Caspian Finance and Credit Institution has become 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 antigovernment protests that roiled the country late last year, according to a report published in The New York Time.
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 Iranian President Hassan Rouhani, who won re-election promising to revitalize the economy, but also the country’s leader, 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.
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 Iranian Revolutionary Guards Corps (IRGC) or other semiofficial investment funds in the Iranian state.
“If there is a little less corruption, our problems will be solved,” demonstrators have chanted at protests against the financial failures.
Bijan Khajehpour, 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 “mal-baakhtegan” 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 last month 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, adding that the money required to prop up the banks will “cause government debt and interest outlays to rise substantially.”
Even 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, Mahmoud Sadeghi, 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.
After the 1979 Iranian revolution, Iran 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.
Clerics controlled religious foundations, called bonyads, that acquired commercial businesses. The largest of these, under the supreme leader, now makes up “15 to 20 percent” of the Iranian economy, according to an estimate by Hooshang Amirahmadi, an economist at Rutgers University who studies Iran. The elite IRGC controls a separate business empire.
All the semiofficial holding companies have major advantages over private businesses in favorable access to capital, tax exemptions and political connections. And most or all of them have been plagued by accusations of inefficiency and mismanagement, in addition to insider dealing and other forms of corruption.
“The involvement of opaque government institutions like the Revolutionary Guards works contrary to transparency, and the lack of transparency is a recipe for poor banking practices,” said Sir Simon Gass, who was the British ambassador to Tehran from 2009 to 2011, in a recent interview. “The Central Bank of Iran tries to inject discipline into the system but with limited success.”
The outsize returns promised by the banks and financial institutions lured capital that might better have gone to more productive uses, contributing to an economic downturn brought on, in part, by international sanctions imposed because of Iran’s nuclear program. Economists say that helps explain why most sectors of the Iranian economy outside the oil industry have yet to reap the benefits of the sanctions’ repeal after the nuclear deal with the West.
When lenders began to fail over the past few years, some senior Iranian officials tried to blame the borrowers, noting that many of the institutions were not officially licensed or guaranteed by the Central Bank.
It was not just the buyer-beware response of officials in the absence of oversight and transparency that outraged the victims. In 2016, Iranians were scandalized by leaks about the high salaries of executives at state-run companies, including $50,000 bonuses paid to eight managers of a state-owned insurance company (when an Iranian laborer might earn $200 a month).
In that context, the release of a draft budget that proposed raising outlays for clerics’ pet projects and their families while eliminating the $12 a month cash subsidy provided to 30 million Iranians and raising fuel prices by 50 percent provided the spark that ignited the protests.