Iran's Banking Reforms Making Slow But Steady Progress

EghtesadOnline: Governor of Central Bank of Iran says the bank has been working hard to reform the banking system long grappling with mismanagement and financial indiscipline.

News ID: ۷۴۸۳۱۸

01 September 2019

Addressing participants in the 30th Islamic Banking Conference on Saturday in Tehran, Abdolnasser Hemmati spoke of reforms coming into force gradually and highlighted the ingrained ills of the key sector.

“Problems cannot be solved overnight simply because they were not created overnight,” he told the conferees, IRNA reported.

Iran’s banking industry is suffering, among other things, from issues such as poor balance sheets, capital inadequacy, inability to recover non-performing loans to the tune of billions of dollars, arcane rules, and dubious operations of illegal credit institutions that have been punishing the economy for years, Financial Tribune reported.

Hemmati underlined the CBI’s strong will and determination to enforce banking reforms, pointing to the rigor with which it took the initiate to do so.

However, he singled out the resistance of some lenders toward reforms, noting that the regulator is approaching the issue with extra care and caution to achieve the reform goals.

“Given the lenders’ sensitivity [to reform], the CBI is exercising due circumspection and reforms are making slow but steady progress.”

Key Measures

The senior banker pointed to restrictions on borrowing from the CBI, controlling interest rates, monitoring lenders in granting big loans, and tightening oversight on ownership of banks shares as some of the measure taken by the CBI in recent months.

Shedding light on rules governing ownership of banks’ shares, Hemmati reiterated that “no legal or natural entity is allowed to own more than 33% of the total shares of a bank”.

In line with broader banking reforms and as part of efforts to regulate interbank interest rates, Hemmati pointed to the CBI’s plan to launch the much-touted Open Market Operation by the end of this month.

Monetary policy reforms have the blessing of the Money and Credit Council – a major monetary decision-making body in April, he told the meeting.

OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.

In the framework of OMO, central banks buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  By the same token, selling government bonds reduces the base money and raises interbank rates.

The policy is hailed by economists and officials alike as it aims to introduce new instruments in CBI’s approach, its monetary rules, help regulate interest rates, curb inflation and develop a regulated framework for controlling the borrowing of banks from the CBI.

Hemmati pointed to the relative stability in some economic variables in recent months, saying “this improvement does not mean our flawed economic structures are healed”.

Leaving behind months of turmoil and volatility triggered by US sanctions since last summer, the economy is showing some sign of improvement, such as lower inflation and decline in currency rates.

The US re-sanctioned Iran in November 2018 after unilaterally withdrawing from the 2015 historic nuclear deal Iran signed with the six world powers.

To fend off impact of the hostile US moves, the government took measures to stabilize the chaotic forex market and curb the inflationary effects of the restrictions on domestic markets.

Thanks to these measures, rial has regained 40% and the growth of annual inflation has reduced from 52% in the late April to 41.6% in the Iranian month ending August 22.

Hemmati pointed to the need for funding the working capital of funds as the main issue of concern for CBI, speaking of plans on the agenda to facilitate financing manufacturing units.

He didn’t elaborate on the plans. Earlier in July, however, he said the CBI is working on a plan, dubbed “productive working capital”.

It is said the plan will allow lenders to procure the funds needed by manufacturing units in an optimal manner, ensuring the loans are actually used for boosting production and staving off inflationary effects.