Iran Banking Industry Outlook
Banking Industry Iran: current status, opportunities and threats
The Iranian Banking industry has a key role to play after the lifting of the sanctions. The opportunities created by the opening of Iran’s domestic market combined with the government’s desire to reform the banking system opens new development horizons for this sector.
|Strengths||The industry has the potential size for major players to realize economies of scale|
Most of the larger banks have significant experience in international trade
The public sector banks have the full backing of the Iranian government
The access to the SWIFT system will infuse a new dynamic in Iran’s banking sector
Iran is the only Muslim country besides Sudan where the entire financial industry is obliged to be consistent with the principles of sharia law, accounting for more than 40% of the world’s total Islamic banking assets.
|Weaknesses||Theoretically, Iranian banks are Islamic institutions but Iranian banks are not generally regarded as Islamic institutions by the rest of the Islamic world|
Government fiscal policies are unfriendly to the development of commercial banking
Disclosure practices are limited vs international standards and it is difficult to get a complete picture of the health of the industry
Banks’ profitability has sharply declined relative to the pre-sanctions levels
|Opportunities||Reconnection to the global banking system amid removal of sanctions|
Lifting of international sanctions
Lower transaction costs for Iranian businessmen
New regional business opportunities related to trade finance, letters of credit and new investments and infrastructure projects
Whilst Iran’s FinTech ecosystem is still very much in a grassroots stage, it has the potential to become one of the Middle East’s leading hubs in the near future.
|Threats||Non-performing loan ratios are dangerously high|
Leverage ratios are very high by international standards, threatening to impact banking sector stability
Uncertainty surrounding the implementation of sanctions from the U.S is leaving many large foreign banks cautious of re-engaging with Iranian institutions
The potential for policy missteps, which may see the reintroduction of sanctions
This white paper gives a brief introduction to Iran’s Banking Industry. Key figures and facts in regards to the industry include:
Improving the Banking Industry is the first and most important step for the Iranian government to increase the impact of the JCPOA and achieve the goals set forth in the 2025 Vision(Iranian authorities have adopted a comprehensive strategy encompassing market-based reforms as reflected in the government’s 20-year vision document (up to 2025) and the recently issued sixth five-year development plan for the 2016-2021 period.) throughout all industries. The sector is expected to benefit from the lifting of the sanctions enforced from 2012, most notably via the reconnection to the SWIFT network and lending growth should pick up towards the latter half of 2016. Nevertheless, other historic US led sanctions remain and will likely limit the short-term positive impacts. The first milestone to the stabilization of Iran’s banking sector has been achieved, but a boom in the lending and deposit market is not expected for several years.
In conclusion, even after the implementation of the JCPOA, many challenges remain for the Iranian Banking industry. It is our strong belief that come the beginning of 2017, this situation will be normalized. Some European and Asian banks will be offering full services to their Iranian customers and some of the governmental and private Iranian banks will be open and operational in Europe and Asia. The banking industry of Iran is going to grow at a fast peace, but certain challenges need to be dealt with.