Economy, Business And Markets

Private Sector Underscores Need for Banking Reforms

Private Sector Underscores Need for Banking Reforms
Private Sector Underscores Need for Banking Reforms

The head of Tehran’s Chamber of Commerce, Industries and Mines, Masoud Khansari says sustainable growth demands structural reforms in the economy and the banking sector in particular.

Speaking at the TCCIM monthly meeting on Tuesday, Khansari said “the sanctions are being lifted but banks have not been able to establish strong ties with international banks.” This is because banks have been unable to catch up with the developments and norms in international banking, TCCIM's website quoted him as saying.

By urging the implementation of banking reforms, Khansari, as the leader of the country's biggest private-sector assembly, was echoing similar concerns aired by economists and officials in recent months. Lenders' structural reforms should first and foremost address the banks' high ratio of NPLs and their failure to meet the capital adequacy ratio set by the regulator.  The regulator is also expanding its supervision on financial institutions according to international regulatory framework Basel III in an effort to prepare bank for stress tests as is customary in developed economies.

Iran’s economy is in dire need of refinancing. Years of sanctions imposed over the dispute over its nuclear program, combined with the populist policies of former president Mahmoud Ahmadinejad, have left it with anemic economic growth since 2011. But analysts say the banking sector — the main source of finance given the country’s weak capital and debt markets — is the biggest hurdle to economic recovery.

Iran’s lenders have long operated with low capital adequacy requirements and inadequate regulatory and supervisory mechanisms. They were further weakened by the policies of the previous government, which compelled them by fiat to provide cheap loans to small businesses and the poor, as well as the international sanctions.

Veliollah Seif, CBI governor, admits that the banks became “outdated” under the sanctions regime and says two steps are needed to restore them to health. First, they need to reintegrate with their foreign peers. Second, banking regulations and compliance must be brought in line with international standards “by measures like fully implementing the pillars [of the Basel accord on bank safety requirements].”

Khansari said reforming the foreign exchange rate is another crucial step.  He also referred to the currency war between China and the US with the former keeping its currency undervalued to boost exports. “Forex policies in Iran move in exactly the opposite direction and therefore we cannot have impressive exports.”

Banking Reform Bill Panned

Pointing to the banking reform bill pending in parliament, Khansari criticized the lawmakers for making hasty and imprudent decisions during their dying days.  “The bill, if ratified, will be a final blow to the banking system.”

The draft bill, which has drawn strong opposition from the Central Bank of Iran, proposes founding a body at the CBI to supervise the banks’ compliance with Sharia-based regulations. The body would comprise the CBI governor, his deputy for supervisory affairs, five Muslim clerics with expertise in banking and monetary issues and a legal expert–something the CBI says would only complicate matters for the already stressed banking system.

Another member of Tehran Chamber, Ali Sanginian also criticized the controversial bill saying it does not take the interests of the private sector into account. “Our Money & Capital Committee reviewed the bill and proposed some modifications, but the parliament was simply not interested.”

He criticized the bill warning that its ramifications could be disastrous for the  ‘ailing’ banking system.  “A part of this bill calls for establishing a Fiqh council which would wield more power than the Money and Credit Council – the top monetary policymaking body.”

Kuroush Parvizian, head of the Private Banks’ Council, also opined that the proposed measures will do more harm than good with its proclivity to make banking operations more, not less, complex.

“This draft does not alleviate the problems hounding the private sector like interest rates, fines for delayed loan repayments and the shortage of finance.  Another problem is that it was put together in haste. The draft should be revised in a process involving the government, banks and the private sector."