Bail-in: Legal and Economic Feasibility Study of Applying Bail-in Tool in Iran Usury-free Banking

Nowadays, Iran monetary and financial market encounter a new concept, named “Resolution” that is going to be technically replaced with “Bankruptcy” system for facing failed or likely to fail banks and credit institutions. Dissatisfaction of policy and decision makers from bankruptcy system toward banks and credit institutions highlights the importance of “Resolution” in their eyes. Among all of the tools utilized under “Resolution” system, “Bail-in” is counted as one of the most challenging on the one hand, and the most useful tool on the other hands which is not only does open a new window in the realm of facing bank failure, but also comprehensively stands against “Bail-out”. This tool can be analyzed in two perspectives; an independent tool and the complementary one. “Bail-in” means “the mechanism for affecting the exercise by a resolution authority of the write-down and conversion powers in relation to liabilities of an institution under resolution”. As it is crystal clear, “Bail-in” includes two steps: loss absorption for “Write-down” and “Conversion” of liabilities to equity. Initially Considering “Bail-in” tool versus the rules of private law, most of the countries have carefully eliminates the impediments before applying this tool. In Iran legal system, originating from Shiite jurisprudence, this tool is not flawless. Islamic banking principles, Shiite jurisprudence rules, i.e. particularly “debt forgiveness” and “novation”, and lack of economic infrastructures are the major barriers before “Bail-in” tool, for which the authors have attempted to resolve them, in addition to explaining and clearing the issues, through descriptive-analyzing method.