The minister of economic affairs and finance stepped up his criticism of unauthorized banks and financial institutions in his latest comments on the issue, saying the government “would have zero tolerance” for the institutions that do not comply with the new benchmark interest rate set by the Monetary and Credit Council.
The MCC – headed by the governor of the central bank – reduced the cap on one-year deposit interest rates by 200 basis points to 20 percent, on April 28. The minister of economy and a number of lawmakers are also members of the council.
Tayebnia deems the uncertified financial institutions a major hurdle to economic stability. Addressing a two-day meeting of Bank Saderat’s mangers on May 5-6, the minister called on all banks to sever their ties with unwarranted financial institutions, Banker reported on Saturday.
“I emphasize the importance of the banking network to discontinue its collaboration with these institutes’’, he said, warning that investment in such banks would involve “high risks”.
Unauthorized banks are especially notorious for their high returns on deposit with the average rates of 28%.
Tayebnia referred to Bank Saderat as an institution with exemplary achievements in quality banking services. “Bank Saderat has played a satisfactory role in standing against the ‘unjust and unprecedented sanctions’ imposed on the people of Iran”, he said.
Tale of Unauthorized Banks
The central bank has threatened to dissolve unauthorized banks, but these banks have so far defied the central bank’s warnings. The central bank’s passivity towards them is partly due to the large financial resources they hold. As these institutions hold a large portion of people’s savings dissolving them could further destabilize Iran’s financial system.
There is also a legal loophole which puts some of the uncertified institutions outside of central bank jurisdiction.
ISNA reported on Saturday that Iran is the only country with nearly 7,000 unsupervised institutions that are making profit in the money market with impunity. The agency said the central bank is not singularly to blame since “certain laws are working in the interest of” these institutions.
Mizan Institution
A well-known crisis about the uncertified institutions happened for Mizan financial institution in the end of the last Iranian year (ended March 20). Mizan was an unauthorized financial institution which had won the trust of many investors as a credible firm, but it ran aground when its investment in a grand project went south.
Large crowds made a run on the institution, but it did not have enough capital to return the customers’ deposits. Although the central bank has normally distanced itself from the unauthorized financial firms, it announced earlier that Mizan may be merged with Bank Saderat, an attempt that officials hope will help end the crisis. The merger, however, has not yet taken place.
Mohammad Reza Movaffagh, the economic deputy governor of North Khorasan – a province with substantial investment in Mizan Bank -- said although the central bank favors such a takeover, Mizan’s managers are opposed to it and want to handle the imbroglio themselves.
The uncertainty surrounding the crisis is further evidence that the central bank is helpless in the face of the reckless behavior of unwarranted banks. It is said that 15-20% of the money supply is held by such institutions.
