Strategies to Curb High Interest Rates in Iran

With interest rates once again in the spotlight, the head of Monetary and Banking Research Institute has proposed three strategies to deal with the punishingly high borrowing rates.

According to Ali Divandari, the Central Bank of Iran first needs to increase its presence in the interbank market.

"Secondly, the government needs to settle its arrears to banks, and interest rates in parallel markets should follow the banks' lead and only then interest rates would come down gradually," Divandari said during a television interview.

Following its active intervention in the interbank market, CBI aims to restore calm to the market and tackle the expanding credit crunch. As a result, the interbank market funding rate gradually declined from a record high of 29% at the beginning of March 2015 to 17% early this year. This trend, however, was short-lived.

He noted that while all banking officials favor further rate cuts and the Money and Credit Council blessed their decision in the past, some financial institutions continue to violate the rates.

Back in June, CEOs of private and state-owned banks agreed to lower rates for long-term deposits from 18% to 15% with short-term rates set at approximately 10%. The MCC–the body that has the final say on financial matters–approved the cut.

However, In the face of growing public backlash over high rates, CBI announced that it seeks to fix the interest rate approximately 2-3% higher than the inflation rate, which was around 10.2% for the Iranian month ending June 21, which is not an easy task when interbank rates are around 20%.

The head of monetary research center added that the 34% discount rate set for banks' overdraft fees is a penalty to prevent them from using CBI's resources and invest in other markets since it raises the monetary base and stokes inflation.

"If banks reduce their interest rates, this will trigger a deposit flight that will cause capital shortage for banks," he said, noting that the government issued participatory bonds to make up for its budget deficit and which has now turned into a rival for the banking system in absorbing investments since the yield of participatory bonds is higher than bank deposits.

After talks for lowering interest rates were postponed in May due to presidential elections, they were expected to resume in a meeting between the major players of the Iranian banking system. No news about the meeting has so far been reported.

Divandari added that the current situation is a result of the unprofessional decision in the past administration, which obligated banks to offer cheap loans and made them engage in other businesses.

"CBI has a special agenda to deal with banks and credit institutions offering higher interest rates than the set limits and will not tolerate any violation in this regard," he said.