Why Is Trading Prohibited in Banking Institutions?

Examining the Challenges, Misconceptions, and Presenting an Alternative Model for Using Non-Deposit Resources in Low-Risk Trading Activities

Abstract

This article examines the theoretical, legal, and institutional foundations behind the prohibition of trading activities within banking institutions. It highlights the structural conflict between the primary role of banks as financial intermediaries and the inherently risky and volatile nature of market trading activities.

Banks are built upon principles such as maintaining liquidity, protecting public deposits, managing short-term obligations, and preserving financial stability. In contrast, trading activities are based on accepting market fluctuations and the possibility of financial losses. The involvement of banks in direct trading operations can increase liquidity risk, amplify systemic risk, create conflicts of interest, and weaken public confidence in the banking system.

Furthermore, within Iran’s legal and regulatory framework, legal restrictions and Sharia-related considerations also emphasize the limitation or prohibition of such activities.

Ultimately, this article proposes that instead of allowing banks to directly engage in trading markets, independent and specialized entities should be established using non-deposit-based capital, professional management structures, and strict risk management frameworks. Such a model can preserve banking stability while enabling controlled access to market opportunities.

Chapter One

The Nature of Banking and Why Trading Is Restricted in Banks

Understanding the Fundamental Role of Banks in the Financial System

Understanding why banking institutions are restricted from engaging in trading activities requires a precise examination of the role and position of banks within the broader financial and monetary framework of an economy.

A bank is not merely a private enterprise or a profit-driven financial intermediary. Rather, it is an institution that performs a public function, carries systemic importance, and plays a fundamental role in maintaining monetary stability, credit flow, and financial security.

For this reason, the operational logic of banks is fundamentally different from that of investment firms, asset management companies, or market participants who actively engage in short-term financial transactions. The limitations imposed on banks regarding trading activities originate from this essential difference in their nature and responsibilities.

The Role of Banks as Financial Intermediaries

Within monetary and financial economics, banks are considered among the most significant financial intermediary institutions. Their primary role is to transform short-term liquid resources into medium- and long-term financial assets, facilitate the movement of capital, collect savings, and distribute credit across different sectors of the economy.

Therefore, banks are not simply institutions designed to hold deposits. They represent critical components of the financial system, supporting monetary policy transmission, liquidity management, and the financing of economic activities.

From this perspective, the stability of banking institutions extends beyond the boundaries of the individual organization. It represents a broader public and systemic concern, as disruptions within the banking sector can generate widespread consequences throughout the entire economy.

The Three Fundamental Functions of Banks

To better understand this distinction, the primary responsibilities of banks can be divided into three fundamental categories:

Resource Mobilization
Payment and Settlement Services
Credit Allocation

Each of these functions requires a high degree of prudence, predictability, and effective risk management.

These very requirements explain why speculative trading activities are fundamentally inconsistent with the traditional operating model of banking institutions.

Deposits and the Principle of Institutional Trust

The first fundamental function of banks is the mobilization of financial resources through public deposits.

Individuals, businesses, and public institutions place their funds with banks based on the expectation of security, accessibility, and preservation of their assets.

Unlike investments in capital markets—where investors generally accept a certain level of risk and exposure to price fluctuations—bank deposits are built upon expectations of stability, reliability, and trust.

In practice, the relationship between depositors and banks is primarily based on institutional confidence.

From a social and economic perspective, banks have a fundamental responsibility to manage deposited funds in a manner that protects their value and ensures their availability whenever needed.

Therefore, allocating these resources toward activities characterized by high volatility, uncertain outcomes, and exposure to substantial gains or losses is inherently inconsistent with the core responsibilities and obligations of banking institutions.

The Role of Banks in Payment Systems and Financial Stability

The second fundamental function of banks is their role in the infrastructure of payments and settlements within an economy.

Banks are an essential component of national and financial payment systems. A significant share of economic activities—including salary payments, daily transactions, corporate settlements, and financial transfers—takes place through banking networks.

A deterioration in the financial condition of a bank is not merely an issue limited to its own balance sheet. Due to the interconnected nature of financial systems, it can disrupt or even impair the payment mechanisms of the broader economy.

Therefore, banks are required to continuously maintain adequate levels of liquidity, capital reserves, financial stability, and the ability to meet short-term obligations.

Short-term and speculative trading activities can undermine these requirements by exposing financial assets to continuous market volatility and unpredictable price movements. Consequently, such activities may conflict with the systemic responsibility of banks to preserve the stability, reliability, and uninterrupted operation of payment systems.

The Role of Banks in Credit Allocation and Economic Development

The third fundamental function of banks is credit allocation and their role in directing accumulated savings toward financing the real economy.

Through lending activities, banks create a vital connection between society’s available financial resources and the funding requirements of businesses, production sectors, service providers, and consumers.

This function can only be performed effectively when banks maintain balance-sheet stability, possess strong credit risk assessment capabilities, and have the capacity to manage maturity mismatches between assets and liabilities.

Engaging in highly volatile trading activities can disrupt this balance by exposing a portion of a bank’s capital and resources to market fluctuations that are unrelated to its primary responsibility of supporting productive economic activity.

From this perspective, excessive involvement in trading can weaken the credit allocation function of banks and gradually shift the focus of financial resources away from long-term economic growth and productive investment toward short-term profit-seeking strategies.

Profitability in Banking: Quality Matters More Than Quantity

An important consideration is that within the banking sector, profitability is not evaluated solely based on the amount of profit generated. The quality, origin, and sustainability of that profit are equally significant factors.

Revenue generated through financial intermediation, lending activities, service fees, and regulated investment operations has a fundamentally different nature from profits obtained through speculative market trading.

Although trading profits may appear attractive over short periods, they can also be accompanied by substantial and unexpected losses.

Therefore, excessive dependence on trading income can make a bank’s profitability structure unstable and gradually transform its business model from that of a credit-based financial institution into that of a risk-oriented market participant.

Trading Activities and Their Fundamental Difference from Banking Operations

In contrast to this logic, trading activities operate according to a fundamentally different structure.

Trading is based on taking positions in financial markets, anticipating price movements, benefiting from market fluctuations, accepting temporary losses, and attempting to generate returns from short-term or medium-term movements in asset prices.

Within this environment, uncertainty is not an exception; rather, it is an inseparable component of the decision-making process. Even the most advanced analytical frameworks and risk management systems cannot eliminate the possibility of loss. They can only control the potential magnitude of losses or reduce their probability of occurrence, although certain modern trading methodologies have improved the ability to manage and limit such risks to some extent.

Therefore, accepting volatility and the possibility of loss is an inherent characteristic of trading activities. In contrast, the fundamental principle of banking is to avoid losses arising from market risks and to preserve the continuous financial health and stability of the balance sheet.

Theoretical Financial Perspective: Why Banking and Trading Follow Different Logics

From the perspective of financial theory, this structural incompatibility can also be explained.

Due to their liability-driven structure, banks generally have a lower tolerance for significant asset value fluctuations compared with many other financial institutions.

A substantial portion of a bank’s resources is obtained through liabilities owed to depositors, and these liabilities are typically short-term in nature and subject to withdrawal demands. Meanwhile, any loss on the asset side directly reduces the bank’s capital position.

When a bank engages in activities where asset values can decline rapidly, its capital adequacy ratio, liquidity position, and ability to meet financial obligations come under pressure.

This issue is commonly discussed in banking literature as vulnerability arising from maturity mismatches and high financial leverage.

In other words, because of their unique funding structure, banks are fundamentally not designed to face market volatility in the same manner as hedge funds or professional trading firms.

The Macroeconomic Consequences of Banking Instability

From a macroeconomic perspective, instability within the banking sector creates broader and amplified consequences.

A deterioration in banking stability can lead to declining public confidence, deposit withdrawals, reduced lending capacity, contagion effects across other financial institutions, and ultimately costly intervention by governments or central banks.

For this reason, financial regulators typically adopt a prudential approach when supervising banks and attempt to limit activities that may increase balance-sheet instability.

Therefore, restrictions or prohibitions on banking trading activities should be understood within this broader prudential framework, rather than being viewed merely as arbitrary administrative limitations.

The Regulatory Distinction Between Banks and Investment Institutions

From a legal and regulatory perspective, the distinction between banks and investment institutions is of fundamental importance.

In most financial systems, banking institutions are subject to stricter requirements regarding capital adequacy, liquidity management, risk control, information disclosure, and the types of assets they are permitted to hold.

This strict regulatory framework exists because banks benefit from a public privilege: the ability to collect deposits from the public and participate in the creation of credit.

Where a public privilege exists, a higher level of accountability and restriction naturally follows.

Accordingly, regulators do not allow banks to use their public position to participate in activities that are inherently associated with speculation, volatility, and uncertainty.

The Position of Trading Activities Within Iran’s Financial and Legal Framework

Within Iran’s financial and legal system, this issue is influenced not only by general banking principles but also by additional regulatory and structural considerations.

Some commonly used financial instruments in global markets—such as leveraged trading, certain complex derivatives, contracts based on price differences, and highly speculative financial structures—either lack a clearly established position within Iran’s legal and jurisprudential framework or face significant restrictions when involving banking institutions.

Even in cases where limited and controlled investment activities are permitted, such activities are fundamentally different from trading in its conventional sense.

What banks may undertake within regulatory boundaries is the allocation of a portion of their resources into permitted and controlled assets, not continuous, volatility-driven, risk-taking market speculation.

Conflict of Interest and Financial Governance Risks

From the perspective of financial governance, the issue of conflicts of interest is also highly significant.

Banks have access to extensive sensitive economic and financial information, including customer data, corporate cash flows, credit conditions, and movements of funds throughout the economy.

If such institutions become active participants in financial markets, the possibility of conflicts of interest, misuse of privileged information, distortion of resource allocation, and prioritization of trading interests over public interests may increase.

Therefore, restrictions on banking trading activities are not solely intended to protect the banks themselves; they also serve to protect market integrity, information fairness, and public trust.

The Functional Separation Between Banking and Trading

Based on this analysis, the restriction of trading activities within banks should not be viewed as an irrational limitation on profitability. Rather, it represents the principle of functional separation within the financial system.

In any efficient financial system, institutions must operate according to their nature, funding structure, and responsibilities.

A bank must remain a stable, low-risk, liquid, and reliable institution, while trading activities inherently involve exposure to volatility, potential losses, and uncertainty.

Although both activities may appear to pursue financial returns, their underlying logic, balance-sheet structure, decision-making horizon, and systemic consequences are fundamentally different.

The Future of Financial Systems: Separating Banking from Market Trading

Therefore, the fundamental question should not be why banks are restricted from engaging in trading activities.

The more important question is how financial systems can preserve banking discipline while organizing investment capabilities and asset management functions through independent, specialized, and non-deposit-taking institutions.

A scientific and sustainable approach requires a clear separation between banking and trading—one that protects financial stability while allowing professional market participants to benefit from investment opportunities within institutions specifically designed for such activities.

Key Reasons Why Trading Is Restricted in Banks

The main reasons behind the restriction of trading activities within banks can be summarized as follows:

1. The Incompatibility Between Banking and Market Volatility Risk

The primary role of a bank is to contribute to economic stability. Banks are institutions designed to preserve financial balance, manage liquidity, and support the continuity of economic activity.

Trading activities, even when conducted at a professional level, inherently generate exposure to market fluctuations. Volatility is a natural characteristic of trading, while stability is a fundamental requirement of banking operations.

For this reason, the speculative and fluctuating nature of trading is structurally inconsistent with the stabilizing role of banks.

2. Protection of Public Deposits

A significant portion of the resources managed by banks belongs to depositors.

Regulatory authorities do not allow banks to use public deposits for activities that carry a substantial possibility of financial loss, as these funds are entrusted to banks with the expectation of security, reliability, and availability.

Therefore, directing deposit-based resources toward high-risk trading activities contradicts the fundamental responsibility of banks toward depositors.

3. Prevention of Systemic Risk

Banks represent a major component of a country’s financial infrastructure.

If a large banking institution suffers significant losses from high-risk trading activities, the consequences may extend beyond that individual bank and potentially spread throughout the broader financial system.

Preventing such systemic risks is one of the central responsibilities of regulatory authorities and central banks.

4. Prevention of Conflicts of Interest

Banks have access to highly sensitive financial information, including customer behavior patterns, liquidity flows, account activities, transactions, and broader economic conditions.

If banks become active participants in trading markets, concerns may arise regarding the potential misuse of confidential information and the creation of unfair advantages.

Therefore, restricting trading activities within banks also serves to protect market integrity and equal access to information.

5. Legal and Regulatory Restrictions

The nature of certain financial instruments—such as leveraged transactions, derivatives, and contracts based on price differences—may face regulatory, legal, or religious considerations within Iran’s financial framework.

Banks, due to their public role and regulatory obligations, cannot engage in activities that operate within legally uncertain or controversial areas.

6. The Need for Accountability and Continuous Liquidity Management

Banks are required to maintain the ability to meet depositor obligations at all times.

Trading activities, by their very nature, involve uncertainty and unpredictable outcomes. Excessive involvement in such activities can negatively affect a bank’s liquidity position and its ability to fulfill short-term commitments.

Conclusion: Trading Restrictions as a Fundamental Principle of Banking

Therefore, restrictions on trading activities within banks are not temporary measures or isolated regulatory decisions.

They are rooted in the fundamental principles of banking, where stability, liquidity, public trust, and risk control take priority over short-term profit opportunities.

Chapter Two

The Key Question: What If the Source of Capital Is Not Depositors’ Money?

One of the arguments raised in discussions regarding banks’ involvement in trading activities is the following: if the capital used for trading does not originate from public deposits, but instead comes from sources such as oil revenues, government foreign exchange reserves, sovereign funds, or surplus public-sector assets, can trading restrictions on banks still be justified?

At first glance, this may appear to be a simple question. However, from an analytical perspective, it relates to the distinction between the source of funding and the institutional nature of the entity utilizing that funding.

A precise answer requires a clear separation between the ownership of resources, the function of the institution, organizational capacity, and the legal and regulatory framework governing the activity.

The Source of Funding Does Not Change the Nature of the Institution

The first point to consider is that the non-deposit nature of a resource, by itself, does not automatically authorize a bank to engage in trading activities.

In modern financial systems, regulators are concerned not only with the origin of resources but also with how those resources are allocated, the level of risk exposure involved, the compatibility of the activity with the institution’s mandate, and its potential systemic consequences.

A bank remains a bank even when it operates using resources obtained from sources other than public deposits. Therefore, it remains subject to the same prudential principles and functional limitations that govern banking activities.

In other words, changing the source of funding does not necessarily change the organizational identity of the institution.

If an entity has been designed, in terms of its mission, balance-sheet structure, and public responsibilities, to perform banking functions, entering high-risk trading activities does not alter its fundamental nature. It only changes the scope and location of the risks involved.

The Difference Between Ownership of Resources and Institutional Authority

At this stage, it is essential to distinguish between the ownership of resources and the institutional authority to utilize those resources.

An asset or financial resource may belong to the government, a sovereign wealth fund, or another public institution. However, this ownership alone does not grant a bank the authority to deploy those resources in highly volatile financial markets.

The use of public resources is not merely an issue of ownership; it is fundamentally a matter of governance, accountability, and institutional suitability.

Within financial law and governance principles, it is widely accepted that every public asset should be managed by an institution that possesses the appropriate mandate, expertise, tools, and supervisory mechanisms for that specific activity.

Therefore, if the objective is to conduct professional trading operations, the appropriate solution is to establish or utilize an institution specifically designed for that purpose, rather than temporarily redirecting a bank away from its core mission.

Institutional Advantage and the Importance of Functional Specialization

From the perspective of institutional economics, every organization possesses a specific institutional advantage.

Banks have advantages in areas such as:

Mobilizing financial resources
Creating credit
Facilitating payments
Performing financial intermediation

In contrast, investment funds, asset management companies, algorithmic trading firms, and specialized government investment arms possess advantages in areas such as:

Market analysis
Trade execution
Portfolio management
Advanced risk management

When an institution enters an area outside its core competence—especially one requiring different expertise, systems, and operational discipline—the probability of inefficiency increases.

Banks, due to their organizational structure, prudential regulations, decision-making horizons, and workforce specialization, are not primarily designed for active trading operations.

Therefore, even if their capital originates from non-deposit and public sources, the issue of institutional suitability remains unresolved.

Financial Resources Alone Do Not Create Trading Capability

Furthermore, professional trading requires advanced risk management infrastructure.

Professional trading is not merely the buying and selling of financial assets. It requires:

Clearly defined risk limits
Leverage control mechanisms
Stop-loss frameworks
Portfolio diversification strategies
Real-time volatility monitoring
Crisis scenario analysis
In many cases, quantitative and algorithmic models

Banks typically do not possess such infrastructure for continuous, active trading operations. And even when they do maintain advanced systems, those systems are generally designed to support balance-sheet management, liquidity management, and risk control—not speculative trading activities aimed at generating market-based returns.

Therefore, simply possessing financial resources does not mean possessing the institutional capability required for professional trading.

The Higher Sensitivity of Public Resources and the Need for Greater Accountability

Another important consideration is that public resources are subject to even greater regulatory sensitivity than private resources.

When capital belongs to the government or a public institution, society has a legitimate right to question, monitor, and evaluate how those resources are utilized.

If such resources are allocated to trading activities within a bank and losses occur, the consequence is not limited to a financial loss. It can also undermine public confidence in economic policymaking, institutional integrity, and the overall quality of financial governance.

Therefore, even when the source of capital does not consist of public deposits, fundamental questions regarding legitimacy, transparency, and accountability still remain.

In this context, the core issue goes beyond “who owns the money” and becomes a question of “which institution, with what mandate, and under what regulatory framework, should manage that capital.”

The Need for Structural Separation Between Banking and Investment Activities

For this reason, the appropriate response is not to prevent banks from engaging in all forms of financial activity. Rather, the solution lies in creating a clear structural separation between banking operations and investment activities.

If governments or public institutions intend to utilize non-deposit resources in financial markets, such activities should be conducted through independent, specialized, and non-banking entities.

These institutions should be designed from the outset for purposes such as:

Investment management
Market trading
Risk management
Performance accountability

Such structures may include dedicated investment funds, government-owned investment companies, asset management entities, or similar specialized organizations.

Through this approach, financial efficiency can be improved while ensuring that banks remain focused on their primary responsibilities.

The Importance of Functional Separation in Public Policy

From a public policy perspective, this separation becomes even more significant.

Because banks are deeply connected to payment systems and credit creation, any failure or mismanagement within a banking institution can generate consequences far greater than those associated with an ordinary investment company.

If a bank engages in trading activities—even with non-deposit capital—it may send a signal to the market that the institution is shifting toward the role of a speculative market participant.

Such a transformation can alter market expectations, influence depositor behavior, and weaken institutional trust in the banking system.

Therefore, the issue is not limited to direct financial losses. The behavioral, reputational, and systemic consequences of such a shift are equally important.

Chapter Three

Why Banks Do Not Directly Utilize Non-Deposit Resources for Trading Activities

Although it may initially appear that resources such as oil revenues, government foreign exchange assets, surplus funds held by certain funds, or public wealth could be allocated to banks for participation in financial markets, such an approach faces significant obstacles in practice and in terms of institutional design.

These obstacles are not merely financial; rather, they are structural, legal, operational, and strategic in nature.

The fundamental issue is not whether such resources exist, but whether a bank, as a banking institution, is the appropriate entity to utilize them for trading activities.

From an analytical perspective, the answer is negative, because banks are not designed for such activities in terms of their mission, operational tools, organizational structure, and regulatory framework.

1. Lack of Specialized and Risk-Oriented Trading Infrastructure

The first reason is the absence of specialized infrastructure designed for professional trading activities.

Professional trading requires a sophisticated framework that includes an independent risk management unit, an active investment committee, value-at-risk measurement models, position control systems, real-time monitoring platforms, and market analysis teams based on quantitative and behavioral approaches.

Commercial banks generally do not possess such structures for managing active and continuous trading positions.

Their decision-making systems are primarily designed for credit management, liquidity management, asset-liability maturity matching, and maintaining balance-sheet health—not for identifying and exploiting short-term market opportunities.

2. Incompatibility Between Banking Objectives and Trading Logic

The second reason is the fundamental incompatibility between the institutional mission of banks and the logic of trading.

A bank is a financial intermediary; its primary responsibility is to transform society’s available financial resources into credit and financial services.

Trading, in contrast, involves converting capital into market positions and accepting market risk in order to generate returns from price fluctuations.

From the perspective of organizational theory and institutional economics, these represent two fundamentally different missions.

When a bank enters active trading, it effectively shifts from the role of a financial intermediary to that of a direct market participant.

This is not merely an expansion of activities; rather, it represents a transformation of organizational function that requires a comprehensive redesign of:

Internal structures
Regulatory frameworks
Organizational culture
Accountability mechanisms

3. The Risk of Combining Public Assets with High-Risk Activities

The third reason concerns the potential consequences of combining public resources with high-risk activities.

Even if the resources provided to a bank are public resources that do not originate from deposits, directing them toward trading activities can still create significant economic and political consequences.

Banks are generally perceived by society as safe, conservative, and trustworthy institutions.

When such an institution becomes involved in risk-intensive operations, the boundary between traditional banking activities and speculative behavior becomes blurred.

As a result, society may begin to perceive the entire banking system as a risk-taking market participant.

This shift in perception increases the cost of maintaining public trust and can negatively affect long-term financial stability.

4. Accountability and Regulatory Supervision Challenges

The fourth reason relates to accountability and regulatory oversight.

Successful trading activities require a certain level of operational flexibility combined with specialized supervision.

However, banks operate under regulatory frameworks that primarily focus on:

Capital adequacy
Liquidity management
Credit quality
Compliance with prudential regulations

Entering the trading sector exposes banks to a new set of requirements that may not be compatible with their existing regulatory framework.

If this framework remains unchanged, the risk of mismanagement increases.

If the framework is fundamentally modified, the institution gradually moves away from its traditional banking identity.

Therefore, both approaches create significant challenges.

5. Lack of Comparative Advantage in Trading Markets

The fifth reason is the lack of a comparative advantage for banks in trading activities.

From an economic perspective, institutions should engage in activities where they possess a clear competitive advantage.

Banks have expertise and advantages in areas such as:

Financial financing
Payment processing
Account management
Credit creation

However, in trading markets, the advantage belongs to institutions specifically designed for:

Market analysis
Rapid trade execution
Portfolio management
Managing market volatility

If a bank enters an area where it lacks institutional expertise, expected returns may not necessarily increase, while the possibility of inefficient resource allocation becomes greater.

Conclusion: The Need for Institutional Separation

Based on this analysis, it can be concluded that even if financial resources are non-deposit-based, the direct use of such resources by banks for trading activities is not theoretically or practically justified.

The appropriate solution is to utilize these resources through independent and specialized institutions—entities whose mission, organizational structure, risk management systems, and accountability mechanisms are aligned with investment and trading activities.

Under this model, the bank remains a bank and continues to fulfill its primary responsibilities in maintaining financial stability and providing credit intermediation, while investment and trading activities are conducted through separate institutions specifically designed for such purposes.

6. The Supervisory Perspective of the Central Bank

Banks are required to maintain transparent, stable, and predictable balance sheets.

Trading activities introduce additional volatility into balance-sheet positions and reduce the level of transparency and supervisory control.

The central bank’s primary responsibility is to preserve financial stability and ensure effective risk management within the banking system. Therefore, activities that significantly increase uncertainty and market exposure are generally inconsistent with the prudential framework governing banks.

7. Legal Separation Between Banks and Investment Institutions

Within Iran’s financial structure, specialized entities such as portfolio management companies, investment banks, and investment funds have been established specifically for asset management and investment activities.

These institutions are designed to manage investment portfolios, allocate capital, analyze markets, and operate within a dedicated regulatory framework.

Banks cannot replace these institutions because their fundamental missions are different.

This separation is based on the principle of functional specialization: each institution should operate within the field for which it was created and equipped.

Chapter Four

A Practical Solution: Establishing Low-Risk Trading Funds Based on Non-Deposit Resources

After examining the nature of banks, their institutional limitations, and the reasons why banks cannot directly engage in trading activities, a more fundamental question arises:

If the use of non-deposit resources for financial activities is potentially possible, what type of structure can activate this capacity in an efficient, transparent, and low-risk manner?

The answer lies in appropriate institutional design.

In other words, the fundamental challenge is not the lack of financial resources or market opportunities, but rather the absence of a suitable organizational structure for professionally utilizing these resources.

The Role of Sovereign Investment Structures in Managing Public Wealth

In many advanced economies and even emerging markets, governments use specialized mechanisms to manage public assets, foreign exchange reserves, and natural resource revenues. In financial literature, these structures are commonly known as sovereign wealth funds (SWFs) or sovereign investment funds.

The purpose of such funds is not banking, but rather professional asset management and the creation of sustainable returns for the national economy.

Countries such as Norway, Singapore, the United Arab Emirates, and to some extent Saudi Arabia have developed versions of this model.

In these countries, revenues generated from natural resources, foreign exchange surpluses, or government-owned assets are organized through independent funds and managed by professional investment teams across various financial markets.

The key point in this model is that these funds operate independently from the banking system.

They do not collect deposits, they do not perform credit intermediation, and they are not responsible for maintaining payment systems.

This institutional independence allows them to operate according to investment and portfolio management principles without threatening banking stability or depositor confidence.

Designing an Iranian Model for Non-Deposit Investment Management

Within Iran’s economic environment, a localized version of such a structure could potentially be developed—one that respects legal, economic, and regulatory considerations while enabling the effective utilization of non-deposit resources.

Within this framework, the establishment of low-risk trading funds based on public resources can be proposed.

These funds could operate as professional vehicles for managing financial assets while remaining consistent with principles of prudential regulation and financial stability.

For such funds to operate effectively, their institutional design should be based on several fundamental principles.

1. Complete Independence from Deposit-Based Resources

The first principle is that the fund’s resources must be entirely non-deposit-based.

The most important feature of this structure is that it must have no dependence on public deposits.

The fund’s capital should be entirely sourced from assets that have an investment nature and do not carry immediate repayment obligations.

Such resources may include:

A portion of oil and gas export revenues
Retained earnings of state-owned companies
A portion of national development fund resources
Excess foreign exchange assets of the central bank
Certain unused government financial assets

Using these types of resources allows the fund to operate with a longer investment horizon and reasonable tolerance for market fluctuations, without facing obligations similar to those of banks toward depositors.

2. Strict Risk Management and Avoidance of High-Risk Trading

The second principle is strict risk management and avoiding excessive risk-taking.

Trading activities within these funds should not represent speculation or the acceptance of extreme market risks.

Instead, the operational framework should be based on low-risk, measurable, and non-leveraged investment strategies.

Within this structure:

Excessive leverage
Highly volatile trading activities
Positions with the potential for severe losses

should be strictly limited.

The fund’s activities could focus on strategies such as:

Diversified portfolio management
Hedging strategies
Investment in highly liquid assets
Controlled arbitrage opportunities

Such an approach ensures that the primary objective of the fund is not generating sudden and risky profits, but creating sustainable and predictable long-term returns.

3. Institutional Transparency and Continuous Reporting

The third principle is institutional transparency and continuous reporting.

One of the major weaknesses in public asset management in many economies is insufficient transparency regarding how resources are utilized.

To prevent such issues, the proposed fund should be designed from the beginning with precise reporting mechanisms.

Publishing monthly or quarterly reports regarding:

Investment performance
Profit and loss results
Risk exposure
Asset allocation
General investment strategies

can strengthen public confidence.

In addition, independent supervisory institutions and periodic audits can ensure that resources are managed according to defined objectives.

4. Professional and Independent Fund Management

The fourth principle is professional and independent management.

Global experience demonstrates that the success of sovereign investment funds largely depends on the quality of their management teams.

These funds should be managed by financial professionals with practical experience in:

Market analysis
Portfolio management
Risk control
Trade execution

Beyond technical expertise, professional independence is equally important.

Investment decisions should not be influenced by short-term political considerations or administrative pressures.

Therefore, the governance structure of the fund should include:

A specialized board of directors
An investment committee
An independent risk management department

Investment decisions should be based on professional analysis and objective frameworks.

5. Establishing a Comprehensive Risk Management Framework

The fifth principle is the existence of a precise risk management system.

Every professional trading fund should operate with a multi-layer risk management framework.

This framework may include:

Maximum permitted risk limits for each asset class
Restrictions on trading position sizes
Quantitative risk measurement models
Stress testing under crisis scenarios

Such mechanisms ensure that even during periods of extreme market volatility, potential losses remain within manageable limits.

6. Creating a Fair Mechanism for Distributing Fund Benefits

The sixth principle concerns establishing a fair mechanism for distributing the benefits generated by the fund.

One of the primary objectives of using public resources in such a structure is to create direct or indirect benefits for society.

Therefore, a transparent framework should be established for the utilization of fund profits.

These returns may be distributed through several models:

Direct distribution among citizens as a form of public income
Allocation toward lower-income groups or social support programs
Investment in national infrastructure, education, healthcare, or long-term development projects

The appropriate approach depends on national economic policies. However, the essential requirement is that the relationship between fund performance and public welfare must be clearly defined.

7. Complete Separation from the Banking System

The seventh principle is the complete separation of the fund from the banking system.

As discussed in previous chapters, one of the most important conditions for the success of this model is that the fund operates as an institution independent from banks.

Banks may provide certain financial services or infrastructure support to such funds when necessary. However, investment management and trading decisions must be conducted within a completely separate structure.

This institutional separation prevents market risks from transferring into the banking system and protects national financial stability from trading-related activities.

Conclusion: A Balanced Model for Managing Public Wealth

Overall, establishing trading funds based on non-deposit resources can provide a balanced solution between two important objectives:

On one hand, preserving the stability and traditional role of banking institutions; and on the other hand, intelligently utilizing financial market opportunities to improve the returns generated from public assets.

Such a model is consistent with principles of institutional economics, financial prudential regulation, and the experience of successful economies.

If properly designed and implemented, these funds could gradually become important instruments for national wealth management.

In this scenario, resources that previously remained unused or generated limited returns could enter the value creation cycle through a professional and transparent framework.

The ultimate outcome would not only be improved returns on public assets, but also stronger financial discipline, greater transparency, and a clearer connection between national resource management and the economic welfare of society.

Chapter Five

Strategic Advantages of Implementing the Low-Risk Trading Fund Model

Transferring trading activities from bank balance sheets to independent and specialized funds is not merely a technical adjustment; rather, it represents an institutional redesign that can generate broad and positive consequences for the national economy.

This chapter analyzes five key advantages of this model from the perspectives of macroeconomic stability and financial governance.

1. Creating a Sustainable Source of Income and Moving Beyond a Resource-Dependent Economy

One of the greatest challenges facing natural resource-dependent economies is the phenomenon of the resource curse and severe fluctuations in government revenues.

Implementing this model allows revenues generated from natural resources—such as oil, gas, and minerals—to be transformed into productive capital rather than being consumed through government current expenditures.

Analysis:
By converting physical assets into financial assets through professionally managed funds, a country’s revenue structure can gradually shift from an unstable and externally driven model—dependent on global commodity prices—toward a more sustainable and internally managed source of income.

This approach contributes to preserving national wealth for future generations while creating a financial buffer against international economic shocks.

2. Distributing Profits and Enhancing National Welfare Without Inflationary Effects

In traditional economic models, governments often rely on borrowing from central banks or money creation to finance budget deficits or implement social support programs. Such approaches directly contribute to inflation.

Analysis:
The returns generated by these funds originate from value creation in financial markets and efficient asset management, rather than from the creation of new money.

Since these returns are based on capital productivity, distributing them among different income groups or allocating them to national development projects does not increase the monetary base.

In practice, this model creates a non-inflationary mechanism for wealth redistribution that can strengthen society’s real purchasing power.

3. Increasing Efficiency and Returning Idle Capital to the Productive Cycle

Many national assets—such as unused land, surplus real estate, or inactive foreign exchange reserves—effectively represent idle capital that generates little or no economic value.

Analysis:
By converting these assets into liquid resources and directing them into professionally managed financial activities under low-risk principles, trading funds can significantly improve the productivity of national capital.

In economic theory, this process represents a transition from static allocation toward dynamic allocation, where each unit of public wealth is deployed in areas that generate the highest risk-adjusted returns.

4. Strengthening Financial Discipline and Institutional Transparency

Due to the complexity of bank balance sheets, financial institutions may sometimes have greater flexibility in reporting or absorbing trading-related losses within accounting structures.

Independent funds, however, operate with a more transparent framework.

Analysis:
Mandatory publication of regular performance reports and continuous supervision by regulatory institutions reduces the possibility of resource mismanagement.

This financial discipline not only limits corruption risks but also strengthens the institutional credibility of governments and financial systems among the public, domestic investors, and international stakeholders.

In this context, transparency functions as a public good that reduces systemic risk.

5. Developing Capital Markets and Creating Specialized Employment Opportunities for Financial Experts

Establishing such funds requires advanced human resources and technological infrastructure.

Analysis:
This model directly increases demand for specialized fields such as:

Financial engineering
Risk management
Data analysis
Algorithmic trading

By activating this ecosystem, financial professionals can contribute within a legal and nationally structured framework rather than seeking opportunities abroad or operating in informal markets.

This approach not only supports specialized employment creation but also contributes to the maturity, depth, and development of domestic capital markets.

Chapter Six

Challenges, Technical Requirements, and Conditions for the Success of the Model

Every financial framework, regardless of its profit potential, can become a source of risk if operational standards and governance principles are not properly implemented.

To ensure that trading funds do not deviate from their intended purpose, adherence to the following five conditions is essential.

1. Reforming the Legal Framework and Regulatory Structure

The first step is moving from a model of absolute prohibition toward a framework based on active supervision.

Explanation:
Lawmakers must establish a dedicated legal framework for these funds, in which the boundaries between permitted and prohibited activities are clearly defined.

These regulations should be designed in a way that provides professional managers with sufficient flexibility to operate effectively while preventing excessive risk-taking beyond defined limits.

Without a clear and comprehensive legal foundation, such funds may become vulnerable to inconsistent interpretations, administrative interference, and regulatory uncertainty.

2. Establishing a Complete Firewall and Separation from the Banking System

The greatest systemic threat is the possibility of contagion risk transferring from these funds to banks.

Explanation:
A strict legal and financial firewall must exist between the fund’s balance sheet and the balance sheets of banking institutions.

The fund should not be permitted to obtain financing from banks or purchase distressed and problematic bank assets.

This complete separation ensures that even if the fund experiences losses during certain market conditions, those losses cannot directly spread to public deposits, bank liquidity, or the broader monetary stability of the country.

3. Implementing a Standardized and Quantitative Risk Management System

Risk management within these funds should not rely on traditional or subjective approaches; instead, it must be based on advanced quantitative models.

Explanation:
The use of indicators such as Value at Risk (VaR) to estimate potential maximum losses within a specific time horizon, conducting stress tests to evaluate the fund’s resilience under severe market conditions, and controlling asset exposure concentration are essential technical requirements.

This means fund managers must have a precise understanding of:

The probability of potential losses
The possible magnitude of those losses
The maximum acceptable risk level

and must establish clearly defined risk limits and stop-loss mechanisms accordingly.

4. Maximum Transparency and Social Oversight

Experience has shown that large-scale national financial projects without public oversight are vulnerable to inefficiency and mismanagement.

Explanation:
The fund should be required to disclose its general investment strategies—without revealing sensitive details that could be exploited by competitors—as well as its financial performance results.

Regulatory institutions, parliamentary representatives, and independent auditors should have access to sufficient and timely information regarding the fund’s operations.

Transparency in this context is not merely an optional feature; it is the fundamental mechanism required to ensure the long-term sustainability and credibility of the model.

5. Protecting Professional Independence and Specialized Management Teams

The greatest threat to sovereign investment funds is the politicization of investment decisions.

Explanation:
Investment and trading decisions must be based solely on market principles, professional analysis, and disciplined risk management.

Government intervention to support specific assets, or forcing the fund to purchase government bonds merely to compensate for budget deficits, can severely damage the fund’s effectiveness and ultimately lead to failure.

The governance structure of the fund must ensure that professional managers have sufficient independence and job security.

Their performance should be evaluated based on:

Risk-adjusted returns
Compliance with professional standards
Adherence to ethical investment principles

rather than short-term political objectives.

Conclusion: The Importance of Governance Before Capital Allocation

The success of low-risk trading funds depends not merely on the availability of financial resources, but on the quality of institutional design, regulatory discipline, and professional governance.

Without these foundations, even large amounts of capital can become a source of instability.

However, with a transparent legal framework, strict risk controls, institutional independence, and professional management, such funds can become effective tools for transforming public wealth into sustainable economic value.

Conclusion

The low-risk trading fund model represents a bridge between strict banking discipline and the dynamism of financial markets.

If the advantages discussed in Chapter Five are implemented alongside the requirements outlined in Chapter Six, Iran’s economy could witness the emergence of a new institutional framework capable of transforming dormant wealth into an engine for national prosperity.

The findings of this article demonstrate that the restriction of trading activities within banking institutions is not merely an administrative or regulatory limitation. Rather, it is rooted in the fundamental principles of banking and the necessity of preserving financial stability.

Banks are institutionally designed for managing deposits, providing credit, and facilitating financial transactions. Their involvement in trading activities can significantly alter the risk structure of these institutions.

Such a transformation may lead to consequences including:

Reduced liquidity capacity
Increased exposure to financial losses
Erosion of depositor confidence
Transmission of risk throughout the broader financial system

On the other hand, even when certain financial resources are non-deposit-based, the legal and institutional nature of banks does not necessarily make them suitable entities for trading activities. The source of funding alone does not provide sufficient justification for changing the fundamental function of a banking institution.

Accordingly, the central conclusion of this article is that banks should remain separated from trading and speculative activities. Any investment or market-based operations should instead be conducted through independent, specialized, transparent institutions that operate separately from banking balance sheets.

This institutional separation preserves banking stability while simultaneously allowing controlled and professional access to the opportunities offered by financial markets.

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