Chapter 11Iran*Islamic Banking and Finance

Farhad Nili

Director, Monetary and Banking Research Institute, Central Bank of Iran

In the first half of the 20th century and based on theoretical foundations expressed by Muslim scholars—such as Abul Ala Mudoodi and Mohammad Nejatallah Siddiqi of India, Seyed Qotb of Egypt, and Mohammad Baqir al-Sadr and Morteza Mutahari of Iran—Islamic banking and finance gained momentum. The idea was put into operation in the second half of the 20th century. The first integrated Islamic bank, established in Jeddah, Saudi Arabia, in 1975, was soon followed by similar efforts in various Islamic countries. The introduction of sukuk in the early 21st century accelerated the trend.

The Islamic Republic of Iran has been a pioneer in both the theoretical and the operational aspects of Islamic banking. The Riba-Free Banking Act was passed in 1983 by the Iranian parliament, much earlier than in other Islamic countries. However, because of a lack of constructive interaction with other countries, the Iranian banking system has not been well introduced abroad.

Islamic finance in general followed a similar path, with a delayed starting point, but in a resilient and market-oriented manner. The financial sector in Iran is heavily bank-based. The extent of equity financing in Iran outside the banking industry through the primary market consists of a tiny portion, whereas the lion's share belongs to banks. This division of labor seems mainly attributable to the relative ...

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