Introduction

Islamic banking is more developed in the Gulf region than anywhere else in the world. Although there is much information and writings on Islamic banking on the Arab side of the Gulf, much less is available on the workings of the Islamic banking system in Iran. The aim here is to examine the very different approaches taken by Iran and its Gulf Arab neighbors to Islamic banking. The political factors that determined these different approaches will be analyzed and their implications explored.

Consideration will also be given to what has been the more successful approach, which inevitably raises the issue of how success is measured in a political economy context. Measuring Islamic bank assets or deposits provides a quantitative indication of relative size, but of greater significance is the dissemination of ideas and the building of international alliances. The outward globalist approach of Islamic bankers in the Gulf Cooperation Council (GCC) countries contrasts with the inward-looking, more nationalistic approach in Iran. In particular, the marketdriven, competitive model of Islamic banks in the GCC contrasts with the statist model of Iran where it is the role of government which is crucial. Ultimately the future of Islamic banking in Iran will depend on the resilience of the Islamic Republic, whereas in the GCC arguably it is a bottom up phenomenon with much popular support which governments cannot ignore irrespective of political factors. In other words, in the GCC, Islamic banking is primarily seen as a business, whereas in Iran, politics has determined developments and will continue to do so.

1. Iran's Islamic Banking Law

Legal, regulatory and sharia compliance systems are also very different on the Iranian and GCC sides of the Gulf. Islamic banking in Iran is governed by a law enacted in 1983, but there are no Islamic banking laws in the GCC apart from some limited and belated provisions in the United Arab Emirates (UAE), and in the case of Kuwait, amendments to the banking legislation with new sections introduced to cover Islamic banking. For the other GCC states, it is at the regulatory level that provision is made for the particular requirements of Islamic banks.