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Iran : Rejecting the West , but Constraining Itself ?
On the other end of the spectrum ,
Iran is a clear example of the difficulties of making a radical break with basic elements of international financial and economic rules . Following the 1979 revolution , it attempted to depart from the prevailing international neo-liberal framework , causing irregularities and much confusion within its ’ own economy . Regarding Iran ’ s financial sector then , three events played a key role in this : nationalization , Islamization , and privatization .
Firstly , in response to the Western orientated policies of the Shah , the banking sector was nationalized which led to the number of banks being reduced from thirty six to nine and subsequently divided into two areas , commercial and specialized ( specialized banks attend to industrial needs such as agriculture , mining etc .) ( Khan & Mirakhor , 1987 , pp . 1-13 ).
The second significant event , consistent with Iran ’ s Islamization , saw the creation of the “ Law of Usury Free Banking ” in 1983 which officially established Islamic banking in 1984 and permitted depositing and crediting without the payment of interest ( Zarrokh , 2010 ). For example , the banking sector has promoted the method of ������������� for depositing and crediting . 9 However , in what Warde ( 2000 ) describes as a “ curious element of the official banking system ” ( p . 120 ), depositors are offered incentives in the form of prizes , gifts , lottery draws , and even preferential treatment when seeking a loan as a replacement for interest payments .
The Central Bank of Iran is controlled by the government who holds precedence over the rate of charge , rate of minimum profit , and the percentage share of profits a bank can take from an agreement .
In the latter case , this means that whilst a bank may have contributed capital of up to 95 % for a given project it may only be able to claim 50 % of this as profit . And while Zarrokh ( 2010 ) believes this enables “ policy makers in setting the economic priorities of the country ,” akin to separating the macro from the micro , it has also reduced the profit making mechanisms of the banking sector ( p . 189 ). For Amir Naghshineh-Pour ( 2009 ) the ignoring of free market supply , demand , and inflation ( maintenance of low interest charges in the face of high inflation for example ) has resulted in structural irregularities within the banking system . Customers therefore have had little incentive to invest or save in the face of an overt “ borrowing market ” ( hence the popularity of ����� ��� ����� and �������� ) and with deposit accounting failing to attract significant numbers to cover costs , debt has begun to spiral . By 2008 nonperforming loans reached US $ 17.8 billion , a situation that Iranian economic advisor Massoud Rad has said could “ make most banks bankrupt if there was an effective auditing system ” ( Bozorgmehr , 2008 , p . 8 ). In 2009 , the Iranian Labour News Agency ( ILNA ) reported that the total debt of state run banks had exceeded US $ 32 billion , with Commercial bank “ Bank Melli ” accumulating US $ 9 billion of this ( Press TV , 2009 ).
In face of this potential banking sector collapse the third and final significant event aimed to recapitalize the banks under the Privatisation Law of 2008 . While inefficiency and debt accumulation were heralded as reasons for this change , the process has not occurred without issues . As Central Bank Governor Mahmoud Bahmani stated , “ Of course , the reality must be accepted that the opening up of the banking system ’ s resources sack in the past few years has brought them ( the banks ) to the brink of crisis ” ( Reuters , 2010 , para . 1 ).
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