Economy, Business And Markets

Banks May Have Slow Return to Global System

Banks May Have Slow Return to Global SystemBanks May Have Slow Return to Global System

As nuclear talks between Iran and six world powers (P5+1) approach the final lap, Iran is preparing to restore banking links with the rest of the world after years of separation, but the process won't be easy as its Islamic financial system has evolved in ways that will complicate ties with foreign banks, according to a report by Reuters.

The report said smothered in debt and shut out of the global system by sanctions, Iranian banks need to resume business with foreign lenders.

Iran's Islamic banking assets totaled 17.3 quadrillion rials ($523 billion at the free market exchange rate) as of March 2014, according to the latest central bank data, over a third of the estimated total of Islamic banking assets globally.

But the Iranian banks' close ties with their government will increase the risks of dealing with them, the report said. "And during their years of isolation, they have developed a version of Islamic finance that is in some ways markedly different from that practiced in other Muslim-majority states."

The differences may make it hard for foreign banks, even ones from other big Islamic banking markets in the Persian Gulf and Southeast Asia, to do business in Iran.

The western sanctions may start to be lifted in coming months if Tehran and world powers reach a deal over Iran's nuclear energy program by a June 30 deadline. The deal would trigger a surge of trade and investment into Iran.

Citing a study by Pakistan's central bank, the report said Iranian banks still retain the accounting standards of conventional banking, which is different from the norms of the Islamic banking in other parts of the world.

"All these features indicate Islamic banking in Iran (is) significantly different from the basic features of Islamic banking in other regions of the world," the study found.

Despite the differences, the report noted that Iran is starting to develop new channels that would ease contacts with foreign banks.

An official of the capital market regulator, the Securities and Exchange Organization, said last month that it was seeking to develop alternative sukuk products. "The Sharia committee in SEO is working hard to adjust these contracts as well as developing new Sharia-compliant contracts," Reuters quoted Majid Zamani, chief executive of Tehran-based Kardan Investment Bank, as saying.