The process of privatizing banks has been imperfect and controversial since inception, Bahaoddin Hosseini Hashemi, former CEO of Bank Saderat Iran said. The same is true for privatizing state-owned insurance firms.
During one of the botched privatization plans in the past, 40% shares of the public-sector banks were transformed to the so-called ‘Justice Shares’ and the former government retained control over 20% of the shares.
“Only 20% of the shares were sold to the private sector and this is while the bank managers are still appointed by the government,” he said during a panel discussion at Fars News Agency.
“Not only does the government appoint managers but also decides their structures and makes all the other key decisions they must respect.”
Twenty-nine banks operate in Iran, twenty of which are listed as private lenders. However, four of these banks—Bank Saderat, Bank Mellat, Tejarat Bank and Refah K. Bank—used to be state-owned banks that were privatized along with many other public-sector institutions.
The privatization saga goes back to 2007, when the Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei recommended government officials to implement policies outlined in an amendment to Article 44 of the Islamic Republic’s Constitution that cleared the way for privatization of major holdings.
Based on the amendment, almost 80 % of the companies subject to Article 44 would be transferred to public and private ownership, 40% of which would be conducted through the Justice Shares and the rest through the stock market.
The Justice Shares were first introduced by the former president Mahmoud Ahmadinejad after he pushed ahead with the privatization process based on the constitutional amendment. The shares were offered to the low-income strata, starting with those at the lowest-end of the economic ladder.
Under the Justice Shares plan, millions of Iranian families owned shares in state-owned firms, the value of which was due to be reimbursed 20 years after the dividends were generated by those shares. The Justice Shares portfolio value stands at 960 trillion rials ($ 31.8 billion), of which 360 trillion rials belongs to the government.
Walk the Talk
The former banker called for reforming banks’ structures criticizing the past and present administrations for failing to take effective measures to address the problems o the key sector. He pointed to the credit crunch as one of the biggest woes of the banking system in need of urgent attention.
“I totally agree with the economy minister, Mr. (Ali) Tayyebnia, that the cash crunch is among the most urgent and malignant issues for our banks. But what we really need is action and not just words,” to solve the problem and move ahead, he said.
On the issue of banks’ assets, Hashemi said 55% of the big banks’ assets are locked in the form of “toxic assets” and beyond access while at the same time “the mountain of bad debts of banks” keeps on growing.
The banks’ capital adequacy ratio stands at alarming levels, he recalled, and said, “The regulator has set CAR at 8% and domestic lenders cannot reach that bar. This is while international standards require CAR to be at 12-14%.”
He opined that it is the responsibility of the government to settle the woes of the banking sector. “Structural reforms are needed for the beleaguered banking system.”
Estimated at $32.4 billion, bad debts and non-performing loans have reached 15.6 % of the total bank loans, mostly incurred by their botched ventures in real estate – a bubble that burst and dragged down lenders both big and small.
Hashemi suggested that the merger of state-owned banks would be the easiest and least painful way of solving the structural problems of the banking industry in Iran and other countries (developed world and emerging economies) saddled with trillions of dollars in soured assets and restructured loans.
