Cronyism in Iran’s banks fuels protests
TEHRAN, Iran — At 25 percent, the interest rate paid on a savings account at the Caspian Finance and Credit Institution in Tehran was a better return than Mehrdad Asgari could earn investing in his own business renting out construction equipment. So in December 2016, he jumped at the chance, depositing $42,000 in a savings account.
Before long though, Caspian stopped allowing withdrawals. After three months, it stopped paying interest. Finally, in May, it shut its doors for good — becoming one of the largest in a long series of failures of Iranian financial institutions in recent years. The closings have destroyed the savings of thousands of people, imperiled the banking system and helped fuel the anti-government protests that roiled the country in late 2017.
The weeklong demonstrations across Iran, centered in religiously conservative, working class towns and cities rather than Tehran, were the broadest display of discontent since the Green Movement protests in 2009, following a disputed presidential election. The outpouring of anger was directed not only at President Hassan Rouhani, who won reelection promising to revitalize the economy, but also the country’s supreme leader, Ayatollah Ali Khamenei. Thousands of people were arrested and 25 were killed, some of them, families of the victims say, at the hands of their jailers.
“I got angry and swore at them,” Asgari said recently, referring to Caspian, adding that he joined other jilted depositors in demonstrations that he had learned about on social media.
The cascade of defaults, economists say, was not just the result of risky banking practices, but also a case study in official corruption — a major reason Iranians found their losses so infuriating. Adding to their outrage, Iranian officials made a series of statements blaming the victims for not being more careful with their money.
Many of the institutions, including those that merged in 2016 to form Caspian, were allowed to gamble with deposits or run Ponzi schemes with impunity for years, in part because they were owned by well-connected elites: religious foundations, the Islamic Revolutionary Guard or other semiofficial investment funds in the Iranian state.
Bijan Khajepour, an Iranian economist based in Vienna, estimated that as many as hundreds of thousands of people lost money because of the collapsing financial institutions. Iranians have a term for the growing class of victims: “property losers,” or “malbaakhtegan” in Persian.
Many of the failing institutions sank the money into speculative investments during a real estate bubble, lent to well-connected friends or charged usurious interest rates to desperate borrowers. Now, regulators have quietly steered many of the companies into mergers with larger banks to try to absorb their losses, but that has created a worsening problem of bad loans and overvalued assets throughout the banking system.
Economists say that as many as 40 percent of the loans carried on the books of Iranian banks may be delinquent.
“The whole financial system in Iran is in a very fragile state,” said Borghan N. Narajabad, an economist in Washington who has studied the system.
The International Monetary Fund warned in December that Iran’s banks and lenders “need urgent restructuring and recapitalization,” calling for write-downs of overvalued assets and a crackdown on loans to insiders. The problem has grown so big, the fund warned, that the money required to prop up the banks will “cause government debt and interest outlays to rise substantially.”
Even Iran’s supreme leader, Khamenei, has acknowledged responsibility for the growing number of victims of “problematic financial institutions.”
“These appeals must be dealt with and heard out,” he said this month. “I myself am responsible; all of us must follow this approach.”
The corruption underlying the bank failures has long been an open secret. In December, a lawmaker, MahmoudSadeghi, released a document listing the Top 20 debtors who had failed to meet payment deadlines for Sarmayeh Bank, which is co-owned by a pension fund for teachers. The loans totaled $1.9 billion, and almost all appeared to be held by well-known insiders.
Among them was Hossein Hedayati, a business tycoon and former member of the Revolutionary Guard, whose swift rise was so conspicuous that websites speculated about the sources of his sudden wealth. The document released by the lawmaker showed that Hedayati owed $285 million, and in a television program discussing the loan, another lawmaker, Mohammad Hassannejad, accused Hedayati of using a series of front companies to swing the loans and hide his role.
Hedayati dialed in to the program, sputtering with rage; he denied borrowing from Sarmayeh and threatened to “sue everyone,” but has yet to follow through on the threat.
After the 1979 Iranian Revolution, the new Islamic Republic initially nationalized all banks, among other industries. It also created a variety of semiofficial holding companies controlled by the supreme leader, senior clerics or top military commanders. Over the years, many of the companies have evolved into sprawling conglomerates with major roles in even the ostensibly private economy.