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Performance of Deference Modes of Investment of Islami Bank Bangladesh Limited
Chapter 1: Introduction
1.1 ORIGIN OF THE REPORT:
As an obligatory requirement of MBA program under the department of Management Information Systems, I have prepared this report for the partial fulfillment of my MBdegree. In my report entitled “Farformance of Deferent Modes of Investment of IBBL”, here I am supposed to analyze investment banking as a whole scenario of Islami Bank Bangladesh Limited (IBBL) particularly in terms of its precise definition, problems, factors, contributions, and inventions.
1.2. Objective of the report:
The primary objective of this report is to observe the investment related activities for the Investment Department of Islami Bank Bangladesh Ltd.
The other objectives include:
§ To understand the different modes of investment.
§ To familiarize with the various investment schemes.
§ To get the practical exposure of the banking activities.
§ To adapt with the corporate environment.
§ To understand the investment policy of IBBL with other banks.
1.3. Scope of the report:
In this report I have focused on all the qualitative which include profiles of IBBL, investment modes like Bai mode, Profit & loss sharing, bearing mode, Rent sharing mode, different schemes of investment such as household durable schemes, housing investment scheme, transport investment scheme, car investment scheme, investment scheme for doctors small business investment scheme, rural development scheme, etc. and lastly financial performances have been depicted.
1.4. Methodology of the Report:
a) Nature of the study: Exploratory
b) Sources of information: Both primary and secondary information sources were used to complete this report.
o Primary sources: Primary sources were officers and manager (VP) of the Islami Bank Bangladesh Ltd., 15,Dhanmondi Branch. Following factors were considered to collect information:
a. Face to Face conversation.
b. Information Queries: Questions were presented in a paper sheet.
c. Respondent size: 9 respondents.
o Secondary sources: Secondary information was collected from various books, journals, manuals, and also from the web sites.
c) Analysis techniques: Self study was used to analyze the collected information.
d) Presentation of information: Collected information and findings of the analysis are presented in both table and graphical form.
e) Preparation and submission of report: A report is prepared and submitted to the respective supervisor Professor Akkas Ali for evaluation.
1.5. Limitation of the Report:
I have faced some problems during preparing my report:
a) Lack of experiences has acted as constraints in the way of meticulous exploration on the topic.
b) Shortage of time for preparing the report in order.
c) Lack of current information.
d) Internet speed is very slow (outside) for collecting necessary data in time.
e) The study was conducted mostly on secondary data.
Background of Islami Bank Bangladesh Limited
2.1 History of Islami Bank Bangladesh Ltd.
In the late seventies and early eighties, Muslim countries were awoken by the emergence of Islami Bank which provided interest free banking facilities. There are currently more than 300 interest free institutions all over the world. Islami Bank now a days not only operate in almost all Muslim countries but have extended their wings to the western world to serve both Muslim and non Muslim customers. In case of Islami Banking, the establishment of Mitghamar Local Savings Bank in 1963 is said to be a milestone for modern Islami Banking. The history of Islami Banking can nevertheless be traced back to the birth of Islam.
In 1974, Bangladesh signed the Charter of Islamic Development Bank and committed itself to reorganise its economic and financial system as per Islamic Shariah (legal framework of Islamic Ideology).
In 1978, Bangladesh recommended in Islamic Foreign Minister Conference in Senegal towards systematic efforts to Islamic Banking.
In 1980, Foreign Minister Conference in Pakistan where Bangladesh Foreign Minister Prof. Shamsul Hoq, proposed for taking steps for Islamic Banking. Further, Bangladesh Bank sent representation abroad to study Islamic Banking System. Also, International Seminar held in Dhaka inaugurated by Bangladesh Bank Governor for early introduction of Islamic Banking.
In 1981, President of the Peoples Republic of Bangladesh addressed the 3rd Islamic Summit Conference held at Makkah and Taif suggested, ”The Islamic countries should develop a separate banking system of their own in order to facilitate their trade and commerce.”
In 1982, IDB visited Bangladesh for study. They found contributions done by Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers Association (BIBA); they mobilized the seminars, public opinion through symposia & workshop. Professional activities reinforced by Muslim Businessman Society (now reorganized as Industrialists and Businessman Association). The body mobilized mainly equity capital for emerging Islamic Bank. Finally, in 1983 Islami Bank Bangladesh Limited (IBBL) came out to take the challenge of doing banking business.
Islami Bank Bangladesh Limited (IBBL) is considered to be the first interest free bank in Southeast Asia. It was incorporated on 13-03-1983 as a Public Company with limited liability under the companies Act 1913. The bank began operations on March 30, 1983, with major share by the foreign entrepreneurs.
At present 17% of total banking business owned by the Islamic Banks in Bangladesh.
IBBL is a joint venture multinational Bank with 63.92% of equity being contributed by the Islamic Development Bank and financial institutions. The total number of branches in 2008 stood at 196. Now the authorized capital of the bank is Tk. 5000 million and subscribed capital is Tk. 3801.6 million.
2.2 Islamic Banking
Islamic 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 operations. -OIC
Ziauddin Ahmed says, “Islamic bank is essentially a normative concept and could be defined as conduct of banking in consonance with the ethos of the value system of Islam.”
It appears from the above definitions that Islamic bank is a system of financial intermediation that avoids receipt and payment of interest in its transactions and conducts its operations in a way that it helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system whose operation is based on Islamic principles of transactions of which profit and loss sharing (PLS) is a major feature, ensuring justice and equity in the economy. That is why Islamic bank is often known as PLS-banks.
To establish Islamic banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the field of all economic activities, achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less developed areas of the country. To encourage socio-economic uplift and financial services to the low-income community particularly in the rural areas.
Our vision is to always strive to achieve superior financial performance, be considered a leading Islamic bank by reputation and performance.
· Our goal is to establish and maintain the modern banking techniques, to ensure the soundness and development of the financial system based on Islamic principles and to become the strong and efficient organization with highly motivated professionals, working for the benefit of people, based upon accountability, transparency and integrity in order to ensure stability of financial systems.
· We will try to encourage savings in the form of direct investment.
· We will also try to encourage investment particularly in projects which are more likely to lead to higher employment.
2.5 Objectives of Islamic Bank
The primary objective of establishing Islamic Bank all over the world is to promote, foster and develop the application of Islamic principles in the business sector. More specifically, the objectives of Islamic bank when viewed in the context of its role in the economy are listed as following:
· To offer contemporary financial services in conformity with Islamic Shariah;
· To contribute towards economic development and prosperity within the principles of Islamic justice;
· Optimum allocation of scarce financial resources; and
· To help ensure equitable distribution of income.
2.6 Essential Features of Islamic Bank
1. Prohibition of interest
The traditional capitalist banking system depends on interest. It receives interest for providing loans and pays interest for taking loans. The spread between these two interests is the source of its profit. But according to Islamic Shariah all types of interest is banned. So, Islamic bank does not carry on business of interest and it completely avoids the transaction of interest.
2. Investment based on profit
After departing from interest, the alternate ways of income for Islamic bank is investment and profit. Thus IBBL gives up any transaction of interest and makes investments based on profit. Bank distributes its profit to its depositors and shareholders.
3. Investment in Halal business
Islamic Shariah has banned the business of haram goods. For example, Islam not only forbids the drinking of alcohol but also banned any business of alcohol. Therefore, Islamic bank does not get any haram business and only do halal business.
4. Halal paths and procedures
Islamic Shariah also rejects any haram path or process in case of a halal business. Therefore, Islamic bank system only allows the halal path procedures of halal business.
2.7 Distinguishing Features of Conventional and IBBL
The distinguishing features of the conventional banking and IBBL are shown below:
|The functions and operating modes of conventional banks are based on manmade principles.||The functions and operating modes of IBBL is based on the principles of Islamic Shariah.|
|The investor is assured of a predetermined rate of interest.||In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).|
|It aims at maximizing profit without any restriction.||It also aims at maximizing profit but subject to Shariah restrictions.|
|It does not deal with Zakat.||In the modern IBBL system, it has become one of the service-oriented functions of the IBBL to collect and distribute Zakat.|
|Leading money and getting it back with interest is the fundamental function of the conventional banks.||Participation in partnership business is the fundamental function of the IBBL.|
|Its scope of activities is narrower when compared with IBBL||Its scope of activities is wider when compared with a conventional bank. It is, in effect, a multi-purpose institution.|
|It can charge additional money (compound rate of interest) in case of defaulters.||TheIBBL has no provision to charge any extra money from the defaulters.|
|In it very often, bank’s own interest becomes prominent. It makes no effort to ensure growth with equity.||It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.|
|For interest-based commercial banks, borrowing from the money market is relatively easier.||For the IBBL, it is comparatively difficult to borrow money from the money market.|
|Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations.||Since it shares profit and loss, the IBBL pay greater attention to developing project appraisal and evaluations.|
|The conventional banks give greater emphasis on credit-worthiness of the clients.||The IBBL, on the other hand, give greater emphasis on the viability of the projects.|
|The status of a conventional bank, in relation to its clients, is that of creditor and debtors.||The status of IBBL in relation to its clients is that of partners, investors and trader.|
|A conventional bank has to guarantee all its deposits.||Strictly speaking, IBBL cannot do that.|
The IBBL holds a diverse shareholding pattern with foreign and domestic sponsor shareholders. The foreign investors hold 57.88% of total shares while the local investors hold the rest 42.12%. The sponsors other than Sponsor Directors (both local and foreign) hold 39.76% and the Board of Directors (Individual and representative of institutions) were holding 11.94% of the total outstanding shares (2,764,800 ordinary shares) as on December 31, 2007. In the total ownership pattern, Arabsas Travel & Tourist Agency, K.S.A. was holding 9.999% shares, which is the highest in the total shareholdings. There are other five foreign institutional shareholders that hold more than 5% shares of the Bank.
2.9 Branch Arrangement
IBBL has the largest network of branches among PCBs. IBBL has 196 branches up-to-date located at different commercially important places. Out of these branches, 157 branches are in urban areas and 29 branches are in rural areas. With the expansion of business, the Bank created 2 more new Zones in addition to the existing 6 Zones to ensure close supervision, effective monitoring, and quick disposal of business and optimum utilization of manpower. 58 branches are located in 3 Dhaka Zones (Dhaka Central, South & North Zones), 25 branches are in Chittagong Zone, 28 branches are in Khulna Zone, 29 branches are in Bogra Zone, 18 branches are in Comilla Zone and 14 are in Sylhet Zone and the rest 4 Branches are directly controlled by Head Office.
2.10 Products & Services of the Bank
IBBL has the scope to explore the market niche through various types of IBBL instruments. IBBL offers wide range of IBBL products and services. It provides Mudaraba Savings Deposit, Mudaraba Term Deposit, Mudaraba Special Savings (Pension), Al-Wadeeah Current Account, Mudaraba Savings Bond, Mudaraba Monthly profit Deposit, Mudaraba Special Deposit, Mudaraba Hajj Savings, Mudaraba Muhor Savings, Mudaraba Foreign Currency Deposit, and Mudaraba Waqf Cash Deposit.
Chapter 3: Modes of Investment of IBBL
Investment is the action of deploying funds with the intention and expectation that they will earn a positive return for the owner. Funds may be invested in either real assets or financial assets. When resources are used for purchasing fixed and current assets in a production process or for a trading purpose, then it can be termed as real investment. Specific examples of financial investments are: deposits of money in a bank account, the purchase of Mudaraba Savings Bonds or stock in a company. Since Islam condemns hoarding savings and a 2.5 percent annual tax (Zakat) is imposed on savings, the owner of excess savings, if he is unable to invest in real assets, has no option but to invest his savings in financial assets.
3.1 Objectives and Principles of Investment
The objectives and principles of investment operations of the Bank are:
· To invest fund strictly in accordance with the principles of Islamic Shariah.
· To diversify its investment portfolio by the size of investment, by sectors (public & private), by economic purpose, by securities and by geographical area including industrial, commercial, and agriculture.
· To ensure mutual benefit both for the bank and the investment-client by professional appraisal of investment proposals, judicious sanction of investment, close and constant supervision and monitoring thereof.
· To make investment keeping the socio-economic requirement of the country in view.
· To increase the number of potential investors by making participatory and productive investment.
· To finance various development schemes for poverty alleviation, income and employment generation with a view to accelerating sustainable socio-economic growth and uplift of the society.
· To invest in the form of goods and commodities rather than give out cash money to the investment clients.
3.2 Investment Modes of IBBL
When money is deposited in the IBBL, the bank, in turn, makes investments in different forms approved by the Islamic Shariah with the intention to earn a profit. Not only a bank, but also an individual or organization can use Islamic modes of investment to earn profits for wealth maximization. Some popular modes of IBBL’s Investment are discussed below.
1. BAI-MURABAHA (Contract Sale on Profit)
1.1 Meaning of Murabaha
“Bai-Murabaha” means sale for an agreed upon profit. Bai-Murabaha may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods permissible under Islamic Shariah and the Law of the land to the buyer at a cost plus an agreed upon profit payable today or on 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.
1.2 Features of Murabaha
1. A client can make an offer to purchase particular goods from the bank for a specified agreed upon price, including the cost of the goods plus a profit.
2. A client can make the promise to purchase from the bank, that is, he is either to satisfy the promise or to indemnify any losses incurred from the breaking the promise without excuse.
3. It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify any losses that may result.
4. Documentation of the debt resulting from Bai-Murabaha by a Guarantor, or a mortgage, or both like any other debt is permissible. Mortgage/Guarantee/Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
5. The bank must deliver the goods to the client at the date, time, and place specified in the contract.
6. The bank sells the goods at a price above the cost to obtain a profit. The sale price that is charged by the bank is agreed upon in the Bai-Murabaha. The profit can be stated in terms of a flat dollar amount or on a percentage of the purchase price. If a percentage is used, the percentage shall never be expressed in terms of time, in order to avoid confusion that the price is a form of interest (Riba), which is not allowed.
7. The price agreed to in the agreement is binding on both parties.
8. It is permissible for the bank to contract with a third party to buy and receive the goods on its behalf. This agreement must be a separate contract.
1.3 Steps of Bai-Murabaha
First Step: The client submits a proposal regarding his requirements of the bank. The clientsends a proposal with the specifications of the commodity to be acquired from the bank. The proposal also indicates details regarding the date, time and place of delivery as well as price and form of payment information. The bank responds by sending a counter proposal either accepting the buyer’s price or stipulating a different price.
Second Step: The client promises to buy the commodity from the bank on a Bai–Murabaha basis, for the stipulated price. The bank accepts the order and establishes the terms and conditions of the transaction.
Third Step: The bank informs the client (ultimate buyer) of its approval of the agreement to purchase. The bank may pay for the goods immediately or in accordance with the agreement.
The sellerexpresses its approval to the sale and sends the invoice(s).
Fourth Step:The two parties (the bank and the client) sign the Bai–Murabaha Sale contract according to the agreement to purchase.
Fifth Step:The Bank authorizes the client or its nominee to receive the commodity.
The seller sends the commodity to the place of delivery agreed upon. The clientundertakes the receipt of the commodity in its capacity as legal representative and notifies the bank of the execution of the proxy.
1.4 Rules of Bai-Murabaha
1. It is permissible for the client to offer to purchase a particular commodity, deciding its specifications and committing itself to buy it on Murabaha for the cost plus the agreed upon profit.
2. It is permissible that the mutual agreement shall contain various conditions agreed upon by the two parties, especially with respect to the place of delivery, the payment of a cash security to guarantee the implementation of the operation and the method of payment.
3. It is permissible to stipulate the binding nature of the promise to purchase. Thus, the agreement can only be satisfied by either fulfilling the promise to purchase or by indemnifying the bank for any losses incurred if the promise to purchase is not fulfilled.
4. It is a condition that the bank purchases the requested commodity (first purchase contract) before selling it on Murabaha to the buyer. The contract in the first purchase must be settled, in principle, between the source seller and the bank.
5. It is permissible for the bank to authorize a second party including the buyer to receive the commodity on its behalf. This authorization must be in a separate contract, particularly if the buyer is going to receive the goods on behalf of the bank. This is necessary to avoid any conflicts with the ensuing Murabaha sale.
6. Once the bank takes ownership of the goods, it is responsible for any damages or defects. Thus, if the goods are damaged, the bank is liable and must repair the damage prior to delivering the goods to the purchaser.
7. It is a condition that the Bai-Murabaha contract be drawn at the last phase. That is after the promise to purchase and the purchase of the commodity in the name of the bank and receipt of the commodity directly by the bank or through an agent.
8. The legal rules of Bai-Murabaha must be observed in drawing the contract of the Murabaha sale connected with a promise to purchase. Particularly concerning the issue of the transparency of the cost of the first purchase and the amount of profit because discrepancies lead to disputes, which may invalidate the contract.
9. It is permissible to document the debt resulting from Bai-Murabaha by a guarantor or a mortgage, like any other sale on credit. Further, it is permissible that the mortgage accompanies the contract, because it is possible to take a mortgage on actual debt as well as promised debt before it is realized. However, the mortgage shall only be in effect if the debt is actually incurred.
1.5 Application of Bai-Murabaha
Murabaha is the most frequently used form of finance in IBBL throughout the world. It is suitable for financing the different investment activities of customers with regard to the manufacturing of finished goods, procurement of raw materials, machinery, and other required plant and equipment purchases. It is used widely about 53%.
2. BAI-MUAJJAL (Deferred Sale)
2.1 Meaning of Bai-Muajjal
The Bai-Muajjal may be defined as a contract between a buyer and a 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.
2.2 Features of Bai-Muajjal
1. It is permissible and in most cases, the client will approach the bank with an offer to purchase a specific good through a Bai-Muajjal agreement.
2. It is permissible to make the promise binding upon the client to purchase the goods from the bank.
3. It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the bank for damages caused by non-payment.
4. It is also permissible to document the debt resulting from Bai-Muajjal by a Guarantor, or a mortgage or both, like any other debt. Mortgage/Guarantee/Cash security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
5. All goods purchased on behalf of a Bai-Muajjal agreement are the responsibility of the bank until they are delivered to the client.
6. The bank must deliver the goods to the client at the time and place specified in the contract.
7. The bank may sell the goods at a higher price than the purchase price to earn profit.
8. The price is fixed at the time of the agreement and cannot be altered.
9. The bank is not required to disclose the profit made on the transaction.
2.3 Some Observations
The following points should receive attention before making any investment decision under Bai-Muajjal.
1. Whether the goods that the client intends to purchase are marketable and have steady demand in the market.
2. Whether the price of the goods is subject to frequent and violent changes.
3. Whether the goods are perishable in short or in long-term duration.
4. Whether the quality and other specifications of the goods as desired by the client can be ensured.
5. Whether the goods are available in the market and the bank will be in a position to purchase the Goods in time and at the negotiated price.
- Whether the sale price of the goods is payable by the client at the specified future date in lump sum or in Installments as per the agreement.
3. HIRE-PURCHASE UNDER SHIRKATUL MELK
Hire-Purchase under Shirkatul Melk has been developed through practice. Actually, it is a synthesis of three contracts: (a) Shirkat; (b) Ijarah, and (c) Sale. These may be defined as follows:
Definition of Shirkatul Melk: ‘Shrkat’ means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset and own the same jointly and share the benefit as per agreement and loss in proportion to their respective equity, the contact is called Shirkatul Melk. In the case of Hire Purchase under Shirkatul Melk, IBBL purchase assets to be leased out, jointly with client under equity participation, own the same and share benefit jointly till the full ownership is transferred to the client.
Definition of Ijara: The term ‘Ijara’ has been defined as a contract between two parties, the lessor and the lessee, where the lessee enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the lessor. It is a lease agreement under which a certain asset is leased out by the lessor or to a lessee against specific rent or rental for a fixed period.
Definition of Sale contract: This is a contract between a buyer and a seller under which the onwnership of certain goods or asset is transferred by the seller to the buyer against agreed upon price paid by the buyer. In the case of Hire Purchase under Shirkatul Melk, the lessor bank sells or transfers its title to the asset under a sale contract on payment of sale price.
3.1 Stages of Hire Purchase under Shirkatul Melk
Hire Purchase under Shirkatul Melk Agreement has got three stages:
1. Purchase of asset under joint ownership of the lessor and the lessee.
2. Hire, and
3. Sale and transfer of ownership by the lessor to the other partner – lessee.
3.2 Important Features
1. In case of Hire Purchase under Shirkatul Melk transaction the asset/property involved is jointly purchased by the lessor (bank) and the lessee (client) with specified equity participation under a Shirkatul Melk contract in which the amount of equity and share in ownership of the asset of each partner (lessor bank and lessee client) are clearly mentioned. Under this agreement the lessor and the lessee become co-owners of the asset under transaction in proportion to their respective equity.
2. In Hire Purchase under Shirkatul Melk Agreement the exact ownership of both the lessor (bank) and lessee (client) must be recognized. However, if the partners wish and agree the asset purchased may be registered in the name of any one of them or in the name of any third party clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement.
3. The share/part of the purchased asset owned by the lessor (bank) is put at the disposal possession of the lessee (clients) keeping the ownership with him for a fixed period under a hire agreement in which the amount of rent per unit of time and the benefit for which rent to be paid along with all other agreed upon stipulations are clearly stated. Under this agreement the lessee (client) becomes the owner of the benefit of the asset not of the asset itself, in accordance with the specific provisions of the contract that entitles the lessor (bank) the rentals.
4. As the ownership of leased portion of asset lies with the lessor (bank) and rent is paid by the lessee against the specific benefit, the rent is not considered as price or part of price of the asset.
5. In the Hire Purchase under Shirkatul Melk agreement the Lessor (bank) does not sell or the lessee (client) does not purchase the asset but the lessor (bank) promise to sell the asset to the lessee only if the lessee only if the lessee pays the cost price/equity price of the asset as fixed and as per stipulations on which the lessee also gives undertakings.
6. The promise to transfer legal title by the lessor and undertakings given by the lessee to purchase the ownership of leased asset upon payment part by part as per stipulations are affected only when it is actually done by a separate sale contract.
7. As soon as any part of lesssor’s (bank’s) ownership of asset is transferred to the lessee (client), that becomes the property of the lessee and hire contract for that share/part and entitlement for rent thereof lapses.
8. The hire contract becomes effective from the day on which the lessor transfers the possession of the leased asset in good order and usable condition, so that the lessee may make use of the same as per provisions of the agreement.
9. Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the lessor to the lessee.
4. MUDARABA (Investment made by the entrepreneur)
4.1 Definition of Mudaraba
The term Mudaraba 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. Mudaraba is also known a Qirad and Muqaradah
4.2 Steps of Mudaraba
The bank provides the capital as a capital owner. The Mudarib provides the effort and expertise for the investment of capital in exchange for a share in profit that is agreed upon by both parties.
1. The Results of Mudaraba: The two parties calculate the earnings and divide the profits at the end of Mudaraba. This can be done periodically in accordance with the terms of the agreement, subject to the legal rules that apply.
2. Payment of Mudaraba Capital: The bank recovers the Mudaraba capital it contributed before dividing the profits between the two parties because the profit is considered collateral for the capital.
3. Distribution of wealth resulting from Mudaraba: In the event a loss occurs, the capital owner (the bank) is responsible for the entire loss. In the event of profits, they are divided between the two parties in accordance with the agreement between them, subject to the capital being recovered first.
4.3 Rules of Mudaraba
There are some legal rules that govern the business relationship Mudaraba which are as follows.
1. It is a condition in Mudaraba that the capital be specific in nature. In other words, the amount of capital must be known at the inception of the contract. The purpose of this rule is to ensure that there is no uncertainty about the amount of capital and, thus, no uncertainty about the division of profits.
2. It is a condition that capital must be in the form of currency in circulation. However, merchandise can be contributed, so long as both parties to the business arrangement agree upon its value.
3. It is a condition that the capital cannot be subject to indebtedness.
4. It is permissible for a Mudarib to mix his private capital with the capital of the Mudaraba, thus becoming a partner. In addition, it is also permissible for the Mudarib to dispose of capital on behalf of the Mudaraba.
5. It is a condition that the capital of the Mudaraba is delivered to the Mudarib.
6. It is permissible to impose restrictions on the Mudarib as long as the restriction is beneficial and does not hinder the agent’s ability to make a profit.
7. It is permissible for the Mudarib to hire an assistant to perform difficult work that he is unable to perform on his own.
5. MUSHARAKA (Partnership based investment)
5.1Meaning of Musharaka
The word Musharaka is derived from the Arabic word Sharikah meaning partnership. At an IBBL, a typical Musharaka transaction may be conducted in the following manner.
One, two or more entrepreneurs approach an IBBL 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. They can also waive this right. The profits are to be distributed according to an agreed ratio, which need not be the same as the capital proportion. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project.
6. BAI-SALAM (Advance payment)
6.1 Meaning of Bai-Salam
Bai-Salam is a term used to define a sale in which the buyer makes advance payment, but the delivery is delayed until sometime in the future. Usually the seller is an individual or business and the buyer is the bank.
The Bai-Salam sales serve the interests of both parties.
1. The seller receives advance payment in exchange for the obligation to deliver the commodity at some later date. He benefits from the Salam sale by locking in a price for his commodity, thereby allowing him to cover his financial needs whether they are personal expenses, family expenses or business expenses.
2. The purchaser benefits because he receives delivery of the commodity when it is needed to fulfill some other agreement, without incurring storage costs. Second, a Bai-Salam sale is usually less expensive than a cash sale. Finally a Bai-Salam agreement allows the purchase to lock in a price, thus protecting him from price fluctuation.
6.2 Steps of Bai-Salam
1. Cash sale or Sale on Credit – The bank pays the agreed upon price at the time of the contracts inception. The seller agrees to the delivery of the commodity some specified date in the future.
2. Delivery and Receipt of the Commodity on the Specific due Date: There are several options for delivery available to the bank
a) The bank may receive the commodity and resell it to another party for cash or credit.
b) The bank may authorize the seller to find another buyer for the commodity.
c) The bank may direct the seller to deliver the commodity directly to a third party with whom the bank has entered into another agreement.
3. The Sale Contract: The bank agrees to sell the commodity for cash or a deferred price, which is higher than the Salam purchase price. The buyer agrees to purchase and to pay the price according to the agreement.
6.3 Rules of Bai-Salam
1. It is a condition that the commodity known by both parties to the agreement.
2. It is a condition that the quality of the commodity be monitored closely, as very little variation from specifications in the contract is allowable.
3. It is a condition that the commodity be deliverable on the due date. If there is uncertainty about the ability to deliver the commodity at the due date, a Salam transaction is impermissible.
4. It is permissible to draw a Salam sale contract for a total to be delivered increments on different specified future dates.
5. It is a condition that the commodity is a liability debt. The seller is obliged to deliver the commodity when it is due, according to the specifications stipulated in the contract, whether or not his firm produces the commodity or obtained from other firms.
6. Salam sales are impermissible on existing commodities because damage and deterioration cannot be assured before delivery on the due date.
6.4 Application of Bai-Salam
Salam sales are frequently used to finance the agricultural industry. Banks advance cash to farmers today for delivery of the crop during the harvest season. Thus banks provide farmers with the capital necessary to finance the cost of producing a crop. Salam sale are also used to finance commercial and industrial activities. Once again the bank advances cash to businesses necessary to finance the cost of production, operations and expenses in exchange for future delivery of the end product. In the meantime, the bank is able to market the product to other customers at lucrative prices. In addition, the Salam sale is used by banks to finance craftsmen and small producers, by supplying them with the capital necessary to finance the inputs to production in exchange for the future delivery of products at some future date.
7. ISTISNA’A SALE
7.1 Definition of Istisna’a Sale
The Istisna’a sale is a contract in which the price is paid in advance at the time of the contract and the object of sale is manufactured and delivered later. It is a contract with a manufacturer to make something and it is a contract on a commodity on liability with the provision of work. IBBL can utilize Istisna’a in two ways.
1. It is permissible for the bank to buy a commodity on Istisna’a contract then sell it after receipt for cash or deferred payment.
2. It is also permissible for the bank to enter into a Istisna’a contract in the capacity of seller to those who demand a purchase of a particular commodity and then draw a parallel Istisna’a contract in the capacity of a buyer with another party to manufacture the commodity agreed upon in the first contract.
7.2 Steps of Istisna’a Sale
Istisna’a Sale Contract: The Buyer expresses his desire to buy a commodity and brings a request to purchase the commodity to the bank. The method of payment, whether cash or deferred is set forth in the agreement. The bank agrees to deliver the commodity to the buyer at some agreed upon time in the future.
Delivery and Receipt of the Commodity: The seller in the parallel Istisna’a agreement, delivers the commodity to the bank on the agreed upon date. The bank, in turn, delivers the product to the buyer of the original Istisna’a contract, in accordance with the original agreement. In this way, all parties fulfill their obligations to the contract.
7.3 Application of Istisna’a Sale
The Istisna’a contract allows IBBL to finance the public needs and the vital interests of the society to develop the Islamic economy in accordance with Islamic teachings. For example Istisna’a contracts are used to finance high technology industries such as the aviation, locomotive and ship building industries. In addition, this type of business transaction is also used in the production of large machinery and equipment manufactured in factories and workshops. Finally, the Istisna’a contract is also applied in the construction industry such as apartment buildings, hospitals, schools, and universities to whatever that makes the network for modern life. One final note, the Istisna’a contract is best used in those transactions in which the product being purchased can easily be measured in terms of the specified criteria of the contract.
8.1 Definition of Ijarah
According to Islamic Shariah, Ijarah is a contract between two parties – the lessor and the lessee, where the lessees (Hirer or Mustajir) have the right to enjoy/reap a specific benefit against a specified consideration/rent/wages from the lessor – the owner (Muajjir).
8.2 Elements of Ijarah
According the majority of Fuqaha, there are three general and six detailed elements of Ijarah:
1. The wording: This includes offer and acceptance.
2. Contracting parties: This includes a lessor, the owner of the property, and a lessee, the party that benefits from the use of the property.
3. Subject matter of the contract: This includes the rent and the benefit.
The lessor (Mujjir) – The individual or organization who leases out/rents out the property or service is called the lessor.
The lessee: (Mustajir) – The individual or organization who hires/takes the lease of the property or service against the consideration rent/wages/remuneration is called the lessee (Mustajir).
The Benefit (Maajur) – The benefit that is leased/rented out is called the benefit (Maajur).
The rent (Aj’r or Ujrat) – The consideration either in monetary terms or in quantity of goods fixed to be paid against the benefit of the goods or service is called the rent or Ujrat or Aj’r.
8.3 Rules for Ijarah
It is condition that the subject (benefit/service) of the contract and the asset (object) should be known comprehensively.
1. It is a condition that the assets to be leased must not be a fungible one (perishable or consumable) which cannot be used more than once, or in other words the asset(s) must be a non-fungible one which can be utilized more than once, or the use/benefit/service of which can be separated from the assets itself.
2. It is a condition that the subject (benefit/service) or the contract must actually and legally be attainable/derivable. It is not permissible to lease something, the handing-over of the possession of which is impossible. If the asset is a jointly owned property, any partner, according to be majority of the jurists, may let his portion of the asset(s) to co-owner(s) or the person(s) other than the co-owners. However, it is also permissible for a partner to lease his share to the other partner(s),
3. It is a condition that the lessee shall ensure that he will make use of the asset(s) as per provisions of the Agreement or as per customs/norms/practice, if there is no expressed provision.
4. The lessor is under obligation to enable the lessee to the benefit from the assets by putting the possession of the asset(s) at his disposal in useable condition at the commencement of the lease period.
5. In a lease contract, the period of lease and the rental to be paid in terms of time, place or distance should be clearly stated.
6. It is a condition that the rental falls due from the date of handing over the asset to lessee and not from the date of contract or use of the assets.
3.3 Investment Processing of IBBL
Generally a bank takes certain steps to deliver its proposed investment to the client. But the process takes deep analysis. Because banks invest depositors fund, not banks’ own fund. If the bank fails to meet depositors demand, then it must collapse. So, each bank should take strong concentration on investment proposal. However, Islami Bank Bangladesh Limited (IBBL) makes its investment decision through successfully passing the following crucial steps:
Selection of the client
Here, investment taker (client) approaches to any of the branch of Islami Bank Bangladesh Limited (IBBL). Then, he talks with the manager or respective officer (Investment). Secondly, bank considers five C’s of the client. After successful completion of the discussion between the client and the bank, bank selects the client for its proposed investment. It is to be noted that the client/customer must agree with the bank’s rules & regulations before availing investment. Generally, bank analyses the following five C’s of the client:
· Collateral; and
At this stage, the bank will collect necessary information about the prospective client. For this reason, bank informs the prospective client to provide and/or fill duly respective information which is crucial for the initiation of investment proposal. Generally, here, all the required documents for taking investment have to prepare by the client himself. Documents that are necessary for getting investment of IBBL is prescribed below:
I. Trade License photocopy (for proprietorship);
II. Abridged pro forma income statement;
III. Attested copy of partnership deed (for partnership business);
IV. Prior three (03) years’ audited balance sheet (for joint stock company);
V. Prior three (03) years’ business transactions statement for the musharaka/mudaraba investment;
VI. Abridged pro forma income statement for the musharaka/mudaraba investment;
VII. Attested copy of the Memorandum of Association (MOA) & Articles of Association (AOA) for the joint stock company;
VIII. Attested copy of the Tax Identification Number (TIN)- including final assessment;
IX. Tenders of the proposed assets (in case of HPSM);
X. Detailed summary of the sundry debtors and creditors (including both time & schedule);
XI. Summary of the personal movable & immovable assets; and others.
At this stage, the bank evaluates the client and his/her business. It is the most important stage. Because, on the basis of this stage, bank usually goes for sanctioning the proposed investment limit/proposal. If anything goes wrong here, the bank suddenly stops to make payment of investment.
In order to appraise the client, Islami Bank Bangladesh Limited (IBBL) provides a standard
F-167B Form (Appraisal Report) to the client for gathering all the information. The original copy of the appraisal report is enclosed in the appendix chapter. However, the following contents are presented from that appraisal report:
A. Company’s/Client’s Information.
B. Owner’s Information.
C. List of Partners/Directors.
D. Purpose of Investment/Facilities.
E. Details of Proposed Facilities/Investment.
F. Break up of Present Outstanding.
G. Other Liabilities of the Client/Group.
H. Previous Banker’s Information.
I. Details of Sister/Allied Concerns.
J. Allied Deposit as on.
K. Business/Industry Analysis.
L. Relationship Analysis.
M. Asset-Liability position of the client as per Audited Balance Sheet.
N. Working Capital Assessment.
O. Risk Grade.
P. Particulars of the godown for storing MPI/Murabaha goods.
Q. Insurance Coverage.
R. Audit Observation.
S. Security Analysis.
At this stage, the bank officially approves the investment proposal of the respective client. In this case client receives bank’s sanction letter. Islami Bank Bangladesh Limited (IBBL)’s sanction letter contains the following elements:
1. Investment Limit in million.
2. Mode & amount of investment.
3. Purpose of investment.
4. Period of investment.
5. Rate of return.
a. Primary- Stock of goods is the primary security.
i. LC/Bills: Related Documents.
ii. Murabaha Post Investment (MPI)/Bai-Murabaha: Pledge of MPI/Bai-Murabaha goods.
iii. MPI/Bai-Bai Murabaha-TR: Lien on goods to be released.
i. Bai-Murabaha: 25% cash security on cost price to be subsequently converted to goods security.
ii. TR (Trust Receipt): Without cash security.
c. Collateral: Immovable properties.
In allowing Murabaha investment and amount of cash security is generally realized from the client (amount depends on the nature of goods, creditworthiness of the client, collateral security obtained etc.) which is converted to goods security after purchase of goods purchased out of bank’s investment and client’s cash security is pledged to the bank, kept under bank’s custody before its delivery to the client on payment. Example: If, for a Murabaha investment cash security is fixed at 25% Bank’s investment stands at 75% on the total goods purchased. For example, if cost of total goods purchased is Tk.100000 Bank’s investment will be Tk.75000 and client’s cash security will be Tk.25000.
|Bank||Client||Total cost of goods|
|Tk. 75000 (75%)||Tk. 25000 (25%)||Tk. 100000 (100%)|
At this stage, usually the bank analyses whether required documents are in order. In the documentation stage, Islami Bank Bangladesh Limited (IBBL) checks the following documents of the client:
I. Tax Payment Certificate.
II. Stock Report.
III. Trade License (renewal).
IV. VAT certificate
V. Liability statement from different parties.
VI. Receivable from different clients.
VII. Other assets statement.
VIII. Aungykar Nama.
IX. Ghosona Potra.
X. Three (03) years net income & business transactions.
XI. Performance report with the bank.
XII. Account Statement Form of the bank.
XIII. Valuation Certificate
a. Particulars of the Proposal.
b. Particulars of the Mortgagor.
c. Particulars of the Properties.
XIV. Outstanding liability position of the bank.
XV. CIB (Credit Information Bureau) Report.
At this stage, bank decides to pay out money. Here, the client gets his/her desired fund or goods. It is to be noted that before disbursement a “site plan” showing the exact location of each mortgage property needs to be physically verified.
Monitoring & Recovery stage
At this final stage of investment processing of the Islami Bank Bangladesh Limited (IBBL), bank will contact with the client continually, for example- bank can obtain monthly stock report from the client in case of micro investment. Here, the bank will keep his eye on over the investment taker. If needed, bank will physically verify the client’s operations. Also if bank feels that anything is going wrong then it tries to recover its investment fund from the client.
3.4 Investment Schemes of IBBL
The salient features of the investment policy of Islami Bank Bangladesh Limited are to invest on the basis of profit and loss sharing system in accordance with the tenets and principles of Islamic Shariah. Profit earning is not the only motive and objective of the bank’s investment policy rather emphasis is given in attaining social good and in creation employment opportunities.
In fact, the bank since its inception has been working for the uplifter and emancipation of the unprivileged, downtrodden, and neglected section of the people and has taken up various schemes for their well being. The objectives of these schemes are to raise the standard of living of low-income group, development of human resources, and creation of awareness for self employment.
In a developing country like Bangladesh people of middle and lower middle class specially service holders with limited income find it difficult to purchase articles like refrigerator, television, cot, almirah, wardrobe, sofa-set, pressure cooker, sewing machine etc. which are part of modern and decent living. They can not enhance the standard and quality of life to the desired level due to the constrain of their limited income.
Islami Bank Bangladesh Limited has, therefore, introduced Household Durables Investment Scheme which has already created great enthusiasm among the people and received tremendous response from them.
§ To assist the service holders with limited income in purchasing household durables.
§ To assist the fixed income group