Penalties Account for 50% of Banks’ Income

More than 50% of many banks’ income are generated through penalty fees while this way of allocating loans will amount to a compound interest, said a member of Iran Chamber of Commerce, Industries, Mines and Agriculture.

“This approach of banks in allocating loans will result in the bankruptcy and closure of production sectors,” Amir Hossein Kaveh was also quoted as saying by IRNA.

According to the Central Bank of Iran’s statistics, public and private sector debts have increased by 25% in the 10-month period to January 19 compared with the corresponding period of last year.

“This method of banking has never been approved by Islam plus it is neither in line with economic facts nor helpful to the production sector,” he said.

Kaveh noted that the average rate of banks’ lending rate is about 18% while banks’ operation raises it to 20-25%, adding that blocking the borrowers’ deposit until the payback is complete and levying a 6% penalty on debtors are to the disadvantage of loan receivers.

“The government allocated 160 trillion rials ($4.2 billion) to foster the production sector by assigning  cheap loans but in reality those cheap loans did not materialize,” he said.

The Central Bank of Iran has ordered banks and credit institutions to allocate a minimum 10% of their loans to small- and medium-sized enterprises to help create jobs and boost the beleaguered production sector.