Although the Central Bank of Iran has warned the public not to invest with illegal credit institutions, “this is at best merely an informative act,” an advisor to minister of industry, mine, and trade said, calling for a reform in the banking system.
“To tackle illegal operations, the monetary and banking structure needs to be overhauled,” Mahmoud Dodangeh, also a member of Iran’s Chamber of Commerce, stated, as reported by ISNA.
“Warning customers against entering business with illegal credit institutions is a surely positive step, nevertheless, the CBI had better closely focus on effective inspection until proper mechanisms are introduced,” the news agency quoted him as saying.
With closer and more comprehensive auditing over a given period of time, all banking and monetary activities could finally come under the supervision of the CBI.
Bilateral trust between clients and the banking system is highly valued and indispensable.
To boost the domestic economy the country largely relies on financial resources provided by the general public; the more the clients’ deposits are the higher the opportunities of providing firms with needed liquidity.
With insufficient monitoring, clients’ trust in the banking system would break and several problems would arise, the official warned.
One of the main problems’ with which the domestic economy commonly struggles with is the fact that the actual productive sectors of the economy (namely manufacturing) are not advancing; therefore, a large portion of financial resources flow towards unproductive economic sectors such as the financial sector and intermediation.
The main reason behind setting up financial institutions should be to provide effective backup for the productive sectors of the economy. This process is unfortunately flawed in Iran, as the CBI – the major custodian of the country’s monetary and foreign exchange system – has failed to control the illegal institutions.
Although formal regulations require that any institution planning to carry out monetary and banking activities to uphold the regulations of and be supervised by the central bank, certain institutions have obtained permits using mechanisms that do not involve the CBI. That is to say, through organizations which should not be permitted to issue work permits in the first place.
At this point, given the soaring number of illegal credit institutions, even if all were to join the legal banking system, the CBI would be unable to properly control their activities for monitoring resources are limited.
To minimize financial misconduct the banking system needs to undergo major reform.
The proper nature of credit institutions and their activities must be laid out and their positions within the banking system clarified.
Attending to single cases will not amount to anything significant; the CBI should introduce proper mechanisms and managerial levels needed for effective monitoring and oblige all institutions to function within the legal monetary and banking frameworks.
Only with such solid approaches can superior monitoring be intensively implemented.
