Economy, Business And Markets

Islamic Banking System Sees Hope in Iran Deal

Islamic Banking System Sees Hope in Iran Deal Islamic Banking System Sees Hope in Iran Deal

Few people are likely to be counting on a successful conclusion to Iran’s nuclear agreement more than the country’s bankers.

Sanctions and loose monetary policy under former President Mahmoud Ahmadinejad led to the highest level of bad loans in the Middle East after Libya and Yemen, Bloomberg said citing the latest International Monetary Fund data.

An end to economic isolation would allow some banks to tap foreign funding and bolster government revenue enough to rescue troubled institutions, the report said.

"The banking sector is not in terribly good shape after some of the more aggressive policies of the last decade," Emad Mostaque, a London-based strategist at research company Ecstrat Ltd., said. "A nuclear deal would be a huge positive to the overall economy and local banks."

Iranian banks make up the world’s largest financial system based on Islamic, or Sharia, law and the state of its health heightens the urgency of a nuclear accord. How to terminated United Nations sanctions on banking has been among the hindrances of progress throughout discussions in Switzerland, where negotiators reached a framework agreement last week.

Iran’s Islamic banking assets are $482 billion, according to Dubai government data from 2014. That’s more than in Saudi Arabia, Malaysia and the United Arab Emirates combined.

Selling Oil

"Despite the size of their assets, most of the Iranian state-owned banks are in fact loss-making entities," Amir Kordvani, an associate at law firm Clyde & Co. dealing with Iran, said by email on April 6. "The implementation of various mechanisms devised by the Central Bank of Iran to address this situation has been delayed by international sanctions."

A deal on ending Iran’s isolation might help avert the need to bail out some banks, said Charles Robertson, global chief economist at investment bank Renaissance Capital.

"How they manage this is connected to the sanctions issue, so if the money from sanctions easing comes really soon, then maybe you don’t have to bail out the banks by printing money, you’ve got the tax revenues coming in from selling more oil," Robertson said in an interview from London.

The majority of Iran’s 20 privately owned banks are listed on the Tehran Stock Exchange and are among the largest companies by market value. Shares in the six biggest banks in the main index declined by an average 17 percent over the past year compared with 10 percent for the benchmark.

Given current strains on Iran’s economy and the continued drop in oil prices, it is unlikely President Hassan Rouhani will allow any bank to fail, whatever the consequences of a bailout could be, the report said.

"I don’t think the authorities have ever let a major bank fail," Robertson said. "The question is would that be the case under Rouhani. My sense is in the current environment, where the oil price has been halved, the authorities cannot afford to be harsh. I would assume they would bail them out."