Islamic Banking

 Islamic banking has the same purpose as conventional banking except that it operates on a principle of equity and fairness in accordance with the rules of Sha'ria. The perception held about interest and profit, i.e. Profit-Loss-Sharing Scheme (PLS), constitutes the basic element defining Islamic banking and finance, in which profit or financial gain is acceptable as long as an effort is made or (partial) liability is accepted for the financial result of a business venture.     

     Iran, in contrast to other countries which have some degree of Islamic banking, has completely transformed its banking activities to comply with Islamic principles. Based on Islamic banking laws and CBI policies, Iranian banks' financial resources are mainly raised through Sha'ria-compliant services and products such as Qard-al-Hassanah accounts[1] and term deposits, which do not entail Riba[2]. On the lending side, the banks adopt several modes of financing through Islamic contracts, mostly in form of civil partnership, without a preset lending rate (settlement is based on the real rate of return after implementation of project) and with the bank's supervision as a partner in the respective affairs[3]. The most significant forms of Islamic contracts used to furnish customers with required facilities are as follows:
Partnership Contracts
     Under these types of contracts, the bank provides the whole or a part of the funding required by its customer for a specific economic activity. The arising profit is shared between the bank and customer as to the terms of related contract. Partnership contracts consist of:
a.       Civil Partnership: The bank provides funds for the customer (legal or natural person), who co-invests in cash or kind, for a specific economic activity, mostly in fields of construction, manufacturing, commerce and service industry. Related profit is shared between the two parties.
b.       Legal Partnership: The bank provides part of a new company's capital, or buys the company's shares. Companies are eligible to receive legal partnership facilities if operative in fields of construction, manufacturing, commerce, and service industry.
c.        Mudharabah: A form of partnership where one party (the bank) provides the funds while the other provides expertise and management. Any profit accrued is shared between the two parties.
d.       Muzarra'a: Subject to a Muzarra'a contract, the bank furnishes the customer with pieces of farmland for a specified duration and related proceeds are shared.
e.       Musaqat: The bank (as the owner of fruit-bearing trees) may provide an orchard to a farmer for a period of time (one year or until its fruition time) for a share of the profit.
Constant-Profit Contracts
     Based on the contracts, the bank supplies the whole or a part of the funding required by the customer for a specific economic activity. As opposed to partnership contracts, the bank's profit is shared on a pre-agreed basis. Chief among constant-profit contracts are as follows:
a.  Installment Sale: The bank delivers goods to the customer at a set price, which is amortized, totally or partially, on pre-determined maturity dates, through equal or unequal installments.
b.  Hire Purchase: The contract allows the bank to buy and then lease buildings, machinery, and equipment. At the end of the leasing period, the lessor (the bank) transfers the property (movable or immovable) ownership to the lessee if complying with the terms of the contract.
c.   Forward Sale (Salaf): A form of contract whereby the bank purchases goods produced by the customer, pays the price in cash, and receives the goods in future.
d.  Jo'aleh: Under Jo'aleh contract, one party (Ja'el) purchases another party's (agent or contractor) services for a specified commission. The bank may function as either Ja'el or contractor depending on the situation and the customers' needs.
     The following table displays credit distribution based on Islamic contracts, mostly installment sale with a 61.2 percent share in 2008/09.
Financial Facilities Extended by BK through Islamic Contracts  (Billion Rials)

Share (%)

Share (%)​​





Percentage Change







Installment Sale






Forward Transactions


















Civil Partnership






Hire Purchase













[1]  Qard-al-Hassanah accounts include checking and savings accounts, as in the conventional banking system, except that they earn no interest. Savings accounts offer incentives to account-holders such as non-fixed prizes and bonuses in cash or in kind (usually in the form of a lottery) and an exemption or discount in the payment of commissions and fees.
[2]  An increase over principal in a loan transaction accrued to the owner (lender) without giving an equivalent counter-value or recompense in return to the other party.
[3]  CBI Monetary and Credit policies in 2008/09.