MRC: Most Banking Woes Unrelated to Sanctions

EghtesadOnline: After reviewing Iran’s conformance to a host of international banking regulations and standards, the research arm of the parliament has noted that the country’s banking woes are rooted internally and called for directing attention and resources to improve the system.

News ID: ۷۸۲۶۰۱

15 May 2018

“Despite the common perception of the people and some of the country’s elite, a considerable portion of problems in Iranian banks’ correspondent relations with global counterparts is rooted in non-sanction reasons,” the Majlis Research Center said in its report published on its website.

The think tank, however, acknowledged that hard-hitting financial sanctions of previous years effectively cut Iran’s ties with global partners and made it fall behind from upgrades in international regulations and standards.

The analytical report comes as US President Donald Trump violated Iran’s nuclear deal with world powers and announced on May 8 that he will be reimposing the hardest possible sanctions against Iran, according to Financial Tribune.

In its report, MRC first takes a thorough look at all the relevant global banking standards and regulations, namely international ISO banking standards, Basel standards devised by the Basel Committee on Banking Supervision, International Financial Reporting Standards, Reports on the Observance of Standards and Codes, the Financial Sector Assessment Program of the World Bank, and the Anti-Money Laundering and Combating Financing of Terrorism regulations of the Financial Action Task Force.

Then, it gauges the adherence of Iranian banking system to ISO, the same standards and regulations as the most relevant and globally-accepted norms.

ISO Banking Standards

According to MRC, Iran has received ISO 8583, ISO 7810, Payment Card Industry Data Security Standard, Europay, MasterCard and VISA (EMV), ISO 9362, ISO 7811 and ISO 9564.

However, ISO 8583, ISO 21188, ISO 13616 and ISO’s standards for controlling counterfeiting and anti-money laundering activities have not been updated.

“The technical and technological wings of Iranian banks are not tackling fundamental problems and their hurdles in this section can be removed. So the most important measure here is to update Iran’s banking infrastructures with global versions,” the think tank said.

Basel Standards

Capital adequacy ratio, corporate governance, rating customers, refraining from speculative activities and double investments of banks with each other are the main tenets of Basel standards.

As MRC outlines, CAR is one of the biggest weak points of the country as the Central Bank of Iran still operates based on the more than two-decade old Basel I standards that require a minimum CAR of 8%.

Even as many banks are preparing themselves for a minimum CAR of 12% required as part of Basel III (15.5% for major lenders), “the average ratio in Iran is less than 5%”, it said.

The parliamentary research center refers to reduced profitability of banks and stacking of losses in recent years, in addition to reformative and supervisory measures not taking a real hold as major reasons behind the lack of increase in the base capital and capital of banks. It points out that as many major banks posted high losses during the fiscal 2014-15, even Bank Melli, the nation’s biggest bank, registered a below zero CAR.

A high volume of non-performing loans and assets with high risks was referred to by the center as another reason behind the low CAR of Iranian banks.

“Even as official numbers announced NPLs to be declining, the truth is that many banks register liabilities as new facilities to show a lower volume of NPLs,” MRC wrote.

“The considerable thing is that among the three kinds of NPLs, more than 60% of Iranian banks’ NPLs are classified ‘unlikely to be cleared’ which is the worst kind.”

Lack of acceptable adherence to corporate governance fundamentals was identified by the research center as another major issue whose resolve hinges on banks creating new corporate structures, regulations and norms.

IFRS, FSAP and FATF

In case of reporting standards, MRC writes that “unfortunately only two counts of global financial reporting standards have equivalents in Iran”, namely IAS 11 and IAS 26. There are 17 other standards that lack a national equivalent, indicating that Iran is far removed from the updated versions of IFRS.

On the other hand, “some reporting standards are defined in Iran have no equivalents in IFRS”.

The think tank notes that not much attention has been paid to FSAP in Iran, but adds that from a total of 43 basics gauged by FSAP, Iran is fully compliant and transparent in case of 20 and ranks “relatively compliant and transparent” vis-a-vis most other criteria.

On Iran’s standing with FATF, the parliamentary entity first points out that Iran has been on average 18 and 14 years behind the world in adopting AML and CFT laws respectively.

It also notes that Iran has ranked first (worst in the world) in the Basel AML Index since 2012, except for 2013 when it ranked second behind Afghanistan.

However, MRC considers FATF’s continued refusal to take Iran off its blacklist as unjust in the face of Iran’s consistent reform measures. What is more, it puts down Basel’s dismal ranking of Iran to the fact that FATF’s assessment plays a heavy role (about 60%) in the list and US and its allies influence their voting and flex muscles in the intergovernmental organization against Iran.

Conclusion and Proposals

All-in-all, MRC writes that “in order to develop Iran’s international banking relations, it seems that the emphasis must be on internal reforms of the banking system, not giving extra privileges to foreign banks for them to establish correspondent banking relations”.

The center directs policymakers to note that Iran’s lack of banking relations is not necessarily tied to the halt or ease of sanctions, because “even if the sanctions are lifted completely, the aforementioned barriers will continue to hamper Iran’s international banking links”.