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Restructuring Iran’s Banking Sector
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Dr. Kooros Sadighi,
Senior Economic Advisor, Management and Planning Organization |
The development of efficient
financial markets is a complex process that requires competitive financial
institutions, substantial infrastructure, and a sophisticated legal and
regulatory framework.
Over
the past two decades, Iran’s financial market has been dominated by wholly
government-owned banking institutions, operating within a restrictive
administrative regime and behind strict exchange controls. Given the
controlled rate of return environment, state-ownership of all banks, the
considerable role of government imposed directed credit and pre-approval by
the Central Bank of most of the banks large loans and foreign exchange
activities, prudential regulation and supervision has in the past played a
limited role in the operation of the banking system.
No nationally integrated
money market has as yet been developed, and most banks lack the skills to
develop new products that could create competition in the financial sector.
Until recently banks did not lend to other banks except if allowed so or
instructed by the Central Bank. This prohibition has now been lifted; banks
have been encouraged to establish an interbank market.
This measure has, however,
been largely ineffective as very little interbank lending has occurred and no
formal market structure has emerged. Insofar as they have been effective,
direct monetary controls have led to an overhang of liquidity, financial
repression, and disintermediation. Thus the following principles should guide
the restructuring of Iran’s banking sector:
(i) Monetary policy needs
to be insulated from the pressures created by the government’s need to finance
its fiscal deficits. A comprehensive program to develop public debt management
and government securities market is required, in order to allow the government
to meet its financing needs through the market.
(ii) The money and
interbank markets need to be strengthened and better integrated. The Central
Bank should help develop the market infrastructure—including the payment and
settlement systems, and the legal and regulatory framework of the markets—and
to introduce suitable market instruments and techniques.
(iii) The banking system
needs to be restructured to create healthy banks and foster competition.
Financial restructuring has to deal with nonperforming loans, problem banks,
and strengthening the managerial capacity of weaker banks, which may be poorly
equipped to adapt to the newly competitive environment.
(iv) The supervisory and
regulatory framework needs to be reinforced. It is necessary for the Central
Bank to put in place safeguards—in the form of minimum capital standards,
criteria for provisioning (that is setting aside reserves) for doubtful loans,
limits on loan concentrations, collateral requirements, and enforcement
mechanisms—that encourage prudent behavior. Financial reporting and disclosure
standards are also needed to improve transparency, so that the market and the
authorities can play their proper roles in ensuring financial discipline.
(v) The technical capacity
of the Central Bank needs to be strengthened. Reliance on indirect instruments
requires that the Central Bank be able to project the demand for, and the
supply of, currency and bank reserves and estimate their effect on broader
credit and monetary aggregates. This requires timely and accurate
data—including early warning indicators—on financial sector developments as
well as Central Bank’s balance sheet.
(vi) Experience suggests
that implementation of indirect instruments is both easier and less likely to
suffer reversals if done gradually, in line with the speed with which
concomitant measures can be introduced and financial markets developed.
Before concluding, it should
be noted that both the third and the fourth Development Plans have envisaged a
comprehensive program for reforming the banking system by allowing private
banking and strengthening the financial position of the existing state-owned
banks through recapitalization.
Also, legislation permitting
the establishment of foreign-owned banks in off-shore free trade zones has
been enacted. However, the state-owned banks can be expected to continue to be
the dominant players, and for these, greater freedom in credit allocation and
pricing is envisaged, while at the same time prudential regulation and
supervision is being strengthened.
Non-bank finance is also
being enhanced, and the Tehran Stock Exchange has re-emerged as a significant
and active institution. |
