Evaluating the Contracts and Methods of Bank Facilities in an Interest Free Banking

Twenty years after the implementation of usury free banking law in Iran it is a proper time to examine and evaluate the Islamic banking system. Resource allocation and concession of banking facilities is one of the main aspects of Islamic banking.By the introduction of usury free banking law and elimination of interest based loans other alternative methods of resource allocation were developed. These methods may be classified under three following categories: qard ul hasaneh, transaction contracts (installment sale, lease purchase, etc.) partnertship contracts (musharikat madani, musharikat huquqi, mudarbah etc) and direct investment. Reviewing the performance of these methods suggest that only the transaction contracts are compatible with the nature and goals of commercial banks and the tastes of applicants of banks. Thus obliging all banks or customers to adopt other forms of contracts may lead to cause wastage in bank resources and formalization of contracts.The methods of providing customers with facilities are another issue in the banking debates. Besides the conventional forms of loans, credit cards and credit in current accounts are increasingly used in the conventional banking system. However, the empirical studies of transaction contracts show that this category of contracts enjoy a better capability to serve the concession of banking facilities both in conventional form and also in credit card and credit in current account forms. Explaining some difficulties in the conventional forms of facilities a new model is proposed for Iranian commercial banks on the basis of transaction contracts.