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. 3
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 3 - Daily Investment 4 - Long Term Invest. Type of (credit) Contract 1 - Installment Credit 0 profit “Bai’e Nasieh” Pre- (deferred Pay) Determined Pre- Bank-as. Attorney Pre- Pre. Determined 3 - Ja’aleh Pre“Ja’aleh” Determined “Eja’reh” (Rental) Bank-as. Attorney 2 - Hire purchase Legal Relationship 4 - Receivable Discount “Bei’e Deyn” (purchase of obligations) 5 - Ghar’zol hass’aneh Non-profit Bearing Determined Pre. Determined 0 11
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 2 - Govahi Sepordeh Khas Specific Power of Attorney Variable Rate Fixed & 3 - Gov. Loans & Grants Various Arrangements 4 - Syndicated Banking Fac. Various Arrangements Floating Rate Var. Rates Type of (credit) Contract 1 - Mosharekate Madani 2 - Mosharekate Hoqoqi 3 - Installment Credit 4 - Hire purchase 5 - Sa'laf 6 - Direct Investment Legal Relationship Participatory Investment profit Variable Rates Variable Return "Beie Nasieh" Pre- (deferred Pay. ) Determined Rental Pre. Determined Pre"Beie Sa'laf" (forward cont. ) Determined ---- Variable Return 12
Proposed Model for Universal 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 3 - Daily Investment Bank-as. Attorney 4 - Long Term Invest. Bank-as. Attorney Pre-Determined 4 - Receivable Discount 5 - Govahi Sepordeh Aam All Purpose Power of Attorney Variable Rate 5 - Ghar’zol’ hasaneh 6 - Govahi Sepordeh Khas Specific Power of Attorney Variable Rate Deposit A/C 7 - Gov. Loans & Grants Type of (credit) Contract 1 - Installment Credit Various Arrangements 0 Pre-Determined Fixed &Variable 2 - Hire purchase 3 - Ja’aleh 6 - Mosharekate Madani 7 - Mosharekate Hoqoqi Rates 8 - Sa'laf Legal Relationship “Bai’e Nasieh” profit Pre-Determined (deferred Pay) “Eja’reh” Pre- Determined (Rental) “Ja’aleh” Pre- Determined “Bei’e Deyn” (purchase of obligations) Pre- Determined Non-profit Bearing Participatory Investment 0 Variable Rate Variable Return "Beie Sa'laf" (forward cont. ) Pre-Determined 13 ` 9 - Direct Investment ---- Variable Return
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