Islamic banking gif
Iranian banking system
– case study of an interest free banking experience (1983-2008), part 2
Author: Dr. Julien Pélissier
In the last issue Dr. Julien Pélis- sier presented in an article the le- gal definition of the prohibition by the Islamic jurisprudence as well as a study of regulatory environ- ment of the prohibition of usury in Iran. In this issue Dr. Julien Pélis- sier discusses Sharia- compliance assessment of the post- revolution Iranian banking system and prob- lems arising from state- ownership of the banks.
N
o attention is paid to the
general banking architecture, nor to free- market constraints for its functioning. The legal relationship between the bank and its customers is one of power of attorney given by the depositor to the bank in order for it to have business with the entrepreneur. On the resource collection side, for current, savings and investment deposits, the bank becomes debtor of the depositor whereas it is its agent on the resource allocation side. On the resource lifting side, deposit ac- counts (excluding qarz al-hasana deposits) are promised profit “ala al-hissab” but with a quasi certainty of payment and a very little variation from the percentage announced by the banks. On the allocation side, dominated by Constituent –agent relationship for term- investment deposits, no guarantee is given from the agent to pay a defined rate of profit to the constituent but at the same time, there is no incentive for the bank (agent) to maximize profit since its fee, as the agent, is fixed whatever the real profit is. The resulting complexity in managing liquidity risk would impede the traditional function of the bank, i.e buy and hold assets of longer maturity and less liquidity than their liabilities.
Banking operating model in the law
a. Brief history of the Iranian banking sys- tem since 1979
We can distinguish four major historical phases for the Iranian banking system
1979-1982: nationalization and reorganiza- tion
The banking system is nationalised, restruc- tured and reorganised in order to remove the weakness of the inherited system. Exter- nal and internal developments in this phase did not allow policy-makers to develop a co- herent plan for the Islamising of the bank- ing system, although various piece-meal attempts were made toward this objective. Since 1979, payment and receipts in inter- est in banking operations are prohibited.
1982-1986: the implementation of the 1983 law passed on August 1983
The usury free banking law has been ap- proved and applied since 22nd of Au- gust 1983. Bank resources are mobilised through deposits on the basis of UFBA. Funds are allocated through eleven various Islamic contracts. A legislative and adminis- trative quantum leap was made in adopting and implementing a clearly conceptualised model of Islamic banking. The UFBA passed
on August 1983 gives a deadline of one year to the banks to convert their deposits in line with Sharia and required that they Islamise all their operations within three years from the date of passage of the law. During this phase, the central bank was implicitly envi- sioned as an independent economic institu- tion similar to that conceptualised in most Western banking systems with a consider- able degree of autonomy from the govern- ment. Administratively, the intermediation role of the banking system was given cen- trality though the central bank exercised ex- tensive control on the operation of individual banks in its regulation and supervisory ca- pacities.
1986-2000: banking system as a part of the government
The banking system becomes an integral part of the Islamic government, an instru- ment directly submitted to government poli- cies. A letter of the Leader of the Revolution, R.Khomeiny, to the President of the Islamic Republic, dated 6th January 1988, insists on velayat faqih’s role, that of parliament (majles) and affirms indirectly the highly ac- tivist role of the banking system in promot- ing social and economic development.
2010 June GlobalIslamic Finance 23
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