Tehran: The 34th Islamic Banking Conference began here this week. This event, held annually, marks the day Iran adopted laws prohibiting interest (usury) in its banking system. This conference has grown into a platform where experts from both Iran and abroad come together to share ideas and knowledge about Islamic banking. It has become one of the largest events focused on Islamic finance, where new research and global trends in finance are discussed.
Islamic banking in Iran emerged after the 1979 Islamic Revolution, as the country sought to create a financial system free from interest. The goal was to build an economy based on fairness and justice. In 1983, Iran officially passed a law prohibiting interest-based banking. In this system, instead of paying interest on savings/loans, Islamic banks operate differently. Money deposited in a bank is considered a loan to the bank, which then uses it for approved investments, such as businesses that do not involve activities harmful to society, like alcohol, tobacco, or gambling. The bank shares any profit it earns with the depositors, rather than paying fixed interest.
When it comes to loans, Islamic banks do not charge interest. Instead, if a bank lends money to a business, the business shares its profits with the bank. If the business doesn’t make a profit, the bank doesn’t benefit either. This approach encourages more ethical investments and discourages risky financial behavior that can lead to economic bubbles.
In 2020, Iran’s Mellat Bank was recognized as one of the top Islamic banks globally by The Banker, a London-based financial magazine. Mellat Bank is now the second-largest Islamic lender in the world. Though Islamic banking has gained attention globally over the last 50 years, interest-based banking still dominates most financial systems. However, countries like Iran and Saudi Arabia continue to lead the way in promoting usury-free banking, with Iran’s assets in Islamic banks reaching $400 billion.
According to data from “The Banker Database”, global Sharia-compliant assets (excluding Iran) grew by 12.8% in 2022, reaching $1.6 trillion. Of these, 57% are managed by dedicated Islamic finance institutions. The growth registered was significantly higher than for the banking sector as a whole, which saw a 1.7% contraction in assets in dollar terms for 2022. The Islamic Finance Development Report 2023 estimates that the Islamic finance industry will expand to $6.67 trillion by 2027.
Capitalism has fallen short in addressing the world’s economic challenges. Many economists argue that the root cause of both national and global financial crises lies in the debt-heavy, interest-driven structures of the current banking and economic systems. The robust growth of Islamic banking and finance and its progress in various regions of the world by delivering financial products and services that are not only Shariah-compliant but also capable to cater to contemporary economic and financial needs, has attracted global interest in this way of supplying interest-free credit.
