Partnership Loans Attractive

EghtesadOnline: Data about loans given by banks and credit institutions based on different Islamic banking contracts show “partnership loans” had the biggest share by the end of the third quarter of the present fiscal year on June 21.

News ID: ۷۴۸۴۲۸

14 September 2019

A report on the official website of Central Bank of Iran shows lenders granted loans worth 13,336 trillion rials ($116.9 billion) under different Islamic contracts.

The figure indicates a growth of 2.6% compared to the end of last fiscal year that ended in March.

Data shows partnership contracts held the lion’s share of loans during the period. The total lending based on partnership contracts amounted to 4,071 trillion rials ($35.7 billion) or 30% of all loans, according to Financial Tribune.

In the framework of partnership contracts, loan applicants and lenders sign a joint venture contract with the latter funding the project and the former in charge of the actual operations. In such contracts profit and loss is shared as are the risks and benefits.

Partnership contracts are designed to fund projects in industrial, agricultural and housing sectors. It is similar to Mudarabah contracts with the difference being that in Mudarabah lenders provide funding entirety. Participation contracts are a joint venture between lender and borrower.

Mudarabah is an Islamic contract in which one party provides money and the other brings management skills for a specific trade. The party supplying capital is owner of the capital. The other party is referred to as an agent who actually runs the daily business affairs.

Data show that lenders paid 149.4 trillion rials in Mudarabah loans during this period, indicating an 8.5% decline compared to the end of last fiscal year. Mudarabah loans had a meager share of 1.1% of all granted loans.

Installment Business

Loans for “sale on installments” were the second most attractive loans for applicants during this period.  Banks granted 3,878 trillion rials ($34 billion) in installment sale loans, accounting for 29% of all loans.

The loans aim to help facilitate the purchase of housing units for the homeless or help in funding the working capital of manufactures by providing loans for installment purchase of machinery and equipment.

The loans paid via Murabaha contracts reached 1,468 trillion rials by the end of June 21, up 6.7% compared with the end of last fiscal year.

Murabaha is an Islamic financing structure in which an intermediary buys a property with free and clear title. Similar in structure to rent-to-own arrangement, the intermediary retains ownership of the property until the loan is repaid in full.

By the month to June 21, lenders granted 831 trillion rials in  Gharz Al-Hasanah loans which accounted for 6.2% of all loans. Also called no interest-bearing loan, Gharz Al-Hasanah loans are returned at the end of the agreed period without any interest in profit or loss of the business.

Data show the share of loans based on Istisna’a contracts was almost zero during this period. Istisna'a is kind of Islamic contract designed for financing construction or manufacturing units.  Under such contracts, the financier provides funds to a supplier who agrees to produce goods for manufacture, construction, assembly or package a specific asset.

As a result, it acquires title to the asset and immediately sells or leases it back to the supplier.