The Role of the Banking System and the Reform of Structures

Gholamreza Khalil Arjmandi
Chairman of the Board of Bank Day and the Member of the Board of Kish Investment and Development Company

Iran’s economy relies on the banking system for various institutional and structural reasons. Despite the increase in the volume of financial markets in recent years, the banking system has maintained its pivotal role in financing the real sector of the economy due to the low depth of the capital market. The power of banks to raise money has led them to get considered the main factor in strengthening the economy or deepening economic crises and failures.

However, some countries such as Japan, South Korea and Malaysia with a comprehensive view of development and interdepartmental management have been able to finance real economic projects using the capacity of fund reselling in the banking system and credit guidance tools and prevent inflationary consequences of those in addition to facilitating economic growth.

Despite international sanctions and pressures, Iran needs to improve its public welfare and adopt development policies in order to follow the path of developing countries. Among the factors influencing development plans, the banks play a key role in guiding and strengthening the country’s development strategies, therefore, the need to reform the banking system and make it more development-oriented should be placed at the top of the policymakers’ plans.

In other words, reforming the prospect of the banking system and aligning it with the governance of development is inevitable for the country as development opportunities are very volatile. However, the reform of the banking system must be accompanied by other reforms in the economic environment and other economic variables in order to ultimately lead to the improvement of economic indicators..

The most important article that needs to be done to organize the banking system is to enhance the relationship between the government and the central bank. When we talk about banks, one is the central bank as the regulator and the other one is the banking network. In recent years, the government has also enacted mandatory policies for the banking network such as guaranteed purchases which were imposed on the banking network and challenged the banks. The challenge of paid facilities which are not received. The government does not give money to private banks yet has mandatory policies on them.

The private banks are formed by people’s money, which means the government use people’s money. Since the government has weakened these banks, they have not been able to assist investors and the manufacturing sector. In other words, the central bank has indirectly helped the government, and bank’s overdrafts have risen sharply.

The government must aim to restrain liquidity in order to be agile. Otherwise, unbridled inflation will grow and no economic and development program will be feasible.

According to economic indicators, 50% of the exchange rate is controllable, and if the government has the right plan, the exchange rate can fall to 50% of the current price. However, as long as there is a policy of converting currency into rials and freezing money in the central bank and interfering in the foreign exchange market and consequently intervening on the monetary base without a strategic plan, inflationary factors cannot be eliminated. Inflation factors should be considered collectively; Even if only one factor were not considered in analyzing it, there would appear a noticeable mistake in the results.

For instance, governments often contemplate sanctions as a factor in inflation, while only the immediate shocks caused by sanctions effect on inflation. A two-year-old sanction no longer affects inflation, so other factors need to be investigated.

 The fact that the previous government reduced inflation from 30% to below 6% in the first four years, yet, it raised to about 40% again in the second four years, is a sign that the targeted indicators to reduce inflation have not been persistent.

The helmsmen of the country’s economy have emphasized on controlling rates such as interest rates in the banking system without a systemic view for many years and have considered the radicle of most of the problems in the inefficiency of the banking system while a balanced economic vision notifies us that grammatical manipulation of a variable without considering other contextual variables in the economy is a fatal fault. The effects and results of this view on the country’s economic situation and the banking system could be evident in recent years.

Additionally, reforms in the banking system require modifications in the method of central banking as the most important governing body in the monetary sector and supervising the activities of all banks. It is worth considering the country’s monetary and banking law well states in a comprehensive conclusion that the main mission of the Central Bank of the Islamic Republic of Iran is to provide appropriate circumstance for the country’s economic development by implementing monetary and credit policies and supporting the government in the implementation of various programs, including stabilization and economic development programs. In this regard, maintaining the stability of the value of money and the balance of payments, along with continuous economic growth through the implementation of monetary policy, is one of its important goals. The text of the law explicitly mentions the importance of the central bank’s role in achieving economic growth, development and progress. In such a situation, the central bank not only must reform its monetary policy to take into account the endogenous or exogenous nature of money and credit and its effect on price and quantity in the economy, whereas, at the present, it focuses solely on the exogenous nature of money and its effect on price, but also ought to comprehensively manage the economic investments profited by bank financing. Therefore, according to the state of the economy, it needs to adjust the policies to be implemented a balanced and appropriate combination of growth patterns with user, capitalist and neutral technologies. Determining such a combination of growth patterns with guiding the banks of the system to make investments in the terms of economic growth and development is one of the crucial measures that the central bank have to take.