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Challenges of
Private Banking in Iran |
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The novice private banking sector of Iran faces a number
of challenges that reflect the nature of the market in which they function
in and systemic factors that naturally affect private banks. |
Over the past five years, five new
private banks have been established in Iran and are currently offering
services within the country's financial markets alongside state-owned banks
and two credit institutions.
Historically, the financial markets of
Iran have suffered from incompetence and a lack of transparency. Privatization
is seen as the only way towards competent and transparent markets. Moreover,
the necessity of this issue becomes more explicit when one takes into account
the possibility of future strong economic ties with other countries and the
potential of joining international financial markets. In this light, many
industries and services in society need to cut down costs, improve the quality
of their products, and effectively restructure the way they do business.
Improving the efficiency of financial markets is a prerequisite for increasing
efficiency in markets of other goods and services.
Thus, the establishment of fair and
competitive conditions for the newly emerging private bank sector along with
diagnosing problems faced by and finding solutions to those problems are among
the main duties of the relevant institutions led by the government.
Understandably, there are a number of
challenges facing Iran's emerging private banking sector such as problems
related to the start of operations, liquidity management, monetary policies
executed by the Central Bank, deposit attraction and systematic risks.
Certainly these problems are not peculiar to the private banking sector alone;
rather, they affect the entire banking system of the country as a whole.
However, the special position of private banks within the economy calls for
more attention to such problems.
Getting the Ball
Rolling:
Until recently, the banking credits
market was monopolized by state banks. The launching of private banks
disclosed a broad and considerable demand for a variety of banking services
and the growing need within society for such services. With respect to this
specific historical background and in line with meeting the demands of the
society, a few private banks, which managed to launch their operations, faced
rapid quantitative growth in demands for various quality services. This
phenomenon called upon private banks to meet certain requirements in a limited
amount of time. They include the a speedy mobilization of resources, the
employment of a new work-force, rapid training of manpower, the establishment
of branches in big numbers, the establishment and expansion of administrative
organizations, and the creation of organizational, hardware and software
structures and infrastructure. These problems are commonly present at the
launching of any new economic institution; yet, the existing economic
conditions coupled with growing demand within society gave rise to challenges
beyond ordinary problems in the establishment stages of private banks.
Liquidity
Management:
In addition to the said
challenges, functional and environmental conditions including regulations,
laws, the role of administrative and bureaucratic structures, and slow
progress of administrative activities in Iran have brought about other
challenges for private banks. Moreover, resource mobilization is more costly
for private banks compared to state banks. There are a number of explanatory
factors for this. For instance, current and Gharzol Hassaneh (interest-free
loans) accounts in private banks constitute a very trivial share in the total
deposit, meaning a private bank needs to absorb short-term and long-term
deposits of depositors by offering suitable conditions. This is while the
share of low-cost current and Gharzol Hassaneh deposits is much higher in
state-owned banks.
Furthermore, state-owned banks have
access to cash resources more easily and face lesser problems in their
liquidity management given their broad dimension of activities and the greater
support they receive from the Central Bank. Thus, private banks need to pay
more attention to their liquidity management.
Another issue that increases
expenditures is the fact that the bank sets out to allocate more resources in
order to preserve resources that would otherwise be paid out to costumers
through loans or other similar mechanism. Therefore, rather than making
investments the bank strives to preserve liquidity or assets which logically
leads to an increase in the bank's overheads.
Challenges
Related to Monetary Policies:
Monetary policies are
sometimes executed by monetary officials with little attention paid to the
special condition of the newly-established banks. For instance, the
unification of the legal deposit s rate for sight deposits and savings in the
2004-2005 period imposed huge spending on private banks. Previously, the
volume of long-term deposits was less than Gharzol Hassane deposits (current
and saving accounts). But the existing resources in private banks, which were
supplied mainly by long-term deposits, came under severe pressure with the
unification of these two rates and with an increase in the rate of investment
deposits. In this situation, new rates should at least be given to new
deposits or private banks should be allowed to distribute participation papers
equal to legal deposits.
Under such
conditions, Parsian Bank followed a specific and precise policy thanks to
efforts made by its management and personnel. Revenues obtained from
facilities or investments were transferred to depositors directly and the bank
strived to mobilize necessary resources through its other services in order to
pay a rational and competitive interest to various shareholders of the bank.
Therefore, Parsian Bank put "customer satisfaction" at the top of its
activities. The result of this policy has been growing investments, the
attraction of more capital and new investors.
Follow-Up of
Payment of Facilities Installments:
One barrier in the way
of private banks is the issue of pursuing payment of facility installments.
Compared to state banks, private banks have little capital and are forced to
be profitable institutions because of being private and belonging to the
people. Settlement of these two issues requires that these banks implement an
optimal system for the circulation of their resources. The outstanding
payments delay the circulation of resources which influence the profitability
of private banks. On the other hand it prevents the banks from fulfilling
their commitments and responding to investors given their limited capital
resources. For state banks, such problems are of less importance and concern
because they have collected huge capital over successive years of activities
and are not forced to be profitable or pay competitive interests to
shareholders thanks to being run by the state. Under such conditions state
banks do not have such motives for pursuing their outstanding payments.
Time-bound expenditures and the complicated process of filing complaints and
pursuing outstanding payments have forced these banks not to take the issue of
arrears seriously.
As a result of
the procrastination of installment payments, those who receive banking
facilities will earn more interests than incurring expenses. This has
unfortunately caused the culture of procrastination of loan repayment to
become prevalent among receivers of facilities. One of the main problems
facing private banks is bringing together the experiences of those in the
state-run banks with their special culture and business model to the private
banking world which requires completely different modes of behavior.
Attracting
Customers:
There also exist a number of
barriers that at times discourage potential costumers from investing their
money with the private banks. Bureaucratic "red-taping" and long process of
receiving various permits and agreements along with non-financial expenses are
all barriers that prevent customers from entering the services markets offered
by the banks. The banks also have a problem attracting customers to monetary
markets and selling services and payment of facilities to them. In other
words, codifying marketing policies and finding new customers are among
important strategies of a private bank.
Systematic
Risks:
The market is also filled with
systematic risk which makes it a difficult reality for the banking industry,
specifically private banks. As active factors of financial markets, the basket
of banking assets is comprised of activities of other markets (companies,
tradesmen and people). The bank will sustain loss, in case a facility receiver
does not have enough resources at his disposal at the time his facility
repayment is due. Market fluctuations cause various industries to experience
periods of stagnation and flourishing. Here, the bank strives to act in a way
that granted facilities would be distributed among various industries and in
different sectors so that it would sustains less damage as a result of the
emerging problems in various markets.
In a situation when all goods and
services markets face problems as a result of a general stagnation within the
economy or strong fluctuation of banking interest rates and broad changes in
other macro economic factors, the asset baskets of various industries also
cannot reduce the banks losses. Since banks have the least fixed asset and the
highest amount of cash debts (deposits) compared to other industries, they
sustain the most losses. In addition to the factors mentioned above, risks
imposed by political, managerial, legal and regulatory changes have a graver
impact on newly established private banks than state banks.
In conclusion, the novice private
banking sector of Iran faces a number of challenges that reflect the nature of
the market in which they function in and systemic factors that naturally
affect private banks. The discussion above has outlined a number of these
problems and has shown that Iran's relatively new private banking sector has a
long uphill battle ahead of it in the future. |
