Banking + Insurance E1:R2

Banking + Insurance E1:R2

Key Developments

◢ Debt owed by Iranian banks to the Central Bank rose over the last two months, an uptick that went against the annual trend

◢ Bank reserves grew 10.4% y-o-y, with increasing deposits as individuals seek to take advtantage of interest rates before pending reductions


Uptick in Bank Debt Owed to CBI

Figures released by the Central Bank of Iran (CBI) show that debts owed by banks the central bank increased by 5.4% in the first Persian calendar month of Farvardin (21 March-April 2016). These debts increased by 6.8% in the following month of Ordibehesht (21 April-May 2016). This recent uptick was recorded while the overall level debt of owed by Iran’s banks to CBI declined by 2.6% over the past Persian calendar year (ended March 21 2016). As such, the increase in the debt burden likely does not signal a reversal in the steady effort of Iran's banks to settle outstanding debts. The uptick may be caused by the timing of payments through the Chakavak online check management system and timing related to short-term facilities provided by CBI to help banks meet requirements, often on behalf of the government such as in commodities purchases. 

The net value of debts owed by banks to the CBI is considered to be a key component of the monetary base in every country. In recent years, an increase in the net value of these debts has grown the monetary base and accordingly increased inflation. Over the past Persian calendar year of 1394 (March 21 2015-2016), the government was able to use various regulatory mechanisms to manage a large portion of the debts owed by banks to the CBI. This helped the government to decrease these debts by 2.6%. The government’s success in doing this came after a year when this debt increased by 42.4% – over the Persian calendar year of 1393 (March 21 2014-2015).

Decreasing bank debt owed to CBI led to a decline of 1.7% in the monetary base. CBI officials believe that improvements in the laws regarding the monitoring of banking activities, as well as using the Chakavak mechanism, will help prevent excessive borrowing by banks from the CBI. The Chakavak mechanism has integrated and streamlined all procedures to issue, transfer, and cash checks. It also prevents issuing checks above a certain amount by banks to other banks and also by individuals. These limits apply particularly for banks that have heavy debts to the CBI. The banks have a deadline of 24 hours to settle their payments to each other through the Chakavak mechanism.

Banks See Rise in Foreign Assets

The CBI has released a brief statement regarding the assets and debts of banks and financial institutions. The statement specifies the assets and debts of the banks by first categorizing them into commercial banks, sector-specific banks, non-governmental banks, and independent financial institutions.

The figures released by the CBI indicate that the combined foreign assets of all of these institutions in Ordibehesht (21 April-May 2016) stood at IRR 1.46 quadrillion (USD 41.7 billion), representing an increase of 13% over the last year. However, the rate of growth has slowed. The increase in foreign assets held by the banks in the first two months of the current Persian calendar year – which began 21 March 2016 – stood at 0.6%.  

Bank Reserves Grow With Deposits

One of the basic elements of the assets of banks is their reserves at the CBI – reserves which are either "legal" or "callable." Over the past Persian calendar year, the CBI decreased the interest rate on the banks’ legal reserves by 1-3%. Nevertheless, figures show that the volume of the legal reserves of banks has been increasing.  We believe this to be the result of growing deposits made by members of the public, despite falling deposit rates. The total volume of the legal reserves of banks in Ordibehesht reached IRR 75 trillion (USD 2.1 billion), a 10.4% increase over the same period last year. 

In Ordibehesht, the total debts of the government to the banks stood at IRR 1.28 quadrillion (USD 36 billion). These debts are still increasing at a projected annual rate of 22.5%. But as the Rouhani administration seeks a more sustainable fiscal policy, the current rate of increase compares favorably to that of the previous year, which hit 32%. Debt owed by the government to banks was IRR 1.22 quadrillion (USD 34.8 billion) for the Persian month of Esfand – the last month of the Persian calendar year that ended on March 21 2016. These debts are expected to rise by 10% with the publication of official figures on the government’s financial performance for the first two months of the current calendar year i.e. Farvardin and Ordibehesht (March 21-May 21 2016).

The total debts of the private sector to the banks have also been reported, hitting IRR 7.5 quadrillion (USD 214 billion). The debts of this sector – mostly loans and financial facilities – show an increase of 18.1% from the same period last year. The increase in debt held by this sector in Ordibehesht (April 21-May 21 2016) was 15.9%, a worrying trend given the high proportion of toxic debt that remains outstanding. 

The total volume of deposits made to the banks up to the end of Ordibehesht (21 April 2016) stood at above IRR 10 quadrillion (USD 28.5 billion), reflecting an increase of 30.6% over the past Persian calendar year (ended 21 March 2016). This figure tracks to the rise of liquidity in the same period. The deposits were distributed across several account categories including callable accounts, current accounts, and Qard al Hasanah accounts.

Deposits that have been made as current accounts have had the highest rise among the deposits over the month of Ordibehesht, recording an increase of 33%. We believe that a recent government decision to lower lending rates could lead to a decline in deposits that are made with the banks in current accounts. Presently, the volume of current accounts in banks comprises 85% of all forms of deposits. Depositors may be seeking to get the best returns before the expected drop in the deposit rate, the rise in deposits in Ordibehesht. 

Banks Struggling to Provide Loans

Top CBI officials, including former governor Mahmoud Bahmani and current governor Valliollah Seif, have repeatedly emphasized that the banks no longer have the required funds to provide loans, despite the liquidity of the IRR 10 quadrillion (USD 28.5 billion) in deposits.

The latest figures released by the CBI show that the remaining facilities of the banks stood at IRR 7.43 quadrillion (USD 212 billion). This is an increase of 2% from the end of the last Persian calendar year of 1394 (ended March 21 2016). A look at CBI figures shows that at least 12.1% of the remaining financial facilities of the banks are outstanding debts, amounting to an estimated IRR 900 trillion (USD 25.7 billion). But some experts believe that banks are underreporting their debt burden, which could be as high as IRR 1.5 quadrillion (USD 42.8 billion), a significant portion of which can be defined as toxic debt. 

Furthermore, 46.3% of all financial facilities in Iran’s banking sector are believed to be participatory contracts that have an interest rate of 20-24%. The exact value of such contracts up to the end of Ordibehesht (April 21 2016) was above IRR 3.20 quadrillion ( USD 92.5 billion).

A look at the figures released by the CBI over the past 10 years shows that the banks have always tended to prefer participatory and speculation contracts as well as direct investments and legal participation. The banks have in fact tried to avoid providing their clients with Mudarabah facilities such as SS, VVV, and leasing products as much as possible. This policy is meant to enable the banks to dodge the mandatory monetary plans dictated to them by the CBI. This became common practice during the tenure of former president Mahmoud Ahmadinejad (2005-2013). The same policy is blamed for the accumulation of debts owed to the banks, given that it allows giving loans at higher interest rates with longer maturity dates.

The participatory contracts through which the banks provide credit to economic enterprises have a maturity date of 3-12 months. In many cases, when the banks have acted to collect payments from clients, they have found that they are unable to return the loan and interest amount.

Islamic credit contracts by nature have a lower interest rate and have also been specifically designed in terms of the amount and the installment period to reduce the chance for default. Banks will know more quickly whether clients have the means to pay installments for these loans or not. This is not the case with participatory contracts. 

Facing Limitations in the Insurance Industry

The recent fire at the Bou Ali Sina Petrochemical Complex was a stark reminder of the importance of insurance to risk management in Iranian heavy industry. A payout of EUR 60 million was announced to cover the losses resulting from the massive blaze. However, considering that the overall profits of insurance companies listed on the Tehran Stock Exchange stands at just IRR 1 trillion (USD 28 million). 

There have been demands coming from within the industry to loosen regulations and to allow fees to rise. But the rise in prices will not easily occur due to market forces. There are 28 insurance companies in Iran, and they serve a small fraction of the public. Only 1.9% of Iranians use insurance services (compared to a global average of 8%). For insurance use to become more widespread, and for Iranian companies to battle for marketshare, there will be a sustained downward pressure on prices.

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