The drop in currency and gold prices since mid-April, coupled with high volatility in cryptocurrency markets and an inflation rate that Iran’s Statistical Center has announced to be over 39%, has once again drawn the attention of depositors—both large and small—toward bank deposits as a risk-free investment option.
Amid this, the fierce and troubling competition among banks to attract public deposits by promising interest rates above the legal limit has raised concerns about how these banks will fund and sustain such payouts in the future. Opening large deposits with high interest rates not only violates the Central Bank’s regulations but also comes at the cost of massive losses for the already loss-ridden banks in the country.
Setting aside the cheap, rent-seeking and government-backed loans, and the interest-free and charitable lending schemes, the maximum legally permitted interest banks can charge on loans is 23%. In such a context, offering 31% interest on deposits results in at least an 8% loss per deposit, which adds significantly to these banks’ already astronomical accumulated losses.
The Banks of Iran: Serving the Economy or Corrupt Capitalism?
While the Central Bank has capped the maximum legal interest rate on bank deposits at 22.5%, competition among Iranian banks to attract depositors has driven them to offer 31% interest in special schemes for large-scale deposits.
These banks, burdened with massive accumulated losses, are willing to obtain needed funds from depositors even at the cost of deeper losses. Offering interest rates significantly higher than the interest earned on loans—despite having accumulated losses in the tens of trillions of tomans (with one US dollar trading at approximately 830,000 rials)—raises serious questions about the source and sustainability of such payments.
Many economic experts and market observers, worried about this ticking time bomb, are asking: When the Central Bank has set the maximum legal interest rate at 22.5%, what response has it given to the blatant violation of offering 31% interest?
These banks, through illegal activities, have themselves played a significant role in driving Iran’s 40% inflation rate. Now they are encouraging depositors to entrust their money to the banks to shield themselves from that very inflation—without clarity on who will use the funds, for what purpose, at what interest rate, and in which sectors or projects.
For example, Ayandeh Bank, the most loss-ridden bank in Iran, is leading the pack in offering high interest rates to raise funds. However, it has lent 83% of the public deposits it collected to itself. These loans have not been repaid, and 80% of them are now classified as doubtful or uncollectible.
The Iranian Regime’s Debt to Banks Has Increased By “Two and A Half Times” In Past Three Years
This bank, which generates a daily net loss of 3.6 trillion rials (approximately $4.3 million), has become a major burden on the country’s economy. Yet it continues to entice the public with promises of 31% interest to bring in even more deposits.
Among all Iranian banks, 10 have a capital adequacy ratio below the 8% minimum standard, and 9 banks have negative capital adequacy ratios.
The “capital adequacy ratio,” often called a bank’s buffer, is a key indicator showing how much capital a bank has to protect itself against the risks it has taken on. While this minimum is set at 12% in most countries and 8% in Iran, Ayandeh Bank’s ratio is estimated to be below -440%.
This means that if the bank faces any type of risk—for example, if a number of depositors simultaneously attempt to withdraw their funds—the bank will not be able to return their money. Even in the event of dissolution, a dire situation awaits the depositors, particularly large-scale depositors and both minor and major shareholders of the bank.
In order to keep such banks alive, the Central Bank is compelled to fulfill the unbalanced bank’s requests for funds and overdrafts. This inevitably leads to printing money and covering the overdrafts of these banks, meaning that it is not the government, nor the Central Bank, nor the regime that bears the cost of their continued operations—but rather the public, who pays through severe inflation caused by excessive and unsupported money printing without any backing of wealth or production.
Mehdi Bani Taba, an economic expert at the Research Center of Iran’s regime parliament, expressed regret over regime president Masoud Pezeshkian’s opposition to the dissolution of Ayandeh Bank. Referring to the bank’s monthly losses of 110 trillion rials (approximately $132.5 million), he warned that if this bank is not dissolved, the country’s economy will face an extremely disastrous situation within five years, as these massive losses will grow exponentially each year.
Regarding the beginning of the dissolution process of Ayandeh Bank, a major concern is that its largest debtor projects are not even eligible for seizure or sale. According to Rasoul Bakhshi Dastjerdi, an economist and member of the regime parliament’s economic commission, the Iran Mall does not possess an official deed. Moreover, the head of Ayandeh Bank has already sold the income and proceeds from Iran Mall to another company for a period of twenty years. This means that even for auctioning and liquidating the bank’s assets, there are no accessible funds or properties available for seizure or sale.
The Fate of Depositors
All depositors’ funds in Iranian banks are insured up to a limited amount by the Deposit Guarantee Fund. This fund is an independent institution that collects membership fees from banks and guarantees that, in case of a bank’s bankruptcy, part of the customers’ deposits will be repaid. According to law, the maximum guarantee per person, regardless of the number of deposits, is 1 billion rials (approximately $1,200).
Therefore, it is clear that the repayment of small depositors with less than 1 billion rials is given first priority.
In similar cases seen during the dissolution of other financial institutions, the process of repaying depositors has sometimes taken more than seven years. For instance, depositors of the Samen-al-Hojaj financial institution staged protests for years in front of the Central Bank demanding the return of their funds.
Even worse, the depositors’ funds held at the bank are not adjusted for the time elapsed before repayment, and in some cases, the value of their money has dropped more than fiftyfold by the time they actually receive it.
Thus, while bank investments may generally be considered lower-risk compared to other financial markets, the critical condition of Iranian banks and the legal recovery prospects for depositors and shareholders after a bank’s dissolution show that placing blind trust in this so-called safe haven is not without risk and danger.
