Iran mulls "interest-free" banking

Banks should generate income through service charge fees not loan interests, central bank governor says.
Iran mulls
By Reuters
Thu 06 Sep 2007 01:34 PM

Iran's new central bank governor has said banks should generate income by charging fees for their services rather than making a profit by receiving interest on their loans, according to a media report.

The comments by Tahmasb Mazaheri in a television interview monitored by the BBC came as President Mahmoud Ahmadinejad advocated an "interest-free" banking system in the Islamic Republic, without giving details on any planned changes.

"Interest-free banking is a very advanced and unique system which is based on Islamic principles," Ahmadinejad was quoted as saying by the English-language Tehran Times daily on Thursday.

Ahmadinejad appointed Mazaheri, a former economy minister, as central bank governor on Tuesday in a move seen as an attempt to assert more control over economic policy in the world's fourth-largest oil producer.

Analysts said the president had disagreed with outgoing Governor Ebrahim Sheibani over interest rate policy. Sheibani's resignation was accepted by Ahmadinejad last month, the third top economic official to leave his post in August.

Analysts have said the new appointment could herald a more interventionist monetary policy, ahead of a 2008 parliamentary election in Iran, which is under Western pressure over its disputed nuclear ambitions. 

In an interview aired on Iranian television on Wednesday evening, Mazaheri said a law on interest-free banking was approved 24 years ago but that it needed to be amended and that a legislative review committee had been formed.

Inflation Concerns

He said banks should concentrate on providing services.

"Instead of generating profits based on interest, the banks should be generating income by charging fees for services rendered," Mazaheri said, according to BBC Monitoring.

He did not elaborate on how the present system may change and central bank officials were not available for comment.

Under Islamic or sharia law, interest is banned and income must instead be derived from a fundamental economic transaction such as trade in goods and services, direct investment in a business or renting out a property.

"They (the banks) need to have some income ... however they describe it," said one international banking source.

Despite concern it would further stoke inflation and hurt private banks, Iran's monetary council in June approved a proposal by Ahmadinejad to cut bank lending rates by up to four percentage points. Banks call this rate a "fee".

The rate for state banks, which dominate Iran's financial sector, was lowered to 12% from 14% while private banks saw it fall to 13% from 17%.

Ahmadinejad, who won the presidency in 2005 on a pledge to share out Iran's oil wealth more fairly, has come under mounting criticism from economists for his government's failure to reduce double-digit inflation and jobless rates and hit growth targets.

Based on official figures, Iran's inflation is running at around 16% and economic growth is just above 5%, roughly 2 percentage points below long-term planning targets.

The United States, leading efforts to isolate Iran over its nuclear programme, has urged Western companies to stop doing business with Iran and many international banks have either pulled out or reduced their transactions with the Islamic state.

Iran, hit by two rounds of limited UN sanctions since December, denies Western accusations it is seeking to develop nuclear bombs and says it only wants to generate electricity.

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