Valiollah Seif
The recent developments surrounding Bank Ayandeh and the decisions to restructure it have once again brought one of Iran’s deepest economic challenges—banking imbalance—to the forefront. What is now unfolding as a visible crisis at Bank Ayandeh is not an isolated failure, but a symptom of a structural illness that has gripped Iran’s banking system for years. The collapse of unlicensed financial institutions, the chronic losses of several banks and the accumulation of fictional assets on balance sheets all point to the same root cause: this is not the story of a single bank, but of how the relationship between the government, the Central Bank and the money market has long been misaligned.
On the surface, each banking crisis is explained by managerial misconduct or weak oversight. But at its core, the problem stems from suppressed interest rates and a command-driven banking structure. In an economy where annual inflation often exceeds 40%, fixing interest rates far below the inflation rate creates a distorted price of money that misdirects every actor in the economy. These artificially low rates may appear to bring stability, but they quickly create beneficiaries who profit effortlessly from cheap money. As a result, bank resources are funneled not into productive and profitable activities, but toward individuals, firms and networks connected to major shareholders and influential groups. Central Bank rules designed to limit lending to related parties are neutralized by paper arrangements and legal loopholes. The result is a web of large non-performing loans that pollute bank balance sheets and silently accumulate hidden losses.
This distortion has also led banks into a dead-end business model. When deposit and lending rates are dictated by the government and the Central Bank, banks lose the ability to compete for funds or allocate credit based on risk and return. These fixed rates match neither the actual credit risk of borrowers nor the real cost of capital. Consequently, instead of focusing on credit evaluation, risk pricing and transparency, banks resort to opaque practices to hide losses and maintain liquidity.
Banking imbalance is essentially the gradual piling up of worthless or impaired assets against very real liabilities. Depositors—whether individuals or institutions—are the actual creditors of banks, but a significant portion of bank assets are either uncollectible or lack any real market value. Each year that structural reform is delayed, this imbalance grows larger. The resulting accumulated losses are ultimately financed through monetary expansion, which increases liquidity, fuels inflation and shifts the burden to the government or the Central Bank. Iran’s experience with the collapse of unlicensed financial institutions showed clearly that delays in decision-making only multiply the costs of crisis.
If Bank Ayandeh—or any other bank—is now on the brink of insolvency, it must be understood not as an isolated event, but as another alarm sounding from within the banking system. Without reforming interest rate policy, supervisory mechanisms and incentive structures, the same crisis will soon repeat elsewhere. The Central Bank has long sought to curb imbalance through limiting overdrafts, strengthening field inspections and enforcing financial transparency. Yet these actions, while necessary, cannot be sustainable without aligning interest rates with economic reality and granting monetary policy true independence.
The remedy lies in returning to fundamental economic principles. Interest rates must reflect inflation and market risk, not serve as tools for short-term government objectives. Supervision by the Central Bank should be independent, intelligent and data-driven, drawing on international experience instead of reacting to crises after they occur. Major shareholders and related entities must be completely barred from access to bank credit, and transparent systems for disclosing large loans must be enforced. Balance sheet restructuring should not depend on money printing or transferring losses to the Central Bank. Rather, it should be based on realistic asset valuation, the sale of non-essential holdings and genuine capital injections.
Global experience shows that no banking system can endure without accepting transparent market rules. If Iran hopes to avoid repeating the scenario of Bank Ayandeh or past unlicensed institutions every few years, it must confront the reality that suppressed interest rates are at the root of many imbalances and forms of corruption. Today it is Bank Ayandeh in the headlines. Without meaningful reform and operational independence for the Central Bank and monetary policy, tomorrow another name will take its place.
