The High Council of Securities and Exchange has given the go-ahead to banks to issue certificate of deposits that can be publically traded in the equities market.
The Governor of Central Bank of Iran Ali Salehabadi made the announcement at a meeting with bank CEOs on Tuesday.
Certificate of deposit (CD) is offered by banks and credit institutions, providing a fixed interest rate in exchange for the customer agreeing to leave a lump sum untouched for a predetermined period.
Addressing the managers, Salehabadi said the central bank will soon announce rules for initial public offering as well as secondary trade of CDs in the equities market.
“This will create a suitable tool for banks to pool resources. CDs issued by banks can be traded in the capital market,” he was quoted as by the CBI website.
The move is seen as the regulator’s effort to attract depositors to banks, giving them the opportunity to sell CDs in the equities market before maturity.
Seen as a newcomer to the bourse, CDs are not unknown to Iranian banking system. It existed for years and was a relatively better substitute for ordinary bank deposits.
CDs are reportedly more advantageous to banks than ordinary deposits. As per existing rules, lenders are allowed to issue CDs up to a ceiling subject to their funding needs. Banks issue CDs when needed and usually do so to a level that they are confident their long-term deposits are adequate. With ordinary deposits, lenders have to pay interest to unlimited amounts of deposits.
They are more attractive to depositors, too, because of higher breaking fee. CDs have 10% break fees while for ordinary long-term deposits it is 8%. This means depositors receive 10% interest if they break the term deposit and withdraw before maturity date.
Interest on deposits in Iranian banks are way lower than the inflation rate and decisions-makers have resisted raising rates for years, apparently because of the frail financial status of banks and the potential detrimental impact on investment in the share market.
Low rates have forced savers to keep their money in banks for shorter periods as the national currency tanks and galloping inflation eats away at their rainy-day savings.
As per a recent CBI report, sight deposits are growing at a higher pace while term deposits lose appeal.
Total sight deposits amounted to 8,671.1 trillion rials ($27.9 billion) by end of the first calendar month on April 20, which was 47.3% higher on the same period last year. Term deposit rose 36.8% to 38,713.1 trillion rials ($124.8b).
The highest interest banks now pay is 18% on deposits that stay at least for two-years.
