Economy, Business And Markets

Banks Told Not to Service Unregistered Lenders

Banks Told Not to Service Unregistered Lenders Banks Told Not to Service Unregistered Lenders

 The Central Bank of Iran has issued a decree telling commercial banks to stop providing services to unlicensed credit and financial Institutions. The decree is the second such warning in as many months prohibiting the lenders to end their patronage of illegal peers.

The paradoxical relationship between the banks and unregistered financial and credit institutions has been going on despite the serious challenges that quasi-lenders present to the banks, luring away their customers by offering higher deposit rates.  

The directive comes after commercial banks this month agreed to cut their one-year deposit rate from 20% to 18% and bring down    overnight deposit rates to below 10 %. The move was welcomed by the CBI with MCC giving its blessing soon afterward.

MCC members also required banks to offer regular (non-Musharakah) loans and Musharakah (joint-venture) loans at approximately 20% and 22%, respectively. The council, earlier in April, had lowered the ceiling on lending rates to 22% and 24% – from a previous 27% to 28%.

Interest rate cuts come after the lifting of economic and banking sanctions renewed hopes for less inflation and more growth in the country.

Since the unlicensed credit institutions are not under the CBI’s direct supervision, they are deprived of many banking services –for one, they are disconnected from the ‘Shetab’ domestic interbank network -- which makes them highly dependent on legal banks for their normal operations.

The last time the CBI asked banks to sever ties with unauthorized lenders was also in the wake of the rate cuts last April to make sure banks implemented the new rates announced by the MCC -- the country’s highest monetary policymaking body.

 Conflict of Interest

According to Bourse Press website, in recent years the illegal credit institutions had set a bad precedent by flouting rules and regulations guiding deposit/lending rates.

The CBI reemphasis indicates banks’ disregard for its instructions since they have a vested interest in working with the unruly bodies in that they are a big source of significant profit for them.

Some experts hold the view that providing banking services to the unlawful  credit institutions is a way to also look into the latter’s books. But others believe that banks should respect CBI rulings in toto.

Bahaoddin Hosseini Hashemi, former CEO of Bank Saderat, in an interview with eghtesadnews called on the CBI to regulate the offending credit institutions to safeguard people’s savings.

He says such lenders are forced to keep their money with the legal banks because they do not have a treasury of their own.

“The CBI should place tight constraints on bank’s cooperation with quasi-lenders to not only curb their growth but also to secure peoples’ deposits in these institutions,” he said.

He noted that because a sudden withdrawal of peoples’ money from these institutions would lead to a crisis that will have a devastating impact on them, the regulator should strike a balance between limiting the provision of banking services to the unlicensed financial institutions and safeguarding the people’s savings, namely the small depositors.