bills have been reviewed in the relevant commissions and are awaiting a final vote in the chamber. However the preoccupation of lawmakers with next year’s budget will probably hinder a vote on the bills for some time. 
According to Fitch, the Central Bank of Iran also made International Financial Reporting Standards (IFRS) mandatory in July. The Iranian banking sector suffers from poor regulatory oversight that will continue to limit investment over the medium term. 
The Financial Action Task Force (FATF) has suspended countermeasures against Iran, but it announced in October that Iran had until February to complete its reform, requiring a strengthening of anti-money laundering and counter-terrorist financing measures (AML/CTF). 
The principal banking regulator is the CBI and was established in 1960. As stated in the Monetary and Banking Act of that year, it is responsible for deciding and implementing monetary and credit policies with due regard to the general economic policy of the country (in the context of the five-year economic development plans and annual budgets). 
The CBI's four main objectives are: maintaining the value of the rial; maintaining the balance of payments; facilitating trade-related transactions; and improving the national growth potential. 
The Money and Credit Council is the highest decision-making body of the CBI, made up of representatives from the CBI, the finance ministry and lawmakers. 

 

 

Bad Balance Sheets  


Iran's banking sector will remain fragile over the quarters ahead, as the re-imposition of US sanctions hampers recapitalization and restructuring efforts, Fitch said in its report. 
Banks' persistent inability to repair bad balance sheets means their ability to extend credit will remain heavily constrained. Meanwhile, although risks of an outright collapse of the sector appear contained, a large-scale consolidation will at some point be necessary to improve Iran’s long-term financial (and thus macroeconomic) stability.
The new US sanctions is clouding the already gloomy outlook for banks. As sanctions hit hydrocarbon exports and foreign investment inflows, state revenues will reduce - in turn restricting the government's ability to inject capital into the financial system. 
Iranian banks, most of which are state-owned or state-linked, have exceptionally high levels of bad debt, with non-performing loans (NPLs) estimated at 13.0% of total loans in 2017, according to the Institute of International Finance.
In addition, capital adequacy is very low, standing at just under 6.0% in that same year, compared with the Basel III stipulated 8.0% (plus a 2.5% cushion). These vulnerabilities are primarily the result of challenging economic conditions in the years leading up to nuclear sanctions relief in 2016, as well as extensive government interference with lending practices and weak regulatory enforcement when Mahmoud  Ahmadinejad was president (2005-2013).

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