Islamic banking gif
b. Assessment of Sharia-compliant banking
Julien Pélissier- PhD from Toulouse Universi- ty; graduated from “Insti- tut Etudes Politiques de Paris” and University of Paris II Panthéon-Assas.. Contact: pelissier2010@
gmail.com . This article was presented at a conference which was organized by the Centre for Middle East Studies and took place in the New Jersey Rutgers Uni- versity (New Brunswick, USA) on the 7th and 8th February 2009.
Which assessment’s method?
In assessing Sharia-compliance of Iranian banks’ operations, we wish to answer the following ques- tions: is the 1983 law really compliant with Islamic law? Is the 1983 law comprehensive enough to achieve the dedicated goals of the Islamic revolu- tion for the Iranian financial system? Is the current operating mode of the Iranian banking system in Iran in conformity with the 1983 law? Some argue that the Iranian banking system should develop its own assessment criteria. As for Sharia-compliance assessment, we can wonder whether a legal crite- rion or a systemic criterion should prevail. The legal criterion only views the Islamic validity of contracts enforced by banks while the systemic criterion looks at the economic and financial effects of banking op- erations as compared to what is expected from an interest-free banking system. The former criterion’s lack of precision may ease arbitrary statements, since there is no undisputed definition of what should actually be the effects of such a system. However, a goof indication of Sharia-compliance, and the most used by the profession, can be the Islamic contracts distribution’s profile.
Benefits expected from the 1983 law
Some operational benefits were expected from the 1983 law. First, the asset-backing obligation in new contracts would ultimately make any financial trans- action based on a tangible, identifiable underlying asset, thus decreasing liquidity risk for banks. Sec- ond, some compulsory requirements of Islamic con- tracts such as determination of final consumption of capital, equivalence of facility with consumption, consideration of return time of capital and profit, and accrued control for the execution, are believed to bring a better circulation, utilization and return of the capital. Third, the diversification of investment portfolio diminishes investment risk and increase profit prospect. Fourth, the possibility for the bank to loose part or all the capital involved compels it to monitor closely the project and therefore a de- crease in the risk of loss, as compared with con- ventional banks. Fifth, the article 16 of 1983 law
makes all contracts compulsory and the fact that in some contracts, the good is itself transferred to the bank, would moderate “guarantee culture”.
The enforcement of the 1983 law
Once the UFBA passed by the Iranian parliament, one year was given to the banks to convert interest- based deposits and loans into Sharia-compliant products. Concerning the lifting side of the banking system (deposit funds), between two periods (1971- 1983) and (1984-2001) quasi money decreased from 56% to 51% of liquidity components, which indicates a relative lack of trust of the private sector from the banking system. And over the 1983-2001 period, due to inflation and the lack of adjustments of the paid benefits to actual profit rates, the share of long run deposits in banks has decreased. The resource collection side has shown mitigated per- formance with a real growth rate of bank deposits up to 3.6% between 1985/1365 and 1994/1374.
Operating problems
Soon, Iranian bankers faced several serious oper- ating problems caused by economic or regulatory constraints. As for economic constraints, the return of deposits in short-term investment accounts has always been well below the rate of inflation. The capitalisation of Iranian banks was not sufficient, given in addition the high regulatory reserve re- quirements. Since most depositors had become accustomed to receiving very predictable returns, they reacted very unfavourably to a bank that fails to deliver the expected rate of return. As for regula- tory constraints, we have already mentioned high reserve requirements. Also, large loans must be ap- proved by the Central bank and their amount can’t anyway exceed 20% of equity capital, according to Central bank regulations. Consequently, banks do not participate in Oil Gas sector projects. In enforc- ing the 1983 law, the habit for fixed rate of profit hampered law implementation. The nature of Islam- ic contracts and the general administrative tradition in Iran have made banking operations more com- plex. And this enumeration is not exhaustive.
Figure 3. The Iranian financial system structure
Governmental commissions: • Credit • Foreign exchange market • Foreign reserve manage- ment
Private commercial banks
General Assembly
Stock exchange: Stock exchange council Securities listing board Arbitration board Tehran Stock Exchanse (TSE)
Supervisory Board
Central Bank
Money
and Credit Council
Foreign Currency Exchange houses
Total banks: 17 Commercial State-owned Private
5 7
Source: author
2010 June GlobalIslamic Finance 25
Specialized 5
Non-banks financial institutions: • Pension Funds • Post Bank • Bonyad Credit Institution • Investment Corporations • Qarzal-Hasana Institutions
Reserve Control Board
Executive Board
State-owned Commercial banks State-owned Specialized banks
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