The government is not authorized to regulate interest rates in a top-down manner in an Islamic banking system, instead rates should be based on market conditions and rate of return, said Minister of Economic Affairs and Finance Ali Tayyebnia on Tuesday, addressing the 26th annual Islamic Banking Conference at IRIB International Conference Center in Tehran.
The theme for this year's event, jointly organized by the Central Bank of Iran and Iran Banking Institute, is "Global Experience of Islamic Banking: Financing Modes, Instruments, Services and Products."
Tayyebnia outlined government’s policies in promoting Islamic banking and said: “Expanding partnership, creating Islamic bank accounts and giving autonomy to banks to set their own rates and instilling responsibility in depositors are among the government’s plans to systemize Islamic banking.”
The minister reemphasized that interest rates should be determined based on the “real function” of the contracts and rate of return and not through governmental decree.
He said: “Islamic banking looks beyond the Usury-Free Banking Act; usury-free principles need to be implemented in an inclusive economic system comprising different sectors with effective interrelations.
“This system would consist of banks, the CBI, regulatory bodies, audit and registration institutions as well as soft infrastructure.”
The top economic official explained that usury-free banking is primarily concerned with “banking behavior” and “contractual relations”, adding that usury-free finance aims to establish a system based on “fairness” and “justice” but insufficiency of the law has so far prevented these tenets from materializing.
He continued: “The relationship between the invested money and its return is not clear in the present economic system and therefore it should be known how bank deposits are invested and how much their return rate is.”
Tayyebnia called for deposit rates to be determined in accordance with real interest rates and regretted the fact that this had not been stated in the law.
“Interest rates are currently measured by adding a percentage point to the inflation rate and then banking fees are added to this rate to determine lending rates,” he said. “But in reality we should do the opposite by using the return rate in the real economy for setting lending rates and then subtracting bank charges from that rate to set deposit rates.”
Weak Oversight
Tayyebnia criticized the inefficient oversight of the banking system, saying that a single watchdog could not keep up with the complex demand to regulate the whole banking industry.
“In conventional banking, a different regulatory committee exists for every area of banking but this is not the case in our country where lack of efficient oversight has led to the disruption of the system by irrelevant bodies,” he said.
Tayyebnia announced that a solution to this legal vacuum has been drafted in the form of two bills and are ready to be sent to the parliament for approval.
“The bills will remove the uncertainty that had dogged the banking system for so long and will instigate a new era of banking transparency,” he said.
The minister also complained about the equity market’s heavy reliance on banks for financing and warned against the perils of a bank-based economy.
“Banks are playing a key role in stoking or lowering inflation as well as creating economic stability.”
He also expressed concern about the current “lending pressure” on banks and said the loan-to-deposit ratio of banks is now 105 and has been on the rise over the years.
“This has led to overdraft by banks from the central bank,” he said. “For instance, the loan-to-deposit ratio of Bank Maskan jumped to 202 in 2013 from 134 in 2009.”
Existing Challenges
CBI’s Governor Valiollah Seif was another speaker who elaborated on the promises and challenges of Islamic banking in Iran and around the globe. Seif said although three decades have passed since the dawn of Islamic banking in the country, the common people and even some elite doubt the compliance of banking laws with Sharia.
Seif considered the failure to distinguish between usury-free banking and Islamic finance the main challenge for Islamic banking and said usury-free banking is the “lowest” form of Islamic banking.
Another issue facing Islamic banking, he said, was the antiquity of the Iranian banking laws that had not been updated in three decades but he hoped the newly-drafted bill which had been partly devised by his bank would mitigate the problem.
Seif also bemoaned the wrongful regulatory oversight of banks which he said had no basis in Sharia.
” In normal circumstances, the regulator should not be allowed to dictate interest-rates to lenders,” he said.
The bank’s top policymaker maintained that another sticking point for Islamic banking was lack of an interbank market that made it impossible for the central bank to recognize a reliable financial entity to be viewed as the “final lender.”
The two-day Islamic Banking Conference is underway in Tehran from Sep.1-2
