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Private glee, public angst

February 1, 2001

Article from: The Banker
Article date: February 1, 2001
Author: Dinmore, Guy

As private banking returns to Iran, a power struggle is being played out between the country’s leading banker and its left-wing politicians.

Twenty-two years after the Islamic revolution, when all banks in the country were nationalised, Iran is on the verge of bringing back private banking as part of a package of slow-moving economic reforms.Mohsen Nourbaksh, governor of the central Bank of Iran (CBI), tells THE BANKER that he hopes by the end of the current Iranian year (March 20) to issue licences for one or two private banks.

Minimum capital requirement has been set at IR200bn ($25m) and the CBI has mostly adopted Bank for International Settlements criteria for capital adequacy ratios.

The move was made possible by a law passed by the previous conservative-dominated parliament, which required reinterpretation of article 44 of the constitution placing the banking sector under state control. Foreign banks are still barred from operating in Iran but about a dozen major banks have representative offices.

Bankers say the reintroduction of private banking is unlikely to have a sizeable impact on Iran’s economy, which is just starting to emerge from recession on the back of higher prices for crude oil that accounts for some 80% of foreign exchange earnings.

Mr Nourbaksh hopes private banks will eventually cover 50% of the private sector, which in turn accounts for only about 10% of the economy. At that point, he adds, the CBI would consolidate the positions of the 12 existing state-owned banks, probably through mergers.

One foreign banker says he expected overseas operations to be merged first. Bank Melli in London may take over Bank Tejarat, and Bank Sepah may merge with the Iran Overseas Investment Bank.

The true financial state of the 12 banks is not publicly known. According to the draft budget for the next Iranian year, they are projected to make a total profit equivalent to $68m. The most profitable appears to be Export Promotion Bank, followed by Bank Melli.

But the figures conceal huge non-performing loans following years of being obliged by the government to cover a budget deficit caused by subsidies to loss-making state firms. Foreign bankers doubt they are solvent. (Several of the banks declined to be interviewed.)

The current five-year plan provides for the issue by the government of IR5000bn ($620m) in domestic bonds for recapitalisation of the banks. According to latest CBI figures for September 2000, “banking system claims on public and nonpublic sectors” were IR280,488bn.

Iran’s first private banker since the 1979 revolution could be Parviz Aghili, now managing director of Karafarinan, a privately owned “credit institution” that all but functions as a bank but is not allowed to operate current accounts.

Mr Aghili is discussing with shareholders whether to apply for a full banking licence. One constraint to be considered, he says, is that the CBI dictates what interest rates banks are allowed to levy.

Karafarinan has broken new ground by issuing a report of its accounts audited by KPMG, showing that in the three months to March 2000 it attracted IR27.3bn in deposits.

Mr Aghili appears cautiously optimistic about the future but believes the economic reform programme under president Mohammad Khatami is not going far enough.

Instead of the vague time frame of a five-year plan (2000 to 2005), Iran, he says, needs a strict plan.

“We have got to have a schedule: to privatise 500 companies, have private banks and private insurance companies, a free rate of interest, more security for local investors,” he says. “As long as we cannot keep and maintain local investors we will still have capital flight. If Iranians invest in this country then foreign investors will be banging on the door.”

Foreign confidence in Iran is slowly returning, largely driven by Mr Khatami’s reform programme, higher oil prices and a perception that the US will soon begin lifting its economic sanctions.

Last October, US agency Moody’s raised its credit rating on Iran to B2 positive from 22 stable. At the same time, the UK announced it was resuming medium-term Export Credits Guarantee Department cover under an agreement that would result in writing off some Iranian debt. This brought the UK into line with most other European Union members that have recently raised their export credit cover for Iran, reflecting a considerable improvement in relations under Mr Khatami.

Last November, HSBC signed a $500m medium-term project finance framework agreement with six Iranian commercial banks: Melli, Saderat, Mellat, Tejarat, Sepah and the Export Development Bank.

Just the right climate, analysts say, for Mr Nourbaksh and the CBI to press ahead with Iran’s long-planned eurobond, its first foray into international capital markets. Commerzbank and Paribas are likely to manage the issue, for up to [epsilon]500m.

Asked to explain the apparent delay in launching the bond, Mr Nourbaksh says the CBI was working on details “to make sure everything is in place”. Bankers claim this is a code for ensuring that in a country of many factions there is full political agreement to go ahead.

“Probably we will proceed,” the governor adds. “This is the best time for Iran to issue a bond because our financial situation is in good shape. This is a good opportunity to get a benchmark. I’m not going to lose it.”

GDP this Iranian year is projected to grow by 5.2%, up from 2.4%. Inflation is officially stated to be down to around 13%, from 20.4%.

Mr Nourbaksh estimates that Iran will post a balance of payments surplus this year of $11.4bn. Foreign debts have fallen below Sl0bn and are more than matched by hard currency reserves.

Iran, Opec’s second largest producer, expects to earn $21.5bn from crude oil this year, of which about $l0bn is flowing into an oil stabilisation fund. Half of that, the CBI governor insists, will be made available through the banking sector for loans to the private sector, to be repaid in hard currency.

But behind these relatively rosy figures a bitter struggle over economic policy is being played out within the president’s broad coalition. At stake may be the survival of Mr Nourbaksh himself. CBI governor for two years before Mr Khatami swept into office in mid-1997, Mr Nourbaksh is regarded with suspicion by the left wingers who came to power on the coat-tails of the popular president.

The US-educated Mr Nourbaksh is generally well regarded by the foreign business community. He is credited with resisting pressure from the government to use the banking system to fund its deficits, with the introduction of private banking and abolition of a multi-tiered exchange rate system that fostered corruption and economic mismanagement.

Differences are most acute with Hossein Namazi, the left-wing finance minister, and it is the CBI governor who currently appears to be losing the power struggle. He is accused of keeping interest rates too high, stifling economic activity but at the same time overseeing a halving in the value of the rial during his five years in office.

Early this month Mr Namazi launched an unusually public attack on the CBI, although he stopped short of naming the governor. He accused “certain people” of having personal interests in keeping the rial down against the dollar.

The rial is trading on the open market at around 8000 to the dollar. Despite Iran’s high inflation, its currency has gained around 10% against the dollar in the past year, fuelled by sales of surplus oil dollars by the government. Mr Nourbaksh has gone on record saying the rial should stabilise at current levels. He has also criticised the government budget for next year — with spending up by nearly 25% — as inflationary.

The whiff of unresolved scandal also hangs over the banking sector. Qods, a conservative newspaper, has demanded that Mr Nourbaksh be held responsible for two major cases of embezzlement involving Bank Saderat and Bank Sepah. In a separate commentary it predicted Mr Nourbaksh would be removed from office.

“For how long will the clash continue between Namazi and Nourbaksh over currency and interest rates? Until the whole economy is destroyed?” Qods asked.

Entekhab, a conservative newspaper believed to be close to Iran’s supreme leader, Ayatollah All Khamenei, said Mr Nourbaksh was US educated and believed in US economist Milton Friedman, while Mr Namazi was educated in Europe and was a follower of John Maynard Keynes. The two would never agree, and in Iran monetary and financial policies were opposed to each other, the newspaper said. It called for unity but did not say which should go.

A cabinet reshuffle is likely after presidential elections on June 8. Mr Khatami is widely expected to win, although he has not officially confirmed he will stand for a second term and appears to be losing considerable public support for failing to withstand pressure from the hardline opposition.

Top five banks in Irans (rial million)
Tier One  %  Total  % capitall
capital change assets change assets %
Bank Melli Iran (03/20/98)   1,162,7301.2 44,593,105   13.7 2.61
Bank Saderat Iran (03/20/99)   660,778   21.8 39,033,556   28.5 1.69
Bank Tejarat (03/20/98)598,0604.7 19,951,930   10.9 3.00
Bank Mellat (03/20/99) 561,530   -1.9 26,728,239   20.3 2.10
Bank Sepah (03/20/99)  405,8882.3 19,499,072   34.9 2.08
Pre-tax  %   Profit/ Employees Branches
Profits change capital %
Bank Melli Iran (03/20/98)   128,753   20.4 11.0737,898 2996
Bank Saderat Iran (03/20/99) 215,118 na 32.5630,256 3343
Bank Tejarat (03/20/98)   36,254   48.6  6.0616,570 1607
Bank Mellat (03/20/99)44,115  239.3  7.8621,895 1885
Bank Sepah (03/20/99) 19,502  106.4  4.8016,753 1419
ratio %
Bank Melli Iran (03/20/98)na
Bank Saderat Iran (03/20/99)  na
Bank Tejarat (03/20/98) 6.85
Bank Mellat (03/20/99)na
Bank Sepah (03/20/99) na
$ = 1754.57 rial (3/20/99).
Average annual inflation 1999 = 19.9%.;
$ = 1757.94 rial (3/20/98).
Average annual inflation 1998 = 18.4%.

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