Assessing the Compatibility between Usury Free Banking Laws and Regulations and the Nature of Modern Banks

Over the past 100 years, three approaches have been presented in the literature about the nature of the bank, including "financial intermediation", "Deposit Multiplier", and "money creation" theory of banking. In the present article, using analytical-descriptive method, these three perspectives are analyzed and the compatible approach with the reality of modern banks is introduced. Besides, the precise investigation of the laws and regulations regarding usury (interest) free banking in Iran, especially the definitions, the contracts between depositors and the bank, and the mechanisms designed for dividing bank income from Joint/Non-joint activities, shows that these regulations are designed based on "financial intermediation approach".In order to increase the consistency between these laws and regulations and the nature of modern banks, recommendations are made, including definitions for banking operations and deposits; amending contracts related to depositing (Wakalah and Qard-al-hasan); and modifying the method for identifying and sharing bank revenues between the bank and depositors. Nevertheless, regarding the relationships between banks and the central bank, and also among banks in the interbank market, serious problems can arise, which make the compatibility between the modern bank's nature and the regulations for usury free banking almost impossible, through the use of Wakalah theory. Accordingly, continuing attempts to eliminate usury form banking system, based on the financial intermediation approach (the current ruling approach), will not be fruitful. Although as a short-term strategy, the above suggestions can be useful, but a fundamental and long-term approach to eliminate usury from the financial system necessitates different arrangements and institutions from modern banks.