Scorched Earth Policy, This Time in the Banking System?

Iran's banking system plays a crucial role in consolidating and equipping liquidity and deposits due to the deficiencies in the country's capital market. As a result, the Iranian banking system has become the most important economic environment for the intersection of supply and demand for financial resources. Therefore, any crisis in this sector can quickly engulf other parts of Iran's economy and create crises there as well. Currently, while the trial process of the financial-management corruption of the Thamen al-Hojaj Institute is at the forefront of various news media, reports indicate that the merger of banks belonging to military, security, and law enforcement institutions is also underway. The merger of these banks is not unprecedented. Recently, Amir Hatami, the Minister of Defense, stated in an interview with Iran newspaper that 'the Supreme Leader of the Islamic Republic has tasked the General Staff of the Armed Forces of Iran to pursue the transfer of 'unrelated' economic enterprises in the Revolutionary Guards, the Army, and the Ministry of Defense.' In this context, according to ISNA, the merger of military banks and their organization has begun with the announcement of the merger of six military banks, and it was planned that these six banks and the Wisdom, Qavamin, Ansar, Kowsar, Mehr Eqtesad, and Thamen banks would initially be merged into two banks and ultimately into one large bank. Although central bank officials claim that the motivation for merging military banks is to increase efficiency in addressing 'some problems,' no precise and transparent explanation is provided regarding what the central bank officials refer to as 'problems.' It seems these problems are related to a lack of transparency, non-compliance with banking regulations, money laundering, and ultimately the risk of bankruptcy of these institutions. They have suffered from widespread management corruption and have attempted to attract investment by offering high and unreasonable interest rates, but in practice, they have become loss-making and are at risk of bankruptcy. In this context, the central bank is trying to prevent the publication of news related to these financial institutions and, so to speak, maintain its reputation. The publication of news related to these institutions further diminishes the credibility of the banking system, and there is a risk that depositors will rush to banks to withdraw their deposits. Such an occurrence would deepen the banking crisis. More precisely and concisely, the main challenges facing these banks include the expansion of credits and loans granted, high growth of debts to the central bank and other banks, low capital adequacy ratios, large overdue debts, rent-seeking relationships, managerial inefficiency, and financial-management corruption. Why have these banks fallen into this situation? The activities of financial institutions and military banks often violate commercial law, tax laws, and the monetary and banking laws of the country. These banks, despite utilizing the country's public resources, lack transparency and accountability, and by employing rent-seeking and using state resources at low prices, they gain an upper hand in competition with traditional state and private banks. The lack of transparency, adherence to laws, and the absence of accountability and oversight make these banks susceptible to money laundering. Although the government is trying to align Iran's banking sector with international standards by joining the Financial Action Task Force (FATF) and establishing a Supreme Council to Combat Money Laundering, this council and other supervisory bodies such as the central bank have not demonstrated the necessary principles and effectiveness. Firstly, the size of Iran's underground economy is very large; secondly, some military and paramilitary security institutions and influential individuals in the upper layers of bureaucracy and governance in Iran play a role in money laundering. Additionally, the inefficiency of laws and other supervisory institutions, such as the Inspection Organization or even the central bank, is another constraint in the fight against money laundering. A prominent example of law-breaking in Iran's banking system was the money laundering through Pilatus Bank in Malta and the arrest of its manager in the U.S. on charges of large-scale money laundering. In this context, since Iran's banking system—affected by military banks and Qard al-Hasan financial institutions—engages in suspicious activities, it is natural that international banks do not want to provide their services to it. This is one of the obstacles to Iran's banking system joining the international banking network. Winners and losers of corruption in military banks: Although a small group composed of military personnel, security officials, and their clerical and bureaucratic allies benefit from the rents of military banks, the government, and of course at the expense of the nation and public resources, pays the costs of the financial crisis and their potential bankruptcy. The government compensates for the losses of state banks to prevent bank bankruptcies and prevents the bankruptcy of banks. This process means transferring funds obtained from oil revenues, state institutions, or taxes into the pockets of a rent-seeking group that holds the levers of power, prestige, and wealth through law-breaking.