Iran, the one country where all banking has had to work without riba since 1983

Islamic finance in Iran refers to the national banking and financial system which, since the 1983 usury-free banking law, bars every bank in the country from charging interest and requires partnership, sale or lease contracts drawn from Shia jurisprudence.

A whole-sector conversion, not a niche

Unlike countries where Islamic and conventional banks coexist, Iran converted its entire banking system. After the 1979 revolution, lawmakers treated interest as usury and wanted no bank in the country to lend or pay depositors at a fixed rate any longer.

The usury-free banking law of September 1983

Approved by the Guardian Council in September 1983, this law prohibits interest-bearing loans in any currency. It sets out the permitted ways of mobilising and using funds and gives the central bank responsibility for fixing the detailed parameters of implementation.

Who sets the rules: the Money and Credit Council

The Central Bank of Iran, founded in 1960, runs monetary policy, but the top body is the Money and Credit Council. It brings together the governor, the economy minister, other ministers, members of parliament and the prosecutor general, and approves the main policy lines.

A fiqh council alongside the central bank

A council of Islamic jurisprudence reviews the religious compliance of banking and monetary instruments. Its role resembles a central Sharia board, but it works within Twelver Shia fiqh, which explains some differences with the AAOIFI standards followed in Sunni-majority countries.

Why Shia jurisprudence changes some products

Shia fiqh accepts structures rejected elsewhere. The Sharia committee of Iran's over-the-counter exchange approved mortgage-backed securities, described as a Shia initiative, whereas the majority Sunni view rejects them. A foreign investor therefore needs to examine each structure individually.

The statutory contracts, from mudaraba to joaleh

The law and its implementing texts recognise about a dozen contracts: qard al-hasan, mudaraba, civil and equity partnership, hire purchase, instalment sale, forward sale, joaleh for a paid service, plus muzara'a and musaqat for farming and orchards.

Qard al-hasan as large-scale benevolent lending

Qard al-hasan accounts pay no guaranteed return, and banks use them to make non-profit loans to households, for example for a wedding or an urgent need. Benevolent loan funds play a more visible social role in Iran than in most other countries.

Profit rates steered by the monetary authority

The central bank can set ranges for profit rates, designate priority sectors and cap commissions and fees. In practice this steering brings announced returns close to an administered rate, which economists criticise as a drift away from genuine loss sharing.

Islamic treasury bills and the Fara Bourse

On 30 September 2015 the first Islamic treasury bills were listed on Iran Fara Bourse, an over-the-counter market. Together with murabaha, manfa'ah, ijara and musharaka sukuk, they make up most of the local market for compliant public debt.

Participation papers and parliamentary control

Participation papers, modelled on musharaka, finance public or bank projects by giving savers a share of the outcome. Their issuance by the central bank requires approval from parliament, which limits the institution's independence in running monetary policy.

Free zones, the exception to the Islamic regime

Foreign currency transactions conducted from within a free zone are exempt from the Islamic banking regime under the applicable texts. How this exception works in practice remains unclear, and no foreign bank held a full licence to operate in the country.

State and private banks in an isolated market

A large share of Iranian banks are state-owned, the rest private. International sanctions largely cut the sector off from global payment networks, so the Iranian model develops in isolation, with no direct link to Islamic financial centres in the Gulf or Asia.