Iran moves from a crawl to a sprint

27 July 2015

The banking sector will struggle to play its vital role in planned investments

With Iran recording GDP of $316bn last year, investors and contractors see an opportunity in the country that could be worth hundreds of billions of dollars once sanctions are lifted.

Tehran is welcoming the chance to upgrade its outdated oil and gas sector, and infrastructure in other industries including transport and heavy industry.

Speculation on the planned investment suggests Iran aims to attract as much as $300bn of investment, although how and when this will materialise has yet to be seen.

For potential developers and investors looking to move into the market quickly, finding sources of finance will be a restraint. Foreign banks remain cautious despite the prospect of a large underdeveloped market, as many have already been burned by sanctions. Larger international banks could take up to a year to approve any dealings with the country.

This means the Iranian banking sector will have to play a vital role in financing the hoped-for economic boom. Needs will range from import-export and other wholesale finance to longer-term investments in development projects.

The problem is the financial sector has been strangled by sanctions in the past four years. Key public and private banks are already overstretched and burdened by high levels of bad debt, and may struggle to finance new schemes on the scale envisaged. The Bank of Industry & Mining, for example, was already carrying $1.3bn in non-performing loans by 2013, a ratio of 15.7 per cent.

Despite a $29bn boost to liquidity expected when Iran’s foreign assets are unfrozen, outdated and restrictive regulations on interest rates and risk management will remain a major stumbling block to addressing the banking system’s bad debt.

If this hurdle is to be successfully overcome, the Central Bank of Iran will need to take action to support lenders as they rejoin the international financial system and play catch-up with global developments.

Bringing banking regulations up to international standards could take years. It will also be dependent on political calculations, as Iran’s conservative government decides how it will engage with the rest of the world.

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