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Government’s Control,
Basic Problem with Iranian Banks
Interest is the cost of money, while usury is overcharge exacted from someone
who is in need.
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Dr.
Parviz Aqili Kermani, Managing Director of Karafarin Bank |
When Dr.
Parviz Aqili Kermani, the Managing Director of Karafarin Bank, was asked about
the 20-year performance of the usury-free banking system in Iran he opined
that banking operations have not had a successful record. What follows are his
viewpoints on how the banking system must be reformed to meet new needs, and
how private banks fit into this system.
Following the victory of the Islamic Revolution, the Iranian banking system
was faced with two problems: first, the government’s control over banks and;
second, the approval of usury-free banking law. I believe that if the banking
system was not state-run, implementation of the usury-free banking would have
been easier. The problems plaguing banks were a result of the government’s
control and as long as that control was in place, even the past or
international methods would become problematic.
State-run
banking is non-productive, just as is the case with other governmental
economic activities. A prominent example in this regard is the economic system
in the former Soviet Union that imploded after more than 70 years.
In my
opinion, usury is different from interest. Interest is the cost of money,
while usury is overcharge exacted from someone who is in need. An overcharged
rate exacted from a needy person would be forbidden in any religion. Interest
is the result of two factors: first, the cost of passing over immediate
consumption, whose maximum rate in most parts of the world is 3-5 percent; and
the second factor is the rate of inflation.
Usury-free banking could only be implemented if inflation rate had reached
zero and only the said 3-5 percent would be given as interest or commission.
Bringing the inflation rate down to zero is not impossible, at present the
inflation rate in many countries is nearly zero. This would depend on the
implantation of correct monetary and financial policies that could eradicate
inflation.
The
theory of usury-free banking that is based on the bank’s power of attorney
with regard to people’s deposits was a clear-cut theory. In advanced
countries, people give their money to those who could use it for investment,
but this is done in a clearly defined manner.
It would
not be correct to mingle participation contracts in the banking system with
other contracts that resembled traditional or Western banking practices. Also,
it is not right to allow interference of activities related to investment
companies with banking activities. Economic activities are defined and their
sources are also clear. If those sources were made clear, market elements
would do their job. For example, the capital market would mobilize resources
for its own goals. The same is true about insurance firms and the banks would
also carry out their duties within a clear context.
I believe
that the usury-free banking law should be revised so that participation
contracts included in it would be carried out in the context of investment
companies. In this way, those who deposit their money with investment
companies would be aware that they are taking more risks and those who work
with the bank would know that they are facing a predetermined rate within the
framework of the Islamic principles. Selling by installment, as well as
hire-purchase contracts are instances of contracts that could be implemented
within the framework of usury-free banking and they were among bank activities
with a predetermined interest rate.
Based on
these contracts, a specific interest would be paid to depositors by the end of
the year and payable interest has also been clarified for those who use
sources within such contracts. You cannot expect someone who has deposited his
monthly salary to make a living to take the risks of a big investment or
recognize them. Therefore, contracts that are related to bank activities and
their interest rate is clear must be included in the banking law and
activities that would entail a high risk be shifted to other economic bodies.
High rates of inflation are the main reason behind high bank interests. The
annual budget deficit is a cause for inflation.
The next
problem nagging private banks was related to personnel. Since we were not
willing to recruit the employees of governmental banks, we took advantage of
retired personnel of state-run banks. On the other hand, we have employed
young people and hope we could train them to gain experience with regard to
banking operations.
The low
experience of young employees was another problem of private banks, however,
there is hope that the young educated manpower that are currently being
trained would be used to good effect in the future. The third problem with
private banks is lagging behind in terms of providing modern banking services.
Although our banking system has greatly improved in terms of providing
electronic services, it is still way behind the rest of the world.
The way
must also be paved for the establishment of foreign bank branches in the
country because they bring with them big capital as well as companies that are
affiliated to them. |
