Investment Process of Islami Bank Bangladesh Limited
Islami Bank Bangladesh Limited (IBBL) This Internship Program as well as this Report is a crucial part of our courses for Department of Business Administration. After completion of courses in the different areas of studies, students are allowed to choose different reputed Business organization to acquire the real life experience. So, there was attached with Islami Bank Bangladesh Limited (IBBL) to understand about the Investment Process of IBBL 1.2 Objective of the Study The primary objective of this report is to observe the investment related activities for the Investment Department of Islami Bank Bangladesh Ltd., Shyamoli Branch. The other objectives include: •
To understand the different modes of investment.
•
To familiarize with the various investment schemes.
•
To get the practical exposure of the banking activities.
•
To adapt with the corporate environment.
•
To understand the investment policy of IBBL with other banks.
1.3 Scope of the Study In this report have focused on all the qualitative which include profiles of IBBL, investment modes like Bai mode, Profit & loss sharing, bearing mode, Rent sharing mode, different schemes of investment such as household durable schemes, housing investment scheme, transport investment scheme, car investment scheme, investment scheme for doctors small business investment scheme, rural development scheme, etc. and lastly financial performances have been depicted. 1.4 Methodology of the Study The data required for this study were collected from both primary and secondary sources; however, majority of the information was collected from secondary sources.
a) Primary sources Primary data has been collected from •
Branch Manager & Second Officer.
•
Face to face conversation with employees and staffs.
•
Practical work experience.
•
Face to face conversation with clients.
b) Secondary sources The secondary data has been collected from •
Annual Report of Islami Bank Bangladesh Limited.
•
Various prescribed forms of investment were analyzed.
•
IBTRA Library.
•
Manuals of Investment of IBBL.
•
Different textbooks & materials.
•
Website of the Islami Bank Bangladesh Limited.
The major portion of the data source used for this report is a secondary one. 1.5 Limitations of the Study The present study was not out of limitations. From the beginning to end, the study has been completed sincerely and truthful. But some problem arises from conducting in the study. During the study it was not possible to visit the whole area covered by the banks although the financial statements and other information regarding the study have been covered. Some limitations are given stated below. •
Islami banking system is different than the traditional banking system
•
It is very difficult to analyze this issue without proper knowledge about Islamic banking and economy.
•
As it is not conventional so it bears some complexity to understand.
•
Some words are in Arabic terms that make it difficult.
•
Some information is confidential.
•
In many cases up to date information is not published.
Chapter Two BANK & Financial Institutions
2. Bank Licensing Bank Company Act, 1991, empowers BB to issue licenses to carry out banking business in Bangladesh. Pursuant to section 31 of the Act, before granting a license, BB needs to be satisfied that the following conditions are fulfilled: "that the company is or will be tion to pay its present or future depositors in full as their claims accrue; that the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interest of its present and future depositors; that, in the case of a company incorporated outside Bangladesh, the Government or law of the country in which it is incorporated Bangladesh as the Government or law of Bangladesh grants to banking companies incorporated outside Bangladesh and that the company complies with all applicable provisions of Bank Companies Act, 1991." Licenses may be cancelled if the bank fails to comply with above provisions or ceases to carry on banking business in Bangladesh. 2.1.1 Commercial Banks The commercial banking system dominates the financial sector with limited role of Non-Bank Financial Institutions and the capital market. The Banking sector alone accounts for a substantial share of assets of the financial system. The banking system is dominated by the 4 State Owned Commercial Banks, which together controlled more than 30% of deposits and operates 3383 branches (50% of the total) as of June 30, 2008. 2.1.2 Specialized Banks Out of the 5 specialized banks, 2(Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit need of the agricultural sector while the other two (Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) ) are for extending term loans to the industrial sector of Bangladesh . 2.1.3 Financial Institutions (FIs) Twenty-nine financial institutions are now operating in Bangladesh. Of these Institutions, 1(one) is govt. owned, 15 (fifteen) are local (private) and the other 13(thirteen) are established under joint venture with foreign participation. The total amount of loan & lease of these institutions is Tk.99, 091.80 million as on 31 December,
2007. Bangladesh Bank has introduced a policy for loan & lease classification and provisioning for Fist from December 2000 on half-yearly basis. To enable the financial institutions to mobilize
medium and long-term resources, Government of Bangladesh (GOB) signed a project loan with IDA, and a project known as ``Financial Institutions Development Project (FIDP)`` has started its operation from February 2000. Bangladesh Bank is administering the project. The project has established ``Credit, Bridge and Standby Facility (CBSF)`` to implement the financing program with a cost of US$ 57.00 million.
2.2 CAPITAL MARKET The Capital market, an important ingredient of the financial system, plays a significant role in the economy of the country. 2.2.1.
Regulatory Bodies
The Securities and Exchange Commission exercises powers under the Securities and Exchange Commission Act 1993. It regulates institutions engaged in capital market activities. Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions engaged in financing activities including leasing companies and venture capital companies. 2.2.2. Participants in the Capital Market The SEC has issued licenses to 27 institutions to act in the capital market. Of these, 19 institutions are Merchant Banker & Portfolio Manager while 7 are Issue Managers and 1(one) acts as Issue Manager and Underwriter. i) Stock Exchanges There are two stock exchanges ( the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE) ) which deal in the secondary capital market. DSE was established as a public Limited Company in April 1954 while CSE in April 1995. As of 30 June 2000 the total number of enlisted securities with DSE and CSE were 239 and 169 respectively. Out of 239 listed securities with the DSE, 219 were listed companies, 10 mutual funds and 10 debentures. ii) Investment Corporation of Bangladesh (ICB) The Investment Corporation of Bangladesh was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programme, and maintains investment accounts, floats and manages closed-end & open-end mutual funds & closed-end unit funds to ensure supply of securities as well as generate demand for securities. ICB also operates in the DSE and CSE as dealers. iii) Specialized Banks Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), BASIC Bank Ltd., some Foreign Banks and NCBs are engaged in long term industrial financing.
2.3 INSURANCE The insurance Sector is regulated by the Insurance Act, 1938 with regulatory oversight provided by the controller of Insurance on authority under the ministry of commerce. General insurance is provided by 21 companies and life insurance is provided by 6 companies. The industry is dominated by the two large, state-owned companies--SBC for general insurance and JBC for life insurance-which together command most of the total assets of the insurance sector. 2.4 MICROFINANCE INSTITUTIONS (MFIs) The member-based Microfinance Institutions (MFIs) constitute a rapidly growing segment of the Rural Financial Market (RFM) in Bangladesh. Micro credit programs (MCP) in Bangladesh are implemented by various formal financial institutions (nationalized commercial banks and specialized banks), specialized government organizations and Non-Government Organizations (NGOs). The growth in the MFI sector, in terms of the number of MFI as well as total membership, was phenomenal during the 1990s and continues till today. Over the period of June 2003 to June 2006 the growth rate was over 70% in terms of horizontal expansion of micro credit borrower. The total coverage of MCP in Bangladesh is approximately 30.09 million borrowers without considering overlapping figures. Table-1 shows the coverage of major institutions in the formal and semi-formal sectors. Table - 1:Coverage of Microcredit Program
Outstanding Loan
Organization
No. of Borrowers
NGO-MFIs (June 2006)
18,415,878
78,930.57
Grameen Bank (June 2006)
6908704
33235.46
Government Program (December, 2005)
1,997,240
7,710.05
Sub Total
27,621,573
120,493.52
Nationalized Commercial Banks (December, 2005)
2311150
32783.45
Private Banks (December, 2005)
164113
1106.46
Sub Total
2,475,263
33,889.91
Grand Total
30,096,836
154,383.43
(in million Taka)
Source: Micro credit Regulatory Authority, Grameen Bank It is estimated that after considering the overlapping problem, which is expected to be over 40%, the effective coverage would be around 18.05 million borrowers. Out of 18.05 million borrowers
covered by micro credit program, about 62% are below poverty line and so over 11.19 million poor borrowers are covered by micro credit program by 2006. Micro credit programs of NGOs (known as NGO-Microfinance Institutions or NGO-MFIs) and Grameen Bank play dominant role in this financial market, NGO-MFIs serve more than 61 percent and Grameen Bank alone serves 24 percent of the total borrowers. Among NGO-MFIs more than 80 percent of the outstanding loan disbursed by the top 20 NGOs, three of them are very large and have coverage all over the country. Service charge on credit varies from 10% to 20% at flat method of collection, all partners of Palli Karma-Sahayak Foundation (PKSF) charge 12.5%. Average interest offered by NGO-MFIs on savings to the members is 5%. Near about 90% of the clients of this sector are female. Loan recovery rate is generally very high compare to the banking sector, which is over 90%. Average loan size of NGO-MFIs was found around Taka 4,000.
2.5 Banking in Bangladesh The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4 State Owned Commercial Banks (SCB), 5 government owned specialized banks, 30 domestic private banks, 9 foreign banks and 29 non-bank financial institutions. Moreover, MRA has given license to 298 Micro-credit Organizations. The financial system also embraces insurance companies, stock exchanges and co-operative banks. 2.6 CENTRAL BANK Central Bank and its policies Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all banks and non-bank financial institutions. It performs the traditional central banking roles of note issuance and of being the banker to the government and banks. Given some broad policy goals and objectives, it formulates and implements monetary policy, manages foreign exchange reserves and lays down prudential regulations and conduct monitoring thereof as they apply to the entire banking system. Its prudential regulations include, among others: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. The Bangladesh Bank has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problem arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime.
2.7 Monetary Policy
Monetary policy is a set of rules that aims at regulating the supply of money in accordance with predetermined goals or objectives. Monetary policy plays a very dominant role in altering the economic activity and the price level in a country. So, it should be very carefully formulated and implemented in achieving the goals and objectives as outlined in the Bangladesh Bank Order, 1972 below: • Price stability both internal & external • Sustainable growth & development • High employment • Economic and efficient use of resources • Stability of financial & payment system
2.8 Reserve Management Strategy (President’s Order No. 127 of 1972) to hold and manage the official foreign exchange reserve of Bangladesh . It maintains its foreign exchange reserve in different currencies to minimize the risk emerging from widespread fluctuation in exchange rate of major currencies and very irregular movement in interest rates in the global money market. BB has established Nostro account arrangements with different Central Banks. Funds accumulated in these accounts are invested in Treasury bills, repos and other government papers in the respective currencies. It also makes investment in the form of short term deposits with different high rated and reputed commercial banks and purchase of high rated sovereign/supranational/corporate bonds. Forex Reserve & Treasury Management Department of BB performs the operational functions regarding investment which is guided by investment policy set by the BB’s Investment Committee headed by a Deputy Governor. The underlying principle of the investment policy is to ensure the optimum return on investment with minimum market risk The Short-term Agricultural and Micro-Credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be classified as 'Substandard ' after a period of 12 months, as 'Doubtful' after a period of 36 months and as 'Bad/Loss' after a period of 60 months from the stipulated due date as per loan agreement. Besides, if any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities decreases or if the recovery of the loan becomes uncertain due to any other unfavorable situation, the loan will have to be classified on the basis of qualitative judgment. As regards the provision, banks are required to maintain General Provision against all categories of loans along with off-balance sheet items in the following manner
Particulars Short Term Consumer Financing Agri. Credit Other than Housing and micro Housing Finance credit Finance & Loans
for
Small for Enterprise Professional Financing Loans
All other Credit
s to set up business
Professional s to set up business UC
Classified
Standard
5%
5%
2%
2%
1%
SMA
-
5%
5%
5%
5%
SS
5%
20%
20%
20%
20%
DF
5%
50%
50%
50%
50%
B/L
100%
100%
100%
100%
100%
Besides, banks are required to maintain general provision against Off-balance sheet exposures in the following manner: (i)
@ 0.5% provision effective from December 31, 2007 and
(ii)
@ 1% provision effective from December 31, 2008.
Other instructions such as Eligible securities in determining base for provision along with a revised format for submitting the report on classification of loans and advances are also provided in the respective circulars. 2.9 Deposit and Insurance: The deposit insurance scheme (DIS) was introduced in Bangladesh in August 1984 to act as a safety net for the depositors aiming at minimizing the risks of loss of depositors' fund with banks in which all the commercial banks including foreign banks and the specialized banks operating in Bangladesh are the member of this scheme by compulsion as provided under Article of Bank Deposit Insurance Act 2000. The DIS is designed to minimize the risks that the depositors suffer a loss out of placing funds with a bank. The purpose of DIS is to help to increase market discipline, reduce moral hazard in the financial sector and provide safety nets at the minimum cost to the public in the event of bank failure. The direct rationale for the deposit insurance is customer protection. The indirect rationale for deposit insurance is that it reduces the risks of systemic crisis, involving, for example, panic withdrawals of deposits from sound banks and breakdown of payments system. A Deposit Insurance
Trust Fund (DITF) has also been created for providing limited protection (not exceeding Taka 0.01 million) to a small depositor in case of winding up of any bank. The Board of Directors of Bangladesh Bank is the Trustee Board for the DITF. Bangladesh bank has adopted a system of risk based deposit insurance premium rates applicable for all scheduled banks effective from the half year January - June 2007. According to new instruction regarding premium rates, problem banks are required to pay 0.09 percent and private banks other than the problem banks and state owned commercial banks are required to pay 0.07 percent where the percent coverage of the deposits is taka one hundred thousand per depositor per bank. With this end in view, BB has already advised the banks for bringing DIS into the notice of the public through displaying the same in their display board. 2.10 Foreign Exchange System On March 24, 1994 Bangladesh Taka (domestic currency) was declared convertible for current transactions in terms of Article VIII of the IMF Articles of Agreement. Consequent to this, current external settlements for trade in goods and services and for amortization payments on foreign borrowings can be made through banks authorized to deal in foreign exchange, without prior central bank authorization. However, because resident owned capital is not freely transferable abroad (Taka is not yet convertible on capital account), some current settlements beyond certain indicative limits are subject to bonafides checks. Direct investments of non-residents in the industrial sector and portfolio investments of nonresidents through stock exchanges are reparable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly. 2.11 List of banks in Bangladesh The commercial banking system dominates Bangladesh's financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system is composed of four state-owned commercial banks, five specialized development banks, thirty private commercial Banks and nine foreign commercial banks. The Nobel-prize winning Grameen Bank is a specialized micro-finance institution, which revolutionized the concept of micro-credit and contributed greatly towards poverty reduction and the empowerment of women in Bangladesh. 2.11.1 Contents •
1 Central Bank
•
2 State-owned Commercial Banks
•
3 Private Commercial Banks
•
4 Foreign Commercial Banks
•
5 Specialized Development Banks
•
6 Reference
•
7 External links
2.11.2 Central Bank •
Bangladesh Bank
Pursuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank with retrospective effect from 16 December 1971. 2.11.3 State-owned Commercial Banks The banking system of Bangladesh is dominated by the 3 Nationalized Commercial Banks , which together controlled more than 54% of deposits and operated 3388 branches (54% of the total) as of December 31, 2004. The nationalized commercial banks are: Specialized Bank of Bangladesh: •
Rajshahi Krishi Unnoyan Bank
•
Bangladesh Krishi Bank
•
BDBL
•
BASIC BANK Ltd.
•
NRB Bank Ltd.
2.11.4 Private Commercial Banks Private banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products. •
Agrani Bank Limited
•
Krishi Bank
•
BRAC Bank Limited
•
Eastern Bank Limited
•
Dutch Bangla Bank Limited
•
Dhaka Bank Limited
•
Islami Bank Bangladesh Ltd
•
Pubali Bank Limited
•
Uttara Bank Limited
•
IFIC Bank Limited
•
National Bank Limited
•
The City Bank Limited
•
United Commercial Bank Limited
•
NCC Bank Limited
•
Prime Bank Limited
•
SouthEast Bank Limited
•
Al-Arafah Islami Bank Limited
•
Social Islami Bank Limited
•
Standard Bank Limited
•
One Bank Limited
•
Exim Bank Limited
•
Mercantile Bank Limited
•
Bangladesh Commerce Bank Limited
•
Mutual Trust Bank Limited
•
First Security Islami Bank Limited
•
The Premier Bank Limited
•
Bank Asia Limited
•
Trust Bank Limited
•
Shahjalal Islami Bank Limited
•
Jamuna Bank Limited
•
ICB Islami Bank
•
AB Bank Limited
•
BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited)
Foreign Commercial Banks •
Citibank
•
HSBC
•
Standard Chartered Bank
•
Commercial Bank of Ceylon
•
State Bank of India
•
Habib Bank
•
National Bank of Pakistan
•
Woori Bank
•
Bank Alfalah
2.11.5 Specialized Development Banks Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector while the other two ( Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) are for extending term loans to the industrial sector.[1] The Specialized banks are: •
Grameen Bank
•
Bangladesh Krishi Bank
•
Bangladesh Development Bank Ltd
•
Rajshahi Krishi Unnayan Bank
•
BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited)
•
Bangladesh Somobay Bank Limited(Cooperative Bank)
•
Ansar VDP Unnyan Bank
Chapter Three 3.1 History of Islami Bank Bangladesh Ltd. In the late seventies and early eighties, Muslim countries were awoken by the emergence of Islami Bank, which provided interest free banking facilities. There are currently more than 300 interest free institutions all over the world. Islami Bank now a days not only operating ate in almost all Muslim countries but have extended their wings to the western world to serve both Muslim and non Muslim customers. In case of Islami Banking, the establishment of Mishear Local Savings Bank in 1963 is said to be a milestone for modern Islami Banking. In 1974, Bangladesh signed the Charter of Islamic Development Bank and committed itself to reorganise its economic and financial system as per Islamic Shariah (legal framework of Islamic Ideology). In 1978, Bangladesh recommended in Islamic Foreign Minister Conference in Senegal towards systematic efforts to Islamic Banking. In 1980, Foreign Minister Conference in Pakistan where Bangladesh Foreign Minister Prof. Shamsul Hoq, proposed for taking steps for Islamic Banking. Further, Bangladesh Bank sent representation
abroad to study Islamic Banking System. Also, International Seminar held in Dhaka inaugurated by Bangladesh Bank Governor for early introduction of Islamic Banking. In 1981, President of the Peoples Republic of Bangladesh addressed the 3rd Islamic Summit Conference held at Makkah and Taif suggested, ''The Islamic countries should develop a separate banking system of their own in order to facilitate their trade and commerce.'' In 1982, IDB visited Bangladesh for study. They found contributions done by Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers Association (BIBA); they mobilized the seminars, public opinion through symposia & workshop. Professional activities reinforced by Muslim Businessman Society (now reorganized as Industrialists and Businessman Association). Islami Bank Bangladesh Limited (IBBL) is considered to be the first interest free bank in Southeast Asia. It was incorporated on 13-03-1983 as a Public Company with limited liability under the companies Act 1913. The bank began operations on March 30, 1983, with major share by the foreign entrepreneurs. IBBL is a joint venture multinational Bank with 63.92% of equity being contributed by the Islamic Development Bank and financial institutions. The total number of branches in 2009 stood at 207. Now the authorized capital of the bank is Tk.20, 000.00 million and subscribed capital is Tk 7, 413.10. Million. 3.2 Islamic Banking “Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations�. -OIC It appears from the above definitions that Islamic bank is systems of financial intermediation that avoids receipt and payment of interest in its transactions and conducts its operations in a way that it helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system whose operation is based on Islamic principles of transactions of which profit and loss sharing (PLS) is a major feature, ensuring justice and equity in the economy. That is why Islamic bank is often known as PLS-banks.
3.3 Mission 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.
3.4 Vision Our vision is to always strive to achieve superior financial performance, be considered a leading Islamic bank by reputation and performance. •
Our goal is 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.
•
We will try to encourage savings in the form of direct investment.
•
We will also try to encourage investment particularly in projects, which are more likely to lead to higher employment.
3.5 Objectives of Islamic Bank The primary objective of establishing Islamic Bank 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 bank when viewed in the context of its role in the economy are listed as following: •
To offer contemporary financial services in conformity with Islamic Shariah;
•
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.
3.6 Functions The functions of Islami Bank Bangladesh Limited are as under. •
To maintain all types of deposit accounts.
•
To make investment.
•
To conduct foreign exchange business.
•
To extend other banking services.
•
To conduct social welfare activities through Islami Bank Foundation
3.7 Essential Features of Islamic Bank 3.7.1 Prohibition of interest The traditional capitalist banking system depends on interest. It receives interest for providing loans and pays interest for taking loans. The spread between these two interests is the source of its profit.
But according to Islamic Shariah all types of interest is banned. So, Islamic bank does not carry on business of interest and it completely avoids the transaction of interest. 3.7.2 Investment based on profit After departing from interest, the alternate ways of income for Islamic bank is investment and profit. Thus IBBL gives up any transaction of interest and makes investments based on profit. Bank distributes its profit to its depositors and shareholders. 3.7.3 Investment in Halal business Islamic Shariah has banned the business of haram goods. For example, Islam not only forbids the drinking of alcohol but also banned any business of alcohol. Therefore, Islamic bank does not get any haram business and only do halal business. 3.7.4 Halal paths and procedures Islamic Shariah also rejects any haram path or process in case of a halal business. Therefore, Islamic bank system only allows the halal path procedures of halal business. 3.8 Distinguishing Features of Conventional Banks and IBBL The distinguishing features of the conventional banking and IBBL are shown below:
Conventional Banks The functions and operating modes of
IBBL The functions and operating modes of IBBL is
conventional banks are based on manmade
based on the principles of Islamic Shariah.
principles. The investor is assured of a predetermined
In contrast, it promotes risk sharing between
rate of interest.
provider of capital (investor) and the user of
It aims at maximizing profit without any
funds (entrepreneur). It also aims at maximizing profit but subject to
restriction. It does not deal with Zakat.
Shariah restrictions. In the modern IBBL system, it has become one of the service-oriented functions of the IBBL to
Leading money and getting it back with
collect and distribute Zakat. Participation in partnership business is the
interest is the fundamental function of the
fundamental function of the IBBL.
conventional banks. Its scope of activities is narrower when
Its scope of activities is wider when compared
compared with IBBL
with a conventional bank. It is, in effect, a
It can charge additional money (compound
multi-purpose institution. The IBBL has no provision to charge any extra
rate of interest) in case of defaulters. In it very often, banks own interest becomes
money from the defaulters. It gives due importance to the public interest. Its
prominent. It makes no effort to ensure
ultimate aim is to ensure growth with equity.
growth with equity. For interest-based
For the IBBL, it is comparatively difficult to
borrowing
from
the
commercial money
banks,
market
is
borrow money from the money market.
relatively easier. Since income from the advances is fixed, it
Since it shares profit and loss, the IBBL pay
gives little importance to developing expertise
greater attention to developing project appraisal
in project appraisal and evaluations. The conventional banks give greater emphasis
and evaluations. The IBBL, on the other hand, give greater
on credit-worthiness of the clients. The status of a conventional bank, in relation
emphasis on the viability of the projects. The status of IBBL in relation to its clients is
to its clients, is that of creditor and debtors. A conventional bank has to guarantee all its
that of partners, investors and trader. Strictly speaking, IBBL cannot do that.
deposits. 3.9 Corporate information at a glance (As on December 31, 2010) Date of Incorporation Inauguration (Local office, Dhaka) Formal Inauguration
13th March 1983 of
1st
Branch
30th March 1983 12th August 1983
Share of Cap ital
8413.20 million
Local Shareholders
41.77%
Foreign Shareholders
58.23%
Authorized Capital
Tk.20,000.00 million
Paid-up Capital
Tk.7,413.10 million
Deposits
Tk291,347.00 million
Investments (including Investment in Shares)
Tk.292084.00 million
Foreign Exchange Business
Tk609331.00 million
Total Number of Branches
251
Number of SME Service Centers
30
Number of Shareholders
52,164
Manpower
10,068
Address of the Head office Islami 40, Dhaka
Bank Dilkusha -
Tower C/A 1000
Bangladesh
GPO
Box
no.
: 233
Telephone
: (02) 9563040(Auto Hunting), 9560099, 9567161, 9567162, 9569417
Telex
: 642525 IBANK BJ 632403 IBANK BJ 671620 IBANK BJ
Fax
: 880- 2- 9564532, 880 -2- 9568634
SWIFT
: IBBLBDDH
Cable
: ISLAMIBANK
: info@islamibankbd.com
3.10 Structure of the organization
Chairman Vice- Chairman Board of Directors Managing Director Deputy Managing Director Executive Vice President Senior Vice President Vice President Assistant Vice President
Senior Principal Officer Principal Officer Senior Officer
Officer
Assistant Officer Grade- II Probationer Officer Assistant Officer Grade- III
3.11 Profile of the IBBL, Shyamoli Branch 3.11.1 About the Shyamoli Branch I worked for 45 days in this Branch. Islami Bank Bangladesh Ltd. of Shyamoli Branch is situated at Shyamoli, Dhaka, Bangladesh. This Branch was established on 27.09.1989. This is an Authorized Dealer Branch. There are 76 employees including SVP and AVP. Total investment of Shyamoli Branch is 2521.23 million and the total deposit is 4091.43 million. The employees of Shyamoli Branch are very co-operative to each other and the always maintain the rules and regulation of the office. 3.11.2 Objectives of the Islami Bank in Shyamoli Branch •
To conduct interest-free banking.
•
To invest on profit and risk sharing basis.
•
To establish a welfare-oriented banking system
•
To establish a well-balanced economic system.
•
To keep position in the competitive market.
•
To provide Islamic banking service for the customer.
3.11.3 Deposit Products of the Islami Bank in Shyamoli Branch
IBBL has the scope to explore the market niche through various types of IBBL instruments. IBBL offers wide range of IBBL products and services. It provides •
Mudaraba Savings Account,
•
Mudaraba Term Deposit,
•
Mudaraba Special Savings (Pension),
•
Al-Wadeeah Current Account,
•
Mudaraba Savings Bond, Mudaraba
•
Mudaraba Monthly profit Deposit,
•
Mudaraba Special Deposit,
•
Mudaraba Hajj Savings,
•
Mudaraba Muhor Savings
•
Mudaraba Foreign Currency Deposit,
•
And Mudaraba Waqf Cash Deposit.
3.11.4 Services of the Islami Bank Shyamoli Branch •
ATM Services
•
Different types of Special Services
•
Foreign Exchange Business
•
Online Service
•
And other Services
•
Money Express Services
3.11.5 Department of Islami Bank in Shyamoli Branch There are three main departments. These are as follows: General Banking Department. It includes •
Account opening section
•
Cash Section
•
Clearing & chequebook section
•
ATM section
•
DD, TT, PO
•
Balance verify & Information section
•
Accounts section
Investment Department. It includes •
Commercial section
•
Project/Industry
•
HPSM
Foreign Exchange Department. It includes •
Export section
•
Import section
•
Remittance section
•
And Local trade
3.11.6 Investment Scheme in Shyamoli Branch The following Products are offering by the branch to the clients by the different mechanism: •
Housing Investment Scheme.
•
Transport Investment Scheme.
•
Small Business Investment scheme.
•
Car Investment Scheme.
•
Micro Industries Investment Scheme.
•
Doctors Investment Scheme.
•
Real Estate Investment Scheme.
•
Rural Development Scheme.
•
And Others.
3.11.7 Client of the Islami Bank Shyamoli Branch Shyamoli Branch has many clients because this Branch is situated at the Shyamoli area. There are 101890 clients of Shyamoli Branch of the IBBL (As on 31 March, 2011) 3.11.8 Account holder of the Islami Bank in Shyamoli Branch MSA:
55,662
AWCA:
4,639
MSS:
29,396
MHSA:
691
MTDR:
6,989
3.11.9 Hierarchy Management of the Islami Bank in Shyamoli Branch
Manager-SVP
Second Manager-AVP
Senior Principal Officer- SPO
Principal Officer- PO
Senior Officer
Probationary Officer
Assistant Officer Grade- I
Assistant Officer Grade- II
Assistant Officer Grade- III
Messenger
Security Guard
Cleaner
Chapter Four 4.3.2 Information Section Lot of customers arrives every day for collecting information about the products, facilities, and foreign exchange of this branch. Clients wanted to know the balance of their account by coming to this branch personally or by phone. They come to collect account statement, certificate, 7 days notice, address change, sign change and account transfer in this section. 4.3.5 Investment Section That worked for total 9 days in this section. Although Islami Bank Bangladesh Ltd. (IBBL) has been the most profitable banking organization in Bangladesh since the last few years but it has also got some limitations. These limitations exist in their operations, management and environment of the Bank. When I engaged in the IBBL Mirpur-10 Branch, then I able to talk to some of clients and employees of this Branch and also talk about Banking Activities of this Branch. The investment procedures, modes of investment & its limitations that are found in the period of my internship are given below: 4.3.6 Investment Procedures of IBBL There are three types of investment Mechanism. Every mechanism of investment is strictly followed investment procedures. These are as follows: •
Selection of the client
•
Application stage
•
Appraisal stage
•
Sanctioning stage
•
Documentation stage
•
Disbursement stage
•
Monitoring and Recovery stage
4.3.7 Modes of investment & its limitations
4.3.7.1 Bai-Murabaha
This mode is binding upon the Client to purchase from the Bank. The Bank sells the goods at a higher price (Cost + Profit) to earn profit. The cost of goods sold and profit mark-up therewith are separately and clearly be mentioned in the Bai-Murabaha agreement. After purchasing of goods the Bank must bear the risk of goods until those are actually sold and delivered to the Client/buyer. 4.3.7.2 Bai-Muajjal This mode is binding upon the Client to purchase from the Bank but bank is not bound to declare the cost of goods and profit mark-up separately to the client. Stock and availability of goods is a precondition for Bai-Muajjal agreement. The responsibility of the bank is to purchase the desired goods at the disposal of the client to acquire ownership of the same before signing the Bai-Muajjal agreement with the client. Bank must bear the risk of goods until those are actually sold and delivered to the client/buyer. 4.3.7.3 Bai-Salam Bai-Salam is a mode of investment allowed by Islamic Shariah in which commodities can be sold without having commodities either in existence or physical /constructive possession of the seller. If the commodities are ready for sale, Bai-Salam is not allowed by Islamic Shariah. Then the sale may be done either in Bai-Murabaha or Bai-Muajjall mode of investment.
4.3.7.4 Higher purchase under Shirkatul Melk In case of Hire Purchase under Shirkatul Melk, the asset / property involved is jointly purchased by the Hire (Bank) and the Hirer (Client) with specified equity participation under a Shirkatul Melk Contract in which the amount of equity and share in ownership of the asset of each partner (Hire Bank & Hirer Client) are clearly mentioned. Under this agreement, the Hire and the Hirer becomes coowner of the asset under this transaction in proportion to their respective equity participation.
4.3.7.5 Mudaraba Most of investment of IBBL is formed under Mudaraba Mode. It is a form of partnership where one party provides the funds while the other provides the expertise and management. Any profits generated are shared between two parties on a pre-agreed basis, while capital loss is exclusively borne by the partner providing the capital. But IBBL is an expert organization in business sector so they face less failure and if there is any loss they can overcome it by other sector
4.3.7.6 Musharaka The partners (entrepreneurs, bankers) share both capital and management of a project so that profits will be distributed among them as per ratio, where loss is shared according to ratio of their equity participation. Investment division is the most important for all banks. In investment division maintain all types of investment procedures of Mirpur-10 branch and support the branch to take different types of initiatives. So prepared to report mode of investment as result majority time work in the Investment department. 4.3 Learning Points Basically the learned about the Investment division and something tried to gather from the several sector about the banking activities. Now it is clear to me how Shyamoli Branch operates their operations. Through internship work learned about•
Products & Services of the Shyamoli Branch
•
Investment procedures Shyamoli Branch
•
Different types of investment modes
•
I have learnt about Bai murabaha investment
•
I have learnt about Bai muajjal investment
•
I have learnt about Bai salam investment
•
I have learnt about the Share Mechanism including Mudaraba & Musharaka
•
How to collect their principals & profits
•
How to apply their investment rules
•
How to open several types of account in this bank
•
What are the requirements for the account opening?
•
What types of account they are dealing etc. Chapter Five
5.1 Introduction 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. 5.2 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 Shariah.
•
To diversify its investment portfolio by the size of investment, by sectors (public & private), by economic purpose, by securities and by geographical area including industrial, commercial, and agriculture.
•
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.
5.3 Categories of Investment /modes of Investment IBBL, New Market Branch has provided various types of Investment modes for their different types of customers according to their requirements. Some popular investment modes of IBBL, Shyamoli Branch are discussed below: IBBL, Shyamoli Branch operates its investment activities mainly through three (3) mechanisms:
1. Bai-Mechanism
a. Bai-Murabaha b. Bai-Muajjal c. Bai-Salam
2. Share Mechanism
a. Mudaraba b. Musharaka
3. Ijara Mechanism
a. Hire Purchase Under Shirkatul Melk
5.4 Bai -Mechanism 5.4.1 Bai-Murabaha (Contract Sale on Profit) Meaning and Definition “Bai-Murabaha” means 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 Shariah and the Law of the land to the buyer at a cost plus an agreed profit payable today or on some date in the future in lump-sum or by installments. The profit may be either a fixed sum or based on a percentage of the price of the goods. 5.4.2 Features of Bai- Murabaha •
A client can make an offer to purchase particular goods from the bank for a specified agreed upon price, including the cost of the goods plus a profit
•
A client can make the promise to purchase from the bank, that is, he is either to satisfy the promise or to indemnify any losses incurred from the breaking the promise without excuse.
•
It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify any losses that may result.
•
Documentation of the debt resulting from Bai-Murabaha by a Guarantor, or a mortgage, or both like any other debt is permissible. Mortgage/Guarantee/Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
•
The bank must deliver the goods to the client at the date, time, and place specified in the contract.
•
The purchase price of goods sold and profit mark-up shall separately and clearly be mentioned in the agreement.
•
The price once fixed as per agreement and deferred cannot be further increased.
•
It is permissible for the Bank to authorize any third party to buy and receive the goods on Bank’s behalf. The authorized must be in a separate contract.
5.4.3 Application of Bai-Murabaha Murabaha is the most frequently used form of finance in IBBL throughout the world. It is suitable for financing the different investment activities of customers with regard to the manufacturing of finished
goods, procurement of raw materials, machinery, and other required plant and equipment purchases. It is used widely about 53 5.4.4 Trends of Bai Murabaha at the Shyamoli Branch
Bai-Murabaha(Amount in million TK)
170 160 150 140 130 Bai-Murabaha
2008 153.61
2009 148.38
2010 167.01
Source:Statement of affairs of Shyamoli Branch Comments: The decreasing rate 2009 was 3.40% whether in 2010 the rate is 12.56% increasing. From this above we can say that Bai Murabaha modes 2009 are decreasing but next year it increasing. 5.4.5 Bai-Muajjal (Deferred Sale) Meaning and Definition “Bai-Muajjal” means sale for which payment is made at future fixed date or within a fixed period. In short, it is sale on Credit. The Bai-Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods, permissible under Shariah and law of the country, to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or in fixed installments. 5.4.6 Features of Bai-Muajjal •
It is permissible and in most cases, the client will approach the bank with an offer to purchase a specific good through a Bai-Muajjal agreement.
•
It is permissible to make the promise binding upon the client to purchase the goods from the bank.
•
It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the bank for damages caused by non-payment.
•
It is also permissible to document the debt resulting from Bai-Muajjal by a Guarantor, or a mortgage or both, like any other debt. Mortgage/Guarantee/Cash security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
•
All goods purchased on behalf of a Bai-Muajjal agreement are the responsibility of the bank until they are delivered to the client.
•
The bank must deliver the goods to the client at the time and place specified in the contract.
•
The bank may sell the goods at a higher price than the purchase price to earn profit.
•
The price is fixed at the time of the agreement and cannot be altered.
•
The bank is not required to disclose the profit made on the transaction.
5.4.7 Trends of Bai-Muajjal at the Shyamoli Branch
Bai-Muajjal(Amount in million TK) 150 100 50 0 Bai-Muajjal
2008 140
2009 131.57
2010 113.24
Source: Statement of affairs of Shyamoli Branch. Comments: Such account is decreasing day by day because of some shariah-based problem. The Islami Bank shariah board has decided to diminish this mode of investment in future & it is being carried out gradually. 5.4.8 Bai- Salam (Advance Payment Meaning and Definition “Bai- Salam” means advance sale and purchase. Bai-Salam may be defined as a contract between a buyer and a seller under which the seller sells in advance the certain commodity/products permissible under Islamic Shariah and the law of the land to the buyer at an agreed price payable on the execution of the said contract and the commodity/products are delivered to the buyer as per specification, size, quality, quantity at a future time in a particular place.
5.4.9 Features of Bai- Salam •
Bai-Salam is a mode of investment allowed by Islamic Shariah in which
commodities can
be sold without having the said commodities either in existence or physical /constructive possession of the seller. If the commodities are ready for sale, Bai- Salam is not allowed in
Shariah. Then the sale may be done either in Bai-Murabaha or Bai-Muajjall mode of investment. •
Generally, industrial and agricultural products are purchased/sold in advance under Bai-Salam mode of investment to infuse finance so that product is not hankered due to shortage fund/cash.
•
It is permissible to obtain collateral security from the seller client to secure the investment from any hazards via non-supply/partial supply of commodities supply of low quality commodities.
•
It is also permissible to obtain Mortgage and /or Personal Guarantee from a third party as security before the signing of the Agreement or at the time to signing the Agreement
•
Bai-Salam on particular commodities or on a product of a particular field or firm cannot be affected (for Agricultural Product(s) only).
•
The seller (manufacturer) client may be made agent of the Bank to sell the goods delivered to the Bank by her provided a separate agency agreement is executed between the bank and the client (agent).
5.4.10 Application of Bai- Salam Salam sales are frequently used to finance the agricultural industry. Banks advance cash to farmers today for delivery of the crop during the harvest season. Thus banks provide farmers with the capital necessary to finance the cost of producing a crop. Salam sale are also used to finance commercial and industrial activities. Once again the bank advances cash to businesses necessary to finance the cost of production, operations and expenses in exchange for future delivery of the end product. In the meantime, the bank is able to market the product to other customers at lucrative prices. In addition, the Salam sale is used by banks to finance craftsmen and small producers, by supplying them with the capital necessary to finance the inputs to production in exchange for the future delivery of products at some future date.
5.4.11 Trends of Bai- Salam at the Shyamoli Branch Bai-Salam(Amount in million TK) 10.5 10 9.5 9 8.5 8 Bai-Salam
2008 8.98
2009 10.44
2010 8.96
Source: Statement of affairs of Shyamoli Branch Comments: From this above graph show that the increasing rate 2010 was 16.23% but on the other hand 2011 is decreasing rate 15.18%. 5.5 Share Mechanism 5.5.1 Mudaraba (Investment made by the entrepreneur) Meaning and Definition The word Mudaraba has been derived from Arabic word “Darb/Darbun” which means, “Travel”. Thus the word Mudaraba means travel for undertaking business. It is a form of partnership where one party provides the funds while the other provides the expertise and management. The first party is called the “Sahib-Al-Maal” and the latter is referred to as the “Mudarib”. Any profits accrued are shared between the two parties on a pre-agreed basis, while capital loss is exclusively borne by the partner providing the capital.
5.5.2 Features of Mudaraba •
Bank supplies capital as Sahib-Al-Mall and the client invest if in the business with his experience.
•
Administration and management is maintained by the client.
•
Profit is divided as per management.
•
Bank bears the actual loss alone.
•
Client cannot take another investment for that specific business without the permission.
5.5.3 Musharaka (Partnership based investment) Meaning and Definition The word “Musharaka" has been derived from Arabic words "Sharikat" or “Shirkat". In Arabic Sharikat and Shirkat means partnership or sharing. Thus the word "Musharaka" means a partnership between two or more persons or institutions. Musharaka means a partnership established between two or more persons or institutions for purpose of a commercial venture participated both in the capital and management where the profit may be shared between the partners as per agreed upon ratio and the loss, if any is to be borne by the partners at per capital/equity ratio. In this case of Investment, "Musharaka" meaning a partnership between the Bank and the Client for a particular business in which both the Bank and the Client provide capital at an agreed upon ratio and manage the business jointly. Share the profit as per agreed upon ratio and bear the loss, if any in proportion to their respective equity. Bank may move itself with the selected Client for conducting any Shariah permissible business under Musharaka mode. 5.5.4 Features of Musharaka •
Bank and client both supply capital unequally/equally.
•
Profit is divided as per agreement and actual loss is divided as per equity.
•
Client will maintain all accounts properly bank or its agent may verify or audit it.
•
Banks can advice the client in such a business in respect of the businesses.
•
All partners can participate in the management of the business and can work for it.
•
The liability of the partner is normally unlimited. Therefore, all the liabilities shall be borne proportionately by all the partners.
5.5.5 Trends of Musharaka at the Shyamoli Branch
Musharaka(Amount in million TK)
300 200 100 0 Musharaka
2008 86.6
2009 275.17
2010 232.96
Source: Statement of affairs of Shyamoli Branch. Comments: From the above graph showed that in 2009 was increasing rate. But next year it is decreasing. The management should be careful in this sector.
5.6 Ijarah Mechanism 5.6.1 Hire Purchase Under Shirkatul Melk Meaning and Definition Hire Purchase Under Shirkatul Melk is a Special type of contract that has been developed through practice. Actually, it is a synthesis of three contacts: 1. Shirkat 2. Ijarah and 3. Sale These may be defining as follows: 1. Shirkatul Melk: ‘Shrkat’ means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset and own the same jointly and share the benefit as per agreement and loss in proportion to their respective equity, the contact is called Shirkatul Melk. In the case of Hire Purchase under Shirkatul Melk, IBBL purchase assets to be leased out, jointly with client under equity participation, own the same and share benefit jointly till the full ownership is transferred to the client.
2. Ijara: The term Ijara has been derived from the Arabic words “Air” and “Ujrat” which means consideration, return, wages or rent. This is really the exchange value or consideration, return, wages, rent of service f an asset. Ijara has been defined as a contract between two parties, the Hiree and Hirer where the Hirer enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the Hiree. It is a hire agreement under which the Hiree to a Hirer against fixed rent or rentals hires out a certain asset for a specified period. 3. Sale: This is a sale contract between a buyer and a seller under which the ownership of certain goods or asset is transferred by seller to the buyer against agreed upon price paid/ to be paid by the buyer. Thus,
in
Hire
purchase
under
Shirkatul
Melk
mode
both
the
Bank
and
the
Client supply equity in equal or unequal proportion for purchase of an asset like land, building, and machinery, transport etc. Purchase the asset with that quit money, own the same jointly, share the benefit as per agreement and bear the loss in proportion their respective equity. The share, part of portion of the asset owned by the bank is hired out to the client partner for a fixed rent per unit of time for a fixed period. Lastly the bank sells and transfers the ownership of its share/part/portion to the client against payment of price fixed for the either gradually part by part or in lump sum within the hire period or after expire of the hire agreement.
Stages of Hire Purchase Under Shirkatul Melk Hire Purchase under Shirkatul Melk Agreement has got three stages: •
Purchase of asset under joint ownership of the lessor and the lessee.
•
Hire, and
•
Sale and transfer of ownership by the lessor to the other partner – lessee.
5.6.2 Features of Hire Purchase Under Shirkatul Melk •
In case of Hire Purchase Under Shirkatul Melk transaction the asset/property involved is jointly purchased by the lessor (bank) and the lessee (client) with specified equity participation Under a Shirkatul Melk contract in which the amount of equity and share in ownership of the asset of each partner (lessor bank and lessee client) are clearly mentioned. Under this agreement the lessor and the lessee become co-owners of the asset under transaction in proportion to their respective equity.
•
In Hire Purchase Under Shirkatul Melk Agreement the exact ownership of both the lessor (bank) and lessee (client) must be recognized. However, if the partners wish and agree the
asset purchased may be registered in the name of any one of them or in the name of any third party clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement. •
The share/part of the purchased asset owned by the lessor (bank) is put at the disposal possession of the lessee (clients) keeping the ownership with him for a fixed period under a hire agreement in which the amount of rent per unit of time and the benefit for which rent to be paid along with all other agreed upon stipulations are clearly stated. Under this agreement the lessee (client) becomes the owner of the benefit of the asset not of the asset itself, in accordance with the specific provisions of the contract that entitles the lessor (bank) the rentals.
•
As the ownership of leased portion of asset lies with the lessor (bank) and rent is paid by the lessee against the specific benefit, the rent is not considered as price or part of price of the asset.
•
In the Hire Purchase Under Shirkatul Melk Agreement the Hire (Bank) does not
sell or
the Hirer (Client) does not purchase the asset but the Hire (Bank) promise to sell asset to the Hirer (Client) part by part only, if the Hirer (Client) pays the cost price / equity / agreed price as fixed for the asset as per stipulations within agreed upon period on which the Hirer also gives undertakings. •
The promise to transfer legal by the Hire undertakings given by the Hirer to purchase ownership of the hired asset upon payment part by part as per stipulations are effected only when it is actually done by a separate sale contract.
•
As soon as any part of Hire's (Bank's) ownership of the asset is transferred to the Hirer (Client) that becomes the property of the Hirer and hire contract for that share part and entitlement for rent thereof lapses.
•
The hire contract becomes effective from the day on which the Hire transfers the possession of the hired asset in good order and usable condition to the Hirer, so that the Hirer may make the agreement.
•
Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the Hire to the Hirer.
5.6.3 Trends of HPSM at Shyamoli Branch (Amount in million tk)
1400 1200 1000 800 600 400 200 0 HPSM
2008
2009
2010
985.38
1208.33
1101.37
Source: Statement of affairs of Shyamoli Branch. Comments: From the above graph show that in 2010 the increasing rate for this mode was 27.81% whether in 2011 the rate is decreased by 8.85%. This mode of investment is specially used in terms of housing investment whether bank and clients are invested together. 5.7 Bai Mechanism Total Trends of Bai-Mechanism at the Shyamoli Branch (Amount in million tk) 305 300 295 290 285 280 Total
2008
2009
2010
302.59
290.39
289.21
Bai-Mechanism Years
Bai- Bai-Muajjal
Bai-Salam
Total
Growth
2009
Mudaraba 153.61
140.00
8.98
302.59
2010
148.38
131.57
10.44
290.39
-5.01%
2011
167.01
113.24
8.96
289.21
-0.41%
Source: The data are collected from Shyamoli Branch of IBBL
Comments: From this above graph and table showed that the growths of Bai Mechanism sector of investment decreasing year to year. Either employees are not performing or clients are not interest as well 5.8 Share mechanism Total Trends of Share mechanism at the Shyamoli Branch (Amount in million tk)
300 250 200 150 100 50 0 Total
2008
2009
2010
86.6
275.17
232.96
Share Mechanism Years
Musharaka
Total
Growth
2009
86.60
86.60
2010
275.17
275.17
117.74%
2011
232.96
232.96
-15.33%
Source: The data are collected from Shyamoli Branch of IBBL Comments: From this above graph and table showed that in this share mechanism bank plays the important role because they don’t have any risk. The above figure indicates that though the year 2009 shared increased trend, it dropped during the year 2010. 5.9 Ijara Mechanism Total Trends of Ijara Mechanism at the Shyamoli Branch (Amount in million tk)
1500
1000
500
0 Total
2008
2009
2010
985.38
1208.33
1101.37
Ijara Mechanism
Years
HPSM
Total
Growth
2009
985.38
985.38
2010
1208.33
1208.33
22.63%
2011
1101.37
1101.37
-8.85%
Source: The data are collected from Shyamoli Branch of IBBL Comments: From this above graph and table showed that at present this the popular sector of IBBL of real-estate business. The growth rate 2010 was increasing; on the other hand 2011 is decreasing. Indicating primarily the bad performance of real-estate business in the country. 5.10 Year to year Investment position of special scheme in Shyamoli Branch (Amount in million tk) Name of Scheme
2009
2010
2011
HDS
7.85
5.12
7.15
ISD
0.87
0.54
0.04
TIS
26.82
22.46
36.85
CIS
1.75
2.34
3.77
SHDS
0.56
0.67
0.60
SBIS
0.13
0.11
0.09
REIP
305.90
300.40
282.83
SHBIS
55.52
63.48
82.12
Sub-Total Investment Under Scheme
398.38
395.12
413.45
Total Investment
1755.89
2135.15
2285.26
Growth rate of
22.69%
18.51%
18.09%
Source: Statement of affairs of Shyamoli Branch. Comments: This table shows that year to year investment position real-estate investment program was the highest. The second position was staff house building investment scheme. And the third position was transport investment scheme. 5.11 Investment position of special scheme in Shyamoli Branch
25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Grow th
2008
2009
2010
22.69%
18.51%
18.09%
This column chart shows that the downward trends for IBBL, Shyamoli Branch in investment from 2009 to 2011 under the various special schemes of investment. In 2009, the investment growth was 22.69% and it was the highest. 5.12 Investment Processing of IBBL Generally a bank takes certain steps to deliver its proposed investment to the client. But the process takes deep analysis. If the bank fails to meet depositors demand, then it must collapse. So, each bank should take strong concentration on investment proposal. However, Islami Bank Bangladesh Limited (IBBL) makes its investment decision through successfully passing the following crucial steps:
(1) SELECTION OF THE CLIENT
(2) APPLICATION STAGE
(3) APPRAISAL STAGE
(4) SANCTIONING STAGE
(5) DOCUMENTATION STAGE
(6) DISBURSEMENT STAGE
(7) MONITORING &RECOVERY STAGE
5.12.1 Selection of the client Here, investment taker (client) approaches to any of the branch of Islami Bank Bangladesh Limited (IBBL). Then, he talks with the manager or respective officer (Investment). Secondly, bank considers five C’s of the client. After successful completion of the discussion between the client and the bank, bank selects the client for its proposed investment. It is to be noted that the client/customer must agree with the bank’s rules & regulations before availing investment. Generally, bank analyses the following five C’s of the client:
•
Character;
•
Capacity;
•
Capital;
•
Collateral; and
•
Condition.
5.12.2 Application stage At this stage, the bank will collect necessary information about the prospective client. For this reason, bank informs the prospective client to provide and/or fill duly respective information, which is crucial for the initiation of investment proposal. Generally, here, all the required documents for taking investment have to prepare by the client himself. Documents that are necessary for getting investment of IBBL is prescribed below: •
Trade License photocopy (for proprietorship);
•
Abridged pro forma income statement;
•
Attested copy of partnership deed (for partnership business);
•
Prior three (03) years’ audited balance sheet (for joint stock company);
•
Prior three (03) years’ business transactions statement for the musharaka/mudaraba investment;
•
Abridged pro forma income statement for the musharaka/mudaraba investment;
•
Attested copy of the Memorandum of Association (MOA) & Articles of Association (AOA) for the joint stock company;
•
Attested copy of the Tax Identification Number (TIN)- including final assessment;
•
Tenders of the proposed assets (in case of HPSM);
•
Detailed summary of the sundry debtors and creditors (including both time & schedule);
•
Summary of the personal movable & immovable assets; and others.
5.12.3 Appraisal stage At this stage, the bank evaluates the client and his/her business. It is the most important stage. Because, on the basis of this stage, bank usually goes for sanctioning the proposed investment limit/proposal. If anything goes wrong here, the bank suddenly stops to make payment of investment. In order to appraise the client, Islami Bank Bangladesh Limited (IBBL) provides a standard F-167B Form (Appraisal Report) to the client for gathering all the information. The original copy of the appraisal report is enclosed in the appendix chapter. However, the following contents are presented from that appraisal report: •
Company’s/Client’s Information.
•
Owner’s Information.
•
List of Partners/Directors.
•
Purpose of Investment/Facilities.
•
Details of Proposed Facilities/Investment.
•
Break up of Present Outstanding.
•
Other Liabilities of the Client/Group.
•
Details of Sister/Allied Concerns.
•
Allied Deposit as on.
•
Business/Industry Analysis.
•
Relationship Analysis.
•
Asset-Liability position of the client as per Audited Balance Sheet.
•
Working Capital Assessment.
•
Risk Grade.
•
Particulars of the godown for storing MPI/Murabaha goods.
•
Insurance Coverage.
•
Audit Observation.
•
Security Analysis.
5.12.4 Sanctioning stage At this stage, the bank officially approves the investment proposal of the respective client. In this case client receives bank’s sanction letter. Islami Bank Bangladesh Limited (IBBL)’s sanction letter contains the following elements: 1. Investment Limit in million. 2. Mode & amount of investment. 3. Purpose of investment. 4. Period of investment. 5. Rate of return. 6. Securities In allowing Murabaha investment and amount of cash security is generally realized from the client (amount depends on the nature of goods, creditworthiness of the client, collateral security obtained etc.) which is converted to goods security after purchase of goods purchased out of bank’s investment and client’s cash security is pledged to the bank, kept under bank’s custody before its delivery to the client on payment. Example: If, for a Murabaha investment cash security is fixed at 25% Bank’s investment stands at 75% on the total goods purchased. For example, if cost of total goods purchased is Tk.100000 Bank’s investment will be Tk.75000 and client’s cash security will be Tk.25000. 5.12.5 Documentation stage
At this stage, usually the bank analyses whether required documents are in order. In the documentation stage, Islami Bank Bangladesh Limited (IBBL) checks the following documents of the client: •
Tax Payment Certificate.
•
Stock Report.
•
Trade License (renewal).
•
VAT certificate
•
Liability statement from different parties.
•
Receivable from different clients.
•
Other assets statement.
•
Three (03) years net income & business transactions.
•
Performance report with the bank.
•
Account Statement Form of the bank.
•
Valuation Certificate a. Particulars of the Proposal. b. Particulars of the Mortgagor. c. Particulars of the Properties
•
Outstanding liability position of the bank.
•
CIB (Credit Information Bureau) Report.
5.12.6 Disbursement stage At this stage, bank decides to pay out money. Here, the client gets his/her desired fund or goods. It is to be noted that before disbursement a “site plan” showing the exact location of each mortgage property needs to be physically verified. 5.12.7 Monitoring & Recovery stage At this final stage of investment processing of the Islami Bank Bangladesh Limited (IBBL), bank will contact with the client continually, for example- bank can obtain monthly stock report from the client in case of micro investment. 5.13 SWOT Analysis SWOT means strength, Weakness, Opportunity, and Threat. The strength, Weakness are the internal part of an organization and Opportunity and Threat are depends on the market situation. In this
section, the tried to analysis first, IBBL’s internal issues like Strength and Weakness then external issues like Opportunity and Threat. Strengths •
Stable sources of fund
•
Efficient and experienced human resources
•
Countrywide branch network
•
On-line banking facilities
•
Diversified product line
•
Strong liquidity position
•
High morality of the employees and customers.
Weakness •
The decision making of the bank is too many centralized.
•
Less efficiency in operating new technology.
•
Average operational performance
•
Shortage of manpower
•
Non-offering special deposit & investment scheme for the expatriates
•
Lack of proper automation.
Opportunities •
SME & Agro based industry
•
Call center section
•
Real time online banking
•
Scope to increase the branch network
•
The demand of Islamic banking services is increased day by day.
Threats •
Increasing competition from shariah based in banking sector
•
Call money system
•
Unstable political and economic situation.
•
Overall liquidity crisis in the money market.
5.14 Overall Findings
The following are the findings found on the basis of graph analysis and practical experience of 45 days internship program:
•
Bai-Murabaha Modes of investment growth rate 2009 was –3.40% but on the other hand growth rate 2010 is12.56% increasing.
•
Bai Muajjal Modes of investment in 2008 was 140.00 million where in 2010 was 113.24 million here investments are decreased by 19.11%.
•
Bai Salam Modes of investment in 2009 was 10.44 million where in 2010 was 8.96 million here the investment is decreased by 15.18%.
•
Investment in Hire Purchase Under Sirkatul Melk in 2008 was 985.38m where in 2010 was 1101.37m here investments is decrease by 11.77%.
•
Investment in Musharaka in 2009 was 275.17m; on the other hand 2010 was 232.96m here the investments are decreased by 15.34%.
•
Variety of investment scheme.
•
Investment re-collection position of this branch is very good. Some clients are in overdue but maximum clients pay their installments regularly.
•
High attention on making quality investment & quick disposal of proposals.
•
Strict controlling of central bank over IBBL sometimes creates problems in sanctioning investment proposals.
•
In this branch there have only two supporting staff, they don’t provide service most of the time for the every officer.
•
Most of the employees of this bank are dissatisfied about their salary range and benefits Chapter Six
6.2 Recommendations
As an internee think, IBBL is performing well but it has some crucial areas to improve which are prescribed below: For Shyamoli Branch •
In general banking department, it is necessary to implement modern process instead of traditional system.
•
Efficient manpower should be recruited with having strong academic background of the related subjects.
•
Need customer relation officer.
•
More furniture should be brought to this Branch like chair, cabinet etc.
•
More equipment like Note Counting Machine, Printer etc. should be brought.
•
Need a computer for every personnel, especially for the personnel of cash section.
For over all IBBL •
IBBL should increase its skilled manpower.
•
IBBL should introduce more innovative & modern product and service for clients.
•
More ATM Booth should be established.
•
IBBL should invest in power sector of the country such as in electricity and in finding of new mine resources of the country.
•
IBBL can introduce Education scheme through the Islami Bank Foundation.
•
Now a day, the online banking is very much popular in all over the world, so should try to more develop is this side.
•
IBBL needs to increase the job satisfaction level of its employees by providing several performance based awards.
•
IBBL should try to introduce Credit card facilities for their clients.
IBBL’s investment processing should become easier than other conventional Banks 6.1 Conclusion Islami Bank Bangladesh Limited is one of the leading Islamic Shariah based commercial bank in Bangladesh. It was incorporated on 13 th March, 1983 as a result of dedicated effort of a group of established Bangladeshi entrepreneurs and internationally important personalities. They are doing according to the proper banking system should have utilized & they are following the Islamic Shariah for a long time. They are ahead among the distant areas people who love the Islam & the rules of Islam.
Today IBBL whatever doing in the banking system they are completely innovative & very much carrying to the clients. For the greater interest of the depositors the investment policy of IBBL is to invest on the basis of profit and loss sharing in accordance with the tents and principles of Islamic Shariah. Profit earning is not the only motive and objective of the bank’s investment policy rather emphasis is given in attaining social good and in creation employment opportunities. Through SME’s they are providing opportunities to cheer up & grow up with new & massive possibilities in business. Finally, in the economic development of the country IBBL is contributing and playing a vital role. Islami Bank Bangladesh Limited investment modes are most helpful to generate more employment and more productive than conventional banking because Islami Bank concerns with the purpose of investment not with only invested money, its create assets. Bibliography 1. Manual for Investment under Bai-Murabaha Mode 2. Manual for Investment under Bai-Muajjal 3. Training materials. --- Islami Bank Training & Research Academy (IBTRA) 4. Manual for Investment under Bai-Salam Mode 5. Manual for Investment under HPSM 6. Annual Report-2009 of IBBL 7. Web Sites: www.islamibankbd,com 8. http://www.islamibankbd.com/Page/ih_2.htm 9. http://www.islamibankbd.com/Page/Shariah.htm 10. http://www.islamibankbd.com/Page/OperAct.htm#investm 11. http://www.islamibankbd.com/Page/SpScheme.htm#HouDS 12. http://www.islamibankbd.com/Page/InvMode.htm#Baimurab 13. http://www.islamibankbd.com/Page/ih_8.htm Appendix Abbreviations ATM
-
Automated teller Machine
AWCA
-
Al-Wadeead Current Account
GB
-
General Banking
IBBL
-
Islami Bank Bangladesh Limited
IBTRA
-
Islami Bank Training and Research Academy
IDB
-
Islami Development Bank
IERB
-
Islami Economics Research Academy
L/C
-
Letter of Credit
MSA
-
Mudaraba Savings Account
MTD
-
Mudaraba Term Deposit
OIC
-
Organization of Islamic Conference
SME
-
Small & Medium Enterprise
REIP
-
Real Estate Investment Program
HDS
-
Household Durable Scheme
SHBIS
-
Staff House Building Investment Scheme
SBIS
-
Small Business Investment Scheme
ISD
-
Investment Scheme for Doctors
References Books: 1) Hasan, M.K. (2003) “Text Book on Islamic Banking”, Islamic Economics Research Bureau, Dhaka. 2) Muhammad Mahfuzur Rahman (2005) “Islamic Financial System & Selected Issues in Islamic Economics”, Islamic Economics Research Bureau, Dhaka. Reports and Others: 1) Annual Report (2008), Islami Bank Bangladesh Limited. 2) Annual Report (2009), Islami Bank Bangladesh Limited. 3) Annual Branch Manager’s Conference Report (2010), Islami Bank Bangladesh Limited. 4) Training Materials (2011), Islami Bank Training and Research Academy. Web site: 1) www.islamibankbd.com