Investment Operations of Islami Bank Bangladesh Limited
Investment or investing is a term with several closely related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. Investment is any use of resources intended to increase future production output or income. Investment is the process of using savings or resources to increase the economy’s productive capacity; investment in capital goods occurs when savings are used to finance the production of new capital goods and/or new technology to increase productivity; investment in human capital or human resources occurs
From the above discussion, we can define investment as:
- The act of investing; laying out money or capital in an enterprise with the expectation of profit
- Money that is invested with an expectation of profit
- Outer layer or covering of an organ or part or organism
- The act of putting on robes or vestments
- The ceremonial act of clothing someone in the insignia of an office; the formal promotion of a person to an office or rank
Objectives of Investment
The objectives of investment operations of the Bank are:
- To invest fund strictly in accordance with the principles of Islamic Shariah.
- To diversify its investment portfolio by the size of investment, by sectors (public & private), by economic purpose, by securities and by geographical area including industrial, commercial, and agriculture.
- To ensure mutual benefit both for the bank and the investment-client by professional appraisal of investment proposals, judicious sanction of investment, close and constant supervision and monitoring thereof.
Necessity for preparation of credit report:
Preparation of credit report of the investment client is necessary and very much important for different purpose which is help to the investment officer to take decision for the invest of the propose project. By preparing the credit report is clearly mention the investment size, its rate of return and the fusibility of the project. The credit report help to identify the client past invest future of the client. Some important things as shown below,
- To select investment client carefully and judiciously.
- To ensure quality investment.
- To ascertain credit worthiness of the client.
- To ensure adequate securities both primary and collateral.
- To ensure clients business establishment and line of business.
Investment Modes of IBBL
When money is deposited in the IBBL, the bank, in turn, makes investments in different forms approved by the Islamic Shariah with the intention to earn a profit. Not only a bank, but also an individual or organization can use Islamic modes of investment to earn profits for wealth maximization. Some popular modes of IBBL’s Investment are discussed below.
BAI-MURABAHA (Contract Sale on Profit)
A. Meaning of Murabaha
“Bai-Murabaha” means sale for an 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 an agreed upon profit payable today or on some date in the future in lump-sum or by installments. The profit may be either a fixed sum or based on a percentage of the price of the goods.
B. Important Features of Murabaha
- A client can make an offer to purchase particular goods from the bank for a specified agreed upon price, including the cost of the goods plus a profit.
- A client can make the promise to purchase from the bank, that is, he is either to satisfy the promise or to indemnify any losses incurred from the breaking the promise without excuse.
- It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify any losses that may result.
C. Steps of Bai-Murabaha
First Step: The client submits a proposal regarding his requirements of the bank. The client sends a proposal with the specifications of the commodity to be acquired from the bank. The proposal also indicates details regarding the date, time and place of delivery as well as price and form of payment information. The bank responds by sending a counter proposal either accepting the buyer’s price or stipulating a different price.
Second Step: The client promises to buy the commodity from the bank on a Bai-Murabaha basis, for the stipulated price. The bank accepts the order and establishes the terms and conditions of the transaction.
Third Step: The bank informs the client (ultimate buyer) of its approval of the agreement to purchase. The bank may pay for the goods immediately or in accordance with the agreement.
The seller expresses its approval to the sale and sends the invoice(s).
Fourth Step: The two parties (the bank and the client) sign the Bai-Murabaha Sale contract according to the agreement to purchase.
Fifth Step: The Bank authorizes the client or its nominee to receive the commodity.
The seller sends the commodity to the place of delivery agreed upon. The client undertakes the receipt of the commodity in its capacity as legal representative and notifies the bank of the execution of the proxy.
D. Application of Bai-Murabaha
Murabaha is the most frequently used form of finance in IBBL throughout the world. It is suitable for financing the different investment activities of customers with regard to the manufacturing of finished goods, procurement of raw materials, machinery, and other required plant and equipment purchases. It is used widely about 53%.
BAI-MUAJJAL (Deferred Sale)
A. Meaning of Bai-Muajjal
The Bai-Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods, permissible under Shariah and law of the country, to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or in fixed installments.
B. Important Features of Bai-Muajjal
- It is permissible and in most cases, the client will approach the bank with an offer to purchase a specific good through a Bai-Muajjal agreement.
- It is permissible to make the promise binding upon the client to purchase the goods from the bank.
- It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the bank for damages caused by non-payment.
HIRE-PURCHASE UNDER SHIRKATUL MELK
Hire-Purchase under Shirkatul Melk has been developed through practice. Actually, it is a synthesis of three contracts: (a) Shirkat; (b) Ijarah, and (c) Sale. These may be defined as follows:
Definition of Shirkatul Melk: ‘Shrkat’ means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset and own the same jointly and share the benefit as per agreement and loss in proportion to their respective equity, the contact is called Shirkatul Melk. In the case of Hire Purchase under Shirkatul Melk, IBBL purchase assets to be leased out, jointly with client under equity participation, own the same and share benefit jointly till the full ownership is transferred to the client.
Definition of Ijara: The term ‘Ijara’ has been defined as a contract between two parties, the lessor and the lessee, where the lessee enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the lessor. It is a lease agreement under which a certain asset is leased out by the lessor or to a lessee against specific rent or rental for a fixed period.
Definition of Sale contract: This is a contract between a buyer and a seller under which the onwnership of certain goods or asset is transferred by the seller to the buyer against agreed upon price paid by the buyer. In the case of Hire Purchase under Shirkatul Melk, the lessor bank sells or transfers its title to the asset under a sale contract on payment of sale price.
A. Stages of Hire Purchase under Shirkatul Melk
Hire Purchase under Shirkatul Melk Agreement has got three stages:
- Purchase of asset under joint ownership of the lessor and the lessee.
- Hire, and
- Sale and transfer of ownership by the lessor to the other partner – lessee.
B. Important Features
- In case of Hire Purchase under Shirkatul Melk transaction the asset/property involved is jointly purchased by the lessor (bank) and the lessee (client) with specified equity participation under a Shirkatul Melk contract in which the amount of equity and share in ownership of the asset of each partner (lessor bank and lessee client) are clearly mentioned. Under this agreement the lessor and the lessee become co-owners of the asset under transaction in proportion to their respective equity.
- In Hire Purchase under Shirkatul Melk Agreement the exact ownership of both the lessor (bank) and lessee (client) must be recognized. However, if the partners wish and agree the asset purchased may be registered in the name of any one of them or in the name of any third party clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement.
MUDARABA (Investment made by the entrepreneur)
A. Definition of Mudaraba
The term Mudaraba refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital. Mudaraba is also known a Qirad and Muqaradah
B. Steps of Mudaraba
The bank provides the capital as a capital owner. The Mudarib provides the effort and expertise for the investment of capital in exchange for a share in profit that is agreed upon by both parties.
- The Results of Mudaraba: The two parties calculate the earnings and divide the profits at the end of Mudaraba. This can be done periodically in accordance with the terms of the agreement, subject to the legal rules that apply.
- Payment of Mudaraba Capital: The bank recovers the Mudaraba capital it contributed before dividing the profits between the two parties because the profit is considered collateral for the capital.
- Distribution of wealth resulting from Mudaraba: In the event a loss occurs, the capital owner (the bank) is responsible for the entire loss. In the event of profits, they are divided between the two parties in accordance with the agreement between them, subject to the capital being recovered first.
C. Rules of Mudaraba
There are some legal rules that govern the business relationship Mudaraba which are as follows.
- It is a condition in Mudaraba that the capital be specific in nature. In other words, the amount of capital must be known at the inception of the contract. The purpose of this rule is to ensure that there is no uncertainty about the amount of capital and, thus, no uncertainty about the division of profits.
- It is a condition that capital must be in the form of currency in circulation. However, merchandise can be contributed, so long as both parties to the business arrangement agree upon its value.
- It is a condition that the capital cannot be subject to indebtedness.
MUSHARAKA (Partnership based investment)
A. Meaning of Musharaka
The word Musharaka is derived from the Arabic word Sharikah meaning partnership. At an IBBL, a typical Musharaka transaction may be conducted in the following manner.
One, two or more entrepreneurs approach an IBBL to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the project. All partners, including the bank, have the right to participate in the project. They can also waive this right. The profits are to be distributed according to an agreed ratio, which need not be the same as the capital proportion. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project.
BAI-SALAM (Advance payment)
A. Meaning of Bai-Salam
Bai-Salam is a term used to define a sale in which the buyer makes advance payment, but the delivery is delayed until sometime in the future. Usually the seller is an individual or business and the buyer is the bank.
The Bai-Salam sales serve the interests of both parties.
- The seller receives advance payment in exchange for the obligation to deliver the commodity at some later date. He benefits from the Salam sale by locking in a price for his commodity, thereby allowing him to cover his financial needs whether they are personal expenses, family expenses or business expenses.
- The purchaser benefits because he receives delivery of the commodity when it is needed to fulfill some other agreement, without incurring storage costs. Second, a Bai-Salam sale is usually less expensive than a cash sale. Finally a Bai-Salam agreement allows the purchase to lock in a price, thus protecting him from price fluctuation.
B. Steps of Bai-Salam
- Cash sale or Sale on Credit – The bank pays the agreed upon price at the time of the contracts inception. The seller agrees to the delivery of the commodity some specified date in the future.
- Delivery and Receipt of the Commodity on the Specific due Date: There are several options for delivery available to the bank
a) The bank may receive the commodity and resell it to another party for cash or credit.
b) The bank may authorize the seller to find another buyer for the commodity.
c) The bank may direct the seller to deliver the commodity directly to a third party with whom the bank has entered into another agreement.
- The Sale Contract: The bank agrees to sell the commodity for cash or a deferred price, which is higher than the Salam purchase price. The buyer agrees to purchase and to pay the price according to the agreement.
C. Application of Bai-Salam
Salam sales are frequently used to finance the agricultural industry. Banks advance cash to farmers today for delivery of the crop during the harvest season. Thus banks provide farmers with the capital necessary to finance the cost of producing a crop. Salam sale are also used to finance commercial and industrial activities. Once again the bank advances cash to businesses necessary to finance the cost of production, operations and expenses in exchange for future delivery of the end product. In the meantime, the bank is able to market the product to other customers at lucrative prices. In addition, the Salam sale is used by banks to finance craftsmen and small producers, by supplying them with the capital necessary to finance the inputs to production in exchange for the future delivery of products at some future date.
A. Definition of Istisna’a Sale
The Istisna’a sale is a contract in which the price is paid in advance at the time of the contract and the object of sale is manufactured and delivered later. It is a contract with a manufacturer to make something and it is a contract on a commodity on liability with the provision of work. IBBL can utilize Istisna’a in two ways.
- It is permissible for the bank to buy a commodity on Istisna’a contract then sell it after receipt for cash or deferred payment.
- It is also permissible for the bank to enter into a Istisna’a contract in the capacity of seller to those who demand a purchase of a particular commodity and then draw a parallel Istisna’a contract in the capacity of a buyer with another party to manufacture the commodity agreed upon in the first contract.
B. Steps of Istisna’a Sale
Istisna’a Sale Contract: The Buyer expresses his desire to buy a commodity and brings a request to purchase the commodity to the bank. The method of payment, whether cash or deferred is set forth in the agreement. The bank agrees to deliver the commodity to the buyer at some agreed upon time in the future.
Delivery and Receipt of the Commodity: The seller in the parallel Istisna’a agreement, delivers the commodity to the bank on the agreed upon date. The bank, in turn, delivers the product to the buyer of the original Istisna’a contract, in accordance with the original agreement. In this way, all parties fulfill their obligations to the contract.
C. Application of Istisna’a Sale
The Istisna’a contract allows IBBL to finance the public needs and the vital interests of the society to develop the Islamic economy in accordance with Islamic teachings. For example Istisna’a contracts are used to finance high technology industries such as the aviation, locomotive and ship building industries. In addition, this type of business transaction is also used in the production of large machinery and equipment manufactured in factories and workshops. Finally, the Istisna’a contract is also applied in the construction industry such as apartment buildings, hospitals, schools, and universities to whatever that makes the network for modern life. One final note, the Istisna’a contract is best used in those transactions in which the product being purchased can easily be measured in terms of the specified criteria of the contract.
A. Definition of Ijarah
According to Islamic Shariah, Ijarah is a contract between two parties – the lessor and the lessee, where the lessees (Hirer or Mustajir) have the right to enjoy/reap a specific benefit against a specified consideration/rent/wages from the lessor – the owner (Muajjir).
B. Elements of Ijarah
According the majority of Fuqaha, there are three general and six detailed elements of Ijarah:
- The wording: This includes offer and acceptance.
- Contracting parties: This includes a lessor, the owner of the property, and a lessee, the party that benefits from the use of the property.
- Subject matter of the contract: This includes the rent and the benefit.
Comparison of different investment modes of IBBL
Bai Murabaha vs Bai-Muajjal:
Bai-Murahaba must be sold on profit on the hand Bai-Muajjal can be sold on profit or loss. The purchase price of Bai-Murahaba is essential to publish. On the other hand the purchase price of Bai-Muajjal is not required to publish.
Murabaha vs Musaraka:
Mudaraba is a form of partnership of profit where one party provides funds while the other party provides expertise and management. On the other hand Musaraka is a contractor of partnership between two or more individuals in which all parties contribute capital, participate in the management, share the profit in portion to their capital as per pre-agreed ratio.
Hire Purchase under Sirkatul Melk (HPSM) vs Bai-Ishtisna:
HPSM is a combination of three contracts as Shirkat, Ijarah and sale. Shirkat means partnership. The Istisna’a sale is a contract in which the price is paid in advance at the time of the contract and the object of sale is manufactured and delivered later.
Investment Schemes of IBBL:
Keeping the same in view, side by side with Commercial and Industrial Investment operations, many special Investment Schemes have been introduced by the Bank over the years like:
- House-hold durables Scheme
- Housing Investment Scheme
- RealState Investment Program
- Transport Investment Program
- Car Investment Scheme
- Invest Scheme for doctors
- Small Business Investment Scheme
- Agricultural Implements Investment Scheme
- Mirpur Silk weavers’ Investment Scheme
- Rural Development Scheme
- Investment under MEIS
- Micro-Industries Investment Scheme.