Why Iran’s Banking Shake-Up won’t be enough

Indeed, the draft reform continues to envisage decision-making committees dominated by representatives of other government bodies. This is in stark contrast to the central banks of developed economies, whose governors are allowed to execute their decisions independently, without interference from the executive branch. Even under the proposed changes, the CBI governor, according to Article 19 of the banking bill, will still need the president’s backing before his decisions can be implemented.

Economic experts are of the opinion that to enhance the ability of the money market regulator to pursue its inflation objectives independently, membership dynamics in decision-making committees should be changed to be limited to CBI officials and independent professionals in the industry. In Article 20, Clause 1, of the reform bill, among the qualifications for CBI governorship candidates is the requirement of “not having [engaged in] extensive financial misdeeds,” which implies that anything less than “extensive” misdeeds is acceptable.

Moreover, the provision that bans the CBI from buying government bonds at their initial issuance is neutralized by the reform bill’s Article 2, which stipulates that the central bank determines the rial exchange rate against foreign currencies. This function is typically not conducted by central banks, but by treasuries.

As such, it appears that Clause C of Article 2 is weighed for political reasons. Indeed, mandating a CBI subservient to the president in regard to fixing exchange rates could come in handy to the government, as it can attract votes by strengthening the rial and thus facilitating cheap imports, such as from China. In practice, this means that fiscal policy will dictate mandates on monetary policies, which is in stark contrast to the autonomy of central banks in developed economies.

To reintegrate Iranian banks into the global financial system, the CBI has requested that local banks prepare their financial statements using the International Financial Reporting System, which would be a step forward in terms of boosting transparency in the financial system. Coupled with the implementation of steps agreed to with the Financial Action Task Force, this will help facilitate foreign direct investment in Iran, expand the Iranian capital market, lower financial costs and eventually mitigate the banking sector’s outsized funding burden.

Banking reform at this juncture is certainly welcomed given the continued sluggish growth of the Iranian economy and toxic assets weighing heavily on the balance sheets of big lenders. Nonetheless, it is imperative that wise and reasonable revisions be made to the Banking Reform Bill. If not, the banking sector, along with the economy as a whole, will continue to pay the price for the absence of necessary and meaningful change.

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