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Commercial Studies (Quarterly)
Dec. 1999, No. 147
Summary: According to Mr. Bahram Zarinqalam, the economic affairs director of the Central Bank of the Islamic Republic of Iran, lack of competition and unreasonable interest rates and unjustifiable allocation of resources to economic projects in the present banking system has prevented the banks from doing a good job. In order to activate the banks, some experts underline the need for changes and reforms in some existing laws.
Text: There seems to be a lot of remarkable changes and developments in restructuring of the financial markets of the country in the Third Economic, Social and Cultural Development Plan bill. The bill was submitted by the President to the Islamic Consultative Assembly (Majlis).
Article 89 of this bill states, "The Central Bank of the Islamic Republic of Iran (CBI) is charged with making room and paving the way for making the domestic banks more competitive, encouraging domestic savings and creating the necessary facilities for the legal activities of various private non-banking (non-governmental) credit institutions, organizations and units. The CBI is also supposed to supervise the aforementioned establishments while preventing illegal institutions from operation." The pertinent implementation manual, which includes the definitions, manner of operation and the enactment of supervision on these institutions in accordance with proposals forwarded by the CBI and confirmation of the Supreme Financial and Credit Council, will be ratified by the Cabinet.
The same article charges the CBI with supervision of the satisfactory operational procedures of non-governmental (private) banking affairs, credit institutions, organizations and units on the basis of ratified criteria. If this article is passed in the Majlis, the present government owned bank will be confronted with the competitions of non-banking credit institutes and units.
Meanwhile article 90 of this bill refers to the building up of the capital sources of the banks and enabling of the Iranian banks to be present in the international banking scene, and the request has been made to allow the government to issue 5,000 billion rials of preferential long term bonds to shore up the bases of the banking capital sources. The proceeds after having been deposited in the government coffer, would be subsequently submitted to banks in similar forms. All the same, the government is of the intention to strengthen banks capitals side by side with the opening up of the capital market on the private sector. The banking system of the country, in the recent years, specially during the life span of the Second Economic Development Plan, has been the best source to assist the government, the government affiliated companies and institutions.
According to the statistics published in the Economic Charts Magazine of the CBI, the previous year's government debts to the banks were 0.01% less than those of 1997 and amounted to 1821.7 billion rials. The government debts to the CBI showed an increase of 26.4% amounting to 58600.6 billion rials. The debts of government affiliated companies and institutions in the same period showed an increase of 47.4% to the amount of 29234.5 billion rials. At the same time their debts to the CBI increased by 19.1% to the amount of 15084.1 billion rials. In the meantime, the government deposits in the banking system have increased by 36% in comparison with the year 1997 to reach 15040.9 billion rials in amount and the deposits belonging to government institutions and companies during the same period show 47% increase which amounts to 5000.9 billion rials.
Bahram Zarinqalam, the economic affairs director at the CBI disclosed the new projects for increasing the productivity of the banks. He said, "In order to improve the economic conditions, significant steps are being taken to privatize the banking system in relative terms. These actions include the transfer of 49% of the government owned banks' shares to the private sector. The role of the non-banking financial institutions will also be enhanced. According to what this gentleman says, for the time being there is no reason for the banks to compete and they are operated according to similar official and bureaucratic regulations. This manner of administration does not create enough motive for better management and performances. This sort of administration of the banks would deprive us of a dynamically active banking system."
Zarinqalam asserted that in previous years the negative side effects of governmental banking operation have seriously been felt. The politicians now clearly understand that the present banking system is hardly able to see to the future objectives of the country. He said: "Specialized financial policy making committees have recommended that a part of the financial system be entrusted to the private sector in order to create competition among the government owned banks."
Zarinqalam is of the belief that non-banking institutions are smaller and more active. They also have the privilege of a better maneuverability. They can absorb more competent and qualified employees through paying higher wages and salaries. He added: "We believe we should have more competitive and reasonable interest rates. Interest rates have a more fundamental part in the allocation of resources to economic projects. Our present projects may bring about some results, but economically speaking they are not necessarily justifiable."
What Zarinqalam says is completely different from what has been foreseen in the Third Economic Development Plan bill. In the said bill the sale of a part of government shares in the banks to the private sector has not been anticipated. The only provisions in the bill is the strengthening of the capital bases of the banks and the creation of private non-banking credit institutions, as well as the instructions for special administrative, employment and disciplinary regulations of the banking system within the framework of the banking charters.
Since according to the Constitution, banks are nationalized in Iran, there is the possibility that the Majlis or the Council of Guardians may not consider the sale of a part of banks' shares to the private sector to be constitutional and the transfer would not take place in practice. Under these circumstances, the existence of private non-banking credit institutions, which are authorized to engage themselves in different banking activities and their ability to absorb people's financial resources and savings at higher rates, would pose a very hard to beat competition for the government owned banks.
Zarinqalam made reference to the lack of competition and unreasonable interest rates, as well as unjustifiable allocation of resources to economic projects in the present banking system. The aforementioned shortcomings have given rise to skyrocketing costs and irreparable damages to the national economic system. The absence of competitive interest rates in the banking system has also caused the people to resort to black market profiteering or usury to get a higher yield on their liquid assets. The banking system has in practice been unsuccessful in absorbing the savings.
On the other hand certain compulsory disbursement of credit facilities, which have been determined and approved in the framework of annual budgets, have created serious impediments for the banking management to allocate the resources to profitable economic projects. The fact is that the government has used the banking system to drive ahead its own objectives and schemes. The private sector has so far been afforded a lesser access to the banking resources and facilities. Some experts believe that it is essential that certain amendments be brought to the Constitution to make provision for private banking and insurance operations. If these amendments are refused the Third Economic Plan would definitely face serious difficulties in practical terms. They believe that these sorts of amendments would bring about profitable operations for the Iranian banking system within the framework of the law for usury free banking and in line with sustained economic growth. The amendments would also improve the allocation of the economic resources and the credit facilities of the banks would be granted to justifiable economic projects. The latter would result in a higher general economic yield. It seems as though the present discussion between the government and the Majlis as regards the amelioration of the banking system would come to acceptable results, let alone privatizing the banking system. On the other hand, some specialists, while referring to government holding of 51% shares of the banks, are of the belief that there won't be any substantial change in the management of the country's banking system and the mere presence of the government managers in the banks would not, in all practical ways, improve the efficiency of the banking system. As a result, the proliferation of the private non-banking credit institutions would precipitate the outflow of capital from the government owned banks and its subsequent inflow into these institutes (in case they offer an acceptable interest rate to the depositors). Should the latter take place, the government owned banks would face a shortage of capital sources and lesser competition power.