Tehran, Iran – Computer programmer and crypto enthusiast Ehsan Bakhtiari would rather convert his money into bitcoin than deposit it in an Iranian bank.
“I much prefer to convert my money into bitcoin and keep it in a secure and anonymous digital wallet than in a bank since I would always be in control of it,” Bakhtiari told Al Jazeera.
Like many Iranians, the 44-year-old Bahktiari doesn’t trust the country’s troubled banking system to safeguard his money.
The public’s distrust is especially high when it comes to foreign banknotes.
Officials in Iran estimate the country’s citizens have between $10bn and $25bn in foreign banknotes stuffed under mattresses or kept in safes. That is a problem for the Central Bank of Iran because it needs foreign exchange to shore up the country’s beleaguered financial system and pay for imports of food, medicine and other humanitarian goods that are exempt from United States sanctions.
Iran has endured a painful currency crisis triggered by President Donald Trump‘s decision last year to withdraw from the Iran nuclear deal and reimpose sanctions. And Iran’s currency, the rial, has faced renewed pressure following the latest escalation in April, when the White House announced it would no longer grant waivers to importers of Iranian oil after the existing exemptions expire on May 2.
But a string of bad decisions made about a decade ago cost Iran’s banking system precious public trust, which the country’s parliament is now hoping to win back.
An unfavourable exchange
To understand how trust was shattered in Iran’s banking system, it helps to start with the country’s exchange rate regime.
For years, Iran operated dual exchange rates (today it has four) that included an “official” one used for imports, and one that more accurately reflected what the rial would fetch on the open market.
Back in 2010, the open market exchange rate valued the US dollar about 15 percent higher than the official rate. That same year, a number of customers went to withdraw their foreign currency deposits from Iranian banks, but instead of getting back foreign bank notes, they found that they could only get their deposits back in rials.
Adding insult to injury, the transactions were calculated at the official exchange rate, not the open market one, meaning the value of the withdrawals was worth far less than the original foreign currency deposits.
This was not the act of a few rogue entities: Iran’s central bank was behind the move. Lacking independence, it was used by the administration of former president Mahmoud Ahmadinejad to fund state projects.
And that was not the only misstep on Ahmadinejad’s watch that eroded faith in Iran’s banking system.
Credit institutions and shadow banks – unlicensed by Iran’s central bank – mushroomed under Ahmadinejad. These poorly regulated institutions spawned an unhealthy competition for deposits by offering astronomical interest rates.
Former central bank governor Valiollah Seif said those rates reached 89 percent in one instance.
These shady institutions were believed by some officials to have held a whopping 25 percent of the country’s money supply in 2016. And when they started to collapse, ordinary Iranians saw their deposits and savings wiped out.
The shadow banks that survived have since been terminated or merged into legitimate, more carefully regulated banks and credit institutions. But the legacy of corruption and of cheating average citizens is still fresh in the minds of many Iranians, who remain guarded about where they keep their money.
Clawing back trust
Last year, in a bid to reintroduce foreign currency deposits and shore up the rial, the Central Bank of Iran announced it would guarantee foreign exchange deposits.
A directive was issued in August allowing banks to accept deposits in US dollars, euros and United Arab Emirates dirhams, with the central bank guaranteeing the original foreign exchange, plus interest to be paid monthly at 4 percent, 3 percent, and 2 percent respectively.
But the directive has largely failed to restore the public’s trust.
The central bank has not released official figures detailing the total value of foreign currency that has been deposited since it issued the directive. Foreign banknotes have also become even more attractive since the rial lost some 60 percent of its value against the dollar last year.
But with the need for foreign exchange ever more pressing, members of parliament have devised a plan to give legal backing to guarantees of foreign currency deposits in banks.
Containing only one article, the plan stipulates that 100 percent of foreign currency deposits will need to be parked in the central bank as legal reserves. If passed in its current form, the proposal will largely take agency from banks, giving the central bank all the power – and responsibility – to manage risks and cushion against defaults on foreign currency loans.
The plan also stipulates that failure to return foreign currency deposits on the part of the banks will be considered a “seizure of public funds” and will merit trial and punishment based on Islamic law.
The general outlines of the proposal were approved by a parliamentary commission in March. If it manages to gain a vote of confidence from the parliament, the measure will then need a green light by the Guardian Council of the Constitution before it becomes law.
But even if the plan is passed into law, banking experts do not see it as an immediate game changer.
“The central bank guarantee alone should have technically been enough, so if the people have not trusted this initiative so far, it means that it has largely failed and legal guarantees won’t have a significant impact either,” banking expert Kamran Nadri told Al Jazeera.
Nadri, who currently heads the Islamic banking department at the central bank-affiliated Monetary and Banking Research Institute, said the system lost the people’s trust very quickly and emphatically, and winning it back will happen only gradually by proving the guarantees actually work.
Moreover, the harsh economic conditions and the concurrent blow to livelihoods have made people even more wary of parting with foreign banknotes.
“Economic hardship and scant foreign currency reserves also fuel the public distrust, raising the question about whether the central bank is able to provide the required banknotes to support this initiative,” said Nadri.
Iran’s banks also have competition for foreign exchange deposits from cryptocurrencies, which have been attracting more users in Iran, especially in the wake of sanctions.
Bakhtiari has been largely using bitcoin and a small handful of other cryptocurrencies to conduct his finances for four years.
“In Iran, cryptocurrencies, especially bitcoin, appreciate both based on global trends and rising foreign exchange rates,” said Bahktiari, “so I may very well profit too in addition to the safety and versatility I get.”