Expensive Deposits leave Iranian Banks stuck with Toxic Assets

The government’s failure to implement banking reforms and its move last year to issue billions of rials of high-return Islamic bonds and treasury bills kept large amounts of money out of reach of the banks. Observers believe the monetary regulator should get to the root of the problem by doing enough research. However, this may take officials months to come to an appropriate solution, while the banking system needs an immediate injection of liquidity.

The fact is that money cost in Iran is unreasonably high. Banks have very limited sources of income and the fees payable for banking services are generally low. The private banks complain that the difference between the lending rate cap and the baseline interest rate — which is currently about 3 percentage points — is too little to generate profit. In other words, as demand for money is increasing, the supply has remained weak. One of the ways to boost the money supply is foreign sources.

Regretfully, the Iranian banking system does not have access to international resources. In this vein, perhaps the lifting of US unilateral sanctions could work as an effective immediate solution to the problems that Iranian banks are facing. If banks have access to sufficient cheap resources they don’t need to be concerned about the flight of expensive deposits. But that scenario will be unlikely given the ongoing hostile policies between Tehran and Washington.

Under the current political circumstances, the Iranian government seems to have one option only, which is the implementation of structural reforms that will take years to elicit change.

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