Economy, Business And Markets

Depositors in Uncertified Institutions Told to Fend for Themselves

Depositors in Uncertified Institutions Told to Fend for ThemselvesDepositors in Uncertified Institutions Told to Fend for Themselves

Depositors in uncertified financial institutions will not be backed by the government, says Economy Minister Ali Tayebni, affirming previous comments by the central bank governor. The warning comes as the central bank received authority from the parliament to counter illegal financial institutions.

“The government will not support people who have deposited in unauthorized financial institutions,” Tayebnia said on Thursday.

The illegal financial firms are said to hold a fifth of Iran’s money supply. There are over 7,000 financial and credit institutions and funds operating in Iran, six of which have significant annual turnover (up to 20 percent).

“The government will not extend any assistance to depositors who are receiving above the government’s approved interest rate, from unauthorized financial and credit institutions,” said Ali Tayebnia.

Iran’s government sets the interest rates banks can offer. However, due to weak oversight of these authoritative methods, unauthorized lenders have ignored government directives and offered high deposit rates. In a quest to attract more money, banks followed suit although many officially claimed otherwise. The cycle is said to have been reversed, with a spike in banks’ compliance with central bank policy. Yet the problem of the illegal financial entities remains.

The Money and Credit Council – a body within the central bank in charge of setting monetary policy – reduced the cap on one-year deposit interest rates by 200 basis points to 20 percent, on April 28. The decision to ease monetary policy took effect on May 6. The council is headed by the governor of the central bank, but the minister of economy and lawmakers are also members, heavily politicizing monetary policy decisions.

The central bank has threatened to dissolve the companies defying its directives several times in the past year, but they have remained warnings. The central bank’s passivity towards them is partly due the large financial resources they hold and partly a result of them being tied to other state entities. There is also a legal gap which puts some of these institutions outside of central bank supervision. As these institutions hold a large portion of people’s savings dissolving them could further destabilize Iran’s financial system, IMF says.

Parliamentarians recently clarified the banking law extending the central bank’s authority to help counter these institutions. If the Guardian Council – a body overseeing the parliament’s laws – confirms the parliament’s decision, the new approval would allow the regulator to supervise the activities of not only the banks but also the numerous financial institutions and funds, including those without an operation license from the central bank.

 Weathering the Storm!?

Tayebnia also called for banks to be lenient on their “good clients and manufacturers being in financial trouble” to help them return to profitability.

“The banking system’s role in containing the economic sanctions is unprecedented in the country’s history and on the international scale,” the economy minister said. Iran’s economy shrank by 6.8 and 1.9 percent in 2012-13 and 2013-14 fiscal years respectively, following the intensification of economic sanctions against Iran and macroeconomic mismanagement.

Sanctions against Iran were tightened after 2010 by the United Nations, European Union and United States over a nuclear dispute with the West. The sanctions included those on Iran’s banking system and the petroleum industry. Iran’s central bank was kicked out of the Swift interbank messaging network, barring it from billions of dollars in oil revenue. In consequence the Iranian rial suffered a 70 percent devaluation against all major currencies.

“Fortunately, the banking system succeeded in appropriately managing harsh conditions, though similar, even weaker, sanctions toppled governments” elsewhere in the past, Tayebnia said.

“Achievements in countering inflation are great,” said the minister, adding that the government plans to bring inflation below 10 percent. Iran’s inflation fell to 17.2 percent in 2014 from the prior year’s 39.3 percent, according to World Bank data.

The government has put economic growth on this year’s agenda, said Tayebnia, “accordingly the financial system is one of the fields requiring special attention.”