Iran Banking Reforms in Final Lap

EghtesadOnline: The initiative to reform the country’s banking system is in its final stage with financial stability being at the core of the measures, the vice governor of the Central Bank of Iran said.

News ID: ۷۴۵۵۵۹

03 July 2018

Akbar Komijani also enumerated the banking system’s main trouble spots, stressing that non-performing loans, the government’s payment arrears to banks and non-liquid assets appear as a sore spot in the lenders’ balance sheets, IBENA, a news website affiliated with the bank, reported.

“Financial stability is among very important and serious issues that have come into focus after 2007 when the global financial crisis struck and this affected domestic banks’ balance sheets,” he said.

In 2008, the world economy faced its most dangerous crisis since the Great Depression of the 1930s. The contagion, which began in 2007 when sky-high home prices in the United States finally turned downward, spread quickly, first to the entire US  financial sector and then to capital markets overseas, according to Financial Tribune.

The crisis adversely affected many banks, which found themselves unable to lend to businesses. Iranian banks, however, were mostly shielded from the adverse effects because they had been gripped by western nuclear-related sanctions and were mostly isolated from global trends.

As the crisis unfolded and global banks were required to embrace new and strict capital and accounting rules, Iranian banks were left behind, which has continued to hamper their international contacts to this day.

Through its Monetary and Banking Research Institute, CBI has launched several initiatives to overhaul the banking system and conform to latest international standards. It upgraded lenders’ capital adequacy ratios and improved their accounting principle by adopting International Financial Reporting Standards.

Shadow banks, which were spawned in the 1990s and mushroomed in the next decade by offering high interest rates, have in recent years disrupted the country’s monetary market by acting as rivals of legitimate lenders. Many of these entities were finally dissolved or merged with other banks by the administration of President Hassan Rouhani at the cost of taxpayers.

“These reforms are to some extent directed toward improvement of banks’ capital adequacy ratios by increasing their capital and adoption of IFRS while measures are underway in the area of supervision,’’ Komijani said.

“All these issues have been identified and it could be said that we are at the stage of implementing and completing banking reforms, especially the government’s support for state-owned banks to increase their capital and to repay heavy government debts to the banking system.”

Backdrop

According to a parliamentary report in May, Iranian banks and credit institutions held a total of about 1.3 quadrillion rials ($30.87 billion) in non-performing loans by the end of the previous fiscal year on March 20, 2018.

The government and the parliament’s main plan for recovering NPLs involve a scheme that waived related penalties. According to statistics published about the scheme, which date back to July 2017, more than $1 billion worth of NPLs had been returned by the people at the time.

In mid-May 2017, CBI Governor Valiollah Seif had said after four years of Rouhani’s tenure, the NPL ratio had dropped to 10% or about 1 quadrillion rials ($23.75 billion).

The need for banking reforms is felt more strongly after the US move to pull out of the Iran nuclear deal in May. The country needs to establish ties with foreign peers to transfer the oil money.

US President Donald Trump pulled out of the international nuclear deal with Iran on May 8 and said he would reimpose sanctions within 180 days, prompting several European companies to announce they would end business with Tehran before the Nov. 4 deadline.

The government has also sought to address the banking sector’s woes by submitting the twin Banking Reform Bill and Central Bank Bill, which have had a tortuous path so far and have yet to become law, to the parliament.