In many bank loan cases, it is observed that instead of taking action to recover overdue and matured debts, banks often choose to reschedule the loans. However, instead of drafting a rescheduling agreement, they proceed to create contracts under titles such as Civil Partnership, Civil Partnership for Rescheduling, Civil Partnership for Revival, Mudarabah, and similar terms.
The capital of the new contract is not paid to the contracting party but is directly withdrawn by the bank to settle previous contracts, ultimately resulting in the new loan being integrated into the bank’s financial system.
The Central Bank, through circulars No. MB/1751 dated 1996/6/2, MB/3876 dated 2007/12/2, and MB/3879 dated 2010/12/2, has announced the prohibition of concluding such contracts. However, many banks prefer entering into fictitious contracts to settle previous loans over recovering the outstanding debts.
Questions that arise are:
1. Why do banks act contrary to the aforementioned circulars?
2. Does the failure to implement the above regulations lead to an increase in the effective interest rate of loans and a deviation from the rates set by the Money and Credit Council?
To answer the above questions, it was necessary to compare two loans with the same amount and conditions using two different calculation methods. In other words, a hypothetical loan of ten billion that the borrower received in 2009 and intends to settle in 2010 is examined using two different methods. In the first method, the borrower’s debt is calculated according to regulations and based on the original contract, considering interest and penalty fees until settlement. However, in the second method, the borrower’s debt, which is the bank’s income or receivable, is calculated by taking into account fictitious and intermediary contracts.
First Method: A Single Original Contract
A loan amounting to 10,000,000,000 rials with a 21% interest rate and a 6% penalty fee was granted at the beginning of 2009 for a participation period of 12 months. The debt arising from this loan, including the expected interest at the time of repayment, which is at the beginning of 2018, amounts to 39,869,500,000 rials.
Second Method: One Original Contract and Multiple Fictitious Contracts
First Scenario:
A similar loan with the same conditions was granted to another individual at the beginning of 2009. However, instead of collecting the debt in 2018, the bank, calculating a total of 21% interest and 6% penalty (27% effective interest), entered into another participation contract with the borrower. Instead of giving the participation capital to the borrower, the bank directly used it to settle the first loan. This process continued until the beginning of 2018, with each new contract’s amount being used by the bank to settle the previous loan.
This action increased the outstanding debt to 69,447,217,257 rials by September 2018. In other words, the difference in the debt amount calculated using this method compared to the legal method is 74%.
Second Situation:
This situation is similar to the first one, but with interest rates of 6% and 10%. In this scenario, the borrower’s outstanding loan balance until September 2018 is equal to 75,820,540,093 Rials. Therefore, the difference in the amount of debt in this calculation method compared to the legal method is 90%.
Third Situation:
In this situation, it is also similar to the first one, but with the application of staggered delay rates. The borrower’s outstanding loan balance until September 2018 is equal to 83,997,799,944 Rials, resulting in a difference of 111% compared to the legal method.
Conclusion
The conclusion drawn from this comparative study is that the non-compliance with the aforementioned Central Bank directives, even in conditions of reducing interest rates from 21% to 18% in the years 2016 to 2019, leads to an increase in the effective interest rate on loans and, consequently, deviation from the approved rates by the esteemed Money and Credit Council. By entering into formal contracts to settle previous loans, banks not only harm the country’s production and service sectors but also collect income without legal legitimacy.
According to the provision of Article 8 of the Regulation on the Method of Disposal of Non-Essential Assets and Welfare Facilities of Banks approved in 2007, banks are obliged, in case of non-payment of customer debts at maturity, to take three warning stages against the borrower to determine their debt situation and subsequently proceed with the sale of collateral and debt collection, which guarantees the enforcement of the aforementioned legal obligations, prohibition of receiving interest, and additional penalties.
