CBI Says Resolute on Reforms

EghtesadOnline: Central bank Governor Ali Salehabadi said Tuesday the regulator is in the process of reforming regulations to help ease the people's access to financial services.

News ID: ۷۸۷۶۶۳

22 January 2022

"Banks must prioritize funding manufacturing companies and we also need to reform the banking system in accord with Islamic principles," Salehabadi was quoted as saying by IRNA in a meeting with economists on Tuesday.

Earlier this week, President Ebrahim Raisi in talks with  CEOs of banks underscored the pressing need for effective changes in the banking sector that has long been under systemic criticism.

"The existing banking environment must change based on justice and in the interest of the people,” president.ir quoted him as saying.

Raisi asked the senior bankers to set up a taskforce in coordination with the Central Bank of Iran to identify and find solutions to the “inherent problems” of the underperforming banking industry.

The taskforce, he said, should be mandated with rewriting rules, promoting transparency and facilitating the banking needs of the people and manufacturers.

Salehabadi is of the opinion that lifting banks' capital adequacy levels and improving lenders' financial statements to prevent money creation are crucial and the CBI is working to that end.

Financial statements of Iranian banks show most if nto all are struggling with capital adequacy ratios (CARs) below global norms.

A review of 23 banks showed the CAR of eight was below zero, six had a ratio between 0-4 and four between 4-8%.

Also known as capital-to-risk weighted assets ratio (CRAR), CAR is used to help protect depositors and promote the stability and efficiency of financial systems.  It is calculated by dividing a bank's capital by its risk-weighted assets.

Minimum capital adequacy ratios are critical in ensuring that banks have enough cushion to absorb a reasonable amount of loss before becoming insolvent and consequently lose deposits.

Currently, the minimum ratio of capital to risk-weighted assets is 8% under Basel II and 10.5% under Basel III.

Money issuance by banks is under stringent CBI oversight. The central bank has said it has taken measures to enhance oversight over the money controlled by banks. Money creation, or money issuance, is the process by which money supply in a financial system increases.

Economists and market experts have called on the CBI to employ special platforms to enhance its supervision of banks, namely their lending/deposit rates and dubious loan policies.

The calls and criticism of banks have gotten more vocal in recent years due largely to their ballooning bad debts and underperformance.