Assessment of Deficiencies in the Central Bank’s Supervision of Qard-al-Hasanah Institutions and Strategies for Improvement

Authors

1 . PhD Candidate in International Oil and Gas Contract Management, Imam Sadiq University, Tehran, Iran.

2 . PhD Candidate in Banking, Imam Sadiq University, Tehran, Iran.

3 Assistant Professor, Department of Finance, Faculty of Islamic Studies and Management, Imam Sadiq University, Tehran, Iran

Abstract

Extended Abstract
 
Introduction and Objectives: The Central Bank of the Islamic Republic of Iran (CBI), according to the 2023 Act, is mandated to prevent violations by “supervised persons” and penalize offenders. “Supervised persons” encompass all credit institutions, Qard-al-Hasanah funds, credit cooperatives, leasing companies, currency exchange houses, asset management companies, credit rating agencies serving banks, and other entities engaged in banking operations or providing financial services. Consequently, the CBI bears the responsibility of supervising Qard-al-Hasanah funds, Qard-al-Hasanah banks, and commercial banks that mobilize or allocate resources via Qard-al-Hasanah instruments.
This study examines the CBI’s performance in its supervisory role over Qard-al-Hasanah institutions to identify legal violations, operational gaps, and structural deficiencies. The research addresses two central questions: (1) What are the challenges faced by the Central Bank in supervising Qard-al-Hasanah-related institutions? and (2) What strategies can enhance the CBI’s supervisory effectiveness and promote the optimal use of Qard-al-Hasanah resources?
Method: This research employs thematic analysis of qualitative data collected from 20 experts in Qard-al-Hasanah and Central Bank operations. Interviews were transcribed, producing 247 primary statements, which were consolidated into 116 basic themes. Further analysis yielded 39 organizing themes, which were synthesized into 5 overarching global themes. A thematic network was then developed to systematically map supervisory challenges and associated solutions. Although the primary focus was identifying the deficiencies in CBI oversight, the interviews also revealed potential strategies for addressing these challenges, allowing the study to propose actionable improvements alongside problem identification.
Results: The analysis reveals five main categories of supervisory deficiencies:
1. General supervisory challenges: Lack of strategic goal-setting for Qard-al-Hasanah, limited incentives for institutions and depositors, and weak culture-building, education, and awareness campaigns.
2. Challenges within the Islamic Economics Organization: Non-transparent information dissemination, absence of a professional supervisory framework, and unclear supervisory responsibilities, resulting in accountability gaps.
3. Qard-al-Hasanah fund challenges: Absence of an independent and integrated supervisory authority, inadequate vetting of fund managers, and lack of a standardized performance monitoring framework.
4. Qard-al-Hasanah bank challenges: Misalignment with contemporary economic requirements, restrictive ceilings on facilities, and difficulties in participating in the interbank market.
 
5. Banking network challenges: Resource diversion due to imposition of Qard-al-Hasanah obligations, lack of transparency, and weaknesses in CBI oversight, reducing efficiency and effectiveness.
These deficiencies indicate a pressing need for comprehensive reforms in supervisory policies, managerial approaches, and operational strategies to improve oversight and enhance the efficacy of Qard-al-Hasanah instruments as tools for Islamic microfinance.
Discussion and Conclusion: The study concludes that structural, legal, and operational deficiencies have hindered the CBI’s capacity to supervise Qard-al-Hasanah institutions effectively. Key issues include the absence of prioritization in supervisory policies, lack of an effective incentive system, fragmentation in fund management, uniform treatment of Qard-al-Hasanah banks and conventional commercial banks, and insufficient transparency and accountability within the Islamic Economics Organization. These deficiencies have constrained Qard-al-Hasanah’s ability to achieve its microfinance objectives fully.
To address these gaps, the study proposes several strategies: reforming the supervisory framework, enhancing transparency, introducing material and spiritual incentives, and separating Qard-al-Hasanah activities from general banking operations. Establishing specialized supervisory bodies, promoting the development of Qard-al-Hasanah banks, issuing Qard-al-Hasanah bonds in financial markets, and formulating transparent operational instructions are essential measures. Furthermore, culture-building, public education, and targeted awareness campaigns can foster civic participation and institutionalize Qard-al-Hasanah practices in society.
In conclusion, achieving an efficient and sustainable supervisory system for Qard-al-Hasanah requires a balanced approach that integrates regulatory rigor, operational transparency, and incentive-driven engagement, thereby enabling the Central Bank to promote responsible microfinance and support social and economic development objectives.

Keywords

References

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