4.2 REGULATION AND CONTROL OF ISLAMIC BANKS IN JORDAN

1. 4.2 REGULATION AND CONTROL OF ISLAMIC BANKS IN JORDAN The Central Bank of Jordan does not make any distinction between ordinary commercial banks and Islamic banks. The Jordan Islamic Bank, like other commer - cial banks operating in the country, has to send fortnightly reports to the central bank with a statement of investment and guarantees. Generally, the central bank insists on a high degree of guarantees and security to be maintained by all commer - cial banks. The instruments of monetary regulation and control as they apply to the Jordan Islamic Bank are discussed below : I. LEGAL RESERVE REQUIREMENT The Central Bank of Jordan requires all commercial banks to keep a 10 percent compulsory legal reserve. This condition is applicable to the Jordan Islamic Bank as well . However, the changes in the legal reserve ratio have not been very frequent which shows that the main purpose of the enforcing the legal reserve requirement in Jordan is to ensure liquidity and security in the banking system. It is not used as an important tool of monetary policy to affect the total volume of credit generated by the commercial banking system. II. DEPOSITS WITH THE CENTRAL BANK The Jordan Islamic Bank keeps its excess liquidity in the form of deposits with the Central Bank of Jordan on a voluntary basis. It does not receive any interest on these deposits while interest is paid by the Central Bank to other commercial banks which keep their deposits with it. No other compensation or concession is given in lieu of interest. III. INSTRUMENTS OF CREDIT CONTROL Credit ceilings are not used by the Central Bank of Jordan as a method of credit control. It mostly relies on policy guidelines. The central Bank of Jordan requires that no commercial bank should make advances (investment in the case of the Islamic Bank) exceeding 70 percent of its total deposits. There is a penalty by the central bank if this limit is violated. No situation has arisen in Jordan in which the Central Bank of Jordan has had to function as a lender of the last resort to the Jordan Islamic Bank. Bank rate policy is not used by the Central Bank of Jordan as an instrument of credit control. How- ever, open market operations are used but the Jordan Islamic Bank does not par- ticipate in them. 41