General Banking Operation and Modes of Investment of Shahjalal Islami Bank Limited
Chapter – ONE
1.1 Introduction of the report:
Banking is the backbone of national economy. All sorts of economic and financial activities revolve around the bank. Financial institutions are investment intermediaries linking the savers and users of fund. These intermediaries are interposed between the ultimate borrowers and lenders permitting them efficient transfer of funds. Individuals having surplus funds can lend them for reasonable return to entrepreneurs who need funds to take the advantage of economically and financially viable investment opportunities. The existence of financial institutions facilitates such exchange of resources. As a result, both the borrowers and lenders are better off than they would have been without financial institutions and market intermediaries. Thus, these financial institutions, such as banks, have a positive role in financing and investment which is a multidimensional process involving the complexity of many interrelated and interdependent factors of diversified nature. It is difficult to assess the contribution of each factor independently.
The key to successful banking lies in the ability of balance many activities simultaneously. The bank must maintain a healthy growth rate, while at the same time it must take action to minimize the risks it faces. The bank must also maintain enough cash on hand to meet obligations. It is mention worthy that Commercial Banks is the front side players of any economy. And interest rate is the price of money in conventional monetary transactions though Islamic Banks are working bypassing interest from their operations. Funded income is the main source of banks income. From the inception of Bangladesh, Banking sector has experienced different control mechanism in mobilizing Deposit and providing Credit and Advances in the economy.
The definition of Islamic Bank, as approved by the General Secretariat of the OIC- “ An Islamic Bank is a Financial Institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operation”
This paper is an attempt to evaluate the Different Modes of Investment of Shahjalal Islamic Bank Ltd., (SJIBL) in terms of productivity and effectiveness.
1.2 Background of the study:
I have to prepare a report on the “General Banking Operation of Shahjalal Islami Bank Ltd.” for the partial fulfillment of the internship course of BBA program. In this report I will include what credit schemes are offering by the Shahjalal Islami Bank Ltd., and also function of General Banking, which will easily understandable to the readers.
Bank is the heart of the economics and banking is the blood circulation of country’s economic growth. Banks perform a significant role to serve the needs of the society in different sectors, such as: capital formation, large scale of production, industrialization, growth of trade and commerce etc. and banks are contributing a lot of aspect.
Shahjalal Islami Bank Bangladesh Limited has already emerged as one of the world wide recognized banks due to its retail product management, which are part of general banking according to the principles of Islamic Shariah. Islamic banking is a new diminution of interest free banking where ‘Riba’ or interest is strictly prohibited. So I have tried to represent their performance and problems and prospects on the ground of general banking.
1.3 Objective of the Report:
The main objective of the report is to fulfill the requirement of BBA program. For this I had to attach with an organization and I chose SJIBL. For this I have some practical job related experience with my academic knowledge.
The objective of the study may be viewed as:
· Broad objective
· Specific objective
1.3.1. Broad Objective:
The general objective of this report is to complete the internship program and submit a report. As per requirement of BBA program of International Islamic University Chittagong, one student needs to work in a business organization for three months to acquire practical knowledge about actual Business operation.
1.3.2. Specific Objective:
- To present an overview of Shahjalal Islami Bank Limited.
- A general description of the banking activities of Shahjalal Islami Bank Limited.
- To submit a brief description about the General Banking Department and their activities.
- To suggest remedial measurement for the improvement of the whole process of the General Banking Department.
1.4 Scope of the Report:
The report will illustrate a basic reflection about the Shahjalal Islami Bank Limited present condition of the bank in private banking sector, various schemes of SJIBL, interest rate and activities, credit management system of SJIBL etc. Since I am working in the Shahjalal Islami Bank Limited, Dhanmondi Branch, I get the opportunity to gain knowledge of different part of banking system. I got the opportunity to work in all three divisions such as investment division, credit division, and foreign exchange division. And from these three different departments or divisions, I hope that I will be capable of doing these types of jobs in the future.
- Area of Study:
The area of the study covered the operational area, particularly investments & Credit, and Financial Aspects of Shahjalal Islamic Bank Ltd Dhanmondi Branch.
- Target Group:
Departmental heads and other concerned officials, particularly those associated with the credit division and FCAD Department of the bank, were consulted to get the required data & information.
- Sources of Data:
The sources of data are given below.
|· Consultation with bank officials.
· Study of Relevant documents.
· Observing the operations of different
Departments of the Bank.
· Discussion with the supervisor.
On the way of my study in Shahjalal Islami Bank Limited, I have faced the following problems, which may be termed as the limitations of the study. The major limitations of this study are given as follows:
i. There were some restrictions to have access to the information confidential by concern authority.
ii. I worked only on Dhanmondi branch of Shahjalal Islami Bank Limited, so I gather knowledge about activities of Head Office only by reading/hearing not in practical way.
iii. Sufficient records, publications regarding customer service were not available as per requirement.
iv. Three-month is not sufficient time to gain practical knowledge and prepare a report.
Chapter – TWO
2.0 Corporate Information:
Name of the Company : Shahjalal Islami Bank Limited
Legal Form : A public limited company incorporated
in Bangladesh on 1st April 2001 under the companies Act 1994 and listed in Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited.
Commencement of Business : 10th May 2001.
Registered office : Jiban Bima Bhaban
Front Block (4th Floor)
10, Dilkusha Commercial Area
Telephone No. : 88-02-9570812, 7160591
Fax No. : 88-02-9570809
Website : www.shahjalalbank.com.bd
SWIFT : SJBLBDDH
E-mail : firstname.lastname@example.org
Chairman : Alhaj Engr. Md. Towhidur Rahman
Managing Director : Muhammad Ali
Company Secretary : Md. Emran Hossain
Auditor : M/S Hoda Vasi Chowdhury & Co.
Ispahani Building (3rd Floor)
14-15 Motijheel C/A, Dhaka,
Tel: 9567587, 9551028
Number of Braches : 52
Number of Employes : 1100
Authorized Capital : Tk. 4000 million
Paid up Capital : Tk. 2,246 million
Face Value per Share : Tk. 100
2.1 Organization Structure:
2.2 Figure: Organization Structure
2.2 Objectives of SJIBL:
The objective of Shahjalal Islami Bank Limited is not only to earn profit but also to keep the social commitment and to ensure its co-operation to the person of all level, to the businessmen, industrialist specially who are engaged in establishing large scale industry by consortium and the agro-based export oriented medium and small scale industries by self inspiration.
· High quality consortium financial service with the latest technology.
· First, accurate and satisfactory customer service.
· Balance & sustainable growth strategy.
· Optimum return on shareholder’s equity.
· Introduction innovative Islami banking products.
· Attract and retain high quality human resource.
· Empowering real poor families and create local income opportunities.
· Providing support for social benefit organization- by way of mobilizing fund and social services.
Shahjalal Islami Bank Limitedstared its journey with the concept of 21st century Islamic participatory three sector banking model:
a) Formal Sector-Commercial banking with latest technology
b) Non Formal Sector-Family empowerment Micro-credit & Micro-enterprise program
c) Voluntary Sector – Social capital mobilization through CASH WAQF and other.
Finally, “Reduction of Poverty Level” is there Vision, which is a prime object as stated in Memorandum of Association of the Bank with the commitment “Working Together for a Caring Society”
2.5 Core Values:
For the customers
To become most helpful Bank-by providing the most well-mannered and efficient service in every neighborhood of business.
For the Shareholders
By ensuring flaxen return on their investment through generating established profit.
For the Community
By presumptuous the role as a socially conscientious corporate entity in a physical manner through close obedience to national policies and objectives.
2.6 Philosophy of the SJIBL:
At present the bank has as many as 44 branches in different places of the country. The sponsors of SJIBL are leading business personalities and renowned industrialist of the country. Now this bank has paid up capital – 46.83 million and No. Of Directors – 13 (source Internet).
2.2: Figure: Branch Network
2.7 Performance of the SJIBL:
SJIBL a blend of expertise and technological excellence is in place to meet varied needs of modern customers. The bank aims at mobilizing untapped money of the country and prudent deployment for productive activities in the form of lending at a competitive profit rates/investment pricing. Towards attainment of its goals and objectives, the bank pursues diversified credit policies and strategic planning in credit management. To name a few, the bank has extended micro credit, consumers durable scheme investments, house building investments etc. to cater to the needs of the individuals, which in turn has helped thousands of families. The bank also extends investment in the form of trade finance, industrial finance, and project finance, exports & import finance etc. The bank’s credit polices aimed at balanced growth and harmonious development of all the sectors of the country’s economy with top most priority to ensure quality of lending by averting growth of non-performing assets.
2.8 Products and Services:
The SJIBL serves its massive clientele with a variety of services apart from the conventional ones. Its frequent improvement and introduction of new products and services has given it a margin over the competitors.
a) Different Types of Scheme:
· Monthly Deposit Scheme (MDS)
· Mudarah Term Deposit Receipt (MTDR)
· Monthly Income Scheme (MIS)
· Double Profit Deposit Scheme (DPDS)
· Millionaire Scheme.
· Hajj Palon Scheme etc
b) Different Types of Investment (Lone) Facilities:
· Working Capital Financing.
· Agriculture, Fishing and Forestry.
· Transport and communication.
· Water works and sanitary service.
· Miscellaneous etc.
2.9 Reserves of SJIBL:
In accordance with the provision of Bank Companies Act, 20% of operating profit before tax is required to be transferred to statutory reserve. As such an amount of Tk.267.13 million has been transferred to statutory reserve during the year.
Total deposit of Shahjalal Islami Bank stood Tk.36, 484.00 million as on 31.12.2009 as against Tk. 22,618.00 million of 31.12.2008 registering an increase of Tk.13, 866.00 million, and 61.99% growth. Deposit is the ‘life-blood’ of a Bank. Bank has given utmost importance in mobilization of deposits introducing some popular and innovative schemes.
2.3 Figure: Deposit of SLIBL
2.11 Profit and Operating Results:
- Investment income:
Total investment of the bank as at 31st December 2009 was Tk. 32919 million as against Tk. 20617 million of the preceding years registering 59% growth over last year that was 84% of the total income as also equal to 84% of 2008.
- Non-investment income:
Total non-investment income of the bank as at 31st December 2009 was Tk. 405 million as against Tk. 263 million of preceding year registering 54% growth over last year which was 16% of the total income compared to 16% of 2008.
1. Profit Paid on Deposits:
Bank distributed profit of Tk. 1491 million the Mudaraba Depositors in the year 2009 against Tk. 944 million in the year 2008 which being 70% of the investment income earned from deployment of Mudaraba fund and 87% of the total expenditure of 2009 against 84% of 2008.
2. Operating Expenses:
Total operating expenses as on 31.12.2009 was Tk. 227 million as against Tk. 174 million of 2008, which was 13% of the total expenditure of the year 2009 against 16% of 2008.
3. Operating Profit:
During the year 2009, the Bank earned an amount of Tk. 2563 million and spent an amount of Tk. 1718 million, resulting a total Operating Profit of Tk. 845 million which increased by Tk. 343 million over last year i.e. 2008. After deduction investment provision and income taxes net profit stood at Tk. 463 million as against Tk. 256 million of 2008. As appropriation of net profit, Tk. 158 million transfers to statutory reserve as per Bank Company Act 1991 and remaining Tk. 306 million transfers to retained earning to adjust previous negative balance.
A summery of operating result of the bank as on December 2009 vis-à-vis the position of December 2008 is shown belo
(Amount in million Taka)
|Less: Total Expenditure||3475||2274|
|Net Profit before Provision & Taxation||1566||1216|
|Less: Provision for Investment||57.50||36.00|
|Net Profit before Taxation||787.57||465.84|
|Less: Provision for Taxation||324.35||210.25|
2.1 Table: Operating Result of SJIBL on December 2009-2008.
2.4 Figure: Operating Result on SJIBL
2.12 Equity of the Bank:
The authorized capital of the bank is Taka 4000 million, and paid-up capital of the bank is Tk. 2246 million as on 31.12.2009. Total equity was Tk. 4069 million as on 31.12.2009. The bank has already raised its paid up capital of Tk. 1872 million through Initial Public Offering (IPO) in January-February 2009. After IPO Bank’s paid up Capital stands at Tk. 1872 million in February 2009. Comparative position of Equity for the year 2009 & 2008 is given below: –
(Amount in million Taka)
Table: Comparative position of Equity for the year 2009 & 2008
2.13 Capital Adequacy:
Total equity of the bank as on 31.12.2008 was Tk. 3040.88 million and the total equity stood to Tk. 4069.09 million on 31.12.2009, which was 13.81% of the Risk Weighted Assets as against the requirement of 10.00%. The core capital was 12.24% of Risk Weighted Assets as on 31st December 2009 as against requirement of 5.00%.
2.14 Investments :
Total investment of the bank stood at Tk.15515.79 million as on 31.12.2009 as against Tk. 10590.27 million of 31.12.2008 registering as increase of Tk. 4925.52 million, i.e. 46.51% growth. The bank is careful in deployment of the fund. Mode wish investment portfolio as on 31.12.2009 is given below:
|Mode of investments||Taka in
|3||Hire-purchase & Ijara||5463.44||16.60%|
|4||Investment against L/C||106.13||0.32%|
|6||Investment against scheme deposits||557.61||1.69%|
2.3 Table: Mode wish investment portfolio as on December 2009
2.5 Figure: Investment Portfolio of SJIBL
2.6 Figure: Deposit & investment position of SJIBL
The bank entertains good investment clients having credit-worthiness and good record. The bank has got a few investment schemes to provide financial assistance to comparatively less advantaged group of people which are.
· Household Durable Scheme.
· Small Business Investment Program
· Small Entrepreneur Investment Program
· Medium Entrepreneur Investment Program
· Housing Investment program
The following two investment schemes are going to be introduced shortly.
· Car Investment scheme.
· Women Entrepreneur Investment Scheme.
2.15 Liquidity of SJIBL:
Liquidity in the form of balance with Bangladesh Bank, Sonali Bank (as the agent of Bangladesh Bank) and in hand including foreign currency stood at Tk. 1670.12 as at 31st December 2008 as against Tk. 1702.27 million in last year to maintain cash & statutory liquidity. The Bank is committed to maintain the cash and statutory liquidity requirement to effectively manage the asset & liability portfolios of the bank in order to maximize the profit. As per guideline of the Bangladesh Bank ALCO (assets liability committee) was formed in 2005, which is highly concerned with proper liability management under the close supervision of senior management. The bank has a policy guideline on liquidity management as approved by its board of directors. We have able to maintain required CRR and SLR throughout the year without fail as per Bangladesh Bank’s norm.
2.16 Information Technology (IT) & Automation:
All the branches of the SJIBL are fully computerized. New software is now in use to provide faster, accurate and efficient service to the clients. The bank is continuously striving for better services through extensive automation of its branches. We are soon going to launch “One Branch Banking” through on-line connectivity. The bank has set up a full-fledged IT division to keep abreast of the latest development of IT for better service in the days to come.
2.17 Corporate Governance:
In recent times, corporate governance has been considered most essential aspect for efficient management of a business house. SJIBL gives much emphasis on the corporate governance in promoting a sound management. The object of the bank is to comply with all regulatory requirements, ensure equitable treatment of all stakeholders. It confirms full & fair disclosure of financial and other material information and show respect for norms of business ethics and social responsibility. The Board of director, Executive committee, Audit committee and other committee of the management perform their respective tasks with accountability and transparency.
2.18 Foreign Correspondents:
Foreign correspondent relationship facilities foreign trade operation of the bank, mainly in respect of export, import and foreign remittance. The number of foreign correspondents and agents of the bank in the year 2008 stood at 244, which covers important business and trade centers of the world. The bank maintains excellent relationship with the leading international banks, for handling all foreign correspondent and maintaining all foreign business there is an International Division, which is called ID.
2.19 Investment (Credit) Rating Report:
|Long Term||Short Term|
|Date of Rating||25 April, 2009|
2.4 Table: Credit Rating Report
Credit rating information and service limited (CRISL) has assigned “AA-” (pronounced as double A minus) rating in the Long Term and ST-2 rating in the Short Term to the Shahjalal Islami Bang Limited.
The above rating has been done in consideration of its significant improvement in asset quality, capital adequacy, and financial performance. Financial institution rated “A” in the long term are adjudged t offer adequate safety for timely repayment of financial obligations. This level of rating indicates a corporate entity with an adequate credit profile. Risk factors are move variable and greater in periods of economic stress then those rated in the higher categories. Bank rated ST-2 in the short term is characterized by high certainty of timely payment, liquidity factor are strong and supported by good fundamental protection factors. Risk factors are very small.
2.7 Figure: Credit Rating Long Term
2.8 Figure: Credit Rating Short Term
Shahjalal Islami Bank Limited has been practicing corporate management with Board of Directors. The Board of Directors for efficient operation of the Bank forms members of Executive Committee. Besides, a Management Committee is formed with top Executives of the Bank as members. The Board of Directors formulates the major policies and business strategies of the Bank. The Executive Committee
And Management Committee executes, implement and monitor the implementation of these policies and strategies.
2.21 Shariah Council: Shariah Supervision
Shariah Council of the Bank is playing a vital role in guiding and supervising the implementation and compliance of Islamic Shariah principles in all activities of the Bank since its very inception. The Council, which enjoys a high status in the structure of the Bank, consists of prominent Ulema, reputed banker, renowned lawyer and eminent economist.
Members of the Shariah Council meet frequently and deliberate on different issues confronting the Bank on Shariah matters. They also conduct Shariah inspection of branches regularly so as to ensure that the Shariah principles are implemented and complied with meticulously by the branches of the Bank.
· To conduct all activities in accordance with Islamic Shariah.
· To make financial transaction fully free from interest.
· To establish a welfare-oriented banking system.
· To establish participatory relation between the Bank and client.
· To conduct all activities of investment on Islamic principles and modes.
· To establish justice and equity in business, trade and economics.
· To take different efforts to develop life-style of less-income groups.
· To play a vital role in human development and self-employment and employment generation.
- To serve the customers in excellence with cordiality.
- To coordinate between economic and social development.
- To conduct social welfare activities.
- To contribute in achieving the ultimate goal of Islamic economic system.
· To contribute towards balanced growth and development of the country through investment operations particularly in the less developed areas.
· To contribute in achieving the ultimate goal of Islamic economic system.
The functions of Shahjalal Islami Bank Limited are as under:
a) To maintain all types of deposit accounts.
b) To make investment.
c) To conduct foreign exchange business.
d) To extend other banking services.
e) To conduct social welfare activities through Shahjalal Islami Bank Foundation.
All branches of Shahjalal Islami Bank Limited are divided into three departments:
· General Banking Department.
· Foreign Exchange Department.
· Investment Department.
General banking department is one of the most important departments of Shahjalal Islami Bank Limited. Basically bank provides the main services to the customer through this department. In general this section of the Shahjalal Islami Bank Limited is divided into five sections.
· Accounts opening section
· Cash section
· Remittance section
· Bills and clearing section
· Accounts section
Banks play a very important role in effecting foreign exchange transaction of a country. Mainly transactions with overseas countries are in respect of imports; exports and foreign remittance come under the purview of foreign exchange department. Banks are the vital sectors by which such transactions are effected/settled. Central Bank records all sorts of foreign exchange transactions. The other banks dealing with foreign exchange are to report to Bangladesh Bank regularly (viz. daily, monthly, quarterly, yearly etc.). The foreign exchange department consists of three sections. They are:
· Import section
· Export section
· Foreign remittance section
Banking business consists of borrowing and lending, Bank act as an intermediary between surplus and deficit economic units. Thus a banker is a dealer in money and credit. Banks accept deposit from large number of customers and then lend a major portion of the accumulated money to those who wish to borrow. In this process banks secure reasonable return to the savers, make funds available to the borrowers at a cost and earn a profit after covering the cost of funds. Banks, besides their role of intermediation between savers and borrowers and providing an effective payment mechanism, have been allowed to diversify into many new areas of better paying business activities.
2.24 Hierarchy of SJIBL
2.25 Social Welfare Activities:
With a view to providing financial assistance to the poor and needy people of the society and also for the welfare of the community, to this perspective, bank has established “Shahjalal Islami bank Foundation” with the objective to provide health care, relief and rehabilitation, education, humanitarian of winter clothes during the winter etc.
Shahjalal Islami Bank Foundation has a planning to establish the following projects and programs:
- Shahjalal Islami Bank International School and College
- Shahjalal Islami Bank Hospital
The foundation have also drawn up programs to look after the education, health and medical requirements of all the people of rural areas where the bank has launched Rural Investment Programs with vision 2020.
The foundation already introduced a program to reward poor student who passes SSC and HSC exam. A student who is not financially sound, the foundation gives financial assistance to them. The bank has started it from 2006 under these project 111 poor and meritorious students awarded by monthly scholarship and lump sum money at yearly basis. This will motivate students to do better in future. The bank appreciates the good things in the society.
3.1 Islamic Banking Concepts:
Islami Bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operation. For millions of Muslims, banks were institution to be avoided. Islam is a religion, which keeps Believers from the tellers’ window. Their Islamic beliefs prevent them from dealings that involve usury or interest (Riba). Yet Muslim needs banking services as much as anyone and for many purposes: to finance new business ventures, to buy a house, to facilitate capital Investment to undertake trading activities and to offer safe place for saving. Muslims are not averse to legitimate profit as Islam encourages people to use money in Islamic ally legitimate ventures not just to keep their funds idle.
However in this fast moving world more than 1400 years after the Prophet (S.A.W) can Muslims find room for the principles of their religion? The answer comes with the fact that a global network of Islamic banks investment house and other financial institution have started to take shape based on the principals of Islamic finance laid down in the Quran and the Prophet’s traditions some 14 centuries ago. Islamic banking based on the Quranic prohibition of changing interest has moved from a theoretical concept to embrace more than 100 banks operating in 40 countries with multibillion-dollar deposits worldwide. Islamic banking is widely regarded as the fastest growing sector in the Middle Eastern financial services market. Exploding onto the financial scene barely thirty years ago an estimated $US100 billion worth of funds are now managed according to Shariah.
The best-known feature of Islamic Banking is the prohibition on interest. The Holy Quran forbids the charging of ‘Riba’ on money lent. It is important to understand certain principles of Islam that underpin Islamic finance. Muslim scholars accepted the word ‘Riba’ to mean any fixed or guaranteed interest payment on cash advances or on deposits.
The rules regarding Islamic finance are quite simple and can be summed up as follows:
a) The predetermined payment over and above the actual amount of principal is prohibited.
b) The lender must share in the profits or losses arising out of the enterprise for which the money was lent.
c) Making money from is not Islamic ally acceptable
d) Ggharar (Uncertainty, Risk or Speculation) is also prohibited.
3.2 Objectives of Islamic Banking
The objective of Islamic Banking is not only to earn profit but also to do good and welfare to the people. Islam upholds the concept that money, income and property belong to ALLAH and this wealth is to be used for the good of the society. The main objectives of Islamic Banking are as follows:
- To conduct interest free banking.
- To establish participatory Banking instead of Banking on debtor-creditor relationship.
- To invest through different modes permitted under Islamic Shariah.
- To accept deposits on profit-loss sharing basis.
- To establish welfare oriented Banking System.
- To extend operation to the poor, helpless and low income group for their economic enlistment.
- To contribute in achieving the ultimate goal of Islamic economic system.
- To facilitate the Islamic banking system in the country.
- To create new entrepreneurs and to arrange required finance them.
3.3 Evolution of Islamic Banking
Islamic Banking comes into reality through a long theoretical exercise of several renowned Islamic scholars and economists. The first attempt to establish an Islamic financial institution took place in Pakistan in 1950. In the modern world, the pioneering role in establishing the first Islamic Bank in 1963 named ‘Mit- Ghamar’ Saving Bank in Egypt at rural area of Nile Delta. As on today, there are many Islamic financial institutions operating through out the world covering both Muslim and non-Muslim countries of various socio-economic environment.
The first Islamic bank in Malaysia was established in 1983. In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds.
In Malaysia, the National Syariah Advisory Council additionally set up at Bank Negara Malaysia (BNM) advises BNM on the Shariah aspects of the operations of these institutions, as well as on their products and services.
3.4 Legitimate Business Contracts for Islamic Banks
The modes of mobilization in Islamic banks have derived from the overall permissible contracts in Islam. In what follows we fast describe the concept of Aqd or contract form business perspective and then discuss the legitimate forms contracts that can be used in Islamic banks for both deposit collection and their profitable employment.
A business contract can be defined as the exchange of a thing of value by another thing of value with mutual consent. There are four element of an Aqd or contract:
- Contract (Aqd).
- Subject Matter (Mabe’e).
- Price (Thaman).
- Prossession of delivery (Qabdh).
3.5Common practices of Islamic banks in mobilization of funds
The common practices of Islamic banks in the sources of funds may be described as follows:
All Islamic banks operate current account on behalf of their client individuals and business firms. These accounts are operated for the safe custody of deposits and for the convenience of customers. There is little different between conventional banks as far the operation of current accounts is concerned. There are two dominant views about current account. One is to treat demand deposit as amnah (trust). A trust deposit is defined by the Jordan Islamic Banks as “cash deposits received by the bank where the bank is authorized to use the deposits at its own risk and responsibility in respect to profit or loss and which are not subject to any conditions for withdrawals or depositing”.
3.5.2 Saving Account
All Islamic banks operate saving accounts. It must be pointed out that any return on capital is Islamic ally justified only if the capital is employed in such a way that it is expected to a business risk. Savings accounts at Islamic Banks Generally operate as follows:
- Savings accounts are opened with the condition that deposits provide the bank with an authorization to invest.
- Depositors have the right to deposit and withdraw funds.
- The profits in savings accounts are calculated on the minimum balance maintained during the month. Depositors participate in the profits of savings accounts with effect from the beginning of the month following the month in which the deposits are made. Profits are not calculated with effect from the beginning of the month in which a withdrawal is made from the account.
- A minimum balance has to be maintained in order to qualify for a share in profit.
3.5.3 Investment Deposit
Investment deposits are Islamic banks counterparts of term deposits or time deposits in the conventional system. They are also called profit and Loss-Sharing (PLS) Accounts or Participatory Account. However they can be distinguished from traditional fixed term deposits in the following manner:
- Fixed term deposits in the conventional system operate on the basis of interest while investment accounts in Islamic banks operate on the basis of profit sharing Instead of promising depositors a predetermined fixed rate of return on their investment the bank tells them only the ratio in which it will share the profits with them.
- While fixed term deposit are usually distinguished from each other on the basis of their maturities investment deposits can be distinguished on the basis of maturity as well as on the basis of purposes as it is possible to give special instructions to the bank to invest a particular deposit in a specified project or trade.
The main distinguishing characteristics of investment deposits can be described as follows:
- Deposit holders do not receive any interest. Instead they participate in the share of the profits or losses.
- Usually these accounts are opened for a specific period e.g. three months, six month, one year or more.
- The return on investment is determined according to actual profit s from investment operations of the bank and shared in an agreed proportion by depositors according to the amount of their deposits and the period for which the bank holds them.
- Generally speaking depositors do not have the right to withdraw from these accounts as is customary in time deposits in conventional banks.
3.6 Islamic Financial Vehicles
Islamic banks around the world have devised many creative financial products based on the risk sharing and profit sharing principles of Islamic banking. For day to day banking activities a number of financial instruments have been developed that satisfy the Islamic doctrine and provide acceptable financial returns for investors.
3.6.1 Al-Mudaraba (Profit sharing)
This implies a contract between two parties whereby one party the rabb al mal (beneficiary; owner or the sleeping partner), entrusts money to the other party called the mudarib (managing trustee or the labor partner). Important features of Mudaraba are as follows:
1. The division of profits between the two parties must necessarily be on a proportional basis and cannot be a lump sum or guaranteed return.
2. The investor is not liable for losses beyond the capital he has contributed.
3. The mudarib does not share in the losses except for the loss of his time and efforts.
This is the sale of a commodity at a price, which includes a stated profit, which includes a stated profit known to both the vendor and the purchaser. This can be called a cost plus profit contract. The buyer in deferred payments usually pays the price back. Under Murabaha the Islamic bank purchases in its own name, goods that an importer or a buyer wants and then sells them to him at an agreed mark-up. This technique is usually used for financing trade, but because the bank takes title to the goods, and is therefore engaged in buying and selling its profit derives from a real service that entails a certain risk and is thus seen as legitimate.
3.6.3 Musharaka (Profit and loss sharing)
This is a partnership normally of limited duration formed to carry out a specific project. It is therefore similar to a western- style joint venture, and is regarded by some as the purest from of Islamic financial instrument, since it conforms to the underlying partnership principles of sharing in and benefiting from risk. In this case the bank enters into a partnership with a client in whom both share the equity capital and perhaps even the management of a project or deal and both share in the profits or losses according to their equity shareholding.
3.6.4 Ijarah (Lease financing)
Another popular instrument is leasing which is designed for financing an asset or equipment. It is a manfaah (benefit) or the right to use the asset or equipment. The lessor leases out an asset or equipment to the client at an agreed rental fee for a pre-determined period pursuant to the contract.
3.6.5 Ijara Wa Iktina (Hire Purchase)
Equivalent to the leasing and installment loan, hire- purchase, practices that put millions of drivers on the road each year. These techniques as applied by Islamic banks include the requirement that the leased items be used productively and permitted by Islamic law.
This technique allows a bank to flat what are effectively Islamic bonds to finance a specific project. Investors who buy muqaradah bonds take a share of the profits of the project being financed, but also share the risk of unexpectedly low profits or even losses.
A buyer pays in advance for a specified quality of a commodity, deliverable on a specific date at an agreed price. This financing technique, similar to a futures or forward- purchase contract is particularly applicable to seasonal purchase but it can also be used to buy other goods in cases where the seller needs working capital before he can deliver.
3.6.8 Istisna (Purchase order)
This is a sale and purchase agreement whereby the seller undertakes to manufacture or construct according to the specification given in the agreement. It is similar to bai salam the main distinction being the nature of the asset and method of payment. Istisna generally covers those things which are customarily made to order and advance payment of money is not necessary as required in bai salam. The method of payment in istisna is flexible.
The terms ‘Bai’ and ‘Muajjal’ have been derived from Arabic words ‘Bai’ and ‘Ajl’. The word ‘Bai’ means purchase and sale. The word ‘Ajl’ means fixed time or a fixed period. ‘Bai-Muajjal’ means sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on credit. ‘Bai-Muajjal’ may be defined as a contract between a buyer and seller under which the seller sells specific goods to the buyerat an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installment’s.
3.6.10 Hire Purchase under Shirkatul Melk
Shirkat means partnership. Shirkatul Melk means share in ownership when two or more persons supply equity to purchase an asset own the same jointly and share the benefit as per agreement and bear the loss in proportion to their equity, the contract is called Shirkatul Melk contract.
It is a virtuous loan. Through this mode, Bank provides loan to its customer for a certain period, which bears no profit/loss/compensation.
3.6.12 Direct Investment
Islamic Bank without the help/assistance of any client may directly invest its fund/capital in share, securities, business and industry. Profit and loss in this business is exclusively, the internal matter of the Bank.
The concepts of equity and morality are at the root of Islamic banking .In Islam moral and equitable values from an integral part of the rules of law governing contractual and financial relations to such an extent that the relationship, which exists between equity law and relation, is an organic rather than supplementary relationship. The importance of Islamic banking has increased dramatically over the past 10 years. The main differences between Western and Islamic style banking is the concentration on people and their businesses rather than on accounts it is a much more grass roots banking according to one expert.
Financial institution/ intermediary that mediates or stands between ultimate borrowers and ultimate lenders is knows as banking financial institution. Banks perform this function in two ways- taking deposits from various areas in different forms and lending that accumulated amount of money to the potential investors in other different forms.
General Banking is the starting point of all the banking operating. General Banking department aids in taking deposits and simultaneously provides some ancillaries services. It provides those customers who come frequently and those customers who come one time in banking for enjoying ancillary services. In some general banking activities, there is no relation between banker and customers who will take only one service form Bank. On the other hand, there are some customers with who bank are doing its business frequently. It is the department, which provides day-to-day services to the customers. Every day it receives deposits from the customers and meets their demand for cash by honoring cheques. It opens new accounts, demit funds, issue bank drafts and pay orders etc. since bank in confined to provide the service everyday general banking is also known as retail banking.
General Banking Section of a branch is designed-
- To serve the general people for saving money
- To ensure smooth transaction for commercial people and
- To ensure security of preaches wealth of the clients and also for all other important activities.
The general banking involves the following activities-
4.1 Account opening
One cannot be a customer of the bank without opening an account. Account opening is an agreement between the customer and the bank. The form of account opening acts as a contract evidence. So account opening is one of the most important activities of a bank. The rules and regulations for opening of an account can vary according to types of accounts.
Types of Accounts
One cannot imagine the banking business without deposits. So the most important activity of the commercial bank is to receive the deposits from the customers Shahjalal Islami Bank’s deposits can be divided as follows—
i. AL-Wadiah Current Deposit
For private, individuals, merchants, traders, importers and exporters mill and factory overset this type of account is advantageous. The minimum deposit of Tk.5000 for opening of a current account is required with reference.
The benefits of current account are as follows-
- Statement of account on monthly basis/any time.
- Free checkbook
- Statement by fax on demand
- Any number of transactions a day.
ii. Mudaraba Savings Deposit
There is restriction on withdrawals. Frequent withdrawal is prohibited. The saving account is primarily for small-scale savers. The main objective of this A/C is promotion of saving money.
Highlights of the Account
- 7 days notice is required for withdrawal of large amount.
- Frequent withdrawal is not encouraged.
- Minimum amount of Tk.2000.00 is required as initial deposit.
§ Normally withdrawal is not allowed more than one time in a week
iii. Mudaraba Short Notice Deposit (MSTD)
The Bank offers more profits in the short-term deposit than savings account. The depositors must keep their money for at least six months to get the profit. Generally it is suitable for various big companies, organizations and govt. departments
IV) Mudaraba Term Deposit Receipt (MTDR)
When an account of cash is kept in the bank for a fixed period of time these deposits cannot withdraw money from the bank before the maternity of a fixed period. When the depositors open these types of account the banker issue a receipt acknowledging the receipt of money, on deposit account. For three and six and twelve months the rate of interest is 12.5%, 12.75%, and 13% respectively.
v) Monthly income scheme:
It is a monthly income scheme that really makes good sense. A sure investment for a steady return.
Highlights of the Scheme:
· Minimum deposit TK, 50,000.00 and profit will be TK, 450.00.
· Higher monthly income for higher deposit.
· The scheme is for a 5-year period.
Objectives of the scheme
· The depositors have to fill up forms for opening this account.
· The receipt, which is provided by the bank to the customers, is not transferable.
· The Bank will not provide profit to means if this deposit is withdrawer within one year of