gif Islamic banking
c. The banks and the government
The Iranian banking system has been assigned by government as the performer of its monetary and fiscal policies. It has been na- tionalised since the 7th of June 1979 for various reasons . The Central Bank (Bank Markezi) is a state apparatus monitoring the whole banking system through the definition of sectoral allocation of banking facilities portfolio (loans portfolio profile) and the fixation of minimum rates of return for both deposits and banking facilities. Banks underwrite the government’s fiscal deficits and shall insure themselves the safety against illiquidity risk and insolvency through deposits’ insurance. They are seen by the government as an effec- tive tool in pursuance of its macroeconomic objectives, i.e: - the modifications and shifts in the pattern of consumption, investment and production behaviour in the economy - as well as the restructu- ration and redistribution of income.
Policy coordination between the credit system and government
This coordination is a top-down administrative process with the gov- ernment enjoining its policy to the Central bank that makes sure it is put in force by banks. So, comprehensive investment plans for banks are to be approved yearly in the budget law with specifications for sector credit allocation given by government. Remuneration of deposits and profits rates for facilities is fixed by the Central bank. In return for implementing government policies and underwriting its deficits, banks’ liquidity needs are met by the Central bank .
Problems arising from state-ownership of banks
Banks’ state-ownership is believed to be at the origin of numerous operating problems encountered by Iranian banks and consequently has been increasingly criticized. The problems raised by state-own- ership are: high operating costs, low innovation, little proper risk management, low amount of free allocation of banking facilities (only 35% of total credit facilities in 2003/1382), clearing house managed by one bank only, high level of delays in loan reimburse- ment , the fact that cutting-off subsidising the economy would lead to the insolvency of many customers , the credit allocation policy caused accumulation of bad loans and the default of many custom- ers without sufficient protection, rates ceiling arbitrarily fixed ex-post without reflecting the actual rates of return in real economy. Branch networks of banks are oversized and not justified by commercial considerations and the Iranian market is oligopolistic. Because of financial repression, bank credit to financial sector is only 20% of annual GDP in 2001 . This state of affairs, some argue, has also achieved the distribution effect through inflation or altering the prof- its of banks and traditional clients.
Table 2. Dependency between banks and Central Bank 1386 2006-2007 In Billion rials
Bank Melli Bank Sepah Bank Saderat Bank Saman Bank Parsian
Central bank
59266 52267 11042 178
1905 Reserve
35369 29949 14865 1362
10218
Equity capital
36758 12407 23519 1364 9355
Source: Monetary & Banking Research Academy
26 GlobalIslamic Finance June 2010
Total
511036 230717 381368 34620 163087
Liabilities
Theoretical arguments given against state ownership in Iran
With the new interpretation of the article 44 of the Iranian Consti- tution by Supreme Leader A.Khamenee in 2005, critical literature against state-ownership in banking operations and focus on the pri- vate sector have intensified . State-ownership can lead the banking system to have negative macroeconomic effects. Indeed, by imple- menting government credit policy, banks are indirectly serving the subsidisation of public policies by the private sector . Portfolio ceil- ing device and policies tied to reserve requirements impact bank profits by imposing implicit taxation on their activities . In focusing on the high-priority sectors, banks foster big firms access to bank credit at the expense of small firms, consumer credit and govern- ment. Finally, the increase of monetary supply through the mutual interest-based lending process between the Central bank and state- owned banks has an inflationary effect which causes public savings purchase power decline. Moreover, microeconomic effects can not be neglected and state-ownership may well ease influence peddling and political pressure on bankers. On the other hand, moral hazard is higher due to the financial irresponsibility of managers.
Assets 3/138
Central bank
51209 23432 40926 4159
23377 Total
511036 230717 381368 34620 163087
In the next issue the author will dis- cuss Progressive liberalization of the banking sector, and Profitability as- sessment of Iranian banks.
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