Last year, Tehran-based banker Parviz Aghili launched a new bank: Middle East Bank. It highlights the hopes many hold for Iran’s financial sector, particularly the privately owned firms, as relations with the west thaw.
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| Iran’s foreign minister Mohammad Javad Zarif at the E3/EU+3-Iran talks at the end of 2013. The thaw in relations with the west should lead to an improvement in the country’s banking sector |
Aghili says that so far Middle East Bank has deposits of IR14 trillion ($560 million) and loans of IR11,000 trillion. It has eight branches and will open two more in the next two months. He aims to have five more branches before the end of the next Iranian year. More generally, recent developments raise the possibility that conditions for Iran’s banking sector will improve. On November 24, Iran struck a deal with six states to wind down its nuclear activities for six months from January 20 in exchange for sanctions relief worth $8 billion.
Although banking sanctions remain in place, the deal brings the international community closer to a final settlement on Iran’s nuclear programme, which would also end sanctions on its banks – particularly after the EU confirmed the suspension of sanctions, as planned, in late January.
Observers are also hoping for a new era of prudence after heavy state spending under former leader Mahmoud Ahmadinejad. Iran’s new president, Hassan Rouhani, presented his first budget to Iran’s parliament in December, focusing on tackling inflation and unemployment.
Iran has felt a heavy effect of banking restrictions, especially since January 2012, when sanctions began to target the central bank. Two months later, Swift barred Iran from its network, making it near impossible for capital to move in or out of Iran officially.
The effects of banking sanctions have been "huge and very dramatic", says Mohammadreza Meskarian, CEO of London-based Persia International Bank, which Iranian banks Bank Mellat and Bank Tejarat jointly own.
"We can carry out no new transactions at Persia International Bank," says Meskarian. "While we are authorized by HM Treasury, it has now become very difficult to pay for our day-to-day expenses such as staff wages and the electricity bill using a frozen UK-based account. We’re just trying to keep our licence valid until sanctions are removed and we will be reactivated."
Optimists have long pointed to the emergence of privately owned banks in Iran, which might be better positioned than state banks to expand and improve the financial sector. But Iran’s 10 purely privately owned banks are grappling with problems that are unrelated to sanctions: the bigger branch networks and access to government business that are enjoyed by banks with closer links to the state.
The central bank also still standardizes rates and services of private banks, which have a 15% slice of banking assets, according to data from the central bank. Private banks need approval for any loan that exceeds $6 million. Amir Reza Kahedi, CEO of Tehran-based Arya Sahm Economic Research, says Iran’s private banks are "not free to take risks and do business".
Bad debt looks set to further hamper the growth of private banks. They hold almost a third of Iran’s bad debt, which accounts for roughly 20% of private bank loans. Central bank data show the amount of bad debt held by private banks surged by 57% between November 2012 and November 2013.
According to Aghili, fundamental attitudes, even in private banks, also present a problem. He says: "The following words have no place in their vocabulary: risk management, corporate governance, moral hazard, bankruptcy, asset-liability management, correct composition of a bank’s assets, differentiation between a bank and an investment company, and many more," he says.
He adds: "They believe and hope – as in the past – that if the sanctions are lifted we will sell some more oil and with the oil money we will wash out our incompetency, bad management and the mistakes we have created."
Private banks have a much lower ratio of loans to deposits than state banks: 0.76 compared with 1.36 at the state banks. Nonetheless, there are genuine opportunities for private banks. Despite the difficult business conditions in Iran they have managed to disburse loans amounting to IR1,144 trillion as of November 2013.
As most private banks have relatively few branches and thus find it hard to compete with much bigger state-linked banks in offering retail banking, observers think there could be opportunities to attract more customers via services such as mobile banking.
Some private institutions, such as Parsian Bank, are thinking along these lines. In May last year, Parsian introduced a new internet banking system, which includes the ability to pay loan instalments online. It also upgraded its telephone banking system. The bank is set to expand in 2014; within the first month of this year it had opened five new branches.
According to Aghili, South Korea, which also overhauled its banking sector in the 1990s, could be a model for banking reform in Iran. He recommends a "short period of rigorous supervision by the central bank" followed by two years in which banks can undertake reforms free from state meddling, such as capital raising, and M&A. Then, following a capital adequacy ratio calculation, the worst banks could be closed.