Economy, Business And Markets

CBI Supports Rates Compatible With Inflation

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CBI Supports Rates  Compatible With Inflation
CBI Supports Rates  Compatible With Inflation

Governor of the Central Bank of Iran said Sunday that interest rates would be acceptable only if they are 2% over and above the inflation rate.

"To lower interest rates, CBI prefers to enter the interbank market instead of dictating rates to banks to prevent negative impacts on the markets," Valiollah Seif said at the First Islamic Finance Conference held at the prestigious Al-Zahra University in Tehran.  

He referred to ongoing heated debates over interest rate cuts and said, "Banks currently calculate deposit returns on a monthly basis. This needs to change to a yearly basis" as a way to lower rates.  

"CBI has prepared a directive for banks to offer rates based on annual calculations," he told the conferees.

CBI's Money and Credit Council voted to bring down deposit rates by two percentage points in April to 20% in order to boost business lending. MCC members have hinted that further cuts are inevitable and could be announced in the near future.

 CBI Assets

Reacting to news that US lawmakers intended to seize CBI assets to compensate victims of terror attacks allegedly linked to the Iranian government, Seif said the bank is pursuing the matter through its legal counsel.

The US Congress voted on Friday to seize $ 1.7 billion of CBI assets blocked in the US to pay the former hostages held at its embassy in Tehran.

Revolutionary students seized the US mission in November 1979 and held 52 diplomats for 444 days on charges of spying. Later the students published several books in English outlining in graphic detail the actions and deeds of the diplomatic staff that was apparently tantamount "to spying and undermining the Islamic Revolution" that had overthrown the pro-US regime nine months earlier.

Noting that the banking system nevertheless is in need of reform, he said an ideal Islamic banking system is and should be based on efficiency and ethics.

"The current system has its own flaws, especially in its operational sphere. Rules and regulations should be improved on a regular basis."

Polices Detailed

Seif said the average inflation rate has dropped to 13.7% by December 21, while it was 40% two years ago when the government took office. "A sustainable single-digit inflation is satisfactory and trends show that we are on the right path."

Lowering inflation, promoting discipline in money markets, managing liquidity, maintaining stability in markets especially in the forex market, and directing investment toward manufacturing, top the CBI agenda, he said.


Seif said liquidity had grown by 17% between March 21 -November 21, standing at 9.07 quadrillion rials ($307 billion), which he considered "reasonable."

Ten new financial institutions, six banks and four credit institutions were added to the banking system in the last two years in line with CBI's plans for organizing the informal money market, which accounts for 1.02 quadrillion rials ($33.8 billion) of the total liquidity,"

"Currently, 45% of the assets of the banking sector remain frozen, but banks have to pay for their expenses and interest, and obviously such a system cannot operate efficiently," Seif added.

A Unique Body for Islamic Banking

Hamid Pourmohammadi, deputy head of Management and Planning Organization, pointed to the substantial frozen assets of the banking industry and called on the government to develop a debt market but stressed that the private sector must be the dominant player in the market rather than the government.

"An asset management company has been planned by the government to help banks liquidate non-performing assets," said the official without providing details.

Issuing bonds and increasing tax revenues are among other plans for improving government revenues and stimulating markets, he added.

He said that the government intends to promote Murabahah contracts for purchasing goods through 2016-17 annual budget law and the next development plan.

Murabahah contracts, as the most popular and common mode of Islamic financing, involves the purchase of goods by the bank which then sells them to the client at an agreed mark-up.

He said an organization is needed for developing standards, shaping a unique understanding of Shia and ranking Islamic financial institutions in the country.

"Such an organization would help turn Fiqh jurisprudence into common legal terms," he was quoted as saying.