Increase in NIR to Help Curb Banks Risky Ventures

In order to diversify banks’ revenues and increase their non-interest revenue, the Central Bank of Iran has proceeded to increase bank charges, said the director of Central Bank of Iran’s department for bank and credit institution supervision.  

“Iranian banks engage in speculative activities because they do not have adequate non-interest income,” Abbas Kamarei said in a talk with Fars News Agency.

“In most countries, fees pertaining to non-interest income of banks are considerably higher than they are in Iran because their banking systems are fee-based.”

“In Iran banks make the bulk of their profit from lending and investments and that pushes them toward alternative means to earn more, namely speculative ventures.”

In the retail banking context, non-interest revenue (NIR) effectively comprises net fee and commission income (and in some cases, net insurance premium income). Or, bank charges. The degree to which banks rely on non-interest fees to make a profit is said to be the function of the economic environment.

On the CBI’s recent move to increase bank charges, the official said considering the fact that it is a common practice throughout the world for banks to generate the majority of their real earnings through non-interest revenues, the CBI saw fit to introduce higher fees. Kamarei referred to the current economic conditions that have led to a considerable surge in bad debts as another reason that made an increase in bank NIRs necessary.   

“As per law, setting fees for lenders is a responsibility of the central bank and the last time this happened was in 2012,” he said. “Keeping in mind the four-year hiatus and the changes in the final cost of banking services, the CBI has set new rates.”

 Majlis Ambivalence

The chairman of the Majlis Economic Commission recognizes that Iranian banks create only a minor portion of their profit through non-interest income, but says his commission will not necessary advocate higher bank fees.

“A high percentage – almost 80% – of the profits of the banking system come from interests on loans and that has caused a hike in the cost of borrowing,” Mohammad Reza Pour-Ebrahimi was quoted as saying by banker.ir.

“The banks generate only 20% of their income from fees,” he added.

But this is not enough for the Majlis to approve higher non-interest income rates, the official noted. “If a change in banking fees would lower loan interest rates, we will work on this approach with the CBI. But if that does not happen,  increasing fees would not be acceptable from our standpoint.”

Pour-Ebrahimi confirmed that the proposal to increase bank fees has been approved by the CBI and is now being implemented.

“It has also been agreed that the CBI provide the MEC with a report on the matter and a joint meeting be held between the governor of the CBI and the MEC to discuss it,” he added.

Should the commission decide that the planned changes are not in line with regulations, he warned, “[it] will surely call for a revision and notify the public.”

In conclusion, the MEC chairman said a series of reforms should accompany the increase in non-interest revenues of banks, including an improvement in the quality of banking services and the measures leading to lower interest rates.