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IRAN: Reform is a huge task

April 11, 2000

While some foreign banks have expressed interest to operate, none has taken the plunge, by Guy Dinmore

Below the snow-capped Alborz mountains, a gleaming blue-glass skyscraper towers over northern Tehran, the new headquarters of the Central Bank of Iran (CBI). Unfortunately, bankers say, the splendour of the newly-built offices scarcely reflects the real state of health of Iran’s banking system. “It’s like a rotten cake that they keep changing the icing on,” says one executive.

Twenty-one years after the Islamic revolution and the nationalisation of all banks, the CBI is slowly embarking on a programme of reforms intended to revitalise the banking sector. The task is enormous.

CBI officials did not respond to requests for interviews, but former advisers and senior managers of the main state-owned banks say tight central control and mismanagement, combined with restrictive labour practices and high inflation, have probably rendered the commercial sector insolvent. Banks are obliged to give soft loans to lossmaking state-owned enterprises as a form of subsidy.

Bankers say some central banks in Europe are pressing the CBI for fuller information on the balance sheets of Iranian banks with branches in European capitals. Reacting to the growing financial crisis, the CBI has apparently adopted three measures – issuing licences for “non-banking credit institutions”, effectively private banks; allowing foreign banks to operate in free trade zones (FTZs); and proposing the sale of 49 per cent of equity in state-owned banks.

Parviz Aghili, a banker who returned to Iran six years ago, has set up Karafarin Credit Association, one of four “non-banking credit institutions” to be issued licences in recent months by the CBI. The title reflects the pragmatic approach of the CBI to get around constitutional restrictions on private banking.

“We act like a bank, work like a bank, but we are a non-bank,” says Mr Aghili. He says his shareholders read like a Who’s Who of the Iranian private manufacturing and construction sectors, including some expatriate Iranians whose wealth, should it be induced to return, would help turn the country around.

Karafarin has a capital requirement of IR30bn (about $3.75m at open market exchange rates) deposited with the CBI. It aspires to become a financial institution linking foreign investors and creditors to the private Iranian sector, perhaps one day listing on the Tehran stock exchange or linking up with a foreign partner. Mr Aghili, in his impressive new offices in central Tehran, is cautiously optimistic.

uch bigger and older, although it operated for some years without a licence, is the Bonyad Finance and Credit Association. It is part of a vast business empire known as the Foundation for War-disabled and the Poor, a charity that is answerable directly to Iran’s supreme leader, Ayatollah Ali Khamenei.

Reza Shiva, managing director of the foundation’s credit association, cuts the image of a modern banker. “I’m pro-competition in every sector.

onopolies don’t work,” he says, promising complete transparency in response to complaints that Iran’s powerful foundations, which distribute alms rather than pay taxes, do not provide full results, and hide corrupt practices.

r Shiva has expanded to 231 branches and describes his operation as an Iranian savings and loan association with a total of IR660bn in deposits. The aim, he says, is to distribute more profits to the disabled.

He estimates that 80 per cent of the Iranian economy is under state control, 10 per cent is controlled by the foundations that answer to Ayatollah Khamenei, and the remaining 10 per cent is in private hands.

Iranian analysts say that because of high inflation and CBI control over interest rates on loans and deposits, the new private “non-banks” are likely to grow only slowly, should they succeed at all. A fifth institution had its licence revoked after it failed to make the capital requirements.

A decision to allow foreign banks to operate in three FTZs, two of them offshore, was intended to attract foreign investment to develop exports. A few foreign banks are reported to have expressed interest, but none so far has taken the plunge. The zones have, in fact, sucked in imports, drawing Iranians on holiday-like excursions to buy foreign consumer goods at lower
prices than on the mainland.

Foreign banks with US affiliates are also wary of being seen to be too involved in Iran because of the danger of economic retaliation by a US administration that still imposes sanctions against Tehran.

“But in time, when the US-Iran problem is resolved, there will be major international banks interested in entering this market,” comments one banker, noting Iran’s vast resources of oil and gas and a population exceeding 63m.

Western and Iranian bankers do not share the public euphoria that greeted the overwhelming victory of the reformist allies of President Mohammad Khatami in parliamentary elections in February.

The government’s plan to sell up to 49 per cent of each state-owned bank was blocked last year by the Council of Guardians, which vets legislation for its adherence to Islam and the constitution. The new parliament, to convene in late May, might try to present the bill again. But bankers say the measure is doomed to fail as long as the government retains a majority share. The favoured recourse is to change the constitution, but bankers doubt the “reformists” are ready to do that.

“We are behind President Khatami, he is an angel,” says an Iranian financier. “But, under him, you’ve got leftists who are so far behind what is happening in the world and want to push the economy back to the 1950s. The pace here is very slow. It’s very unfortunate. The people who make decisions here don’t know how fast the world is moving.”

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