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Bank Mergers

Ministry of Economic Affairs and Finance is drawing up a draft plan to merge eight state-owned banks.

According to Fars News Agency, the proposed plan will involve eight state-owned banks and establish a new usury-free Islamic bank known as 'Gharz-al-Hassanah bank'.

The draft plan has not yet been approved and finalized by the government, but the Central Bank of Iran has been assisting the Economic Ministry to prepare the plan. The proposed plan will merge eight state-owned banks and set up a new usury-free Islamic bank known as ÔGharz-al-Hassanah bankÕ.

Under the draft articles of association for setting up usury-free and investment banks (which is yet to be approved by the first vice president), the eight state-run banks will be merged to form a usury-free Islamic bank and the rest of the banks will become specialized for investment purposes.

In this respect, a number of experts argue that if the plan gets the go-ahead and the banks are merged to form a new bank that is not privately-run and owned, then it will go against the very purpose of Article 44 in the Iranian Constitution pertaining to the privatization of state-owned sector.

For instance, banks will no longer be able to sell their shares in the stock market within the framework of Article 44. They also argue that Saderat , Tejarat and Refah banks will remain state-owned and it will be impossible to privatize them.

Moreover, they argue that once these banks are merged into a usury-free bank, no one will be willing to purchase the new Islamic bank's shares in the stock market.

However, under the draft plan devised by the Economic Ministry , grounds have been created to allow the transfer of long-term saving accounts from the new Islamic banks to investment banks--although the new Islamic banks will no longer be authorized to offer interest on these accounts. The new Islamic banks, instead, can transfer these accounts to investment banks. Long-term investment accounts in Iran stand at around 420 trillion rials.

As things stand, since the inception of Islamic banking system about three decades ago, the number and reach of Islamic financial institutions worldwide has risen from one institution in one country in 1975, to more than 300 institutions operating in more than 75 countries.

That explains why the Iranian government is so keen on implementing the new banking merger plan.

The entire banking systems of Iran are based on Islamic finance principles. Islamic banking assets and assets under management reached $750 billion in 2006, and the Islamic finance sector is expected to reach $1 trillion by 2010 in the world.

Islamic or Shariah-compliant banking in Iran can provide and use financial services and products that conform to Islamic religious practices and laws, which, in particular, prohibit the payment and receipt of interest at a fixed or predetermined rate. In practice, this means that instead of loans, the new Islamic banks will use profit-and-loss sharing arrangements (PLS), purchase and resale of goods and services, and the provision of services for fees on the basis of contracts.

The new Islamic banks will determine return on deposits differently though. In a commercial bank, the rate of return is set contractually (fixed in advance or tied to a reference rate) and does not depend on the bank's lending performance. In new Islamic banks, the rate of return on a deposit will be directly dependent on the quality of the bank's investment decisions.

If the bank records losses as a result of bad investments, depositors may lose some of their deposits.

The contractual agreement between depositors and Islamic banks will not predetermine any rates of return and will only set the ratio according to which profits and losses are shared by the parties to the contract.

Compiled by Ghanbar Naderi

© Iran Daily 2008