Banking Reform Takes Center Stage Once Again

Reforming the Iranian banking system, whose representatives have been grappling with a variety of issues, has once again come to the fore of national dialogue at a time when the Central Bank of Iran is trying to enforce lower interest rates.

President Hassan Rouhani was on state television to address the woes of banking system among other things and outlined what his administration plans to do in its second term that started this month.

“We have to overhaul the economy,” he said, referring to CBI’s plans to allocate 300 trillion rials ($7.7 billion) in loans to small- and medium-sized enterprises to assist production and boost job creation.

Support for SMEs holds significance, especially since the administration needs to create close to a million jobs during the current fiscal year ending in March 2018.

As Rouhani said, “The role of banks in this regard will be great.”

But for lenders to be able to support production, they will need backing from the administration since, as the president notes, “their primary problem is that they are low on capital, so we need to boost their capital”.

Their second major hurdle is the “unhealthy competition” taking shape in the banking sector, which the president says must end. He added that at present, a number of banks secretly offer higher interest rates to attract more deposits.

He also pointed to illegal credit institutions and said “we still need to take steps to complete what has already been done”, in reference to CBI efforts to resolve the problems of illegal institutions.

According to the president, another detrimental activity in which Iranian banks dabbled was their speculative activities, especially in the real-estate sector.

“They must put an end to these activities and sell their stagnant assets so they can begin to circulate again,” he added.

He referred to high interest rates as “the big dilemma of our economy”, asking how “investors can stay afloat when the interests on their loans are up to 20%”.

Rouhani pointed out that the inflation rate stands below 8% for the current month, which would render interest rates of around 11% acceptable.

“[A difference of] two to three percentage points between deposit rates and interest rates will be agreeable,” he added, meaning that his target for interest rate would be about 14%.