The Method of Allocating Joint Profits from Non-Performing Loans in Interest-Free Banking

Articles in Press

Document Type : Research Paper

Author

Faculty of Economics, University of Tehran, Tehran, Iran.

10.22059/jte.2025.400819.1009029

Abstract

The allocation method of banking operations profit constitutes one of the most significant differences between interest-free banking and conventional banking. The framework for this allocation is defined in the Law on Interest-Free Banking Operations, the executive bylaw of Chapter II of the Law, and ultimately, in the Instruction on the Allocation of Joint Revenues of banks approved by the Money and Credit Council. This article, after explaining the model envisaged by the legislator and its developments in the aforementioned regulations, first seeks to demonstrate that, according to the Law on Interest-Free Banking Operations and the standards of Islamic banking (AAOIFI), profits arising from non-performing loans (including provisions and revenues from penalty charges) must be classified as joint profits, while the Central Bank’s instruction classifies provisions as non-joint. In the next step, based on financial statement data published by banks, the financial scale of including provisions for doubtful receivables as joint revenues are identified, and the adjusted final profit is compared with the commonly reported final profit in Iran’s banking network. Another finding extracted from the review of financial statements is that, in all years under study since 1397, the administrative profit rate determined by the Central Bank has been the only factor in the profit paid to depositors, rather than the realized joint revenues or costs of banks.

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Journal of Economic Research (Tahghighat- E- Eghtesadi)

Articles in Press, Accepted Manuscript
Available Online from 29 October 2025

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History

  • Receive Date: 17 August 2025
  • Revise Date: 13 October 2025
  • Accept Date: 29 October 2025

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