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Capital Markets

Banking reform moves up the agenda

Iran's banking sector is dominated by five large state-owned commercial banks, accompanied by five smaller ones, which are required to conform to Islamic banking principles. As a rule, the public banks post weak profits, are undercapitalized and over-staffed, and are run by risk-averse managers. James McCormack at Fitch Ratings says the sector's weakness is state induced. "Sectoral credit allocations, deposit rates and lending rates are prescribed by the authorities based on economic development objectives as opposed to credit risk or monetary policy considerations," he says. The banks are thus "direct instruments of public policy". New licences

In an effort to tackle the black market of moneylenders and speculative traders, the Central Bank of Iran began from the mid-1990s to look at ways of increasing private-sector involvement. It recently licensed four private banks and authorized the creation of private insurance companies, with the proviso that they are 100% Iranian owned. Private banks are now estimated to account for around 5% of the system's assets and are being closely monitored by the central bank.

The central bank is expected to issue more licences soon, and this is clearly one way in which the banking sector can be gradually reformed.

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