How Corruption and Cronyism in Banking Fueled Iran’s Protests
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Exchange rates posted on a store window on Thursday in Tehran's financial district. |
TEHRAN
— At 25 percent, the interest rate paid on a savings account at the Caspian Finance and
Credit Institution in Tehran was a better return than Mehrdad
Asgari could earn investing in his own business renting out construction
equipment. So in December 2016, he jumped at the chance, depositing $42,000 in
a savings account.
Before
long though, Caspian stopped allowing withdrawals. After three months, it
stopped paying interest. Finally, in May, it shut its doors for good — becoming
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.
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
President Hassan Rouhani, who won re-election promising to revitalize the
economy, but also the country’s supreme leader, Ayatollah 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.
“I got
angry and swore at them,” Mr. Asgari said recently, referring to Caspian,
adding that he joined other jilted depositors in demonstrations that he had
learned about on social media.
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 Islamic Revolutionary Guards Corps 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, that the money required to prop up
the banks will “cause government debt and interest outlays to rise substantially.”
Even
Iran’s supreme leader, Mr. 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.
Among
them was Hossein Hedayati, a business tycoon and former member of the
Revolutionary Guards, whose swift rise was so conspicuous that websites
speculated about the sources of his sudden wealth. The document released by the
lawmaker showed that Mr. Hedayati owed $285 million, and in a television
program discussing the loan, another lawmaker, Mohammad Hassannejad, accused
Mr. Hedayati of using a series of front companies to swing the loans and hide
his role.
Mr.
Hedayati dialed in to the program, sputtering with rage; he denied borrowing
from Sarmayeh and threated to “sue everyone,” but has yet to follow through on
the threat.
After
the 1979 Iranian Revolution, the new Islamic Republic 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
Revolutionary Guard Corps 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.
Government
reformers took steps to open up the banking business in the late 1990s and
early 2000s, first by allowing religious foundations to set up loosely
regulated savings and loans, ostensibly to serve the poor. The opening of
private banks or the sale of shares in state banks soon followed.
But
under a conservative president, Mahmoud Ahmadinejad, who came to power in 2005, semiofficial bodies
controlled by clerics, the Revolutionary Guards or their allies dominated the newly private financial sector. An
internal study produced in 2013 showed that
semiofficial state bodies owned seven of the 17 private banks. Among them, the
Revolutionary Guards controlled at least two, while the army, the police, the
municipality of Tehran and a giant religious foundation close to the Guards
controlled the others.
Among
those financial institutions not directly controlled by these semiofficial
bodies, the largest were usually run by individuals close to the same ruling
elite, economists and diplomats say. They say that made it almost impossible
for even the best-intentioned regulators to police the banks.
“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.
“How
many times do you want to be bitten by a snake from the same hole?” asked
Mohammad Bagher Nobakht, a government spokesman, in an interview with the
semiofficial news agency ILNA. Officials, he added, “told people several times
but still they invested.”
Mohammad
Bagher Olfat, a Muslim cleric who is deputy chief of the judiciary, said that
jilted borrowers shared the blame with the lenders and regulators.
“Yes,
their money is gone, but they shouldn’t expect the state to pay for their
loss,” he told the same news agency.
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.
They
were upset to read about the $2 million — a 9 percent increase — that went to
the son of the late Ayatollah Shahab ad-Din Muhammad Hussein Marashi Najafi to
maintain his father’s library, and the $15 million provided to the grandson of
Ayatollah Ruhollah Khomeini, the founder of the Islamic Republic, to publish
the late leader’s works.
But
some Iranians had already had enough. When Mr. Asgari was told in May that
Caspian was closing without repaying his $42,000, he stepped outside and
checked the encrypted social media app Telegram, where he found many groups for
“property losers” victimized by Caspian and others like it.
“We
organized demonstrations in front of their head office,” he said. Bowing to
pressure, the government eventually refunded most of his original deposit but
deducted the three interest payments he had received. (The government has since
tried to block the use of Telegram in Iran.)
Arash
Tajaloo, 42, a civil engineer in Tehran, deposited a total of $414,000 with
Caspian in the spring of 2016, when the institution was promising him interest
payments of as much as 30 percent a year. Caspian started restricting his
withdrawals after six months, offering the excuse of temporary technical problems.
“They
kept buying time, week after week,” he said in an interview over Telegram.
A
lawsuit he filed was consolidated into a class action, “given the large number
of cases,” he said. He says he joined protests in front of Parliament, the
presidential palace and the residence of the supreme leader, and took part in a
33-day sit-in outside the courthouse.
Caspian
has promised to repay him about one-eighth of his original deposits, he said,
but he has yet to see any of it.
“We
still have not received either our deposits or the interest on them for 13
months,” he said.
Resources : The New York Times
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