Iran’s Banks: Are they ready?

The lifting of sanctions has created a new dawn for the Iranian economy, its booming stockmarket is defying global trends and investors are piling into the country looking for new opportunities. The country’s leaders and people are hopeful greater interaction with the rest of world will create jobs and economic growth after years of recession and stagnation resulting from the sanctions regime. One sector that is desperate for outside investment and involvement and which is key to helping the economy grow and modernise is banking.

To develop a modern economy access to capital is of course vital but the Iranian banking sector is in a sorry state. Government instructions for banks to lend to small businesses has undoubtably helped these firms but it has weakened the banking industry in the country as an economy in recession has meant loan delinquencies have risen sharply.

So perhaps the most worrying indicator for Iranian banking sector is its high non performing loan rate – supposedly around 15 percent across the industry, but reckoned by some to even be higher. Some analysts have also speculated that a “bad” bank might have to be created to deal with all the non-performing loans. The other big issue faced by the same institutions is their lack of capital. There is an industry wide capital adequacy ratio of around 7 percent across all banks, compared to a regional average of 15 percent, a huge shortfall.

On top of this the regulatory regime is also massively outdated, Iranian banks are still using the Basel I framework for capital requirements while the rest of the world is using Basel III. The net result of high non-performing loans and low capital ratios could be that some banks have negative capital – this is not a state of affairs which will spark international investment.

Iranian banks need international experience, but it is difficult to see many other institutions wanting to work with them – apart from the financial issues there is the fear of sanctions being re-imposed and the reputational damage that association with poorly run Iranian banks could occur.

Some institutions like the China Development Bank (CDB) have continued to do business and will carry on now regardless. However the CDB while large, does not have a track record of providing advice, or investing in other banks, its remit is too lend to governments or lend to Chinese firms in order to help develop infrastructure. Iran will certainly benefit from this, particularly as China promotes its Belt and Road policy, the latest chapter in this story is a new freight line from Yiwu in China to Teheran.

However all is not lost – as the post-sanctions landscape becomes clearer bankers will start to pluck up the courage to start doing more business with the country, an improving economy (highly likely) will see commerce start to pick up and this in turn should help with the non performing loan rate. Bank Parsagad and Bank Mellat, two big players in Iran are looking at expanding abroad and perhaps most significantly the country was reconnected to the SWIFT network, allowing international financial transfers to be made much more easily which will all help to smooth Iran’s re-acceptance into the global economy.



Categories: CDB, Frontier Markets

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Trackbacks

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