Economy, Business And Markets

Experts Scrutinize Islamic Banking, Fair Lending

Experts Scrutinize Islamic Banking, Fair LendingExperts Scrutinize Islamic Banking, Fair Lending

Islamic banking’s usury-free monetary system has always been among the concerns of Muslim-majority countries. These ideals, along with fair lending regulations and statutes have eluded the Iranian banking system for decades. A debate took place in Allameh Tabatabaei University in Tehran on Sunday to discuss the issues affecting the banking system and address the obstacles holding it back from realizing its true aspirations, news website Otaghnews reported.

Mohammad Habibian Naghibi, an Islamic banking expert, opined that the establishment of interest-free banks by the former administration was a fundamental mistake. He called for the closure of all interest-free accounts in commercial banks, dismantling interest-free banks and putting an end to interest-free loans, so far offered by Imam Khomeini Relief Committee (IKRC) and the State Welfare Organization (SWO).

Instead, he called for the creation of a ‘Central Interest-Free Bank’, tightening supervision over lending institutions and strengthening interest-free services among guilds.    

“The former administration established interest-free banks with much fanfare and in effect turned them into rivals for commercial banks; banks and interest-free institutions are two antithetical entities and therefore cannot coexist alongside each other,” he argued. “Now we see that interest-free banks and institutions are mired in profit-making, which is contradictory to their nature.”

He added that the so-called interest-free banks are more concerned about keeping up with other banks than they are about lending to people.

About money market dealings, Naghibi complained about lack of inventiveness in approving new Islamic transactions and said, “Non-expert views have so far dominated Islamic finance.”

 Triumvirate of Nuisances

Naghibi described banks, IKRC and SWO as problematic entities for the financial system in which they have become involved in “peripheral practices instead of focusing on their main duties.”

“IKRC and interest-free banks are not being fair in their lending services since they have become profit-oriented,” he said. The profit-driven mentality has permeated all forms of interest-free lending, he added.

 Liquidity Woes

Joining the debate was Hossein Eyvazloo, an economist and university professor who began by highlighting the importance of justice and balance in Islamic finance. He said while it is often mentioned that prices should be determined by supply and demand, the Islamic system enjoins that the rightful state of money supply be determined in a way to preserve equilibrium.

But the actions by some banks and their profit-driven ventures have led to excessive supply of money and rampant inflation, Eyvazloo bemoaned. He further called for more transparency in transactions, for instance when it comes to Musharikah (participatory) transactions where every detail should be clarified.

“Islamic banking demands that the real sector dominate the nominal sector but now we see the nominal sector is four times bigger than the real one,” he complained.

He continued: “The Central Bank of Iran should make it a point to maintain monetary stability; overseeing banks should not be the prerogative of the CBI since regulation all over the world is in the hands of independent bodies.”

Eyvazloo also criticized the CBI for not paying due attention to usury-free banking and said Islamic banking has so far been championed only by a handful of banks.

 Financial Institutions

Eyvazloo made the case that the growth of uncertified financial institutions is to be traced in CBI’s “inflexible regulatory policies.”  He argued that since financial institutions spring up in accordance with the needs of the market, the CBI should create new regulatory rules to oversee them.

“Sadly, the CBI regards all banks as commercial, which is a very rigid policy. It intends to subject them all to a fixed procrustean rule, and this will encourage the mushrooming of unauthorized institutions,” he maintained.    

An expert has called for the creation of a ‘Central Interest-Free Bank’, tightening supervision over lending institutions and strengthening interest-free services among guilds.