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Banking and Credit Rationing Under the Islamic Republic of Iran

Published online by Cambridge University Press:  01 January 2022

Mehrdad Valibeigi
Mehrdad Valibeigi*
Affiliation:
The American University
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Extract

Since the Iranian revolution of 1979, the Iranian banking system and practices have changed significantly. Shortly after the revolution, according to a decree by the Revolutionary Council, banks and insurance companies were nationalized. In 1980 and 1982 legislation was passed to convert all banking practices to Islamic interest-free banking. Despite such significant developments in the Iranian banking system, this area of research has not been given its due attention by the scholars in the field. It is the purpose of this study to describe the process of post-revolutionary change in the Iranian banking system and outline the new trends in credit rationing practices after the revolution.

It will be argued here that the Islamization of the banking system did not result in the so-called abolition of interest from the financial system; in practice the banking system continues to pay interest—now called “profit“—to savings account depositors, and standard interest-bearing financial contracts continue to be utilized by the banks under new Islamic terms.

Type
Research Article
Information
Iranian Studies , Volume 25 , Issue 3-4 , 1992 , pp. 51 - 65
Copyright
Copyright © Association For Iranian Studies, Inc 1992

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Footnotes

*

This article is based on some of the findings in my doctoral dissertation titled “Islamization of Economy: the Iranian Experience” (The American University, December 1991).

References

1. Prior to nationalization of the banking system in October, the government took over the entire insurance industry, consisting of 11 insurance companies, on 25 June 1979.

2. 1) Bānk-e Tehrān, Pārs, e'tebārāt-e ta'āvon va tawzī', Iran va ‘Arab, ‘omrān, tejārat-e khārejī, bayn al-melal-e Irān and farhangīān were all consolidated into bānk-e mellat; 2) bānk-e rāh va sākhlemān, the Corporation for Construction Investment Banking of Iran, and all savings and loans specializing in real estate mortgage were consolidated into the bank-e maskan; 3) bānk-e e'tebārāt-e ṣan'atī, tawse'a-ye ṣanāye’ va ma'āden, tawse'a va e'tebār, Corporation for Investment Banking of Iran, Industrial Credit Fund, and Mining Credit Fund were consolidated into the Bank of Industry and Mining; 4) bānk-e ta'āvon-e keshāvarzī, tawse'a-ye keshāvarzī, and all other credit institutions controlled by the ministry of agriculture and rural development were consolidated into the bānk-e keshāvarzī; 5) bānk-e e'tebārāt-e Irān, Iran and Middle East, Iran and Holland, Commerce, Irānshahr, Industry, shahrīār, Irāniān, kār, Iran and Japan, were consolidated in the bānk-e tejārat; 6) bānk-e tawse'a-ye Khazar, Khuzestān, va Āẕarbāyjān, and ṣāderāt were consolidated into bānk-e ostān; 7) bānk-e mellī, sepah, and kārgarān continued their operation. See Gozāresh-e sālāneh-ye bānk-e markazl (Tehran: Central Bank of the Islamic Republic, 1980), 92.

3. Looney, E. Robert, The Economic Origins of the Iranian Revolution (New York: Pergamon Press, 1983), 189Google Scholar.

4. Qur'an, trans. Dawood, N. J. (Baltimore: Penguin Books, 1968), 3:132, 2:276Google Scholar.

5. Karsten, Ingo, “Islam and Financial Intermediation,” International Monetary Fund Staff Papers 28, 108-142 (1982):110CrossRefGoogle Scholar.

6. The Economist, 16 September 1989.

7. As Roover explains, when capitalist growth gained momentum in the fifteenth century, the scholastic attitude towards usury changed. In Christianity the final blow to the theory of usury prohibition came as the Catholic church announced interest as a licit practice in 1840. See Noonan, John T., Jr., The Scholastic Analysis of Usury (Cambridge: Harvard University Press, 1957), 199Google Scholar.

8. Ahmed, Shaikh M., Economics of Islam: A Comparative Study, 2nd. ed. (Lahore: Ashraf Press, 1952)Google Scholar.

9. Siddiqi, Muhammad Nejatullah, Issues in Islamic Banking (Leicester: Camelot Press, 1983), 82Google Scholar.

10. Choudhury, Masudul Alam, Contributions to Islamic Economic Theory: A Study in Social Economics (New York: St. Martin's Press, 1986)CrossRefGoogle Scholar.

11. “'Societas,’ or partnership, was a normal form of … commercial organization throughout the Roman world; and it enters scholastic thought largely in the form given it by Roman law. A societas, according to the Digest, is the union by two or more persons of their money or skill for a common purpose, usually profit” (Noonan, Scholastic Analysis, 133).

12. Abdeen, Adnan M. and Shook, Dale N., The Saudi Financial System in the Context of Western and Islamic Finance (New York: John Wiley & Sons, 1984), 165Google Scholar.

13. On 10 February 1979, the government of Pakistan announced that all laws— economic, political and social—would be brought into conformity with Islamic precepts. Initially, a scheme of profit sharing was adopted by the banking sector to run parallel to interest-bearing accounts. This decision came as a result of the Report of the Committee on Islamization, commissioned in April 1980, recommending a smooth and gradual process of Islamization of the entire banking system. In the committee's view, the premature introduction of an interest-free economy might cause a serious deterioration in the distribution of income. It argued that “Pakistan's economy had evolved essentially on capitalist lines and, therefore, had many features that were not Islamic. True, the institutions will change under the impact of Islamic reform, but that takes time.” Indeed, the commission argued that abolition of interest might produce un-Islamic results: a “rise in the overall level of economic exploitation of the poor by the rich” (Shaid, Burki Javad, “Economic Management Within an Islamic Context,” in Weiss, Anita M., ed., Islamic Reassertion in Pakistan: The Application of Laws in a Modern State [New York: Syracuse University Press, 1986])Google Scholar.

14. Abdeen and Shook, Saudi Financial System.

15. Central Bank of the Islamic Republic of Iran, Barrasl-e taḥawolāt-e eqteşādī ba'd az enqelāb (Tehran: Tehran chap, 1983), 453.

16. Ibid., 452-3

17. For a more comprehensive account of the economic Islamization policies under the Islamic Republic see Mehrdad Valibeigi, “Islamic Economics and Economic Policy Formation in Post-revolutionary Iran,” forthcoming in Journal of Economic Issues (September 1993).

18. Kayhan, 17 December 1980.

19. Ibid.

20. Ibid.

21. Abbas Mirakhor divides the process into three stages. The last, according to him, began in 1986 when Khomeini reaffirmed the principle of velāyat-e faqīh, or “supreme authority of the Imam,” as the most important principle in the management of an Islamic society. See Mirakhor, Abbas, “The Progress of Islamic Banking: The Case of Iran and Pakistan,” in Chibli Mallat, ed., Islamic Law and Finance (London: Graham & Trotman, 1988), 98Google Scholar.

22. Central Bank of the Islamic Republic of Iran, Barrasi, 111.

23. Iran Times, 13 July 1980.

24. This statement seems inconsistent with another made by ‘Adeli, who complains about the irresponsible and un-Islamic practice of the central bank and the government officials in investing people's deposits in bankrupt state enterprises. There, he said: “We have to inform the people that the central bank is forced [by the government] to invest its deposits in bankrupt state enterprises which do not have any profit” (Iran Times, 4 January 1991).

25. Choudhury, op. cit.; Metwally, M. M., “Fiscal Policy in an Islamic Economy,” in Ahmed, Ziauddin, Iqbal, Munawar, and Khan, M. Fahim, eds., Fiscal Policy and Resource Allocation in Islam (London: Pap-Board Printers, 1983)Google Scholar; Khan, Mohsin S. and Mirakhor, Abbas (eds.), Theoretical Studies in Islamic Banking and Finance (Houston: The Institute for Research and Islamic Studies, 1987)Google Scholar; Hamid Zangeneh, “Islamic Banking: Theory and Practice in Iran,” Comparative Economic Studies (Winter 1989).

26. Khan and Mirakhor, Theoretical Studies, 98.

27. It is interesting to note that all the existing models of an Islamic monetary system function under the assumption of a competitive banking system, where banks are privately owned and can freely enter and exit the markets. According to these models banks operate on the basis of profit maximization. Therefore a certain level of capital mobility is allowed. And, like the interest-based banking system, markets are the ultimate means of credit rationing in the economy. As is clearly noted in the law of interest-free banking, such a level of capital mobility is not provided for under the Iranian system-—that is, by imposing various forms of limitations on the level and allocation of credit expansion, the law inversely affects the flexibility of the banking system in responding to the financial needs of the capital market.

28. Khan, M. Y., Indian Financial System, Theory and Practice (New Delhi: Viskas Publishing House, 1980)Google Scholar.

29. Such measures were recently required by I.M.F. as a prerequisite for a $250 million loan for the reconstruction of the war-damaged areas. See Middle East Economic Digest, 16 January 1991.

30. Mckinnon, Ronald, Money and Capital in Economic Development (Washington, D.C.: Brookings Institution, 1973)Google Scholar; Shaw, Edward S., Financing Deepening in Economic Development (New York: Oxford University Press, 1973)Google Scholar; Fry, Maxwell J., Money, Interest, and Banking in Economic Development (Baltimore: Johns Hopkins University Press, 1988)Google Scholar.

31. Kitchen, Richard L., Finance for the Developing Countries (New York: John Wiley & Sons, 1986)Google Scholar.

32. See Mckinnon, Money and Capital; Fry, Money, Interest, and Banking; Anthony Lanyi and Rusdu Saracoglu, “The Importance of Interest Rates in Developing Economies,” Finance and Development 20.2 (June 1983).