Proposed Revision of the
Iranian Non-Usury
Banking Act
(Proposed for consideration to: the Monetary & Credit Council and the Central Bank of I.R. of Iran)
1
Problems with the Existing (Iranian) Non-Usury Banking Law:
1. Multiplicity/Variety of Contracts (o’quood),
2. Inadequate Training of the Users,
3. Inappropriate Selection of Contracts by Users and Inability to Counsel the Clients,
4. Inapplicability of certain Contracts to the Operation of some Banks,
5. Absence of Proper Supervision over the Use of Various Contracts,
6. High Cost of Proper Implementation of Contracts,
7. Divergence of Contracts from the Requirements/Wishes of some Clients.
2
The New Proposal for Non-Usury Banking:
In view of the above-mentioned shortcomings, a new Non-Usury Banking Model is being
proposed based on the following premises:
a) There will be three different types of banks: Commercial, Specialized, and Universal; and two sets of
contracts: Mobadelei (Transactional) such as installment credit, and Mosharekatie (participatory) such
as “mosharkate madani or participation in a certain project”;
b) Our proposed “commercial bank”, while restricted to a limited number of “contracts” (only
Mobadelei),will be able to offer almost all-above-the-line services offered by a typical commercial
bank as defined in the international literature;
c) The “specialized bank”will be able to offer what a typical “development bank” does;
d) Our “universal bank” may offer what a commercial bank and/or a specialized bank do only if it has a
sophisticated enough accounting system, capable of splitting various sources and uses of
funds/contracts; and
e) Below the line activities: “derivative products”, as well as investment banking services are under
consideration and development at present.
Benefits of the proposed model:
a)Fewer contracts (Mobadelei) are designated for Commercial Banks,
b) Fewer contracts (Mosharekatie) are assigned for Specialized Banks,
c) Mobadelei and Mosharekatie contracts for Universal Banks,
d) Multiplicity of contracts is reduced, lessening the need for training, and
e) No longer matching of types of deposits and types of contracts (trust funds)
would be needed.
4
Definitions and Interpretation:
Ghar’zol hasaneh Jari (current a/c):
Based on mutual consent, this type of deposit accounts earn no profit as
depositors wish to make use of them as current a/c’s.
Ghar’zol hasaneh Pass-an-daz (savings a/c):
Based on mutual consent, this type of deposit account earns no profit as
depositors wish to have their funds used by banks for granting of Ghar’zol
hasaneh loans (credit lines granted by banks in spirit of charity, claiming no
profit from recipients).
5
Daily investment deposits a/c:
Based on an all-purpose power-of-attorney granted to banks, depositors place
their surplus funds with banks and wish to earn profit on the daily balances with
this type of deposit a/c’s.
Term investment deposit a/c:
Based on an all-purpose power-of-attorney granted to banks, depositors who
wish to earn higher profit on their available funds for investment for specified
periods, place such funds with banks for short, medium or long term.
Installment Credit:
Under this type of credit facility, banks cash-purchase the items (including
current or fixed tangible assets )desired by their clients, add their profit to the
purchase price and sell the items to their clients on credit, receiving the selling
price and profit over time.
6
Hire purchase:
Under this type of credit facility, banks cash-purchase “depreciable assets” desired by
their clients, and rent these assets to their clients. Upon making the last rental
payment, the client will own the asset.
Ja’aleh:
Under this type of credit facility, banks cash-purchase desired “services” that their
clients require under a “cash Ja’aleh contract” and convey the same to their clients
under a “credit Ja’aleh contract.” The credit amount including profit may be paid back
in one lump sum amount or in installments.
Sa’laf (forward contracts):
Under this type of credit facility, banks purchase for cash, an amount or all of, the
“future finished products” of their clients. Under the same agreement, clients are
empowered (authorized) to sell the finished product, to their regular customers and
reimburse their bankers out of the proceeds of such sales.
7
Purchase of Future Obligations (discounting receivables):
Under this type of credit facility, banks may discount “account or notes receivables” of
their clients with or without recourse to their clients. The difference between face value
of the obligations and the discounted price consists of profit and conditions of the
transaction.
Ghar’zol hasaneh (non-profit bearing loans):
Under this type of credit facility, banks offer non-profit-bearing loans for charitable
purposes. What each bank may offer for this type of facility amounts to what it has
received in form of Ghar’zol hasaneh pass-an-daz (savings a/c), less than what it places
with the Central Bank in form of statutory deposits. Banks may charge only a
commission for the services rendered.
Govahi Sepordeh Aam (universal certificate of deposit):
Based on an all-purpose power-of-attorney to specialized banks, for profit-bearing
investment at the option of the banks. The term may be froom one to five years.
8
Govahi Sepordeh Khas (special purpose certificate of deposit):
Based on a specific-power-of-attorney to specialized banks, for profit-bearing
investment in specific projects. The term may be froom one to five years.
Government loans and grants (from development budget):
The state may allocate a portion of the development budget for this purpose and
place it with specialized banks. Grants may be invested and loans may be granted
under the terms and conditions specified above for different kinds of credit
facilities.
Banking facilities:
Specialized banks may utilize banking facilities, whether domestic or international,
to supplement their local currency resources.
9
Mosharekat Hoqoqi (equity investment in legal entities):
Specialized banks may invest in legal entities. Their stake may be as low as a
token holding, to a majority stake in the target entity, a new venture or a goingconcern. No collateral is envisaged here.
Mosharekate Madani (investment/participation in selected projects):
Specialized banks may invest in the form of “Mosharekate Madani” in selected
projects with legal or real persons. Collateral in form of the project itself, or
additional collateral within the legal entity may be obtained.
Direct Investment:
Specialized banks may invest in and own all shares of another entity.
10
Proposed Model for Commercial Banks:
Sources of Funds
Applications of Funds
Legal
Relationship
profit
1- Ghar’zol’ hasaneh
Jari
(Current)
Non-profit
Bearing
0
2- Ghar’zol’ hasaneh
Pasan’daz (Savings)
Non-profit
Bearing
Deposit A/C
1- Installment
Credit
3- Daily Investment
Bank-asAttorney
4- Long Term Invest.
Type of (credit)
Contract
Bank-asAttorney
0
Pre-
2- Hire purchase
Pre-
(deferred Pay)
Determined
“Eja’reh”
Pre-
(Rental)
Determined
Pre-
“Ja’aleh”
4- Receivable
Discount
“Bei’e Deyn”
(purchase of
obligations)
5- Ghar’zol
hass’aneh
Non-profit
Determined
profit
“Bai’e Nasieh”
3- Ja’aleh
Determined
Pre-
Legal
Relationship
Bearing
Determined
PreDetermined
0
Proposed Model for Specialized Banks:
Sources of Funds
Applications of Funds
Deposit A/C
Legal
Relationship
profit
1- Govahi Sepordeh Aam
All Purpose
Power of
Attorney
Variable Rate
Specific
Power of
Attorney
Variable Rate
2- Govahi Sepordeh Khas
3- Gov.Loans & Grants
4- Syndicated Banking
Fac.
Various
Arrangements
Various
Arrangements
Type of (credit)
Contract
Legal
Relationship
profit
Participatory
Variable Rates
1- Mosharekate
Madani
2- Mosharekate
Variable
Investment
Hoqoqi
Fixed &
Return
"Beie Nasieh"
Pre-
(deferred Pay.)
Determined
3- Installment Credit
Var.Rates
Floating Rate
4- Hire purchase
Rental
PreDetermined
5- Sa'laf
6- Direct Investment
"Beie Sa'laf"
(forward cont.)
----
PreDetermined
Variable
Return
Proposed Model for Universal Banks:
Sources of Funds
Deposit A/C
1- Ghar’zol’ hasaneh
Jari (Current)
Applications of Funds
Legal
Relationship
profit
Non-profit
Bearing
0
Type of (credit)
Contract
1- Installment
Credit
2- Ghar’zol’ hasaneh
Pasan’daz (Savings)
Non-profit
Bearing
Legal
Relationship
“Bai’e Nasieh”
Pre-Determined
(deferred Pay)
“Eja’reh”
0
profit
Pre- Determined
2- Hire purchase
(Rental)
3- Daily Investment
Bank-asAttorney
4- Long Term Invest.
Bank-asAttorney
Pre-Determined
5- Govahi Sepordeh
Aam
All Purpose
Power of
Attorney
Variable Rate
6- Govahi Sepordeh
Khas
Specific
Power of
Attorney
Variable Rate
7- Gov.Loans & Grants
Various
Arrangements
Pre-Determined
3- Ja’aleh
4- Receivable Discount
5- Ghar’zol’ hasaneh
6- Mosharekate Madani
Fixed &Variable
“Bei’e Deyn”
(purchase of
obligations)
Non-profit
Bearing
Pre- Determined
Pre- Determined
0
Participatory
Variable Rate
7- Mosharekate Hoqoqi
Investment
Variable Return
"Beie Sa'laf"
(forward cont.)
Pre-Determined
----
Variable Return
Rates
8- Sa'laf
`
“Ja’aleh”
9- Direct Investment