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Iran banks get freedom to set deposit rates

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Points of Essence:

  • Iranian banks will be at liberty to set their deposit rates above the levels set by the central bank as the government was said to soften its stance on monetary policy.
  • As the banking system adheres strictly to the interest ban by the Islamic rules, Iran uses the officially termed “provisional” interest rates, as rates to be paid to depositors or received from borrowers, reflect profits and losses of a business.

TEHRAN: Iranian banks will be allowed to to raise their deposit rates above levels set by the central bank, according to media reports on Monday that were seen as a sign the government was softening its stance on monetary policy.

The central bank and President Mahmoud Ahmadinejad’s government have been at loggerheads over interest rates, with the government seeking to keep them below inflation of 27% and the bank arguing higher rates are needed to curb price rises.

“Based on the new order, banks can pay more interest to customers than announced (central bank) rates,” Central Bank governor Tahmasb Mazaheri was quoted as saying by the business daily Sarmayeh and other newspapers.

The governor said the order would come into effect at the end of the Iranian month of Mehr, which finishes on October 21.

Banks have struggled to attract funds because they have had to keep deposit rates at levels set by the central bank.

The central bank in July kept interest rates steady at 12% in the 2008-’09 Iranian year. Banks can pay more on deposits but, until now, those rates were kept below inflation.

Business people say that while lending rates are below inflation, banks – in particular private ones – charge more via fees or other practices, in line with Iran’s Islamic banking rules.

Allowing banks to offer higher deposit rates suggested the government was starting to heed the central bank, which has already seen one governor leave his post over the rate row.

“It is a victory for the central bank. It is because the banks are in very bad shape, more than anything else the public banks,” said an Iranian economist, who asked not to be named.

It suggested the government was starting to hand back more supervisory powers to the central bank, whose authority had been eroded after Ahmadinejad won the presidency in 2005, the economist said.

However, he added that the banking system and economy was in poor shape and it would take years to address issues like high subsidies, heavy state spending and loose monetary policy.

Ahmadinejad came to power in 2005 promising to distribute Iran’s oil wealth more fairly. His government has railed against some businesses for making what it deemed excessive profits and has complained banks are not lending to productive projects.

Economists say Iranians have little incentive to put money in accounts where they earn below-inflation rates or invest in industry, when it is easier to make money on a soaring property market.

Meanwhile, economists say the poor have become poorer.
Analysts say the economy will be a key battleground in the June 2009 presidential election, when Ahmadinejad is expected to run for a second term.

But they say it will also be vital to keep the support of Supreme Leader Ayatollah Ali Khamenei, who has so far voiced public backing for the president.

Allowing banks to pay higher deposit rates is seen as a step towards attracting cash into system, particularly helping state banks, which were less agile than private ones.

Iran’s small private banks, which do not need state approval for new ventures, have been more adept at opening businesses that adhere to Iran’s Islamic finance laws, such as leasing firms, to boost returns and use more profits to attract clients.

Iran’s banking system adheres to Islamic rules that prohibit usury. Iran uses what are officially termed “provisional” interest rates, as rates to be paid to depositors or received from borrowers should reflect profits and losses of a business.

Some economists say the system does not differ vastly in practice from more conventional banking systems, where the interest rates, not profits, guide what customers earn or pay. – Reuters

Source: http://www.gulf-times.com

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Written by Suapi Shaffaii

September 16, 2008 at 5:54 pm

Posted in General Issue

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