A Model for Asset Quality Review in Iranian Banks

Objective
Asset quality review is a core concept in accounting and banking literature, closely tied to financial stability, the effectiveness of monetary policy, and the overall sustainability of the economy. In the current Iranian economy, which is heavily bank-centered and where banks play a primary role in resource mobilization and allocation, assessing asset quality has gained particular importance. Structural problems such as balance sheet mismatches and liquidity constraints, a growing volume of non-performing loans, sanctions and international restrictions, low efficiency in risk management, and capital shortages have made asset quality review a critical necessity for improving the health of the banking system. However, a review of domestic and international studies indicates that a comprehensive and localized framework for reviewing the asset quality of Iranian banks has not yet been developed. Therefore, the main objective of the present study is to present an integrated and indigenous model for asset quality review in Iranian banks and to identify the key factors influencing this process.
Methods
The research adopts a mixed qualitative–quantitative approach. In the first phase, through a review of theoretical and empirical literature and in-depth interviews with banking and academic experts, the dimensions and indicators affecting asset quality were identified. Then, using the fuzzy Delphi technique and the opinions of 37 banking experts, 53 initial indicators were screened, leading to the removal of three indicators and the final confirmation of 50 indicators. In the second phase, the conceptual model of the study was tested using Structural Equation Modeling (SEM) and Smart PLS 3.0 based on data collected from 210 banking experts. Reliability and validity of the instruments were evaluated using Cronbach’s alpha, confirmatory factor analysis, convergent and discriminant validity indices, and KMO and Bartlett’s tests, all of which demonstrated satisfactory results. Furthermore, the overall model fit, assessed by the GOF index (0.664) and the mean Communality (0.673), confirmed the adequacy of the proposed model.
Results
The findings indicate that factors affecting asset quality in banks can be categorized into five main dimensions: financial, credit/loans, supervisory, macroeconomic, and legal/ institutional. Path coefficients and factor loadings showed that all identified dimensions and indicators influence asset quality, though their magnitude and importance vary. The priority analysis revealed that the most critical dimension is the supervisory factor, which includes staff training in risk management, post-lending supervision, comprehensive information systems, client ranking, and accurate collateral evaluation. This is followed by legal/institutional factors (e.g., the role of the Securities and Exchange Organization in enhancing transparency, independent audit of financial statements, and bankruptcy law reforms), macroeconomic factors (e.g., inflation rate, sanctions, recession, and GDP growth), credit-related factors (e.g., ratio of non-performing and doubtful loans), and finally, financial factors.
Conclusion
This study indicates that improving asset quality in Iranian banks cannot rely on a single dimension; a combination of supervisory, legal, economic, and managerial measures must be implemented simultaneously. However, the primary priority should be strengthening both intra- and extra-bank supervisory mechanisms, as weaknesses in supervision are at the root of many banking problems in Iran, such as rising non-performing loans and declining capital efficiency. Additionally, the findings suggest that economic policymakers and the Central Bank can play a crucial role in enhancing asset quality through regulatory reforms, the development of transparent asset valuation standards, improved auditing mechanisms, and more effective supervision. Practically, the proposed model can serve as an operational tool for bank managers, regulatory authorities, and policymakers to identify strengths and weaknesses in asset portfolios and facilitate banking reforms in Iran. Presenting a comprehensive and localized model, this study seeks to constitute a step toward enhancing the financial health of Iranian banks and strengthening the country’s economic stability.