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Speculative Activities Crippling Banking

Speculative Activities Crippling BankingSpeculative Activities Crippling Banking

A parliament member expressed concern over banks’ speculative activities, as they use over half of their money to run non-banking businesses, putting depositor’s savings at risk. This exceeds the Central Bank of Iran’s directive allowing them to use only 40 percent of their resources for such activities.

The central bank has allowed banks to run businesses so that banks can cover their costs, as other banking activities have become less profitable.

Mohammad-Ali Pourmokhtar regards banks’ involvement in speculative activities as one of the current plights of financial system, since it would funnel a large part of their financial resources into “unhealthy and unproductive activities,” IRNA reported.

However, the lawmaker believes banks sometimes have no choice but to run non-banking businesses, as they have to take over a company that has failed to repay its debt.

The MP pointed to 30 meetings held by specialized committees of the parliament with bank debtors to discuss the issue and assess their debt. This was done to tackle toxic debt problem.

Pourmokhtar urged the economy ministry and the central bank to lower the cap on the money banks can use in non-banking businesses from 40 percent of assets, noting that banks’ mission is financing productive projects rather than directly running businesses.    

Hadi Ghavami, another parliament member, blamed the banks for establishing housing companies to legalize their involvement in the housing market. This would make buying houses an investment, not a consumer good, leading to the rise of property prices.

The MP said banks’ participation in construction or purchase is not only against financial and banking laws, but also would disrupt the housing market.

Referring to the law of regulating the house market approved in 2006, Ghavami said the government has to fund construction companies with banks’ resources and let the private sector carry out the construction.

“In fact, banks need to guide deposits towards the manufacturing sector to financially support producers who are at risk of financial collapse to help the country survive the current downturn.”

Mohammad Alipour, member of the parliament’s economic committee, believes as long as banks are engaged in low risk activities, their shares would fare better in the stock markets. He pointed to 12.3 percent decline in the share prices of seven major banks over the past three months and argued that although part of the drop is due to economic recession, banks’ engagements in the housing market is another cause, since recession in the housing market is weighing on banking shares.

Financialtribune.com