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How Banks Develop Financial Markets
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Jalal Rasulov, Managing Director of Bank Keshavarzi |
The traditional approach to
financial markets changed after the Industrial Revolution in proportion to
economic developments. After the1950s, the new approach to the financial
sector was changed from a limited, one-dimensional approach to qualitative
promotion of services. Since a decade ago, expansion and development of the
financial markets led to positive effects in economic fields.
During the past two decades,
the Iranian financial market has failed to break new grounds due to such
problems as inefficiency of the capital market and dominance of the monetary
market, lack of active and efficient stock and commodity bourses, lack of an
outside the bourse (OTC) market or a consolidated primary market as well as
the scarcity of major players and financial and traditional institutions.
A major share of the
performance of the country’s financial sector during this period has been
accounted for by commercial and specialized banks (a bank-based financial
basis). Although there were retirement funds, insurance firms, investment
companies, bourse agencies and other financial and credit institutes and
funds, the banks enjoyed the lion’s share. Based on figures produced in the
1990s, the share of the capital market in the country’s financial sector stood
at about 3%. However, in advanced countries with an active and dynamic capital
market, sometimes more than 70% of finances for plans and investment projects
are carried out by this market.
Absence of other financial
institutes and institutions, limited financial tools, not attracting
international capital, foreign liabilities, credit obligations for banks,
prosperity of unofficial market and, sometimes, state control over banks
during the Iraqi imposed war against Iran in the face of international
sanctions, oil shocks and commercial cycles and other domestic and
international limitations created a complicated situation. Therefore, during
the studied period domestic financial markets were largely stagnant and lacked
initiative drive. Domestic economic problems including unemployment, low
productivity of industries, consecutive drought and so on; added to the
country’s woes.
The Approach
Taken by Domestic Banks Must Be Reviewed:
Generally
speaking, each economic system is divided into a real sector and a financial
sector and optimal performance of any system depends on the efficiency of
those two sectors.
The above classification
took place during development of economies and expansion of financial markets
and their active institutions. Banks are major members of any given country’s
financial institutions that enjoy a considerable share of any market. During
the past one or two decades, especially since the beginning of the new
century, banks had tried to attract clients by providing varied services and
in addition to increasing their share of the financial market, stabilized
their position. Today, banks are present in various investment opportunities
by taking advantage of mobilizing people’s deposits and instead of earning
revenues resulting from the difference of the interest rate, they have turned
into major players in financial and money markets and reap remarkable profits.
Therefore, domestic banks
were facing growth requirements under the current competitive and changing
conditions that made adoption of a new approach inevitable. This mainly
started since the Third Economic Development Plan and led to basic
developments within the framework of strategic reforms of banks. In addition
to these changes, which affected performance and internal organization of
banks, developments happened outside the domestic economy that accelerated and
guaranteed the creation of the atmosphere needed for the development and
improvement of performance of the country’s financial institutions. Those
developments included:
1. Efforts to speed up the
approval of the capital market law and dividing the supervising authority of
the money and capital markets;
2. Emphasis on more
endeavors for attracting foreign investments;
3. Emphasis on the
independence of the Central Bank;
4. Controlling liquidity
growth and curbing inflation;
5. Emphasizing more
development of indirect instruments of monetary policies, especially bringing
more resilience to application of bank interest rates;
6. New finance approach
through the capital market;
7. Geographical expansion of
the stock exchange and appearance of other financial institutions in the
country including commodity bourse and the possibility of more participation
and investment by people and development of the capital market;
8. Design and use of
investment funds and stocks basket for the development of the capital market;
9. Accepting laws for
fighting money laundering;
10. Publishing bonds and
diversifying use of financial and monetary instruments;
11. Reforms and changing the
approach of state-run banks and bolstering them through increasing their
capital;
12. Presence of private
banks in the country and trying to enforce laws for monetary institutes and
funds other than banks. |
