These are interesting times economically for Iran. Sanctions against the country are likely to be lifted after global powers agreed a deal to curb Iran’s nuclear program in July.
And yet, for banks, it’s a bit of a game of cat-and-mouse. Despite German businesses seeking access to loans, banks have been slow to seek out new opportunities in Iran, after many were penalized by the United States for violating sanctions in the past.
“No-one wants to be the first in the eyes of U.S. authorities to go back into Iran,” Tim Niklas Müller of the law firm Clifford Chance said at a conference in Frankfurt this week. “Many banks are first waiting to see what their competitors will do.”
In fact, many European banks are quietly hoping their U.S. rivals might go first. But this is unlikely, said Mr. Müller. Even once the international nuclear agency IAEA says Iran has implemented the key elements of July’s nuclear deal – likely at the start of 2016 – the United States is unlikely to lift sanctions for quite a while. It means U.S.-dollar transactions by banks – the action that got many European banks into trouble in the past – will still be prohibited for the time being, Mr. Müller said.
Vali Zarrabieh, head of the Iranian bank Saman Bank, agreed, telling Handelsblatt: “Dollar clearing will only happen again in a few years.” Instead of looking to U.S. banks, he’s therefore looking to other Middle East countries and Europe. His bank hopes soon to set up branches in Frankfurt, Rome and London.
The cautious approach of international banks is painful for Iran, which desperately needs the expertise of foreign investors to strengthen its economy. In an exclusive interview with Handelsblatt, Iran’s central bank head, Valiollah Seif, encouraged foreign banks to partner with domestic banks to improve the operations of the financial sector in the country.
Mr. Seif criticized the U.S. penalties against European and Asian banks in the past few years as “unjust and unacceptable,” and acknowledged that there was “some cautiousness” among German banks considering a return to Iran as a result.
But he said he was confident that German and European banks would seek out opportunities over time, pointing to the long history that German banks in particular have had in Iran. Germany, Europe’s largest economy, once had more banks with partnerships in Iran than any other foreign country,
Handelsblatt: Mr. Seif, could you tell us about the condition of the Iranian economy after so many years of sanctions?
Valiollah Seif: When the government of President Hassan Rohani took office three years ago, the economy was imbalanced. The reasons for that were not only the sanctions, but also the policies of the former government. At that time, the economy suffered from stagflation, with an inflation rate touching 40 percent per year and two consecutive years of a recession. In one year, the economy shrank 6.8 percent. Thanks to new measures taken by the government, such as budgetary and monetary discipline, we returned last year to a growth rate of 3 percent. The inflation rate went down at the same time to 11 percent.
You have said the Iranian economy has the potential to grow up to 8 percent per year. How quickly can this goal be achieved?
First of all, we have to bear in mind that we returned to growth despite the limitations set by the sanctions. The dramatic fall in oil prices last year could have led the economy into another recession. However, new policies limited the downside risk. This year we might see a lower growth rate, but we are more optimistic for next year. Our forecast is for around 6 percent growth for the coming year.
Do you have any fixed targets for the inflation rate, similar to those of the ECB?
In the coming year, we want to achieve a single-digit inflation rate. Our policy isn’t just about targeting a certain inflation rate. We pursue two objectives: inflation and economic growth. Before Mr. Rohani came into office, we had high inflation and low growth rates. Now we see the chance to achieve both goals – lower inflation and higher growth rates – simultaneously.
Hard economic times usually affect banks’ balance sheets. Are the Iranian banks sound and able to finance an upswing in growth?
In recent years, the Central Bank of Iran embarked on eradicating all the weaknesses in banks’ balance sheets. One problem of the banking sector is the high percentage of non-performing loans, which reached 15 percent over the past two years. We tackled this matter by increasing the provisions for these bad loans to strengthen the balance sheet. We managed to lower the share of non-performing loans to around 12 percent so far.
But Iranian banks are still regarded as under-capitalized.
The capital ratio is another problem of the banks. It needs to be offset by increases in net capital. During the last two years, the Iranian banking system has been put in a position to increase its capital base. Also, the Central Bank of Iran is trying to encourage banks to gradually increase their capital ratios.
How long will it take until the capital base is at a satisfactory level?
Maybe two or three years.
Where are you on the road to introducing the Basel Committee standards on global financial regulation?
Our task is first to complete the Basel II framework. Then we will target Basel III. Besides the Basel standards, we need to implement international compliance and governance standards. We hope we will achieve these goals within two or three years. One challenge is that we don’t have a proper consultancy to deal with these issues. We need the central bank to prepare some technical courses to educate and train the banks for those requirements.
Given these improvements, will Iranian banks be able to finance increased international trade for Iran, or would foreign banks also have to play a role?
Actually, when it comes to encouraging Iranian banks to comply with international rules, regulations and standards, the role of foreign banks is important and even inevitable. The involvement and participation of foreign banks in our banking operations can facilitate and expedite the timing of this procedure. Also, the financing approach of foreign banks can play a key role. I would like to note the very good relationships between German and Iranian banks. Once, the number of German correspondent banks and partner banks in Iran exceeded 27.
So, you’re saying German banks were once the largest foreign banking group in Iran?
Yes, they were the main banking group because Germany was our main trading partner. Based on my dealings with different European and German banks, I feel the same willingness and intention of German banks to return and restore their relationships. If you look at the historical track record, there were no defaults from the Iranian side, although Iran was caught in a war and suffered from heavy and unfair sanctions.
When we ask European banks about their plans with Iran, they are always cautious and seem to be scared, partly because of the harsh penalties imposed on them by U.S. authorities for dealing with Iran.
Let me first of all say that the actions of U.S. authorities against German, European and Asian banks were unjust and unacceptable to us. We are sorry for that. But for the future, we are trying our best to create a very transparent environment for a new era of banking relationships.
What about the international agreement on Iran’s nuclear program signed in Vienna on July 14, 2015?
We set up a working group to focus on the text and prepare a guide that gives answers to any kind of questions, ambiguities and hindrances. Then the group will try to give a unified interpretation of all aspects. We want our Western partners to feel comfortable and on the safe side when trading with and investing in Iran.
Foreign investors are limited to a maximum of 40 percent of ownership of Iranian banks at the moment. Will this maximum be increased?
We believe the current criteria can satisfy the requirements of interested foreign banks coming to invest. Foreign banks can open branches with a license from the central bank. If they want to set up a subsidiary, they can own up to 40 percent, with the remainder held by Iranian partners. This is a nice arrangement because foreign banks also benefit from the experience of local partners. In the free zone [special economic zones where business and trade laws differ from the rest of the country], by the way, they can own up to 100 percent of banks.
When you talk to German banks, what are the main concerns you hear about when it comes to reestablishing ties with Iran?
I noticed some cautiousness in negotiating with German banks. They are entitled to have their concerns, but it is our duty to eradicate and eliminate all sorts of ambiguities about Iran. But we believe that the historical and long-lasting relationships with German banks will overcome all sorts of problems in the future.
Yasmin Osman, Handelsblatt’s Frankfurt-based correspondent covering banks and bank supervision, conducted the interview. To contact the author: email@example.com