gif Islamic banking

2000-2008: progressive shift toward priva- tisation and liberalisation of the financial sector

Direct credit controls are gradually removed. Schedule banking facilities are gradually decreased. The private sector shares in banking facilities are increased. Four private banks and one non bank financial institution are licensed. Also foreign branch banking and insurance activities in Free Trade Zones

are licensed. Up to 35% of Bank resources are released to use them on a competitive basis (2002). We see a decrease in the legal reserve requirement ratio, in the numbers of rates of return on bank deposits and lending, moving away from range of rates of return to a unified rates and PLS modes of financing . First indirect instrument of monitory control, the Central bank participation papers (CPP) are introduced in 2000. Risk based banking supervision begins to be implemented.

Figure 1. The Iranian banking model scheme

Economy

Resource collection (DEPOSITS)

Gharzal-hasana accounts-Current

-Savings 33% of total

Investment accounts 66% of total deposits

Source: author

Table 1. Evolution of the sectoral allocation of credit facilities until 1995

Year/Sector

Housing (in%)

1973/1352 12.9 1979/1358 31.2 1995/1375 20.5

Source: Central Bank of Iran

Figure 2. Typical balance sheet in conventional and Islamic banking

Assets (funds’ use

Cash items (including reserves) Loans

Securities Others

Deposits: Current, Save Long term Borrowed funds Share capital

Cash items

Loan (charitable) Islamic contracts PLS-Equity Mark-up transactions (Trade, debt and securities)

Source: author

24 GlobalIslamic Finance June 2010

Deposits: Gharz al-hasana (current, save) Investment Short and Long term Borrowed funds Share capital

Liabilities (funds’ source)

As corporate business, banks have to allow daily financial transactions, to clear and set- tle payments. They reduce transaction costs through its intermediation role. They also re- duce informational costs. Finally, they trans- fer risk to provide ways for managing uncer- tainty and controlling risk. In many cases, public policy objectives may be contradictory with corporate objectives of banks.

Conventional aspects of the Iranian banking system

The Iranian system is a fiat money fractional reserve banking system, refinancing mostly by the Central bank and marginally on inter- bank monetary market. The Iranian banks are commercial banks moving in a two-digit inflation rate environment, thwarting the enforcement of an efficient management of the bank spread and that of liquidity and credit risks.

Industry and mines

18.3 22.4 40.5

Trade and services

44.4 22

19.1 Agriculture 7.5

10.5 19.9

Government deficit

Legal rates Sector

allocation Reserve

requirement

Credit obligations

Resource allocation (CREDIT FACILITIES)

Sharia-compliance assessment of the post-revolution Iranian banking sys- tem

a. The business environment of the Iranian banking system

PLS contracts (31.2%) Trade

contracts Claims and Securities

A harsh internal and external environment

Any fair assessment of the Iranian banking system should take into consideration the harsh economic and political environment surrounding it. As put by Mirrakhor (1988), the “progress of Islamic banking in Iran has been influenced by factors with roots in the pre-revolutionary economic structure as well as post-revolutionary external and internal political developments”. No doubt that the new revolutionary regime in 1979 inherits from the pre-revolutionary situation , more- over, in the following decade, the Iranian state has to cope with worrying economic, political and social trends, such as freezing of foreign assets and capital flight, economic sanctions, interruptions in production, influx of refugees (Afghan, Iraqi), war with Iraq, vol- atility and drastic reduction in oil revenues and political instability.

Double standard objectives

We have already mentioned the main ob- jectives of the Iranian banking system, as quoted in the legal framework. But it is easy to understand that Iranian banks have to en- force what we can call double standard ob- jectives, i.e. public and corporate objectives, which are not necessarily smooth together. As a representative of the banking system’s regulator, they ensure that three traditional monetary objectives are met (safety, stabili- ty, structure) , as well as the implementation of government credit policies and Sharia- compliance of their operations.

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