Love is like war, easy to start but very hard to stop, said H. L. Menken, notable American author. But the saying can be ascribed, albeit much less poetically, to describe the cocktail of woes precipitated by uncertified credit and financial institutions – aka illegals - in Iran.
Once dismissed as Lilliputian nonentities, these quasi-lenders have rapidly “graduated” into Brobdingnagian companies that hold about a quarter of the country’s liquidity!
A handful of these lenders are now considered too big to fail and the news of their collapse sends shivers down the spines of regulatory bodies. As soon as one of them goes under, monetary officials scramble to appease the irate customers who have awakened to a nightmarish reality that outrageously generous deposit rates offered by these uncertified institutions are too good to be lasting.
But the first question the victims of these institutions ask is about the ease with which these companies operate notwithstanding their illegality. Interestingly, this enigma looms large even for policymakers who are literally at a loss as how to deal with the ugly and dangerous phenomenon. A member of the Majlis Economic Commission recently said “he is baffled to compare the amount of red tape for obtaining license for a corner shop and the unhindered process for illegal institutions to open branches without any difficulty.”
P is for Profit
Said Rezaee Moghaddam and his family run a successful transport company in the northeast South Khorasan Province. The reputation of the Mashhad-based Mizan Credit Institution, which even benefited from the judicial logo and the generous returns they offered on deposits prompted them to invest big with the lender, preferring it over legitimate commercial banks who at best would offer a 22% return and lend rather sparingly. The returns provided seemingly safe and stable revenue to repay their loans and pay their bills. However, they were in for a big shock when news swirled that Mizan’s risky real estate ventures had backfired and the institute is in big hole. The defunct institute was merged with Bank Saderat in October to reimburse the dismayed customers. However, the biggies like the Moghddams have not received a dime so far.
From Acute to Chronic
Last week Samen-al-Hujaj became the latest juggernaut quasi-lender to go bust and the private Parsian Bank agreed to stand in. One silver lining of the event, however, was that the country became one step closer to get rid of the remaining “giant” illegal lenders which include Noor, Samen, Afzal Toos, Arman (later renamed Caspian) and Samen-al –Hujaj. Among these, Afzal Toos remains the last remaining renegade which is still neither dissolved nor registered.
Stemming the flow of these corruption-infested bodies has been rather difficult, some say impossible. The Rouhani administration has become heir to a phenomenon that saw an insidious yet explosive growth during the previous administration. It is now an open secret that these companies are backed by powerful religious and military organizations. In fact a huge part of their success comes from their exploitation of pious and religious names, promotion on huge street billboards and infomercials on the state-run TV.
Their exact number is unknown but estimates point to the presence of 7,000 illegal financial institutions and Qarzol-Hassaneh (usury-free micro-lending) funds. For instance, Samen-al-Hujaj is said to have started operation with a paltry capital of $1,600 but no one really knows how it could open 450 branches across the country (it opened a branch barely 10 days before it was declared bankrupt).
An Everyday Tale
The growth of quasi-lenders is symptomatic of a broader malaise inflicting the national financial industry and that is the economy’s heavy reliance on a banking system still run by fossilized regulations.
The bitter truth is that commercial banks are not doing much better than their rogue peers; their love-hate relationship has been on full display in their rivalry to win more and bigger clients by offering higher returns. Legally operating banks have also abetted illegals by opening accounts for them.
Bank’s high and growing soured assets and their botched ventures in the real estate bubble have turned them into ticking time bombs. At $32.4 billion, their bad debts have now reached 15.6 % of total bank loans. That is on a par with Italy and half that of Greece, according to World Bank data. That is where the line between commercial banking and speculative non-banking becomes all the more blurred. According to some reports 10 banks and credit institutions are sinking in red ink and on the brink of collapse.
Is the Sun Setting?
Although the country is basking in the prospect of sanctions relief, the threat of unlicensed financial institutions still weigh heavily on the economy. While it seems that all the political factions are rallying to turn on the heat on illegals, tangible results are yet to be seen. The central bank had formerly pledged to end the drama before this fiscal year is out (March 19), but now that seems highly unlikely.
Now that the problem has gotten out of control, it’s necessary to focus on preventing these companies to sprout up in the first place and organize the rest in an efficient way. A hybrid solution must focus on addressing the woes of the banking system simultaneously. The measures must include establishing an asset-management company to sort out banks’ stressed assets and problem loans. Banks must also adhere to international capital standards which require them to bolster their balance sheets and focus on small-business lending.
An overhaul of the money market is vital for the post-sanctions terrain and a robust banking industry free from the sting of non-banks is only the first step in realizing a decent and sustainable future.
