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Report on “Ratio analysis of Al-Arafah Islami Bank Ltd.”
Introduction:
The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word ‘bank’ was probably derived from the word ‘bench’ as during ancient time Jews used to do money -lending business sitting on long benches.
First modern banking was introduced in 1668 in Stockholm as ‘Savings Pis Bank’, which opened up a new era of banking activities throughout the European Mainland.
In the South Asian region, early banking system was introduced by the Afgan traders popularly known as Kabuliwallas. Muslim businessmen from Kabul, Afghanistan came to India and started money-lending business in exchange of interest sometime in 1312 A.D. They were known as ‘Kabuliawallas’.
The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4 nationalized commercial banks (NCB), and 5 government owned specialized banks, 30 domestic private banks, 10 foreign banks and 28 non-bank financial institutions. The financial system also embraces insurance companies, stock exchanges and co-operative banks
The structure of the banking system has changed substantially over the last few years. NCBs’ role has gone down. Their share in total assets went down from 54 percent in 1998 to 40 percent in 2006. On the other hand, PCBs’ share went up from 27 percent in 1998 to 43 percent in 2006. The change reflects adoption and implementation of new policies for the banking sector.
One important challenge that the banking sector is facing is the introduction of information technology in the banking system in an aggressive manner.
This is required to improve management efficiency, reduce operational cost, improve customer services, and increase transparency.
Hence, the banking sector would play a vital role in the development of the country and efficient and sound banking management would led the country to reach at the highest peak of success.
Rational of the study:
With the rapid growing competition (due to free market economy) among nationalized, foreign and private commercial banks as to how the banks operates its banking operation and how customer service can be made more attractive, the expectation of the customers has immensely increased. Reciprocating the sentiment, commercial/private banks are trying to elevate their traditional banking service to a better standard, to meet the challenging needs, demands. Side by side these banks have now concentrated their attention towards diversification of their products for better performances and existence. For the above circumstances, it has become necessary for Al-Arafah Islami Bank Ltd, one of the leading commercial banks, to focus its attention towards the improvement of the customer service. That’s why it is quite justified to make an in-depth study about its operation and evaluate the service provided by this bank and scope for its improvement. The study may help formulating policy regarding the ideas relating to the feelings of the customers and bankers.
Further more, Al-Arafah Islami Bank Ltd executives who are actually executing the policies undertaken by the top management will have a chance to communicate their feelings and will have the feedback about their dealing from the customers.
Scope of the Study:
The scope of this report is to analyze the operation of all departments and to evaluate the performance of the different departments of Al-Arafah Islami Bank Ltd.
Methodology:
The methodology of the report is stated below, which was appropriately exercised in achieving the above stated objective.
Time period of the study:
For the fulfillment of the desired purpose following working days are spend to various department:
Al-Arafah Islami Bank Ltd. VIP Road Branch,Naya Paltan Dhaka, Bangladesh.
Sources of Data collection:
The inputs are collected from two sources:
a) Primary Sources:
ª Discussion with Bank Officers.
ª Personal observation.
ª Desk work in different sections/departments.
b) Secondary Sources:
ª Annual report of the Bank.
ª Consultation of related book and publications.
ª Different Statements.
ª File Balance sheet and various documents.
c) Data Processing:
Collected information is processed by the use of computer system. Detailed analysis, working variables and working definitions are embodied in the report.
Objectives of the Report:
The primary objectives of the report are:
· To submit a report, for the fulfillment of my BBA practical.
· The main objective of this report is to find out the “Overall Branch Banking and A Comprehensive Review on Investment of Al-Arafah Islami Bank Limited.”.
· To gather comprehensive knowledge on overall banking functions and the expectations of the customers regarding the service level of the bank.
· Identify the factors contributing to the attractive and operative performance of the local branch of the bank.
· To make a study of the facts in order to arrive at certain conclusion about overall banking operation.
- Identify the main objectives of AIBL Investment Disbursement.
- To find out the sector in which AIBL provides Investment.
- To evaluate financial affairs of the Bank
- To visualize the quantitative and qualitative aspects of AIBL
Limitations
To prepare this report had to collect different types of information from different sources. While was collecting information’s to complete this report I faced some problems. Lack of information’s in the web sites was the main problem. Some required information’s were not available in the annual report. But it was very difficult to find out these information’s. have found there was not enough published materials. But I have tried my level best to make this effective and informative enough. If more time was assigned this paper would have been more pragmatic, informative as well as educative.
Organizational Overview of Al-Arafah Islami Bank Ltd:
Al-Arafah Islami Bank Ltd. as the name implies a newly formed commercial bank in Bangladesh. It has been incorporated in Dhaka, Bangladesh as a public limited company and its Head Office of the Bank is located at Rahman Mansion, 161, Motijheel C/A, Dhaka- 1000.In the world of consumerism the business organization of the world strive for the consumers satisfaction as a number one business strategy whatever may be the product of the organization, either service or non service. Service is the product of bank. There is a saying that customer service starts rights right from the stairs of the bank building. The guard at the door is first person pep resents of the bank, receives a customer with wishes in smiling face.
Historical Background of Al-Arafah Islami Bank Limited:
Al-Arafah Islami Bank Ltd. (AIBL) was incorporated on 18 June,1995 with authorized capital of Tk.1000 million (100 Crore) and paid up capital of Tk.10.12 Crore paid up by the Sponsors/Directors and Tk.10.12 Crore was offered to the public for subscribed portion of public issue of shares. The Bank was formally inaugurated on 27th September, 2005 with Motijheel Branch (Principal Branch).The Management of the Bank is vested in a Board of Directors consisting of 24 members including the Managing Director of the Bank. Among 24 Directors 2 (two) Directors came from the public shareholders. Managing Director is the chief executive of the Bank. There is a Shariah council of 7 (seven) members in Al-Arafah Islami Bank Ltd. to monitor the investments whether it invests in Shariah allowed sectors or not .Since its establishment, AIBL opened 5 branches in 1995, 5 in 1996, 10 in 1997, 10 in 1998, 5 in 1999, 2 in 2000, 3 in 2001, 1 in 2005, & 5 in 2006 i.e. at the end of 2006 the Bank Branch reaches to 46.
Total number of employees of the Bank was 771 in 1995 and reached to 912 in 2006 and during the short period of its activities the Bank has made remarkable progress in various activities. Since commencement of its activities on 18 June ,1995 the Bank has mobilized the deposit of Tk.6415.79 million and 16775.33 million at the end of the year 1999 and 2006. Foreign exchange business handled by the Bank during the year 1999 to 2006 were Tk.7859.72 million and 11314.18 million respectively and investment was Tk.3793.71 million and 17423.18 million at the end of the year 1999 and 2006 respectively. The bank earned a profit of Tk.31.70 million in the year 1999 compared to Tk.470.02 million (profit after tax and provision) in the year 2006.
Al-Arafah Islami Bank Ltd. was established not only to earn profit and to develop economy of the country but also it had an ultimate goal to get reward in the Heaven by banning interest in business. Since its commencement the Bank has been trying to achieve this goal. The Islam loving people specially who are not interested with interest, should help this
Mission of Al-Arafah Islami Bank Limited:
By establishing an interest free atmosphere in day to day business transactions, the Promoters, Sponsors & Directors expect the Shafayat from our beloved Prophet Hadrat Muhammad (S) and the ultimate emancipation in the Afterwards.
Vision of Al-Arafah Islami Bank Limited:
To establish an interest free transaction in the economy.
Special feature of the bank:
i) All activities of the bank are conducted according to Islamic Shariah where profit is the legal alternative to interest.
ii) The Bank’s investment policy follows different modes approved by Islamic Shariah based on Quran & Sunnah.
iii) The Bank is committed towards establishing welfare oriented banking system, economic enlistment of the low-income group of people, create employment opportunities.
iv) According to the needs and demands of the society and the country as a whole the Bank invests money to different Halal business. The bank participates in different activities aiming at creating jobs, implementing development projects taken by the Government and developing infrastructure.
v) The Bank is committed to establish an economic system through social justice and equal distribution of wealth.
vii) The Bank is contributing to economic and philanthropic activities side by side. Al Arafah English Medium Madrasha and AIBL Library are among mention worthy. (Source-Annual Report-2005, P-24)
Objectives of AIBL:
? To establish an interest free economy.
? To establish a 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.
? Finally to achieve ultimate goal i.e. Nazat in Akhirat.
Auditors:
In terms of Article 149 of the Articles of Association of the Bank M/S Pinaki and Co. Chartered Accountants were re-appointed as external auditors for conducting the audit of accounts as 31st December, 2000. The Auditor M/S Pinaki & Co. Chartered Accountants being eligible offered themselves for re-appointment for the year 2001. But now M/s Rahman Hoq becomes the auditor in the year 2005.
Training and Motivation:
Training and Motivation are utmost important to bring about positive change in the outlook of the manpower and to increase efficiency. Set of trained and efficient workforce is indispensable for any commercial bank and they are the fundamental strength of the bank.
Al-Arafah English Medium Madrasaha:
Al-Arafah English Medium Madrasaha has been established by the Al-Arafah Bank Foundation with a view to building next generation according to the ideals of peace and equality of Islam and to establishing banking and other aspects of life in the way
Branches of AIBL:
AIBL started its working at 161, Motijheel C/A with a Branch named Motijheel Branch on 27th September, 1995 was the first & main Branch of AIBL and has been operating throughout the country. The Head Office of the Bank was situated at the same holding of Motijheel Branch since its establishment but from 11 January, 2007 it has started its working at its own premises 36, Dilkusha (6th, 7th, 8th & 9th floor), Dhaka-1000. The age of the Bank is only 11 years and during this short period of time, the Bank has established total 46 Branches over the country and made a smooth network inside the country. The number of Branches as Division wise is mentioned in the following table:
| Division | No. of Br. |
| Dhaka Division | 22 |
| Chittagong Division | 10 |
| Rajshahi Division | 4 |
| Khulna Division | 4 |
| Sylhet Division | 5 |
| Barisal Division | 1 |
| Total | 46 |
Hierarchy of Position in AIBL Bank:
|
Form of Organization:
?Board of Directors
?Executive Committee
?Audit Committee
?Management Committee
?Shariah council
Environment of Al- Arafah Islami Bank:
“Al- Arafah Islami Bank shall bear the mark of the Sunnah of our prophet Muhammad (S), of our faith and conviction, our values and attitudes towards life and that the entire environment of Al- Arafa Islami Bank shall be in conformity with Sunnah, simple in style, noble and rich in thought, but dynamic and far reaching in impact, exemplary in efficiency and service to the customers.”
Mudaraba Terms Savings Deposit:
Deposit in monthly installment @Tk.300/-, Tk.500/-, Tk.1000/-Tk.1500/- & Tk.2000/- is obtained under the aforesaid scheme for a tenure of 5,8,10 and 12 years and the same is withdrawal with
profit at the end of the tenure.
Monthly Profit based Term Deposit:
Under the above scheme, deposit of Tk. 1.00 lac and multiple thereof are accepted for a term of 5 (five) years and the bank gave profit thereon Tk. 885 per month per lac and proportionately on the rest amount of deposit under the category during the year under review. The aforesaid rate shall, however, be adjustable at the close of calendar year on finalization of accounts.
Monthly Haj Deposit:
Hajj deposit at monthly installment from 1 (one) year to 20(twenty) years are accepted under the above scheme to enable the account holder to perform Hajj out of the accumulated saving with profit.
Onetime Haj Deposit:
Under the above scheme, fixed amount of Hajj deposits are accepted from the clients for particular term and as per rules profit is accumulated thereon per year in this regard. As and when the fixed deposit is matured, Hajj expenses are defrayed by the same. Under the scheme, the guardians may also open Hajj account to enable their successors to perform Hajj. Highest amount of profit is paid in the above types of deposit by the bank.
Savings Investment Deposit:
Deposit under the scheme is accepted by monthly installment and after expiry of the term, double amount of such savings is given as investment in feasible sectors by the bank as per choice of the depositors without any collateral security. Any one by saving under the scheme can take business venture on utilization the amount saved under the scheme as well as availing bank investment.
Marriage Savings Deposit:
Fixed monthly installment for a particular period is to be deposited to defray the expenses of marriage and the bank allows double of saving or Tk.30,000/- which is higher as investment to procure ornaments, furniture, fixture etc., repayable in 24 monthly installment without any collateral security.
Savings Bond Deposit:
Under this scheme the bank has introduced saving bonds for Tk. 10,000/-, Tk.25,000/- and Tk. 100,000/- for 3,5 and 8 years. After the completion of the tenure the depot.
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:
Bai-Murabaha or simply Muraba:
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 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.
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.
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.
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.
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.
General Banking practices in Al-Arafah Islami:
Bangladesh is one of the less developed countries. So the economic development of the country depends largely on the activities of commercial banks. So we need to
Emphasis whether these commercial banks are effectively and honestly performing their functions, assigned duties and responsibilities. In thus respect we need to kno
The cash section of Al-Arafah Islami Bank Ltd deals with all types of negotiable instruments, cash and other instruments and treated as a sensitive section of the bank. It includes the vault that is used as the beyond this limit, the excess cash is then transferred to Bangladesh Bank. This section performs the following functions:
Cash Packing:
After the banking hour cash is packed according to the denomination. Notes are counted and packed in bundles and stamped with initial.
Allocation of Currency:
Before starting the Banking hour all tellers give requisition of money through “ Teller cash proof sheet”. The head Teller writes the number of the packet denomination wise in “Reserve sheet” at the end of the day, all the notes remained are recorded in the sheet.
Procedure for Opening of Accounts:
Before opening of a currents or savings account, the following formalities must be completed by the customer:
Submit application on the prescribed form.
Furnishing photographs- 2 (Two) copies.
Introduction by an account holder.
Putting specimen signatures in the specimen card.
Mandate, if necessary.
After fulfilling above formalities, opens an account for the client and provide the customer with a pay-in-slip book and a checkbook in case of savings account and currents account.
Types of Deposit Accounts and Their Formalities:
A. Current Account
In this kind of account a customer can deposit his money and can write one or more check to withdraw their money. For doing this notice is not required. He can deposit it whenever he/ she wants to and also can withdraw it whenever he/ she wants to
In The Name of Individual:
The client has to fill up a light green account opening form. Terms and conditions are printed on the back of the form. The form contains the declaration clause, special instructions etc. two copies of passport size photograph duly attested by the introducer are affixed with the form.
In Joint Name:
In this type, the formality is same as individual account, but in the special instruction clause, either or ‘survivor’ or ‘former or survivor’ clause is marked.
Proprietorship:
In addition the customer has to submit the valid Trade License and Tax Paying Identification Number (TIN) along with the application.
Partnership:
In case of partnership account, the bank asks for,
A copy of the partnership agreement (Partnership Deed)
A letter signed by all the partners containing the following particulars.
The name and addresses of all partners
The nature of the firm’s business
The name of the partner authorized to operate the account in the name of the firm, including the authority to draw, endorse and accepting the bills and mortgage and sell the properties belonging to the firm.
Limited Company:
On having the desire to open an account from a limited company, an EXIM Bank Officer asks for the following documents:
Registration Certificate from the Registrar of Joint Stock of Companies
Certificate of Incorporation
Certificate of Commencement of Business
Memorandum of Association
Articles of Association
Copies of Annual Accounts
Copies of the Board’s resolution, which contains
a). The name of the persons who have been authorized to operate the bank account on behalf of the company.
b). The name of the persons who are authorized to execute documents with the bank on company’s behalf.
Societies, Clubs and Associations:
In case of these sorts of accounts Al-Arafah Islami Bank Ltd requires the following documents:
Registration Certificate Under the Societies Registration Act, 1962
Copies of Memorandum, Articles of Association
Resolution of the Managing Committee.
Power of Attorney to Borro
Non-government Organization (NGO):
The account opening procedure is same but in exception is that the Registration Certificate from the Social Welfare Department of Government must be enclosed with the application.
Joint Account in The Name of Minor:
A minor cannot open an account in his own name due to the incapacity to enter into a contract. He can open an account in Al-Arafah Islami Bank Ltd in Joint name of another person who will be guardian of him.
B. Savings Bank Account:
This deposit is basically meant for small-scale savers. There is restriction on withdrawals in a month. Heavy withdrawals are permitted only against prior notice. Interest is paid on these types of accounts.
Short-term Deposit (STD):
In Short-term Deposit, the deposit should be kept for at least seven days to get interest. The interest offered for STD is less than that of savings deposit. In Al-Arafah Islami Bank Ltd various big companies, Organizations, Government Departments keep money in STD accounts. Frequent withdrawal is discouraged and requires prior notice.
Fixed Deposit:
They are also known as time liabilities or term deposits. These are deposits, which are made with the bank for a fixed period specified in advance. The bank need not maintain cash reserves against these deposits and therefore, the bank offers high are of interest on such deposits.
In Al-Arafah Islami Bank Ltd, fixed deposit account is opened in two forms- Midterm (MTD), which is less then one year & the other is Term Deposit, which is more than one year.
Opening of Fixed Deposit Account:
The depositor has to fill an application form where in he mentions the amount of deposit, the period for which deposit is to be made & the name/ names is which the fixed deposit receipt is to be issued. In case of a deposit in Joint name Al-Arafah Islami Bank Ltd. also takes the instructions regarding payment of money maturity of the deposit. The banker also takes the instructions regarding payment of money on maturity of the deposit. The banker also takers the instructions regarding payment of money on maturity of the deposit. The banker also taker specimen signatures of the depositors.
A fixed deposit account is then issued to the depositor acknowledging receipt of the sum of money mentioned therein. It also contains the rate of interest & the date on which the deposit will fall due for payment.
Payment of Interest:
It is usually paid on maturity of the fixed deposit. Al-Arafah Islami Bank Ltd calculates interest at each maturity date and provision is made on that “Miscellaneous creditor expenditure payable accounts” is debited for the accrued interest.
Encashment of F.D.R:
In case of premature FDR, Al-Arafah Islami Bank Ltd is not bound to accept surrender of the deposit before its maturity date. In order to deter such a tendency the interest on such a fixed deposit is made cut a certain percentage less a the agreed rate. Normally savings bank deposit interest rate is allowed.
Loss of FDR:
In case of a lost FDR, the customer is asked to record a GD (General Diary) in the nearest Police Station. After that the customer has to furnish an Indemnity Bond to Al-Arafah Islami Bank Ltd a duplicate FDR is then issued to the customer by the bank.
Renewal of F.R.D.:
In Al-Arafah Islami Bank Ltd, the instrument is automatically renewed within seven days after the date of its maturity if the customer does not come to en-cash the FDR. The period for renewal is determined as the previous one.
Remittance:
Remittance can be done by telegraph transfer, mail transfer, traveler’s Cheque and drafts and Cheque. There are two steps of remittance:
Inland Remittance:
By using ways we can do it. When one bank sends these T.T, M.T, T.C or Cheque to another bank than it will be called inland remittance. It is done within the country from one bank to another.
Foreign Remittance:
When a bank got this T.T, M.T, T.C and cheque from outside bank, which is not situated in the home country than it will be called foreign remittance. Using these methods also has done it.
Types of Remittance:
– Between banks and non-banks customers.
– Between banks in the same country.
– Between banks in the different centers.
– Between banks and central bank in the same country.
– Between central bank of different customers.
Types of Credit Activities:
Depending on the various nature of financing all the lending activities have been brought under the following major heads:
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1. Loan (General): Short term and long term loans allowed to individual/ firms/ industries for a specific purpose but a definite period and generally repayable by installments fall under this head these types of lending are mainly allowed to accommodate financing under the categories.
a). Large and Medium Scale Industries.
b). Small and Cottage Industries. Very often term financing for agriculture and others are also included here.
2. House Building Loan (General):
Loans allowed to individual/enterprises construction of house (residential or commercial) fall under this type of advance. The amount is repayable by monthly installment within a specified period, advances are known as Loan (HBL?GEN).
Interest rate: Currently the interest rate is 16%. But it may changes from time to time depending on the market interest rate. From the customers point of view this changes have an adverse impact on the customers. Some times if they have to bear a higher interest on the principal amount which causes a great burden on them. But from the bank’s point of view this is very good to maintain the markup. Because when the market interest rate raises 1% than they are getting 1% less markup. So for this clause of increasing interest rate they can have the same markup by increasing the interest rate changing on the clients. So this is very effective for the Bank to maintain markup.
Mode of repayment:
The loan shall be adjusted by monthly installment basis. The repayment will start from 6(six) months of the date of first disbursement (it may change according to the terms and conditions of the agreement)
.Consumers Credit Scheme of Al-Arafah Islami Bank Ltd.
Introduction:
Consumer Credit Scheme is a major program of Al-Arafah Islami Bank Ltd. In CCS the bank engages an agent who works on behalf of the Bank. This agent performs all the works prior to the sanction of the CCS. They do the inspection and make all the documents necessary for CCS. For this purpose they get commission.
Clients:
The clients are Service Holders and Businessman. Service holders can be Government and Private. In case of Government officer, the client must be an officer in rank.
Products:
Electronic goods, cars, jeeps, microbuses, Mobile telephone, T&T telephone etc.
Profit Rate:
Down payment is 20% of the CCS amount. It is considered as equity. The payment is 50% for vehicles.
Advance allowed for retirement of shipping documents w d release of goods imported through LIC falls under trust with the arrangement that sale proceeds should be deposited to liquidate the advances within a given period. This is also a temporary advance connected with import and known as post?Import finance and falls under the category “Commercial Banking.
Formalities for Opening Foreign Currency (FC) Account:
The AD may without prior approval of the Bangladesh Bank open Foreign Currency (FC) account in the name of:
Bangladesh national residing abroad.
Foreign nationals residing abroad/ in Bangladesh and also foreign firms registered abroad and operating in Bangladesh and abstract.
Foreign Missions and their expatriate employees.
Resident of Bangladesh nationals working with the foreign/ international organizations operating in Bangladesh provided their salary in paid in foreign currency.
Procedure for Opening Letter of Credit (L/C):
An importer desirous to have an import Letter of Credit (L/C) limit must have applied to the designated bank in prescribed form for sanction of margin, Letter of Credit (L/C) limit it etc.
L/C Opening flow chart in case of BTB L/C:
Figure: Letter of Credit (L/C) Opening Process
Letter of Credit (L/C) Application:
For opening Letter of Credit (L/C) the client is to submit to the bank an application in the printed format of the designated bank. This is called Letter of Credit (L/C) application form, which is also an agreement between the importer and the bank. The form is to be stamped under stamp Act. The importer must submit the LCA and IMP and Indent or contract / purchase order/ proforma invoice (duly accepted by the importer) along with Letter of Credit (L/C) application.
The Letter of Credit (L/C) application must be completed/ filled in and signed by the authorized person of the importer giving the following particulars. Full name and address of the supplier or beneficiary and importer. Brief description of the goods. Last date of shipment and negotiation time (must not be beyond 30 days from the shipment date).
Examination of Letter of Credit (L/C) Application:
On receipt of Letter of Credit (L/C) application an officer of L/C section must check it very careful by the following manner.
That the terms and conditions as stipulated in the L/C application are consistent with the exchange control and import trade regulation and UCPDC 500.That all the information mentioned in above column have been furnished. That the terms to be imported are eligible according to importers entitlement. That the goods are not being imported or originated form South Africa or Israel. If the goods are imported form any member countries of ACU.
That the validity of the L/C must not exceed the validity of LCA.L/C is opened within the validity period permitted in the License. For Letter of Credit (L/C) limit following information are to be furnished by the applicant.
Preparation of Credit Report:
Bank prepares credit report in prescribed forms. Character, Capacity and Capital, which are known as the three C’s of credit. Instead of the three C’s some mentions the three R’s i.e. reliability, responsibility and resources. To these three C’s we may add two more C’s i.e. collateral and conditions.
Position of Letter of Credit (L/C):
Import section will see whether there is sufficient fund available in the account to cover the margin to be sanctioned, commission, postage, cable or telex charge etc. If it is found O.K, Letter of Credit (L/C) will be sanctioned.
In all cases the sanction must be informed to the importer for acceptance. On receiving confirmation from the client then the terms and conditions of the sanctioned are acceptable, the subsequent documentation/ charge document are taken up.
Following papers/ documents submitted by the importer before opening of the L/C:
# Memorandum of (In case of partnership firm).
# Resolution.
# Photo One Copy.
# VAT Registration Certificate.
Bank will supply the following papers/ documents before opening of the L/C:
– Letter of Credit (L/C) Application Form.
– LCA Form.
– IMP Form.
– Charge Documents Paper.
– Guarantee Form.
The above papers must be completed duly filled in and signed by the party and verified the signature.
Maintenance of Register:
The sanction must be recorded in the following registers:
– Document Execution Registers. All the charge documents must be recorded in this register.
– Limit Register.
– Liability Ledger.
Confidential Report of Beneficiary of Letter of Credit (L/C):
According to exchange control regulations bankers are required to obtain confidential report of the beneficiary of Letter of Credit (L/C) before opening the same, if the amount of Letter of Credit (L/C) exceeds Tk. 5 lac. Bank can open Letter of Credit (L/C) below Tk. 5 lac without obtaining C.R.
Banker can write to their foreign correspondents to supply the C.R. But from practical experience foreign correspondents of different country are not supplied timely.To overcome the above situation bankers can conduit reference book i.e. MUWN/ DUNN/ BRADSTREET/ Trade directory of various chambers of commerce of different countries in the world.On receipt of C.R. form any source the banker can accumulate the same in one master file.
LCA Registration:
Letter of Credit (L/C) authorization forms consisting of six copies. 1st copy for exchange control purposes, 2nd copy for the licensing authority, 3rd and 4th copies for the CCI and
Procedure or Preparation and Dispatch:
Amendment is to be typed in the Banks printed format. The copies of the amendment must be dispatched to all concerned as done in dispatching the L/C. Amendment can be done either by cable/ telex or airmail.
Each and every amendment of L/C must be noted in the L/C file and copies of each amendment are kept in the L/C file chronologically (date wise).
Bank Charge:
Amendment commission is to be realized from the party as per instruction of Bangladesh Bank F.C. circulars.
Accounting Procedure:
– Dr. Party’s Account.
– Cr. Commission Account.
– Cr. P & T Account.
Clearing House & Collections of Bill:
According to the Article 37(2) of Bangladesh Bank Order 1972, the banks, which are the member of the clearinghouse, are called as Scheduled Banks. The scheduled banks clear the cheques drawn upon one another through the clearinghouse. This is an arrangement by the central bank where everyday the representative of the member banks gathers to clear the cheques. Banks for credit of the proceeds to the customer’s accounts accept cheques and other similar instruments.
Procedures for Collection:
The following procedures are taken for collection,
Procedure for Outward Bills for Collection:
Definition of Investment:
Investment, transaction between two parties in which one ( the creditor or lender) supplies money, goods, services or securities in return for a promised future payment by the other ( the debtor or borrower). Such Transaction normally includes the payment of interest to the lender. Investment may be extended by the public or private institutions to finance business activities, agricultural operation, consumer expenditures or government projects.
Introduction of Investment:
Modern Investment management is extended through specialized financial institutions of which commercial banks are the oldest and most important. In present days of industrial economics, the banks are able to extend and increase the supply of Investment by the creation of Investment management for their loan customers. The lender must judge each loan he makes on the basis of the charter of the borrower (his intention to pay), (his capacity to pay), (based on his potential for earning) and his collateral pledged in case of default on the loan. The terms of Investment transactions may be publicly regulated to prevent abuses by customers and lenders as well as to channel Investment in to particular sectors of the economy.
AIBL 2006 Deposit, Investment and Asset Information:
Deposit: The total deposit of the bank was Tk. 16775.33 million at 31st December 2006, of which bank deposit was 611.72 million taka and general deposit was 16163.61 million taka. At the same time in the last year, the amount was total deposit was 11643.66 million taka. In this area the growth rate is 44.07%.
Fig: 1 Deposit
Investment: At the end of the year 2006, the amount of investment of the bank was Tk. 17423.19 million in comparison to Tk. 11474.41 million of the last year 2005. the amount of investment has increased 5948.78 million taka within this period, which is around 51.84%
Fig: 2 Investments
Total Assets:
Fig: Total Assets
– Cash in hand 1%
– B.Bank & S.Bank 7%
– Other Bank 5%
– Investment 82%
– Fixed Assets 1%
– Other Assets 4%
Lending (Investment) Decision:
The principal function of a Bank is to lend or invest. Lending is a dynamic activity .It helps to create entrepreneur and thus the country would be industrialized. When a country becomes industrialized it eradicates poverty from the society and over all from the country. Bank collects deposits from common people invest to the people who are willing to run business or to set up an industry. In this respect the Bank takes collateral security to secure the invested amount.
Safety:
Safety is the first guiding principle of a prudent banker. A bank is in business to make money. It mainly uses depositor’s fund as a means of its earnings. The money of the depositor’s being repayable on demand or, after a short notice, determines the capacity of a bank as to the period for which he can safety lend it out without an uncalculated risk. Safety should never be sacrificed for profitability. Once the confidence of the depositor’s is shaken, the banker cannot carry on the banking business.
Liquidity:
Liquidity is the availability of bank funds on short notice. It is not enough that the money will come back, it is also necessary that it must come back on demand or in accordance with agreed terms of repayment. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made; otherwise, the liquidity position of the bank is endangered.
Profitability:
Commercial Bank has to distribute its resources in a manner that they meet the twin requirements of liquidity and profitability. A banker has, therefore to see that major portion of the assets owned by it are not only liquid but also aim at earning a good
Purpose:
A Banker would not through away money for any purpose for which the borrower want. The purpose should be productive so that the money not only remains safe but also provides a definite source of repayment. The banker should study the purpose for which loan is required and the resources from which the borrower is expected to repay. If the funds borrowed are employed for unproductive purposes like marriage ceremony, pleasure trip, repayment of old debts etc.
Security:
It is the practice of banks not to invest money without any security. A banker would normally like to recover the investment from the sell of the security. The importance of an adequate and acceptable security can, however, be hardly over emphasized. Security serves as a safety value for an unexpected emergency. Security taken by Banks can be classified into two categories such as: i) Primary Security, ii) Collateral Security.
Disposal:
The investment should be as much broad based as possible and must be in keeping with the deposit structure. The investments must not be in particular direction or to one particular industry because adversity may face problems but diversified investments can minimize the risk.
National Interest:
Banking industry has significant role to play in the economic development of a country. The banker would lend if the purpose of the investment is for overall national development plans necessitating flow of credit to priority sector in the larger national interest. Sometimes, the need of the borrower may be considered so essential for the benefit of the national economy despite of heavy risk involved if the investment may be granted.
Role of CIB in Bangladesh:
Due to irregular and insufficient flow of credit information in the banking system the proportion of classified loan in relation to total credit is very high. This proportion of classified loan operated a bad culture in the Banking sector. In order to eliminate the bad culture & to equip the banks with proper credit information for loan application processing, proposal for relation of CIB was put forward by different committee and organizations and it was established in 1992.
Functions of CIB:
– To standardize information flow on loans/credits within the Bangladesh Banking system.
– To increase the speed & accuracy with which the credit information is made available to banker assessing credit role.
– To combine the information gathered on classified loans with the information on newly sanctioned loans to the borrowers thereby making available on integrated information package.
– To integrate the default loan information in the CIB its timely submission to the banks for loan application processing.
– To collect credit information on quarterly basis from banks
Ratio Analysis for the last Five years:
The Al-Arafah Islami bank is one of the leading Islamic Bank in our country. Every year it needs to declare or calculate many financial report or activities. They also need to make their ration analysis against every year. There some calculations may change or may not change. Many terms may changeable or may not changeable by the calculation. They actually do this analysis for making their financial terms and activities more strong and effective. So as a part of my term paper I need to make the Al-Arafah Islami bank’s ratio analysis for the previous five years. Here my analysis calculation is in below-
just make 10 elements of ratio analysis. Because I tried to make many but there was not sufficient information all the year. So for that just made the following analysis. As like:-
# Current ratio
# Gross profit margin
# Net profit margin
# Operating expense ratio
# Operating profit margin
# Fixed asset turnover
# Debt ratio
# Return on asset (ROA)
# Debt equity ratio
# Asset utilization ratio
# Sales turnover or total asset turnover
The analysis is like that. Here is not all the analysis. I just give this eleven analysis coz for information lacking. I’ll show all the analysis separately to the following page. I will show them in a graph or chart and I’ll discuss all the problems and solutions among them.
The analysis: –
Calculation part:-
Here is the calculation part. In this part I am going to show all the calculation of all the year individually.
?
CURRENT RATIO:
In the below there is the current ratio in a chart. This chart belong all the current ratio of year 2006-2010. In this chart one thing is very much clear that all the year there have some changes of this ratio. All the years are not same. Below the chart all the details of every year’s calculation are given very clearly.
Current asset
Current ratio = (Times)
Current liabilities
? For the year 2006:
In the year of 2006 we can see that there is the calculation is zero. Because in the year of 2006 the current asset is 394, 49, 78,380 /- BDT. And there was no current liability of this year.In the annual report there was no current liabilities. So for the calculation it comes zero ratios.
? For the year of 2007:
In the year of 2007 there the current asset is 727,59,55,470 /- BDT. And the current liabilities are 132,00,00,000 /- BDT. And the calculation of the ratio is 5.512087 times. That means the current ratio for this year is more that the previous year, where the previous year’s ratio was just nil.
? For the year of 2008:
In the year of 2008 the current asset is 943,46,46,990 /- BDT. And the current liability is 178,00,00,000 /- BDT. So the calculation for this year is 5.300363 times. That means the current ratio for this year is less than the previous year.
? For the year of 2009:
In the year of 2009 the current asset is 1238170259/- BDT. And the current liabilities is 2620000000 /-BDT. So the calculation of ratio for this year is 4.725840 times. That means this year’s ratio is decreasing that the previous year.
? For the year of 2010:
In the year of 2010 the current asset is 217,91,40,468 /-BDT. And the current liability is 568,00,00,000/- BDT. So the calculation of ratio for this year is 3.836514 times. That means this year’s ratio is also less then the previous years ratio.
Lickings arising on current ratio:
In the current ratio there have some problems. In the year of 2006 there was no current liability. But for the banking sector sometimes liability is need for some reason. But if I compare all the year then I can say the ratio’s of all year are comparatively small. Where the current asset good but the current liabilities is always near about the current assets. This is a major problem for AIBL.
Own opinion and solutions:
For the current ratio The AIBL need to give more concentration about there current liabilities. Their current liabilities are always small difference than the current asset. So this is not a easy way to keep their competition in this competitive economic market. So my own opinion is that the management level must need to observe for their current liabilities. hope if they observe that carefully then they will do better.
? Gross profit margin:
In the below there is gross profit margin ratio in a chart. This chart belong all the gross profit and all the sales revenue for the year of 2006-2010. In this chart one thing is very much clear that all the year there have some changes of this ratio. All the years are not same. Below the chart all the details of every year’s calculation are given very clearly.
Gross profit
Gross profit margin = (percentage)
Sales revenue
? For the year of 2006:
In the