Economy, Business And Markets

Banks Need to Revise Asset Allocation

Banks Need to Revise Asset AllocationBanks Need to Revise Asset Allocation

If the banking system is to play a role in helping the economy exit recession and curb inflation, commercial banks need to revise the process of their asset allocation, a senior economic expert said, as reported by IRNA.

“Banks should allocate their resources to productive activities, rather than staying focused on running businesses and having no objective but to maximize their own profit,” said Taj-Mohammad Ghajavand.

Involvement of banks in commercial activities has raised controversy among economic authorities and policymakers.

Participating in business activities per-se is not against the law. It is a usual practice all around the world for banks to invest in profit-making projects. Also, most macro scale national projects in such fields as mining, heavy industries, and road construction, among others are capital-intensive, making it inevitable for banks not to invest in them, as the private sector usually lacks the required financial ability to invest in such projects.

However, banks should only be involved in investment process, and have to fully transfer the projects to the private sector as soon as the investments begin to bear fruit. Commercial activities of banks should be thoroughly monitored by a superior authority, in a bid to avoid creating mess in the economy.

Problems only rise when the limits set by the authorities are exceeded, or when banks begin to act as profit-making companies and invest in non-productive activities like “construction and selling of residential towers and shopping centers for the sake of profit,” a case that developed in Iranian banks since a few years ago, Ghajavand said.

Banks are now involved in different kinds of non-productive activities especially in the services sector, involving themselves in leasing, insurance, foreign currency exchange, auto and housing, Ghajavand said, stressing that they need to shift from such activities to more productive ones.


Article 34 of the Monetary and Banking Law approved by the Central Bank of Iran (CBI) states that commercial banks are not allowed to engage in “purchase of shares or participation in the capital of any corporate body or purchase of local or foreign securities for their own account in excess of the amount prescribed in special directives and regulations to be drawn up by the central bank.”

Accordingly, the CBI has allowed banks to allocate at most 40 percent of their capital to commercial activities. However, commercial banks have violated the permitted amount specified by law and increased their investment in business activities by up to 100-400 percent of their constant capital.

State-owned banks, though, have mostly respected the ceiling set by law, the report adds, having a better status compared to private banks.

The law also prohibits banks from owning more than 49 percent of a single company’s shares. The rule in many cases has been violated by banks.

The IRNA report added that most banks also violated the law that states they cannot invest more than 30 percent of their capital in real state.  

The cause of banks’ violations mainly lie in what most experts and authorities call “lack of proper supervision on the part of the central bank,” during former president Mahmoud Ahmadinejad’s terms in office.

The abuses deepened in 2011 and 2012, when the economy was hit by western sanctions and the national was sharply depreciated against all foreign currencies, the report said.

Some experts argue that banks during the previous administration were actually “forced” to engage in business, due to the external pressure.

“During a particular period, the central bank (pressured by the previous government) dictated banks to pay high interest rate on deposits, which led them to take on different economic activities to compensate for their losses,” said Ahmad Mojtahed, former director of the Monetary and Banking Research Institute of the central bank.

Calling on the judiciary system to help sort out the banks’ non-performing loans, currently standing at more than $30 billion, Mojtahed said, “Major debtors who have for years been refusing to pay their debt to the banking system must be forced to do so by the judiciary.”  

In case the debtors continue to refuse paying to the banking system, he suggested, the banks should begin to sell the collateral they seize from bad loans. The move, he said, would help banks raise the funds they need to resume providing loans to the manufacturing units suffering from lack of cash flow.

 Parliament Approach

Iranian parliamentarians decided on December 30 to restrict the commercial activities of banks, while they were working on a bill for eliminating production barriers and enhancing the financial system.

Parliament also approved 28 percent profit tax for the banks running non-banking businesses.

The deputies approved that the amount could even be increased by three percent each year if the banks continue with their illegal businesses.

The decision provoked the opposition of economic experts who described it as “unexpected and unjustifiable,” saying that it cannot make up for the lack of supervision of the central bank, which is actually the main cause of the current situation.

Such a measure (collecting extra tax) only discourages banks from investing in economic projects, thus having a negative effect on employment, critics argued.

Thus, the lawmakers revised the approval last week by including a clause to Article 13 of the bill, which stated that the government will in a ten-year period allocate 100 trillion rials ($2.85 billion at market rate) of the annual budget to increase the capital of banks in a bid to encourage them abandon their non-banking businesses.

The banks would in return be obligated to lend triple the capital raised by this amount to non-governmental projects as loans, which should paid in seven years, the report said.