Dr. Jalal Rasoulof, Managing Director of Eghtesad Novin Bank

When the Islamic Consultative Assembly approved an act related to establishment of private banks in Iran, producers were more delighted than other people because the new banks were supposed to discard past ideas and instead of engaging in business, bolster production. In this way, their emergence would have benefited domestic producers.

But this did not happen and private banks followed suit with their state-run predecessors. Therefore, Association of Production Advocates of Iran invited Rasoulof, former managing director of Agriculture Bank and current managing director of Eghtesad Novin Bank to relay demands of producers to directors of private banks and to inform them about obstacles facing those banks.

Since capital market is very profitable in advanced countries, people are not enthusiastic about the money market. For this reason, all people active in the money market are seeking a method to sell their services to people one way or another. Insisting on usury-free banking has practically taken banks into capital market while duties of money market are not compatible with such activities.

Issuing participation bonds is one of the main ways for introducing banks to money market, which is probably the main method, used by banks to pass through money market toward capital market. Rasoulof noted that issuing participation bonds and investments made by banks have taken them into the capital market. In recent years, a major share of the capital market has been monopolized by banks. His statements are not far from reality in that whenever capital market has been facing problems over past years, banks prevented stock market’s index from plummeting through dealings or paying loans.

Rasoulof pointed to economic situation of the country, adding, “At present, banks are practically taking care of various economic sectors including housing, agriculture, industries and mines. During recent years, share of banks from agriculture, housing, industries and mines as well as export and general service sectors has increased to 22 percent, 29 percent, 38 percent, and 11 percent, respectively. In fact, 89 percent of banks resources are circulating in the above sectors.”

“In fact, we need structural reform because banks are doing their job right now. Balance of facilities in the banking system to balance of deposits was 52 in (Iranian year) 1376 (1997-98), but the figure reached 89 in 1383 (2004-05). This shows that banks have redirected part of their capital to production centers due to state policies.”

Banks account for more than 85 percent of capital market and this figure is a clear indication of their role in that market. Of total facilities granted by banks in 2004, 5.6 percent was disbursed by private banks, which also accounted for 5.4 percent of facilities disbursed in production sector. Meanwhile, the housing sector received the lion’s share of private banks’ facilities and credits disbursed to other sectors were not remarkable. Out of total bank deposits in 2004, 6.1 percent went to coffers of private banks. Rasoulof believes that the money at the disposal of private banks cannot give them a considerable clout in money and capital markets of Iran. Although private banks have not played a considerable role in domestic economy thus far, it seems that new measures taken by the government has paved the way for high-profile presence of those banks in domestic economic activities.

“Private banks are facing many challenges in Iran. The main challenge is that such banks have not yet been taken seriously by the government. Many officials still expect private banks to act like state-run ones which is impossible.”

Rasoulof then explained about capital of private banks and said, “If private banks intended to increase their investors and stockholders, this will cause tension in domestic economy. On the other hand, austere regulations are considered by the Central Bank of Iran for private banks, which seem to be the source of existing problems. At present, private banks are established according to regulations governing state-run banks.”

Experts believe that Iran’s private banks are also facing problems with regard to communicating with their foreign peers. Rasoulof said, “Fortunately, current conditions have encouraged foreign investors to transact with Iran’s private sector, but needed grounds are still lacking.” The profit rate of facilities granted by private banks is not much different from state-run banks, which is considered by financial experts, as being an obstacle on the way of investors using private banks. The managing director of Eghtesad Novin Bank further noted that this problem should be addressed while producers have to change their attitude toward private banks.

Asked about shortage of private bank branches, Rasoulof stated, “If virtual banking is promoted, there would be no need to expanding bank branches. In fact, this is not considered economical. On the other hand, Post Bank is an efficient banking tool, which is not used to good effect in our country because citizens are not willing to use it.”

Rasoulof added, “Establishing private representative offices will greatly help banks. For example, Iran Insurance Authority has thousands of private representative offices and some of its activities are carried out through those offices. This can be also be done for banks as well. In fact, banks can establish private representative offices.”

“However, foreign investment is the main challenge facing banks. Iran’s private banks have not been successful in attracting such investments and perhaps a major reason has been domestic regulations…private banks should be able to attract foreign investment and be allowed to consider suitable profit rates proportionate to their capitals.”

Perhaps different profit rates considered for offering bank facilities is the most important challenge facing banks. At present, banks provide their customers with various services, but this is not true about Iran’s banking system. Rasoulof also believes that a system of multiple rates should govern the banking system. He added, “There is no reason why a single rate should be considered for all investor and all economic activities. In fact, when a customer enters a bank, he/she should be presented with a list out of which they could choose their favorite service. At present, there is a certain rate in foreign banks for people who pay the profit at the beginning or they are offered priorities under different conditions.”

Referring to investment consultation, he said, “Some investors do not clearly know what to do with their money. On the other hand, there are other people who can use their money to good effect. Under such circumstances, banks can act as a link between the two groups.” Rasoulof noted that investment banks should be established in parallel to private banks to prevent unnecessary expenses. “In fact, a professional institutes links investor to entrepreneur. However, such consultants have not attained their deserved status in the country,” he said.

When asked about syndication, managing director of Eghtesad Novin Bank said, “syndication can greatly reduce the risks and lower the rates.”

Rasoulof explained about presence of insurance firms besides banks and called for more attention to be paid by those firms to providing profitable insurance services. He opined that establishing institutes for managing investors’ assets will prevent wastage of capital. Such institutes will greatly help investors in cooperation with private banks. “Sometimes, even investors are not fully aware of their assets and such institutes can help them in this regard and provide them with proper management of those assets.”

“Companies which grade their services and customers should ask for mortgage according to customer’s risk. However, grading customers is not possible in Iran due to lack of such institutes and officials should find a solution to this problem. In western countries there are institutes alongside banks which buy bank’s claims and collect them.” Such companies greatly reduce risks faced by banks and, therefore, act as a tool for collecting banks’ claims. Rasoulof said, “Buying and selling claims is usual in all financial systems of the world. This tool can help both investor and bank. However, since banks are not thinking about having overdue claims, they rapidly resort to legal action. At the same time, various services can be offered through various companies to boost revenues of private banks.”

Managing director of Eghtesad Novin Bank stated that, “When you talk about reducing profit rate of facilities, all banks oppose it. Private banks in Iran earn about 75 percent of their revenues through granting facilities, while corresponding figure for banks in advanced countries is 30 percent. If we took steps to increase revenues through changing the banking system, dependence of banks on profit rates would certainly decrease and they will not be too sensitive about reducing profit rates.”