CBI and the Ministry of Economic Affairs and Finance received ultimatum from the Parliament, last week, to regulate the non-bank credit institutions.
After many non-bank credit institutions were bankrupt or were subject to bankruptcy, a group of lawmakers asked regulators to regulate these financial institutions and to manage the looming crisis.
In Iran, banks and financial institutions play a significant role in the economy system of the country. After the privatization of the banking sector in the early 2000’s, the CBI (Central Bank of Iran) deal with the entities which are more commonly referred to as Credit and Financial Institutions (CFIs) which were non-bank credit institutions, which formed with the aim of offering small loans to applicants under the supervision of the CBI.
However, these non-bank credit institutions engaged in offering banking services and even paying higher interest on savings, compare with banks. CBI couldn’t challenge the CFIs because they claimed they are not offering full banking and financial activities.
Today, these non-bank credit institutions have dominated a large segment of the Iran’s financial sector which most of them are unlicensed. It is estimated that more than 3500 financial and credit institutions are active in Iran without having license from the CBI.
Mizan Credit and Financial Institute bankruptcy case
As a case study, Mizan Credit and Financial Institute, formed as a cooperative fund and licensed as non-bank credit institution in 2005, Mizan owned by the pensioners and employees of the judiciary branch in Razavi Khorasan province. In 2010, under the administration of then President Mahmoud Ahmadinejad, it received a permanent license from the CBI. Mizan declared itself bankrupt on 2013, after extending 3.25 trillion Rials loan to the Padideh Shandiz company. This caused vast protests in the province and Mashhad. Finally, in May 2015, CBI decided to dissolve Mizan with huge debts and commitments to its clients.
Caspian Credit Institution financial issue
The second major credit institution that collapsed financially, is Caspian Credit Institution which was licenced last year by the CBI, as the fifth certified financial institution in Iran to resolve the financial issues of eight other credit institutions based in Khorasan Razavi Province including Fereshtegan, Ferdowsi and Badr Toos.
Despite recent gathering of Caspian’s depositors, against Iran’s central bank, Valiollah Seif, CBI’s Governor, announced that the situation is under control and there is no crisis in sight.
Seif stated that all depositors of the Caspian Credit Institution will get their money back or they can deposit it again into a new account in Caspian.
According to CBI’s announcement, a credit line has been allocated for Caspian Credit Institution, to solve its financial problems.
One of the key points is to find a solution for the currently active CFIs and regulate their activities such as merging the existing CFIs with banks. Also, banks should be fully equipped to fulfil the client’s demand for loans like what CFIs were doing.
Despite the political and religious barriers existing in many institutions, the Central Bank of Iran and Government officials attempt to take a serious decision to regulate the non-bank credit institutions.