Iran ceases licensing new banks to fight Ponzi.
The action follows the collapse of numerous institutions over the years that pauperized depositors. Fury over the collapses is believed to have helped fuel the anti-government protests across the country.
Many credit institutions and funds--whose high interest rates allowed them to expand rapidly over the past decade--have shut their doors. The lenders were again a focus of anger as demonstrations swept through Iranian cities from late December in the biggest challenge to Iran's clerical system in nearly a decade.
"I've instructed the Central Bank not to issue any permits to any new private banks," President Rohani announced Monday in a television appearance responding to the protests that erupted December 28.
"We're determined to solve the problem facing depositors at financial credit institutions, which has affected two to three million families," he said, blaming his predecessor for allowing the unchecked spread of the unregulated lenders.
The practice of allowing poorly run banking institutions to be set up was started under President Ahmadi-nejad. But President Rohani has been in office more than four years without acting to shutter them. Some were just badly managed, but others were outright frauds operating Ponzi schemes.
In a Ponzi scheme, an institution attracts depositors by paying huge interest rates. The interest is paid to last week's depositors from this week's deposits--after the scheme organizer takes a cut. Eventually, there are not enough new depositors to make all the promised payments and the scheme collapses, usually after the organizer has fled the country.
During the protests that broke out December 28, banks and credit institutions in several cities were attacked by protesters. The unrest has revived concerns over how a parallel financial industry was able to thrive without oversight and regulation.
Those who face losing their life savings have also run into an unresponsive state.
"People have complained to the Majlis, to the courts, to the prosecutor's offices. They've done everything they can, but still can't get anywhere," said Majid, an office worker, who requested his full name be withheld.
He had deposited what he could spare with Iran's Fereshtegan Credit Institute, and at age 50 appeared financially secure. Soon after, the lender ran into trouble and its branches were shuttered, with Iran's Judiciary citing inaccurate and poor accounting.
Last November, Central Bank Governor Valiollah Seif described the way some credit institutions had operated as Ponzi schemes, saying in an interview with state television that the institutions would pay unsustainable interest rates--sometimes as high as 89 percent--using money acquired from new depositors.
The credit institutions mushroomed under President Mahmud Ahmadi-nejad. During his eight years in office, lenders appeared to offer "an attractive market and people invested in it," said Ali Kherad, an analyst at Tehran-based Behgozin Brokerage Co. "There were few other businesses in Iran as profitable."
The International Monetary Fund said in a report last month that the credit institutions as well as Iran's banks--which had been weakened by years of sanctions and competition from unlicensed financial institutions--were in need of "urgent restructuring and recapitalization."
Caption: SCHEMER--Charles Ponzi (1882-1949) was an Italian-born swindler and con artist who operated in the US and Canada. He became known in the early 1920s by promising clients a 50 percent profit within 45 days, or 100 percent profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. In reality, Ponzi was paying earlier investors using the investments of later investors. While this type of fraudulent investment scheme was not originally invented by Ponzi, it became so identified with him that it now is referred to as a Ponzi scheme. His scheme ran for over a year before it collapsed, costing his "investors" $20 million. He served 10-1/2 years in prison.