Will Iran’s banking sector collapse?

Al Monitor | : Iranian and international experts have opined for some time that Iran’s banking sector is at risk of a financial collapse due to toxic assets. It is no secret that over the past decade all Iranian banks were negatively affected by sanctions, internal mismanagement and corruption. Another disturbing factor in the financial sector has been the presence of unlicensed financial institutions that distorted the market and created unregulated competition for regulated banks. Furthermore, corruption and government interference have led to the accumulation of tens of billions of dollars of bad debts that will continue to put pressure on the balance sheets of Iranian banks for some time to come. Should these toxic assets lead to a collapse of the banking sector, Iran will experience major economic hardship.

Before addressing the risk of collapse, it should be noted that the Central Bank of Iran (CBI) is midway into a reform and restructuring process that is aimed at improving the conditions in the banking sector — a process that was discussed in Al-Monitor recently.

In this article, we will focus on the outlook for the banking sector, which, according to the International Monetary Fund (IMF), remains weak due to the high ratio of nonperforming loans (NPLs). Experts agree that most NPLs have resulted from politicized lending through corrupt networks. Furthermore, Iranian banks have a high portion of overvalued and illiquid assets on their balance sheets that need to be adjusted through a transparent process. In a statement on Dec. 18, 2017, the IMF outlined the need for “an asset quality review, related-party lending assessment, and a time-bound action plan to recapitalize banks and address non-performing loans.”

Over the past decade and as a result of the mentioned ills, most Iranian banks have been faced with what is known as a low capital adequacy ratio (CAR) and have tried to address this issue by increasing their base capital. This fact led the CBI to introduce new capital rules for banks in June 2017, resulting in all banks being compelled to increase their capital and also introduce Basel III compliance structures.

For example, Bank Sepah’s CAR had dropped to 2% during the sanctions years and the entity had to increase its capital by 740% to reach a CAR of above 10% by January 2018. Bank Sepah is one of three large banks that remains in government ownership.

 

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