Home Weekly Islamic Pages Banking in Islamic Republic of Iran

Banking in Islamic Republic of Iran


Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

Following the Iranian Revolution, Iran’s banking system was transformed to be run on an Islamic interest-free basis. As of 2010 there were seven large government-run commercial banks. As of March 2014, Iran’s banking assets made up over a third of the estimated total of Islamic banking assets globally.

Currently, there are 30 banks and 5 financial/credit institutions active in Iran, where banks are the main source of funding for development plans and companies.

The origin of controversy between the modernists and the conservatives’ views on riba dates back to early Islam, and it revolves around the question of what kind of riba the Qur’an really prohibited. Was it riba al-nasi’ah, which involves lending and borrowing, or riba al-fadl, which involves buying and selling? One view is that in the early period of Islam, the Qur’anic injunctions against riba was understood to apply to loans in money and food, and anything beyond that is accepted to be later development. Another authoritative view is that riba al-fadl has its origin in the hadith, and concludes that no attempt to define riba on the basis of the hadith has really been successful.

A more recent contribution claims that riba in both sales and loans existed before Islam, and al-Qur’an clearly implies that. Furthermore, the hadith, and the juristic formulations, therefore, are elaborations and extensions of the basic Qur’anic concept. It is also argued that riba al-fadl is merely a consequence of riba al-nasi’ah, since money can always be transformed into commodities. The controversy in its contemporary form turns on the definition of riba itself, whether the riba merely attached to profits obtained through interest-bearing loans involving exploitation of the economically weak by the strong and resourceful, or through all kinds of loan irrespective of the purposes; whether the prohibition is the form of ribapracticed in the pre-Islamic period; whether it prohibits usury but not interest or it prohibits the charging of interest altogether; whether it relates to loans for consumption or investment in a business venture; whether it prohibits nominal or real interest; whether the prohibition applies to compound or simple interest; and whether the ban relates to the borrower as individual or institution. In Iran if lender and borrowers are father and son than transaction between them is not treated as Riba. Since most of the banks in Iran are governmentally owned hence profit paid among them is not treated as Riba.

According to the modernists’ trend towards riba, extra charges are permitted where they are used: 1. for the purposes other than exploiting the weak people of the community by the strong; 2. for loans that are similar to what were practiced in the pre-Islamic period; 3. for the present form of interest-based banking transactions but not for usurious transactions; for business investment but not for consumption loans; 5. for the loss suffered by the creditor due to inflation; 6. for simple interest but not for compound interest; and  for institutional credit. As opposed to this rather pragmatic viewpoint, the conservatives view forbids every form of fixed and predetermined interest.

This article sets out a high-level review of the legislation governing the existing banking system in Iran and options available to international institutions looking to undertake financial activities in or with Iran.

The legal system in Iran is a civil law-based system which incorporates, where applicable, the principles of Islamic laws and jurisprudence.

At present, there are no fully licensed foreign banks in Iran. Many banks in Iran are Iranian government owned, while the rest are private Iranian banks. The Monetary and Banking Law of Iran issued on 9 July 1972 provides that the Central Bank of Iran is responsible for the formulation and implementation of monetary and credit policies with due regard to the general economic policy of the country. Among other things, the Central Bank is responsible for the supervision of banks and credit institutions in accordance with the Monetary and Banking Law.

The Central Bank’s scope of authority both in the Monetary and Banking Law and in the Banking and Monetary Act of Iran issued on 27 May 1960 is subject, in many cases, to the supervision and approval of the Currency and Credit Council. The Council’s duties, amongst other things, are to:

  • cooperate with the governor of the Central Bank in the general management of the Central Bank;
  • direct and supervise all banking affairs, as provided in the Banking and Monetary Act;
  • define what constitutes banking operations; and
  • approve the granting of banking licenses on a case-by-case basis.

In the discharge of its duties, the Council may demand any information from, or issue any directive to, banks operating in Iran. As per the Banking and Monetary Act, all banks operating in Iran are under the obligation to implement the Council’s directives. There are, however, a few exceptions to this obligation, mostly in relation to the Council’s competence to request personal information pertaining to customers.

As a general observation, there is an overlap between the scope of competence of the Central Bank and the Council in some areas. It is well established, however, that the Council is the highest policymaking body of the Central Bank.

The Law for Usury (Interest) Free Banking, as approved by the Council of Protectors in September 1983, includes a number of objectives and duties applicable to the banking system in Iran, including adherence to Islamic jurisprudence and interest free lending. This applies to all forms of lending, regardless of the currency in which the loan is made. The Regulations on Monetary and Banking Operations in Free Trade – Industrial Zone of the Islamic Republic of Iran contain an exception to this prohibition on interest, whereby foreign currency transactions conducted from within a free zone are exempt from implementing the Islamic banking system. It remains unclear, however, whether this exemption is consistently applied in practice.

The Law for Usury (Interest) Free Banking also empowers the Central Bank to intervene in, and supervise, the monetary and banking activities in Iran through the following mechanisms:

  • Fixing a minimum or maximum ratio of profit for banks in their joint venture and Modarabah activities (these ratios may vary for different fields of activity).
  • Designation of various fields for investment and partnership within the framework of the approved economic policies, and the fixing of a minimum prospective rate of profit for the various investment and partnership projects. The minimum prospective rate of profit may vary with respect to different branches of activity.
  • Fixing a minimum and maximum margin of profit, proportionate to the cost price of the goods transacted, for banks in installment and hire-purchase transactions.
  • Determination of the types, and the minimum and maximum amounts, of commissions for banking services and the fees charged for putting to use the deposits received by banks.
  • Determination of the minimum and maximum ratios in joint venture, Modarabah, investment, hire-purchase, installment transactions, buying or selling on credit, forward deals, and customer deposits with respect to various fields of activity, and fixing the maximum facility that can be granted to each customer.

 Currently Iranian Lira 42,025.39 is equal to one US $. Inflation rate in Iran is 35%. GDP of Iran is $ 454 billion. GDP growth rate is in negative 6.8%. So basically, Iranian economy is in great trouble due to US and EU embargoes. So there is a great need of research to make it competitive with conventical system of the world.


Please enter your comment!
Please enter your name here