Civil participation and partnership as a pretext for loan rescheduling are among the challenges facing the country’s economic institutions, including the production sector. These challenges pertain to the calculations of interest and related components in loan agreements where the capital is never delivered to the borrower and is not used for business activity.
Instead, as soon as the bank deposits the funds, it withdraws them to repay past and overdue debts and settles the previous contract. In reality, the recent contract amount is the aggregate of the principal, interest, and late payment penalties of the previous contracts. As a result, real economic activities do not take place, which means there is no contribution to the Gross National Product or economic growth. This practice leads to interest on interest and exponential late payment penalties, which initially lead to the collapse of the economic enterprise and ultimately to the collapse of the macroeconomy. According to Circular No. MB/3876 dated 11/12/2007 of the Central Bank and the latter part of Article 6 of the Monetary, Credit, and Supervisory Policies of the Banking System in 2011, such contracts have been prohibited and announced to the banking network. However, we still witness such contracts being drawn up, which lead to the destruction of economic enterprises. Below are brief and practical details about the legal status of these contracts and ways to compensate economic actors for their damages.
Contracts Enumerated in Monetary and Banking Laws
All contracts that banks can enter into with the counterparty are enumerated in the note under Article 3 of the Usury-Free Banking Operations Law and Article 98 of the Fifth Five-Year Development Plan of the Islamic Republic of Iran. They include: partnership contracts (including civil and legal participation), partnership, leasing with a condition of ownership, installment sales, agricultural sharecropping, direct investment, forward transactions, contract work, and Estisna. Murabaha, debt purchase, and benevolent loans are also foreseen in other regulations. Each of these contracts is subject to mandatory provisions in the Loan Granting Regulations approved in 1983, the Executive Instructions approved in 1984 and 2011, and they differ from some specific contracts included in the Civil Code. None of the regulations, whether specific or general, allow the bank to deposit the funds arising from civil participation or partnership and immediately withdraw them to settle previous loans. Therefore, this bank action contradicts the monetary and banking regulations and the nature and explicit terms of these contracts.
Bank Civil Participation and Partnership Contracts
Civil participation and partnership contracts are among contracts with variable yields, and each has its own rules and regulations in the Loan Granting Regulations approved in 1983, the Executive Instructions approved in 1984, and the Usury-Free Banking Law.
Therefore, the capital related to civil participation and partnership contracts must necessarily be used in the subject of the contract and real economic activities to provide economic growth. However, it is unacceptable that civil participation and partnership capital can be withdrawn from the account to settle previous loans as soon as it is deposited, effectively canceling the business activity that was the subject of the contract. For this reason, the Central Bank has announced the following to the country’s banking network, based on the referenced regulations and Circular No. MB/3879 dated 11/30/2010: “Banks’ loan granting should be based on specific contracts enumerated in the note under Article 3 of the Usury-Free Banking Operations Law. Each of these contracts has specific characteristics and is used in certain economic sectors to meet specific needs. Accordingly, loans should either be granted within the framework of the bank’s participation in a specific plan (participatory contracts), be granted through the bank’s purchase of goods (transactional contracts), or be subject to the performance of a specific task or service (commitment contracts). Therefore, the ‘loan subject’ must always be clear when granting loans. It cannot be expected that loans will be granted to applicants to repay past and overdue debts, as this is inconsistent with the rules and procedures governing the country’s banking system.”
Bank Loan Rescheduling Regulations
If the bank’s action in granting new loans to settle previous loans is intended for rescheduling, it must necessarily follow specific rules known as rescheduling regulations, such as Section 20 of the 2013 Budget Law. According to this section, banks are obliged to pay the approved loans based on the project implementation schedule and work progress. If the loans are not paid according to the approved schedule, the previously granted loans must be rescheduled without penalty, in proportion to the delay in payment. Other laws related to rescheduling regulations have also been enacted, including:
– Note 28 of the 2011 Budget Law
– Note 29 of the 2012 Budget Law
– Note 16 of the 2013 Budget Law
– Article 23 of the Law on Removing Barriers to Competitive Production and Improving the Country’s Financial System (2015)
– Article 11 of the Regulations on the Collection of Past-Due, Overdue, and Unrecoverable Credit Claims (Rial and Foreign Currency) (2009)
Based on these regulations, banks can only consolidate and reschedule previous loans based on the rescheduling regulations by preparing an agreement that is set in specific forms. According to the country’s monetary and banking regulations, there is no possibility of depositing money into an account through a new civil participation or partnership contract to settle previous loans. Subsequently, the contracting party is declared indebted in the new contract. Therefore, it is unreasonable to expect that the funds that have not been handed over to the other party will be used in the economic fields or that there will be a profit from work that has not been done. This is not logically possible.
Banks’ Civil Liability Toward Loan Recipients
Banks and credit institutions must comply with all relevant laws and regulations, resolutions of the Money and Credit Council, the provisions of the approved statutes, and the central bank’s circulars and instructions. According to Section (c) of Article 35 of the Monetary and Banking Law of the country and Article 88 of the Regulations on the Establishment and Administration of Non-Governmental Credit Institutions, as well as the note under Section 20 of the 2013 Budget Law, and based on some jurisprudence principles, the Civil Code, and the Civil Liability Law, each bank and credit institution is responsible and obliged to compensate for damages caused to its customers due to its operations. As explicitly stated in the aforementioned laws, the CEO, the chairman of the board, the members of the board of directors, and the board members of each bank are responsible and obliged to compensate for the damage caused to customers due to the violation of the regulations, laws, and bylaws imposed on shareholders and customers.
Therefore, if the bank deviates from the laws and regulations and this causes damage to the loan recipient, it is possible to claim damages from the bank and its officials, including the CEO and board members, according to the aforementioned regulations. Furthermore, based on Article 44 of the country’s Monetary and Banking Regulations, violations of monetary and banking regulations and the central bank’s instructions will result in disciplinary action against bank managers and offending executives.
Conclusion
Based on the above, the following conclusions can be drawn:
1. All contracts enumerated in the Usury-Free Banking Operations Law have specific provisions and cannot be deviated from.
2. Bank managers and officials are required to comply with the instructions, executive guidelines of each contract, and central bank instructions, and are in no way allowed to deviate from them.
3. If loans are not paid according to the approved schedule, the previously granted loans must be rescheduled without penalty, in proportion to the delay in payment.
4. If the bank deviates from the laws and regulations and causes damage to the loan recipient, it is possible to claim damages from the bank and its officials, including the CEO and board members. Furthermore, violations of monetary and banking regulations and the central bank’s instructions will result in disciplinary action against bank managers and offending executives.
