Infiltration into the Central Bank of Iran with the Excuse of Fighting Usury
15 May, 2016
Vistar Business Monitor
Some of the lawmakers, who have failed to win a seat in the next parliament, have raised a motion that would push monetary officials to apparently fight usury in the banking system. However, the move is actually an effort to infiltrate the Central Bank of Iran and its subsidiaries. News media have already called the motion as a sign of rising tension between the administration and parliament, making the CBI governor to write a letter to the speaker asking on the so-called free-usury banking plan to be blocked.
The plan includes an article which calls for turning the jurisprudent council of the CBI to one of the essential bank’s components. This would end up in a weaker position of the council, turning the CBI more reliant on the government. In the past few decades, monetary policy of the CBI has been affected by the government policies. The CBI has generally acted as a tool in the hand of the government to inject oil revenues into the economy. That means fiscal policy has been prior to monetary policy in the past years, leading to high inflation. The new motion raised in the parliament has now weaken the CBI’s position even weaker than ever, reducing its independency.
Mesbahi Moghadam, an MP from Tehran, says the parliament’s move will make two major changes in the free usury banking operation law. He said last week that under Chapter 5 of the motion, banking operation must be compatible with Sharia or Islamic law, allowing banks to use Mubadala contracts, which offer fixed profits to households and SMEs. This method could help banks manage 90 percent of their operations, enabling them to finance more projects and offer more loans to households and SMEs. For big projects too, the bill will have a solution, which is the offering of participatory contracts. This way, banks would be able to get involved in the management process of the projects. Meanwhile, the motion would also allow banks to use interest-free savings accounts in favor of poor households. That means banks will no longer have any excuse to use these resources in their own favor to collect up to 30 percent in interest. The Guardian Council has to endorse the approvals of the parliament but it does not have any control on CBI’s performance.
The banking crisis in Iran comes as a result of events, none of which would be addressed by the new motion raised in the parliament. While sanctions were in place, a number of financial institutions were created aimed at circumventing the sanctions. However, those institutions have now turned to be a source of disruption in the banking system. Under sanctions, Iran’s banking system lost its transparency and its efficient structure. Meanwhile, interest rates significantly increased and savings were transferred from banks to the institutions which offered higher interests. As a result, the institutions used the public capital to invest in properties, ending up with a lack of resources to finance big and small projects across the country.
On the other hand, sanctions caused Iranian banks to distance from international standards, so that the presence of global banks in Iran in the post sanctions era could threaten the interests of both sides now. Meanwhile, the government’s debt to banks increased during the sanctions era. This should be added to the rising non-performing loans, a phenomenon which was intensified in 2012 and 2013 when the economy slipped into a deep recession.
So the banking system is now in desperate situation, being under pressure of recession, government debt and rising NPLs. Now the question is how will the new move in the parliament help the banks? Is it a right decision to put a supervisor at each branch of banks to watch out whether the banking operation is based on Sharia? The new move in the parliament does not seem to be able to help banks address their fundamental problems. It could even deteriorate the situation, though the next pro-administration parliament is likely to neutralize such motions even if they pass the parliament.
Some of the lawmakers, who have failed to win a seat in the next parliament, have raised a motion that would push monetary officials to apparently fight usury in the banking system. However, the move is actually an effort to infiltrate the Central Bank of Iran and its subsidiaries. News media have already called the motion as a sign of rising tension between the administration and parliament, making the CBI governor to write a letter to the speaker asking on the so-called free-usury banking plan to be blocked.
The plan includes an article which calls for turning the jurisprudent council of the CBI to one of the essential bank’s components. This would end up in a weaker position of the council, turning the CBI more reliant on the government. In the past few decades, monetary policy of the CBI has been affected by the government policies. The CBI has generally acted as a tool in the hand of the government to inject oil revenues into the economy. That means fiscal policy has been prior to monetary policy in the past years, leading to high inflation. The new motion raised in the parliament has now weaken the CBI’s position even weaker than ever, reducing its independency.
Mesbahi Moghadam, an MP from Tehran, says the parliament’s move will make two major changes in the free usury banking operation law. He said last week that under Chapter 5 of the motion, banking operation must be compatible with Sharia or Islamic law, allowing banks to use Mubadala contracts, which offer fixed profits to households and SMEs. This method could help banks manage 90 percent of their operations, enabling them to finance more projects and offer more loans to households and SMEs. For big projects too, the bill will have a solution, which is the offering of participatory contracts. This way, banks would be able to get involved in the management process of the projects. Meanwhile, the motion would also allow banks to use interest-free savings accounts in favor of poor households. That means banks will no longer have any excuse to use these resources in their own favor to collect up to 30 percent in interest. The Guardian Council has to endorse the approvals of the parliament but it does not have any control on CBI’s performance.
The banking crisis in Iran comes as a result of events, none of which would be addressed by the new motion raised in the parliament. While sanctions were in place, a number of financial institutions were created aimed at circumventing the sanctions. However, those institutions have now turned to be a source of disruption in the banking system. Under sanctions, Iran’s banking system lost its transparency and its efficient structure. Meanwhile, interest rates significantly increased and savings were transferred from banks to the institutions which offered higher interests. As a result, the institutions used the public capital to invest in properties, ending up with a lack of resources to finance big and small projects across the country.
On the other hand, sanctions caused Iranian banks to distance from international standards, so that the presence of global banks in Iran in the post sanctions era could threaten the interests of both sides now. Meanwhile, the government’s debt to banks increased during the sanctions era. This should be added to the rising non-performing loans, a phenomenon which was intensified in 2012 and 2013 when the economy slipped into a deep recession.
So the banking system is now in desperate situation, being under pressure of recession, government debt and rising NPLs. Now the question is how will the new move in the parliament help the banks? Is it a right decision to put a supervisor at each branch of banks to watch out whether the banking operation is based on Sharia? The new move in the parliament does not seem to be able to help banks address their fundamental problems. It could even deteriorate the situation, though the next pro-administration parliament is likely to neutralize such motions even if they pass the parliament.