Investment Fund Restrictions to Help Reduce Interest Rates

In what could be another step toward bolstering efforts to reduce the tenaciously high bank interest rates and balance markets, investment funds owned by banks and credit institutions have been slapped with a number of restrictions aimed at returning them to their original mandate.

As per an official directive issued by the Securities and Exchange Organization to all financial entities active in the stocks market, investment funds have been barred from guaranteeing a fixed interest rate on deposits made with them by the people.

They have also been prohibited from investing the absorbed deposits in any market other than the capital market. The directive is to be implemented by all funds effective immediately, which could entail notable changes in the banking system and the exchange market.

Until now, even though banks and credit institutions faced severe pressure to lower their deposit and loan rates, their built-in investment funds continued to prove unruly by guaranteeing high returns on deposits and had effectively become deposit funds.

According to Pouya Jabal-Ameli, a senior economic analyst, these funds had no right to provide any return guarantees and the fact that they had done so meant that they were far removed from their original mandate.

The way they should operate is by posting consistent and acceptable performance reports that would attract customers because they indicate that the risks are worth the rewards, not by ensuring the rewards in the first place.

"The [SEO] directive will probably be able to prevent the banks from circumventing the lowered interest rates and work in line with decreasing the deposit rates," Jabal-Ameli told Financial Tribune.

A directive issued by the Central Bank of Iran in late August decreed that all banks and credit institutions are to refrain from paying interests on long- and short-term deposits higher than 15% and 10% respectively. But as it became evident on September 2, the very first day the directive was implemented, the investment funds would act as a loophole through which lenders could offer higher rates and gain much-needed deposits.

The fact that the funds have been obligated to work within the confines of the exchange market is significant in terms of transparency in that while the market fluctuated and sometimes posted negative returns, the funds continued to offer high interests, meaning that they would profit from undisclosed sources.

Asked whether the SEO directive would reduce client base for investment funds because they can no longer guarantee returns, Ali Khosroshahi, a senior asset management and investment analyst at Amin Investment Bank, said the funds will retain their base.

"The directive might create a psychological effect, but the investment funds will not lose customers because there is simply no good alternative for them out there at the moment," he told Financial Tribune.

In fact, he noted that the funds have witnessed an increase in assets during the past few weeks, which has been mainly an aftermath of the central bank directive that directed the deposits of people who wanted higher interests to their coffers.

According to the investment analyst, the funds would now be more inclined toward purchasing bonds in the debt market, which will decrease the interest rates of bonds as a new wave of demand will hit the market.

So far, Khosroshahi noted, a number of these funds have already made big investments–as high as 50% of their total assets–in the debt market.

An executive with another investment bank echoes the same views that the new SEO directive will not have a significant impact on the funds themselves in terms of the number of people making deposits with them.

"Since the investment funds belong to the banks, the people that work with them look at them with a deposit mindset and ultimately only care about how much money they are actually gaining from them," Mohammad Semsari with the Sepehr Investment Bank tells Financial Tribune.

Semsari, who is a financial manager at the investment firm owned by Bank Saderat and Bank Sarmayeh among others, said that as of now investment funds will be forced to forecast how much interest they will be able to offer people, but they will emerge unscathed as their returns are strong.

Actually, he stressed, their returns are often better than strong as they are able to dole out higher-than-anticipated interests and that is what keeps people coming.