A senior member of the Central Bank of Iran’s Fiqh Council says the disclosure of deposits’ performance as part of the new financial statements by banks is not only an advantage but a necessity compelled by sharia laws.
According to Abbas Mousavian, part of the new financial statements is a separate statement clarifying how money entrusted with banks is used and what are the returns.
“These tools have been developed in a way to elucidate the performance of banks vis-à-vis depositors. On the other hand, because such a process has no precedent, it is now being discussed by accounting and audit experts”, he was quoted as saying by the MBRI news website.
Earlier this week, Ali Divandari, head of Monetary and Banking Research Institute said the new financial statements of banks would be in line with global norms, in particular the International Financial Reporting Standards (IFRS). Promising more transparency, Divandari noted that the banks are now required to publish their financial statements based on the new rules, which also means listing the salaries of executives and board members.
“Deposit performance reports will be published in line with sharia and juridical values and not only are they a boon, but a sharia-based necessity,” he said elaborating on the new procedure.
“As institutions that safeguard savings, bankers are now obliged to clearly explain their performance regarding the deposits. There were a series of wrong and opaque methods in the past like putting time deposits under the liabilities of banks. It was a mistake and has been rectified in the new format.”
Inconsistent Ways
Noting that time deposits (which are to be invested by the banks) are similar to the shareholders’ capital in terms of ownership rights, he asked: “How is it that time deposits are classified as liabilities while the capital of shareholders is not?”
According to usury-free banking principles, Mousavian said, bank credits are either deposits “lent” to the bank by depositors in the form of sight deposits or current accounts or time deposits which the banks have permission to invest however they deem fit.
The Islamic finance expert said banks should distinguish between these two groups on their balance sheets so that they are left with time deposit gross profit. “Then by deducting the investment fees, depositor returns will be declared. Therefore it is an imperative for the bank as an intermediary party to reveal to the investors what they have done with their deposits.”
As to the discrepancy between monthly returns and annual returns paid to depositors (which are almost always the same), Mousavian emphasized that all profit made from deposits belong to the investor and not banks. Stressing that when paying monthly interest on deposits and earning higher annual profits, banks shouldn’t withhold the difference from their clientele.
“Sometimes board members don’t want to pay such interests. This is while it is not within our rights to give the depositors’ money to shareholders and vice versa. Similarly, banks must not modify bank charges to adjust the monthly returns with earnings made on a yearly basis.”
Mousavian believes that the depositors have a right to know whether or not their bank has managed to secure their returns by manipulating bank fees, sometimes reducing them to zero in order to be able to pay the interests.
“Or could it be that the bank has reached a degree of success so as to become profitable for both the shareholders and the depositors,” he said.
This, he added, would help investors to make more informed choices when looking for the most qualified banks to put their deposits in.
