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Will the Iranian Crisis of Unauthorized Financial Institutions Permeate to Banks?

Mar., 2016

Dozens of financial and credit institutions are not authorized by the Central Bank of Iran, and therefore are barred from using mangy advantages provided by the regulator. For instance, the unauthorized financial institutions are not connected to the national interbank card switch (SHETAB); so, they need to use the check services available only in banks and authorized institutions to satisfy their customers.

Given the intensified crackdown on illegal institutions, the CBI already ordered commercial banks to stop providing services to the unauthorized institutions. The crackdown may even be intensified further as the deposit rate has recently been reduced by two percentage point for the second time this year, making CBI officials more concerned about the illegal institutions’ disobedience.

In its latest effort to intensify pressure on the unauthorized financial institutions, the CBI communicated a directive to all commercial banks in May, calling them to collect all their POS terminals given to the unauthorized institutions and stop any sort of cooperation with them.

Under the CBI’s directive, commercial banks are not allowed to open any type of account, especially current accounts, for the unauthorized institutions or their CEOs.

These latest measures taken by the CBI seek to reorganize the financial institutions which have not received any operation permit from the regulator. These institutions generally violate rules and regulations, providing higher deposit rates than that agreed upon to their customers. The CBI and the Tax Administration had even agreed to tax both the institutions violating interest rate rules and also the depositors at those institutions, in a move to avoid accumulation of long-term savings in the financial institutes.

A banking expert has recently warned against a looming crisis caused by the performance of the unauthorized financial institutions. “The CBI has to organize the unauthorized financial and credit institutions in a bid to protect public capital and savings,” the expert said.

The CBI has recently once again communicated its directive to all branches of all commercial banks, urging them to keep away from cooperating with the illegal institutions. The recent move by the regulator could mean that banks have so far been ignoring the key directive.

Some experts have warned against putting more pressure on the unauthorized institutions, saying the regulator may lose the option to supervise and monitor their capital and savings if they are barred from banking services. Other experts believe that the CBI and institutions must cooperate to find a solution, since the capitals of these institutions are mainly in the hands of banks.

The unauthorized financial and credit institutions have been good customers of banks in the past years. So, it is reasonable that banks do not want to lose them. Commercial banks have to be persuaded to cooperate with the CBI in fight against the unauthorized institutions.

Of note that commercial banks have repeatedly criticized the unauthorized institutions for failing to comply with agreed interest rates, saying that as long as such institutions offer high deposit rates it would be impossible to implement the interest rate rules confirmed by the Money and Credit Council.

A crisis seems to be looming, and the CBI to make an immediate action to organize the unauthorized institutions if it is serous in protecting public capitals and savings.

The problem is although the CBI has avoided offering banking services to the unauthorized institutions, in practice they use the same service through commercial banks. Commercial banks are using the financial resources collected and held by the institutions, so banks resist losing these good customers.

The unauthorized financial institutions have influenced many state entities and figures and will not give up unless the pressure is some powerful. However, the regulator must be careful in dealing with these institutions, since billions of dollars in savings are held by them.

If depositors storm to withdraw their money from the institutions, social damages will be very likely since the institutions will fail to fulfill their financial commitments. And the looming crisis could permeate to authorized institutions and banks at the end.


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