The Finance System
in Iran: 1974 -1993
Another execution in the Islamic Republic may not make news. Yet the death by hanging of Fazel Khodadad for the embezzlement of 1,230 billion rials (approximately $300 million) was unique and made headlines. Unique because of the close links between Khodadad and the Morteza Rafighdoust brother of Mohsen Rafighdoust the head of Iran’s largest industrial and service enterprise - the totally misnamed Bonyade Mostaz’affin [loosely translatable as Dispossessed Foundation].
The revelations around the trial of Khodadad and Morteza Rafighdoust, who had links with the Saderat Bank, and were instrumental in channelling the funds through the banking system, opened the lid on a chain of mega-corruptions that have rocked the Islamic regime, and have been known about, but kept under a tight lid, for years by anyone who had any links with the regime. It is a gross, but typical, example of the peculiar position occupied by financial and banking institutions in the country, whose main function over the years is to channel money into the coffers of a few tightly knit circles close to the top echelons of government.
The Bonyade Mostaza’afan, with assets worth tens of billions of dollars, was set up after the revolution by amalgamating all the major industrial and service enterprises confiscated by the victorious regime. It included the Pahlavi Foundation, a huge industrial, land, building, and hotelling empire run for the deposed monarch. As the name implies the Bonyad was all to be the inheritance of the poor who had made the revolution possible and who had catapulted the mullahs into power. Khodadad’s sordid tales is as poignant an end to their revolutionary dreams as anything imaginable.
Yet a brief look at the history of financial institutions over the two decades straddling the revolution shows that it was always so - these institutions, private or state run, were there to channel funds away from the small saver to the big hoarder (or the Iran-Iraq war).
Like many modern revolutions, the Iranian revolution began in shanty towns, and the first sparks were lit when Teheran Municipal bulldozers tried to erase squatters in Khak Sefid township “illegally” erected outside the official boundaries of the capital. The key slogan of the 1979 revolution was “bread, home, freedom” (nan, maskan ,azadi). The Islamic regime, like so many before and after, rose on tattered shoulders by promising them cheap housing. It failed, even more miserably than many comparable regimes. Indeed housing provision became a lucrative channel for diverting a spiralling volume of funds into the pockets of ever smaller and closer knit circles. In this process the evolving financial systems of the country played a leading part.
This article traces the evolution the finance system in Iran between 1974 and 1993 with a slant towards finance for housing. It illustrates the direct link between the state banking system and oil revenues, which affects, and indeed defines, the whole financial system of the country. The period can be divided into four phases.
Oil price boomed, the state’s role in the country’s economy expanded and the finance system ballooned to unheard of levels. 0il revenues of US$2.4 billion in 1972 nearly doubled to $5.1 bn in 1973 and rose nine fold to $21 bn in 1974. The GDP leaped by 33.8% in 1973 and 42% in 1974 and per capita income increased from US$501 in 1972 to $821 in 1973 and $1,344 in 1974. The growth formation of gross domestic capital increased from 23% in 1973 to 70% in the following year. 42.9% of the accumulated value in this period belonged to the construction sector [1].
In 1973, for the first time in 15 years, four new private banks were opened: Bank of Shahryar, Bank of Iranian Industry, Bank of Investment, and the Bank of Daryush with a total investment of US$1 billion. By 1975, the total credit allocated by the banking system to the private sector increased by 55%. In 1975, in a further expansion in Iran’s banking network two new banks: the Iranian-Arabic and the International Bank of Iran with US$300 million each were opened [2].
By 1979 the banking system consisted of 54 banks including one mortgage bank, 16 savings funds and 2 merchant banks with 8,274 branches , 2167 in Teheran. The share of the public sector within the total banking system was 8 banks: 2 specialist and the rest commercial [3].
The private banking system was set up by a circle of privileged capitalists closely related to the Shah and the imperial family. They also owned the largest industrial enterprises, the main construction companies and were the principal developers of housing [4]. From 1970 to 1979 the same groups constructed more than one hundred urban housing development schemes, consisting of approximately 200,000 units, were constructed throughout Iran by the same groups. The projects were financed by the banking system which was in fact established and developed exclusively for this purpose [5]. The Mortgage Bank, or public bank, was almost the only source of housing finance for the middle income groups - more than 90% of the state’s employees - which were its target.
Lower income groups had virtually no access to the formal finance system. For the poor it was the informal system, money lenders including “Sarrafies” (money-changers) which was the main source of loans. Yet loans granted by these sources was limited both in amount and duration. This was the principal reason for the glaringly uneven process of housing provision [6]. In 1979, this system collapsed. The revolution set fire to the banking system. Yet already before the revolution over 10 of the private banks, born in this period, had actually gone bankrupt - there were more borrowers than lenders [7]
This stage is marked by the absence of a formal operational sector, a total collapse in the informal sector, and its most powerful sectors - that of money lenders - and the emergence of new revolutionary-Islamic financial foundations.
After the revolution the formal sector became a very delicate subject of dispute. Firstly, because of its bankruptcy and destabilising effects on the economy, which led to the nationalisation, and reorganisation, of the banking system [8]. Five new commercial banks, including the Welfare Bank of Workers, and four new specialised banks, including the Bank of Housing, emerged through merger of former private and state banks [9]. Secondly, the uncertainty resulting from its conflict with Islamic law (according to sharia’a to obtain interest from money is a mortal sin) for a period caused major dispute between senior clergy.
There was, therefore for a time, confusion and a complete absence of an effective formal finance system. The prevailing revolutionary atmosphere and immense public expectations, however, encouraged the formal finance system as to concentrate on housing loans. The number of loans allocated in 1980 rose by 50% on the previous year to 150,000 [10].
The impact of the Islamic Revolution on the informal sector was, on the other hand, was its total collapse. Money lenders were strictly banned from operating, many were prosecuted and some even executed [11]. Consequently, almost all of the old money lenders disappeared overnight. Some even emigrated to other cities where no one would recognise them.
Its place was taken by new foundations (bonyad) which spread rapidly throughout the country to finance housing, now almost exclusively for the poor. They included the “Martyrs Foundation” (Bonyade Shahid), Dispossessed Foundation (Bonyade Mostaza’afin) and the Housing Foundation (Bonyade Maskan). They were set up as charities, with ideological and political aims, to provide grants, non-interest loans and building materials, as well as land and technical assistance [12]. They were at first funded through revenues rising out of confiscated properties and money obtained from the overthrown regime’s officials and later by donation and state loans.
These Bonyads were engaged in organising the
poor to constitute a solid popular base for the Islamic regime. Ultimately this
approach, including housing for the low income groups, became an instrument for
the institutionalisation of the post-revolutionary political power. Thus, when
allocating grants and loans, priority was not
given to those whose need was greatest, but to those with the strongest
political links. The circle covered by
these funds gradually narrowed and the distribution of loans and grants became
more selective.
The formal finance sector was resurrected by 1988 and the revolutionary foundations were integrated into the war machinery. A new informal finance sector also emerged. The theoretical problems relating to the sharia’a prohibition of usury were largely solved by devising a system based on “profit sharing” rather than “interest”. Lenders receive a share of the profits, supposedly obtained when their money is invested in a particular activity [13]. This convenient formula allowed the injection of private savings into the banking system and the lending of money to borrowers.
With the
ideological obstacle removed, the banking system could now operate freely. Yet,
it neither responded to social needs nor took an active role in the running the
country’s economy. The wartime state monopoly
over the banking system merely led to the transfer of almost all the
accumulated capital in the banking system to the war machine.
Central Bank annual reports show that, between 1977 and 1986, the total public debt to the banking system increased from 1,000 billion to 9,500 billion Iranian rials (IR), while the share of the private sector in the same period increased from IR 1,900 billions to IR 5,500 [14].
Most of the credits allocated to the private sector were absorbed by those revolutionary foundations operating inside the political system (which were perversely officially counted in the private sector). The role of the formal finance system in this period was confined to satisfying government needs. The whole process was facilitated by the banking system operating within, and receiving separate allocation in the annual budget [14]. For example, the Housing Foundation and other revolutionary institutions, previously involved with financing housing activities, shifted towards war engineering and construction. Their role in housing was limited to financing those homes destroyed in the war, or to provide temporary shelter for war refugees [15].
In the informal sector, a new creature emerged and rapidly mushroomed - the Islamic “non-interest loan fund” (Sandughe Gharz el-Hasaneh). This was an interesting model adapting the private financing system to Islamic law (sharia’a), similar to what had previously been done in the public sector. It was supposed to be a non-profit making model, targeted towards the poor and those with the greatest needs, furnishing non-interest loans for such uses as housing. The model was initially based on a concept of “brotherly trust” and self help, but in practice was transformed into powerful tool for the accumulation of capital. Potential deposits were channelled into speculative activities, specifically on land and property.
Meanwhile the war-racked unbalanced market led to the emergence of an expanding black market and ample conditions for obtaining high rate profits. Cashing in on the opportunity, these private funds increased the rate of “profit” (returns) from 20% to 40% and over 100% per anum and mobilised a large portion of individual savings as well as channelling deposits from the formal banking system towards themselves in a big way. The tight connections between these funds, especially the largest ones, and upper ranks of the clerical institutions and government officials, secured the ground for these funds to function. In a short time they were miraculously transformed into a machinery for organised fraud.
Only one of these Islamic funds, the Nabovvat fund, embezzled IR 100 billion from thousands of depositors, mostly pensioners, widows and people who sold their homes and invested the proceedings to benefit from the high profit rates offered. The fact that the operators of these funds were blood relatives of those who had invaded the key positions in the clerical apparatus and the state, was why they escaped prosecution for the hundreds and thousands of billions of rials swallowed up in fraud.
In summary,
the newly emerging informal finance system soon became a major obstacle to the
setting up of a housing finance system. It not only soaked up funds for
speculative activities, but even more importantly, its activities damaged
public confidence on the finance system as a whole. The period of 1981-88 came to a close with the finance system again
developing for the benefit of limited circles of privileged groups.
This was the time when the IMF Structural Adjustment Programme was being implemented. Its impact on the finance system was: to dissolve the revolutionary foundations as financier in the housing sector; cause the non-interest Islamic funds to collapse; the banking system to return to the economic scene as its main finance system; and the old money lenders to return to the scene and firmly re- establish themselves.
Being in reality part of the state apparatus, the revolutionary foundations followed the government lead. They became commercial systems and acted as housing developers rather than financiers of housing for the poor. Many 50-60 storey luxury towers were built in Teheran by these funds or in partnership with them.
The Islamic funds, on the other hand, in large part collapsed under successive waves of scandals. Depositors rushed to withdraw their money. What remained of them were forced to apply for permission from the Central Bank and to act within newly issued set of regulations. [16].
This period also witnessed the glorious return of money lenders to the finance system. The absence of any alternatives in the formal sector, the fading away of the revolutionary atmosphere, and the dilution of religious passion and dogma, paved the way. Money lenders spread their activity in a black financial market, providing short term loans in exactly the same manner, and the same fields, as they had done previously [17]. High interest rates and short term loans, as well as conditions attached to acceptable collaterals, made them inaccessible to the poor, as indeed they were to many middle income groups, as a means of providing housing loans.
In this period the banking system, still exclusively a public finance system, became more active. Commitment to the Structural Adjustment Programme’s principles required the banking systems to become more rational, profitable and relatively self-manageable. In addition, two other factors helped promote the formal banking system. First: the cease-fire and end to the Iran-Iraq war released funds to finance to the private sector. The disappearance of the Islamic funds, and a relative restoration of depositor’s confidence in the formal system (as the more secure) allowed the banks to attract individual savings. Second: privatisation and liberalisation led to a rise in demand in credits and commercial loans.
All these factors, however, in the backdrop of a very critical economy, led to a peculiar result. The interaction between an extremely corrupt state apparatus, dominating the banking system and a ballooned speculatory capital ended up in a hyper-extraction of the finance system benefiting those tiny groups. One could almost picture it like a vacuum cleaner, sucking up the system into a few lined pockets. Between 1994-5 more than 2,000 cases of fraud in the banking system have seen the light of day.
By contrast the access of the middle classes to the formal finance system became even more difficult than to the informal sector. Comparisons with the 1,230 billion rial embezzlement made by the Khodadad-Rafighdoust gang, cited above, is instructive. In the 16 years spanning 1979-1994 the Housing Foundation distributed a total of 195 billion rials to 251 thousand households [18]. In 1990 the Housing Bank gave out 272 billion rials to 98.5 thousand people across the country - ostensibly a 202% increase on the previous year! The sum of money loaned to over a third of a million families (1.5 million people) was less than half pocketed by a small coterie of bankers and their contacts. [19]
In fact between 1988 and 1992 the cost of housing increased five fold, the price of housing increased even more (in certain areas it reached 15 fold in the same period) Today affordability, and consequently access to the finance system for middle income groups is much lower now than any period in the recent history of Iran.
During the years under consideration access to the finance systems for the poor has been all but negligible. The banking system has never been accessible for those without a permanent job and stable income, and access to the informal finance market, too had been prohibitive by high interest small and short term loans. Thus financing from money markets for the purpose of housing was never an option for the poor. This is one of the key factors that has turned the urban housing provision for the poor into a longer process than even in rural areas.
A large section, perhaps four fifths, of the urban population, now comprising up to 60% of the Iranian population, relies exclusively on its housing on community self-help and recycled rubbish. Community self-help provides the labour and the main source of housing finance, usually interest free, though very limited and negligible [20]. The materials are castaways and that is why these homes are often located near rubbish dumps or the main sewage routes of the cities. “Halabi-abads” (literally tin-towns) are built from empty tin drums (halab) filled with soil. Thus do millions of Iran’s urban poor Iran survive while financial, as well as other resources, remain inaccessible to them.
Housing remains the Achilles heal of the modern state, which in peripheral capitalist countries becomes unbearably hyperacute It would be no exaggeration to state that housing, and in particular low-cost housing for the poor, is the most emotive issue in today’s world and one of the key elements that has underlined all modern revolutions. From Port au Prince’s Cite Soleil and Rio’s shanty towns crawling up the hillside in the Americas, to Soweto and Algiers’ Casbah in Africa, to Manila’s garbage city and Calcatta’s slums- a world of misery is sardined into makeshift and temporary fragility in virtually every major city. They are ready to explode, and some are already exploding, as recently happened in Teheran’s poor suburb of Eslamabad.
Financial facilities between 1974 and 1994 were never
established as a system. These facilities became increasingly inaccessible to
the middle income groups as well as the poor. The beneficiaries were a closed
circuit of privileged groups. The majority of the people were losers.
Ardeshir Mehrdad
1. Rashidi A. 1992. Development of money and exchange
rates in Iran between 1973 and 1975. Political-Economic Ettela’at Vol 7 no3-4 pp73-4.
2. ibid. Political-Economic Ettela’at Vol 7 no3-4
pp78-9.
3. ibid.
Political-Economic Ettela’at
Vol 7 no 3-4 p 78-82.
4. Soudagar MR
1980. Development of capitalist relations in Iran, Teheran, p208-18
5. ibid
p258-64.
6. The Organisation of National Industries of Iran
1993; A research paper. In: Political-Economic Ettela’at, volume 7, nos
9-10, p70-71
7. Rashidi 1993. Economic development of Iran after
the revolution. Political-Economic Ettela’at.
volume 7 no 7-8 p82
8. ibid
Political-Economic Ettela’at.
volume 7-8, p81-4.
9. ibid. Political-Economic Ettela’at. Vol 7, nos 9-10; 109-113
10 Central Bank of Islamic Republic of Iran. 1981
Annual Report, Teheran.
11. Organisation of National Industries of Iran
(1993). Political-Economic Ettela’at,
volume 7, no9-10, pp70-71
12. Bayat A
1994. Squatters and the state. In: Middle East Report, November-December; p13.
13. Hedayati 1944. The Internal Banking System
Operations, Central Bank, Teheran p18-22.
14. Central Bank of Islamic Republic of Iran.
1981-1986; Annual Report, Teheran.
15. Islamic Revolutionary Housing Foundations (1994).
Annual Report, Teheran.
16. Resalat
daily paper. March 5, 1989.
17. The Organisation of National Industries 1993: No
9-10; p71.
18. Rashidi A 1992. ibid Volume 7 no 3-4 page 73
19. Resalat,
February 21, 1990.
20. Piran P 1988. Squatter settlements in Iran.
Political-Economic Ettela’at, vol 2, nos 10-12 and vol 3, no 1. Teheran.
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