More than two decades after the 1979 Islamic revolution and a
comprehensive nationalisation strategy, Iran is about to embark on a
major privatisation programme both in industry and in the financial
sector. While many details are still to be thrashed out and some
political obstacles remain, there is broad consensus within the
financial community that significant reform of the economy is needed
and improved efficiency is vital for financial institutions.
Amid the turmoil in neighbouring Iraq and Afghanistan and the recent
furore surrounding Iran’s nuclear capabilities, the Iranian authorities
are pushing ahead with privatisation plans and clearing the way for an
expanded role for the private sector. Although in the initial years
following the revolution the banks were nationalised and the private
sector shunned, in recent years the reformist government of President
Mohammad Khatami has moved to bolster inadequate infrastructure and
revive the economy.
Six years ago, bankers note, talk of private banks was taboo. But, in
an important shift during the past four years, the central bank of Iran
(Bank Markazi) has issued licences for the establishment of four
private (non-state) banks: Parsian Bank, Saman Bank, Karafarin Bank and
Bank Eqtesad-e-Novin. These banks are now up and running, attracting
customers and this is only the beginning.
Two-year schedule
Iran’s Minister of Economy and Finance Tahmaseb Mazaheri said in early
November that the shares of four state-owned insurance firms and nine
state banks would be ceded to the public gradually in two years’ time,
and that a draft bill seeking privatisation of the state companies and
banks had been submitted to the parliament.
“This is an urgent bill because moves toward privatising insurance
firms and some state banks have already begun and we only need to
remove the existing ambiguities concerning certain cases. If these
ambiguities are not removed as per the schedule, the privatisation
process will come to a standstill,” he says.
Stock exchange interest
In Iran, banks were taken out of the stock exchange listings in the
aftermath of the revolution. However, in 2002 the Tehran Stock Exchange
(TSE) council passed a by-law for the admission of the banks. So far
only Karafarin Bank, one of the newly created private banks, has
successfully applied and it is expected to be listed in the near
future. But state banks, such as Bank Saderat Iran and Bank Sepah, and
some private banks, such as Parsian and Eqtesad-e-Novin, have shown
interest in entering the TSE.
Politics remains critical in Iran. And the key question, as Parsian’s
executive director Bahram Fathali notes, is “how and to what extent the
government will go ahead with de-nationalisation of the banks”. He
says: “There are many problems – some think de-nationalisation is
against the constitution, some think it is essential and some are
suspicious of the private sector – and how do you value the banks?”
Privatisation details
Bankers agree that the state-owned banks need to be more efficient but
the concern is how to achieve this without causing shocks to the
markets and other negative consequences. Meanwhile, the Privatisation
Organisation has added some clear detail about which banks are to be
privatised and when.
Speaking to The Banker, Gholamreza Zaipour, member of the board of the
Privatisation Organisation, said that just two medium-sized banks, Bank
Mellat and Bank Refah, can be fully privatised with no limitation on
shares sold. Mr Zaipour hopes that the privatisation of these two will
take place by March 2005, the end of the Third Development Plan. The
banks can either be sold by tender or through the TSE, he says.
He adds that the other commercial banks could also be privatised but
there are legal obstacles. He says recent efforts to privatise Bank
Saderat Iran were cancelled by the Attorney General, who said that it
was not permitted under Article 44 of the constitution. Nevertheless,
the Privatisation Organisation is optimistic that if Article 11 of the
Third Development Plan is revised then the other commercial banks
(excluding Bank Melli Iran, Bank Keshavarzi and Bank of Industry and
Mine) can be privatised.
Mr Zaipour says that the revision of Article 11 could take place after
elections in February 2004 and after the end of the Iranian year in
March 2004. However, unlike Mellat and Refah, the other commercial
banks (including Saderat, Bank Tejarat and Bank Sepah) could only be
privatised to less than 50%. The government would maintain more than
50% control and Melli, Keshavarzi and Bank of Industry and Mine would
stay in state hands.
Officials suggest that Article 44 of the constitution could be amended
by the Majlis Assembly by end of March, thereby clearing the way, but
this and Article 11 revisions are uncertain and deliberations could
drag on. The critical decisions remain with President Khatami’s
administration, although elements within the financial infrastructure
are pushing hard to get the privatisation process moving quickly.
Mr Zaipour is keen to stress that 375 companies are in the pipeline to
be privatised, and 10 would be sold off by the end of December 2003.
The expected value of these 10 companies is put at $1.3bn, which is
equivalent to all the companies privatised during the past decade, he
says.
“These sales will be the real start of the privatisation process, we
have buyers for these companies and the new law, which is expected to
be passed in six months maximum, will give us the ability to do a lot
more,” he says.
Ingrained habits
Many in government, including Bank Markazi, recognise that bank
privatisation is a necessity but progress is slow. Farid Zia Molki, the
former head of Eqtesad Novin Bank, says that the main obstacle in the
way of privatisation in general – and banking privatisation in
particular – is the deeply ingrained habits of the state-owned system.
The lack of competition, he says, has made state banks “incredibly
lazy”.
Parviz Aqili, head of Karafarin Bank, agrees. He believes the main
purpose of privatisation is to improve transparency in activities and
increase free competition. “State-owned banks are not able to achieve
an optimal distribution of capital resources and this failure inflicts
a heavy cost on Iran’s economy.”
Nevertheless, despite the entrenched public sector culture, private
sector attitudes are gaining strength. Changes in management of the TSE
and the Privatisation Organisation are expected to have a positive
influence on Iran’s capital market. The former top management of TSE
has moved to the Privatisation Organisation and a former member of the
TSE Council has been appointed as the exchange’s new secretary general.
The changes indicate that the TSE will play an even bigger role in the
privatisation process. Already in the past two years the Privatisation
Organisation has been ceding shares in listed companies to the public
almost daily and this is expected to continue. Whether the TSE is used
for the privatisation of big banks, such as Saderat, Tejarat and Sepah,
remains to be seen but Sepah recently applied to join the TSE, opening
up the possibilities in time.
Who will buy?
A key aspect of Iran’s privatisation plans is the potential buyers. It
is not clear as yet what role the country’s pension and social security
funds will play. For many, the sale to various pension funds does not
represent a genuine sell-off, just a transfer from one area of
government to another. The Privatisation Organisation is confident that
there are private businesses willing to snap up the non-financial
companies that are coming to market. This seems possible but when it
comes to the large banks, it is unclear from where the major new
shareholders will come.
Valuation task
If Mellat and Refah, the relatively smaller players among the majors,
can be absorbed by the TSE then momentum may be built and more could
follow. But it is doubtful that the private sector appetite for
state-owned banks will be sufficient to meet the government’s
aspirations. Valuing these giants and making them attractive to
investors is a mighty task. Selling them to funds may be possible but
may not achieve the desired objectives.
Also, the pressure to privatise raises the issue of employment for the
Khatami administration. The bulk of the state banks each employ more
than 15,000 staff (Saderat employs more than 30,000) and the
prospective mergers and improved efficiency make significant job losses
likely. President Khatami has to balance the need for change and
efficiency against pledges on job creation and employment.
Much needs to be done – but as one banker said recently: “The
government still owns 80% of the economy; it is practically
overburdened with responsibility. Until some of that burden is removed,
it will be impossible to make these changes quickly.”
Foreign exclusion
Iran’s approach is very different from that of the central European
countries, for example, which have opened up their markets to foreign
banks. Although 40 international banks have representative offices in
Tehran, many of them very active, they are excluded from having
operations on the mainland. While foreign banks can now set up branches
in the free zones, bankers see the prospect of branches on the mainland
as being a long way off. Iran is getting its domestic house in order
before it allows foreign banks to compete directly.
As for the privatisation process, foreigners are firmly excluded. The
Privatisation Organisation’s Mr Zaipour rules out any foreign role in
the sale of Mellat and Refah or the other commercial banks.
Although excluded from privatisation, foreigners can still participate
at the TSE. However, there are strict limits and they are not allowed
to buy more than 10% of any stock.
Bank Keshavarzi
Five years ago, a sleepy agricultural development fund decided to
change gear. For 65 years it had provided support for farmers and rural
development but through a change in statutes it shifted into universal
banking and the new Bank Keshavarzi was born. Under the chairmanship of
Jalal Rasoulof, the bank has not only retained its agricultural roots
but has spread well beyond the rural sector into investment, community
and international banking.
Today, Keshavarzi has grown into the largest bank in Iran in Tier One
capital terms and, although it is only a third the size of Bank Melli
Iran in assets, it has made a significant impact. “We have shaken up
the market,” says Mr Rasoulof, who has greatly diversified the bank’s
product range and changed the culture of the institution.
“The bank used to run losses. I have changed the attitudes in the bank.
If we had continued in our style of thinking, we would not have
survived. We have developed the bank in urban areas, focused on
training and adopted a selective strategy,” he says.
“We have tried to be first in electronic banking and have built up two
million electronic customers and introduced debit and credit cards. We
were the first to set up telephone banking services and have also
established the first call centre in Iran,” says Mr Rasoulof.
Keshavarzi has moved into new areas, developing women’s banking and
banking for children, which is important given the dominance of youth
in the population. The bank has also set up a range of agricultural
insurance products, such as insuring crops and livestock, which hardly
existed before. And, in another innovation, the bank is active in
funding Iran’s successful movie industry.
With 300 online branches out of its network of 1800, Keshavarzi has
made important strides in introducing innovative products and new
technology. The chairman is keen to build a proactive strategy and
continue to manage the massive changes taking place in the economy.
Although Keshavarzi is not earmarked for privatisation, Mr Rasoulof
says: “We are going to privatise some of our shares in the future.” The
bank has returned to profitability in recent years and its attractive
branches in Tehran have helped build its customer base to more than 2.4
million.
Like other major banks, Keshavarzi has some way to go to improve
overall performance and service levels but, nevertheless, it has
demonstrated in just a few years that genuine improvement in the
state-owned banks is possible.
