Assessment of Profit Rate of Banks in Inflationary Conditions (with Emphasis on Islamic Jurisprudence)

Determining the optimal rate of profit on bank facilities and deposits is one of the important issues facing the country right now. In traditional financial system, short-term profit rate determined by the government (which is proportionate to inflation rate) replaces the profit rate for investment without risk. Meanwhile, in the usury-free banking system no interest is paid on deposits and only a profit rate is considered for the investments. Studies show that inflation rate exerts the highest influence on the profit rate of bank facilities and deposits. Also, the real profit rate on facilities granted by banks is very low for people requesting loans and this issue will lead to various economic rents. Therefore, the real profit rate is taken as the basis of discussions on the Islamic banking. This paper reviews reciprocal effects of the profit rate of bank facilities and deposits on the inflation rate in the Iranian economy, while showing that in the studied period (1993-2006) the profit rate of bank facilities has been lower than the real rate of investment return. This deficiency has destructive effects on the ability of banks to absorb liquidity and will lead to cash flow into unofficial markets. From the viewpoint of the Islamic jurisprudence, considering inflation rate when determining profit rate will not amount to usury and will only protect the real value of money in the society.