The Iranian banking system is bankrupt.
The Iranian banking system is bankrupt. According to Iran Gate, the issue of inefficiency and the unfavorable state of Iran’s banks has been a topic of discussion in economic academic circles for years. Recently, strange plans have been implemented by the parliament and the government, which have once again raised the issue of bank bankruptcy.
The Iranian banking system has currently entered a very difficult and sensitive stage, to the extent that many experts believe that if the country’s monetary and banking policymakers cannot make reasonable, scientific, and operational decisions at this time, there will certainly not be a favorable outcome for the banking system and consequently for Iran’s economy.
The macroeconomic variables in Iran indicate the dire state of the banks, which are the main pillar of the country’s economy. In general, it can be said that the bank-centric system governs the entire economic system of Iran. However, the banking system has always been targeted by decisions over the past four decades, which have been mostly made with ideological and populist backing.
Among these decisions are the suppression of bank interest rates, corruption within the country’s banking system, direct and indirect government borrowing from banks, and pressure to provide unsecured loans and bank business activities.
Interest rate suppression
One of the issues that economists have always emphasized to draw attention to a massive economic crisis is the suppression of bank interest rates. Governments, at times like what we are witnessing these days, manipulate interest rates up or down for various purposes and motives. Currently, interest rate suppression is being carried out under slogans such as Islamic banking, a usury-free banking system, and combating corruption in banks.
But the reality is different. The government of Ebrahim Raisi has so far proven that it neither has a clear idea for managing the economy nor is capable of implementing the same unhealthy and irrational policies of the past. The grand promises he made during the election campaign have now caught up with him, making his job more difficult. For example, one of the areas putting a lot of pressure on Raisi is the shareholders harmed in the capital market. These shareholders, who had pinned their hopes on the thirteenth government, now have very high expectations from the cabinet, including the suppression of interest rates to attract idle capital to the stock market.
Last year, the Ministry of Economy, under pressure from the stock market participants, took action to limit the interest rate to below 20 percent.
This is while the interest rate channel is recognized in economics as a tool for controlling inflation. However, economists believe that in a situation where inflation in Iran exceeds 42 percent, the interbank interest rate is fluctuating within a narrow range of less than 20 percent.
In other words, the interest rate in the money market is about negative 20 percent, meaning that given the inflation rate, the money market is in a bad state, leading to widespread corruption. On the other hand, this situation has been detrimental to the banks, and only some bank managers are trying to take advantage of the situation for their own benefit.
Who gave the loan and who took it?
Ebrahim Raisi is caught in a predicament where his grandiose election slogans have made his job more difficult. The promises Raisi made to his audience have now caught up with his government, and it seems they are grasping at any straw to escape these pressures.
Among the actions taken by the thirteenth government in this regard is the imposition of irregular and unprincipled pressures on both state and non-state banks to provide facilities to applicants. Meanwhile, banks are severely criticizing this approach by the government and are trying to escape the implementation of government orders by any means possible.
Economists believe that the government has put banks in a situation where imbalances have been greatly exacerbated. The issue of indirect government borrowing from the central bank has led to severe pressure on this monetary and banking policymaking institution and, consequently, on both state and private banks.
On the other hand, the parliament has passed the population rejuvenation plan, which is fundamentally centered around providing marriage loans and increasing fertility rates. This situation has led to numerous reports being sent to the media about banks refusing to provide loans to applicants and those eligible for facilities.
Bankruptcy is a reality.
Given the conditions described, it can be said that the country’s banking system is also on the verge of collapse. However, if we look more deeply into the state of the country’s banking system, we will realize the severity of the situation. The issue of interest-free banking and the plan recently passed by the parliament has significantly added to these concerns.
The overdrafts by banks, which have become commonplace, have now led to a super-crisis, which could result in a catastrophic outcome. On the other hand, the government’s pressures on the banking system and the parliament’s unprincipled plans have paved the way for the banking system’s fall into the abyss of overdrafts and monetary base growth, an abyss that will result in nothing but increased inflation and hardship for various segments of society.
In this regard, reports and analyses have been published in Iran Gate, a few examples of which are listed for your convenience.
- Who is the face behind the Central Bank?
- Iran’s economy is bankrupt, Part Two.