Main objective of this report is to analysis Performance Analysis and Banking Service of Social Investment Bank Limited. This report provide the correct information about the financial state and future prospect of Social Investment Bank Limited from investors’ viewpoint as well as the Company. Report also discuss about the modes of investment of Islamic Banks. Finally find out strengths and weakness of the bank compares to competitors.
Objective of the study
This study is aimed at providing me invaluable knowledge about banking system especially Islamic banking in Bangladesh. It will also help me to develop my concept of banking and it operations. The study undertaken as an assignment for fulfillment of the requirement for completion of the Post Graduate Diploma in Financial Management for the session 2007.
The objective of the study has been categories as follows :
- To relate theoretical knowledge in several functions of the bank.
- To be acquainted with how bank perform its operation.
- To know about the modes of investment of Islamic Banks.
- To study strengths and weakness of the bank compares to competitors.
- To present my observation and suggestions to the bank.
- Weight alternative approaches to the management information
- Appreciate the information systems play in today’s world.
- Articulate why information system projects frequently fail to deliver the desired results.
- Understand the critical importance of equity information in decision making and the role of computer technology in making that information available.
- Articulate current issues in information systems, particularly as they relate to management of business.
- Speculate about what factors are likely to play important roles in future information systems.
Background of the Company:
Social Investment Bank Ltd. (SIBL) became operational on 22 November 1995 with a clear manifesto to demonstrate the operational meanings of participatory economy, banking and financial activities as an integrated part of an Islamic code of life. It is an alternative concept of Islamic Banking with a unique human face approach to credit and Banking based on interest free economics and financial transactions and income generating program for the millions of the urban and rural poor and a profitable investment option for the rich to invest, earn and live in a better society with greater security and peace at the operational level, SIBL is operating three-sector Banking, such as, Formal, Non-Formal and Voluntary sector, SIBL is beginning a new era of Islamic Banking having social, ethical and moral dimension in each of its activities ranging from credit to construction, trading to transport, farming to fishing, manufacturing to mining and so on. Some renowned personalities and institutions are sponsors and directors of this bank, specially, the Founder Chairman Prof. Dr. M. A Mannan, who is an internationally reputed. Islamic thinker and Professional Economist. He served in different important capacities in different International Organizations including Asian Development Bank and Islamic Development Bank. With his heartiest efforts and inspiration Ex-Secretary General of O.I.C Dr. Hamid AI-Gabid and Deputy Speaker of Saudi Arabia and former Secretary General of Rabeta, Dr. Abdullah Omar Nasseef, and Ex-Commerce Minister of Saudi Arabia Salah Jamjoom took part in the establishment of the Bank. Besides, International Solidarity Fund (IFS) and International Islamic Relief Organization (IIRO) also took part as Sponsors.
Social Investment Bank Limited started its journey with the concept of 21st Century Islamic participatory three sector banking model: i) Formal Sector- Commercial banking with latest technology; ii) Non-formal Sector-Family empowerment Micro-credit & Micro-enterprise program and iii) Voluntary Sector- Social Capital mobilization through CASH WAQF and others. Finally, “Reduction of Poverty Level” is the Vision, which is a prime object as started in Memorandum of Association of the Bank with the commitment “Working Together for a Caring Society.”
- High quality financial services with the latest technology.
- Fast, accurate and satisfactory customer service.
- Balanced & sustainable growth strategy.
- Optimum return on shareholders’ equity.
- Introducing innovative Islamic banking products.
- Attract and retain high quality human resource.
- Empowering real poor families and create local income opportunities.
- Providing support for social benefit organizations-by way of mobilizing funds and social services.
This Bank’s program will be directed mainly to uplift the socio- economic conditions of rural and urban poor with a view to eventual elimination of poverty. In the process, this Band intends to empower the family as a basic unit of the society. Thus, investment program of this Band will be geared to generate profits, a percentage of which will be set aside to support social projects on a non-profit basis. Thus, all activities of the Bank will be subject to social Assignments, thereby making social and moral preferences transparent and revealed in all its financial and economic operations. The concept of social welfare will then have a different meaning. Here right will be linked to duties. The operational strategies of the Band would, therefore, involve mobilization and utilization of:
- Local resources at the grass-root level mainly from within;
- Surplus labor wherever possible;
- Human and money capital of beneficiaries of earlier programs;
- Unemployed and underemployed in the informal sector;
- Islamic voluntary sector and voluntary labor for social capital accumulation and welfare;
- Adoption of class-harmony extended family approach to industrial relations through employment buy participation; and
- Participation of women, minorities, and people or other religions to operationally the concept of brotherhood of man and humanism.
The management of such a Bank would mainly be participatory in nature so that employees feel that the enterprise belongs to them.
The program of this Bank would include commercial, agricultural, small industrial, educational, health and grass-root level social banking activities. The will be designed in a manner so as to make finance, production, marketing, training and moral suasion in one package. While basic human endowments and God-loving or God-fearing criteria will be used as fundamental collateral, in all operations of this Bank, it will give particular emphasis on programs dealing with the problem of absolute rural and urban poor, the various mechanics of partnership, equity-based and profit-sharing operations (i.e., Mudarabah, Musharaka, Murabaha) and other tools will be operational zed in manner so that economic, human and moral dimensions are clearly manifested in order to hive them a distinctive character of Islamic finance.
The Authorized share capital of Social Investment Bank is TK. 4000 million. The paid up capital and equity of the Bank stood at TK.585 million and TK 980.70 million respectively as at 31st December 2006.
|Paid up Capital||585.00|
|1% provision on unclassified investment||147.34|
|Investment Loss Off-setting Reserve||8.15|
Operating Result and Profit
Total Operating Income of the Bank as on 31st December 2006 stood at Tk. 632.24 million against Tk. 522.14 million of the preceding year. The Bank made an operating profit of Tk. 295.89 million in 2006 against Tk. 213.57 million of 2005. A summary of operating result of the Bank as on 31st December 2006 vis-à-vis the position as on 31.12.2005 is shown below. (Tk. In Million)
|Income on Investment||1898.66||1677.51||13.18%|
|Profit paid to the Deposit||1596.61||1400.12||14.03%|
|Net Investment Income||302.05||277.40||8.89%|
|Total Operating Income||632.24||522.14||21.09%|
|Profit before Provision||295.89||213.57||38.54%|
|Provision against Investment||164.31||150.00||9.54%|
|Profit Before Tax||120.23||54.20||121.83%|
Types of Accounts
Al- Wadiah Current Account:
Almost similar to current account of conventional banks. The owner of the fund does not enjoy any profit nor bear any loss. But the bank obtains the permission from the depositor so that the bank has the option to use the interest of the bank. Features of Alwadiah C/A as practiced in Bangladesh-
- The account requires minimum tk. 500 to open.
- This account is operated under Al Wadiah principle/
- According to this principle permission is taken in the account form from the depositors that bank can use the funds of the bank, other depositors and Al wadiah accounts of trade & commerce.
- Without any condition any amount can be deposited in is account.
- A chequebook is provided for the account.
Mudarabah Special Notice Account
- Any company, business entity, debt of the govt. organization and trust or any person can open this account.
- This account is operated under Mudaraba principle.
- Any amount can be withdrawn or transferred to al wadiah current account or any other accounts after placing a notice of seven days.
- Cheque books are provided for these accounts.
- The profit rate is comparatively lower.
Mudarabah Savings Account
Mechanism is almost similar to the savings account of the conventional banks. The basic difference in this case is that the profit from the investment will be shared by the bank and the owner of the fund while the loss from the investment will be borne by the owner of the fund unless the loss is incurred due to the negligence or overacting of the bank. Features of Mudarabah Savings Account as practiced in Bangladesh-
- This account is operated under profit sharing principle. Here bank is Mudarib and depositors are Sahib al-mal.
- Cheque books are provided for this account.
- From this account money can be withdrawn four times a month. And in each time one forth of he deposit or 15000 tk. Whichever is lower can be withdrawn.
- For any amount greater than this a seven days notice is required. The deposit is accounted for profit when money is withdrawn with notice.
- If money is withdrawn in a month without placing notice no profit is provided for that money.
Term Mudarabah Account
The term and condition Mudarabah is same as general Mudarabah excepting one that under this arrangement the owner of the fund agrees keep the deposit remain with the Islamic bank for a particular time period ( 3 months/6 months/one year/two year/three year.
- With a minimum of tk. 1000 or greater which is a multiple of tk. 100 this account can opened at any time of the year.
- There are terms of 6 months, 12 months.24 months and 36 months under which deposits are received.
- No profit is provided if money is withdrawn before completion of 6 months.
- When money is withdrawn before the completion of the term but after 6 months profit is measured by deducting the proportionate profit of 6 months from the profit of the amount deposited for the related term.
Special Mudarabah Account
Under this arrangement the term and conditions of Mudarabah is same as general Mudarabah. The only specialty of his arrangement is that the owner of the fund specifies a particular type of business for the purpose of investment. The depositor can also specify the sectors where the fund should not be invested.
Special Term Mudarabah Account:
- This arrangement is the combination of both term Modarabah and special Mudarabah Account. Under this arrangement the owner of the fund.
- agrees keep the deposit remain with the Islamic bank for a particular time period (3 months/6 months/1 years/ 2 years/3years) and .
- Specifies a particular type of business for the purpose of investment.
Mudaraba Hajj savings Account:
- A person intended to perform Hajj within 1 to 10 years can open this account for a period at his convenience.
- A year is divided into 12 installments.
- Profit is given for the daily balance based on a weightage of 1.1%
- There is no provision for withdrawal.
Mudarabah Monthly savings account:
- Under this system, the procedure of deposit is like the DPS of conventional baking system.
- The scheme is taken for a period of time say 5 years.
- A provisional monthly profit is given and at the end of the year the profit is adjusted with the actual profit for the year.
Mudarabah Saving Bond scheme as practiced by the IBBL
A person above 18 years in single or in joint name and non profit earning institutions can buy these bonds for 5 to 8 years of tk. 1000, tk.5000, tk.10000, tk.25000, tk.100000, tk.500000.
Owner of the bonds can receive profits for their proportionate investment in bond at 65% of their income from investment based on weightage as follows-
- Mudaraba savings bond of 8 years: Weightage of 1.5.
- Mudaraba savings bond of 5 years: 1.1.
Cash Waqf Certificate
- In this case the waqf concept of Islam has been borrowed by the Islamic bank for deposit mobilization purpose.
- The nature of account is donation type.
- The accountholder operate the account for benevolent purposes.
- He can withdraw any amount from the account for personal use or consumption.
- Highest weightage is given to this account in distributing profit.
Bai-Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods (permissible under Islamic Shariah and the Law of the country), 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 installments. The seller may also sell the goods purchased by him as per order and specification of the buyer.
The terms “Bai” and “Muajjal” have been derived from Arabic words means purchase and sale and the word means a 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.
The terms “Bai-Murabaha” have been derived from Arabic words means purchase and sale and the word means an agreed upon profit. “Bai-Murabaha” means sale on agreed upon profit.
Bai-Murabaha may be defined as a contract between a Buyer and a Seller under which the Seller sells certain specific goods permissible under Islamic Shariah and the Law of the land to the Buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump sum or by installments. The profit marked-up may be fixed in lump sum or in percentage of the cost price of the goods.
Types of Murabaha
In respect of dealing parties Bai-Murabaha may be of two types.
- Ordinary Bai-Murabaha
If there are only two parties, the seller and the buyer, where the seller as an ordinary trader purchases the goods from the market without depending on any order and promise to buy the same from him and sells those to a buyer for cost plus profit, then the sale is called Ordinary Bai-Murabaha.
- Bai-Murabaha on Order and Promise
If there are three parties, the buyer, the seller and the Bank as an intermediary trader between the buyer and the seller, where the Bank upon receipt of order from the buyer with specification and a prior outstanding promise to buy the goods from the Bank, purchases the ordered goods and sells those to the ordering buyer at a cost plus agreed profit, the sale is called “Bai-Murabaha on Order or Promise”, generally known as Murabaha.
Meaning and Definition
Hire Purchase under Shirkatul Melk is a Special type of contract, which has been developed through practice. Actually, it is a synthesis of three contracts:
Shirkat means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul Melk contract.
The term Ijarah has been derived from the Arabic works (Air) and (Ujrat) which means consideration, return, wages or rent. This is really the exchange value or consideration, return, wages, rent of service of an asset. Ijarah has been defined as a contract between two parties, the Hire and Hirer where the Hirer enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the Hire. It is a hire agreement under which a certain asset is hired out by the Hire to a Hirer against fixed rent or rentals for a specified period.
This is a sale contract between a buyer and a seller under which the ownership of certain goods or asset is transferred by seller to the buyer against agreed upon price paid / to be paid by the buyer.
Thus, in Hire Purchase under Shirkatul Melk mode both the Bank and the Client supply equity in equal or unequal proportion for purchase of an asset like land, building, machinery, transports etc. Purchase the asset with that equity money, own the same jointly, share the benefit as per agreement and bear the loss in proportion to their respective equity. The share, part or portion of the asset owned by the Bank is hired out to the Client partner for a fixed rent per unit of time for a fixed period. Lastly the Bank sells and transfers the ownership of it’s share / part / portion to the Client against payment of price fixed for that part either gradually part by part or in lump sum within the hire period or after the expiry of the hire agreement.
Stages of Hire Purchase Under Shirkatul Melk
Thus Hire Purchase under Shirkatul Melk Agreement has got three stages:
- Purchase under joint ownership.
- Hire and
- Sale and /or transfer of ownership to the other partner Hirer.
It is a form of partnership where one party provides the funds while the other provides the expertise and management. The first party is called the Sahib-Al-Maal and the latter is referred to as the Mudarib. Any profit accrued is shared between the two parties on a pre-agreed basis, while capital loss is exclusively borne by the partner providing the capital.
Thus, it embraces different types of profit and loss sharing partnership. The partners (An Islamic financial technique that adopts “equity sharing” as a means of financing entrepreneurs, bankers, etc.) share both capital and management of a project so that profits will be distributed among them as per ratios, where loss is shared according to ratios of their equity participation.
Under this mode Bank will execute purchase contract with the client and make payment against purchase of product, which is under process of production. Bai-Salam contract will be executed after making any investment showing price, quality, quantity, time, place and mode of delivery. The profit is to be negotiated. In this mode the payment as the price of the goods is made at the time of Agreement and the delivery of the goods is deferred.
SPECIAL DEPOSIT/INVESTMENT SCHEMES
‘Certificates of sale’
It has been suggested that consumers buying consumables on credit would issue ‘certificates of sale’ similar to letters of credit. These could be encashed by the seller at the bank at a discount. This seems very similar in structure to Bai-salam.
Prizes and bonuses
Iran and Pakistan have both attempted to fully Islamise the entire banking. Iran converted to Islamic banking in August l983 with a three-year transition period. In Iran banks accept current and savings deposits without paying any return.
No fee accounts
There is a substantial Muslim population in South Africa and they are serviced by two small Islamic banks. The main product being offered is the “no fee” current account which is also provided by the conventional banks by arrangement.
Gifts to depositors are given entirely at the discretion of the Islamic banks on the basis of the minimum balance. These gifts may be monetary or non-monetary are based on the banks’ returns.
Rural Development Scheme
The main objectives of the Scheme are:
- To extend investment facilities to agricultural, other farming and off-farming activities in the rural areas.
- To finance self-employment and income generating activities of the rural people, particularly the rural unemployed youths and the rural poor.
- To alleviate rural poverty through integrated rural development approach.
- To extend investment facilities for rural housing, keeping in view the needs of housing facilities of the rural dwellers.
- To provide educational services and safe drinking water, sanitation & Medicare facilities to the down trodden people.
Command area and baseline survey
Each designated Branch selects villages within a radius of 16 kilometres of the Branch premises. Following criteria is being followed in selecting a village:
- Easy communication;
- Availability or scope of agriculture and other off-farm activities;
- Abundance of low-income people;
- Predominance of Islamic values and ideas.
After primary selection of a project area consisting of 5 villages, Branch conducts detailed Baseline Survey to identify the various economic activities and types of people residing in the area.
- Farmers having land holding of maximum 0.50 acres.
- Sharecroppers with consent from the landowners.
- Persons engaged in off-farm activities having no land or land up-to-maximum 0.50 acres.
- Persons/farmers permanently residing in the selected villages.
- Persons having derelict pond will be eligible for investment for re-excavation and fish cultivation.
- Destitute women and distressed people will be provided investment for milk cows/poultry birds/ducks/goats etc. and other suitable off-farm activities for raising their supplementary income.
- Persons having liabilities with other banks/institutions including defaulters will not be eligible for investment under the Scheme.
Modes of Investment in Rural Banking
The Branch selects any of the following modes depending upon the sector and purpose of investment:
Under this mode Branch sells goods to the client under deferred payment basis. The payment is be made in instalment/ lump sum on predetermined future date.
Hire-Purchase Shirkatul Meelk (HPSM) or Leasing
Under this mode Branch may supply implements/equipments on rental basis. The ownership of the equipment lies with the Bank but the client is authorised to possess the equipment for certain period. Under HPSM the client has to contribute minimum 10% of the cost price of the equipment and the rest is invested by the Bank. Under leasing system, 100% cost price of the equipment is paid by the Bank while the client deposits down-payment of equipment equivalent to 2 instalments prior to availing the investment which is kept as cash securities and is refunded at the expiry of lease term.
Under this mode Branch supplies capital to the Mudarib (agent) for conducting business, purchase of inputs, commodities etc. to be repaid on future date. The profit is to be negotiated and be determined time to time by the Bank.
Under this mode the Bank extend investment on profit and loss sharing basis. In this case, Branch should receive investment proposal on a very selective basis with prior discussion with the Zonal Head. The capital-sharing ratio may be maximum 80: 20 between Bank and the client. The profit is to be negotiated and will be determined time to time by the Bank.
Under this mode Branch executes advance purchase contract with the client and make payment against purchase of product, which is under process of production. A Bai-Salam contract is to be executed before making any investment showing price, quality, quantity, time, place and mode of delivery. The profit is to be negotiated and determined time to time by the Bank.
Under this sale contract the Bank purchases a certain commodity for the client as requested and specified by him which are deliverable to him on payment at a pre-determined price. Under this mode, client has to provide minimum cash security 20% of the cost price.
While considering the investment proposal under Musharaka, Mudaraba and Bai-Salam modes Branch must ensure not to exceed 20% of the total investment under the Scheme. Branch should also be very selective in considering proposals under the above modes and confer with the Zonal Head before sanction.
Recovery of Investment
To ensure recovery of the investment in time, the Branch determines the instalments judiciously. Instalments should be fixed in the following manner, keeping in view the income generation capacity of the investment and time thereof:
- In case of “off-farm activities,” instalments should be fixed on weekly basis.
- In case of agricultural/crop production, instalments should be fixed on quarterly basis or on the basis of harvesting period of the crop in each of the investment area. A token instalment may be realised on weekly basis.
- The members of the Group have to open Mudaraba Savings Account (RDS) in their individual names with the Branch from the very inception of the Group activity.
- This Mudaraba Savings Account is non-chequing which induces the clients to make a habit of compulsory savings.
- This savings may, however, be withdrawn by the member if he does not have any other liability with the Branch in any way.
- The weekly compulsory savings is minimum Tk.10.00 per member.
Each member of the Group has to deposit minimum Tk.2.00 per week in the Centre Fund. This Fund is kept by opening a Mudaraba Savings Account in the name of the respective centre. This Fund is utilised for the welfare of the members by way of Quard as per decision of the Centre in the weekly meeting. This account is operated by Centre Leader & Deputy Centre Leader jointly. This fund is refundable.
Supervision, Follow-up and Monitoring
The investment under the Scheme is fully supervised. The Branch must take the responsibility for the investment as well as recovery. To ensure this the Branch must ensure systematic and continuous relationship with the clients. To achieve this close relationship, the Branch has to work together and meet closely and regularly with the clients.
Accordingly, the target area should be nearest to the Branch and to make continuous relationship with the client, Group approach is encouraged. Through Group approach, clients are motivated, induced and pressed by the fellow members in the recovery of the investment.
One each Field Officer is appointed for every 400 investment clients and one or more Assistant Officer/Officer is engaged in the Branch as Project Officer to supervise the activity of the Field Officers. The Field Officers will under-take the following functions under the overall supervision of the Project Officers and Managers of the concerned Branch:
- To conduct base-line survey of the Project area.
- To organise the target Group people and induce them to form Group(s).
- To conduct General meetings, elect Leader and Deputy Leader of the Groups.
- To form Centre and elect Centre Leader & Deputy Centre Leader.
- To conduct weekly Centre meeting and ensure collection of weekly personal savings, centre fund and investment instalments and enter them in the ledgers/computer.
- To make entries of the Pass Book of respective clients. The Pass Books must be verified with the respective Ledgers/computer by the Project Officer every month.
Islamic Mode of Operation
From 1995, the Conventional Bank has taken up the Challenge to start Islami Banking Operations. The Challenge is not so much as in operating Islamic Banking but in maintaining both the forms in Parallel. From its inception as an Islami Bank the bank has proven itself to be worthy of its slogan of ‘Bank with a Difference’, through successful operation of Islami Banking.
Following are the salient features of Islamic Banking, as is practiced in Conventional Bank:
- All activities are conducted according to Islamic Shariah.
- Interest free monetary operations.
- Building partnership relation between the Bank and its customers.
- Following Islamic principles in its investment portfolio.
- While investing special consideration to social needs is given.
- Through small and long term deposit schemes providing hope to the poor income group of the society.
- Client service centric banking, through which making the clients feel special.
- Conduct welfare activates etc.
Conventional Bank provides following services under Islami Banking:
- Foreign Trade
- Remittance and Fund Transfer
Conventional Bank under its Islami Banking operations collects deposit mainly in two modes. These are:
In this mode of deposit depositors are not given any profit. Bank can use the deposit in its business but committed to pay back to the customers on demand.
It is partnership between two parties, the capital provider, the depositor in this case and the provider of skill and labor, here the bank. In Islamic terms the depositors are the “Shahib-Al-Maal” and the Bank is “Mudarib”. In this kind of partnership the profit of investment is divided as per agreed upon ratio and the loss is borne by the provider of capital, the depositor in this case. According to Banking laws depositors money should always be protected and be deliverable on demand. Thus, Mudaraba mode of deposit, for profit and loss, capital is not considered rather it is subject to the projected profit rate.
Deposit Product List
Following are the list of products Conventional Bank has under Islamic Deposit mode:
- Al-Wadiah Current Account
- Mudaraba Savings Account
- Mudaraba Short Term Deposit
- Mudaraba Term Deposit
- Mudaraba Education Savings Scheme
- Mudaraba Hajj Savings Scheme
- Mudaraba Contributory Savings Scheme
- Mudaraba Monthly Benefit Deposit Scheme
- House Building Mudaraba Deposit Scheme
- Foreign Currency Account
- Resident Foreign Currency Deposit
- Non-Resident Foreign Currency Deposit
The special feature of the investment policy of Islami Banking is to invest on the basis of profit and loss sharing system in accordance with the tenets and principles of Islamic Shariah. Earning of profit is not the only motive and objective of the Islamic Banking investment policy rather emphasis is given in attaining social welfare and creating employment opportunity.
The objectives and principles of investment of Islami Banking are:
- To invest fund strictly in accordance with the principles of Islamic Shariah.
- To diversify its investment portfolio by size, by sector, by economic purpose, by securities and by geographical area including industrial, commercial and agricultural involvement.
- To ensure mutual benefit for both the Bank and the investment client.
- To make investment keeping in view of the socio economic requirement of the country.
- To increase the number of potential investors by making participatory and productive investment.
- To finance various development schemes for poverty alleviation, income and employment generation, with view to accelerate sustainable socio-economic growth.
- To invest in the form of goods and commodities rather than give out cash money to the investment clients.
- Though all mode of investment is practiced in the Islami Banks are fully permissible, Musharaka and Mudaraba are the pristine mode of Islamic investment. The objective would be to increase investment through these modes.
Conventional Bank conducts its investment portfolio mainly under three mechanisms. These are as follows:
- Bai Mechanism
- Share Mechanism
Investment Product List
Under Bai Mechanism
Under Share Mechanism
- Hire Purchase / Ijara
- Hire Purchase under Shirkatul Melk
A comparative study of Islamic Bank and Conventional Bank
- Islamic Economics:
Islamic economics is a framework for studying economic activities that allow mutual benefit of exchange to be realized. It provides proper tools and techniques for evaluating economic decisions, showing when and how to achieve win/win outcomes and avoid win/lose or lose/lose ones. Islamic economics is based on the principle that Allah, the Almighty created this world with plenty of resources that satisfy the needs of everyone. Thus one person’s success is not necessarily achieved at the expense or excluding of the success of others. This “win/win” framework leads to better economic behavior and performance, and thus promises better future for mankind.
- Islamic Banking:
Islamic banking is an inseparable part of Islamic economy. During the fifty’s it was only a subject matter of research and was limited to the writing of scholars and philosophers. During the sixty’s actual experiment were made and in the seventy’s Islamic Banking Institutions started gaining strength. The eighty’s and ninety’s are the period of consolidation and now Islamic Banking is coming up as the only welfare banking system of the modern world.
There has always been a desire to establish financial institution to operate as per the tenets of Islamic Shariah. A successful Islamic banking venture in My Gamer, Egypt was launched in 1963. Subsequently, Islamic banking movement achieved steady progress and assumed significant dimension and role with the establishment of the Nasser Social Bank (1972), Dubai Islamic Bank (1975), Islamic Development Bank (IDB) (1975), Faisal Islamic Bank in Egypt and Sudan (1977). Emergence of the Islamic Development Bank as and International Islamic Financial Institution with a view to involving all the Islamic Countries in the establishment of Islamic Banks and Financial Institutions was considered as a milestone in the history of Islamic Banking. In August 1974, Bangladesh signed the charter of Islamic Development Bank and committed itself to reorganize its economic and financial system as per Islamic Shariah.
Earlier in November 1980, Bangladesh Bank, the country’s central Bank sent a representative to study the working of several Islamic Bank’s abroad. In January 1981, at the 3rd Islamic summit conference held at Makkah and Taif, a great emphasize were given on that the Islamic countries should develop a separate banking system of their own in order to facilitate their trade and commerce.
In November 1982, a delegation of 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 work had already been done and Islamic banking was in ready for immediate introduction. Islamic Economic Research Bureau (IERB) and Bangladesh Islamic Banker Association (BIBA) made contributions towards introduction of Islamic Banking in the country.
- Definition of Islamic Bank:
Islamic banking is a part and parcel of Islamic Economy. It is an interest free financial institute, which is based on Islamic Shariah. OIC (Organization of Islamic Conference-1978) defined Islamic Bank as ‘a financial Institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the principles of Islamic Shariah and to the banking of the receipt and payment of riba (interest) on any of its operations”.
Islamic Banking in Bangladesh
Background of Islamic Banking in Bangladesh:
Bangladesh is the third largest Muslim country in the world with around 130 million population and 90 percent of them are Muslim. The hope and aspiration of the people to run Banking system on the basis of Islamic Principles came into reality after the OIC recommendation of its Foreign Ministers meeting in 1978 at Senegal to develop separate Banking system of their own. After 4 years of that declaration in 1983, Bangladesh established 1st Islamic Bank. At present, in Bangladesh, out of 51 banks, 6 full-fledged Islamic Banks and 2 Islamic Banking Branches of two conventional Banks have been working in the private sector on the basis of Islamic Shariah. Islamic Banking system has been designed and developed to prevent exploitation, ensure justice and growth in the society. However, Islamic Banks in Bangladesh since their inception have been facing multifarious problems in their operation, which needs to be carefully addressed.
Development of Islamic Banking in Bangladesh:
At present, six full fledged Islamic Banks viz.
- Islamic Bank Bangladesh Limited (IBBL).
- Al-Baraka Bank Bangladesh Limited (ABBL).
- Al-Arafah Islami Bank Limited (AIBL).
- Social Investment Bank Limited (SIBL).
- Shahjalal Bank Limited (SBL).
- Shamil Bank of Bahrain EC (Islamic Bankers)
And two Islamic Banking Branches of prime Bank Limited and two Islamic banking branch of EXIM Bank Ltd. are operating in Bangladesh as per Islamic Shariah.
The first Islamic Bank, Islami Bank Bangladesh Limited was established in March 1983 to conduct banking activities based on the basic tenets of Islamic Shariah.
Later, Al Barka Bank Bangladesh Limited was established as the second interest free Islamic Bank in March 1987.
The third and fourth Islamic Banks of Bangladesh namely, Al-Arafah Islami Bank Limited & Social Investment Bank Limited has started functioning in Bangladesh from September 27, 1995 & November 25, 1995 respectively.
At last, fifth private sector Islamic Bank “Shahijalal Bank Limited” has been started banking operation very recently from Mid-May 2002.
The only Foreign Islamic Bank “Shamil Bank of Bahrain Ec (Islamic Bankers)” which is the largest Islamic Bank of the world opened a Branch in Dhaka, Bangladesh, in August 1997.
Besides, two Islamic Banking branches of Prime Bank Limited also started operation on Islamic Shariah basis from 18th December, 1995 & 17th December, 1997 respectively and two Islamic banking branch EXIM Bank started operation from on mid-2002.
Present Status of Islamic Banking in Bangladesh:
The growth of Islamic Banking in Bangladesh is progressing day by day. Islamic Banking is a brighter reality now days in the competitive business and financial world. The present status of the Islamic Banking in Bangladesh has been highlighted in the ongoing passage.
Liquidity position of the Islamic Banks:
The Saturate Liquidity Requirement (SLR) for the Islamic Banks is fixed at 10% instead of 20% fixed for the traditional commercial Banks. Some of the Islamic Banks e.g. Islami Bank Bangladesh Limited are facing excess liquidity problems while some other banks are maintaining liquidity position at the marginal level. There is excess liquidity of the Islamic Banks to the tune Tk. 524.79 crores as on December 2000, which originated mainly due to the absence of interest free financial instruments in the country.
Branch Expansion of the Islamic Banks:
The total number of branches of Islami Banks in the country stood at 202 in December 2000 of which 162 are urban and 40 are in rural. The number of branches of Islamic Banks as on December 2000 is 3.30% of all branches of the banking system.
Problems of Islamic Banking in Bangladesh:
Presently 60%-70% investment of Islamic Banks is made on mark-up profit basis (Murabaha & Bai-Muajjal etc.). As a result, ideal mode of investment (Mudaraba & Mushraka) is quite absent. Some of the typical problems faced by the Islamic Banks are:
- Absence of Islamic Money Market.
- Absence of Legal framework for Islamic Banking
- Shortage of support and link institutions
- Shortage of trained Manpower, and
- Lack of co-ordination and co-operation among Islamic Banks.
Some areas to be developed to popularize Islamic Banks in Bangladesh:
Islamic Money Market:
In absence of Islamic Money Market in Bangladesh, the Islamic Bank cannot invest their surplus fund (temporary excess liquidity) to earn any income rather than keeping if as idle. Because all the Government Treasury Bills, approved securities and Bangladesh Bank Bills in Bangladesh are interest bearing. Naturally, the Islamic Banks cannot invest the permissible part of their Statutory Liquidity Reserve and Liquid Surplus in those securities. As a result, they deposit their whole reserve in cash with the Bangladesh Bank. Similarly, the liquid surplus also remains UN invested. However, the conventional banks of the country do not suffer from this sort of limitation. As such the profitability of the Islamic Banks in Bangladesh is adversely affected.
Legal Framework for Islamic Banking:
Another constraining factor for the Islamic Banks is the absence of necessary legal framework. Due to absence of separate legal framework of Islamic Bank in Bangladesh these banks are facing problems to handle Islamic based contracts. All the financial and commercial laws of the country are interest oriented. Even the tax structure has a bias towards loan financing. Interest cost on borrowed funds is exempted from taxes whereas dividend paid on funds mobilized as equity is subject to tax at braying rates. Under Islamic Framework, the loan mechanisms are required to be replaced by Shariah laws like Mushraka, Mudaraba etc. But there is no enactment of Shariah laws to validate these modes of contracts.
Support and link institutions:
Any system, however integrated it may be, cannot thrive exclusively on building elements. It has to depend on a number of link institutions and so is the case with Islamic Banks. For identifying suitable projects, Islamic Banks cannot profitably draw the services of economists. Similarly they need the services of lawyers, Insurance companies, Management Consultants, Auditor and so on. They need also training forums for prompting entrepreneurship amongst their clients. Such support services properly oriented towards Islamic Banking are yet to be developed in Bangladesh.
Dual Quality Manpower for Islamic Banks:
In Bangladesh, for smooth implementation and successful replication of Islamic Banking, we need a band of people having modern Banking knowledge, skill and orientation of the Shariah Methodology. Such people are needed for Islamic Banks as well as for link institutions. The trainers engaged in imparting training to such people at the training academies of the respective banks, should be very clear about the required profile so that can channel their efforts accordingly.
Lack of Co-ordination & Co-operation among the Islamic Banks:
Lack of Co-operation, Co-ordination and collaboration among the Islamic Banks has created a lot of problems, particularly in the following fields:
- Identification, promotion and establishment of joint projects
- Exchange of Shariah views in different banking issues.
- Promotion of Islamic inter-bank money market
- Inter-Islamic Bank exchange of personnel for promotion of expertise in various fields.
Some achievements of Islamic Banks
Formation of Islamic Banks Consultative Forum:
Under the auspices of Islamic Banks and supervision of Bangladesh Bank (Central Bank), Islamic Bank Consultative Forum has been formed for establishing effective interaction and foster and strengthen the bond of co-operation for all Islamic Banks, so far the Forum met five times and took some important decisions.
Formation of Central Shariah Board
The Central Shariah Board of Islamic Banks has been formed recently for supervision of Shariah principles of Islamic Banks and Islamic Banking Branches of Traditional Banks operating in Bangladesh. The Board will advise and co-operate with Islamic Banks relating all kind of Shariah Issues.
Identified areas of Co-operation
- Development of an Islamic Money Market:
In the Islamic Banks Consultative Forum it was decided to work for developing an Islamic Money Market in Bangladeshi mechanism.
- Common Islamic Insurance Company:
All Islamic Banks have taken initiative for establishing of a common Islamic Insurance Company. Details modus operandi has been formulated.
- Islamic Banking Act:
It was agreed upon that full-fledged Islamic Banking Act is essential for smooth operation of Islamic Banking in the country. Draft Islamic Banking act has been prepared and now it is under active consideration of Bangladesh Bank (The Central Bank).
- New Financial Product:
It was decided to put in the best efforts for development of New Financial Products approved by Shariah Board by all Islamic Banks and all other Banks will share Expenditure of one Bank.
Consortium/Syndication Financing by Islamic Banks was approved possibility for suitable project for syndicate is going on.
- Development of Training Institute:
It was decided to establish of Central Training and Research Academy and Central Library for the Islamic Banks.
Business Strategy Analysis
Social Investment Bank Limited is a growing performing private sector bank. It is relentless in pursuit of business innovation and improvement. SIBL is staffed by qualified and experienced officials always prepared to provide efficient, personalized and quality services backed by state-of-the-art technology for both customers and internal use. One of the prime objectives of the bank is to be a high quality distributor of products and services and achieve excellence in customer service next to none and superior to all competitors in all spheres of banking providing the services of the next. Services of SIBL is trying to match the demand of the 21st century.
We have conducted the business strategy of AMCL in three subsequent parts:
- Industry analysis
- Competitive strategy analysis
The details of the above part are presented below:
As we know strategy literatures suggest that the average profitability of an industry is influenced by the “Five Forces”. We have tried to find out important aspect of the “Five Force” for SIBL.
Competitive Force 1: Rivalry among existing firms
The number of firms in this industry and their relative sizes increases day by day. So the degree of concentration becomes lower. Degree of differentiation and switching costs is low as the product quality of competitors is very much similar and the switching cost of the customers is very low. The competitors of the Bank offer different product at different time. So customers have a good option to choose the suitable product among the various products.
Competitive Force 2: Threat of new entrants
For SIBL threat of new entrants is high as DBL is a private bank and many private banks are growing day by day. The legal barriers such as patents, copyrights for new entrants are not active enough to protect the new entrants. In our country, there is a big and profitable market of bank industry. Because of this, many foreign companies open their branch in our country.
Competitive Force 3: Threat of Substitute products
Threat of substitute products in SIBL is high. Because the relative price and utility of the substitute products is very much similar, buyer’s switching costs is low. Moreover, when buyers get benefit over the SIBL’s product then they will go to another product. The threat of substitute products depends on the relative price and performance of the competing products or services and on customer’s willing to substitute. In some cases threat of substitution comes not from customer’s switching to another product but from utilization of new ideas that allow them to do without, or useless of existing products.
Competitive Force 4: Bargaining Power of Buyers
Two factors determine the power of buyers: These are Price Sensitivity and Relative Bargaining Power. Bargaining Power of Buyers for SIBL is high as the buyers of the product are more price sensitive as the product is undifferentiated and there is a few or no switching cost.
A: Price sensitivity:
Price sensitivity in our selected company SIBL is high. Because there are many company exist in this industry, and buyer’s switching cost is low. It determines the extent to which buyers care to bargain on price. Buyers are more prices sensitive when the product is undifferentiated and there is few switching cost.
B: Relative Bargaining Power:
Bargaining power of buyer’s in SIBL is high because alternative products are available and buyer’s switching costs is low. It determines the extent to which they will succeed in forcing the price down. Relative bargaining power is determined by the number of buyers relative to the number of suppliers. Volume of purchase by a single buyer, number of alternatives products available to the buyer, buyer’s switching costs from one products to another and the threat of backward integration by the buyers.
Competitive Force 5: Bargaining Power of Suppliers
SIBL is a private bank and alternative private banks are available in market. So, in this case bargaining power of suppliers is low. Suppliers are powerful when there are only a few companies and there are few substitutes available to the customers.
Competitive Strategy Analysis
The profitability of SIBL is influenced not only by its industry structure but also by the strategic choice it makes in positioning itself in the industry. SIBL follows both the cost leadership and differentiation strategies in positioning itself in the industry. The potential competitors are; Prime Bank, BRAC Bank, Duch Bangla Bank Limited, Dhaka Bank etc.
Competitive Strategy 1: Cost Leadership
SIBL always try to offer its products to its customer at a lower price. As for example, The bank always try to charge lower profit from the customers and try to give higher profit than other competitors.
Components of the Financial Statement of Social Investment Bank Limited:
- Balance Sheet
- Profit & Loss Accounts
- Cash Flow Statement and
- Accounting Policies and Explanatory Notes.
To evaluate the accounting quality of Social Investment Bank Limited as an analyst follows a series of steps:
Step 1: Identify key accounting policies
Social Investment Bank Limited maintains some specific policies, which are found by analyzing their financial statement. The financial statements of the company are made up to 31 December each year, and are prepared under the historical cost convention, and in accordance with first schedule of the Bank Companies Act (BCA) OF 1991, Bangladesh Bank circulars, Bangladesh Accounting Standards (BAS), the Companies Act 1994, the Listing Regulations of the Stock Exchanges, the Securities and Exchange Rule 1987 and other laws and rules applicable in Bangladesh on a going concern basis. The revenues are recognized as a manner which satisfies all conditions of revenue recognition as prescribed by BAS 18 “Revenue Recognition” Depreciation assets are stated at cost less accumulated depreciation. Depreciation on fixed assets other than land and land development is provided at straight-line method. Foreign currency transactions are converted into equivalent Taka currency using the ruling exchange rates on the dates of such transaction.
Step 2: Assess Accounting Flexibility
Social Investment Bank Limited has flexibility in choosing their key accounting policies and estimates. Though their financial statements have been drawn up in accordance with the requirements of Companies Act 1994, securities and exchange rules 1987 and other applicable laws and rules containing all the information in the manners required by the said relevant laws and rules and the IAS, adopted and applicable and accuracy of the account and financial statements but their accounting policies are not constrained by accounting standard and convention. From the analysis of their financial statement, it is clear that their accounting policies are more informative for understanding the firm’s economics.
Step 3: Evaluate Accounting Strategy
The company is competing in a market where there are new competitions. Still the company is striving hard not only to maintain existing market share but also to expand it in which they have been successful. They recognize sale when the goods are delivered, so their growth of turnover is mentionable. Net profit, on the other hand, showing a growth trend by strict cost control system.
Step 4: Evaluate the Quality of Disclosure
Social Investment Bank Limited provides adequate disclosures to assess the firm’s business strategies and economic consequences. They use notice to the shareholder in their annual report to clearly lay out the firm’s industry conditions, its competitive position, and management’s plan for the future. They explain their current performance such as profit margins price competition, cost control strategy, firms invest in product quality and customer services. They disclose all the related information about all units of the firms. Their accounting records, relevant books of account, registered, schedules and financial statements are sufficient to measure authenticity and accuracy of disclosure.
Step 5: Identify Potential Flags
The annexed Balance Sheet, Profit and Loss Account, Statement of changes in Equity and Cash Flow Statement represent a true and fair view of the state of the Company’s affairs and of the profit earned and cash flows of the year then ended and that these financial statements have been drawn up in accordance with the requirements of Companies Act 1994, Securities and Exchange Rules 1987 and other applicable laws and rules containing all the information in the manner required by the said relevant laws and rules and the IAS’s adopted and applicable in Bangladesh including IAS 24. So, there is no unexplained change in accounting, any unusual increase in inventories in relation to sales increases, any increasing gap between the firm’s reported income and its cash flow from operating activities.
Step 6: Undo Accounting Distortions
The accounting analysis suggests that whether the firm’s accounting numbers are misleading or not, analysts should attempt to restate the reported numbers to reduce the distortions to the extent possible. From the balance sheet and financial statements the analysts did not find any accounting distortions to undo. Their reported numbers reflect the true judgment of the SIBL.
SWOT Analysis of Social Investment Bank Ltd.
- Good Management System.
- High Morality of the employees and customers.
- Religious Feelings of the people.
- Unique System: 100% supervise credit related with Islamic Shariah.
- Absence of Islamic money market.
- Deficiency of experienced manpower.
- Absence of Competitors. Existing are quite weak.
- Few employees’ attitude towards customers is not satisfactory.
- SIBL does not use the share mode of investment.
- SIBL still remain under lower position in the world ranking.
- They have no such program to finance to the new entrepreneur or creating the same.
- SIBL has a vast opportunity to hold the most of the customers of Bangladesh as its banking operation is based upon Islamic Shariah.
- They provide card service (Visa Card or ATM Card) to customers.
- In the money market of Bangladesh there is no call money system of Islamic Sharia.
- State law defers with the Islamic Shariah.
- Other conventional banks opened their branch in rural areas.
One of the principles tools of financial analysis involves assessing how various line items in a firm’s financial statement (balance sheet and income statement) relate to one another. It tells about profitability, liquidity, solvency, efficiency and performance of an entity.
Calculation of financial ratios- Case of Social Investment Bank Ltd.:
Here we compare ratios of Social Investment Bank Limited five (5) years (a time-series comparison). In ratio analysis, I try to cover overall profitability, liquidity, leverage, activity, and individual profitability.
Measuring Overall Profitability (Dupont Analysis)
The starting point for a systematic analysis of a firm’s performance is its return on equity (ROE), defined as
Calculation of ROE:
Return on Equity
|Return On Equity|
|Cost Efficiency||Operating Efficiency||Leverage||13.49% (Avg.)|
Calculations are enclosed in Append
Calculation of ROA:
Return on Asset
|Return On Asset|
|Cost Efficiency||Operating Efficiency||0.58% ( Avg.)|
Calculations are 15enclosed in Appendix
SIBL’s ROE showed a decrease, from 29.2% in 2002 to 5.8% in 2006. The rate is a decreasing trend. The reason for declining of ROE in 2002 to 2006 is poor performance in cost efficiency and leverage. The average ROE is 13.49%, which indicates that the profitability of the firm is not well enough.
The reason for this type of trend in ROE is because the company’s sales increase at a higher rate than net income. On the other hand total asset of the company increase at a higher rate than total equity. From the above graph we can say that ROA is not in good position of the bank. After 2002, it was decrease. The cost efficiency or net profit margin of the bank is very bad. But the asset turnover or operating efficiency increase in 2006. However, from the trend of ROA it is clear that the bank has not a good and improving ROA position.
|Name of the ratios||2002||2003||2004||2005||2006|
|Debt to Equity Ratio||19.17||19.76||19.39||15.19||13.570|
|Debt to Total Asset||.57||.82||0.81||0.68||0.60|
|Interest Coverage Ratio||1.44 times||1.30 times||1.11 times||1.03 times||.98 times|
|Name of the ratios||2002||2003||2004||2005||2006|
|Return on Investment||0.0125||0.0091||0.0039||0.000068||0.0029|
|Return on Equity||0.29||0.21||0.092||0.015||0.059|
The profitability in 2004 and 2005 is comparatively lower than previous year. Return on investment is showing a decreasing trend up to 2002. The reason behind this is the decreasing of net income and total asset in 2003, 2004 and 2005. Higher rate of increase in general expenditure is also responsible. From the trend analysis, it is clear that the profitability position of the bank is not in good condition because both of the profitability ratios have a negative trend. But Return on Investment is positive sign in 2006. Because it show positive trend than the previous year.
To perform better in foreign exchange Social Investment Bank Limited adopts some necessary steps. Here I would like to mention some of them.
- First of all Social Investment Bank Limited should increase its equity (ROE) level.
- Social Investment Bank Limited should look after about their return on asset (ROA).
- Social Investment Bank Limited can expand their export business for more export financing to minimize the difference between export & import financing.
- Previously I have mentioned that import business is a very short-term profitable source of income for banks. But due to some new government regulation the import business is highly stubbing. So to promote this sector SIBL can offer new profit rate. Such as SIBL can offer new profit rate (Profit rate swap) option that will repay the money before the time.
- New investment sector is booming rapidly. The Social Investment Bank Limited should identify those untapped areas of business and invest in those sectors.
I believe these steps will be helpful to improve the foreign trade performance of Social Investment Bank Limitedand the financial sector of Bangladesh as well.
Lot of new commercial bank has been established in last few years and these banks have made this banking sector very competitive. So, now banks have to organize their operation and do their operations according to the need of the market. Banking sectors no more depends on a traditional method of banking. In this competitive world this sector has trenched its wings wide enough to cover any kind of financial services anywhere in this world. The major task for banks, to survive in this competitive environment is by managing its assets and liabilities in an efficient way.
Through this report I have tried to present the overall foreign trade performance of Social Investment Bank Ltd (SIBL) in comparison with its closest competitor whish were established lot of private bank.. From my analysis, I have found that the performance of SIBL is not a very satisfactory one. The bank should try to overcome the consequences to improve its performance. According to my findings Prime Bank Limited posses the better performance in every criterion than its competitor. The performance of Social Investment Bank Limited and Al-Arafah Bank is nearly the same.
One of the major problems for SIBL is not possessed with good marginal efficiency in ROA. And their return on equity (ROE) ratio is not so high compare to other banks. But for foreign trade section they are doing good business. Especially SIBL has more import business than its rivals. If SIBL can concentrate on import business, it will give the opportunity to circulate the profit more rapidly than other sources. Besides these, SIBL should also increase the export business. Because if SIBL can reduce the difference between import financing to export financing, bank can use it’s own foreign exchange for import financing. Here I would like to mention that Prime Bank Limited (PBL) has little difference between imports financing to export financing.
For the client point of view, they think, they are more satisfied with import business at SIBL rather than export business. But at the same time they found some lacking in this department that can be over come at no time.
For the pricing policies, I found that Social Investment Bank Limited is providing on of the best pricing rate in compare to other banks. Moreover, the clients’ response is very much positive in
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