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

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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.

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



of Incorporation


of Business

February, 1982

meeting of the Board of Directors


of First Branch(Kawran Bazar)


in Dhaka Stock Exchange(DSE)


of Prospectus for IPO


for share status


of the AB International Finance Ltd Of Hong Kong


in Chittagong Stock Exchange(CSE)


Foreign Branch at Mumbai, India


of ATM


of Merchant Banking Wing(MBW)


of AB Bank Foundation


of Visa cards


of Islamic Banking Branch

May, 2007

Share Transaction in CDS

January, 2007

Custodial Services License

2007 (Completion)

Roll-out (1st Phase)

January, 2008

logo Launch




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


be the best performing bank in the country.

Vision :

be the trendsetter for innovative banking with excellence and perfection.

Goal of ABBL

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.

Keeping ahead of other competitors in
productivity &

ii) Short term goal:

To attain budgetary target fixed in each
area of business.

1.4 Hierarchy of ABBL


























1.5 Management of ABBL

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 –

online Banking system

Western Union money transfer


Pay order

Demand Deposit

Credit Card

Debit Card

Visa Card


Easy loan

Gold Grace

Islamic Banking

Foreign exchange

Remittance etc.

1.8 Network of Branches

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



% Change

Interest Income

Interest Income

Profit (PBP & T)

Operating Profit (PBT)

after Tax (PAT)


& Advances





Interest Income to Operating Income ( %)


Income Ratio


on Equity (%)


on Assets (%)

Deposit Ratio 








1.10 Performance Status of ABBL

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

Figure-Net Interest Income

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.

Per Share

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.

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

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

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

services are mainly of two type’s like-

  • Deposit services
  • Investment services

Deposit services

Deposit services the following services are being rendered:

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

Investment Services

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):

Ijara or Leasing:

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:


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


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

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

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

2.7 Foreign Trade

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

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.

Progress of Islami Banking Branch

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

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

2.10 Shari’ah Compliance

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

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 Profits


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

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.”

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.

Essential features of Islamic banking

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.

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:

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

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.

History and Growth of Islamic Banking

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.

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.

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.

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.

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.

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.

Islami Banking in 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.

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

January 1981, the president of peoples Republic of Bangladesh while addressing
the 3rd 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

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.

last the long drawn struggle to establish an Islamic bank in Bangladesh became
a reality and Islami Bank Bangladesh Limited (IBBL) was incorporated on
13th March, 1983 and commenced banking operations on and from 30th
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.

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

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

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.

Characteristics of Islamic Banking

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.

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.

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.

Objectives of Islamic Banking

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
  • 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

3.9 Financial Framework of Islamic

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

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.

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

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

¨ Cash section

¨ Financial Control Department

4.2 Account opening section

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.

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

consist of two forms-

Demand or Al-Wahdia current deposit.

Time or Mudaraba Savings deposit.

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

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

Deposit Scheme



F  Al-Wahdia Current Account

F  Mudaraba Savings Deposit

F  Mudaraba Short Notice Deposit

F  Mudaraba Term Deposit


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. 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

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 Savings account.

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

Ø  Provisional profit will be credited twice a year i/e.
on 30the june and 31st 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

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  Mudaraba Short Notice Deposit

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.

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:

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.


Rate of profit

to 3 month


To 6 month


to 12 month (year)


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:-

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.

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

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

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.

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.

4.3.2 Deposit Scheme

Mudaraba Pension Deposit Scheme

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.

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

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

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-





by the Depositor





















Mudaraba Third-Terminal Profit Scheme

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

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

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

TT-Telegraphic Transfer

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

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.

@10% but minimum taka 25.00

Charge: taka 25 for DD

Phone Charge: Taka 50.00for TT

PO-Pay Order

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

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:




TK 1.00 TK  1,000.00



TK 1,000.00 to TK  1,00,000.00



TK  100000.00 to TK 500000.00






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,
  • 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

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

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.

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. Out ward Clearing

    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.

    branch knows as collecting branch.

    Inward 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

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

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

    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.

    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.

    1. Stamping:

    Special Crossing: On the instrument

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

Cr. Party Account

  1. The Register is
    balanced; the vouchers are separated from the instruments.
  2. Sorting of instruments
    bank-branch wise and accordingly prepares sub main schedules.
  3. Prepare House page
    according to main schedules.
  4. Tallied house page
    Outward Clearing Register.
  5. The house page with
    instrument sent to Head Office
  6. 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 passed.

Dr. Party A/C

Cr. ABBL General Account.

Second: Principal Branch/Local Office/
Main Branch.

received by this office: Same as previous section (SL. 1 to 9).

by this branch:

Received house pages with instruments from the

Recorded the amount in a Register from house page.

The instruments with schedules are rearranged
bank-branched wise and prepare main schedules are for each bank.

Prepare house page.

The instruments with schedules, house page and the
house book are sent to the clearing house through bank representative.

Third: Clearing House (Bangladesh Bank)

instruments are delivered to the respective banks.

Proceeding of Inward Clearing

Clearing House (Bangladesh Bank / Sonali

  1. The instruments are
    drawn on our bank are received from other banks in the clearing house.
  2. The amount and number
    of instruments received are entered in the house book from the main
    schedule of respective banks.
  3. The amount of
    instruments delivered, received and the differences are written on a
    figure slip provided in the clearing house.

Head Office

  1. The instruments with
    schedules are arranged branch wise.
  2. The amount of each
    schedule received is entered in the house pages of the respective
  3. The respective house
    pages are totaled and check the amount with total amounts of instrument
    received from all banks.
  4. The instruments are
    sent to respective branches with the slip showing total amount and number
    of instruments.
  5. The instrument sent to
    the branches concerned for clearance and Advice are collected from them
    for honored cheque.

Paying Branch

Particulars of the instrument are compared with the

The instruments are sent to the respective departments
for honoring them.

For the total value of honored cheque pass following

Dr. Party A/C
(already debited by instruments)

General A/C

Dishonored cheques (if any) with reason memo and
Credit Advice are to
sent Head Office.

4.4.6 OBC (Outward bills for Collection)

is required when both the banks are not in the same clearing zone. Outward
Bills for collection (OBC) and Inward Bills for collection (IBC) is required
when both the bank (collection bank and paying bank) are not in the same
clearing zone. For example-when the cheque of Dinajpur Branch of Sonali Bank is
received and sends for collection by ABBL Islami Banking Branch then it is OBC.
On the other hand it is IBC for Sonali Bank Dinajpur Branch.

(Outward Bills for collection)


can be collection in the two ways—


Through Collecting Branch

Form the
Collection Ban king’s side (OBC):

Direct collection

and verify the cheque and deposit slip (customer’s portion and bank’s portion).

F  Special crossing is marked over the cheque.

F  Entry the details into OBC Register.

F  OBC seal is marked over the cheque and deposit slip,
mentioning the OBC number.

F  The endorsement is given on the back side of the
cheque, mentioning ‘Payees A/C will be credited after realization’.

F  Authorized Signature of a P.A holder must be taken
over the Deposit slip, OBC Register and forwarding letter.

F  Two copies of schedule are prepared. First copy is
sent to the drawee branch with forwarding letter and instrument. Second copy is
reserved as office copy.

F  Send to the respective branch.

F  Lodgment Voucher for the collecting Bank.

Collection of Bills

the IBCA from the drawee branch

the signature of the officer, executed over the IBCA.

the response the IBCA, the voucher will be as follow:

Debit- Party Account

Credit-Income Account, Commission

Credit-Income Account, Postage Charge

reverses the Lodgment Voucher. E.g.

Credit-Outward Bills Collection

the date of payment over the OBC Register. Received Seal is marked over the
Office copy of the Schedule and deposit slip.

the procedure is almost the same. In this case we get a draft from the drawee
branch and commission is charged twice. Firstly by the drawee branch and
secondly by the drawer branch. The drawee branch sends a draft and we collect
this through clearing house.


Outward Bills Lodged

Outward Bills for collection.

receiving the bills through draft, we have to send collection and after
collection the voucher will be as following:

voucher will be reversed for E.g.

Bills for collection

Bills Lodged

party voucher will be prepared accordingly.


4.4.7 IBC (Inward bills for Collection)

Procedure of payment of IBC

F  Receive the schedule with instrument.

F  Instrument is checked with apparent tenor and matched
with schedule.

F  Received the cheque and scrutinizing all the basic
part of the cheque.

F  The following SEAL is marked over the instrument.

F  Special crossing seal (If the instrument is not
collection) and IBC seal.

F  Entry into the Register with an IBC Number over
instrument and schedule

F  Signature of the drawer of the cheque is verified by
the authorized officer.

F  The cheque is posted on Computer.

F  If theme is sufficient balance of the account of the
account, the authorized officers cancel the cheque.

F  Issue IBCA favoring the collection branch.

F  In case of collection:

If the instrument is other branch of CBL, the voucher
is prepared as following page

Debit _

Credit – Sundry Deposit Account sundry Creditors (In
case of  


collection of the cheque issue an IBCA favoring the respective branch.

First copy of the IBCA
is sent to drawer branch

Second copy of IBCA is
sent to Central Account Division.

Third copy of IBCA is reserved as office copy

Debit – Party Account

Credit – DD issue Account

Debit – Party Account

Credit – Income Account on commission

Credit – Income Account on Postage Charge.

and send a DD to drawer branch.

Entry of collection
into the IBCA Register.

Received seal is
marked over the copy of schedule

Commission: 15%
but minimum of TK.25 and maximum of TK.1000.

Postage Charge:
at actual but minimum of TK.10.

minimum of K.40

Same –Day Clearing

Bangladesh Bank starts clearance of cheque amounting to TK.5000000 and above to
help the country’s business community speed up its activities. The system
allows bank clients to encash cheque and other instruments for TK.5 lac and
above within the day of submission. Presently, such withdrawal takes at least
two days, as it requires clearance from the central bank. Initiall.202 branches
of 50 nationalized, private and foreign banks in Dhaka, who are the members of
the BB clearing house, introduced the system.

Saturday through Wednesdays. The same-day clearing will start at 11 am and
close at 12 noon while return clearing will start 2.p.m. on Thursdays, it will
start at 10 .a.m. their respective branches situated within four km. of the
central bank head office for introducing same- day clearance.

4.5 Cash Department

Department is the most important part of General Banking. Cash department
should be placed in a branch from where manager can watch everything from his
table either clients or the vault. It is the most important department of the
bank since from desk cash department has direct interaction with customers.
Usually cash department receives and pays cash directly which work as a media
to communicate with the clients. In the Islami Banking Branch I have got
acquainted with cash receiving and cash payment procedures. Some register books
uses in the cash department are mentioned bellow:

Cashier’s Book

Payment Cashier’s

Cash Balance Book

Vault Register or
safe–in  and safe-out Register

Key Register


addition, I have also learnt the procedure of cash-in and cash-out from the
vault. I have also got acquainted with systematic procedure of cash receiving
through different vouchers as well as payment procedure by different cheque and

4.5.1 Cash Receive:

is the blood of a branch. It is the life of a bank. Cash may be received by-

Cash Receiving by
Pay Slip

Cash Receiving by
TT, DD, Pay-Order, MTDR.

Cash Receiving by Paying-Slip:

paying slip we receive cash of AWD or MSD account. When we receive cash by
paying slip, officers check the paying slip if there is any discrepancy, if
everything is found to be in order, then they make entry of the amount in the
scroll register and put receiving seal on paying slip.

Cash Receiving by TT, DD, Pay-Order,

first the form filled up by the party should be checked to verify whether is
any discrepancy, if everything is found to be in order, then officers make
entry of the amount in the scroll register and put receiving seal on the
respective form.

4.5.2 Cash payment

cash is paid against cheque, pay-slip, pay-order, DD and debit voucher. While
paying cash against any instrument, officers first verity whether there is any
material alteration on the instrument. He also check the instrument if it is in
holder in due course and holder in due time. Then he verifies the signature of
payee. If everything is in order, he pays the amount to the respective payee.

Position of the Cash Department

position of the cash department is very important. The cash department should
be at a safe place. If should be at the middle position of the branch. The cash
counter and vault should be a close to cash department. The cash position of
the Islamic Banking Branch AB Bank Limited is in the front side of the branch
and its safe and vault is at the back side of cash department.

4.5.3 Duties and Responsibilities of
Cash in Charge

F  Holds the key of cash safe.

F  Receive cash from other bank/Branch and acknowledge,
where necessary. Opens the cash safe before commencement of business along with
other personal holding the key.

F  Supervise receipt and payment of cash.

F  Supervise the carrying of the cash to the cash

F  Delivers cash to the paying cashier against receipt on
a memo.

F  Countersigns the credit vouchers if he is an attorney.

F  Arranges sending cash to other Branch.

F  Check the receiving cashier’s and paying cashier’s
receipt/payment sheet and collect cash from them.

F  Writes the cash balance book and cash position memo
and signs them

F  Maintains record of stamped forms.

F  Investigate and inform the manager about excess or
shortage of cash.

F  Gets books and cash checked by manager or authorized

F  Supervise the custody o f cash in the safe and books
in the strong room.

F  Checks the drawers of the cashiers before leaving the

4.6 Financial Control Department

This is the most confidential department of a bank.
Recording all kind of transaction of the branch, confirming their accuracy and
preparing statements are the main job of this dept. Now a day, under
computerized banking system, the jobs of account dept. become very easy. Now
the computer directly prepares the clean cash statement and the supplementary
statements on party ledger vouchers. The account also manually doses other works
as for extra security.

The function of the accounts dept. can be divided
into two parts:

A.   Daily Function,

B.   Periodical Function.

4.6.1 Daily Functions

Posting the a/c to a/c transfer transaction in transfer register,

Preparation of supplementary statement,

Computer posting of different transactions that occur in a day the
account officer examines whether cashbook has agreed or not.

4.6.2 Periodical Functions

The routine periodical tasks
performed by the Financial Control Department are as are given in the

The periodical function of this dept. is to prepare different types of
statement for its own branch, Head Office, Bangladesh Bank.

Prepare the
monthly salary statements for the employees

Publish the basic
data for the branch, which is sent to the Head Office to maintain Cash reserve

Prepare the
monthly position for the branch, which is sent to Head Office to maintain
liquidity requirement

Prepare the
weekly position for the branch comprising of the break of sector wise deposit,
credit etc.

4.7 Other Services Provided by General

Account Transfer

can transferred from one branch of a bank. This is applicable to all sorts of
account except MTDR. In transferring account, the following formalities are to
be maintained:

F  An application containing the following matters is to
be submitted:


Name of he branch where the account is to be

Date of Effect (from when account holder wants the
account to be effected)

Signature in the application should be same as that in
the SS Card.

F  Permission of the manager is needed.

F  The account holder has to surrender the Bank will give
the account statement before transferring it. Profit will also be applicable
here. This profit will be calculated, but is not written in the IBCA, it may be
mentioned separately as the interest amount.

some exception, it is almost same as the transferring of an account. The
exceptions are:

Here a commission
is charged. In case of MSD and AWD it is Tk. 100 and in case of three-stage
account it is Tk.200.

The account
holder has to pay an excise duty to the government regarding this purpose of
closing the account.

Profit is
directly to the account.

Stop Payment

payment is only done when party applies mentioning specific cause. For stop
payment the signature is verified with the SS card signature by the officer.
Then in the computer the stop payment is done and in the instruction the name
and the time date cheque (in case of specific Cheque) number is noticed.

Cheque-Book Issue

is a material to withdraw money from the bank. It is a very convenient way to
transact money from one place to another without any accident. If anyone opens
an account, s/he will apply for a cheque-book of requisition slip. After
verifying the signature of the account holder by the officer we shall issue the
cheque-book my maintaining the procedures. Then the cheque-book is delivered to
the party after taking the signature on the register book.

Duplicate cheque-Book

a party looses his/her cheque-book, then h/she is provided a duplicate
cheque-book. In this case, the party will apply to the manager for a duplicate
cheque-book. In this case the party will also give indemnity bondage referring
that s/he will be liable for any fraud-forgery by the lost cheque.

5.1 Comparisons between Conventional and
Islamic Banking

“Allah has permitted trade and forbidden
Sura-Al-baqarah- 275

which has been the basis of conventional banking is prohibited by Islam in
unqualified term. Reminding this thing in mind and to harmonize banking
practices with the requirements of Islamic ideals of social and economic life,
Islami banking has been emerged. Islami banks operate on Islamic principles of
profit and loss sharing and strictly avoiding interest which is the root of all
exploitation and responsible for large scale inflation and unemployment. So one
of the basic difference between Conventional/ Interest based banking and Shari’ah
based banking is:

former (Conventional Banking) provides the depositors with a return of a
predetermined rate known as interest rate on the amount deposit irrespective of
the utility of the concerned deposit/ fund. Thus conventional bank offers its
depositors a fixed return (rate/ percentage) of the deposit (say 10% on
deposit). Such a return is called Interest.

latter (Islamic Banking) provides the depositors with a share of income/
revenue the bank earns by deploying those funds. Islamic banking, among other
prohibitions, permits neither to pay nor to receive interest. It offers its
depositors an agreed share/ proportion of income it earns through investment of
their fund (say 40% of earned income unlike a conventional rate variable such
as 10% on deposit). In other words under Islamic Banking profit to depositors
is essentially a consequence of Return on Investment (ROI)/ Return on Asset
(ROA). In terms of cause and effect such profit is the effect. It is neither
the cause nor is it the independent. The share of (gross) income/ revenue
(fetched by the bank) thus paid to the depositors is called/ known as profit.

the Islami banking is completely separate and distinctive from conventional in
regard to its principles, objectives, goals, procedures and methodologies.  Though my internship was going on general
banking operation of Islami banking branch of AB Bank Ltd, I have also studied
including investment the other sides of banking for seeking the differences
between the Conventional and Islami banking. Because the difference is very
little in banking operation and deposit collection. Rather the differences are
mainly on the mechanism, principles, objectives, goals, procedures, investment,
return etc. I have also showed some graphical presentation of performance for
practicing Islamic banking in my branch over Conventional banking.  However the overall differences from
different perspective are shown by my best efforts-

5.2 Comparisons on the basis of

DEFINING A conventional Bank

  1. “A bank is dealer in
    debt – his own and of other people” – Crowther
  2. “ We can define a bank
    as an institution whose debts are widely accepted in settlement of other
    peoples’ debt to each other” – Sayers
  3. “A commercial bank is
    dealer in capital or more properly a dealer in money. He is intermediate
    party between the borrower and the lender. He borrows from one party and
    lends to another and the difference between the terms at which he borrows
    and those at which he lends form the source of his profit.” —-Prof. Gilbert

DEFINING an Islamic Bank

the April of 1978 this definition was approved in the conference of foreign
ministers of Muslim countries held at Dakar the capital of Senegal.

Islamic banking is essentially a
normative concept and could be defined as conduct of banking in consonance with
the ethics of the value system of Islam

5.3 Comparisons on the basis of


Conventional Banking

Islamic Banking

main objective of conventional banking is to help the maximization of profit
motive of the business, commerce and industry.

main objective of Islamic banking is to help in building development and
helping welfare of the human being by ending exploitation and Zulm from the
society through the directives of the Almighty Allah.

of profit

of an Interest-free financial system

medium of exchange

justice to both suppliers of fund (depositor) and user of fund (Investment

of industry and commerce

and patronizing entrepreneurship

of a healthy money market

poverty through Zakat and profit sharing micro-finance.


5.4 Comparisons on the basis of Features


Conventional Banking

Islamic Banking

conventional bank, the relation between customer and banker is nothing but
debtor and creditor. The bank does not have the responsibility of profit/loss
of the customer.

Islamic banking is not only banker but also a partner in business. It is a
participatory banking in capital and profit/ loss.

conventional banks give greater emphasis on credit-worthiness of the clients.

Islamic banks, on the other hand, give greater emphasis on the viability of
the projects.

often it results in the bank’s own interest becoming prominent. It makes no
effort to ensure growth with equity.

gives due importance to the public interest. Its ultimate aim is to ensure growth
with equity.

interest-based banks, borrowing from the money market is relatively easier.

the Islamic banks, it must be based on a Shari’ah approved underlying

5.5 Comparisons on the basis of


Conventional Banking

Islamic Banking

activities of conventional banking are done by the procedures and laws
evolved through human research, studies and innovation.

the activities of Islamic banking are done according to Islamic Laws
(Shari’ah ) i.e. as per guidelaine and directives of the Holy Qur’an and the

Conventional banking follows the man made practice
and rules.

banks are to follow Quran, Sunnah, Ijma and Kias i.e. Shari’ah, in all the
buswiness transactions including Accounting entires.

The basis of conventional banking is is interest and
as such its all activities are operated with interest.

Islamic banking interest (Riba) is strictly prohibited and consequently all
its activities are operated without involvement of interest.

It aims at maximizing profit without any restriction

also aims at maximizing profit but subject to Shari’ah restrictions



5.6 Comparisons on the basis of

Conventional Banking

Islamic Banking

in partnership business is the fundamental function of the Islamic banks.

of deposit on the basis of interest

of deposit on the basis of profit sharing

credit on the basis of interest.

following Buy mode/investment mode/ lease mode

medium of exchange and credit

against Creation of  medium of exchange
and credit

in shares and securities having coupon rate of interest

in shares and Mudarabah bond

of bill

discounting of bill

5.7 Comparisons on the basis of Social


Conventional Banking

Islamic Banking

banks do not think about as much economic and social responsibility as the
Islami banks do.

ensure equitable distribution of wealth and to establish socio-economic
justice is the main concern of Islamic Banking.

is no commitment and undertaking in conventional banking system to make
coordination with social development and economic development.

banks make coordination with social development and economic development. It
has clear social commitment.

do not consider social factors or aspects rather it gives more importance on
earning profit.

banks encourage investment in production of essential as well as in social
welfare sector.

is no justification or consideration whether the business id good or bad in
conventional banking system. Earning interest is the main motive of this

banks do not do the business on items harmful for societies though there are
possibilities to earn more there against.


5.8 Comparisons on the basis of Deposit


Mudaraba deposit accounts of Islamic
banks I different from the Savings Bank account of a conventional bank. Mudaraba is a form of business contract
where one party supplies money and the other manages the business by investing
labour, skill and time. The Financier is called Shahib-al-Maal and the person
who undertakes the venture is Mudarib.

principles implies that the bank receive deposits from the depositor with the
authority that the bank will have exclusive right to manage the fund and the
profit resulting from such deposit will be shared between the bank and the
depositor at a pre-agreed ratio and the loss, not the resulting from the
negligence of the bank or any of its representative, will be borne by the
depositors. Profit-loss sharing i.e. Mudaraba saving Account and various term
deposits of Islamic banks are conducted on this principle. Through this account
the depositors do not acquire any management (voting right) on the bank or on
the deposits

Conventional Banking

Islamic Banking

of deposit on the basis of interest

Collection of deposit on the basis
of profit&loss sharing

Islamic bank can
only guarantee deposits for deposit account, which is based on the principle
of al-wadiah, thus the depositors are guaranteed repayment of their
funds, however if the account is based on the mudarabah concept, client have
to share in a loss position.

depositors do not share any profit or bear any loss.

depositors are to share the loss if any, incurred out of investment made from
mudaraba Deposits.



Rate of Profit Distribution on Deposit

derived from the use of Mudaraba deposits i.e. any benefit outy of investment
activities of the bank using Mudaraba funds are shared by the bank and by the
all types of Mudaraba depositors as per agreed ratio. These activities of the
bank are done under the principles of Islamic shari’ah. The depositors are not
entitled to share any income of the bank derived from miscellaneous services
other investment. Also the depositors will not share any income derived from investing
bank’s equity and other cost-free income.

the Mudaraba Term Deposit Account Holders along with other Mudarabah depositors
shall get minimum 65% of the income derived from the deployment of Mudarabah
fund in the investment according to their proportion in

total investment during an accounting year applying the following weightage-

Mudaraba Term Deposit

Weightage Rate

months and above










of full weightage of yearly cumulation of profit shall become payable if
withdrawn on maturity.

in case of Conventional Banking the deposit rate is fixed even if the bank can
not employ the deposits of the depositors. It is not the matter of depositors’
headache whether the bank can make profit or not.

rates of different amount of fixed deposit for different time period are in the
following page-

Interest Rate of Fixed Deposit under
conventional Banking

Fixed Deposit (Time Deposits)

15 (fifteen) Days

& above


1 (one) Month

& above


3 (three) Months

to 10,00,000


& above


6 (six) Months

to 10,00,000


& above


1 (one) Year

to 10,00,000


& above


2 (two) Years


5.9 Comparisons on the basis of


Conventional Banking

Islamic Banking

mode of investment is basically lending.

basic mode is investment through Bai+lease+direct Investment

income from the advances is fixed, it gives little importance to developing
expertise in project appraisal and evaluations.

it shares profit and loss, the Islamic banks pay greater attention to
developing project appraisal and evaluations.

of the loan is considered with less importance.

is the most important to consider the purpose of the loan.

interest is the secondary consideration.

interest is the primary consideration.

of profit is the most important consideration 

is not a prime consideration.

and constant supervision and monitoring is must be a routine work

and constant supervision and monitoring is not a routine work

conventional Banking there is no practice of Musharaka, Mudaraba, Bai-Salam
modes of Investment and most of their income can be recognized on accrual

Musharaka, Mudaraba, Bai-Salam modes of Investment, income cannot be
accounted for on accrual basis.

bai-Muraba and bai-muazzal investment in conventional banks. They charge
interest/ penalty interest for delay in payment/ repayment.

delay of payment of investment by the clients, in case of Bai-Mudaraba and
Bai-Muazzal etc. investment further amount of profit cannot be charged

do not pay a certain amount to the depositor from their investment income,
rather pay fixed rate of interest irrespective of investment income.

Bank is to pay zakat 2.50% or 2.58% on its reserves.

5.10 Comparisons on the basis of

basic accounting Principle (Golden Rule) in determining Debit or Credit for
Accounting Entries is universally accepted. In banking transactions the Golden
Rule is also accepted. In Islamic Banking the Golden Rule is also accepted.

golden Rule is as under-

A decrease -Credit

decrease – Debit

decrease – Debit

decrease – Debit

A decrease -Credit

Islamic Banking accounting the main difference with conventional Banking is
that Islamic Banking can not deal with interest transaction and also cannot
deal with Haram business.

differences are shown in the following page-

Conventional Banking

Islamic Banking

only follow International Financial Reporting Standards (IFRS), Bangladesh
Bank guidelines, The rules of the Income tax, The rules of the companies Act,
The rules of the Sec.

Banks are to follow Accounting and Shari’ah standards developed by Accounting
and Auditing Organization for Islamic Financial Institution (AAOIFI) in
addition to International Financial Reporting Standards(IFRS) developed by
International Federation of Accountants, Bangladesh Bank guidelines, The
rules of Income Tax, The rules of Companies Act , The rules of the SEC. .

conduct their transactions on interest basis.

cannot engage in any interest transactions.

is their main income

any interest is included/ entered in the operation of the banks, that should
be excluded from the regular income of the Bank

do not follow the Shari’ah rules and regulations.

any income is earned violating Shari’ah Principles that cannot be included in
the distributable income of the bank.

5.11 Comparisons
on the basis of Performance

Differences on the basis of performance depend on
the various performance level of banking performance in the Islami Banking
Branch that varies from the performance level of AB bank Limited. For
conducting business in accordance with Islamic Shari’ah the differences on
performance level are significant.

I have tried to give a distinguished picture of the performance level of ABBL
from the perspective of practicing IslamicBanking and Conventional Banking-

differences are shown below-

5.11.1 Deposit

Deposit of ABBL

Deposit of IBB

Deposit % of IBB in ABBL Deposit (Year
2006& 2007)

can see from the above graphs that the Deposits are rising in a higher level in
the Islamic banking in compared to conventional banking of AB Bank Limited.
Also the deposit percentage of Islami Banking branch is higher than the other branches
of ABBL that practice conventional banking system.

5.11.2 Loans and Investment

Loans and advances of ABBL

Investment of IBB

Investment % of IBB in ABBL Loans and
Investment(Year 2006& 2007)

deposit the investment is also increasing in the Islami Banking as well as the
conventional banking in aAB Bank Limited. But the percentage of investment is not
as much higher as deposit in the Islami Banking of AB bank Limited.

5.11.3 Return on Asset (ROA)

on asset is one of the important indicators of measuring performance through
which we can understand the rate of net profit after tax returned to the
utilization of branch assets. As the branch does not separately give tax, I
assume and calculate 45% tax given by the branch itself for the sake of my
study. If we see the graphical presentation of return on Asset (ROA) of ABBL
IBB, we can understand that the ROA of Islami Banking branch of AB Bank Ltd is
increasing at about same rate with Overall performance of AB Bank Ltd after
meeting up its primary loss of initializing the system. After 2006 the ROA is
increasing here at a satisfactory rate in Islami banking branch for practicing
even Shari’ah-based banking.

6.1 Findings

the entry of Islamic Banking into the field of local financial market of
Bangladesh and international financial markets has been well received, it has
yet to cross many hurdles before it can claim to be an institution capable of
handling the needs of world financial markets. We have identified those
positive and negative findings during my study of differentiating Conventional
banking from Islamic Banking. However those findings are tried to depict below-

  • The Islamic Banks in
    Bangladesh have good prospects in our country. As the Islamic Banks meet
    both banking & ethical expectation, the people of the country have
    reposed a great deal of trust & confidence on them.

  • Islamic banks operate
    on Islamic principles of profit and loss sharing, strictly avoiding
    interest, which is the root of all exploitation and is responsible for
    large-scale inflation and unemployment.

  • 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 opportunity.

  • But like their
    counterparts around the world, the Islamic Banks in Bangladesh as well as
    in Islami Banking branch of ABBL are also facing some legal and practical

  • Absence of Islamic
    money market, shortage of skilled manpower, lack of regulatory supervisory
    framework & shortage of link institutions are some of example of
    constraints for practicing Islamic banking operation

  • Sometimes people
    become discouraged to deposit their money to the Shari’ah practiced bank
    as are to share the loss if any, incurred out of investment made from
    Mudaraba Deposits

  • The Islamic Banks need
    a distinct organization & management structure to suit their purposes,
    but the branch is established on traditional organization & management

  • The
    Islamic Banks (full fledged) and Islamic Banking Branches are facing
    serious problems of lack of manpower having proper Islamic Banking
    knowledge due to non existence of appropriate and institutional supply
    line of Islamic Bankers.

  • Sometimes some investment
    clients even being Muslims have no Shariah knowledge especially in respect
    of Riba, Permissible, and Prohibition etc. in financial transaction. It is
    a fact that without the basic knowledge of Shariah and adherence of the
    clients to the concepts of Halal and Haram Islamic Banking has become a
    difficult task.

  • Most of the Islamic
    Banks operate on Bai- Murabaha, Bai Muazzal, Bai- Salam, Istisna, Hire
    Purchase/ Leasing mode of Investment i.e. Islamic Banks prefer to run on
    markup/ guaranteed profit basis. For this reasons, some times, the
    conventional Economists and general people fail to understand the real
    difference between the Islamic Banking and conventional Banking.

  • Due to the application
    of limited modes of investments v.z. Bai-Murabaha  Bai-Muajjal ,clear distinction could not
    yet be made to the general people

7.1 Conclusion

concept of Islamic Banking is a very recent innovation to the Banking world. At
the beginning the world was not familiar with Islamic Banking. In the very
recent stage banking system was only understood a Capitalist system based on
interest. Islamic Banking system emerged with its unique feature of interest
free system. The focal point around which Islamic banking system revolved is
the straight departure from interest. Based on the Shari’ah law all dealing,
transaction, business approach, product feature, investment focus,
responsibility of Islamic Banking lead to the significant difference in many
part of the operations with as of the conventional. 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. Moreover
like their counterparts around the world, the Islamic Banks in Bangladesh as
well as in Islami Banking branch of ABBL are also facing some legal and
practical constraints. But  with only
minor changes in their practices, Islamic banking can get rid of all their
cumbersome, burdensome and sometimes doubtful forms of financing and offer a
clean and efficient interest-free banking. All the necessary ingredients are
already there. The modified system will make use of only two forms of financing
— loans with a service charge and Mudaraba participatory financing —
both of which are fully accepted by all the Muslims. Thus such a system will
offer an effective banking system where Islamic banking is obligatory and a
powerful alternative to conventional banking where both co-exist. Additionally,
such a system will have no problem in obtaining authorization to operate in
non-Muslim countries.

7.2 Recommendations

sustain and develop the Islamic banking system with its ethical and intrinsic
values system, Islamic banking practiced banks and branch of the country have
to strive to solve the problems mentioned in the findings, which stand in the
way of their growth and survival. However, the recommendations may be the

  • It requires complete
    examination on the Islamic Banks whether they are run by Shari’ah Council
    and competent professionals who are really practicing Muslims.

  • The initiative, drive,
    farsightedness and relentless efforts of the people who are associated with
    the Islamic banking system may give it a great boost & momentum.

  • The personnel should
    be equipped enough with proper Islamic Banking knowledge to meet the
    growing demands of Islamic Banking

  • All of the people
    working in Islamic Banks should be well conversant with Islamic Banking
    modes and its operations

  • The inspection and
    supervision of Bangladesh Bank and its massive training program on Islamic
    banking both at home and abroad should be equally familiar with different
    operational methodologies of the Islamic banking system.
  • People should be made
    convinced and understood about the justification of real meaning and
    practice of Islamic Banking. They should really understand the basic
    difference between Conventional and Islamic banking.
  • Lack of Regulatory and
    Supervisory Framework for Islamic Banking, Shortage of Supportive and Link
    Institutions are to be met up to meet the growing demand and sustain the
    growth of Islamic Banking.