ISLAMIC CREDIT - THE IRANIAN EXPERIENCE

The replacement of the Shah's regime by an Islamic fundamentalist gove rnment in Iran resulted in the outlawing of interest-bearing credit an d its replacement with a credit system which accords with the teaching s of the Koran. Two forms of credit are acceptable: interest-free loan s, 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 bus iness 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 beha viour and a numerical illustration is also provided. Results of a farm survey are reported, and indicate that small risk-averse farmers pref er the Islamic credit system, whilst medium and large-scale farmers pr efer interest-based credit. Some of the obstacles to more widespread u ptake of the Islamic credit system in Iranian agriculture are identifi ed.