Economy, Business And Markets

Need for Returning to Banking

Need for Returning to BankingNeed for Returning to Banking

Iran’s financial system is currently inflicted with a dangerous disease, with commercial banks investing in businesses and stocks.

The problem, as described by an article published by the Banker News website, started when the previous administration decided to sell state-owned companies to the banks in return for its debt. The measure violated the investment bylaws of banks and transformed them from the mediator of capital for economic enterprises to business owners.

The philosophy behind the restrictions on banks to prevent them from business activities has roots in the efficiency of the financial system, where depositors should be fully ensured of the safety of their deposits with the banks even in the event of bankruptcy. That is why there are strict international standards enforcing risk management within the banking system covering credit, market and operation risks.

The same holds true for the Iranian banking regulations that prohibit the banks from investing public deposits in business activities.

Article 3 of Regulations Concerning Investment by Banks (2007) sets the maximum investment by the banks at 40 percent of their basic capital. In the meantime, except for special cases, banks are not allowed to engage in the management of investments. Neither can they invest more than 20 percent directly in any project.

As another important factor, it should also be noted that the mandate of banks have not been designed for investment and business activities. It is evident that economic boom happens when national resources are entrusted into the right hands that can create value added. Therefore, direct involvement of banks in business reduces their productivity.

Iranian banks should give up business activity and resume loans to active players in the real economy in return for sufficient guarantees that ensure the safety of clients’ deposits. This is where the role of central bank becomes more crucial as a supervisor to ensure the implementation of regulations and public deposits.

However, the central bank has so far failed to have enough control over commercial banks, and that is why a large part of banking resources are used in business activity.