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Majlis Think Tank Recommends Ways to Repay Gov’t Debt
Economy, Business And Markets

Majlis Think Tank Recommends Ways to Repay Gov’t Debt

The Majlis Research Center has suggested the government repay a portion of its huge debts to the banking network by issuing Islamic Sukuk with maturity in the medium-term.
In a report on the crisis in the banking industry, the center has offered solutions to gradually remove the serious dangers threatening banks, which were exacerbated during the banks’ decade-long isolation because of the sanctions.    
The report recommends “a step-by-step strategy” to firstly focus on the banks’ balance sheets and capital ratios. At the same time, monetary authorities need to regain and improve their supervisory and regulatory clout gradually because for now “supervision has almost come to a halt.”   
Given the most important constraint of the shortage of resources with which to  recapitalize banks and pay off the government’s monumental debts, the government can issue debt instruments like sukuk to raise money.
“The government can repay a part of its debt to the banking system in the form of medium-term Islamic Sukuk (financial instruments like bonds that comply with Sharia or Islamic law) at good returns and incorporate the repayments in the annual budget law,” says the report.  
Because injecting resources into the banking system by offering such instruments would result in the reduction of bank deposits, banks’ total assets will eventually drop. Devising a timetable for regular repayment of debts and exercising fiscal discipline can offset  the potential harmful effects of this procedure on the equity  market, the influential think-tank said.

 Other Solutions
There are other ways to handle the situation, the experts say, including attracting investors from depositors and effectively turning deposits into capital.
The Central Bank of Iran making medium-term and long-term deposits with the banks, but at the same respecting liquidity ratio limits, is another way to increase banks’ capital.
 Other ways forward to prevent a “bank failure” would be to follow up on the selling of excessive property of banks and close down the unprofitable branches.
Furthermore, banks could utilize shared branches; not only will this cut operational costs, but it will also improve the liquidity of banks.
Calling the situation “critical” for Iran’s banking sector, the report also warned against the role and impact of “illegal” credit institutions saying that six such institutions have 1.3 quadrillion rials ($43.6 billion) liquidity, which accounts for nearly 6% of the total assets of the banking system.
The CBI has repeatedly warned of the negative impact of the unruly and unlicensed lenders that reportedly account for 20% of the total  liquidity in the country.
 

 

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