Overall Branch Banking and A Comprehensive Review on Investment of Al-Arafah Islami Bank Limited.
Preface
We shall be benefited of by our education if we can effectively apply the institutional education in practical fields. Hence, we all need practical education to apply theoretical knowledge in real world. By considering this importance arranges internship program each semester compulsory for the students of Bachelor of Business Administration to complete the requirement of the course. As a part of this program topic of the study was selected as “Overall Branch Banking and A Comprehensive Review on Investment of Al-Arafah Islami Bank Limited.
The best to conduct effective study by collecting current data. Even though if mistake appears, it is truly undesirable. So would request to look at the matter with merciful eyes.
Executive Summary
Through this Internship report an attempt has been made to assess the performance of Al-Arafah Islami Bank Limited (AIBL). Basically this report has been developed from the basis of secondary data. The sources of information are annual report of the bank, internet, newspaper, magazine etc. The experience also helps to establish this report.
Banking is a system of intermediation. Modern commercials banks since their early days had been doing two main functions. These are Acceptance of deposits from the public and lending money to the people.
In addition, they also involved themselves in investment. Apart from the principal function, they also have to render various services to the people. The ever-changing demands of the society, business and industry have led the banks to undertake such services for enhancing their utility to the society at large. Based on nature of these services, they may be classified as under (a) agency services: collection and payment of cheques, payment on behalf of customs, purchase and sale of stocks, acting as trustees, acting as agency (b) General services: opening letter of credit, safe custody, dealing in foreign exchange, providing Investment reports, underwriting of loans, providing remittance facilities, complete service in foreign trade.
Chapter- 1
1.1 Introduction
Bank and financial institution play an important role in financial inter mediation and thereby contribute to the overall growth in the economy. At present the financial system in Bangladesh consists of the central bank, nationalized commercial/specialized banks, private banks, foreign banks and other non-bank financial institution. This report is based on one Islami Bank that is the Al-Arafah Islami Bank Ltd.
1.2 Objectives of the Study:
1. Broad/General Objective: This study will help to understand the real scenario as a Human Resource Management student. This study will help to take better HR decisions in future as a HR professional.
2. Specific Objectives: After the end of this study will be able to-
· T0 take proper initiatives to train and develop employees.
· To pay employees the market value.
· And To understand other HR related decisions.
1.3 Scope and Delimitations of the Study:
This study is limited to the Human Resource department of AIBL and Branch in Khilkhet of AIBL. The information is provided by AIBL Human Resource department and employees of Khilkhet Branch of AIBL. This study is only prepared for AIUB Human Resource department.. This study is the outcome of experience as a Trainee Officer in AL-ARAFAH ISLAMI BANK LIMITED.
1.4 Methodology of the Study
The used interview and observation method to collect information. The also randomly interviewed Seven Employees categories among 13 employees in Khilkhet branch of AIBL and other official categories to find information about HR related issues in Khilkhet branch of AIBL. Used sampling method in collecting information. have used some statistical tools like percentage and pie chart to conduct my study. The sources of information are as below-
a) Primary Sources:
· Discussion with Bank Officers.
· Personal observation.
· Desk work in different sections departments.
b) Secondary Sources:
· Annual report of the Bank.
· Consultation of related book and publications.
· Different Statements.
· File Balance sheet and various documents.
1.5 Literature Review
Literature review is an imperative part of any study or research. Through this process a researcher conduct a review of the relevant literature so that he can make a clear conception in his mind about the problem. This process is really effective for a researcher in order to refine the problem under study. In this report an effectual literature review is conducted to understand the problem more clearly.
According to Raymond A. Noe, Trainingrefers to a planned effort by a company to facilitate employees’ learning of job related competencies. These competencies include knowledge, skills, or behaviors that are critical for successful job performance. The goal of training is for employees to master the knowledge, skill, and behaviors emphasized in training programs and to apply them to their day-to-day activities. For a company to gain a competitive advantage, its training has to involve more than just basic skill development.1 That is, to use training to gain a competitive advantage, a company should view training broadly as a way to create intellectual capital. Intellectual capital includes basic skills (skills needed to perform one’s job), advanced skills (such as how to use technology to share information with other employees).
Keep in mind that traditionally most of the emphasis on training has been at the basic and advanced skill levels. But some experts estimate that soon up to 85 percent of jobs in the United States and Europe will require extensive use of knowledge. Employees will be required not only to understand the service or product development system but also to share knowledge and to creatively use it to modify a product or serve the customer. Many companies have adopted this broader perspective, which is known as high-leverage training.
High-leverage training is linked to strategic business goals and objectives, uses an instructional design process to ensure that training is effective, and compares or benchmarks the company’s training programs against training programs in other companies.
2 High-leverage training practices also help to create working conditions that encourage continuous learning. Continuous learning requires employees to understand the entire work system including the relationships among their jobs, their work units, and the company.
3 Employees are expected to acquire new skills and knowledge, apply them on the job, and share this information with other employees. Managers take an active role in identifying training needs and help to ensure that employees use training in their work. To facilitate the sharing of knowledge, managers may use informational maps that show where knowledge lies within the company (for example, directories that list what individuals do as well as the specialized knowledges they possess) and use technology such as groupwareor the Internet that allows employees in various business units to work simultaneously on problems and share information. The emphasis on high-leverage training has been accompanied by a movement to link training to performance improvement.5 Companies have lost money on training because it is poorly designed, because it is not linked to a performance problem or business strategy, or because its outcomes are not properly evaluated.6 That is, companies have been investing money into training simply because of beliefs that it is a good thing to do. The perspective that the training function exists to deliver programs to employees without acompelling business reason for doing so is being abandoned. Today, training is being evaluated not on the basis of the number of programs offered and training activity in the company but on how training addresses business needs related to learning, behavior change, and performance improvement. In fact, training is becoming more performance-focused. That is, training is used to improve employee performance, which leads to improved business results. Training is seen as one of several possible solutions to improve performance. Other solutions can include such actions as changing the job or increasing employee motivation through pay and incentives. Today there is a greater emphasis on 7
• Providing educational opportunities for all employees. These educational opportunities may include training programs, but they also include support for taking courses offered outside the company, self-study, and learning through job rotation.
• An ongoing process of performance improvement that is directly measurable rather than organizing one-time training events.
• The need to demonstrate to executives, managers, and trainees the benefits of training.
• Learning as a lifelong event in which senior management, trainer managers, and employees have ownership.
• Training being used to help attain strategic business objectives, which help companies, gains a competitive advantage.
Medtronic is a good example of a company that uses high-leverage training. Medtronic is the world leader in medical technology, providing lifelong solutions for people with chronic heart and neurological diseases. Medtronic has 30,000 employees in more than 120 countries. Medtronic has set a goal of 15 percent annual growth, a goal of doubling the size of the company in five years.8 To reach this goal, Medtronic believes that people development is important. Medtronic engages employees in learning and development, which links them to the company mission of restoring many people to full and productive lives and of making sure that products are available to patients who need them.
Training and development occurs only after business strategies for achieving growth are identified by the company. For example, strong leadership is needed for a growing company. Strategies that the company uses to develop leadership skills include cross functional, global job rotations as well as mentoring. To keep up with Medtronic’s growth, training and development initiatives must be flexible. The training and development staff are continually scanning the company and the broader medical device industry to understand the issues and prepare training solutions to meet them. Because Medtronic is a global company, certain skills are needed by all managers wherever they are in the world. But the various offices have the ability to adapt programs to their locations
1.6 Limitation:
Objective of the practical orientation program is to have practical exposure for the students. My tenure was for twelve weeks only, which was somehow not sufficient. After working whole day
in the office it very much difficult, it not impossible to study again the theoretical aspects of banking. On the other hand to prepare my internship report I have faced some limitations as follows:
· To collect data and information, it is a common tendency of any departments to keep
· Back their departmental data and information.
Chapter-02
Profile of the Selected Organization
2.1 History
Islam provides us a complete lifestyle. Main objective of Islamic lifestyle is to be successful both in our mortal and immortal life. Therefore in every aspect of our life we should follow the doctrine of Al-Qur’an and lifestyle of Hazrat Muhammad (Sm.) for our supreme success. Al-Arafah Islami Bank started its journey in 1995 with the said principles in mind and to introduce a modern banking system based on Al-Qur’an and Sunnah. A group of established, dedicated and pious personalities of Bangladesh are the architects and directors of the Bank. Among them a noted Islamic scholar, economist, writer and ex-bureaucrat of Bangladesh government Mr. A.Z.M Shamsul Alam is the founder chairman of the bank. His progressive leadership and continuous inspiration provided a boost for the bank in getting a foothold in the financial market of Bangladesh. A group of 13 dedicated and noted Islamic personalities of Bangladesh are the member of Board of Directors of the bank. They are also noted for their business acumen. They are also noted for their business acumen. Al-Arafah Islami Bank Ltd. has 78 braches and a total of 1711 employees (upto December 2010). Its authorized capital is Taka 5000 millions and the paid-up capital is Taka 4677.28 millions.The Bank is committed towards establishing welfare oriented banking system, economic uplift of the lower-income group of people, create employment opportunities. Wisdom of the directors, Islamic bankers and the wish of Almighty Allah make Al-Arafah Islami Bank Ltd. most modern and a leading bank in Bangladesh.
2.2 Company Vision:
To establish an interest free transaction in the economy.
2.3 Mission:
· 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 a welfare-oriented banking system.
2.4 Objectives of AIBL:
· To establish an interest free economy.
· To establish an modern banking system for all kinds of people
· To take part in the economic growth of the country.
· To eradicate the poverty and to do social services by establishing Schools, Madrashas, University, Hospitals, Public Library etc.
2.5 Hierarchy
2.6 Branches of AIBL:
The number of Branches as Division wise is mentioned in the following table:
| Division | No. of Br. |
| Dhaka Division | 42 |
| Chittagong Division | 13 |
| Rajshahi Division | 6 |
| Khulna Division | 6 |
| Sylhet Division | 7 |
| Barisal Division | 4 |
| Total | 78 |
2.7 Organizational Structure:
The forms of AIBL are:-
· Board of Director
· Executive committee
· Audit committee
· Management committee
· Shariah council
2.7 PRODUCTS AND SERVICE
· Mudaraba Savings Deposit Account (MSD)
· Mudaraba Current Deposit Account (CD)
· Mudaraba Term Deposit Receipt Account (MTDR)
· Short Notice Deposit Account (SND)
· Installment Term Deposit (ITD)
· Mudaraba Hajj Account
· Mudaraba Pension Scheme
· Mudaraba Lakhpoti Scheme
· Mudaraba milliner Scheme
· Mudaraba Kotipoti Scheme
· Mudaraba Double Deposit Scheme
General procedure of opening account:
Step1 : Bank provides account opening form to the prospective customer or applicant.
Step 2 : Applicant fills up the form
Step 3 : Application submits the form dully signed by a introducer and along with 2 passport size photo signed by the introducer.
Step 4 : The authorized officer scrutinizes the application form and
Step 5 : If they are satisfied, they will open the account
Step 6 : They issue deposit slip and deposit must be made it
Step 7 : After deposition one checkbook is issued
Step 8 : Bank preserves the specimen Signature card to verify the signature of the client
Step 9 : Account is opened
Current Account
Current account facilitates the account holder to draw money at any times but no profit is given to the current account deposited money. Current accounts can be opened by any individual or joint or any name of proprietorship business, private limited company or public limited company, association, clubs, societies, trusts etc. Generally, current account is opened for businessman and traders for easy transaction. By taking this liability, AL-ARAFHA-ISLAMI Bank takes service charge 250/- for six months. Minimum deposit of opening amount is tk. 20000/ . Closing of account charge is tk. 300/. (Those charge is start From 01/07/2008)
Mudaraba Term Deposit Receipt Account (MTDR)
It’s a certain period deposited system, which is not repayable before the maturity date of a fixed period. AL-ARAFHA-ISLAMI Bank offers higher rates of profit on such deposits. Usually customers are allowed to open this account for a certain period and the rate of profit in accordance with the terms of the deposit. The features of MTDR as follows:
Minimum balance: TK 10000.00
| Term | 3 months | 6 months | 1 year |
| Profit | 11.00% | 11.50% | 12.00% |
Savings Account
To maintain smooth and certain life in future Savings account is very suitable for middle class groups. The attributes of Savings Account are:
• 500/- is the minimum amount of initial deposit. (From 01/07/2008)
· Service charge is tk. 150/ (1/2 year). (From 01/07/2008)
· Account closing charge is tk. 300/. (From 01/07/2008)
· Client cannot withdraw money more than twice a week,
· The profit rate is 8% against MD account
For opening of this type of accounts following requirements are necessary:
a) The introducer must be attested photograph.
b) The introducer must be account holder of MD of AL-ARAFAH-ISLAMI Bank Bangladesh Ltd
Short Term Deposit (SND)
Short Term Deposit has following attributes:
· 6% profit rate against STD.
· No restriction over withdrawal of money
· 5000/- is the minimum balance.(From 01/07/2008)
· Service charge is tk. 250/. (From 01/07/2008)
· Account closing charge is tk. 150/. (From 01/07/2008)
a) Installment Term Deposit (ITD)
It’s a sure investment for a steady return. It can be opened for 5, 8, 10, or 12 years for Tk.200, Tk.300, Tk.500, Tk.1000, Tk.1500 and Tk2000. The savings amount is to be deposited any day of the month. If the depositor has a separate account in the bank for which a standing instruction can be given to transfer the monthly deposit in the scheme’s account. Incase of failure to make the monthly installment in the schedule time 5% on overdue installment amount will be charged. The lowest charge will be Tk. 10 and this will be added with the following month’s installment. After 3 years of savings in this schemed the depositor is eligible for a loan up to 80% of his deposited amount.
b) Highlights of the Scheme
- Mudaraba Lakhpoti Scheme
- Mudaraba milliner Scheme
- Mudaraba Kotipoti Scheme
Mudaraba Kotipoti Scheme
This is the most popular & target oriented schemes. One can open for 3,4,5,6,7,10,12,15,18,20 years and have to pay (Monthly installment) 2,39,500/- 1,69,500/- 1,27,500/- 99,500/- 80,000/- 46,000/- 33,450/- 21,485/- 14,330/- 11,100/- respectively and will get 1corror.
Mudaraba milliner Scheme
For Mudaraba milliner Scheme 3,4,5,6,7,10,12,15,20 year’s monthly installments are 23,950/- 16,950/- 12,750/- 9,950/- 8,000/- 4,600/- 3,345/- 2,170/- 1,150/- respectively and will get 10million.
Mudaraba Lakhpoti Scheme
For Mudaraba Lakhpoti Scheme 3,5,8,10,12 year’s monthly installments are 2,375/- 1,275/- 670/- 460/- 335/-/- respectively and will get 1lak.
Conditions of the Scheme:
1) By filling up a form an account is opened.
2) A non-transferable deposit receipt will provide to the customer after opening the account.
3) If the deposit is withdrawn before a 5-year term, then saving interest rate will be applicable and paid to the depositor. However, no in profit paid if the deposit is withdrawn within 1 year of opening the account and Monthly Income paid to the customer will be adjusted from the principal amount.
4) This scheme will be credited to the loan account until liquidation of the loan amount inclusive of profit. A depositor can avail loan up to 80% of the deposit amount under this scheme.
C) Mudaraba Double Deposit
Savings works as the very foundation of development. Savings is the prime source of business investment in a country. So it helps to build up capital. To create more awareness and motivate people to save, AL-ARAFAH-ISLAMI Bank offers Mudaraba Double Deposit. Here people put their money for double return after 6years.
Conditions of the Scheme:
a) The deposit can be made in multiplies of TK. 10000.00.
b) This is 6 years period deposit. The deposit cannot be withdrawn at any time with in the maturity date.
c) Al-Arafah monthly deposited Hajj account.
d) Pension scheme.
Chapter-03
Theoretical discussion
Theoretical Basis of the Concept of Islamic Banking:
Conventional banking is essentially based on debtor-creditor relationship between depositors and the bank in the one hand and between the borrowers and the bank on the interest is considered as the price of credit, reflecting the opportunity cost of money. Islam, on the other hand, considers loan to be given or taken, free of charge, to meet contingency and that the creditor should not lake any advantage of the borrower. The money is lent out on the basis of interest, more often it happens that it leads to some kind of injustice. The first Islamic principle underlying such kinds of transactions is that “deal not unjustly and ye shall not be dealt with unjustly”. Hence, commercial banking in an Islamic framework is not based on debtor-creditor relationship.
The second principle regarding financial transactions in Islam is that there should not be any reward without risk-taking. This principle is applicable both to labor and capital. As no payment is allowed to labor unless it is applied to work, no reward for capital should be allowed unless it is exposed to business risks.
Thus, financial intermediation in an Islamic framework has been visualized on the basis of the above principles. Consequently financial relationships in Islam have been participatory in nature. Several theorists suggest that commercial banking in an interest-free system should be organized on the principle of profit and loss sharing. The institution of interest is thus replaced by a principle of participation in profit and loss. That means, a fixed rate of interest is replaced by a variable rate of return based on real economic activities. The distinct characteristics which provide Islamic banking with its main points of departure from the traditional interest-based commercial banking system are: (a) the Islamic banking system is essentially a profit and loss sharing system and not merely an interest-free (Riba) banking system; and (b) investment (loans and advances in conventional sense) under this system of banking must serve simultaneously both the interest of the investor and those of the local community. The financial relationship as pointed above is referred to in Islamic jurisprudence as Mudarabah.
Chapter-04
Analysis and Findings
4.1 GENERAL BANKING
Bank is nothing but an intermediary between lender (surplus unit) and borrower (deficit unit). Savings and deposits are the main strength of the banks to provide loan. And the interest earned from the difference borrowing and lending is the major portion of banks income. Banks also earns from variety of operation. Branch banking includes four operational divisions in Al-Arafah Islami Bank Limited.
General banking is the front side banking service department. 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, these are no relation between banker and customers with who bank are doing its business frequently. Al-Arafah Islami Bank Ltd General Banking is divided into five sectors.
- Account opening section
- Bills and clearing Section
- Remittance Section
- Deposit Section
- Cash Section
Initially all the accounts are opened through deposit money by the customer and these accounts are called deposit account. Normally a person needs to open an account to take services from the bank. Without opening an account, one cannot enjoy variety of services from the bank. Thus, the banking usually begins through the opening of the account with the bank.
4.1.1 TRANSECTION:
Transaction is a financial event, which changes the financial position of a company. There are three types of transaction that is performed by the Al-Arafah Islami Bank Limited.
- Cash Transaction
§ Transferring Transaction
§ Clearing Transaction
4.1.2 Cash Transaction:
Cash department is a sensitive and important place of Bank. Cash receiving and cash payment is the first and important duty. A Bank should member that the image of a Bank is dependent on cash officer of Bank. If the Cash officer is not smart, outstanding and handsome person, then it is meant this does not care for its customers.
4..1.3 Cash Receipt:
Receiving cash officer should draw his attention to avoid from these types of notes when he /she taken money from the customers”
· Mutilated note
· Mismatched note
· Discolor note
· Forged note
· Incorrect note
· Burn note
4.1.4 Cash payment:
The officer should enough care when he/she makes payment of a cheque. Some of the important checkpoints are given below:
· Amount of the cheque
· Who is the draw of the cheque
· Verifying the signature
· Posted and cash paid sale on the cheque
· Name of the branch
· Is it a fraud cheque?
After payment, the cheque the officer should maintain/noted account number, name of the draw, and withdrawal amount in a register book.
4.1.5 Clearing Transaction:
There are two types:
Inward Clearing:
When any client of any Bank gives cheque to the creditors, the creditor generally gives deposit to their respective Bank account for collection. Then the banks will send those cheques to Bangladesh Bank. The Bangladesh Bank then sends this type of cheques to their respective Bank main branch this type of transaction is called inward clearing This is presented in below:
Fig: Inward out clearing
Outward Clearing:
When the bank gets different types of cheques of different banks from their client for collection, they then send cheques to their main branch. The main branch then sends those cheques to Bangladesh Bank. The Bangladesh Bank sends those to the respective banks. The process is as follows:
Fig: Outward clearing
4.2 Financial performance
Investment
The Total investment of the bank stood at Tk.5079.21 million against Tk.3728.41 million during the corresponding period of last year. The percentage of increase is 36.23% as against 13.00% in banking sector. The bank extends investments to the clients under the following modes of investment under Islamic Shariah:
1. Bai-Murabaha or simply Murabaha: The terms “Bai-Murabaha” have derived form Arabic words Bai and Ribhum. The word “Bai” means purchase and sale and the word ‘Ribhum’ means an agreed upon profit. So Bai-Murabaha means sale for an agreed upon profit. It may be defined as a contract between a Buyers and a Seller under which the seller sells certain specific goods permissible under Islamic Shariah and the word Law of the land to the Buyer at a cost plus and agreed upon profit payable today or some date in the future in lump-sum or by installments. The profit may be either a fixed sum or based on a percentage of the price of the goods.
2. Musharaka: The word Musharaka is derived from the Arabic word Sharikah meaning partnership. Islamic jurists point out that the legality and permissibility of Musharakah is based on the injunctions of the Holy Qura’n, Sunnah and Ijma (consensus) of the scholars. Musharaka transaction may be conducted in the following manner:
One, two or more entrepreneurs approach an Islamic Bank to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the project. All partners including the Bank have the right to participate in the project. The profit is distributed according to an agreed ratio. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project.
3 Mudarabah: The term Mudarabah refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital. The first party provides capital and the other party provides the expertise with the purpose of earning lawful profit (approved by Islamic law) which will be shared in a mutually agreed upon proportion.
4. Bai-Muajjal: The term ‘Bai’ and ‘Muajjal’ are derived from the Arabic words ‘Bai’ and ‘Ajal’ where ‘Bai’ means purchase and sale and ‘Ajal’ means a fixed time or a fixed period. So Bai-Muajjal is a sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on Credit. It is basically a contract between a buyer and seller under which the seller sells certain specific goods, permissible under Shariah and law of the country to the buyer at an agreed fixed price payable at a certain fixed future date in lump-sum or in fixed installments.
5. Bai-Salam: The term Bai-Salam is used to define a sale in which the buyer makes advance payment, but delivery is delayed until some time in the future. Usually the seller is an individual or business and the buyer is the bank.
Foreign Exchange Division
Foreign exchange is the means and methods by which rights to wealth in a country’s currency are converted into rights to wealth in another country’s currency. In banks when we talk foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another. Foreign Exchange Department (FED) is the international department Bangladesh Bank issues license to scheduled banks to deal with foreign exchange. These banks are known as Authorized Dealers. If the branch is authorized dealer in foreign exchange market, it can remit foreign exchange from local country to foreign countries. So AL-ARAFAH ISLAMI Bank, Principal branch is an authorized dealer.
There are three kinds of foreign exchange transaction:-
A) Import.
B) Export.
C) Remittance.
A) IMPORT:
To import, a person should be competent to be and importer. According to Import and Export Control Act, 1950, the Office of Chief Controller of Import and Export provides the registration (IRC) to the importer. In an international business environment, buyers and sellers are generally unknown to each other. So seller of goods always seeks security for the payment of his exported goods. Bank gives export guarantee that it will pay for the goods on behalf of the buyer if the buyer does not pay. This guarantee is called Letter of Credit. Thus the contract between importer and exporter is given a legal shape by the banker by ‘Letter of Credit’.
Letter of Credit:
A letter of credit is a letter issued by a bank (know as the opening or the issuing bank) at the instance of its customer (known as the opener) addressed to a person (beneficiary) undertaking that the bills drawn by the beneficiary will be duly honored by it (opening bank) provided certain conditions mentioned in the letter gave been complied with.
Parties to the L/C
| Importer | Who applies for L/C |
| Issuing Bank | It is the bank which opens/issues a L/C on behalf of the importer. |
| Confirming Bank | It is the bank, which adds its confirmation to the credit and it, is done at the request of issuing bank. Confirming bank may or may not be advising bank |
| Advising or Notifying Bank | It is the bank through which the L/C is advised to the exporters. This bank is actually situated in exporter’s country. It may also assume the role of confirming and / or negotiating bank depending upon the condition of the credit. |
| Negotiating Bank | It is the bank, which negotiates the bill and pays the amount of the beneficiary- The advising bank and the negotiating bank may or may not be the same. Sometimes it can also be confirming bank. |
| Accepting Bank | It is the bank on which the bill will be drawn (as per condition of the credit). Usually it is the issuing bank |
| Reimbursing Bank | It is the bank, which would reimburse the negotiating bank after getting payment – instructions from issuing bank. |
Steps for import L/C Operation – 8 steps operation
Step 1 – Registration with CCI&E:
• For engaging in international trade, even7 trader must be first registered with the Chief Controller of Import and Export.
• By paying specified registration fees to the CCI&E- the trader will get IRC/ERC (Import/Export Registration Certificate), to open L/C with bank, this IRC is must.
Step 2 – Determination terms of credit:
• The terms of the letter of credit are depending upon the contract between the importer and exporter. The terms of the credit specify the amount of credit, name and address of the beneficiary and opener, tenor of the bill of exchange-period and mode of shipment and of destination, nature of credit, expiry date name and number of sets of shipping documents etc.
Step 3 – Proposal for Opening of L/C:
To have an import LC limit an importer submits an application to department to AL-ARAFAH-ISLAMI Bank.
The proposal contains the following particulars:
- Full particulars of the bank account.
- Nature of business.
- Required amount of limit.
- Payment terms and conditions.
- Goods to be imported.
- Offered security.
- Repayment schedule.
Step 4 – Application by importer to the banker to open letter of credit:
• For opening L/C, the importer is required to fill up a prescribed application form provided by the banker along with the following documents:
| 1. L/C Application form | 7. Authority to debit account |
| 2. Filled up LCA form | 8. Filled up amendment request Form |
| 3. Demand Promissory Note | 9. IMP form |
| 4. pro-forma invoice | 10. Insurance cover note and money receipt |
| 5. Tax Identification number | 11. Membership certificate |
| 6. Import registration certificate | 12. Rate fluctuation undertaking |
Step 5 – Opening of L/C by the bank for the opener:
- Taking filled up application form from the importer.
- Collects credit report of exporter from exporter’s country through his foreign correspondence there.
- Opening bank then issues credit by air mail/TELEX/SWIFT followed by L/C advice as asked by the opener through his foreign correspondent or branch as the case may be, at the place of beneficiary. The advising bank advises the L/C to the beneficiary on his own form where it is addressed to him or merely hand over the original L/C to the beneficiary if it is so addressed.
Step 6 – Shipment of goods and lodgment of documents by exporter:
Then exporter ships the goods to the destination of the importer country.
Sends the documents to the L/C opening bank through his negotiating bank. Generally the following documents are sent to the Opening Banker with L/C:
| 1. Bill of Exchange | 6. Packing List |
| 2. Bill of Lading | 7. Advice Details of Shipment |
| 3. Commercial Invoice | 8. Pre-shipment Inspection Certificate |
| 4. Certificate of Origin | 9. Vessel Particular |
| 5. A certificate stating that each packet contains the description of goods over the packet. | 10.Shipment Certificate |
Step 7 – Lodgment of Documents by the opening Bank from the negotiating bank:
After receiving the documents, the opening banker scrutinizes the documents. If any discrepancy found, it informs the importer. If importer accepts the fault, then opening bankers call importer retiring the document. At this time many thing can happen. These are indicated in the following:
Discrepancy found but the importer accepts – no problem occurs in lodgment.
Discrepancy found and importer not agreed to accept – In this case, importer protest and send back all the documents to the exporter and request his to make in the specified manner. Herebanker is not bound to pay because the documents send by exporter is not in accordance with the terms of L/C.
Documents are OK but importer is willing to retire the documents – In this case bank is obligated to pay the price of exported goods. Since importer did not pay for bill of exchange, this payment by bank is one kind of credit to the importer and this credit in banking is known as PAD.
Everything is O.K. but importer fails to clear goods from the port and request bank to clear- In this case banks clear the goods and takes delivery of the same by paying customs duty and sales tax etc. So, this expenditure is debited to the importer’s account and in banking it is called LIM.
Step-8 Retirement
The importer receives the intimation and gives necessary instruction to the bank for retirement of the import bills or for the disposal of the shipping document to clear the imported goods from the customs authority. The importer may instruct the bank to retire the documents by debiting his account with the bank or may ask for LTR (Loan against Trust Receipt).
Accounting Procedure in case of L/C Opening:
When the officer thinks fit the application to open a L/C, giving the following entries-creates the following charges:-
| Particulars | Debit/ Credit | Charges in Taka |
| Customer’s A/C | Debit | 12% |
| L/C Margin A/C | Credit | 10% |
| Commission A/C on L/C | Credit | 50% |
| VAT | Credit | 15% on commission |
| SWIFT Charge | Credit | 3000/= |
| Data max | Credit | 1000/= |
| Stamp | Credit | 150/= |
| Postage | Credit | 300/= |
| HL/Courier | Credit | 1500/= |
Amendment of L/C:
After opening of L/C some time’s alteration to the original terms and conditions become necessary. These amendments involve changes in
a Unit price.
b. Extension of validity o the L/C.
c. Documentary requirements etc.
Such amendments can be affected only if all the concerned parties agree i.e. the beneficiary, the importer, the issuing bank and the advising bank.
For any amendment the importer must request the issuing bank in writing duly supported by revised indent/preformed invoice. The issuing bank then advises the required amendment to the advising bank. L/C amendment commission including postage is charged to the clients A/C.
Loan against Trust Receipts (LTR):
Advance against a Trust Receipt obtained from the Customers are allowed to only first class tested parties when the documents covering an import shipment or other goods pledged to the Bank as security are given without payment. However, for such advances prior permission/sanction from Head Office must be obtained.
The customer holds the goods or their sale-proceeds in trust for the Bank, till such time, the loan allowed against the Trust Receipts is fully paid off.
The Trust Receipt is a document that creates the Banker’s Hen on the goods and practically amounts to hypothecation of the proceeds of sale in discharge of the lien.
Loan against Imported Merchandise (LIM):
Advance (Loan) against the security of merchandise imported through the Bank may be allowed either on pledge or hypothecation, of goods, retaining margin prescribed or their Landed Cost, depending on their categories and Credit Restriction imposed by the Bangladesh Bank. Bank shall also obtain a letter of undertaking and indemnity from the parties, before getting the goods cleared through LIM Account.
Payment Procedure of Import Documents:
This is the most sensitive task of the Import Department. The officials have to be very much careful while making payment. This task constitutes the following:
Date of Payment:
Usually payment is made within seven days after the documents have been received. If the payment is become deferred, the negotiating bank may claim interest for making delay.
Preparing Sale Memo:
A sale memo is made at B.C rate to the customer. As the T.T & O.D rate is paid to the ID, the difference between these two rates is exchange trading. Finally, an Inter Branch Exchange Trading Credit Advice is sent to ID.
Requisition for the Foreign Currency:
For arranging necessary fund for payment a requisition is sent to the International Department
Transmission of Message:
Message is transmitted to the correspondent bank ensuring that payment is being made.
B) EXPORT:
Understanding:
The goods and services sold by Bangladesh to foreign households, businessmen and Government are called export. The export trade of the country is regulated by the Imports and Exports (control) Act, 1950. There are a number of formalities, which an exporter has to fulfill before and after shipment of goods. The exports from Bangladesh are subject to export trade control exercised by the Ministry Of Commerce through Chief Controller of Imports and Exports (CC & E).
No exporter is allowed to export any commodity permissible for export from Bangladesh .
Unless he is registered with CC! & E and holds valid Export Registration Certificate (ERC). The ERC is required to be renewed ever}year. The ERC number is to be incorporated on EXP forms and other documents connected with exports. The formalities and procedure are enumerated as follows:
1. Obtaining exports LC: To get export LC form exporter issued by the importer.
2. Submission of export documents: Exporter has to submit all necessary documents to the collecting bank after shipping of goods
3. Checking of export documents: After getting the documents banker used to check the documents as per LC terms
4. Negotiation of export documents: If the bank accepts the document and pays the value draft to the exporter and forward the document to issuing bank that is called a negotiating bank. If the bank does buy the LC then the bank normally acts as collecting bank
5. Realization of proceeds: This is the period when the issuing bank has realized the payment.
6. Reporting to the Bangladesh bank: As per instruction by Bangladesh bank the bank has to report to respective department of Bangladesh bank by mentioning latest payment.
7. Issue to proceeds realization certificate (PRC): Bank has to issue precede realization certificate of export LC to the supplier / exporter for getting cash assistance
Export operation:
Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both knitted and woven), Jute, Jute-made products, frozen shrimps, tea are the main goods that Bangladeshi exporters exports to foreign countries. Garments sector is the largest sector that exports the lion share of the country’s export; Bangladesh exports most of its readymade garments products to U.S.A and European Community (EC) countries, Bangladesh exports about 40% of its readymade garments products to U.S.A. Most of the exporters who export through AL-ARAFAH-ISLAMI BANK are readymade garment exporters. They open export L/Cs here to export their goods, which they open against the import L/Cs opened by their foreign importers.
Export L/C operation is just reverse of the import L/C operation For exporting goods by the local exporter, bank may act as advising banks and collecting bank (negotiable bank) for the exporter.
As An Advising Bank:
It receives documents from the foreign importer and hands it over to the exporter. Sometimes it adds confirmation on the L/C on request from the Opening Bank. By adding confirmation, it assumes the responsibility to make payment to the exporter.
As Negotiating Bank:
It negotiates the bills and other shipping documents in favor of the exporter. That is? it collects the proceeds of the export-bill from the drawer and credits the exporter’s account for the same. Collection proceed from the export bill is deposited in the bank’s NOSTRO account in the importer’s country. Sometimes the bank purchases the bills at discount and waits till maturity of the bill. When the bill matures, bank presents it to the drawer to in cash it.
In our country, Export and Import operation of bank is very much related with one another because of use of Back to Back and maturity of payment for Back-to-Back L/C is set in such that it can be paid out of export proceeds.
Back-To-Back L/C:
It is simply issued to the clients against an import L/C. Back-to-Back mechanism involves two separate L/C. One is master Export L/C and another is Back-to-Back L/C. On the strength of Master Export L/C bank issues bank to Back L/C. Back-to-Back L/C is commonly known as Buying L/C. On the contrary, Master Export L/C is known as Selling L/C.
Features Of Back To Back L/C:
• An Import L/C to procure goods /raw materials for further processing.
• It is opened based on Export L/C,
• It is a kind of Export Finance.
• Export L/C is at Sight but back to Back L/C is at Séance.
• No margin is required to open Back to back L/C
• Application is registered with CCI&E
• Applicant has bonded warehouse license.
• L/C value shall not exceed the admissible percentage of net FOB value of relative Master L/C.
• Séance period will be up to 180 days.
• The import L/C is opened for 75% of the value of Export L/C.
• Here L/C issued against the lien of export L/C.
• Arrangements are such that export L/C matures first then out of this export profit, import L/C is paid out.
Documents Required for Opening a Back-to-back L/C
In AL-ARAFAH-ISLAMI Bank Principal Branch, following papers/ documents are required for opening a back-to-back L/C-
1. Master L/C.
2. Valid Import Registration Certificate (IRC) and Export Registration Certificate (ERC).
3. L/C Application and LCAF duly filled in and signed.
4. Performa Invoice or Indent.
5. Insurance Cover Note with money receipt.
6. IMP Form duly signed.
In addition to the above documents, the followings are also required to export oriented garment industries while requesting for opening a back-to-back L/C –
1. Textile Permission.
2. Valid Bonded Warehouse License.
3. Quota Allocation Letter issued by the Export Promotion Bureau (EPB) in favor of the applicant for quota items.
Check list of export I/C :
Following defective points are usually found in the Master L/C. So, these points are so much carefully checked by the bank officials. These are:
1. Name of the Advising Bank.
2. Name of Transferring Bank
3. Form of Doc. credit:
• Name of Issuing Bank
• Documentary Credit No. And issuing date
• Date of shipment
• Expiry date and place
4. Applicant/ for order of/ On Account.
5. Beneficiary/ Favoring
6. Amount
7. Availability of Credit
8. Partial shipment/ Transshipment
9. Payment condition /Draft Sight
10. Category.
11. Description of goods:
• Item
• Total Qty
• Unit price
12. B/L Clause
13. Reimbursement clause.
14. UCPDC Clause
15. Net FOB value.
Payment of back to back L/C:
In case back to back as 60-90-120-180 days of maturity period, deferred payment is made. Payment is given after realizing export proceeds from the L/C issuing bank.
L/C under EOF:
• Exporter development Fund is created by Bangladesh Bank to give encourages to the exporter in Bangladesh.
• Generally Back-to-Back L/C is Usance L/C that is here bill of exchange is payable after some maturity date say 90 or 120 days after the date of acceptance/negotiation. But some foreign seller may require sight payment. Here import L/C matures first. In that case Bangladesh Bank gives the fund to the bank to pay the price of imported goods in favor of the local purchaser of raw materials. When export proceeds come, first Bangladesh Bank loan to the importer is adjusted and remaining part goes to the importer of raw materials
Negotiation of Export Documents:
The most common method of financing exporters is negotiation of documents under L/C. It is a post-shipment credit. Here the bank acts as a negotiating bank. After the shipment of the goods, the exporter submits the relative documents to the branch for negotiation. The documents are to submit within the period mentioned in the L/C. after approval of negotiation of the bill the full particulars of the documents are branch with a forwarding letter. The branch claim reimbursement from the issuing bank or from the reimbursing bank, giving clear instructions to credit the proceeds of the bill to the AL-ARAFAH-ISLAMI Bank head office NOSTRO A/C maintained with the named correspondent bank abroad under telex intimation to the Principal branch and Head Office (International Division).
Negotiation stands for payment of value to the exporter against “the documents stipulated in the LAC. If documents are in order, AL-ARFAH-ISLAMI Bank purchases (negotiates)
the same on the basis of banker- customer relationship. This is known as Foreign Documentary Bill Purchase (FDBP).If the bank is not satisfied with the documents submitted to AL-ARAFAH-ISLAMI Bank gives the exporter reasonable time to remove the discrepancies or sends the documents to
L/C opening bank for collection , this is known as Foreign Documentary Bill for Collection (FDBC) entered into the Foreign, bill Purchased (F.B.P) register. The documents are sent to the L/C opening
Presentation of export documents for negotiation/Purchase:
After shipment exporter submits the following documents to AL-ARAFAH-ISLAMI Bank for negotiation.
• Bill of exchange
• Bill of Lading
• Invoice
• Insurance Policy/Certificate
• Certif