Economy, Business And Markets

Key Functions of Capital Markets, Banks Reviewed

Key Functions of Capital Markets, Banks Reviewed
Key Functions of Capital Markets, Banks Reviewed

The main responsibility of the capital markets is to finance large enterprises in the long run, as assumed in the new economic policies announced by the government.

In a meeting attended by top government officials and managers of holdings and investment companies, Vice President Es’haq Jahangiri, economy minister Ali Tayebnia, and CBI governor Valiollah Seif spoke about the status of Iran’s economy and the role of the banking system and capital markets in financing manufacturing activities.  

 Gov’t Support for Capital Markets

The government has no doubt that it should support the capital markets if the economy is to thrive and recover fully from recession, Vice President Es’haq Jahangiri said.

The average annual growth of gross fixed capital formation slumped into negative territory during the past eight years. “This means that, in order to help realize the growth targets within the 20-Year Vision (2005-2025), we should set a new goal of reaching an annual growth of about 21 percent,” Jahangiri said.

The Rouhani administration’s economic policy focuses mainly on providing the conditions for private sector to grow and help boost the national economy, Jahangiri stated. The equity market is a major source of economic activity that can work as provider of working capital for small and big enterprises so as to stimulate growth in the capital markets, he said.

“We won’t make any decision that we feel is contrary to what the business owners want,” Jahangiri asserted, adding that, since taking office last year, the government has been holding regular meetings with investors, industrialists and economists to discuss major economic issues.

The government aims to help improve the job market situation through encouraging entrepreneurship, Jahangiri said. “We will try to find an urgent solution to the unemployment problem through increasing productivity and paving the ground for more investment in the national economy.”

 Call for Bigger Capital Markets Financing Role

Also during the meeting, minister of finance and economic affairs Ali Tayebnia criticized the negligible role of the capital markets in financing the manufacturing sector, saying that, “At the peak of its activity last year, the capital markets raised only 270 trillion rials ($10 billion) for the manufacturing industries, which is insignificant in comparison to the proportion raised by the money markets, which amounted to more than 2000 trillion rials ($75 billion) in the same period.”

Tayebnia said that in recent years, the capital markets have significantly developed in terms of value, but most transactions and exchanges of the capital markets have been conducted in secondary markets. “So, the capital markets have not played a significant role in financing small and big enterprises.”

In Iran, there are no serious problems regarding savings rates, according to Tayebnia, but the problem is that “personal savings are not invested in profitable projects to help industries.” This is a problem “we have been facing since a long time ago, but now it has even worsened.”

Tayebnia believes that it’s the responsibility of the banking system and the capital markets to allocate people’s savings to productive economic activities. “In the past, our financial markets used to be bank-oriented, i.e. the banking system was in charge of financing economic activities, which is not a problem per se, but the problem arose when the banking system failed to fulfill its responsibility in doing so.”

Tayebnia said that “presently we have failed to keep the slight economic growth achieved during last 20-30 years. For two successive years our economy experienced a negative growth rate, while our production and revenue decreased by 10 and 20 percent from their prior maximums.”   

The recent plan of action to exit recession has arranged for enhancing the role of capital markets in financing enterprises via defining new financial regulations and tools.

“The essence of economy of resistance – a system for circumventing sanctions—is to obtain consistent economic growth in order to foster domestic economy in international arena and bring prosperity to people’s lives.”

He also stated that the main responsibility of the banking system is to provide businesses with cash flow, and helping to promote the role of capital markets in financing enterprises.

He said the action plan to exit recession is aimed at the same time to solve the problems faced by the banking system on the one hand, and enhancing the role of the capital markets in financing enterprises on the other.

 $52.6b in Credit Facilities for Industries

The governor of the Central Bank of Iran, who also attended the meeting, said that the total amount of credit facilities paid by the banking system in the previous year reached 2360 trillion rials ($88.7 billion). The number is planned to reach 2,450 trillion rials ($92.1 billion) this year.  

Seif said that the amount included 1,400 trillion rials ($52.6 billion) of credit facilities that are to be injected into different industries. The facilities would be used primarily to provide the cash flow required by industries to finance their need for raw materials and to pay workers’ wages.

Small and medium enterprises should be financed by banks, while the financing of larger enterprises in the long run will be assigned to the capital markets, said Seif, asserting that various solutions have been offered to increase the capital of banks.

“One main proposal urges exclusion of banks from the corporate bodies so that they can allocate their entire resources to fostering of private sector activities.”    

Other solutions include transferring banks’ non-operating assets and equities to other entities and repaying government debts to banks, said the CBI governor.