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Iran Poised  to Embrace Global Finance
Economy, Business And Markets

Iran Poised to Embrace Global Finance

Largely absent from the global finance scene during the sanctions era, Iranian banks and investment houses are beginning to take calls, schedule meetings and discuss partnerships with foreign counterparts who see potentials for investment in Iran after last month’s nuclear deal.
But while there has been an upsurge in foreign interest, Iranian banks are trying to shake off the rust of operating in a market cut off from the global financial system.
Parviz Aqili, chief executive of Tehran’s Middle East Bank– one of the country’s privately owned institutions, told the Wall Street Journal that his bank desperately needs investment.
For years Iran has been secluded while the world has developed, he said. “There is so much to be done.”
The financing opportunities in Iran are huge. The government is planning almost $40 billion of infrastructure development as sanctions ease up, some of which will require bank financing. It may not be enough to entice larger banks that still feel the sting of large fines during the sanctions era but may draw in smaller players from Turkey, China, India and the [Persian] Gulf Cooperation Council states that don’t have the same fears, banking executives told the journal on Monday.
“The way I look at Iran right now is it’s very similar to China,” said Nima Obohat, a consultant at the Iran-focused Black Bridge Associates in Dubai. “Iran has reached the same point where it needs to find a growth model for the economy, and solving the issues of the banking sector is key.”
A trio of Iranian financial firms focused on the stock market—Turquoise Partners, Agah Brokerage Co. and Mofid Securities—have already signed partnerships with boutique asset managers in London to launch Iran-focused investment funds this year.
Informal talks are also taking place between Iranian banks and some foreign lenders, according to people familiar with the discussions, though most are treading cautiously.
Many banks fell afoul of tightening US sanctions by continuing to do business with Iranian entities. In 2012, US authorities fined HSBC Holdings PLC $1.9 billion over lax money-laundering controls following allegations that it did not properly police transactions with Iranian entities, among other charges. BNP Paribas SA agreed to pay a record $8.9 billion last year to settle allegations that it violated sanctions on Iran, Cuba and Sudan.
Other big banks—including Barclays PLC, Royal Bank of Scotland PLC, ABN Amro Bank NV, Credit Suisse Group AG and Standard Chartered PLC—have all paid substantial fines related to Iranian transactions.
Even apart from these fears, banking executives said there is recognition that the Iranian system is rusty after being cut off from the world by a decade of sanctions. Bad loans hover at around 14% of total loans, according to the most recent central bank figures, one of the highest ratios in the Middle East.
“The banks are suffering from very high nonperforming loans, and that’s because loans have been extended to trading firms that because of sanctions haven’t been able to work at full capacity,” said Xanyar Kamangar, a founding partner of Griffon Capital, an asset-management and corporate advisory firm focused on Iran.
Many banks invested heavily in real estate during the sanctions era, too, a consequence of economic circumstances that made their core banking businesses less profitable. Real-estate prices are now falling, putting pressure on balance sheets. Competition for deposits by unregulated credit institutions—which sprung up as traditional banks struggled under sanctions—has been another hindrance to growth.
“They have to clean up their act and stick to being banks,” Aghili said. “It’s going to take time.”
Foreign banks and financial companies may themselves need to change their ways to work in Iran. Iran required banks to comply with Islamic laws that prohibit charging or paying out interest in the early 1980s, making it the first and one of the few financial systems in the world to operate wholly on Islamic principles.
There are more than 30 banks in Iran, a large number of which are privately owned but the biggest of which are state-controlled. They offer loans that act like interest-bearing debt but use structural changes—for example, having banks own mortgaged real estate until the borrower repays the debt plus a profit rate—to avoid interest payments.
Insurance companies must also operate in Sharia-compliant ways.
Zamani of Kardan Bank is also keen on joining forces with a US or European investment bank, potentially by selling a sizable minority stake.
Zamani said that because of his US educational background—he has a degree from Columbia University—he felt comfortable talking to US bankers. However, US bankers often had not obtained the official go-ahead to start formal talks with Iranian banks, which means Zamani’s European colleagues were easier to talk to about a possible partnership.
“The European counterparts are considerably closer to the action and can mobilize a lot more responsively,” he said.
Zamani acknowledged Iran’s banking sector cannot open up overnight or begin competing and cooperating with foreign banks. Iranian red tape and regulatory obstacles are real.
“This is a sector that has never experienced a foreign partnership [before],” he said.

 

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