In its latest analysis of the Iranian banking sector, Capital Intelligence, the international ratings agency, noted that the repayment of government arrears to banks and the private sector is an urgent priority for Iranian banks to lift their weak capital adequacy ratios and allow their financing capacity to improve.
According to CIratings, this would revitalize the banks' function as financial intermediaries and may also support regular economic ties with foreign banks and/or strategic shareholders from outside Iran.
The banking sector in Iran continues to face significant headwinds, even after the partial lifting of sanctions, CI says.
This is mainly related to a number of legacy problems that continue to drag banks' asset quality, profitability and capital adequacy, limiting their capacity to provide the financing for meeting the needs of the economy.
The challenges for the banking sector were clearly recognized by reelected President Hassan Rouhani in an address to the parliament where he renewed his promise to pursue reforms in the banking sector during his second term.
"Weak banking supervision, expansion of illegal credit institutions, improper monetary policymaking, financing the government through the banking system, false boom in the housing sector, moving a portion of the assets held by the banks to this sector and unregulated speculative activities of banks in the past decades have all created a plethora of problems in the banking system," he said.
The president referred to "major reforms in the government's budget, retirement funds, banking system, climate of doing business" as the focal points of the administration's reform plans.
The announced reforms also include overdue reforms of outdated banking regulations. Following an approval by the Cabinet on July 23, 2017, and a presidential endorsement, the Banking Reform Bill and the Central Bank Bill devised by the government to reform the banking system after almost 45 years have now been sent to the parliament.
Banking Bills
The Banking Reform Bill is expected to replace the current Usury-Free Banking Law.
The last amendments to the Usury-Free Banking Law were made in 1983, while the law itself specifies that upgrades are needed every five years.
The reform bill outlines the procedures that banks and non-bank credit institutions need to follow to obtain a license from the Central Bank of Iran. It explains all banking operations and services, notifies regulations for the establishment of foreign bank branches and sets limits on their investments.
Other articles put in place a professional set of criteria for appointing top executives and board members, and make provision for setting up internal risk and auditing committees while detailing financing and capital adequacy rules.
On the other hand, the Central Bank Bill, whose law was first passed in 1972, aims to update banking regulations. Improving the independence of CBI, enhancing monetary policymaking and enforcing CBI's supervision over the monetary market are among its key goals.
The bill puts added emphasis on supervision and obliges currently unlicensed credit institutions to "cooperate with CBI supervisors and investigators, and provide them with all the relevant information within the framework of regulations".
It stresses that "CBI's oversight over credit institutions is comprehensive", meaning that in addition to evaluating the operational risks of the institution, it has the mandate to evaluate the risk emanating from the parent company that owns the credit institution.
The reform measures also include articles on bankruptcy and merger of banks and credit institutions. The goal of these reforms is to "ensure the stability, health and sustainability of the monetary and banking regime and safeguard the interests of depositors".
In line with this, the bills also allow the Deposit Guarantee Fund, which guarantees customers' deposits up to a ceiling, to continue with its operations and obligate "all credit institutions" to become members and make contributions.
The Iranian Cabinet first approved the change in early December 2016, but it has to be approved by the parliament and ratified by the Guardians Council to become law.
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