A Theoretical Study on Islami Banking With Reference to General Banking Operations Of AB Bank Limited

View with images and charts

A Theoretical Study on Islami Banking With Reference to General Banking Operations Of AB Bank Limited

1. Company Profile

1.1. Background of AB Bank Limited

AB Bank Limited, the first private sector bank under Joint Venture with Dubai Bank Limited, UAE incorporated in Bangladesh on 31st December 1981 and started its operation with effect from April 12, 1982.

Dubai Bank Limited (name subsequently changed to Union Bank of the Middleast Limited) decided to off-load their investment in AB Bank Limited with a view to concentrate their activities in the UAE in early part of 1987 and in terms of Articles 23A and 23B of the Articles of Association of the Company and with the necessary approval of the relevant authorities, the shares held by them in the Bank were sold and transferred to Group “A” Shareholders, i.e. Bangladeshi Sponsor Shareholders.

As of December 31, 2006; the Authorized Capital and the Equity (Paid up Capital and Reserve) of the Bank are BDT 2000 million and BDT 2582.76 million respectively. The Sponsor-Shareholders hold 50% of the Share Capital, the General Public Shareholders hold 49.43% and the rest 0.57% Shares are held by the Government of the People’s Republic of Bangladesh. However, no individual sponsor share holder of AB Bank holds more than 10% of its total shares.

Since beginning, the bank acquired confidence and trust of the public and business houses by rendering high quality services in different areas of banking operations, professional competence and employment of the state of art technology.

During the last 26 years, AB Bank Limited has opened 70 Branches in different Business Centers of the country, one foreign Branch in Mumbai, India, two Representative Offices in London and Yangon, Myanmar respectively and also established a wholly owned Subsidiary Finance Company in Hong Kong in the name of AB International Finance Limited. To facilitate cross border trade and payment related services, the Bank has correspondent relationship with over 220 international banks of repute across 58 countries of the World.

AB Bank Limited, the premier sector bank of the country is making headway with a mark of sustainable growth. The overall performance indicates mark of improvement with Deposit reaching BDT 42076.99 million, which is precisely 53.78% higher than the preceding year. On the Advance side, the Bank has been able to achieve 46.32% increase, thereby raising a total portfolio to BDT 31289.25 million, which places the Bank in the top tier of private sector commercial banks of the country.

On account of Foreign Trade, the Bank made a significant headway in respect of import, export and inflow of foreign exchange remittances from abroad

1.2 AB Chronicles

Date Major Events

31st December,1981	Certificate of Incorporation
27th February,1982	Commencement of Business
5th February, 1982	1st meeting of the Board of Directors
12th April,1982	Opening of First Branch(Kawran Bazar)
28th December,1983	Listed in Dhaka Stock Exchange(DSE)
5th May,1984	Publication of Prospectus for IPO
25th june,1984	Subscription for share status
November,1995	Opening of the AB International Finance Ltd Of Hong Kong
January,1996	Listed in Chittagong Stock Exchange(CSE)
6th april,1996	1st Foreign Branch at Mumbai, India
12th April,2002	Launching of ATM
2nd November,2002	Opening of Merchant Banking Wing(MBW)
3rd November,2003	Incorporation of AB Bank Foundation
23rd December,2004	Launching of Visa cards
23rd December,2004	Opening of Islamic Banking Branch
7th May, 2007	Online Share Transaction in CDS
22nd January, 2007	Security Custodial Services License
March, 2007 (Completion)	MISYS Roll-out (1st Phase)
1st January, 2008	New logo Launch

Branching-out

Date	Branch Opening
16th January, 1986	Opening of Principle Branch
19th September, 1982	First Branch in Chittagong Division (Agrabad Branch)
27th May, 1983	First Branch in Sylhet Division (Dargha Gate Branch)
15th March, 1984	First Branch in Khulna Division (Khulna Branch)
25th July, 1984	First Branch in Rajshahi Division (Bogra Branch)
7th October, 1986	First Branch in Barishal Division (Barishal Branch)

1.3 Mission, Vision and Goal

Mission:

To be the best performing bank in the country.

Vision :

To be the trendsetter for innovative banking with excellence and perfection.

Goal of ABBL

To exceed customer expectations through innovative financial products and services and establish a strong presence to recognize share holders expectations and to optimize their rewards through dedicated workforce.

i) Long term goal:

Keeping ahead of other competitors in productivity &

profitability.

ii) Short term goal:

To attain budgetary target fixed in each area of business.

1.4 Hierarchy of ABBL

CHAIRMAN
?
BOARD OF DIRECTORS
?
MANAGING DIRECTOR
?
DEPUTY MANAGING DIRECTOR
?
EXECUTIVE VICE PRESIDENT
?
SENIOR VICE PRESIDENT
?
VICE PRESIDENT
?
SENIOR ASSISTANT VICE PRESIDENT
?
ASSISTANT VICE PRESIDENT
?
SENIOR PRINCIPAL OFFICER
?
PRINCIPAL OFFICER
?
SENIOR OFFICER
?
OFFICER

1.5 Management of ABBL

The management of the bank is vested on a broad of Directors, for over all super vision and directors on policy formulation by the board. The power of general supervision and control of the affairs of the bank is exercise by the president and the managing director of the bank who is the chief executive. The board establishes the objectives and policies of the Bank. The board has the authority to declare dividend, to approve the Balance sheet, etc. Chairman keeps board of directors informed, on the progress of the bank and implements the policies established. The Board consists of 11 members.

1.6 Strength of AB Bank Ltd

• Customer’s satisfaction is the top priority of the Bank.

• AB Bank being the first private sector bank is always one step ahead of the other competitors in serving the customers need.

• Bank in its goal has mentioned that customer’s expectations will be met through innovative financial products and services.

• A bunch of young and energetic work force is engaged to serve the valued customers.

1.7 Offerings of the Bank

AB Bank offers different type of services to its customer. And day by day they are expending the area of services. From the very beginning they gave more emphasis on satisfaction of customers. They offer the general banking facilities such as –receive deposit, giving loan etc. Otherwise they also offer –

a) online Banking system

b) Western Union money transfer

c) ATM

d) Pay order

e) Demand Deposit

f) Credit Card

g) Debit Card

h) Visa Card

i) Sonchoypottra

j) Easy loan

k) Gold Grace

l) Islamic Banking facilities

m) Foreign exchange

n) Remittance etc.

1.8 Network of Branches

Bank’s present branch network stand at seventy (70) till date. Towards the end of 2007, Feni, Khulshi, and Pahartoly Branches joined the network of AB. Overall status of AB’s branches network is given below-

2.1.9 ABBL at a Glance: Year 2006 and Year 2005

	Million Taka
December 31	2006		2005		% Change
Gross Interest Income	3,378.34		2,262.95		49.29
Net Interest Income	615.50		691.41		(10.98)
Operating Profit (PBP & T)	710.69		755.03		(5.87)
Net Operating Profit (PBT)	532.19		407.45		30.61
Profit after Tax (PAT)	532.19		162.45		227.60
Deposit	42,077.00		27,361.44		53.78
Loans & Advances	31,289.25		21,384.63		46.32
Total Assets	47,989.34		33,065.40		45.13
Shareholders’ Equity	2,582.76		1,526.88		69.15
NIM %	18.22		30.55
Non Interest Income to Operating Income ( %)	76.78		56.17
Cost Income Ratio	73.18		76.02
Return on Equity (%)	20.61		10.64
Return on Assets (%)	1.11		0.50
Advance Deposit Ratio	74.36		78.16
CAR (%)	9.23		9.17
NPL (%)	4.02		8.21
EPS (Tk.)	93.08		31.26

1.10 Performance Status of ABBL

Some graphical performance of different performance sectors of ABBL over five years are shown as follows-

Figure-Net Interest Income

Interpretation: After observing the above graph, we can say that the Net interest income of ABBL fluctuating year to year which is essential for the company. From the year 2003 the net interest income is increasing, which is a good sign for the company-ABBL should try to maintain the current level of performance for its future betterment.

Figure-Earning Per Share

Interpretation: Fromthe above graph, we can say that the Earning per Share of ABBL fluctuating year to year which is essential for the company. From the year 2003 the net interest income is increasing, which is a good sign for the company-ABBL should try to maintain the current level of performance for its future betterment.

Figure-Return on Equity

Interpretation: After observing the above graph, we can say that the Return on Equity of ABBL fluctuating year to year which is essential for the company. From the year 2003 the net interest income is increasing, which is a good sign for the company-ABBL should try to maintain the current level of performance for its future betterment

Figure-Operational Performance

Interpretation: After observing the above graph, we can say that the Operational performance of ABBL fluctuating year to year which is essential for the company. In 2006 the operating revenue, profit before tax and after tax was low. But in 2007 the all above has been increased. This is very essential for the company. ABBL should maintain the continuous progress about it.

Each and every sector of AB Bank Limited, the performance is in a satisfactory level from year to year that we can show from the above graphs.

2.0. Branch Orientation

2.1 Islami Banking Branch of AB Bank Ltd

To provide the Islamic banking services in accordance with the principles of Islamic Shari’ah, AB Bank has established Islamic Banking Wing and started its functioning by opening full-fledged Islamic banking branch on 23.12.2004. The branch is known as AB Bank Islami Banking Branch, Kakrail, and is situated at 82, Kakrail, Ramna, Dhaka.

2.2 Conduction of Islami Banking

Prominent Islami Banker Mr. M. Azizul Huq has joined the Bank as its Islamic Banking Consultant. A dedicated team of experienced Islamic bankers is working under his active guidance both at head office and branch level. A competent Shari’ah Council consisting of Islamic scholars, Ulema, Fukaha and Islamic bankers headed by Mr. Shah Abdul Hannan, a prominent Islamic scholar and former Secretary, Government of Bangladesh has also been formed to guide the Islamic banking affairs. Board of directors as well as management of the bank are very much interested to promote Islamic banking system in the bank aiming at opening more Islamic branches in the near future. AB Bank has already obtained membership of Islamic Banks Consultative Forum (IBCF) and Central Shari’ah Board for Islamic Banks of Bangladesh.

2.3 Goals and objectives of Islamic Banking Branch

• To facilitate the Islamic banking system in the country
• To create new entrepreneurs and to arrange required finance for them
• To play effective role for socio economic development of the country
• To give assistance in launching welfare oriented economic system under Islamic values

2.4 Islamic Banking Services

The services are mainly of two type’s like-

• Deposit services
• Investment services

Deposit services

Under Deposit services the following services are being rendered:

• Mudaraba Savings Account
• Mudaraba Short Noticed Account
• Mudaraba Term Deposit Account (with different terms)
• Mudaraba Monthly Profit Account
• Al-Wadiah Current Deposit Account
• Mudaraba Deposit Pension Scheme
• Mudaraba Hajj Deposit Scheme

Investment Services

AB Bank Islmic Banking Wing provides investment facilities for project finance, working capital finance, SME finance, consumer / retail baking finance etc. under following modes:

Hire-Purchase under Shirkatul Melk (HPSM):

Under this mode the Bank and the client procure asset such as machinery, land, car etc. on equity participation basis. The Bank rents out its portion of assets to the client for a certain period. The client pays the rental with a part of principal amount on monthly quarterly basis. The client gets its proportionate ownership with the payment of monthly quarterly installments. On maturity, total ownership of the assets automatically goes to the client as and when final payment of the account is made.

Ijara or Leasing:

It is more or less like the HPSM. In this case equity participation may or may not exist. Ownership of the asset is not automatically transferred to the client with the payments of installments. On maturity, the bank transfers the ownership to the client on payment of certain transfer fees.

Bai-Muajjal / Bai-Murabaha:

These modes are applicable for working capital finance. Under these schemes bank purchases goods / raw materials as per requirement of the client. In case of Bai-Muajjal bank receives the sales proceed on deferred payment basis. On the other hand in case of Bai-Murabaha Bank receives the sale price at the time of delivery of the goods / raw materials. Before handing over the goods / raw materials the bank generally keeps the same in its custody under pledge.

Musharaka:

this mode the Bank and clients jointly participate in a project, in a scheme or project. Profit is shared between the Bank & the concerned client as per pre-agreed ratio. On the other hand loss is shared according to capital ratio.

Mudaraba:

Under this mode bank finances the scheme as a Shaheb-Al-Maal (owner of the capital). Profit is shared between the two sides as per pre-agreed ratio.

2.5 Sector of Investment

Islamic Banking Wing of the bank finances in all sectors i.e., Industry, business, Agriculture, Real Estate etc. if purpose of the investment is permissible under Islamic Shari’ah.

2.6 Limit of Investment

Investment is offered to the extent of single borrower exposure limit as fixed by the Bangladesh Bank from time to time.

2.7 Foreign Trade

Islamic Banking Wing provides the following services at its foreign trade desks:

• Opening of LCs
• Post -Import Finance
• Export bill purchase and negotiation
• Pre-shipment financing etc.

AB Bank Islamic Banking Wing has been continuously trying to expand its service horizon keeping the necessity of valued clients in view and upholding the principle of Islamic Shari’ah.

2.8 Progress of Islami Banking Branch

Islamic Banking Business (IBB) has made remarkable progress in its third year of operation in 2007. The single branch of Islamic banking Window of AB has been able to earn confidence through its efficient service and products designed to cater to particular segment of customers. Three new deposit products were launched after being cleared by the Shari’ah Council of the bank.

2.9 Islamic Banking Software

Islamic Banking Software named “ABABIL” has been procured and as in the final stage of implementation/ roll-out. This will enable our bank to extend its Islamic banking services throughout the country by utilizing the the existing online branches.

2.10 Shari’ah Compliance

The Shari’ah council of the bank assigned with the overall supervision of the Islamic Banking business comprises of eminent Ulema, Fuquah, Islamic Scholars and bankers. There is a Standing Committee of thecouncil to address operational issues in light of the Shari’ah principle. During 2007, Shari’ah council met three times while the standing met twice.

2.11 Branch Performance of IBB

Year 2007, was a year of performance for this particular business wing. Operating profit was taka 7.15 crore which was nearly four times the previous year. Deposit for the year was taka 147.79 crore while investment reached taka 58.71 crore resulting in over 170.43 percent growth, respectively.

Figure-IBB Deposits & Investment

Figure- IBB Profits

3.1 Introduction

The concept of Islamic Banking represents a radical departure from traditional banking. Islamic banking has to derive its inspiration from the religious edicts of Islam and has to mould its operation within the framework of the teachings of Islam. The most distinctive features of Islamic Banking are its total abstinence from interest in observance of Islamic prohibition of all interest-based transactions. The Islamic banks organize their operation on the basis of profit/ loss sharing and other modes that are permitted in Islam. Alongside the conventional interest bearing banking system, Bangladesh entered into an Islamic banking system (profit-loss sharing) in 1983. At present, out of 48 banks in Bangladesh, 7 private commercial banks are operating as full-fledged Islamic banks and 10 conventional banks are partially involved in Islamic banking in a total of 20 branches.

3.2 Concept of Islamic Banking

The General Secretariat of the Organization of the Islamic Conference (OIC) defines an Islamic Bank as “Islamic Bank is a financial Institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shari’ah and to the banning of the receipt and payment of interest on any of its operations.”

All OIC countries including Bangladesh have approved the above definition of Islamic Bank. The Islamic Development Bank and other national and multi-national Islamic Banks have also adopted the above definition as their operating guide.

3.3 Essential features of Islamic banking

Prohibition of Interest:

The traditional capitalist banking system depends on interest. It receives interest for providing loans and pays interest for taking loans. The spread between these two interests is the source of its profit. But according to Islamic Shari’ah all types of interest is banned. So, Islamic Bank does not carry on business of interest and it completely avoids the transaction of interest.

Investment based on profit:

After departing from interest, the alternate ways of income for Islamic Bank are investment and profit. Thus Islamic Bank gives up any transaction of interest and makes investments based on profit. Bank distributes its profit to its depositors and shareholders.

Investment in Halal Business:

Islamic Shari’ah has banned the business of haram goods. For example Islam not only forbids the drinking of alcohol but also banned any business of alcohol. Therefore Islamic Bank does not get any haram business and only do halal business.

Halal Paths and Procedures:

Islamic Shari’ah also rejects any haram path or process in case of a halal business. Therefore Islamic Banking system only allows the halal path procedures of Halal business.

3.4 History and Growth of Islamic Banking

The Islamic banking movement as we know it today is recent phenomenon. The history of modern Islamic Banking dates back to the 1950s when a small private Islamic Bank appeared in Pakistan but subsequently windup. In the decade of 1950s, the concept of Islamic banking was a matter of thinking and research and the result was preserved in the papers of different scholars of the Muslim world. The 1960s was the decade of practical experiment and 1970s was the decade for establishment. The decade of 1980s was the decade of success and expansion at a faster rate.

During 1960s, it was observed that the Muslims of Malaysia used to save primarily for performing Hajj and such savings are mostly kept idle in pillows, under mattresses and floors for avoiding interest, which was unproductive and damaging for the growth and development of the economy. For utilizing these savings, the Malaysian Government in 1962 establishes an interest free financial institution known as “Pilgrim Savings Corporation”. Though it was not a full-fledged bank, even then we can say that it was the beginning of an institution free of interest, which is unconditionally prohibited in Islam.

‘Mitghamr Bank’ is pioneer of modern Islamic Banking which was established by Dr. Ahmed-El-Naggar in 1963 by his personal endeavor at Mitghamr in Egypt with a view to bring some development in socio-economic field in the process of Islam. The conducted its banking operation successfully in the light of Islamic Shari’ah for about of five years. Now the Islamic Bankers of the world has treated the short life of Mitghamr Bank as the first model of Islamic Banking. A survey report by the national Institute for management development, Cairo, Egypt shows that the Mitghamr Bank was tremendously successful in achieving its objectives. In addition, the tremendous success of the bank was the cause of closure by the vested interest in 1967.

Islamic Development Bank (IDB) was established in 1975 and during the following the years 7 (seven) Islami Banks and financial institutions namely (i) Dubai Islami Bank , (ii) Kuwait Finance House, (iii) Faisal Islami Bank, Sudan (iv) Jordan Islami Bank for Finance and Investment (v) Islamic Banking System International Holding S. A., Luxembourg, (vi) Faisal Islami Bank of Egypt and (vii) Islamic Investment Corporation Ltd, Sharjah were established.

In 1978, Islamic Foreign Minister Conference in Dakar (senegal) recommended to the members of OIC to make systematic efforts to establish Islamic Banks gradually and during the next three years of their recommendation, 20 Islamic Banks and Financial Institutions came into being.

Till now near about 300 hundred Islamic Banks and financial Institutions in about 40 countries of Asia, Africa, Europe, America and countries like U.K., U.S.A., Germany, Argentina, Denmark, Luxembourg, Switzerland and India have been established. The banking system of Iran and Sudan has been totally remodeled on the basis of Islamic shari’ah.

3.5 Islami Banking in Bangladesh

Bangladesh is one of the largest Muslim Countries I the world. The people of this country are deeply committed to Islamic way of life as enshrined in the holy Qur’an and Sunnah. Naturally, it remains an ordeal desire in their hearts to fashion and design their economic lives in accordance with the prospects of Islam. With this end in view, in August 1974, Bangladesh signed the charter of Islamic Development Bank (IDB) and committed itself to recognize its economy and financial system as per Islamic Shari’ah.

In November 1980, Bangladesh Bank, the country’s central bank, sent a representative to study the working system of several Islamic banks abroad.

In January 1981, the president of peoples Republic of Bangladesh while addressing the 3^rd Islamic Summitr 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 of the President reflected the people’s desire, attitudes and commitment of Bangladesh towards establishing Islamic Banks and Financial Institutions in the country.

In November 1982, a delegation of Islamic development Bank (IDB) visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic Bank in the private sector. They found a lot of works have already been done and Islamic banking was in a ready form for immediate introduction. Two professional bodies namely Islamic Economic research Bureau(BIBA) made significant contribution towards introduction of Islamic Banking in Bangladesh.

At last the long drawn struggle to establish an Islamic bank in Bangladesh became a reality and Islami Bank Bangladesh Limited (IBBL) was incorporated on 13^th March, 1983 and commenced banking operations on and from 30^th March1983 as the first Islamic Bank in the south East Asia. It is the first joint venture in Bangladesh with the equity participation of Islamic Development bank (IDB), Kingdom of Saudi Arabia, Bahrain and Kuwait.

Thereafter as of now, six other Bangladeshi Banks have launched banking operations in the private sector based on Islamic shari’ah. Some other newly established traditional private banks have also set up some Islamic banking branches in the country.

3.6 Growth of Islamic Banking in Bangladesh

Bangladesh is the third largest Muslim country in the world with around 139 million populations of which 90 percent are Muslim. Islamic banking system started operation in Bangladesh in 1983 with the establishment of first Islamic bank “Islami Bank Bangladesh Limited”. The growth of Islamic banking in Bangladesh is progressing day by day. The remarkable shifting or conversion of the conventional banks and their branches into the Islamic lines, signals high acceptance of the interest-free banking by the public in general. The Islamic banking industry continued to show strong growth since its inception in 1983 to June 2008 in tandem with the growth in the economy, as reflected by the increased market share of the Islamic banking industry in terms of assets, financing and deposits of the total banking system. The products being offered by these banks range from consumer credit to long term finance for big investment projects using Islamic modes of financing such as Marahaba, Bia-Muazzal and Ijarah.

The Islamic banks in Bangladesh started from a very limited resource base right from the beginning. But with the passage of time, they have excelled strong performance in respect of mobilization of deposits as well as in investments. Total deposits of the Islamic banks and Islamic banking branches of the conventional banks stood at Taka 232981.00 million at end June 2006. This was 28.46 percent of the deposits of all private commercial banks and 9.67 percent of the deposits of the total banking system at the end of June, 2006. Total investment of the Islamic banks and the Islamic banking branches of the conventional banks stood at Taka 210493.80 million at end June 2006. This was 29.35 percent of all private banks and 14.88 percent of the total banking system of the country.

The Statutory Liquidity Requirement (SLR) for the Islamic banks is fixed at 10 percent since inception of first Islamic Bank in 1983. This has remained unchanged till date while SLR for the traditional commercial banks has been changed several times which presently is fixed at 18 percent. The low requirement of SLR for Islamic banks is due to the non-holding of interest bearing types of eligible securities. In order to overcome the situation, the Bangladesh Bank has issued an Islamic Bond on behalf of the government namely “Government Islamic Investment Bond (GIIB)” in October 2004, which is governed by the Islamic Shari’ah. It is evident from the Table that Islamic banks have been facing excess liquidity problems. Excess liquidity of the Islamic banks and Islamic banking branches as well stood at Taka 8956.80 million as at end June 2006 (19.08 percent of private banks and 8.19 percent of all banks) which originated due mainly to the non-responsiveness of the good borrowers for investment demand and absence of adequate interest free financial instruments and an organized Islamic money market in the country as well. However, efforts are underway to develop Islamic inter-bank market instruments to help banks in managing their liquidities.

The role of Bangladesh Bank in regulating, guiding and supervising the Islamic Banks in Bangladesh in accordance with Islamic Shari’ah is at the preparatory stage. The inspectors and supervisors of Bangladesh Bank have been undergoing massive training programme on Islamic banking both at home and abroad to be equally familiar with the technicalities of the different operational methodologies of the Islamic banking system.

3.7 Characteristics of Islamic Banking

Islamic Banking is a progressive and revolutionary banking system, working effectively and reputedly in modern days in many parts of the globe. Sin developed and de3veloping countries, this unique banking system works side by side with other conventional banking.

An Islamic bank may be defined as a financial intermediary whose objectives and operations as well as principles and practices must conform to the principles of Islamic Law (Shari’ah) and consequently is conditioned to operate all its activities without interest. The introduction of Islamic Banking in modern world is based on the principles of Islamic economics. The aim of Islamic economics, as observed by the Muslim Scholars, is not only the elimination of interest-based transactions and the introduction of Zakah (Contribution to poor) system but also the establishment of just and balanced social order free from all forms of exploitation. Islamic Banks play a vital role in achieving this balanced and social order and establishing ideal Islamic societies in Muslim countries.

An Islamic bank is not only a banker but also a partner in business. The system essentially involves sharing of risk between the owner of capital and entrepreneurs, as well as sharing the result of the collective efforts. Thus, it differs from a interest-free system in which the risk is mainly borne by the entrepreneur or by the user of capital. In other way we may call Islamic Banking as participatory banking.

3.8 Objectives of Islamic Banking

The fundamental objective of Islamic banking is to bring about departure from the conventional system moving from debt-based relationship to an equity based and stake taking economy. While there are scopes for some debt-based transactions of the principle of quard-e-hasana, the overall trust of the Islamic banking towards equity based and risk sharing arrangements. This is distinct from the capitalist approach where the whole economy is revolved round making money by manipulating, managing the evils of interest and compounding interest mechanism. This is the root cause of exploitation in society and leads to inequitable distribution of income and wealth in the economy generally the objectives of Islamic banking are-

• Providing banking services of the highest standard according to Islamic Shari’ah without dealing in Riba (interest on money) and by using the-state-of-the-art technology in computer, telecommunication and information system.
• Investing funds prudently to achieve optimum profits for the mutual benefit of customer and the bank.
• Coordination, cooperation and integration with other financial bodies that apply Islamic Shari’ah in their dealings, in order to support creating a base and regulation for an Islamic financial system
• Development of the Islamic society in all fields of the economy by investing in the industries, agriculture, commerce and real estate in order to provide job opportunities.
• Promotion of social benevolence through its Islamic methods particularly through Zakah.
• Contributing to the welfare of the society in line with the five main tenants of Islam, namely protection of life, purity of mind, property, honour and social justice.
• Promoting the savings habit and encouraging people to invest wisely within the parameters of Islamic Shari’ah through investment and finance instruments to suit individual requirements.
• Making available the necessary capital for entrepreneurs for the establishment of economic projects and creation of alternative instruments according to Islamic Shari’ah

3.9 Financial Framework of Islamic Banking

Islamic banking is based on an ethical framework. It is not only a shifting from a debt-based economy to an equity-based economy but also a movement from pecuniary situation to an economy of ethical norms and social commitments. There is a framework of Halal and Haram within which all economic activities, private and public has to take place. The activities like pornography, gambling, prostitution, the promotion of alcohol, tobacco, cigarettes, cinema etc would be treated in the capitalist system as productive because it is supposed to be satisfying some demand but in the Islamic framework which would be unacceptable. Therefore ethical and social dimensions are integral to the Islamic Banking approach.

3.10 Methods/ Process of investment in Islamic Banking

(i) the first process is direct Investment through which the people who have money in excess of their needs and the other who have productive ideas and expertise join hands to pool their resources for production and exchange. This is the oldest and one of the most common forms of productive cooperation between money and entrepreneurship.

(ii) The second is financial intermediation. In this process, there emerges a series of banks and financial Institutions, which act as intermediaries between savers and producers. In principle, direct investments as well as financial intermediation are accepted as part of the Islamic framework.

4.1 General banking

General banking department is the “heart” of all banking activities. The general Banking section is what keeps the overall banking going. All sorts of day- to-

day transactions are performed in here as it plays a vital role in banking. The general banking department that consists mainly of the following are given below:

¨ Account opening section

¨ Clearing & Remittance

¨ Cash section

¨ Financial Control Department

4.2 Account opening section

Account is the systematic record of transaction. Bank Account is a contract between the Bank and the client, allowing the customer to use Bank Service against a cost of fees. This is the best way a Client can build relationship with the Bank. Deposit of different kinds and schemes are accepted on the Mudaraba principle of islamic shari’ah. Under the above principle the client is the shaheb-al-mal and the bank is mudareb. As per contract the bank is authorized to Mudaraba funds at joint risk of the client and the bank. The client can not interfere/ participate in the management of the fund. Any profit resulting from the investment of Mudaraba fund is distributed between the client and the bank as per principle of distribution of profit announced by the bank as at the beginning of the year or as per contract. Loss is to be born by shaheb-Al-Mal after adjustment of the same from equity and the bank does not get any remuneration for the management of fund.

The main purpose of opening account is to deposit money. Deposit account can take on a various forms.

They consist of two forms-

1) Demand or Al-Wahdia current deposit.

2) Time or Mudaraba Savings deposit.

The basic things that any accounts require are:

Ø A valued client’s Introduction.

Ø Two photographs of the concerned party.

Ø Taka 1000 cash deposit for Mudaraba Savings deposit and Taka 5000 cash deposit for Al-Wahdia current deposit.

4.3 Classification of Account

In Islami Banking Branch of AB Bank Ltd. the following accounts are under operation:

Deposit Scheme

1.	Deposit
	F Al-Wahdia Current Account F Mudaraba Savings Deposit F Mudaraba Short Notice Deposit F Mudaraba Term Deposit
2.	Deposit Scheme
	F Mudaraba Pension Deposit Scheme F Mudaraba Hajj Deposit Scheme F Mudaraba Monthly Profit Deposit F Mudaraba Probable Millionaire Scheme F Mudaraba Third-Terminal Profit Scheme

4.3.1 Deposit

Al-Wahdia Current Account

Most businessmen maintain current in order to make their daily business activities. This account’s funds change most frequently than any other accounts because customer used to withdraw and deposit funds in regular basis.

Types of AWD Account:

1. Individual Account
2. Proprietorship A/C
3. Partnership A/C
4. limited company A/C
5. Cooperative A/C
6. Special A/C

The summery of the rules and regulations to open a current account as follows :-

Ø A minimum deposit of TK. 5000.00 is needed to open a current account.

Ø Deposit is accepted on Al wadiah principles which mean Al amanah with permission to use. According to this principle, bank can use the fund of the account along with other funds as per Islamic Shari’ah at bank own risk. Account holder will not share any profit/loss.

Ø The bank charges an incidental charge of TK.50.00 for every 6 months for the maintenance of the account.

Ø In case of the closure, the bank charges TK. 100.00 as closing charge of the account.

Ø Withdrawal of money is allowed only through the leaves of the cheque book issued by the bank

Mudaraba Savings Account

This account is a popular account maintained in Banks. The different matters relating SB account are described in the following discussion. The summary of the Rules and regulations to open a savings account is as follows:-

Ø A minimum deposit of TK. 1000.00 is needed to open Mudaraba Savingsaccount.

Ø This type of Deposit account will be conducted on Mudaraba Principles of Islamic Shari’ah. Account holders shall share income derived from investment made out of the Mudaraba funds in economic activities permitted by Islamic Shari’ah.

Ø The Mudaraba Saving Deposit Account holders along with other Mudaraba depositors shall get premium 65% of the income derived from the deployment of Mudaraba fund in the investment according to their proportion in the total investment during an accounting year applying the weightage rate of 0.75.

Ø Provisional profit will be credited twice a year i/e. on 30the june and 31^st December. Final profit is determined and adjusted at the end of the year i.e. after finalization of account.

Ø Any person of more than 18 Years having sound mind can open and operate this account singly or jointly.

Ø In case of a minor (a person below 18 years), a guardian can open and operate this account on his or her behalf.

Ø Clubs, societies, sole proprietorship firms, partnership firms, Limited Companies either public or private and other similar organization are eligible to open such account.

Ø More than one account can not be opened in the same name.

Ø Money would be withdrawn through cheques. Withdrawal cannot be more than twice a week and generally the amount will not be more than 25% of the balance available, subject to maximum TK.15000.00.

Ø The closing charge is TK.50.00.

Mudaraba Short Notice Deposit

This special types of account is just in between CD and MSD which gives profit at the rate of 6%(simple rate of profit calculated annually on daily balance) but requires 7 days-30 days prior notice of cash withdrawal. It is notice, the amount of money is withdrawn without notice, and then profit won’t be given on the said money. If any financial organization or autonomous bodies open this A/C hen no excise duty will be deducted but source tax will be deducted.

Mudaraba Short Notice Deposit is conducted on Mudaraba Principle of Islamic Shari’ah. Account holders shall share income derived from investment made out of the Mudaraba funds in economic activities permitted by Islamic Shari’ah.

Mudaraba Term Deposit Receipt:

In this types of deposit, a large amount of money is deposited in the bank for comparatively higher rate of interest (simple, not communed but calculated annually) is offered to the depositor for the period of 3 months, 6 month, 1year with the condition that s/he can not withdraw the amount before maturity but can draw the profit on a monthly basis.

Maturity & Profit

Particulars	Rate of profit
1 to 3 month	11%
3 To 6 month	11.50%
6 to 12 month (year)	12%

If the client not applies for renewal after maturity then the interest will be imposed after every three month.

The summary of the Rules and regulations to open a MTDR account is as follows:-

1) Terms Deposit Account will be conducted on Mudaraba Principles of Islamic Sariah Account holders shall share income derived from investment made out of the Mudaraba funds in economic activities permitted by Islamic Sariah.

2) Term of deposit are Three months, six months, twelve months Twenty four months, Thirty six months and above.

3) Benefits of full weightage with yearly cumulation of profit shall become payable if withdrawn on maturity.

4) The deposit receipt is not transferable except to this bank and the MTD receipt must be preserved with due care by holder of the MTDR. The bank will not be responsible if the lost receipt is paid by way of cheating/ deception.

5) Funds covered by the Deposit Receipt are payable in accordance with the laws and regulations current at the time of withdrawal or repayment. The depositor will be bound to receive the profit at the provisional rate if the account is closed before finalization of yearly profit.

6) The bank can deduct any Govt. tax & levies to be imposed by the Govt of Bangladesh any time from time to time.

4.3.2 Deposit Scheme

Mudaraba Pension Deposit Scheme

This is an attractive deposit scheme of Islamic banks. It is governed by Mudaraba principles also. All categories of particularly the small income group can be able to make savings on monthly installment basis at a very higher rate. Generally the term is for 5 to 10 years and size of installment is minimum Taka 500 to maximum Taka 20000.00.

Mudaraba Hajj Deposit Scheme

Hajj is one of the basic pillars of Islam.Islamic banks are accepted deposit on installment basis or in peacemeal from the intending pilgrims under Mudaraba principles. Considering the religious aspects of this account and to inspire the individual to perform hajj, a better rate of profit camparing to other Mudaraba Accounts is given to this Hajj Account. The aim of this deposit is only to perform hajj. The intending pilgrim may choice different terms from 1 to 25 years as per his capacity and age.

Mudaraba Monthly Profit Deposit

For the benefit of the retired service holders and wage earners residing abroad who want to help their departments/ relatives by contributing a certain amount of money on monthly basis from the of their one time deposit, this bank has introduced this Mudaraba Monthly profit Deposit Scheme in accordance with the Mudaraba principles of Islamic Shari’ah. Any individual may open account under this scheme by depositing a minimum amount of taka 100000.00 and multiples thereof at a time for a specified term. Monthly provisional profit, is given to the account just after completion of thirty days from the date of opening of the account.

Mudaraba Probable Millionaire Scheme

It is a Mudarba term deposit account where the depositor deposits on a monthly basis and including profit they can get more or less 1000000.00(Ten Lac). The period for this account would be minimum three years and maximum six years. Here the rate of monthly deposit, provisional profit rate in the following-

Year	Monthly Deposit	Total Deposit	Income Tax	Receivable by the Depositor
3 4 5 6	23602.00 16766.00 12836.00 10138.00	1016711.00 1021748.00 1025586.00 1030084.00	16704.00 21698.00 25543.00 30315.00	1000007.00 1000050.00 1000044.00 1000070.00

Mudaraba Third-Terminal Profit Scheme

This is an attractive deposit scheme of Islamic banks. It is governed by Mudaraba principles also. The depositor can open this account by depositing minimum taka 25000.00 or any multiples of this amount. Generally the term is minimum three years and the depositor can get 70%investment opportunity against this account

4.4 Remittance and Clearing

4.4.1 Remittance Section

Remittance means transmission of money from one place to another. There are different modules of remittance. They are as follow:

• TT-Telegraphic Transfer
• DD-Demand Draft
• PO-Pay Order

TT-Telegraphic Transfer

TT is the quickest method of transferring funds from one place to another. The remitting branch sends a telegraphic/ telephonic/ Fax message to the branch at the other end, to pay a certain sum of money to a named payee.

DD-Demand Draft

It is an instrument containing an unconditional order of one bank office to pay certain amount of money to the named person or order the amount therein on demand. DD is very much popular instrument for remitting money from one corner to another.

Charges of DD & TT

Commission @10% but minimum taka 25.00

Postage Charge: taka 25 for DD

Mail/ Phone Charge: Taka 50.00for TT

PO-Pay Order

It is process of money transfer from payer to payee within a certain clearing area through banking channel. A person can purchase payment order in different models such as Pay Order by cash, Pay Order by cheque

Pay Order can be issued in favor of the payee with commissions paid. The Pay Order can be made either from the account of the issuer or by giving the account to the Bank if the issuer has no account with Bank. The rate of commission charged for Pay Order is as follows:

Amount	Commission	Vat
From TK 1.00 TK 1,000.00	TK. 25.00	TK. 4.00
From TK 1,000.00 to TK 1,00,000.00	TK. 50.00	TK. 8.00
From TK 100000.00 to TK 500000.00	TK. 75.00	TK. 11.00
Over 500000.00	TK 100.00	TK. 15.00

The pay order is presented to the bank either through clearance or for credit to the clients accounts. When payment, relative entry is given in the pay order register with the date of payment.

• In case of collecting DD, PO following things are to be carefully checked: –
• Instrument of ABBL, IBB.
• Crossing seal
• Clearing seal
• Branch name
• Amount same in the word and figure.
• Signature verification
• Avoid the stop order P.O, D.D
• Test key verification. Every T.T must have test key. D.D over tk.25000 must have test key.
• Maintenance of T.T / P.O /D.D issue and payable books.
• Balancing at the end of the month.

4.4.2 Clearing section

Clearing stand for mutual settlement of claims made in among member banks at an agreed time place in respect of instruments drawn of each other:

Clearing House is an arrangement under which member banks agree to meet, through their representatives, an appointed time and place to deliver instruments drawn on the other and in exchange to receive instruments drawn of them.

The nit amount payable or receivable as the case may be, is settled through an account kept with the controlling bank (Bangladesh Bank).

4.4.3 Types of clearing

1. Outward Clearing
2. Inward Clearing

Out ward Clearing

When a particular branch receives instruments drawn on other bank within the clearing zone and sends those instruments for collection through the clearing arrangement is considerate as Outward Clearing for that particular branch.

This branch knows as collecting branch.

Inward Clearing

Clearing returns (inward) consists of those instruments which were presented by us to other banks for payment but have been returned and unpaid by them due to specified reason through the clearing house.

4.4.4 Procedures of Outward clearing:

First: Collecting Branch

1. The instrument is deposited duly entered in the pay-in-slip or voucher.

2. The instrument is checked for any apparent discrepancy and is compared with the particular noted in the pay-in-slip.

3. In case an order instrument is being deposited in second payee’s account guarantee is obtain from the second payee and is attached to the pay-in-slip.

4. In case the payee’s name on the specially crossed instruments differs slightly that of the depositor, the instrument may be accepted but only from customers well know to the bank and after obtaining an indemnity which is attached to the pay-in-slip.

3. Stamping:

Special Crossing: On the instrument

Clearing Stamp: Both on instrument & pay-in-slip.

Endorsement: Back of the instrument.

4. Duly signed and return of counterfoil to the customer.
5. The particulars of the instrument and voucher are entered in the Outward Clearing Register/Computer.
6. Prepare voucher: Dr. ABBL General Account

Cr. Party Account

7. The Register is balanced; the vouchers are separated from the instruments.
8. Sorting of instruments bank-branch wise and accordingly prepares sub main schedules.
9. Prepare House page according to main schedules.
10. Tallied house page Outward Clearing Register.
11. The house page with instrument sent to Head Office
12. In the following working day prepared voucher is to be passed. If any return and unpaid instrument is received from principal branch, in addition to above voucher the following voucher will be