Croneyism’s Bad Loans Threaten the Stability of Iran’s Banking System
The recent findings from a report by Iran’s Central Bank have brought to light the alarming prevalence of insider dealings and corruption that jeopardize the integrity of Iran’s banking system. This report, featured on the Tehran-based Aftab News website, outlines significant overdue debts and non-performing loans that illustrate the challenges faced by both bank customers and the institutions themselves.
The report indicates that 27 major institutional debtors owe a staggering approximately 790 trillion rials (around $10 billion at the current free market exchange rate) in non-performing loans. These loans were issued over several years when the Iranian rial was much stronger, and their current value has likely escalated significantly due to the devaluation of the currency. A non-performing loan (NPL) refers to a bank loan that has not been repaid on time or is unlikely to be repaid in full.
Key points highlighted in the report include:
- Over 25% of the total overdue loans are owed by the Bank of Industry and Mines.
- The CEO of this bank, Mahmoud Shayan, has a background that began at the National Bank and includes various leadership roles.
- Political insiders have leveraged their connections to secure substantial loans, often through companies they control, while evading repayment obligations.
The largest debtor within Iran’s banking system is the Middle East Mines and Mineral Industries Development Holding Company (MIDHCO), which has been under US sanctions since 2019. MIDHCO’s chairman, Majid Ghasemi, also serves as the Deputy for Economic Research at the Expediency Council, a body opposing Iran’s compliance with international anti-money laundering standards set by the Financial Action Task Force (FATF).
Other notable debtors include:
- Debsh Sabz Gostar: A tea trading company involved in a $3.5 billion embezzlement scandal since 2023.
- SAIPA: A state-backed automaker previously active in Syria until 2023.
- Esfahan Steel Company: Associated with Iran’s second-largest embezzlement case.
The Islamic Revolutionary Guard Corps (IRGC) holds a significant stake in several of these companies, including Khuzestan Steel Company, which is embroiled in broader embezzlement allegations. The MAPNA Group, Iran’s largest power plant construction firm with IRGC ties, is also a major debtor to multiple banks.
Additionally, Ghadir Investment Company, under the control of Iran’s Supreme Leader Ali Khamenei, ranks among the 27 largest non-performing debtors. This situation unfolds as Iranian banks face substantial financial losses, with the central bank reporting a cumulative loss of 540 trillion rials (approximately $6.8 billion) by October 2024.
Notably, Pasargad Bank and Parsian Bank are at the forefront of these financial struggles, having issued a significant volume of non-performing loans to the identified major debtors.
The past year has seen the value of the US dollar surge by more than 50% against the Iranian rial, with a tripling effect over the last three years. This currency fluctuation has driven real estate prices even higher, creating lucrative opportunities for insiders to acquire loans from banks for investments in real estate and other sectors.
MIDHCO, despite being the largest debtor, reported a 25% increase in investments during the last Persian calendar year, indicating a paradoxical growth amid economic turmoil. The Iranian government, the largest debtor overall, has intensified its borrowing from domestic banks, which in turn borrow from the central bank.
Recent statistics from the central bank reveal that government debt to the central bank has surged by 65% as of October compared to the previous year, with state-owned enterprise debts to the overall banking system also increasing significantly. This borrowing spree is chiefly aimed at addressing budget deficits stemming from reduced oil export revenues due to ongoing sanctions.
As a result, banks have doubled their debt to the central bank over the past two years. To cover loans extended to banks and the government, the central bank has engaged in extensive money printing, leading to liquidity surges and rampant inflation. This troubling cycle is likely to exacerbate the already dire economic situation in the country.
In conclusion, the growing issue of non-performing loans and insider dealings in Iran’s banking system poses a significant threat to its financial stability. As various entities leverage their political connections to secure loans, the integrity of the banking sector continues to be undermined, raising concerns about the future economic landscape in Iran.
