The Islamic Republic of Iran has also enforced various regulations pertaining

1. The Islamic Republic of Iran has also enforced various regulations pertaining to the functions and activities of the BMJII which have been made for designing and implementing the money and credit policies of the country in consonance with gen- eral economic policies. In order to achieve the goals of economic and money and credit policies, the BMJII is empowered by Article 3 of the regulation relating to Chapter 4 of the law for Usury Free Banking to supervise the commercial banking system. The BMJII has been accorded the necessary powers to determine (a) the legal reserve requirement for various types of bank deposits; (b) the various fields of investment and partnership; (c) the minimum and/or maximum share of profit for banks in Mudarabah and Musharakah; (d) the minimum and maximum expected rate of return to commercial banks from various facilities; (e) the minimum ratio of liquid assets to asset liabilities; (f) the maximum amount of credit facility granted to each client whether a real or a legal person; (g) the ratio of credit facilities granted by each bank to that bank's capital. [Regulation Relating to Chapter 4 of the Law for Usury Free Banking.] 3.3 REGULATION AND CONTROL OF COMMERCIAL BANKS IN PAKISTAN Pakistan when embarked upon Islamization of its banking system in 1979, its banking and financial structure was relatively well developed in comparison to other Islamic countries, The process of Islamization in Pakistan has been gradual. Instead of establishing an entirely new legal framework for conducting banking business along Islamic lines, a course of action was chosen which involved the modification of the then existing laws to the extent required. Even before the Islami - zation of banking, the State Bank of Pakistan (SBP), which is the central bank of the country, used direct and selective methods of credit control. Annual credit plans and targets were formulated in accordance with the development plans of the country and credit was allocated accordingly. Under these circumstances, general methods of credit control were used mainly for "Prudential Purposes" [Igbal and Mirakhor, 1987, p. 21.] In this section, we shall explore the methods of credit control employed by the SBP after the Islamization of the banking system in Pakistan. 1. LEGAL RESERVE REQUIREMENT Under Section 36 (1) of the SBP Act of 1956, all scheduled commercial banks in Pakistan are required to maintain with the State Bank of Pakistan (SBP) cash re- serve equal to five per cent of their total demand and time deposits. Under the in- terest based system, penal interest was recovered from scheduled banks if their cash reserve fell short of the required amount. In accordance with the recommen- dation of the CII Report, the system of penal interest has been replaced by a system of penalty and fines. [Zaidi, 1987, pp.118 -120.] II. WORKING AS LENDER OF THE LAST RESORT been before the Islamization of the banking system, the SBP only made limited use of the bank rate policy because the borrowing facility from the SBP to commer- cial banks was restricted to certain specific refinancing facilities. Thus, there were not frequent changes in the bank rates. [Igbal and Mirakhor, 1987, p.21.]. 33