This report, attempted to give on overview of Al-Arafah Islami Bank Limited in general Banking.
EXECUTIVE SUMMARY
Banks plays vital role in the economy of the country. Countries development greatly depends on the activities of the banks. Commercial banks take deposit & give away loans. This loan build on industrialization’s Commercial Bank helps in savings. Savings create investment. Investment contributes the GDP. Finally the commercial banks play on important role in import of country through opening of bank L/Cs. It helps to earn foreign currency by helping the exporters in export. This report is prepared on the basis of three months practical experience at Shahjalal Islami Bank Limited. The internship program helped to learn about the practical situation of a financial institution. This program helped to implement theoretical knowledge into practical & realistic work environment.
In the age of modern civilization bank is playing its spending role to keep to the economic development wheel moving. The co-operation of the bank is needed in every economic activity. Bank provides means & mechanisms of transferring command over resources from those who have an excess of income over expenditure to those who can make use of the same for adding to the volume of productive capital. There are a large number of small savers with small amount of savings who are generally reluctant to invest their surplus income because of their lack of adequate knowledge about complicated investment affairs. The bank provides them with the safety, liquidity and profitability by means of different savings media offering varying degrees of a mix of liquidity return and safety of savings. The saving banks use as their key of business. They invest the savings in higher degree of return and maximize their profit in business. Shahjalal Islami Bank Limited is a scheduled Islamic commercial bank registered by the Bangladesh Bank. Shahjalal Islami Bank follows the rules and regulations prescribed by the Bangladesh Bank for Scheduled commercial banks. The functions of the bank cover a wide range of banking and functional activities to individuals, firms, corporate bodies and other multinational agencies.
Chapter One
Introduction
1.1 Origin of Report:
This report is based on an internship program. Stamford University Bangladesh, arranges internship program in attachment with its students after the completion of theoretical courses (i.e., after final semester) of program of Bachelor of Business Administration (BBA). Each intern must carry out a specific project, which is assigned by the concerned organization and approved by the Internship and placement authority of Stamford University Bangladesh. Consequently a report based on the project is to be submitted to the respective authority.
In this particular report, the author is an intern of the previously mentioned program and the concerned organization is AIBL, which is a prominent private and the Bank of Bangladesh that based on Islamic law.
Hence was placed in the Mouchak Branch of Al-Arafah Islami Bank Ltd. From 1st July , 2009 to 30th September 2009.
In way of delegation, responsibility of carrying out the study has conferred upon the concerned intern.
1.2 Background:
Bank and financial institution play an important role in financial inter mediation and thereby contribute to the overall growth in the economy. At present the financial system in Bangladesh consists of the central bank, nationalized commercial/specialized banks, private banks, foreign banks and other non-bank financial institution. This report is based on one commercial Bank that is the Al-Arafah Islami Bank Ltd.
1.3 Scope of the report
The scope of the organizational part covers the organizational structure, background, and objectives, functional, departmental and Business performance of AIBL as a whole and the main part covers foreign exchange department of AIBL.
1.4 Importance of the study
Þ To identify the problem of AIBL.
Þ To achieve practical knowledge of banking side of AIBL.
Þ To observe interrelated activities of general banking of AIBL.
Þ To gain practical knowledge about over all banking system & especially general banking and foreign exchange sector.
1.5 Objective of the Report:
The first objective of writing the report is fulfilling the partial requirements of the BBA program. In this report, attempted to give on overview of Al-Arafah Islami Bank Limited in general. Also in the major part, have shown the practical approach of Foreign Exchange. Some following objectives of the report are as shown.
Þ To gain or achieve the practical Idea of banking System of AIBL.
Þ To observe the economic condition of AIBL
Þ To explain the general banking activities of AIBL.
Þ To explain the activities of foreign exchange of AIBL
Þ To identify the problems of AIBL prevailing in its banking system
Þ To suggest some possible recommendations to overcome the problems.
1.6 Methodology of the study:
In order to make the report more meaningful and presentable two sources of data and information have been used widely.
‘’The primary sources’’ which are as follows Face-to-face conversation with the Executives and officers of Bank.
- Informal conversation with the client.
- Practical work exposures from the different desks of the various departments of the Branch covered.
- Relevant file study as provided by the officer’s concerned.
‘’The Secondary Sources’’ of data and information are:
- Annual Report of Al-Arafah Islami Bank Ltd.
- Periodicals published by Bangladesh Bank.
- Various books, articles, compilations etc. Regarding general banking functions.
Data Collection Method:
Secondary:
For the organization, part information has been collected through different published articles, journal.
Primary:
Formal questionnaire for data collection is not used. Information is collected through informal discussions with Relationship managers & respective Unit heads.
Ratio analysis tools: Using tools of ratio analysis are given bellow:
Tools used for analysis:
Bank profitability ratios
1. ROA=return on assets=NI /ATA=net income/ average total assets
2. ROE=return on equity=NI /SE=net income/ average stockholders’ equity
3. PM=profit margin=NI /OI=net income/ operating income
4. ROD=return on deposits=NI /ATD=net income/ average total customer deposits
5. ROSC=return on shareholder capital=NI /SC=net income/ shareholder contributed capital
6. NOM=net operating margin=OI /IN=operating profit or income/ interest income
Bank efficiency ratios
7. IEE=interest income to expenses=(IN?IE) /ATLA=(interest income?interest expenses) / average total
loans and advances
8. OEA=operating expense to assets=OE/ATA=operating expenses/ average total assets
9. OIA=operating income to assets=OI /ATA=operating income/ average total assets
10. OER=operating expenses to revenue=OE/OI=operating expenses/ operating income (revenue)
11. ATO=asset turnover=IN/ATA=interest income/ average total assets
12. NIM=net interest margin=(IN?IE) /ATA=(net interest income?net interest expenses) / average total assets
13. NNIM=net non-interest margin=(NIN?NIE)/ATA=(net non-interest income?net non-interest expenses) /average total assets
Asset-quality indicators
14. PEA=provision to earning assets=PLL/ATLA=provision for loan losses / average total loans and advances
15. APL=adequacy of provision for loans=ALL/ATLA=allowance for loan losses at the end of the year / average total loans and advances
16. WRL=write-off ratio=WR/ATLA=write-off of loans during the year / average total loans and advances
17. LR=loan ratio=ATLA/ATA=average total loans and advances / average total assets
18. LTD=loans to deposits=ATLA/ATD=average total loans and advances / average total customer deposits
Liquidity ratios
19. CTA=cash to assets=C/ATA=cash / average total assets
20. CTD=cash to deposits=C/ATD=cash / average total customer deposits
Risk ratios
21. DTA=deposits to assets=ATD/ATA=average total customer deposits / average total assets
22. EM=equity multiplier=ATA/SE=average total assets / average stockholders’ equity
23. ETD=equity to deposits=SE/ATD=average shareholders’ equity / average customer total deposits
24. TLE=total liabilities to equity=TL/SE=average total liabilities / average stockholders’ equity
25. TLSC=total liabilities to shareholder capital=TL/SC=average total liabilities / shareholder contributed capital
26. RETA=retained earnings to total assets=RE/ATA=retained earnings / average total assets
Population: All the branches of Al-Arafah Islami Bank Ltd. exist in Bangladesh.
Sample: Mouchak Branch of Al-Arafah Islami Bank Ltd. Observation period three months.
1.7 Limitation
Objective of the practical orientation program is to have practical exposure for the students. My tenure was for twelve weeks only, which was somehow not sufficient. After working whole day in the office it way very much difficult, it not impossible to study again the theoretical aspects of banking. On the other hand to prepare my internship report I have faced some limitations as follows.
Þ To collect data and information, it is a common tendency of any departments to keep back their departmental data and information.
Þ Unavailability to required published documents.
Þ Lack of my experience and efficiency to prepare the standard report.
Þ observed that unskilled persons are available in AIBL; they are not able to teach us various aspects.
Chapter Two
2.1 Shahjalal Islami Bank Limited (SJIBL):
The “Shahjalal Islami Bank Limited” a Shariah Based Commercial Bank in Bangladesd was incorporated as a public limited company as on 1st day of April 2001 under the Companies Act. 1994. The Bank started its commercial operation on May 10, 2001. The Bank has made a significant progress within a very short period of its existence and occupied an enviable position among its competitors after achieving remarkable success in all areas of business operation. The authorized capital of the Bank is Tk. 2,000 million and Paid up capital of the Bank stood at Tk. 1,872 million as on 31 December 2007. The total equity (capital and reserves) of the Bank as on December 31, 2007 stood at Tk. 3,040 million.
Managing Director:
Muhammed Ali
Phone: +880 2 9570807, Mobile: 880 187031674
Contact Person:
Md. Jillur Rahman, Deputy Managing Director
Phone: +880 2 9568800
Contact Address:
Shahjalal Islami Bank Limited
Jiban Bima Bhaban Front Block (4th floor)
10, Dilkusha Commercial Area
Dhaka-1000, Bangladesh
Phone: +880 2 9570812, 7160591, 9561473
Fax: +880 2 9570809, 9553562
E-mail: sblho@shahjalalbank.com.bd, shahjalajislamibank@gmail.com,
sblho@aitlbd.net.
2.2 Shahjalal Islami Bank Limited at a glance
With a view to materialize the dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam, a group of highly successful entrepreneurs conceived an idea of floating a commercial bank styled as “Shahjalal Islami Bank Limited” which is named after the name of the renowned saint Hajrat Shahjalal (R) who dedicated his life for the cause of peace in this world and hereafter and for the service of humanity. The sponsors are reputed personalities in the field of trade & commerce, industry and finance.
“Shahjalal Islami Bank Limited” offers the full range of banking services for personal and corporate customers, covering all segments of society within the framework of Banking Company Act and rules and regulations laid down by our central bank. Diversification of products and services include Corporate Banking, Retail Banking and Consumer Banking right from industry to agriculture, real estate to software and is backed by the latest technology.
The Bank is being managed by a group of highly experienced professionals with diversified experience in finance and banking. The Management of the bank constantly looks after customers’ satisfaction and believes that a satisfied customer is a great Ambassador. The Bank has already achieved tremendous progress within only eight years. The bank has already ranked as one of the quality service providers & is known for its reputation. Offers the full range of banking services for personal and corporate customers, covering all segments of society within the framework of Banking Company Act and rules and regulations laid down by our central bank.
By now, the Bank established correspondent Banking relationship with 18 Banks covering their global network of 385 branches/units of International repute at different important locations. It also established accounting relationship with 10 Banks and maintaining 22 NOSTRO Accounts in 8 (eight) major Currencies at different convenient locations.
The Board of Directors of our Bank consists of reputed Industrialists and Businessmen who are successful in their respective fields headed by Mr. Sajjatuz Jumma, the Chairman of the Board who is an eminent Industrialist & reputed businessman in Bangladesh and current Chairman of Islamic Banks Consultative Forum (IBCF). The Board generally deals with policy matters relating to management of Business and sets goal for the growth & development of the Bank as a whole, review of the same from time to time and gives necessary guidance to the management.
The Bank is managed by a Team of professional Executives and Officials having profound banking knowledge & expertise in different areas of management and operation of Banks. The Team is headed by the immediate past Executive President and CEO of Islami Bank Bangladesh Ltd. (IBBL) for about 7 years. During his Incumbency, IBBL attained a remarkable growth & development. Above all, he had the opportunity to hold the position of Chairman of the Board of Directors of Islami General Insurance Company & then he Joined Shahjalal Islami Bank Ltd on February 25, 2004 as the Managing Director and Chief Executive Officer (CEO) to enrich Islamic Banking methodology in the Country.
During the short span of time, Shahjalal Islami Bank so far introduced a good number of attractive deposit products to broaden the resource base and also Investment products to deploy the deposit resources so mobilized. Some more schemes covering the deposits, Investments & Services will be introduced gradually in near future suiting to the taste and requirement of the clients. The Bank has a strong Shariah Council consisting of prominent Ulama, Fuquah & Economists who meet periodically to confer decisions on different Shariah issues relating to Banking Operation & to address them and to give necessary guidance to the management on Shariah Principle. Since inception, Bank has been performing in all the sectors i.e. general Banking, Remittance, Import, Export and Investment. All our branches are fully computerized having on line Banking facility for the clients.
All activities of the Bank including its products and services are mainly for different economic groups of Bangladesh at home & abroad. Bangladeshi expatriates living abroad in different countries form a strong economic group who contribute greatly towards the economic development of the country.
2.3 Vision of SJIBL
To be the unique modern Islami Bank in Bangladesh and to make significant contribution to the national economy and enhance customer’s trust and wealth, quality investment, employee’s value and rapid growth in shareholders equity.
2.4 Mission of SJIBL
- To provide quality services to customers
- To set high standards of integrity
- To make quality investment
- To ensure sustainable growth in business
- To ensure maximization of shareholders wealth
- To expand the customer’s innovative service acquiring state-of the-art technology blended with Islamic principles.
- To ensure human resource development to meet the challenges of the time.
2.5 Objectives of SJBL
From time immemorial Banks principally did the functions of moneylenders or “Mohajans” but the functions and scope of modern banking are now a days, very wide and different. They accept deposits and lend money like their ancestors, nevertheless, their role as catalytic agent of economic development encompassing wide range of services is very important. Business commerce and industries in modern times cannot go without banks. There are people interested to abide by the injunctions of religions in all sphere of life including economic activities. Human being is value oriented and social science is not value-neutral.
Shahjalal Islami Bank believes in moral and material development simultaneously.
“Interest” or “Usury” has not been appreciated and accepted by “the Tawrat” of prophet Moses, “the Bible” of prophet Jesus and “the Quran” of Hazrat Muhammad (sm). Efforts are there to do banking without interest Shahjalal Islami Bank Limited avoids “interest” in all its transactions and provides all available modern banking services to its clients and wants to contribute in both moral and material development of human being. No sustainable material well-being is possible without spiritual development of mankind. Only material well-being should not be the objective of development. Socio-economic justice and brotherhood can be implemented well in a God-fearing society.
The other objectives of Shahjalal Islami Bank include:
- To conduct interest-free and welfare oriented banking business based on Islamic Shariah.
- To implement and materialize the economic and financial principles of Islam in the banking arena.
- To contribute in sustainable economic growth.
- To help in poverty alleviation and employment generations.
- To remain one of the best banks in Bangladesh in terms of profitability and assets quality.
- To earn and maintain a ‘Strong’ CAMEL Rating.
- To introduce fully automated systems through integration of information technology.
- To ensure an adequate rate of return on investment.
- To maintain adequate liquidity to meet maturing obligations and commitments.
- To play a vital role in human development and employment generation.
- To develop and retain a quality work force through an effective Human Resources Management System.
- To ensure optimum utilization of all available resources.
- To pursue an effective system of management by ensuring compliance to ethical norms, transparency and accountability at all levels.
2.6 Strategies of SJIBL:
The strategies of Shahjalal Islami Bank include:
- To raise capital.
- To strive for customers’ best satisfaction and earn their confidence.
- To manage and operate the Bank in the most effective manner.
- To identify customers’ needs and monitor their perception towards meeting those requirements.
- To review and update policies, procedures and practices to enhance the ability to extend better service to customers.
- To train and develop all employees and provide them adequate resources so that customers’ needs are reasonably addressed.
- To promote organizational effectiveness by openly communicating company plans, policies, practices and procedures to employees in a timely fashion.
- To cultivate a congenial working environment.
- To diversify portfolio both in the retail and wholesale markets.
- To increase direct contact with customers in order to cultivate a closer relationship between the bank and its customers.
2.7 Equity of the Bank:
Total equity of the Bank as on 31th December 2006 was Tk. 1,362 million and the total equity stood at Tk. 3,040 million on 31th December 2007.
| (Figure in milloin) | ||
| Particulars | 2006 | 2007 |
| Equity Fund (Capital & Reserve) | 3,040 | 1,362 |
|
|
||||
|
||||
The Bank mobilized a total deposit of Tk. 22,618 million as on December 31, 2007 as against Tk. 18,090 million as on December 31, 2006 showing an increase of 25%. The combination of competitive interest rates that offered sustained deposit raising efforts of the Bank and confidence reposed by customers in the Bank resulted in this growth of deposits. Steps are being taken to further increase the deposit base continuously at a reduced average cost of funds.
| (Figure in million) | ||
| 2006 | 2007 | |
| Deposit | 18,090 | 22,618 |
|
|
2.9 PERFORMANCE OF SHAHJALAL ISLAMI BANK LIMITED AT A GLANCE:
Balance Sheet
As At 31 December’2007 (with compare 2006)
| PROPERTY AND ASSETS | 2007 | 2006 |
| Taka | Taka | |
| Cash
Cash In Hand (Including Foreign Currencies) Balance with Bangladesh Bank & Sonali Bank(Including Foreign Currencies) Balance with other Bank and Financial Institutions Inside Bangladesh Outside Bangladesh Investments in securities Government Investments Murabaha, Bai-Muajjal etc. Bills Purchased & Discounted Fixed Assets Including Premises Furniture and Fixtures etc. Other Assets Non Banking Assets Total Assets |
261,429,435
1,641,085,037 |
142,281739
1,026,778,924 |
| 1,902,514,472 | 1,169,060,663 | |
| 3,978,605,071
149,449,849 |
3,621,506,648
168,428,566 |
|
| 4,128,054,920 | 3,789,935,214 | |
| 858,994,699 | 500,000,000 | |
| 858,994,699 | 500,000,000 | |
| 19,028,608,508
1,587,996,827 |
14,207,244,676
1,308,545,007 |
|
| 20,616,605,335 | 15,515,789,683 | |
| 127,055,567
713,771,402 – |
92,728,456
275,030,922 – |
|
| 28,346,996,395 | 21,342,554,938 | |
| LIABILITIES AND CAPITAL | 2007 | 2006 |
| Taka | Taka | |
| Liabilities
Financial (Borrowings) from other Banks, Financial Institutions and Agents Deposits and other Accounts: Al-Wadiah Current Deposit & Other Accounts Bills Payable Mudaraba Saving Deposits Mudaraba Term Deposits Other Mudaraba Deposits |
1,545,000,000
1,684,623,059 281,432,964 1,832,746,451 11,341,507,251 7,477,877,578 |
1,360,000,000
1,237,913,399 188,852,087 913,162,681 10,252,660,459 5,498,058,752 |
| 22,618,187,303 | 18,090,647,378 | |
| Other Liabilities
Total Liabilities Capital/Shareholders’ Equity |
1,396,077,951
25,559,265,254 |
686,994,110
20,137,641,488 |
| Paid-up Capital
Statutory Reverse Retained Earnings |
1,871,650,000
510,392,155 405,688,986 |
935,825,000
267,130,476 1,957,974 |
| Total Shareholders’ Equity
Total Liabilities & Shareholders’ Equity |
2,787,731,141 | 1,204,913,450 |
| 28,346,996,395 | 21,342,554,938 | |
2.10 Departments of SJIBL
All branches of Shahjalal Islami Bank Limited are divided into three departments:
· General Banking Department.
· Foreign Exchange Department.
· Investment Department.
2.10.1 General Banking Department:
General banking department is one of the most important departments of Shahjalal Islami Bank Limited. Basically bank provides the main services to the customer through this department. In general this section of the Shahjalal Islami Bank Limited is divided into five sections.
· Accounts opening section
· Cash section
· Remittance section
· Bills and clearing section
· Accounts section
2.10.2 Foreign Exchange Department:
Banks play a very important role in effecting foreign exchange transaction of a country. Mainly transactions with overseas countries are in respect of imports; exports and foreign remittance come under the purview of foreign exchange department. Banks are the vital sectors by which such transactions are effected/settled. Central Bank records all sorts of foreign exchange transactions. The other banks dealing with foreign exchange are to report to Bangladesh Bank regularly (viz. daily, monthly, quarterly, yearly etc.). The foreign exchange department consists of three sections. They are:
· Import section
· Export section
· Foreign remittance section
2.10.3 Investment Department:
Banking business consists of borrowing and lending, Bank act as an intermediary between surplus and deficit economic units. Thus a banker is a dealer in money and credit. Banks accept deposit from large number of customers and then lend a major portion of the accumulated money to those who wish to borrow. In this process banks secure reasonable return to the savers, make funds available to the borrowers at a cost and earn a profit after covering the cost of funds. Banks, besides their role of intermediation between savers and borrowers and providing an effective payment mechanism, have been allowed to diversify into many new areas of better paying business activities.
2.11 Credit Rating Report:
| Long Term | Short Term | |
| Entity Rating | A+ | ST- 2 |
| Date of Rating | April 03, 2008 | |
Credit Rating Information and Services Limited (CRISL) upgrades the rating of Shahjalal Islami Bank Limited(SJIBL) to A+ (pronounced as single A plus) from A (pronounced as single A) in the Long Term and reaffirms short term rating to ST-2.
2.12 Branches of SJIBL:
The Bank has 33 branches all over the country with a worldwide network of correspondents. The Bank is going to open more branches in the current fiscal year to expand the network.
2.13 Hierarchy of SJIBL
2.14 Social Welfare Activities:
With a view to providing financial assistance to the poor and needy people of the society and also for the welfare of the community, to this perspective, bank has established “Shahjalal Islami bank Foundation” with the objective to provide health care, relief and rehabilitation, education, humanitarian of winter clothes during the winter etc.
Shahjalal Islami Bank Foundation has a planning to establish the following projects and programs:
- Shahjalal Islami Bank International School and College
- Shahjalal Islami Bank Hospital
The foundation have also drawn up programs to look after the education, health and medical requirements of all the people of rural areas where the bank has launched Rural Investment Programs with vision 2020.
The foundation already introduced a program to reward poor student who passes SSC and HSC exam. Students who are not financially sound, the foundation gives financial assistance to them. The bank has started it from 2006 under these project 111 poor and meritorious students awarded by monthly scholarship and lump sum money at yearly basis. This will motivate students to do better in future. The bank appreciates the good things in the society.
Chapter Three
Conceptual Framework
3.1 Islamic Banking Concepts:
Islami Bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operation. For millions of Muslims, banks were institution to be avoided. Islam is a religion, which keeps Believers from the tellers’ window. Their Islamic beliefs prevent them from dealings that involve usury or interest (Riba). Yet Muslim needs banking services as much as anyone and for many purposes: to finance new business ventures, to buy a house, to facilitate capital Investment to undertake trading activities and to offer safe place for saving. Muslims are not averse to legitimate profit as Islam encourages people to use money in Islamic ally legitimate ventures not just to keep their funds idle.
However in this fast moving world more than 1400 years after the Prophet (S.A.W) can Muslims find room for the principles of their religion? The answer comes with the fact that a global network of Islamic banks investment house and other financial institution have started to take shape based on the principals of Islamic finance laid down in the Quran and the Prophet’s traditions some 14 centuries ago. Islamic banking based on the Quranic prohibition of changing interest has moved from a theoretical concept to embrace more than 100 banks operating in 40 countries with multibillion-dollar deposits worldwide. Islamic banking is widely regarded as the fastest growing sector in the Middle Eastern financial services market. Exploding onto the financial scene barely thirty years ago an estimated $US100 billion worth of funds are now managed according to Shariah.
The best-known feature of Islamic Banking is the prohibition on interest. The Holy Quran forbids the charging of ‘Riba’ on money lent. It is important to understand certain principles of Islam that underpin Islamic finance. Muslim scholars accepted the word ‘Riba’ to mean any fixed or guaranteed interest payment on cash advances or on deposits.
The rules regarding Islamic finance are quite simple and can be summed up as follows:
a) The predetermined payment over and above the actual amount of principal is prohibited.
b) The lender must share in the profits or losses arising out of the enterprise for which the money was lent.
c) Making money from is not Islamically acceptable
d) Ggharar (Uncertainty, Risk or Speculation) is also prohibited.
e) Investment should only support practices or products that are not forbidden.
3.2 Objectives of Islamic Banking
The objective of Islamic Banking is not only to earn profit but also to do good and welfare to the people. Islam upholds the concept that money, income and property belong to ALLAH and this wealth is to be used for the good of the society. The main objectives of Islamic Banking are as follows:
- To conduct interest free banking.
- To establish participatory Banking instead of Banking on debtor-creditor relationship.
- To invest through different modes permitted under Islamic Shariah.
- To accept deposits on profit-loss sharing basis.
- To establish welfare oriented Banking System.
- To extend operation to the poor, helpless and low income group for their economic enlistment.
- To contribute in achieving the ultimate goal of Islamic economic system.
- To facilitate the Islamic banking system in the country.
- To create new entrepreneurs and to arrange required finance them.
3.3 Evolution of Islamic Banking
Islamic Banking comes into reality through a long theoretical exercise of several renowned Islamic scholars and economists. The first attempt to establish an Islamic financial institution took place in Pakistan in 1950. In the modern world, the pioneering role in establishing the first Islamic Bank in 1963 named ‘Mit- Ghamar’ Saving Bank in Egypt at rural area of Nile Delta. As on today, there are many Islamic financial institutions operating through out the world covering both Muslim and non-Muslim countries of various socio-economic environment.
The first Islamic bank in Malaysia was established in 1983. In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS). These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds.
In Malaysia, the National Syariah Advisory Council additionally set up at Bank Negara Malaysia (BNM) advises BNM on the Shariah aspects of the operations of these institutions, as well as on their products and services.
3.4 Legitimate Business Contracts for Islamic Banks
The modes of mobilization in Islamic banks have derived from the overall permissible contracts in Islam. In what follows we fast describe the concept of Aqd or contract form business perspective and then discuss the legitimate forms contracts that can be used in Islamic banks for both deposit collection and their profitable employment.
A business contract can be defined as the exchange of a thing of value by another thing of value with mutual consent. There are four element of an Aqd or contract:
- Contrat(Aqd).
- Subject Matter (Mabe’e).
- Price (Thaman).
- Prossession of delivery (Qabdh).
3.5Common practices of Islamic banks in mobilization of funds
The common practices of Islamic banks in the sources of funds may be described as follows:
3.5.1Current Accounts
All Islamic banks operate current account on behalf of their client individuals and business firms. These accounts are operated for the safe custody of deposits and for the convenience of customers. There is little different between conventional banks as far the operation of current accounts is concerned. There are two dominant views about current account. One is to treat demand deposit as amnah (trust). A trust deposit is defined by the Jordan Islamic Banks as “cash deposits received by the bank where the bank is authorized to use the deposits at its own risk and responsibility in respect to profit or loss and which are not subject to any conditions for withdrawals or depositing”.
3.5.2 Saving Account
All Islamic banks operate saving accounts. It must be pointed out that any return on capital is Islamically justified only if the capital is employed in such a way that it is expected to a business risk. Savings accounts at Islamic Banks Generally operate as follows:
- Savings accounts are opened with the condition that deposits provide the bank with an authorization to invest.
- Depositors have the right to deposit and withdraw funds.
- The profits in savings accounts are calculated on the minimum balance maintained during the month. Depositors participate in the profits of savings accounts with effect from the beginning of the month following the month in which the deposits are made. Profits are not calculated with effect from the beginning of the month in which a withdrawal is made from the account.
- A minimum balance has to be maintained in order to qualify for a share in profit.
3.5.3 Investment Deposit
Investment deposits are Islamic banks counterparts of term deposits or time deposits in the conventional system. They are also called profit and Loss-Sharing (PLS) Accounts or Participatory Account. However they can be distinguished from traditional fixed term deposits in the following manner:
- Fixed term deposits in the conventional system operate on the basis of interest while investment accounts in Islamic banks operate on the basis of profit sharing Instead of promising depositors a predetermined fixed rate of return on their investment the bank tells them only the ratio in which it will share the profits with them.
- While fixed term deposit are usually distinguished from each other on the basis of their maturities investment deposits can be distinguished on the basis of maturity as well as on the basis of purposes as it is possible to give special instructions to the bank to invest a particular deposit in a specified project or trade.
The main distinguishing characteristics of investment deposits can be described as follows:
- Deposit holders do not receive any interest. Instead they participate in the share of the profits or losses.
- Usually these accounts are opened for a specific period e.g. three months, six month, one year or more.
- The return on investment is determined according to actual profit s from investment operations of the bank and shared in an agreed proportion by depositors according to the amount of their deposits and the period for which the bank holds them.
- Generally speaking depositors do not have the right to withdraw from these accounts as is customary in time deposits in conventional banks.
3.6 Islamic Financial Vehicles
Islamic banks around the world have devised many creative financial products based on the risk sharing and profit sharing principles of Islamic banking. For day to day banking activities a number of financial instruments have been developed that satisfy the Islamic doctrine and provide acceptable financial returns for investors.
3.6.1 Al-Mudaraba (Profit sharing)
This implies a contract between two parties whereby one party the rabb al mal (beneficiary; owner or the sleeping partner), entrusts money to the other party called the mudarib (managing trustee or the labor partner). Important features of Mudaraba are as follows:
1. The division of profits between the two parties must necessarily be on a proportional basis and cannot be a lump sum or guaranteed return.
2. The investor is not liable for losses beyond the capital he has contributed.
3. The mudarib does not share in the losses except for the loss of his time and efforts.
3.6.2 Murabaha
This is the sale of a commodity at a price, which includes a stated profit, which includes a stated profit known to both the vendor and the purchaser. This can be called a cost plus profit contract. The buyer in deferred payments usually pays the price back. Under Murabaha the Islamic bank purchases in its own name, goods that an importer or a buyer wants and then sells them to him at an agreed mark-up. This technique is usually used for financing trade, but because the bank takes title to the goods, and is therefore engaged in buying and selling its profit derives from a real service that entails a certain risk and is thus seen as legitimate.
3.6.3 Musharaka (Profit and loss sharing)
This is a partnership normally of limited duration formed to carry out a specific project. It is therefore similar to a western- style joint venture, and is regarded by some as the purest from of Islamic financial instrument, since it conforms to the underlying partnership principles of sharing in and benefiting from risk. In this case the bank enters into a partnership with a client in whom both share the equity capital and perhaps even the management of a project or deal and both share in the profits or losses according to their equity shareholding.
3.6.4 Ijarah (Lease financing)
Another popular instrument is leasing which is designed for financing an asset or equipment. It is a manfaah (benefit) or the right to use the asset or equipment. The lessor leases out an asset or equipment to the client at an agreed rental fee for a pre-determined period pursuant to the contract.
3.6.5 Ijara Wa Iktina (Hire Purchase)
Equivalent to the leasing and installment loan, hire- purchase, practices that put millions of drivers on the road each year. These techniques as applied by Islamic banks include the requirement that the leased items be used productively and permitted by Islamic law.
3.6.6 Muqarada
This technique allows a bank to flat what are effectively Islamic bonds to finance a specific project. Investors who buy muqaradah bonds take a share of the profits of the project being financed, but also share the risk of unexpectedly low profits or even losses.
3.6.7 Bai-Salam
A buyer pays in advance for a specified quality of a commodity, deliverable on a specific date at an agreed price. This financing technique, similar to a futures or forward- purchase contract is particularly applicable to seasonal purchase but it can also be used to buy other goods in cases where the seller needs working capital before he can deliver.
3.6.8 Istisna (Purchase order)
This is a sale and purchase agreement whereby the seller undertakes to manufacture or construct according to the specification given in the agreement. It is similar to bai salam the main distinction being the nature of the asset and method of payment. Istisna generally covers those things which are customarily made to order and advance payment of money is not necessary as required in bai salam. The method of payment in istisna is flexible.
3.6.9 Bai-Muajjal
The terms ‘Bai’ and ‘Muajjal’ have been derived from Arabic words ‘Bai’ and ‘Ajl’. The word ‘Bai’ means purchase and sale. The word ‘Ajl’ means fixed time or a fixed period. ‘Bai-Muajjal’ means sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on credit. ‘Bai-Muajjal’ may be defined as a contract between a buyer and seller under which the seller sells specific goods to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installment’s.
3.6.10 Hire Purchase under Shirkatul Melk
Shirkat means partnership. Shirkatul Melk means share in ownership when two or more persons supply equity to purchase an asset own the same jointly and share the benefit as per agreement and bear the loss in proportion to their equity, the contract is called Shirkatul Melk contract.
3.6.11 Quard-Al-Hasan
It is a virtuous loan. Through this mode, Bank provides loan to its customer for a certain period, which bears no profit/loss/compensation.
3.6.12 Direct Investment
Islamic Bank without the help/assistance of any client may directly invest its fund/capital in share, securities, business and industry. Profit and loss in this business is exclusively, the internal matter of the Bank.
The concepts of equity and morality are at the root of Islamic banking .In Islam moral and equitable values from an integral part of the rules of law governing contractual and financial relations to such an extent that the relationship, which exists between equity law and relation, is an organic rather than supplementary relationship. The importance of Islamic banking has increased dramatically over the past 10 years. The main differences between Western and Islamic style banking is the concentration on people and their businesses rather than on accounts it is a much more grass roots banking according to one expert.
Chapter – Four
Activities of the SJIBL Motijheel Branch
4.1 Introduction of SJIBL, Motijheel Branch:
This branch was established 23rd August, 2007 it is situated at the Ground floor & First Floor, 99 Karim Chamber, Motijheel C/A. Dhaka-1000. It has been providing Islamic banking services for the customers.
4.2 Objectives:
- To provide Islamic banking service to the people within the commanding area.
- To expand business based on Islamic Shariah.
- To keep position in the competitive market.
- To contribute in profitability of SJIBL
4.3 Department of the Branch:
- Account opening department
- Cash department
- Accounts department
- Investment department
- Foreign exchange department
- Clearing department
- Remittance department.
4.4 Number of Accounts:
| Application | Total Account |
| AL-Wadiah Current Deposit (ACD) | 287 |
| Mudaraba Savings Deposit (MSD) | 1,534 |
| Mudaraba Short Notice Deposit (MSND) | 47 |
| Doble Profit M.Savings Scheme (DPMSS) | 389 |
| Education Deposit Scheme (EDS) | 79 |
| FCD | 4 |
| Hajj Palon Scheme (HAJJ) | 53 |
| House Deposit Scheme (HDS) | 15 |
| InLand Doc. Bill Purchase (IDBP) | 56 |
| INV | 430 |
| Lakhopoti Dep. Scheme (LDS) | 94 |
| Multiple Benefits M. S. Scheme (MBMSS) | 49 |
| Monthly Deposit Scheme (MDS) | 5,205 |
| Monthly Income Scheme (MIS) | 471 |
| Millionaire Scheme – 12 Yrs (MS12) | 195 |
| Millionaire Scheme – 12 Yrs (MS15) | 173 |
| Millionaire Scheme – 20 Yrs (MS20) | 108 |
| Millionaire Scheme – 25 Yrs MS25 | 205 |
| Marriage Deposit Scheme (MSD) | 101 |
| Mohor Deposit Scheme (MSD) | 279 |
| M. Term Deposit Scheme (MTDR) | 1,045 |
| Non Resident FC Depo. – Dollar (NRFCD) | 4 |
| TOTAL | 10,823 |
4.5 Statement of Affairs on SJIBL Motijheel Branch:
| Account No. | Account Name | Balance |
| Sundry Deposits | ||
| 9020824002 | S/D- Sundry Creditors | 2,739,726.50 |
| 9020824006 | S/D- Tax on Profit of Deposit | 202,251.00 |
| 9020824009 | S/D- Tax on Bills | 225.00 |
| 9020824013 | S/D- Excise Duty on Deposits | 14,425.00 |
| 9020824021 | S/D- Margin of LC | 4,307,555.00 |
| 9020824022 | S/D- Margin of LG | 7,120,209.00 |
| 9020824028 | S/D- Risk Fund for HHD Scheme | 5,700.00 |
| 9020824029 | S/D- Risk Fund for Ijara | 120,000.00 |
| 9020824030 | S/D- Leased/ Ijara Deposits | 263,840.00 |
| 9020824033 | S/D- FC Held for B/B Payment USD | 2,270,181.55 |
| 9020824036 | S/D- Clearing adjustment A/C | 292,300.00 |
| 9020824039 | S/D- Stamp | 35,220.00 |
| 9020824041 | S/D- VAT | 6.50 |
| 9020824049 | S/D- Others | 73,170.95 |
| Total 14,444,810.50 | ||
4.6 A list of Employees of the SJIBL Motijheel Branch:
| SL. | Designation | Number of Employer | |
| 01 | Senior Assistant Vice President & Manager | 1 | |
| 02 | Junior Assistant Vice President | 1 | |
| 03 | Executive Officer | 3 | |
| 04 | First Executive Officer | 2 | |
| 05 | Senior Officer | 3 | |
| 06 | Officer | 4 | |
| 07 | Management Trainee Officer | 1 | |
| 08 | Trainee Senior Officer | 1 | |
| 09 | Trainee Officer | 3 | |
| 10 | Staff | 4 | |
| Total | 23 | ||
4.7 Products of Shajalal Islami Bank Limited, Motijheel Branch:
4.7.1 Deposits:
Shahjalal Islami Bank Limited accepts deposits on the basis of Mudaraba in the following types of accounts, and pays profit, like that of dividend in these accounts, except AL-Wadiah Current Account.
The relationship between banker and customer is not debtor-creditor relationship of conventional banks. The depositor is a partner in business with Shajalal Islami Bank Limited. Customers’ deposit their fund in the following types of Accounts:
1. Mudaraba Short Notice Deposit Account
2. Mudaraba Savings Account
3. Mudaraba Term Deposit Account
4. Other Scheme Deposit Accounts