Social investment bank limited and its functions

Social investment bank limited and its functions

Back ground

The Bank was incorporated as a public limited company in Bangladesh in the year 1995 under Companies Act.1994.The Bank is one of the interest-free Shariah based Banks in the country and its modus –operandi are substantially different from those of other Commercial Banks. The Bank within the stipulations laid down by Banking Companies Act.1991 and directives as received from time from Bangladesh Bank. provides all types of commercial services. Besides as a matter of policy the Bank conducts its business on the principles of Mudaraba, Musharaka, Murabaha, Bai-Muazzi & Hire purchase transaction approved by Bangladesh Bank. The Bank is listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange as a publicly traded company. The Bank carries its banking activities through twenty-four branches operating as per Islamic Shariah in the country.

Vision

Social investment Bank Limited stated its journey with the concept of 21^st century Islamic participatory three sector banking model : i) Formal Sector-Commercial banking with latest technology; ii) Non-formal Sector-Family empowerment Micro-credit & Micro – enterprise program and iii) Voluntary Sector-Social Capital mobilization through CASH WAQF and others. Finally “Reduction of poverty Level’ is our vision, which is a prime object as stated in Memorandum of Association of the Bank With the commitment “Working Together for a Caring Society”

Structure of Organization

Board of Directors

1.Major (Retd) Dr.Md.Rezaul Haque Chairman

2.Mr. Md.Humayun Kabir Khan Vice Chairman

3.Alhaj Nasiruddin Vice Chairman

4.Mr. Md. Shah Alam Director

5.Alhaj Sultan Mahmood Chowdhury Director

6.Mr.Kamaluddin Ahmed Director

7.Mr.K.M Ashaduzzaman Managing Director

Executive Committee

01 Mr.K.M Ashaduzzaman Managing Director

02 Mr.Abu Sadek Md.Sohel Deputy Managing Director

03 Mr.Md.Abdul Matin Consultant

04 Mr.Sheikh Borhan Ali Executive Vice President

05 Mr.Mohd.Tahirul Islam Executive Vice President

06 Mr.A.F.M Shamsuddoha Senior Vice President

07 Mr.Manjur Alam Khan Vice President

08 Mr.Shaikh Md.Amir Hossain Vice President

09 Mr.A.K.M Zahurul Alam Vice President

10 Mr.Faruque Ahmed Vice President

Auditors Committee

M/S Syful Shamsul Alam & Co.

Chartered Accountants 15.Dilkush C/A (6^th Floor)

Dhaka-1000

Culture of Organization

SIBL has been responding spontaneously to its social commitment As a part

of Corporate Social Responsibility (CSR), Welfare activities of social investment bank Limited (SIBL) are being done mainly from (1) Profit of Cash Waqf Fund (2) Social Welfare fund – generated from compensation and doubtful income.

Cash Wagf program under voluntary sector of the Bank paves the way of doing welfare of mankind in various sectors such as (i) family Rehabilitation (ii) Education & Culture (iii) Health & Sanitation And (iv) Social utility and Others in Conformity with Shariah.

Out of profit of Cash Waqf fund several beneficiaries including Orphanages , Schools, Madrashas, Social organizations & individuals suffering from fatal diseases like cancer, kidney failure, heart diseases etc.are being benefited round the year.

Meanwhile financial support has been extended to different Mosques,Madrashas , orphanages & voluntary Social Organizations also. Center for Rehabilitation of the paralyzed (CPR), Sight Savers international kidney Foundation. Bangladesh Cancer Foundation Hospital,Jatiya Ando Kalyan Samity, Comilla, Mosabbir Cancer care center, Dhaka are among the list of the several beneficiaries. Out of Specific Cash waqf ( where waqf mentioned the of beneficiary ) thousands of beneficiaries are also getting the proceeds every year.

Particulars of beneficiaries: General Cash Waqf Fund up to December 2006

SI.No Field of Donation Number of beneficiary Amount (In Tk)

01 Education &Culture 14 individuals 9, 18.998.50

14 institutions

02 Family Rehabilitation 03 individuals 2, 50.000.00

01 institutions

03 Health & Sanitation 05 individuals 4, 01.325.00

01 institutions

04 Social Utility Service 02 individuals 4.10.000.00

03institutions

05 Others 10 individuals 1.98.000.00

SIBL Executive & Officers, out of their personal capacity. Have been distributing spectacles among the poor patients suffering from cataract & low vision during Holy Ramadan Since 2005.SIBL`s Executives & Officers Spontaneously Participated in the Voluntary Blood Donation Program jointly organized with Sandahani during 2006.

SIBL stood besides the poor patients suffering from Cataract & Low vision , Cleft Lip/palate & Acid burning etc.by arranging camps at their door steps. During 2006,six (06) such camps held at different parts of the country where 28 cleft lip & palate operations took place and 2622 no.of patient have received medicine / Medicare, spectacles and cataract surgery free of cost .After successful cataract operation. the patients can see the light of the beautiful world and can read the holy Quran or scriptures. As a result of successful operation of Cleft lip & palate – many children / adults have been able to smile brightly while they had to bear the curse of measurable lives at the pre-operative stages.

SIBL will keep on continuing welfare activities as a part of its Corporate Social Responsibility (CSR)

THIS REPORT ALSO STATES THAT

(a) The financial statements prepared as on 31.12.2006 by the bank, presented fairly its state of affairs, the results of its operation, cash flows and changes in equity.

(b) The Bank has been maintained proper books of accounts;

(c) Appropriate accounting policies have been consistently applied in preparation and presentation of the financial statements and that the accounting estimates are based on reasonable and prudent judgment.

(d) International Accounting Standards , as applicable in Bangladesh, have been followed in preparation of the financial statements.

(e) The system of internal control is sound in design and has been effectively implemented and monitored;

(f) Management has reasonable ground to believe that there are no significant doubts upon the Bank’s ability to continue as a going concern.

Function

Presentation of financial statements :

Although the operation of the Bank are in strict compliance with the rules of Islamic law (Shariah) relating to business activities the financial statements have been prepared basically in accordance with the First Schedule (sec 38),BRPD circular no:14 dated 25.06.2003. other Bangladesh Bank Circulars, AS (International Accounting Standards ) and IFRS (International Financial Reporting Standards) as adopted by the ICAB (Institute of Chartered Accountants of Bangladesh).The Securities & Exchange Rules 1987.DSE & CSE listing Regulations and others laws and rules applicable in Bangladesh.

Basis of preparation of the financial statements :

The Financial Statements ,namely. Balance Sheet, profit and Loss Statement .Cash Flow Statement. Statement of changes in equity, Statement of Liquidity Analysis and relevant Notes to the Accounts and disclosures thereto, of the Bank are prepared under historical cost convention on a going concern basis.

Consolidation procedures :

A separate set of records for consolidating the Statement of Affairs and Income and Expenditure Statement of the branches are maintained at the Head office of the Bank in Dhaka from which these accounts have been prepared.

Investment (Shares & Securities )

The Bank Investment in different securities have been valued 31.12.2006 as under :

ICB 8^th Mutual Fund At cost or Market value whichever is lower

Bangladesh Govt.Islami Bond Fund At cost

CDBL Share At cost

Investment in Bangladesh Govt.islami bond fund is termed as HTM (Held to Maturity ) investment whereas investment in ICB 8^th Mutual fund and CDBL share have been termed as Available -For- Sale according to the definition of International Accounting Standard 39.

Revenue Recognition :

A) Investment income & proit on deposits :

Profit on investments & deposits are recognized against the investment of fund under Mudaraba, Musharaka, Murabaha, Bai-Muazzi & Hire purchase etc.in line with related approved policy of the Board in terms of the provision of BAS (Bangladesh Accounting Standard) 18 n revenue and disclosures in the financial statements of the bank. profit receivable is recognized on accrual basis. profit on Investment ceases to be taken into income when such investment accounts are classified. It is then kept in suspense account and the same is accounted for on cash basis when recovered.

Fees and commission income are recognized when earned.

Income on investment (Shares & securities) is recognized on accrual basis.

B) Profit paid on Deposits and Other expenses :

In terms of the provision of BAS -1: Presentation of Financial Statement. profit paid on deposits and other expenses are recognized on accrual basis.

C) Profit /Rent/ Compensation Suspense account and Doubtful Income:

Profit /Rent/ Compensation accrued on classified investment are suspended and accounted for as per circular issued by the Bangladesh Bank.Moreover,incomes that are irregular (doubtful) as per Shariah are also not included in the distributable income of the bank.

Income on unclassified overdue Investment of Murabaha and Bai-Muazzal is charging under compensation account instead of showing as income of the Bank.

Interest received from NOSTRO accounts are not credited to the income as per Islamic Shriah and it is shown in Sundry Deposit. Doubtful Income which is utilized as per decision of the Shariah Board.

Reconciliation of Inter Bank /Branch transactions :

Books of accounts with regard to inter bank /branch transactions (In Bangladesh and outside Bangladesh ) are reconciled and there are no material differences that may affect the financial statements significantly.

Fixed Assets and Depreciation :

Assets have been shown at cost less depereciation.Depreciation has been charged on reducing balance method except motor vehicle; which has been charged on straight-line method. Depreciation on addition of assets as been charged from the date of purchase. Rate of depreciation are as under :

Particulars Rate(%)

Buliding 2.5

Furniture 10

Decoration 10

Mechanical Appliance 20

Motor Car 20

Books 10

Provision for classified and unclassified investment :

Provision for classified and unclassified Investment is made on the basis of year end review by the management and of instruction contained in Bangladesh Bank BCD Circular No.34 dated 16 November 1989.BCD Circular No. 20 Date 27 December 1994.BCD Circular No.12 dated 4 September 1995.BRPD Circular No.16 Dated 6 December 1998.BPRD Circular No.9 dated 14 May 2001 and BRPD Circular Letter No.10 dated 20 August 2005 respectively at the following rates :

Particulars Rate

General Provision on unclassified Investment 1%

General Provision on Short term Agric /Micro credit 5%

General Provision on Special Mention Account 5%

General Provision on Small and Medium Enterprise 2%

Specific Provision on Substandard Investment 20%

Specific Provision on Doubtful Investment 50%

Specific Provision on Bad/ Loss Investment 100%

Foreign Currencies Transactions / Translation :

Foreign Currencies transactions are converted into equivalent Take Currency using the ruling exchange rates on the dates of such transaction(S)

Assets and Liabilities in foreign currencies as on 31^st December 2006 have been converted into take currency at the weighted of the prevailing buying and selling rate of interbank market as determined by Bangladesh Bank on the Closing date of every Balances held in foreign currencies other than US dollar are translated into equivalent US dollar at buying rates of New York closing of the previous day.

Differences arising through buying and selling transactions of foreign currencies on different dates of the year 2006 have been adjusted by debiting or credited to the profit and loss Account.

(a) Provision for taxation :

Provision for Income Tax Has been calculated as per Finance Act.2006 of income tax ordinance 1984 considering the allowances and disallowances.

(b) Deferred Tax :

The Bank has provided deferred tax as per Bangladesh Accounting Standard (BAS)-12

(c) Zakat Fund :

The Bank has created a Zakat fund @ 2.58% on average reserve and surplus for the first time in the year 2006.Hizri Calendar has been considered to calculate 2.5% Zakat fund. Since Hizri Calendar counts 11 days less than the English calendar, the percentage 2.5% represents equivalent 2.58% of English calendar.

Retirement Benefits :

(a) Provident Fund :

The Bank operates a 10 % of Basic salary employer and employees contributory provident fund liability, which is recognized in monthly basis covering all its eligible employees, A trustee board administers the fund.

(b) Gratuity :

As per service rules of the bank. employee who has completed seven years regular service. The Bank has started to comply with BAS 19 from the year 2005 and necessary provision has been made for the year 2006.

Analysis of service marketing

Analyzing

CAPITAL:

The authorized capital of the Bank is taking 4000 million. The paid-up capital and equity of the Bank stood at Take 585.00 million and Taka 980.70 Million respectively as at 31^st December 2006.

Capital BASE (TIER I & II) :

Capital base of the Bank as on 31^st December 2006 stood at tk 1128.03 million as against Tk 1065.41 million as on 31^st December 2005.It is note worthy that one of the major cause of listing SIBL as Problem Bank was the failure of the Bank to maintain minimum Capital Adequacy ratio of 9 % on risk- weighted assets at the end of December 2006 due to fester growth of assets. In order to maintain the ratio, the Board of Directors recommended to issue 1:1 Right Share at par but due to obvious reasons we did not get the approval of the Securities and Exchange Commission in that behalf.Meanwhile,the Securities & Exchange Commission (SEC) vide their letter no.SEC/CI/RI-13 (Part-III) 2005/277 dated 24.04.2007 has been pleased to approve the Rights Issue of Social Investment Bank Limited at a ratio of 1:1 i.e. one right share for each existing share. we have already completed the required formalities in June 2006 and the other has surpassed the requirements of Capital Adequacy by TK .30 chore approximately as on June 2007.SIBL has achieved Tk 1.00 Billion Capital requirement ahead of the deadline set by Bangladesh Bank.

The Comparative position of Capital Base of the year 2006 and 2005 is given below :

Particulars 2006 2005

1. Paid up capital 585.00 585.00

2.Statutory Reserve 290.98 266.93

3.Retained Earnings 90.44 56.86

4.1 % provision on unclassified investment 147.34 142.35

5.Investment loss Off –setting Reserve 8.15 8.15

6.Exchange Equalization 6.12 6.12

Total 128.03 1065.41

Capital Adequacy Ratios 2006 2005

1. Tier-1Capital Ratio (Requirement 4.50%) 6.22% 5.83%

2.Risk weighted Capital Adequacy Ratio 7.19% 6.77%

3.Shareholders Fund to Investment 6.40% 6.11%

DEPOSIT :

Since deposit is the life blood of the Bank, we drew -up series of action plan both short term and long term to raise the deposit base of the Bank in line with the Directives of the Bangladesh Bank. The short term action plan included launching of special drives like service months, deposit mobilization months. customers get together etc.during Aprill-june and September -December 2006.In the service months new deposit of TK 382.84 corer was mobilized. Along side the treasury operation of SIBL was Made prudently. Resultantly there was an increase in client deposit by TK.170.47 corer and avoid dependency on Bank deposits as compared to 2005.Besides Borrowings of Tk 170.47 corer and avoid dependency on Bank deposits as compared to 2005.Besides,borrowing of tk .177 crore from Bangladesh Government Mudaraba Islamic Bond Fund Has Added qualitative value in liquidity management of SIBL.Therefore we could efficiently save the Bank from manage the fund and liquidity mishap despite liquidity crisis in 2006 in the market. As a result of continuous evaluation and monitoring we could significantly improve the deposit mix in 2006.

INVESTMENT:

The investment portfolio of the bank was propelled efficiently in 2006 as per directives of Bangladesh Bank. The total investments of the Bank stood at Tk.15312.90 million in various sectors as at 31^st December,2006 against tk.15096.83 million of 2005 registering a growth by 1.43% that signifies the confidence of the clients on the Bank. The increase in investment by tk.216.07 million as compared to 2005 was due to expansion of business. We are now concentrating our efforts to increase Fee-based and Exchange –based investments to expedite the earnings of the Bank side by side to facilitate the investment earnings. it is mentionable here that the assets quality of some of our Branches have deteriorated since 2004 resulting in the increase of classification but we have successfully made up the provision shortfall to Nil as on 31.12.2006 against classified investment as depicted in the Audit Report.

To overcome the situation. we launched special drives to recover the sticky and classified investments. The following graphs show the year wish position of investment

During 2006.we put much emphasize on the recovery / regularization of the classified /overdue investments, minimize provision shortfall. match the investment-deposit ratio as per Directives of Bangladesh Bank. As a part of our action plan, we have restructured Recovery Department and created “Law & Recovery Division” with proper logistics to combat the “Bad Investment”.Now.the recovery drives not only rest with the “Law & Recovery Division” but Senior Management and the members of employees of the Bank shoulder the responsibilities through special campaign/program.

LIQUIDITY :

Liquidity in the form of Balance with Bangladesh Bank.Sonali Bank(as the agent of Bangladesh Bank) and cash in hand including foreign currency stood at TK.1384.25 million as at 31^st December 2006 as against tk.1079025 million in last year to maintain cash & statutory liquidity. The Bank is committed to maintain the cash and statutory liquidity requirement to effectively manage the asset & liability portfolios of the Bank in order to maximize the profit. As per guideline of the Bangladesh Bank ALCO (assets liability committee) was formed in 2005 under “assets Liability Management” project which is concerned with proper liquidity management under the close supervision of senior management .The Bank has a policy guideline on liquidity management as approved by its Board of directors.

RISK MANAGEMENT:

The management of Social Investment Bank acknowledges that risk is an integral part of business and attach due importance of various risks involved risks involved in the banking business. the Board of the Bank has also endorsed the views of the management and instructed to implement the same in line with the Directives of Bangladesh Bank. Accordingly the Board of directors of SIBL has approved 5 policy guidelines on the above. our policy envisages that the management shall pay special attention to reduce the risk to an acceptable level apart from prudent controls over the Banks assets. These issues are periodically reviewed and examined by the Audit & inspection department and Board Audit cell as well as the Senior Executives of the Bank.

CORRESPONDENT BANKING RELATIONSHIP :

SIBL has a very strong correspondent Banking network around the globe. The Bank has SWIFT Bi-Lateral key Exchange (BKE) arrangement with renowned Banks around the world. Due to our strong correspondent relationship with overseas Banks we enjoy credit lines of substantial amounts offered by our different correspondents, which helps us honor LCs and fulfill our payment commitments aboard.

CORPORATE GOVERNANCE :

IN recent time corrate governance has been considered most essential aspect for efficient management of a business house.SIBL gives much emphasis on the corporate governance in promoting a sound magement.Besides to support and enhance the practice of corporate governance. Board Audit Committee has been formed according to BRPD Circular No 12 date 23-12-2002 of the Bangladesh Bank. The main function of such committee is to ensure smooth compliance with all rules and regulations, policies and procedure within the bank.

FOREIGN EXCHANGE BUSINESS :

Foreign Exchange Business stood at TK23280.00 Million in 2006 against Tk17438.07 million of 2005.The break-up of this exchange business as under :

Particulars 2000 2001 2002 2003 2004 2005 2006 Growth Rate

Import 2983.20 4723.40 11124.85 14908.90 13363.07 11576.71 11791.00 1.85%

Export 530.80 1440.20 2287.64 4035.90 4500.23 5528.40 10714.00 93.80%

Remittance 33.40 31.70 107.57 120.30 224.82 332.96 775.00 132.76%

PROBLEM IDENTIFICATION:

Risk Management

Today’s most risky nature of Banking business has caused the central banks .In this connection every Central Banks have come forwarded to establish a general framework to defeat the risk factors considering the laws of the land .Bangladesh Bank has also undertaken an overall core-risk management project under which every Bank shall be bounded to the auroiritative convents to install distinguished risk management system. Social investment Bank has established approved policies covering major areas such as (a) Investment Risk Management (b) Foreign Exchange Risk Management (c) ALM (Asset Liability Management) (d) Money Laundering Prevention (e) Internal Control & Compliance and (f) Guideline on information & Communication Technology according to the guideline of Bangladesh Bank.

Investment Risk Management :

Investment risk is one of the major risks face by the Bank. This can be described as potential loss arising from the failure of a counter party to perform as per contractual agreement with the Bank. The failure may results from unwillingness of the counter party or decline of financial condition.therefore,the Banks Investment risk management actives have been signed to address all these issues.

In determining single borrower / large investment limit, the instructions of Bangladesh Bank are strictly followed. Internal audit is conducted on periodical interval to ensure compliance of Banks and Regulatory policies. Investment are classified as per Bangladesh Bank guidelines. Concentration of single borrower /large investment limit shown in note.

Foreign Exchange Risk management

Foreign Exchange risk is defined as the potential change in earnings arising due to change in market prices. The foreign exchange risk of the Bank is minimal as all the transactions are carried out on behalf of the customers against underlying L/C commitment and other remittance of single borrower limit shown in note.

International Department independently conducts the transactions relating to foreign exchange and is responsible for verification of the deals and passing of their entries in the books account.

Asset Liability Management :

Asset Liability Management (ALM) has been defined as a planned. structured and systematic process of managing the asset and liability with a view to lead the Bank to a balanced and sustainable growth through minimizing various business risk factors-market risk and liquidity risk. Besides that monitoring and analyzing of significant volatility in net Investment Income. Investment value and exchange earnings etc. are the common and regular job of the ALM desk.

Prevention of money laundering :

Social Investment Bank Limited (SIBL) has framed an approved Money Laundering Prevention policy Guideline so that it could be sufficient enough to protect the bank from tribulations of money laundering.

The training procedure has been conforming as per the action plan which was given to Bangladesh Bank. It provides significant role to develop and to aware the staffs of SIBL about Anti Money Laundering. The management of the bank is committed to train all of its workforces regarding Anti Money Laundering.

Internal Control and Compliance :

Internal control ensure systematic and orderly flow of various operational activities within the organization. Now a day in the biggest and complex business environment, compliance becomes on of the great concern to the corporate being major risk involved in non-compliance of statutory requirements and operational procedures.Meanwhile.to strengthen the “Internal Control” System of SIBL.the ICCD has undertaken special training programs to motivate the employees with adequate tools so that they can explore the importance of day to day operational control functions of the Bank.

Recommendation

i) our obtained all information and explanation. which to the best of our knowledge and belief were necessary for the purpose of our audit. And made due verification thereof and found them satisfactory ;

ii) our opinion proper books of account of the bank should by law were kept by the Bank so far as it appeared from our examination of those books and proper returns adequate for the purposes of our audit have been received from branches not visited by us;

iii) The records and statement submitted by the branches should be properly maintain and consolidate in the financial statements;

iv) The Balance sheet profit and loss account should be dealt with by this report are in agreement with the books of account and returns ;

v) The financial statement should be drawn up in conformity with the Banking Companies Act 1991 subject to the section 13(2) and in accordance rules and regulations issued the Bangladesh Bank and the financial statement conform to the prescribed standards set in the accounting regulations issued by Bangladesh Bank after consultation with the professional accounting bodies of Bangladesh; as per BPRD circular 14 dated 25^th June 2003

vi) the financial position of the Bank at and the profit for the year then ended should be properly reflected in the financial statement, and the financial statement have been prepared in accordance with generally accepted accounting principles;

vii) adequate provision should be make for advances, investments and other assets which are in our opinion doubtful of recovery

viii) the expenditures should during the year were for the purposes of the business of the bank.

ix) 80% of the risk –weighted assets should be reviewed spending 2.850 man hours.

Conclusion

Member of the Board take this opportunity to express their gratitude to all the valued Shareholders,clients,patrons and well wisher for their continued support over the years,we are also deeply indebted to the Govement of Bangladesh in particular to the Bangladesh Bank, SecuritiesExchange Commission (SEC),Stock Exchanges, Other Financial InstiutionsOffice of the Register of Joint Stock Companies & Firms and all others concerned for their continued guidance and support throughout this long journey of the Bank.Finally.Board would like to place on record their deepest appreciation for dedicated services by all the Employees Of the Bank.

SIBL will remain committed to its vision and also towards creation of shareholder value.Besides.SIBL will also continue its efforts in contributing towards economic development of the country

BIBLIOGRAPHY