Iran’s Supreme Leader Ayatollah Ali Khamenei instructed the armed forces and security institutions in January to divest from economic activities non-related to their core missions. Consequently, among other steps, plans were devised to merge the six lenders owned by the latter entities and their respective cooperatives and pension funds. The original plan was to merge the six lenders into two banks and then later merge these entities into a single bank. So far, only one of the smaller lenders — credit and finance institute Samen-al-Hojaj, which went bankrupt in 2015 — has been merged into the larger Ansar Bank. All other mergers seem to have been delayed. Meanwhile, reports have emerged that plans have been altered and that the remaining five lenders will be merged into state-owned Bank Sepah. This prospect raises important questions about the envisioned path forward, including its implications for the various interest groups in Iran.
At present, there are five lenders that are owned by military and security organizations: Ansar Bank is owned by a web of companies belonging to Bonyad Taavon Sepah (BTS, or the Islamic Revolutionary Guard Corps’ Cooperative Foundation); Bank Hekmat Iranian is wholly owned by the army; Bank Ghavamin is wholly owned by NAJA Cooperative Foundation (the cooperative of the Law Enforcement Force); and Mehr Eghtesad Bank is owned by the Basij, the paramilitary organization affiliated with the IRGC. Lastly, Kosar — a credit and financial institution as opposed to a fully licensed bank — belongs to the Cooperative Foundation of the Ministry of Defense.
Ayatollah Khamenei’s decree prompted the Central Bank of Iran (CBI) to devise a plan to initially merge Ansar, Samen-al-Hojaj and Mehr Eghtesad (all IRGC-related banks), and then merge the other three non-IRGC banks, followed by a merger between these two resulting entities to create a sole military-affiliated lender.
Samen-al-Hojaj — owned by BTS and already merged with Ansar Bank — was previously a credit and financial institution that was involved in a massive embezzlement case. Abolfazl Mir Ali, its former CEO, was recently found guilty of “disrupting the economic order” and sentenced to 15 years imprisonment. This should be seen as a positive development in the current process as it will likely put pressure on the CEOs of other banks that may be engaged in similar schemes.
The initial logic behind the creation of so many different banks was to manage the financial affairs of the respective organizations as well as their affiliated companies. For example, in the case of Bank Hekmat Iranian, most of the branches are adjacent to military bases nationwide. However, as the case of Samen-al-Hojaj shows, there have been widespread corrupt practices, especially in offering unconventionally high bank deposit interest rates and the extending of loan facilities. The visible presence of these entities given their many physical branches — amounting to 3,340 or 16% of all bank branches across the country — indicates their reliance on traditional banking, i.e., savings and loans.
A closer look at the disclosures about Samen-al-Hojaj indicates the depth of the corrupt scheme: The bank offered to purchase properties if the owner would put 80% of the property value into a savings account. To entice account holders, it intentionally overvalued properties, and then sold the properties at their real price to cash out, all the while knowing that there was no financial backbone to ever repay the principal of the deposits. In other words, the bank cashed out the properties of their customers while offering them savings accounts that could not be retrieved, knowing full well that the principal would never be paid out. At the same time, Samen-al-Hojaj extended inexpensive loans to influential political and clerical figures in order to secure political clout. Evidently, such corrupt schemes emerge if one extends licenses to operate to entities that have no knowledge and experience in professional and sustainable banking activities. They also flourish in a society that is under economic duress where individuals and companies alike are looking for high economic gains.
Interestingly, Iran already had an established bank that was affiliated with the military. The country’s oldest lender, Bank Sepah — not to be confused with the Persian word used to refer to the IRGC — was historically affiliated with the armed forces as it was originally established with funds from the military pension fund. Therefore, all transactions relating to military personnel were handled by Bank Sepah until a decade ago. Nonetheless, all military organizations decided to establish their own financial institutions in order to be in control of and benefit from the volume of their financial transactions. One can imagine the attraction of financial dealings in an economy where liquidity has grown almost threefold in the past five years alone to surpass gross domestic product.
Though news has emerged that all five remaining lenders associated with the military and security forces will be merged with Bank Sepah, it is more likely that further bargaining will be needed before such a merger can happen.
First and foremost, the merger of the five banks with Bank Sepah presents a political challenge. Each of the mentioned banks constitute networks that have clear political and economic interests. This explains why the directors of Ansar Bank commented in July that the ongoing meetings were only “discussions of feasibility” rather than actual merger talks. Even if all of these networks agree to merge into one major network, the merger would dramatically change the balance of power between the various networks including various governmental interest groups — such as the Social Security Organization — and a wide range of semi-state institutions such as Mostazafan Foundation and the Mashhad-based Astan-e Qods Razavi. The outcome of the merger would potentially become the second-largest bank in Iran after the government-owned Bank Melli Iran and would overshadow a number of other networks.
Furthermore, Bank Sepah would become vulnerable to sanctions through the planned inclusion of military entities. Bank Sepah has been one of the Iranian banks that has obtained international banking licenses including four licenses in London, Paris, Rome and Frankfurt. A deep dive into affiliation with Iranian military organizations — albeit in effect constituting a return to its original mission — would certainly lead to international sanctions and limitations that would undermine the bank’s future development. In fact, it is valid to assume that the CBI has tried to achieve the opposite, namely an insulation of Iranian banks from military organizations in order to reduce sanctions and non-compliance risks.
It remains to be seen whether the CBI will have enough political support to implement this plan. For now, the more likely scenario is that Bank Ansar will remain as the main IRGC bank and will also swallow up Mehr Eghtesad. Meanwhile, the other three non-IRGC military banks will probably attempt to merge after long bargaining processes and potential ownership shifts among the current owners. Interestingly, even though all these entities are accountable to the Ministry of Defense, each of them has its own agenda and will try to hold on to its various economic assets for as long as it is politically feasible.
In the meantime, the CBI continues to push for broader consolidation in the banking sector via mergers. This process is likely to lead to other mergers that are probable to occur more promptly than those planned for military-affiliated banks, especially since such processes involve less political and legal complexity in ownership structures and affiliations with interest groups. However, even if the important endeavor to turn Iran’s banking sector less crowded is successful, the more urgent task remains: to contain the spiraling liquidity growth that spurred the mushrooming of lenders in the first place.