The Executive Board of the Central Bank of Iran said banks can raise the interest rate on certificates of deposit (CDs) up to 23%.
Mostafa Qamari Vafa, head of the CBI public relations department, wrote on Twitter that "Banks can issue certificates of deposit with 23% interest…Details about the board's decision will be announced in the coming days."
Certificates of deposit provide a fixed interest rate in exchange for the customer agreeing to keep a lump sum untouched for a predetermined period. Normally the time limit is 12 months, but if a client wants to withdraw, the interest rate is cut as a penalty.
Data published by Rade, a local website involved in comparing banking services, shows that all banks had been offering CDs at 18%.
Earlier, the High Council of Securities and Exchange had given the go-ahead to banks to issue CDs that can be publicly traded in the equities market.
The move is seen as the regulator’s renewed bid to attract deposits to banks giving them the option to sell CDs in the equities market before maturity.
Though seen as a newcomer to the bourse, CDs are not new to Iran’s banking industry and have existed for years offering a comparatively better substitute for ordinary bank deposits.
CDs are reportedly more advantageous to banks than ordinary deposits. Lenders are allowed to issue CDs up to a ceiling subject to their funding needs.
Banks can issue CDs when they see the need and usually do so to a level that they are confident their long-term deposits are adequate. For ordinary deposits lenders pay interest on unlimited amounts of deposits.
What Comes Next?
EcoIran interpreted the latest CBI move as paving the way for the much-debated higher deposit rates. The website quoted one informed source as saying that the CBI will soon allow banks to increase interest on deposits by 5%.
The Money and Credit Council (MCC), the top decision-making body of financial and monetary markets, is expected to endorse the higher rates. The CBI Governor Ali Salehabadi this week commented on the potential higher rates.
In mid-2020 the MCC increased interest rates on one-year maturity deposits by 1 percentage point to 16%, on two-year deposits the rate was set at 18%. The rate for short-term deposits with 3-month maturity was hiked by 2 percentage points to 12%.
The CBI measure comes after in the past several months it warned banks and credit institutions that offering higher interest rates is illegal and those in breach would face the law.
The regulator announced 14% for six-month deposits, up 3 percentage points while the cap on lending rates was 18% -- seen by most businesses as unaffordable.
Despite the warnings some private and state lenders have been offering interests as high as 22% and sometimes 24% to selected clients to attract big money and compete with their peers.
Banks argue that the rates “must rise in tandem” with the high and rising inflation to make it attractive to savers. Interest that banks at best is less than half the annual inflation rate and in many cases far much lower.
The average goods and services Consumer Price Index in the 12-months ending Nov. 21 increased by 50.2% for the first decile (the lowest income households) and jumped 41.7% for the 10th decile (highest income).
