The basic differences between the Islamic Banking system & Conventional banking system
Chapter-1
1. Introduction:
At present, the banking sector is uprising and it is playing a vital role in our economy. In introduction chapter, we need to define ‘Bank’ before going to make differences between Islamic Banking systems with conventional Banking system. So, in a nut shell it can be defined as a financial institution which collects deposits from the surplus unit and makes investment to the deficit unit. In this process bank’s income is the difference between the lending and deposit rate. The nature of income may have 2 types: >Interest income: It is the earning of Conventional bank following the system of interest. Interest income is prefixed and not allowed to give or take in accordance with the Islamic system. Mention that it is the source of exploitation. > Profit: it is the earning of “Islami bank” following the Islamic system. Profit generated from buying and selling process which has been made ‘halal’ in Islam. According to the principle of Islamic Shari’ah, interest is strictly prohibited. Thus, no muslin is allowed to take or give interest as per the Islamic system. Since Islami Bank is conducted based on profit & loss sharing approach rather than interest basis, it has more acceptability to the Muslim mankind.
But basic principle of Islamic banking being PLS(Profit Loss sharing system)-based shariah financing and thereby having been exposed to interest rate risk .Because most of the investment of Islamic Bank are on Bai-Mode . In this mode bank sell specified goods to the clients on cost plus agreed upon profit or at a negotiable price payable after a certain fixed period. If, the client fail to pay the price within the fixed period the Islamic Bank cannot imposed or realized additional amount as income of the bank .But , the Conventional banks can continue to charge interest even they can charge & realize penal interest as income of the bank. Therefore, Conventional banking system which is based on prefixed interest rate are exposed to less interest rate risk .So how can Islamic banking system can survive with their huge interest rate risk in a economy ? That’s why topic of the report is to identify the basic differences between the Islamic Banking systems with conventional Banking system
1.2 Muslim Mankind & IBBL:
Now, we need to know the definition of “Islamic Banking” and prove whether its activities are unequal to the conventional Banking system & satisfy the principle of Islamic Shariah. Definition given by ‘OIC’ is- “An Islami bank is financial institution whose statutes, rules and regulations expressly state it’s commitment to the principle of Islamic shariah and to he banning of the receipt and payment of interest on any of its operation”. This definition indicates that IBBL is more convenient and acceptable to the Muslim mankind.
Based on the Quran and Sunnah, organization of Islamic Conference (OIC) first introduces the idea of Islamic Banking which is also first of this kind in South Asia. It is committed to conduct all kinds of banking activities on the basis of profit-loss sharing system. Among other Islami banks and conventional banks, IBBL has now earned the unique position as a leading private commercial bank in Bangladesh.
1.3: Vision:
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 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.
1.4: Mission:
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 enlistment and financial services to the low-income community particularly in the rural area.
1.5Objectives of the study:
The objective of the study is to fulfill the requirement of MBA program as well as the main thirst of this study is to test whether it’s activities is unequal to the conventional Banking system. Other objectives are –
- This is the fulfillment of the requirement of the internship program
- To gather the overall knowledge about Islamic banking operation & Conventional Banking system.
- To acquire the insights of IBBL.
- To know about the product of IBBL.
- To highlight the problems and necessary recommendations to overcome the problems.
- To know the investment mechanism of IBBL.
- To know the project investment scenario of IBBL impact of project investment on the profitability of IBBL & Other Conventional Bank.
1.6Methodology:
The adopted both mathematical and descriptive analysis to find out the basic differences between the Islamic Banking system & Conventional Banking system. There are a lot of descriptive analyses that have also played a significant role in detecting my target finding. In the report considered Islami Bank Bangladesh Ltd which is based on Islamic banking system.
The methodology of the report includes direct observation, oral communication with the employees of all departments of Local Branch and Head Office, studying files, circulars etc and practical experience. This report is basically qualitative in nature. But the report includes both quantitative as well as qualitative data. In this report no hypothesis is considered.
1.7Sources of data:
From this study the tried to know whether it’s activities is unequal to the conventional Banking system .To find out this, it is needed to acquire the details of Islamic Bank Bangladesh Limited which is based on Islamic Banking system). have attended in a 15days theory classes at Islamic Bank Training and Research Academy (IBTRA) to know the details of IBBL. After completion of 29 days I have gone to Local branch of IBBL following the instruction of IBTRA to study the practical activities. In Local office branch the participated 37 days. Within these days the gathered experiences and insights of the operations of IBBL from different desks.
This report contains both primary and secondary data. The theoretical development of the report has done collecting information from various publications. To prepare this report it is needed to acquire details of Trust Bank which is based on Conventional Banking system & IBBL which is based on Islamic Banking system.
There are two types of data the collected to prepare this report ———primary and secondary.
Primary Sources
Primary data are collected from ———-
· Face-to-Face conversation with the respective officers and staffs.
· Interviewing officers and staffs.
· Sharing practical knowledge of officials.
· Relevant file study provided by the officers concerned.
· In-depth study of selected cases.
· Islami Bank Training and Research Academy (IBTRA).
Secondary sources
The secondary sources are given bellow:-
1) Annual report of Islami Bank Bangladesh Limited & Prime Bank Ltd of 2004 to 2008
2) Islami Bank Bangladesh Limited,
3) Periodical publication of Bangladesh Bank
4) Different publication regarding various activities of Islami Bank Bangladesh Limited
5) Some articles
6) Web sites
After collection of data, this report is made. The completed an internship program in IBBL, especially on its Banking system for the purpose of earning practical knowledge & making report as well.
1.8Rationality of the study:
There are three types of schedule commercial banks are in operation in our economy. They are Nationalized Commercial Banks, Local Private Commercial Banks and Foreign Private Commercial Banks. Islamic Bank has discovered a new horizon in the field of banking area, which offers different General Banking, Investments and Foreign Exchange banking system. So I have decided to study on the topic “The basic differences between the Islamic Banking system & Conventional banking system”. Because the Internship program of the university is an integral part of the BBA program. So it is obligatory to undertake such task by the students who desirous to complete and successfully end-up their BBA degree. This also provides an opportunity to the students to minimize the gap between theoretical and practical knowledge. During the internship program the teachers of the department are attached to actively and constantly guide the students. Students are required to work on a specific topic based on their theoretical and practical knowledge acquired during the period of the internship program and then submit it to the teacher. That is why we have prepared this report.
This study covers the basic differences between two Banking systems & comparative financial analysis, their contribution on the socio-economies to attain the stable economy & which one is best for Muslim. It is helpful to know why this two Banking system is so much different & from what perspective. Thus my study is very rationale.
1.9Limitations of the study:
– There is a difficult mater to collect sufficient data from banks. Many expected data I have failed to collect. So, Lack of sufficient data is one of the most limitations of preparing this report.
– All the employees of the bank are so busy that they can not help properly about banking. So, there is no constructive suggestion of bank employee achieved and comprised in this report.
– Lack of available published data.
– Most of the essential data are confidential for the bank. So, there is a lack of primary data.
– Employees’ assistance to get data as well as to get many answers was poor. So, there is a limitation in this regard that has obstructed me to make this report perfect.
Part two
2.0 INTRODUCTION OF ISLAMI BANK BANGLADESH LINITED
2.1 Conceptual Background
Definition of Islamic Banking
An Islamic bank is a financial institution which operates with the objective to implement and materialized the economic and financial principles of Islam in the arena of banking. “ An Islamic Bank is a financial institution whose status, rules and procedure expressly state its commitment to the principle of Islamic sharah and to the banking of the receipt and payment of interest on any of its operations” –O/C
The organization of (Ali & Shaskar 1995, pp20-25) Islamic bank is a “company which carries on Islamic banking business? Islamic banking means banking business whose aims and operation do not involve any element which is not approved by the religion Islam”
Ziauddin Ahmed Says, “Islamic banking is essentially a normative concept and could be defined as conduct of banking is consonance with the ethos of the value system of Islam” (Ibid).
2.2 movement of Islamic banking thought-out the world
The expansion of Islamic banking along with traditional interest based is a recent phenomenon. During the fifties it was only subject matter of research but during the sixties actual experiments were made and in the seventies Islamic banking institutions started to gain strength. The eighties and nineties are the period of consolidation and now Islamic banking is coming up as the only welfare banking system of the modern world.
The First Attempt: The concept of Islamic banking is several decades old. The first attempt to establish an Islamic financial institution took place in Pakistan in the late 1950s with the establishment of a local Islamic banking in a rural area (wilson1983). Some pious landlords who deposited funds at no interest, and then loaned to small landowners for agricultural development initiated the experiment. The borrower did not pay interest on the credit advanced, but a small charge was lea o cover the bank’s operational expresses. The charge was far lower than the rate of interest.
The second attempt: The second pioneer experiment of putting principle of Islamic banking and finance into practice was conducted in Egypt from 1963 to 1967 thought the establishment of the Mit Gramar saving in a rural area of the Nile Delta. The experiment combined the idea of Grammars saving with the principle of rural banking within the general framework of Islamic value (Ahmed 1992). The banks operation was based on the same Islamic principle i.e. no- interest to the depositors or from the borrower. This was the first Islamic bank in an urban setting based in Cairo. The bank is a public authority with an autonomous status (Ahmed1992). The principles pf operations of the Naser Social Bank are very similar to those of the mitt Grammars Saving bank. However, the latter offers a full range baking services and a wide range of investment activities though equity participation.
Taunq Hajji: A successful attempt- Islamic banking, contemporary to that in Egypt, emerged in Malaysia. It was a financial institution developed for the pilgrims of Malaysia. These institutions were establish in response to what the contention of the Malaysia Muslims that money spent on pilgrimage must be Halal and free from ‘riba’ consequently, Pilgrims Saving Corporation was established in 1963, which was later on incorporation into the Pilgirims Management Fund Board in 1969.
Other attempts: Next the Dubai Islamic bank was established in 1975. Since then, a number Islamic and financial institution have been established of different parts of the world and have functioning successfully.
A significant development in Islamic banking has been the grating opf an Islamic bank license in Saudi Arabia to the fifty-year old “Al- Rajhi Company” a firm noted for its currency, exchange and commercial activity, whose assets exceed $ 5bilion. The firm began in operation in 1985 under the name of “Al Rajhi banking Investment Corporation”
In the August 1974, Bangladesh signed the Charter of Islamic Development bank and committed itself to reorganize its economic and financial system according to Islamic Shariah.
Late President Ziaur Rahman, In January 1981, while addressing 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” This statement indicate favorable attitude of the Government of the people Republic of Bangladesh toward establishing Islamic banks financial institution in the country.
Earlier in November 1980, a delegation of IDB came to Bangladesh and showed their keen interest in establishing a joint venture Islamic bank in the private sector. Two professional bodies Islamic Economics Research Bureau (ERB) and Bangladesh Islamic Bankers Association (BIBA) made significant contributions towards introduction of Islamic banking in the country. They came forward to provide training in Islamic banking to top bankers and economist to fill-up the vacuum of leadership for the future Islamic banks in Bangladesh. They also held seminars, symposia and workshops on Islamic economics and banking throughout the country to mobilize public opinion in favor of Islamic banking.
At least, in March 1983, long drawn struggle to establish and Islamic Bank in Bangladesh become a reality and Islami Bank Bangladesh Limited was established; which includes institution -19 Bangladesh national, 4 Bangladeshi institution and 11 banks, Financial institution and government bodies of the Middle East & Europe including IDB, two eminent personalities of the kingdom of Saudi Arabia.
2.3 Objective of Islamic banking
- Islamic banks operate on Islamic principle if profit sharing and strictly avoided interest, which is the root of all exploitation and is responsible for large scale inflation and unemployment.
- The objectives of Islamic banking are not only to earn profit, but to do good and welfare to the people. Islam upholds the concept that money, income and property belong to Allah and this wealth is to be used for the good of the society.
- An Islamic bank is committed to do away with disparity and establish justice in the economy, trade, commerce and industry; build socio-economic infrastructure and create employment opportunities.
2.4 Historical Background of IBBL
Bangladesh signed the Charter of Islamic Development Bank and committed itself to reorganize its economic and financial system as per Islamic Shariah. The signed year was 1974. In January 1981, The then President of People’s Republic of Bangladesh while addressing the third 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. This statement creates a favorable situation towards establishing Islamic bank and financial institution in Bangladesh.
Earlier in November 1980, Bangladesh Bank, the country’s Central Bank sent a representative to study the working of several Islamic banks abroad. In November 1982, a delegation of IDB visited Bangladesh and showed keen interests of participate in establishing a joint venture Islamic bank in the private sector. They found a lot of work had already been done and Islamic banking was in a ready form for immediate introduction. Two professional bodies of Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers Association (BIBA) made significant contribution towards introduction of Islamic banking in Bangladesh.
They came forward to provide training on Islamic banking to top bankers and economists to fill up the vacuum of leadership for the future Islamic banks in Bangladesh. They also held seminars, symposiums and workshops on Islamic economics and banking throughout the country to mobilize public opinion in favor of Islamic banking. Their professional activities were reinforced by a number of Muslim entrepreneurs working under the agency of the then Muslim Business society. (Now recognized as industrialist & Businessmen Association). The body concerned mainly in mobilizing equity capital for the emerging Islamic bank.
At last, the long drawn struggle to establish The first interest free Islamic Shariah based bank in Bangladesh incorporated on 13 March 1983 as a public limited company under the Companies Act 1913 in which 19 Bangladeshi nationals, 4 Bangladeshi institutions and 11 banks, financial institutions and movement bodies of the middle east and Europe including IDB and two eminent personalities of the kingdom of Saudi Arabia joined hands to make the dream a reality. The bank obtained license from Bangladesh bank on 28 March 1983 and started banking operations on 30 March 1983 through its main branch at Dhaka, which was formally inaugurated later, on 12 August 1983. The bank is a joint-venture enterprise of 22 private sponsors of Bangladesh, the government of Bangladesh, Islamic Development Bank, and 13 banks and financial institutions of the oil-rich Middle Eastern Muslim Countries.
IBBL started its banking operations with an authorized and paid up capital of Tk 500 million and Tk 67.50 million respectively. The capital is divided into ordinary shares of Tk 1,000 each. The paid up capital of the bank was enhanced to Tk 640 million in 2001. Of the 79,500 ordinary shares of the bank in 1985, foreign sponsors, including the Islamic Development Bank (IDB), owned 56,000, while 23,500 shares were owned by local sponsors and the general public. investment corporation of Bangladesh was allocated 20% of bank’s issued capital, but the corporation subscribed shares of Tk 0.5 million only. The bank is listed with both Dhaka and Chittagong Stock Exchanges.
Latter, other four Islamic banks, Islamic insurance companies and financial institutions were established in the country. Some traditional banks opened Islamic banking branches in some major cities.
2.5 Business Philosophy of IBBL
The philosophy of IBBL is to the principle of Islamic Shariah. The organization of Islamic conference (OIC) defines an Islamic bank as “ a financial institution whose status, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banking of the receipt and payment of interest on any of its operations. The sponsor, perception is that IBBL should be quite different from other privately owned and managed commercial bank operating in Bangladesh, IBBL to grow as a leader in the industry rather than a follower. The leadership will be in the area of service, constant being effort being made to add new dimensions so that clients can get “Additional” in the matter of services commensurate with the needs and requirements of the country growing society developing economy.
2.6 Objectives of IBBL
- To conduct interest free banking.
- To establish participatory banking instead of banking on debtor creator relationship.
- To invest thought different modes permitted under Islamic Sharah.
- To accept deposits on profit -loss sharing basis.
- To establish welfare – oriented banking system.
- To extent co-operation to the poor, the helpless and the low- income group for their economic uplift.
- To play a vital role in human development and employment and employment generation.
- To contribute towards balanced growth and development of the country thought investment operations particularly in the developed area.
- To contribute in achieving the ultimate goal of Islamic economic system.]
2.7 Goals of IBBL
- To establish Ihsan (gracious conduct of kindness) in economic affairs.
- Establish of Maroof (proper and good acts) in the economic life.
- Elimination of Munkar (Evil, wrong of injurious practices) from economic life.
- Achieve maximum economic growth.
- Maximize employment to ensure maximum distribution of wealth in society.
- Achieve universal education.
- Encourage Co-operation in society.
2.8Mission
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 enlistment and financial services to the low-income community particularly in the rural area.
2.9 Vision
Our vision is to always strive to achieve superior financial performance, be considered a leading Islamic bank by reputation and performance.
- IBBL goal is to establish and maintain the modern banking techniques, to ensure 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.
- IBBL will try to encourage savings in the form of direct investment.
- IBBL will also try to encourage investment particularly in projects, which are more likely to lead to higher employment.
2.10 At a glance of IBBL
Date of incorporation : 13th March 1983
Inauguration of 1st Branch : 30th March 1983
Formal inauguration : 12th August 1983
Authorized Capital : 10,000.00 Million
Paid up Capital : 4752.00 Million
Number of Branch : 206
Equity : 18,572.08 Million
Deposit : 200,343.41 Million
Investment : 187,586.55 Million
Foreign exchange business : 402,695.00 Million
Manpower : 9,397
Number of share holder : 33,686
IBBL thought its steady progress and continued success has by now, earned the reputation of being one of the leading private sector Banks of the country.
2.11 Trend of Branch Expansion
2.12 Trend of Deposit of IBBL
The trend of deposit increasing of IBBL last four years is so much satisfactory. Total deposit stood at tk 200343.41 million as on 31st December 2008 as against tk. 166325.29 million of the year registering an increase of tk 34018.12 million i.e. 21% growth rate of the year.
2.13 Investment
Investment of the bank stood at tk 180053.94 million on 31st December2008 as against tk 144920.61 million showing an increase of 35133.33 million i.e. 25% growth rate of the year.
2.14 Operating Result:
2.15 IBBL, s World rating
As per bankers Almanac (2004 edition) published by the Reed Business Information Windsor Court, England, IBBL,s world bank is 1581 among 3000 banks selected by them. This position was 1902 among 4500 selected bank as on January 2001 edition.
In 2001 the position of this bank 414 amongst top 500 bank of Asia
Award and Prizes: international & National perspective
IBBL was awarded for several times by international & national organizations. The Global Finance, A reputed London based quarterly magazine, awarded IBBL has the best bank award of the country for the year 1999,2000,2005,2008 and 2009.
IBBL has got the 2nd prize of national Export. Fare for its pavilion of Service Organization in 1985.
2.16 Performance of IBBL
Performance of IBBL for least s years
| Particular | 2004 | 2005 | 2006 | 2007 | 2008 |
| Authorized Capital | 3000.00 | 5000.00 | 5000.00 | 5000.00 | 10000.00 |
| Paid-up Capital | 2304.00 | 2764.80 | 3456.00 | 3801.60 | 4752.00 |
| Reserves Fund | 4329.92 | 5450.94 | 6551.23 | 7418.05 | 9308.49 |
| Total Equity | 6691.12 | 8331.14 | 10435.96 | 14957.74 | 18572.08 |
| Total Deposits( Including bills payable) | 87841.01 | 107779.42 | 132419.40 | 166325.29 | 200343.41 |
| Total Investments (Excluding Inv in Share) Gross | 79392.72 | 97178.31 | 117132.83 | 165286.32 | 187586.55 |
| Import Business | 59804.00 | 74525.00 | 96870.00 | 137086.00 | 168329.00 |
| Export Business | 29151.00 | 36169.00 | 51133.00 | 66690.00 | 93962.00 |
| Remittance | 23669.00 | 36948.00 | 53819.00 | 84143.00 | 140404.00 |
| Total foreign trade | 112624.00 | 147642.00 | 201822.00 | 287919.00 | 402695.00 |
| Total Income | 8262.73 | 10586.78 | 14038.30 | 17699.52 | 24230.33 |
| Total Expenditure | 6419.74 | 8424.36 | 11129.63 | 13918.70 | 178408.50 |
| Net Profit before Tax | 1842.99 | 2162.42 | 2908.67 | 3780.82 | 6347.83 |
| Payment to Government | 829.35 | 973.09 | 1490.12 | 2322.46 | 3424.39 |
| Dividend | 20% | 25% | 25% | 25% | 30% |
| Total Assets (including Contra) | 125776.94 | 150959.66 | 188115.27 | 250012.79 | 288017.19 |
| Total Assets (Excluding Contra) | 102149.28 | 122880.35 | 150252.82 | 191362.35 | 230879.14 |
| Fixed Assets | 2552.70 | 3067.99 | 3724.69 | 3987.23 | 4407.22 |
| Number of Foreign Correspondents | 850 | 860 | 870 | 884 | 906 |
| Number of Shareholders | 15892 | 17201 | 20960 | 26488 | 33686 |
| Book value per Share ( Taka) | 2904 | 3013 | 3020 | 182 | 238 |
| Earnings per Share (Taka) | 518.59 | 487.57 | 368.42 | 30.04 | 56.29 |
| Market Value per Share (Taka) (Highest) | 5110.00 | 5580.00 | 4749.00 | 6999.00 | 830.00 |
| Capital Adequacy Ratio | 9.21% | 9.44% | 9.43% | 10.61% | 10.72% |
2.17 Types of Product of the IBBL
To mobilize deposit thought the operation of following accounting:
AL-Wayadia current Account
Islamic banks receive deposits in their AL-Wayadia account. This account is similar to the demand deposit account of interest-based banks. Conventional interest-based banks do not pay interest on this type of deposit account. In addition, depositors may withdraw all or a part of the funds deposited in this account without restriction. The term AL-Wayadia means deposit of money allowing somebody to claim the funds in the account. The bank as trustee preserves and safe keeps the funds deposited. Thus, depositors feel safe keeping their money with the bank because the bank provides assurance of returning their money on demand.
Mudaraba saving Account (MSA)
As per Bangladesh bank instruction 905 of SB deposits are trended as time liability and 10% of it as demand liability. In EBL there is a restriction about drawing money from SB account but anytime holder may draw money of any amount with prior notice, generally house holder and individual are the clients of this account.
Mudaraba Saving Notice Account (MSNA)
MSA account can be treated as semi term deposit. Deposit should be kept in this account for at least seven days to get interest of MSA account is less then SB account. (5.50%) generally profit. but may increase to 6% or more depending on the fund. Check book is issued them but frequent use of checkbook is discouraged. Government organization, big corporate house and banks are generally the client of this account. The volume of this account is generally large and notice has to be given to draw money.
PART –THREE
INVESTMENT SYSTEM OF IBBL
3.0 Investment
The special feature of the investment policy of the Islamic banking is to invest on the basis of profit loss sharing system in accordance with the tents and principle of Islamic sharah. Earning profit is not only motive and objective of the banks investment policy rather emphasis is given is attaining social good and in creating employment opportunity.
Pursuant to the investment policy adopted by the bank a 7 years perspective investment plans aims at diversification of the investment portfolio by size, sector, geographical area, economic purpose and securities to bring in phased all sectors of the economy and all types of economic groups of the society within the fold of banks investment operations.
According the plan envisages composition of the investment portfolio with for agriculture and rural investment, 16% for industrial term investment,14% for industrial working capital 6% for housing and real estate, 6% for transport and communication, 2% for electricity, gas, water and sanitation services, 2 % for storage’s 40% for import and local trade related activates and 1% for other productive purposes by the end of the plan perioc i.e. the year 2002.
3.1 Investment Policy of IBBL
Investment operation of a bank is very important as the greatest share of total generates from it. Maximum risk is centered in it and the very existence of a bank mostly depends on prudent management of its investment port folio.
For efficient deployment of mobilized resources in profitable, safe and liquid sector a sound, well- defined and appropriate investment policy in necessary.
The important feature of the investment policy of the bank is to invest on eh basis of profit – loss sharing system in according with the tenets and principle of Islamic sharah. Earning of profit is not the only motive and objective o the bank investment policy rather emphasis is given in attaining social good and in creating employment opportunities.
3.2 Investment objective of IBBL
The objective and principles o investment operation of the banks are:
- The investment fund strictly in accordance with the principle of Islamic Shariah.
- To diversifies its portfolio by size of investment, by sectors (public and private), by economic purpose, by securities and by geographical area including industrial, commercial and agricultural.
- To ensure mutual benefit both for the bank the investment client by professional appraisal of investment proposals, judicious of investment, close and constant supervision and monitoring therefore.
- To make investment keeping the social- economic requirement of the country in view.
- To increase the number of potential investors by making participatory and productive investment.
- To do away with disparity and establish justice in trade, commerce and Industry.
- To diversify its investment portfolio by size of investment portfolio by sectors (Public &Private), by economic purpose, by securities and by geographical area including industrial, commercial & agricultural.
- 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 accelerate sustainable socio-economic growth and enlistment of the society.
- To invest in the form of goods and commodities rather than give out cash money to the investment clients.
- To contribute to social enlistment and sustained Economic growth of the country.
- To ensure avoid all the investment forbidden by the Islamic Shariah.
- Investment to trade, commerce, Industry, Foreign trade, IT, small scale industry, transportation, service sector.
3.3 Salient feature of investment
- Observing of the legal investment limit of the bank.
- Observance of the legal investment limit of the client.
- Optimum utilization of investable fund.
- Profitable of the investments.
- Safety and security of the investments.
- Investment at minimum possible risk.
- Liquidity of investments.
- Conform to central bank’s investment restrictions.
- Preference to short term investment restrictions.
- Preference to the investments for small size.
- Satisfactory return on investments.
- To take in view inter alia the following points while considering an investment proposal.
- Sector and sect oral performance.
- Management of the company.
- Location of the company.
- Market demand/supply gap, import/export position, consumption trend.
- Cash flow position.
- Financial or internal rate of return.
- Infrastructure facilities in and around the proposed project.
3.4Composition of the port- folio
Following may lbe the compositions of the investment lport- folio of the bank:
- Money Market Port-Folio (Having Tenor Up To The Year)
- Capital Market Port Folio ( Having Tenor Above One Year)
- General Investment Port Folio
3.5 Money / Capital Market Port- Folio
The bank is required to maintain as statutory cash reserve and liability requirement, a portion of its deposit liability in account with the central bank and in approved securities. Beside, the bank, at bank, at its own discretion, may also invest in securities a portion of list mobilized with a view to:
- Ensure regular return.
- Avoid investable surplus.
- Diversify the overall port-folio.
3.6 General market port folio
General investment port-folio is not only the major port- folio of the bank; it also contributes the greatest share of the total revenue generates from all assets of the bank. Besides, it is the general investment function where the bank \generally accepts the greatest risk. The failure of a commercial bank is usually associated with the problem in the general investment port- folio and is less often the result of shrinkage in the value of other assets. Precisely speaking most of the banks resources are committed to general investments the bulk of their revenue is generated by it and the maximum risk is centered in it. As such this port folio not only fractures dominants in the asset structure of the bank, it is also critically important to the success of the bank.
3.7 Important of assessing investment needs
- Assessment of investment needs is necessary for the following resources.
- To detect actual investment limit of bank.
- To assess the quality, quantity, price, and marketability of the commodities.
- To ensures proper follow up supervision and monitoring of the investment.
- To ensure capacity of the client in handing investment activities.
- To ensure trading instead of leading of money.
- To ensure payment against delivery of goods.
- To ensure actual buying and selling of goods.
- To select proper and genuine investment client.
- To ensure viability/ profitability of the project.
- To ensure compliance of Shariah principle.
- To secure the investment.
- To allow investment for appropriate period.
- To ensure investment for productive purpose.
- To know the objective of investment
- To ensure welfare of the society.
- To ensure Business ethics.
- To minimize the risk of investment.
- To ensure recovery of investment in time.
3.8 Strategies
Risk is the investment and return there on are interrelated. An investment policy that emphasizes a high return must accept reality high risk. Conversely an investment policy that will tolerate only small amount of risk must be prepared to accept a reliability low return.
As such it is really difficult whether to select a high return port folio why high risk of low risk port- folio with a low return.
Nevertheless, considering all aspects following guidelines shall be followed as strategy for banks investments.
- If two port-folios have the same risk but different returns, the port folio having higher return shall be preferred.
- If the two port- folios have the same expected returns, but different degree of risk the portfolio with lower risk shall gets preference.
- If on me port folio has both a higher return and a lower risk than anther , the first portfolio shall be referred.
- Keeping in view the risk factor, the bank shall maintain flexibility in determination of rate of return on investment in case to case basis in consideration of the risk element involved in the respective investments.
- Emphasis is given for expansion and strengthening cottage and small industries sector and rural industries. This immensely potential industrial sub sector shall create employment opportunities to rural and semi urban population and shall have positive contribution in employment and income generation and poverty alleviation of the low income group.
- Investment facilities shall be extended for establish and expansion of exports oriented forward/ back ware linkage and import substitution industries.
- Safety, security, profitability, and liquidity of bank investment.
- Each branch invests at least 50% of its deposit locality.
- Enhance of extending limit of good investment clients.
- Adopting of modem technology.
So banks investment policy investment planning and investment budgeting till a situation change improves shall aim at promotion of quality general investment.
3.9 Evaluation of the bank’s investment portfolio
A. The bank should go for investment in large scale dairy farming and other milk processing project and poultry farming which is not worth mentioning at present.
B. The quantum of bank’s investment against fishing is very negligible. There is scope for investment in :
· Shrimp culture
· Sweet water fishing including pond fishery.
· Marine fishing.
C. The banks investment for construction purpose shall continue to be made within the ceiling prescribed in the plan.
D. Presently the banks export investment is mostly is mostly centered in readymade garments and the bank is the bank is yet to centre onto the area of investment in major traditional exportable items like jute and jute goods, frozen foods, hosiery products, tea lather and leather product lit knitwear, basis chemical product, electric goods, electronic goods, handicraft, fruit juice concentration project other.
E. Beside the existing item of import, the bank should fo for investment in the following areas:
· CDSO being imported by edible refineries.
· Cotton yarn.
· Coal and hand coke.
· Fresh fruit.
· Spices.
· Dry fruits.
· Pulses
· Bitumen
· Other items.
F.
1. Investment against real estate of the bank shall continue to be made within the ceiling prescribed in the plan.
2. The banks investment against agriculture, fishery, and working capital investment are not significant compared to other private commercial banks. As such the banks shall make attempt for extension of investment in these sectors.
3.10 Investment perspective plan 2003-2007
In according with the investment policy, 5 year perspective investment plan from 2003 to 2007 is formulated Deposit target of the bank as on 2002 plus 10% has been taken as base and 90% of the lyrar wise estimated deposit have been taken as investment fund, size wise sector wise, geographical area wise, economic purpose wise, security wise, mode wise, allocation of estimated investable funds are made in according with the wegtage given in the investment plan as shown In the table A,B, C, D, E, F,
| Year | Investable Fund 90% of total deposits | Up to tk 50 M | Above to tk. 50 M to tk 100.M | Above to tk. 100 M to tk 250.M | Above to tk. 250 M to tk 500.M | Above to tk500M | TOTAL |
| 2003 | 90% | 20% | 11% | 16% | 13% | 40% | 100% |
| 2004 | 90 | 20 | 11 | 16 | 13 | 40 | 100 |
| 2005 | 90 | 20 | 11 | 16 | 13 | 40 | 100 |
| 2006 | 90 | 20 | 11 | 16 | 13 | 40 | 100 |
| 2007 | 90 | 20 | 11 | 16 | 13 | 40 | 100 |
Investment distribution by size of accounting
Table A
Table- B
| Year | Investable fund 90% of total deposit | Public sector | Private sector | Total |
| 2003 | 90% | 5% | 95.% | 100% |
| 2004 | 90 | 5 | 95 | 100 |
| 2005 | 90 | 5 | 95 | 100 |
| 2006 | 90 | 5 | 95 | 100 |
| 2007 | 90 | 5 | 95 | 100 |
Table- C
Table distribution of by Area – wise (Urban and Rural)
| Year | Investable fund 90% of total deposit | Public sector | Private sector | Total |
| 2003 | 90% | 6% | 94% | 100% |
| 2004 | 90 | 7% | 93% | 100 |
| 2005 | 90 | 8% | 92% | 100 |
| 2006 | 90 | 9% | 91% | 100 |
| 2007 | 90 | 10% | 90% | 100 |
Table –D
Distribution of investment by Economic Purpose
| Year | Investment fund of total deposit | Agriculture dishing and forestry | Industry | Working capital | Construction real estate | Electricity, gas, water, & sanitary service | Transport & communication | Storage |
| 2003 | 90% | 2% | 18% | 15% | 10% | 0.5% | 5% | 1% |
| 2004 | 90 | 2 | 18 | 15 | 10 | 0.5 | 5 | 1 |
| 2005 | 90 | 2 | 18 | 15 | 10 | 0.5 | 5 | 1 |
| 2006 | 90 | 2 | 18 | 15 | 10 | 0.5 | 5 | 1 |
| 2007 | 90 | 2 | 18 | 15 | 10 | 0.5 | 5 | 1 |
| house hold durable scheme | Small business investment | Doctors investment | Poultry dairy | Rural development RDS | Micro industry | Others | Miscellaneous | total |
| 1.5% | 1.5% | 0.5% | 0.5% | 2% | 0.5% | 1% | 1% | 100% |
| 1.5 | 1.5 | 0.5 | 0.5 | 2 | 0.5 | 1 | 1 | 100 |
| 1.5 | 1.5 | 0.5 | 0.5 | 2 | 0.5 | 1 | 1 | 100 |
| 1.5 | 1.5 | 0.5 | 0.5 | 2 | 0.5 | 1 | 1 | 100 |
| 1.5 | 1.5 | 0.5 | 0.5 | 2 | 0.5 | 1 | 1 | 100 |
Table –E
Investment distribution by Securities
| Year | Investment | Share securities | Marsendise | Machinery with fixed assets | Real estate | Financial obligation | Miscellaneous | Total |
| 2003 | 90% | 2% | 70% | 15% | 8% | 3% | 2% | 100% |
| 2004 | 90 | 2 | 70 | 15 | 8 | 3 | 2 | 100% |
| 2005 | 90 | 2 | 70 | 15 | 8 | 3 | 2 | 100% |
| 2006 | 90 | 2 | 70 | 15 | 8 | 3 | 2 | 100% |
| 2007 | 90 | 2 | 70 | 15 | 8 | 3 | 2 | 100% |
Table –F
Investment distribution by Mode
| Year | Investment fund 90% of total deposit | Bai –Mode | Ijara Mode | Share mode | Purchase & negotiation | Quard | Total |
| 2009 | 90% | 65.5% | 20% | 7.5% | 5% | 2% | 100% |
| 2004 | 90 | 62.5 | 21 | 10 | 5 | 2 |
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