Iranian Lenders Hobbled by Big Bank Qualms

EghtesadOnline: Iran's banking network has historically had a robust presence in Europe, offering services to Iranian merchants and facilitating trade transactions between the European Union and resource-rich Iran.

News ID: ۷۷۴۶۹۵

19 March 2017

With the onset of nuclear sanctions that targeted Iran's banking system, domestic banks were gradually cut off from the global financial system. The timing of the embargo coincided with the global financial crisis that eventually led to the overhaul of many of the past banking regulations.

With the lifting of sanctions in January 2016, it looked like the moment had come for Iranian banks to reengage in the global international scene but so far that has proved a Herculean task.

"It's not that we have not normalized our operations; in fact we have gotten all the licenses we need to do our normal banking work but problems remain," says Mohammad Reza Fatemi, managing director of Bank Sepah International Plc, a London-based lender owned by Iran, according to Financial Tribune.

In an interview with Financial Tribune, Fatemi noted that while in theory everything has fallen back into place, the reality has been far from satisfactory for Iranian banks.

"Of course, we're doing what is required from a bank such as opening LCs, offering bank guarantees and financing projects, but the lack of correspondent relations with major European banks has hampered our efforts to fully capitalize on sanctions relief," he said.

The bank is among a handful of Iranian-owned banks based in Europe, which have been connected to Target2– the leading European platform for processing large-value payments, meaning that the bank is now allowed to conduct euro transactions.

Since Iran is barred from dollar transactions due to US residual sanctions, euro transfers are crucial to the country.

The Central Bank of Iran recently announced that as of the next fiscal year (starting March 21), all official reports will be prepared in euro and not the US dollar.

According to Fatemi, big banks' fears have cast a heavy shadow on these banks' operations. He traces these restrictions mainly to "extraterritorial" US sanctions that punishes every individual or entity, be it American or non-American, which does business with Iran.

About a dozen international banks, mostly European, have been stung by US penalties for sanctions-busting totaling nearly $14 billion since 2009, making them think twice before reengaging Iran.

Progress in the Making

This is not to say that no progress has been made. Fatemi believes that the combination of US restrictions and fear of previous sanctions has been potent enough to deter big banks from reengaging Iran. And big banks are what Iran needs to finance its big projects.

"Despite all the push from British politicians and European officials, big banks have not completely gotten over their fears, choosing instead to heed warnings from their compliance departments that working with Iran still involves risks," he said.

Fatemi emphasizes the fact that European governments have not been "totally" successful in persuading their banks to work with Iran, since most of these lenders are "private" entities, which has further complicated efforts to win them over.

Another factor highlighted by Fatemi is the outdated framework that Iranian banks operate under–a legacy of years of isolation during the fast-paced changes that swept the global financial sector in the years that followed the sanctions period.

In a press event this week, Masoud Khansari, the head of Tehran Chamber of Commerce, Industries, Mines and Agriculture–the country's biggest private-sector assembly–said it was wrong to assert that banking relations in the post-sanctions era have not been smoothed since over half the payments  are taking place in the form of L/Cs. He, however, admitted that major banks are still reluctant to pitch in mostly due to Iranian banks' own internal problems and external problems emanating from the US embargo.

Khansari and many other private-sector players are hoping that with the passage of time all these problems would go away.

Fatemi and his fellow bankers share their optimism, although their current path has been paved with difficulties.