Few banks in the world have as tough a deal as those in Iran. In June the UN made their situation even worse with yet another round of punitive sanctions that was followed up by additional penalties from the US and Europe. While Iran's banks had a relatively good financial crisis, there are a host of other challenges that they will face in the coming year.
These include high levels of non-performing loans, mostly a result of a government policy that forces banks to give loans to the poor at rates lower than inflation, and weakening capital ratios.
The UN resolutions themselves are aimed predominantly at the government's activities, but there are a few provisions that will make life very difficult for the country's banks. For example, countries are urged not to allow Iranian banks to open branches in their territory or enter into agreements if there is suspicion that the bank could be involved in nuclear proliferation.
Furthermore, foreign banks operating in Iran are discouraged from opening offices and accounts in the country. Yet perhaps it is the overall effect of the sanctions, the slowing of the Iranian economy, which will hurt the banks the most. If their clients are suffering, goes their rationale, so will they. However, bankers across the country still believe they will be able to grind through the sanctions, but readily admit that the restrictions will not help.
Mohammad Amir Davoud, director of international affairs at Bank Pasargad, believes the restrictions will have a negative effect on the entire Iranian banking industry. He says: "We are trying to facilitate and finance the country's trading. We have been very cautious and taken pre-emptive action to soften the effects. But if sanctions affect these trades, and it looks likely that they will, they will therefore definitely hurt us indirectly. And if banks are creating restrictions for operating and co-operating with us, they will have a negative effect.
"But hopefully there are some ways to make the co-operation and trade financing continue. The politicians' views are different from this, but as professionals we can see that these restrictions will hurt us."
Despite the sanctions, many banks are going to considerable lengths to open more branches abroad. This goes for the country's trade banks as well as its specialised and development banks.
These potential branches are most likely to be in other Middle Eastern countries that have traditionally continued to work with Iran. Mostly out of necessity, bankers do not name specific target markets and say they will look for possibilities with anyone who is interested. This is more feasible than one might think, as the sanctions are more recommendation than outright restriction.
Bank Pasargad seems particularly ambitious about the opening of new branches, whereas EN Bank has actively reduced the number of domestic branches in an effort to reduce costs. However, EN is interested in opening international branches. Seyed Ahmad Taheri Behbehani, chief executive officer of EN Bank, explains that when he took the reins, the bank's expansion had been excessive and had to be rationalised. EN differs slightly from Pasargad in that it is more involved in private and investment banking. It made the move into private banking a few years ago because it saw a need for it in the market, but private banking and wealth management is still a very new concept in the country.
Mr Behbehani says: "At one point we opened 200 branches in two years. This was too fast. We had to consolidate. For foreign expansion, we are interested, but it is not the right time to talk about where we will go or make that decision. It will come eventually, and naturally my preference would be for it to be in an important financial centre."
Kourosh Parvizian, chairman and managing director, Export Development Bank of Iran
Recruitment drive
In addition to this expansion effort, many banks have indicated that they will be hiring more staff. Not only that, but they also claim that no workers were laid off during the financial crisis. Pasargad says it added 664 employees in 2009 along with 32 new branches. EN Bank says it plans to add 600 people to its ranks this year and has had more than 15,000 applicants, perhaps not a huge surprise given Iran's unemployment is estimated to be close to 20% by economists. Even official figures put the mark at an unsightly 13%.
While it remains to be seen how successful or possible an international expansion and recruitment drive could be for these banks, help could indeed be on its way. Iran's parliament, the Majlis, recently passed a law that will allow foreign groups to purchase up to 50% of the shares of any Iranian bank. This reform has been universally welcomed by the country's banks, which say it will benefit them in a number of ways.
Mr Behbehani is encouraged by the reform as well as a general trend towards more liberalisation of the country's economic policies. He says: "It could increase the volume of our business activities as well as the size of our business. It will promote a better atmosphere for our business and work. Foreign investment will create more co-operation and these investors can add value to what we do."
Bank Pasargad president Majid Ghassemi agrees with his EN Bank counterpart and adds that it will create much-needed competition in the market. He says he will continue to push the Majlis for more relaxed regulations, such as those on interest payments and Islamic banking. As Mr Ghassemi sees it, the country's banking system is still very much restriction instead of market oriented.
Technology update
There is also unanimous recognition among the country's bankers that Iran's infrastructure and technology are lagging behind many other countries in the Middle East. Internet banking is not a common element and managers are eager to get their clients involved to both streamline operations and cut costs. In May, Pasargad went as far as starting a client education programme on online banking that is available at all of its branches.
Dr Kourosh Parvizian is the chairman and managing director of the Export Development Bank of Iran. While his bank is state owned and more involved in financing export projects around the country, he nonetheless sees the need for more technology around the entire system. He says: "We are in true need of it in all of our organisations, especially because of the special situation we have in Iran. Infrastructure that will make banking easier will help us get through more difficult times."
So for the moment, Iran's banks will be forced to look for innovative ways to get around the sanctions and survive an economic climate that could very well worsen. To date, the banks have proven resolute and survived decades of previous sanctions. They have done it by looking for new areas for their businesses and gaps in the market to fill. However, as the screws tighten, the banks will once again be challenged. The domestic market is large enough to be self-sustainable, but if it slows down considerably they are more vulnerable.
Perhaps Mr Behbehani sums it up best in saying: "We don't appreciate the sanctions. And they won't be forgotten. The sanctions will have an impact, no doubt. But we should not exaggerate their effect. We have the ability to survive and we will."
