Open Market Operations through Istesna Papers " Problems and Solutions"

Controlling powerful money and cash holdings within the framework of monetary policies of every country is established by the Central Bank of that country, and to achieve this, the Central Banks utilize tools such as open market operations, discount rates, and legal reserve requirements. However, open market operations, is the oldest, the best known as well as the most important tool among others. In the Islamic Republic of Iran, regarding the prohibition of usury (interest) and consequently the impossibility to use bonds which are based on interest, the “banking without usury” rule has not allowed the banking system to utilize this tool.This paper, introducing Istesna’ contracts and developing Istesna’ papers as a means to implement monetary policies, seeks to examine how the Central Bank would finance the purchase of Istesna’ papers and suggests that by prioritizing the discount rate of Istesna’ papers in general, or discount rates within the framework of “surplus drawings”, it is possible to make use of Istesna’ papers besides Mosharekat bills (partnership papers) of the Central Bank to exercise the expansionary and contractionary policies, and thus, to some extent, fill the vacuum of bonds and open market operations.