Economy, Business And Markets

New Banking Directive Needs Revision

New Banking Directive Needs Revision
New Banking Directive Needs Revision

There is no guarantee that if banks give up running firms the economy will thrive, former managing director of Tehran Stock Exchange told Eghtesad News on Wednesday.

Last month, the Central Bank of Iran ordered commercial banks to sell their non-banking assets in the equity market within three years, an issue that garnered a lot of media attention.

The central bank said it was determined to have commercial banks relinquish their firm-running activities. However, the issue has raised concern among experts who are worried that the measure might even worsen the not-so-favorable status of the economy, “Such an action may even give rise to more economic problems,” Ali Rahmani said.

“The CBI has instructed commercial banks to sell their equities in the stock market within three years,” said Rahmani, adding that “however, experts are examining whether it is the right time to force them to do so.”

The total capital of Iranian banks is less than 10 percent of the total 6000 trillion rials ($225 billion) liquidity in the country, which is not a significant proportion as Rahmani said, arguing that “it might not be the proper time to enforce the directive.”

In traditional banking systems, said Rahmani, banks and capital markets used to be viewed as competing sources of financing. However, when we move towards modern systems of banking, there is no “banks versus markets” distinction any more.

In modern banking, these two intermediaries can actually be complementary to one another. Rahmani said all over the world, money markets and capital markets complement each other, thus “capital markets can help resolve the problems faced by banks these days.”

However, he said that the capital market possesses complicated characteristics that have to be taken into account.

While capital markets only finance projects that are economically justifiable and produce returns, the money market can finance projects that lack such justification, which are mostly assigned to them by governments.

“These are mostly social projects, whose importance for the society is more important than their economic returns,” said Rahmani, adding that, this is in the realm of banks’ responsibility, since compared to the capital market, banks can do a better job, “a fact that highlights the significance of interaction between banks and capital markets.”