IMF Hails Iran Efforts Against Shadow Banks

The International Monetary Fund has hailed efforts by the Central Bank of Iran in curbing the activities of a multitude of unruly credit institutions, which eluded the regulator's oversight for many years and imperiled the stability of the country's financial markets.    

The global body made the announcement during its latest Article IV Consultation mission to Iran this week, the final report of which will be released in December.

"Fortunately, we have witnessed positive measures in regards with organizing these institutions. They must strictly not be allowed to become a competitor to [legitimate] banks and we hope that this positive trend will continue," Catriona Purfield, the head of IMF's Iran mission, was quoted as saying by the official news website of CBI.

Uncertified credit institutions spawned years ago but mainly flourished during the tenure of the former administration and became a major player, as they managed to take hold of a quarter of the nation's liquidity because of little or no supervision.

They grabbed many headlines in the past two years and became a thorn in the side of President Hassan Rouhani's administration and the ailing banking system he has vowed to reform. These shadow banks have also been blamed for fueling a price war to attract more savings, which gave rise to unreasonably high interest rates in the banking system.

After much discussion and an unprecedented intervention by the parliament, the central bank managed to curb the activities of the last of these institutions and tasked a number of commercial lenders to manage their operations so that they can be gradually removed altogether from the sector.

In the IMF-CBI meeting, Purfield referred to the 12.5% GDP growth registered for Iran last year, saying that while it was one of the highest rates achieved in the world, "the share of non-oil sector still needs to be improved".

She spoke approvingly of the administration's focus on stabilizing important macroeconomic indicators such as the inflation rate, noting that the average 9% rate achieved last year was unprecedented in the last 25 years.

Stressing the necessity of maintaining economic stability, the IMF official exhorted CBI to keep an eye on foreign exchange rates while striving to instill reforms in the banking and financial sectors alongside improving regulations concerning entrepreneurship and job creation.

  Steps Taken

Purfield and CBI representatives headed by Vice Governor Akbar Komijani further discussed other measures, such as reforming the banking sector, increasing the supervisory authority of CBI, providing solutions for unifying the dual foreign exchange regime, curbing non-performing loans and ways of improving non-oil growth.

Komijani, who was accompanied by other officials, including from the Ministry of Economic Affairs and Finance, Majlis Research Center and Budget and Planning Organization, briefed the IMF mission on the country's latest economic trends.

He recalled how dismal the conditions were before the sanctions and the reversal achieved by the administration, which is chiefly embodied in significantly lowering the inflation rate and maintaining stability in foreign exchange rates that registered notable volatilities when President Hassan Rouhani's administration first began work four years ago.

"All indicators show that the Iranian economy has become more predictable and more able," he added.

The CBI official referred to reforming the banking system as one of the most important macro policies of the central bank, saying its main components include organizing government payment arrears to the banking system.

Referring to CBI's directive that prohibited all banks and credit institutions from offering interest rates higher than 15% from early September, Komijani said the directive has been largely observed while the policymaker has taken disciplinary measures against lenders that violated it.

"In line with lowering interest rates and bond rates, curbing overdrafts by banks, strengthening the interbank market to meet the short-term needs of lenders have all been put on the agenda," he said.

The Article IV mission annually consults each IMF member government and assesses each country's economic health to forestall future financial problems.