REGULATION AND CONTROL OF COMMERCIAL BANKS IN IRAN

3.2 REGULATION AND CONTROL OF COMMERCIAL BANKS IN IRAN

The legal framework for the functioning of the Islamic banking system in Iran is provided by the Law for Usury (interest) Free Banking 1983 which was ratified by the Islamic Consultative Assembly (Iranian Parliament) and approved by the Council of Protectors. While in Pakistan, the existing rules and regulations were legislated and modified, usually by executive orders to suit the requirements of Islamic banking, in Iran, completely new laws were enforced. Thus, banking institutions in Iran were completely overhauled after the Islamic Revolution of 1979. The law out- lines the objectives and duties of the banking system, and the methods of the mobilization of its resources and provides for central bank and the conduct of its monetary policy.

The central Bank of Iran is called Bunk Markazi Jomhouri Islami Iran (BMJII),

i.e. the Central Bank of the Islamic Republic of Iran. According to Article 21 of the Law of Usury Free Banking, the BMJII is not authorized to engage in banking oper- ations which involve usury (interest). Similarly, commercial banks are also not sup- posed to indulge in such activities among themselves. The BMJII is empowered by Articles 19 and 20 of the Law to supervise monetary and banking activities by using the following instruments:

" Fixing a minimum and/or maximum ratio of profit for commercial banks in their joint venture and Mudarabah activities. These ratio may vary for dif- ferent fields of activities.

ii. Designation of various fields for investment and partnership within the framework of the approved economic polices, and the fixing of a minimum prospective rate of profit for the various investment and partnership pro- jects; the minimum prospective rate of profit may vary with respect to dif- ferent branches of activity.

iii. Fixing a minimum and maximum margin of profit, as a proportion to the cost price of the goods transacted, for banks in installment and hire purch- ase transactions.

iv. Determination of the types and the minimum and maximum amounts of commissions for banking services, provided that they do not exceed the expense of service rendered and the fees charged for putting to use the deposits received by the banks.

v. Determination of the types, amounts, minimum and maximum bonuses to different kind of deposits.

vi. Determination of the minimum and maximum ratio in joint venture, Mudarabah, investment, hire purchase, installment transactions, buying and selling on credit, forward deals, Muzara'ah, Musaqat, Joa'alah, and Qard Hasan for banks or any thereof with respect to various fields of activity; also fixing the maximum facility that can be granted to each customer." [Article 20 of the Law for Usury Free Banking.)

The Islamic Republic of Iran has also enforced various regulations pertaining to the functions and activities of the BMJII which have been made for designing and implementing the money and credit policies of the country in consonance with gen- eral economic policies. In order to achieve the goals of economic and money and credit policies, the BMJII is empowered by Article 3 of the regulation relating to Chapter 4 of the law for Usury Free Banking to supervise the commercial banking system. The BMJII has been accorded the necessary powers to determine (a) the legal reserve requirement for various types of bank deposits; (b) the various fields of investment and partnership; (c) the minimum and/or maximum share of profit for banks in Mudarabah and Musharakah; (d) the minimum and maximum expected rate of return to commercial banks from various facilities; (e) the minimum ratio of liquid assets to asset liabilities; (f) the maximum amount of credit facility granted to each client whether a real or a legal person; (g) the ratio of credit facilities granted by each bank to that bank's capital. [Regulation Relating to Chapter 4 of the Law for Usury Free Banking.]