Comparative Analysis between Conventional and Islamic Bank

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“Comparative Analysis between Conventional and Islamic Bank”

Banking System of Bangladesh:

Background

After the year 1971, Bangladesh was nothing but a war ravaged country. Like other sector the financial sector was also collapsed. Banking system was beasts with various problems like Bank offices were burnt, bankers were killed, and Properties of the banks were destroyed etc.

To rescue the banking system from this critical situation the then government was taken some steps those are:

· Appointment of Administrators.

· Banking operations were kept suspended.

· Restrictions on withdrawals of Deposits.

· Payment of TT, MT was suspended etc.

Nationalization of Banks in 1972: The most significant decision after the liberation war regarding banking system is to nationalize the banks of the country. Though the decision was very contradictory it was accepted by the young generation and freedom fighters.

Banking in the Private Sector: To allow more competition in the market and to solve the increasing the problems in nationalized banking government decided to private sector Banking in 1976. Government leaves the 51% share of ‘International Finance Investment and commerce Limited’. In 1983 seven years after the establishment of I.F.I.C Limited the Government took two important decisions which are landmarks in the history of banking in Bangladesh. Two nationalized commercial banks, namely, Pubali Bank and Uttara Bank were denationalized.

Structure of Banking System in Bangladesh:

Bangladesh has a mixed banking system comprising nationalized, private and foreign commercial banks. Bangladesh Bank is the central bank of the country and is in charge of monetary policies of the Government and controls all commercial banks. The names of the selected banks by category are given below:-

List of Scheduled Banks

(As on 30 June 2006)

Nationalized/government controlled banks (4+5=9)

Commercial banks (4)

1. Agrani Bank
2. Janata Bank
3. Rupali Bank Limited*
4. Sonali Bank

Specialized banks (5)

1. Bangladesh Krishi Bank
2. Bangladesh Shilpa Bank
3. Bangladesh Shilpa Rin Sangstha
4. Bangladesh Small Industries and Commerce (BASIC) Bank Limited
5. Rajshahi Krishi Unnayan Bank

Private commercial banks (30)

1. Al-Arafah Islami Bank Limited
2. Arab Bangladesh Bank Limited
3. Bangladesh Commerce Bank Limited
4. Bank Asia Limited
5. BRAC Bank Limited
6. Dhaka Bank Limited
7. Dutch Bangla Bank Limited
8. Eastern Bank Limited
9. Export Import Bank of Bangladesh Limited

10. First Security Bank Limited

11. International Finance Investment and Commerce Bank Limited

12. Islami Bank Bangladesh Limited

13. Jamuna Bank Limited

14. Mercantile Bank Limited

15. Mutual Trust Bank Limited

16. National Bank Limited

17. National Credit and Commerce Bank Limited

18. One Bank Limited

19. Prime Bank Limited

20. Pubali Bank Limited

21. Shahjalal Islami Bank Limited
22. Social Investment Bank Limited
23. South East Bank Limited
24. Standard Bank Limited
25. The City Bank Limited
26. The Oriental Bank Limited
27. The Premier Bank Limited
28. The Trust Bank Limited
29. United Commercial Bank Limited
30. Uttara Bank Limited

Foreign commercial banks (9)

1. Bank Alfalah Limited
2. Citibank N.A
3. Commercial Bank of Ceylon Limited
4. Habib Bank Limited
5. National Bank of Pakistan
6. Standard Chartered Bank
7. State Bank of India
8. The Hongkong and Shanghai Banking Corporation Limited
9. Woori Bank

* In December 1986, it was decided to transform Rupali Bank into a Public Limited Company, keeping 51 percent ownership in the Government Sector. Subsequently, the above bank’s ownership in the Government Sector was raised to 94.5 percent in 1996. The bank is now in the process of being privatised.

Sources:

Bangladesh Bank Annual Report

Bangladesh: Some Selected Statistics Appendix – 2 Table-XXIV:

Specialized Banks:

These are the Banks which concentrate mainly on financing specialized economic and social activities. Specialized activities may be small and cottage industries financing, financing the rural asset less and less people etc.The main reason behind establishment of these type of bank was to provide Banking Services to the rural areas. Because PCB’s are not willing to go to rural areas and provide services in agriculture and some other specialized sectors.

Islamic Banking

5.35 Alongside the conventional interest bearing banking system, Bangladesh entered into an Islamic banking system (profit-loss sharing) in 1983. At present, out of 48 banks in Bangladesh, 6 private commercial banks are operating as full-fledged Islamic banks and 10 conventional banks are partially involved in Islamic banking in a total of 20 branches. Box 5.2 provides a brief review on operations of Islamic banks in Bangladesh.

Banking Sector’s Performance:

Industry Statistics of the banking sector and the performances trends have been discussed here. The banking sector of Bangladesh comprises of four categories of scheduled banks. These are nationalized commercial banks (NCBs), government owned development finance institutions (DFIs), private commercial banks (PCBs) and foreign commercial banks (FCBs). The number of banks came down from 49 in 2004 to 48 in 2005 due to acquisition of American Express Bank by the Standard Chartered Bank. These banks have a total number of 6412 branches (including 10 overseas branches) as of December 2005. The number of bank branches increased from 6303 to 6412 due to opening of new branches by the PCBs mainly during the year. Structure of the banking sector with breakdown by type of banks is shown in Table

angladesh Bank:

Like all the countries of the world, Bangladesh has also a central bank, namely, Bangladesh Bank. Its functions are similar to the functions of any other central bank of any country. Main functions of Bangladesh Bank are: issue of notes, regulation of the currency and monitoring and supervision of the banks and non-bank financial institutions It is wholly owned by the Government of the People’s Republic of Bangladesh. Its Board of Directors is also appointed by Government.

CAMEL Rating

Performance indicators of the banking industry depict a trend similar to that of the state owned banks, which is understandable due totheir predominant market share. Ratings done on the basis of the various indicators discussed hereinbefore indicate that financial performance of the PCBs and FCBs in general has been better than that of the industry average. However, 1 of the PCBs rated CAMEL 5 are still in the problems bank list out of 7 put in this category in the mid-nineties. Activities of the problem banks are closely monitored by the central bank with special guidance and care. Up to 2005, 6 such banks were taken off the problem bank list because of improved performance. Newly 3 banks were included in the problem bank list for their distressed financial position. At present 4 banks are in the problem bank list.

BASEL

At present, capital adequacy requirement of the banking sector in Bangladesh is based on Basel-I accord. Bangladesh has decided in principle to adopt the new capital adequacy framework finalized by the Basel Committee on Banking Supervision (BCBS) known as Basel-II. A plan for the implement of Basel-II in Bangladesh has also been chalked out.

Cash Reserve Requirements (CRR) of Scheduled Banks with Bangladesh Bank

In pursuance of the objectives of monetary policy, the amount of CRR has been increased to 5 percent from 4.5 percent of total demand and time liabilities of banks effective from 1 October 2005. However, banks are allowed to maintain CRR at the rate of 5 percent daily on bi-weekly average basis subject to the condition that the amount of CRR so maintained should not be less than 4 percent in any day.

Statutory Liquidity Requirement (SLR) of Scheduled Banks

The Statutory Liquidity Requirement (SLR) for the scheduled banks, excepting banks operating under the Islamic shariah and the specialized banks, was re-fixed at 18 percent from 16 percent on 1 October 2005 and remained unchanged thereafter. The SLR for the Islamic banks remained unchanged at 10.0 percent. The specialized banks continued to remain exempted from the SLR.

Activities of Credit Information Bureau

In the backdrop of huge non-performing loan of the banking sector of the country during the decade of the 1980s, a full-fledged Credit Information Bureau (CIB) was set up in 18 August 1992 in Bangladesh Bank under Financial Sector Reform Project (FSRP) of the World Bank. The main objective behind setting up of the Bureau was to minimize the extent of default loan by facilitating the banks and financial institutions with credit reports of the loan applicants so that the lending institutions do not encounter any credit risk while extending any lending or rescheduling facility.

BANKS WE HAVE SELECTED

Conventional Bank:

EASTERN BANK LIMITED

ISLAMIC BANK:

Eastern Bank Ltd.

Company Profile

Eastern bank Ltd. (EBL) is a second generation commercial bank with 28 online branches across major cities in Bangladesh and 690 full time employees on year end 2007. It offers full range of commercial banking products and services to the corporate, mid-market and retail segment. Under the corporate banking segments the Bank has comprehensive range of financial products including corporate deposit accounts, syndicated financing, term loan, project finance, export-import financing, working capital and other finance, bonds and guarantees, investment and business counseling, infrastructure finance, cash management services etc. with urban banking focus, the Bank is offering various alternative delivery channels like ATMs, Bills Pay Machines, Kiosks, and Internet Banking etc. The Bank has set up a brand image attributable in part to its policy of continuous customer service excellence, innovative products and services at competitive prices and maximum technology utilization. Unlike conventional branch banking, credit proposals as well as business operations are processed centrally at EBL. The bank also established its offshore banking activities in the year 2004.

The Eastern Bank Limited was formed as a public limited company incorporated in Bangladesh with primary objective to carry on all kinds of banking business in and outside Bangladesh. Eastern Bank Limited has also taken over the businesses, assets, liabilities and losses of erstwhile Bank of Credit & Commerce International (Overseas) Limited, ( hereinafter called BCCI) branches in Bangladesh with effect from 16^th August, 1992 as they stood after reduction or adjustments in accordance with the provisions of the Bank of Credit & Commerce International (Overseas) Limited (Reconstruction) Scheme, 1992, hereinafter called the Scheme.

The Bank is listed in the Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited.

The Bank commenced its business with four branches from 16 August 1992. Number of branches as on 31 December 2007 were twenty eight.

Offshore Banking Unit is a separate business unit of Eastern Bank Limited, governed under the Rules & Guidelines of Bangladesh Bank. The Bank obtained the Offshore Banking Unit permission vide letter no. BRPD(P)744/(89)/2004-303 dated January 25, 2004. The Bank commenced operations of this unit from May 19, 2004 and its office is located at 10, Dilkusha C/A (2^nd floor), Dhaka.

Corporate Information

01. Name of the Company: Eastern Bank Limited

02. Year of Establishment: 1992

03. Name of the Chairman: A. Q. I Chowdhury.

04. Company Legal Form: Public Limited Company.

05. Vision : To become “the bank of choice” by transforming the way we do business and developing a truly unique financial institution that delivers superior growth and financial performance and be the most recognizable brand in the financial services in Bangladesh.

06. Mission : Deliver excellence service, maximize shareholders’ value, to maintain a cohesive and professional team in order to achieve service excellence, create an enabling environment.

07. Service : Deposit

Lending service

Investment

Social welfare.

08. Products : Credit Cards,

Consumption Loan,

SME Banking,

ATM,

Branch Bills Pay & Students Center.

EBL AT A GLANCE

All Figures in Million BDT

GRAPHICAL VIEW

Balance Sheet Size

Loans & Advances – Deposit

Cost to Income Ratio

Capital Adequacy Ratio

Non Performing Loan Ratio

Trade Service Business

Share Holders Equity

Operating Profit per Employee

EASTERN BANK LIMITED

Product and Investment

INVESTMENT

OTHER PRODUCTS

Monetary Policy and Islamic Banking in Bangladesh

The central bank has the sole authority to issue currency and manage the liquidity of the economy.Among others, the objectives of the monetary policy is to ensure stability of the value of Taka and regulate the banking system prudently. As a central bank, Bangladesh Bank was not aloof from the ongoing changes in the world

financial system. Bangladesh Bank had issued license in 1983 for establishment of the first Islamic bank in Bangladesh. The Bangladesh Government had participated in establishing the Bank, by subscribing five percent share in the paid up capital. Considering lack of Islamic financial markets and instruments or products in

the country, Bangladesh Bank had granted some preferential provisions for smooth development of Islamic banking in Bangladesh. Among the preferential provisions, the following are important.

1. Islamic banks in Bangladesh have been allowed to maintain their Statutory Liquidity Requirement (SLR) at 10% of the total deposit liabilities while it is 20% for the conventional banks. This provision had facilitated the Islamic banks to hold more liquid funds for more investment and thereby generate more profit.

2. Under indirect monetary policy regime, Islamic banks were allowed to fix up their profit-sharing ratios and mark-ups independently commensurate with their own policy and banking environment. This freedom in fixing PLS ratios and Mark-up rates had provided scope for the Islamic banks to follow the Shariah principles independently for realizing goals of Islamic Shariah.

4. Role of Bangladesh Bank in Promoting Islamic Banking in Bangladesh

Though there is no complete Islamic Banking Act for controlling, guiding and supervising the Islamic banks in Bangladesh, some Islamic banking provisions have already been incorporated in the amended Banking Companies Act, 1991 (Act No. 14 of 1991). Bangladesh Bank did not set up any separate Department at its Head Office to control, guide and supervise the operation of the Islamic banks. Inspection and supervision of the Islamic banking operations are conducted by the Bangladesh Bank as per the general guidelines framed for the conventional banks. So, ensuring implementation of Shariah principles in the Islamic banks are being conducted

by their own Shariah Councils. The role of Bangladesh Bank in controlling, guiding

and supervising the Islamic Banks in

Bangladesh in accordance with Islamic Shariah is very minimal. In observing the Shariah implementation status of the Islamic banks, Bangladesh Bank examines only the report of the respective banks’ Shariah Councils. However, the inspectors and supervisors of Bangladesh Bank are not equally familiar with the technicalities of the different operational methodologies of the Islamic banking. This is because of the fact that there is no separate Department to look into this important matter.

ISLAMI BANK

BANK PROFILE

Shahjalal Islami Bank Limited a shariah based commercial bank was incorporated as a public limited company on 1^st April 2001 under company act 1994.

The bank commenced commercial operation on 10^th may 2001 by opening its first branch. In its Dhaka at 58 Dilkusa commercial area after obtaining the licence from Bangladesh bank,the central bank of Bangladesh.

CORPORATE HEADOFFICE

10 DilkushaC /A , jibon bima bhaban, Dhaka 1000 , Bamgladesh

TOTAL BRANCH

26 Branches

LEGAL FORM

A public ltd company incorporated in Bangladesh on first April 2001 under the companies act 1994 and listed in Dhaka Stock Exchange limited and Chittagong Stock Exchan