Iranian President Hassan Rouhani has committed his second administration to rectifying problems in the banking system and removing what he described as unhealthy competition, Islamic Republic News Agency reported on August 29. Several banks in Iran are bordering on insolvency, while the country’s credit institutions are operating with high debt ratios.

In recent years, the Central Bank of Iran (CBI) has struggled to begin seriously addressing problems in the banking sector. However, it has made some noteworthy progress, including forcing many poorly performing credit institutions to merge to lower their overall debt level. The under-performance and investment choices of some such institutions, which typically offer several percentage points more in interest on deposits than is offered by banks, has in the past year even sparked street protests organised by disgruntled customers.

Such publicly expressed anger is not uncommon among Iranian investors. In early July, groups of angry investors descended on the Tehran Stock Exchange and hoisted banners after suffering heavy losses on the shares of a firm which had drawn in money that tripled its share price triple across one month.

Rouhani - re-elected in May as voters overwhelmingly chose to give the pragmatist and centrist a chance to finish what he started in his first term rather than take their chances with a hardliner – and his team of largely US-educated ministers know that there is little time left if they are to turn around Iran’s beleaguered banking system. The president spoke of some of his bank industry concerns and aims on the occasion of Iran’s Government Week. He said his administration would work to raise the bank’s overall level of working capital.

“One of the main programs of my administration is to reorganise the banks, implement articles of the Constitution, remove monopolies and attract foreign and domestic capital, among other matters,” Rouhani remarked.

Haemorrhaging money
It is clear that many Iranian banks are haemorrhaging money. Back on May 27, it was reported that the central bank is looking to merge lenders weighed down by bad debts in order to meet international debt reduction standards. Such consolidation is seen as necessary to enable Iran to reconnect with the global banking system.

Many of the vast amount of non-performing loans (NPLs) burdening state banks, as well as some private banks backed by governmental entities, can be attributed to loose lending policies permitted under the Ahmadinejad presidential administrations in power from 2005-2013. Today’s borrowers must accept a terribly high benchmark interest rate of towards 20% and many who apply for a loan have no hope of meeting collateral demands.

The banks, meanwhile, are fretting about plans to push down interest rates. As in 2013, some may refuse to make the move, fearing it might trigger bank runs and a total collapse in savings.

Iran’s mortgage market is another huge headache. It doesn’t meet the needs of contemporary Iranians in the slightest. The weak demand for property in the past few years demonstrates this. Tehran is thought to have half a million vacant properties. Builders and sellers are unwilling to drop asking prices which buyers can’t deal with due to the lack of available credit. Property owners would rather hold on to their assets in the hope that banking reform might eventually unlock lending liquidity.

During his re-election campaign, Rouhani released a set of “developmental economic policies”. The 68-year-old Rouhani says the banking sector’s deficiencies are to be partly addressed by promoting the CBI’s supervisory role, improving government fiscal discipline, bringing forward appropriate monetary policies and improving the business climate for lenders. 

Reforming the banking sector to the point that it can be reconnected to the world financial system will require making Iranian banks adhere to the Basel III international capital adequacy standards, provide real transparency and regulatory compliance and introduce a regulated approach to their loan facilities. 

Loan-friendly banking please

Earlier this week, the CBI, pushing for loan-friendly banking, announced that all banks should now offer savings rates at a maximum 15% while at the same time offering loans tied to interest rates of more than 18-19%. Inflation currently stands at around 10%.

Peyman Ghorbani, CBI vice governor for economic affairs, said of the measure: “All banks must offer this new lower interest rate for deposits from [the current Persian calendar month].”

He added: “According to Islamic banking, the interest rates will be paid in cash at the set amount after the new measure comes in.”

The plan to lower rates was initially launched last year, but several banks have been reluctant to lower their rates fearing bank runs by depositors.

Iranian banks doled out IRR1.53qn ($40.2bn) as credits across the economy in the first four months of the current year, up 18.4% y/y, the CBI said on August 21.

Unofficial lending mechanisms are also being addressed as part of the drive for banking reform. Carmakers offering saving rates of over 27% have been brought into line in recent weeks. Their saving accounts, tied to planned vehicle purchases, can now not be above 18% in the current year.

The country’s two largest carmakers - Iran Khodro Group and SAIPA - have used offers that give new car buyers discounts of around 20% on their products if deposits are placed 24 months in advance of a car purchase. However, consumers have been pulling out of buying their earmarked car ahead of delivery and taking the cash lump sum instead.