TBY talks to Dr. Valiollah Seif, CEO of Karafarin Bank.

Dr. Valiollah Seif
Dr. Valiollah Seif is currently CEO of Karafarin Bank.

What was behind the establishment of Karafarin Bank?

Karafarin Bank was initially established as a non-bank credit institution with IR30 billion in capital. The founding shareholders were members of the Association of Industrial Managers of Iran, the Association of Construction Companies of Iran, the Utility Engineers Society, and the Architects and Urban Development Society, together with a group of senior bankers and, of course, the public. It was registered with the Companies Registrar's Office of Tehran in December 1999 and operated as a non-bank credit institution until December 2001. The services currently available from Karafarin Bank cover a wide range from retail to commercial activities, with investment banking also provided.

How have the changes in the banking sector, with the growth of private banking interests, affected your bank? Will the privatization of the state-owned banks increase the level of competition in the marketplace?

The privatization of the state-owned banks will surely give a new impetus to these developments. Its effect upon the structure of the banking system has been rather limited as it is really in its early stages. The competition has become fiercer with the newer private banks entering the market. Naturally, they want to increase their share of the market in a period of international turmoil and uncertainties for blue-chip investors.

Karafarin Bank has adopted, since its early days, a rather conservative approach and remains the smallest private bank in size and in terms of the number of branches. This situation was accentuated by the entrance of the new banks. Obviously, if we continued this approach, our share of the market would shrink even further. There is now a slight shift in our policy and our intention is to extend, step by step, our branch network and increase our comparative market share. The fact remains that our profitability has remained high throughout these years.

What sort of steps do you think need to be taken to increase the per capita savings rate in Iran?

To increase this amount is within the power and prerogative of the monetary authorities and goes well beyond the ways and means of one bank, or even the banking system as a whole; it is basically a function of the growth and the level of national income and its distribution. Be that as it may, for our bank in 2009, the average deposit amounted to some IR108 million (about $10,000). This is a rather respectable amount for the banking system, and is a direct product of Karafarin Bank's strategy of focusing on a smaller number of clients primarily composed of corporate clients and the upper strata income groups.

As for the term of deposits, our strategy, however, within the permitted leeway (limits on the permitted rates of profit) set by the Central Bank of Iran (CBI), has been to concentrate on short-term deposits, including one-year investment deposits. Previously, the CBI accorded a more flexible position to private banks in determining the rate of profit on deposits. This is no longer the case and all banks are subject to the same criteria as regards remunerating depositors. For the banks, the only means of differentiating themselves is by offering better services and through targeted advertising.

Where lie the future potential areas for the expansion of credit facilities? Retail, SMEs, or large institutional clients?

The potential for investment and the provision of credit in Iran is enormous, as there remains so much to be done. Nonetheless, it is a huge task to determine which projects are viable and where the risks justify bank credit. This is also a structural and fundamental question because it is only through macroeconomic planning and input-output analyses that we can meaningfully determine economic priorities, risk optimization, and how credit distribution should be managed. Bankers mostly operate on the level of microeconomic feasibilities.

In most countries economic policy makers provide guidelines and supply incentives for the promotion of investment in less-developed sectors, as well as in infrastructure. It would be unrealistic to expect even the well-established state-owned banks to undertake the financing of infrastructure projects, let alone recently established privately owned banks. However, some private banks, including Karafarin Bank, are willing and have the capability to participate in the syndication of projects of national importance. But as a general rule, we finance exclusively private sector projects, and, all things being equal, medium-sized projects are preferred over small ones. Generally, we avoid personal loans.

How did the global financial crisis affect your bank and the Iranian economy in general?

The banks hardest hit by the crisis were those most exposed to international activities. So as far as Iran was concerned, the immediate effect seemed minimal as the economy was relatively isolated because of various political and economic factors. The oil revenue has also helped to shield the economy. But as the oil sector itself was hit, in turn the whole economy was affected. The economy was already weakened by inflation and faltering investment and was rather vulnerable. Consequently, it is rather hard to precisely determine the negative impact of the international crisis. As for the banks, the enormous increase in their non-performing and doubtful assets from 11% in 2007 to 22% in 2009 must have partly been due to this effect.

What role is the CBI providing in terms of supervision over the private banking industry?

Previously, privately owned banks were given slightly favorable treatment by the CBI. This is no more the case as of two years ago. We are subject to the same reserve requirements as the state-owned banks and are expected to pay the same rates of profit (interest) as the state-owned banks. Ditto for the sectoral distribution of facilities—the exception being mandatory facilities the state banks are subject to. Otherwise, the difference lies in the slightly different structure of our balance sheets and the choice of Islamic contracts. Last year, the ratio of sight deposits to total deposits was 4.8% for the private banks and 32.7% for the state-owned banks; 82.4% of the private banks' contracts were in the form of participatory contracts, while in the state-owned banks transactional contracts accounted for 71.7% of the contracts.

How has the private banking industry grown in Iran, and how much of the market does it now control?

There is no precise estimate of the share of the private sector in the economy in recent years. Most economists believe the great bulk of the economy is run by the public sector and semi-public organizations. Nor are there sufficient grounds to assume that it has been rising. But the share of private banks in the banking sector has increased considerably: from 2002 to 2008 their share of total deposits increased from 1.6% to 23%, while facilities rose from 1.2% to 18.6%. As might be expected, gradually the difference between the rate of growth of private banks and that of state banks has narrowed. On the other hand, there are indications that the share of the semi-public sector has been rising, both in the economy as a whole as well as the banking system. Here again the statistics are sparse. For instance, a study of the balance sheets of five non-bank unauthorized financial institutions during a period of 1.5 years ending in February 2009 showed that their share of deposits rose from 8% to 13.4% and the share of their facilities rose from 6.3% to 10.8%—a great leap forward.

What do you see as the forward-looking scenario for the Iranian banking industry, and will the regulation allowing foreign investors to have up to a 40% stake change anything?

Today, the CBI is dealing with an ever-increasing demand for new licenses, and privately owned banks seem to have carved out a niche for themselves. They now account for between one-fifth and a quarter of the market in terms of total deposits and outstanding credit. The new, more lively competition between the banks has raised the standard of efficiency in the banking system. The private banks have taken over a huge chunk of the unofficial market in which money lenders operated—although some continue to operate—and helped to lower the average rate of profit on credit facilities. We may attribute to them the introduction of new high quality services and, most important of all, transparency. As mentioned before, there seems to be much interest in setting up new banks and there is no dearth of new demand for licenses from the CBI. As a result, we may accept many more private banks. According to the statements made by CBI authorities, the monetary authorities intend to extend their supervision over unauthorized financial institutions. At the same time, the minimum capital requirements are being raised, so that the smaller institutions have to merge. Only recently, two formerly unauthorized institutions put up the capital required and were granted licenses as private banks. Also, last year some 875 credit coops and 5 gharz-al-hasanehs (charity) funds obtained their official permits to operate.

Most bankers welcome the idea of allowing foreign participation in Iranian banks. This would help open up and extend our international relations and create a more competitive environment. We could only benefit from such a policy and train a new generation of bankers well versed in modern banking techniques. One should, however, expect that initially this policy to be tried in the region and in neighboring countries—its wider application should take several years.