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EghtesadOnline: A decision by the Money and Credit Council – a policymaking body - to scrap overnight interest payments has yet to display its full force but the development has become a topic of hot debate among businesses and economic pundits.

While Central Bank of Iran Governor Abdolnasser Hemmati has apparently successfully sold the theory that ending overnight interest payments would reduce the "fluidity" of bank deposits, detractors say it will have the opposite effect. 

In their view it will encourage the public to invest in safe haven assets like gold and forex instead of parking money in the banks. 

Ahmad Hatami Yazd, a senior banker and former CEO  of Bank Saderat Iran, rejects the latter premise on grounds that even if the CBI move causes a flight of deposits to other safe havens, money should and will eventually come back to the banking system, Financial Tribune reported.

"When, for example, a person goes to a shop and buys gold, the seller will not keep the money in his safe. He will ultimately deposit it in the bank," Hatami Yazd told the Financial Tribune. 

If the CBI idea holds, he added, the “momentum of money flow will be restrained, and by extension curb liquidly growth and also help contain inflation. 

According to the research arm of the Iranian parliament, since 2013 liquidity has registered an average annual growth of 28%. By last October, the figure for money supply stood at 16,930 trillion rials and is predicted to reach 17,000 trillion rials by March. 

The newly-announced interest rate mechanism, which took effect on Jan. 21, obliges banks and credit institutions to pay interest on deposits on a monthly basis with the minimum balance in a month as the base.

The new rule notes that interest rates per se are unchanged and only the mechanism has changed from overnight to monthly basis. It emphasizes that the minimum balance in a month will be the basis for calculating the interest – a point opponents of the rule say is discouraging and a big drawback.   

In the past banks calculated the overnight interest for the average amount deposited in short-term accounts and paid customers at the end of the month. 

This fact, Hatami Yazd argues, indeed encouraged speculators to rush to the currency and gold markets by withdrawing money and re-depositing it without any risk or potential loss. 

"But from now on these people are forced to keep their money with the banks until the end of the month," he said. 

The national currency lost over 50% of its value since last summer and the steep decline was largely attributed to the new US economic and banking sanctions after mercurial President Donald Trump pulled out of the 2015 Iran nuclear deal. 

However experts also pointed to structural problems in the economy as the main culprit for the currency crisis unseen in decades. 

The final outcome of the change, Hatami Yazd hopes, would be the shift of liquidity from short-term to long-term deposits. This, he insists, can and will empower banks and credit institutions to lend more to businesses and industries across the country. 

And by curbing the operational costs of banks, the chances will improve for lower interest rates. 

In light of recent CBI policy of limiting bank transactions and discouraging imports, some – especially in the private sector – have warned that this could trigger a recession. 

Hatami Yazd does not buy this argument.  In his view, “limits on transactions are the effect, not the cause of recession.” 

He blames the current dire economic conditions on the US sanctions and inability of the government to access its overseas forex reserves and revenues.  


Rule Iran Money and Credit Council Central Bank of Iran Senior Banker Interest Payment overnight interest payments