Vision sion fo for th the fi financial ancial services rvices industry dustry • As Asad A. A. Jafre ree 0
Agenda Background to FSI Vision Project Issues facing the banking industry Financial Market Development Pillars of the FSI Vision 1
1 Background to FSI Vision Project 2 2
Concerns regarding the financial services industry Is the banking sector adequately serving the needs of the real economy to spur growth? Does the banking sector have adequate financially stability? Is there sufficient financial inclusion with access to financial services across Iran, including disadvantaged and low income segments? 3
Concerns regarding the financial services industry Does the banking sector have adequate technology to serve its customers efficiently and provide reliable reporting to the CBI? Are financial statements reliable and based on international standards? Are banks in Iran ready and prepared to be part of the global financial system now sanctions have been suspended? 4
Background to the FSI Vision The financial services industry in Iran can be an engine for economic growth. We look to a time when Iran’s Financial Services Industry is recognised as effectively serving the economy and population. That opportunity is being articulated in the FSI vision. 5
An IMF study showed that Iran had the highest NPL ratio in the peer group According to Akbar Torkan, a top adviser to Rouhani, the overdue loans have exceeded 2,200 trillion rials ($80.5 billion at the official exchange rate)…. As put by Gholam-Hossein Mohseni-Ejei, the judiciary spokesman, bad loans amount to $72.2 billion (at the official exchange rate). 6
Poor macroeconomic conditions lead to high NPLs with significant implications to the economy Increase in losses for Reduced Reduced demand for enterprises in real employment in goods and services economy economy Increased inability of Reduced production enterprises to of goods and service debt services High level of NPL in Reduced cash flows Reduced lending to banking sector for banks real economy Increased provisions Limits on ability of Reduced capital and write offs for banks to continue adequacy banks lending 7
Iran’s banking sector has also suffered from low interest rate spreads for over 5 years Interest rate spread (lending rate minus deposit rate, %) 10.0% 8.0% 6.0% 4.0% 2.4% 2.0% 0.4% 0.1% 0.0% 0.0% -0.2% 2004 2005 2006 2007 2008 2009 2010 2011 2012 -1.1% -1.3% -2.0% Azerbaijan Egypt, Arab Rep. Iran, Islamic Rep. Iraq Jordan Kuwait MENA (developing only) Oman Pakistan Qatar 8
The IMF has raised concerns in relation to the capital adequacy of Iran’s banks 9
Iran’s collateral and bankruptcy laws are deemed weak and do not facilitate the expansion of credit Strength of legal rights index (0=weak to 12=strong) - 2013 6 4 4 3 2 2 2 2 Iran, Islamic Egypt, Arab Saudi Arabia Turkey Brazil Russian India China Rep. Rep. Federation Strength of legal rights index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. The index ranges from 0 to 12, with higher scores indicating that these laws are better designed to expand access to credit. 10 10
Iran’s resolving insolvency ranking is very low as is the recovery rate on defaults Resolving Insolvency Recovery rate Rank out of 189 countries (percent) China China 53 36 Brazil Brazil 55 25.8 Russian Federation Russian Federation 65 43 Turkey Turkey 109 27.9 Egypt, Arab Rep. Egypt, Arab Rep. 126 26.6 India India 137 25.7 Iran, Islamic Rep. 138 Iran, Islamic Rep. 19.5 Saudi Arabia Saudi Arabia 163 28.7 11 11
These factors have contributed to lower credit to the private sector and reduced GDP Growth Domestic credit to private sector (% of GDP) 33.46% 11.39% GDP growth rate 3.94% -1.9% 12 12
Projected growth for Iran – Institute of International Finance (IIF) 13 13
Projected growth for Iran – ICAEW 14 14
Financial sector reforms "Ultimately, if mild reforms are implemented the sanctions relief will have only a moderate positive impact on the economy. If, on the other hand, more assertive and deeper reforms along the lines outlined above are carried out, the boost to confidence and investment inflows would put Iran’s economy on a significantly higher growth trajectory." Mr. Cerisola, IMF after concluding the 2015 Article IV Consultation 15 15
2 Issues facing the banking industry 16 16
The major issues facing the banks are shown below NPL 9.1 Debt capital market 8.9 Skills 8.8 SME & Consumer finance 7.9 Credit institutions 7.6 CG FSI 7.6 Foreign perception 7.3 CBI Power 7.1 Regulation 7.1 Technology 7.1 CG Economy 6.8 Priv sect access to finance 6.6 Corruption / fraud 6.0 Sharia interpretation 4.5 17 17
Biggest single factor facing the banking industry Regulation Skills NPL CBI Power 18 18
The three biggest issues facing banks Banking problems 10 9 8 7 6 NPL Skills Debt capital market These three issues had the highest scores showing they were the most problematic, they all had the same range (between 7 & 10) but the problem related to skills had a higher concentration of results than the other two problems cited 19 19
3 Financial Market Development 20 20
The low Financial Market Development has constrained growth in Iran 21 21
The WEF corporate survey highlights the most problematic factors for doing business Access to financing 16.9 Policy instability 13.0 Inflation 13.0 Inefficient government bureaucracy 11.5 Inadequate supply of infrastructure 10.6 Corruption 7.9 Foreign currency regulations 7.3 Restrictive labor regulations 5.6 Poor work ethic in national labor force 4.0 Inadequately educated workforce 3.5 Tax rates 2.0 Tax regulations 1.8 Insufficient capacity to innovate 1.5 Crime and theft 0.7 Government instability/coups 0.5 Poor public health 0.2 22 22
World Bank Financial Market Development measurement FINANCIAL INSTITUTIONS Private credit to GDP Financial institutions’ assets to GDP DEPTH M2 to GDP Deposits to GDP Gross value-added of the financial sector to GDP Accounts per thousand adults (commercial banks) ACCESS Branches per 100,000 adults (commercial banks) % of people with a bank account % of firms with line of credit (all firms) % of firms with line of credit (small firms) Net interest margin EFFICIENCY Lending-deposits spread Non-interest income to total income Overhead costs (% of total assets) Profitability (return on assets, return on equity) Boone indicator (or Herfindahl or H-statistics) Z-score (or distance to default) STABILITY Capital adequacy ratios Asset quality ratios Liquidity ratios Other (net foreign exchange position to capital etc.) 23 23
WB Financial depth: Private credit by deposit money banks to GDP (%) Mexico 18 Pakistan 21 Indonesia 24.4 Iran, Islamic Rep. 24.6 Philippines 28.7 Nigeria 29.9 Egypt, Arab Rep. 33.2 Turkey 38.5 Bangladesh 41.2 Russian Federation 42.1 Saudi Arabia 44.8 India 45.5 Brazil 50.3 Korea, Rep. 100.8 Vietnam 104.4 China 118.1 24 24
WEF: Availability of financial services Iran, Islamic Rep. 2.9 Egypt, Arab Rep. 3.4 Vietnam 3.9 Korea, Rep. 4.0 Nigeria 4.1 Bangladesh 4.1 Pakistan 4.2 India 4.2 Mexico 4.3 Russian Federation 4.4 China 4.5 Saudi Arabia 4.9 Indonesia 4.9 Philippines 5.0 Turkey 5.2 Brazil 5.2 25 25
WB: Financial Access - Account at a formal financial institution (%) Indonesia 5.6 Egypt, Arab Rep. 9.7 Pakistan 10.3 Vietnam 21.4 Philippines 26.6 Mexico 27.4 Nigeria 29.7 India 35.2 Bangladesh 39.6 Saudi Arabia 46.4 Russian Federation 48.2 Brazil 55.9 Turkey 57.6 China 63.8 Iran, Islamic Rep. 73.7 Korea, Rep. 93 26 26
WEF: Ease of access to loans Nigeria 1.6 Iran, Islamic Rep. 1.6 Egypt, Arab Rep. 1.9 Mexico 2.4 Bangladesh 2.4 Vietnam 2.6 Pakistan 2.6 Brazil 2.7 Turkey 2.9 Russian Federation 3.0 Philippines 3.5 Saudi Arabia 3.6 India 3.6 China 3.7 Korea, Rep. 3.9 Indonesia 3.9 27 27
WEF: Affordability of financial services Iran, Islamic Rep. 3.1 Egypt, Arab Rep. 3.3 Nigeria 3.5 Vietnam 3.6 Mexico 3.7 Korea, Rep. 3.9 Bangladesh 3.9 Pakistan 4.0 Russian Federation 4.1 India 4.1 China 4.4 Philippines 4.8 Turkey 4.9 Indonesia 4.9 Brazil 5.0 Saudi Arabia 5.1 28 28
WB: Financial Efficiency – Bank lending- deposit spread (%) Turkey Saudi Arabia India Iran, Islamic Rep. 0.1 Korea, Rep. 1.8 Vietnam 2.4 Indonesia 2.8 China 3.1 Mexico 4.4 Philippines 4.5 Egypt, Arab Rep. 4.9 Russian Federation 5.2 Bangladesh 5.2 Pakistan 6 Nigeria 8.8 Brazil 33.1 29 29
WB: Interest rate spread 30 30
WB: Financial stability - Bank Z-score Iran, Islamic Rep. Nigeria 0.1 Turkey 5.8 Russian Federation 7 Bangladesh 8.1 Korea, Rep. 10.2 Pakistan 13.4 Saudi Arabia 14.1 Vietnam 18.6 China 19.4 Brazil 21.2 Mexico 21.9 Philippines 22.8 Indonesia 37.9 Egypt, Arab Rep. 39.9 India 40.2 31 31
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