Interbank Market’s Rise Meteoric

The latest report of the Central Bank of Iran on the interbank market indicates a steady increase in the scope and extent of this relatively new market both in terms of value and quantity.

According to CBI, nearly 27,500 daily deals worth 180 trillion rials ($4.09 billion) have been recorded in the interbank market in the first nine months of the current fiscal year to Dec. 21.

Compared with the same period of last year when 23,931 deals worth 120 trillion rials ($2.72 billion) were made, the market shows a respective growth of 14.8% and 49.9% in terms of volume and value.   

In the entire previous fiscal year to March 20, a total of 31,403 deals took place in the interbank market with an average daily value of 107 trillion rials ($2.43 billion).

The Iranian interbank market was established in July 2008 for strengthening the management of liquidity held by banks, facilitating short-term lending among banks, maintaining a suitable monetary discipline and improving the implementation of the monetary policies set by the regulator.

CBI has been in charge of organizing and supervising the market and chooses to intervene in the market based on its varying conditions to maintain optimal interbank interest rates.

When the market was initially established, 10 banks were active in it, but in what the CBI considers another sign of the market increasingly finding its hoped-for place, 30 banks and credit institutions have been active in the market as of Dec. 21.

“With the gradual increase in the depth of the market, the number of deals in the rial interbank market also registered a considerable rise,” the CBI noted, adding that only 17 deals were registered in the year of the market’s establishment.

Overnight deals constitute nearly all the activity in the interbank market by accounting for 98.7% of the value share, while that of deals spanning two days or more decreased from 2.7% last year to 1.3% in the ninth month of the current fiscal year.

  Interbank Rate  

When the market was established in 2008, the average interbank rate was 21.1%, but as the number of deals was meager, the total volume was equal to about only 10 billion rials ($227,000). The interbank interest rates continued to come down for the next two years and reached 14.4%.

However, in the next four years–when western sanctions mainly targeted Iran’s financial system and the banking system faced an acute credit crunch–the market witnessed consecutive hikes in interbank rates until they reached an all-time high of 27.1% in the fiscal 2014-15.

By that time, the average daily value of the deals in the market stood at 40 trillion rials ($909 million).

From that time, the central bank took a number of measures for bringing down the rates–which are considered as a harbinger of real interest rates–such as reducing the reserve requirements of banks and turning the lenders’ overdrafts into credit lines.

As a result of the monetary easing, interbank rates dropped to 24.5% in the fiscal 2015-16 and subsequently experienced their biggest plunge last year to reach 18.6%.

Interbank rates averaged 18.9% in the first three quarters of the current fiscal year, while the average rate for the month to Dec. 21 was 18.1%.

The central bank wishes to completely transfer interbank deals to a system established last year for covering the rial deals between lenders.

It hopes to “witness the expansion of the role of the rial interbank market in facilitating short-term funding for the banking system” in the coming months and years.