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August 2011, No. 60


Banking

2011, A Year for Heightened Competition in Iranian Money Market

State officials and high-ranking banking authorities have announced that the current Iranian calendar year (started March 21, 2011) can be considered a year for major changes in the banking system.

The economic development plan, whose first phase started late last year (first quarter of 2011) by reallocation of subsidies, also includes a plan for the banking system. The unique role played by banks in domestic economy has prompted stat officials to pay special attention to this sector for promotion of their developmental goals. The tenth government, as the executor of the country’s biggest economic plan, which includes reallocation of subsidies, has been reckoning on banks for this purpose. The effects of reallocation on the national economy will be evident this year the most important of which is expected to be serious shortage of financial resources for economic entities.

In addition to structural factors of the past, which caused shortage of capital in production sector, another reason for financial shortages is increased costs due to rising price of energy carriers. Therefore, the government and the Central Bank of Iran have tried to offer a monetary package for the current year which includes monetary and credit policies. Thus, they will follow an expansionary policy so as to make it easier for cash-strapped production units, which were grappling with stagnation last year and need money to change production technology, to weather the existing dire straits. The expansionary policy includes concurrent reduction of the interest rate on bank deposits and facilities.

Anyway, monetary officials believe that reducing the interest rate of bank deposits will decrease the cost of mobilizing resources in banks and will direct liquidity in the private sector toward production. Also, reduction of the interest rate on bank facilities will reduce cost of production. Past experiences have shown that limitations in the money market will cause banks to become more stringent on facilities due to shortage of cash. Alternatively, they will withdraw more of the Central Bank’s resources, thus expanding money basis, which in turn, increases liquidity and intensifies inflation.

Organizing unauthorized finance institutes, which are said to be in control of about 600,000 billion rials out of the Central Bank’s supervision, will be one of the most important tasks for the Central Bank of Iran in the current Iranian calendar year. Governor of the Central Bank recently announced that about 300,000 billion rials of those resources have been identified and are now supervised by the Central Bank. However, this is just half that figure and if the Central Bank of Iran failed to gain control over the rest of it, national economy may be seriously damaged. Last year, a large number of finance cooperatives which lacked a permit were organized and some of them were shut down. The Central Bank of Iran is said to be focusing on certain interest-free funds and finance institutes which are affiliated to military institutions.

Ignoring international standards, the Iranian banks embarked on mobilization of resources in past years. In fact, the capital efficiency ratio was totally ignored by state-run banks. After privatization of some banks according to Article 44 of the IRI Constitution, the need to observe that ratio according to international standards was felt more than before. This ratio allows banks to regulate their activities to gain more profits and reduce risks faced by depositors. Therefore, the High Council of Money and Credit decided that the minimum initial capital for banks should be 4,000 billion rials and if banks violated that decision, they would be demoted to credit institutes. The Central Bank of Iran has also tried to get the parliament to increase capital of state-run banks through the Oil Stabilization Fund with no success so far. It seems that it will continue to get that permission from the Islamic Consultative Assembly (Parliament) during the current year.

According to available estimates, domestic banks, both state-run and private, are short of 300,000 billion rials to fund economic activities. Private banks should procure 150,000 billion rials through outstanding claims and cash deposits of stockholders while state-run banks will have to do the same through the Oil Stabilization Fund or through selling their surplus assets.

In view of the expected reduction in bank interest rate both on deposits and facilities and increased demand for bank facilities, Iranian banks are expected to face serious shortage of funds in the current year and there will be intense competition in the money market to obtain needed cash. Entry of powerful monetary institutes and new banks will further increase that competition.

The Iranian money market, especially its state-run sector, is moving in direction of heightened competition after many years of monopoly. Thus, this will be a year for competition among pioneers of the market. New communication technology will also help the banks in that competition. Internet, mobile and virtual forms of banking are new methods used by banks under new competitive conditions. This will be a year for banks to gain supremacy over rivals by using these methods.

 

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  August 2011
No. 60