Iran became an Islamic republic in 1979, was the revolution that transformed Iran from an absolute monarchy under Shah Muhammed Reza Pahlevy, when the monarchy was overthrown and clerics political controling under supreme leader Ayatollah Ruhollah Khomeini (the founder of the Islamic Republic of Iran). The Iranian revolution marked by the full enforcement of Islamic economic and cultural politics including converting conventional banking into Islamic banking. Much industry was nationalized, laws and Islamicized schools, and Western influences were banned.
Furthermore, capital city Islamic Republic of Iran is a Teheran with the majority religion is Islam, provision religion is Shi’a mazhab (89%), Sunni (10%) and other religion (1%). Curently, Iran country control under the Supreme Leader Ayatullah Ali Khamanei, his call it Imam Khamanei and the presiden is Hasan Rauhani. According to World Bank, the population of Iran is 80.6 million people, and Persian major language is Iran. In economics development, Iran the second largest economy in Midle East and North Afrika (MENA) after Saudi Arabia. Contribution of exports and import in Iran very slightly, the petroleum, carpet and nuts given income to country by exports and capital goods and food items from import. In 2018, release of data from World Bank, the unemployment rate in Iran remains hight, 12.1 % (April-June 2018) and represent moderate improvement compared to the same period of the previous year (12.6%) (World Bank 2018).
On the other hand, the development of Gross National Product (GDP), Iran still adopted comprehensive strategy encompassing market-based reforms as reflected in the government 20 year vision. Plan for 2016-2021, three pillars must be acheive to five year again, firstly, the development of a resilient economy, second is progress in science and technology and the last is promotion of cultural excellence. Furthermore, Iran GDP growt in 2017/18 dropped to 3.8 %, effect of a large surge in oil revenues in the previous year dissipated. Proverty is estimated to have fallen from 13.1% to 8.1% between 2019 and 2013 and currently, 11 million Iranian live below poverty (World Bank 2018).
Historical backgroud of Financial System
Conventional Banking Iran
Before establishment of the modern bank in Iran, banking operations had bess carried out in traditional form, or in other words in the form of money changing. With the introduction of trade and business in the country, money became popular and changed function into a promosing business in Iran. Exchanges of coin and hard currencies were also common in Iran. Furthermore, 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 dealer. It was in fact a receipt of a sum of money taken by money dealers from the owners Bijak. The establishment of the New East Bank in 1850 indicated that changes in money were still continuing. A Russian citizen, in 1856 was named Jacquet Polyakov, had established Esteqrazi Bank for 75 years. The bank continued its activities under the name of Bank Iran until 1933 when it was incorporated into the Bank Keshavarzi (Agriculture Bank). During the Shah Vahlevi regime in Iran, in 1925 the first conventional bank was established in the Iranian capital called Bank Sepah under the name Pahlavi Qoshun Bank. In order to handle the financial affairs of the military personel and set up their retirement fund. With the start of the opening of the Sepah Bank branches in major cities of Iran, financial operations starts off by opening a current account and transfer money around the country (S Husain Ashraf and Ali Alizadeh Giashi 2011).
According to Ashraf and Giashi (2011), The Central Bank of Iran (CBI) was adobted the conventional bank 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). Lastly, the role of rule operation CBI before revolution still adopted conventional transaction and interest rate becomes an attraction in every transaction (S Husain Ashraf and Ali Alizadeh Giashi 2011).
The Islamization of banking system in Iran
Cititation of https://www.cbi.ir/default_en.aspx The Central Bank of Iran (CBI) also know Bank Markazi Jomhouri Islami Iran was established in 1960. Established under the Monetary and Banking and Monetary Act of Iran (MBAI) in 1960. The government of Iran played a primary role in converting conventional banking into Islamic banking after 1979 revolution. Based on 1983 law in 1984, interest free banks started to implement Islamic banking and the law of usury-free banking was passed in 1983. Furthermore, the banking system of Iran is being perceived as an effective tool in pursuance of Islamic economic objectives. After being legalized in 1983, the Majlis of Iran imposed the Islamic Banking (Sharia) law on all banks in Iran must follow the banking principles and practices In the explanation stated in the Monetary and Banking Act of Iran (MBAI), CBI is responsible for the design and implementation of the monetary and credit policies with due regard to the general economic policy of the country.
According to Hassani (2010), the process of Islamization of the banking system in Iran had gone through two phases. Beginning in 1979-1982, the first phase of the process of Islamization of the banking system in Iran nationalized the banking system and reorganized. However, in this phase internal and external developments did not allow the policymakers to build an adequate plan for the Islamization of the banking system. In 1982 and lasted until 1986, the second phase began. The application of the law of usury-free banking (i.e. no interest) that was passed in 1983, which went into effect on March 20, 1984 (Hassani 2010). Dalam the law described 14 types of operations applicable to assets and liabilities. Supported by real assets, for a period of one year, the banks were allowed to buy debt instruments. (Parveen, Zadeh, and Muzakkirsyed 2015).