Iran's Central Bank Doubles Down on Enforcing Interest Rates

While more than a year has passed since bank deposit interest rates were officially set at 15%, the Central Bank of Iran has now set a deadline through its latest directive to enforce the lowered rates.

"According to the directive, the implementation of which is mandatory from September 2, banks and credit institutions are obligated to adhere to long- and short-term deposit rates set respectively at 15% and 10%," the official news website of the central bank reported.

In June of last year, the Money and Credit Council–a top financial decision-making body affiliated to CBI–put its stamp of approval on the 15% deposit rates and 18% interest rates that were agreed upon by bank CEOs shortly before.

However, due to a variety of factors that keep challenging the embattled banks, including a hefty credit crunch, lenders were unable to stick to the rates and continued to offer interests higher than 20% on deposits. After much dialogue and a consensus that the rates need to decline, CBI has finally taken direct action.

According to the CBI directive, the stipulated interest rates on deposits are fixed, but the interest rates might be subject to change as the final approval on their payment will strictly be given when they come to maturity and banks have calculated yearend yields.

The central bank stresses that any ploys or schemes to attract more deposits by banks and credit institutions must be done with the direct approval of CBI and the way interests are paid on deposits must conform to the Usury Free Banking Law.

> Punitive Action for Violators

Banks and credit institutions are allowed to allocate interests higher than what has been decreed in the directive before September 2 and any previous agreement will be valid until they come to maturity. But if they promise higher interests after the aforementioned date, they will be met with punitive action.

What is more, "deposits made in investment funds" belonging to banks and credit institutions are "also subject to the fixed interest rates devised as part of this directive".

If the depositor moves to close the account or take out their deposit in their one-year investment accounts, their fixed interest rates will equal the rates devised for short-term deposits, i.e. 10%. To be able to receive interests, their short-term accounts must be open for at least one month.

More importantly, CBI has obligated banks and credit institutions to "strictly refrain from employing any measures that will lead to an increase in their effective deposit rates" or any violating party, including CEOs and workers of lenders and software companies dealing with them will be legally prosecuted.

If any banks or credit institutions rely on a variety of accounting ploys or implement software changes in their computer systems to offer higher rates, "the banking system will be prohibited from working with the offending parties".

In conclusion, CBI calls on the banking system to move in line with gradually offering interest rates lower than the cap set in the directive.

On Wednesday, on the sidelines of the latest Cabinet meeting, CBI Governor Valiollah Seif said the directive has been months in coming and was formulated with much forethought.

"All the banks are eager for this [rate cuts] to be implemented," he said, adding that all the prerequisites are in place and the 15% rates are expected to "find their place in the banking system naturally".

CBI's deputy for economic affairs, Peyman Qorbani, also commented on the directive, saying it sets rates more in tune with the inflation rate that currently circles around 10%.

The central bank recently intervened in the interbank system more prominently and has decreased the interbank rates to around 18% from the 21% of last month.

> Majlis Voices Support

Head of Majlis Economic Commission Mohammad Reza Pour-Ebrahimi said the parliament fully supports the directive communicated by the central bank and has written a letter to President Hassan Rouhani to stress upon him the importance of adopting a unified approach toward interest rates.

"The high rate of finances provided to businesses is one of our most fundamental challenges and we must pursue interest cuts because it will lead to economic prosperity and job creation," he told ICANA, the official news outlet of the parliament.

Pour-Ebrahimi stressed that it is very important for the Ministry of Economic Affairs and Finance and the Securities and Exchange Organization to adequately manage the debts market for the optimal implementation of the rates directive.