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Usury-Free Banking Flawed
Economy, Business And Markets

Usury-Free Banking Flawed

Islamic banking is a comprehensive sphere and its reach is more widespread than usury-free banking, Heidar Mostakhdemin Hosseini, a senior economic analyst said this week.
“Usury-free banking focuses mainly on deposit/lending rates and procedures. But Islamic banking is more comprehensive and covers several other criteria including social, cultural and economic issues” he told Mehr News Agency.
The senior analyst stated that Iran’s banking system works based on two basic laws. The first is the “Monetary and Banking Law” which was passed in the 70s “and which was in line with the economic conditions in the country and the world.” He said back then the basic law was “dynamic and advanced” and many countries imitated it.
“The second was the ‘Usury-Free Banking Law’ which was passed in 1983 and helped the banking system move toward usury-free banking.”
Mostakhdemin Hosseini was of the opinion that the two laws are rather old and do not correspond to the changed economic realities at home and abroad. “We continue to function based on the same old law regardless of the passage of time and major changes in the global and domestic economy.”
Pointing to the usury-free banking law he said that the law was meant to be revised after five years, something which did not happen. “After passing of this law 30 years ago it has not been revised. It is now high time we revised this and other laws in order to improve the banking system and its services.”
He highlighted a number of questions and doubts about the honest execution of usury-free banking laws saying the people and society have doubts about the issue. “The society does not agree that usury-free banking is functioning properly. The disbelief is because there are many vague and questionable points in the execution of this law and also about deposit/lending rates banks offer.”
Banks, as the “people’s representatives” should disclose the details of their ventures and how they use the money of their clients and thereby remove the doubts that exist regarding this issue.

 Incongruent Factors
The former Central Bank of Iran official pointed to the current higher-than-inflation deposit rates offered by lenders saying this has created serious questions about ‘’banks’ actions’’ while it also is not in line with economic realities and  Islamic or international banking principles.”
“There is no advanced economy in the world where deposit rates are higher than the inflation rate. This is really a serious issue and the reasons behind paying such high rates should be clarified.”
The former deputy minister of economy claimed that members of clergy are “worried about the situation” and called on the CBI to conduct a thorough study and clarify the issue.
According to the usury-free banking law, banks should share the profit or loss incurred by loans they pay, Mostakhdemin Hosseini pointed out. “This is while the banks do not accept the losses. If the customer cannot repay the loan when times are bad, they simply impound the collateral.”
This attitude of banks is “a one-way street while usury-free banking is a two-way street, which shares profit and loss with the customers. Banks play a number of tricks to shield themselves form loss.”
Turning to the issue of corruption and rent-seeking, the analyst said in the usury-free banking law, banks are indeed responsible for supervising the use of loans. “If there is rent-seeking or corruption in the banking system, the major problem lies with the usury-free banking law and lack of proper supervision by banks.”

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