Economy, Business And Markets

Huge Investment Needed to Modernize Banking

Huge Investment Needed to Modernize Banking Huge Investment Needed to Modernize Banking

The world is moving fast towards tech-based services, banking included. Tech is changing the dynamics of financial services and Iran's shift to electronic banking is incomplete, as its banking system hasn't gone through all its stages of development, says Economy Minister Ali Tayebnia. To change the banking system into a vibrant one, "heavy and hefty" investment is needed in the sector, says the Central Bank Governor Valiollah Seif.

The two overlords of Iran's finance spoke in the 4th Annual Conference on Electronic Banking and Payment Systems in Tehran on Monday. They outlined some of the challenges, achievements in the economy and e-banking, saying how the shift towards e-banking could solve the issues.

E-banking can change the dynamics of banking by raising the profitability of providing banking services to customers, said Seif, who along with Tayebnia was speaking in a panel during the conference. The increased profitability of banking services will in turn reduce the focus of banks on financial intermediation, thus reducing borrowing costs.

"A heavy and hefty investment is needed to modernize banks so that they can provide better services to their customers," said the Central Bank of Iran's governor.

The costs of providing services and the investment in e-banking are now being paid through financial intermediation. This has to change. Paying for electronic services should be partially done by clients of these services, thus reducing the focus for generating profits from financial intermediation and moving it towards banking services.

Banking services make up most of the profits of major lenders, "as heavy competition among banks has eroded the profit margin of financial intermediation." A move towards electronic banking services is what the central bank wants the banking system to move towards, Seif said.

Currently, Iranian lenders are generating most of their profits via financial intermediation. This amplifies their need for deposits, raises deposit rates, and in turn, interest rates. Higher interest rates will reduce the economic viability of many investments. Thus the lessening feasibility of investments has led lenders to move towards "speculation" and non-banking activities. The two officials are aiming to reverse this cycle.

The CBI governor urged bankers and those in IT "to have the courage to undertake big projects," pointing to Checkavak, electronic check management system, which will go online nationwide on Feb. 11 – the anniversary of the 1979 Islamic Revolution.

Furthermore, using e-banking reduces the want for increasing the monetary base – total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves – as it boosts commercial lenders' ability to lend.

The expansion of monetary base or powerful money hikes inflationary pressures. Not a welcome sight in Iran's stagflation-ridden economy. On the other hand, a surge in use of e-banking raises the amount of money that banks generate with each dollar of reserves.

This is seen in the escalating effect of e-banking on how people use money. As pointed out by Tayebnia, the circulation of hard currency in Iran is declining. The ratio between hard cash and total money supply is down from over 13 percent in the 1980s to 4.5 percent in the six-month period ending Sep. 22, 2014. "This is a sign of financial development, which will lead to economic development," said Tayebnia.

Cost of Money

But, "we have a credit crunch" as financial resources are scarce and the cost of money is soaring, said the minister.

Tayebnia blast the former administration for its "wrong policies" which have escalated Iran's reliance on oil revenues and pushed the banking system to crisis. "Our country is in a critical condition," said the minister, "and the combination of mismanagement and economic sanctions has sent the economy into stagflation." There is also the issue of plunging crude oil prices.

Tayebnia called the declining crude oil prices a "bitter reality," which complicates the management of the economy. Oil prices have halved since June highs, plummeting to 5-1/2 year lows.  The drop puts real pressure on Iran for which oil revenues comprise around 80 percent of exports. Iran’s revenue from crude sales fell 30 percent because of oil’s plunge, which has put pressure on the budget, Rouhani said on Dec. 8, a day after he presented the budget bill to the parliament.

But the minister said the government is trying to capitalize on the drop in oil revenues by pushing thorough structural changes that reduce the economy's reliance on oil revenues, reversing the former administration's wrong policy.

He also criticized moves to  force banks to lend at uneconomic rates, which have now left them with over $30 billion of toxic debt, calling the action "economically illogical and against Islamic law." The former administration forced lenders to finance many profligate projects at low interest rates, in an attempt to boost economic growth.  

The conference kicked off in Tehran on Monday, hosting top financial and monetary officials. The two day event, organized by the central bank, Monetary and Banking Research Institute and Informatics Services Corporation, is set to review international megatrends in e-banking and payment systems; provide an effective communication platform for domestic policymakers, bankers and IT professionals to exchange ideas about the outlook of the industry; introduce a roadmap of the Iranian National Payment System; discuss latest developments in e-banking; review applicable rules and regulations; and showcase national and international ICT and banking industry’s achievements.

Mohammad Bagher Nobakht, vice-president and head of the newly-revived Management and Planning Organization, was to attend the gathering but was called to the parliament for explaining a series of issues at the last minute, Tayebnia said without elaboration.