Baku, Azerbaijan, June 3
By Farhad Daneshvar – Trend:
The issue of unauthorized financial and credit institutions which have spelled serious trouble for the Central Bank of Iran (CBI), offers a wide range of possibilities for mergers in the country’s banking system.
The CBI Governor Valiollah Seif believes that the merger of banks would help the financial statements of Iranian banks comply with international standards.
The supporters of the idea back Seif’s remarks describing the lack of the suitable capital adequacy ratio in the banks as a main reason behind the international leading banks’ reluctant behavior to expand cooperation with Iranian counterparts. They suggest merger could contribute to the improvement of the capital adequacy ratio.
On the other hand, opponents argue that the banks before taking any steps regarding the issue of merger must increase the quality of financial reporting standards.
Shadow banks
Unauthorized credit institutions began to grow in Iran over the past several years as a result of international embargo on the Islamic Republic over its nuclear deal. The efforts made by the CBI to deal with the unauthorized institutions have apparently led to nowhere, so far.
This has caused instability and crisis in the country’s monetary system with shadow banks engulfing the informal money market.
The CBI, however, says it is decisive in tackling such institutions adding that it will put an end to the issue of illegal credit institutions by the end of the current Iranian year in March 2018.
In a bid to reimburse the depositors, Iran has already launched the process of merger with the Caspian credit institution which was formed as a result of a consolidation of eight illegal institutions that went bankrupt.
Merger procedure
According to the law, the shareholders of private banks should decide on the merger, which eventually needs to be approved by the CBI.
Coming to the public-sector banks, the government will have the final say regarding possible mergers since the government oversees the general assembly of public banks in the country.
Ups and downs
The consolidation or merger would possibly lead to the reduction of the number of existing banks but the fact is that Iran’s banking system could perform better with fewer but healthier entities.
Many see the idea as a chance to scale up operations quicker and an opportunity to plump up the capital cushions of banks. However, the merger of unhealthy banks and financial institutions would run the risk of bankruptcy of the new entities.