Islamic Credit: The Iranian Experience

The replacement of the Shah's regime by an Islamic fundamentalist government in Iran resulted in the outlawing of interest‐bearing credit and its replacement with a credit system which accords with the teachings of the Koran. Two forms of credit are acceptable: interest‐free loans, and profit‐and‐loss‐sharing loans. Although the latter have assumed only a small proportion of lending by the Agricultural Bank, they are potentially attractive to small risk‐averse farmers because of their risk‐sharing characteristics. In particular, they pass part of the business risk (e.g. due to uncertainty in yields and prices) back to the lender and avoid creating any financial risk for the borrower. A model is developed to explore the impact of Islamic credit on borrower behaviour and a numerical illustration is also provided. Results of a farm survey are reported, and indicate that small risk‐averse farmers prefer the Islamic credit system, whilst medium and large‐scale farmers prefer interest‐based credit. Some of the obstacles to more widespread uptake of the Islamic credit system in Iranian agriculture are identified.