MALAYSIA: Performance of Islamic banking sector 2006

Source: Bank Negara Malaysia - Financial Stability and Payment Systems Report 2006 (www.bnm.gov.my)

Operating parallel to conventional banking, Islamic banking has also grown in size, diversity and importance in the Malaysian financial landscape. The number of players in the Islamic banking sector has increased with the commencement of operations of four institutions during the year. Assets of the Islamic banking system expanded by 20.5% in 2006 to constitute 12.2% of banking system assets. This development has been underscored by growth in financing activities (+12.3%) which now accounts for 13.2% of banking system lending. Deposits mobilised by the Islamic banking system had also grown at a robust rate of 18.2% in 2006 to account for 12.2% of banking system deposits.

The Islamic banking sector remained well capitalised, supported by higher pre-tax profit and the injection of capital by new entrants and players. The RWCR recorded a strong level of 16.6% whilst the core capital ratio stood at 12.6%. Preliminary unaudited profit before tax for the Islamic banking system amounted to RM1.7 billion, posting a growth of 9.6%. The higher profit was contributed largely by growth in financing income (13%), income from funds placement (75.1%) and recoveries from nonperforming assets (22.8%). Consequently, return on assets and return on equity for the Islamic banking sector was 1.3% and 16.4% respectively.

The Islamic banking sector continues to support various economic activities that contribute to the nation’s economic growth. Total financing extended by the Islamic banking sector was RM78.5 billion as at end-2006. Similar to the trends observed for conventional banking, of the 12.3% increase in financing, 57.6% was channeled to the household sector. The level of non-performing financing continued to decline steadily as net non-performing assets as at end-2006 declined almost 25% to RM3.4 billion to account for 4.5% of net financing.

Investment deposits (general and specific) rose by 10.3% to account for 49.6% of Islamic banking deposits, the bulk of which was concentrated in the short-term maturity profile of below one year (95.2%). Meanwhile, savings and demand deposits expanded by 16.7% and 38.8% respectively, mainly attributed to the expanding retail customer base in Islamic banking.

The ratio of staff-related expenses and overheads to gross operating income rose to 42.6%. The increase in staff costs was attributed mainly to higher remuneration packages offered to retain and attract expertise amidst competition from the new entrants, as well as additional resources required to support the expansion of the industry. Meanwhile, higher overheads were due mainly to establishment and administrative expenses incurred in the setting up of new branches by Islamic banking institutions, in particular, by the new market entrants.

PAKISTAN: Background of Islamic banking industry

Source: http://www.sbp.org.pk

Steps for Islamization of banking and financial system of Pakistan were started in 1977-78. Pakistan was among the three countries in the world that had been trying to implement interest free banking at comprehensive/national level. But as it was a mammoth task, the switchover plan was implemented in phases. The Islamization measures included the elimination of interest from the operations of specialized financial institutions including HBFC, ICP and NIT in July 1979 and that of the commercial banks during January 1981 to June 1985. The legal framework of Pakistan's financial and corporate system was amended on June 26, 1980 to permit issuance of a new interest-free instrument of corporate financing named Participation Term Certificate (PTC). An Ordinance was promulgated to allow the establishment of Mudaraba companies and floatation of Mudaraba certificates for raising risk based capital. Amendments were also made in the Banking Companies Ordinance, 1962 (The BCO, 1962) and related laws to include provision of bank finance through PLS, mark-up in prices, leasing and hire purchase.

Separate Interest-free counters started operating in all the nationalized commercial banks, and one foreign bank (Bank of Oman) on January 1, 1981 to mobilize deposits on profit and loss sharing basis. Regarding investment of these funds, bankers were instructed to provide financial accommodation for Government commodity operations on the basis of sale on deferred payment with a mark-up on purchase price. Export bills were to be accommodated on exchange rate differential basis. In March, 1981 financing of import and inland bills and that of the then Rice Export Corporation of Pakistan, Cotton Export Corporation and the Trading Corporation of Pakistan were shifted to mark-up basis. Simultaneously, necessary amendments were made in the related laws permitting the State Bank to provide finance against Participation Term Certificates and also extend advances against promissory notes supported by PTCs and Mudaraba Certificates. From July 1, 1982 banks were allowed to provide finance for meeting the working capital needs of trade and industry on a selective basis under the technique of Musharaka.

As from April 1, 1985 all finances to all entities including individuals began to be made in one of the specified interest-free modes. From July 1, 1985, all commercial banking in Pak Rupees was made interest-free. From that date, no bank in Pakistan was allowed to accept any interest-bearing deposits and all existing deposits in a bank were treated to be on the basis of profit and loss sharing. Deposits in current accounts continued to be accepted but no interest or share in profit or loss was allowed to these accounts. However, foreign currency deposits in Pakistan and on-lending of foreign loans continued as before. The State Bank of Pakistan had specified 12 modes of non-interest financing classified in three broad categories. However, in any particular case, the mode of financing to be adopted was left to the mutual option of the banks and their clients.

The procedure adopted by banks in Pakistan since July 1 1985, based largely on ‘mark-up’ technique with or without ‘buy-back arrangement’, was, however, declared un-Islamic by the Federal Shariat Court (FSC) in November 1991. However, appeals were made in the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan. The SAB delivered its judgment on December 23, 1999 rejecting the appeals and directing that laws involving interest would cease to have effect finally by June 30, 2001. In the judgment, the Court concluded that the present financial system had to be subjected to radical changes to bring it into conformity with the Shariah. It also directed the Government to set up, within specified time frame, a Commission for Transformation of the financial system and two Task Forces to plan and implement the process of the transformation.

The Commission for Transformation of Financial System (CTFS) was constituted in January 2000 in the State Bank of Pakistan under the Chairmanship of Mr. I.A. Hanfi, a former Governor State Bank of Pakistan. A Task Force was set up in the Ministry of Finance to suggest the ways to eliminate interest from Government financial transactions. Another Task Force was set up in the Ministry of Law to suggest amendments in legal framework to implement the Court’s Judgment. The CTFS constituted a Committee for Development of Financial Instruments and Standardized Documents in the State Bank to prepare model agreements and financial instruments for new system.

The CTFS in its Report identified a number of prior actions, which were needed to be taken to prepare the ground for transformation of the financial system. It also identified major Shariah compliant modes of financing, their essentials, draft seminal law captioned ‘Islamization of Financial Transactions Ordinance, 2001’, model agreements for major modes of financing, and guidelines for conversion of products and services of banks and financial institutions. The Commission also dealt with major products of banks and financial institutions, both for assets and liabilities side, like letters of credit or guarantee, bills of exchange, term finance certificates (TFCs), State Bank's Refinance Schemes, Credit Cards, Interbank transactions, underwriting, foreign currency forward cover and various kinds of bank accounts. The Commission observed that all deposits, except current accounts, would be accepted on Mudaraba principle. Current accounts would not carry any return and the banks would be at liberty to levy service charge as fee for their handling. The Commission also approved the concept of Daily Product and Weightage System for distribution of profit among various kinds of liabilities/deposits. The Report also contained recommendation for forestalling willful default and safeguarding interest of the banks, depositors and the clients.

According to the Commission, prior/preparatory works for introduction of Shariah compliant financial system briefly included creating legal infrastructure conducive for working of Islamic financial system, launching a massive education and training program for bankers and their clients and an effective campaign through media for the general public to create awareness about the Islamic financial system.

The Finance Minister of Pakistan in his budget speech for the FY02 declared the following:
“ Government is committed to eliminate Riba and promote Islamic banking in the country. For this purpose a number of steps are under way which are:

1. A legal framework is designed to encourage practice of Islamic banking by banks and financial institutions as subsidiary operations of their main operations;
2. Consultations and exchanges are undertaken with brother Islamic countries and renowned institutions of Islamic learning such as middle eastern countries and Al-Azhar University of Egypt, to learn more about their experiences and practices;
3. Amendments in HBFC Act are being made in line with the directive of the Supreme Court. With these changes, HBFC would be fully Shariah compliant institution, which will play an effective role both in promotion of Islamic financing method but also in the development of the important housing sector;
4. Shariah compliant modes of financing like Musharaka and Mudaraba will be encouraged so that familiarity and use of such products is enhanced and their adoption at a wider scale made possible.

It is government’s intention to promote Islamic banking in the country while keeping in view its linkages with the global economy and existing commitments to local and foreign investors”.

The House Building Finance Corporation had shifted its rent sharing operations to interest based system in 1989. The Task Force of the M/O Law proposed amendments in the HBFC Act to make it Shariah Compliant. Having vetted by the CTFS, the amended law has been promulgated by the Government. Accordingly, the HBFC launched in 2001 Asaan Ghar Scheme in the light of amended Ordinance based on the Diminishing Musharakah concept. A Committee was constituted in the Institute of Chartered Accountants, Pakistan (ICAP), wherein the SBP was also represented, for development of accounting and auditing standards for Islamic modes of financing. The Committee is reviewing the standards prepared by the Bahrain based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) with a view to adapt them to our circumstances and if considered necessary, to propose new accounting standards.

It was decided in September 2001 that the shift to interest free economy would be made in a gradual and phased manner and without causing any disruptions. It was also agreed that State Bank of Pakistan would consider for:

1. Setting up subsidiaries by the commercial banks for the purpose of conducting Shariah compliant transactions;
2. Specifying branches by the commercial banks exclusively dealing in Islamic products, and
3. Setting up new full-fledged commercial banks to carry out exclusively banking business based on proposed Islamic products.

Accordingly, the State Bank issued detailed criteria in December 2001 for establishment of full-fledged Islamic commercial banks in the private sector. Al Meezan Investment Bank received the first Islamic commercial banking license from SBP in January 2002 and the Meezan Bank Limited (MBL) commenced full-fledged commercial banking operation from March 20, 2002. Further, all formalities relating to the acquisition of Societe Generale, Pakistan by the MBL were completed, and by June, 2002 it had a network of 5 branches all over the country, three in Karachi, one in Islamabad and one in Lahore. The MBL now maintains a long term rating of A+ and short term rating of A1+, assessed by JCR VIS Credit Rating Co Ltd, signifying a consistent satisfactory performance.

The Government as also the State Bank are mainly concerned with stability and efficiency of the banking system and safeguarding the interests, particularly, of small depositors. With this concern in mind it has been decided to operate Islamic banking side by side with traditional banking. The approach is to institute best practice legal, regulatory and accounting frameworks to support Islamic banks and investors alike. The year 2002-2003 witnessed strengthening measures taken in the areas of banking, non-bank financial companies and the capital markets.

Islamic Banking Subsidiaries
A new clause (aa) was inserted in sub-section (1) of Section 23 of the Banking Companies Ordinance 1962 by an amendment notified in the Gazette of Pakistan on November 4 2002, which provided that banks could form subsidiaries for “carrying on of banking business strictly in conformity with the Injunctions of Islam as laid down in the Holy Quran and Sunnah.” In January, 2003 the State Bank issued BPD Circular No. 01 outlining detailed instructions on the remaining two parts of the strategy, viz. setting up of subsidiaries and Stand-alone branches for Islamic Banking by existing commercial banks. The criteria for subsidiaries are almost similar to the criteria for setting up scheduled Islamic commercial bank with emphasis on complete segregation of accounts of Islamic banking subsidiaries and the parent banks doing conventional banking. The subsidiaries shall have minimum paid up capital of Rs 1,000 million that is equal to the capital requirement for full-fledged commercial banks.

Islamic Banking through Stand-alone Branches
For Part-III of the strategy, guidelines for opening of stand-alone branches for Islamic banking by existing commercial banks, enlisting eligibility criteria, licensing requirements and other operational details on the subject were issued on January 1 2003. The criteria pertain to financial strength of the applicant bank as evident from its capital base (net capital free of actual and potential losses), adequacy of its capital structure, record of earning capabilities, future earning prospects of the bank, managerial capabilities, bank’s liquidity position, track record of the bank’s adherence to prudential regulations, credit discipline, quality of customer services and the convenience and the needs of the population of the area to be served by the proposed branches. Further, banks seeking permission should have CAMELS rating of 1, 2 and 3 in the last ON-SITE inspection and there should not be major adverse inspection findings against the bank. The applying bank is required to submit proposal to the State Bank, outlining the following details:

• Number of branches along with name of city where the Islamic Banking Branch (IBB) is to be offered within the next financial year.
• Products and services to be offered by the IBB including deposits, financing, investment, etc.
• Method of segregating the funds of IBB from the funds of commercial banking of the applying bank.
• Infrastructure and logistic requirements, including manpower and training programs.
• The name, qualification and experience of Shariah Adviser (s), and
• Accounting aspects, such as accounting policies to be followed, profit and loss sharing mechanism, manuals, etc.

The bank will also be required to set up Islamic Banking Division (IBD) at the Head Office/Country Office in Pakistan. The responsibilities of this Division have been depicted in detail. The bank would also appoint a Shariah adviser/Shariah Supervisory Committee consisting of Shariah scholar(s) of repute to advise the IBD on matters pertaining to Shariah. Moreover, the bank shall ensure that proper systems and controls are in place in order to ensure segregation of funds and to protect the interest of depositors. The banks shall ensure proper maintenance of records for all transactions for disclosure of assets, liabilities, expenses and income of IBD/IBB(s). The IBD will also comply with statutory liquidity and cash reserve requirements determined by SBP.

As regards the status of Islamic banking industry in the country (End June 2004), Meezan Bank is operating with 10 branches in 5 cities as a full fledged Islamic bank. In addition to it, 5 banks (MCB, Bank of Khyber, Bank Alfalah, Habib Bank AG Zurich and Standard Chartered Bank) have been issued licenses for 12 dedicated Islamic Banking Branches (IBB) of which 10 branches are operating in Karachi, Islamabad, Peshawar, Lahore, Faisalabad and Multan. These banks are planning to offer Islamic banking products in Quetta, Hyderabad, Gujranwala and other major cities during the year 2004. SBP has also given in principle approval for opening 10 more Islamic banking branches during 2004 by MCB and Bank Alfalah.

Habib Bank Limited and Bank Al Habib Limited have been granted in principle approval to open two Islamic banking branches. They are expected to start these branches during the year 2004. At least five more banks are expected to open Islamic banking branches during the year ending December, 2004. Applications for two new full-fledged Islamic banks are also under scrutiny while the license of a foreign Islamic bank is being converted to Islamic banking. Some of the banks who are operating Islamic banking branches are also offering Islamic banking products through their existing conventional branches by using hub & spoke arrangement. It will increase the outreach of Islamic banking products in other cities as well.

SUDAN: Background of Islamic banking industry

Source: www.country-studies.com/sudan

The traditional banking system was inherited from the AngloEgyptian condominium (1899-1955). When the National Bank of Egypt opened in Khartoum in 1901, it obtained a privileged position as banker to and for the government, a "semi-official" central bank. Other banks followed, but the National Bank of Egypt and Barclays Bank dominated and stabilized banking in Sudan until after World War II. Post-World War II prosperity created a demand for an increasing number of commercial banks. By 1965 loans to the private sector in Sudan had reached £Sd55.3 million.

Before Sudanese independence, there had been no restrictions on the movement of funds between Egypt and Sudan, and the value of the currency used in Sudan was tied to that of Egypt. This situation was unsatisfactory to an independent Sudan, which established the Sudan Currency Board to replace Egyptian and British money. It was not a central bank because it did not accept deposits, lend money, or provide commercial banks with cash and liquidity. In 1959 the Bank of Sudan was established to succeed the Sudan Currency Board and to take over the Sudanese assets of the National Bank of Egypt. In February 1960, the Bank of Sudan began acting as the central bank of Sudan, issuing currency, assisting the development of banks, providing loans, maintaining financial equilibrium, and advising the government.

There were originally five major commercial banks (Bank of Khartoum, An Nilein Bank, Sudan Commercial Bank, the People's Cooperative Bank, and the Unity Bank) but the number subsequently grew. The public was dissatisfied with the commercial banks, however, because they were reluctant to lend capital for longterm development projects. Since the Nimeiri government decreed the 1970 Nationalization of Banks Act, all domestic banks have been controlled by the Bank of Sudan.

In 1974, to encourage foreign capital investment, foreign banks were urged to establish joint ventures in association with Sudanese capital. Banking transactions with foreign companies operating in Sudan were facilitated so long as they abided by the rulings of the Bank of Sudan and transferred a minimum of £Sd3 million into Sudan. Known as the "open door" policy, this system was partly a result of Nimeiri's disillusion with the left after the unsuccessful communist coup of 1971. Several foreign banks took advantage of the opportunity, most notably Citibank, the Faisal Islamic Bank, Chase Manhattan Bank, and the Arab Authority for Agricultural Investment and Development.

In addition, the government established numerous specialized banks, such as the Agricultural Bank of Sudan (1959) to promote agricultural ventures, the Industrial Bank of Sudan (1961) to promote private industry, the Sudanese Estates Bank (1966) to provide housing loans, and the Sudanese Savings Bank established to make small loans particularly in the rural areas. The system worked effectively until the late 1970s and 1980s, when the decline in foreign trade, balance-of-payments problems, spiraling external debt, the increase in corruption, and the appearance of Islamic banking disrupted the financial system.

Islamic Banking

The Faisal Islamic Bank, whose principal patron was the Saudi prince, Muhammad ibn Faisal Al Saud, was officially established in Sudan in 1977 by the Faisal Islamic Bank Act. The "open door" policy enabled Saudi Arabia, which had a huge surplus after the 1973 Organization of Petroleum Exporting Countries (OPEC) increases in the price of petroleum, to invest in Sudan. Members of the Muslim Brotherhood and its political arm, the National Islamic Front, played a prominent role on the board of directors of the Faisal Islamic Bank, thus strengthening the bank's position in Sudan. Other Islamic banks followed. As a consequence, both the Ansar and Khatmiyyah religious groups and their political parties, the Umma and the Democratic Unionist Party, formed their own Islamic banks.

The Faisal Islamic Bank enjoyed privileges denied other commercial banks (full tax exemption on assets, profits, wages, and pensions), as well as guarantees against confiscation or nationalization. Moreover, these privileges came under Nimeiri's protection from 1983 onward as he became committed to applying Islamic doctrine to all aspects of Sudanese life. The theory of Islamic banking is derived from the Quran and the Prophet Muhammad's exhortations against exploitation and the unjust acquisition of wealth, defined as riba, or, in common usage, interest or usury. Profit and trade are encouraged and provide the foundation for Islamic banking. The prohibitions against interest are founded on the Islamic concept of property that results from an individual's creative labor or from exchange of goods or property. Interest on money loaned falls within neither of these two concepts and is thus unjustified.

To resolve this dilemma from a legal and religious point of view, Islamic banking employs common terms: musharakah or partnership for production; mudharabah or silent partnership when one party provides the capital, the other the labor; and murabbahah or deferred payment on purchases, similar in practice to an overdraft and the most preferred Islamic banking arrangement in Sudan. To resolve the prohibition on interest, an interest-bearing overdraft would be changed to a murabbahah contract. The fundamental difference between Islamic and traditional banking systems is that in an Islamic system deposits are regarded as shares, which does not guarantee their nominal value. The appeal of the Islamic banks, as well as government support and patronage, enabled these institutions to acquire an estimated 20 percent of Sudanese deposits. Politically, the popularity and wealth of Islamic banks have provided a financial basis for funding and promoting Islamic policies in government.

IRAN: Background of Islamic banking industry

From: Tejarat (Trade), The Internal Publication of Bank of Tejarat

Before a bank in its present form was established in Iran, banking operations had been carried out in traditional form, or in other words in the form of money changing. Simultaneous with promotion of trade and business in the country, more people chose money changing as their occupation. Exchanges of coins and hard currencies were also common in Iran.

Before the advent of the Achaemenid Dynasty, banking operations had been carried out by temples and princes and seldom had ordinary people been engaged in this occupation.

During the Achaemenid era, trade boomed and subsequently banking operation expanded to an extent that Iranians managed to learn the banking method from the people of Babylon.

Following a boost in trade and use of bank notes and coins in trade during the Parthian and Sassanian eras, exchange of coins and hard currencies began in the country.

Some people also managed to specialize in determining the purity of coins. Bank notes and gold coins were first used in the country following the conquest of Lidi by Achaemenid king Darius The Great in 516 B.C. At that time, a gold coin called Derick was minted as the Iranian currency.

During the Parthian and Sassanids eras, both Iranian and foreign coins were used in trade in the country. However, with the advent of Islam in Iran, money changing and use of bank notes and coins in trade faced stagnation because the new religion forbade interest in dealing.

In the course of Mongol rule over Iran, a bank note which was an imitation of Chinese bank notes was put in circulation. The bank notes, called Chav bore the picture and name of Keikhatu. On one side of the bank notes there was the following sentence: "Anybody who does not accept this bank note, will be punished along with his wife and children." The face value of the bank notes ranged from half to 10 dirhams. Besides Chav, other bank notes were used for a certain period of time in other Iranian cities and then got out of circulation. These bank notes were called `Shahr-Rava' which meant something that was in use in cities.

Before the printing of first bank notes by the Bank Shahanshahi (Imperial Bank), a kind of credit card called Bijak had been issued by money dealers. It was in fact a receipt of a sum of money taken by money dealers from the owners of Bijak. The credence of the Bijak depended on the creditability of the money dealer who had issued it.

As mentioned before, money changing got out of fashion with the advent of Islam under which usury is strictly forbidden. At that time, only a few persons with weak religious faith continued their occupation as money dealers. It was the same persons who promoted usury even during the post-Islamic era. They offered various excuses to justify their unlawful act.

With a boost in trade during the rule of Safavid Dynasty, particularly during the reign of Shah Abbas the Great, money changing brisked again and wealthy money dealers started their international activities by opening accounts in foreign banks. Major centers for money changing at that time were Tabriz, Mashhad, Isfahan, Shiraz and Boushehr.

Money changing continued until the establishment of New East Bank in 1850. With the establishment of the bank, money changing actually came to a standstill. The New East Bank was in fact the first banking institute in its present form established in Iran. It laid the foundation of banking operations in the country. It was a British bank whose headquarters was in London. The bank was established by the British without receiving any concession from the Iranian government.

The bank opened its branches in the cities of Tabriz, Rasht, Mashhad, Esfahan, Shiraz and Boushehr. Of course, at that time, foreigners were free to engage in economic and trade activities in the country without any limitations. For the first time, the New East Bank allowed individuals to open accounts, deposit their money with the bank and draw checks. It was at this time that people began to draw checks in their dealings.

In order to compete with money dealers, the bank paid interest on the fixed deposits and current accounts of its clients. The head office of the bank in Tehran issued five `qeran' bank notes in the form of drafts. These drafts were used by people in their everyday's dealings and could be changed into silver coins when offered at the bank. According to a concession granted by the Iranian government to Baron Julius De Reuter in 1885, Bank Shahanshahi (Imperial Bank) was established. This bank purchased the properties and assets of the New East Bank, thus putting an end to the baking operations of the former.

The activities of Bank Shahanshahi ranged from trade transactions, printing bank notes, and serving as the treasurer of the Iranian government at home and abroad in return for piecework wage.

In return for receiving this concession, Reuter obliged to pay six percent of the annual net income of the bank, providing that the sum should not be less than 4,000 pounds, and 16 percent of incomes from other concessions to the Iranian government.

The legal center of the bank was in London and it was subject to the British laws but its activities were centered in Tehran.

In 1894, the right of printing bank notes was purchased from Bank Shahanshahi for a sum of 200,000 pounds and ceded to the Bank Melli of Iran.

Bank Shahanshahi continued its activities until 1948 when its name was changed into Bank of Britain in Iran and Middle East. The activities of the bank continued until 1952.

In 1856, a Russian national by the name of Jacquet Polyakov, received a concession from the then government of Iran for establishment of Bank Esteqrazi for 75 year. Besides, banking and mortgage operations, the bank had an exclusive right of public auction. In 1898 the Tzarist government of Russia bought all shares of the bank for its political ends. Under a contract signed with Iran, the bank was transferred to the Iranian government in 1920. The bank continued its activities under the name of Bank Iran until 1933 when it was incorporated into the Bank Keshavarzi (Agriculture Bank).

Bank Sepah was the first bank to be established with Iranian capitals in 1925 under the name of Bank Pahlavi Qoshun, in order to handle the financial affairs of the military personnel and set up their retirement fund. The capital of the bank was 388,395 tomans (3.88 million rials).

With Bank Sepah opening its branches in major Iranian cities, the bank began carrying financial operations such as opening of current accounts and transfer of money across the country. The Iran-Russia Bank was formed by the government of the former Soviet Union in 1926 with an aim of facilitating trade exchanges between the two countries.

The headquarters of the bank was in Tehran with some branches being inaugurated in northern parts of the country. The bank dealt with financial affairs of institutes affiliated to the government of the former Soviet Union and trade exchanges between the two countries. The activities of this bank, which were subjected to Iranian banking regulations, continued until 1979. In that year, this bank along with 27 other state-owned or private banks were nationalized under a decision approved by the Revolutionary Council of the Islamic Republic of Iran.

The proposal to establish a national Iranian bank was first offered by a big money dealer to Qajar king Naser-o-Din Shah before the Constitutional Revolution. But the Qajar king did not pay much attention to the proposal. However, with the establishment of constitutional rule in the country, the idea of setting up a national Iranian bank in order to reduce political and economic influence of foreigners gained strength and at last in December 1906 the establishment of the bank was announced and its articles of association compiled.

In April 1927, the Iranian Parliament gave final approval to the law allowing the establishment of Bank Melli of Iran. But, due to problems arising from preparing a 150 million rial capital needed by the bank, the Cabinet ministers and the parliament's financial commission approved the articles of association of the bank in the spring of 1928. The bank was established with a primary capital of 20 million rials, 40 percent of which was provided by the government. The bank was formally inaugurated in September 1928.

The Central Bank of Iran was established in 1928, tasked with trade activities and other operations (acting as the treasurer of the government, printing bank notes, enforcing monetary and financial policies and so on). The duties of the CBI included making transactions on behalf of the government, controlling trade banks, determining supply of money, foreign exchange protective measures (determining the value of hard currencies against rial) and so on.

In June 1979, Iranian banks were nationalized and banking regulations changed with the approval of the Islamic banking law (interest free), and the role of banks in accelerating trade deals, rendering services to clients, collecting deposits, offering credits to applicants on the basis of the CBI's policies and so on was strengthened.