Economy, Business And Markets

CBI Battles Unauthorized Lenders

CBI Battles  Unauthorized Lenders
CBI Battles  Unauthorized Lenders

Unauthorized financial institutions are under attack by the Central Bank of Iran as it tries to pressure them to comply, though the scope of the situation remains unclear.

The Central Bank of Iran is taking action to stop illegal credit institutes from operating in the near future, the deputy governor of the Central Bank of Iran told IRNA on Wednesday.

“Some of the institutes are still operational, without CBI even being aware of their existence,” said Hamid Tehranfar.

It is unclear how unlawful institutions with such scale were initially created, as corporate laws in Iran are complex and the CBI regulates banks and financial institutions.

Establishing financial firms without the central bank’s knowledge and supervision is not unheard of in Iran, as many bureaux de change were established without a permit from the bank via a permit by the Tehran Gold and Jewelers Union. But the bureaux de change were still authorized and much smaller in size than the institutions Tehranfar talks about.

 Banks’ Competitors

“People would be terrified if they come to know what is going on in these institutes and their balance sheets” said the deputy, adding that “still, [people] do put their deposits in these institutes, because of the suspicious and unusually high interest rates offered by them.”

The deposit rates offered by these lenders have also created an outflow of deposits from the commercial banks, which is causing distress to both CBI officials and commercial banks. As most commercial banks in Iran are struggling with toxic debt and illiquid assets that have rendered them insolvent and crippled their lending power. The money outflow from commercial banks to the illegal lenders has further augmenting the problem.

 Incapacitating the CBI

In August, central bank Governor, Valilloah Seif, criticized the measures taken by the authorities in the previous administration to exclude the bank from the decisions making process, “while at the same time they let other agencies engage in the process.”

The central bank was stripped of many of its powers by the former president, Mahmoud Ahmadinejad, including the authority to set interest rates, bank levies and control liquidity. Many of these credit institutions sprung up during that time, as a 600 percent increase in liquidity over the period increased demand for financial services, making them extremely profitable.

Numerous problems arose as the result of wrong decisions made in the absence of the central bank’s supervision and now “25 percent of overall financial activities in the country are conducted without central bank’s supervision,” said Tehranfar.

The minister of Economic Affairs and Finance, Ali Tayebnia, recently said that the government is planning to restore CBI’s powers and even further increase them by giving the central bank autonomy and independence.

 Cautious Approach

The Central Bank appears to be willing to revive its position as a key monetary decision maker and halt these institutes. Yet as various CBI officials express their commitment to stop such institutions, no hard actions have been executed against them by the bank, as it fears, it might create panic.

“The CBI is not going to terminate the credit institutions established during the former administration, who are affiliated to certain organizations,” said the deputy, “unless they fail to obey the central bank’s regulatory framework.”