Profitability Paradox in Iranian Commercial Banks Business Model: A Study Based on System Dynamics Methodology

اقتصاد پولی مالی

Article 7, Volume 26, Issue 18, December 2019, Pages 197-242   

Document Type: پژوهشی

DOI: 10.22067/pm.v26i17.65314

Authors

Mahdi Bastan^{* 1}; Sareh Akbarpour²; Alimohammad Ahmadvand²

¹Amirkabir University of Technology

²Eyvanekey University

Abstract

Iranian banking system was considered as one of the most important pillars of financing and this is due to the unsuitable growth of the country's capital market, so the banks must satisfy the important role in the Iran economy. Iranian Banks as economic lifeline of county needs to have an appropriate business model for doing this act and reaching sustainable profitability power for its shareholders. For many Iranian banks earn money by customer’s deposits attraction with definite and certain interest rate and giving this resource to their other customers as a facilities and loans with specific and deterministic higher interest rate, But by seeing the banks financial documents and analysis of their financial performance indicators, this is clear that their business procedure was failed to provide profitability and value creation for its shareholders. Really linear and one-way approach to profitability was created a business procedure for them which they have learned to earn money only by credit operation by deposit attraction and giving high-interest rate loans and facilities. This method has a specific spread that called hagh-Al-Vekaleh in Islamic banking system. The main problem was originated from this approach. Implementation of this approach has some consequences and feedback effects which will increase risk weighted assets and then decreasing capital adequacy ratio and other financial indicators. Finally it was converged to share-value reduction. This is opposite of primary objective and called” Banking Paradox” in this research. It was used a holistic and system approach based methodology for finding the main causes of problems and prepare effectiveness solution for managing it, by presenting a mathematical model which provide scenario-making and simulation of decision and policies as scenario on model. By running what-if analysis, learning form system will occur. The results show that there are not any way to allude form this banking paradox, only by changing some important parameters such as deposit interest rate, loans interest rate, regulatory reserve ration and etc. only by shifting to new business model for banking that emphasize on fee incomes and avoid from interest incomes, they can reach to sustainable profitability which create value for shareholders.

Keywords

profitability; Business model of Banks; Capital Adequecy Ratio; Interset Income; Non-Interest Income

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