The call to protest came through a group channel on the smartphone app Telegram. Younes, a 42-year-old accountant at a saffron-importing company, like most of the group’s thousand or so members, had lost his savings when a financial firm promising huge returns went bankrupt amid bad investments and corruption.
Younes, who lives in Iran’s northeastern city of Mashhad, had used all his funds and borrowed from his employer to invest about $20,000. The firm was offering returns of up to 27%, up to 15 percentage points higher than banks were offering. Younes said he has recovered only about 20% of his investment.
“We lost all our fortune and no one cares,” said Younes, who didn’t want The Wall Street Journal to use his last name out of fear of government retribution. He said the firms appeared to have the backing of the country’s central bank. “Why wouldn’t we invest our money in a firm approved and licensed by the government offering more return?” he said.
Protests over losses at loosely regulated credit institutions, which have hit millions of Iranians, smoldered through 2017. The resentment exploded at the Dec. 28 event, which Younes attended, and others like it, and provided the spark that set off the most sustained unrest in Iran in almost a decade.
The complaints over financial fraud quickly morphed into a wider protest
Many Iranians took to the streets to protest rising prices and the economic policies of centrist President Hassan Rouhani. Very quickly protests shifted into demonstrations against Iran’s regime, and marchers called for the downfall of Supreme Leader Ayatollah Ali Khamenei. The government deployed security forces to crack down on protesters and arrested over 4,000 people. More than 20 people have died in the protests and three in detention centers.
Mr. Khamenei blamed the upheaval on Iran’s enemies, including the U.S., Israel and Iranian dissidents abroad. On Tuesday, he acknowledged for the first time that some protesters had legitimate concerns
The unrest, shaking the foundations of the regime, is the most sustained bout Iranian authorities have faced in almost a decade, since millions of protesters in 2009 claimed the presidential election results were rigged to crush the reformist candidate.
Protests have ebbed in recent days. But the working-class grievances that gave rise to the protests remain, including double-digit inflation, a 12% unemployment rate and the perception that systemic corruption is robbing the country’s wealth from the majority.
Over the past year, workers have staged strikes at industrial and energy facilities, including at the country’s giant South Pars field, as well as at sugar, cement and tire factories. They complain they haven’t been paid wages or pensions for months.
Mr. Rouhani caused a stir in early December when he revealed the details of his proposed government budget to the public, showing millions of dollars allocated to religious foundations and clerical offices outside the government’s control. The Islamic Revolutionary Guard Corps received around $8 billion. At the same time, he warned that cash handouts for the poor would be slashed and some fuel prices could rise 50%.
The biggest outcry has surrounded the investment issue, which encapsulates some of the country’s deepest problems.
The business of financial firms boomed under Mr. Rouhani’s predecessor, Mahmoud Ahmadinejad, when he legalized private and semiprivate ownership of credit unions in the mid-2000s. Working-class and middle-class Iranians, whose purchasing power was diminishing from inflation and the devaluation of the currency, flocked to them, eager to make money.
The IMF has estimated that there were more than 7,000 such financial firms. The government’s official account states that until last year they controlled 25% of the country’s cash flow. In August, Mr. Rouhani ordered the central bank to impose strict structure to the firms and to limit the interest rates they were offering to 15%.
Iranian analysts and economists say the firms were doomed to fail. They were owned and managed not by financial experts but by people with close links to religious institutions, the judiciary and the Revolutionary Guards.
Much of their capital was invested in real-estate development ventures that weren’t profitable enough to pay investors promised rates of return. A lack of regulation, accountability or transparency and a culture of corruption sped the collapse of many.
The IMF has praised Iranian authorities in recent years for addressing problems with the firms by forcing mergers, asset-transfers to healthier institutions and conversions to licensed banks, but the moves haven’t led to reimbursement for all depositors. Iran’s struggles echo problems China has faced in curtailing similar “wealth management” firms
People who lost money have met with elected officials, staged rallies in Tehran in front of the parliament and held demonstrations in Izeh, Khoramshahr, Dorooz, Toysarkan, Abhar and Qom. In the past two weeks, those cities have seen some of the largest and most violent protests against the regime.
Protesters chanted “Death to Khamenei” and “Clerics get lost.” Unverified video shared on social media showed young men tearing up and burning Mr. Khamenei’s pictures and spraying graffiti against his images. Peaceful demonstrations turned into violent riots as crowds vandalized police outposts, burned a seminary and a mosque and stormed the governor’s headquarters in Arak.
The Telegram group that publicized the Dec. 28 protest, which has since been deleted, was named “Invitation to Protest” and was administered by Hamed Movahedi, the nephew of hard-line politician Javad Karimi Ghodoosi. Mr. Ghodoosi is Mashhad’s representative to parliament and a member of the political party Jebhe Paydari, which is opposed to the nuclear deal, opening the economy or improving ties with the West.
Mr. Ghodoosi couldn’t be reached for comment.
Hard-line opponents of Mr. Rouhani have used the financial losses to inveigh against the president’s economic policies, accusing him of letting institutions get away with fraud. But Mr. Movahedi and his hard-line allies underestimated the combustible nature of the protests, analysts say.
“It was a match in a big pile of tinder that was waiting to catch fire,” said Marie Donovan, a senior analyst at the American Enterprise Institute in Washington. “The reality is that the hard-liners were weaponizing the people’s economic discontent and Rouhani’s economic track record long before the protests.”
The financial firms have their roots in government controlled finance institutions called “taavoni” that flourished in the years after the 1979 revolution. Later, then-President Ahmadinejad privatized them, and the central bank gave them permits to operate.
Before privatization, the firms functioned largely as retirement funds for government employees. The general public, by contrast, distrustful of banks and government institutions, bought dollars or gold coins as investments.
After privatization, the firms began luring depositors with better rates than banks offered. Inflation had spiked to about 40% under Mr. Ahmadinejad, which eroded the purchasing power of people’s savings, making these high returns more attractive.
Many firms were attached to religious foundations or were thought to have the backing of the judiciary or the Revolutionary Guards, which bolstered confidence in their stability. The firms were loosely supervised and began to engage in lending and other banking services for which they weren’t licensed, according to the IMF.
The institutions put much of investors’ money into real estate and other illiquid assets, while using new deposits to manage cash flows. By 2013, financial losses piled up as real-estate prices went down; others were hit with allegations of corruption and mismanagement. When depositors demanded their money back, the cash wasn’t there.
Mizan Credit and Financial Institution, closely associated with the Iranian judiciary, was among the first and largest to fail, in 2013. It had given large loans to Padideh Shandiz, a construction outfit that itself drew in millions of dollars of Iranians’ money before becoming the target of a corruption probe in 2015 and declaring bankruptcy.
Fereshtegan, a credit firm in the northeastern Khorosan Razavi province, went bankrupt about four years ago and was merged along with several other ailing firms to form the Caspian Credit Institution. It had about 450,000 depositors and about half a billion dollars in assets, a central bank official said last May. The bank said those who lost money would be gradually reimbursed, with priority given to smaller depositors.
Iran’s central bank has stepped in to save other faltering companies, either by arranging mergers and asset transfers to healthy banks, or by converting them into authorized financial institutions. Mizan, for example, had its assets transferred to Bank Saderat, Iran’s largest lender.
Many who lost money accuse managers of pocketing funds or blame authorities for failing to regulate them. Few have faced legal consequences. A judicial official last month said defendants in cases against the Samen al-Hujaj firm had been released on bail. He noted there were about $2.7 billion of assets at stake, although a large part of the money had been returned, according to the semiofficial Tasnim news agency.
Sara, a 29-year-old housewife who asked that her last name not be used, put about $1,500 into Samen al-Hujaj, the same firm Younes invested in, based on recommendations from friends and a promise of annual interest payments of 20%. After the institution failed and talks began over a merger with a healthier bank, she said, she and other depositors had to wait in long lines each week to get regular interest payments. She said she eventually recovered all her funds but that others, including her brother, are still waiting to be repaid.
“I don’t think these protests will solve the problem,” she said. “My brother doesn’t think so. He even took part in these protests, but now he is not really hopeful. Nothing will change.”
Parvaneh Ranjbar, an administrative worker at a law office in Tehran, saw television ads about four years ago for the construction firm Padideh Shandiz. They were alluring enough for her to sell some of her jewelry to raise money for an investment. Her sister sold her share in a piece of land, and together they put in about $10,000.
The firm declared bankruptcy three years ago. Neither Ms. Ranjbar nor her sister recovered their money—even the interest due. Padideh Shandiz investors have protested government inaction regularly in recent months, including on Oct. 30. Ms. Ranjbar said she has become despondent.
“I don’t even follow it up even though every penny counts for us,” she said. “I consider it a loss. I am so hopeless and I don’t think anything—even national protests—would bring our money back.”
Farnaz Fassihi and Asa Fitch