CBI’s New Bid to Dismantle Unlicensed Credit Institutions

The Central Bank of Iran is pushing forward with the initiative to regulate non-bank institutions via a four-point master plan, says the director of the office for supervising non-bank institutions.

"In order to control non-bank institutions, the CBI has a four-phase scheme to identify illegal lenders, determine the status of companies which have applied for licenses, halt the activities of illegal firms and subsequently dismantle and prosecute them," Farhad Khaalati said in a talk with IBENA.

Unlike what is commonly believed, he said, the operation of [uncertified] non-bank entities has vastly negative consequences, while the false notion is publicized that these unruly companies are generators of jobs and help spur economic growth. "In essence, the opposite has proved to be true."

The official says the unlicensed institutions make it hard (possibly impossible) for the CBI to balance interest rates within the legal network because deposit rates offered by these institutions are always higher because they do not hold reserve requirements with the CBI.

"Therefore if the CBI and the banking network decide to lower interest rates, savings will migrate to these institutions."

Noting that the second adverse effect of the lawless companies is a surge in money supply, he said although they do not observe conventional financial ratios, they nevertheless have the ability to generate money within the framework of a bank.

"The third problem is disruption in other markets," Khaalati said. "Because these institutions have huge volumes of liquidity, they have the ability to heavily invest in other markets such as currency, gold and real estate. When these markets are bullish, the liquidity directed toward them serves to further destabilize them.

Bankruptcy Certain

Furthermore, he noted, illegal institutions can create grounds for money laundering as they tend to commit financial and tax fraud, have non-transparent financial statements and keep the source and conceal the destination of their monies.

"Eventually they face the threat of bankruptcy as a result of inefficient management and the inescapable consequences hurt the trust of depositors in the banking system as a whole."

Regarding the now-defunct Samen al-Hojaj Credit Institution, the official commended efforts made to handle the situation, saying it was the first time that the judiciary and the CBI joined hands to reduce the damage emanating from such institutions.

Samen is one of the several thousand uncertified lending institutions to go bust in recent months. In July the privately-owned Parsian  Bank took over as the CBI agent to reimburse depositors of the defunct credit institution

As to the promise made by CBI officials to bring the activities of illegal institutions to a complete halt by the end of the current fiscal year (March 2017), Khaalati said crucial measures have been taken and expressed the hope that while the public is now more aware of the dangers of such entities, they will no longer turn to them.

"The fact that these illegal institutions do their business in the open and at such a level indeed demonstrates the multi-faceted conundrum of dealing with them," he said. "It also shows that a permanent end to their activities demands joint efforts of all related official bodies."