While the election of Mahmoud Ahmadi-Nejad, a self-proclaimed fundamentalist, as Iran’s president sent shock waves around the world and prompted dire warnings from US analysts, there was a far more measured reaction in Iran. Although many in business and finance had made no secret of their preference for Akbar Hashemi Rafsanjani, the influential 71-year-old veteran whom Mr Ahmadi-Nejad defeated in June’s run-off ballot, a feeling of ‘wait and see’ dominated the weeks leading up to the presidential inauguration in early August.
Worries about the new government were reflected in the Tehran stock exchange losing 3.5% by mid-July, but there were also signs in the oil sector that big international players saw advantages in Iran having a conservative president. Within the financial sector also, many hoped conservative control of all main organs of government ‘parliament, presidency and Islamic watchdogs’ could end the political infighting of recent years.
Abdullah Talebi, president of Parsian, the largest by far of Iran’s four private banks, says: “We’ve had a spread of power, and management has suffered. A merger between power and authority has to bring accountability.”
Economic policy
Iran’s economic policy operates within a framework of Five-Year and 20-Year Development Plans that have passed through all state bodies and have been approved by Ayatollah Ali Khamenei, the supreme leader. These plans identify privatisation and attracting foreign investment as priorities, although the fundamentalist-controlled parliament has since last year pressed for greater state regulation and asserted its right to vet foreign contracts signed by the government.
Optimists in Iran’s private sector now hope the parliament’s moves were designed to block the reformist government of President Mohammad Khatami, rather than a serious attempt to revive the statism of the early years after the 1979 Islamic Revolution.
The banking sector has specific concerns. “The two main challenges for the new government are updating contradictory regulations and improving transparency while simplifying procedures,” says Mr Talebi. “And the government should not interfere in setting profit rates [the Islamic equivalent of interest rates] for either deposits or loans.”
Profit rates
Over the past year, parliament has complained at high profit rates, which bear down on small businesses and farmers. But with inflation at about 15%, bankers say the problem cannot be dealt with simply through a government decree.
“There are four problems in simply commanding the banks to lower profit rates,” said Mr Talebi. “First, it’s against all expert advice; second’ it’s against current law and the fourth Five-Year Development Plan, which suggests the banks should set their own profit rates; third, it’s contrary to Islamic law; and fourth, it couldn’t be implemented in practice.”
In a pre-emptive move, the Money and Credit Council – which is headed by the central bank governor, Ebrahim Sheibani – in July ordered all state banks to lend at 16%, but made exemptions. Agricultural loans would be at 13.5%, industry and mining at 15%, exports at 14%, with the balance to be funded by the government. Effectively, this was a lowering of profit rates, although well short of the single-digit borrowing envisaged by some parliamentary deputies.
Parviz Aghili, managing director of the private bank Karafarin, says the first step towards further reduction in profit rates must be to tackle inflation: “Just reducing profit rates would produce a flight of money from the banks, because capital would go instead into real estate. There would be lower deposits and higher consumption.”
Oil revenue
Another crucial financial test of the new government will be its management of the Oil Stabilisation Fund (OSF), established five years ago to allow windfall revenue from oil sales above budgeted prices to fund investment and soft loans, organised through the banks. In recent years, politicians have diverted revenue from the OSF into current spending, including a $350m grant made by the fundamentalist-controlled parliament to the Basij, the Islamic militia.
Finance and business did not welcome Mr Ahmadi-Nejad’s election slogan that people should “feel oil money on their dining tablecloth”. The fund currently contains about $10bn and is expected to increase substantially in the current Iranian year, March 2005-March 2006, during which oil revenues should reach $36bn, far ahead of the $14bn budgeted.
While potential moves on profit rates and the OSF may indicate the intentions of Mr Ahmadi-Nejad’s government, an even earlier signal will be the composition of his cabinet. Among the names bandied around for economic posts are Ali-Reza Ali-Ahmadi, professor at Tehran’s Elmosanat university; Mohammad Khosh-Chehreh, a leading parliamentary deputy; Kamal Daneshyar, chair of the parliament’s energy commission; and Ahmad Tavakoli, another prominent deputy.
“We are concerned about some of the deputies,who lack experience,” says a leading banker. “Some of Mr Ahmadi-Nejad’s comments show a lack of expertise, but we have been having meetings with some of his advisers and that’s a good sign.” In particular, bankers downplay Mr Ahmadi-Nejad’s comments about Parsian during the election campaign, when he queried how a bank could increase its capital from IR341bn ($38m) to IR2000bn over three years.
The Tehran stock exchange (TSE) has suspended trading in the three listed private banks – Parsian, Karafarin and Eghtesad-e. Although the TSE has given the banks’ general assemblies as the reason, the closure is longer than usual. Traders say the TSE feared the banks’ shares would drop and Heydar Mostakhdemin-Hosseini, head of the TSE managing board, admitted “short-term” concerns about the private banks was one reason for the general index falling.
Encouraging investment
Those close to Mr Ahmadi-Nejad have been keen to offer reassurances. A leading economic adviser says the new government would encourage “healthy and transparent” conditions for foreign investment, promote decentralisation and take preventative measures against corruption. He says private banks, developed over the past four years, could help create competition, increase banking efficiency and lower profit [interest] rates.
Iran’s four private banks – Parsian Bank, Saman Bank, Karafarin Bank and Eqtesad-e-Novin (EN) Bank – have opened since a law in 2001 ended the state monopoly introduced after the 1979 Revolution. The need for private banks, says Mr Aghili, is not only recognised in the Five-Year and 20-Year Development Plans, but is a necessity if Mr Ahmadi-Nejad is to deliver on a key campaign pledge to reduce unemployment from an official level of 12%. “The only way to reduce unemployment is through investment,” he says. “Whatever you might say in opposition, in power you realise that private banks are needed in pushing ahead investment.”
Mr Sheibani announced in July that two more private banks had “agreement in principle” from the central bank to go ahead: Pasargad and Sarmayeh Va Danesh. Private banks, at present, hold around 5.5% of banking assets, so the real boost to private banking would come with the privatisation of state commercial banks envisaged in the fourth Five-Year Development Plan. The central bank has even recommended five banks – Saderat, Mellat, Export Development Bank, Tejarat and Refah – for privatisation, but the plan awaits the go-ahead from the supreme leader. Ayatollah Khamenei has already given his approval for the continuation of private banks within the national plans.
An even bigger step for Iran would be opening up to foreign banks. Standard Chartered is aiming to open, in August, a branch in Kish, Iran’s offshore free trade zone – technically, the first one opened by a foreign bank since the revolution.
“Our main goal is international and major Iranian clients, but at the same time we recognise that businesses encouraged to come to Kish by the Iranian government have recognised their main problem there is the lack of [appropriate] banking,” says Mohammad Sarrafzadeh, chief executive office of Standard Chartered in Iran.
Analysts say Standard Chartered’s move makes sense only as a step towards the mainland. “International banks have long eyed up the Iranian market,” say an international banker. “It’s probably a question of a joint venture first, although we find it hard to evaluate the finances of banks likely to be privatised.”
All in all, Iran’s bankers feel the trend towards liberalisation is inevitable. “The improvement in banking services in the past three to four years is exceptional, given Iran’s history,” says Mr Aghili. “It’s clear that private banking has increased the efficiency of state banking. Not only will there be more private banks under the next government, within three to four years there will be foreign banks and some state banks will be privatised. That’s not wishful thinking, it’s necessity.”
International view
Like the rest of Iran’s business community, bankers know the greatest threat to the country’s development lies in the international situation. American sanctions, begun just after the 1979 Islamic Revolution, have complicated business practice and retarded development.
“Sanctions hurt,” says Mr Aghili. “It makes it much harder for banks to get suitable software. American firms are number one in many fields, and when you go for second-best you pay more.”
Hence the greatest worry of Iran’s bankers is not Mr Ahmadi-Nejad but the prospect that tensions with the outside world will increase if long-running negotiations with the European Union over Iran’s nuclear programme fail. Even here, they are hopeful though. “I think the Europeans now realise that Iranians prefer negotiations – this is part of our culture,” says an Iranian banker with wide international experience. “They also know Iranians pay up on time. When we make an agreement we stick to it. So let’s hope we can make one and move on.”
