During a recent seminar on the role of development banks on economic growth, Minister of Economy Ali Tayyebnia announced that a banking overhaul plan, which he said has been drafted, would be completed by the end of the Iranian year (March 20), launching a new era in the banking industry.
Tayyebnia hoped the reforms would remove the current challenges and lead to a more efficient, transparent banking system.
The need to restructure the banking industry has been felt in recent years with various economic and central bank officials calling for an overhaul of the system, which they perceived as dysfunctional.
The banking reforms are long overdue and any delay in doing so will cost the economy dearly, experts told the Banker website.
Citing analysts, the website said the irresponsible behavior of banks in the last couple of years, which led to billions of dollars being held captive in the form of non-performing loans, has drawn censure from the public and officials alike, but banks are still eluding actual reform. The time for reform is right here and now, experts insist.
Reviving Competition
One controversial practice of banks in recent years has been their entry into speculative ventures such as investments in the real estate market and other businesses that are a far cry from what mainstream banking looks like.
"With regard to their multiple roles in different sectors of the economy, banks ought to act in a way that leads to the realization of development goals and hence they shouldn't become part of the problem by turning themselves into profit-driven enterprises," says Abouzar Nadimi, a lawmaker and member of the Parliament's economic commission.
Nadimi noted that banks should reassume their traditional role of being "financial intermediaries" by raising capital from depositors and then inject it into the manufacturing sector.
"Banks should engage in healthy competition by satisfying their customers, and the central bank also needs to prepare the ground for this," he said. "Banks should serve the developmental interests of the country and not allocate their resources in a way that creates more problems for the economy."
Nadimi touched upon the banking overhaul plan, saying that any reform must envelope these problematic areas.
"The structure of banks should be subject to revision and their efficiency should be enhanced," he said.
The lawmaker also lamented the constant deferment of reforms in the banking system, saying this would certainly have dire consequences. "Currently, banks finance many of the projects and if they are effectively reformed, this could lead to better employment and economic growth," the lawmaker hoped.
Competence
Another issue facing banks is their isolation from global finance largely due to the sanctions, which have led to their growing incompetence and toxic debts.
Mohammad Rabizadeh, a banking expert, told SMT news website that any real reform in the banking system should involve a return to international standards.
"If banks can promote their services on par with international standards, this will make them more competitive and competent," Rabizadeh said. "One area is the capital of banks meaning that banks cannot survive with their current level of capital."
The expert added that if banks do not raise their capital they will not be able to play an effective role in the international arena even if sanctions against Iran are lifted. He deemed the reform in the banking system necessary in three areas: legal, financial, and human resources.
On the legal front, Rabizadeh said it would be necessary to revise the usury-free banking act that was passed into law in 1983 and has not been updated yet.
"If the usury-free act, which was only functional for the decade in which it was passed, is revised, it can even help solve the issue of NPLs," the expert noted.
He advocated a restructuring of the financial system and attention to capital sufficiency as well as transparency in financial statements as means to organize the financial behavior of lenders.
Rabizadeh also complained about the banks' lukewarm attention to training their staff and the hiring of the wrong person, which he said have been a major hindrance to the development of banks.
