Iran’s Banking Overhaul: Central Bank Reports Significant Progress in Capital Adequacy
In a comprehensive update to the national parliament, the Governor of the Central Bank of Iran (CBI), Mohammadreza Farzin, detailed the substantial progress made in strengthening the country’s banking sector, highlighting a dramatic turnaround in capital adequacy and institutional reforms.
A Milestone in Banking Health
Governor Farzin identified capital adequacy as the primary indicator of a sound banking system. He reported a remarkable recovery, noting that the banking network’s capital adequacy ratio has surged from a negative -3.59% in 2020 to a positive 4.54% today. This marks a critical shift from instability towards a foundation of strength. The CBI is confidently steering the sector towards the ambitious 8% target set by the national development plan.
Drastic Reduction in Struggling Banks
The Governor provided a clear snapshot of the sector’s improved health. “In 2020, out of 29 banks, 14 had negative capital. Today, that number has been drastically reduced to only 5 banks,” Farzin stated. Conversely, the number of banks with positive capital has risen to 23, with 13 of these already exceeding the 8% capital adequacy benchmark. This indicates a broad-based and successful consolidation effort.
A Threefold Increase in Bank Capital
Further underscoring the sector’s revitalization, Farzin revealed that the registered capital of the banking network has nearly tripled compared to two years ago. From 336 quadrillion Rials at the end of 2021, it has now reached 1,035 quadrillion Rials, with a projected year-end figure of 1,460 quadrillion Rials. This significant capital boost has been achieved through high-quality sources, including asset re-evaluation and shareholder profitability.
Structural Reforms and Monetary Policy
The CBI chief also outlined completed work on a major structural reform: the comprehensive classification of all banks into six distinct categories (commercial, specialized, developmental, interest-free, land and housing fund, and comprehensive). All related statutes have been finalized and approved, paving the way for a more streamlined and specialized banking industry.
On monetary policy, Farzin acknowledged the ongoing challenge of managing liquidity growth. While disciplined policies successfully reduced liquidity growth from 42.8% in 2021 to 24.3% in the first quarter of 2023, it saw a recent increase to 29.1%. The Governor attributed this primarily to government bond issuances and specific policy measures, including the release of legal reserves to facilitate marriage loans, a social priority where the CBI exceeded its obligations by 50% last year.
Inflation trends were also addressed, with Farzin noting a consistent decline in both point-to-point and annual inflation until December 2023, before a recent uptick linked to exchange rate fluctuations. The Central Bank continues to focus its credit policies on supplying working capital and developing new financial instruments to support the national economy.