Without Reforms, Iranian Banking Crisis Looms

The capital adequacy ratio (CAR) of Iranian banks is another issue that needs to be imminently addressed. The CBI has already ordered a dozen banks struggling with low CAR not to distribute annual profits to shareholders. Instead, the banks are urged to use the profit to raise their capital so they can maintain their CAR at a minimum level of 8%.

Three of these banks had a capital adequacy ratio of less than 4% in the Iranian fiscal year ending March 20, 2016. In this vein, the CBI has issued a directive allowing only banks with CAR above 8% to distribute profits from the previous Iranian fiscal year to shareholders. Annual reports pertaining to the last Iranian year have yet to be published.

Almost all banking experts in Iran believe that the CBI needs a freer hand in regulating the market and implementing banking reforms. The judiciary and parliament can play a key role by helping the regulator make sensitive decisions without having to consider pressure from politicians who may oppose changes to the status quo.

The Iranian public expects President Rouhani’s second-term Cabinet to be more proactive and aggressively lobby lawmakers and influential moderate conservatives in the Office of the Supreme Leader to help pursue tougher policies to regulate troubled CFIs. As such, the Iranian authorities must help restore the banking system’s ability to lend by weeding out nonviable CFIs and banks.

If Rouhani fails to advance major banking reforms during his second term, his successor may be faced with a situation in which it may be too late for reforms to stave off a serious banking crisis.

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