The Contribution of Islamic Banking to Economic Development
(The Case of The Islamic Republic of Iran)

Abstract

Abstract

Islamic banking is a new industry which has attracted the attention of many economists in the world regarding its ability to operate successfully and its instruments for mobilising and allocating monetary resources (Deposits). Usually, in the majority of Islamic countries and in some non-Islamic countries, Islamic banking works as one part of a banking system. There are few countries where the banking system is completely Islamic and the Islamic Republic of Iran is one of them. In a country in which the entire system is Islamic there are more questions about its activities. The most important questions are: how can bank managers ensure the Shariah-compliance of banking system activities and how can they contribute to economic development? These are the two main questions of this research.
In order to answer the first question, the Law of Usury-Free Banking in Iran was analysed and it was shown that this law is Shariah-compliant. However, the most important issue is to make sure that all banks in the country work according to the Law of Usury-Free Banking. In order to explore this semi-structured interviews were carried out with twelve interviewees including managers of the Central Bank and commercial banks and researchers. The result of the interviews was the introduction of several instruments used in the banking system of Iran for the supervision of banking activities and to ensure their Shariah-compliance. A new issue in this research is that being Shariah-compliant does not only mean utilising appropriate contracts for each project but also using deposits for the most efficient and profitable projects. This is because banks are the agents of the depositors and therefore they must use their deposits for the best possible projects. The vast majority of interviewees believe that Islamic banking system in Iran works in conformity with the Law of Usury-Free Banking in Iran.
Regarding the second main question, this study utilised both quantitative and qualitative methods in order to obtain sufficient data to analyse it. The secondary data was taken from Iran‘s Central Bank Annual Reports, other Iranian banks‘ reports, the Ministry of Industry, the Ministry of Agriculture and the Statistics Centre of Iran. Although the main period of the study was 1989-2006, in order to make a comparative study the periods 1961-1978 and 1979-1988 were considered in some parts of the study. For a more accurate study, not only were the amounts of deposits and financial facilities in the periods before and after the Islamic Revolution compared, but their ratio to liquidity (M2) and GDP were also compared. Our finding was that Islamic banking was relatively more successful than conventional banks operating before the Islamic Revolution in Iran. One important aspect of the contribution of the banking system in Iran to economic development is direct investment. The Islamic banking system in Iran has carried out thousands of huge projects directly most of which cannot be undertaken by private sector including: highways, petrochemical industries, wood and paper industries, industrial farming and animal husbandry, automobile manufacture, the cement industry, railways and so on. In addition, primary data was collected via semi-structured interviews. The majority of interviewees believed that Islamic banking in Iran has had a positive effect on economic development.