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The paper was presented at the 8th Annual Conference on Monetary and Foreign Exchange Policies, sponsored by the Central Bank of the Islamic Republic of Iran, May 20-21, 1998. The authors wish to thank colleagues in the Middle Eastern and Monetary and Exchange Affairs Departments of the Fund, with special thanks to Tito Cordella for his input, and Abbas Mirakhor, Executive Director.
Mudharaba is a contract where one party provides funds and the other provides work. Profits are distributed according to a negotiated percentage (the party providing the work can not claim wage, salary or any compensation other than a share in profits) while losses are born by the fund provider. Ijara is a leasing-type contract. For more detailed discussions of Islamic financial contracts, see Kazarian (1993) and Iqbal and Mirakhor (1987).
The scope of this instrument could be widened to cover a pool of projects (i.e., an unrestricted Mudharaba) instead of specific projects, with the rate of return being determined by the average yield of all the projects. It is also possible to issue and float the two types (the restricted and the unrestricted Mudharaba) simultaneously.
See Choudry and Mirakhor (1996).
The formula for determining the purchase or sales price of the GII at the discount window of BNM is as follows: Price = (1 + a*b)/365*100; where a= number of days after issue date for certificates of one year of original maturity or number of days after last dividend payment date for certificates with more than one year of original maturity; and b= expected dividend rate in percent.
Haque and Mirakhor (1997) discussed the possibility that an international or regional elements could be included in the index.
A decree was issued in early 1997 by Ayatollah Gholamreza Rezwani allowing the authorities in the Islamic Republic of Iran to issue NPP representing a set value as a proportion of a portfolio of assets (composed of completed development projects) with an expected rate of return. Financial resources thus mobilized are to be used to repay Government debt to the central bank and as a monetary control instrument. The central bank will calculate and guarantee a minimum rate of return.
Musharaka is a partnership contract (usually in capital) with profits distributed according to contribution or on a negotiated basis.
In line with a pre-set timetable subsequent auctions of CMC’s have taken place. Moreover, a repurchase auction has also been conducted and the net liquidity effect of these operations (up to July 22, 1998) has been an absorption of LSd 9 billion.
In principle, central banks could acquire shares in the open market up to any limit, and build up a balanced equity portfolio against which CMC’s could be issued.
The issuance of GMCs would, therefore, require a significant disclosure of budgetary performance and revenue objectives.
Significant progress has been achieved in preparing standardized accounting and reporting methodology by the Bahrain-based accounting and auditing organization for Islamic financial institutions.
For discussion of issues pertaining to prudential regulations and supervision in Islamic Banking, see Errico and Farahbaksh (1998).
α in effect determines the distribution of profit/losses arising from an over or under performance of revenues in relation to the initial projections of the government.