Transformations in Iran’s Banking System: Challenges and Reform Strategies

Abstract

Iran’s banking system, as one of the main pillars of financial intermediation and economic resource allocation, has faced numerous structural and functional challenges in recent decades. Using a thematic analysis approach and expert interviews with professionals in the banking and economic sectors, this study analyzes these challenges and proposes corrective strategies. Findings indicate that factors such as the traditional approach to banking, lack of diversity in funding sources, government pressure to grant mandatory loans, and banks’ involvement in non-banking commercial activities have significantly contributed to the sector’s imbalance. One of the central issues is banks’ entry into enterprise ownership and management, which diverts their focus from their core mission—optimal financial resource allocation—and leads to problems such as corruption, managerial inefficiency, and reduced transparency. Additionally, the government's dependence on banks and the emphasis on financing through them, instead of diversifying financial instruments, has led to a decline in efficiency and productivity within the banking system. Quantitative findings reveal that the capital adequacy ratio in some banks—such as Bank Melli, Parsian Bank, and Shahr Bank—has been negative, placing them in a critical situation, while banks such as Middle East Bank, Karafarin Bank, and Bank Mellat are in relatively better condition. Moreover, the accumulated losses of eleven banks exceeded 57,590 billion IRR (approximately 575.9 trillion IRR) in 2023. According to Article 141 of the Commercial Code, this level of accumulated loss indicates a potential risk of bankruptcy in these banks. To address these issues, the study proposes strategies such as revising and updating banking regulations, strengthening the Central Bank’s oversight using advanced technologies, increasing transparency in bank operations, and diversifying funding sources. Additionally, transitioning from a bank-centered to a production-centered approach and implementing genuine, targeted privatization could enhance banking performance. Establishing a credit rating system to reduce credit risks and optimize the loan allocation process is also essential. Implementing these reforms can not only reduce existing challenges but also pave the way for a more sustainable and effective role for the banking system in the country’s economic development. These reforms, alongside transparency and efficient supervision, can ensure the realization of Iran’s macroeconomic goals.