“A STUDY ON PRODUCT SERVICES OF ISLAMI BANK BANGLADESH LIMITED”
1.3 OBJECTIVE OF THE STUDY
There are mainly two objectives behind the preparation of this report such as primary objectives and secondary objectives. These are discussed as under:
Secondary Objective: The secondary objectives of this report are as below:
- To make a bridge between the gap of theoretical and practical knowledge.
- To have an overall idea about Islamic Banking System that is based on Al-Quran and Sunnah.
- To know about the interest free Banking System within the Islamic Shariah and how it could be processed.
The word methods come from the Greek words ‘Meta’ and ‘hoods’ meaning a way (Geddie, 1965). Broadly, a method or methodology is “The underlying principles and rules of organization of a philosophical system of inquiry procedure” (Urdong, 1968). A method involves a process or technique in which various stages or steps of collecting data/ information are explained and the analytical techniques are defined. A dictionary of social sciences observes, “Methodology is the systematic and logical study of the principles guiding scientific investigation” (Gould and Kolb, 1964). In sample a method is the way of doing something.
For collaborating the data and information collected through primary and secondary sources we have used both qualitative and quantitative method, which contains the past, present, and future situation of “Islamic Bank Bangladesh Limited”. During this study we followed some methodology to find out the fact and feature of the Bank.
Source of Data/ Information:
I have collected my information/data from the following sources, which helped me to make this report. The source can divide into two parts. Such as-
- Primary source and
- Secondary source
I used both the sources.
Primary sources include interviews and conversation with officers and executives of the Bank of different divisions and departments.
Secondary sources of information include annual report, general report, project profile, journals, periodicals, Bank manual, selected books and other publications etc.
Analysis of data:
Two approaches have been mainly used in this report.
· Conceptual Approach
· Empirical Approach
These two approaches are discussed below:
A theoretical section is given in this report (i.e. the organization part) to give an insight to the various information concerning the financial function. It is given in relevance with the organization in context i.e. Islamic Bank Bangladesh Limited. A background of IBBL is given to facilitate the understanding of this report. Every single portion is discussed in order to understand the empirical section.
Empirical Approach: This refers to the information that has been directly collected and interpreted from the survey of Islamic Bank Bangladesh Limited. The report is prepared by interviewing the officials of IBBL. The reports of IBBL and documents are also been to do.
1.5 LIMITATIONS OF THE STUDY
The officers are very co-operative but they are too busy to give me time to get knowledge about practical activities. Moreover they have to deal in a very competitive environment based on money related activities. That has to prepare this report alone.
Every task has some limitations. Faced some usual constraints during the course of my internship. These are as follows:
Short of time:
Had to complete this report writing within a shorter period of time since many days have passed during the training session. So the time constraint of the study hindering the course of vast area and time for preparing a report within the mentioned period is really difficult.
Busy working environment:
The officials had some times been unable to provide information because of their huge routine work.
Lack of sufficient well informed officials:
Many officials of the branch are not well informed about different systems of IBBL. They know but less.
2.0 OVERVIEW OF IBBL
2.1 IBBL AT A GLANCE
Islami Bank Bangladesh Limited (IBBL) was incorporated on 13.3.1983 as a Public Company with limited liability under the Companies Act. 1913. The bank started functioning with effect from 30.3.1983. IBBL is the first private sector Islamic bank in South-east Asia. The establishment of this bank ushered a new era in Bangladesh, the 3rd largest Muslim country of the world. The bank is committed to run all its activities based on Islamic Shariah. IBBL through its steady progress and continued success has, by now, earned the reputation of being one of the leading private sector banks of the country
(As on 31st October 2007)
Date of incorporation :13th March 1983
Inauguration of 1st Branch :30th March 1983
Local office, Dhaka
(the then main branch)
Formal inauguration :12th August 1983
Authorized capital :Tk.5000.00 million
Paid up capital :Tk.3801.60 million
Share of capital:
a. Local shareholders :42.63%
b. Foreign shareholders :57.37%
Equity :Tk.12135.11 million
Deposit :Tk164032.00 million
Investment :Tk.167523.00 million
Foreign Exchange business :Tk.221790.00 million
Number of shareholders :2371
· Securities Trading Department (Proposed): The Board of Directorsof IBBL in its emergent meeting held on 20 August 2006 decided to purchase the membership of Dhaka Stock Exchange accordingly a membership of DSE was purchased on 27 December 2006 at a cost of Tk. 23603339. Permission from SEC was obtained on 23 May 2007. Securities Trading Department or brokerage house of IBBL has started its operation on 01 January 2008. Dial up connection with DSE was installed and two traders have been working with two trading work stations for the purpose of trading of shares and securities.
· Depository Participants: IBBL obtained custodian DP license on 21 August 2006 and inaugurate the custodian DP on 19 July 2007. Full service DP license was received from the SEC on 13 December 2007.
· Mudaraba Perpetual Bond: The board of directors of the bank in its emergent meeting held on December 28 2006 decided to issue mudaraba perpetual bond for Tk.3000 million which was also approved in Annual General Meeting held on February 23 , 2007. Permission of which already been accorded from Bangladesh Bank on May 7, 2006. The SEC consented to issue of MPB on 10.07.2007 through private placement for Tk. 1,500 million and through repeat public offer of Tk. 1,500 million.
2.2 VISION OF IBBL
The vision of Islami Bank Bangladesh limited is to strive to achieve superior financial performance be considered a leading Islamic bank by reputation and performance.
- To establish and maintain the modern banking techniques
- To ensure the soundness and development of the financial system based on Islamic principles and to become the strong and efficient organization with highly motivated professionals, working for the benefit of people, based upon
- Accountability, transparency and integrity in order to ensure stability of financial systems.
- O encourages savings in the form of direct investment.
- To encourage investment particularly in projects which are more likely to lead higher employment.
2.3 MISSION OF IBBL
To establish Islamic banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the field of all economic activities , achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less developed areas of the country. To encourage socio-economic uplift and financial services to the low income community particularly in the rural areas.
2.5 ORGANOGRAM OF IBBL
Board of Directors Shariah Council
2.6 SHARIAH COUNCIL OF IBBL
Shariah Council of the bank is playing a vital role in guiding and supervising the implementation and compliance of Islamic shariah principles in all activities of the bank since its very inception. The council which enjoys a high status in the structure of the bank. The main components of Islamic shariah are Quran and Sunnah or Hadit. A shariah supervisory board is an independent body of specialized jurists in fiqh almuamalat. An Islamic bank does not only has to have a board of directors but it also has to have a advisory board. The Murakibs supervise the activities of the bank whether it is doing its activities according to shariah and if found any fault they inform the member of shariah supervisory board . Shariah supervisory board to be appointed by the share holders in their annual general meeting upon the recommendation of the board of directors. The Shariah Council of Islami Bank generally consists of experts from the following four areas:
1. Fuqaha: Persons representing this group must be well versed in the Quran, Sunnah and fully conversant with the opinion of all schools of Islami thought and Islami law and jurisprudence. They must view Islam as a total way of life and a living religion.
2. Banker: There must be a member who is fully conversant with banking laws and practices and has practical experiences in Banking business including foreign trade.
3. Economist: A member from this group need not necessarily be an Islami economist to start with. But if he is an Islami Economist it is an added advantage. What is important is that he must be really proficient in modern economics with an in depth study of the community, which a
4. Lawyer: A member representing this group should be a successful practitioner lawyer. He must be proficient in commercial law including company law.
2.7 SALIENT FEATURES OF IBBL
The bank is committed to run all its activities as per Islamic Shariah. IBBL through its steady progress and continuous success has earned the reputation of being one of the leading Private Sector Banks’ of the country. The distinguishing features of IBBL are as follows:
· All activities are conducted on interest-free banking system in accordance with Islamic Shariah.
· Investment is made through different modes permitted under Islami Shariah.
· Establishment of participatory banking instead of banking on debtor-creditor relationship.
· Investment income of the Bank is shared with the Mudaraba depositors according to a ratio to ensure a reasonable fair rate of return on their depositors.
· Its aims are to introduce a welfare-oriented banking system and also to establish equity and justice in the field of all economic activities.
3.0 ROLE OF IBBL IN BANGLADESH’S ECONOMY
3.1 CONTRIBUTION OF IBBL
Islami Bank Bangladesh Limited is playing a great role in the economy of Bangladesh by creating employment, dealing foreign exchange business , providing investment to the people of this country as well as foreign investors such as Warid Telecom Limited. Some of them are summarized below:
- Islami Bank Bangladesh Limited is the pioneer and most efficient institution of Islamic Banking in Bangladesh.
- The success of IBBL has attracted other sponsors at home and abroad to establish Islamic Banking in Bangladesh. Four national, one international Islamic Banks have since been established in the country.
- IBBL successfully mobilizes deposits from a section of people who hesitated to make any deposit with interest-based banks or other financial institutions.
- IBBL’s market share of deposit investment and subsidiary business is steadily increasing .
- IBBL, though still a tiny bank, handles more than 10% of country’s export and import trade.
- Among the contemporary commercial Banks IBBL’s position is first in respect of mobilization of deposit, deployment of fund and earning profit.
3.2 OTHER SOCIAL WELFARE TASKS OF IBBL
The IBBL performs the following tasks for the welfare of the society:
· Income generating scheme for the unemployment youth of the nation.
· Monorom sale centers for marketing homemade garments, handicrafts and other items.
· Educational Scheme for assisting poor scholar students to case and help them to continue their study.
· Health Scheme for fulfillment of health needs of rural people.
· Assistance to mosque for construction, repair and renovation.
3.3 SUPERIORITY OF ISLAMIC BANKING OVER CONVENTIONAL BANKING
Islamic bank is superior over the traditional bank for the following reasons:
Abolition of interest based loan market.
There in no fixed cost of capital.
Emphasis on productivity as compared to credit worthiness.
Increasing rate of growth.
Stimulation for accelerating saving and capital formation.
Establishment of Adal to attain Ehsan and Falah in this life and the life hereafter.
3.4 ISLAMIC BANKING DECISION DIFFER WITH CONVENTIONAL BANKING
Investment decision Conventional Banking:
The bank makes a loan at a fixed rate, which includes a mark-up to cover its cost of capital. The bank is not worried about the rate of return on the project. In other words, in conventional banking, the rate of return to the bank is fixed regardless of the success of the project, which is the opposite of what happens in a PLS banking system. Under the conventional banking framework, as depicted in Fig-la, the bank charges a fixed rate of interest to finance only those projects which have rates of return greater than or equal to the rate of interest. Thus, the conventional banking system could be termed a Fixed Return System.
Investment decision of Islami Banking:
Under the profit-loss sharing system of investment financing, the bank receives a variable rate of return as it shares a percentage of profits earned by the borrower. Though there is a consensus as to sharing losses in proportion to capital participation, some of the Muslim economists think that the ratio may vary with the application of different types of modes of financing. Thus, the Profit-loss-sharing system of investment financing may be termed a Variable Return System.
Comparison of Operating Profit of IBBL with other commercial banks: (Figure in Million Taka)
|No.||Name of Banks||2005||2006||2007|
|1||Islami Bank Bangladesh Ltd.||2920||3530||5500|
|2||Prime Bank Ltd.||1660||2330||3500|
|3||South-East Bank Ltd.||1540||2100||2910|
|4||Pubali Bank Ltd.||1520||2070||3060|
|5||National Bank Ltd.||1200||2000||2900|
|6||AB Bank Ltd.||1050||1800||3350|
|7||The City Bank Ltd.||1350||1530||1300|
|8||UCB Bank Ltd.||1200||1420||2150|
|9||EXIM Bank Ltd.||1150||1410||2040|
|10||Eastern Bank Ltd.||1010||1360||1890|
4.0 FUNCTION OF IBBL
4.1 GENERAL BANKING FUNCTIONS OF IBBL
General banking activities of IBBL includes the following:
a) Mobilization of deposits
b) Receipts and payment of cash
c) Handling transfer transaction
d) Operations of clearing house
e) Maintenance of accounts with Bangladesh bank and other Banks.
f) Collection of cheques and bills
g) Issue and payment of Demand Draft, Telegraphic transfer and Payment Order.
h) Executing customers standing instructions.
i) Maintenance of safe deposit lockers
j) Maintenance of internal accounts of the bank.
While doing all the above noted work IBBL issue cheque-book, Deposit account operating form, SS cards, cheque book, ledgers, cash books Deposit account ledgers, preparation statements of accounts and pass book, balance different accounts and calculates profits.
Islamic Bank Bangladesh limited offers to open the following account to the depositors:
(i) Al-Wahdeeah Current Account
(ii) Mudaraba Savings Account
(iii) Mudaraba Term Deposit Account (3 month/6 month/12 month/24 month/36 month term)
(iv) Mudaraba Special Notice Account
(v) Mudaraba Hajj Savings Account ( 1 year to 25 year term)
(vi) Mudaraba Special Savings (Pension) Account (5 year to 10 year term)
(vii) Mudaraba Saving Bond Scheme (5 year and 8 year term)
(viii) Mudaraba Foreign Currency Deposit (Savings) Account
(ix) Mudaraba Monthly Deposit Account
(x) Mudaraba Muhor savings Account
(xi) Mudaraba waqf cash deposit account.
The distributes minimum 65% of its investment income earned through deployment of Mudaraba deposits among the Mudaraba depositors.
Distribution of profit to Mudaraba Depositors:
The principles of calculation and distribution of profit to mudaraba depositors generally followed by different islami banks are as under:
Mudaraba depositors share income derived from investment of fund.
Mudaraba depositors do not share any income derived from miscellaneous banking services where the use of fund is not involved, such as commission , service charges, exchange, and other fees realized by the bank.
Mudaraba deposits get priority in the matters of investment over bank’s equity and other cost free fund.
The gross income derived from investments during the accounting year is, at first , allocated to mudaraba deposits and equity & cost-free funda according to their proportion in the total investment.
The share of gross investment income of mudaraba deposits as worked out in terms of principle shown against serial no 4 is distributed as under:
§ 20% is retained by the bank as management fee for managing the investment.
§ 15% is transferred to a reserve fund for setting investment loss or with a view to maintaining a general level of return on mudaraba deposits
§ The remaining 65% is distributed to mudaraba depositors applying weightages.
Weightage, System of Calculation and distribution of profit among deposit A/Cs:
Weightage means preference ofone product in comparison of other product . On the other hand we can say weightage means giving the value of the specific or particular matter/ subject higher or lesser than that of/ in comparison to similar one.
Factors of weightage:
1 The more risk, the more weightage.
1 The longer the period, more the risk.
1 The more the uses of Bank’s facility, the less the weightage.
1 The less the uses of Bank’s facility, the more the benefit/ weightage.
Weightage of different Mudaraba Accounts:
|SL No.||Name of Accounts||Weightage|
|01||Mudaraba Hajj Savings(MHS): above 10 years term||1.35|
|02||Mudaraba Hajj Savings(MHS): upto 10 years term||1.30|
|03||Mudaraba Cash Waqf Deposit Accounts:||1.35|
|04||Mudaraba Special Savings (pension) A/C (MSS):10 years||1.30|
|05||Mudaraba Special Savings (pension) A/C (MSS): 5 years||1.10|
|06||Mudaraba Muhor Savings Account :10years||1.30|
|07||Mudaraba Muhor Savings Account: 5 years||1.10|
|08||Mudaraba Savings Bond: 8 years||1.25|
|09||Mudaraba Savings Bond: 5 years||1.10|
|10||Mudaraba Monthly Profit Deposit Scheme: 5 years||1.10|
|11||Mudaraba Monthly Profit Deposit Scheme: 3 years||1.00|
|12||Mudaraba Term Deposit: 36 months||1.00|
|13||Mudaraba Term Deposit: 24 months||0.98|
|14||Mudaraba Term Deposit: 12 months||0.96|
|15||Mudaraba Term Deposit: 6 months||0.92|
|16||Mudaraba Term Deposit: 3 months||0.88|
|17||Mudaraba Savings Account||0.75|
|18||Mudaraba Foreign Currency Deposit Account||0.75|
|19||Mudaraba Special Notice Deposit Accounts||0.55|
Work out the rates of profit using the information and figures given below: (Tk. in Million)
a) Total Investment Tk. 1000
b) Total Investment Income Tk. 150
c) Total Fund Employed
i. Banks equity and Al-Wadeeah Deposits Tk. 200
ii. Mudaraba Deposits Tk. 800
Therefore the share of investment income of Mudaraba
Deposit will be (150*800/1000) Tk. 120
a) 20% Management Fee Tk. 24.00
b) 15% Loss off-setting Reserve Tk. 18.00
Distributable Investment Income Tk. 78.00
|SL No.||Type of Mudaraba Deposit||Yearly Product||Weightage
|Weighted Product||Share of Distributable Profit||Rate of Profit|
|1||Mudaraba Hajj Savings||120||110||132||14.05||11.71%|
|2||Mudaraba Term Deposit|
|4||Mudaraba Short Notice||50||55||27.50||2.93||5.86%|
Weighted Product =
Share of Distributable Profit=
Rate of Profit =
Product Profits of IBBL:
|SL No.||Particulars of Deposit||Provisional Rate of Profit in %|
|01||Mudaraba Hajj Savings(MHS)|
|From 11 years to 25 years||10.40|
|From 1 years to 10 years||10.00|
|02||Mudaraba Special Savings(MSS)|
|03||Mudaraba Term Deposit|
|04||Mudaraba Monthly Profit Deposit Scheme|
|05||Mudaraba Savings Bond|
|06||Mudaraba Savings Account||6.10|
|07||Mudaraba Muhor Savings Account|
|08||Mudaraba Special Notice Deposit Accounts||4.25|
|09||Mudaraba Cash Waqf Deposit Accounts||10.40|
4.2 INVESTMENT FUNCTIONS OF IBBL
IBBL invests its money in various sectors of the economy through different modes and permitted by Shariah and approved by the Bangladesh Bank. The modes of investment are as follows:
· Share Mechanism:
1. Mudaraba Mode
I. Restricted Mudaraba
II. Unrestricted Mudaraba
2. Musharaka Mode
I. Shirkat Ai Inan
II. Shirkat Al Mufabada
III. Shirkat Al Wajoo
IV. Shirkatus Sanai
· Ijara Mechanism:
I. Hire Purchase Under Shirkatul Melk.
Investment Trend of IBBL since 1983
4.3 FOREIGN EXCHANGE BUSINESS OF IBBL
Foreign Exchange means Foreign Currency. If we consider Foreign Exchange as a subject, then it means all kinds of transaction related to Foreign Currency, as well as currency instruments, such as Draft, MT, TT, TC, Payment Order (PO) & Foreign Trade. In other words, Foreign Exchange deals with Foreign Financial Transactions.
IBBL is doing Foreign Exchange business through its 38 AD branches. IBBL performs the following tasks:
a) Opening letter of credit (LC) against commission for importing industrial, agricultural and other permissible items under Islamic Shariah and Import policy.
b) Opening letter of credit on the principle of Mudaraba sale. On the principle of Musharaka sale and under wage earner scheme.
c) Handling of export/import document
d) Negotiation of export/ import document when discrepancy occur
e) Financing in import under MPI
f) Financing to export on profit or loss sharing.
g) Handling Inward and outward remittance.
Foreign Exchange Operation:
The foreign trade handled by the bank may be classified as under:
o Import Business
o Export Business and
o Foreign Exchange Remittanc
Import Business of IBBL:
Import business of Islami Bank Bangladesh Ltd. is being operated under Bai mechanism mode of investment. The whole transaction of an import is made under single deal system from opening of the letter of credit Up to purchase of the whole imported merchandise by the importer from the bank if the finance against imported merchandise is made
Import business of IBBL stands at Tk. 13709 crore during 2007 as against target of Tk. 14050 crore . Achievement is 97.57% with 41.51% growth rate.
Figure: Total Import of IBBL:
Figure : Total Growth & Achievement of IBBL:
Sales of goods to foreign country in exchange of foreign currency can broadly be defined as export. Islami Bank Bangladesh Limited handles a substantial amount of export business through their 23 Authorized dealer branches in the country
Export business during 2007 stands at Tk. 6669 crore as against target of Tk. 7400 crore. Achievement is 100.35% with 41.36% growth rate.
Export business of IBBL since 2001
Pre shipment Export Finance:
The Bank finance is allowed to the exported goods against an irrevocable letters of credit/ firm contract for procuring and processing of exportable goods for ultimate export is called pre-shipment export finance
Post Shipment Export Finance:
A bank extends financial facilities to their exporter against purchase of clean export documents can be defined as post shipment exports finance
4.4 FOREIGN REMITTANCE:
Foreign remittance target of IBBL was Tk.8050 crore against which achievement is Tk. 8414 crore which is 104.52% of our foreign remittance plays a vital role in national economic development in wider sense . It accelerates deposit, investment, import of the bank and maximizing profit through risk free exchange gain.
Figure: Foreign remittance of IBBL since 2001
Figure: Growth and achievement of foreign remittance IBBL
4.5 OTHER SERVICES OF IBBL
ATM of IBBL:
ATM service of IBBL can be used for the following:
- Withdrawal of money.
- Payment of mobile phone bill.
- Balance in query
- Fund transfer
- Mini statement ( Last 10 transactions)
- To deposit the money of Mudaraba savings (pension) A/C
- To deposit the money of Hajj Savings A/C
- To deposit the money of Mudaraba Mohor Savings A/C
- To deposit the money of HDS (Household Durable Scheme)
Online service of IBBL:
1. Cash withdrawal limit Tk. 3,00,000
2. Transfer amount- unlimited
3. Tk. 25 up to Tk. 20,000+Tk. 0.60 per next one thousand or part
4. Highest online charges not over Tk. 1,000
5. Officers of IBBL may be allowed to avail the online banking facilities free of charges up to the limit of his/her monthly gross salary.
6. Online charges for selected valued client may be reduced/ exempted as per approval of the management
7. For balance inquiry and account statement , charges may be as before Tk. 10%
8. Vat is applicable for all charges.
A demand draft is an order to pay money drawn by one office of the bank upon other office of the same bank for a sum of money payable to order on demand.
|Range in Tk.||DD Commission||VAT||Total Tk.|
|10,001.00-Above||20+1.00 Tk. Per Thousand||15% On Commission|
Telegraphic Transfer (TT):
Telegraphic transfer is so far the quickest method of transferring funds from one place to another. It is an instruction conveyed by telegraph/telex/telephone to the drawee branch for paying certain amount of money to a specified person.
|Types of services||Nature of charge||Rate of Charge/Commission|
a) TT Issuance
|Commission||Minimum Tk. 20.00
15% VAT on Commission
|c) Telephone for TT issued||Charge||Tk. 30.00 per TT.|
|Above Tk. 10,000 , Tk.1.00 for each thousand|
Pay Order is meant for making payment of the banker’s own or of the customers dues locally and not for effecting any remittance to an out station. In a sense , the payment order is used for making a remittance to the local creditors.
|Range in Tk.||PO Commission||VAT||Total Tk.|
|Cancellation of pay order||Commission||Tk. 20 (Flat)|
5.0 MODES OF INVESTMENT
5.1 PROCEDURE FOR INVESTMENT UNDER BAI-MURABAHA
The terms “ Bai-Mubaraha” have been derived from Arabic word and (Bai and Ribhun).The word means purchase and sale and the word means an agreed upon profit. “Bai-Mubaraha” means sale on agreed upon profit.
Bai-Mubaraha may be defined as a contract between a Buyer and a seller under which the seller sells certain specific goods permissible under Islamic Shariah and the Law of the land to the buyer at a cost plus agreed profit in cash or on any fixed future date in lump or by installments. The profit marked –up may be fixed in limp sum or in percentage of the cost price of the goods.
Types Of Murabaha
In respect of dealing Murabaha may be of two types.
1) Ordinary Bai- Mubaraha:
If their are only two parties the seller and the buyer, where the seller as an ordinary trader purchase the goods from the market without depending on any order and promise to buy the same from him sells those to a buyer for cost plus profit then the sale is called ordinary Bai-Mubaraha.
2) Bai-Murabaha on Order and Promise:
If there are three parties, the buyer, the seller and the bank as an intermediary trader between the buyer and seller where the Bank upon receipt of orde3r from
the buyer with specification and a prior outstanding promise to buy the goods from the bank, purchases the ordered goods and sells those to the ordering buyer at a cost plus agrred profit ,the sale is called “Bai-Mubaraha on a order or promise ” ,generally known as Murahaha.
Figure: Bai Murabaha investment of IBBL since 1983
5.2 PROCEDURE FOR INVESTMENT UNDER BAI-MUAJJAL
Bai Muajjal may be defined as a contract between Buyer and Seller under which the seller sells certain specific goods(permissible under shariah and law of the country),to the buyer at an agreed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installment. The seller may also sell the goods purchase by him as per order and specification of the buyer.
It may be noted here that in case of Bai –Muajjal and Bai –Murabaha, the Islami Bank is a financier to the client not in the sense that the bank finances the purchase of goods by the client rather it is a financier by deferring the receipt of the sale price of goods, it sells to the client.
1) It is permissible for the client to offer an or purchase by the bank particulars goods deciding its specification and committing himself to buy the same from the bank on Bai –Muajjal and deferred payment sale at a fixed rate.
2) It permissible to make the promise binding upon the client to purchase from the bank, that is, he is to either satisfy the promise or to indemnify the damage.
3) It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the damage.
4) It is permissible to document the debt resulting from Bai- Muajjal by a Guarantor or a mortgage or both like any other debt. Mortgage/cash security may be obtained prior to signing of the agreement.
5.3 PROCEDURE FOR INVESTMENT UNDER BAI-SALAM
The terms “Bai” and “Salam” have been derived from Arabic words. The word “Bai” means “sale and purchase” and the word “Salam” means “advance”. “Bai-Salam” means advance sale and purchase.
Bai Salam may be defined as a contract between a Buyer and a Seller under which the Seller sells in advance the certain commodity (ies)/ products (s) permissible under Islamic Shariah and the law of the land to the Buyer at an agreed price payable on execution of the said contract and the commodity (ies)/product(s) are delivered as per specification , size, quantity, at a future time in a particular place. In other words , Bai Salam is a sale whereby the seller undertakes to supply some specific commodity(ies) / product(s) to the buyer at a future time in exchange of an advanced price fully paid on the spot.
Here the price is paid in cash , but the delivery of the goods is deferred.
Bai-Salam is a mode of investment allowed by Islamic Shariah in which commodity (ies)/ Products(s) can be sold without having the said commodity (ies)/products(s) either in existence or physical/ constructive possession of the seller. If the commodity (ies)/product(s) are ready for sale, Bai-Salam is not allowed in Shariah. Then the sale may be done either in Bai-Murabaha or Bai-Muajjal mode of investment.
Generally, Industrial and Agricultural products are purchased/sold in advance under Bai-Salam mode of investment to infuse finance so that product is not hindered due to shortage of fund/cash.
It is permissible to obtain collateral security from the seller client to secure the investment from any hazards viz. non-supply/partial supply of commodity (ies)/product(s), supply of low quality commodity (ies)/product(s) etc.
It is also permissible to obtain Mortgage and /or personal Guarantee from a third party as security before the signing of the Agreement or at the time of signing the Agreement.
Bai-Salam on a particular commodity (ies)/product(s) or on a product of a particular field or farm cannot be affected [for Agricultural product(s) only].
The seller (manufacturer) Client may be made agent of the Bank to sell the goods delivered to the Bank by him provided a separate agency agreement is executed between the Bank and the Client (Agent).
Obtain the following charge documents executed properly ie. Duly filled in signed , stamped, and witnessed, where necessary:
1) A copy of application form F-136
2) Single party D.P. Note F-118, if there is no guarantor.
3) Double party D.P Note F-119, if there is guarantor(s) to be made by the client in favour of the guarantor and endorsed by later in favour of the bank.
4) D.P Note Delivery Letter (F-171) in all cases.
5) Sanction advice.
6) Bai-Salam agreement
7) Letter of disbursement.
8) Insurance policy.
9) Letter of disclaimer.
· Where the investment is made collaterally secured by equitable mortgage of property, the following documents are to be obtained.
Memorandum of deposit of title deed signed by the owner of property.
Personal guarantee of the owner of the property.
Original title deed (s) with CS,RS,SA Mutation Parcha, DCR of the property and mutation record.
Updated rent receipt.
Non-encumbrance Certificate along with search fee paid receipt.
Valuation certificate countersigned by the Manager.
Lawyer’s certificate about verification of the title deed.
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 free from all encumbrances and he is lawful rightful owner in possession and he will not en cumber, transfer, sale or charge the property in any way.
· Wherever the investment is secured by hypothecation of stock-in –trade, machineries etc. obtain the following documents:
Letter of Hypothecation(F-116)
· In case of investment collaterally/additionally secured by pledge of shares of reputed Public Limited Company on bank’s approved list and quoted in the Stock Exchange Market, the following documents are to be obtained:
Agreement for pledge of shares along with original share certificates
Blank share transfer deed in duplicate- one copy signed, dated and another copy signed undated.
Share delivery letter addressed to the bank
Letter of the concerned company to the registrar of joint stock company to make lien in bank’s favour. This notice shall be sent by registered acknowledgement due post and confirmation of recording lien shall be obtained from the concerned company.
Letter of authority in bank’s favour duly signed by the shareholder to collect this dividend or bonus on the share pledged to the bank.
· In case of investment to partnership concern, obtain the following documents:
Letter of partnership signed by all partners.
Copy of partnership deed duly verified 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 documents:
As bank enters to hire purchase shirkatul melk or Musharaka with this company/firm Bank measures the right to nominate / depute its representative to
Personal guarantee of all directors of the company.
If the investment is allowed on hypothecation basis 1st charge under relevant section of the companies Act. 1994 shall be created in bank’s favour respect of company’s asset prescribed as security . This change shall be created with the registrar of joint stock companies within 21 days from the date of execution of relative charge documents.
Certificate issued by the registrar of joint stock companies under the companies Act 1994 in respect of creation of charges.
Copies of memorandum and articles of association with latest amendments if any duly certified by the registrar of Joint Stock Company.
·In case of investment to a trust organization obtain the following documents:
Copy of trust duly verified with the original copy and attested by the incumbent in charge of the branch . The trust deed must have power to do businesswith bank under Islamic shariah.
Resolution of board of directors to do business with IBBL under Islamic principle and authorizing the office bearers to execute charge documents.
Charge documents shall be signed either by persons authorized by all members of the trust committee, if trustees are authorized to delegate their powers by the trust deed or all of the trustees.
· In case of investment to co operative society obtain the following documents:
Clearance from registrar of cooperative societies for doing business with IBBL under Islamic shariah.
Letter to be concerned registrar of cooperative societies under registered A/D mail informing about bank’s allowing of investment facility to the concerned society as per clearance accorded by him.
Personal guarantee of the office bearer of the society in personal.
A copy of bylaws of the society duly certified by the registrar of the societies.
Obtain insurance policy through the client equal to the value of fixed asset and raw materials including stocks and stores +10% covering all usual risks including FIRE ,RSD, Flood and cyclone with bank’s mortgage claim unless and until the goods are delivered to the bank.
Insurance policy will be taken by the clients and all cost including premium shall be paid born by the clients.
Insurance policy shall be obtained either from a Islamic insurance or from sadharan bima corporation or bank’s approved list.
The client will handover the insurance policy covernote and periodical premium receipt to the bank for record and preservation.
Checking shall be made.
Enter the policy to the insurance policy registrar(B-39).
Repayment/ adjustment of Bai-Salam investment account:
In case the seller (client) fails to deliver /export the goods within the stipulated time as per schedule hereto for any reasonable exigencies, he may return the price of commodities as mentioned in the Bai- Salam agreement compensation al time for delayed period of repay and shall be imposed.
In case the consignment is exported in different installments and/ or the export proceeds on repatriated installments or the consignment I required to be disposed of at a discount ,the proceeds received / available at the first instance shall be outstanding Bai- Salam investment if any and thereafter other claims shall be settled
5.4 PROCEDURE FOR INVESTMENT UNDER ISTISNA’A SALE
The Istisna’a sale is a contract in which the price is paid in advance at the time of the contract and the object of sale is manufactured and delivered later. It is a contract with a manufacturer to make something and it is a contract on a commodity on liability with the provision of work. IBBL can utilize Istisna’a in two ways.
- It is permissible for the bank to buy a commodity on Istisna’a contract then sell it after receipt for cash or deferred payment.
- It is also permissible for the bank to enter into a Istisna’a contract in the capacity of seller to those who demand a purchase of a particular commodity and then draw a parallel Istisna’a contract in the capacity of a buyer with another party to manufacture the commodity agreed upon in the first contract.
Steps of Istisna’a Sale:
1.Istisna’a Sale Contract: The Buyer expresses his desire to buy a commodity and brings a request to purchase the commodity to the bank. The method of payment, whether cash or deferred is set forth in the agreement. The bank agrees to deliver the commodity to the buyer at some agreed upon time in the future.
2.Delivery and Receipt of the Commodity: The seller in the parallel Istisna’a agreement, delivers the commodity to the bank on the agreed upon date. The bank, in turn, delivers the product to the buyer of the original Istisna’a contract, in accordance with the original agreement. In this way, all parties fulfill their obligations to the contract.
Application of Istisna’a Sale:
The Istisna’a contract allows IBBL to finance the public needs and the vital interests of the society to develop the Islamic economy in accordance with Islamic teachings. For example Istisna’a contracts are used to finance high technology industries such as the aviation, locomotive and ship building industries. In addition, this type of business transaction is also used in the production of large machinery and equipment manufactured in factories and workshops. Finally, the Istisna’a contract is also applied in the construction industry such as apartment buildings, hospitals, schools, and universities to whatever that makes the network for modern life. One final note, the Isti