Evaluation of Corporate Investment standards of different Islamic and non Islamic banks in Bangladesh and its overall effect in Bank’s Performance
1. Introduction and Background
Corporate Investment is a generic term given to different banking services that large companies, governments, or other big institutions need in order to carry out their functions. Corporate banking consists of simple business of issuing loans to more complex matters, such as helping minimize taxes paid by overseas subsidiaries, managing changes in foreign exchange rates, or working out the details of financing packages necessary for the construction of a new office, plant or other facility.
Corporate investment has the bankers who typically help clients raise money through loans. When necessary, corporate bankers will bring in the expertise of their capital markets colleagues.
In addition Commercial banking, Bank provides financial and technical assistance to broaden the private as well as public sector industrial base of the country. It prioritizes, especially, Export Oriented/Export Linkage industrial units, Efficient Import Substitution, Joint Ventures, Commercialization of local technology and promotion of agro-based industry. Corporate investment is one of the more popular and visible function of bank in all over the world. Corporate investment is a facility for the corporate clients to purchase goods or service for their business use on the assumption that the company has a stable source of income over the next few years. It enables the consumers have access to their desire goods and service based on future purchasing power.
The Corporate investment facilities are varying from bank to bank in terms of conditions, eligibility, eligible item or goods, security and the necessary documentations. Bank has introduced standards which are to improve the opportunity and interest of the entrepreneurs of the country and this function is known as corporate investment.
In Bangladesh corporate investment program of different banks have made a significant change in the corporate client group for providing loans. This loan is very much convenient for client as well as profitable for the offering banks. corporate investment facility play a vital role to create a distinctive image in consumer’s mind because it deals with one to one consumer, so by corporate investment it’s very easy to come near to consumer and to know their perception about a bank.
1.1 Origin of the Report
This report is an individual assignment as part of the internship program for the completion of the MBA course at Bangladesh University of Professionals. The internship program of 10 week has been conducted at Shajalal Islami Bank Limited from November 28, 2011 to February 3, 2011. The internal supervisor of the internship Major Asaduzzaman of Bangladesh University of Professionals and the external internship supervisor FAVP Mr. Lutful Haque of, Shajalal Islami Bank Limited, Kawran Bazar Branch assigned the research topic jointly on December 18, 2010. The research topic for the internship is “Evaluation of Corporate investment standards of different Islamic and non Islamic banks in Bangladesh and its overall effect in Bank’s Performance – A study based on Shahjalal Islami Bank Limited (SJIBL)” .With the proper guidance of both the supervisors, this report could come to an existence.
1.2 Problem Statement
Development of the country mainly depends on the growth of the industrial sector and growth of the business. For development intensive efforts should be undertaken to accelerate the rate of industrialization in the country. In order to attain this objective, large amount of industrial credit was funneled to the industrial sector. Today set up a large business or industry become a dream for the entrepreneurs. But it is not possible for an individual entrepreneur to arrange the full capital for the investment. Nowadays entrepreneur takes loan from different financial institute
In recent days financing has become an important area for Commercial Banks in Bangladesh. To align its corporate policy with the regulation of Central Bank, banks have become more concerned about corporate investment and opened windows to conduct business or set up industry in particular area.
A good number of Islamic and non Islamic Banks in our country are successfully operating this program. But the standards such as requirements, document, interest rate, installment system of the Corporate investment of different banks are different. Considering the popularity of Corporate investment it will try to identify comparison its various aspects, which are directly related, with the Corporate investment customers and Corporate investment providing bankers and its effect on the providing banks performance. Again, most of the aspects are related with the salient features of corporate investment in the relevant sample banks
1.3 Objectives of the Research
To evaluate the different present standards of corporate Investment of different Islamic and non Islamic banks and its effect on the banks overall performance, and a competitive analysis between Shahjalal Islami Bank Limited and other banks.
· To know in details about the corporate loan standards of different Islamic and non Islamic banks in Bangladesh.
· To find out the different factors clients consider for selecting bank.
· To find out the corporate clients awareness about prerequisite for corporate loan by Islamic and non Islamic banks.
· To find out the clients perception about the interest charge and other charges or expenses charged by Islamic and non Islamic banks for corporate investment.
· To find out the clients perception about loan processing time of different Islamic and non Islamic banks.
· To find out clients perception about the procedural obligation of Banks for corporate loan.
· To find out the clients perception about corporate loan disbursement system of different Islamic and non Islamic banks in Bangladesh.
· To find out the corporate clients preference towards Islamic and non Islamic bank for taking their loan.
· To find out the perception about corporate loan repayment systemof different Islamic and non Islamic banks in Bangladesh
· To find out the present situation of corporate loan of different Islamic and non Islamic banks in Bangladesh.
· To find out rules and regulations of Bangladesh bank regarding corporate investment for Commercial Banks.
· To know the effect of corporate investment on Islamic and non Islamic banks performance.
1.4 Research Questions
Research Questions 1: What are the factors that are important for corporate loan of different Islamic and non Islamic bank?
Justifications: This question will help me to know the difference important factors like interest rate, payment system, loan amount, mode of repayment, securities, step taken for defaulters etc of Islamic and non Islamic bank.
Research Questions 2: What is therelationship between corporate loan program and Islamic and non Islamic Banks Performance?
Justifications: This question will help me to know what the effect of corporate loan on banks performance is.
Research Questions 3: What are the clients awareness about prerequisite of corporate loan that borrower need for loan of Islamic and non Islamic Banks?
Justification: This question will help me to know whether or not clients are well known with prerequisite documents and what procedural obligation and charges clients face for Islamic and non Islamic Banks for corporate loan.
Research Questions 4: What is the satisfaction level of required documents or securities that clients need to submit for obtaining loan of Islamic and non Islamic Banks?
Justifications: This question will help me to know how hassle client have to face for submitting required documents of Islamic and non Islamic Banks.
Research Questions 5: What are the Bangladesh Bank’s guidelines or policy about corporate loan?
Justification: This question will help me to know whether or not the Islamic and non Islamic Banks are following guidelines given form Bangladesh bank.
Research Questions 6: What is corporate client’s perception about loan disbursement system of Islamic and non Islamic Banks?
Justification: This question will help me to understand the existing loan disbursement system of Islamic and non Islamic Banks.
Research Questions 7: What is the satisfaction level of the clients about profit/interest rate, loan processing time, documentation and other factors of selected bank?
Justification: This question will help me to understand the client’s awareness about banks profit/interest rate charged loan processing time, documentation and other factors
Research Questions 8: What is corporate client’s perception about service charge or processing cost of Islamic and non Islamic Banks for corporate lending?
Justification: This question will help me to understand the client’s opinion about service charge and processing cost for corporate lendingof Islamic and non Islamic Banks.
Research Questions 9: What is corporate client’s perception about repayment systemof Islamic and non Islamic Banks?
Justification: This question will help me to understand the existing loan repayment systemof Islamic and non Islamic Banks
1.5 Research Hypotheses
The hypothesis for this research will be formulated in details after exploratory research. However, the model of hypothesis may be as follows:
Null Hypothesis H0: 40 % or more of the corporate clients are aware about prerequisite corporate loan.
Alternative Hypothesis H1: less than 40 % of the corporate clients are aware about prerequisite corporate loan.
Null Hypothesis H0: Profit charged or interest rates of Islamic banks significantly differ from non Islamic banks for corporate investment.
Alternative Hypothesis H1: Profit charged or interest rates of Islamic banks insignificantly differ from non Islamic banks for corporate investment.
Null Hypothesis H0: There is an association between service charge or processing cost and corporate investment standard of Islamic and non Islamic bank.
Alternative Hypothesis H1: There is no association between service charge or processing cost and corporate investment standard of Islamic and non Islamic bank.
Null Hypothesis H0: There is no significant difference in corporate investment documentation process of Islamic banking and non Islamic bank.
Alternative Hypothesis H1: There is significant difference in corporate investment documentation process of Islamic banking and non Islamic bank.
Null Hypothesis H0: Islamic and non Islamic banks corporate investment loan processing time insignificantly differs insignificantly.
Alternative Hypothesis H1: Islamic and non Islamic banks corporate investment loan processing time insignificantly differs significantly
Null Hypothesis H0: Corporate investment disbursement system of Islamic bank (Payment order) is more preferable than Non Islamic Bank (Cash).
Alternative Hypothesis H1: Corporate investment loan disbursement system of Islamic bank (Payment order) is not preferable than Non Islamic Bank (Cash).
Null Hypothesis H0: There is a significant difference repayment systemof corporate investment standard of Islamic and non Islamic banks.
Alternative Hypothesis H1: There is no significant difference between repayment system of corporate investment standard of Islamic and non Islamic banks
Null Hypothesis H0: There is a positive association between corporate loan standard and Banks performance.
Alternative Hypothesis H1: There is no positive association between corporate loan standard and Banks
Null Hypothesis H0: there is a significant relationship between corporate loan standard and Banks positive performance.
Alternative Hypothesis H1: There is no significant relationship between corporate loan standard and Bank positive performance
1.6 Scope of the Research
This research has deal the corporate investment of different Islamic and non Islamic banks in Bangladesh banking sector and its effect on the banks performance. Therefore my working area is whole banking sector of Bangladesh. But this kind of research needs lot of time. For convenient and complete the research with the limited time the research will be conducted competitive analysis of corporate investment standards of six privet Islamic and non Islamic bank names Shajalal Islami Bank, Social Investment Bank limited, Islami Bank Limited, Trust Bank Limited, Bank Asia and AB Bank. A primary survey has been conduct to find out the opinions of different bank executives, consumers and government regulatory authorities. It has focused on the very limited comparable credit practices of selected Banks.
1.7 Limitations of the study
The limitations of the study are as follows
- The credit policies and manuals of Banks are of confidential nature and thus it is difficult to collect the necessary literature and documents within this short time.
- The bank officials though helpful in every respect do not have much time to explain the internal procedures.
- Many operations relating to the credit extension run simultaneously by different credit officials and it will be difficult to capture the sequence of any particular credit proposal.
- Borrowers do not often have the time to cooperate in the information gathering process.
1.8 Benefits of the study
Commercial banks are both Islamic and non Islamic providing different types of investment for profit form lending of their deposits. Besides there are many business clients who looking for a suitable lending opportunities. This report will help the management of Islamic and non Islamic Banks to know the opinions of the clients about policy of corporate investment and as results banks will be able to give a suitable investment program that will attract more business people for taking financial help from their banks.
1.9 Report preview
The report has discussed mainly in eight chapters. Literature review and overview of Shajalal Islami Bank are discussed in the second and third chapter. Fourth chapter talks about the corporate investment standers of different Islamic and non Islamic banks of Bangladesh. The project part of the research has discussed at chapter five. Summary of findings and recommendation are discussed briefly in chapter six and seven respectively. And finally the chapter eight is the conclusions.
2. Literature Review
The primary objectives for the formation of the first Islamic bank, Bank Islam Malaysia Berhad was to strive in its operation as a commercial bank based on Shariah laws in facilitating and banking services to both the Muslim and non-Muslim societies in this country by achieving strength and capacity to develop from time to time. Therefore, the bank has to operate its business without Riba or usury as an alternative to the conventional banking operating based on usury or interest. In order to operate a banking business and other financial dealings, the bank has to operate based on profit and loss sharing mechanism. This is to ensure better social justice in the distribution of the added created wealth of the bank to the depositors, customers benefiting from financings and the equity holders of the bank. In this regard, the bank has to ensure it may become strong financially and expanding in all aspects of its operation as this will then become the measure on the ability of Shariah laws and rules as well as capabilities of the Muslims in offering an alternative way of life when dealing with banking business (Mohd Nasir and Amirul Hafiz, 2006).
The key characteristic of Islamic finance is the prohibition of Riba, Islamic Financial ethics and law. The literal meaning of Arabic word, Riba is increase, addition of growth. However, it is usually translated as usury. Riba or usury is defined as extra or excess in lending and borrowing or additional in terms of weight or measurement in an exchange or buying and selling transaction. All transactions and contracts must be free from elements of Riba. The prohibition of Riba in Islamic finance is form based traditions (habith) and relates to prohibition of Riba in loan, sale or exchange contracts or exchange sale contract. Those who earn from usury stand only like one who is struck by the devil’s touch. This is because they claim that usury is a form of trade. Therefore the act of giving and taking as well as managing usury or interest is forbidden in Islam. Usury is any fixed percentage of earnings in return for funds deposited (Mohd Nasir and Amirul Hafiz, 2006) Islamic banking is an activity based on Islamic Syariah principles, which do not allow the paying and receiving of interest and promotes profit sharing in the conduct of banking. The most important difference between Islamic and conventional banking is the prohibition of interest in Islamic banking. Islamic banking activity is based on the trading principles of buying and selling of assets. Following that, in conventional financing, customer’s outstanding loan consists of principal plus the interest charged then onwards. The interest is actually the financial institution’s cost in obtaining the funds and its profit. Islamic financing work on the concept of buying and selling where the financial institution purchases the property and subsequently sells it to customers above the purchase price (Mohd Nasir and Amirul Hafiz, 2006).
The “Islamic banking system has gained momentum worldwide”. Citibank opened one new branch in Bahrain and Sudan adhering to Islamic Sharia’h principles. When a customer borrows money from a bank, it may lead to the interest rate. Thus, Islamic bank will use Shariah principles and specially offer the product and services like conventional banks. Customer pleasure has been a critical perception in contemporary marketing related to buyer behaviour. If customers are satisfied with a particular product or services offering after its use, then they are likely to engage in a repeat purchase. Then, the customer satisfaction is often described as being related to factors such as service quality and future services like convenience, competitiveness, location of service providers and a form of attitude that results from the comparison of expectation with performance. The Islamic banking system is expected to face strong competition not only from the Islamic banks but also from well-established conventional banks offering Islamic products and services (Naser and Pendlebury, 1997).
Modern banking system was introduced into the Muslim countries at a time when they were politically and economically at low ebb, in the late 19th century. The main banks in the home countries of the imperial powers established local branches in the capitals of the subject countries and they catered mainly to the import export requirements of the foreign businesses. The banks were generally confined to the capital cities and the local population remained largely untouched by the banking system. The local trading community avoided the “foreign” banks both for nationalistic as well as religious reasons. However, as time went on it became difficult to engage in trade and other activities without making use of commercial banks. Even then many confined their involvement to transaction activities such as current accounts and money transfers. Borrowing from the banks and depositing their savings with the bank were strictly avoided in order to keep away from dealing in interest which is prohibited by religion.
In 1963, Islamic banking came into existence on an experiment basis on a small scale in a small town of Egypt. The success of this experiment opened the doors for a separate and distinct market for Islamic banking and finance and as a result, in 1970s Islamic banking came into existence at a moderate scale and a number of full-fledge Islamic banks was introduced in Arabic and Asian countries. Most of these Islamic banks were in Islamic countries. Having started on a small scale, Islamic banks and non-banking financial institutions are now in operation even on more intensive scale. Today, Islamic banks are operating in more than sixty countries with assets base of over $166 billion and a marked annual growth rate of 10%-15%. In the credit market, market share of Islamic banks in Muslim countries has risen from 2% in the late 1970s to about 15 percent today (Aggarwal and Yousaf 2000). These facts and figures certify that Islamic banking is as viable and efficient as the conventional banking.
To adhere to the teachings of Islamic Law (Shari’ah) – avoid paying and receiving Riba, avoid Gharar, investing in profit-sharing ventures, avoid investing in such business that are unethical and impermissible, and making socially responsible investments – are the distinguishing points as well as goals of all Islamic banks. How well these Islamic financial institutions have performed and to what extent they have been successful in achieving these goals have been the question marks for the scholars, researchers, and the stakeholders.
Where Islamic banking, on the one side, is being regarded as a fastest growing market, on the other side, it is not free from issues, problems, and challenges. Numerous studies have been performed since the inception of the modern Islamic banking and finance. Conceptual issues underlying interest free financing (Ahmad 1981, Karsen 1982) have been the prime focus of these previous studies on Islamic banks. It is hard to find enough coverage in the existing literature on the issues of viability of Islamic banks and ability to mobilize saving, pool risk and facilitate transactions (Hassan & Bashir 2003). However, there are few studies that have focused on policy implications of eliminating interest payments [see for example, Khan (1986) and Khan & Mirakhor (1987)].
Although the phenomenon of Islamic Banking and finance has emerged in recent yearsand despite the considerable development of Islamic banking sector, the studies focusing on the efficiency of the Islamic banks are still limited in number [see, for example, Yudistira (2003) and Sufian (2007)]. Most of the studies that have been conducted, generally evaluate the performance of Islamic banks with regards to the relationship between profitability and bank characteristics. Bashir (2000) and, Hassan & Bashir (2003) employ bank level data and perform regression analysis to determine the underlying determinants of Islamic performance. Samad & Hassan (2003) and Kader & Asarpota (2007) apply financial ratio analysis to assess the performance of the Malaysian Islamic bank and UAE Islamic banks respectively. Similarly, to measure efficiency of Islamic banks in Bangladesh, Sarker (1999) utilizes Banking efficiency model and claims that Islamic banks can stay alive even within a traditional banking architecture in which Profit-and-Loss Sharing (PLS) modes of financing are less dominated. Sarkar (1999) further claims that Islamic financial products have different risk characteristics and consequently different prudential regulations should be in place.
Samad and Hassan (2000) evaluate intertemporal and interbank performance in profitability, liquidity, risk and solvency, and community involvement of an Islamic bank (Bank Islamic Maalysia Berhad (BIMB) over 14years for the period 1984-1997. The study is intertemporal in that it compares the performance of BIMB between the two time period 1984-1989 and 1990-1997. This is not a new method (Elyasiani 1994). To evaluate interbank performance, the study compares BIMB with two conventional banks (one smaller and one larger than BIMB) as well as with 8 conventional banks. Using financial ratios to measure these performance and F-test and T-test to determine their significance, the results show that BIMB make statistically significance improvement in profitability during 1984-1997, however, this improvement when compared with conventional banks is lagging behind due to several reasons. This result is consistent with that of Samad (1999) and Hassan (2003). The study also reveals that BIMB is relatively less risky and more solvent as compared to conventional banks. These results also conform to risk-return profile that is BIMB is comparatively less profitable and less risky. Performance evaluation of BIMB indicates that it is more liquid as compared to the group of 8 conventional banks. Results of the primary data gathered by surveying 40% to 70% bankers identify that lack of knowledgeable bankers in selecting, evaluating and managing profitable project is a significant cause why Musharka and Mudarabah are not popular in Malaysia.
Survey and analysis by Ismail and Abdul Latif (2001) on financial reporting of Islamic banks shows that the main difference between standards produced by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and selected Islamic banks in Malaysia including Islamic bank is in classification of deposits funds and the particular prominence that is given to restricted investment accounts and unrestricted investment accounts from other deposits like current and saving. Most of the intellectual activity over the past few decades has been geared toward into developing Shari’ah-compliant alternatives for bank financing. The deposits side attracted little attention. A closer look at the matters reveals that the line of distinction between Islamic banks and their interest-based counterparts is thin. Tahir (2007)
Abdus Samad (2004) in his paper examines the comparative performance of Bahrain’s interest-free Islamic banks and the interest-based conventional commercial banks during the post Gulf War period 1991-2001. Using nine financial ratios in measuring the performances with respect to (a) profitability, (b) liquidity risk, and (c) credit risk, and applying Student’s t-test to these financial ratios, the paper concludes that there exists a significant difference in credit performance between the two sets of banks. However, the study finds no major difference in profitability and liquidity performances between Islamic banks and conventional banks.
Kader and Asarpota (2007) utilize bank level data to evaluate the performance of the UAE Islamic banks. Balance sheets and income statements of 3 Islamic banks and 5 conventional banks in the time period 2000 to 2004 are used to compile data for the study. Financial ratios are applied to examine the performance of the Islamic banks in profitability, liquidity, risk and solvency, and efficiency. The results of the study show that in comparison with UAE conventional banks, Islamic banks of UAE are relatively more profitable, less liquid, less risky, and more efficient. They conclude that there are two important implications associated with this finding: First, attributes of the Islamic profit-and-loss sharing banking paradigm are likely to be associated as a key reason for the rapid growth in Islamic banking in UAE. Second, UAE Islamic banks should be 18 regulated and supervised in a different way as the UAE Islamic banks in practice are different from UAE conventional banks.
Saleh and Rami (2006) in order to evaluate the Islamic banks’ performance in Jordon, examine and analyze the experience with Islamic banking for the first and second Islamic bank, Jordan Islamic Bank for Finance and Investment (JIBFI), and Islamic International Arab Bank (IIAB) in Jordon. The study also highlights the domestic as well as global challenges being faced by this sector. Conducting profit maximization, capital structure, and liquidity tests as performance evaluation methodology, the paper finds several interesting results. First, the efficiency and ability of both banks have increased and both banks have expanded their investment and activities. Second, both banks have played an important role in financing projects in Jordan. Third, these banks have focused on the short-term investment. Fourth, Bank for Finance and Investment (JIBFI) is found to have high profitability. Finally, the study concludes that Islamic banks have high growth in the credit facilities and in profitability.
Bashir (2000) examines the determinants of Islamic banks’ performance across eight Middle Eastern countries between 1993 and 1998. Using cross-country bank-level data on income statements and balance sheets of 14 Islamic banks in eight Middle Eastern countries for each year in the 1993-1998, the study closely examines the relationships between profitability and the banking characteristics. After controlling for economic and financial structure indicators such as – macroeconomic environment, financial market structure, and taxation – the study shows some very important and interesting results. First, the profitability measures of the Islamic banks react positively to the increases in capital and loan ratios, which is intuitive and consistent with previous studies. Second, the study highlights the empirical role that adequate capital ratios and loan portfolios play in explaining the performance of Islamic banks. Third, the results indicate that customer and short-term funding, non-interest earning assets, and overhead are also important for promoting banks’ profits. Fourth, the results reveal that foreign-owned banks are more profitable than their domestic counterparts. Fifth, keeping other things constant, there is evidence that implicit and explicit taxes affect the bank performance measures negatively. Sixth, favorable macroeconomic conditions have positive effect on performance measures of the bank. Finally, the results of the study show that stock markets are complementary to bank financing.
A similar study performed by Hassan and Bashir (2003) analyzes how the performance of the Islamic banks is affected by bank characteristics and the overall financial environment. They utilize cross-country bank level data on Islamic banks in 21 countries for each year in 1994-2001 to closely examine the performance indicators of Islamic banks. In general, they find their analysis of determinants of Islamic banks profitability consistent with previous findings. The study indicate that controlling for macroeconomic environment, financial market structure, and taxation, the high capital and loan-to-asset ratios lead to higher profitability. Everything remaining equal, the regression result of the study reveals that there is negative effect of implicit and explicit taxes on the bank performance measures, while there is positive impact of favorable macroeconomic conditions on bank performance measures. That is, favorable macroeconomic environment appears to kindle higher profit margins. Results also show surprisingly a 19 strong positive correlation between profitability and overhead. That is in the Islamic banking market expense preference behavior appears to hold. They also find in their study that size of the banking system has negative impact on the profitability except net on interest margin.
Yudistira (2003) in his study makes an empirical analysis on efficiency and provides new evidences on the performance of 18 Islamic banks over the period 1997-2000. Panel data set for this time period is extracted from non-consolidated balance sheets and income statements of these Islamic banks with specific purpose of seeing the impact of recent financial crises on efficiency of Islamic banks. This study is different from previous studies in that it utilizes non-parametric approach, Data Envelopment Analysis (DAE) to analyze the technical efficiency, pure technical efficiency, and scale efficiency of Islamic banks. Being in line with the principle of Islamic financial system, the intermediation approach is used to specify input-output variables of Islamic banks. The study finds several results. First, the overall efficiency results indicate that there is a small (at just over 10%) inefficiency across 18 Islamic banks, which is considerable as compared to many conventional counterparts. Similarly, global crisis in 1998-1999 badly affected the performance of Islamic banks; however, they performed better afterwards. Second, the results show that small and medium sized Islamic banks faced diseconomies of scale which suggests that M&A should be encouraged. Moreover, as compared to their nonlisted counterparts, publicly listed Islamic banks are found to be less efficient. Lastly, Country specific factors mainly determined the efficiency differences across sample data.
Sufian (2007) performs a similar study to provide new evidence on the relative efficiency between the domestic and foreign banks Islamic banking operation in Malaysia during the period of 2001-2004. Non-parametric Data Envelopment Analysis (DEA) methodology has been utilized to distinguish between three different types of efficiency: technical, pure technical and scale efficiencies. The study also used intermediation approach to specify input-output variables of Islamic banks. A series of parametric and non-parametric tests were performed to examine whether the domestic and foreign banks were drawn from the same population, as most of the most of the results could not reject the null hypothesis at 5% level of significance. Finally, Spearman Rho Rank-Order and the Parametric Pearson correlation coefficients were employed to examine the association between the efficiency scores derived from the DEA results with the traditional accounting ratios. Several results are drawn form the study. The results from the DEA show that efficiency of Malaysian Islamic banks recovered slightly in years 2003 and 2004 after declining in year 2002. The domestic Islamic banks are found marginally more efficient than foreign Islamic banks. The study examines that operating at the wrong scale of operations has been the main reason for the Malaysian Islamic banks inefficiency. The dominance of scale in determining the technical efficiency of Malaysian Islamic banks is further confirmed from the results of the correlation coefficients. The results of the study also indicate that profitability is significantly and positively correlated to all efficiency measures.
A similar study performed by Bashir (2000), In general, our analysis of determinants of Islamic bank profitability confirms previous findings. Controlling for macroeconomic environment, financial market structure, and taxation, the results indicate that high leverage and large loans to asset ratios lead to higher profitability. The results also indicate that foreign-owned banks are more profitable than their domestic counterparts. Everything remaining equal, there is evidence that implicit and explicit taxes affect the bank performance measures negatively. Furthermore, favorable macroeconomic conditions impact performance measures positively.
3. Overview of Shajalal Islami Bank Limited
Banks play an important role in economy of any country. At Bangladesh Muslim constituted more than about 90% of its population. This population possesses strong faith on Allah and wants to lead their lives as per the constructions given in the holy Quran and the way shown by the prophet Hazrat Muhammad (Sm). But No Islamic Banking system was developed here upto 3983. The traditional banking is fully based on interest it is commonly meant as commercial banks. But interest is absolutely prohibited by Islam. As a result people of Bangladesh have been experiencing such a no-Islamic and prohibited banking system against their normal values and faith.
In the Islamic banking system the bank receive no interest. In this case bank receives its entire deposit from the investment of the clints on the basis of profit sharing places it to the actual entrepreneurs on the basis of profit sharing. So it is clear that in case of the traditional banking system, a fixed percentage of interest, irrespective of income earned is paid to the depositors. The depositors of Islamic banking are never deprived of excess income, which the bank may make at the end of year. Not only has this traditional bank given fixed interest rate even when they incur operational loss. The critics of Islamic Banking system are of the opinion that both are found same in terms of deposits mobilization and advances investment.
The number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks, four are Nationalised Commercial Banks (NCBs), 28 local private commercial banks, 12 foreign banks and the rest five are Development Financial Institutions (DFIs). Among these banks only six local banks have fully Islamic banking system, Shajalal Islami Bank Limitd is one of the Islami Bank.
3.1 Background of SJIBL
Bangladesh is one of the largest Muslim countries in the world. The people of this country are deeply committed to Islamic way of life as enshrined in the Holy Qur’an and the Sunnah. Naturally, it remains a deep cry in their hearts to fashion and design their economic lives in accordance with the precepts of Islam.
The establishment of Shahjalal Islami Bank Limited (SJIBL) on 2001 is the true reflection of this inner urge of its people, which started functioning with effect from 10th May 2001. It commenced its commercial operation in accordance with principle of Islamic Shariah on the 10th May 2001 under the Bank Companies Act, 1991. It is committed to conduct all banking and investment activities on the basis of interest-free profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the Gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh. Shahjalal Islami Bank Limited” offers the full range of banking services for personal and corporate customers, covering all segments of society within the framework of Banking Company Act and rules and regulations laid down by our central bank. Diversification of products and services include Corporate Banking, Retail Banking and Consumer Banking right from industry to agriculture, real estate to software and is backed by the latest technology.
The Bank is managed by a Team of professional Executives and Officials having profound banking knowledge & expertise in different areas of management and operation of Banks. During the short span of time, Shahjalal Islami Bank so far introduced a good number of attractive deposit products to broaden the resource base and also Investment products to deploy the deposit resources so mobilized. Some more schemes covering the deposits, Investments & Services will be introduced gradually in near future suiting to the taste and requirement of the clients. The Bank has a strong Shariah Council consisting of prominent Ulama, Fuquah & Economists who meet periodically to confer decisions on different Shariah issues relating to Banking Operation & to address them and to give necessary guidance to the management on Shariah Principle. Since inception, Bank has been performing in all the sectors i.e. general Banking, Remittance, Import, Export & Investment. All our branches are fully computerized having on line Banking facility for the clients.
During last nine years SJIBL has diversified its service coverage by opening new branches at different strategically important locations across the country offering various service products both investment & deposit. Islamic Banking, in essence, is not only INTEREST-FREE banking business, it carries deal wise business product thereby generating real income and thus boosting GDP of the economy. Board of Directors enjoys high credential in the business arena of the country, Management Team is strong and supportive equipped with excellent professional knowledge under leadership of a veteran Banker Mr. Muhammad Ali.
|Company Profile in Brief
|Shahjalal Islami Bank Limited
|Alhaj Engr. Md. Towhidur Rahman
|2/B, Uday Sanz,, Gulshan South Avenue,Gulshan-1,Dhaka-1216
|M/S. Syful Shamsul Alam & Co
|M/S K.M Hasan & Co.
|Hasan & Associates
|Public Limited Company.
|Nature of Business
|Commercial, Corporate, Investment & Retail Banking
|First meeting of the promoters held on
|4th September, 2000.
|Date of Certificate of Incorporation
|1st April, 2001.
|Date of Certificate of Commencement of Business
|1st April, 2001.
|Banking License received on
|18th April, 2001.
|First Branch License received on
|24th April, 2001
|Inauguration held on
|10th May, 2001.
|Paid up Capital
|Number of Branches (as on 20.06.2010)
3.2 Vision of Shajalal Islami Bank Limited
To be the unique modern Islami Bank in Bangladesh and to make significant contribution to the national economy and enhance customers’ trust & wealth, quality investment, employees’ value and rapid growth in shareholders’ equity.
3.3 Mission of Shajalal Islami Bank Limited
To expand Islamic banking through welfare oriented banking system, ensure equity and justice in economic activities, extend financial assistance to poorer section of the people and achieve balanced growth & equitable development.
- To provide quality services to customers.
- To set high standards of integrity.
- To make quality investment.
- To ensure sustainable growth in business.
- To ensure maximization of Shareholders’ wealth.
- To extend our customers innovative services acquiring state-of-the-art technology blended with Islamic principles.
- To ensure human resource development to meet the challenges of the time.
3.4 Moto of Shajalal Islami Bank Limited
Committed to Cordial Service.
3.5 Objectives of Shajalal Islami Bank Limited
From time immemorial Banks principally did the functions of moneylenders or “Mohajans” but the functions and scope of modern banking are now-a-days very wide and different. They accept deposits and lend money like their ancestors, nevertheless, their role as catalytic agent of economic development encompassing wide range of services is very important. Business commerce and industries in modern times cannot go without banks. There are people interested to abide by the injunctions of religions in all sphere of life including economic activities. Human being is value oriented and social science is not value-neutral. Shahjalal Islami Bank believes in moral and material development simultaneously. “Interest” or “Usury” has not been appreciated and accepted by “the Tawrat” of Prophet Moses, “the Bible” of Prophet Jesus and “the Quran” of Hazrat Muhammad (sm).
Efforts are there to do banking without interest Shahjalal Islami Bank Limited avoids “interest” in all its transactions and provides all available modern banking services to its clients and want to contribute in both moral and material development of human being. No sustainable material well being is possible without spiritual development of mankind. Only material well-being should not be the objective of development. Socio-economic justice and brotherhood can be implemented better in a God-fearing society.
Other objectives of Shahjalal Islami Bank include:
- To establish interest-free and welfare oriented banking system.
- To help in poverty alleviation and employment generations.
- To contribute in sustainable economic growth.
- To remain one of the best banks in Bangladesh in terms of profitability and assets quality.
- To earn and maintain a ‘Strong’ CAMEL Rating
- To ensure an adequate rate of return on investment.
- To maintain adequate liquidity to meet maturing obligations and commitments.
- To play a vital role in human development and employment generation.
- To develop and retain a quality work force through an effective Human Resources Management System.
- To pursue an effective system of management by ensuring compliance to ethical norms, transparency and accountability at all levels.
3.6 Strategies of Shahjalal Islami Bank include
- To strive for customers best satisfaction & earn their confidence.
- To manage & operate the Bank in the most effective manner.
- To identify customers needs & monitor their perception towards meeting those requirements.
- To review & updates policies, procedures & practices to enhance the ability to extend better services to the customers.
- To train & develop all employees & provide them adequate resources so that the customers needs are reasonably addressed.
- To promote organizational efficiency by communicating company plans, polices & procedures openly to the employees in a timely fashion
3.7 Management Strategy of Shahjalal Islami Bank include
The entire employees are divided into two categories at large:
a) Bank Official
b) Bank staff
The hierarchy of the Management is as follows:
The whole management functions as per following Organogram:
Figure: Proposed Organogram of Shahjalal Islami Bank Ltd
3.8 Financial Strategy
Shahjalal Bank limited started it’s business operation when the world had just experienced the deterioration in the overall economy and declining growth for almost all major regions of the world. The overall economic scenario in Bangladesh was also under crucial situation. Confronting many different difficulty of our economy the bank has successfully established a track of steady growth and desired level of achievement. Within five months of inception, the Bank could attain “breakeven” position. As on 20.12.2003, the Bank has achieved profit worth of Tk.19.00 crore. Besides, the bank is increasing asset financing. The Board of Directors of the Bank does not compromise on the quality of assets and the management, within many obstacles has shown their ability to generate steady growth in business. In the process, the Bank has been able to maintain a satisfactory capital adequacy ratio. As per guideline of the central bank, limit on portfolio concentration has necessitated diversification of it’s investment. As a result, small and medium enterprises have been receiving financial assistance.
The management has become more strength in servicing the clients by developing its technology, human resources and service policy.
3.9 Stock Summary of SJIBL
Authorized Capital : Tk. 4,000 million
Paid up Capital : Tk. 2,245.98 million
Face Value per Share : Tk. 100
3.10 Board of Directors of SJIBL
|Alhaj Engr. Md. Towhidur Rahman
|Alhaj Mohiuddin AhmedAlhaj Md. Sanaullah Shahid
|Alhaj Sajjatuz Jumma,Alhaj Mohammed Faruque,
Alhaj Anwer Hossain Khan,
Alhaj Tofazzal Hossain,
Alhaj Md. Harun Miah,
Alhaj Mohammed Farooq,
Alhaj Mohammed Hasan,
Alhaj Abdul Halim
|Alhaj Nazmul Islam Nuru
|Alhaj Md. Abdul Mannan
3.11 Shariah Council of SJIBL
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.
Members of the Shariah Council meet frequently and deliberate on different issues confronting the Bank on Shariah matters. They also conduct Shariah inspection of branches regularly so as to ensure that the Shariah principles are implemented and complied with meticulously by the branches of the Bank.
3.12 Management Hierarchy of SIBL
Fig: Organizational Management Hierarchy of SIBL
3.13 Activities of Shajalal Islami Bank Limited
The major actives of SJIBL is exchanges of right to possession of money and exchange of money from credit for exchange of money from credit for money. As a banking business it includes deposits taking, extending credit to corporate organization, retail and small and medium enterprise, leases and hire purchase financing, issuance of local and international credit cards etc.
The mode of banking included interest based conventional and shariah based Islamic Banking. It also performs Merchant Banking function under the license issued by Securities and Exchange Commission, Dhaka , Bangladesh which offers portfolio management, Issuemanagement, underwriting, lease financing, lending at share purchase.
The main function of SJIBL are-
- Retail / Personal Banking
- Foreign Remittance
- Credit Facilities and Programme
- Utility Service
- Micro Enterprise and Special Credit
- Rural Banking & Credit Programme
- Merchant Banking
- Bank Guaranty
3.14 Product and Services of Shajalal Islami Bank Limited
Shajalal Islami Bank Ltd. has launched several financial products and services considering the needs and requirements of the cuslomer SJIBL have classified the product under different head as below:
3.14.1 General Banking:
General Banking is the starting point of all banking operation. General banking division aids in taking deposits and simultaneously provide some ancillaries services. It provides those customers who come frequently and who come one time in banking for enjoying ancillary services. It is the department which provides day to day services to customers. Every day it receives deposits from the customers and meets their demands for cah honoring check. General banking consist of the following sections:
- Customer service
- Account opening/ Closing
- Payment Order Issue
- Demand draft issue/ Collection
- T.T Issue and collect
- Account Transfer
- Clearing etc
3.14.2 Deposit Scheme
Deposit comes from saving and according to investment scheme able fund theory, the four source of saving are house hold, business, government and companies retain earning. Among these as a low cost sensitive and large source house hold savings is the most important for bank. Considering the demography, income, and other variables SJIBL has introduce the following deposit schemes:
- Mudaraba Monthly Income
- Mudaraba Double Money
- Mudaraba Monthly Deposit
- Mudaraba Millionaire
- Mudaraba Haji Deposit
- Mudaraba Housing Deposit
- Mudaraba Small Business
- Mudaraba Cash Waqf Deposit
- Mudaraba Lakhopoti Deposit
- Mudaraba Bibaho Deposit
- Mudaraba Mohor Deposit
- Mudaraba Shikhkha Deposit
- Mudaraba Special Term Deposit
Deposit schemes are classified by above categories as policy to meet the customers need and diversification of sources of financing.
3.14.3 Investment Scheme
Bank has to invested the collected fund at higher rate than the depositors rate and difference between the deposit and investment rare is known as spread. SJIBL offers several investment scheme considering customers occupation, business and other requirements. These are called SME and Customer Credit (CC) which have more Return on Investment (ROI) than the corporate investment. SJIBL has introduce the following investment schemes:
- Small & Medium Enterprise Investment
- Small Business Investment
- Housing Investment
- Household Durable
- Car Investment
- CNG Conversion Investment
- Overseas Employment Investment
- Investment Scheme for Doctors
- Investment Scheme for Marriage
- Investment Scheme for Education
3.14.4 Foreign Exchange Service
Foreign exchange department of SIBL is one of the most important department of all department this department deals the following activities
- Import section
- Export section
- Foreign Remittance section
3.15 Corporate Investment Processing of SJIBL:
Since Shahjalal Islami Bank is running Shariya based banking system, so they exercise islamic term for Deposit Scheme, Loan .etc. For example “loan” term is used as Investment. The bank offers a wide range of Islamic financial products like
a) Short Term financial
b) Mid term financial
c) Long term financial – Up to 5 years
d) Long term financial -Above 5 years.
But the processing system of all investment products is same. Here we give a short overview about the whole process in theoretically.
3.15.1 Life Cycle of Loan Products:
· The investment-client starts repayment as per schedule in regular manner for the disbursed amount. In parallel, the Branch Investment Officer starts monitoring. If any deviation founds in compliance of terms and condition and Investment financial health he prepares an early alert and send it to Investment Administration Division, HO.
· If the customer repays the Investment regularly the account is adjusted at maturity. Sometime it may require restructuring of the repayment schedule at any time during the validity period. It is possible at any time. If repayment is irregular, it becomes overdue and/or classified.
· At the end of month, the Profit of the all accounts (except BAD/LOSS marked) applies to the Investment account and the Profit for the regular Investment is credited to the income account. In case of classified account (except BAD/LOSS), the Profit is credited to the Suspense Account.
· The classified Investment information must be reported to the central bank at the month end and quarter end by submitting the CL, CIB and SBS3 report
· Whenever the Investment account is marked BAD/LOSS, the Profit calculation continues but the Profit application to Investment account stops.
· If the Classified Investment account seems recoverable, then as per Head office approval Investment account proceeds to rescheduling. If the Investment account is rescheduled it gets a newer life. The rescheduled Investment information must be kept in the system for Central bank reporting.
· During the rescheduling, the suspense Account balance for that Investment account must be recovered first. Sometimes it may hold some balance after the rescheduling and declassification of the Investment account if the recovered amount is less than the suspense balance for that Investment.
· If the Classified Investment account seems unrecoverable, then the HO recovery unit proceeds to Lawsuit filing. After lawsuit filing the system stops Profit calculation. And capitalize all unapplied Profit to the Investment account while marking Lawsuit. And System just holds the account status open until the Court gives any resolutions.
· As per court order, recovery unit of Head office liquidates the collaterals of the customer and adjusts the Investment.
· Meanwhile, if the Investment is not rescheduled, the Recovery Unit writes off the Investment and transfers the Investment to a separate Written-off Investment Register. Though it is washed out from the balance sheet of the Bank, the recovery process continues.
3.15.2 Process Work Flow:
· Prospective customer collects