View with images and charts The Concept of Islamic Banking with Special Emphasis On Investment Appraisal Process Of First Security Islami Bank Limited Introduction: Islami Banking a new type of banking that operates on principles adhering to the Quranic norms forbidding usury and transactions, including granting of loans or credits for interest. The economic rationale for eliminating riba (interest) and establishing the Islamic BANKING SYSTEM is based on values of justice, efficiency, stability and growth. It is assumed that under the system of Islamic banking, the industrial and/or commercial risk is shared more equitably between the entrepreneur and the capital owner and the returns on investment are shared among the investors on the basis of their proportionate capital. The conventional banks tend to serve the most creditworthy borrowers, while the Islamic banking system presumably looks for the most productive and profitable projects. The Islamic banking approach theoretically opposes the idea of discrimination in offering banking services to people of different social standings and provides for social cohesion between different classes. Literature Review: Islamic banking is an area that has mushroomed to become an increasingly substantial segment within the global financial market. It has been recognized as a viable and competitive form of financial intermediation not only in Muslim countries but also outside the Muslim world and offering a wide range of financial products and services. The industry that started on a modest scale since its inception in the mid-1970s has shown a rapid expansion and evolution over the past three decades. It is in fact one of the fastest growing industries, having posted double-digit annual growth rates for almost 30 years (Iqbal and Molyneux, 2005). According to information released by Council for Islamic Banks and Financial Institutions (CIBAFI), there are over 284 financial institutions operating in 38 countries and managing US$250 billion. This does not include conventional banks offering Islamic financial products and services through window operations, which CIBAFI estimates to manage about US$200 billion. (Understanding the Objectives of Islamic Banking: A Survey of Stakeholders' Perspectives By: Dr. Asyraf Wajdi Dusuki, Paper published in International Journal of Islamic and Middle Eastern Finance and Management; Vol.1, Issue 2. 2008 (Published by Emerald Group Publishing,) Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively. The fundamental differences between Islamic banking and conventional banking, not only in the ways they practice their businesses, but above all the values which guide Islamic banking whole operation and outlook. These values prevailed within the ambit of Shariah (Islamic law) are expressed not only in the minutiae of its transactions, but in the breadth of its role in society. This demands the internalization of principles on Islamic financial transactions, in its
form, spirit and substance. By so doing, it epitomizes the objectives of Shariah in promoting both economic and social welfare. (Understanding the Objectives of Islamic Banking: A Survey of Stakeholders' Perspectives By: Dr. Asyraf Wajdi Dusuki, Paper published in International Journal of Islamic and Middle Eastern Finance and Management; Vol.1, Issue 2. 2008 (Published by Emerald Group Publishing) In other words, as a Shariah-based firm, Islamic banks need to fulfil social obligations that go beyond the conventional capitalist worldview aiming at only maximizing profits. Objectives of Islamic Banking: To understand Islamic banking in its entirety requires full comprehension of its objectives and philosophy. As a Shariah-oriented business entity, Islamic bank is vigorously expected to be guided by the philosophy of Islamic business. Haron (1996) gives two reasons for establishing the right philosophies for any Islamic bank. First, the philosophies will be used by the management or policy makers of the banks in the process of formulating corporate objectives and policies. Secondly, these philosophies serve as an indicator as to whether the particular Islamic bank is upholding true Islamic principles. Essentially, the philosophy of Islamic banking can be fully understood in the context of the overall objectives of Islamic economic system. Many prominent Islamic economists, like Chapra (1985, 2000a, 2000b), Ahmad (2000), Siddiqui (2001) and Naqvi (2003) assert that Islamic banking is a subset of the overall Islamic economic system that strives for a just, fair and balanced society as envisioned and deeply inscribed in the objectives of Shariah (also popularly known as maqasid a-shariah). Accordingly, the many prohibitions (e.g. interest, gambling, excessive risks, etc.) are to provide a level playing field to protect the interests and benefits of all parties involved in market transactions and to promote social harmony (Chapra, 1985, 1992; Ahmad, 2000; Chapra, 2000, 2000a; Siddiqui, 2001; Naqvi, 2003). Furthermore as a system grounded on ethical and moral framework of the Islamic law of Shariah, Islamic banking is also characterised by ethical norms and social commitments (Ahmad, 2000; Mirakhor, 2000; Warde, 2000). Therefore, Islamic banking is much more than just refraining from charging interest and conforming to the legal technicalities and requirements on offering Islamic financial products. It is a system which aims at contributing to the fulfilment of the socio-economic objectives and the creation of a just society (Siddiqui, 2001; Haron and Hisham, 2003; Hassan and Musa, 2003). In the process of conducting business, Islamic banks seek to bring about a lasting balance between earning and spending in order to achieve a betterment for the whole community (Haron, 1995; Al-Omar and AbdelHaq, 1996). Al-Omar and Abdel-Haq (1996) indicate the duty of Islamic banks towards the society in which they operate by providing a clear expression outlined in the public statement of the International Association of Islamic Banks (IAIB): The Islamic Banking system involves a social implication which is necessarily connected with the Islamic order itself, and represents a special characteristic that distinguishes Islamic banks from other banks based on other philosophies. In exercising all its banking or development activities, the Islamic bank takes into prime consideration the social implications that may be brought about any decision or action taken by the bank. Profitability â€“ despite its importance and priority â€“ is not therefore the sole criterion or the prime element in evaluating the performance of Islamic banks, since they have to match both between the material and the social objectives that would serve the interests of the community as a whole and help achieve their role in the sphere of social mutual guarantee.
Social goals are understood to form an inseparable element of the Islamic banking system that cannot be dispensed with or neglected.â€? This statement represents the core of what the advocates of Islamic banking expect Islamic banks to do in terms of social obligations. Clearly, Islamic banks operating on the Shariahbased philosophy and principles must depart significantly from conventional banks that are deeply rooted to the capitalistic profit-maximization philosophy. As for Islamic banks, the intense commitment of Islam to brotherhood and justice makes the well-being of all human beings the principal goal of Islam. This well-being includes both physical and spiritual satisfaction of the human personality encompassing the happiness in the present world and the hereafter. Therefore, maximization of outputs cannot be a sufficient goal of a Muslim society, rather it has to be accompanied by efforts directed to ensure spiritual health at the inner core of human consciousness, and justice and fair play at all levels of human interaction (Al-Omar and Abdel-Haq, 1996). Thus, while ordinary business institutions are likely to place profit as their primary epitome and objectives, Islamic banks have to incorporate both profit and social obligation into their objectives (Ahmad, 2000). Only endeavors of this kind would be in conformity with the objectives of Shariah. However it is ill-conceived for anyone to believe that Islamic banks are charitable or welfare organizations which only have concern for the unprivileged or to provide monetary assistance as requested (Rosly and Bakar, 2003). Similarly, it is inappropriate for the management of Islamic banks to emphasise on the profit maximization policies alone, while neglecting other social obligations (Haron, 1995). Instead, Islam strives for a balance between profit and social objectives. It is considered unjust for Islamic banks if they are unable to provide sufficient returns to depositors and shareholders who have entrusted them with their money. At the same time, Islamic banks are not supposed to make excessive profits at the expense of their customers or undermining and neglecting their social responsibility and commitments to their various stakeholders (Chapra, 1985; Ahmad, 2000). Table I summarizes the fundamental differences between Islamic banks and their conventional counterparts. Table 1(A): Fundamental Distinctions between Islamic Banks and Conventional Banks Islamic Banks
Functions and operations are guided by sources of Shariah (Islamic Divine Law) namely the Quran and the Sunnah (traditions of the Prophet Muhammad p.b.u.h.). Institutions that aim at balancing between profitmaximisation doctrine and social responsibility.
Functions and operations are guided by secular principles and not based on any religious doctrines and values. Institutions that emphasise on profits maximisation.
Financing instruments are based on either asset- Financing instruments are based on backed trading contract or equity financing with risk interest-bearing mechanism. sharing.
Deposits are not interest-oriented but profit-loss sharing oriented whereby investors' principal repayment is not guaranteed but entitled to a predetermined share of actual profit realised by the business. No penalty on defaulters. However some Muslim countries allow charging a small percentage of late payment penalty as a deterrent but the amount need to be channelled to charity and not treated as part of business income. Islamic banks are restricted to participate in economic activities which are unethical and prohibited by Shariah such as businesses involving alcohol, prostitution, pork, environmental pollution etc. Islamic banks need to do charity by paying zakah (compulsory religious levy) out of their income.
Deposits are interest oriented and the investor is assured of a predetermined rate of interest with a guaranteed principal repayment. Normally charge compounded rate of interest in case of default.
There are no such restrictions for conventional banks. There are no such requirements to do charity.
(Understanding the Objectives of Islamic Banking: A Survey of Stakeholders' Perspectives By: Dr. Asyraf Wajdi Dusuki, Paper published in International Journal of Islamic and Middle Eastern Finance and Management; Vol.1, Issue 2. 2008 (Published by Emerald Group Publishing).
There is no standard way of defining what an Islamic bank is, but broadly speaking an "Islamic bank is an institution that mobilises financial resources and invests them in an attempt to achieve predetermined islamically -acceptable social and financial objectives. Both mobilisation and investment of funds should be conducted in accordance with the principles of Islamic Shari'a".
(Source: http://www.albaraka.com/default.asp?action=article&id=46 ) The Origin of Islamic Banking The origins of Islamic banking can be traced back to the practice of mudaraba by the Prophet Muhammad (Sm) himself. The Prophet (Sm) was mudarib (agent) for his wife, who entrusted her capital or merchandise to him for trading and got back the principal plus an agreed share of the profit. As a reward for his labour (and entrepreneurship), the Prophet (mudarib) received his share of the same. The mudarib, however, was not liable for losses resulting from the exigencies of travel or from an unsuccessful business venture. This form of partnership is called mudaraba. There is another form of partnership called musharaka, in which the musharik (agent) has a contribution to the capital and can therefore, claim a higher percentage of profit. As early as in the seventh century, the tax revenue from Iraq was sent across the desert to Medina in the form of a mudaraba. Caliph Umar is known to have invested orphans' money in merchant trading between Medina and Iraq. Musharaka partnerships were practised in the north-south trade between Egypt and Jeddah during the eleventh century. As many as 32 mudaraba contracts were practised in the 17th century in the Turkish city of Busra. Mudaraba was in practice in Tunisia, Indonesia, Arabian Peninsula and India. The concept of Modern Islamic Banking: Modern Islamic banking concepts came from the historical practice of the concept of a 'threetier mudaraba'. The first tier, there is the individual, rab-al-mal, who wishes to invest capital. The second tier is the mudarib (agent), to whom the rab al-mal entrusts his capital by contract and finally, The third tier, there is the entrepreneur, with whom the mudarib signs a contract, and to whom the mudarib passes the capital originally entrusted to him by the rab-al-mal. The first attempt to establish an Islamic financial institution: The first attempt to establish an Islamic financial institution took place in Pakistan in late 1950s with the establishment of a local Islamic bank in a rural area. Borrowers of the bank did not pay interest on the CREDIT advanced, but a small charge was levied to cover the bank's operational expenses. Although the experience was encouraging, two main factors were responsible for its failure. First, the deposits made in the bank were to be held for long and the depositors, who were mostly the landlords found that with increasing number of borrowers the gap between the amount of capital available and that of the credit demanded had become very large. Secondly, the depositors showed considerable interest in the way their money was lent out but the bank staff did not have complete autonomy over the bank's operations and therefore, could not always satisfy the customers in this regard. The second experiment with Islamic banking:
The second experiment with Islamic banking was conducted in Egypt between 1963 and 1967 through the establishment of the Mit Ghamr Savings Bank in a rural area of the Nile Delta. The bank's operations were based on the same Islamic principles of no-interest to depositors or from the borrowers. Unlike the Pakistani case, the borrowers made deposits in the bank for credit facilities. On the basis of success in the experiment more branches were soon opened in different parts of Egypt to develop a network of local savings banks. The project suffered a setback due to political unrests in the country but was revived in 1971 under the name of Nasser Social Bank, which became the first Islamic bank in the urban setting based in Cairo. Starting of Islamic banking in Bangladesh: First, Islamic banking started in Bangladesh through establishment of the ISLAMI BANK BANGLADESH Ltd. (IBBL), which is considered to be the first interest-free bank in Southeast Asia. It was incorporated on 13 March 1983 as a public limited company under the COMPANIES ACT 1913. In December 2001, IBBL had 121 branches, its authorised capital was Tk 1000 million and paid up capital Tk 640 million. Second, AL BARAKA BANK Ltd, often called the second Islamic bank of Bangladesh, commenced banking business on 20 May 1997. It is a joint-venture enterprise of Al-Baraka Investment and Development Company, a renowned financial and business house of Saudi Arabia, Islamic Development Bank, a group of eminent industrialists of Bangladesh, and the government of Bangladesh. The authorised capital of the bank is Tk 600 million and its paid up capital is Tk 259.55 million. The bank has now 35 branches in different parts of the country. (SOURCE : Banglapedia). Dr. Seyed Nezamuddin Makiyan has mentioned about the operational risk of Islamic banking in the article on “Risk Management and Challenges in Islamic Banks” which was published in the Journal of Islamic Economics, Banking and Finance. These are given belowOperational risk may arise from various sources: a) The unique activities that Islamic banks must perform. b) The non-standardized nature of some Islamic products. c) The lack of an efficient and reliable Shari’ah legislation system to enforce financial contracts. From the viewpoint of Islamic Shariah, in order to be justified islamically the banking system has to avoid interest. Consequently, financial intermediation in Islamic banking between the bank and the client takes place as a partner rather than a debtor-creditor. The financial activities of modern conventional banks are based on a creditor-debtor relationship between depositors and bank on the one hand and between the borrower and the bank on the other Interest is regarded by conventional banks as the price of credit reflecting the opportunity cost of money. As interest is prohibited in Islam, commercial banking in an Islamic framework could not be based on the creditor-debtor relationship. The other aspect of the theoretical basis of Islamic banking is that the interest free bank is not risk free. This principle is applicable to two main factors of production, i.e. labor and capital. According to
this principle, as no payment is allowed to labor, unless it is applied to work, no reward for capital should be allowed unless it is exposed to business risk. From these two principles of the theoretical basis of Islamic banking, it may be said that Islamic financial relationships are of a participatory nature (Ahmad, 1993). (ISLAMIC BANKING IN BANGLADESH: A CASE STUDY OF IBBLMohammed Nurul Alam, International Journal of Islamic Financial Services Vol. 1 No.4). Objectives of the Report: 1. To know the objectives of Islamic banking which stakeholders consider important in a dual-banking environment like Bangladesh. 2. To get familiar with the Islamic banking rules and regulations. 3. To know the overall banking system of the Islamic bank. 4. To study the over all management function of a branch banking. 5. To measure and evaluate the performance of First Security Islami Bank Limited based on loan appraisal. 6. To represent an overview of banking activities specially investment appraisal process. 7. To find out the difference of academic and real life practice of accounts those are practiced in the bank 8. To know the task of different department of the bank 9. To identify how the bank is careful to segregate the duties and responsibilities of all employees. 10. To find out where the bank was and where the bank is standing at present time. Methodology of the Study: This report is prepared based on the information extracted from different sources. Sources of data: All the information in the study has been incorporated and collected from the primary sources as well as secondary sources. Primary Sources: 1. Interviewing officers and staffs. 2. Sharing practical knowledge of officials. 3. Relevant file study provided by the officers concerned. 4. Face to face conversation with the respective officers and staffs.
Secondary Sources: 1. Annual report of First Security Islami Bank Ltd. 2. Manuals for investment published by the bank. 3. Website of the bank. 4. Internet. 5. Relevant books, Research papers, Newspapers, Articles and Journals. Overview of the Organization Overview of FIRST SECURITY ISLAMI BANK LIMITED First Security Islami Bank Limited (FSIBL) was incorporated in Bangladesh on 29 August 1999 as a banking company under Companies Act 1994 to carry on banking business. It obtained permission from Bangladesh Bank on 22 September 1999 to commence its business as a name of First Security Bank Limited which conducted their banking operation as conventional Banking. After Nine year conventional banking operation 1 st January, 2009 it converted into a full fledged islamic Bank rename as “First Security Islami Bank Limited. The Bank carries banking activities through its FIFTY THREE (53) branches through out the country. The commercial banking activities of the bank encompass a wide range of services including accepting deposits, making investment, discounting bills, conducting money transfer and foreign exchange transactions, and performing other related services such as safe keeping, collections and issuing guarantees, acceptances and letter of credit. Vision Statement To be the unique modern islami bank in Bangladesh and to make significance contribution to the national economy and enhance customer’s trust and wealth, quality investment, employee’s value and rapid growth in shareholder’s equity. Mission Statement “To be able to provide banking products & services of high quality to large part of the population of the country both at home & abroad at reasonable and affordable price with cutting edge technology & transparency of our books” Corporate Objectives The bank has chalked out the following corporate objective in order to ensure smooth achievement of its goals: 1. To be most caring , customer friendly and service oriented bank 2. To create a technology based most efficient banking environment for its customers 3. To ensure ethics and transparency in all levels 4. To ensure sustainable growth and establish full value of the honorable shareholders and above all , to add effective contribution to the national economy Eventually Bank also emphasizes on the following matters1. Provide high quality financial services in export and import trade
2. 3. 4. 5. 6. 7. 8. 9.
Providing efficient customer services. Managing Corporate and Business ethics Bring trusted depository of customerâ€™s money Making its product superior and rewarding to the customers Display team spirit & professionalism Sound Capital base Enhancement of shareholders wealth Fulfilling its social commitments by expanding its charitable and humanitarian activities
FSIBL at a Glance Name of the Company
First Security Islami Bank Ltd.
Alhaj Md. Saiful Alam
Alhaj Md. Abdul Maleque
Company Secretary (Current Charge)
Abdul Hannan Khan
Public Limited Company
Date of Incorporation
Date of Commencement of Business
29 August 1999
Date of Permission from Bangladesh Bank 22 September 1999 Date of Opening of First Branch
25 October 1999
23, Dilkusha Commercial Dhaka-1000, Bangladesh
Line of Business
Paid up Capital
Date of consent of IPO
04 June 2008
Syful Shamsul Alam & Co . Chartered Accountants 15, Dilsusha C/A(6th Level) Dhaka-1000, Bangladesh Phone: 7169487, 9569256 Email: email@example.com
The Law Counsel Barrister & Advocates City Heart (7th Floor) Suit No. 8/8, 67, Naya Paltan,Dhaka-1000 Phone: 9349647-8 Fax: 9349866, 9567029 E-mail: firstname.lastname@example.org
K.M. Hasan & Co. Chartered Accountants Home Tower Apartment (8 th & 9 th ) 87, New Eskaton Road , Dhaka Phone: 9351457,9351564 Fax: 8358817
Board of Directors: First Security Islami Bank Ltd. has a Board of Directors consisting with 13 members headed by Alhaj Md Saiful Alam, Chairman of the Board. Mr S Alam is a well known & successful business personality of the country. Mr. Abdul Malek a sponsor Shareholder is the ViceChairman of the Board. Following personality consist the Board. Chairman
Alhaj Md. Saiful Alam
Alhaj Md. Abdul Maleque Mr. Md Didarul Alam
Director Ms Farzana Perveen Ms Rahima Khatun Mr Hamidul Haque Ms Atiqun Nessa Mr Sharif Hossain A.K. M. ali Johar Md Wahidul Alam Seth Mr Shahidul Islam Mohammad Oheidul Alam
Dr. Mohammad Loqman MS. Shamsad Jahan Mrs Shahella Rashid Chowdhury Mohammed Kutub Uddowllah Managing Director
Mr. A. A. M. Zakaria
Mr. Abdul Hannan Khan
SHARIAH BOARD For accomplishing real islami banking service to its customer FSIBL consist a high powered Shariah Board which comprises of islamic Scholars who ensure the shariah based service to the community. Shariah Board comprises with the following Sl# Name 1.
Sheikh (Moulana) Mohammad Qutubuddin Mufti Sayeed Ahmed
2. Moulana Md. Shamaun Ali 3.
Baitush Sharaf Complex Shah Abdul Jabbar (R) Road Dhanialapara Chittagong-4100
Markaze Eshaete 2/2 Darus Salam Mirpur, Dhaka
491, Wireless Railgate Bara Moghbazar Dhaka-1217
2/C Green Valley Apartment 493 Moghbazar Wireless Railgate Dhaka-1217
Room # 616, Sir P. J. Hortog International Hall, University of Dhaka Dhaka-1000
Moulana Abdus Shaheed Naseem 4. Janab Mohammad Azharul Islam 5.
Observers Members Sl# Name
Alhaj Md. Abdul Maleque Vice Chairman, Board of 8/A, OR Nizam Road Directors FSIBL & Panchlaish R/A Observer Member, Chittagong . Shariah Council
Prof. Md. Sharif Hussain Board FSIBL
Directors 57, East Hajipara (5 th Floor) Rampura,
& Observer Member, Dhaka-1219 Shariah Council 3
Prof. Dr. Loqman
Muhammad Board of FSIBL & Member, Council
Islam Board of FSIBL & Member, Council
Directors Road # Observer House # Shariah Dhanmondi Dhaka-1205
02, 22/B R/A,
Directors Home# 7, Road# 1, Observer Nasirabad Housing Society, Shariah Post: Medical P.S: Panchlaish, Dist.: Chittagong
Managing Director JanabA.
Management Efficiency Senior Management FSIB is functioning with professional management team headed by the Managing Director Mr. A. A. M. Zakaria. Among other senior executives currently two DMD, One Principle(Training Center), two SEVP, eleven SVP, ten VP, five FVP, twelve SAVP, five AVP and eight FAVP are discharging their services in progression of the banks business. Managing Director Mr. A. A. M. Zakaria, Managing Director of the bank is an eminent banking personality having long 30 years of experience in banking industry. After successful completion of his B.A. (Hons) M.A. in Economics from Dhaka University, Mr. A. A. M. Zakaria has started his banking career in 1977 as Senior Officer of Rupali Bank. Before the current responsibility, Mr. A. A. M. Zakaria was the Deputy Managing Director of Dutch-Bangla Bank Limited. In his multi-greeted banking service, Mr. A. A. M. Zakaria participated in many courses, training program and workshops on banking at home and abroad. Mr. A. A. M. Zakaria joined in FSIB in 7 August 2005 as Managing Director in a crucial moment when the bank had fallen into Problem Bank with lots of great complex situations. Within a short span of time FSIB under his proper guidance recovered from the â€œProblem Bankâ€?. Top management of the bank is supported by human resource strength of 900 executives and officers. For smooth functioning of the Bank, following committees have been formed: 1. Management committee (MANCO) comprises of senior members of the management headed by Managing Director of the bank. All divisional heads are the member of the committee. MANCO meets on regular basis to discuss relevant agenda.
2. Asset Liability Management Committee (ALCO) headed by the Managing Director, is responsible for balance sheet risk management. The committee participate is the monthly ALCO meeting and review the liquidity position, review rate of interest on deposit and lending, and review the ALCO papers on presentation by treasury back office on the position of profit, deposit, advance, cost analysis, maturity bucket of deposit & advance, balance sheet, profit and loss account and many other issues relating to banks business and assets-liability management. Five relevant divisional heads including DMD are the members and FVP & Head of Treasury of the Bank is the member secretary of the committee Human Resources Development FSIB has a separate Human Resources Division (HRD) to manage the employee policies and practices. As on FYE 2009, Total 900 executives & officers of the bank have been working for smooth banking operations. Bank follows a standardized human resources policy. HRD of the Bank follow a transparent and free & fair system to ensure the standard recruitment, training & development of human resources of the bank. The bank has defined HR policies including recruitment, training & development, promotion, leave, transfer and disciplinary action policy. Usually internal recruitment procedures are considered to fill up the mid and top management positions, while entry-level positions are filled with regularly through competitive recruitment exams. They follow transparent, well-defined and strict rules for appointment of officers and staff in the Bank. The tasks of Human Resource Management are given below: i.
Preparing human resource plan and maintaining data card for the employees of the bank. ii. Preparing training and human resource development plan, programmer and formulating, reviewing and ensuring implementation of policies for promotion, job rotation, and disciplinary action. iii. Formulating and ensuring implementation of policies for employeeâ€™s appraisal and performance rating. Maintenance of centralized service record and confidential reports up to grade level as may be determined form time to time. Periodical staff appraisal and formulating policies for skill development. iv. Providing all support services for effective and meaningful training of bankâ€™s employees. Preparation of retirement list, collecting of date from of all employees and officers and updating data cards. Maintenance and updating the human resource register officers and employees. Corporate Governance Corporate governance is about how corporation is running its operations to achieve its corporate objectives. Bangladesh Bank (BB) gives emphasis on implementing corporate governance among the financial institutions and to do that, BB emphasizes implementation of the guidelines issued by them for improving corporate governance in banking. Good Corporate Governance practices enhance an entity's corporate image and market credibility, which attract capital and increase its borrowing power. These can be reflected in the quality of financial reporting and disclosures; strength of internal control system and internal audit function induction of professionally competent, independent non-executive Directors on
corporate Board; formation of Audit Committee; delegation of authority to executives and staff; protection of corporate governance for strengthening organizational strength. With a view to ensure effective participation and deep interest in the affairs of the company and as per Articles of Association of the Company and as per Bangladesh Bank Circular No. 16 dated March 24, 2003 the bank has set up the following 2 committees: 1. Executive committee 2. Audit Committee 1. Executive Committee: FSIB has constituted 09 members executive committee of the board as per Bangladesh Bank guidelines to ensure corporate governance in the business of which managing director of the Bank is Ex-officio Member. The executive committee of the board is responsible for developing policy and strategy for smooth operations of business and business development of the bank to ensure maximization of shareholders wealthâ€™s protecting other stakeholderâ€™s interest in the company Mr. Alhaj Md. Saiful Alam, Chairman of the board of Directors is the Chairman of the present Executive Committee of the bank. He is very dynamic person and leading the executive committee of the bank in a very manner. 2. Audit Committee: FSIB has formulated an audit committee can play an effective role in formulating an efficient and secured banking system. The Audit Committee has been formed comprising three members of the Board of Directors. As per corporate governance guidelines the Chairman of the Audit Committee should have sound knowledge and expertise in finance & accounting or auditing. Mr. Hamidul Haq, who is also a Director of the Bank, is Convener of the committee. He is associated in banking field over long years. PRODUCTS & SERVICES OF FSIBL The bank serves all types of modern, progressive and dynamic business as well as banking services to the customers of all strata of society. During the short span of time , Bank has been highly recognized and praised by business community, from small entrepreneur to enlarge traders and industrial conglomerates and emerged as the fastest growing among the third generation banks in respect of business and profitability. It has already 53 branches in different commercially important places throughout the country to make its services available to the people. First security Islami Bank Ltd. successfully marked its products designed to fulfill the needs of various socio-economic strata. Attractive feature of the products have given a distinctive image among the private banks. They has been continuous endeavor to offer new products and services. However, the Product & Services of the bank as following: a.Deposit Products Al-Wadiah Current Deposit Mudarabah Savings Deposit Mudarabah Short Term Deposit
Non-resident Foreign Currency Deposit Resident Foreign Currency Deposit b. Scheme Mudarabah Monthly Savings Schemes Mudarabah Monthly Benefit Deposit Schemes Mudarabah Double Benefit Deposit Schemes C . Investment / Deployment of Funds: a. Bai-Murabaha (Deferred Lump Sum/ Installment Sale) b. Bai-Muajjal (Deferred Installment / Lump Sum Sale) c. Ijara (Leasing) d. Musharaka (Joint-Venture Profit-Sharing) e. Mudaraba (Trustee Profit-Sharing) f. Bai-Salam (Advance Sale and Purchase) g. Hire-Purchase h. Direct Investments i. Post Import Investment j. Purchase and Negotiation of Export Bills k. Inland Bills Purchased l. Murabaha Import Bills m. Bai-Muajjal Import Bills n. Pre Shipment Investment o. Quard-ul-Hasan (Benevolent Investment) i.
Letter of Guarantee: a. Tender Guarantee b. Performance Guarantee c. Guarantee for Sub-Contracts d. Shipping guarantee e. Advance Payment guarantee f. Guarantee in lieu of Security Deposits g. Guarantee for exemption of Customs Duties h. Others
Specialized Schemes Consumer Investment Scheme, SME Investment Scheme, Lease Investment Scheme, Hire Purchase, Earnest Money Investment Scheme, Mortgage Investment, Employees House Building Scheme, Services
Full Fledged Online Banking
Ready Cash Card
Western Union Money Transfer
Information Technology: FSIBL started its Banking operations with strong Information Technology(IT) based Software “PcBank2000”from the very beginning of Banking operation of its all the branches. Recently they have plan to upgrade their software into “BANK ULTIMUS” which will cover the all current issues of banking solutions to the customer with a single server Branch Networks and Inter Division and Branch Coordination At present, the bank has 53 branches of which 21 branches are in Dhaka Division, 19 branches are in Chittagong Division, 06 branches are in Sylhet Division, 03 branches are in Rajshahi Division, 03 branches are in Khulna Division and 01 branch is in Barishal Division. All the 53 branches are computerized under distributed server environment. FSIB has already started their on-line, SMS and ATM banking facilities for their clients Risk management Bangladesh Bank BB has defined (05) Five core risk areas in Banking for the management and has provided necessary guidelines for implementation of the risk management. The Five core risk areas are – 1. 2. 3. 4. 5.
Investment Risk Management Asset Liability Management Foreign Exchange Risk Management Internal control & compliance Prevention of Money Laundering
1. Investment risk management The board of directors of the bank has formulated a Investment policy keeping in view the business strategy, nature of its operation, segment and management sophistication for use at every level of processing and decision making. On the other hand Bangladesh Bank issued guidelines on investment Risk Management function emphasis on Policy Guideline organization Structure & responsibilities & Procedural Guideline.
The banks existing investment policy guideline & procedure are being continuously reviewed & upgraded within the framework of above stated focus which had been given to shape of comprehensive document for the purpose of reference, day to day predation and reflect changes in the economic scenario. Relationship Managers are given the overall responsibility
of managing the respective investment portfolio commencing with the business solution, investment assessment, Risk grading, investment approval and management thereof. FSIBL adopted the Investment Risk Management (IRM) guidelines issued by Bangladesh Bank for improving the risk management culture, establishing minimum standards for segregation of duties and responsibilities, promoting the ongoing process for improvement of the banking sector in Bangladesh in the context of Globalization. This puts apace a robust process for proactive management of investment portfolio in order to minimize loss and enhance return to shareholders. The Bank has introduced investment policy guideline for IRM
The bank has segregated their investment operation at the Head Office under the divisions which as follows-
1. Investment Division 2. Corporate Banking Division 3. Investment Administration Division 4. Investment Monitoring & Recovery Division
2. Asset Liability Management
Asset Liability Management (ALM) refers to the co ordination and integration say for organization should ensure that they do not clash each (Asset Liability) other. Now we see the asset and liability management individually
A) Asset Management Strategy The Asset Management view held that the amount & kinds of deposits a depository institution held the volume of other borrowed funds it was to attract largely determined by its customers. Under this view the public determine the relative amounts of checkable deposits, savings accounts and other sources of fund available to depository institution. The key decision area for management was not deposits and other borrowing but assets
B) Liability Management Strategy The main things of this management it to control over funds sources comparable to the control financial mangers had long exercised over their asset. The key control level was the price, profit rate and other terms offered on deposits and other borrowings to achieve the volume, mix and cost desire.
The Bank has an Asset Liability Committee (ALCO) which is responsible for maintaining short term &long term liquidity and ensure that the bank has adequate liquidity at all times at optimal funding cost. The other task of the committee includes Balance Sheet Structure & management, Capital adequacy, keeping available cushion to meet the risk and determination of lending and deposit pricing strategy. The assessment and control of liquidity are done through liquidity reports & financial statement.
Asset Liability Committee (ALCO) headed by Managing Director, is responsible for balance sheet risk management. The committee participate is the monthly ALCO meeting and review the liquidity position, review the profit rate on deposits & investment and review the Alco papers on presentation by treasury back office on the position of profit, deposit advance cost analysis maturity bucket of deposit & advance, balance sheet, profit & loss Account and many other issues relating to bank’s business and asset liability management. Five relevant divisional head including DMD are the members and FVP & Head of Treasury of the Bank is the member secretary of the committee.
3. Foreign Exchange Risk Management Market based floating exchange rate has been introduced both trading opportunities and foreign exchange volatility. There has thus risen a need for controlled management, through a single department of risk and at the same time to exploit the business potentials. The task of reconciliation fo all transaction initiated by Treasury Department, rest with a separate blocks office independent of treasury.
4. Internal Control & Compliance (IC&C) “The system of internal controls the plan of organization and all the methods and procedures adopted by management of an entity to assist in achieving management’s objective of ensuring, as far as practicable, the orderly bad efficient conduct of its business “From this definition, it can be seen that the objective of a system of internal control is to assist the management of an enterprise in the orderly and efficient conduct of its business. Objectives of Internal Control is following –
a. Adherence to policies and procedures laid down by management b. Safeguarding of assets c. Prevention and detection of fraud and error d. Accuracy & Completeness of records and timely preparation
The component of effective internal control I e effective information system is already in place from FSIBL’s perspective. The bank has further established the following internal control measures
a. Established authority limits for transactions & expenses b. Strengthen the audit department to ensure comprehensive audit of the branches & Head Office (HO) at regular intervals c. Review of the Bank’s performance on monthly and quarterly basis at the highest level d. Review of Bangladesh Bank’s report and management’s compliance thereof at regular basis e. Taking measures for strict compliance of other regulatory requirement First Security Islami Bank Ltd has separate Internal Control & Compliance Division (IC &CD) Headed by a VP. This division consists of 03 (Three) units namelyi. Audit & Inspection Unit ii. Compliance Unit iii. Monitoring Unit 5. Prevention of Money Laundering Money laundering in its simplest form most often being described as “ Turning Dirty or Black money into Clean or White money” till recently money laundering is not viewed as a criminal offence in many countries. Due to growing regulatory hassle in combating crimes, associated with money laundering, many countries had recognized money laundering as criminal offence. Bangladesh is one of those countries. In Bangladesh Money Laundering Prevention Law was promulgated April 1, 2002. A Definition of what constitute the offence of money laundering under Bangladesh Law is set out section 2 of Prevention of Money Laundering Act 2002(act No. 7 2002) which is as follows: “Money Laundering means (Au) Properties acquired or earned directly or indirectly through illegal means (Aa) Illegal transfer, conversion, concealment of location or assistance in the above act of the properties acquired or earned directly or indirectly through legal or illegal means” There are 3(Three) basic stages of money laundering which is drawn bellow
1. Placement process (Deposit into the Bank)
3 Integration process (Process to make the illegal money into legal way)
2. Layering process ( Frequently made transactions to conceal the source of)
Figure: Money Laundering Process Corporate Social Responsibility (CSR) First Security Islami Bank Ltd keeps on discharging its corporate social responsibility’s per part of social entity for the greater interest of the entire society. It has extended its support to the development of the community through promotions of sports, culture, educational program, disaster and treatment aids of the distressed people. First Security Islami Bank Ltd actively participates for promotion of the sports, religious events and culture. Credit Rating of FSIBL First Security Islami Bank Ltd. was rated by Credit Rating Agency of Bangladesh (CRAB) during 2008. The summary of the rating is given bellow: CRAB assigned “BBB1” (Pronounced Triple B one) rating the Long Term and “ST-3” in the short term of First Security Islami Bank Ltd. Commercial Banks rated in the Long Term” BBB1” category, are adjudged to be solid banks, characterized by above average financials valuable and defendable business franchises , and an attractive and stable operating environment. The Short termST-3 category, is consider having satisfactory capacity for timely repayment of obligations, although such capacity may impair by adverse changes in business, economics or financial conditions. CRAB performed the rating assignment based on the audited financial statement Topic Long Term Short Term Validity
Rating BBB3 ST-4 1 (one) Year
CRAB reviews the fundamentals of managing credit including qualitative and quantitative analysis as a part of credit risk evaluation includes credit policy, credit approval process and credit monitoring. CRAB also addresses intrinsic risk, concentration risk as well as large loan exposures. Auditors Report of FSIBL First Security Islami Bank Ltd has been audited by auditing firm Syful Shamsul Alam & Co. for financial year 2008. Auditor’s opinion is Quote “We report that, Through our test checking it is found that additional provision for TK.2.01 crore is required to be provided in the financial statements against non- performing Loans & Advances under BRPD Circular Ref 05 dated June 05,2006.
In our opinion , except for the effects on the financial statements of the matter stated in the preceding paragraph & note , the financial statement prepared in accordance with Bangladesh Accounting Standard (BAS), give a true and fair view of the state of company’s affairs as on December31,2008 and of the result of its operation and its cash flow for the year ended and comply with Banking Companies Act 1991, the Securities and Exchange Rules1987, the rules & regulation issued by the Bangladesh Bank and other applicable laws and regulations” Unquote Capital Structure : Auditor certify that paid –up capital of First Security Islami Bank Ltd. as on April,2009 is Tk 2,300,000,000 divided into 23,000,000 of ordinary shares of TK. 100 each based on evidence Description Number of Share Subscribed Capital as per 2,000,000 Memorandum & Articles of Association at the time of incorporation Issue of Shares in Cash 2003 1,200,000
Face Value of Shares 200,000,000
Issue of Shares in Cash 2005 2,800,000 Issue of Shares in Cash 2006 3,000,000 Issue of Cash2007
Issue of Shares in Cash 2008 1,500,000
Public Issue in 2008 11,500,000
23,000,000 Financial Performance at a Glance at 31.12.2008 SI No 01 02 03 04
Authorized Capital Paid- Up Capital Shareholder’s Equity Total Capital (Tier 1 + Tier 2)
3,600 1,000 1134.29 1347.91
2,300,000,000 ( Amount in millions Tk.) 2008 4,600 2,300 2538.57 2862.19
05 06 07 08 09 10 11 12 13 14 15 16 17
Statutory Reserve Total Asset Total Deposit Total Loans & Advances Operating Income Net Profit after provision & tax Capital Adequacy Ratio Dividend Cost of Fund Net Asset Value per Share Earnings Per Share(EPS) No. of Emploees No. of Branches
96.16 26,942 23,504.04 18,616.22 414.53 30.63 9.15% NILL 9.06% 113.43 3.20 412 20
134.08 31,239 25,854.54 25,094.65 572.78 104.28 16.49% NILL 11.37% 110.37 7.35 485 29
About Motijheel Branch: Name of the Branch: The name of the branch is First Security Islami Bank Limited, Motijheel Branch. Location of the Branch : The Motijheel Branch of First Security Islami Bank Limited is situated in the first floor of Swantex Court 9/1, Motijheel C/A, Dhaka-1000. Total size of the branch is ….. History of the Branch: The Branch has been opened in the 7th December, 2008. This branch is not an authorized dealer (AD) license holder. So, it can not help the clients in case of international business. Employees of the Branch: There are fifteen (15) numbers of employees in this branch. Positions of the employees are as followsA. B. C. D. E. F. G.
Senior Executive Vice President & Manager -01 Senior Assistant Vice president – 01 Executive Officer – 01 Senior Officer – 03 Officer – 02 Assistant Officer- 02 Assistant Cash Officer – 02
Department and Their Activities: Departments of the branches can be divided into five (05) departments. Those areas – A. Account Opening Department, B. Cash Department, C. Accounts Department D. Clearing Department, E. Investment Department. Activities of the departments are described below shortly:
A. Account Opening Department: The main task of this department are given belowAccount opening, Account closing, Account transfer, giving bank statement, bank certificate, dispatch, issuing check book and savings book. B. Cash Department: the main task of the cash department are Receiving Cash from Clients and Paying against instrument. Instead it also maintains the locker service. C. Accounts Department: all kinds of preservation of documents/voucher, paying bills, paying salary is the main task of this department. This department also serves the client by Western Union Money Transfer service. D. Clearing Department: Receiving all kinds of inward & outward checks for collection/ payment, issue pay order/ pay slip is the main task of this department. E. Investment Department: Processing all kinds of Investment’s proposal, check and update CIB, opening investment account, investment monitoring and recovery are the main task. But in this branch, this department also does all the related task of FDR. Total number of Accounts: a. b. c. d. e. f. g. h. i. j.
Al-Wadiah Current Deposit A/C…………………..83 Mudaraba Savings Deposit A/C…………….....825 Mudaraba Special Notice A/C…………………..…17 Mudaraba Term Deposit A/C…………………….100 Mudaraba Monthy Profit A/C……….................12 Mudaraba Double Deposit A/C…………………...72 Mudaraba Monthly Deposit Scheme A/C ……436 Bai- Murabaha………………………………............28 Hire Purchase under Shirkatul Milk ………….…17 Quard Against MTDR ……………………………....08
Motijheel branch has so much potentiality and all of the employees are helpful to its clients. The working environment of this bank is pleasant. In short, this is all about the Motijheel Branch. Deposit & Investment Scenario: Motijheel branch shows its performance in case of Deposit mobilization around 100 crore taka and they invest 10 crore taka within the opening year which indicate that branch has higher potentiality in this area. Following figure shows the deposit & investment of Motijheel Branch (Deposit Investment portfolio of 2009).
Figure 2(a) : Deposit & Investment of Motijheel Branch for 2009 Investment Policy under Islamic Banking Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah). Policy GuidelinesThe Investment Policy guidelines of the Bank describes details fundamental Investment risk management policies, outlines general principles that are designed to govern the implementation of more detailed Investment procedures and Investment risk analysis / risk grading system. Investment Guidelines The basic principles of Investment are described in this section. It must be clearly understood at the outset that these principles are not inflexible and are given as guidelines for protecting the Investments. The followings are the general principle to be considered for Investment to customer on a basis consistent with the global operational objectives and business strategies of the bank: a. The bank shall provide suitable Investment services and products for the markets in which it operates. b. Investments shall normally be Investment from customers deposit and not out of temporary funds or borrowing from other Banks. c. Investment facility will be allowed in a manner, which will in no way compromise with Banks standards of excellence. d. All Investment extension must comply with the requirements of Bank’s Memorandum and Articles of Association, Banking Companies Act 1991 as amended from time to time / Bangladesh Bank’s instructions and other applicable rules and regulations. e. A prudent banker should always adhere to the following principles of Investment to his customer: (1) Background, character and capability of the borrowers, (2) Purpose of the facility, (3) Term of facility, (4) Safety, (5) Security, (6) Profitability, (7) Source of repayment, (8) Diversity It should be remembered that selection of the appropriate borrowers, proper follow-up and end-use supervision through constant follow-up and monitoring are the cornerstone for timely recovery. These guidelines will be updated annually. Industry and Business Segment Focus As a general practice First Security Islami Bank Limited will definitely concentrate its business in Trade Investment / Export – Import business and all types of Commercial Investment, Industrial / Project Investment / Syndication and structured Investment / SME Investment and other specialized programs except otherwise restricted by the
Government or indicated as unethical and banned items.The Bank will give emphasis to diversify its business portfolio commensurate with economic and business trend, life cycle of the products, demand supply gap, social and national obligation etc. The Bankâ€™s policies for Investment in different major sectors are summarized as follows: SL 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12)
13) 14) 15) 16) 17) 18) 19) 20)
Sectors Textile/Spinning/Sweater/Knitting/Denims & Garments Cement Construction / Real estate / House building Telecommunication Communication Information Technology (IT) Project Agro-based Industry Hospital / Clinic / School / College / University Healthcare / Pharmaceuticals / Medicine Electrical / Electronic appliance Investment to NBFI Special Program: Consumer Investment Scheme, SME Investment Scheme, Lease Investment Scheme, Hire Purchase, Earnest Money Investment Scheme, Mortgage Investment, Employees House Building Scheme, ATM, VISA Investment Card, EEF, etc. Plastic / Packaging Leather Steel and Engineering Edible oil Scrap Vessel Paper / Pulp / Partex Chemicals Others
Policies To expand To maintain To maintain To maintain Selective basis To expand To expand Selective basis To expand To expand Selective basis Selective basis Selective basis To expand To expand To maintain Restricted way To expand To maintain Based on merit
The Bankâ€™s policy is to handle the specialized business sectors / segments by setting up separate units in Head Office Investment Division. In view of this, Bank has a plan to set up the following units in Head office Investment Division: a. b. c. d. e. f.
Corporate Banking (already implemented), Project Investment, Syndication Investment, Garments Sector, SME (already implemented), Specialized Schemes like a. Consumer Investment Scheme, b. Lease Investment Scheme, c. Hire Purchase, d. Earnest Money Investment Scheme, e. Mortgage Investment, f. Employees House Building Scheme, g. ATM, VISA Investment Card, EEF, etc.
The Policies for the above specialized segments / sectors have been / to be circulated to all concerns from time to time. Types of Investment Facilities The Bankâ€™s Policy is to introduce diversified / new types of Products / Product derivatives along with usual Banking Products. At present the Bank offers the following facilities: ii.
Investment / Deployment of Funds: 1. Bai-Murabaha (Deferred Lump Sum/ Installment Sale) 2. Bai-Muajjal (Deferred Installment / Lump Sum Sale) 3. Ijara (Leasing) 4. Musharaka (Joint-Venture Profit-Sharing) 5. Mudaraba (Trustee Profit-Sharing) 6. Bai-Salam (Advance Sale and Purchase) 7. Hire-Purchase 8. Direct Investments 9. Post Import Investment 10. Purchase and Negotiation of Export Bills 11. Inland Bills Purchased 12. Murabaha Import Bills 13. Bai-Muajjal Import Bills 14. Pre Shipment Investment 15. Quard-ul-Hasan (Benevolent Investment)
Letter of Guarantee: 1. Tender Guarantee 2. Performance Guarantee 3. Guarantee for Sub-Contracts 4. Shipping guarantee 5. Advance Payment guarantee 6. Guarantee in lieu of Security Deposits 7. Guarantee for exemption of Customs Duties 8. Others
Letter of Credit (L/C) / Back to Back Letter of Credit (L/C)
Specialized Schemes 1. Consumer Investment Scheme, 2. SME Investment Scheme, 3. Lease Investment Scheme, 4. Hire Purchase, 5. Earnest Money Investment Scheme, 6. Mortgage Investment, 7. Employees House Building Scheme, 8. ATM, VISA Investment Card, EEF, etc. Investment Caps 1. The Bank Management will establish a specific industry sector exposure cap to avoid over concentration in any one-industry sector. Sector-wise allocation
of Investment shall be made annually with the approval of the EC of the Board / Board of Directors. 2. Diversification of Investment Portfolio will be encouraged so as to reduce the risk of dependence on a particular sector for balanced socio-economic development of the country. 3. Branches shall submit a report outlining trend and outstanding to the Head of Investment Administration Division on quarterly basis for onward submission to the Executive Committee of the Board of Directors / Board of Directors for information/ perusal/ guidance. Discouraged business types (areas of business) 1. 2. 3. 4. 5.
Military Equipment / Weapons Investment, Companies listed on CIB black list or known defaulters, Highly Leveraged Transactions, Investment of Speculative Investments, Tobacco Sector / Logging, Mineral Extraction / Mining or other activity that is Ethically or Environmentally Sensitive, 6. Counter parties in countries subject to UN sanctions, 7. Bridge Investment [Equity/Debt issuance as a source of repayment], 8. Investment to Holding Companies. Investment Facility Parameters The Bank in general will approve / renew trade Investment facility for the period of 01 (one) year from the date of approval / last expiry date. a. The Bank will extend medium term Investment for 3 (three) years period. b. The Bank will extend long term Investment for maximum period of 7 (seven) year including grace period of 6 (six) months to 18 (eighteen) months (depending on the nature of Project) for project Investment but in case of need, in syndication or club Investment, the Bank may extend the period of Investment up to 8 (eight) years or as per consensus of the syndicated members. c. However, in case of House Building Investment (General), the repayment period will be a maximum of 20 (Twenty) years. d. House Building Investment to Bank’s employee shall be governed as per policy guidelines of “Employees House Building Investment” scheme. e. Besides above, the Bank will extend Investment facilities under special program like Consumer Investment Scheme, Small Investment Scheme, SME Investment, Doctor’s Investment Scheme, Women Entrepreneurship Development Project, Personal Investment, Car Investment, House Building Investment (General) / Mortgage Investment to be set by the Bank under the policy guidelines of the specific scheme. f. The rate of Profit / Commission / Charges / Fees etc. would be as per the approved schedule of charges with variation permissible as per Bangladesh Bank guidelines and with the approval of competent authority. g. The Profit rate to be charged and to be paid out on yearly basis except the especial schemes and unless otherwise specified in the approved terms. h. Repayment of term Investment would be fixed on monthly/quarterly basis. i. In general, the cash margin for L/C would be 10% of the L/C amount or on the basis of Banker – Customer relationship subject to the minimum requirement of Bangladesh Bank whichever is higher.
j. For the import of Capital machinery, the cash margin for L/C would be 25% 30% or on the basis of Banker – Customer relationship subject to the minimum requirement of Bangladesh Bank whichever is higher. k. The competent authority of the Bank, as mentioned above, would specifically approve any exception. l. Security accepted against Investment facilities shall be properly valued and shall be affected in accordance with Laws of the country in which the security is held. An appropriate margin of security will be taken to reflect such factor as the disposal costs or potential price movements of the underlying assets. m. Accepted Securities: Cash/Cash equivalent, Land and Building (registered mortgage with registered IGPA), hypothecation / ownership of Plant and Machinery, stock of goods, assignment of bills / receivables, book debts, pledge of shares, guarantee / Corporate Guarantee, etc. n. Valuation of the landed property / Building / Machinery / Stock of Raw materials / finished products shall be done by the Bank’s enlisted professional surveyors duly checked by the Bank officials. o. Mortgage formalities including execution of registered IGPA must be completed as per legal vetting of the Bank’s approved enlisted Lawyer. p. The value of the mortgage property shall be preferably being double of the facility to be extended depending upon other security coverage. The security condition may be relaxed depending upon the Investment worthiness of the client / Banker-Customer relationship / potentiality of the business. Any exceptions of the parameters mentioned above are subject to be approved by the competent authority as per delegated power approved by the Board of Directors Pricing Policy Profit rates/pricing of Investments, charges, commissions, etc. on various Investment categories will depend on the level of risk, period of Investment and type of security offered. The higher the risk, the higher will be the Profit rate. However, exceptions shall be made in case of Investment in national priority sectors. The Bank from time to time circulate the Profit rate / pricing of Investments / charges / commissions, etc. to its branches with the approval of competent authority and as per guidelines of Bangladesh Bank. As on date the Bank fixes a mid rate for Investment based on the Average Cost of Fund. All pricing of Investments shall, however, have relevance to the market condition and be approved by the appropriate authority of the Bank. Investment Assessment And Risk Grading All financial activities involve a certain degree of risk and particularly, the financial institutions of the modern era are engaged in various complex financial activities requiring them to put proper attention to every detail. Investment Assessment A thorough Investment and Risk assessment shall be conducted for all types of Investment proposals. The results of this assessment to be presented in the approved Investment Appraisal Form that originates from the Investment Officer / Relationship Manager (RM) and is to be approved by the Investment Committee / Executive Committee of the Board of Directors / Board of Directors. The Investment Officers / RM is the owner of the customer relationship and must be held responsible to ensure the accuracy of the entire Investment application / proposal submitted for approval. The Investment Officer / RMs must be familiar
with Bank’s Investment Guidelines and should conduct due diligence on new borrowers, principals and guarantors in line with policy guidelines. Investment Appraisal should summarize the results of Investment Officers / RMs risks assessment and includes, as a minimum, the following details: i. ii. iii. iv. v.
Amount and type of Investment(s) proposed Purpose of Investment(s) Results of Financial analysis Investment structure (Tenor, Covenants, Repayment schedule, Profit) Security Arrangements
KYC Concept The Investment Officers/RM must know their customers and conduct due diligence on new borrowers, principals and guarantors to ensure such parties are in fact who they represent themselves to be i.e., Know Your Customer (KYC). The Banker – Customer relationship would be established first through opening of CD/ STD / SB accounts. Proper introduction, photographs of the account holders / signatories, passport, Trade License, Memorandum and Articles of the Company, certificate of incorporation, certificate of commencement of business, List of Directors, resolution, etc. i.e. all the required papers as per Bank’s policy and regulatory requirements are to be obtained at the time of opening of the account. A declaration regarding approximate transaction to the account is to be obtained during opening of account. Information regarding business pattern, nature of business, volume of business etc. is to be ascertained. Any suspicious transaction must be timely addressed and brought down to the notice of the Head Office / Bangladesh Bank as required and also appropriate corrective measures to be taken as per the direction of Bank Management/Bangladesh Bank. Risk Management/Investment Risk Assessment- Investment Decision. A comprehensive and accurate appraisal of the risk in every Investment proposal of the Bank is mandatory. No proposal can be put on place before approving authority unless there has been a complete analysis. In order to safeguard Bank’s Profit over the entire period of the Investment, a comprehensive view of the capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all regulatory /legal formalities, condition of all documentation and finally a continuous and constant supervision on the account are called for. It is absolute responsibility of the Investment Officer / RM to ensure that all the necessary documents are collected before the proposal is placed for approval. Where Investments are granted against the guarantee of the third party, that guarantor must be subject to the same Investment assessment as made for the principal borrower. Investment Principles: While making Investment decisions, attention shall be given to the analysis of Investment proposals received from heavily leveraged companies and those dealing in non-essential consumer goods. Special care regarding their debt servicing abilities is to be taken. Emphasis shall be given on the following several Investment principles: 1. Present and future business potentiality for optimum deployment of Bank’s fund to increase return on assets, 2. Preference for self liquidating quality business, 3. Avoiding marginal performers,
4. Risk depression is basic to sound Investment principles and policies. Bank shall be careful about large and undue concentration of Investment to industry, one obligor and common product line etc., 5. Managing the amount, size, nature and soundness of one-obligor exposures relative to the size of the borrower and Bankâ€™s position among his other lenders, 6. Personal guarantee of the principal partners or the Directors of the Company shall be obtained. Basics of Investment Risk The following risk areas shall be considered for analyzing a Investment proposal. 1. Borrower Analysis (Management / Ownership / Corporate Risk) The majority shareholders, management teams and group or affiliate companies shall be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall be addressed, and risks to be mitigated. The following questions may be asked to assess the Management Risk: 1. Who is the borrower? Does any particular/special characteristic of borrower need particular attention? For example, if the borrower is a Trust, this calls for examination of Trust Deed. 2. Are there adequate abilities and experience in senior management? 3. Is there adequate depth and succession planning? 4. Is there any conflict amongst owners / senior managers that could have serious implications? 5. Is the Manager/Investment Officer satisfied about the character, ability, integrity and experience of the borrower? 2. Industry Analysis (Business and Industry Risk) The key risk factors of the borrowerâ€™s industry shall be assessed. Any issues regarding the borrowerâ€™s position in the industry, overall industry concerns or competitive forces (demand supply gap) shall be addressed and the strengths and weaknesses (SWOT Analysis) of the borrower relative to its competition to be identified. For the above purpose the Investment Officers/RM may obtain / collect data from the statistical yearbook / economic trends of Bangladesh Bank / public report / newspaper/ journals etc. The following questions may be asked to assess the Business and Industry Risk: i. Are there any significant concentrations of sales (by customer, industry, country, region)? ii. How does the borrower rate with its competitors in market share? iii. Can increased direct production costs be passed on to customers? iv. Does the borrower deal in products that are subject to obsolescence? v. Is the purpose of borrowing consistent with the objectives of the Company? vi. Is the purpose legal? Does it contravene any laws of the country and any instruction issued by the Bangladesh Bank/Head Office? 3. Supplier / Buyer Analysis / Market Risk Any customer or supplier concentration shall be addressed, as these could have a significant impact on the future viability of the borrower. Market Risk
The sufficient market data is to be obtained to identify clients/borrowers’ market share in the industry / demand-supply gap in the market. 4. Technological Risk The product that is manufactured must be technologically viable i.e. whether the technology applied is updated. The product’s stage in its life cycle must be understood. Technical Aspects of the products must be addressed. The Investment Officer/RM must be satisfied with the mitigating factors of technical and technological risk, associated with the products. 5. Financial Analysis (Historical / Projected) An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor’s financial statement should also be analyzed. The analysis should address the duality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. In this regard the Investment Officer / RM must look into the status of chartered accountant audit firm. Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Investments shall not be granted if projected cash flow is insufficient to repay debts. In this regard the possibilities of cost overrun and sensibility analysis shall be done. The following questions may be asked to assess the Financial Risk: I. Does the borrower produce financial statements on time? II. Is working Capital Adequate? III. Has the customer actual title to stock? IV. Have financial covenants been met? V. Has there been any major sale of shares by directors? VI. Any significant change in asset conversion cycle? (Account Receivables/ payables Inventory etc.) Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, Profit and principal payments, etc.) shall be assessed. In this regard the Investment Officer / RM may look into the account turnover like debt summation / Investment summation / highest debit balance/ highest Investment balance (or lowest debit balance), no. of debit entries/ no. of Investment entries for last three years (year wise). Adherence to Investment Guidelines The Investment Applications/ Appraisals must be prepared in line with Bank’s Investment guidelines. It must be clearly stated whether or not the application/proposal is in compliance with Bank’s Investment Policy Investment guidelines. Related questions to be addressed are: i. Is proposed application in compliance with Bank’s guidelines? ii. Does the Investment to clients also compliant with Central Bank’s guideline? iii. What are the Niche Products?
6. Profit Rate Risk The Profit rate must be fixed based on different risk factors associated with the type of business such as liquidity risk, commodity risk, equity risk, and Investment period risk. Profit rate also arises from the movements of Profit rate in the market. In assessing the pricing and profitability, the Investment Officer/RM must consider the income from ancillary business like foreign exchange business, group business, volume of business etc. Related questions to be addressed are: i. What is the rate of Profit charged? ii. Is the rate fixed in consideration to the risk factors? iii. Will the rate charged be profitable to the Bank? 7. Foreign Exchange Risk The foreign exchange transaction is associated with foreign currency fluctuation risk. Therefore the Investment Officer/RM must take care of for the Fore risk. The questions to be addressed are: 1. Does the business involve foreign currency dealings? 2. What are trends of foreign currency fluctuation?
8. Cost overrun Risk This type of risk is generally involved in taking project Investment decision. A high degree of cost overrun may cause the failure of the project. Therefore the Investment officer must consider the cost components of the project and their chance of devaluation. The questions to be addressed are1. Whether the construction cost may increase? 2. Whether the imported machinery cost may increase for the fluctuation of the foreign currency. 3. Are all types of cost components addressed during preparation of feasibility report? 4. Does sensitivity analysis prove sufficient shock absorbing capability? Mitigating Factors The Investment Officer/RM must address to different risks associated with the proposal. The possible risk include but not limited to market risk, financial risk, foreign exchange risk, risk of cost overrun, margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues, rapid growth, acquisition or expansion, new business line/product expansion: management changes or succession issues, customer or supplier concentrations, and lack of transparency or industry issues. Mitigating factors for risks identified in the Investment assessment shall have to be described and understood. The Bank must assess the critical risks of facilities given / to be given and ways / factors of mitigation of those risks. Some of the critical factors are: 1. Volatility 2. High debt
3. 4. 5. 6. 7.
Overstocking Rapid growth Acquisition Debtors issues Succession
Risk Grading Risk grading is a key measurement of a Bank’s asset quality and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Investment Applications. Presently the Bank is following/conducting the Investment Risk Analysis to assess the risk grade. The concerned Investment Officer / RM must clearly indicate the risk grade (as per the finding) in the specific column of Investment appraisal form so that the authority can take decision on the matter. A standard Risk Grading Matrix is depicted as under based on the Risk Grade Scorecard attached Risk Rating Grade Details Investment facilities, which are fully secured i.e. fully cash covered. Superior Investment facilities fully covered by government guarantee. (SUP) – 1 Investment facilities fully covered by guarantee of a top tier Low Risk international Bank Good (GD) – Satisfactory 2 Risk
Acceptable (ACCPT) – Fair Risk
These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record. Borrowers have adequate liquidity, cash flow and earnings. Investment in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property). Acceptable management Acceptable parent/sister company guarantee Aggregate Score of 75-84 based on the Risk Grade Score Sheet
This grade warrants greater attention due to conditions affecting the
Strong repayment capacity of the borrower The borrower has excellent liquidity and low leverage. The company demonstrates consistently strong earnings and cash flow. Borrower has well established, strong market share. Very good management skill & expertise. All security documentation should be in place. Investment facilities fully covered by the guarantee of a top tier local Bank. Aggregate Score of 85 or greater based on the Risk Grade Score Sheet
Risk Rating Grade Details borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Watch List Weaker business Investment& early warning signals detected. (MG/WL) The borrower incurs a loss Investment repayments routinely fall past due Account conduct is poor, or other untoward factors are present. Investment requires attention Aggregate Score of 65-74 based on the Risk Grade Score Sheet.
Special Mention (SM)
Substandard 6 (SS)
Doubtful(DF) (Non 7 -performing)
Bad and Loss 8 (BL) (Nonperforming)
This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Severe management problems exist. Facilities should be downgraded to this grade if sustained deterioration in financials (consecutive losses, negative net worth, excessive leverage), An Aggregate Score of 55-64 based on the Risk Grade Score Sheet. Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of Investments. Bangladesh Bank criteria for sub-standard Investment shall apply An Aggregate Score of 45-54 based on the Risk Grade Score Sheet. Full repayment of principal and Profit is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss. Bangladesh Bank criteria for doubtful Investment shall apply. An Aggregate Score of 35-44 based on the Risk Grade Score Sheet. Investment of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation. Prospect of recovery is poor and legal options have been pursued. Proceeds expected from the liquidation or realization of security may be awaited. The continuance of the Investment as a bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad Investments must be adhered to. Legal procedures/suit initiated.
Risk Rating Grade Details Bangladesh Bank criteria for bad & loss Investment shall apply. An Aggregate Score of less than 35 based on the Risk Grade Score Sheet. Approval Authority A. Basics of Approval Authority 1. All powers of the Bank are vested in the Board. They are the source of all powers, and any person or body can exercise only the powers delegated by the Board in ways and manners specified by them. 2.
First Security Islami Bank Limited believes in decentralization of powers. With a view to ensuring prompt and efficient services to its multitude of clients spread far and wide, the Bank envisages delegation of optimum powers to its Executives and Officials at different levels of operations. But, while delegating powers, the Board is also aware of the followings: a. The Board can delegate the authority, not its responsibility. b. The evil of dual sub-ordination may creep in the chain of command if authority is not well defined and properly implemented. c. Exercise of the delegated authority must commensurate with the shouldering of the responsibility. 3. In order to implement the system of delegation of powers effectively, and to derive the desired benefit for the Bank as well as the Executives concerned, the Bank must develop a system to ensure that the delegated authority exercised by the Executives can be evaluated realistically and qualitatively. For that purpose, the Bank will have to develop a Management Information System (MIS) so that the Board gets prompt and systematic feed back as to how effectively and efficiently the delegated authority is being exercised by the Executives. For the purpose of investment of Bank’s Fund, the cardinal principle is ‘Safety first, Business next’. Delegation of power shall test the ability of the Executives to take decisions judiciously with honesty and integrity to achieve the objectives of the Bank. 4. The Investment approval function has been separated from the marketing/relationship management function. 5. Unless personally authorized by a separate letter, mere mention of delegation in these guidelines shall not entitle an official falling under the category to exercise the powers. 6. Delegated approval authorities shall be reviewed annually by Managing Director & CEO/ Executive Committee of Directors / Board of Directors 7. All Investment risks must be authorized by executives within the authority limit delegated to them by the Managing Director & CEO/ Executive Committee of Directors / Board of Directors. The “pooling” or combining of authority limits is not permitted. 8. The aggregate exposure to any borrower or borrowing group is used to determine the approval authority required. 9. Any Investment proposal that does not comply with Investment Guidelines, regardless of amount, has to be referred to Head Office for Approval.
10. Managing Director & CEO/Head of Investment Risk Management / Board as per the delegated power shall approve and monitor any cross border exposure risk / exceptional case. 11. Any breaches of Investment authority to be reported to Managing Director & CEO, Head of Internal Control and Head of IRM. B. Training and Experience It is essential that Executives/member of the Committee authorized to exercise delegation of business power must have relevant training and experience to carry out their responsibility effectively and a minimum they should have: 1. At least 5 years experience working in Corporate / Commercial banking as a Relationship Manager / Head of Branch / Head of Investment, etc. 2. Training and experience in financial statement, cash flow and risk analysis. 3. A thorough working knowledge of Accounting 4. A good understanding of the local industry/market dynamics 5. Adequate knowledge of the following areas: Introduction of accrual accounting. Industry / Business Risk Analysis. Borrowing causes. Financial reporting and full disclosure. Financial Statement Analysis. The Asset Conversion/Trade Cycle. Cash Flow Analysis. Projections. Investment Structure and Documentation. Investment Management. C. Organizational Structure And Responsibilities The appropriate organizational structure must be in place to support the adoption of policies described in Chapter-I of these guidelines. The key feature is the segregation of the Marketing / Relationship Management function from Approval / Risk Management / Administrative Functions. Investment approval shall be centralized within the IRM function. Investment application shall be approved by the Managing Director / Deputy Managing Director / Head of Investment at Head Office / Head of Branches as per their delegation of business powers approved by the Board of Directors and beyond their authority, the proposals are to be placed before the Executive Committee of the Board of Directors / Board of Directors for approval. Organizational Structure
B o a rd
o f th e
o f D ir e c t o r s
B o a rd
M a n a g in g
o f D ir e c t o r s
D ir e c t o r a n d
D e p u t y M a n a g in g
C E O
D ir e c t o r
H e a d o f C r e d it ( A p p r a is a l & A p p r o v a l) H e a d o f C o rp o ra te / C o m m e r c ia l B a n k in g
R e l a t io n s h ip
M a n a g e m e n t
B u s in e s s D e v e l o p m e n t H e a d
o f C r e d it A d m in is t r a t io n
H e a d o f C r e d it M o n it o r in g , R e c o v e r y a n d C o m p l ia n c e
Head of Investment Administration Division (IAD) The responsibility of the Head of Investment Administration Division (IAD) includes planning, organizing, directing, controlling and reviewing the operational and administrative functions of Investment Administration Division to ensure efficient and effective support to the concerned Divisions in line with regulatory and Bank requirements while exercising appropriate control and independent judgment. The other key responsibilities of the Investment Administration Division are as follows: 1. 2. 3. 4. 5. 6. 7.
Ensure Investment documentation and securities are duly completed and in place prior to disbursement of Investments. Ensure that CIB report reflects/includes the name of all the lenders with facility, limit and outstanding. Ensure compliance with all formalities regarding large Investments and Investments to Directors as per Directives of Bangladesh Bank Circulars & rules and regulations of Banking Companies Act. Ensure that adequate insurance is in place on all pledged assets, all approval conditions have been met and exceptions, if any, are approved prior to disbursement of Investments. Maintain control over all security documentation. Monitor borrowerâ€™s compliance with covenant, agreed terms & conditions and also monitor account performance. Produce required statements related to Investment division including statement of newly approved facilities, renewed facilities, declined proposals and submit a report before the Managing Director and CEO / EC / Board for their review and guidance.
Head of Monitoring, Recovery and Compliance Division The key responsibilities of the Head of Monitoring, Recovery and Compliance Division are as follows: 1) Directly manage all Special Mentioned, Substandard, Doubtful and Bad and Loss accounts in order to standardize/regularize/maximize recovery and ensure that appropriate and timely Investment loss provisions have been made.
2) Provide early signals/warning to the Branches/Marketing Division/Account Relationship Managers/Officers. 3) Determine Account Action Plan/Recovery Strategy. 4) Pursue all options to maximize recovery. 5) Deal with all legal matters. 6) Process branch proposals regarding rescheduling of classified accounts. 7) Collect CIB report from Bangladesh Bank and be responsible for sending CIB, CL returns to Bangladesh Bank on time. 8) Ensure all required Bangladesh Bank returns and statements to other regulatory authorities are submitted with accurate statistics in the correct format in a timely manner. 9) Ensure that Bangladesh Bank circulars/regulations are maintained centrally and advised to all relevant divisions to ensure compliance. 10) Enlist surveyors, lawyers, and insurers with approval of the Bank Management and to monitor and review their performance periodically. Approval Process In approval process the Bank segregates its Relationship Management / Marketing from the Approving Authority. The existing approval authorities are Head of Branch, Head Office Investment Committee, Executive Committee of the Board of Directors and Board of Directors as per their delegation of business powers defined in later section. The recommending or approving executives shall take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits shall be as per policy guidelines that Managing Director & CEO subject to the limit approved by the Board of Directors shall approve all proposals where facilities are up to 15% of the bankâ€™s capital shall be approved at the IRM level, facilities up to 25% of the capital. At present the Bank has business delegation powers approved by the Board of Directors in its meeting held on April 2006. Investment proposals in excess of 25% of the Bankâ€™s Capital to be approved by the Executive Committee of the Board of Directors or Board of Directors after recommendation of IRM, Corporate Banking and Managing Director & CEO. The Branch Marketing Team comprising of Executives and Officers shall market the clients and then prepare Investment appraisal memo as per the prescribed format and within the purview of the set rule/policy guideline of the Bank. In case it is within the delegated business power of the Head of Branch, the concerned Executive / Officer will place it to the Head of Branch who will make judgment (qualitative and quantitative judgment) and if found viable then he/she will approve the Investment otherwise he/she may reject it or forward it to the Head of Corporate / Commercial Banking at Head Office. The concerned Executive / Officer at Branch on receipt of the proposal will prepare a Investment appraisal memo as per the prescribed format and within the purview of the set rule / policy guidelines and then place it to the Head Office, Corporate Division who will make Judgment (qualitative and quantitative) and if found viable then he will approve the facility, if it is within his business delegated power otherwise he may reject it or forward it to the Head of Corporate / Commercial Banking at Head Office along with his recommendations. The Proposal on receipt by the Head of Corporate / Retail Banking will forward it to the Head of Investment who in turn distribute it to the respective Investment Officer at the Head Office for scrutiny, analysis and prepare a Office Note / Memo with due diligence along with their observations / results of analysis and to place it before the Head
Office Investment Committee. In Head Office Investment Division, separate Investment Officers are designated for looking after the proposal of separate Branches. There also exist separate units for handling Garments related proposal / Export Investment, Project Investment, Syndication and Structured Investment. The Head Office Investment Committee depending upon the delegated business power shall either approve it (or reject it if not found viable) or place it to the Executive Committee of Directors / Board of Directors.
APPROVAL PROCESS FLOW CHART BRANCH MARKETING TEAM
HEAD OF BRANCH (APPROVAL / DECLINE) BEYOND CAPACITY RECOMMEND
BOARD OF DIRECTORS (APPROVAL / DECLINE)
BEYOND CAPACITY RECOMMENDED TO
EXECUTIVE COMMITTEE OF TH BOARD OF DIRECTORS (APPROVAL / DECLINE) AS PER DELEGATION
HEAD OF CORPORATE COMMERCIAL BANKING (MARKETING)
HEAD OF INVESTMENT DMD (APPROVAL / (APPROVAL / DECLINE) DECLINE) AS PER DELEGATION
BEYOND CAPACITY RECOMMENDE D TO
MD & CEO
(APPROVAL / DECLINE)
BEYOND CAPACITY RECOMMENDED
Appeal Process Any declined Investment proposal may be represented to the next higher authority for reassessment / approval. However, there shall be no appeal process beyond the Managing Director & CEO. Renewal and Status Verification On expiry of a facility, the borrower may come forward with a proposal either for renewal of the facility for a further period or for enhancement of the existing facilities or for both. He may also agree to offer additional stocks/securities or even furnish a guarantor. The Head of Branch (Branch Manager) should examine all such proposals and if he is satisfied, the proposals should be sent to Sanctioning Authority at Head Office as, as the case may be, if beyond his business delegation power, duly supported by full fledged Investment analysis including report of verification of Stocks/status of Collateral Securities etc. as is done in case of fresh proposals. The Head Office in turn will process the renewal/enhancement proposal after verifying the following factors: a) b) c) d)
Justification for renewal / enhancement. Reasons for non-payment / adjustment of the Investment in time. Security aspect in terms of outstanding Investment. Investment worthiness of the client.
An Overview of Islamic Banking Investment Islamic Banking Investment Islamic investments are a unique form of socially responsible investments because Islam makes no division between the spiritual and the secular. The establishment of an Islamic investment policy, be it for the institutional or individual investor, starts with the Sharia Board, a group of Islamic scholars (jurists) that vests investment products for compliance with Islamic Law and conducts ongoing due diligence of them. Sources for interpretation follow a hierarchy of authority: the Quran, believed by Muslims to be the words of Allah verbatim as revealed to his prophet Muhammad in the seventh century; the Sunnah which are rules from the prophet's sayings (Hadiths) and actions;
Qiyas which are scholarly legal deductions; and Ijma, the consensus of scholars on a particular issues Types of Islamic Banking Investment 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15)
Bai-Murabaha (Deferred Lump Sum/ Installment Sale) Bai-Muajjal (Deferred Installment / Lump Sum Sale) Ijara (Leasing) Musharaka (Joint-Venture Profit-Sharing) Mudaraba (Trustee Profit-Sharing) Bai-Salam (Advance Sale and Purchase) Hire-Purchase Direct Investments Post Import Investment Purchase and Negotiation of Export Bills Inland Bills Purchased Murabaha Import Bills Bai-Muajjal Import Bills Pre Shipment Investment Quard-ul-Hasan (Benevolent Investment)
Bai-Murabaha (Deferred Lump Sum/ Installment Sale) Islamic Shariah defines Bai-Murabaha as a contract of sale between a buyer and seller under which the seller sells certain specific goods permissible under Shariah to the buyer at a cost plus an agreed upon profit/mark-up paid on the spot or to be paid on a future date in lumpsum or within a fixed period by fixed installments. The profit/mark-up may be agreed upon as a lumpsum amount or as a percentage of actual total cost of the goods including freight, transportation, storage etc. Bai-Muajjal (Deferred Installment / Lump Sum Sale) 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 Shariah and the Law of the country), to the buyer at an agreed fixed price payable at a certain fixed future date in lumpsum 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. Ijara (Leasing) Ijara is an exchange transaction in which a known benefit arising from a specified asset is made available in return for a payment, but where ownership of the asset itself is not transferred. The ijara contract is essentially of the same design as an installment leasing agreement. Where fixed assets are the subject of the lease, such can return to the lessor at the end of the lease period, in which case the lease takes on the features of an operating lease and thus only a part amortization of the leased asset's value results. In an alternative approach, the lessee can agree at the outset to buy the asset at the end of the lease period in which case the lease takes on the nature of a hire purchase known as ijara wa iqtina (literally, lease and ownership).
The terms of ijara are flexible enough to be applied to the hiring of an employee by an employer in return for a rent that is actually a fixed wage. Musharaka (Joint-Venture Profit-Sharing) Musharaka is an agreement under which the Islamic bank provides funds which are mingled with the funds of the business enterprise and others. The literal meaning of the word Musharaka is sharing. Under Islamic law, Musharaka refers to a joint partnership where two or more persons combine either their capital or labor, forming a business in which all partners share the profit according to a specific ratio, while the loss is shared according to the ratio of the contribution. All providers of capital are entitled to participate in the management but not necessarily required to do so. Al-Mudaraba (Trustee Profit-Sharing) The word “Mudarabah” has been derived from the Arabic word “Darb/Darbun” which means movement to earn rahmat (munafa) of Allah. Mudaraba is a partnership where one of the contracting points called the “Shahib-al-Maal” or the Rabb-ul-Maal” (the financier) provides a specified amount of capital and acts like a sleeping a dormant partner while the other party, called the Mudarib (entrepreneur), provides the entrepreneurship and management for caring on any venture, trade, industry or service with the objectives of earning profits. The Mudarib is in the nature of a trustee as well as an agent of the business. Profit is distributed as per pre agreed ratio while the loss is entirely borne by the Shahib-al-Maal. Bai-Salam (Advance Sale and Purchase) Bai Salam is a form of forward contract when the price for an asset is paid upfront at the time of the contract for an asset or commodity to be delivered later. Salam sales are frequently used to finance the agricultural industry. Banks advance cash to farmers at the time of contract for delivery of the crop during the harvest seasons. Hire-Purchase under Shirkatul Milk (HPSM) Hire Purchase under Shirkatul Milk is a special type of contract which has been developed through practice. Actually, it is a combination of three contracts viz: Shirkat, Ijarah and Sale. Shirkat means partnership, Shirkatul Milk 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 and bear the loss in proportion to their respective equity, the contract is called Shirkatul Milk Contract. Some other financing mode of investment are practiced by Islamic banking are as follows1. 2. 3. 4. 5.
Direct Investments Post Import Investment Purchase and Negotiation of Export Bills Inland Bills Purchased Murabaha Import Bills
6. Bai-Muajjal Import Bills 7. Pre Shipment Investment 8. Quard-ul-Hasana (Benevolent Investment) Operational Procedure of Islamic Investment BAI-MURABAHA MODE The term ‘Bai-Murabaha’ is composed of two Arabic words, ‘Bai’ and ‘Murabaha’. The word ‘Murabaha’ has been derived from the word ‘Ribhun’, which means profit and the word ‘Bai’ means buying and selling. Thus ‘Bai-Murabaha’ means sale on profit or cost plus profit/mark-up. Islamic Shariah considers ‘Bai-Murabaha’ as a contract of sale, pure and simple. The only feature which distinguishes it from other kinds of sale, specially from ‘Bai-Muajjal’ is that in ‘Bai-Murabaha’ the profit/mark-up and the cost are separately and clearly mentioned in the contract, i.e. the seller must expressly tell the buyer about how much cost he has incurred to procure the goods and how much profit/mark-up he is going to charge on the total cost. TYPES OF BAI-MURABAHA Normally Bai-Murabaha transactions involve three parties – Seller, an ultimate Buyer and an Intermediary buyer and seller. The intermediary buyer first, purchases goods from any seller in the market, and then he sells the bought goods to the ultimate buyer. Thus the intermediary buyer and seller perform dual functions, first as a buyer and second, as a seller. Again sometimes he may purchase goods from the market without depending on any order or sometimes he purchases goods upon receipt of an order from the ultimate buyer. Thus in respect of procedure of purchase and sale Bai-Murabaha may be of two types: A) Ordinary Bai-Murabaha: When the seller as a trader purchases goods from any seller in the market without depending on any order and promise received from any customer and sells those to any buyer for cost plus profit, then the transaction is called Ordinary Bai-Murabaha. B) Bai- Murabaha on Order and Promise: But where the intermediary trader upon receipt from any customers, of an order and a prior outstanding promise to purchase the goods by them from the intermediary trader, procures the ordered goods and sells those to the ordering customer at a cost plus agreed upon profit/markup, the transaction is called Bai Murabaha on Order and Promise. Further, the definition given above clearly shows that payment of price (cost plus profit) of Murabaha goods may be paid at once on the spot or it may be paid on a subsequent date/dates as agreed upon by the parties. Thus Murabaha does not necessarily imply the concept of deferred payment only. So in respect of modes of payment of price, Bai-Murabaha contract may again take two forms: 1) Spot and 2) Deferred
A) Spot Murabaha: This type of Murabaha is also called as cash Murabaha. If both the goods and the price (cost plus agreed upon profit) are exchanged at once on the spot, it is called Murabaha bil-Naqad or Spot/Cash Murabaha. B) Deferred Murabaha: If the Murabaha goods are delivered to the client (along with ownership and possession) but the payment of the price (cost plus profit) is deferred for a certain specific period, the sale is called Bai-Murabaha bil-Azal or Deferred Murabaha. Thus, ultimately taking together all the forms mentioned above Bai-Murabaha transactions may be divided into the following four types: i. ii. iii. iv.
Ordinary Spot Murabaha or Ordinary Murabaha on Spot/Cash Payment; Ordinary Deferred Murabaha or Ordinary Murabaha on Deferred Payment; Order and Promise Murabaha on Spot Payment. Order and Promise Murabaha on Deferred Payment.
This latter type, i.e. Order and Promise Murabaha on Deferred Payment is now being generally practised by Islamic Banks all over the world and is popularly called BaiMurabaha or Murabaha in short. IMPORTANT FEATURES OF MURABAHA a. Murabaha is not a loan given on interest, rather it is a sale of commodity for a deferred price which includes the cost and an agreed upon profit. b. Murabaha sale must fulfill all the conditions for a valid sale. c. Murabaha requires real sale of commodities. Hence it can be used as a mode of financing only where the client wants to purchase some goods/merchandise. But if the funds are required for some other purposes, like paying the price of commodities already purchased by the client, or the bills of electricity and other utilities, or for paying the salaries of the staff, Murabaha can not be applied. d. The bank/financier must have owned the commodity and this must come into their possession, whether physical or constructive, i.e. the commodity must be in their risk, though it may be for a while. e. The price of Murabaha goods once fixed and agreed upon cannot be further increased. f. The best way for Murabaha is that the financier/bank itself purchases the commodity and keeps it in their possession, or purchases the commodity through a third party appointed by them (financier/bank) as their agent, before delivering the same to the client. However, in exceptional cases where direct
purchase by the bank or through its agent is not practicable, it is also allowed that the bank appoints the client himself as their agent to buy the commodity on behalf of the bank. STEPS OF BAI-MURABAHA PRACTISED BY ISLAMIC BANKS First Step: Submission of Proposal The client sends a proposal with the specification of the commodity to be acquired from the bank. The proposal also indicates details regarding the date, time and place of delivery as well as information about cost and profit and the form of payment. The bank responds by sending a counter proposal either accepting the buyerâ€™s offer or stipulating a different one or they may regret the same. Second Step: Signing a promise to Purchase The client agrees with the bankâ€™s counter offer/proposal and promises to buy the commodity from the bank on Bai-Murabaha basis, for the stipulated cost plus profit and places the order to buy the goods by the bank. The bank accepts the order and establishes the terms and conditions of the transaction. Third Step: The first sale contract The bank communicates the client (ultimate buyer) of its approval of the agreement to purchase the ordered goods as per specification given by him. The bank, on receipt of clientâ€™s reply in the affirmative, sends an offer to the seller in the market to sell the goods to the bank with detailed terms and conditions. The seller (in the market) expresses their approval to sell and sends the invoice to the bank. Fourth Step: The signing of a Murabaha Sale Contract The two parties (the bank and the ordering client) sign the Bai-Murabaha contract according to the agreement to purchase. Fifth Step: Delivery and Receipt of the Commodity The Bank authorizes his nominee or the client as their agent to receive the commodity on behalf of the bank. The seller (in the market) sends the commodity to the place of delivery agreed upon. The nominee or the agent (client) undertakes the receipt of the commodity in its capacity as legal representative of the bank and notifies the bank of the execution of the proxy.
The client, in his capacity as the ultimate buyer confirms the bank the receipt of goods from the bank or agent or nominee of the bank. RELATIONSHIP BETWEEN THE PARTIES TO MURABAHA At the first stage the bank and the client promise to sell and purchase a commodity in future. Thus at this stage the relation between the bank and the client is only of a promisor and a promisee. At the second stage when the Bank appoints an agent to buy goods on their behalf,the relationship between them is that of a principal and an agent. At the third stage when the bank purchases the commodity from seller in the market, the relation between them stands as that of a buyer and a seller. At the fourth stage when the bank sells the goods to the client, the relationship between the bank and the client is that of a seller and a buyer. At the last stage, since the sale is effected on deferred payment basis, a debtor-creditor relationship emerges between the bank and the client. THE RULES OF BAI-MURABAHA The Fuqaha (Islamic Jurists) have allowed the use of Bai-Murabaha on Order and Promises on Deferred Payment basis as a mode of financing by Islamic banks subject to the following conditions and rules: 1. At the Phase of promise to purchase i) It is permissible for the client to offer to purchase a particular commodity by the bank, deciding its specifications and committing itself to buy it from the bank on Murabaha basis for the cost plus the agreed upon profit. ii) It is permissible that the mutual agreement may contain various conditions agreed upon by the two parties, especially with respect to the place of delivery, the payment of a cash security to guarantee the implementation of the operation, and the method of payment. iii) It is permissible to stipulate the binding nature of the promise to purchase the commodity from the bank. Thus, the agreement can only be satisfied by either fulfilling the promise to purchase or by indemnifying the bank for any losses incurred if the promise to purchase is not fulfilled. iv) It is permissible to guarantee the implementation of the promise or to indemnify the losses/damages incurred by the bank for failure of the client to implant the promise, by guarantor or mortgage or both. 2. At the phase of the First Purchase
v) It is a condition that the bank purchases the requested commodity (first purchase contract) before delivery on Murabaha to the ultimate buyer. The contract in the first purchase must be settled, between the source seller and the bank. vi) It is permissible for the bank to authorize a second party including the client buyer to receive the commodity on behalf of the bank. This authorization must be in a separate contract, particularly if the client is going to receive the goods on behalf of the bank. This is necessary to avoid any conflicts with the Murabaha sale. vii) After the bank takes ownership of the goods, the bank is responsible for any damages or defects. Thus, if the goods are damaged prior to delivering the same to the purchaser/client the bank is liable and must repair the damage. 3. At the phase of Murabaha Sale viii) The legal rules of Bai-Murabaha must be observed in drawing the contract of the Murabaha sale connected with a promise to purchase. [Particularly concerning the issue of the transparency of the cost of the first purchase and the amount of profit because discrepancies may lead to disputes, which may invalidate the contract]. ix) It is permissible to document the debt resulting from Bai-Murabaha by a guarantor or a mortgage, like any other sale on credit. However, the mortgage shall only be in effect if the debt is actually incurred. x) The bank must deliver the specified goods to the client on specified date and at specified place of delivery as per contract. xi) It is permissible that the bank shall sell the goods at a higher price (cost + profit) to earn profit. The cost of goods sold and profit/mark-up therewith shall separately and clearly be mentioned in the Bai-Murabaha Agreement. The profit/mark-up may be mentioned in lump sum or in percentage of the purchase/cost price of the goods. But, under no circumstances, the percentage of the profit shall have any relation with time or expressed in relation with time, such as per month, per annum etc. xii) The price once fixed as per agreement and deferred cannot be further increased or decreased. However, the bank at its own discretion may allow any rebate on the deferred cost and profit, but this should not be a part of the contract. xiii) In order to protect the bank from willful default of the depositors money it is permissible to ask the Murabaha buyer to promise to the effect that if he fails to pay the price within due time, he will pay compensation/donate a lump sum amount for each day of (willful) delay for charitable purpose. In such a case the bank will receive such amount to use the same for charitable purposes and not to include it in its income. APPLICATION OF BAI-MURABAHA IN ISLAMIC BANKING
Murabaha is the most frequently used form of finance in Islamic banking throughout the world. It is suitable for financing different investment activities of customers with regard to the manufacturing of finished goods, and the purchase of raw materials, machinery, and other required plant and equipment. BOOK KEEPING AND ACCOUNTING FOR BAI-MURABAHA MODE OF INVESTMENT A) Receipts of Cash Security At the time of receiving Cash Security (which will be subsequently converted to Goods Security) the branch shall debit cash or clientâ€™s Current Account and credit Bai-Murabaha Investment Account (Security Deposit) (Commercial/Industrial etc.) on account of M/s..............................................
B) Purchase of goods At the time of purchase of the goods by the Bank, the bank shall debit the Bai-Murabaha Investment Account (Commercial/Industrial etc.) on account of M/s. ....................... (client) for the total purchase price of the goods and credit: PO/IBG A/C of DD or TT/Current Account of the seller/supplier/buying Agent. C) Sale and Delivery of goods After execution of Bai-Murabaha Sale Agreement and delivery of the goods to the client, the branch shall debit Investment Account of the client for the amount of profit of the bank and all other procurement costs. D) Maintenance of Day Book, Supplementary Sheets and Clean Cash Book All debits and credits to Investment Account, Shall first be recorded in day book/ Supplementary Sheets where form the amount shall be taken to Clean Cash Book and General Ledger. E) Vouchers and Investment A/c Pay-in-Slip General Voucher: Debit and credit shall be used for debiting and crediting Investment Account respectively. Investment Account Pay-in-Slip shall however be used for depositing cash, cheque and other instruments into the Investment Account. F) Maintenance of Investment Ledger Investment Ledger combines five accounts viz.: Investment Account-Principal, Profit Receivable Account, Security Deposit Account, Other Charges and Compensation Charged Account. Separate vouchers shall be prepared for these five types of transactions and recorded in the respective column/account. Cash security will be transferred and credited to the respective Investment Account as the first transaction.
Total amount of profit, rate of return (percent per annum) and month-wise profit calculated on the basis of Sanction Advice shall be recorded in the columns earmarked for the purpose on the top right hand corner of Investment Ledger. G) Profit Receivable A/c Total amount of profit on every deal as per Sanction Advice/Agreement (sale price-cost) shall be debited to the respective Investment Account immediately after delivery of the goods to the client and shall be credited to the “Profit Receivable Account”. On the last working day of each month, amount of profit receivable up to the end of the month shall be debited to “Profit Receivable Account” and credited to “Investment Income Account”. For this purpose, the Branch shall prepare a Working Sheet on the following proforma-Ledger-wise. OPERATIONAL PROCEDURE IN FIRST SECURITY ISLAMI BANK LTD. STEP 1: INDUCTION OF CLIENT The Branch manager and officers concerned should search for and if found shall cordially receive the potential investment client and explain to him the various aspects of investment under Islamic Shariah principles. i)
The Branch shall exchange views about the business of the prospective client and assess his capability, experience, business needs etc.
The branch shall explain to the client the detail procedure of BaiMurabaha mode of investment and the terms and conditions under which the bank makes such investments.
On completion of the assessment of client’s capability, business experience, commitment and his business needs, if everything is found satisfactory, the branch shall request the client to open an Al-Wadiah current A/c and to operate the same satisfactorily at least for six months.
If not found satisfactory, the branch shall regret him politely.
On being satisfied with performance of the client, if the branch thinks it wise, will request him to submit a formal application for Murabaha investment and provide him with an application form.
STEP-2: APPLICATION a. If the Investment proposal falls within the discretionary power of the Branch, they shall obtain only one copy of Application duly filled in and signed by the client. (For new client and renewal cases, Application shall be obtained and for Deal Application shall be obtained. b. Head Office Controlled Branches shall obtain Application from the client in Duplicate (One copy for Branch record and the other to be sent to Head Office along with the Proposal duly recommended by the branch).
c. Branches under Zone shall obtain Application from the client in Triplicate (one copy for Branch record and the rest two copies to be sent to Zonal Office along with the Proposal duly recommended by the branch). d. The Zonal Office shall retain one copy for their record and the other to be sent to Head Office along with the Proposal and their opinion and recommendation. STEP-3: Scrutinize and entry of the Application of the client The concerned officer of the Branch shall scrutinize the application and ensure that: a) All columns of the application are properly filled in; b) Particulars and information given therein are complete and correct in all respects; c) All required Documents/ Papers as listed in the footnote of the Application are submitted; d) It is signed by the client as per specimen signature with the Bank and duly verified by the authorized Official of the Bank. e) Attested photographs of the Proprietor(s), Partners, Directors, Trustees are affixed on the top right hand corner of the Application. After scrutinize, if it is found satisfactory the concerned officer of the branch will enter the Application in the â€œInvestment Proposal Received and Disposal Registerâ€? and allot a Serial Number to it. Step-4: Categorization of the proposal The branch shall categorise the proposal as under: a)
Bai-Murabaha Commercial If the proposal is for sale of goods to the applicant as individual or Firm or Company for Trading purpose, it shall be categorised as Bai-Murabaha Commercial.
Bai-Murabaha Industrial If the proposal is for supply of Machinery, Equipments, Raw Materials etc. by the bank this will fall in the category of Bai-Murabaha Industrial.
Bai-Murabaha Agriculture If the bank is requested to supply seeds, fertilizer etc. for agricultural purpose this shall be termed as Bai-Murabaha Agriculture. d) Bai-Murabaha Import If the client requests the bank to Import goods from abroad and sell those to the client the proposal shall be termed as Bai-Murabaha Import. STEP-5: PROCESSING AND APPRAISAL 1) The branch shall examine Shariah Permissibility of the Goods. If the goods are permissible by Islamic Shariah, proposal may be approved, otherwise will be rejected outright.
2) The branch manager or concerned officer shall Check-up Credit Restriction Schedule of Bangladesh Bank and Current Investment Policy Guidelines of the Bank and reject proposal if it conflicts with the existing Credit Restrictions of Bangladesh Bank and Policy Guidelines of FSIBL. 3) Concerned officials of branch will visit the Business establishment of the client, Tally the Particulars, Information and Figures in the Application Form with the original Documents/ Papers and shall be sanguine about its genuineness and correctness. They shall also obtain additional information, particulars, facts and figures, if required. 4) They would have talk to the business and important personalities of the locality to ascertain the honesty, integrity and business dealings of the client. 5) The Branch shall obtain Confidential Report of the client from local Bank Branches and shall not finalize the proposal until the Confidential Report from all Bank Branches are received. 6) Confidential Reports should also be obtained from local Financial, Credit and Leasing Institutions, if felt necessary. 7) Report from Credit Information Bureau (CIB) of Bangladesh Bank through Head Office Investment Division as per Instruction Circular of Head Office in this regard shall also be obtained by the branch. 8) The branch shall obtain declaration of the client about his liability (both contingent and real) with other Banks/Financial Institutions/Leasing Companies including any other Branches of First Security Islami Bank Ltd. 9) They shall obtain Financial Statement/Balance Sheet of the client for the last three consecutive years for Investment Proposals of Tk.50.00 lac or above or as per Head Office instruction. This is to be furnished by all clients irrespective of their status, i.e. Individual, Proprietorship, Partnership, Private/Public Limited Company, Trust Body etc. engaged in business. 10) Branch shall inspect Land, Building(s), other Assets and Properties proposed to be mortgaged or hypothecated. Ascertain Prima-facie genuineness and correctness of those in cross reference to documents, title deeds and other relevant papers. Ascertain primarily the market value and the forced sale value of the proposed collaterals. 11) The branch shall forward documents, title deeds and other relevant papers to the approved Lawyer of the Bank for examination and furnishing his opinion (Lawyerâ€™s opinion should be clean and without ambiguity). 12) The Branch must obtain Lawyerâ€™s opinion. 13) The concerned official of the branch should study the following carefully and note down the actual findings in the Appraisal Form against each item; a) Whether the goods which the client intends to purchase are readily saleable and have constant and effective demand in the market. b) Whether the price of the goods is subject to frequent and violent changes. c) Whether the goods are perishable on short or in long-term duration. d) Whether the quality and other specifications of the goods as desired by the client can be ensured.
e) Whether the goods are available in the market and the Bank will be in a position to purchase the goods in time and at a negotiated price. f) Whether sale price of the goods is payable by the client at specified future date in lump sum or in installments as per proposal. Note: Market price and cost price should be carefully studied by the Investment Committee of the branch and properly recorded, verified and signed. 14) In Corporate branches, the Investment Committee shall be formed headed by the Branch Incumbent and In-charge of Investment, Foreign Exchange and General Banking Department shall be its members. 15) In small branches, Investment Committee shall consist of the Branch Incumbent as its head and Second Officer/Investment Officer and Cash In-charge as the members. 16) For Bai-Murabaha Commercial and Bai-Murabaha Industrial Investments the branch shall prepare Appraisal Report. 17) For Appraisal of Bai-Murabaha Agriculture and Bai-Murabaha Import the branch shall use specific Appraisal Form devised for each of those, if any, otherwise providing the available/required supplementary information. 18) In course of preparation of the Appraisal Report, the branch shall ensure incorporation of all information, particulars, figures and statistics in Appraisal Form correctly with special attention to the following; a) Composition of Assets of the client, viz., cash, goods, investments, building, landed property, stock in trade, work-in-process, marketable securities, bonds, etc. b) Extent and nature of liabilities of the client, i.e. whether the volume is within the manageable capacity of the client. Opinion in this regard and justification thereof must be clearly mentioned. c) The value of Liquid Assets, viz., cash and book debts of the client. d) Respectability and business reputation of the client in the market. e) Experience of the client in the business. f) Whether the storage facilities and arrangement for marketing and selling are satisfactory and bankâ€™s interest will be protected properly. The branch shall contact primarily with the producers/sellers/suppliers of the goods in the market, study the market price and work out the purchase and sale prices of the goods as per following guidelines, and ascertain whether the purchase of the goods by the client from the bank will be profitable to him and whether the client shall be able to lift and pay the price of Bai-Murabaha goods to the bank within the due date. STEP-6: SANCTION If on completion of the appraisal, the proposal is found viable, the branch shall sanction and issue sanction advice if it is within the business power of the branch mentioning all the terms and conditions in duplicate. One copy shall be retained by the client and the other copy shall be returned to the branch by the client duly accepted by him all the terms and conditions. The branch shall also endorse copies to Zonal and Head Offices retaining one copy in the clientâ€™s file duly accepted by the client.
The branch shall forward the proposal with Appraisal Report, if it is not within their Discretionary Power to Zonal Office in duplicate together with all required documents and papers giving specific comments and recommendations. Zonal Office shall accord approval/regret the proposal. If the proposal is beyond the business power of the Branch and the Zone, the Branch shall forward the proposal to Head Office with their views and recommendations through the Zone. Head Office will either approve or regret. On receipt of approval from the Zonal Office/Head Office, the branch shall issue the sanction advice mentioning all the terms and conditions in duplicate to the client. But if the proposal is regretted by the Zone/Head Office, the branch shall intimate the client of the same politely. On receipt of the Sanction letter, if the client duly accepts the sanction terms and conditions, the branch shall enter the particulars of the sanctioned proposal in the Limit Register allotting a fixed serial number for each client as per Limit Register which shall remain permanent irrespective of the Mode(s) so long as the limit remains valid and the client continues business with the Bank. The branch shall open file client-wise affixing the fixed number allotted to him/her as per Limit Register and clientâ€™s name, address (Business address, present address, permanent address, residential address) and Telephone/Fax/Telex/Cable numbers be recorded prominently in the inner side of the Investment File for easy tracing in case of need. It may be noted that, the Branch Manager or the Zonal Head shall have no power to sanction investment to the Trust Organization or Co-operative Societies. The branch shall obtain required papers, documents/application with the past performances and outstanding liabilities of the client, if any of the existing investment client process/sanction the proposal as per instruction laid down here-in-above after due evaluation/study. STEP-7: DOCUMENTAION Before purchasing the goods, the branch shall obtain sufficient collaterals/ securities as mentioned in the Sanction Advice along-with the following charge documents properly executed, i.e. duly filled in, signed, stamped, verified and witnessed, where necessary: i) Murabaha Sanction Advice deal-wise duly accepted by the client. ii) Bai-Murabaha Agreement (Deal-wise). iii) Agreement for pledge of goods (Deal-wise). iv) Single Party D.P Note, if there is no Guarantor, (Deal-wise). v) Double Party D.P Note, if there is Guarantor, to be made by the client in favour of the Guarantor and endorsed by the latter in favour of the bank (Dealwise). vi) Joint and Several Party D.P Note signed by all the Directors in case of Limited Company (Deal-wise). vii) D.P Note Delivery Letter duly signed by the maker and the endorser (the client and the Guarantor). (Deal-wise)
Letter of Hypothecation for client’s stock in trade/work-in-process, if the investment allowed is additionally secured by Hypothecation of stock/stockin-trade. (Deal-wise). ix) Letter of Disclaimer, if the goods are stored in parties own/hired storage. x) Insurance policy (if the goods are stored in party’s storage/Yard under bank’s effective control). xi) Trust Receipt duly executed by the client if goods are delivered under TR (Delivery Order wise). xii) Balance Confirmation Letter (Deal-wise). xiii) Letter of Guarantee signed by the Guarantor as per terms of sanction (Dealwise). xiv) Letter of Installments, if sale price is payable on installments (Deal-wise). If the investment is made collaterally secured by mortgage of property, the branch shall obtain the following documents: i) In case of Equitable Mortgage, Memorandum of Deposit of Title Deed (MDTD) signed by the owner of the property. ii) In case of Legal Mortgage, Registered Mortgage Deed. iii) Personal Guarantee of the owner(s) of the property. iv) Original Title Deed(s) with CS, RS, SA, Mutation parcha, DCR of the property and Mutation record. v) Up-to-date Rent Receipts. vi) Non-encumbrance Certificate along-with search fee paid receipt. vii) Site plan (MAP/Naksha) of the proposed mortgaged property. viii) Valuation Certificate (issued by a competent Civil Engineer and physically verified by the branch officials) countersigned by the Manager certifying the market value and the forced sale value. Value of the Land and value of the construction to be shown separately taking the depreciable value of the construction/building into consideration as per standard norms. (Valuation certificate should be self contained giving full particulars of the land, i.e. dag/plot number, khatian number, holding number, mouza number and name of the mouza, schedule (chowhaddi), mentioning the name of the owner(s) of the land/building along with a site plan duly signed by the owner(s) of the property and the client and attested by a Civil Engineer and the Branch Manager). ix) Lawyer’s Certificate about verification of the Title Deed (the Lawyer should certify in clear terms that the property covered by the Title Deeds is free from all encumbrances and the same can be accepted as collateral security against the particular investment). Legal opinion should be self-contained and clean in all respects without any ambiguity. x) An affidavit sworn in before a 1st Class Magistrate by the owner of the property to the effect that the property offered for mortgage as security is free from all encumbrances and the owner(s) is/are lawful owner(s) in possession and he/she/they will not encumber/transfer/sale and/or charge the property in any manner whatsoever to others during the continuance of bank’s investment without prior written clearance of the bank. If the investment is secured by hypothecation of stocks-in-trade, machineries etc., the following documents should also be obtained: i) Letter of Hypothecation for client’s stocks-in-trade/work-in-process/stores/mills and machineries etc. ii) Trust Receipt.
Legal Mortgage of machineries with full details of each machinery in seriatim.
If the investment is collaterally/additionally secured by pledge of shares of reputed Public Limited Company on Bank’s approved list and quoted in the Stock Exchange, the branch shall obtain the following additional documents: i) Agreement for pledge of shares along with original Share Certificates (No share in the name of minor shall be accepted as security). ii) Share Transfer Deed in duplicate one copy signed dated and another copy signed but undated. iii) Share Delivery Letter addressed to the Bank. iv) Letter to the concerned Company to register Lien in Bank’s favor. This notice shall be sent by Registered Acknowledgement Due Post (Registered A/D post) and confirmation of recording the Lien shall be obtained from the concerned Company. v) Letter of Authority in Bank’s favor duly signed by the share holder to collect Dividend and Bonus on his behalf of the share pledged to the Bank. If investment is sanctioned to Partnership Firms, the branch must obtain the following documents: i) Letter of Partnership signed by all partners. ii) Copy of Partnership Deed duly attested by the Incumbent-in-charge of the Branch. In case of Investment to Private or Public Limited Company, the branch shall also obtain the following additional documents: i) Certified copy (duly certified by the Registrar of Joint Stock Companies and Firms) of the Memorandum and Articles of Association to ensure that the Company has necessary power to borrow/take investment from any Bank. ii) Resolution of the Board of Directors of the Company to do business and authorising the office bearers to execute necessary documents. iii) Personal Guarantee of all the Directors of the Company. iv) If the investment is on Hypothecation basis, in addition to other charge documents, the branch shall create 1st charge under relevant section of the Company’s Act-1994 in Bank’s favour in respect of Company’s Assets prescribed as security. This charge shall be created with the Registrar of Joint Stock Companies and Firms within 21 days from the date of execution of the relative Charge Documents. v) Certificate issued by the Registrar of Joint Stock Companies and Firms under section-114 of the Companies Act, 1994 in respect of creation of charges. vi) Copies of Memorandum and Articles of Association with latest amendments, if any, duly certified by the Registrar of Joint Stock Companies and Firms and attested by the Managing Director on every page with official seal of the Company and duly verified by the Branch Incumbent/Authorized Official. vii) A certified copy of Certificate of Incorporation. viii) A copy of Certificate of commencement of business in case of Public Limited Company. In case of investment to a Trust Organisation, the branch must obtain the following documents, in addition to other charge documents:
i) ii) iii) iv)
Copy of Trust Deed duly attested by a 1 st class gazetted officer and verified by the Incumbent-in-charge of the Branch with the original copy. The Trust Deed must have power to do business with Banks. Resolution of the Board of Trustees to do business with First Security Islami Bank Ltd. Charge documents shall be signed either by persons authorised by all members of the Trust Committee, if Trustees are authorised to delegate their powers by the Trust Deed or all of the Trustees. Personal Guarantee of all the office bearers of the Trust in their personal capacity.
In case of investment to Co-operative Society, the branch shall obtain the following documents also: i) Clearance from the Registrar of Co-operative Societies for doing business with First Security Islami Bank Ltd. ii) Letter to be issued to the concerned Registrar of Co-operative Societies under Registered A/D Mail informing about investment/facility to the concerned Society as per clearance accorded by him. iii) Personal Guarantee of the Office bearers of the Society in their personal capacity. iv) A copy of Bye-laws of the Society duly certified by the Registrar of the Cooperative Societies. Rates of Stamp Duty on various types of documents will be supplied by the concerned Department (Law Department) of the Head Office from time to time. Signature of the client on documents must be verified by the Incumbent-in-charge/Authorized Official of the Branch by a wooden lead pencil. The Investment Committee of the Branch should ensure that all the formalities of documentation have been properly done and completed strictly as per terms of the Sanction Advice. After completion of documentation, the branch shall enter the documents in Documents Execution Register, and put the same into an Envelope duly inscribing the name of the client deal-wise and preserve it in the Strong Room in Fire proof Safe/Almirah under Joint Custody of the Incumbent-in-charge of the Branch and the Officer-in-charge of the Investment Department. Movement of documents, if any, should be duly recorded in the â€œDocuments Ex-Custody Registerâ€? duly signed by the Custodians. HIRE PURCHASE UNDER SHIRKATUL MILK MEANING AND DEFINITION Hire Purchase under Shirkatul Milk (HPSM) is a special type of contract developed by Islamic Banks through practice. The mode is a combination of three Shariah approved contracts: Shirkat, Bai and Ijarah. A brief discussion on meanings and definitions of the three concepts will clarify what is really meant by Hire Purchase under Shirkatul Milk. Shirkatul Milk
a) Meaning: Shirkat means partnership; al-Milk means the ownership; Shirkatul Milk means share in the ownership. b) Definition : When two or more persons supply equity, purchase an asset/property (nonfungible goods), own the same jointly in proportion to their respective equity, share the benefit as per agreement and bear the risk in proportion to their respective ownership ratio, the contract is called a Shirkatul Milk Contract. Purchase (Bai) a) Meaning: Bai means buying and selling. b) Definition: Bai is a contract between a buyer and a seller under which the seller sells and transfers the ownership of certain goods asset/properties to the buyer in exchange for a fixed price paid by the buyer. OPERATIONAL PROCEDURE OF HIRE PURCHASE UNDER SHIRKATUL MILK The Modus Operandi of Hire Purchase under Shirkatul Milk will be as follows: Step One: Induction of Client 1. The Branch manager and officers concerned should search for and if found shall cordially receive the potential investment client. 2. The Branch shall exchange views about the business of the prospective client and assess his capability, experience, business needs etc. 3. The branch shall explain to the client the detail procedure of HPSM mode of investment and the terms and conditions under which the bank makes such investments. 4. And explain to him the various aspects of investment under Islamic Shariah principles. 5. On completion of the assessment of clientâ€™s capability, business experience, commitment and his business needs, if everything is found satisfactory, the branch shall request the client to open an Al-Wadiah current A/c and to operate the same satisfactorily at least for six months. 6. If not found satisfactory, the branch shall regret him politely. 7. On being satisfied with performance of the client, if the branch thinks it wise, will request him to submit a formal application for HPSM investment and provide him with an application form. STEP TWO : PREPARING APPLICATION 1. If the Investment proposal falls within the discretionary power of the Branch, they shall obtain only one copy of Application duly filled in and signed by the client.
2. Head Office Controlled Branches shall obtain Application from the client in Duplicate (One copy for Branch record and the other to be sent to Head Office. 3. Branches under Zone shall obtain Application from the client in Triplicate (one copy for Branch record and the rest two copies to be sent to Zonal Office duly recommended by the branch). 4. The Zonal Office shall retain one copy for their record and send the other copy to Head Office along with the Proposal and their opinion and recommendation. Scrutinize and entry of the Application of the client The concerned officer of the Branch shall scrutinize the application and ensure that: 1. All columns of the application are properly filled in; 2. Particulars and information given therein are complete and correct in all respects; 3. All required Documents/ Papers as listed in the footnote of the Application are submitted; 4. It is signed by the client as per specimen signature with the Bank and duly verified by the authorized Official of the Bank. 5. Attested photographs of the Proprietor(s), Partners, Directors, Trustees are affixed on the top right hand corner of the Application. After scrutinizing, if it is found satisfactory the concerned officer of the branch will enter the Application in the â€œInvestment Proposal Received and Disposal Registerâ€? and allot a Serial Number to it. STEP THREE: CATEGORIZATION HPSM investment proposals may be Categorizes as under the following way: 1. Hire Purchase under Shirkatul Milk Commercial Investment proposal for Commercial purpose(s) shall be termed as Hire Purchase under Shirkatul Milk Commercial (HPSM Commercial). 2. Hire Purchase under Shirkatul Milk Industrial Investment proposal for Industrial Land, Buildings, Machineries, Equipments, Transport etc. shall be called Hire Purchase under Shirkatul Milk Industrial (HPSM Industrial). 3. Hire Purchase under Shirkatul Milk Agriculture Investment proposal for Agricultural Equipments, Machineries, Shallow Tube-Well, Deep Tube-Well, Tractor, Trailers, Transport etc. shall be turned as Hire Purchase under Shirkatul Milk Agriculture (HPSM Agriculture). 4. Hire Purchase under Shirkatul Milk Transport Proposal for Investment on Transport- Bus, Truck, Car, Taxi, Launch, Steamer, Cargo Vessel, Air Transport etc. shall be called Hire Purchase under Shirkatul Milk Transport HPSM Transport). 5. Hire Purchase under Shirkatul Milk Real Estate Proposal for Investment on Land, Building, Market, Apartments, for use/rental shall be called Hire Purchase under Shirkatul Milk Real Estate (HPSM Real Estate).
STEP THREE: CATEGORIZATION HPSM investment proposals may be Categorizes as under the following way: 6. Hire Purchase under Shirkatul Milk Commercial Investment proposal for Commercial purpose(s) shall be termed as Hire Purchase under Shirkatul Milk Commercial (HPSM Commercial). 7. Hire Purchase under Shirkatul Milk Industrial Investment proposal for Industrial Land, Buildings, Machineries, Equipments, Transport etc. shall be called Hire Purchase under Shirkatul Milk Industrial (HPSM Industrial). 8. Hire Purchase under Shirkatul Milk AgricultureInvestment proposal for Agricultural Equipments, Machineries, Shallow Tube-Well, Deep Tube-Well, Tractor, Trailers, Transport etc. shall be turned as Hire Purchase under Shirkatul Milk Agriculture (HPSM Agriculture). 9. Hire Purchase under Shirkatul Milk Transport Proposal for Investment on TransportBus, Truck, Car, Taxi, Launch, Steamer, Cargo Vessel, Air Transport etc. shall be called Hire Purchase under Shirkatul Milk Transport HPSM Transport). 10. Hire Purchase under Shirkatul Milk Real EstateProposal for Investment on Land, Building, Market, Apartments, for use/rental shall be called Hire Purchase under Shirkatul Milk Real Estate (HPSM Real Estate). 11. Hire Purchase under Shirkatul Milk ………………. Schemes Investment proposal in the form of asset for use/rental under any scheme …………….. shall be turned as Hire Purchase under Shirkatul Milk ……………………. Scheme (HPSM Schemes). STEP FOUR : PROCESSING AND APPRAISAL 1. The branch shall examine Shariah Permissibility of the Goods and reject the proposal outright, if the goods are not permitted by Islamic Shariah. 2. The branch manager or concerned officer shall Check-up Credit Restriction Schedule of Bangladesh Bank and Current Investment Policy Guidelines of the Bank and reject proposal if it conflicts with the existing Credit Restrictions of Bangladesh Bank and Policy Guidelines. 3. Concerned officials of branch will visit the Business establishment of the client, Tally the Particulars, Information and Figures in the Application Form with the original Documents/ Papers and shall be sanguine about its genuineness and correctness. They shall also obtain additional information, particulars, facts and figures, if required. 4. They would have talk to the business and important personalities of the locality to ascertain the honesty, integrity and business dealings of the client.
5. The Branch shall obtain Confidential Report of the client from local Bank Branches and shall not finalize the proposal until the Confidential Report from all Bank Branches are received. Confidential Reports should also be obtained from local Financial, Credit and Leasing Institutions, if felt necessary. 6. Report from Credit Information Bureau (CIB) of Bangladesh Bank through Head Office Investment Division as per Instruction Circular of Head Office in this regard shall also be obtained by the branch. 7. The branch shall obtain declaration of the client about his liability (both contingent and real) with other Banks/Financial Institutions/Leasing Companies including any other Branches of First Security Islami Bank Ltd. 8. They shall obtain Financial Statement/Balance Sheet of the client for the last three consecutive years for Investment Proposals of Tk.50.00 lac or above or as per Head Office instruction. This is to be furnished by all clients irrespective of their status, i.e. Individual, Proprietorship, Partnership, Private/Public Limited Company, Trust Body etc. engaged in business. 9. Branch shall inspect Land, Building(s), other Assets and Properties proposed to be mortgaged or hypothecated. Ascertain Prima-facie genuineness and correctness of those in cross reference to documents, title deeds and other relevant papers. Ascertain primarily the market value and the forced sale value of the proposed collaterals. 10. The branch shall forward documents, title deeds and other relevant papers to the approved Lawyer of the Bank for examination and furnishing his opinion (Lawyerâ€™s opinion should be clean and without ambiguity). The concerned officer of the branch shall study the following carefully and note down the actual findings in the Appraisal Form against each item. a) b) c) d) e) f) g) h)
Whether the Asset, which the Client intends to hire and purchase, is readily useable and have constant and effective demand in the market. Whether the price of the asset is subject to frequent and violent changes. Whether the Asset is non-fungible or has flow of services. Whether the quality and other specifications of the asset as desired by the Client can be ensured. Whether the assets are available in the market and it is possible to purchase/construct/ manufacture/make the asset in time and at the negotiable price/cost. Whether rental and sale price of the assets are payable by the Client at the agreed specified future date(s) in lump sum or by installments as per proposal Whether Client and Bankâ€™s equity ratio is fixed to cover the price/cost of the asset. Whether the project/deal is profitable to generate sufficient fund to pay the rent/sale price by the Client within the deal period.
Market price and Cost price should be carefully studied by the Investment Committee of the Branch and properly recorded, verified and signed. In course of preparation of the Appraisal Report the branch shall ensure incorporation of all information, particulars, figures and statistics in Appraisal Form correctly with special attention to the following:
a) b) c) d) e) f)
Composition of Assets of the Client viz. Cash, Securities, Investments, Building, Landed Property, Stock in Trade, Stores, Work-in-process etc. Extent and nature of liabilities (institutional/market) of the Client i.e. whether the volume is within the manageable capacity of the Client. Opinion in this regard and justification thereof must be clearly mentioned. The value of liquid Assets viz. Cash and Book Debts of the Client to ensure required cash flow. Respectability and business reputation of the Client in the market. Experience of the Client in the business, management capability etc. Where the Asset will be kept/run/established/constructed/installed and how the same will be used. Whether the arrangement is satisfactory and Bankâ€™s interest will be protected properly.
STEP FIVE: SANCTION a)
If on completion of the appraisal, the proposal is found viable, the branch shall sanction and issue sanction advice if it is within the business power of the branch mentioning all the terms and conditions in duplicate. One copy shall be retained by the client and the other copy shall be returned to the branch by the client duly accepted by him all the terms and conditions. The branch shall also endorse copies to Zonal and Head Offices retaining one copy in the clientâ€™s file duly accepted by the client. b) The branch shall forward the proposal with Appraisal Report if it is not within their Discretionary Power to Zonal Office in duplicate together with all required documents and papers giving specific comments and recommendations. c) Zonal Office shall accord approval/regret the proposal. d) If the proposal is beyond the business power of the Branch and the Zone, the Branch shall forward the proposal to Head Office with their views and recommendations through the Zone. e) Head Office will either approve or regret. f) On receipt of approval from the Zonal Office/Head Office, the branch shall issue the sanction advice mentioning all the terms and conditions in duplicate to the client. But if the proposal is regretted by the Zone/Head Office, the branch shall intimate the client of the same politely. g) On receipt of the Sanction letter, if the client duly accepts the sanction terms and conditions, the branch shall enter the particulars of the sanctioned proposal in the Limit Register allotting a fixed serial number for each client as per Limit Register which shall remain permanent irrespective of the Mode(s) so long as the limit remains valid and the client continues business with the Bank. h) The branch shall open file client-wise affixing the fixed number allotted to him/her as per Limit Register and clientâ€™s name, address (Business address, present address, permanent address, residential address) and Telephone/Fax/Telex/Cable numbers be recorded prominently in the inner side of the Investment File for easy tracing in case of need. i) It may be noted that, the Branch Manager or the Zonal Head shall have no power to sanction investment to the Trust Organization or Co-operative Societies. j) The branch shall obtain required papers, documents/application with the past performances and outstanding liabilities of the client, if any of the existing investment client process/sanction the proposal as per instruction laid down here-in-above after due evaluation/study.
STEP SIX: DOCUMENTATION Before purchasing the asset/property/by the Bank, the branch shall obtain sufficient collateral securities as mentioned in the sanction advice along-with the following charge documents properly executed, i.e. duly filled in, signed, stamped, verified and witnessed, where necessary: i)
Hire Purchase under Shirkatul Milk (HPSM) Sanction Advice deal-wise duly accepted by the client.
ii) Hire Purchase under Shirkatul Milk (HPSM) Agreement (Deal-wise). iii) Letter of Pledge (Deal-wise)/Mortgage Deed. iv) Single Party D.P Note, if there is no Guarantor. v)
Double Party D.P Note, if there is Guarantor(s), to be made by the Client in favor of the Guarantor and endorsed by the later to the Bank.
vi) D.P Note Delivery Letter. vii)Letter of Hypothecation for the asset(s) and Client’s Stock in Trade/Work-in-Process. viii) ix)
Letter of Disclaimer, if stored in Client’s/ Party’s own/hired storage. Insurance Policy (if stored in Client’s/Party’s Storage /Yard under Bank’s effective control) duly recorded in Insurance Register.
x) Letter of Guarantee signed by the Guarantor as per terms of sanction. xi) Balance Confirmation Letter. xii)Letter of Installments. xiii)
Letter of Disbursement.
If the investment is made collaterally secured by mortgage of property, obtain the following documents: i)
In case of Equitable Mortgage, Memorandum of Deposit of Title Deed (MDTD) signed by the owner of the property.
ii) In case of Legal Mortgage, Registered Mortgage Deed should be obtained. iii) Personal Guarantee of the owner(s) of the property. iv)
Original Title Deed(s) with CS, RS, SA, Mutation parcha, DCR of the property and Mutation record.
v) Up-to-date Rent Receipt. vi)
Non encumbrance Certificate along-with Search Fee Paid Receipt of the concerned Registry/Sub-Registry Office.
vii)Site plan (MAP/Naksha) of the proposed Mortgaged Property. viii)
Valuation Certificate (issued by a competent Civil Engineer and physically verified by the Branch Officials) countersigned by the Manager certifying the Market value and the Forced sale value. Value of the Land and value of the construction to be shown separately taking the depreciated value of the construction/building into consideration as per standard norms. (The Valuation Certificate should be self contained one giving full particulars of the land, i.e. Dag Number, Khatian Number, Plot Number, Holding Number, Mouza Number and name of the Mouza, Schedule (Chowhaddi), mentioning the name of the owner(s) of the Land/Building along with a Site Plan duly signed by the owner(s) of the Property, the Client and attested by a Civil Engineer and the Branch Manager).
Lawyer’s certificate about verification of the Title Deed, which should be in clear terms that the property covered by the Title Deeds is free from all encumbrances and the mortgagor(s) have clear valued Title to the property and the same can be accepted as collateral security against the Investment/Facility. Legal opinion should be selfcontained, without any ambiguity and clean in all respects.
An Affidavit be sworn in before a 1st Class Magistrate by the owner of the property to the effect that the property offered for mortgage as security is of his own and free from all encumbrances and the owner(s) is/are lawful owner(s) in possession and he/she/they will not Encumber/Transfer/Sale and/or Charge the property in any manner whatsoever to others during the continuance of Bank’s Investment without prior clearance of the Bank.
Where the Investment is secured by pledge/hypothecation of Stock-in-Trade, Machineries etc., also obtain the following Documents: i)
Letter of Pledge for pledged asset and goods security, for Client’s Stocks-inTrade/Work-in-Process etc. if any.
ii) Letter of Hypothecation for Client’s Stocks, Stores, Work-in- Process etc. iii) Legal Mortgage of machineries with full details of each Machinery. In case the Investment is Collaterally/Additionally secured by Pledge of Shares of reputed Public Limited Company on Bank’s approved list and quoted in the Stock Exchange, the following additional Documents are to be obtained: i)
Agreement for Pledge of Shares along with original Share Certificates (No share in the name of minor shall be accepted as security).
Blank Share Transfer Deed in duplicate- one copy signed, dated and another copy signed and undated.
Share Delivery Letter addressed to the Bank.
Letter to the concerned Company to register Lien in Bank’s favour. This notice shall be sent by Registered Acknowledgement Due Post (Registered A/D post) and confirmation of recording the Lien shall be obtained from the concerned Company.
Letter of Authority in Bank’s favour duly signed by the Share holder to collect Dividend/ Bonus on his behalf on the Share Pledged to the Bank.
In case of Investment to Partnership Firms, obtain the following Documents: i) Copy of Partnership Deed signed by all partners. ii) Copy of Partnership Deed duly attested by a 1 st Class Gazetted Officer with the original copy and attested by the Incumbent-in-charge of the Branch. In case of Investment to Private or Public Limited Company, obtain the following additional Documents: i) Obtain certified copy of the Memorandum and Articles of Association of the Company (duly certified by the Registrar of Joint Stock Companies & Firms) to ensure that the company has necessary power to borrow/avail investment from any Bank. ii) Resolution of the Board of Directors of the Company to avail Investment/Facility/ Borrow, do business with First Security Islami Bank Limited and authorising the office bearers to execute necessary documents. iii) Personal Guarantee of all the Directors of the Company. iv) If the Investment is allowed on Hypothecation of assets, in addition to other Charge Documents, 1st charge under relevant section of the Company’s Act-1994 shall be created in Bank’s favour in respect of Company’s Assets prescribed as security. This charge shall be created with the Registrar of Joint Stock Companies within 21 days from the date of execution of the relative Charge Documents. v) Certificate issued by the Registrar of Joint Stock Companies under section-114 of the Companies Act-1994 in respect of creation of charges. vi) Copies of Memorandum and Articles of Association with the latest amendments, if any, duly certified by the Registrar of Joint Stock Companies and attested by the Managing Director on every page with official seal of the Company duly verified by the Incumbentin-Charge of the Branch. vii)A copy of the Certificate of Incorporation duly attested by the Incumbent-in-Charge of the Branch. viii) A copy of Certificate of Commencement of Business (in case of Public Limited Company) duly attested by the Incumbent-in-Charge of the Branch.
In case of investment to a Trust Organization obtain the following Documents in addition to other Charge Documents: i) Copy of Trust Deed duly attested by a 1 st Class Gazetted Officer and verified by the Incumbent-in-Charge of the Branch with the original copy. The Trust Deed must contain a clause authorizing the Trustees to do business with Banks and to avail Investment/ facilities/borrow from Banks. ii) Resolution of the Board of Trustees to do business with First Security Islami Bank Ltd. and avail investment/facilities/borrow from First Security Islami Bank Ltd. iii) The Charge Documents and all other agreements shall be signed/executed by persons authorized by all the Members of the Board of Trustees, if Trustees are authorized to delegate their powers by the Trust Deed. Otherwise all of the Trustees must sign/execute the charge documents and all other agreements. iv) Personal Guarantee of all the members of the Board of Trustees must be obtained. In case of Investment to Co-operative Society, obtain the following Documents also: i) Clearance from the Registrar of Co-operative Societies for doing business and avail Facilities/Investment from First Security Islami Bank Ltd. within the annual borrowing limit of the Society. ii) Letter to be issued to the concerned Registrar of Co-operative Societies under Registered A/D Mail informing about Bankâ€™s allowing Investment/Facility to the concerned Society by the Bank as per clearance accorded by him. iii) Personal Guarantee of the Office Bearers of the Society in their personal capacity. iv) A copy of the Bye-Laws of the Society duly certified by the Registrar of the Co-operative Societies. BAI-SALAM Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship. Basic features and conditions of Salam 1. The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party, an act prohibited under Sharia. The idea of Salam is to provide a mechanism that ensures that the seller has the liquidity they expected from entering
into the transaction in the first place. If the price were not paid in full, the basic purpose of the transaction would have been defeated. Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam, because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible. Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain. It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned. It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa. The exact date and place of delivery must be specified in the contract. Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.
Practical steps of the Salam sale: 1. Cash sale and or sale on credit: The bank pays the agreed upon price at the time of the contractâ€™s inception. The seller agrees to deliver the commodity at the specific date in the future. 2. Delivery and receipt of the commodity on the specific due date: there are several options for delivery available to the bank: a) The bank may receive the commodity and resale it to another party for cash of credit. b) The bank may authorize the seller to find another buyer for the commodity. c) The bank may direct the seller to deliver the commodity directly to a third party with whom the banks have entered into another agreement. 3. The sale contract: The bank agrees to sell the commodity for cash for a deferred price which is higher than the salam purchase price. The buyer agrees to purchase and to pay the price according to the agreement. Application of Bai-Salam Salam sales are frequently used to finance the agricultural industry. Banks advance cash to farmers at the time of contract for delivery of the crop during the harvest seasons.
Salam sale is also used to finance commercial and industrials 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 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 delivery of products at some future date. Thus, as has been demonstrated, the salam sale is useful in providing financing for a variety of clients, including farmers, industrialists, contractors, and traders. Quard Quard is borrow money from someone with an agreement that borrower will repay the money as he/she borrowed (without any interest). Islamic Bank provide their customer quard facility against their deposit receipt & Monthly deposit for short term, where Bank & customer has an agreement that quard receiver will not give any interest to bank at the same time bank will provide any profit of the customerâ€™s deposited money. Since Islamic bank is not run interest basis, therefore any sort interest (additional money) transaction is highly prohibited. Operational Procedure of Quard Step 1 Application from quard receiver with specified Form and fill up CIB form properly and collect clean CIB report for Bangladesh Bank. Step 2 Lien mark of the MTDR (Mudarabaha Term Deposit Receipt) or MMBS( Mudarabaha monthly Benefit Scheme) for which against quard will provide. And keep in bankâ€™s safe custody. Step 3 Prepare Sanction advice and one of the copy of sanction advice will signed by quard receiver, keep it as document. Step 4 Documentation: Following document should be signed by quard receiver and keep it under bank custody as charge document. 1. Quard Sanction Advice as per duly accepted by the client. 2. Agreement for pledge of goods (Deal-wise). 3. Single Party D.P Note, if there is no Guarantor, (Deal-wise). 4. Double Party D.P Note, if there is Guarantor, to be made by the client in favor of the Guarantor and endorsed by the latter in favor of the bank (Deal-wise). 5. Joint and Several Party D.P Note signed by all the Directors in case of Limited Company (Deal-wise). 6. D.P Note Delivery Letter duly signed by the maker and the endorser (the client and the Guarantor). (Deal-wise) 7. Letter of Hypothecation for clientâ€™s stock in trade/work-in-process, if the investment allowed is additionally secured by Hypothecation of stock/stock-in-trade. (Deal-wise). 8. Letter of Disclaimer, if the goods are stored in parties own/hired go down.
9. Insurance policy (if the goods are stored in party’s go down/Yard under bank’s effective control). 10. Trust Receipt duly executed by the client if goods are delivered under TR (Delivery Order wise). 11. Balance Confirmation Letter (Deal-wise). 12. Letter of Guarantee signed by the Guarantor as per terms of sanction (Deal-wise) Musharaka The literal meaning of the word Musharaka is sharing. Under Islamic law, Musharaka refers to a joint partnership where two or more persons combine either their capital or labor, forming a business in which all partners share the profit according to a specific ratio, while the loss is shared according to the ratio of the contribution (Usmani, M.I. 2002, p.87). It is based on a mutual contract, and, therefore, it needs to have the following features to enable it to be valid: • •
Parties should be capable of entering into a contract (that is, they should be of legal age). The contract must take place with the free consent of the parties (without any duress).
In Musharaka, every partner has a right to take part in the management, and to work for it (Gafoor 1996). However, the partners may agree upon a condition where the management is carried out by one of them, and no other partner works for the Musharaka. In such a case the "sleeping" (silent) partner shall be entitled to the profit only to the extent of his investment, and the ratio of profit allocated to him should not exceed the relative size of his investment in the business. However, if all the partners agree to work for the joint venture, each one of them shall be treated as the agent of the other in all matters of business, and work done by any of them in the normal course of business shall be deemed as being authorized by all partners (Usmani, M.I. 2002, p.92). Musharaka can take the form of an unlimited, unrestricted, and equal partnership in which the partners enjoy complete equality in the areas of capital, management, and right of disposition. Each partner is both the agent and guarantor of the other. Another more limited investment partnership is also available. This type of partnership occurs when two or more parties contribute to a capital fund, either with money, contributions in kind, or labor. Each partner is only the agent and not the guarantor of his partner. For both forms, the partners share profits in an agreed upon manner and bear losses in proportion to the size of their capital contributions (Lewis & Algaoud 2001, p. 43). ‘Interest’ predetermines a fixed rate of return on a loan advanced by the financier irrespective of the profit earned or loss suffered by the debtor, while Musharaka does not envisage a fixed rate of return. Rather, the return in Musharaka is based on the actual profit earned by the joint venture. The presence of risk in Musharaka makes it acceptable as an Islamic financing instrument. The financier in an interest-bearing loan cannot suffer loss, while the financier in Musharaka can suffer loss if the joint venture fails to produce fruits (Usmani, M.T. 1998, p. 27).
Musharaka In Home Financing When used in home financing, Musharaka is applied as a diminishing partnership. In home financing, the customer forms a partnership with the financial institution for the purchase of a property (Saeed 2001). The financial institution rents out their part of the property to the client and receives compensation in the form of rent, which is based on a mutually agreed fair market value. Any amount paid above the rental value increases the share of the customer in the property and reduces the share of the financial institution. The application of diminishing Musharaka in home financing can be illustrated with the help of the following example, which the LaRiba bank in the U.S. follows: Let us assume that a potential buyer is interested in purchasing a home worth $150,000. The buyer approaches an Islamic financial institution for the purchase of the property and puts 20 per cent of the price ($30,000) as down payment (the down payment required differs between financial institutions. In some cases it is as low as 5 percent). The financial institution pays for the other 80 per cent of the price ($120,000). This agreement results in 20 per cent of the home ownership belonging to the client and the remaining 80 percent to the financial institution. The next step for both parties would be to determine the fair rental value for the property. One way to determine the rental value is for both the client and financial institution to survey the market to obtain estimates for similar properties in the same neighborhood and negotiate an agreement. This fair rental value will remain constant over the life of the agreement. For this example, we will assume $1,000 per month as the rental value. A rental value of $1,000 means that the client will pay $800 as rent for the 80 per cent share the financial institution holds. The two parties then agree on the period of financing. In this example we will assume that the financing period is 15 years (180 months). Based on the rental value and the financing period, the financial institution then determines the fixed monthly payments the client would have to make to own the house. Table 5(a): Example of payment schedule for a home-loan under Musharaka is given belowExtra Payment Total Fixed Month Rent $ $ Payments $ Bank's Ownership $ Opening 120,000 1 800 347 1147 119,653 2 798 349 1147 119,304 … …… ….. ….. …… 176 37 1110 1147 4,439 177 30 1117 1147 3,322 178 22 1125 1147 2,197 179 15 1132 1147 1,065 180 7 1065 1072 0
In this example the client starts by paying $1147, which includes the required 80% of the $1,000, and extra payment of $347. By doing so the client reduces the share of the financial institution by $347, and increases their own share by the same amount. The next monthâ€™s rental payment of the client would be reduced to $798, and again the payment made above the rent amount will result in an increase in the clientâ€™s ownership of the property. This continues on till the client buys back all the shares of the home that the financial institution holds at the end of the agreed financing period. This example does not take into account fees and charges that the financial institution may charge such as insurance and taxes. In the event of non-payment of rent from the client, the financial institution has to take into consideration the reason for the non-payment. If the client has a valid excuse for nonpayment, the financial institution has to show leniency so that the client does not feel overburdened, and the client should give more time to make the payment. In theory, if the financial institution charges any extra amount as compensation for the late payment, the amount would be considered as interest and therefore is not permitted in Islam. If there is no genuine reason for the late payment, the financial institution can ask the client to make a payment to a charity as penalty (Usmani, M.T. 1998, p.172). This prohibition of charging late fees makes it even more important for Islamic financial institutions to carefully evaluate each application before entering into an agreement. Criticism of Musharaka Musharaka is sometimes criticized as being an old instrument that cannot be applied in the modern world. However, this criticism is unjustified. Islam has not prescribed a specific form or procedure for Musharaka. Rather it has set some broad principles which can accommodate numerous forms and procedures (Usmani, M.T. 1998, p.29). A new form or procedure in Musharaka that would make it suitable for modern financial needs cannot be rejected merely because it has no precedent in the past. In fact, every new form can be acceptable as long as it conforms to the principles laid down by Shariâ€™ah. Therefore, it is not necessary that Musharaka be implemented only in its traditional form (Usmani, M.T. 1998, p.30). Another criticism leveled against Musharaka is based upon the issue of profits being guaranteed by some financial institutions. Even though Musharaka is considered to be the most authentic form of Islamic financing, the risk associated with sharing losses means that it is not as popular as the other modes. To make the product more appealing to the customer, some financial institutions have started guaranteeing profits in Musharaka. By doing so, these institutions are contravening the basic law of Islamic finance that requires linking rewards to risks (Warde 2000, p.5). If profits are guaranteed, the risk factor is eliminated, making the profit resemble interest. Although these actions may help Islamic banks grow in the shortrun, the long-term costs (harm to reputation and authenticity) will outweigh the benefits. Such moves also provide ammunition to the critics of the system, who are already questioning whether the system is nothing more than an interest-based system operating under the guise of profit (The Economist 1994). Findings & Recommendation Findings:
1. First Security Islami Bank Ltd. Momentum Gather on its performance after weak image by establishing its quality services & wider operations specially in financing area both in SME & Corporate Finance. 2. Islamic Banking operation runs on profit loss sharing basis which needed real knowledge on Islamic philosophy and Islamic economy, but First Security Islami Bank Ltd. Just started its business on shariah based from 2009, therefore they have to face number of problems in operation, although they have improved their service from the on job experiment. 3. FSIBL have started its operation as an Islamic bank with the previous executives & staff, therefore they take time to acquaintance with shariah related rules & regulation. 4. Human resources are not as much efficient as needed for improvement of the service. 5. Islamic Economy is required to execute real islami banking practice; Bangladesh economy does not cover real practice of islami banking. 6. Profit Loss Sharing based Banking does not have the chance to bankruptcy of one party but it must be compile properly. 7. Investment system of First Security Islami Bank Ltd. has highly time consuming from the borrower perspective to hamper their operation.( from application to disbursement has time consuming ) 8. First Security Islami Bank Ltd. is not well acquainted by the community due to proper advertisement & focus. 9. Significant thing is that FSIBL perform its operation robustly. For example last year they have opened 25 branches successfully & operating profit have also increased by 3 times. 10. Sequential working process is clumsy & time consuming, sometime it may dissatisfy the customer. 11. Investment rules& regulations are not so much flexible. Borrowers are not highly familiar with Islamic to be one of the most authentic forms of Shariâ€™ah approved financing. Recommendations Strategies have to be carefully devised so that the image of Islamic character and solvency as a bank is simultaneously promoted. The following policy actions are suggested for immediate application: 1. Islamic banks should clearly demonstrate by their actions that their banking practices
are not guided merely by profitability criterion. They must also establish that their practices ensure efficient allocation of resources and provide true market signals through PLS modes.
2. Islamic banks should continuously monitor and disseminate through various means the
impact of their operations on the distribution of income primarily between the bank and the other two parties: the depositors and the entrepreneurs, and then on different income groups of the society. These presuppose the establishment of a fully equipped research academy in each Islamic bank. 3. The Islamic banks can improve their allocated efficiency by satisfying social welfare
conditions in the following manner. Firstly, they should allocate a reasonable portion of their available funds to social priority sectors such as agriculture (including poultry and fishery), MSME (micro, small and medium enterprises) sector, and export-led industries like garments, shrimp cultivation etc. Secondly, when the percentage shares of allocation of available funds are determined among the sectors of investment financing, profitability of projects should be the criterion for allocating investment funds. The criterion would be best satisfied if more and more projects were financed under PLS modes. 4. It is assumed that in the face of competition with interest-based institutions, a critical
initial mass of the hybrid type is necessary not only for the survival but also ensuring efficiency of the PLS in a heterogeneous environment. The recent financial innovations may be tried to suit the need of the integrated global Islamic financial markets. 5. Islamic ethics supports a poverty-alleviation strategy that is based on the principle of
promoting economic growth with productive equity. Islamic banks should act as 'Banks for Enriching the Poor' (or as Rural Poor Bank and Urban Poor Bank), because the current collateral-based system for efficiently financing business/projects kicks the poor out of participation in economic activities. Banning interest should have the illuminating effect of allowing greater access by population to finance, and hence lead to a better income distribution, the ultimate objective of the glorious Shariah. 6. It may be mentioned that if the Islamic financial system is to become truly liquid and
efficient, it must develop more standardized and universally (or at least widely) tradable financial instruments. The development of a secondary financial market for Islamic financial products is crucial if the industry is to achieve true comparison with the conventional system. 7. It must also work hard to develop more transparency in financial reporting and accounting. Development in the wholesale and especially inter-bank money markets will be the key to Islamic finance growing outside its current little sphere of influence, and becoming a truly robust and dynamic banking system alongside the traditional system. 6. Since First Security Islami Bank Ltd. has improved its service quality tremendously therefore it must continue to ensure more quality services. 7. Since 90% populations of Bangladesh are Muslim, therefore it is easier to make understand the real Islamic banking system to the community. First Security Islami Bank Ltd. can get the chance to make understand islami banking practice to the community. 8. Human Resources are the key recourses for any service organization, but unfortunately skilled, knowledgeable efficient banker are too few, FSIBL should concentrate human resource development training, seminar, symposium & information sharing practice
should be started by FSBIL. Training can be practiced in two ways a) On the job training b) Off the job training. 9. Since Bangladesh economy is not Islamic economy, therefore customer are not familiar with the policy & procedure of Islamic banking. As an Islamic Bank First Security Islamic Bank Ltd. can pursue regulatory authority & people of Bangladesh to create Islami economy. 10. Investment policy & procedure should be flexible, easier & understandable so that business people can understand and cope up with that. 11. Investment processing time should be reduced so that businessmen can avail the real business opportunity. 12. Information regarding the organization is most important thing for proper growth of an organization; First Security Islami Bank Ltd. should take effective & efficient measure to publicize their information with using proper media & other means. 13. In current digital world, website is an important tool for highlighting oneself, but website of First Security Islami Bank Ltd. does not contain sufficient information by which it may represent itself. 14. With increasing number of branch, it has a chance to decrease the quality service; top level management should concentrate regarding that matter. Conclusion The history of organized Islamic banking system is not too long. Therefore, conventional banking modes of finance cover almost all the aspect of financing area. In order to compete with conventional modes of financing (interest based financial instrument) islamic financial institutions have to developed their product which will fulfill the shariahâ€™s obligation and provide greater value than conventional mode of finance. One of the main selling points of Islamic banking, at least in theory, is that, unlike conventional banking, it is concerned about the viability of the project and the profitability of the operation but not the size of the collateral. Good projects which might be turned down by conventional banks for lack of collateral would be financed by Islamic banks on a profitsharing basis. It is especially in this sense that Islamic banks can play a catalytic role in stimulating economic development. Islamic banks are expected to be more enterprising than their conventional counterparts. In practice, however, Islamic banks have been concentrating on short-term trade finance which is the least risky. Part of the explanation is that long-term financing requires expertise which is not always available. Another reason is that there are no back-up institutional structures such as secondary capital markets for Islamic financial instruments. It is possible also that the tendency to concentrate on short-term financing reflects the early years of operation: it is easier to administer, less risky, and the returns are quicker. The banks may learn to pay more attention to equity financing as they grow older. It is sometimes suggested that Islamic banks are rather complacent. They tend to behave as though they had a captive market in the Muslim masses who will come to them on religious
grounds. This complacency seems more pronounced in countries with only one Islamic bank. Many Muslims find it more convenient to deal with conventional banks and have no qualms about shifting their deposits between Islamic banks and conventional ones depending on which bank offers a better return. This might suggest a case for more Islamic banks in those countries as it would force the banks to be more innovative and competitive. Another solution would be to allow the conventional banks to undertake equity financing and/or to operate Islamic ‘counters’ or ‘windows’, subject to strict compliance with the Shariah rules. It is perhaps not too wild a proposition to suggest that there is a need for specialized Islamic financial institutions such as Mudaraba banks, Murabaha banks and Musharaka banks which would compete with one another to provide the best possible services. Recognizing the problem that some financing instruments used by Islamic financial institution closely resemble interest-bearing instruments, Muslim scholars have voiced their opinion that more profit-and-loss sharing instruments should be developed and used. In recent times there have also been calls for Muslim countries to follow the lead of Iran and Pakistan, where their governments have enforced the Islamic financial system as the only available finance option. One of the major pillars required to be put in the place in order to strengthen both international and domestic financial system is; to develop a uniform supervisory and regulatory frameworks which are consistent with internationally accepted practices for banks and non-banks financial entities. Organizations such as Islamic Development Bank can play a major role in the development of Islamic banks and the essential dissemination of information on the above issues to its global membership. Strategies have to be carefully devised so that the image of Islamic character and solvency as a bank is simultaneously promoted. Pilot schemes in some selected areas should be started to test innovative ideas with profit-loss-sharing modes of financing as major component. This type of scheme may be experimented both in urban and rural areas. This endeavor will serve as a ready reference that Islamic banks are in the process of transforming themselves as PLS banks. Side by side, they will gain experience from real situation as to the problems that might come up while implementing profit-loss-sharing modes on trial and error basis.