Role of Iranian Banks in Boosting Economy in Post-Sanctions Era
Sept., 2015
Vistar Business Monitor
Iranian banks should increase their capability on the front line of doing business with external world after sanctions are lifted. Many money market experts expect the Iranian banking industry should help macroeconomic management to be upgraded and support manufacturing and employment in a move to return to the growth rate of the pre-sanctions era.
Other pundits believe that once sanctions are lifted, banks would be in the front line of dealing with foreign companies. They can help Iran’s trade be developed by providing banking services to domestic and foreign investors inside the country and abroad. So Iranian banks need to immediately standardize their services and improve their financial and technical infrastructure if they want to rejoin the international banking industry and help trade with foreign sides be expanded.
The Rouhani administration have already taken effective measures to control money base and money supply, curb inflation from once 40 percent to 15 percent now, and improve business environment in cooperation with the banking system. The government has succeeded in compensating negative growth in the past years and help banks provide 3400 trillion rials in loan to businesses in the year to March 2015 only. The banking system is expected to provide 3800 trillion rials in loan in the current fiscal year. In the first months of this year only, 940 trillion rials were granted in loan to the businesses which sought to address their cash flow problems. Critics say the government also needs to address development projects which are in need of billions of dollars in investment. They argue that such projects can pave the ground for economic growth. However, bank need to get prepared for post-sanctions era.
Experts forecast that once oil output and its export increase the government’s revenue in foreign currency would increase. On the other hand, Iran’s assets so far frozen overseas will be released. So the government will have billions in hand to expand trade with other countries. So, transfer of money in the future will need more banking services. After sanctions are lifted foreign investment in Iran will get momentum in oil, gas, telecommunications, auto, home appliances, tourism, steel, transportation and other industries, leading to rising demand for banking services and loans. So the role of banks in the post-sanctions era is getting more and more importance.
Now the main concern of Iranian authorities is whether or not these coming developments is in favor of employment and other goals set by the resistance economy doctrine, that is, boosting domestic manufacturing, increasing lending, resolving the NPLs issue, controlling excessive overdrafts from central bank’s reserves, respecting interest rates set by the Monetary and Banking Council, reducing government debt to banks, improving credit assessment system in banks, among others.
On the other hand, the parliament, the administration, and the central bank have put on their agenda to amend free-interest banking law and expand banking ties with foreign lenders. So the next several years would be busy years for the banking industry as the Rouhani administration is determined to fundamentally reform banking laws in a move to back domestic and foreign investment, help boost manufacturing and employment, and reduce speculative activities.
At present, more than 83 percent of the public cash have been blocked in short-term and long-term deposits in banks, leading to a shortage of financing in the manufacturing sector.
Among attempts by the banking authorities to improve services is a recent plan called Checkavak, which is an online service that controls credibility of checks. However, there are many other issues that need to be addressed in this industry. For instance, 41 percent of banking contracts are based on Musharkah (an Islamic banking contract) while the share of Mubadalah (another form of Islamic contract) has been reduced in recent years. The government needs to find solutions to support long-term investment projects. It also needs to help improve business environment.
Additionally, some experts believe it is not enough for the government to help reform the banking system only, but it must come up with a quantitative easing program, like what happened in the United States after a financial crisis occurred in 2008, to save banks and help their lending strength. Some experts believe although the move could bring about inflation, it would end up in economic growth and improved business environment.
But the question is for how long we can expect the government to print money and inject it into the development projects, causing growth? Why should the private sector not get involved in the process, helping improve economic productivity? In the year to March 2014, 3400 trillion rials in loan were given by banks to the manufacturing units suffering from lack of cash flow. In the year to March 2015, the figure increased to 3800 trillion rials, but the economy has not yet start recovering as many manufacturing units are on the verge of bankruptcy.
Practically, whenever the government prints money it uses the money for such projects as Maskan-e Mehr and some other with low productivity. So the government’s money would be wasted and lead to high inflation only. Banks can play as a middle entity here, examining whether or the projects are economically justified. This could improve productivity and lead to growth.