Chapter

APPENDIX

Author(s):
Abbas Mirakhor, and Zubair Iqbal
Published Date:
March 1987
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Laws and Regulations Governing Islamic Banking in the Islamic Republic of Iran and in Pakistan

Islamic Republic of Iran

1. The Law for Usury- (Interest) Free Banking (August 1983)1

Chapter I Objectives and Duties of the Banking System in the Islamic Republic of Iran

Article 1

The Objectives of Banking System:

(1) The establishment of a monetary and credit system based on rightness and justice (as delineated by Islamic jurisprudence) for the purpose of regulating the sound circulation of money and credit to enhance the health and growth of the country’s economy.

(2) Availing itself of monetary and credit mechanisms, to engage in activities conducive to the attainment of the economic goals, policies and plans of the Government of the Islamic Republic.

(3) Creation of necessary facilities for the extension of cooperation and Gharz-al-hasaneh among the general public through the attraction and absorption of surplus funds, reserves, savings and deposits, and the mobilization thereof in provision of conditions and opportunities for gainful employment and investments, as stipulated in Clauses (2) and (9), Article (43) of the Constitution.

(4) Maintenance of the currency value and equilibrium in the balance of payments and facilitating the commercial exchanges.

(5) Facilitating payments and receipts, exchanges, transactions and other services to be performed by the banks, as determined by the Law.

Article 2

Duties of the Banking System:

(1) Issuance of notes and coins as legal tender, in conformity with the Law and regulations.

(2) Regulating, controlling and guidance of the circulation of money and credit, in accordance with the Law and regulations.

(3) Performance of all banking operations in foreign exchange and local currency, and undertaking or guaranteeing the foreign exchange payments of the Government, according to the Law and regulations.

(4) Supervision of transactions in gold and foreign exchange and the inflow or outflow of Iranian currency and foreign exchange, and the formulation of regulations governing thereof, in accordance with the Law.

(5) Performance of operations relating to valuable papers and documents according to the Law and regulations.

(6) Carrying out the monetary and credit policies, in accordance with the Law and regulations.

(7) Banking operations related to those parts of the approved economic plans which are to be conducted through the monetary and credit system.

(8) Opening of various Gharz-al-hasaneh (current and savings) accounts and accepting term investment deposits and issuance of relevant certificates, as required by the Law and regulations.

(9) Granting of loans and credits free of interest charges in accordance with the Law and regulations.

(10) Granting of loans and credits and provision of other banking services to the legally established cooperatives, for the realization of the provisions of Clause (2), Article (43) of the Constitution.

(11) Conducting transactions in gold and silver and holding and management of foreign exchange and gold reserves, with due observance of the relevant Law and regulations.

(12) Holding the Rial balances of international monetary and financial institutions or similar organizations and/or their affiliates, according to the Law and regulations.

(13) Entering into payments arrangements in order to effect monetary, trade and transit agreements concluded between the Government and other countries in accordance with the Law and regulations.

(14) Accepting and holding in trust of gold, silver, valuables, securities and official documents for real or legal persons and leasing of safe-deposit boxes.

(15) Issuance, confirmation and acceptance of Rial or foreign exchange guarantees for customers.

(16) Performance of the services of attorney or guardian, in accordance with the Law and regulations.

Chapter II Mobilization of Monetary Resources

Article 3

Banks are authorized to accept deposits under each of the following titles:

(A) Gharz-al-hasaneh Deposits.

  • 1 — Current

  • 2 — Saving

(B) Term Investment Deposits.

Note: Term investment deposits, for the utilization of which the bank enjoys the power of attorney, shall be used in joint venture, Mozarebeh, hire-purchase, installment transaction, Mozara-ah, Mosaqat, direct investment, forward dealings and Joaalah transactions.

Article 4

Banks are obliged to repay the principals of Gharz-al-hasaneh (saving and current) deposits and may undertake and/or insure the principals of the term investment deposits.

Article 5

Based on signed agreement, proceeds derived from activities stipulated in Note of Article (3) of this Law shall, in proportion to the term and the amounts of investment deposits and the bank’s resources as a proportion to the aggregate resources used in such activities, be apportioned.

Article 6

In order to attract and mobilize deposits, the banks may, through promotional methods, give the following awards to the depositors:

(A) Non-fixed bonuses in cash or in kind to Gharz-al-hasaneh deposits.

(B) Exempting the depositors from, or granting discounts thereto, in payment of commissions and/or fees.

(C) According priority to depositors in the use of banking facilities as specified in Chapter III.

Chapter III Banking Facilities

Article 7

In order to bring about the necessary conditions for the expansion of the activities of various productive, commercial and services sectors, the banks may, on the basis of partnership, provide a portion of the capital and/or resources required by these sectors.

Article 8

The banks may directly invest in productive and development projects or activities. Plans for such investments should be included in the State Annual Budget Bill to be approved by Majlis Shoaraye Eslami [The Islamic Consultative Assembly] and evaluation of the project should be indicative of no loss.

Note: The banks are by no means entitled to invest in the production of luxury and non-essential consumer goods.

Article 9

In order to provide facilities required for the expansion of commercial activities, the banks may, within the framework of the commercial policies of the government, put the necessary financial resources at the disposal of the customers on the basis of Mozarebeh, according priority to the legally established cooperatives.

Note: The banks shall not enter into Mozarebeh with the private sector for imports.

Article 10

For the purpose of providing facilities necessary for the expansion of housing activities, the banks may, in coordination with the Ministry of Housing and Town Planning, construct low-priced residential units for sale on installment or hire-purchase.

Note: The banks are authorized to acquire land for the construction of low-priced residential units subject to Article (10), provided that they duly observe the Law Governing Lands Within City Limits.

Article 11

In order to create conditions necessary for the expansion of activities in industry, mining, agriculture and services, the banks are empowered, upon the request of the customer and his undertaking for the purchase, consumption and/or direct use of goods or commodity thus requested, to purchase movable property, and to sell them to the customer, on secured basis, on installment.

Article 12

In order to create the necessary facilities for the expansion of services, agriculture, industrial and mining activities, banks may purchase movable and immovable properties, at the request of the client and his under-taking to hire-purchase the same for his own use, and place them at the disposal of the client in accordance with hire-purchase arrangements.

Article 13

In order to create the conditions required for the provision of working capital needed by the productive units, the banks may engage in any of the following operations:

(A) Upon the request of the productive units and their undertaking for the purchase and utilization of the raw materials and the spare parts thus requested, to purchase raw materials and spare parts needed by productive units and to resell them to the said units on credit.

(B) Upon the request of the productive units, to purchase, on a forward basis, the easy-to-sell products of the said units.

Article 14

For the realization of the aims contained in Clauses (2) and (9) of Article (43) of the Constitution, the banks are obliged to earmark a portion of their resources, as Gharz-al-hasaneh, to the applicants. The procedures for enforcement of this Article shall be drawn up by the Central Bank and approved by the Council of Ministers.

Article 15

All agreements concluded in pursuance of Articles (9), (11), (12), (13), and (14) of the present Law, shall, under the contract to be signed between the parties concerned, be considered binding documents and shall be subject to the Rules governing Legal Documents.

Article 16

In order to provide the necessary conditions for the expansion of productive, commercial and services activities, banks may engage in Joaalah.

Article 17

The banks may assign on Mozara-ah or Mosaqat agricultural lands and/or orchards which are at their disposal or in their possession.

Chapter IV Bank Markazi Jomhouri Islami Iran (BMJII) and Monetary Policy

Article 18

Bank Markazi Iran which shall be called Bank Markazi Jomhouri Islami Iran shall with respect to the state-owned corporations, the shares of which are not fully owned by the Government, conduct only those operations sanctioned by this Law.

Article 19

Policy for credit and short-term (one year) facilities shall be adopted upon recommendation by the General Assembly and approval by the Council of Ministers, and policy for credit and five-year and long-term facilities shall be incorporated in bills for five-year and long-term development plans and submitted to The Islamic Consultative Assembly for ratification.

Article 20

For the proper functioning of the monetary and credit system, BMJII, under Rules to be approved by the Council of Ministers, is empowered on the strength of Article 19, to intervene in, and supervise, the monetary and banking activities through the following instruments:

(A) Fixing a minimum and/or maximum ratio of profit for banks in their joint venture and Mozarebeh activities; these ratios may vary for different fields of activity.

(B) Designation of various fields for investment and partnership within the framework of the approved economic policies, and the fixing of a minimum prospective rate of profit for the various investment and partnership projects; the minimum prospective rate of profit may vary with respect to different branches of activity.

(C) 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-purchase transactions.

(D) Determination of 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.

(E) Determination of the types, amounts, minimum and maximum bonuses subject of Article (6), and the establishment of guidelines for advertisement by banks in the cases referred to.

(F) Determination of the minimum and maximum ratio in joint venture, Mozarebeh, investment, hire-purchase, installment transactions, buying or selling on credit, forward deals, Mozara-ah, Mosaqat, Joaalah and Gharz-al-hasaneh for banks or any thereof with respect to various fields of activity; also fixing the maximum facility that can be granted to each customer.

Chapter V Miscellanea

Article 21

In its dealings with other banks, BMJII is not authorized to engage in banking operations which involve usury; nor are the banks among themselves.

Article 22

Upon authorization by BMJII, banks may engage in authorized banking operations with state-owned institutions, government-affiliated organizations and public corporations.

Article 23

The funds received as commissions and fees shall constitute the banks’ income and cannot be divided among the depositors.

Article 24

Exemption from commercial tax and/or tax exemptions granted by law to factories and productive enterprises shall also apply to banks when replacing them in matters of imports or ownership.

Article 25

The units in which the banks have made investments and/or hold a share shall be governed by the Commercial Code, unless they are subject to another law.

Article 26

Consequent to the ratification of this Act, all contravening laws and regulations shall be null and void and all the powers and duties stipulated in the Monetary and Banking Law and the Bill for the Administration of the Banks and the amendments thereto, but under the present Law have been delegated to other authorized entities, shall be divested from the previous authorities.

Article 27

With the recommendations by the Bank Markazi Jomhouri Islami Iran, the Ministry of Economic Affairs and Finance shall draw up the By-Laws under this Law and put it into effect following its approval by the Council of Ministers. The drafting and approval of the By-Laws shall not exceed a four-month period.

This Law, containing twenty-seven Articles and four Notes, was ratified by Majlis Shoaraye Eslami (The Islamic Consultative Assembly) in its session held on Tuesday, Eight Sharivar 1362 and approved by the Council of Protectors on 10/6/1362.

Akbar Hashemi

Speaker

Majlis Shoaraye Eslami

This is an unofficial translation of the original Farsi text which, in case of any dispute, shall be controlling.

2. Regulations Relating to the Law for Usury-Free Banking 1

(a) - Regulations Relating to the Mobilization of Monetary Resources (December 18, 1983)

Gharz-al-Hasaneh Deposits

Article 1

The banks accept Gharz-al-hasaneh deposits under the following titles:

a. Current

b. Savings

Article 2

The banks undertake and guarantee payment of the principal of Gharz-al-hasaneh deposits and are obliged to repay such principal on demand.

Article 3

In order to mobilize Gharz-al-hasaneh deposits, the banks may, at their discretion and without contractual obligation, grant to depositors one or more of the following rewards:

1. Non-fixed bonuses in cash or in kind.

2. Reduction or exemption from payment of commission for banking services.

3. Priority in the use of banking facilities.

The type, level, minimum and maximum of such rewards to be approved by the Money and Credit Council.

Article 4

Gharz-al-hasaneh deposits are considered as part of a “bank’s resources.”

Article 5

As of the date of enforcement of the Law, the banks are not authorized to accept funds of any kind for the credit of existing savings accounts. With the consent of the holders of existing savings accounts, the banks shall gradually convert such accounts into one of the deposit categories specified in Article 3 of the Law, before the end of the year 1363 [1984]. After the foregoing time limit, savings accounts which have not been converted into one of the new categories of accounts shall be deemed Gharz-al-hasaneh savings accounts.

Investment Term Deposits

Article 6

The banks accept investment term deposits as long-term and short-term investment deposits.

Article 7

The duration and other terms and conditions of short-term and long-term investment deposits, as well as the rewards specified under Article 6 of the Law for such deposits, are to be approved by the Money and Credit Council.

Article 8

The banks undertake or insure at their own expense the repayment of the principals of the investment term deposits.

Article 9

As “depositors’ resources,” investment term deposits shall be utilized by the banks, in their capacity as attorneys, in equity participation, Mozarebeh, hire-purchase, installment transaction, Mozaraah, Mosaghat, direct investment, forward delivery transaction (“Salaf”) and Joaalah.

Note: Subject to the relevant regulations, acceptance of investment term deposits for use in a specified project is authorized. The application of Article 8 to such deposits is conditional upon its incorporation in the respective contract.

Article 10

No profit at a predetermined figure may be paid on investment term deposits. The profits derived from operations which are the subject of Article 9 shall be divided between the bank and the depositors, as per the concluded agreement, inclusive of proxy, in proportion to the amount of such investment deposits, net of statutory reserve requirements, and the duration thereof; and the amount of Bank’s resources and the duration thereof, in relation to the total funds utilized in such operations.

Note 1: The Bank’s remuneration for acting as attorney in utilizing the investment deposits shall be deducted from the depositors’ share of profits. The minimum and maximum amount of such remuneration to be approved by the Money and Credit Council.

Note 2: In contracts between banks and depositors it is obligatory to stipulate the principle of compromise concerning sharing of profits, the undivided utilization of the deposit and the method of calculation and payment of profit.

Article 11

In providing the necessary resources for granting the facilities which are the subject of Article 9, the banks shall give priority to the utilization of “depositors’ resources.” In the event that the total amount of facilities granted, the subject of Article 9, is either less than, or, equal to the total volume of investment term deposits, net of statutory reserve requirements, then all of the profits, which are the subject of the said Article, shall be divided among such deposits. Should the total amount of facilities granted for such purposes exceed the total amount of such deposits, the balance shall constitute the share of bank’s resources.

Article 12

Renewal, at maturity, of the existing fixed deposits with the banks is not permitted under the same category. In any event, if fixed deposits, with maturities extending beyond the end of Esfand 1363,2 are not by the said date, with the consent of depositors, converted into one of the new categories, subject of Article 3 of the Law, such deposits shall be transferred into the Sundry Creditors Account. At the latest within one month after the maturity of those deposits which have not been converted into new categories, and also after the end of Esfand 1363 with respect to all those fixed deposits then existing which have been transferred to the Sundry Creditors Account, banks are obliged to notify the depositors in writing so that the position may be determined.

(b) Regulations Relating to the Granting of Banking Facilities (January 4, 1984)

General

Article 1

Banking facilities shall be granted in such a manner that the principal amount thereof as well as the expected profit thereon would, based on their respective projections, be capable of liquidation within a definite period of time.

Article 2

The criteria, for the determination of the rate of profit and/or the expected rate of return on the facilities granted by the banks, as well as the minimum and maximum rate of profit and/or the expected rate of return to be approved by the Money and Credit Council and endorsed by the Prime Minister.

Article 3

The criteria, for the determination of the period for which the facilities are granted by the banks and the manner of the liquidation of the principal together with the profit arising therefrom to be approved by the Money and Credit Council.

Article 4

The banks shall implement the necessary and adequate supervision over the good performance of the contracts entered into, which are the subject of these present Regulations, in respect of both the manner of utilization and of the facilities granted. The banking operations in respect of the facilities granted shall be centered at the bank granting the facilities, at its discretion, and as may be warranted in each case.

Article 5

The provision of facilities shall be contingent upon, if deemed necessary, receipt by the banks of a certain amount of funds as “Advance Deposit.” Determination of the cases when such “Advance Deposit” is necessary and the minimum amount thereof rests with the Money and Credit Council.

Article 6

At the banks’ discretion, granting of facilities shall be contingent upon receiving adequate security, as deemed necessary, to safeguard the banks’ interest and to ensure the good performance of the respective contracts.

Note: In cases where facilities granted are in connection with goods which, in the judgment of the banks, have exclusive or limited use, and/or because of installation and operation, their further use is not economically viable, the banks shall require additional securities for granting of such facilities.

Article 7

The banks shall, if necessary, arrange for insuring annually in the banks’ favor, the properties which are subjects of the facilities granted and/or the securities obtained in respect thereof, during the execution of the respective contracts for an amount at least equivalent to the outstanding balances due from the granting of such facilities.

Article 8

The granting of any one of the different types of facilities jointly by two banks or more to an individual or real persons or legal entities is authorized. In every case, the administration of such facilities shall be conducted by one bank, as chosen by the participating banks.

Article 9

All banking transactions connected with the facilities granted by banks are governed by the provisions of these Regulations and their relevant procedural instructions and shall, therefore, not be covered by the guidelines and regulations governing transactions pertaining to the banks’ own supply requirements.

Note 1: Transactions relating to properties acquired by the banks as a result of the facilities granted and/or constructed by the banks, shall also be covered by the Rules of this Article.

Note 2: The period of the transaction and the disposal value of the acquired properties shall, according to the case, be determined by the banks.

Article 10

Effective from the date of the Law coming into force, the granting of the banks’ new form of facilities shall be carried out based on the provisions of the Law for Usury-Free Banking and the Money and Banking Law, to the extent that it does not contravene the Law for Usury-Free Banking. With the consent of their customers, the banks are obliged to adjust, in the minimum time possible, the facilities granted previously, so as to conform with Islamic principles. In the event that adjustment of the banks’ previous transactions and contracts so as to conform with the new banking transactions prove to be impossible, such transactions and contracts shall remain in force until their expiry date.

Article 11

In drafting contracts connected with operations in Mozarebeh, installment transactions, hire-purchase, buying or selling on credit, forward delivery deals and Gharz-al-hasaneh, the banks are required to stipulate that on the basis of agreement reached, the said contracts are considered binding instruments and shall be governed by procedural Regulations relating to legal documents drawn and attested before Notaries Public.

Note: Those transactions which should be executed before a Notary Public, as required by laws and enacted regulations, shall continue to be so executed in conformity with the relevant procedures.

Article 12

In cases where the subject of the facilities granted involves the transfer of title to property, the banks are obliged to notify the customer of the cash value thereof, in accordance with the rules adopted by the Money and Credit Council.

Article 13

For the purpose of providing facilities necessary for expansion in the area of housing, the banks are empowered to engage in the construction of low-cost housing units.

Article 14

With due regard to the monetary policies, the subject of Article 20 of the Law, and in accord with the policy of the Ministry of Housing and Town Planning, Bank Markazi Jomhouri Islami Iran shall formulate annually the program for building low-cost housing units by banks and shall communicate such program to the banks for implementation.

I. Gharz-al-hasaneh

Article 15

Gharz-al-hasaneh is a contract in which one (the lender) of the two parties relinquishes a specified portion of his possessions to the other party (the borrower) which the borrower is obliged to return to the lender in kind or, where not possible, its cash value.

Article 16

In order to accomplish the objectives set out in Clauses (2) and (9) of Article 43 of the Constitution and so as to satisfy the basic needs of individuals, the banks, in accordance with the rules to be adopted by the Money and Credit Council and endorsed by the Prime Minister, shall set aside a part of their resources and provide Gharz-al-hasaneh for the following purposes:

(a) to provide equipment, tools and other necessary resources so as to enable the creation of employment, in the form of cooperative bodies, for those who lack the necessary means;

(b) to enable expansion in production, with particular emphasis on agricultural, livestock and industrial products;

(c) to meet essential needs.

Article 17

The expenses incurred in the provision of Gharz-al-hasaneh shall be, in each case, calculated on the basis of the directives issued by Bank Markazi Jomhouri Islami Iran and collected from the borrower.

II. Civil Partnership

Article 18

Civil partnership is based on the contribution of cash or non-cash capital by several real or legal persons to a common pool, on a contractual basis, for the purpose of making a profit.

Article 19

The banks shall undertake participation in civil partnership in order to provide the necessary facilities for productive, commercial and service activities. The object of partnership shall be specified.

Article 20

Civil partnership will be considered as formed and effective when, on the basis of the contract, the partners pay their cash share in the capital into a special account opened at a bank in the name of the partnership, and in the event that all or part of the share is non-cash, it should be transferred to the Director or Directors of the civil partnership, in accordance with the rules of civil partnership.

Note: The share contribution of the partners in the civil partnership may be effected in installments, as stipulated in the contract.

Article 21

Civil partnership shall dissolve and liquidate upon the accomplishment of the objectives of the partnership.

Article 22

In the contracts of civil partnership, the banks are required to stipulate that the Director or Directors of civil partnerships formed under these Regulations are not authorized to enter into transactions or to undertake financial commitments which exceed the combined total value of the cash capital paid into the account or non-cash capital transferred to the Director or Directors of the civil partnership. III. Legal Partnership.

III. Legal Partnership

Article 23

The purpose of legal partnership is to provide a part of the capital of new joint-stock companies or to purchase part of the shares of existing joint-stock companies.

Article 24

In order to provide the necessary facilities for the expansion of the activities of various productive, commercial and service sectors, the banks may provide part of the capital needed by joint-stock companies which are and/or will be established for such purposes.

Article 25

Prior to their engaging in participation, the banks are obliged to assess and evaluate the companies whose shares are the subject of acquisition and/or the projects proposed for partnership, from the technical financial and economic aspects, insofar as the banks require. The participation of any bank, by drawing on its own resources and the investment deposits, is permissible only if the result of such assessment and evaluation evidences that the partnership is not anticipated to suffer a loss.

Note: At the outset of the partnership, the minimum ratio of the capital of the companies in which the banks intend to participate to the total financial resources of such companies, shall be determined by Bank Markazi Jomhouri Islami Iran, if deemed necessary.

Article 26

The banks are authorized to sell the shares they hold in joint-stock companies.

Article 27

If deemed necessary, Bank Markazi Jomhouri Islami Iran may fix the ratio of participation, through the use of bank’s resources and investment deposits, by one or several banks, in a newly established joint-stock company as well as the ratio of shares purchased in existing joint-stock companies by one or several banks by drawing on the above-mentioned resources.

IV. Direct Investment

Article 28

Direct investment means the provision of capital by banks for the implementation of profit-making productive and development projects.

Note: The banks are not permitted to invest in the production of luxury or non-essential goods.

Article 29

The ratio of the capital to the total financial resources required for the implementation of a project, up to the point when it starts operation, should not be less than 40 percent.

Note: 100 percent of the fixed term investment required for the implementation of such projects must be provided in the form of long-term financial resources (whether from capital or other resources).

Article 30

Implementation of the projects which are the subject of Article 28 of the present Regulations is permissible through the establishment of joint-stock companies. The joint-stock companies which are established, independently of the banks, under these Regulations, shall be governed by their own Articles, rules and regulations.

Article 31

Prior to engaging in direct investment, the banks are obliged to assess and evaluate the proposed projects for investment from the economic, technical and financial aspects, insofar as the bank requires. Direct investment in such projects which require the use of the banks’ own resources and investment deposits is permitted only if the result of the assessment and evaluation of any project is financially justifiable. The minimum profitability (rate of return) of any project shall be determined by the Money and Credit Council.

Article 32

In conformity with the relevant directives, the banks are required to report to Bank Markazi Jomhouri Islami Iran their plans for allocation of funds for direct investment, in order that such plans may be submitted, together with the State Annual Budget Bill, to Majlis Shoaraye Islami (the Islamic Consultative Assembly).

Article 33

In co-ordination with the High Council of Banks, the banks may offer to the public for sale part or all of their shares in companies which have been established through direct investment, once the said companies start operation.

Article 34

The banks are required to have the accounts and financial operations of the companies governed by the rules of direct investment audited annually by the auditing forms certified by the Ministry of Economic Affairs and Finance.

Note: Bank Markazi Jomhouri Islami Iran may, if deemed necessary, inspect the banks’ direct investment operations.

Article 35

The banks are obliged to adjust their existing direct investments so as to comply with the provisions of these Regulations, no later than the end of the year 1365.

V. Mozarebeh

Article 36

Mozarebeh means a contract whereby one (the owner) of the two parties undertakes to provide capital (cash) on proviso that the other party (the agent) employs such capital in trade and that both parties share the resulting accrued profit.

Article 37

For the purpose of providing the facilities necessary for the expansion of commerce, the banks, as owners, may place the required cash capital (resources) at the disposal of the Agent, being either a real or legal person.

In providing such facilities, the banks shall give preference to the legally established co-operatives.

Article 38

The banks are not permitted to enter into Mozarebeh with the private sector for imports.

Article 39

The types of expenses acceptable in Mozarebeh shall be determined and declared by Bank Markazi Jomhouri Islami Iran.

VI. Forward Delivery Transactions

Article 40

Forward delivery transactions means the advance purchase for cash of products at a fixed price (with due observance of Shari’a religious laws).

Article 41

In order to provide the necessary facilities to raise working capital for the productive units, whether such units are owned by real or legal person, the banks may, solely on the request of such units, buy their products in advance of delivery.

Article 42

The banks are forbidden to sell the products so bought in advance before their date of delivery, unless the purchased products have been delivered to the bank before the date of delivery.

Article 43

The forward delivery purchase, under contract, by the banks of the products of the productive units is permitted only if such products:

(a) are produced by the applicant productive units;

(b) are not rapidly perishable (unless there exists the means of taking precautionary measures against spoilage during the period intervening between delivery and sale);

(c) are readily salable.

Note: The phrase “readily salable,” the subject of Clause (c), means that the banks, at the time of forward delivery purchase, should satisfy themselves that the products, the subject of the transaction, would be readily salable at the date of delivery.

Article 44

The forward price of the products purchased by the banks shall be fixed by taking into account the price-determining factors including the forecast of the sale price of the products at their delivery date as well as the banks’ own profits. In any event, the forward purchase price of products should not exceed their cash price at the time of transaction.

Article 45

In transactions involving forward delivery purchase of products, the banks are required to observe the following points and to incorporate them in the respective contracts:

(a) to identify the main specification of such products in such a manner that contributes to the determination of prices;

(b) to pay in full to the seller, at the time of transaction, the forward purchase price of the products bought forward;

(c) to specify the date of delivery;

(d) to specify the quantity, number, weight and other customary specifications of the products, the subject of the transaction;

(e) to specify the place of delivery of the products purchased forward.

Article 46

The banks are authorized to engage in forward delivery purchase of products only if the time for delivery of all the products to the bank (from the date of the transaction) is, at the most, equal to one production cycle, provided that in no circumstances does it exceed one year.

VII. Sale by Installment (Credit Sale) To Provide Working Capital for Productive Units

Article 47

Sale by installment means the surrender of a property by one party to another at a fixed price in such a manner that the whole or part of the said price will be received in equal or unequal installments at a specified future date or dates.

Article 48

In order to provide the necessary facilities to raise working capital for the productive units, the banks may buy the raw materials, spare parts, working tools and other initial requisites needed by such units, solely upon the written request of applicants and on their undertaking to buy and utilize the above-mentioned items; and to sell them, on installments, to such applicants. In estimating the requirements of the productive units, the volume of raw materials commensurate with the rate of production during one production cycle should be taken into consideration.

Article 49

The installment sale price of the goods, the subject of Article 48, shall be determined by taking into consideration their cost price as well as the bank’s profit.

Article 50

The period of collecting the value of the goods sold, the subject of Article 48, shall not exceed the duration of one production cycle or one year at the most.

Note: Where the sale by installment is intended to provide working capital for new productive projects, the respective bank shall decide, on an individual case basis, upon payment period exceeding one year.

VIII. Sale by Installment of the Means of Production, Machinery and Equipment

Article 51

The goods, the subject of this section, are the machinery and equipment with an effective life of more than one year according to a table to be drawn up by Bank Markazi Jomhouri Islami Iran.

Article 52

For the purpose of providing facilities for the expansion of activities in industry, mining, agriculture and services, the banks may purchase goods, the subject of Article 51, solely upon the written request of the applicants and their undertaking to purchase, consume and make direct use of such goods, and sell them to the applicants by installments.

Article 53

The installment sale price of the goods, the subject of Article 51, shall be determined according to their cost price as well as the bank’s profit.

Article 54

The period for collecting the value of the goods sold by installment, the subject of Article 51, shall not exceed the duration of the effective life of such goods as specified in the relevant table. The starting date of the productive operation, as determined by the bank, shall be regarded as the starting point for the purpose of calculation of the effective life.

IX. Sale by Installment—Housing

Article 55

The banks may sell by installment the housing units constructed, which are the subject of Article 13.

Article 56

The banks shall fix the sale price of the housing units on the basis of the cost price plus relevant expenses together with a reasonable profit for the bank.

Note 1: The rules governing the provision of facilities by the banks to those applying for the low-cost housing units constructed shall be adopted by the banks, on the basis of recommendations made by the Ministry of Housing and Town Planning and as approved by the Economic Council.

Note 2: In exceptional cases, as determined by the Prime Minister, the facilities required by the governmental organizations shall be provided by the use of the banks’ own resources.

X. Hire-Purchase

Article 57

Hire-purchase means a leasing contract wherein it is stipulated that the leaseholder, at the end of the period of the lease and upon fulfilling the conditions specified in the contract, will receive the title to the leased property.

Article 58

In order to provide the necessary facilities for the expansion of services, agricultural, industrial and mining activities, the banks may, as lessors, engage in hire-purchase transactions.

Article 59

Solely upon the written request of an applicant and his acceptance to undertake the hire-purchase for his personal use, the banks may purchase movable and immovable property for the purpose of providing the facilities set out in Article 58 and to place them at the disposal of the applicant by way of hire-purchase.

Article 60

The banks may sell the housing units constructed, which are the subject of Article 13, by way of hire-purchase.

Note 1: The banks are required to stipulate in the concluded contracts the obligation of the leaseholder to derive benefit from the hired goods, except in cases of emergency or force majeure, as determined by the banks.

Note 2: The rules governing the provision of facilities to those applying for the low-cost housing units constructed by the banks, shall be determined by the Economic Council.

Article 61

The period of hire-purchase shall not exceed the duration of the effective life of the properties, which are the subject of Articles 59 and 60. The starting date for the calculation of the effective life and the commencement of operations shall be determined by the bank.

Note: The banks are forbidden to engage in hire-purchase transactions in respect of properties with productive operation of less than two years.

Article 62

The amount of rent charged in respect of the properties purchased or housing units constructed, which are the subject of Article 13, shall be determined on the basis of the cost price, the period of the hire-purchase and a reasonable profit for the bank. In calculating the profit, allowance shall be made for the “payment on account” which is the subject of Article 63.

Article 63

The banks are required to obtain as “payment on account” at least 10 percent of the total cost as part of the rental over the period of the hire-purchase.

Article 64

In the hire-purchase contracts it should be stipulated that at the end of the hiring period and after the last payment of the rental, the ownership of the property will be transferred to the leaseholder, provided that the leaseholder has fulfilled the conditions specified in the contract.

Note: If, prior to the end of the hiring period, the leaseholder pays and settles in full the balance of the rentals remaining due, the banks are authorized to transfer to the leaseholder the ownership of the property, in addition to giving an appropriate discount on the balance of rentals remaining due.

Article 65

The banks are required to specify in the hire-purchase contract the cases for termination and the method of settling accounts.

XI. Joaalah

Article 66

In these Regulations, Joaalah means an undertaking by one party, called “Jael” or “Employer” to pay a specified sum of money or wages (Joal) according to the contract in return for a specific service being rendered. The party rendering the service is called “Amel” or “Contractor.”

Article 67

In order to provide the necessary facilities for the expansion of productive, commercial and services activities, the banks may engage by contract in Joaalah as Amel or, if deemed necessary, as Jael.

Article 68

Where a bank is the Amel in Joaalah, the bank’s authority to entrust to another party, under the title of secondary Joaalah or any other title, the performance of a part of a specific action shall be stipulated in the Joaalah contract. In such cases, the banks are required to supervise the operations involved, the manner of consumption and the payment of funds.

Note: Where the bank acts as Jael in Joaalah, the Amel is permitted, subject to the bank’s approval, to entrust to another party the performance of part of the service concerned.

Article 69

The responsibility for making initial preparations, procurement of materials, products and any other necessary equipment for performing the task can, by contract, be entrusted to Jael or Amel.

Article 70

In conformity with the regulations determined by the Money and Credit Council setting the minimum and/or maximum, the receipt of payment of part of the amount in the Joaalah contract, as “payment on account” and/or “advance payment,” is permitted.

XII. Mozaraah

Article 71

Mozaraah is a contract under which one (“Mozare”) of the two parties commits a particular plot of land for a specified period of time to another party (“Amel”) to cultivate and the harvest to be divided between Mozare and Amel.

Article 72

In order to increase the productivity and the production of agricultural products, the banks may, as Mozare, commit, by contract, to Mozaraah the arable lands which they own or the lands which in one way or another they are entitled to possess or utilize.

Note: In addition to land, the banks may, by contract, provide other necessary elements such as water, seeds, fertilizers, pesticides, implements and means of production and transportation.

Article 73

By taking into consideration the share of each party in the harvest, the banks may, if deemed necessary, pay a certain amount of money in cash to Amel during the production cycle.

XIII. Mosaghat

Article 74

Mosaghat means a transaction between the owner of trees or the like and Amel, in return for a specified amount of common share in the produce. Produce includes fruit, leaves, flowers and the like.

Article 75

In order to increase the productivity and the production of agricultural products, the banks may commit to Mosaghat the orchards or fruiters which they own and/or to which they are beneficially entitled and/or are in one way or another entitled to possess or utilize.

Note: The banks may, by contract, provide other necessary elements such as water, fertilizers, pesticides and the means of production and transportation.

Article 76

By taking into consideration the share of each party in the harvest, the banks may, if deemed necessary, pay a certain amount of money in cash to Amel during the production cycle.

(c) Regulations Relating to Chapter 4 of the Law for Usury-Free Banking (March 7, 1984)

Article 1

Based on the country’s general economic policies and priorities set, as well as taking into consideration its monetary situation, Bank Markazi Jomhouri Islami Iran shall formulate the general policy guidelines for credit and the provision of banking facilities, for the term of each plan, whether five years or longer, with due regard to their economic impact, so as to be submitted, subsequent to adoption by the Money and Credit Council, together with the bills on development plans, to Majlis Shoaraye Eslami for ratification.

Article 2

Based on the policies and priorities which are the subject of Article 1 of these Regulations, Bank Markazi Jomhouri Islami Iran shall formulate, with the approval of the Money and Credit Council, no later than the end of Aban of each year, a policy in respect of credit as well as a policy for the extension of short-term (one year) banking facilities for the following year, so as to be submitted to the General Assembly of Bank Markazi Jomhouri Islami Iran for proposal to the Council of Ministers for approval.

Article 3

For the effective implementation of the monetary and credit policies and the maintenance of currency value, Bank Markazi Jomhouri Islami Iran, in addition to using the instruments of monetary policy as outlined in the Monetary and Banking Law, to the extent that it shall not contravene the provisions of the Law for Usury-Free Banking, may intervene in, and supervise, the monetary and banking operations, with the approval of the Money and Credit Council, by availing itself of the following measures:

1. Determining the various fields for investment and partnership, with due regard to the economic policies approved by the Council of Ministers.

2. Determining the minimum projected rate of profit (return) for the purpose of selection of investments and/or partnership projects as well as stipulating the minimum and/or, if deemed necessary, the maximum projected rate of profit and/or the projected rate of return for other types of banking facilities.

3. Determining the minimum and/or maximum share of the profit for banks in Mozarabeh and in partnership.

4. The minimum and/or maximum ratios referred to in Clauses 2 and 3 above may differ in various fields.

5. Determining the minimum and/or maximum amount of facilities provided by the banks, from the investment deposits and/or the banks’ own resources, for each area of activity and, if deemed necessary, for each of the operations which are the subject of Article 9 of the Regulations relating to Mobilization of Monetary Resources (the subject of Cabinet Decree No. 81962 dated 12/10/1362), for all of the banks and/or any of them. The said limits shall be determined, at least once a year, in such a manner that will facilitate the implementation of the policies set out in Articles 1 and 2 of these Regulations.

6. Determining the maximum limit for each type of facility and/or total of facilities to be granted by one of several banks to any person, whether real or legal.

7. Determining the minimum and/or maximum limits of the remunerations of the various attorney functions in respect of the employment of investment deposits. Such attorney remuneration may include the banks’ administrative expenses for the mobilization and management of the said deposits. No other amount whatsoever under any title shall be charged by the banks to the holders of investment deposits.

8. Determining the rules governing the minimum and/or maximum commissions for various banking services on the basis of the volume of tasks performed in respect of such services. The maximum rate of the said commissions shall not exceed the cost of tasks involved in rendering such services.

9. Determining the type, amount, minimum and/or maximum reward which are the subject of Article 6 of the Law, and introducing regulations governing the banks’ promotional activities in this respect.

Article 4

With regard to the provision of banking facilities, Bank Markazi Jomhouri Islami Iran is authorized to conduct banking operations with the government companies (whose capital equities are not owned 100 percent by the government) solely in conformity with the requirements of the Law for Usury-Free Banking and these Regulations.

(d) Regulations Relating to Chapter 5 of the Law for Usury-Free Banking (March 7, 1984)

Article 1

Bank Markazi Jomhouri Islami Iran may provide the banks with the necessary resources or accept to hold as deposits their surplus resources. The conditions governing the provision and/or acceptance of resources, as well as the period, profit margin and/or commission relating thereto shall be approved by the Money and Credit Council. The said profit margin and/or commission, however, shall be governed by the directives of the latter part of Article 4 of these Regulations.

Note: Subject to the conditions specified in Article 3, and its relevant Note, of these Regulations, Bank Markazi Jomhouri Islami Iran is authorized to accept resources drawn from investment term deposits.

Article 2

The banks may provide part of the resources needed by the other banks, using, according to priority, the depositors’ and/or their own resources.

Article 3

Where the provision of resources by one bank to another is effected using the depositors’ resources, the receiving bank, as the proxy, by right of substitution, on behalf of the providing bank, shall use the funds received solely for purposes which are the subject of Article 9, in accordance with the rules governing the investment deposits as stipulated in the Regulations relating to the Mobilization of Monetary Resources (the subject of Cabinet Decree No. 81962 dated 12/10/1362).

Note: The remunerations for attorney functions in the employment of deposits shall be based upon the agreement reached between the transacting banks. The attorney remunerations collected from the holders of investment deposits shall not in total exceed the limit prescribed by Clause 4 of Article 20 of the Law.

Article 4

Where the provision of resources by one bank to another, in the form of loan and/or credit and the like, is supplied from the bank’s own resources, the funds obtained by the receiving bank shall be considered as its own resources.

The profit and/or commission on these types of interbank transactions shall be applied as income to the account of the providing bank on the one hand and as expense to the account of the receiving bank on the other.

Article 5

The government, institutions, government-affiliated institutions, and government-owned companies are required to hold their funds exclusively with, and to conduct all their banking operations exclusively through Bank Markazi Jomhouri Islami Iran, except in cases where the said bank, by virtue of Article 22 of the Law, consents to the execution of part or all of the abovementioned operations by other banks. In such cases, the banks may, subject to the relevant regulations, conduct authorized banking operations with such government institutions and companies.

Article 6

The directives and operational rules of these Regulations shall be drawn up by Bank Markazi Jomhouri Islami Iran and following their approval by the Money and Credit Council, shall be put into effect.

Note: Bank Markazi Jomhouri Islami Iran is obliged to communicate immediately to the Economic Council, the directives issued.

Article 7

The banks are required to act in accordance with the instructions and circulars which Bank Markazi Jomhouri Islami Iran will issue in accordance with the respective Laws and Regulations.

Article 8

As provided in Article 25 of the Law for Usury-Free Banking, the units with whom the banks have entered into partnership and/or have made investment, for any amount, or intend so to do, shall not be considered as government companies on account of such partnership and/or investments by banks.

Pakistan

The law governing operations of the banking system (Banking Companies Ordinance, 1962) has remained unchanged; several measures have been introduced to phase out fixed interest rate as the basis for financial transactions. Reproduced below are three primary circulars issued by the State Bank of Pakistan that aim at eliminating interest rate.

State Bank of Pakistan Banking Control Department Central Directorate Karachi

BCD Circular No. 13

June 20, 1984

Elimination of “Riba” from the Banking System

1. As has been announced by the Finance Minister, it is the intention of Government that the Banking System should shift over to Islamic modes of financing during the course of the next financial year. These modes of financing have been described in Annexure I. This shift will take place according to the following program.

  • (i) As from the 1st July, 1984, all banking companies will be free to make finances available in any of the modes of financing listed in Annexure I. However, as a transitional arrangement, they will also be free to lend on the basis of interest, provided that no accommodation for working capital will be provided or renewed on interest basis for a period of more than six months.

  • (ii) As from the 1st January, 1985, all finances provided by a banking company to the Federal Government, Provincial Governments, public sector corporations and public or private joint stock companies shall be only in any one of the modes indicated in Annexure I.

  • (iii) As from the 1st April, 1985, all finances provided by a banking company to all entities, including individuals, shall be on the same basis as mentioned in (ii) above.

  • (iv) The appropriate mode of financing to be adopted in any particular case will be settled by agreement between the banking company and the client. Some possible modes of financing for various transactions have been shown in Annexure II.

  • (v) As from the 1st July, 1985, no banking company shall accept any interest-bearing deposits. As from that date, all deposits accepted by a banking company shall be on the basis of participation in profit and loss of the banking company, except deposits received in Current Account on which no interest or profit shall be given by the banking company.

2. The instructions contained in items (i), (ii), and (iii) above shall, however, not apply to on-lending of foreign loans which will continue to be governed by the terms of the loans. Likewise, the instructions contained in item (v) above shall not apply to foreign currency deposits.

3. The above instructions are being issued under the Banking Companies Ordinance, 1962. Further instructions, where necessary, will follow.

ANNEXURE I Permissible Modes of Financing

(A) Financing by lending:

  • (i) Loans not carrying any interest on which the banks may recover a service charge not exceeding the proportionate cost of the operation, excluding the cost of funds and provision for bad and doubtful debts. The maximum service charge permissible to each bank will be determined by the State Bank from time to time.

  • (ii) Qard-e-Hasana loans given on compassionate ground free of any interest or service charge and repayable if and when the borrower is able to pay.

(B) Trade-related modes of financing including the following:

  • (i) Purchase of goods by banks and their sale to clients at appropriate mark-up in price on deferred payment basis. In case of default, there should be no markup on mark-up.

  • (ii) Purchase of trade bills.

  • (iii) Purchase of moveable or immoveable property by the banks from their clients with Buy-Back Agreement or otherwise.

  • (iv) Leasing.

  • (v) Hire-purchase.

  • (vi) Financing for development of property on the basis of a development charge.

The maximum and the minimum rates of return to be derived by the banks from these modes of financing will be as may be determined by the State Bank from time to time.

(C) Investment type modes of financing. These modes include the following:

  • (i) Musharika or profit and loss sharing.

  • (ii) Equity participation and purchase of shares.

  • (iii) Purchase of participation term certificates and Modaraba certificates.

  • (iv) Rent-sharing.

The maximum and minimum rates of profit to be derived by the banks from such transactions will be as may be prescribed by the State Bank from time to time. However, should any losses occur, they will have to be proportionately shared among all the financiers.

ANNEXURE II Possible Modes of Financing for Various Transactions

Nature of BusinessBasis of Financing
I. Trade and Commerce
(a) Commodity operations of the Federal and Provincial Governments and their agencies.Mark-up price.
(b) Export Bills purchased/negotiated under Letters of Credit (other than those under reserve).(i) Exchange rate differential in the case of foreign currency bills.
(ii) Commission or mark-down in the case of Rupee bills.
(c) Documentary Inland Bills drawn against Letters of Credit purchased/discounted.Mark-down in price.
(d) Import Bills drawn under Letters of Credit.Mark-up in price.
(e) Financing of exports under the State Bank’s Export Finance Scheme and the Scheme for Financing Locally Manufactured Machinery.Service charge/Concessional service charge.
(f) Other items of trade and commerce.Fixed investment Equity participation, PTCs, leasing or hire-purchase.
Working capital Profit and loss sharing or mark-up.
II. Industry
Fixed investment Equity participation, PTCs, Modaraba certificates, leasing, hire-purchase or mark-up.
Working capital Profit and loss sharing or mark-up.
III. Agriculture and Fisheries
(a) Short-term financeMark-up. In the case of small farmers and small fishermen who are at present eligible for interest-free loans finance for the specified inputs, etc., up to the prescribed amount may also be on mark-up basis. The mark-up amount may however be waived in the case of those who repay the finance within the stipulated period and payment of the mark-up made by the State Bank to banks by debit to Federal Government Account.
(b) Medium- and Long-Term Finance
(i) Tubewells and other wellsLeasing or hire-purchase in addition to ownership of machinery, banks may create charge on the land in their favor as in the case of other loans to the farmers under the Passbook System.
(ii) Tractors, trailors and other farm machinery and transport (including fishing boats, solar energy plants, etc.)Hire-purchase or leasing.
(iii) Plough cattle, milk cattle, and other livestock
(iv) Dairy and poultryPLS/mark-up/hire-purchase/leasing.
(v) Storage and other farm construction (viz., sheds for animals, fencing, etc.)Leasing or rent-sharing basis with flexible weightage to the bank’s funds.
(vi) Land developmentDevelopment charge.
(vii) Orchards, including nurseriesMark-up, development charge, or PLS basis.
(viii) ForestryMark-up, development charge, or PLS.
(ix) Water course improvementDevelopment charge.
IV. HousingRent sharing with flexible weightage to bank’s funds or buy-back cum mark-up.
V. Personal Advances (other than those for business purposes and housing)
(a) Consumer durables (cars, motorcycles, scooters and household goods).Hire-purchase.
(b) For consumption purposes.Against tangible security buy-back arrangement.

State Bank of Pakistan Banking Control Department Central Directorate Karachi

BCD Circular No. 26

November 26, 1984

Elimination of “Riba” from the Banking System—Rate of Service Charge Recoverable on Finances Provided by Way of Lending Other Than “Qard-e-Hasana”

1. Please refer to item (A) (i) of Annexure I to BCD Circular No. 13 dated the 20th June, 1984.

2. The maximum rate of service charge which a bank/development finance institution may recover on its loans other than “Qard-e-Hasana” during an accounting year shall be calculated by dividing the total of its expenses excluding cost of funds and expenditure relating to bad assets and income taxation by the mean of its total assets at the beginning and end of the year and rounding off the result to the nearest decimal of a percentage point. An illustration of this is given in the annexure.

3. A bank/DFI may recover service charge during an accounting year on the basis of the rate determined by it which shall be communicated by it to each of its branches, as also intimated to the State Bank at least a week before commencement of each accounting year. However, immediately after its accounts for an accounting year are audited, it shall work out the maximum rate at which service charge was recoverable during that accounting year on the basis of the methodology laid down in paragraph 2 above and in case the rate so worked out is less than the rate determined for the year earlier, it shall refund the excess recoveries if any, to its clients concerned within one month of audit of the accounts. It shall also submit to the State Bank for post-facto audit, within five months of the close of the accounting year, the rate worked out as above along with a certificate, in case the rate is lower than the one determined earlier for the year, to the effect that excess recoveries have been refunded to the clients concerned.

4. The above instructions are being issued under the Banking Companies Ordinance, 1962.

ANNEXURE TO BCD CIRCULAR NO. 26 November 26, 1984
Name of Bank _____________________________________
Maximum Rate of Service Charge recoverable for the year ended_____________________________________
Calculation Sheet
(Figures in Millions of Rs.)
For the above year
1. Total expenditure (total income less balance of profit, i.e., gross profit, as per audited Profit and Loss Account)4,775
2. Less:
  • (i) Interest and return on deposits, borrowings, etc.

  • (ii) Income taxation and provision for it if charged to Expenses Account

  • (iii) Bad assets provision and write-offs by direct debit to Expenses Account

  • (iv) Total of (i) to (iii)

3,600



50



25



3,675
3. Administrative expenditure (1 minus 2(iv))1,100
4. Total Assets at the beginning of the year29,000
5. Total Assets at the end of the year35,000
6. Average of the total assets at the beginning and end of the year32,000
Service Charge in percentage terms to the nearest decimal point
(3 divided by 6 and multiplied by 100)=1,100×10032,000=3.4%

State Bank of Pakistan Banking Control Department Central Directorate Karachi

BCD Circular No. 34 November 26, 1984

Elimination of “Riba” from the Banking System—Determination of Rates of Profit on Various Types of PLS Liabilities of the Banks and Development Finance Institutions

1. In exercise of the powers vested in it under the Banking Companies Ordinance, 1962, the State Bank of Pakistan is pleased to direct that a banking company or development finance institution receiving PLS deposits shall declare rates of profit on various types of its PLS deposits on a half yearly basis for the half year ending 30th June and the half year ending 31st December each year after obtaining clearance from the State Bank in regard to the rates of profit proposed to be declared. The proposed rates should be worked out after compiling the relevant information in the enclosed proformae “A,” “B,” “C,” “D,” and “E” which also give numerical illustrations for guidance in determining the rates. Proposals along with information in the aforesaid proformae in regard to the rates proposed to be declared for each half year shall be submitted to the State Bank by the 20th of the month succeeding the half year.

2. As explained in the proforma “E” enclosed, while distributing noninterest income in the manner spelt out therein, the following weightages will be given to PLS deposits, PLS borrowings, and equity:

Type and MaturityWeightage to be given
A. Deposits:
I. Special notice deposits:
(i) Withdrawal at 7 to 29 days’ notice0.65
(ii) Withdrawal at notice of 30 days or over0.75
II. Savings accounts1.00
III. PLS Call Deposits from other banksWeightage as agreed to by

the banks concerned.
IV. Term deposits:
(i) For terms up to and inclusive of 6 months1.00 + 0.05 for each month of the term of the deposit.
(ii) For terms in excess of 6 months1.3 for the first six months plus 0.01 for each subsequent month of the term of the deposit, subject to a maximum of 2.08.
B. PLS BorrowingsBorrowings of various maturities will be given weightages as for term deposits of corresponding maturities.
C. EquityNot exceeding 5 as may be determined by the concerned bank.

The amount of non-interest income distributable on PLS deposits of each type/maturity will be converted into an annual percentage rate of profit and the rate rounded off to the nearest one-tenth of a percentage point as illustrated in proforma “E. “

3. It would appear that if the non-interest earning assets are low as compared to PLS deposits, the rate of return on such deposits will be low as in such a situation a part of the funds will remain unutilized. The Banks/DFIs should carefully watch the growth of PLS deposits and ensure that their investments in non-interest bearing assets are substantially higher than the deposits. If for any reason this is not feasible at any stage, the unutilized funds should be deposited with the State Bank on PLS basis as already permitted under BCD Circular No. 27 dated the 24th December, 1980 in the case of banks, which facility is being extended to DFIs also.

4. The figures in the annexed Statements should pertain only to the domestic operations of the nationalized commercial banks. The part of the cost of head office organization attributable only to external operations will be secluded from domestic costs. Similarly, the cost of foreign banks organizations meant only for external operations will have to be distributed among the branches abroad and the share attributable to branches in Pakistan taken into account. The figures for these cost calculations as well as the provisions for bad and doubtful debts will have to be finally estimated by the State Bank of Pakistan for distribution of profits. This will, however, be without prejudice to the figures adopted by Income Tax authorities in due course which will be the basis of taxation of banks and allowing remittance of profits by foreign bank branches located in Pakistan.

Statement A
_____________________________
(Name of the Bank)
Average funds employed on earning assets during the six months ended...................................
(Rs.......................000)
I. Funds employed on the basis of interest
ParticularsAverage
(i) Loans and Advances80,000
(ii) Balances held abroad5,000
(iii) Investments35,000120,000
II. Funds employed on non-interest basis
(i) Assets based on trade-related modes of financing100,000
(ii) Assets based on investment type modes of financing110,000
(iii) PLS deposits with other banks20,000
(iv) Funds employed on the basis of other modes, if any10,000240,000
Total360,000
The following assets will not be included in this statement:
(i) Loans on the basis of service charge
(ii) Qard-e-Hasana
(iii) Assets on which interest or return is not being taken to income account
Statement B
_________________________________
(Name of the Bank)
Income for the six months ended______________________
(Rs.......................000)
I. Interest-Based Income
Income fromAmount of income
(i) Loans and Advances4,800
(ii) Balances held abroad300
(iii) Investments2,100
(iv) Total7,200
II. Non-Interest Income
Income fromAmount of income
(i) Assets based on trade-related modes of financing7,000
(ii) Assets based on investment type modes of financing6,600
(iii) PLS deposits with other banks1,000
(iv) Non-fund based income800
(v) Other non-interest sources200
(vi) Total15,600
(vii) Less:
  • (a) Proportionate Admn. cost as per Statement “D”

  • (b) Provision for Bad/Doubtful non-interest based assets

4,930



380



5,310
(viii) Balance ((vi) minus (vii))10,290
(ix) Less management fee not exceeding 10% of (viii)1,029
(x) Net non-interest income ((viii) minus (ix))9,261
Statement C
__________________________________
(Name of the Bank)
Average remunerable liabilities for the six months ended________________________________
(Rs......................000)
ParticularsAverage
I. Interest-Bearing Liabilities
(i) Deposits70,000
(ii) Borrowings10,00080,000
II. PLS Liabilities
(i) Deposits140,000
(ii) Borrowings20,000160,000
III. Equity
(i) Capital20,000
(ii) Reserves10,000
(iii) Balance of Profit and Loss Account30,000
Total270,000
Statement D
__________________________________
(Name of the Bank)
Administrative cost for the six months ended ____________________________ and its allocation between interest-based income and non-interest income
(Rs........................000)
I. Administrative Cost
ParticularsAmount
Total expenditure excluding taxes on income Less:18,000
(i) Interest and/or return on deposits, borrowings, etc.10,500
(ii) Bad and doubtful assets written off directly29510,795
Administrative cost7,205
II. Allocation of the Administrative Cost
(i) Non-interest income as per statement “B”15,600
(ii) Interest-based income as per statement “B”7,200
(iii) Total22,800
(iv) Ratio of (i) to (iii)13:19
(v) Administrative cost allocable to non-interest income (cost multiplied by the ratio, i.e., 13/19)4,930
Statement E
________________________________
(Name of the Bank)
(Rs.................000)
Distribution of net non-interest income (item II(x) of Statement “B”) for the six months ended_______________________
1. Average earning assets as per statement “A”3,60,000
2. Average remunerable liabilities as per statement “C”2,70,000
3. Ratio of 2 to 1 above3:4
4. Total non-interest assets as per statement “A”2,40,000
5. Total non-interest assets deflated by the ratio at 31,80,000
6. Manner of distribution of non-interest income:
  • (i) If the figure at 5 above is less than or equal to the average PLS deposits as per statement “C” the entire net non-interest income as per statement “B” will be distributed on the PLS deposits.

  • (ii) If the figure at 5 above is more than the average of PLS deposits as per statement “C” but less than or equal to the sum of average PLS deposits and PLS borrowings, the non-interest income will be applied to remunerate the entire PLS deposits plus such portion of the PLS borrowings, which together with PLS deposits is equal to the amount at 5 above.

  • (iii) If the figure at 5 above is more than the average of PLS deposits and PLS borrowings but less than or equal to the sum of PLS deposits, PLS borrowings and equity as per statement “C,” only such portion of non-interest income will be applied to remunerate the whole of PLS deposits and PLS borrowings and such portion of equity which together with PLS deposits and PLS borrowings is equal to the amount at 5 above.

  • (iv) If the figure at 5 above is more than the sum of average PLS deposits and PLS borrowings and equity as per statement “C,” only such portion of non-interest income will be applied to these items as bears the same ratio to the total non-interest income as the sum of PLS deposits, PLS borrowings, and equity bears to the amount at item 5 above.

  • (v) The distribution of non-interest income to the various remunerable liabilities will be made after giving the following weights to various items:

ParticularsWeightage
I. Deposits
1. Special Notice Deposits
(i) Withdrawable at 7 to 29 days’ notice0.65
(ii) Withdrawable at notice of 30 days or more0.75
2. Savings Accounts1.00
3. PLS call deposits from other banksWeightage as agreed to by the banks concerned.
4. Term Deposits
(i) For terms up to and inclusive of 6 months1.00 + 0.05 for each month of the term of the deposit.
(ii) For terms in excess of 6 months1.3 for the first six months plus 0.01 for each subsequent month of the term of the deposit, subject to a maximum of 2.08.
II. PLS BorrowingsBorrowings of various maturities will be given weightages as for term deposits of corresponding maturities indicated above.
III. EquityNot exceeding 5 as may be determined by the concerned bank.
Net non-interest income (Rs. 9,261,000) would thus be distributed as in the Annexure.

Annexure to Statement E

(Rs........................000)
Type and Maturity of Non-Interest LiabilitiesAverageWeightedWeighted Average LiabilitiesIncome AllocationAnnual Rate of Return in Terms of PercentageRate of Return Rounded off to the Nearest One Tenth of a Percentage
I. Deposits
1. Special Notice Deposits
(i) 7 to 29 days’ notice30,0000.6519,5008285.25%5.5%
(ii) Over 30 days’ notice20,0000.7515,0006376.37%6.4%
2. Savings Accounts30,0001.0030,0001,2738.49%8.5%
3. PLS Call Deposits20,0001.0020,0008498.49%8.5%
4. Term Deposits
(i) 3 months10,0001.1511,5004889.76%9.8%
(ii) 6 months10,0001.3013,00055211.04%11.0%
(iii) 1 year10,0001.3613,60057711.54%11.5%
(iv) 5 years10,0001.8418,40078115.62%15.6%
II. Borrowings
Borrowings (1 year)20,0001.3627,2001,15411.54%11.5%
III. Equity20,0002.5050,0002,12221.22%21.2%
Total180,000218,0009,261

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