“Foreign Exchange Procedure of Al-Arafah Islami Bank Limited (AIBL)”.
1.1. Origin of the report:
We the students of MBA are asked to complete internship program as an integral part of MBA program. After successful completion of the program period a student must submit the report on the assigned topic to the Supervisor and the department. Six (6) credit hours are being reserved for this internship program. This program’s duration is three months. I was assigned to Al-Afafah Islami Bank Limited (AIBL) to complete the program. My respective Supervisor has given me the topic “Foreign Exchange Procedure of Al-Arafah Islami Bank Limited (AIBL)”. In connection to this, HRD of AIBL sent me to the VIP Road Branch and assigned to prepare this report.
1.2 Authorization of the Study
The banking world has been undergoing rapid and fundamental changes. The speed of these changes has been maintained even after the global financial turmoil experienced during the past few years. It is well recognized that there is an urgent need for better-qualified management and better-trained staff in the dynamic global financial market. Bangladesh is no exception of this trend. Banking sector in Bangladesh is facing challenges from different angles though its prospect is bright in the future. To meet up the growing needs of skilled and eligible managerial manpower of different banks in the country, Dhaka University has initiated the MBA Program in Accounting & Information Systems under the Faculty of Business Studies. The objective of the MBA Program is to equip individuals to develop the specific skills and the breadth of judgment required of effective financial executives or bankers. Bank education is a practice-oriented education. Hence, the practical orientation in business or financial organization has been made an integral part of the MBA Degree requirement. For fulfilling this very requirement, I was sent to Al-Arafah Islami Bank Limited. This report has been prepared on the basis of theoretical part of the various articles and under the close supervision of my internal Guide Mr. Shahidul Islam, Lecturer, Department of Accounting & Information Systems, University of Dhaka.
1.3 Objectives of the study
The core objectives of the practical orientation program in banks are as follows:
- To gain practical knowledge in banking;
- To know about the profile of Al-Arafah Islami Bank Limited (AIBL)
- To get an overview of the private Banking in our country.
- To compare the performance of the bank from different aspects.
· To identify major strength and weakness of AIBL in respect to other Banks
- To make a brief discussion foreign exchange.
- To know about performance Compare to other Banks.
- To know about trends of Performance Parameters
· To apply theoretical knowledge in the practical field.
· To fulfill the requirement of MBA Program.
- To gather knowledge about the functions and transactions of different departments of bank and check the compliance of practice with the theory.
- To recommend ways and means to solve problems regarding Banking.
1.4 Scope of the Report
Al-Arafah Islami Bank Limited is one of the growing banks in Bangladesh. The scope of the study is Performance Evaluation and Profitability Analysis of the bank. The report covers the organizational structure, background, functions and the performance of the bank in different sections like General Banking, Investment Activities, Foreign Exchange Banking staring from the origin of the bank up to December of 2007.
The duration of the study was a very short span of time. It was three months long internship program (Starting from February 2007 to April 2007). It was very much hard to complete a report as well as assigned tasks by the Bank. So I had to complete this study facing very much time pressure.
1.6 Areas of Operation:
This report focuses mainly of the foreign exchange procedure of Al- Arafah Islami Bank Limited. Prior to that the report has a literature review of banking. The report also covers the organizational structure, background, functions and the performance of the bank, compares foreign exchange procedures with the Traditional Banks Average and Islamic Shariah based Banks.
To make the Report more meaningful and presentable, two sources of data and information have been used widely.
Source of Data
Figure 1.1: Sources of data
Both primary and secondary data sources were used to generate the report.
Primary Sources are as follows:
- Face-to-face conversation with the respective officers and staffs of the Branch.
- Practical work experience in the different desks of the departments of the Branch covered.
- Relevant file study as provided by the officers concerned.
Secondary Sources of data and information are:
- Annual Report of Al-Arafah Islami Bank Limited
- Web site of the Al-Arafah Islami Bank Limited: http://www.al-arafahbank.com/
- Various books, articles regarding general Banking functions, Foreign exchange operations and credit policies.
- Different ‘Procedure Manual’, published by Al-Arafah Islami Bank Limited.
- Different circular sent by Head Office of Al-Arafah Islami Bank Limited
The major limitations of this study are:
- Sufficient records, publications were not available as per my requirement.
- Information is not processed through computer.
- Time and budget constraint.
- Non-cooperative behavior of some officials of the bank.
- 3 months are very short time to prepare this type of comparative report.
- Another limitation of this report is Bank’s policy of not disclosing some data and information for obvious reason, which could be very much useful.
2.1 Historical Background of Banking
Banks and other financial institutions play a vital role in fostering the economic and social condition of a country. They help to develop a conducive climate for capital formation through three stages such as, savings, financing and investment and the role of banks is instrumental in all these stages. Banks in Bangladesh now constitute the core of the country’s organized financial system. They mobilize the savings of people and channel the resources towards different sector of the economy.
The objectives of this paper are to trace (i) how banks evolved over periods, (ii) what were the factors that shaped the modes of credit and other services (iii) how was the policy framework evolved, and (iv) who looks after control and regulations of banking institutions.
In order to fulfill the objectives, basically historical method of research has been applied. The available book. research works, articles, publications of Bangladesh Bank were reviewed. The required items of information were developed, searched, noted from sources without bias, and organized into an appropriate order.
2.1.1 Banking in ancient and British Period
Banking in India is traceable in ancient Vedic era, Ancient bankers performed the functions such as accepting deposit, granting loan against security, acting as bailee to customers, or as treasurers and bankers to the state, and managing the currency of the country. Also they used loan deeds. During Buddhist period, Brahmins and Kshatriyas entered banking business. The concept of hundis or indigenous bills of exchange came in use (Ahmad 1992.25).
During Mughal rule, indigenous banks granted loans for both domestic and foreign trade, assisted the state, issued metallic coin, and acted as moneychanger, revenue influence and power. They financed trade, performed treasury function and were trusted custodians of deposit (Ahmad 1992:27). However, the Jagath Seth Seths did not provide banking services, per se.
The tradition and culture of the Bengalis reflect their conscious of money and assets. They have been exposed to the principles of cash transaction, saving, investment, credit, interest, and several kinds of mortgages since Indian classical civilization. By the third century BC, Mauryan urban economy extended up to Mahasthan (Bogra), where its silver coins have been found (Maloney and Ahmed, 1988:1).
In seventeenth century, the English traders and the East India Company utilized indigerons bankers for borrowings, and collection of land revenue. But the business and power of indigenous bankers declined due to the emergence of the English Agency Houses (in Calcutta and Bombay) which began banking business in addition to their commercial business. Other causes of decline of the indigenous bankers can be attributed to the break up of the Mughal Empire, and establishment of uniform currency throughout the country in 1835. Also changes in trade routes and trade relaingons with other countries due to development of railways, steamships, post and telegraph etc. badly affected the indigenous bankers. Indigenous bankers lost their business in urban areas and the European bankers captured the urban banking. Then, indigenous bankers existed in rural areas by concentrating on banking services to agriculture and internal trade. The Agency Houses were bankers of the East India Company, and the European merchants in India. The Agency Houses financed the crops trade, issued paper money, and paved the way for the establishment of joint stock banks (Ahmad 1992:28).
Commercial banks in Bangladesh territory have been functioning for the last two centuries. “The Bank of Hindustan” was the first modern bank formed in 1770 by an English Agency House in Calcutta, but was wound up in 1832 (Guru Datta 1987:5 in Abrol, (1987); Ahmad 1992:30). The Bengal Bank and the General Bank of India were established in about 1785chartered by the East India Company (Ahmad 1932:30). In the first quarter of the nineteenth century, the state aided bank facilitated government borrowing and helped the trading class. In the year 1806 the first presidency bank, the Bank of Bengal, was established, followed by the Bank of Bombay (1840) and the Bank of Madras (1843). The East India Company and European private shareholders mostly owned these banks. The presidency banks had the monopoly of government banking and the issue of notes. In 1876, the Presidency Banks Act was passed and government had withdrawn its capital. The government’s balances were kept in three reserve treasuries. The policy of the Presidency Banks. Act was to safeguard the interest of the government, and also it imposed restriction on all three banks to carry out the business of banking only (Ahmad 1992:30). In that period, the English agencies established mostly the joint stock banks. After 1813, several joint stock banks were established by the British settlers in India, but most of them could not stay long as they failed to confine to banking business only (Ahmad 1992:31). Between 1861 and 1865 there was a mushroom growth of banking companies. Under the Indian management, the Oudh Commercial Bank’ was first formed in 1880 followed by the Punjab National Bank and the Alliance Bank of Simla [Srinivasaraghavan, 1955:567). The three presidency banks and Indian joint stock banks were established by the acts of Indian legislature. In 1860, the principal of limited liability was first applied to the banks (Ahmad 1992:30).
The failure of Indian banks (upto 1935) was mostly because they indulged in other activities. Such as large sums of money were locked up in speculative business, the banks had provided ling-term financed to businesses without efficient investigations into their soundness, for getting the chance of earning large profits and also short term deposits were invested for this purpose. Many of the directors and managers of these banks were incapable and dishonest. Loans to directors and concerns in which they were interested were unrestricted (Ahmad 1992:32).
The political stimulus of the “Swadeshi movement” of the early twentieth century inspired the opening of important joint stock banks. (such as Bank of India, the Cenara Bank of Baroda) Srinivasaraghavan, 1985:568; Ahmad 1992:31). In order to face the competition of foreign banks, the three presidency banks were amalgamated and the Imperial Bank of India was formed in 1920 (Ahmed 1992:31). In order to face the competition of foreign banks, the three presidency banks were amalgamated and the Imperial Bank of India was formed in 1920 (Ahmed 1992:31). The Imperial Bank of India Act was passed in 1920. Before the establishment of RBI, commercial banks were regulated by different acts. The establishment of RBI was the first organized initiative to bring banking and monetary system of the sub-continent in a disciplined way.
After 1942, circumstantial forces changed the traditional pattern of banking policy in India. The subcontinent experienced a tremendous inflow of money due to expenditure in war and post-war reconstruction Ismail in Uzair 1967:42]. The British rulers pursued a policy package that had two characteristics: (i) the exploitative relation between the United Kingdom and India, and (ii) the dominance of the British over the Indians. The maintenance of imperial systems received the highest priority. The philosophy and socioeconomic intent of the British rules concentrated mostly on administration for laws and regulations for protecting the imperial interest. The government monopoly was retained in the sphere of post, telegraph, and telecommunication. The banking and insurance etc. were encouraged for private enterprises (Ahmad 1987:68). The foreign exchange banks, which were fifteen in number, were not under the control of the Indian government.
2.1.3 Banking during Pakistan Period
In Bengal, the rural informal credit was part of the social, economic and trade culture. Traditional mahajans were goldsmiths, and Hindu businessmen, especially “baniyas” who acted as moneylender since long. But, many have left for other areas of India and their place in money lending was taken by Muslim landowners (Maloney and Ahmed, 1988:49).
The areas that fall within the boundaries of Pakistan had been fairly well provided with commercial banking facilities during the pre-1947 period. In March 1947, the number of Indian scheduled bank offices in undivided India was 3,496, of which 631 were in Pakistan. Of the total number of bank offices, 487 (77%) were in the West Pakistan and 144 (33%) were in the East Pakistan. Small and mostly non-scheduled banks mainly provided banking facilities in the then East Pakistan.
After the announcement of independence of Pakistan in August 1947, the banking services in Pakistan were seriously hampered and the number of banks declined to 38 with 195 bank offices. Many funds and accounts were transferred to India. Most of the bank offices, which belonged to India, had closed their business. This resulted in a sharp curtailment of banking business in Pakistan the country had only two banks owned by Pakistani nationals. In East Pakistan, number of bank offices remained unchanged but banking functions reduced harply due to the fact that non-Muslims had withdrawn all their deposits and went to India. In June 1948, of the 195 bank offices that remained in Pakistan, 81 were in the West Pakistan and 114 were in East Pakistan (Srinivasaraghavan, 1955:569). At that time, Pakistan banking system consisted primarily of non-Indian foreign banks. The Australisia Bank had been functioning in Pakistan prior to June 1947. Nineteen non-Indian foreign bank offices and a number of Indian banks were in limited operation. Prior to June 1947, only one Muslim-managed schedule bank, Bank of Bahawalpur Limited, was functioning in the Pakistan territory. The Habib Bank Limited, established in 1941, had transferred its head office to Karachi after partition (Andrus and Mohammed, 1966:105). The number of Pakistan bank on the 30th June, 1948 was 4 with 23 branches (Banking Statistics of Pakistan, 1960-61, 1964-65).
2.1.4 Banking in Bangladesh
Since early British rule, the history of banking in Bangladesh territory shows that the traditional trade-networks developed before the banks invaded rural areas. And the banking services have slowly flourished in Bangladesh territory. Even today, in many places, moneylenders provide credit services. Small shopkeepers and businessmen use informal credit at high interest rate (Maloney and Ahmed, 1988: 54). Traditional mahajans’ money lending business gradually declined due to expansion of bank and the micro credit programs of NGOs, cooperative banks and government agencies.
Public Sector Banks
During the liberation was in 1971, the economic, political, and social system including the banking system were severally damaged at that time, all hi a and medium financial institutions except two small banks had their head office in the West Pakistan. The non-Bengali owners and managers of the financial establishments that operated in east Pakistan had abandoned them. After independence’ in 1 971, the now government had to take over management and ownership of all such institutions, The Baths Nationalization Order 1972 was issued to nationalize banks and financial institutions (except those incorporated abroad) in order to control chaos in the field oh ownership, party. Bureaucracy, the intelligentsia, and pressure group. By several orders six nationalized commercial banks (NCBs), one industrial bank (BSB), one agricultural bank (BKB), and one industrial development financial institution (BSRS) were created, the banks and financial institutions, which originated during the Pakistan period and were merged. And renamed and continued their functioning after independence of Bangladesh have teen presented in Table-3. The banks were consolidated and nationalized. The nationalized banks and foreign banks constituted the total banking system of Bangladesh. Investment Corporation of Bangladesh was established in 1976. Grameen Bank, a specialized bank for the poor but not under control f the Central Bank, was established in 1983. In the’) year 1983, the government allowed private sector to participate ii the 1 business.
The Public Bank and the Uttara Bank were denationalized in January 1985, due to non-profitability. This action reduced the number of NCBs to four. The nationalized banks continue to receive refinancing and other subsidies in order to fill credit demand and government desires. Rupali Bank was converted into a public limited company on 14th December 1986. Rajshahi Krishi Unnayan Bank was established in 1987 through a bifurcation of the offices of Bangladesh Krishi Bank of Rajshahi division. Bank of Small Industries and Commerce Bangladesh Ltd. was established in 1993. This was made with the intent of reversing the urban monopoly of banking and the flow of capital from rural to urban areas. Such restructuring of public sector bank was in order to attain economic growth, and policies were formulated for scheduled banks to play their role in industry, agriculture, export, self-employment etc. As a result there has been an advancement in the public sector banks in terms of increase in the number of branches, deposit mobilization, and advances to the society (Table-4). There are nine public sector banks, of which four are nationalized commercial banks and five are specialized banks.
Private Commercial Banks
Taking advantage of the liberalization policy of the government regarding participation of private sector in the banking business, a number of private sector banks were established in-and-after 1983. With the emergence of private banks in Bangladesh, a competitive situation in the sector has been created. There are twenty seven private banks in Bangladesh. They are: The City Bank (1983), International finance Investment and Commerce Bank (1983), Arab Bangladesh Bank (1986), Al-Baraka Bank Bangladesh (1995), South East Bank (1995) Dhaka Bank (1996), Dutch Bangla Bank (1996), Al-Arafah Islami Bank (1996), Social Investment Bank (1996), Mercantile Bank, Standard Bank, One Bank, EXIM Bank, Bangladesh Commerce Bank, Mutual Trust Bank, Premier Bank, The First Security Bank, Bank Asia, and The Trust Bank. The emergence of Private Banks has added a new dimension to the banking system in Bangladesh. The private commercial banks show a steady growth in terms of number of branches, deposit, and advances (Table-5).
The state Bank of India opened one branch during July-September 1975. In 1975, the four foreign banks operating in Bangladesh were: (a) American Express International Banking Corporation, (b) Grind lays Bank, (c) The Chartered Bank, and (d) State Bank of India. Now, there are thirteen foreign banks – American Express Bank, ANZ Grindlays Bank, Standard Chartered Bank, State Bank of India, Habib Bank, Citibank N.A., Credit Agrocole Indosuez, National Bank of Pakistan, Muslim Commercial Bank., The Bank of Nova Scotia, Hanil Bank, and Hong Kong and Shanghai Banking Corporation, Faysal Islamic Bank of Bahrain E.C. The foreign banks show a steady growth in terms of number of branches, deposit, and advances (Table-6).
Cooperative banks are indigenous banks in model and function. they are organized in three tiers and their form of functioning is unit banking. The then British government promulgated cooperative rules in 1904 and 1912 to shape the organization. In 1947 the then East Pakistan had twenty-six thousand cooperatives, which collapsed after partition. The traditional cooperatives in Bengal were mostly organized by savings and credit societies. In 1948, Union Multipurpose Cooperative Societies (UMPCSs) were formed with government patronage but were mostly dissolved due to malfunctioning. The cooperative financing (Maloney and Ahmed, 1988: 115-6). The Land Mortgage Banks have been operating in India since 1929. They supplied long-term and medium term loans to their members on the mortgage of land for agriculture purpose. They also performed banking functions of deposit mobilization, supply of credit, and provision of remittance facilities.
After independence, Bangladesh Bank had taken measures such as credit expansion, branch expansion, deposit mobilization, advances to priority sectors through the banks. (Chowdhury, 1973:1). Immediately after independence, to recover and reconstruct the war affected economy, Bangladesh signed several trade agreements with different countries, donor agencies, and international banks for inflow of capital in the form of aid, grant, loan, etc. The Government and the Bangladesh Bank implemented several loan schemes for economic development and the government continuously adopted deficit budget and followed foreign aid financed development strategy. All these contributed to the growth of banks in Bangladesh (Sobhan and Islam, 1988, 182; Hossain, 1988: 211; Hashemi, 1988: 213; Bhattacharya, 1988:233: Ahmad, 1988:309). The main factors which shaped the nature of development of the banking system in Bangladesh are (i) nationalization of banks in 1972, (ii) inflow of capital under trade agreement to reconstruct the war affected economy, (iii) Bangladesh Bank’s policy measures for the growth of disciplined banking system and services to the deposit mobilization and loans to priority sectors, (iv) de-nationalization and permission to open new private banks, (v) gradual growth in foreign trade, (vi) inflow of capital from the World Bank, Asian Development Bank, Islamic Development Bank, and other organizations and agencies and (vii) wage earners remittances. The institutional structure that has evolved for providing financial services consists of development financial institutions, investment institutions (insurance companies, trust) and scheduled commercial banks. The Banking Companies Act 1991 now regulates the activities of banks in Bangladesh.
2.2. Credit Management and Guidelines
There is no iron clad formula to Inc and determine t1i guidelines for credit management. As a central hank l3at Bank sets the guidelines for commercial banks in operations. Such types of guidelines are gent in Commercial banks also have their own guidelines or plan of actions for sound credit management. Lending is most profitable business of a commercial bank but at the same tic it is risky. Loans always accompany credit risk arising out of borrower’s default in repaying the money. A banker should. Therefore, manage loan business in a j and S manner’. Commercial banks businesses in Bangladesh are regulated by the guidelines of central bank; the Bank companies 1 I and also the guidelines introduced by the world Bank and the IMF from time to time. How commercial banks in Bangladesh, both in public and private sector, are following such guidelines in their credit management operations is intended to be discussed this chapter.
2.2.2 The Bank Companies Act 1991
According to section 22 and sub-section 1 (a),any bank other than new or specialized bank will not declare dividend on Its hare until the bank has written off its previous losses, preliflui11 expenses and other deferred revenue expenses28.
As per Bangladesh Bank Inspection Reports-NBL incurred heavy losses continuously in real terms. But the bank declared div1de on its paid-up capital each year since the time of its operation. On the other hand, Sonali Bank, as a NCB, does not necessarily require to pay any dividend. According to sub-section 2 (c) of sector 22; bank will declare dividend whatever be stated elsewhere if and ‘only if bank will take proper steps for their bad and doubtful credit in accordance with the satisfaction of their auditors.
Bangladesh Bank Inspection Report on NBL indicates that NBL charged Tk. 2.75 crores for the year 1989 as provisions for bad and doubtful credit whereas according to BCD Circular No. 34/ 1989 they should have charged Tk. 77.72 crores as provisions for bad and doubtful credit for the same period. Now the question a how it would satisfy the auditors by charged TK. 74.97 crores less as provisions for bad and doubtful debts.
The situations are same in case of Sonali Bank. Because In 1988 they charged only TK. 61.72 crores as provision for bad and doubtful debt whereas the Bangladesh Bank Inspection Report demanded the amount of Tk. 254.80 crores for the same purposes.
2.2.3 The International Accounting Standard No:30
(The fund object of International Accounting Standard (IAS) is the generalization as well as harmonization of accounting practices in all over the world. The LAS # 30 becomes operative for the financial stat of banks Covering periods beginning on or after 1st January 1991 under the title of “DISCLOSURES IN THE FINANCIAL STATEMENTS OF BANK AND OTHER SIMILAR FINANCIAL INSTITUTIONS”29. Though the accounting regulatory bodies i.e.: ICAB and ICMAB in Bangladesh still do not implement this IAS # 30 in our country, but I have to discuss some important paragraphs of this standard relating to sound credit management because of comparing the positions of our banking sector with that of international standard.
According to the IAS No. 30 bank should disclose the following information in Its financial statements:
a. The basis for the determination of losses on loans and advances and for writing off uncollectible loans and advances.
b. The basis for the determination of charges for general banking risks and the accounting treatment of such charges.
c. The amount of losses which have been specifically identified are recognized as expenses and charged against income and deducted from the carrying amount of the appropriate category of loans and advances as a provision for losses on/ loans and advances.
Practices in Bangladesh
Bank discloses some general guidelines (not / comprehensive) that act as the basis for calculation of provisions for bad and doubtful credit. But National Bank Limited still does not disclose any sort of such information in that respect rather state that their auditors are satisfied. But whether users and investors are satisfied or not is not a matter of their consideration.
Paragraph No.10 of this standard again states that the principal types of expenses from the operations of a bank include Interest. Commissions, losses on loans and advances, charges relating to the reduction in the carrying amount of investments and general administrative expenses are separately disclosed in order that users can assess the performance of the bank. Both the banks under study do not d1 relevant and comparable information’s about their credit management operations. Not only that, both the banks Incurred losses continuously; but they disclosed profit from their operations in their financial statements which may mislead the users in their conception about the banks.
2.4 Foreign Banks in Bangladesh: Performance & limitations
Foreign banks have played a significant role in the less developed countries by the process of monetization and providing the cornerstone of an efficient and dependable financial structure which are crucially important for promoting economic growth. The manner in which the Foreign Banks have benefited the colonies has been put succinctly by Edward Nevin in the following sentences: ‘It would be inaccurate and unfair to omit reference to the immense benefits which these territories have secured through their possession of a commercial banking system which has established and retained extremely high standards so far as stability, integrity and safety are concerned. It is by no means obvious that if the international banks had never operated in these countries any really adequate local banking would have emerged instead local banking in many of them has had an unhappy history of improvident operation and inefficient administration which has ultimately resulted in bank failures and has scarcely been conducive to confidence in banks and banking in the part of the local population.
Despite the contributions made by foreign banks a number of criticism have been put forward against their modus operandi in the less developed countries. Drake (1980) has summarized the major allegations against the role of foreign banks especially in their early days of observation as follows:
Firstly the foreign banks especially in the LDCs. However, Professor nevin in a study observed a considerable reversal of this behavior. Data provided by him on the commercial bank’s operation in British colonial territories furnishes the following trend.
Percentage of Domestic Investment against Local Liabilities
In various years from 1954 to 1959.
|% of domestic Investment against Liabilities||68||70||74||78||77||79|
Source : Nevin, Edward (1961), Capital Funds in Underdeveloped countries: the Role of financial institutions.
The second criticism leveled against Foreign Banks is that these banks do not identify themselves with the economic goals of the LDC’s in which they operate. The volume and pattern of business to be carried out by the bank in any country tends to be determined by the Head Office and has no necessary connection with the local demand for credit and the output and employment generation in these countries. Credit mainly goes to finance international trade. Since foreign banks are not concerned with local development, they do not extend much credit to manufacturing and agricultural sectors as needed.
The presence of foreign banks in our country is helpful in attracting foreign investment; these banks often provide valuable services to Government in getting credit from the international capital market. Moreover, they facilitate the transfer of modern banking skill to out country. But foreign banks policies regarding deposit mobilization and advances need a critical review in the context of out country. Bangladesh is predominantly an agricultural country where government policies put much emphasis on the modernization of agriculture and small and cottage industry sectors. There advances to manufacturing sector are concentrated on large-scale activities, So the foreign banks do not identify themselves with the economic goal of our country. Their fundamental aim is profit maximization and hence they usually undertake scale economization our social goals. In view of the “default culture” in our society it should not be expected that these commercial banks will ignore these socially desired goals. Rather in order to make them consistent with our social goals there needs to be some provision to lessen their risk of giving loans and advances to the hitherto neglected but priority sectors.
2.5 The Problems of Shariah Based Commercial Banking
Problems of Islamic Commercial Bank
As a banking institution, commercial banks run on the basis of Shariah are facing similar type of problems as the interest based conventional banks. But as a new type of institution Islamic Commercial banks are also facing some peculiar problems unlike their counterparts run on the basis of interest. Some of the important problems are as follows:
1. Conceptual Problem
In popular meaning, band is a financial intermediary, acting as a middleman between the surplus savers and deficit savers requiring funds for investment. Islamic bank is somewhat different to this popular meaning. It is because; these banks are more participatory institutions than merely intermediaries like their counterparts based on interest.
The relationship between the bank and its fund users are not of “Debtor” and Creditor”. This is rather a partnership relation. Because of long practice of the conventional banking, it is often misunderstood by most of the bank customers. And this has paused a problem for the Islamic banks to be understood at its right perspective.
2. Ideological Problem
People want Islamic beliefs not willing to asked or give interest are eligible to become customers of Islamic Bank. Thus has rather restricted the supply of clients for the Islamic Banking business. All economic activities found viable and feasible are worthy of financial assistance from conventional banking systems. But in case of Islamic Banking, if not permissible by Shariah and socially productive, even otherwise economically viable projects are not eligible for financial assistance.
3. Problems due to Partially Islamized economy
It requires total Islamisation of the society for effective functioning of Islamic bank. But in a country of partial Islamisation, national fiscal and monetary policies, financial rules and regulations and relevant Acts and Ordinances remain mostly secular in character which put the operation of Islamic Band into trouble every now and then.
4. Problem of late starting
It is to be noted that conventional banking is about 350 years old, while Islamic banking is only in infant stage with around 30 years of age.
With long experiences and experimentation, conventional banking experimented, developed, re-experimented and improved their style of operation, mechanism of operation, instruments for transaction and above all raised their standard of skill and efficiency overtime. Islamic Bank has just started, not yet adequately conceived of even by most of the personnel—not to speak of the large number of the clients.
5. Structural problem
The patterns of organizational hierarchy that are now used by the Islamic banks are just imitations of the conventional bankers. In true Islamic organizations, there are no bosses and subordinates. All are “Khadems” including the owners, primarily to the organization.
6. Problem Relating to transaction With Central Bank
Islamic banks are facing some problems in dealing with Central bank:
· Like other commercial banks, Islamic banks are often asked to keep a portion of their deposit to the central bank. This is a drain on the resources of the Islamic banks on which they cannot enjoy interest like others banks.
· In case of need, Islamic bank can’t borrow from the central bank as the central bank usually charges interest on the borrowings.
· Islamic bank can’t also enjoy the facility of refinancing from the central bank as it carried interest, may be at a concessional rate.
· Islamic bank can’t also enjoy the facility of refinancing from the central bank as it carries interest may be at a concessional rate.
7. Problem Relating to Inter- Banking Transaction
The Islamic banks operating in a non Islamic economy face a wide range of hindrances in inter banking transaction. It has to conduct transactions with the conventional banks based on interest. Sometime it has to borrow and land fund to other banks.
8. Problem of deposit mobilization
Islamic banks are facing some problem in deposit mobilization like:
- As Islamic banks do not offer any fixed rate of profit, many marginal believer depositors are found to be reluctant to deposit money with Islamic band while fixed income earning alternatives.
- In Case of Islamic banks the operational loss of the bank, if any, are proportionately shared even by the depositors. This has a discouraging effect on the existing depositors as also among the potential depositors.
9. Problems relating to loans
Islamic Bank can’t extend any loan to any project or to any customer whatever good be their credit standing. They are selective and as such, face a number of problems in the extension of credit such as:
· Clients involved in Haram activities who are defamed in the society are debarred from Islamic banks.
· If the project are is found viable from economic, financial and technical points of view, but is not allowed by Shariah and found to be socially unproductive, extension of loan to this type of project is restricted.
· Credit appraisal is useful only with reliable data. This apart, credit utilization report and repayment ability require honest disclosure of result of performance. But it is found that many of the existing borrows and potential borrowers furnish fabricated and unreliable information.
· Many of the Islamic banks are known to be promoted by particular political groups. These groups are found to have influenced the Islamic banks to extend financial accommodation to their followers. These favored persons are often observed to be inexperienced in business and as such extension of loan facility to these people hardly found to be productively utilized and paid back.
10. Problem Relating to Recovery
In many countries Islamic Banks are facing recovery problems of various nature:
- Many are found to have availed of bank facility under Bai Muajjal and Murabaha mechanics. These types of loans are frequently defaulted.
- Accommodation facilities are provided for a fixed period and profits are calculated for that period only. There is no scope for realization of additional profits/financial penalty. This has encouraged many dishonest borrowers to linger repayment willfully in the plea of this or that.
- In many of the countries including Bangladesh there are number of laws and ordinances acting as deter ant in the quick processing of default cases.
11. Problem Relating to Investment
As regards investment, Islamic banks are facing problems some of which may be seen as under:-
- Islamic banks can’t invest in Govt./commercial securities which bear fixed rate of interest. This has narrowed down the scope for investment of Islamic bank.
- Islamic bank is not allowed to invest in equity shares of those enterprises which are engaged in activities not permissible by Islamic Shariah.
- Islamic banks are also not permitted to participate in the projects which are not found to be socially productive.
- As stated earlier Islamic bank is not simply financial intermediary like other conventional banks. They are rather participatory institution in business houses, real estate and construction works. Etc. In some countries central banks prohibit the involvement of commercial banks in trading and investment activities. These is normally done to prevent industrial houses from setting up commercial banks and then to use them to their advantage in other industries. This is a big hindrance in the development of Islamic banks as these banks can’t function without indulging in trade and investment directly.
12. Lake of Islamic Framework
Islamic banking must be based on the basic fundamental principles of Islam. These are-
Most of the Islamic banks in the world excepting a few are operating with established laws of many of the country based on secular framework.
13. Problem Relating to Fund Mobilization
The sources of bank’s fund include deposit, borrowings, dale of shares etc. There are problems in case of Islamic banks to mobilize large amount of deposits which was hinted earlier as problem number 8. Ob the other hand, Islamic bank can’t resort to borrowings in countries not yet totally Islamised as the element of interest is payable to the parties allowing borrowing, such as, central bank or other sister commercial banks.
14. Problem Relating to International Transaction
- The numbers of Islamic bank are not adequate to serve about 1000 million Muslim population of the world. In the view of the size and diversity of the Islamic world the existing Islamic banks can only make a beginning but certainly not even minimum to achieve any perceptible change.
- As more than half of the Islamic countries are yet to be covered by Islamic banking the existing Islamic banks need to perform transaction with these countries with problems as they are as yet operating on interest based banking.
- The existing Islamic banks find difficulty in their transaction with the non Islamic countries whose banking system is fully Interest based.
Suggested Solutions to the stated Problems
Problems stated in the foregone pages are many in number and there are no readymade solutions to be delivered overnight. Some problems are likely to be overcome with the passage of time, some with repeated experimentation, some with evolving suitable Acts/ Ordinance/Regulations some requiring changes in the outlook of Government and the Central bank and the personnel related problems requires both professional and moral training.
Foreign Exchange Department
H.E. Evitt defined “Foreign Exchange” as the means and methods by which rights to wealth expressed in terms of the currency of one country are converted into rights to wealth in terms of the currency of another country.
Foreign Exchange Department is international department of the bank. It deals with
globally and facilitates international trade through its various modes of services. It bridges between importers and exporters. 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 country. This department mainly deals with foreign currency. This is why this department is called foreign exchange department.
Some national and international laws regulate functions of this department. Among these, Foreign Exchange Act, 1947 is for dealing in foreign exchange business, and Import and Export Control Act, 1910 is for Documentary Credits. Governments’ Import &Export policy is another important factor for import and export operation of banks.
AIBL, Nababpur Branch foreign exchange department has three sub-sections. One is foreign remittance section, another is import section and the third one is export section. An AVP is the in-charge of the Foreign Exchange Department of this branch.
3.2 Foreign Trade:
Foreign trade can be easily defined as a business activity, which crosses national boundaries. These may be between parties or government ones. Trade among nations is a common occurrence and normally benefits both the exporter and importer. In many countries, international trade accounts for more than 20% of their national incomes.
Foreign trade can usually be justified on the principle of comparative advantage. According to this economic principle, it is economically profitable for the country to specialize in the production of that commodity in which the producer country has the grater comparative advantage and to allow the other country to produce that commodity in which it has the lesser comparative advantage. It includes the spectrum of goods, services, investment, technology transfer etc. this trade among various countries calls for lose linkage between the parties dealing in trade. The banks, which provide such transactions, are referred to as rendering international banking operations. International trade demands a flow of goods from seller to buyer and of payment from buyer to seller. And this flow of goods and payment are done through Letter of Credit.
3.3 Letter of Credit:
Letter of credit (L/C) can be defined as a “Credit Contract” whereby the buyer’s bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller’s disposal under some agreed conditions. Since the agreed conditions include, amongst other things, the presentation of some specified documents, the letter of credit is called Documentary Letter of Credit. The Uniform Customs & Practices for Documentary Credit (UCPDC) published by international Chamber of Commerce (1993) Revision; Publication No. 100 defines Documentary Credit:
Any arrangement however named or described whereby a bank (the “issuing bank”) acting at the request and on the instructions of a customer (the “Applicant”) or on its own behalf,
- is to make a payment to or to the order of a third party(the beneficiary) or is to accept and pay bills of exchange(Drafts)drawn by the beneficiary, or
- authorizes another bank to effect such payment or to accept and pay such bills of exchange (Drafts)
- Authorizes another bank to negotiate against stipulated documents provide that terms and conditions are complied with.
3.3.1 Types of Documentary Credit:
Documentary Credits may be either:
(i) Revocable or, (ii) Irrevocable.
Revocable credit: A revocable credit is a credit that can be amended or cancelled by the issuing bank at any time without prior notice to the seller.
In case of seller (beneficiary), revocable credit involves risk, as the credit may be amended or cancelled while the goods are in transit and before the documents are presented, or although presented before payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of payment buy the issuing bank at which the issuing bank has made the credit available. In the modern banking the use of revocable credit is not widespread.
Irrevocable credit: An irrevocable credit constitutes a definite undertaking of the issuing bank (since it cannot be amended or cancelled without the agreement of all parties thereto), provided that the stipulated documents are presented and the terms and conditions are satisfied by the seller. This sort of credit is always preferred to revocable letter of credit.
Sometimes, Letter of Credits is marked as either ‘with recourse to drawer’ or ‘without recourse to drawer’.
3.3.2 Parties to a letter of Credit:
The parties are:
· The Issuing Bank,
· The Confirming Bank, if any, and
· The Beneficiary.
Other parties that facilitate the Documentary Credit are:
· The Applicant,
· The Advising Bank,
· The Nominated Paying/ Accepting Bank, and
· The Transferring Bank, if any.
- Importer – Seller who applies for opening the 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 / Notifying Bank – 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 and / or negotiating bank depending upon the condition of the credit.
- Negotiating Bank – 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.
- Paying / Accepting Bank – is the bank on which the bill will be drawn (as per condition of the credit). Usually it is the issuing bank.
- Reimbursing bank – is the bank, which would reimburse the negotiating bank after getting payment – instructions from issuing bank.
3.3.3 Some Important Documents of L/C:
Forwarding: Forwarding is the letter given by the advising bank to the issuing bank. Several copies are sent to the issuing bank. All copies including original should be kept in the bank.
Bill of Exchange: According to the section 01, Negotiable Instruments (NI) Act-1881, A “bill of exchange” is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay [on demand or at fixed or determinable future time] a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. It may be either at sight or certain day sight. At sight means making payment whenever documents will reach in the issuing bank.
Invoice: Invoice is the price list along with quantities. Several copies of invoice are given. Two copies should be given to the client and the other copies should be kept in the bank. If there is only one copy, then its photocopy should be kept in the bank and the original copy should be given to the client. If any original invoice contains the custom’s seal, then it cannot be given to the client.
Packing List: Packing list is the letter describing the number of packets and there size. If there are several copies, then two copies should be given to the client and the remaining should be kept in the bank. But if there is only one copy, then the photocopy should be kept in the bank and the original copy should be given to the client.
Bill of Lading: Bill of Lading is the bill given by shipping company to the client. Only one copy of Bill of Lading should be given to the client and the remaining copy should be kept in the bank.
Certificate of Origin: Certificate of origin is a document describing the producing country of the goods. One copy of the certificate of origin should be given to the client and the remaining copy should be kept in the bank. But if there is only one copy, then the photocopy should be kept in the bank and the original should be given to the client.
Shipment Advice: The copy mentioning the name of the insurance company should be given to the client and the remaining copies should be kept in the bank. But if only one copy is given, then the photocopy should be kept in the bank and the original copy should be given to the bank.
3.3.4 Form – Imp:
This form is prepared for maintaining account of the money, which goes out side the country for the purpose of payment. This form is required by Bangladesh Bank. It is an application for permission under 4/1 of the Foreign Exchange Regulation Act, 1947 to purchase foreign currency for the payment of import.
IMP – FORM has four copies:
- Original copy for Bangladesh Bank.
- Duplicate copy for authorized dealers. It is issued for processing Exchange Control Copy of bill of entry or certified invoice.
- Triplicate copy for authorized dealers’ record.
- Quadruplicate copy for submission to the bank in case of imports where documents are retired.
Following documents are sent with FORM-IMP:
a) Letter of Credit Authorization Form,
b) One copy of invoice,
c) Indent copy / proforma invoice.
The following information is included in the FORM-IMP:
i. Name and address of the authorized dealer,
ii. Amount of foreign currency in words and figures,
iii. Names and address of the beneficiary,
iv. L/C Authorization Form number and date,
v. Registration number of L/C Authorization Form with Bangladesh Bank, and
vi. Description of the goods.
3.4 Import Section:
Imports of goods into Bangladesh is regulated by the ministry of commerce and industry interims of the Import and Export (Control) Act, 1910, with import policy orders issued by annually, and Public Notices issued from time to time by the office of the Chief Controller of Import and Export (CCI & E). Through the process of import some vital but which are inadequate in our country products are imported to meet the local needs of the people.
3.4.1 Import Mechanism:
To import, a person should be competent to be an ‘importer’. According to Import and Export (Control) Act, 1910, the officer of Chief Controller of Import and Export provides the registration (IRC) to the importer. After obtaining this, the person has to secure a letter of credit authorization (LCA) from Bangladesh Bank. And then a person becomes a qualified importer. He requests or instructs the opening bank to open an L/C.
3.4.2 Source of Finance:
Import may be allowed under the following sources of finance:
i. cash foreign exchange (balance of the foreign exchange reserve of Bangladesh Bank);
ii. Foreign currency accounts maintained by Bangladeshi Nationals working/living abroad.
(b) External economic aid.
(c) Commodity exchange.
4.4.3 Import Procedures:
An importer is required to have the following to import through AIBL—
i. Applicant has to apply for opening L/C by a prescribed form.
ii. Applicant has to submit the Letter of Indent or Letter of Proforma Invoice.
Letter of Indent: Many sellers have their agent in seller’s country. If the contract of buying is made between the buyers and the agent of the sellers then Letter of Indent is required.