• The interview of Parsian managing director with Fars News Agency

      The interview of Parsian managing director with Fars News Agency

      Reporter: One of recent events in the banking arena is the question of partnership contracts. Since 2006, the issue of Islamic contracts and differentiating between them has been seriously discussed. The current regulatory package issued by the central bank has also defined and specified these contracts and designated the fees for trading and partnership contracts.
      As you know, partnership contracts leave the investors and facility receivers with carte blanche and their return is based on mutual agreement. The very fact that no specific interest rate is determined for partnership has tempted the banks to favour these contracts. Experts believe that private banks show stronger tendencies towards them. Could you explain a little about their applications and specifications? Receivers of these facilities are obliged to pay higher interests. However, there are still more and more applicants. Why do banks prefer these contracts?

      Mr. Shayesteh: In the name of Allah. First of all I would like to congratulate you on the occasion of reporters' day and express hopes that one day all journalists will be able to report what is of benefit to the society in a free manner. Since the Islamic revolution, journalism in our country has witnessed desirable conditions which, we hope, will improve even more.
      In order to discuss partnership contracts, we first need to review the conditions where interest free banking code was ratified. Approximately one year after the revolution, this question was put forward how to follow banking operations based on Islamic and religious contracts. In their meeting with Imam Khomeini, bank authorities asked him about their duties and he replied; "you are responsible to run banking operations based on Islam."
      This was the starting point for interest free banking operations. However, there existed this issue whether to ratify a new law based on Islamic principles or a law which simply did not contradict them. Again we wondered if we could call it Islamic banking code. Eventually, we came to this conclusion that we called it non- usury banking. It meant we were supposed to eradicate usury from our banking system and then ratify a law without obvious contradiction with Islamic principles. Even the law makers had never claimed that the code was in perfect compliance with Islam and later proposed some amendments to the code. Most countries which execute this banking operation utilize only one contract. Some others have turned to both limited partnership and partnership contracts. They believe these two types can respond to all economic needs of bank clients.

      Reporter: Is the same procedure followed in countries like Malaysia which claim they execute Islamic banking?

      Mr. Shayesteh: Yes, Malaysia, Emirates, Saudi Arabia, Kuwait, and many others. Even some European banks have established an Islamic department which acts accordingly.
      When interest free banking code was ratified there was a question whether or not we had to observe all the 12 or 13 types of contracts. In practice, some of them were totally ignored. Some contracts such as Mozareh (leasing a farm) or Mosaghat (letting a farm for a part of its products) are too inaccessible since they require conditions which banks lack. Some contracts are not applicable at all. Since the formation of interest free banking, most authorities have maintained that only the two contracts of limited partnership and partnership would suffice. Just the way it is in other countries. Iran is the only country where the entire banking system observes Islamic contracts. We see no non- Islamic section. However, if you travel to Saudi Arabia, you can see the banks are following international rules. This trend exists in other Islamic countries like Kuwait, United Arab Emirates, Malaysia, and Indonesia. However, when it comes to Islamic banking, all these countries utilize one single contract that is partnership. Others are totally ignored. In Iran, banks are not divided into Islamic and non- Islamic sections. We just follow interest free banking.

      Reporter: Are we going the same direction?

      Mr. Shayesteh: First of all I should admit that partnership or limited partnership is adequate to respond to the clients of a bank which intends to be consistent with Islam. These two contracts can cover all their demands. However, from the very beginning, they made a distinction between business and non- business contracts. In business contract the transaction is finalized and the price is clear. In installments, we say that, for instance, this loom costs X in cash and X H!u!Z Y in three- year payments. So, the price is clearly determined.

      Reporter: This is legitimate. You expressed that Iran follows Islamic contracts, but some experts claim that trading contracts are meaningless in Islamic banking.

      Mr. Shayesteh: Not everybody can decide about legitimacy. This is a question posed by clergymen. Makaseb is a book taught in seminaries and it has clearly defined all these concepts. I claim that partnership contract is sufficient. We do not need other types. I need your attention here. In business the price is already determined and installments as well as duration are clarified. In order to avoid fluctuations, the government has set a fee to be followed throughout the country. But in partnership or limited partnership contracts you cannot fix a fee since everything depends on the termination of the contract. The income turns up in the end. We even protested against the auditing and taxing system. They say we should audit the banks upon their commitments in 1.5 year durations and declare the income. This is inconsistent with partnership. Perhaps we make no profits in the end, or the profits are far more than what is specified in the contract. The problem lies in the fact that we have made the banking code but failed to amend other laws. Based on international standards, the auditing system expects us to declare our expenses annually.
      Just a few years ago, the interest we took from the customers was registered in the receivable column. Now, Parsian is a private bank. Each year we hold the general meeting and calculate the profits to be divided among shareholders. At the termination of a partnership contract, there may be losses both to the bank and to the shareholders. Profits may be less than expected, but we have already paid the dividends. They are gone.
      Due to its comprehensive domain, interest free banking code should make a harmony among all its parts. When a chief auditor calculates the tax for a certain company, he considers the cost of dividends as expenses. A customer pays the share of the bank and considers it as his cost. It is profit for the bank. The bank and the customer agree on shares, say 40 - 60. There is no loss for the bank. Then auditing, statements and taxes are determined in the same way. These are issues to be discussed while posing the question why or why not the banks prefer partnership.
      Therefore, there are three main points to be mentioned; first, partnership contracts are adequate alone. Second, the regulators themselves believed in one or two types of contracts. And third, which is most important, is the fact that if we offer facilities with two fees, this issue arises that some people who have the power receive facilities on business basis with lower returns and invest them in more profitable cases. They get facilities in industry but spend it on housing. This is what the government itself has critisised; receiving facilities in one field and spending them on other activities.

      Reporter: Don't you think this happens because there is no monitoring?

      Mr. Shayesteh: Granting facilities is well executed and monitored. However, receivers may spend some percentage of them on the specified project and leave the rest for other purposes. When the bank sets the installments, it does not monitor the funds. Just like when you sell merchandise and see no sense in monitoring. If you are a seller, will you go after the buyer to see how he consumes the item?

      Reporter: Do you mean there is no possibility of monitoring?

      Mr. Shayesteh: Finalized transactions require no monitoring. Imagine that someone asks for a loan to purchase a bulldozer. We grant him the loan and then see the bulldozer. However, he can sell it later on. This is impossible in partnership. The bank can monitor the process regularly. It can inspect the items or progress of projects. The funds are also granted accordingly. But when a transaction is finalized, there is no sense in monitoring.

      Reporter: That raises another basic question. The main question lies in the fact that the banks have devoted business facilities to partnership transactions. Perhaps the most evident is the car loan when the banks use a formula in which the interest rate is 17 % but the final return is 25 or 30 percent. This means something higher than the original agreement. Why is this happening? Why is the interest rate going up?

      Mr. Shayesteh: You should ask other people. I wasn't in charge three years ago.

      Reporter: Why do banks go around the law? With this measure that Mr. Rezayee pointed to, the fee is apparently based on partnership but it is a business contract in practice.

      Mr. Shayesteh: I think it is unimaginable to change partnership into business contracts in our banking system. But in business you are free to use various contracts. All over the world, the banking system is supposed to allocate resources to economic demands and this is the best way to do so. We define economics as responding to unlimited demands by limited resources. We have so many applicants for facilities. I am free to choose from among them and decide to whom I can grant facilities. There have been cases when the applicant failed to run a project since its economic feasibility studies had been inaccurate. We are the center for allocation of funds. We observe the applications and select the ones with higher returns.

      Reporter: It means the banks are not raising the interest rate; rather, they select the applicants.

      Mr. Shayesteh: Imagine that a certain project promises a return of 40%. Is it justified that I ask only for 12% return and pay fewer dividends to depositors? In contrast, if the bank earns more, it means higher returns to depositors and attraction of more deposits. This will enhance the quality of resource allocation in the whole banking system and in the country.

      Reporter: Don't you think that the banks will do all they can to select applicants with higher rates at partnership and turn a blind eye to business contracts?

      Mr. Shayesteh: I have a question. Is it plausible to put profitable projects aside and turn to less promising ones?

      Reporter: I have no intention to support those who apply for business facilities. We are at two sides of the table. I put another question forward. Is it appropriate that the people who need to purchase goods are unable to receive a loan?

      Mr. Shayesteh: That is another issue. We are talking about economic projects. If as an economist you asked me whether we should select high return projects or think about macro economy of the country, I would tell you that projects with low return are also prioritized.

      Reporter: Private banks turn to high return projects whereas public banks prefer low return ones.

      Mr. Shayesteh: That is not true. But first, I should ask you a question. As a person who is active in economy, and while considering the importance of economic growth, do you prefer high return projects or low return ones?

      Reporter: High return ones.

      Mr. Shayesteh: The second issue relates to the government. Sometimes they decide to support a certain project due to national concerns. The parliament ratifies a plan and assigns the banks to grant a loan at a low interest rate and promises to make compensations through national budget. That is the reason why state- run banks grant more facilities, even these three banks which are listed in the stock market and are supposedly privatized.

      Reporter: Mr. Bahmani does not consider them as private banks since he says they are still managed by the state.

      Mr. Shayesteh: Do you know about the volume of their partnership and business facilities?

      Reporter: You mean they may shift to highly profitable projects?

      Mr. Shayesteh: It is justifiable. If the government intends to support a project, they should pay the costs. However, if the banks decide to allocate resources, they will turn to profitable projects.

      Reporter: This means maximizing profits as stated in liberal economies. We have other considerations; Islamic banking and not maximizing profits.

      Mr. Shayesteh: How did you come to this conclusion?

      Reporter: Maximising profits is a common issue. Most people believe that a financial firm is supposed to maximize profits.

      Mr. Shayesteh: Is making profits prohibited in Islam?

      Reporter: Of course not. But I believe it will create disequilibrium.

      Mr. Shayesteh: That's it. Why don't banks support low return projects?

      Reporter: What about those who apply for business contracts?

      Mr. Shayesteh: We know there are some normal demands which should be responded through other contracts.

      Reporter: You mean Gharzul hasaneh (no - interest) deposits and the like?

      Mr. Shayesteh: Yes. For example, I ask you for 100 million Rials loan to repair my house. Do I need to pay 14% return according to a contract?

      Reporter: But this is prevalent in the country.

      Mr. Shayesteh: There are consumption as well as investment needs. Is it fair that an investor or speculator maximizes their profits at the cost of minimizing bank revenues? If someone gets a housing loan with 12% return, do you think they will sell their house at a low price?
      Reporter: I get this implication that you believe in bank division. Private and public banks now attempt to contribute to profitable projects and make distinction between partnership and Gharzul hasaneh contracts.

      Mr. Shayesteh: If you consider banks as centers for allocation of funds, that sounds right.

      Reporter: The government established a Gharzul hasaneh bank. But in practice, it was unsuccessful.

      Mr. Shayesteh: Banks need Gharzul hasaneh deposits. Private banks advertise to attract such deposits and have to make profits out of them. This is a contradiction. There cannot be divisions.

      Reporter: You mean they should have the choice to move towards partnership contracts and higher profits?

      Mr. Shayesteh: I do not suggest the banks should have free choice. What I say is that they themselves allocate resources naturally in the most efficient way.

      Reporter: in practical terms, they show tendencies towards high return projects in macro economy. This is the situation in which the applicant, the bank, and the society are satisfied.
      However, what if some people need facilities and Gharzul hasaneh banks cannot respond? When business banks are insufficient? There have been companies which received more than 20 billion Rials loan from Parsian or Eghtesad Novin banks. What mechanism do you recommend?

      Second reporter: There are intermediary companies. I saw an advertisement in the newspaper and they claimed they could make provisions for me to receive 200 billion Rials loan from Parsian bank.

      Mr. Shayesteh: This is fraud. We were informed about one case in Karaj where we could sue the company and close it. There are about 10 cases on my desk now. The so- called intermediary companies have taken the collateral without giving any loan. These are symptoms of a real problem. The applicants are content to receive a loan with a higher interest rate. When we do not allow the banking system to make the right decisions, the result is what we witness now.

      Reporter: In order to leave some time for another discussion about Money and Credit Council, let's finalize this point and ask for your mechanism as you believe that division of banks is not possible.

      Second reporter: Considering the fact that the governor of the central bank offered a mechanism the day before. He said that charges for partnership and business contracts should be the same.

      Mr. Shayesteh: This is against the law and if they want to enforce their view, we will face other problems. Partnership contracts are more efficient. If a certain project rewards 20% return, why should the receiver of facilities pay less interest and our depositor make less profit? There ought to be a balance. If we are determined to allocate the resources in an efficient manner, we should prefer partnership. Or for instance, if the government needs to construct a highway, they should pay the costs, not the depositors. When people deposit their money they are postponing their consumption and intend to make benefits. If they contribute to a project they should receive their returns.

      Reporter: What do you think about the regulatory package?

      Mr. Shayesteh: As an expert, I should say there are three angles to each organization; the owner, the manager, and the shareholders. Most of the terms of the regulatory package lie within the authorities of the board of directors and shareholders. It has intervened in both domains. Whether it was to the benefit of the country or any other expedience, I have no idea. It is fixed and we have to obey, no matter what we think. We should also remember that these three angles should not trespass each other's territories. The regulatory package cannot interfere with duties of shareholders and the board of directors. Now you see that the package has assigned duties for them.
      There is also another point. All over the world the firms try to adjust themselves with the customers' needs. In the banking system they offer any kind of deposit that suits the customers. Now, can we decide for 70 million people and impose only 4 or 5 types of deposits? There is no innovation on the part of the bank and no choice for the customers. For instance, the board of directors may decide about the ways to attract deposits. Perhaps, we decide to open 5 or 6 - month deposits, but the regulatory package determines the duration. It restricts our freedom.
      The government and policy makers can impose restrictions and we have to comply with the rules, but we preserve the right to have our voice heard.

      Reporter: Well. It was mentioned in previous discussions that some representatives from private banks or even the private sector attend the Money and Credit Council. At the moment there is a representative from the private sector, but private bank representatives are the big absentees. Their presence may redirect economy into its appropriate course.

      Mr. Shayesteh: Money and Credit Council is a specialized assembly consisting of economic experts from outside the banking system and 4 or 5 experts from the central bank. Financial and economic policies are separated in economics. However, if you look at the composition of the Council, you will notice that financial policy makers have the upper hand. It means that the majority is held by those who determine financial policies. They make monetary policies as well. The more specialized the Money and Credit Council, the better impacts it has on economy and monetary policies. That effect is best reflected in the necessity for presence of a representative from private banks in the Council, just like the time when the bank association had a representative in the Council.

      Reporter: Was it before or after the dissolution of the association?

      Mr. Shayesteh: Before dissolution. When Mr. Adeli was at the office as the governor of the central bank, the composition of Money and Credit Council weighed towards financial policy makers. I insist on attendance of a representative from private banks, but that's not everything. The main issue is the necessity for the Council to target specialized decisions not those made by the government. There is no doubt that monetary policies should comply with financial ones, but the composition of the Council should entail diversified expertise and specialized thoughts. At the moment, private banks possess 24 to 25 percent of resources which make them eligible to join policy makers. The composition of the Council needs independent specialists. This is to the benefit of the country. In the association of the private banks we insisted on the presence of our representative in the Council but we did mean independent expertise.

      Reporter: Do they collect the opinions of private banks while making the regulatory package?

      Mr. Shayesteh: They do so. But the opinions are ignored later.

      Reporter: Mr. Bahmani claimed that he gathers various ideas for decision making.

      Mr. Shayesteh: He is right. We had a meeting with him.

      Reporter: One of the suggestions made by Eghtesad Novin bank was approved and included in the package.

      Mr. Shayesteh: I have no idea. We expressed our transparent views and the central bank decided which one is worth attention.

      Reporter: One final question. You mentioned profitable projects while talking about partnership. If a project makes losses, will the bank share the loss as well? This is the procedure based on partnership contracts, but it is not observed in practice.

      Mr. Shayesteh: No. We are not allowed to do anything against banking code. Moreover, we examine each project at the beginning to see whether or not it is profitable. Partnership and limited partnership contracts specify that if an executor does his best and fails, we share the loss. This is the law. There have been cases when the receivers of facilities made losses due to force majeure events. For instance, we had a farmer in Hamedan who made a loss only because of the fluctuations in the price of barley and we shared the loss.
      We study each project before we make any contributions so that nothing may go wrong. If we witness any losses despite efficient management, we do share them.

      Reporter: Thank you very much for the interview. We hope that private banks such as Parsian will help the economy to flourish.

      Mr. Shayesteh: I do appreciate your attempts and hope that this discussion would be fruitful.