Reduction of Bank Interest Rates and Bank Behavior on the First Day of Implementation

On Saturday, the first day of the Central Bank of Iran's directive regarding the reduction of deposit interest rates was implemented. The Central Bank had previously mandated all banks and credit institutions to reduce the interest paid on deposits to a maximum of 15 percent, effective from September 2. According to ISNA news agency, while visits to most banks indicated a reduction in interest rates for new deposit accounts, some 'violating banks' still defined a 23 percent interest rate for their annual accounts on the first day of the directive's implementation, continuing to apply previously existing interest rates. ISNA reports that some banks, despite accepting the new deposit interest rates, simultaneously tell their customers to wait a few days for the directive to take effect, claiming that special plans for higher interest payments will be announced. Meanwhile, the Central Bank's directive has prohibited any plans to circumvent bank interest rates. Furthermore, as ISNA notes, the behavior of some banks on the first day of the interest rate reduction caused dissatisfaction and difficulties for customers. Some banks reportedly 'created concern and confusion among customers by sending text messages with varying content and complicated access to their accounts, while others even transferred customers' accounts without permission, leading to widespread discontent.' ISNA states, 'Last July, based on an agreement among banks and the approval of the Money and Credit Council, the bank interest rate for deposits was reduced to 15 percent and for loans to 18 percent.' However, in practice, rates have gradually changed in banks, and 'it has rarely been seen that a 15 percent interest rate was applied for term deposits. Banks often offered higher interest rates to their customers under various schemes or simply set the interest rate above 15 percent.' Kamran Dadkhah, a university professor and economic expert in Boston, told Radio Farda, 'The bank interest rate in Iran reflects the disintegration of Iran's financial and monetary system. If a bank offers 20 percent interest to its depositors, it must provide these deposits as loans to economic actors at 30 percent, considering the bank's costs and a minimum profit.' He continued, 'An economic actor who accepts a loan with a 30 percent interest must at least engage in production or an activity that yields about 40 to 45 percent income to be able to pay the bank's interest.' According to Dadkhah, 'This scenario is practically impossible, and that is why we witness major corruption in the monetary and financial system in Iran.' Dadkhah also believes that the reduction in deposit interest rates will push depositors towards institutions and individuals promising higher returns, likely leading to a repeat of previous scenarios where depositors gravitate towards informal financial institutions and funds, a situation he refers to as 'fueling the underground financial activities.' Regarding the impact of the reduction in bank interest rates on the housing market, Afshin Parvinpour, a former member of the Housing Council, told Tasnim news agency, 'The reduction in bank interest makes it less attractive to keep capital in banks, and this capital seeks alternative investments. However, the reduction in bank interest rates will affect rental prices more than it will influence buying and selling homes.' In the Central Bank's eight-article directive, in addition to requiring banks to pay a maximum annual interest of 15 percent, a daily interest ceiling of 10 percent has also been set. However, the reduction in interest rates will not apply to contracts concluded at the previous interest rate until the contract matures; instead, the new directive's conditions will apply upon the renewal of the contract. According to ISNA, since 2014, the Central Bank's directive has prohibited the opening of five-year term accounts, and banks are not allowed to open such accounts. However, if banks fully comply with this directive and if such accounts were opened before the 2014 deadline for opening five-year accounts, there are about two years left for these accounts.