All the tough talk and bluster which was considered to be the signature approach of the Central Bank of Iran under Valiollah Seif toward unlicensed financial institutions, now seems to be on its way out. In a stark about-face, Hamid Tehranfar, vice governor of the central bank, declared in an interview released on Saturday that the CBI “is not after dismantling” uncertified credit and financial institutions.
The heavy-handed approach of the central bank toward unlicensed institutions showed signs of fading after the bank’s chief in an interview in June ruled out any “hasty action” in dealing with credit companies that had flouted CBI’s regulations.
Seif’s comments contradicted former threats against these institutions; warning them to follow rules or disband; when the perils they posed to the stability of the financial system were fervently pontificated upon and state TV was heavily criticized for running commercials of these companies.
Now Tehranfar in a conciliatory tone has spoken of the “market’s need” for these companies, whose number exceeded 6,000. He noted that CBI has no reasons to deny permits to the myriad of money and credit institutions scattered throughout the country.
“If an operating uncertified institution accepts our terms, we are willing to grant them license,” Tehranfar said. “These companies have emerged from the market’s hub and we don’t intend to disrupt the market.”
The growth of unlicensed credit and financial institutions picked up steam during the two-term presidency of Mahmoud Ahmadinejad, when the informal money markets became a hotbed for rent-seeking behavior and profitable speculative ventures.
Mizan Effect
One reason for the shift in CBI’s policy toward unlicensed companies is thought to be the rancorous closing of Mizan Financial Institution that resulted in all of its employees losing their jobs and its board members detained on judicial order.
Rumor had it that Mizan would be merged with Bank Saderat but the private lender released a statement last month, saying it had “no exposure to the institution’s liabilities,” leaving the fate of the vanished deposits in limbo.
In defense of the decision to dismantle Mizan, Tehranfar drew attention to that institution’s ties with Padideh Shandiz—a giant investment company that was banned for misconduct— saying that Mizan’s downfall was perpetrated by its investments in Padideh.
Mizan and Padideh had become strange bedfellows after the former provided the now defunct company with huge loans. Tehranfar added that Mizan had never complied with CBI’s standards and its managers lacked “banking expertise.”
Logjam
The already crowded field of banking in Iran, with too many banks and financial institutions clamoring for attention, however, did not prompt Tehranfar to comment.
The World Bank data for Iran suggest there are 27.7 commercial bank branches per 100,000 people. This figure is way higher than that of many countries with developed economies, like Germany with 14.7 bank branches or the United Kingdom–a global financial hub—with 22.2 banks per 100,000 citizens. The figure for Saudi Arabia, a regional country with a larger economy, is 9, while the global average is 12.2. The figures do not include institutions yet to be anointed by the central bank.
Tehranfar has argued that top-down directives have had little efficacy in binging unruly institutions to their knees and has suggested a softer, friendlier approach.
CBI’s new approach is praiseworthy, but whether uncertified institutions will readily kowtow to CBI demands and accept its regulatory authority remains to be seen.
