Unauthorized Institutions Imperil Capital Markets
Economy, Business And Markets

Unauthorized Institutions Imperil Capital Markets

The performance of unauthorized credit and financial institutions not only has affected the banking system but seems to be stretched to capital markets now, economic Persian daily Forsat Emrooz suggests in a recent report.
“The activities of unauthorized credit and financial institutions are among the main causes lying behind the recent crisis in the stock market,” the newspaper quoted Economy Minister Ali Tayebnia, who appeared before the parliament last week to furnish the house with details of the situation in capital markets, as saying.
Central bank officials say certain institutions illegally offer higher interest rates to deposits in an effort to attract the public capital.
“Via irregular activity outside the legal frameworks, the institutions have managed to absorb high amount of liquidity from the capital markets, which has apparently given rise to a liquidity crisis in the stock market,” Tayebnia noted.

Unauthorized institutions mushroomed during a particular period of time (under the previous administration) when the Central Bank of Iran paid the least attention to the possible harmful consequences of their activities, the paper said, citing Farshad Ghorbani, an economic expert.
“As a result of lack of CBI control over the establishment and activity of the financial institutions in that period, the number of unauthorized financial institutions spread like wild mushrooms and recent efforts made by the central bank to organize the institutions have hardly proven successful,” Ghorbani said.    
The domain of unauthorized credit institutions has become so extensive that “the CBI cannot confront them without the help of other bodies,” said Sirous Karami, another economic expert.
However, he noted that this cannot be interpreted as an indication of CBI’s unwillingness in dealing with such institutions, as “the regulator has tried several times to confront them in recent years, but had little success.”  
 Damage Mechanism
Unauthorized institutions pay unusually high interests that cannot normally be offered by commercial banks.
Even from an Islamic banking viewpoint, the activity of these institutions is under question, said the expert, as “such profit can be produced in no other way but speculative activities.”
Confirming the statements made by the minister of economy regarding the distractive influence of unauthorized institutions on capital markets, Karimi added that the institutions are not “directly” responsible for the recent crisis in stock market, as it totally originated from different reasons. “However, the activity of these institutions did play a role in intensifying the crisis.”
“High expected returns of the institutions triggered the stockholders to pull out their money from the stock market and deposit it in unauthorized credit institutions in the hope of gaining higher interests,” he explained.
Nevertheless, stock market volatility is certainly not the only damage unauthorized institutions have caused, Karami argued.
Right before the rial lost more than 60% of its value against the dollar and other foreign major currencies in 2012-13, the unauthorized institutions also manipulated the foreign exchange market “by injecting their affluent liquidity resources into the market,” he said. “That was an effective factor which led to sudden fall of the rial’s value.”  
Warning the central bank about the potential risks of aggregate liquidity in the hands of organizations that are not operating under the central bank’s supervision, he said, “In certain conditions, these institutions might come to target, for example, the consumer goods.”
They can create a speculative demand for consumer goods by buying and storing them, he said, “giving rise to extremely high prices.”

Although the central bank is now regaining its stature as the regulator of the monetary and financial markets, other agencies were also involved in shaping the unauthorized institutions in the past, Karami noted.  
The ministry of cooperatives, which apparently was assigned by the previous government to issue licenses for financial institutions, issued a great number of certificates for such institutions, he said.  “The regulators now need to address the weaknesses of the regulatory framework, and not let entities interfere in capital markets anymore.”
He also urged the CBI “to prompt the government to take serious measures against the unauthorized financial institutions.”

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