AN INVESTIGATION OF IRAN’S BANKING SYSTEM: CHALLENGES AND REMEDIES

Abstract

Iran is one of the two countries that have full-fledged Islamic banking in theirbanking systems. Although there are many criticisms about the operation of theIslamic system in Iran, this country has the greatest proportion of Islamicbanking assets in the global Islamic financial system. Islamic banking in Iran, asone of the milestones of the reorganization of Iranian society after the IranianRevolution, continues its operation by the contracts which take their roots fromthe economic and social factors. The banking system in Iran contains commercialstate banks, specialized state banks, qard al-hassan banks, and private banks. Inaddition to contributing to economic development by supporting economicactivities, the banking system also supports the strategies of income distributionequality. Some portion of the banking sources in Iran is used to supportindividuals who are below adequate income level. In this study, the performanceof the Islamic banking system in Iran will be analyzed. The study consists of threeparts. In the first part, the historical development of Islamic finance and Islamicbanking and in the second part, the current situation of the Iranian bankingsector will be discussed. In the last part, challenges related to the local economicproblems as well as the sanctions initiated by the US, other countries, andorganizations will be explained. Besides, some policy recommendations toimprove the performance of Islamic banking in Iran will be put forth.