Islami Bank Internship Report

Internship Report On General Banking, Investment & Foreign

Exchange operations of Islami Bank Bangladesh Ltd.

Submitted To

Mrs. Mahmuda Sultana Course-Coordinator (Training) SPO & Faculty member, IBTRA

Submitted By:

Name

University

Nazma Haque

University of Dhaka

Snigdha Rajbongshi

University of Dhaka

Jasmin Akhter

International Islamic University of Chittagong

Shanzida Rahman

Stamford University

Bangladesh

Date of Submission: 27.12.2010

Letter of Transmittal 27th December 2010

To

Mrs. Mahmuda Sultana

Course-Coordinator (Training)

SPO & Faculty member, IBTRA

Subject: Submission of report on “General Banking, Investment & Foreign Exchange operations of Islami Bank Bangladesh Ltd.”

Honorable Madam, With due respect we do hereby submit our Internship Report titled “General Banking, Investment & Foreign Exchange operations of Islami Bank Bangladesh Ltd.”, which was assigned to us as an integral part of our course requirements in B.B.A program.

As we have been working in IBBL, Jatrabari Branch, Dhaka, thus, it is a very good opportunity for us to prepare the report properly out of practical experiences & empirical data, as well as, application of theoretical knowledge.

Preparing this report has been extremely challenging, interesting and rewarding experience. Now we are able to understand and utilize the key terms of Islamic Banking in banking sector. Now it is very easy for us to interpret any impact and its effect on bank. We would like to express our deepest gratitude to you for providing us with such an opportunity.

We have tried our best to make this report as comprehensive and informative as possible within the time allowed for us. Due to various constraints, there may be some mistakes for which we beg your apology.

Sincerely yours, Nazma Haque Snigdha Rajbongshi Jasmin Akhter Shanzida Rahman

Acknowledgement First of all we remember Almighty Allah for making us successful to prepare this report. We are grateful to the Islami Bank Bangladesh Limited authority that has helped us by updating desired information at their website. At the very outset, we would like to thank Mrs. Mahmuda Sultana, Course-Coordinator, SPO & Faculty member IBTRA for giving us the opportunity to know about the Islamic Banking in Bangladesh, and her support and direction it would never be possible for us to make this report.

We also express our heart full thanks to all the faculty members of Islami Bank Training and Research Academy (IBTRA) specially Dr. Mahmood Ahmed, SVP & Course Director (Training) IBTRA, Janab Md. Hedayet Ullah, AD (Training) and other faculty members as well as the employees from top to bottom of IBTRA, who gave us necessary information and excellent guidance to prepare this internship report.

We talked all the concerned officers of the Islami Bank Bangladesh Limited, Jatrabari Branch, who kindly provided us the information and other handouts. Especially we cannot but mention Rana Mohammad Raihan, Senior vice President of IBBL and Branch Manager, Jb.Md.Monowarul Islam Chowdhury, SPO & Jb.Md. Nasiruddin, Senior Officer of this branch.

The management of this Branch had been extremely helpful in providing necessary documents, annual report, statements, voucher etc. which helped us to prepare this Internship report. We express a deep debt of appreciation & gratefulness to the employees of IBBL, Jatrabari Branch.

Serial No.

TABLE OF CONTENTS Executive Summary

Chapter 1

Introduction of the Report

1-2 3

•

Rational of the study

4

•

Objective of Report

4

•

Methodology

5

•

Scope of the study

6

•

Limitation

6

•

Objective of Islamic Banking

7

•

Basic properties of Islamic Banking

Islamic Banking In Bangladesh

Chapter 2

Page No.

About the organization

8-10 11-13

14 15

•

Corporate Information

•

Vision of IBBL

•

Mission of IBBL

•

Special feature of IBBL

16

•

Management of IBBL

16

•

Financial Performance of IBBL

16

18 19-20

Chapter 3

Analytical Part of IBBL

21

Chapter 4

Chapter 5

Chapter 6

•

PEST Analysis

22-23

•

SWOT Analysis

23-26

Functions of IBBL

27

•

General Banking Operations

28-42

•

Modes of Investment of IBBL

43-49

•

Foreign Exchange Operations

50-53

•

Welfare Activities of IBBL

Difference between Conventional & Islamic banking

Findings, Recommendation& Conclusion •

Findings

54-56

57-64

65 66-67 68-69

•

Recommendations

•

Conclusion

70 71 72-74

•

Bibliography

•

Appendix

Executive Summary

Banking system plays a very important role in the economic life of the nation. The health of the economy is closely related to the soundness of its banking system. In a developing country like Bangladesh the banking systems as a whole play a vital role in the progress of economic development. Modern trade and commerce would almost be impossible without the availability of suitable banking services. Islamic Banking is an integral part of Islamic Economics and thereby an Islamic way of life. Islamic Banking is a special nature of financial intermediary which has not involve in any way with interest. The introduction of interest-free and equity-based financing by the Islamic banking system is based on the principles of Islamic economics. Here I provide information about Islamic Banks in Bangladesh. IBBL is a third generation bank in the private sector banking of Bangladesh. IBBL is the private commercial bank that is a brain child of some successful local entrepreneurs. IBBL is a banking company registered under the Companies Act, 1913 (At present the companies Act, 1994) with its Head Office at 40, Dilkusha Commercial Area, Dhaka- 1000, Bangladesh. The bank started its historical operation on the 30th March 1983. Now it has as many as 234 Branch throughout the country. Five more Branches are placed to be opened in 2010. IBBL has already achieved tremendous progress within only 8 years. Now IBBL is offering about to all modern banking service with modern technology. Meanwhile, IBBL has already introduced on-line banking services. Islami Bank has discovered a new horizon in the field of banking area which offers different General Banking, Investments and Foreign Exchange banking system. IBBL has some special mission & vision to establish interest free Banking in the country. From the very beginning since inception the Bank it has been facing different kinds of problem due to lack of Islamic Banking Act, Islamic money market and also general people have no idea about Islamic mode of investment.

We have prepared the internship report on “General Banking, Investment & Foreign Exchange operations of Islami Bank Bangladesh Ltd.” as a partial fulfillment for the BBA program of the university based on primary & secondary data & information. For this specific purpose we have collected data & information from various sources like published materials such as the annual report, articles related to Banking activities. We concentrated on arranging

& putting the data in such a way that the report progressively anchors to a desired destination of understanding. In this report we have tried to show overall activities & performance of Islami Bank Bangladesh Ltd. We have also shown the differences with conventional banking regarding different aspects as well as identified strength and weakness of IBBL & recommend actions that may be necessary to redesign functions of IBBL.

Chapter One

Introduction of the Report

1.1 Rationale of study: Internship program of University is a partial requirement for the graduation of BBA/M.B.A students. Every B.B.A/M.B.A student is appointed to learn some practical knowledge within the pre-stipulated period by observing the organization day to day activities. In this regard our internship program started at 27th October at Islami Bank Bangladesh Limited. In the modern society commercial Banks occupy a position of economic importance. They play a

significant role to meet the needs of the society such as capital formation, large-scale production, industrialization, growth of trade and economy etc. Islamic banks are unconditional and specialized financial institutions that perform most of the standard banking services and investment activities on the basis of profit and loss sharing system conforming to the principles of Islamic Shari’ah. Out of 50 banking institutions, 7 banks are backed by Islamic mechanism and worldwide accepted Islamic morality and established code of conduct. This paper, however attempts to appraise performance and dictate the overall scenario of Islami Bank Bangladesh Limited performing beneath the umbrella of Islamic shari’ah and approved welfare oriented principles.

1.2 Objectives of report The first objective of writing the report is fulfilling the partial requirements of the BBA program. In this report, we have attempted to give an overview of Islami Bank Bangladesh Limited in general. The primary objective of this report is to observe the general banking, investment related activities & foreign exchange operations of Islami Bank Bangladesh Ltd. The other objectives include: Following are the main objectives •

To familiar the history of Islami Banking in Bangladesh.

•

To learn about the overall general banking operations of IBBL.

•

To show the investment mechanism and product offerings in different modes of IBBL.

•

To learn about the shari’ah aspects followed for foreign exchange operations.

•

To learn about the welfare activities of IBBL.

•

To show the differences with conventional banking regarding different aspects.

•

To identify strength and weakness of IBBL.

•

To find problems or lacking that IBBL is facing.

•

To recommend actions that may be necessary to redesign the investments of IBBL

1.3 Methodology In order to carry out the report, we have collected the required data from both primary and secondary sources. We focused on taking the interviews of the personnel involved in the different departments, Manager and Senior Level Employees, Business Clients and Account Holders. After collecting information the data were used to analyze information, Graphical tools were used to get clear picture of the situation.

a) Nature of the study: Exploratory

b) Sources of information: Both primary and secondary information sources were used to complete this report.

Primary sources of data: Direct interview process in bank employees.

Secondary sources of data: Manuals provided by Islami Bank Training & Research Academy, Published financial statement & Website of Islami bank Bangladesh Limited.

Analytical Review:

•

PEST Analysis

•

SWOT Analysis

•

Graphical Analysis

1.4 Scope of the Study

Islami Bank is the pioneer of welfare driven economy and promoter of balanced growth in a country like Bangladesh which has a poverty stricken contemporary economic background. To address the ongoing condition of IB and their bright prospects is a vital issue to be explored.

1.5 Limitations During preparing this report I have faced these following limitations:

 Inadequate published information about bank  Financial constraints to collect information  Insufficient information in websites of bank  Confused definition about products and services of Islamic bank  Unsound database about Islamic banks in Bangladesh Bank  Busy working environment  Lack of sufficient well informed officials  Data could not been collected for confidentiality or secrecy of management

1.6 Objectives of Islamic Banking

The primary objective of establishing Islamic banks all over the world is to promote, foster and develop the application of Islamic principles in the business sector. More specifically, the objectives of Islamic banking when viewed in the context of its role in the economy are listed as following: 

To offer contemporary financial services in conformity with Islamic Shari’ah;



To contribute towards economic development and prosperity within the principles of Islamic justice;



Optimum allocation of scarce financial resources; and to help ensure equitable distribution of income.

These objectives are discussed below:

Offer Financial Services: Interest-based banking, which is considered a practice of Riba in financial transactions, is unanimously identified as anti-Islamic. That means all transactions made under conventional banking are unlawful according to Islamic Shari’ah. Thus, the emergence of Islamic banking is clearly intended to provide for Shari’ah approved financial transactions. Islamic Banking for Development: Islamic banking is claimed to be more development- oriented than its conventional counterpart. The concept of profit sharing is a built-in development promoter since it establishes a direct relationship between the bank’s return on investment and the successful operation of the business by the entrepreneurs.

Optimum Allocation of Resources: Another important objective of Islamic banking is the optimum allocation of scarce resources. The foundation of the Islamic banking system is that it promotes the investment of financial resources into those projects that are considered to be the most profitable and beneficial to the economy.

Islamic Banking for Equitable Distribution of Resources:

Perhaps the must important objective of Islamic banking is to ensure equitable distribution of income and resources among the participating parties: the bank, the depositors and the entrepreneurs.

1.7 Basic Properties of Islamic Banking Islamic banking is emerging in an era when the world is settling down to a free market economy and when phenomenal changes are taking place in the global economy. A freemarket economy visualizes three essential features - free trade, open capital market and minimum governmental intervention. The vagaries of protectionism and regionalism are transforming the economy to free trade and globalize. The changes could provide ample scope for the Islamic banking to grow and work in competitive environment. Islamic banking, being an integral part of an Islamic economic system can be practiced more effectively in an environment, which conforms to the doctrine of Islam. Thus there are some essential requirements for a successful Islamic banking, such as:

•

Supportive Legal Framework and Swift Judicial System:

An effective legal framework ensuring speedy justice is essential for a good society, it is more so for the success of Islamic banking, because its investment risk is more than that of a conventional interest-based bank as its dealings are on profit and loss basis. •

Disciplined Entrepreneurship:

It would minimize cases of malfeasance and mismanagement. Besides, a banker must extend from being merely a financier to a role-player in business. Although a Murabaha transaction in Islamic banking does provide an opportunity to a banker to share in business, the Islamic banks generally limit themselves to being inactive partners for their credit risk only. The real entrepreneurial role of an Islamic bank needs, therefore, to be increased. • Conceptual Management:

Change

from

Credit

Risk

to

Overall

Risk

While it is difficult to predict, with any degree of certainty, the operating results of an enterprise and the magnitudes of profit and loss, all the same, it seems unjust if the party providing the capital is guaranteed a fixed and predetermined rate of return, and the other party undertaking the enterprise is made to bear the uncertainty alone. Under the circumstances, an Islamic banker has not only to focus on credit risk but also to view all the business risks of the enterprises in which he has invested the bank money.

•

Strong Ethical Values:

The Islamic economic system offers a balance between the two extremes of public or social and private or individual ownership of property. The success of Islamic banking in a society is related to the extent of acceptability of the doctrine of trusteeship and transformation of the self-interested and profit-oriented behavior of people into an altruistic and value-oriented behavior. •

Supreme Shari’ah Council:

The function of Shariah Council in maintaining Islamic banking activities in a country within the orbit of Islamic injunctions is dependent on its legal status and the extent of implementation of its opinion. The opinions of Shari’ah Councils of different countries may not necessarily be uniform. There is, therefore, a need for a Supreme Shari’ah Council representing Muslim community all over the world to decide about various issues con fronted by Islamic banks. A beginning has been made in this direction by establishing the Council of the Islamic Fiqh Academy at Jeddah, Saudi Arabia under the auspices of the Organization of Islamic Conference (OIC) but its role has to be augmented. •

Uniform Accounting Standards:

There is need for harmonization of financial reporting of Islamic banks in respect, particularly, of the following; 

The significant accounting policies on which the statements are based should be fully and clearly declared,



The methods of translating foreign currency transactions would be appropriately disclosed,



Appropriate and sufficient disclosures regarding the quality of banks assets is of much concern to the depositors,



Additional disclosure of the nature of the financial contingencies and commitments of the banks in their financial statements.

•

Committed Management:

If the management of a bank is determined to step into the business of Islamic banking, it can easily evolve a strategy for the same, formulate a plan for a specific time - frame and implement it accordingly. •

Progressive and Modern outlook:

In order to ensure successful management in Islamic banks, there is need to apply all the available modern tools of managing corporate business, including management of human assets, offices, information resources, marketing etc. •

Body to Evaluate Islamic Financial Institutions:

In order to ensure quality and standard in management of Islamic financial institutions and to build confidence of the general public in Islamic banking, there is need to establish some professional body responsible to define professional standards and ethics and other aspects of Islamic financial institutions. It may also certify the level of financial health of such institutions.

•

Treatment in case of Loan default:

In time of loan default these banks don’t take any penalty for default which is one of the major differences between Islamic & conventional banks. •

Participatory financing:

Islamic banks believe in participatory financing. They do the investment through profit & loss sharing. Their investment modes depend on mudaraba & murabaha principles which require participatory financing of both the parties. •

Lending and investing:

In Islam, there is a clear difference between lending and investing lending can be done only on the basis of zero interest and capital guarantee, and investing only on the basis of Mudaraba (profit-and-loss-sharing).

1.7 Islamic Banking in Bangladesh

Islamic Banking has experienced a phenomenal growth and expansion in Bangladesh in the backdrop of strong public demand and support for the system along with its gradually increasing popularity across the world. As a result, a number of full-fledged Islamic Banks has been established, while a good number of conventional banks have come forward to offer services compliant with Islamic Shari’ah through opening of Islamic branches along with conventional ones. There is also a trend of conversion of conventional banks into Islamic bank. It has, therefore, become necessary to ensure that activities of the fast growing Islamic Banks are carried out properly and uniformly according to the principles of Islamic Shari’ah. With this end in view, Bangladesh Bank constituted a Focus group comprising representatives of the central Bank, a number of Islamic Banks and the Central Shari’ah Board for Islamic Banks of Bangladesh to formulate an integrated guideline for conducting banking business of the Islamic Bank/Islamic bank branches of conventional banks. Based on the recommendations of the Focus group this guideline embodying different terminologies used in Islamic Banking operations, definitions of the terminologies, the principles and modes of deposits and investments has been prepared. It also dwelt upon the issues of liquidity, maintenance of books of accounts and preparation of financial statements and other related issues. This guideline has been prepared mainly on the basis of Banking Companies Act 1991, Companies Act 1994 and Prudential Regulations of Bangladesh Bank. However, this guideline should be treated as supplementary, not a substitute, to the existing banking laws, rules and regulations. Incase of any point not covered under this Guideline as also in case of any contradiction, the instructions issued under the Banking Companies Act and Companies Act will prevail.

Definitions of Terms used in Islamic Banking Operations The following terms as used in this guideline, if not repugnant to the subject or affairs, shall have the following meaning: • "Shari’ah" means such rules and regulations as have their origin in the holy Qur'an

and Sunnah to govern all aspects of human life.

• "Islamic bank" means such a banking company or an Islamic banking branch (es) of a banking company licensed by Bangladesh Bank, which follows the Islamic Shariah in all its principles and modes of operations and avoids receiving and paying of interest at all levels. • "Islamic Banking Business" means such banking business, the goals, objectives and

activities of which is to conduct banking business/activities according to the principles of Islamic Shari’ah and no part of the business either in form and substance has any elements not approved by Islamic Shari’ah.

• "Branch or Branch Office" means any branch or Branch Office of Islamic Bank Company or office or Branch of such interest based conventional Banks which run Islamic banking business. • "Depositor" means some one who holds with any Islamic Banking Company any account namely Current account based on Al-Wadiah principles, Savings or long and short term deposit accounts under Mudaraba principles. • "Investment" means any such modes of financing which Islamic Bank Company does

bin accordance with principles of Shari’ah or as per the Shari’ah approved modes like Mudaraba, Musharaka, Bai-Murabaha, Bai-Muajjal, Istisna, Lease, Hire-purchase under Shirkatul Melk, etc. • "Client" means such a person or institution who/which has any business relationship with Islamic Banking Company. • "Compensation" means such financial penalty as is imposed by a Islamic Banking Company over and above the amount of installment when a client fails to repay Bank's investment on due dates as per the agreement executed by him Bangladesh is one of the largest Muslim countries in the world. The people of this country are deeply committed to Islamic way of life as enshrined in the Holy Qur’an and the Sunnah. Naturally it remains a deep cry in their hearts to direct and design their economic lives in accordance with the precepts of Islam. The establishment and commencement of Islamic banks in Bangladesh, is the true reflection of this inner urge of its people.

In our banking sector there operates 7 banks which are backed by Islamic Shari’ah and approved principles according to Quran and Sunnah. First Islamic bank is IBBL which is established in 1983. This was in fact the one of a kind bank in the Southeast Asia. Other players in the market are:

•

EXIM Bank

•

SJBL

•

First Security Islami Bank Ltd

•

Al-Arafah Islami Bank Ltd

•

Social Islami bank Ltd

•

ICB Islamic Bank

CAMELSRatingStatusof Is

Strong: Shahjalal Islami Ba Satisfactory: EXIM Bank , I Fair: Al-Arafah Islami Bank Marginal: Social Islami Ban

Chapter Two About the Organization

2.1 Islami Bank Bangladesh Limited

The establishment of Islamic Bank Bangladesh Limited on March 13, 1983, is the true reflection of this inner urge of its people, which started functioning with effect from March 30, 1983. This Bank is the first of its kind in Southeast Asia. It is committed to conduct all banking and investment activities on the basis of interest-free profit-loss sharing system. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the Gulf countries, Islamic Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh.

Corporate information: (As on Diary 2009 of IBBL)

Date of Incorporation

13th March 1983

Inauguration of 1st Branch (Local office, Dhaka)

30th March 1983

Formal Inauguration

12th August 1983

Share of Capital Local Shareholders

41.77%

Foreign Shareholders

58.23%

Authorized Capital

Tk. 10,000.00 million

Paid-up Capital

Tk. 7,413.00 million

Deposits

Tk. 265,193.00 million

Investments (including Investment in Shares)

Tk. 255,178.00 million

Foreign Exchange Business

Tk. 277,739.00 million

Number of Branches

211

Number of SME Service Centers

20

Number of Shareholders

52164

Manpower

9588

2.2 VISION OF IBBL

The vision of Islami Bank Bangladesh limited is to strive to achieve superior financial performance be considered a leading Islamic bank by reputation and performance. •

To establish and maintain the modern banking techniques

•

To ensure the soundness and development of the financial system based on Islamic principles and to become the strong and efficient organization with highly motivated professionals, working for the benefit of people, based upon

•

Accountability, transparency and integrity in order to ensure stability of financial systems.

•

Encourage savings in the form of direct investment.

•

To encourage investment particularly in projects which are more likely to lead higher employment

2.3 MISSION OF IBBL

To establish Islamic banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the field of all economic activities, achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less developed areas of the country, to encourage socio-economic uplift and financial services to the low income community particularly in the rural areas.

2.4 Special features of The bank is committed to run all its activities as per Islamic Shariah. IBBL through its steady progress and continuous success has earned the reputation of being one of the leading Private Sector Banks’ of the country. The distinguishing features of IBBL are as follows: •

All activities are conducted on interest-free banking system in accordance with Islamic Shari’ah.

•

Investment is made through different modes permitted under Islami Shari’ah.

•

Establishment of participatory banking instead of banking on debtor-creditor relationship.

•

Investment income of the Bank is shared with the Mudaraba depositors according to a ratio to ensure a reasonable fair rate of return on their depositors.

•

Its aims are to introduce a welfare-oriented banking system and also to establish equity and justice in the field of all economic activities.

•

It extends Socio-economic and financial services to the poor, helpless and low-income group of the people for their economic enlistment particularly in the rural areas.

•

It plays a vital role in human resource development and employment generation particularly for the unemployment youths.

•

Its aim is to achieve balanced growth and equitable development of the county through diversified investment operations particularly in the priority sectors and in the less developed areas.

•

It extends co-operation to the poor, the helpless and the low-income group for their economic development

2.5 MANAGEMENT OF IBBL

Islami Bank Bangladesh limited is being managed by a board of directors comprising foreigners and local. An executive committee is formed by the board of directors for efficient and smooth operation of the Bank. Besides a management committee looks after the affairs of the bank.

Organizational Structure of the Company

Financial Performance of IBBL at a glance Table-2.1 2005

2006

2007

2008

2009

Authorized

5,000.00

5,000.00

5,000.00

10,000.00

10,000.00

capital Paid-up

2,764.80

3,456.00

3,801.60

4,752.00

6,177.60

capital Shareholde

8,331.14

10,435.96

14,957.74

18,572.08

23,619.81

r’s equity Total

1,50,959.66

1,88,115.2

2,50,012.7

2,88,017.1

340,638.49

Assets Total

1,07,779.42

7 1,32,419.4

9 1,66,325.2

9 202,115.45

244,292.14

deposit Total

97,178.31

0 1,17,132.8

9 1,65286.32

1,87,586.5

225,752.41

investment Investment

86.89%

3 85.77%

87.13%

5 89.08%

87.85%

to deposit Export

36,169.00

51,133.00

66,690.00

93,962.00

106,424.00

Import

74,525.00

96,870.00

1,37,086.0

1,68,329.0

161,230.00

0

0

84,143.00

1,40,404.0

194,716.00 11.65%

Remittance

36,948.00

53,819.00

9.44%

9.43%

10.61%

0 10.72%

ratio Cost of

8.58%

9.34%

9.06%

9.56%

8.76%

fund No. Of

169

176

186

*206

*231

Capital Adequacy

Branches

*10 SME / Agriculture Branch for year 2008 *20 SME / Agriculture Branch for year 2009

Chapter Three

Analytical Part of IBBL

3.1 PEST Analysis of Islami Banking System

Political > Economical > Social > Technological

PEST analysis: Bangladesh Perspective PEST analysis is a comprehensive analytical process to trace the competitive position in the general business environment of any country. The countrywide various factors under the four terms specified above categorize the status of any business concern.

•

Political factors: Regional legislation, legal procedure, law and order of a country influence the banking mechanism to a greater extent. Our provision is more or less friendly towards the banking sector. Principles directed by the regulatory authority and international bodies’ impact the banking performance of our country.

•

Economical: GDP, corporate income tax provision and distribution channels, market routes and customer base are components of economical factor. Our country background and increasing customer demand raise the importance and evolution of Islamic banking system.

•

Societal factors: The biggest proposition of Islamic banking system is the religious perception in minds of people since most of the residents of our country are Muslims. Media support, life style, major events like RAMADAN, Eid festivals and Hajj saving propensity also stimulate the advancement of Islamic banking.

•

Technological aspect: Technological factors involve competitive development, research methodology, revolutionary online transaction system, innovative potentials, one stop service delivery system manipulate the Islamic shari’ah powered banks operating in our country.

3.2 SWOT ANALYSIS STRENGTH

WEAKNESS

OPPORTUNITY

THREATS

SWOT analysis is a tool for screening an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. It helps to detect the possible threats and opportunities in the market and viability. It helps recognize internal strength and overcome weaknesses. It is the scanning of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths, or weaknesses, and those external to the firm can be classified as opportunities or threats.

STRENGTHS •

Islamic Banking will explicitly reorganize the deplorable condition of the poor and marginalized segments of society. Banking products which comply with Islamic law are becoming increasingly popular, not only in the Gulf countries and far eastern states like Malaysia, but also in other developed markets such as the United Kingdom. Reputed banks like Standard Chartered, Citibank, and HSBC are operating interest free windows in several West Asian countries, Europe and USA. There is a huge potential market in Bangladesh for Islamic banking products.

•

Moreover, Islamic banking helps the weaker and hapless section of the society through various financial products. Islamic banking finances (through its Joint ventures, partnerships and leasing)are provided by investors or banks to the borrowers with a condition that financial risk is to be borne by the investors, and other risks to be borne by the borrower. This helps even the indigent and vulnerable to get finance at a no risk and cost basis, but definitely requires other credits like strong business proposal, rational planning, skilled hands and specialized art to attract the financier. Better business proposals succeed in fetching funds as opposed to the projects with comparatively poor propositions. Such inclusive growth will aggrandize the Bangladeshi economy.

•

There is no room for diversion of funds. Therefore, investment in consonance with Islamic banking principles will surely boost the engine of economic growth in our country.

•

Commercial banks cannot raise deposits without promising a specified rate of return to depositors, but under Shari’ah, returns can only be determined post-facto depending on profit. Also banks have to maintain a Statutory Liquidity Ratio (SLR), which involves locking up a substantial portion of funds either as cash, gold or in government securities. Such cash will not get any return, keeping it in gold is risky as it could depreciate and government securities come with interest.

•

We have seen the fall of giants in the world of financial sector like Lehman Brothers in the aftermath of the US sub-prime mortgage crisis. Therefore, it is of paramount importance to be strict about credit rating system, to circumvent any chance of further bankruptcy. Since Islamic banking adheres to strict credit rating

•

system and prohibits indebted economic agents to avail more debt finance, it could save our financial and economic enterprises from bankruptcy.

•

Religious appeal.

WEAKNESS

•

Islamic banking needs to introduce corporate governance with transparent accounting standards. It needs to perform detailed evaluation before embarking Profit Loss Sharing Scheme, which demand a pool of highly trained professionals. The imparting of professional training is costly. Detailed principles are still to be laid down and techniques and procedures evolved to carry them out.

•

The financial institutions in Bangladesh comprises of Banks and Non Banking Financial Institutions. Banks in Bangladesh are governed through some Regulatory Acts. But Islamic banking operations sometimes contradict with the set laws. Like:

 Banking Regulations Act prohibits bank to use any sort of immovable property apart from private use –this is against Ijarah for home finance.  Banking Regulations Act requires payment of Interest which is against

Shari’ah.

•

It is observed that inability to evaluate a projects' profitability has tended to act against investment financing. Some borrowers are frustrated to the banks appraisal efforts as they are reluctant to provide full disclosures of their business.

•

Limited appeal outside core customer base.

•

Widely acceptable and reliable techniques are yet to be devised.

•

Adverse selection has been one of the major impediments in the world of Islamic banking.

•

Among the other disincentives from the borrower's point of view are the needs to disclose his accounts to the bank if he were to borrow on the Profit Loss Sharing basis. However, many small-time businessmen do not keep any accounts, leave alone proper accounts. And large conglomerates do not like to disclose their real accounts to

anybody. The widespread lack of business ethics among certain business community will be another major hurdle in the path of Islamic banking in Bangladesh. •

The practices in use by the Islamic banks have evoked questions of morality. Bai mu'ajjal (sale with deferred payment) and Murabaha (cost-plus financing) are permitted in the Shari’ah under certain conditions. What are being done in many countries are fictitious deals which ensure a predetermined profit to the bank without actually dealing in goods or sharing any real risk. This is against the letter and spirit of Shariah.

Opportunity •

Fastest growing religion in the world.

•

The size of the market will be very large if it can be targeted properly.

•

In the name of religious faith, people are looking for interest free banking and finance. It is significant to mention here that Islamic banking is not meant for Muslims only but non Muslims may also avail the benefit of it. And it is feasible to have a parallel banking system based on Shari’ah along with a conventional one.

•

After 4/5, most of the countries started pulling out their investments from the US and Europe because of the fear of freezing of assets. Another reason could be the slowdown in the economies of western countries. A growing Bangladeshi economy has created a huge enthusiasm among Islamic nations as it sees the unlimited opportunities it can avail.

•

Islamic banking is an effective mechanism to defeat the liquidity and inflation problems along with allowing comprehensive growth. For real inclusive growth, we have to ensure increase in income and employment status of workers in all segments.

•

If Islamic banking is introduced, the inadequate labor capital ratio, for informal sector workers associated with agriculture and manufacturing industries could be resolved through equity finance, which might be a revolution in our agriculture and unorganized sector. With improved labor capital ratio, our vulnerable workers associated with agriculture and unorganized sector might be able to compete effectively with the formal sector workers. Thus Islamic Banking may financially empower majority of our work force.

•

Islamic banking should not be a religion based banking business, but could be profitably used to resolve our issues pertaining to economy.

Threats •

Moving towards more Shari’ah compliant services offered by mainstream banks.

•

It may bring financial segregation in the economy. The compartmentalization of Shari’ah compliant and Non Shari’ah Compliant banking might be dangerous for the stability of our financial environment.

Chapter Four

Functions of IBBL

General Banking, Investment & Foreign Exchange Operations of IBBL

General Banking Operations General banking provides the foundation of banker – customer relation ship through opening account. This is the busiest department and the daily transactions of concerned to the customers for drawing or depository money , selling of the instrument to them for remittance purpose, collection of their instruments providing other services to them and keep customer section busy. Usually the following sections/departments are involved to perform the general banking operations:

   

Cash Section Bills & Remittance Section Clearing and Collection Section Accounts Section

The major general banking operations of IBBL are  Mobilizing deposits through opening different  types of account.  Receipts and payments of cash.  Passing, cancellation, issuance and payment of cheque.  Maintenance of Vault and Strong Room under  Joint custody for safe keeping cash and vouchers.  Handling transfer transactions.  Operations of Clearing House. Proper house keeping , maintenance of Books and Records and Computer (eIBS Software)  Maintenance of ATM, Electronic Funds Transfer, Internet Banking, Phone Banking etc.  Maintenance of security in transaction hour by armed security guard.  Correspondence, receipt & dispatch.  Personal administration  Proper house keeping , maintenance of Books and Records and Computer (eIBS Software)  Maintenance of ATM, Electronic Funds Transfer, Internet Banking, Phone Banking etc.  Maintenance of security in transaction hour by armed security guard.  Correspondence, receipt & dispatch.  Personal administration

Mobilizing Deposits Islami Bank accepts deposits under two principles viz. Al-Wadeah principle and Mudaraba principle. Current account is operated on Al-Wadeah principle and all other deposit accounts on Mudaraba principle of Islamic Shari’ah.

Al-Wadeah The word 'Al-Wadeah' has been derived from the Arabic word 'Wada'yun' which means to keep/to deposit/to give up/Amanat. In case of Amanat, Bank/any other person/institution can not use, invest, and amalgamate the funds of Amanat with the banks/his/its other funds without prior permission of the owner of the Amanat. Thus, in Al-Wadeah account there is a provision to obtain prior permission from the owner of the fund to use, invest, amalgamate the said fund with their/other funds and return the same within banking hour on demand. Bank is here ‘Muaddah Elaihe’ and depositor is ‘Muaddi

Mudaraba The word 'Mudaraba' has been derived from Arabic word 'Darb'/'Darbun' which means “Travel”. Thus the word ‘Mudaraba’ means travel for undertaking business. Mudaraba is a form of partnership in profit whereby one party provides capital and the other party provides skill and labour. The provider of capital is called ‘Shahib-al-Mal’ or the ‘Rabb-ul-Mal’ (the financier or owner of the fund) and acts like a sleeping or dormant partner while the provider of skill and labour is called ‘Mudarib’ (entrepreneur/organizer) who provides the entrepreneurship and management for carrying on any venture, trade, industry or service with the objectives of earning profits. Both the parties share the profit as per pre-agreed ratio and the losses, if any, being borne by the provider of capital i.e. ‘Shahib-al-Mal’ except if it is due to breach of trust, misconduct, negligence or violation of the conditions agreed upon by the Mudarib becomes liable for that. The Mudarib is in the nature of a trustee as well as an agent of the business. He is to work with honesty and sincerity and to exercise the maximum possible care and precaution in the exercise of his functions.

Deposit Products of IBBL           

Al-Wadeah Current Account Mudaraba Savings Account Mudaraba Special Notice Account Mudaraba Term Deposit Account Mudaraba Hajj Savings Scheme Mudaraba Savings Bond Scheme Mudaraba Special Savings (Pension) Account Mudaraba Monthly Profit Deposit Scheme Mudaraba Muhor Savings Account Mudaraba Waqf Cash Deposit Account Mudaraba Foreign Currency Deposit (Savings) Account

Al-Wadeah Current Account

The major features of this account are as follows:

 The depositor can deposit any amount in this account and the bank receives money from the clients for safe-custody with the condition to return the money on demand.  The depositor can withdraw any amount at any time through cheque or any other acceptable means retaining the minimum balance in the account.  As the depositors do not take the risk of losses with Al-Wadeah account they are not entitled to any profit from use of their deposits by the investors.  Cheques, bills etc. may be collected in this account.  Govt. excise and incidental charges for safe keeping of the depositors’ money or for services rendered to them can be realized from the account as per rule. Mudaraba Savings Account

The major features of this account are as follows:  This account may be opened in single or joint name of the person (s) or any organization acceptable to the Bank.  The accountholders are generally allowed to deposit several times as they require but in case of withdrawal of money there are some restrictions as per rules and practices of the commercial banks.  The Bank is authorized to invest the Mudaraba funds at the risk of the depositors.  The Bank will arrange proper deployment of funds without any intervention of the depositors.  Total profit resulting from such investment will be distributed between the Bank and the depositors as per agreed ratio.  If any loss is incurred, it is to be borne by the depositors. However, in IBBL a reserve fund named as ‘Investment Loss Offsetting Reserve (ILOR)’ has been created to meet up such losses and other purposes. Mudaraba Special Notice Account

This account is also conducted under Mudaraba principle. The very special character of this account is to serve seven days prior notice for any withdrawal.

Mudaraba Term Deposit Account

 Mudaraba Term Deposit Account is also conducted under Mudaraba principle of Islamic Shari’ah.  Generally deposit is accepted in different tenure of 3,6,12,24 & 36 months of minimum Tk.1000.  No withdrawal facility is allowed here.  However the depositors may enjoy premature encashment facility or may avail ‘Quard’ against the lien of MTDR as per norms of the Bank. If the clients encash the MTDR before 3 months, no profit is allowed.

 MTDR holders can withdraw profit yearly basis against 1(one) year and above MTDR. In case of no withdrawal of profit, the same to be considered principal amount for further period.  If MTDR is not encash within 1(one) month of its maturity date, it is automatically renewed for a further same period.

Mudaraba Hajj Savings Scheme

 Any Muslim intending to perform Hajj can open this account for accumulating savings with a view to meeting Hajj expenses and may select 25 alternative choices based on duration from 1 year to 25 years.  The Bank accepts deposits on installment basis under Mudaraba principle.  Considering the religious aspects and to inspire the individual to perform Hajj, the Bank gives here the highest weightage in distribution of profit in compare to other accounts.  Premature encashment is allowed. To avail the highest weightage which is 1.35 for above 10 years term and 1.30 up to 10 years term, the accountholder has to show the proof of performing Hajj.  It is opened in the name of single person. Mudaraba Savings Bond Scheme

Mudaraba Savings Bond Scheme

• • • • • • •

The person (s) aged 18 years and above shall be eligible to purchase Bond (s) in single name or in joint name. Educational Institutions, Clubs, Associations and other non-trading and non-profit socio-economic institutions shall also be eligible to purchase Bond(s) in the name of the institutions. Guardian(s) shall be allowed to purchase Bond(s) jointly with a Minor mentioning the age of the Minor. The profit of Bond may be withdrawn by the bondholder once in a year. No profit shall be paid for the period after maturing of the Bond, if not encashed on maturity. The terms of Bond are 5-year & 8-year. Available denominations are Tk.5,000; Tk.10,000; Tk.25,000; Tk.50,000; Tk.1,00,000; Tk.5,00,000; & Tk.10,00,000. Present weightages are 1.10 & 1.25 respectively.

Mudaraba Special Savings (Pension) Scheme

 IBBL has introduced such Scheme (viz. MSS) so that a person can get the opportunity to build-up savings by contributing small monthly installments for getting an attractive amount at the end of a specific term of maturity.  Generally the terms of maturity are 5-year & 10- year. Under this scheme, account may be opened for monthly deposits of Tk.100; Tk.200; Tk.500; Tk.1,000 and multiple of Tk.1,000 upto Tk.20,000 only.  Any bonafide citizen of Bangladesh of 18 years and above can open this account in his own name or in the name of Minor.  The applicant shall have to introduce by a bonafide account holder of the Branch where he intends to open account or any client of any Branch of IBBL or any respectable person known to the Bank.  The MSS account can be transferred from one Branch to another Branch.  The depositors may issue written standing instruction for monthly transfer of installment from any other account maintained with the same Branch for credit to his MSS account. The client has to pay a charge of Tk.5/= only for each such transfer.  Benefits of full weightage with yearly cumulating of profit shall become payable if withdrawn on maturity. No profit shall accrue if the account is closed within 1(one) year.  In case of premature encash/withdrawn after 1(one) year, profit shall be payable at the rate applicable for Mudaraba Savings Deposits. In case of 10 years term MSS account encashed after 5 years but before 10 years, profit shall be payable at the rate applicable to 5 years term MSS account for 5 years and at the rate of Mudaraba Savings Deposit for the subsequent period. Mudaraba Monthly Profit Deposit Scheme

 Any individual may open an account under this Scheme by depositing a minimum

amount of Tk.1, 00,000 and multiples thereof at a time for 3 or 5 years.  Monthly provisional profit is given to the account just after completion of 30 days 

from the date of opening of the account. The profit amount shall be adjusted after completion of each accounting year after declaration of final rate of profit.

Mudaraba Waqf Cash Deposit Account

 IBBL has introduced Mudaraba Waqf Cash Deposit Account through which fund is pooled for the purpose of Waqf from the well-off and the rich people of the society. The income to be generated thereon may be spent for different benevolent purposes including various religious, educational and social services.  Under this scheme one may create Cash Waqf at a time or may start with a minimum deposits of Tk.10,000/- only and the subsequent deposit shall be made by

installment(s) in Thousand Taka or in multiple of thousand Taka. The highest weightage is given here for encouraging Waqf system of Islam which is now 1.35. Profit from this account is utilized as per instruction of the Accountholders. Mudaraba Foreign Currency Deposit (Savings) Account

Mudaraba Foreign Currency Deposit Account has been introduced by IBBL under Mudaraba principle. The following categories of people can open this account.

 Bangladeshi nationals residing, working and earning abroad;  Foreign nationals residing in Bangladesh and also foreign companies registered abroad but operating in Bangladesh; and  Foreign missions and their expatriate employees.

Chart 4.1

Types of Account in 31.12.2009 4.32, 0.01, 4% 0% 1.67, 2% 2.25, 2% 6.8, 7%

MSA MSS MTA

38.92, 39%

9.12, 9%

AWCA MSBA MMPA MSNA FCA Other

18.16, 18% 18.75, 19%

Trend of Deposits over years:

Deposits Table-4.1

In Million

Year

2005

2006

2007

2008

2009

Deposits

107779.42

132419.40

166325.29

202115.45

244292.14

Chart-4.2

IBBL is the bank which is able to collect highest amount of deposits among the whole banks. No one can compete with this bank. From 2005 to 2009 the amount of deposits is just doubled. For this reason the bank has the great opportunity to invest its huge amount of money. And at the same time this never faces any type of liquidity crisis in spite of maintaining this huge amount of deposits. Now IBBL maintains more than TK. 2 lac million as deposit.

Local Remittance Remittance represents transmission/transfer of money from one place to another. Local remittance represents remittance that takes place within the territory of a country. Banks have a wide network of branches all over the country and offer various types of remittance facilities to the public/customer/client etc.

Modes of Local Remittance: There are four modes of remittances which are as under: (a) DD - Demand Draft (b) TT - Telegraphic Transfer (c) PO - Payment Order (d) Online banking Demand Draft

According to Section 85 (A) of the Negotiable Instruments Act, a demand draft is “an order to pay money drawn by one office of the bank upon other office/branch of the same bank for a sum of money payable to order on demand”. Issuance of DD A prescribed Application Form bearing No. F-20 is required for effecting remittance through D-D and the following columns should be filled in properly: • • • • • • • • • • •

Name and address of the applicant. Telephone No. (if any). Date Signature of the applicant Name of the payee Drawee branch Amount in figure and words. Commission is to be realized /charged as per Head Office circular. At present min. Tk. 23/For Tk. 1-20,000 (Com. 20+Vat 3), but for Tk. 20,001 and above Tk. 1/thousand and vat @ 0.15%.

Payment of Draft The drawee branch should exercise proper care while paying drafts. • • • • •

When the draft is presented to the drawee branch for payment, the particulars of the draft is/are checked with the advice and signature (s) therein to be verified. Payment of the DD has not been stopped is to be ensured Verification of Test no, if any, is to be done If the DD issued for cash payment ‘A/c. Payee' rubber stamp’ should be cancelled and a letter requesting the drawee branch to pay the DD in cash should be issued under sealed cover and signature of the payee should be attested. DD Advice should be sent on the same day.

•

The drawee branch should ensure that the payment of the instrument is made in due course. • As the demand draft is payable to order it is duty of the paying branch to obtain identification of the payee if payment is desired over counter. • If the DD is presented through a bank, the endorsement(s) appearing on the instrument should be prima-facie in order of certification by the collecting banker. Cancellation of Draft

•

Some times the purchaser returns the draft to the issuing branch and requests for payment by cancellation thereof. In such case we must make sure that the request is from the genuine purchaser, that the draft was issued by him and is not a fake one and

•

•

that he has not already issued a duplicate thereof. However, if the purchaser of the draft makes a request to cancel the draft and refund him the amount of draft, the bank should do so after taking the following precautions:Bank should satisfy itself that the draft has not been delivered to the payee. Section 46 of the NI Act states that the making, accepting and endorsement of a negotiable instrument is completed only when it is delivered to the person concerned. Thus, a banker should refuse to cancel the draft, if it is found that the draft has been delivered to the payee. As a matter of fact, the purchaser losses the right of getting the draft cancelled as soon as he sends the drafts to the payee. If the purchaser wants to get the draft cancelled after delivering it to the payee he can do so only with the consent of payee. If the draft is sent by post, the act of posting itself proves the delivery of the draft to the payee. This is because the post office is taken as the agent of the payee of the draft.

TT (Telegraphic Transfer) Telegraphic transfer is so far the quickest method of transferring funds from one place to another. Some times, the remitter of the funds requires the money to be available to the payee immediately. In that case the banker is requested by the remitter to remit the funds over telephone. It is an instruction conveyed by telegraph/telex/telephone to the drawee branch for paying certain amount of money to a specified person. Issuance of TT TT application form (F-22) is to be filled in by the remitter with full particulars signature of the remitter is to verify by the bank's officials. Money to be received in cash or by debiting remitters account with commission and Telex/Telephone charges. Entry should be given in B-44 branch wise serially under supervision of authorised official. Message to be passed immediately to the drawee branch under secret test by Telex, Telephone, Telegram followed by IBCA for confirmation. Cost memo F-23 to be issued and handed over to the client.

Payment of TT The amount transferred by TT is either credited to the account of the beneficiary, if he/she maintains an account, or paid by means of a TT payment order if he/she does not maintain an account. Cash is paid to the beneficiary on proper identification, if he/she has no account.

Payment Order Payment order is meant for making payment of the banker’s own or of the customer’s dues locally and not for affecting any remittance to an out station. In a sense, the payment order is used for making a remittance to the local creditors.

Issue and Payment of Payment Order F-19, should be filled in properly by the customer. Total amount should be deposited through cheques/cash. Commission to be realised as per bank’s circular: From Tk. 1/- upto Tk. 10,000/-

Tk. 15/-

From Tk. 10,001/- upto Tk. 1,00,000/-

Tk. 20/-

From Tk. 1,00,001/- upto Tk. 5,00,000/- Tk. 30/From Tk. 5,00,001/- upto Tk. 10,00,000/- Tk. 40/From Tk. 10,00,001/- and above

• • •

Tk. 50/-

Printed Payment Order leaf should be filled in as per F-19 and signed by two authorised officers. The instrument should be handed over to the purchaser. Payment Orders are required to be discharged by the beneficiary, where applicable on revenue stamp of appropriate value against in cash or through account.

Online banking: IBBL is the only bank in Bangladesh that has developed and implemented core banking software eIBS having online features by its own software engineers based on open source technology and oracle. The online banking section of IBBL does the following activities: •

Post all kinds of online related vouchers

•

Post all kinds of deposits accounts

•

Issue balance confirmation letter to the A/C holder

•

Check daily computer transaction list

•

Prepare IBCA/IBDA vouchers etc.

Other general banking operations of IBBL

•Sale of Share: Islamic banks sell primary shares of a company registered with

the Stock Exchange in exchange for a commission. This contributes to the raising of capital for a company. Companies make arrangements with Islamic Banks to issue shares for public subscriptions. These are known as “new issues” which a company intends to sell to the public. Islamic banks are the most effective method of selling the shares to the public. •

Transfer of Money: Islamic banks transfer money from one place to another place as per the order of its customers through Mail Transfer (MT), Telephonic Transfer (TT), Demand Draft (DD), and Pay Order (PO). They receive a fee or commission for performing such services. Customers benefit from these services, as it helps them to fulfill their financial needs timely.

•

Maintenance of Budget Accounts: Islamic banks can maintain budget accounts for their customers. Laborers, who earn regular monthly wage, may deposit money into a budget account. The bank pays the client’s bills such as: taxes and donations for example, on the client’s behalf. Thus the client benefits because his financial affairs are handled automatically and his monies are set-aside on a monthly basis to handle bills that are due quarterly or annually. In exchange the bank receives a fee for providing this service. Only the Al Wadiah Current account and Mudaraba Savings account holders can maintain budget accounts with Islamic banks.

•

Settlement of Transactions: Islamic banks pay Bills of Exchange, and Checks of their customers to settle transactions with third parties. Thus, financial relations between the bank and its customer, and the customer and any third party (the Beneficiary) of the bill or check are maintained.

•

Providing Bank Guarantee: A bank guarantee is a written agreement

that guarantees the performance or payment of debt by a bank client to a third party. Under the agreement, if the customer fails to perform in the capacity stipulated, the bank is held responsible for ensuring performance or payment of debt. Islamic Banks provide this guarantee based upon cash held on deposit by taking a mortgage on other assets. In some cases the bank can act as a guarantor taking a partial mortgage on an unsecured basis. Some Islamic Banks receive a commission based on the lower of 2% or 3% of the amount guaranteed or simply incidental expenses.

•

Account Maintenance Activities: The opening of an account is the beginning of the relationship between a banker and a customer within the framework of banking deposits. The account is established with a standard proforma contract, which must be signed by the customer who wishes to deal with the bank concerned. A number of subsidiary operations are related to the account opening operation, such as the receipt of deposits into the account, payment of checks drawn on the bank and the execution of bank transfers and payment orders. Furthermore, among the services rendered, the bank must prepare and communicate to its customer periodic statements of the account.

•

Safe Custody: A safe custody account is a small box, which is maintained

•

Opening of L/C: Islamic Banks also offer Letters of Credit (L/C) for

in a secured area within the bank. This box is adjoined to other boxes belonging to other customers of the bank. Each box has two keys. The banker has a key and the customer has a key. Both keys must be used simultaneously to open the safe custody box. Thus, the client is assured his assets are safe in the custody box due to the dual control. Clients may access their box during normal business hours and can step into a private room in order to add items of value to the safe custody box or remove items from the safe custody box. • Islamic Banks charge a relatively low fee for this service. The main objective of offering this service is one of convenience which the bank hopes will attract additional customers.

domestic and international trade on a commission basis. Thus, they facilitate business relationships between importers and exporters through this service.

•

Issue of Solvency Certificate: Islamic banks issue solvency certificates to their customers as per an order received. This certificate is required for business purposes, to acquire assets on an installment basis, or to go abroad for study.

•

Business Advising Service: Islamic Banks can provide business-

advising services (BAS) to its clients as well. The bank offers counseling on technological issues, marketing and other important business information to industrial entrepreneurs of small and medium sized business of any nature. A banker should be an expert in banking as well as in business to provide BAS. Moreover, he will conduct an extensive survey of the customer’s business.

•

Transaction of Foreign Currency: Islamic banks buy and sell foreign currencies. They allow their customers to draw local currency against foreign currency deposited in a foreign currency account with the bank.

•

Publication Works: Islamic banks publish books, journals, booklets,

pamphlets to advertise the bank’s services. Important information related to trade, commerce and industry are published in these forums to address the needs of the banks customers. Such services have created social awareness about Islamic banking in the economy. Today, more people are familiar with the terms of Islamic banking like Bai-Murabaha, Mudaraba, and Musharaka. In addition, they also know the special features of the Islamic Economy.

•

Exchange of Information: Islamic banks exchange information with other banks, organizations and individuals pertaining to the credit worthiness of its customers. In addition, banks seek this information prior to extending a loan to a prospective customer. Thus the bank can be assured it has made a good decision on whether or not to make the loan to the customer.

•

Financial help: Islamic banks provide financial help to different organizations through paid advertisements describing various services that the bank offers. These advertisements increase the competitiveness of Islamic banking products in the market by creating awareness among the people.

•

Use of Automatic Teller Machine: Islamic banks offer Automatic Teller Machines (ATMs) to allow customers access to their accounts after the banks are closed. The ATM provides service twenty-four hours a day, and seven days a week. • It is electronically imprinted with the customer’s branch and account number. The customer inserts the card into a machine and on a keyboard he taps out his personal identification number (PIN). The card will only operate if the correct PIN is keyed in thus safeguarding the customer and the bank in the event of loss or theft of the card. Having inserted the card and keyed in the correct PIN, the customer then has a variety of services offered by the ATM. Cash dispensing is the most

important but, in addition, most machines allow check books to be ordered, account balances to be obtained and statements to be ordered.

•

Issue of Qard Cards: Islamic banks can issue Qard Cards (QC) unto

certain limits to their valued customers. The card will enable a holder of it to purchase goods from the market without cash or a check. The merchants indicate clearly which cards they will accept. At the point of purchase, the Cardholder presents his card to the merchant who runs the card through a special machine, which imprints account information on a form to be signed by the Cardholder. Thus, a customer can make his purchase without having to pay cash on the spot. In addition, the (QC) can also be used like an ATM card at participating banks. •

Issue of Travelers Cheques: Islamic banks also issue Travelers Cheques (TC). These are special types of cheques drawn on the issuing bank and signed by the person to whom they are issued. The issuing bank guarantees the payment of these cheques. Thus, it is accepted worldwide without a question. When the item is presented for payment, the person to whom it was issued needs to countersign it. The signature should be similar to the one that already appears on the cheque. Normally a passport is required as proper identification when the check is being used for payment. If a TC is lost or stolen it can be replaced again through a local branch/agent of the issuing bank subject to verification of the signature. •

Factoring Service: The factoring agreement covers assessment of

creditworthiness of all potential buyers and provides complete protection against bad debt, provided the credit limits are not exceeded. The small and medium sized business houses benefit from this service of Islamic banks. In exchange for this service, these businesses pay a service charge or commission to the bank. As part of this service, the bank will maintain sales ledger records, and control the finances of the client’s business house. This makes business easier for the wholesalers.

Modes of Investment of IBBL

Investment is the action of deploying funds with the intention and expectation that they will earn a positive return for the owner. Funds may be invested in either real assets or financial assets. When resources are used for purchasing fixed and current assets in a production process or for a trading purpose, then it can be termed as real investment. Specific examples of financial investments are: deposits of money in a bank account, the purchase of Mudaraba Savings Bonds or stock in a company. Since Islam condemns hoarding savings and a 2.5 percent annual tax (Zakat) is imposed on savings, the owner of excess savings, if he is unable to invest in real assets, has no option but to invest his savings in financial assets. Investment is one of the important functions of IBBL. IBBL collect Deposits on Al-wadeah and Mudaraba principles and deploy the collected fund using shari’ah-based Mechanism & Modes of Investment. Objectives and principles of investment The objectives and principles of investment operations of the Bank are: • •

•

• • •

•

To invest fund strictly in accordance with the principles of Islamic Shari’ah. To diversify its investment portfolio by size of investment, by sectors (public & private), by economic purpose, by securities and by geographical area including industrial, commercial & agricultural. To ensure mutual benefit both for the Bank and the investment-client by professional appraisal of investment proposals, judicious sanction of investment, close and constant supervision and monitoring thereof. To make investment keeping the socio-economic requirement of the country in view. To increase the number of potential investors by making participatory and productive investment. To finance various development schemes for poverty alleviation, income and employment generation with a view to accelerating sustainable socio-economic growth and uplift of the society. To invest in the form of goods and commodities rather than give out cash money to the investment clients.

Mechanisms & Modes of Investment of IBBL

Bai- Mechanism

Share Mechanism

A) Bai-Murabaha B) Bai-Muajjal C) Bai-Salam D) Bai-Istisa’a e) Bai-Asraf

A) Mudaraba

Ijara Mechanism

B) Musharaka

A) Hire Purchase Under shirkatul Melk

I) Bai- Murabaha (Sale on agreed upon profit) Bai-Murabaha may be defined as a contract between a Buyer and a Seller under which the Seller sells certain specific goods (permissible under Islamic Shari’ah and the Law of the Land) to the Buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump sum or by installments. II) Bai-Muajjal (Sale on deferred payment basis) Bai-Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods (permissible under Islamic Shari’ah and the law of the land), to the buyer at an agreed fixed price payable at a certain fixed future date in lump-sum or within a fixed period by fixed installments. The seller may also sell the goods purchased by him as per order and specification of the buyer. III) Bai-Salam (Purchase of Goods on deferred delivery basis): Bai-salam is a contract between a buyer and a seller under which the seller sells in advance the certain commodity (ties)/product(s) (permissible under Islamic Shari’ah and the Law of the land) to the buyer at an agreed price payable on execution of the said contract and the commodity (ties)/ products(s) is/are delivered as per specification, size, quality, quantity at a future date and time in a particular place. In other word, Bai-Salam is a sale whereby the seller undertakes to supply some specific commodity (ies) product(s) to the buyer at a future time in exchange of an advance price fully paid on the spot.

IV) Bai- Istisna’a:

Istisna’a is a sale contract by which al-sani’ (the seller) on the basis of the order placed by al-mustasni’ (the buyer) after having manufactured or otherwise acquired al-masnoo’ (the goods) as per specification and sells the same to al-mustasni’ for an agreed upon price and method of settlement whether that be in advance, by installments or deferred to a specific time. It is a condition of Istisna’a contract that the seller should provide either the raw material or the labour. V) Bai-Assarf: Related with foreign currency buying and selling. Under this mode the bank engaged with buying and selling of foreign currency. V1) Mudaraba It is a form of partnership in profit where one party provides the funds while the other provides expertise and management. The First party is called the Sahib-al-Maal and the later is referred to as the Mudarib. Any profit accrued is shared between two parties on a preagreed ratio, while capital loss is exclusively borne by the supplier of the capital except the loss it is due to the breach of trust by the Mudarib. V1I) Musharaka Musharaka is a contract of partnership between two or more individuals or bodies in which all partners contribute capital, participate in the management, share the profit as per pre agreed ratio and bear the loss, if any, in proportion to their capital/equity ratio. VII1) Hpsm (Hire Purchase Under Shirkatul Melk) Hire purchase under Shirkatul Melk is a special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts: Shirkat, Ijara and Sale. Shirkat means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement, the contract is called Shirkatul Melk contract. Along with these modes there is another important mode of investment of IBBL which is Quard-al-Hasana.

Quard-al-Hasana: A virtuous loan. A loan with the stipulation to return the principal sum in the future without any increase. 

*Specially the Modes applicable to RDS

Welfare Oriented Special Investment Schemes 1. Household Durables Scheme 2. Housing Investment Scheme 3. Real Estate Investment Scheme 4. Transport Investment Scheme 5. Car Investment Scheme 6. Investment Scheme for Doctors 7. Small Business Investment Scheme 8. Agriculture Implements Investment Scheme 9. Rural Development Scheme 10. Micro Industries Investment Scheme 11. Women Entrepreneurs Investment Scheme 12. Mirpur Silk Weavers Investment Scheme 13. Equity and Entrepreneurship Fund of Bangladesh Bank

Chart 4.3

Compositionof modewiseInvestment in 31.12.2009 0.95, 1% 0.02, 0% 1.19, 5.68, 6%1% 3.64, 4%

Bai Murabaha HPSM Bai Muajjal

35.08, 35%

53.44, 53%

PurchaseandNegotiation KorjeHasna Bai Salam Musharaka

Chart 4.4

Sectorsof Investment in 31.12.2009 3.4, 4% 2.27, 5.06, 5%2%

Industry Commercial

5.65, 6%

Real Estate Agriculture

53.53, 54%

Transport

28.51, 29%

Other

Trend of Investment over the years:

Investment Table-4.2 Year investmen

In

2005 93644

2006

2007

113575

144921

t

Chart-4. 5

2008 180054

2009 214616

It shows that the amount of investment is increasing year to year. It is in upward trend. In 2008 the Bank’s total investment was Tk. 180,054 million and in 2009 it was TK. 214,616 million while in 2005 the investment was only TK.93, 644 million. Details of Special Investment Schemes under Investment Mode

Name of Scheme

Eligibility

Maximum invested money

Client’s equity

Period of investment

Mode of investment

Household Durables scheme

Govt., semi govt, autonomous official, teachers, doctors, engineers etc.

500000

25%

2 years

Bai-Muazzal

Housing Investment Scheme

Govt., semi govt, autonomous official, universities teachers, doctors, engineers etc. of City Corporations

3000000

50%/

15 years

HPSM

Transport Investment Scheme

Govt.semi-govt, autonomous official, universities teachers, doctors, engineers, business man, etc.

2000000

30%

3 years

HPSM

Car Investment

350000

30%

4 years

HPSM

Scheme

Govt.semi-govt, autonomous official, universities teachers, doctors, engineers, business man, etc.

Investment for Doctors

New, experienced, specialized doctors

1000000

20-30%

5 years

HPSM, Baimuazzal

Small Business

Fishery, livestock, manufacturing.

100000

0-20%

1-2 years

HPSM, Baimuazzal

Agriculture Implements

Farmer, half educated rural youth

200000

20%

2 years

Micro Industries

Diploma, skilled & semi skilled youth

200000

Nil

5 years

HPSM, Baimuazzal

Real Estate Investment Program

For all Kind of land owners under City Corporation & important business places

50% of cost of construction

50%

10-15 years

HPSM

40%

HPSM

Foreign Exchange Operations IBBL is playing a very important role in foreign exchange business of the country. Islami Bank offers different trade products and services complying Shari’ah and law of the land. The foreign exchange operations can be categorized in following four areas:

1. Import Services and Import Finance 2. Export Services and Export Finance 3. Foreign Remittance Services 4. Foreign Exchange Treasury operations

Principles of Foreign Exchange Operations: Service Principles

Wakalah

Kifalah

Scope of applications •

Letter of Credit

•

Safe keeping

•

Remittance

•

Letter of Credit

•

Performance Bond

•

Bid Bond

•

Advance payment

•

Guarantee

Financing Principles

Bai

Shirkat

Ijarah

Basis

Commission basis

Commission basis

Scope of applications •

Murabaha Import

•

Murabaha Import Bills

•

Murabaha post Import Bills

•

Mudaraba

•

Musharaka

•

Hire purchase Melk

Basis

Mark up basis

Sharing basis under

Shirkatul

Rental basis

Shari’ah aspects Foreign Exchange Operations Islami Bank follows the following shari’ah aspects at the time of Foreign Exchange Operations:

Wakalah: Agency service •

Wakalah means entrusting someone to act as agent on behalf of principal.

•

Agency is one of the most important elements of Islamic partnership.

•

Agent gets fees/commission for extending desired services from the principle.

Kifalah: Surety ship •

Kifalah means an obligation that someone wants to assume in addition to its existing obligation in respect of a demand for something.

•

Kifalah may relate to a person, finance or an act.

•

Finance kifalah means an obligation to be met in the event of the principal debtor‘s inability to honor his obligation.

Bai: Buy and sell •

Bai is defined to mean simultaneously ‘purchase and sale’. i.e. the exchange of a thing of value by another thing of value.

•

The subject of sale must be existing at the time of sale.

•

The subject of sale must be in the ownership of the seller at the time of sale.

Shirkat: Partnership •

Shirkat means partnership for undertaking any lawful business.

•

There are two broad categories of partnership include: - Mudaraba - Musharaka

Ijarah: Leasing It is an arrangement to lease equipments, buildings or other facilities to a client against an agreed rental .There are two broad categories of of Ijarah: - Ijarah Muntahia bit Tamlik (Hirepurchase) - Ijarah wa liqtina (Leasing)

Trend of Export and Import and Remittance over the years:

Export and Import and Remittance Table-4. 3

In Million

Year

2005

2006

2007

2008

2009

Import

74525

96870

137086

168329

161230

Export

36169

51133

66690

93962

106424

Remittance

36948

53819

84143

140404

194716

Chart-4.6

In 2009 remittance collection has reached the peak. Every year the remittance collection is growing at an increasing rate. And in every sector IBBL is now in the first position. Compared to any other banks IBBL contributes a lot in enriching foreign currency reserve.

Welfare Activities of IBBL

Welfare is a condition of having good health, comfortable living and pleasant working conditions (Hornby). Hence, it can be said that welfare services are those which ensure conditions of having good health, comfortable living and working conditions, which are generally one’s basic needs. Islam views work as the primary means of earning and acquiring income and wealth. But if real income is not sufficient to purchase necessities of life, then welfare services become essential in a society to maintain the minimum standard of living of the people. In fact, in every society, there are many people who lack the necessary income and, consequently, face inadequate lifestyles due to unemployment and under-employment. Their condition cannot improve if welfare services remain absent and concentration wealth remains in certain segments of society. The Quran states the principle that “wealth should not circulate only among the rich” [59:7].

The Quran also encourages people to contribute generously to social welfare and helping the needy in society. Thus the Quran establishes the general principle of generous welfare spending while encouraging sacrificial levels of spending perhaps for social crises and for conditions demanding high financial support. Thus Islam calls for the meeting of the basic needs of the poverty groups through welfare services, which might include –

Care for others: Siddiqi (1995, pp.2-3) mentioned that care for others, or helping behavior, is another cardinal principle of Islamic economic behavior. It tempers the self-interest that is ingrained in human nature to ensure survival. It is a natural concomitant of trusteeship, since one serves the Master by caring for His people. The Prophet, peace is upon him, said: “Mankind is God’s dependants, so the most beloved of people in the Sight of Allah are those who do good to His dependants.” Helping behavior is required because of the interdependent nature of manhood life. There is no fulfillment in life without interaction with others; individual facility requires socialization. The exclusive pursuit of self-interest in social relations is counter-productive; it defeats its own purpose. Men serve their individual and collective interest best when each individual cares for the welfare of others while striving to protect and promote his own interest. This is what religion teaches. Those who deny it, deny religion.

Zakat: Zakat is one of the five pillars of Islam. In a broad sense, it is only for social welfare purposes as specified by the Quran: “The Zakat is (meant) only for the poor and the needy, those who collect the tax, those whose hearts are to be won over, for the freeing of human beings from bondage, for the relief of those overwhelmed by debts, for the cause of God (all priority social needs), and for the wayfarer: (this is) an ordinance from God and God is all-knowing, Wise”[9:60].

Qard Hasan (benevolent loan) Since interest on all kinds of loan is prohibited in Islam, a loan, which is to be given in accordance with the Islamic principle, has to be, by definition, a benevolent loan (Qard Hasan), i.e. a loan without interest. It has to be granted on the grounds of compassion; to remove the financial distresses caused by the absence of sufficient money in the face of dire

need. Since banks are profit-oriented organizations, it would seem that there is not much scope for the application of this technique. However Islamic banks also play a socially useful role. Hence, they make provisions to provide Qard Hasan besides engaging in income generating activities. However practices differ in this respect. Some banks provide the privilege of interest free loans to the holders of investment accounts at the bank. Some other banks have the provision to provide interest free loans to needy students and other economically weaker sections of the society. Yet, some other banks provide interest free loans to small producers, farmers, entrepreneurs who are not qualified to get financing from other sources. The purpose of these interest-free loans is to assist them in becoming financially independent or to assist in raising their incomes and standard of living.

Mobilization of Zakah A pioneering experiment putting the principles of Islamic banking into practice was conducted in Mit-Ghamr in Egypt from 1963 to 1967, in which three types of accounts were operated. A Zakah account was one of them. The Zakah account attracted the stipulated amount of Zakah for redistribution amongst the poor (Ausaf Ahmed, op cit, p.21). Since Islamic banks follow the rules of The Islamic Shari’ah, they have to pay Zakah on their own resources (capital assets etc.), which paved the way for mobilization of financial resources for the needy and poor. “An Islamic bank accumulates its Zakah in the Zakah fund and distributes amongst the poor as per Islamic Shari’ah”.

Rotating Savings and Credit Associations: This credit program is intended to alleviate poverty. Under this program a small number of individuals, typically six to forty, form a group and select a leader who periodically collects a given amount (a share) from each member. The money collected (the fund) is then given in rotation to each member of the group. The leader receives no special consideration (other than possibly getting the first fund). He may also get commission, who in return may assume liability for defaults. Loans are interest-free. This program helps to generate economic activities among the poor in the non-corporate sector. It deals with informal finance and credit packages that improves the situation of poorer families and creates local income opportunities for the people. It also discourages internal migration. At a grass root village and local level it is directed towards landless laborers, marginal farmers, fishermen, small artisans, (e.g. blacksmith, carpenter, potter and handicraft producer), urban unemployed, small traders, rural industries, and small to medium scale business enterprises. Empowerment and Humanizing Family Credit Program:

Under this program, the bank is operating with a human face. For example, it offers financing of consumer durable assets for the newly married couple provided marriage is dowry free. Environmental Friendly Business Program: This credit program is directed towards small traders of Tokai (mainly street children of distressed parents) with a recovery rate of 100% Social Fund: Every IB has already established its social fund by mobilizing voluntary social saving, linked to its all Formal, Non-formal and Voluntary Sector Banking operations. IB has been able to mobilize a surplus Social Fund for social investment purposes in the family empowerment action program, social education fellowship program, and in the health and social services sector. Cash Waqf Certificate: IB has already introduced the Cash Waqf Certificate Scheme intended to empower the family heritage of the rich and to benefit society as a whole. It could, be the most effective and perpetual mode of deposit mobilization and use of its profit for perpetual social investment and benefits is virtually unlimited. A waquif can choose the purpose (s) to be served by his investment from the list of some purposes identified by IB; which are related with Family Rehabilitation, Education and Culture, Health and Sanitation, Social Utility Service, or any other purpose(s) approved by Islamic Shari’ah.

Chapter Five Difference between Conventional & Islamic banking

One must refrain from making a direct comparison between Islamic banking and Conventional banking (apple to apple comparison). This is because they are extremely different in many ways. The key difference is that Islamic Banking is based on Shari’ah foundation. Thus all dealing, transaction, business approach, product feature, investment focus, responsibility are derived from the Shari’ah law, which lead to the significant difference in many part of the operations with as of the conventional. By the way of the definition an Islamic bank & Conventional bank can be distinguished: •

“Islamic Bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shari’ah and to the banning of the receipt and payment of interest on any of its operations”.- OIC • “A commercial (conventional) bank is dealer in capital or more properly a dealer in money. It is an intermediate party between the borrower and the lender. It borrows from one party and lends to another and the difference between the terms at which it borrows and those at which it lends from the source of its profit”.- Prof. Gilbert

Conventional Bank 1. Loan

Bank

Bank Client

4. Principle Investment

2.

3. Good

Cash Pa yment

Suppli er

Islamic Bank

4. Cost plus agreed profit

Bank

Bank Client

3. Goods 2. Good

1. Cash Payment

Supplier

•

Foundation:

The foundation of Islamic bank is based on the Islamic faith and must stay within the limits of Islamic law or the Shari’ah in all of its actions and deeds. The meaning of Shari’ah is the way to the source of life and is now used to refer to legal system in keeping with the code of behavior called for by the Holly Qur’an. On the other hand, the conventional bank is based on man made principles. There many fundamental and functional differences exist in these principles. As a result various conflicts arise within the internal and external management systems. These principles vary man to man, place to place. As a result it increases complexity in the conventional banking systems.

•

Maintenance of CRR/SLR:

All Islamic Banking Companies shall maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per rates prescribed by Bangladesh Bank from time to time. Every commercial Bank having Islamic bank branches shall maintain SLR/CRR for its Islamic branches at the same rate as prescribed for the Islamic banks and shall, for the purpose, maintain a separate Current Account for the Islamic branches with Bangladesh Bank. For Islamic banks, SLR is 10.5%, CRR is 4.5% & LRR is 5%. But Conventional banks SLR is 18.5%, CRR is 5.5% & LRR is 13%.

•

Project appraisal and evaluation: Islamic banks share profit and loss of any project financed. So the banks pay greater attention to developing project appraisal and evaluations. It gives more emphasis on the viability of the project. As the bank’s interest is linked with the earnings capability of the enterprise, it has to judge the worthiness or suitability of the project by applying suitable appraisal criteria. Any failure on the part of the bank to assess the soundness of the project would seriously affect the profitability of the enterprise. But in the conventional banking system, the bank is simply a financier and is not directly concerned about the success or failure of the project for which loan was made, as long as it receives its payments. This is so because the banks income (interest income) does not fluctuate with the fluctuations in the profit generated from the specific projects. Since return from loan is fixed, it gives little importance to project appraisal and evaluations.

•

Basis for collection of deposit

Islamic banks collect the deposits on the basis of profit sharing. The main function of Islamic banks is to mobilize savings and provide financial support to the entrepreneurs. Like the conventional banks, the Islamic banks neither pay nor receive interest from any of its transactions thereby saving everybody from the course of interest. It disapproves hoarding of savings and encourages its productive investment. It mobilizes savings of the common people in line with Islamic Shari’ah. In the conventional banking system, the collection of the deposit is on the basis of interest. Here depositors receive interest in a predetermined rate of their deposits. Investors are to pay a predetermined rate of interest to the bank. The techniques, thus, involves each and every partner in the transaction process with the element of interest.

•

Moral Dimension

In the Islamic banking system all economic agents have to work within moral value system of Islam. They can not finance any project which conflicts with the moral value system of Islam. They will not finance a wine factory, a casino, a night club or any other activity which is prohibited by Islam or is known to be harmful for the society. But the conventional banking is secular in its orientation. It has no restriction to finance any project like Islamic banking systems. It emphasizes on the possibility of earning maximum profit. It does not follow any religious rules and regulations or does not obey any restriction.

•

Emphasis on Productivity as compared to credit worthiness

Islamic banks give greater emphasis on the viability and soundness of the project and the business acumen and managerial competence of the entrepreneur. Under profit loss sharing banking, the Islamic banks will receive a return only if the project succeeds and produces a profit. Islamic banks have very careful attitude towards evaluation of applications for equity oriented financing. Since Islamic banks have a built in mechanism of risk sharing, it would need to be more careful in how it evaluates financing requests. It adds a healthy dimension in the whole lending business and eliminates a whole range of undesirable lending practices. On the other hand, conventional banks give greater emphasis on credit worthiness of the clients. It is customary that conventional banks evaluate applications, consider collateral and avoid risk as much as possible. Their main concern does not go beyond ensuring the security of their principal and interest receipts.

•

Scope of the activities:

An Islamic Bank has wider scope of activities compared to a conventional bank. A substantial distinguishing feature is that Islamic banks are universal or multipurpose banks and not purely commercial banks. These banks are conceived to be a crossbreed of commercial and investment banks, investment trust and investment management institution and would offer a variety of service to their customers. A substantial part of their financing would be for specific projects or ventures. Their equity oriented investment would not permit them to borrow short term fund and lend to long term investment. This should make them less crisis prone compared to their capitalist counterparts, since they would have to make a greater effort to match the maturity of their liabilities with the maturity of their assets.

Compared to the Islamic banks, conventional banks have narrower scope of activities. The main function are collecting the deposits and ending to the borrower in different purposes in exchange of rate of interest.

•

Guarantee for deposit:

There is no guarantee for deposit money in the Islamic bank system. Without taking risk financial transactions are not allowed in Islam. Under Islamic framework, depositors are taking risk as Sahib-al-Mal. Therefore the earning of the depositors is uncertain. As Islamic banks works on the basis of profit loss sharing system, depositors or Sahib-al-Mal have to bear the loss if any. On the other hand conventional banks have to guarantee all its deposits. Without considering the trend of income these banks have to give interest on the deposits money at predetermined rate. They do not share any profit or loss with their clients. They only maintain a debtor-creditor relationship with their clients/depositors.

•

Distributive justice and economic stability:

Since profits are shared between the entrepreneurs, the bank and depositors in the Islamic banking system, there is no bias towards any income sector. In fact, the banks welcome profitable business ventures form all income sectors. Islamic banks share a proportion of the profits accrued from a project implying an equitable distribution. The distributors remain unaltered since the Islamic banks receive a share of total profits accrued from different projects financed by the bank. But the conventional banking maintains a flat rate of interest regardless of the profitability of the projects financed by it. This system of fixed interest rate is somewhat biased against the borrower rate is determined in a way that assures profits to the other parties in the transaction. This limits investment opportunity utilization capacity of the conventional bank thereby reducing productive efficiency of conventional banking.

•

Allocate Efficiency:

The income distribution scheme under conventional banking works against the goal of optimum allocation of scarce financial resources. This is because of the fact that conventional banking, instead of financing in terms profitability of projects, diverts funds to projects with sound collateral. These results in loans being made to higher income borrower that can be meet the collateral requirements. But in Islamic banking, the productivity of the projects is more important. In this way, the resources instead of going to low to higher return projects even if the creditability of the borrower is lower. Therefore, this system is more efficient in allocation of resources. Since, they are specialized in the area of finance and investment; their expertise will be improving the profitability of the project as well as contribute in the management of that project.

•

Stability of banking system:

The Islamic banking model is more stable than the conventional banking model. In an interest based system, there is lack of symmetry in the cash flow of the banks and the cash flow of the enterprise. The entrepreneurs of the businessman have to give a fixed interest to the banks that has no relationship to the actual return of the project. This creates instability in the entire business sector. The bankers also lack equilibrium in their assets and liability side because their assets are fixed while liabilities are variable. In case of Islamic banking system, the liabilities of the bank are on the basis of mudarabah and hence are also variable. If there is any stock, it affects equally both asset and liability side of the banker's balance sheet. Thus their liabilities are related with actual performance of the projects hey financed. The asset and liabilities are mutually linked and this mechanism returns equilibrium between the assets and the liabilities of the Islamic banks. So there is a very likelihood of bank failures.

•

Growth of the banking system:

From growth point of view the Islamic banking system is better than the conventional banking system. Islamic banking model promotes innovation. In Islamic banking small and medium entrepreneur has a better project he has a possibility of getting it's financed. Since risk is shared between the financer and entrepreneur. It results in a better distribution of risk. Therefore ingenious efficient entrepreneurs will be forthcoming and innovation will be promoted. Moreover conditions of the cost of capital are more favorable under the Islamic system. Here the cost of capital varies with productivity. It does not have any deterrent effect on investment which a fixed cost of capital has. •

Emphasis on the character of the loan applicant:

When money is deposited with an Islamic bank, the bank in turn makes investment in different forms approved by the Islamic Shari’ah. When a client make an offer or a proposal regarding loan or investment the bank emphasizes more on the character of the applicants. The bank must verify the character of the applicant before allowing his application. The banks deal with their client based on faith and trust. So it is necessary for the bankers to know the background, family status, educational qualification, business experience, reputation of the applicant. Again the bank may meet with the prospective client regarding his investment needs and business experience prior to an application/proposal is submitted. The bank may review the client's past performance and other financing arrangement he may have had with the bank in the past. When the banks become contain that the applicant is not involved with any activities violating the Islamic Shari’ah they grant his proposal.

On the other hand, conventional bank emphasizes on the financial strength, collateral security, and creditworthiness of an applicant more than his character. Without considering the character the bank will grant that proposal which will certainly give a maximum profit at a predetermined fixed rate. Islamic banks perform mostly the same functions as the conventional banks but they do it in distinctly different manners. These differences make the Islamic banking system distinct from the conventional banking system. It may be mentioned that if the Islamic banking system, is to become truly liquid and efficient it must develop more standardized and universally tradable financial instrument. Islamic banks can provide more efficient banking services if they are supported with appropriate banking laws, regulations and guidelines. It would be better if Islamic banks had the opportunity to work as a sole system in an economy. That would provide Islamic banking system to fully utilize its potentials. Thus it can be free from all difficulties and problems that are in the conventional banking system. It can be hopefully expected that if the overall economic system as well as the banking system can be executed according to Quran, Sunnah and Hadit it will bring the maximum prosper in the entire economy.

Chapter Six

Findings, Recommendations, Conclusion, Bibliography & Appendix

6.1 Findings From the above analysis we found that the overall functions and performance of IBBL over the years are quite satisfactory. Though the no of branches in not enough for this overpopulated country, the IBBL is performing well. Though it’s a profitable bank, it has some lacking which are constrains for its operations.

•

Devising an interest-free mechanism:

They have not yet been successful in devising an interest-free mechanism to place their funds on a short-term basis. They face the same problem in financing consumer loans and government deficits. •

Risk of profit-sharing:

The risk involved in profit-sharing seems to be so high that almost all of the Islamic banks in Bangladesh have resorted to those techniques of financing which bring them a fixed assured return. As a result, there is a lot of genuine criticism that these banks have not abolished interest but, they have, in fact, only changed the nomenclature of their transactions.

•

Inadequacy of legal support of the Central bank:

The Islamic banks do not have the legal support of the Central bank in Bangladesh, do not have the necessary expertise and trained manpower to appraise, monitor, evaluate an audit the projects that are required to finance. As a result, they can not expand despite huge excess financial liquidity.

•

Lack of risk-hedging instruments:

The prohibition against “riba” and some “fiqh” issues in the interpretation of “gharar” mean that many risk-hedging instruments based on traditional tools, such as option, futures and forwards are not available to Islamic banks in the current state of Islamic banking. •

Underdeveloped money market and government securities based on profit-loss sharing:

This may difficult to manage the liquidity in terms of mismatching the asst-liquidity and increases the liquidity shocks. Fortunately, significant progress has been made in Iran for government securities and short-term instruments such as National Participation Certificates and Central Bank Mushrakah for such issues.

•

Requirement of holding a large proportion of the assets in reserve accounts:

Islamic banks have historically been forced to hold a large proportion of their assets in reserve accounts in central banks or in correspondent accounts than conventional banks. This has significantly affected their profitability because Central Bank gives minimum or no return to these reserves. This in turn, has affected their competitiveness ad increases their potentiality to the external shocks with its consequences. •

Operational risks:

Operational risks may arise from various sources;  The unique activities that Islamic banks must perform.  The non-standardized nature of some Islamic products.  The lack of an efficient and reliable Shari’ah legislation system to enforce financial contracts. •

Risks involved with ‘Salam’:

Salam (purchase with deferred delivery) contracts expose Islamic banks to both credit and commodity price risk. This is because banks agree to buy the commodity on a future date against current payment and also hold the commodity until it can be converted to a cash. •

Risks involved with ‘Ijarah’:

Ijarah also contain the credit and commodity price risk because this contract do not provide Islamic banks with the ability to transfer substantial risks and rewards to the lessee as leased assets must be carried on the balance sheet of banks for the term of the issue.

6.2 Recommendations After observing the operation procedure of IBBL, we recommend the following: IBBL should launch new financial products to attract customers as Consumer Credit Scheme, Child Education Scheme, and Plastic Money etc. IBBL can also lunch ATM as diversification.

Marketing Division:

To increase the faith of people, IBBL should convince them in the best manner, so that market share can be captured. Marketing division should concentrate more on investment strategy. Diversify Assets Portfolio: Leading portfolio of IBBL should be diversified. It should not concentrate or give weight only in working capital financing. IT Facilities: IT facilities of IBBL are not satisfactory enough. Computer system which owned by branch are not up to date, not sufficient and moreover some of computer system not work properly when they are needed. There is no sufficient and high bandwidth Internet connection available in the bank. So, IBBL should develop Information Technology to ensure better service for the customer and support communication with outside Upgrading website: Islami Bank Bangladesh Ltd. should upgrade its website regularly and provide details information of Consumer Credit Scheme. Real judgment before sanctioning the loans: When a loan is issued for the customer, he should justify by the KYC policy. It is a sensitive issue for the investment division. So the relevant officer must take the responsibilities to recover the loan. Ensure Sufficient Manpower: The number of human resources in documentation section is really insufficient to give services to huge number of customers. So, number of staff should be increased in the sections.

Need Personnel having Business Knowledge: Most of the personnel have no business education. So selection of employee from business school can give proper solution. Development of Human Resources: Human resource is another sector for the branch to be developed urgently. Human resources, in the branch, need to be equipped with adequate banking knowledge. Majority of the human resources must have basic knowledge regarding money, banking, finance and accounting.

Without proper knowledge in these subjects, efficiency cannot be optimized. Bank can arrange training program on these subjects. Ensure Proper Maintenance of Files: IBBL gives personalized services. All the officers have to give concentration to the customers, while maintaining the customer files. Every staff should try to reduce these irregularities. Ensure Proper Machineries:

Communication

System

and

Maintenance

of

Sometimes Communication System remains out of order. Attention should be given on proper maintenance of phone, computer, fax machine and photocopier.

6.3 Conclusion:

Banks play a very vital role in the economic development of the country. The popularity of banks is increasing day by day which leads to increase competition as well. Currently 57 Banks are operated in Bangladesh. All the Commercial banks are offering almost the same products and services. But the way they provide the services are different from each other. So people choose their bank according to their satisfaction and need. On the other hand, Banks innovate new products and services to attract their desired customer. Islami Bank Bangladesh Ltd. is one of the fast growing banks in Bangladesh because of its rapid customers’ satisfaction. The bank is committed to run all its activities as per Islamic Shari’ah. IBBL through its steady process and continued success has, by now, earned the reputation of being one of the leading private sector banks of the country. Islami Bank Bangladesh Ltd. is also playing an important role in establishing Islamic Economics by combing the economic values with social and moral values. By following the novelty of Islamic Economics the bank is trying to make a balance development between spiritual and material life. Still now hear about 301 Islamic banking and financial institutions in about 49 countries of Asia, Africa, Europe, America and countries like Pakistan, U.K., U.S.A., Germany, Argentina, Denmark, Luxembourg, Switzerland and India have been established. The banking system of Pakistan and Iran was totally remodeled on the basis of Islamic Shari’ah services. IBBL will be more effective in our economy by launching new financial products to attract deposit as Consumer Credit Scheme, Pension Scheme, and Child Education Scheme and contribute more to develop the living standard of middle class people.

Bibliography 1. Islamic Banking -

Habibur Rahman

2. Annual Reports of Islami Bank- 2005-2009 3. www.islamibankbd.com 4. Handout provided by IBTRA .

Appendix

Questioner 1. Does IBBL facilitate fund transfer on behalf of clients? • •

Yes No

2. Does it charge high commission for this service? • •

Yes No

3. Does IBBL offers SME? • •

Yes No

4. Which investment mechanism is widely used? • • •

Bai Share Ijarah

5. Which Bai Mode is widely used? • • • •

Bai-Murabaha Trust Receipt Bai-Muajjal Bai-Salam Bai-Istisna

6. Do your branch have special section for RDS? • •

Yes No

7. Does IBBL invest for any industry? • •

Yes No

8. Do your branch provide any investment facility for women entrepreneurs?

• •

Yes No

9. What is the valuation process of collataralled asset? Ans. 80% 0f market value 10. For how many period(s) you provide investment facility a) 1 year b) 2 year c) 3year d) more than 5years 11. Does IBBL participate at call money market? • •

Yes No

12. Is there any locker system? • •

Yes No

13. Does the bank provide MICR? • •

Yes No

14. Does IBBL offer L/C? • •

Yes No

15. Do you offer both local & foreign DD/P. O.? • •

Yes No

16. Do you offer both local & foreign T.T.? • •

Yes No

17. Does the bank provide online services? • •

Yes No

18. What types of export section of investment do you provide? • • • • •

Back to Back L/C Master L/C Pre shipment financing Post shipment financing All of them

19. Does it take long time for the bank for making payment to the customers? • •

Yes No

20. Does the bank charge high commission for any service? • •

Yes No

21. Do you think your customers are satisfied with all of your services? • • • • •

Strongly agree Agree Neutral Disagree Strongly disagree

22. Do your customers fell comfortable with your percentage on profit? • • • • •

Strongly agree Agree Neutral Disagree Strongly Disagree