Authors
1
Assistant Professor, Department of Islamic Economics and Banking, Faculty of Economics, Kharazmi University, Tehran, Iran.
2
M.A. in Banking Jurisprudence (Fiqh al-Muʿāmalāt al-Maṣrafiyyah) Head of Sharia Compliance and Supervision, Bank of Industry and Mine, Tehran, Iran.
Abstract
Undoubtedly, financing government projects through external sources is crucial for initiating infrastructure projects in oil, steel, petrochemicals, and other major industries. The private sector also requires financing to procure equipment and goods, but due to limited domestic liquidity, the unavailability of deferred letters of credit from suppliers (domestic or foreign), and buyers' lack of liquidity, domestic financing is often unfeasible. Consequently, utilizing external financing methods, including foreign financing (fainans), becomes essential for the progress of developing nations.
In banking terminology, fainans refers to a form of credit provision involving medium- to long-term loans from foreign banks to purchase goods and services necessary for project execution, capital equipment, startup services, maintenance, technical and engineering services, and similar needs, often guaranteed by insurance companies. The credit period typically ranges from one to three years, with repayment extending over five to fifteen years. Fainans can be categorized into two main types:
1. Buyer’s Credit Facility: In this arrangement, the financing contract is signed between a foreign and a domestic bank, with the latter guaranteeing repayment.
2. Line of Credit Facility: Here, the central bank contracts with a foreign bank, while domestic agent banks assume repayment responsibility.
In both methods, the credit is transferred to the foreign supplier’s account. The client repays the loan to the domestic agent bank, which then settles the debt with the foreign bank. Additional costs, such as management fees, commitment fees, and insurance premiums, must also be considered. These expenses, particularly in high-risk countries like Iran, can amount to 12–16% of the total financing value.
The legal process of fainans in Iran involves obtaining necessary permits and completing internal procedures, alongside interest payments, management fees, commitment fees, and insurance costs. This financing method is referenced in the Seventh Development Plan and budgetary laws, such as the 2023 and 2024 budgets (e.g., Clause "L" of Note 1, Clauses "J" and "Zh" of Note 7, and Clause "H" of Note 15). Additionally, Clause "Z" of Note 3 in the 2022 budget and Clause "V" of Note 3 in the 2023 budget mandate Sharia compliance in foreign financing contracts.
Methodology: This study employed a library research method to analyze the operational process of fainans. The second section adopted a descriptive-analytical approach to examine its jurisprudential implications, while the third section used ijtihadi (jurisprudential) analysis to propose Islamic alternatives to conventional fainans.
Findings: Despite existing economic and legal studies on fainans, few address its Sharia compliance. This paper fills that gap by analyzing its jurisprudential dimensions and proposing Sharia-compliant frameworks. Key findings include:
* Conventional fainans, based on interest-bearing loans (riba), violates Islamic principles.
* Additional fees charged by central and agent banks constitute unlawful gain (akl mal bil-batil).
Discussion and Conclusion: Given the Sharia prohibition of conventional fainans, this paper proposes three Islamic alternatives:
1. Agency-Based Murabaha (Murābaḥah Wikālati): The central bank negotiates with foreign entities, while domestic agent banks guarantee repayment. The client purchases goods/services on deferred payment terms.
2. Agency-Based Ju’alah (Juʿālah Wikālati): Similar to Murabaha but framed as a service contract (ujrah), where the foreign bank acts as a contractor.
3. Debt Discounting (Tanzīl al-Dayn): The foreign bank discounts the supplier’s receivables, with the client repaying the principal at maturity.
Among these, agency-based Murabaha is the most viable due to its international acceptance. However, if foreign banks refuse cooperation and external financing remains indispensable, the Islamic government may permit fainans under maslahah (public interest), as determined by the Expediency Discernment Council.
Policy Recommendations
* Strengthen legal and operational frameworks for Islamic financing.
* Clarify the roles of the central bank and agent banks in Sharia-compliant contracts.
* Enhance transparency in international agreements to align with Islamic principles.
Acknowledgments: The authors extend gratitude to the journal editors and reviewers for their valuable feedback.
Conflict of Interest: The authors declare no conflicts of interest.
Keywords
