Banking Sector of Alarafah Islami Bank

EXECUTIVE SUMMARY

 “Ahllahhul Bai-E-Wa Harramahu Riba” Allah has permitted trade and forbidden usury, having all Islamic banks has been established to reject usury. AIBL has recognized in 1995 as an Islamic bank out of five Islamic banks in Bangladesh at that time. AIBL cannot give loans against interest as other banks but can do any of the following profitable method:

Partnership of SHARKAT-AL-ANANE:

It is a partnership between two or more parties as a well known and at a fixed percentage. And losses are to be shared in proportion of capita.

Mudaraba:

It is a contract between two people whereby bank gives promoter a sum of money for trade purposes. Profit is divided between them according to an agreement and if there is any loss, goes straight to the bank for bearing.

Bai-muajjal:

It is a contract between the bank and the client under which the bank procures certain goods permissible under the Shariah and the law of the country and sell of those goods to the clients at a price payable on a fixed future date in lump-sum or in fixed installments. Ownership of bank on the goods must be established. Like MURABAHA, bank is not bound to declare cost of goods and profit mark-up separately.

Murabaha sales (cost plus):

It is a contract between the bank and the client under which at the request of the client the bank procures certain goods remissible under Shariah and the law of the country. And it sells those to its clients at cost plus mutually agreed profit payable in cash at any time of future and a fixed date in lump-sum or by installments.

Sales by installments:

This method is used by the bank on the basis of Bai- muajjal machine, type-writer, Photostat machine and baby toy basis for the poor employee of lower income, unemployed person on the agreement of paying off in installment.

Hire purchase Shirkatul melk:

The bank gives capital in partnership on the basis of hire purchase under Shirkatul melk. Bank uses this policy to sell bus, taxi, house, machinery, etc.

Leasing:

AIBL has a direct investment system. In this system, this bank finances in Al-Arafah Islami Kinder Garden Madrasha. And, the bank bears all loss or profit arises here. This bank takes various types of projects and investments that are directly expressed in its overall banking activities. AIBL invests on opening L/C for import or export business when the clients fail to repay the value of L/C and the others, those that are used as procedures in it. And, it may be occurred before or after the export or import. After that, I have gone through discussing about general banking system whereas I had to open up some questions and answers due to the completion of this task. Also, beside it, I have related bank’s various types of account policies to open.

AIBL collects deposits that are going to open various types of accounts. These accounts include no fixed profit rate, but a significant amount of loss may occur due to the accounts continuing period. Side by side, there is a great possibility to obtain profits from them. For instance, AIBL has some exceptional savings deposit accounts relate of its deposit account:

 Monthly profit based term deposit

Monthly hajj deposit

Savings investment deposit

Marriage savings deposit

Savings bond deposit

Last of all, having analyzed all related matters and studying them about this bank, it is well believed that it is the only Islamic bank whereas internal environment are followed by Islamic rules & regulation. AIBL, through its banking activities, has gained the support and believes of people set by this bank, itself. It could not possible for AIBL to gain that respect by its people without paying extra efforts of its all kind of staffs and surely to get more into the future as well.

Origin of the Report

The report on “A SNAP-SHOT OF THE BANKING SECTOR & AN OVERVIEW OF AL-ARAFAH ISLAMI BANK” was initiated as part of the Internship Program, which is a BBA Degree requirement of the School of Business of ASIAN UNIVERSITY OF BANGLADESH. The report is being submitted to the Dean, Dr. Abdul Awal Khan of School of Business.

Since the BBA program is an integrated, practical and theoretical method of learning, the students of this program are required to have practical exposure in any king of business organization as last term of this course.

Objective

The report focuses on two parts. They are:

  • Primary Objective

The main objective of the report is to determine the various Service Dimensions that the Standard Chartered Bank’s CBS (Consumer Banking Service) customers expect throughout Bangladesh.

  • Secondary Objective
  • Briefly observe the banking environment of Bangladesh and look at Standard Chartered Bank as an organization at some length.
  • Identify the major strengths of the banks customer service division.
  • Provide with probable solutions for the improvement of the customer service quality.

 Methodology

Primary Survey – Primary Data has been collected by interviewing the staffs of the Banks.

Secondary Survey – All the necessary data has been collected from the –

  • Periodic Bulletins published by the Bangladesh Bank.
  • Internet.
  • Various brochures on the products and services offered by banks.
  • Some textbooks.

  Limitation

  • Limitation of time was one of the most important factors that shortened that present study.
  • Lack of comprehension of the respondents was the major problem that created many confusions regarding verification of conceptual questions.
  • Confidentiality of data was another important barrier that was faced during the conduct of the study. Every organization has its own secrecy that cannot be revealed in publics.
  • Rush hours and business was another reason that acts as an obstacle while gathering data.

AL-ARAFAH ISLAMI BANK LIMITED

Islamic ideology encourages us to succeed in life here & hereafter. To achieve this success we must follow the way dictated by the Holy Quran and the path shown by Rasul (SM). With this goal in view Al-Arafah Islami Bank Ltd. was established (registered) as a public limited company on 18 June 1995. The inaugural ceremony took place on 27 September 1995. The authorized capital of the Bank is tk.1000 million and the paid up capital tk. 677.94 million. Some very renowned Islamic personalities and pious businessmen of the country are the sponsors of the bank. The total paid up capital was invested locally.

 The Bank is committed to contribute significantly in the national economy. It has made a positive contribution towards the socio-economic development of the country by opening 41 branches on which 15 authorized dealer (AD) throughout the country.

 The equity of the bank stood at tk.122.01 Crore as on 31 December 2005, the manpower was 771 and the number of shareholders was 5402.

 Special Features of AIBL:

      All activities of the bank are conducted according to Islamic Shariah where profit is the legal alternative to interest.

      The bank’s investment policy follows different modes approved by Islamic Shariah based on Quran & Sunnah.

      The bank is committed towards establishing a welfare-oriented banking system, economic upliftment of the low income group of people, create employment opportunities.

         According to the needs and demands of the society and the country as a whole the bank invests money to different Halal business.

         The bank is committed to establish an economic system through social justice and equal distribution of wealth.

       The bank is contributing to economic and philanthropic activities side by side. Al- Arafah English Medium Madrasha and AIBL Library are among mention worthy.

Objectives of AIBL:

      To establish a banking system devoid of interest and based on Islamic Shariah.

      To offer banking facilities to those people who are staying outside the banking habit, especially to those, who have religious sympathy to banks based on interest.

      To provide commercial and investment banking services to big business clients.

       To provide facilities of intending Hajees to perform Hajj and Umra.

Activities of AIBL’S Shariah Council for the Year – 2005

Muraqibs of the council has visited all branches (41) over the year of the bank to observe the Shariah compliance, give necessary instructions on the spot and submitted report to the council. They have also submitted corrective measures to rectify the laws in implementing Shariah guidelines into the banking operations and placed those to the bank management for further follow up. Members of the Shariah council sit in 12 meetings of the year 2005 to discuss the matters placed before them by the board and management of the bank to give directions and suggestions in the field of Shariah principles. Shariah council advised everybody concerned to complying Shariah requirements and render all their effort to increase the standard of service rendered to the clients. A library is established in the Shariah council secretariat of Al Arafah Islami Bank with about 500 books on Qur’an, Hadith, Fiqh, Islamic economics and Islami banking. Honorable members of the council give Shariah guidelines to run the bank’s operations taking necessary consultations and data from those books doing exhaustive research and study.

Al Arafah Islami Bank ltd is a member bank of the central Shariah board for Islamic banks of Bangladesh and the chairman and member secretary of the Shariah council are also members of the central Shariah board. It is a great honor for this bank as the chairman and member secretary of the Shariah council playing the roles of vice chairman and secretary general respectively in central Shariah board. Thus, the Shariah council of Al Arafah Islami Bank is playing an active role in enhancing brotherhood and establishment of cordial relationship amongst Islamic banks of Bangladesh, increasing cooperation and develops the standard of Shariah principles of Islami banking.

 Position in the Stock Market:

Bank’s share sustained a steady strong position throughout since its inception at Dhaka & Chittagong Stock Exchange in 1998. In Dhaka Stock Exchange the face value of taka 1000 of our share was traded at taka 3300 highest in 2005.

 Progressive Analysis:

 At the end of year 2005, the number of depositors stood at 196,401 and the amount of deposit has accumulated to tk.11643.66 million. The total number of investors are 10743 and total investment extended to them was sum of taka 11474.41 million.

 The bank has earned tk.1452.68 million and incurred an expense of tk.904.48 million. At the end of the year the profit before tax has stood tk.548.20 million, which is 57.12% more than tk.348.89 million pre-tax income of the last year.

 Capital:

 The Bank Company Act 1991 which amended in March 2003 includes a provision of raising the capital to a new level of tk.100 crore for the commercial banks within March 2005. Incompliance to the new provision, the bank has raised its capital from tk.41.58 crore in the year 2002 to tk.85.56 crore in 2003 by issuing a right share against each of the existing shares in the year 2003 and declared 16% bonus dividend from the profit of the year 2003. The bank again declared 15.50% bonus dividend from the profit 2004. As a result, the paid up capital of the bank stood at tk.67.79 crore as at 31st December 2005.

Reserve Fund:

 The total balance of the reserve fund stood at tk.542.22 million in the current year against tk.488.96 million compared to the previous year 2004. In this fund, the bank experienced a growth rate of 10.89%.

 Capital Adequacy:

 The Bangladesh bank has fixed the ratio of capital adequacy against Risk- Weighted Assets at 9% in place of 8% in the month of September 2002. In 2002, the total amount of total equity of the bank was 41.57 crore taka, which stood at tk.85.56 crore in the year 2003 and tk.104.27 crore in the year 2004. This year it stood at tk.130.56 crore. At 31st December 2005, the capital adequacy ratio of the bank was 12.16%, against 14.56% at the same period of 2004.

Deposit:

The total deposit of the bank was tk.11643.66 million at 31st December 2005, of which bank deposit was 132.00 million taka and general deposit was tk.11514.66 million. At the same time in the last year, the amount of total deposit was 10108.28 million taka. In this area, the growth rate is 15.19%.

Investment:

At the end of the year 2005, the amount of investment of the bank was tk.11474.41 million in comparison to tk.8150.16 million of the year 2004. The amount of investment has increased by 3324.25 million taka within this period, which is around 40.78% growth.

Foreign Trade:

At the year of 2005, AIBL has experienced satisfactory growth in foreign trade. At the end of year 2004, the total amount of foreign trade (export, import and remittance) was 13268.83 million taka; which has increased at 35.81% to reach 18020.10 million taka in 2005.

 Income:

Investment Income:

The total investment of the bank was tk.11474.41 million at 31″ December of 2005. The total income generated from this investment is tk.1118.34 million, which is 76.98% of the total income. At the corresponding period of 2004, this income was tk.889.47 million. It indicates an increasing growth rate of. 25.73%.

Income from Other than Investment:

The bank has earned tk.334.34 million from other sources than investment like commission income, exchange income, locker rent, etc. in the current year, which is 23.01% of the total income. The bank earned tk.231.38 million from the same sources in the corresponding period of the last year, which indicates 44.49% growth rate.

Expenditure:

Profit Paid To Depositors:

The bank has paid the depositors 550.79 million taka which is 70% of the investment income and 60.90% of the total expenditure of the year 2005. The amount of this expenditure was 506.89 million taka in the last year. In this purpose, the expenditure has increased 43.90 million taka or by 8.66% compared to the previous year.

Administrative and other expenses:

The administrative and other expenses have increased 33.42% in 2005, in comparison to that of 2004. The administrative and other expenses were tk.265.07 million in the last year and it amounts to tk.353.68 million in the current year which is 39.10% of the total expenditure.

 Operating Profit:

The bank has earned tk548.20 million as operating profit during the year. In 2004 it was tk348.88 million. The growth rate is 57.13%.

 Dividend:

The bank has been paying dividends in every year from 1998 when it was established as a public limited company. The bank paid dividend at the rate of 15% in 1998, 12% in 1999, 12% in 2000, 7.5% in 2001 and 20% in 2002. Bank declared bonus dividend at the rate of 16%, 15.50% &26.00% to its shareholders in the year 2003, 2004 & 2005 respectively.

 Board and committee meeting:

During the year 13 regular and emergency meeting have been held, besides 15 meetings for Executive Committee and 11 meetings for Audit Committee of the Board have been held during the year.

Human Resource:

The bank has recruited experienced new manpower to coordinate its extended operation. The total manpower employed in the bank including Managing Director is 771 at 31st December 2005.

Manpower position as on 31st December 2005

Designation

Number

Managing Director

1

Executive Vice President

4

Senior Vice President

6

Vice President

10

Assistant Vice President

24

Senior Principal Officer

20

Principal Officer

58

Senior Officer

62

Officer

167

Probationary Officer

17

Junior Officer

180

Assistant Officer

144

MCG

77

Tea Boy

1

Total

771

 AIBL AT A GLANCE                                             (Million taka)

Particulars

1999

2000

2001

2002

2003

2004

2005

Authorized Capital1000100010001000100010001000
Paid up Capital253253253253506586.96677.94
Reserve Fund46.8673.07117.63155.43231.89488542.22
Shareholder’s Equity299.86326.07370.63408.43737.89957.261220.16
Deposit6415.87307.67879.271638643.310108.311643.7
Investment3793.73728.45079.26403.67571.58150.1611474.4
Import5555.55979.95559.35162.67698.39337.4912631.6
Export2304.23313.22524.61894.83075.53639.344932.9
Total Income534.76752.19800.35835.42987.681120.851452.68
Total Expenditure464.3598.45678.84671.48681.34771.96904.48
Profit before Tax and Provision70.476739.48163.94306.34348.89548.2
Profit after Tax and Provision31.730.1519.5350.71127.06154.76262.9
Tax24.6623.4513.8257.76103.96157215.1
Total Assets774685859253.88759.31088712874.615336.9
Fixed Assets50.3552.4458.54114.83126.23195.17208
Earning per Share181.04172.14101.43312.42251.1263.67387.8
Dividend12%12%7.50%20%16%15.50%26%
Number of Shareholder

6319

5849

5778

5557

5584

5379

Number of Employees

664

674

659

670

685

803

Number of Branch

35

37

40

40

40

40

 Products of Al- Arafah Islami Bank:

AIBL’S offering of Different Deposit Account:

A1-Wadiah Current Deposit Account (CD):

It is an account that is based on no loss, no profit. This account is opened by all kinds of clients, including individuals, companies, organizations, etc. who are protected by their legal laws as per to the contract with this bank. Here, the accountholder comes with money to save it in their accounts as many times as they wish. At the same time, accountholders like to withdraw the needed money by keeping a balance of narrow margin in their accounts.

 Before opening this account, accountholders must deposit tk. 1000/- into their accounts as initial deposit for the first time. And, in this account, cheque books are issued to the clients whenever they want. But, a procedure is followed here, that for getting the first cheque book, an application form must be filled up by the client itself.

 Mudaraba Deposit Account (MSD):

 It is an account that is opened by any person, if he or she meets the obligations of opening this account by his or her name. In this account, person who deposits money for his or her own is called the “Shahib Al-Mal” and the bank is called “Mudareb”. hi this account, money is not permitted to withdraw more than four times in a month and the amount would not be more than one-forth of actual saving. And, in cases like this, if any accountholder wants to withdraw more than the required amount set by the bank, he or she (the accountholder) has to give a pre-notice to inform the bank about it before seven days.

 In case of Mudaraba deposit account in AIBL, a minimum requirement of tk. 500/- needs to give by the clients as initial saving for opening the account. And, like Al-Wadiah deposit account, cheques are provided by the bank to its clients. This kind of account also involves opening joint accounts maintained by two or more person together,

 Mudaraba Term Deposit Account (MTD):

 Clients of the bank keep the opportunities to open this account in AIBL. In this kind of account, deposit in monthly installment @ tk.300/-, tk.5OO/-, tk.1000/-, tk.1500/- & amp; tk.2000/- is obtained under the aforesaid scheme for a tenure of 5,8,10, and 12 years and the same is withdrawal with profit at the end of the tenure. And, 1000/- tk. must be deposited as initialby the clients before opening this account.

 Mudaraba Short Notice Deposit Account (STD):

 It is an account like all Mudaraba accounts. In this account, clients may save their money as many times they wish. And, similarly accountholders can withdraw their money from this account on a short notice (seven days) any time they want. Basically, educational or other institutions who do not need funds for a regular period, try to keep money in this account therefore.

Monthly Profit Based Term Deposit (PTD):

Under the above scheme, deposit of tk.1.00 lac and multiple thereof are accepted for a term of 5 (five) years and the bank gave profit thereon tk. 885 per month per lac and proportionately on the rest amount of deposit under the category during the year under review. The aforesaid rate shall, however, be adjustable at the close of calendar year on finalization of accounts.

 Monthly Hajj Deposit:

Hajj deposit at monthly installment from 1 (one) year to 20 (twenty) years are accepted under the above scheme to enable the account holder to perform hajj out of the accumulated saving with profit.

Savings Investment Deposit (MHD):

Deposit under the scheme is accepted by monthly installment and after expiry of the term; double amount of such savings is given as investment in feasible sectors by the bank as per choice of the depositors without any collateral security. Any one by saving under the scheme can take business venture on utilization the amount saved under the scheme as well as availing bank investment.

Al-Arafah Savings Bond:

Under this scheme, the bank has introduced saving bonds for tk. 10,000/-, tk. 25,000/- and tk. 100,000/- for 3, 5 and 8 years. After the completion of the tenure the deposited money may increase by 1.5 or even double.

Grameen & Small Investment Scheme:

AIBL has introduced a new investment project as grameen and small investment. The objective of this project is to introduced Shariah based banking system in rural and village area, creating employment through financing in low income group, build up savings attitude, improvement of living standard of rural low income mass people, creating opportunity to carry out Islamic lifestyle by way of alleviating poverty and at the same time financially establish career men/women by investing in small investment projects. Initially, this scheme is introduced in two branches of AIBL i.e. Gallai, Comilla and Ruposhpur, Srimongol. There is a plan to expand gradually this project in other rural branches. Thus, within the scope of grameen and small investment scheme, the following sectors have been invested:

1. Fisheries                                     l0Vegetables business

2. Poultry                                       11. Cultivation of bettle leaf

3. Cattle                                         12. Tailoring business

4. Goat                                           13. Work of bamboo and cane

5. Cow                                           14. Cultivation of pineapple

6. Poultry Finn                              15. Earthen ware

7. Preparing Muree                       16.Purchasing rickshaw

8. Preparing sweets                       17.Cultivation of lemon

9. Cosmetics items                        18. Small business i.e. rice, paddy, grocery, medicine shop, cloth shop, shoe business, library, etc.

•    Under this method, after getting the demand and the giving assurance of credit payment by the customer, bank takes the authority to purchase the specific goods on behalf of its customer and after that sells them to that customer.

•    In this case bank obviously has to purchase the goods from a third party and has to keep them under its authority for an instance. After that, a sale agreement is accomplished between the bank and the customer.

•    Here, goods are firstly delivered to the customer and payment is made on a specific future time. It is clear that in this method, goods are reached under the authority before payment is done.

•    In this method, bank is not liable to inform about the buying price and the amount of profit respectively to the customer. The only tiling mat is mentioned to that client is the selling price of those goods.

•    If the customer fails to pay the payment of the goods on a specific time and therefore if that customer takes some extra time to pay it fully, then in that sort of case, bank can not charge any more profit due to that overtime period.

Investment Methods Followed By Al-Arafah Islami Bank:

Bai Mudaraba:

Bai Mudaraba means limited partnership. In general sense, contract to make sharing in profit amount occurred in partnership business. In this method, one side provides the capital needed to start the business and the other side, after using that capital and employing the labor, time and experience, gets the right to participate into the sharing of profits earned by the business by directly maintaining the business.

In short, Mudaraba is the main investment policy of Islam. In this method, the person; who opens the account simply called as ‘Rb-Al-MaT and the bank is known as ‘Mudareb’ in case of capital earning. On the other hand, in case of investment bank is regarded as the ‘Shahib-Al-Mal’ and the client of the bank is known as ‘Mudareb’. Here, this bank (AIBL) supplies the needed capital to do business and the client directs its business by employing its labor, time and experience. And the profit that is earned in this investment is distributed at a pre-determined rate (for example, 60%:40%, 50%:50%, 70%:30%) regarding to the contract between the bank and the client.

In this method, bank does not charge any advance profit on its provided capital. Rather, profit that is earned is shared also by the bank, itself. Here, Mudareb can participate only into the sharing of profit of the business. If any loss occurs in this sort of investment then that loss goes to the bank to bear, as it becomes the ‘Shahib-Al-Mal’.

Overall Features of Bai Mudaraba Investment Method:

•    Here, the bank supplies the capital needed for business and the client directs that business by using his own labor, time and experience.

•    In this method, AIBL does not directly participate into the authority of business and in general can not. Rather it gives advises to the Mudareb in any necessary condition.

•    Profit of this kind of investment is distributed at a pre-fixed rate between the bank and the client due to the contract and bank takes the duty of caring any loss if it occurs in it.

•    Two parties exist in this kind of investment method. They are: a) bank (Shahib- Al-Mal) and b) customer (Mudareb),

Bai Musharaka:

Bai Musharaka means partnership business i.e. to share in company’s profit-loss and in the ownership of business. It is the second major investment method in Islam and for all islami banks. In this method, islami banks provide funds on investment purposes to direct Islami Shariah based businesses with its well known clients or institutions on the basis of its partnership profit-loss sharing ratio. Since AIBL follows this investment method, therefore, to invest here, both AIBL and its client provide the needed funds.

Discussions are made in case of fixing funds that would be provided by the participating parties. In general, each participant or partner has the right to directly participate into the business of the client and the bank, respectively. In this method of investment, all related expenses regarding the controlling of business are beard from the business, itself. All profitable earnings regarding the actual agreement are distributed between the bank and the client on a pre-fixed rate (for example, 50%:50%, 60%:40%) according to consideration by both parties. Similarly, if loss is occurred, both the bank and the client bear their respective losses on the rationale basis of their funds.

Bai Salam:

Bai Salam is an advance purchase & sales investment mode. In this method firstly, the price of goods demanded is repaid. And in a specific future date, the demanded goods are going to be delivered by the seller to the buyer (bank). In this method, Islamic banks repay the price of goods by paying in advance to the client (seller) on a given condition of buying the goods by fixing a exact value of goods demanded. This investment is generally made by the bank in case of agriculture and industry sector.

Overall Features of Bai Salam Investment Method:

•    It is an agreement to make purchase & sales in advance. Here the bank repays the client first for buying the goods needed, And on a specific date, that client delivers that demanded goods to the bank on a fixed time in future.

•    Two parties participate in this kind or purchase agreement. They are: a) bank (buyer) and b) client (seller).

•    Name   of  the   goods,   quantity,   price,   kind,   date   to   be   delivered,   place, transportation cost are clearly mentioned in the agreement for this kind of investment business.

 Hire Purchase under Shirkatul Melk:

Goods those, whose selling price is fixed for the purpose of paying their purchase, price into some installments and on a giving assurance of their selling and purchasing at a fixed rental rate is called the procedure of hire purchasing. Islamic banks firstly, purchased the specific goods of its clients and rent them to that client on a given condition, that if the client pays the price of goods in installment and pays the rental charges at the fixed rate, after that, the client will get the complete ownership of that goods regarding the contract.

In common sense, by ‘Hire Purchase’ we mean to say that durable items, like vehicle, machinery, equipment, etc. are purchased on equity participation by both the bank and the client and the same is handed over to the investment client on rental basis entering into an agreement with the client that principal amount shall be paid within a certain period of time by installments. Here, rent is to be paid on the principal outstanding till the ownership is transferred to the client on payment of the entire principal amount.

Thus, Al-Arafah Islami Bank offers following categories of HPSM:

1.   Industrial

2.   Commercial

3.   Transport

4.   DDIS

5.    SSBI

6.   HPSM real state

7.    Staff house building investment

8.   HPSM car (for executives of AIBL)

Overall Features of Hire Purchase Investment Method:

•     In this method, asset is reached to the client as the contract is made for a time.

•    Here, asset is placed under the authority of the client, but the ownership goes to the bank.

•    After the payment of asset and the payment of rents by the client, the ownership is finally transferred to the client.

•    Until the payment of the asset’s price is done by the client, the bank charges rents on a specific rate.

•    Regarding the contract, the client uses the asset and gets the duty to authorize it. But, ownership is maintained by the bank.

•    The client would not have the ability to sell the assets somewhere else or to take as a mortgage until the price of the asset and the specific rent is paid up by him.

Overall Features of Bai Murabaha Investment Method:

•    A certain promise given by a bank itself to sell some specific goods to its specific client on demanded from a specific party for getting some profit by entering in a contract.

•    This kind of investment contract involves three parties. They are: a) commodity seller (third party), b) bank (commodity seller or first buyer) and c) client (second or final commodity buyer).

•    Here, obviously bank has to buy the goods and at the some time it takes the duty of keeping them (goods) all under its authority. Then the bank and the specific client enter into a written contract to accomplish between them.

•    After that, bank takes the duty to put those purchased goods in its own or the customer’s warehouse under the authority of it.

•    Here, either customer can receive total commodity by paying the total amount of purchasing price or get the amount of commodities up to his current payoff.

•    The cost price of commodities and profit amount are respectively mentioned in the contract.  Beside these, transportation of goods,  insurance,  and’ cost of warehouse, security wages and other related costs is beard by the customer itself, according to the contract.

•    The amounts of profit do not increase since selling price is fixed once for a time.

Bai Muazzal:

Bai Muazzai means to seli goods someone on credit. In this kind of investment method first of all, goods that have been demanded are being delivered to its customer before any payment and after getting the goods a specific future time is fixed by that specific customer for paying the purchase value of those goods. In case of AI-Arafah Islami Bank, customer of this bank applies to it for purchasing goods by itself for its applying customer and gives the assurance to pay the value on a specific future date. A sale agreement between the bank and the customer occurs therefore.

Overall Features of Bai Muazzal Investment Method:

•    Three parties enter into this kind of investment procedure.

They are:

a) Commodity seller (third party),

b) Bank (commodity seller or first buyer) and

c) Customer (second buyer of commodity).

•    Under this method, after getting the demand and the giving assurance of credit payment by the customer, bank takes the authority to purchase the specific goods on behalf of its customer and after that sells them to that customer.

•    In this case bank obviously has to purchase the goods from a third party and has to keep them under its authority for an instance. After that, a sale agreement is accomplished between the bank and the customer.

•    Here, goods are firstly delivered to the customer and payment is made on a specific future time. It is clear that in this method, goods are reached under the authority before payment is done.

•    In this method, bank is not liable to inform about the buying price and the amount of profit respectively to the customer. The only tiling mat is mentioned to that client is the selling price of those goods.

•    If the customer fails to pay the payment of the goods on a specific time and therefore if that customer takes some extra time to pay it fully, then in that sort of case, bank can not charge any more profit due to that overtime period.

Qard:

A1BL also allows Qard in very special cases on obtaining proper security. Here, the bank’s service charge is equal to cost of funds is recovered on Qard amount.

Special Investment:

This bank also closely supervises and reviews the investment operation of the bank with a view interalia to alk out policy which would not only be innovative but also covers all sectors of the economy including income-generating activities. The bank has, in the meantime, introduced the following schemes for enlistment of the fixed wage earners as small traders and for income generating activities of the poor people:

1.   Desired Durable Investment Scheme (DDIS)

2.   Masjid Madrasha Based Investment Scheme (MMIS)

3.    Small business Investment Scheme (SBIS)

4.    Special pally Biniyog Prakalpa

5.   Transport Investment Scheme

Provisions on Investments by AIBL:

a) In case of this bank, provision for investment is made on the basis of year end review by the management and of instructions contained in Bangladesh Bank BCD circular no. 34 dated 16 November 1989, BCD circular no. 20 dated 27 December 1994, BCD circular no. 12 dated 4 September 1995, BRPD circular no. 16 dated 6 December 1998 and BRPD circular no. 9 dated 14 may 2001. The provision rates are given below:

General provision on unclassified investment @ 1% Specific provision on substandard investment @ 20% Specific provision on doubtful investment @ 50% Specific provision on bad/loss investment @ 100%

b) Investment is written off to the extent that (i) there is no realistic prospect of recovery, (ii) against which legal cases are pending for more than five years as per guidelines of Bangladesh bank.

STATUS OF THE BANK

Al-Aralah In I ami Bank Limited was established in 1995 under die companies Act, 1994 as a banking Company with Limited Liability by shares. It is an interest free Shariah bank of Bangladesh rendering all types of commercial banking services under the regulation of Bank Companies Act, 1991. The Bank conducts its business on [lie principles of Musliaraka, Bai-Murabaha, Bai-muazzal and Hire Purchase transactions approved by Bangladesh Bank. Naturally, its modes and operations are substantially different from those of other conventional commercial banks. There is a Shariah Council in the bank who maintains constant vigilance to ensure that the activities of the bank are being conducted on the precepts of Islam. The Shariah Council consists of prominent i llema. reputed Bankers, renowned Lawyers and eminent Economist.

NATURE OF BUSINESS

All kinds of commercial banking services are provided by the bank to the customers following the provisions of Banking Companies Act, 1991, Bangladesh Bank’s directives and the principles of Islamic Shariah.

SIGNIFICANT ACCOUNTING PRINCIPLES

Preparation of financial statement

These accounts have been prepared on a going concern basis under the historical cost convention and on (iLMierally Accepted Accounting Principles consistently widi those of previous year. Although the operation of (he Bank are in strict compliance with the rules-of Islamic Shariah, the Financial Statements have been prepared basically as per Bank Company Act 1991, Bangladesh Accounting Standard (BAS), Financial Accounting .Standard issued by the Accounting and Auditing Organization for Islamic Financial Institutions.

Basis for ConsolidationA separate set of records for consolidating the statement of Affairs and Income & .Expenditure Statement of die- ts randies are maintained at the Head Office of the Bank in Dhaka from which the financial statement are drawn up.

Provisions on Investment

a) Provision of investment is made on the basis of year end review by the management and of instructions contained in Bangladesh bank BCD Circular no. 34 dated 16 November \I-WK BCD Circular no. 20 dated 27 December 1994, BCD Circular no. 12 dated 4 September 1995. BRPD Circular no. id dated 6 December 1998 and BRPD Circular no. 9 dated 14 May 2001. The provision rates are given below:

General provision on unclassified Investment @  1%

Specific provision on substandard Investment @ 20%

Specific provision on doubtful Investment @ 50%

Specific provision on bad/loss Investment @ 100%

b) Investment, arc written off to the extent that (i) there is no realistic prospect of recovery, (ii) and against which legal cases are pending for more than five years as per guidelines of Bangladesh Bank.

Fixed assets and depreciation

a) All fixed assets are stated at cost or revaluation less accumulated depreciation. The following assets were revalued ai 31 st December 2004 on the basis indicated below:

i) Land

By a professional valuer on the basis of market value at 31st December 2004. The valuer was independent of the company. The property is located within Dist ; Dhaka, P. S Motijheel, Sub – registry office : Sulrapur, Dhaka collectors Touzi # 141-B-l, Mouza : Sabek Shahar Dhaka, Sheet # 22, Ward # 03, Sabek Kliatian # 6947, 6947 [KA1, 6947[Jha], Sabek Dag #97, 100,101,102 and 110, SA Mouza: Ramna, Sheet # 10, SA Khatian # 362, SA Dag # 1979,1980,1981,2025,1997,1998 and 1979/2039, RS Mouza : Motijheel, RS Kliatian # 420, RS Dag # 1314 and 1322, D.P Khatian # 619, D.P Dag # 812 and 804. The area of land measuring about 27.10 decimal. Mutation Khatian # 362/3 and Dag # 1979 and 1980. The land was revalued at Tk. 5,000,000 per decimal. The cost of which was Tic 2,116,116 per decimal. The Bank accounted for 90% of book value of revaluation. Total Capital gains amounting Tk. 64.603,248 out of Which 50% was included capital revaluation A/C. as per Bangladesh bank Circular.

b)  Depreciation is charged at the following rates on a reducing balance method on all fixed assets other than

Assets                                                                   Percentage

Furniture and Fixture                                                     10

Motor Vehicles                                                              20

Mechanical Appliances                                                  15

Books                                                                             20

Computer                                                                       20

Building                                                                         2.5

c) Maintenance and repairs cost when incurred are charged to Profit and Loss Account.

Allocation ol1 distributable profit

Total investment income (except exchange and coin miss inn income) is shared between depositors and the bank @ 70:30.

Exchange rates

 a) The transactions in foreign currencies arc converted into equivalent Taka currency using Qis ruling exchange rates prevailed on the dates of such transactions.

b) The assets and liabilities denominated in foreign currencies as on 31 December 2004 are translated into Taka currencies at the prevailing selling and buying rates of the concerned foreign currencies. el Gains and loss of translation are dealt with through exchange account.

Basic Earning per share

This has been calculated by dividing the basic earning by the weighted average number of ordinary shares miisianding during the year. Diluted earning per share is required lo be calculated, for the year, as there is scope I or dilution during the year under review.

Cash flow Statement

Cash How statement is prepared principally .in accordance with “B AS-7 Cash flow Statement” and the cash flow I mm the operating activities have been presented- under direct method as prescribed by die securities and exchange rules 1987 and considering the provision of paragraph is(b) of BAS-7 which provides that enterprise ,ire encouraged lo report cash flow from operating activities using the direct method.

Retirement benefit and staff welfare scheme

I lie Rank operates a contributory Provident fund, Sofia] Security Fund, Gratuity Fund and a Benevolent Fund,

These lunch are managed by separate Board of Trustees.

Taxation

Provision for income tax has been made @459fc as prescribed in finance act 2004 of the profit made by the bank without considering taxable add- backs of income and isallowances of expenditure but considered provision on classified investment during the year. No deferred tax is currently maintained by the Bank however, the Bank considering changes in accounting policies for implementation of the same.

Tax return for the income year 2003 (Assessment year 2004-2005) has been filed but assessment is to be done by ihc lax authority. Bank filled an appeal for the income year 2002 (Assessment year 2003-2004) before the commissioner of [axes (appeal) against the order of disallowances of deputy commissioner of tuxes. Bank also filled iin appeal before the appellate tribunal against the order of commissioner of taxes (appeal) for the income year 2(100 and 2001 (Assessment year 2001-2002 & 2002-2003).

Reconciliation of inter bank/books of accounts

Books of accounts in regard to ■Inter-Bank (In Bangladesh and outside Bangladesh) are reconciled and there are no material differences, which may affect the financial statements significantly. Unreconciled entries in case of inter- Brandi transactions as on the reporting date are not raenlionable due to the time gap before finalizing the same.

Risk Management

The risk of Al-Arafah Islami Bank limited is defined as the possibility of losses, financial or otherwise. The risk management of the Bank covers 5 (five) Core risk Areas of banking i.e Credit risk management, Foreign risk management. Assets Liability Management, prevention of money laundering and establishment of Internal Control and Compliance. The prime objective of the risk management is that the Bank lakes well ealculative business risks while safeguarding the Bank’s capital, its financial resources and profitability from various risks. hi this conlexi. the Bank took steps to implement the guidelines of Bangladesh Bank as under :

The Ending Summery

The report is arranged in five parts. A detail discussion has included every policy, say, definition, features, condition, profit etc. “Shariah” types of investment practiced in Al-Arafa Islami Bank they are as follows, i) Mudarabah, ii) Musharaka, iii) Leasing which has discussed n details in this report.

How they investment on export and import goods based on the above policy has discussed in details also. They invest on import goods on the basis of L/C opening, which are the following types: i) Investment system before import on 100% security base marginal L/C, ii) Investment system before import on partial or nil marginal L/C, iii) Investment system for a short time before import. How they will process investment on import goods. What types of steps are taken when processing investment, problem for investment of AliBL has discussed in details of this chapter. General Banking has assigned the source of fund of AIBL, various types of Account opening such as Deposit Account, saving Account, OBC, IBC, Account section etc. To clear of concept of the daily function. In chapter five has given the progressive of AIBL specially there was try to focus why the prospect of AIBL in Bangladesh which is based on the discussion of the environment, structure, special feature, rapid increase of deposit, investment, profit, dividend on behalf of short time, the public responded whole heartedly to the policy of AIBL for over last year. In part one has arranged introduction origin of the report, purpose, limitation, historical background, sources and methods of collection data. However which I left to discuss, the errors that remain are due to me alone.

Alarafah Islami Bank