TBY talks to Vali Zarrabieh, CEO of Saman Bank.
TBY Can you give us some background information on Saman Bank? When was the bank established?
VALI ZARRABIEH We started our activities in September 1999. Basically, we received the first general license for a non-bank credit institute, and this was the first such license granted by the Central Bank of Iran (CBI) to a private entity after the Islamic Revolution. Based on the capital requirement for a credit institute at the time, we started with $1.1 million in fully paid capital. It is worth noting that we applied for the license two years prior to receiving it. The ex-governor of the CBI, Dr. Noorbakhsh, was in favor of the privatization of financial institutions to boost the sector’s competition, dynamism, and development, and he managed to convince the Parliament to permit the issuance of such licenses. The CBI started with granting licenses for non-bank credit institutes. The only point that distinguished them from a bank was not having the permission to open current accounts and issue checkbooks. All other services, including deposit taking and granting loans, were permissible. Two years after that the CBI announced it would start granting banking licenses, and credit institutes that could increase their capital to $20 million were able to apply for one. We followed suit and started increasing our capital to $20 million as well. We were the third institution to receive a license purely due to the fact that all our shareholders were and are from the private sector with manufacturing backgrounds. Accumulating the required capital was a huge task and time consuming, given the fact that they did not want to dilute the ownership of the bank. EN Bank and Karafarin Bank received their licenses before we did. Currently, EN Bank is rightly using this claim to be “the first private bank of IR Iran” in its branding and advertisements. Actually, at the beginning only four credit institutes were granted a license in a short span of time, and we were the first to be granted a general license. Later on EN and Karafarin managed to increase their capital sooner than we did. I must say that, however, we were the trend setter, by introducing many new concepts. In fact the software we developed for our operations is being used by almost all private banks today, and the IT company we established is now one of the largest independent IT banking solution providers in the country.
How many branches do you have throughout Iran?
We have 120 branches at present with another 10 branches under construction. When we devised our strategy at the very beginning for 2001-2006 we produced a five-year plan focusing on product innovation by utilizing IT, and the opening of 250 branches. And during this time a lot of parameters changed, and so did our plan. We introduced a new branch concept to the market. Traditionally, branches in Iran were designed in a way that 70% of the space was allocated to employees and 30% to customers. We changed this concept. We made it an open-stand branch. We allocated 70% of the space to clients and only 30% to our staff. And because we had the proper technology, we were able to reduce the number of employees per branch. Let me make a comparison. In its Bazaar branch, Bank Melli has more than 150 employees and we managed to run our Bazaar branch with 14 employees. We are talking about more than $120 million worth of deposits in one branch. Then we increased that number from 14 to 20. Among the private sector banks, the per branch deposit level is between $40 million and $42 million, whereas with state-owned banks it is about $4 million to $6 million. This comparison can easily be used as an index for efficiency, which means that private banks are 10 times more efficient than public banks in that respect. In terms of deposits per branch our ranking hovers between second and third after Parsian Bank and Bank Pasargad.
Do you think this is because you are working mainly with companies?
No, this is the case because we focus mainly on service. We are offering superior service, we care for our customers, we open branches in very convenient locations, and we have larger branches. The design is very important: We do not use counters, you can come and sit down in our branch and a branch manager can do all of your tasks from just withdrawing cash to processing loans. There is no going from one counter to another, which was the traditional way of banking.
How did the strategy of the bank change in its first five years?
During the first five years of operations, the competition changed because the government started offering new licenses to other banks. From the private sector, Parsian Bank entered the market, and Pasargad and Sarmaye started up their businesses. Now the structure of competition has changed. We had to focus more on electronic banking to maintain our lead and our edge in comparison with others. We established the very first Payment Service Provider (PSP) company by installing EFT-POS terminals in shops and retail outlets. So if I come back to the strategy of the bank, we were mainly focusing on the retail side. Although we did not have many branches available nationwide, we were mainly focused on retail and SMEs. The main reason for this was CBI regulations. You could not lend more than 20% of your capital base to one entity and its related parties or project, and of $20 million capital, 20% is just $4 million. So we could not approach large organizations needing $50 million or $100 million in financing. Therefore, we had to focus on SMEs and retail services to attract deposits. We were the first in many items, having had our strategy sketched around innovation. We were the first bank to introduce commercial papers, credit cards at a mass level, internet and mobile banking services, sharia-based overdraft facility, and the list continues.
Credit cards are very important for retail banking. Why does your bank only issue them to customers who are SME owners?
The only reason that we are unable to issue them en masse is that we do not have a proper credit-scoring agency in place, and so we have to take collateral to issue credit cards. This is why we cannot issue unsecured loans on a very large scale. We have issued 36,000 credit cards, and it is at present a special service for those customers who maintain deposits with us.
How many customers do you currently have and what percentage are internet customers?
In terms of customer numbers, we have just under 1 million, out of which we have more than 220,000 internet banking users. If we compare this to the more mature Western markets this is not a good ratio, but in this society it is amazing. Other banks have less than 10% of their customers using internet banking, though we are maintaining 23%. That is why we have been able to attract clients who are more educated. The average age of our clients is 34, they are mainly holding a bachelor’s degree or a diploma at least, and they generally run their own companies and businesses.
How do you plan to increase your capital?
As I said, we started with $1.1 million; right now our paid up capital stands at $225 million. This is the result of organic growth plus three capital increases through rights issues. The first one was to $20 million when we applied for a fully fledged banking license. The second one was from $25 million to $60 million, and the third one was from $90 million to $180 million. Having had a Return on Average Equity (ROAE) of more than 25% consistently for the past 10 years contributed significantly to our current capital level.
For the past couple of years, the CBI has changed regulations on the minimum capital necessary for a bank. It initially set it at $20 million, then after two years at $200 million, then $350 million, and now we have to increase our capital to $400 million by the end of March 2011 to maintain our license. This is why we changed our strategy between 2002 and 2007. And you see a lot of volatility in terms of regulations. The instability in regulations makes doing business difficult. We can increase our capital organically through our performance and our profitability, but when you are obliged to triple your capital in a very short span of time it becomes a different story. Then you have to bring in more money, fresh capital, from new investors. Bringing in a new investor in Iran is a very challenging task too. You need to have good partners that will be willing to stay with you on a long-term basis in order to maintain the stability of the organization. In a bank you cannot change partners every two years. Within a board you need consistency and long-term planning, since in a bank, unlike other organizations, you are working with peoples’ cash, money, and funds. It is not a privately owned venture per se in which you can do whatever you would like. Consistency and stability in terms of decision-making in a bank to me is a first priority. However, if you have to increase your capital in the way that the Central Bank of Iran requires, you need to bring in new partners because you cannot increase your capital only through your profitability. This is why it was a big challenge for us in particular. Yet, up to now we have managed to increase our capital and maintain the stability and consistency of our board members. The board members of Saman Bank have never changed over the last 10 years.
How did you solve the problem of increasing your capital?
We intend to do the increase to $400 million locally. For that we have prepared a workable plan. Some $100 million of it comes from this year’s profit, and the first six months’ results are looking quite promising. Another $75 million we will do through a rights issue.
What does the CBI seek to achieve by increasing the minimum capital requirements for private banks?
There are two objectives. One was to reduce competition, because the CBI had many applications for licenses. However, the second thing is that the private banking sector in Iran grew quite tremendously and we have to manage our capital adequacy ratio (CAR). Right now we are hovering around 10% in terms of CAR, but to be categorized as a sound bank you have to be at least above 12 or 13%. The minimum requirement is 8%, of which we are well above, but to be on the safe side it is better to be above 12 or 14%. Higher than that and you are not properly utilizing deposits, and lower than that you are exposed to greater risk. However, based on Basel II requirements, which we implemented last year and disclosed in our 2009 Annual Report, our CAR ratio is 13%. The CBI’s guideline states that we have to comply with Basel I requirements, but it has sent us some new guidelines stating that we have to start working on Basel II.
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