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Banks Bypass
the Law |
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When the law was enforced first, share of partnership
contracts from bank contracts was very high while share of exchange
contracts was very low. |
Usury-free
banking law, which has been approved 25 years ago, has not been fully
implemented yet. At various junctures, workgroups have been established to
adapt it to conventional banking system of the world while some economists
maintain that government intervention in determining economic variables such
as the interest rate will cause banks to distance from usury-free banking law
and easily bypass it. Dr. Mousa Ghaninejad, member of the workgroup in charge
of reviewing usury-free banking law, has taken part in the following interview
to discuss different viewpoints on bank interest rate and reasons behind
inefficiency of usury-free banking law.
What has been introduced as substitute to usury by
usury-free banking law to enable banks carry on with their ordinary
activities?
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Dr. M.
Ghaninejad,
Senior Economist |
This is a complicated legal and economic
issue. However, to put it simply, conventional banking system of the world is
based on loan contract. We have a similar contract in Islamic jurisprudence.
That is, in conventional banks in the world and also in pre-revolution Iran,
contracts concluded with a bank by both depositor and those taking loans are
of this type. The loan taker is one who takes money as debt. Of course, we
later used “facilities” instead of “debt”.
We have an important rule in Islam about
usury and banking which says any condition increasing the amount of debt would
be considered usury and forbidden. Therefore, those who designed the
usury-free system decided to erase such contracts from Iran’s banking system
because when a debt contract is ensued by interest, it becomes usury. They
replaced debt contract with other contracts which included legal and civil
participation, selling on installments, purchasing debts and other Islamic
contracts. Here, debt was limited to gharz-al-hassaneh (interest-free loan).
They said all debts should be in the form of interest free loans like
short-term and long-term gharz-al-hassaneh accounts for which no interest is
paid, but periodical prizes are given to depositors. Other accounts for which
an interest is paid have been defined according to other Islamic contracts.
For example, they have noted that bank is proxy of depositor to use their
money according to Islamic contracts and give them a profit.
Don’t you think that this idea will turn banks into
investment companies?
This is true.
This idea will turn banks into investment companies. As I told you,
conventional banking system of the world is based on loan and is not a
cooperative or investment system. There are investment companies in Western
countries which outnumber banks, but they are not banks and their task is
management of deposits which are used for investment through specific
mechanisms. Also, there are some pension funds which invest what they take
from their staff in stock portfolios at different stock markets. They all do
investment, but none of them are banks. Bank is a money market and you have no
long-term investment at a money market. Money market is a short-term market
for liquidity.
Why banks are distancing from exchange contracts?
When the law was
enforced first, share of partnership contracts from bank contracts was very
high while share of exchange contracts was very low. Gradually, exchange
contracts took the place of partnership contracts. This is not restricted to
Iran and it has been common all over the world. A reason was that banks are
mainly supposed to supply needed liquidity and this is better done through
exchange contracts than partnership contracts. This has also happened in Iran.
Of course, some proponents of usury-free banking system noted that this was a
deceit and was, in fact, usury. However, such contracts have been allowed by
law and approved by the Guardian Council. Exchange contracts are turning into
the main form of banking contracts in Iran, but their share has suddenly
fallen in recent years. This was due to government’s intervention in
determining banking interest rate.
What factors have prevented
usury-free banking law to be effectively enforced?
It has been shown in practice that usury-free banking law
is inefficient and ridden with flaws. One of those flaws is that many
contracts are outwardly exchange contracts. Determination of interest rate by
the government has intensified the problem. This is why we are distancing from
this law. Another problem is that our banking system has turned into an
investment-partnership system. That is, we have tried to superimpose on a
phenomenon which is not compatible with it. If we want to establish a new
banking system conforming to conventional banks through the existing laws in
order to facilitate interactions with the outside world, a good way is to base
operations of our commercial banks on exchange contacts. |
