In recent months, the Iranian financial system has seen a lot of fluctuation and a considerable amount of cash flow to and from its different segments.
The novel COVID-19 outbreak has shown its effects on international financial markets and in this situation many investors are trying to find the best markets for their investment portfolio management. Meanwhile, regardless of the decisions taken by the financial system policy maker (i.e. the ministry of financial affairs and economy of Iran), the Iranian capital market and banking system are trying to attract the much-needed investors’ attention. The banking system uses deposit rates as a critical arm to absorb money and simultaneously many investors who are more risk-takers prefer to enter the capital market instruments with the hopes of earning more than the less risky banking deposits.
It is notable that based on the Iranian constitution, financial products such as equities, bank deposits or other debt-based instruments should follow Islamic principles. It is illegal in the market to launch or to trade any financial instrument that contradicts the Islamic principles. Considering this fact, the Iranian financial system is one of the most unique financial frameworks, which legally wholly comply with Islamic principles.
In Iranian financial system, the Money and Credit High Council is in charge of determining the deposit rates for many banking deposits and announces different deposit rates for different types of deposits at the beginning of the Iranian New Year (i.e. March 21). One of the reasons relates to the Central Bank’s plan to manage the money outflow from banks to the real economy. Notably, lending rates have a very important role in this regard, because many segments of the real sector economy such as auto-making factories and related industries, healthcare, tourism and other manufacturing companies greatly depend on the lending rates, which the banks ask for when providing the needed money to such institutions.
With all the aforementioned points, during recent weeks there was a huge demand in the capital market indices upward trends and as a result mini-deposit holders may prefer to use capital market instruments rather than the banking products for their investment. Such potential flow of the money may result in extracting the deposit holders’ money from bank accounts and moving toward the capital market instruments and subsequently result in reducing the bank’s power for protecting the real economy.
Herewith, the Central Bank of the Islamic Republic of Iran announced that there is no plan on the table for reducing the deposit rates. Right at this moment, it seems that changing the deposit rates will have a negative effect on the banks’ performance and may reduce the banks’ stability. However, in the future, reducing the deposit rates might be a good option on the table for protecting the real sector of the economy. Let’s wait for a suitable time for that change.
Majid Pireh is the Head of Islamic Banking Group at Securities and Exchange Organization of Iran and Banking PhD Student at Allameh Tabatabaei University; Tehran; Islamic Republic of Iran.
He may be contacted at: majidpireh@islamiceconomist
