“Foreign Exchange Activities of Al-Arafah Islami Bank Ltd.”
This internship report is a partial requirement for the Bachelor of Business Administration program. The report is based on 90 days (3rd October 2010 to 3rd January 2011) working experience on Al-Arafah Islami Bank Limited (AIBL). It was assigned in the Nayapalton (VIP) Road Branch, Dhaka of AIBL. This report gives a clear idea of the activities, operation strategies and the performance of AIBL’s foreign exchange activities. There are several variable taken for analysis of the report which are number of letter of credit opening, irrevocable letter of credit, commission on foreign exchange, volume of import, back-to-back L/C, foreign documentary bills for purchase, export finance, volume of export, foreign currency deposit, exchange gain, foreign remittance etc.
The data has been collected from primary & secondary sources. Primary sources are group discussion, practical work experience, case study & interview. Secondary sources are DSE library, several books and periodicals related to the banking sector, Bangladesh Bank’s reports, different circulars sent by the head office of AIBL, annual reports of AIBL and other private banks.
The analysis of AIBL’s performance in foreign exchange transactions has been conducted based on the trend analysis, factor analysis & comparative analysis.
The report consists of six parts. The first part describes the introductory matters of a formal report which includes acronyms & abbreviations, rationale of the study, limitations etc.
The second part gives a concise description of the organization. These include origin & evaluation of AIBL, Islami banking system, concepts & principles etc. To their point of view – “Islam provides us a complete lifestyle. Main objective of Islamic lifestyle is to be successful both in our mortal and immortal life. Therefore in every aspect of our life we should follow the doctrine of Al-Quran and lifestyle of Hazrat Muhammad (sm.) for our supreme success.” Al-Arafah Islami Bank (AIBL) started its journey in 1995 with the said principles in mind and to introduce a modern banking system based on Al-Qur’an and Sunnah.
A group of noted Islamic scholar, economist, writer and ex-bureaucrat of Bangladesh Govt. Mr. A. Z. M. Shamsul Alam is the founder chairman of the Bank. His progressive leadership and continuous inspiration provided a boost for the bank in getting a foothold in the financial market of Bangladesh .A group of 26 dedicated and noted Islamic Personalities of Bangladesh are the member of executive council of the Bank. Al-Arafah Islami Bank Ltd. (AIBL) has 46 Branches and 1033 employees (as on December 2007). Its authorized capital is 2500 million Tk. and paid up capital is taka 1153 million Tk.
The third part gives a brief description of macroeconomic environment including the financial sector of Bangladesh & foreign exchange activities by the country.
The economy of Bangladesh has once again faced a great challenge mainly for the devastating natural and other catastrophes combined with political uncertainties, abolition of quota regime of readymade garments industries, abnormal price-hike of imported commodities including oil.
Some brief foreign exchange information of the country is:-
Exports (2006-07): US$ 12177.86 mn.
Imports (2006-07): US$ 17156.80 mn.
Trade Deficit: US$ 4978.90 mn .
Foreign Exchange Reserve: US$ 5514.60 mn.
Remittance: US$ 3447.32 mn.
The fourth part of the report analysis the theoretical aspects of foreign exchange transactions of AIBL. There are three kinds of foreign exchange transactions- Export, Import & Remittance. Foreign exchange business starts with a Letter of Credit (L/C). The part also describes various terms used in foreign exchange business like back-to-back L/C, FOB, understanding, shipment, LIM, LTR etc.
According to Imports and Exports (Control) Act, 1950, the officer of the chief controller of import and export provides the registration (IRC) to the importer. After obtaining this, a person has to secure a letter of credit authorization (LCA) from Bangladesh Bank and then the person becomes a qualified importer. He is the person who requests or instructs the opening of bank to open an L/C. He is also called opener or applicant of the credit.
AIBL is an authorized dealer (AD) to operate foreign exchange transaction. With the legal formalities the bank serves the customers with export, import & remittance services. In the process of providing remittance services, it sells and buys foreign currency, the convertion of one currency into another takes place at an agreed rate of exchange , which the banker quote one for buying and another for selling. There are various types of income of the bank in Foreign Exchange Sector.
The main concentration of the report is in the fifth part. In this part the performance of the bank has been assessed in the foreign exchange business. The analysis was done with some stated principles some of which are specific assumptions. The assumptions were:
- The reported financial data are free from error & bias because there were no scopes of the study to verify the data.
- Analysis & findings are valid up to June 2007 because the other data are not available.
- The data shown of 2008 are estimated figures.
- I have selected banks with the following criterion:
(i) Local commercial banks (PCB)
(ii) Foreign banks (FB)
(iii) Govt.’s specialized banks
- The banks selected are assumed to be the representatives of banking sector of our country.
Selected banks are – Dhaka Bank Ltd., National Bank Ltd., AB Bank Ltd., Standard Chartered Bank, HSBC, City Bank N. A., Sonali Bank Ltd. & Basic Bank Ltd.
The growth statistics shows that the economic downturn in 2005 & 2008 has influenced the whole banking industry.
In the comparative analysis it was revealed that:–
- Al-Arafah Islami Bank is lagging behind compared to the other banks in foreign exchange business. But the bank has a consistent performance with the trend of industry’s performance.
- The remittance business of Al-Arafah Islami Bank is significantly lower than the other local competitors.
- This can be a cause of customer focus /market segmentation of the bank.
- The bank has a huge amount of loan incentives for export & import business compared to other banks in foreign exchange activities.
- The bank provides comparatively higher loan facilities in export & import business.
However, a brief performance overview on deposit & investment division of the bank revealed that the bank is heavily concentrating on deposit schemes. With the advantage of religious belief hence Islamic Banking concept, the bank has an edge in deposit schemes which is a strong success factor of the bank.
The working environment of AIBL is very conductive and friendly. Although they don’t maintain strict hierarchical protocol among the staffs, the environment is much more relaxed & easy. The staffs are specialized in their respective fields. Each of them works on their own and there is close supervision from the top. The motivation of the employees comes from the very sense of responsibility.
The sixth part ends up the report with major findings & complementary remarks.
The human resource division is lacking to ensure modern independent work environment as women are especially discouraged to join the bank’s workforce. However, to their view, they don’t like to see women working outside the home as Islami Shariah doesn’t allow it.
Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in a modern society. Financial institutions are very much essential for the overall development of a country. Especially banks play an important role in the field of promotion of capital, encouragement of entrepreneurship, generation of employment opportunities etc. Market economy or free economy is a widely used-concept about the present economy of Bangladesh. The country adopted the concept in the late seventies with the privatization of significant number of enterprises. The practices of free market economy started from the eighties with the changing of the world economy. A number of initiatives were taken from the nineties to increase the competition and efficiency in money market, relaxation of unwanted rules & regulations, improvement of loan related law and other situations to improve the financial base of the banks of the country. In recent times the banking sector over the world has been undergoing a lot of changes due to deregulation, technological innovation, globalization etc. Banking sector in Bangladesh is lagging behind in adopting these changes.
1.1 Sources of Data:
This study is mainly based on secondary data available from the various relevant journals, annual reports of Al-Arafah Islami Bank Ltd, DSE library and publications of other relevant institutions. However the bank was a tough source of data as they lack of a useful website & some excuses of confidentiality.
(a) Primary sources of data:
- Face to face conversation with the bank officers & staffs.
- Conversation with the clients.
- Different’ manuals of AIBL.
(b) Secondary sources of data:
- Procedures manual published by the Al-Arafah Islami Bank Ltd.
- Files and documents of the branch.
- Annual reports of Al-Arafah Islami Bank Ltd.
- Different papers of Al-Arafah Islami Bank Ltd.
- DSE library
- Bangladesh Bank Journals
1.2 Objectives of the Study:
1.2.1 General Objectives:
- To get practical exposure of corporate culture.
- To understand the system and methodology adopted in conducting day to day banking by AIBL.
- To get an overall idea of banking from banker’s point of view.
1.2.2 Specific Objectives:
- To observe the foreign exchange operations of AIBL and their services review the techniques used by the bank to make it lucrative.
- An analysis and discussion of foreign exchange services of the bank.
- To evaluate of the present performance of the bank regarding foreign exchange.
- To search the problems of this branch of AIBL.
- Determining the drawbacks of the existing foreign exchange system.
- Recommending some guidelines to improve the effectiveness of foreign exchange services.
1.3 Limitation of the Study:
The study was thorough & systematic but there were some problems which can be the limitation factors for the significance of the study:
- The financial statements were up to 2007, recent data were not published yet. Macroeconomic data are also unavailable after 2007.
- Within such a short period of time, it was not possible for me to study everything about Al-Arafah Islami Bank Ltd, Nayapalton (VIP) Road Branch.
- The officers are so much busy that they cannot properly co-operate with me, which is a problem.
- Bank’s policy of not disclosing some data and information for obvious reason, which could be very much useful.
- Sometimes the officials were reluctant to give proper information regarding their activities because they felt hesitation and ambiguity to give data and information.
- Lack of personal knowledge and experience.
- Lack of a useful website of the bank.
2. Background of AIBL
2.1 Vision of AIBL:
To be a pioneer in Islamic Banking in Bangladesh and contribute significantly to the growth of the national economy.
2.2 Mission of AIBL:
- Achieving the satisfaction of Almighty Allah both here and hereafter.
- Proliferation of Shariah Based Banking practices.
- Quality financial services adopting the latest technology.
- Fast and efficient customer service.
- Maintaining high standard of business ethics.
- Balanced growth.
- Steady and competitive return on shareholders’ equity.
- Innovative banking at a competitive price.
- Attract and retain quality human resources.
- Extending competitive compensation packages to the employees.
- Firm commitment to the growth of national economy.
- Involving more in Micro and SME financing.
2.3 To attain the above vision and mission AIBL follows the following:
- The main strategy of the bank is to use Islami Banking System to attract its market.
- Providing efficient customer service.
- Maintaining corporate and business ethics.
- Being trusted repository of customers and their financial advices.
- Making its products superior and rewarding to the customers.
- Display team spirit and professionalism.
- Sound capital base.
- Enhancement of shareholders wealth.
- Fulfilling its social commitments by expanding its charitable and humanitarian activities.
- Providing high quality financial services in export and import trade.
- Building tight personal relationship with customers and clients.
- Taking less promotional activities and emphasizing on relationship marketing.
2.4 History of Al-Arafah Islami Bank (AIBL):
Islamic ideology encourages us to succeed in life here & hereafter. To achieve this success we must follow the way dictated by the “Holy Quran” and the path shown by Prophet Muhammad (SM). With this goal in view AL Arafah Islami Bank Ltd was established (registered) as a public limited company on 18 June, 1995. The inaugural ceremony took place on 27 September, 1995. The authorized capital of the Bank is TK.2500.00 million and the paid up capital is TK.1153 million. Some very renowned Islamic personalities and pious businessmen of the country are the sponsors of the bank. The total paid up capital was invested locally.
The Bank is committed to contribute significantly in the national economy. It has made a positive contribution towards the towards the socio-economic development of the country by opening 46 branches off which 16 are authorized dealer (AD) throughout the country.The equity of the bank stood at TK.2037 million as on 31 December 2008, the manpower was 1033 and the number of shareholders was 12013.
The Bank conducts its business on the principles of Musaraka, Bai-Muazzal, and hires purchase transactions approved by Bangladesh Bank. Naturally, its modes and operations are substantially different from those of other conventional commercial Bank. There is a Shariah council in the Bank who maintains constant vigilance to ensure that the activities of the bank are being conducted on the precepts of Islam. The Shariah council consists of prominent Ulema, reputed bankers, renowned lawyers and eminent economist.
2.5 Special Features of AIBL:
- All activities of the bank are conducted according to Islamic Shariah where profit is the legal alternative to interest.
- The banks investment policy follows different modes approved by Islamic Shariah based on Quran & Sunnah.
- The bank is committed towards establishing welfare oriented banking system, economic upliftment of the low-income group of people and create employment opportunities.
- According to the needs and demands of the society and the country as a whole the bank invests money to different Halal businesses. The bank participates in different activities aiming at creating jobs, implementing development projects taken by the government and developing infrastructure.
- The bank is committed to establish an economic system through social justice and equal distribution of wealth. It is committed to bring about changes in the underdeveloped rural areas for ensuring balanced socio-economic development of the country through micro credit program.
- According to Mudaraba system, the depositors are the partners of the investment income of the bank. During the period under review, 70% of the investment income has been distributed among the Mudaraba depositors.
- To render improved services to the clients imbued with Islamic spirit of brotherhood, peace and fraternity and by developing an institutional cohesion.
- The bank is contributing to economic and philanthropic activities side by side. AIBL English Medium Madrasaha and AIBL library are among mention worthy.
2.6 Management Al-Arafah Islami Bank Ltd.:
There are numerous boards & committees to handle the bank’s management decisions & tasks (detailed list is given in appendix). The management includes the following:
(i) Operating body
(ii) Executive committee
(iii) Audit committee
(iv) Shariah council
2.6.1 Hierarchy of the Executive Body of AIBL:
2.6.2 Branch Location all over Bangladesh:
Currently the bank is operating with 46 branches scattered over the country. The detailed branch name & geographical locations are provided by graph:
2.7 Corporate Culture & CSR:
The bank has a friendly work environment which is not usual in other commercial banks. However the efficiency of the employees & a strict corporate protocol is not present in the bank. The people in the Bank see themselves as a tight knit team/family that believes in working together for growth. The corporate culture has developed but not been imposed; it has rather been achieved through their corporate conducts.
(a) Shariah Board:
Shariah Council of AIBL consists of 5 members specialized in Fiqhul Muamalat (Islamic Commercial Law) according to guidelines given by the Bangladesh Bank to ensure whether all banking operations are transacted in accordance with Islami Shariah, Qur’an, Sunnah, Ijma, and Iztihad.
In the year 2007 the Shariah Council has complied various decisions taken by the council on different matters at different times under the caption “Islami Banking Shariah Nitimala (1995-2006)” and prepared a Shariah Manual and published which is first of its kind in Bangladesh. Shariah Council advices everybody concerned to comply with Shariah requirements and renders all out efforts to increase the standard of services rendered to the clients.
(b) Welfare Projects of AIBL:
Al-Arafah Islami Bank also runs some welfare project which they term as their corporate social responsibility (CSR). Here are some brief descriptions of the projects:
(i) Staff Welfare Project:
The Bank always kept a careful eye on the economic security and benefit of its staffs & officers. The Bank operates a contributory provident fund, a social security & benevolent fund and a gratuity fund for its employees. In the year 2007 Tk. 7.5 lac was paid to wife of late Mr. Shahidul Islam, AVP & former branch manager of Joydevpur Branch from bank’s social security & benevolent fund. Till now a total of Tk. 30 lac has been paid from the fund to the families of late officers & staffs of the bank.
(ii) Al-Arafah Islami Bank Foundation:
The Bank has a foundation launching philanthropic activities: Al-Arafah English Medium Madrasah and Al-Arafah Islami Bank Library are major two wings for launching philanthropic activities.
(iii) Al-Arafah English Medium Madrasah:
Al-Arafah English Medium Madrasah has been established by the Al-Arafah Bank Foundation with a view to building next generation according to the ideals of peace and equality of Islam and to establishing banking and other aspects of life in the way of Islam. The prime aim of this madrasah is to contribute towards building human resource and in the broader sense to ensure human welfare. With this view Al-Arafah Islami Bank Foundation has established an English Medium Madrasah at Dhanmondi in 1999. Such institution up to O level of its kind is for the first time in Bangladesh.
(iv) Al-Arafah Islami Bank Library:
Library is the carrier and reservoir of knowledge. Al-Arafah Islami Bank has shown that other than generating profit, it can also contribute significantly in the field of providing good source of knowledge by establishing a public library at 32, Topkhana Road, Chittagong Bhaban (1st floor), Dhaka, thus strengthening social development. It is placed in sound and healthy surroundings. It harbours 23,000 books of reference for the researchers, students, professionals, bankers, physicians, engineers, politicians, writers or journalists, even for the kids. It is open to all from the year 2000 and well located & accessible to everybody. It procured some exceptional collection of books on Religion, Economics, Banking, Computer Science, Business Administration, Sociology, English & Arabic language and juvenile literature in Bangla, English, Urdu & Arabic which are very rare.
Education is the harmonious development of body, mind & soul. If religion is not attached to it the real attitude towards life and values will fail to develop. It is mandatory to learn Elm-e-Din to govern our life in the right way of Islam. To fulfill this noble intention Al-Arafah Islami Bank Library started Dars-ul-Quran (Teachings of Quran) program. This program will cover translation with detail explanation of Quran starting from Sura Fatiha upto Sura Nas gradually. Dars-ul-Quran program takes place every Monday after Magrib prayer.
Other than this Al-Arafah Islami Bank Library arranges shows of feature films or documentary films on Islamic life & culture.
2.8 Workforce of AIBL’s Nayapalton (VIP) Road Branch:
2.9 Information Technology of AIBL:
AIBL started providing on-line general banking services to the clients from 23 May 2008 through a network of all branches in the country using satellite based communication links. This bank is a member of the Society for Worldwide Interbank Financial Telecommunications (SWIFT).All of the Authorized Dealer Branches has SWIFT connectivity. The bank will introduce a few more products for the client, such as SMS banking, Tele-banking, Internet Banking etc in near future. To present the overall picture of the bank to the Depositors, Shareholders, and Investment Clients and Well wishers in home and abroad transparently bank has designed a web site named as www.al-arafahbank.com.
The bank presently uses “ABABIL” as banking solution software. However the software is not so much sophisticated. Very often the software related problems hamper the operations.
2.10 Classification of Bank’s Products:
|Self-custody, Sale of drafts, Standing instruction, Trusteeship.etc.|
|L/C, Foreign currency|
|Tax, Consultancy, Merchant banking project, Counseling, Investment counseling|
|Guarantees, Letter of credit.|
|Terms loans, Clean loans, Bills discounting, Pre shipment, Post shipment, Lines of credit- Secured, Unsecured, Overdraft.|
2.11 Services provided by AIBL:
The importance of mobilizations of savings for the economic development of our country can hardly be over emphasized. We considered savings and deposits as lifeblood of the bank. More the deposit, greater is the strength of the bank. The bank intends to launch various new savings scheme with prospect of higher return duly supported by a well-orchestrated system of customer services. The bank would cater to the credit needs of individuals as well as corporate clients. Initially it will emphasize on trade finance, which would be short term and self-liquidating in nature. Considering the importance of foreign trade in our national life, financing and handling of export & import business and also handling of foreign remittance business would be given top most priority. Moreover the bank operates all of its activities under the rules and regulations of Islamic Shariah. The services provided by the Al-Arafah Islami Bank Ltd. are given bellow: –
|SOD General loan, House building loan, Lease finance, Hire purchase, CC hypo, Staff loan, CCS etc.|
|Different accounts open, issues of DD. TT. PO, Clearing,
FD, Different Scheme etc.
2.12 Growth of AIBL:
|Figure in Million Tk.|
|08.||Profit before Tax and Provision||348.89||548.20||969.77||756.18|
|09.||Profit after Tax and Provision||154.76||262.90||470.02||347.31|
|10.||Earnings per Share||26.36||38.78||55.02||30.12|
|11.||Dividend||Bonus 15.50%||Bonus 26%||Bonus 35%||Bonus 20%|
|12.||Number of Employees||803||771||912||1033|
|13.||Number of Branches||40||41||46||46|
The total deposit of AIBL is increasing sharply. The total deposit of bank was Tk. 23009.13 million at 31st December 2007 as against Tk. 16775.33 million at 31st December 2006 recording growth of 37.16% of which Tk. 685.50 million was bank deposit and general deposit was 22323.63 million Tk. The graph shows that the deposit collection rate is dramatically increasing year to year:
The investment of the Bank stood at Tk. 22906.37 Million as on 31st December 2007 as against Tk. 17423.19 Million in the previous year showing an increase by 31.47%. The growth of Investment from 2004 to 2007 is shown graphically. Graph shows that every year the bank earns a huge amount of income from Investment Account.
2.12.3 Operating Profit:
The Bank earned operating profit of Tk. 756.18 million during this year 2007 before the pre-tax profit of the bank during the year 2006 was Tk. 969.77 million and thus the bank attained negative growth of 22.02% in respect of operating profit. The growth of operating profit for the year 2004 to 2007 graphically given below:
Political unrest, economic recession and many other factors badly affected the total banking sector, so that it earned lower profit than the previous year.
The Bank has been paying Dividend every year since 1998 just after conversion of a public limited company. The Board of Directors of the Bank recommended 20% stock dividend in the year 2007, which was lower than the previous year because of lower operating profit. Dividend for different years shown below graphically:
The total export earnings in 2004 were Tk.3639.34 Million and in 2007 it was Tk.12714.91 Million. So it is seen that the export earnings was 3.49 times in 2007 than that of 2004. It is also depicted from the figure.
The total Import earning in 2004 was Tk.9337.49 Million and in 2007 it was Tk.27042.72 Million. So it is seen that the Import earnings was 2.9 times in 2007 than that of 2004. It is also depicted from the figure.
2.12.7 Human Resources:
The total number of human resources in 2004 was 771 and in 2007 it was 1033.So number of employees in AIBL has increased by 262 employees from the year 2004 to 2007, which is shown below graphically:
The total number of Branches in 2004 was 40 and in 2007 it was 46. So number of Branches in AIBL has increased by 6 Branches from the year 2004 to 2007, but in 2007 there were no addition of Branches. This is shown below graphically:
3. Industry Overview
3.1 Global Economy:
Every firm’s operation is connected with the world, as a bank it is more affected by global economy.
- Financial performance, quality, price etc. of Global Competitors.
- Socio-economic Phenomena.
- Foreign Exchange Rate.
3.1.1 Global Competitors:
As the banking sector of our country involves global partner, our domestic banking sectors have to compete with the international competitors .So, it should provide services matching with the improved international quality. If they are able to do so, they are able to gain higher earnings. Financial performances of some other global banks, operated in Bangladesh, are quite better than the two banks, which is a potential threat for this company.
3.1.2 Socio-economic Phenomena:
Two important socio-economic variables are Political Condition and Taste Pattern.The world is now in an unstable economic condition. And the main reason behind it is the terrorism, which is the product of political condition. The economy of a county is biased by its political condition. As maximum countries are economically unstable, the whole world is economically unstable. As the environment, technology and income level are changing now day by day, the taste pattern of the world customer is also changing rapidly. To keep pace with this rapid change our concerned banks are also trying to do something new which may help them to survive in the present changing world strongly.
3.1.3 Foreign Exchange Rate:
Though there is no huge change in the world economy, the economies of various countries are fluctuating rapidly. And this fluctuation effects the exchange rate of that country’s currency with dollar. Some of them are rising against dollar rapidly and some are falling. Foreign exchange rate of dollar in Bangladesh is comparatively very high ($1 = TK. 70). As banking sector is the main financial sector, the change in foreign exchange rate deeply affects our economy.
3.2 Bangladesh Economy
The economy of Bangladesh has once again faced a great challenge mainly for the devastating natural and other catastrophes combined with political uncertainties, abolition of quota regime of readymade garments industries, abnormal price-hike of imported commodities including oil. Side by side, the inflationary trend across the global economy together with the apprehension of sluggish growth further deepened the challenge.
Currency: Taka (Tk.)
GDP at Current Price: Tk. 4674.97 billion (US$ 68.05 billion)
Annual per capital GDP: US$ 482
GDP growth rate at (1995/96) constant price: 6.51 percent
Agricultural growth rate at constant price: 2.95 percent
Industrial/Mfg growth rate (% of GDP): 11.19 percent
Large & Medium scale Industry: 11.56percent
Small scale Industry: 10.28percent
Service sector growth:
Rate of GDP at current price: 12.45 percent
Inflation rate (12 month average): 8.65 percent
Domestic savings rate of GDP: 20.46 percent
National savings rate of GDP: 29.15 percent
Investment rate of GDP: 24.33 percent
Exports (2006-07): US$ 12177.86 mn
Imports (2006-07): US$ 17156.80 mn
Trade Deficit: US$ 4978.90 mn
Foreign Exchange Reserve: US$ 5514.60 mn
Remittances: US$ 3447.32 mn
Direct: US$ 263 mn
Portfolio: US$ 48 mn
Bank rate: 5.0 per cent
Broad Money (M2): 222042.60 crores
Total No. of Limited Co.
Public Limited Co: 35,000
Private Limited Co.: 23,000
Principle Industries :
Garments, Pharmaceuticals, Textiles, Paper, Manufacturing, Newsprint, Fertilizer, Leather and Leather goods, Sugar, Cement, Fish processing, Steel & Chemical industries etc.
Major export items:
Garments, Tea, Jute, Frozen shrimps, Leather products, Newsprint, paper, Naphtha, Urea, etc.
Principle import items:
Fuel, Rice, Wheat, Cotton & Textile, Petroleum products, Fertilizer, Staple fibers, yarn etc.
3.2.1 Banking Sector:
The commercial banking system dominates Bangladesh’s financial sector with limited role of Non-Banking Financial Institutions and the capital market. The Banking sector alone accounts for a substantial share of assets of the financial system. The banking system is dominated by the 4 Nationalized Commercial Banks, which together controlled more than 54% of deposits and operated 3388 branches (54% of the total) as of December 31, 2004. Out of the 5 specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sectors while the other two (Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) ) are for extending term loans to the industrial sectors. Twenty-eight financial institutions are now operating in Bangladesh. Of these institutions, 1 (one) is govt. owned, 15 (fifteen) are local (private) and the other 12(twelve) are established under joint ventures with foreign participation.
3.2.2 Import Situation of Bangladesh over the year:
3.2.3 Export Performance of Bangladesh over the year:
3.2.4 Export Policy of Bangladesh:
(i) Export Policy Objectives:
The principal objectives of the export policy are as follows :–
- To achieve optimum national growth through increase of exports to regional and international markets.
- To narrow down the gap between the country’s export earnings and import payments through achievement of the export targets.
- To undertake timely steps for production of exportable goods at a competitive price with a view to expanding the existing market.
- To take the highest advantage of entering into the post Uruguay liberalized and globalized international market.
- To make our exportable items more attractive to the market through product diversification and quality improvement.
- To establish backward linkage industries.
- To simplify export procedures.
- To develop an export infrastructure.
- To develop trained human resources in the export sector.
(ii) Export Policy Strategies:
- Provide assistance through developing necessary numbers of product development councils for increased product of export items.
- Provide market intelligence to producers and exporters on product demands and prices in markets abroad.
- Offer increased institutional facilities through trading and export houses to encourage export.
- Offer assistance in establishing seal of quality organization or similar organizations to ensure quality of export items in required cases.
- Offer assistance in establishing “Bangladesh International Arbitration Centre” or similar organizations for prompt settlement and disposal of Trade disputes.
- Offer assistance to producers for development of product designs and use of modern technology.
- Offer assistance to enable exporters getting acquainted with the strategies and methods of countries which attained remarkable success in export trading and highlight the exporters.
- Organize single country export fair for Bangladeshi products in abroad and offer assistance to exporters in participating trade fairs in different countries.
(iii) Export Incentives:
- Income tax exemption for export earning: Under the income tax law other than the owners of factories not registered in Bangladeshi, all exporters will get 50% exemptions in their income taxes.
- Exemption in insurance premium
- Bond facilities for export oriented industries
- Facilities for duty free import of capital machineries for export – oriented industries
- The export-oriented industries will get the advantage of importing 10 percent spare parts of their capital machineries without duty in every two years.
- Providing alternative facilities to export-oriented local textiles and RMG other than duty-bond or duty-draw-back
- Tax holiday & Duty-draw-back scheme.
4. Foreign Exchange Division of AIBL
4.1 Foreign Exchange Operations:
Foreign exchange is the means and methods by which rights to wealth in a country’s currency are converted into rights to wealth in another country’s currency. In banks when we talk of foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another. Foreign Exchange Department (FED) of Bangladesh Bank issues license to scheduled banks to deal with foreign exchange. These banks are known as Authorized Dealers. If the branch is authorized dealer in foreign exchange market, it can remit foreign exchange from local country to foreign countries. So Al-Arafah-Islami Bank Ltd.’s Principal branch is an authorized dealer.
There are three kinds of foreign exchange transaction:
To import, a person should be competent and an importer. According to Import and Export Control Act, 1950, the Office of Chief Controller of Import and Export provides the registration (IRC) to the importer. In an international business environment, buyers and sellers are generally unknown to each other. So seller of goods always seeks security for the payment of his exported goods. Bank gives export guarantee that it will pay for the goods on behalf of the buyer if the buyer does not pay. This guarantee is called ‘Letter of Credit’ (LC). Thus the contract between importer and exporter is given a legal shape by the banker through ‘Letter of Credit’.
4.2.1 Import Registration Certificate (IRC):
The first thing one need to carry on a business of import is called Import Registration Certificate. But registration is not required for import goods, which do not involve remittance of foreign exchange like medicine, reading materials etc. can be imported without registration by the users within monetary limit. Documents required for Import Registration Certificate are as follows —
- Income Registration Certificate
- Nationality Certificate
- Certificate from Chambers of Commerce and Industry Registered Trade
- Bank Solvency Certificate
- Copy of Trade License
- Requisite fees
4.2.2 Functions of Import Section:
The form IMP contains the followings:-
- Name and address of the Authorized dealers
- Amount of remittance to be permitted
- LCA form no. Date and value in Taka
- Description of goods
- Invoice value in foreign currency
- Country of origin
- Port of shipment
- Name of steamer / Airline
- Port of importation
- Indenter’s name and address
- Indenter’s registration number with CCI & E and Bangladesh Bank
- Full name and address of the applicant
4.2.3 Letter of Credit:
A letter of credit is a letter issued by a bank (known as the opening or the issuing bank) at the instance of its customer (known as the opener) addressed to a person (beneficiary) undertaking that the bills drawn by the beneficiary will be duly honored by it (opening bank) provided certain conditions mentioned in the letter have been complied with.
22.214.171.124 Parties to the L/C:
|Importer||Who applies for L/C|
|Issuing Bank||It is the bank which opens/issues a L/C on behalf of the importer.|
|Confirming Bank||It is the bank, which adds its confirmation to the credit and it is done at the request of issuing bank. Confirming bank may or may not be advising bank|
|Advising or Notifying Bank||It is the bank through which the L/C is advised to the exporters. This bank is actually situated in exporter’s country. It may also assume the role of confirming or negotiating bank depending upon the condition of the credit.|
|Negotiating Bank||It is the bank, which negotiates the bill and pays the amount of the beneficiary. The advising bank and the negotiating bank may or may not be the same. Sometimes it can also be confirming bank.|
|Accepting Bank||It is the bank on which the bill will be drawn (as per condition of the credit). Usually it is the issuing bank.|
|Reimbursing Bank||It is the bank, which would reimburse the negotiating bank after getting payment and instructions from the issuing bank.|
126.96.36.199 Mechanism of L/C operation:
|Advising bank/Confirming Bank/Negotiating bank|
|Issue of L/C|
Steps for Import L/C Operation:
Registration with CCI&E:
• For engaging in international trade, even trader must be first registered with the Chief Controller of Import and Export.
• By paying specified registration fees to the CCI&E, the trader will get IRC/ERC (Import/Export Registration Certificate) to open L/C with bank. This IRC is a must.
Determination terms of credit:
• The terms of the letter of credit are depending upon the contract between the importer and exporter. The terms of the credit specify the amount of credit, name and address of the beneficiary and opener, exchange-period time of the bill, mode of shipment and destination, nature of credit, expiry date, name and number of sets of shipping documents etc.
Proposal for Opening of L/C:
To have an import LC limit an importer submits an application to department to AL-ARAFAH-ISLAMI Bank. The proposal contains the following particulars:
- Full particulars of the bank account
- Nature of business
- Required amount of limits
- Payment terms and conditions
- Goods to be imported
- Offered security
- Repayment schedule
Application by Importer to the Banker to Open Letter of Credit:
• For opening L/C, the importer is required to fill up a prescribed application form provided by the banker along with the following documents:-
|1. L/C Application Form||7. Authority to Debit Account|
|2. Filled up L/C Form||8. Filled up Amendment Request Form|
|3. Demand Promissory Note||9. IMP Form|
|4. Pro-Forma Invoice||10. Insurance Cover Note and Money Receipt|
|5. Tax Identification Number||11. Membership Certificate|
|6. Import Registration Certificate||12. Rate Fluctuation Undertaking|
Opening of L/C by the Bank for the Opener:
• Taking filled up application form from the importer.
• Collects credit report of exporter from exporter’s country through his foreign correspondence there.
• Opening bank then issues credit by air mail/TELEX/SWIFT followed by L/C as asked by the opener through his foreign correspondent or branch, at the place of beneficiary. The advising bank advises the L/C to the beneficiary on his own form where it is addressed to him or merely hand over the original L/C to the beneficiary if it is so addressed.
Shipment of Goods and Lodgment of Documents by Exporter:
Then exporter ships the goods to the destination of the importer country and sends the documents to the L/C opening bank through his negotiating bank. Generally the following documents are sent to the Opening Banker with L/C:
|1. Bill of Exchange||6. Packing List|
|2. Bill of Lading||7. Advice Details of Shipment|
|3. Commercial Invoice||8. Pre-shipment Inspection Certificate|
|4. Certificate of Origin||9. Vessel Particular|
|5. A certificate stating that each packet contains the description of goods over the packet.||10.Shipment Certificate|
Lodgment of Documents by the Opening Bank from the Negotiating Bank:
After receiving the documents, the opening banker scrutinizes the documents. If any discrepancy found, it informs the importer. If importer accepts the fault, then opening banker calls the importer to retire the documents. At this time many things can happen. These are indicated in the following:
• Discrepancy found and the importer accepts :- No problem occurs in lodgment.
• Discrepancy found but the importer not agreed to accept :- In this case, importer protests and sends back all the documents to the exporter and request him to make changes in the specified manner. Here, the banker is not bound to pay because the documents send by the exporter is not in accordance with the terms of L/C.
• Documents are OK but the importer is willing to retire the documents :- In this case, bank is obligated to pay the price of exported goods. Since importer did not pay for the bill of exchange, this payment by bank is one kind of credit to the importer and this credit in banking is known as PAD.
• Everything is O.K.