3.2 REGULATION AND CONTROL OF COMMERCIAL BANKS IN IRAN

1. 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.) 32