Iran’s Banking Sector Wrap-Up in
11th Administration Tenure
By Mahdi Goodarzi & Mojde Rezaee
As one of the major sectors in each country, the banking sector is always faced with challenges, which call for special attention by governments. Granting license to banks and credit institutions unjustifiably, insufficient supervision by the regulatory body, weak monetary and financial discipline, forex market instability and rates non-unification, speculative activities draining most liquidity available along with the weakening of Iranian banks’ fame were among those with which the 11th administration was grappling in this field; intensified by international sanctions, banks’ performance was hit even harder.
Dividing its activities over this 4-year period into international and domestic categories, the government took great steps to improve Iran’s face in the world. Banking sanctions had made impossible direct forex transfer without resorting to brokers and through the SWIFT mechanism and most used to be done in an informal manner via exchange houses and intermediary companies registered in other countries; a completely non-transparent and costly way unlike common international methods. After the JCPOA was struck, negotiations for collaborating with banks in the region, south-east of Asia and Europe started, which lowered the cost of fund transferring to a great extent, although it will take long for banking relations to normalize. Another important issue was the transparency in international interactions, which prepared grounds for re-establishing trust in Iran’s financial system in general and Iranian banks in particular.
In fact, within one year after JCPOA implementation, significant improvement was seen in lifting constraints over Iranian banks’ interactions with the international banking system. However, many Iranian banks were still not fully benefiting from that sanctions-free atmosphere mainly due to outdated executive, operational and supervisory structures, although some private ones managed to meet international criteria, normalize relations and receive the necessary licenses to open branches in other countries, mostly Europeans under the same circumstances.
Irrespective of some problems, however, using credit and getting access to the financial messaging system, joining euro payment system and boosting Iran’s credit ratings by Capital Intelligence to +B fall among the most important outcomes of JCPOA implementation during this time.
In addition, grounds became ready for effective collaboration of Iran and well-known export credit agencies in the world, which promised a brighter future for foreign finance for domestic projects, as stated in Donya-e Eqtesad newspaper. Besides, after the removal of the UN, EU and US secondary sanctions, the risk of entering into business with Iran reduced significantly, which itself dragged down the expenses of financing and raised foreign banks’ credit ceilings for lending to Iranian banks and companies.
It is worth mentioning that despite the lifting of some sanctions and reforms by the CBI and a few Iranian banks’ attempts to make their operating structures compliant with the international system, its effects were not tangible; the main reasons were:
- primary sanctions still being in place;
- US officials threatening to impose new sanctions on Iran every now and then; and
- serious attempts by Persian Gulf countries to promote Iranophobia and Anti-Iran Sentiment in the world.
Considering the above said, most foreign companies and investors as well as international banks were left with fear and ambiguities, which had resulted in low-speed collaboration with Iranian parties.
From a domestic point of view, the CBI found out that establishing relations with foreign banks was subordinate to a collection of internal reforms, having assessed modern international banking requirements in the post-JCPOA atmosphere. Due to years of sanctions and therefore, lack of direct relations with the global banking system and not upgrading rules and regulations, Iranian banks were left behind their foreign counterparts, which had applied upgrades in their procedures after the bubble burst in 2008.
For starters, the administration focused on creating more transparency in the banking system. In fact, banks’ unhealthy structure and postponed/doubtful/non-performing claims had made accounts un-compatible with international standards. Under the 11th administration, the CBI mandated banks to prepare IFRS-based financial statements, since their balance sheets were the first item investigated by foreign counterparts in collaborations.
Additionally, in March 2016, the Iranian Parliament approved the Anti-Money Laundering/Fighting the Financing of Terrorism law and declared its commitment to implement an action plan; this finally directed the Financial Action Task Force (FATF) to suspend counter-measures in June 2016 for 12 months in order to monitor Iran’s progress in implementing the Action Plan. In this regard, an official expressed hope that Iran would be deemed in compliance by the FATF when the deadline is met, which would stop countermeasures altogether.
Foreign exchange rate unification, unfortunately, is an issue not completed by the government. A great part of this inability is rooted in the remaining international constraints. According to the former Governor of the Central Bank of Iran, there are 3 requirements for this to happen, which are:
- defining how to deal with country’s foreign currency commitments (i.e. the difference between foreign currency rate when opening an LC and the unified rate);
- announcing the country’s current undertakings/liabilities, including trade usances and finances; and
- defining the relations between factors involved in opening LCs, i.e. banks, the central bank and foreign counterparts.
Of the latest attempts done in line with improving the country’s banking system is the recent letter of the CBI, which was announced only 1 day after the presidential election; this letter addressed the requirements for the country’s monetary and banking system in the 6th five-year development plan and among its policies are organizing unsupervised institutions and monetary markets aimed at improving transparency and health along with lowering the NPL to ratio.
Considering both strengths and weaknesses of the 11th administration, its performance is interpreted as positive by experts in general. It seems that during the past 1 and half years, the openings in relations between Iran’s banking system and that of the world along with the enthusiasm in this space to take steps towards professional banking emit signs of improvement and how it deals with the world, which has itself been strengthened by the re-election of President Rouhani, which promises the continuance of such a path.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
To contact reporters: Inter@agah.com