Internship Report on Al Arafah Islami Bank
Subject: Business, Management | Topics:


“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.

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.

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.


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.


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.


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 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.




The gradual improvement in the overall policy environment has enabled Bangladesh to improve its economic performance in recent years. Successive governments in Bangladesh have been confronted with the problem of stimulating the economic growth rate in a country where a substantial segment of the population lives below the subsistence level. Economic policies are still guided by five year plans. Nevertheless, some progress has been made over the years, such as self -sufficiency in food grain production, reducing the population growth rate, poverty alleviation and boosting export income. The GDP growth per annum has been about 5 percent on an average from 1994-2000; Per capita GDP was $363 in 1999-2000.

The prospect of economic growth in Bangladesh in the near future will depend on the pace of economic reforms and the quality of macroeconomic management. Accelerating the rate of economic growth will require higher levels of investment. This will primarily come from private flows of foreign direct investment. This can be established by reforming the financial system and continuing the process of financial deepening.

The financial system in Bangladesh is relatively small and less developed than in most countries in South and East Asia. The sector’s contribution to GDP has remained static at 1.5 percent during 1999-2000 periods. Commercial banks are at the heart of this financial sector by contributing 80% of the total. The depth of the financial system, as measured by the ratio of the broad money supply to GDP, has been growing slowly and was low at around 32% in 1999-2000.

However, as the government is often the owner and regulator as well as the supervisor and customer of a bank, there has been ample opportunity for mismanagement over the years. The banking sector is plagued with a lack of credit discipline, archaic loan recovery law, corruption, inefficiency, overstaffing, etc. Several reform measures of the financial sector have been taken to improve the situation. Relative stability achieved by the support extended by both the central bank and the Government of Bangladesh in the past has restored public confidence in the country’s banking sector. Moreover, Nationalized Commercial Banks (NCBs) and old generation Private Commercial Banks (PCBs) would have to lower the rate of NPAs in their portfolios. Failure to do so would mean re-capitalization, at least for the NCBs. This may in turn lead to a further drain on the limited resources of the Government of Bangladesh. At this time or in the immediate future this re-capitalization would not be feasible. With these conditions in place, the World Bank anticipates the likelihood of a situation where the ever-increasing burden of non-performing loans and growing rate of debt servicing would place the economy under enormous strain and result in a crisis in the banking sector in the long term.

Market Segment

The banking industry of Bangladesh is mainly divided into two sectors, such as Specialized Banks (SBs) and Commercial Banks (CBs). The Specialized Banks are those banks that deal with specific sectors or industry of an economy. For instance, Bangladesh Krishi Bank (BKB) only deals with the agricultural sector of the economy; Bangladesh Shilpa Bank (BSB) only deals with the industrial sector of the economy, etc.

On the other hand, Commercial Banks are Scheduled Banks that are operating in the country under the rules and regulations of the Central Bank. Commercial banks in turn can be grouped as Nationalized Commercial Banks (NCBs); Foreign Commercial Banks (FCBs) and Private Commercial Banks (PCBs) with three different segments, such as 1st Generation Private Commercial Banks, 2nd Generation Private Commercial Banks, and 3rd Generation Private Commercial Banks.

The Bangladesh Bank (BB) Order created in 1972, authorized Bangladesh Bank (BB) as the central bank of the country. Bangladesh Bank Order 1972 and the Banking / Companies Act 1991 mainly guide the commercial banks in Bangladesh. Commercial Banks in Bangladesh are not allowed to do business other than just banking. Normal activities include borrowing, raising or taking up of money, lending or advancing of money with or without security. They are also authorized to issue letters of credit, trade in precious commodities and buying and selling of foreign goods excluding foreign bank notes. They are also authorized to trade in bills of exchange, promissory notes, coupons, drafts, debentures, certificates and other instruments approved by Bangladesh Bank (BB). Banking companies are required to provide safe vaults and are authorized to collect money and securities.

All banks operating in Bangladesh with different paid-up capital and reserves having a minimum of an aggregate value of Tk. 5 million and conducting their affairs to the satisfaction of the Bangladesh Bank have been declared as scheduled banks in terms of section 37(2) of Bangladesh Bank Order 1972. Now in terms of section 13 of Bank Company Act, 1991, the minimum aggregate capital is Tk. 200 million.

After liberation, the banks operating in Bangladesh (except those incorporated abroad) were nationalized. These banks were merged and grouped into six commercial banks. Of the total six commercial banks, Pubali Bank Ltd. and Uttara Bank Ltd. have subsequently been transferred to the private sector with effect from January 1985. Moreover at present there are 51 scheduled banks operating allover the country. Out of these, 9 are state-owned (including five specialized banks), 30 are private commercial banks (including four Islami banks) and the remaining 12 are foreign commercial banks (including one Islami bank).

The name of all the banks operating in Bangladesh and their year of incorporation are given in table 1.
Table 1. Name of the Banks operating in Bangladesh



Nationalized Commercial BanksSpecialized Banks
Sonali Bank1972BKB1972
Janata Bank1972BSB1972
Agrani Bank1972BSRS1972
Rupali Bank Ltd.1972RAKUB1987
Private Commercial Banks
1st Generation Private Banks(1982 – 1988)2nd Generation Private Banks(1992 – 1996)
Arab Bangladesh Bank Ltd.1982Eastern Bank Ltd.1992
Uttara Bank Ltd.1983National Credit & Commerce Bank Ltd.1993
National Bank Ltd.1983Prime Bank Ltd.1995
Islami Bank Bangladesh Ltd.1983Dhaka Bank Ltd.1995
IFIC Bank Ltd.1983Southeast Bank Ltd.1995
United Commercial Bank Ltd.1983Al-Arafa Islami Bank Ltd.1995
The City Bank Ltd.1983Social Investment Bank Ltd.1995
Pubali Bank Ltd.1984Dutch-Bangla Bank Ltd.1996
Al-Baraka Bank Ltd.1987 
3rd Generation Private Banks(1998 – Present)Foreign Commercial Banks
Bangladesh Commerce Bank1998Standard Chartered Grindlays Bank1905
Mercantile Bank Ltd.1999Standard Chartered Bank1948
Standard Bank Ltd.1999American Express Bank Ltd.1996
One Bank Ltd.1999State Bank of India1975
Exim Bank Ltd.1999Habib Bank Ltd.1976
Premier Bank Ltd.1999Muslim Commercial Bank1994
Mutual Trust Bank Ltd.1999National Bank of  Pakistan1994
First Security Bank Ltd.1999CITI Bank, N.A.1995
Bank Asia Ltd.1999HSBC1996
The Trust Bank Ltd.1999Shamil Islami Bank1997
Jamuna Bank 2001Credit Agricole Indosuez1997
Shahjalal Bank2001Hanvit Bank1999
BRAC Bank2001Mashreq2001

Source: Bangladesh Bank.

Current Status of the Banking Industry

The Banking Industry of Bangladesh at present is in the growth stage. Almost every year new private banks are coming up, new branches are opening within two to three months, new customers are coming to open an account in different banks. As a result, according to July 30, 2001 there are 4 nationalized commercial banks, 5 specialized banks, 30 local private commercial banks and 12 foreign commercial banks operating in this country. Moreover, as on July 30, 2001 there are 27,881,322 numbers of deposit accounts and 7,462,785 numbers of advance accounts in the banks.

Market Size and Market Growth Rate

Market size of an industry can be measured by many ways, such as Total Revenue, Volume of production number of customers and so on. However, in case of the Banking sector the measurement of market size is quite peculiar as both the total amount of deposits and advances are taken into consideration.

The following table shows that the number of total branches off all the banks grew from 5,852 to 6,124 during 1995 – 2002 February:

Table 2 Number of Bank Branches


Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2000; Economic Trends, March 2001.

Area wise distribution of bank branches operating in Bangladesh is depicted in table 3:
Table 3 Area Wise Distribution of Bank Branches

NCBs21.99 %37.36 %59.35 %
SBs2.45 %17.15 %19.60 %
FCBs0.56 %0 %0.56 %
PCBs15.22 %5.27 %20.49 %
All Banks40.22 %59.78 %100 %

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

The largest provider of advances among all the banks is the Nationalized Commercial Banks. With their high number of branches scattered throughout the country NCBs topped the list with Tk. 290,800 million in 2000 (September) remotely followed by Private Banks (Tk. 181,380 million). The share of advances of the SBs and PCBs are increasing at an alarming speed than the NCBs. However, the share of FCBs is consistent. Therefore, table 6 shows advances by category of banks.

Table 4 Advances by Category of Banks (Amount in million Taka):

2002 (Sept.)290,800101,450181,38032,980606,610

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

Again NCBs also dominate in the total deposits. It can be seen from the table below that over the years the share of NCBs, FCBs, and SBs are decreasing, whereas the share of PCBs is increasing significantly. Therefore, table 5 shows the deposits by category of banks.

Table 5 Deposits by Category of Banks (Amount in million Taka):

2002 (Sept.)400,66244,880222,30060,256728,098

Regulation of the Banking Industry

Bangladesh Bank, being the central bank exerts supervisory controls over the banking sector. BB requires that banks have a minimum paid up capital and reserve funds and that no person, family or company own more than 10% of bank share personally, jointly or both. Bangladesh Bank may with prior Government approval at any time change the policy regarding the reservation of risk-based capital of assets. BB may determine policy to control advances by banking companies. BB has direct authority to appoint any new Managing Director, General Manager, or CEO and BB can dismiss none so appointed without prior approval. BB also has the power to supersede the Board of Directors of a banking company. BB is also the official liquidator and has the power to give directions to a banking company and also remove directors when it feels that this may be in public interest. Banking companies in Bangladesh are not allowed to form subsidiaries, although this rule may be amended soon.

The World Bank recently called BB as “a weak central bank” in its report entitled ‘Bangladesh: Key Challenges for the Next Millennium’. The functions and responsibilities of BB are not clearly defined, and it lacks autonomy in such core areas as the licensing of new banks, monetary and exchange rate policies, and the supervision of NCBs. Banks are allowed to operate even though some of them suffer from capital deficiency. Loan classification and provisioning are not fully enforced, and no punitive measures are taken against banks that fail to implement agreed corrective measures. BB would be unable to deal with a banking sector crisis if one were to occur. With over 6,200 staff, of whom 1,720 are clerical, BB is significantly overstaffed relative to the size of the financial system.

Market Entry & Exit

Bangladesh Bank (BB), the central bank of Bangladesh, has the authority to determine the entry and exit rules of all the banks operating in Bangladesh. BB performs the traditional central banking roles of note issue and banker to the government and banks. It formulates and implements monetary policies, manages foreign exchange reserves and supervises banks and non-bank

Industry’s Competitive Forces

Rivalry among the Competitors
In the banking industry, rivalry among the competing banks is moderate to high due to the following reasons:
– Major rivals are equal or close to in size and capability (revenue and volume).
– Exit barriers are high.
– New private banks are snatching share from the NCBs and each other’s customers by providing extra benefits.
– Slow market growth due to the sluggish economy.
– Depositor’s cost of switching banks is low.


There are substitute financial institutions that do many of the activities and transactions of a bank in the leasing field but these financial and leasing institutions are too small in size. These institutions can shrink the profit margin of commercial banks. Industrial Leasing and Development Company Ltd. (IDLC), Industrial Promotion and Development Corporation (IPDC), United Leasing Company are the key players. They provide industrial leasing to many companies in the country. Vanik Bangladesh Ltd., a merchant bank provides investment counseling and credit services among its other financial activities. But some of the operations of the banks like exporting / importing have no substitutes.

Power of Suppliers

Depositors are considered to be the suppliers of the banks. There are thousands of depositors from all walks of life. There are businessmen, service holders, farmers, students and people from virtually any other professions who are depositors of the banks. Big amount depositors have strong powers in determining interest rate of their deposits. However, the following table (table 6) would provide information regarding depositors of different categories of banks:

Table 6: Deposits (no. of accounts) of Different Categories of Banks as on 30.09.2002
(Amount in million Taka):

Types of BankNo. of AccountsAmountsDeposits per Account

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If the amount of deposits were distributed sector wise, it would look like the following table:

Table 7: Sector Wise Deposits as on 30.09.2002 (Amount in million Taka):

Public SectorPrivate SectorGrand Total
7.40 %11.19 %18.59 %81.41 %100 %

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If deposits were distributed account size wise, it would look like the following table:
Table 8 Account Size Wise Deposits as on 30.09.2002 (Amount in million Taka):

Up to Tk. 10,000152,66717,67835,7761,830207,950
Tk. 10,001 – Tk. 100,000102,0159,54473,70110,353195,613
Tk. 100,001 – Tk. 1,000,00057,4675,99368,09921,860153,419
Tk. 1,000,001 – Tk. 10,000,00052,1079,04636,17514,993112,322
Tk. 10,000,001 and above36,4062,6198,45911,22058,704

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If amounts of deposits were distributed area wise, it would look like the following table:

Table 9: Area Wise Deposits as on 30.09.2002 (Amount in million Taka):

Types of BankUrbanRuralTotal

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

Sector wise distribution of deposits is given in table 10 for individual types of banks:

Table 10: Deposits Distributed by Sectors and Types as on 30.09.2002 (Amount in
million Taka):

 Public SectorPrivate SectorTotal

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

Power of Buyers

Creditors are considered to be the buyers of the banks. There are thousands of creditors from all walks of life. Mainly businessmen are the major buyer of Bank’s credit. Big amount creditors have strong powers in determining interest rate of their credit amounts. Banks distinguish their prime customers from others by setting a prime interest rate for them. However, the following table (table 13) would provide information regarding creditors of different categories of banks:

Table 11: Advances (no. of accounts) of Different Categories of Banks as on 30.09.2002
(Amount in million Taka):

Types of BankNo. of AccountsAmountsAdvance per Account

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If amount of advances were distributed sector wise, it would look like the following table:

Table 12: Sector Wise Advances as on 30.09.2002 (Amount in million Taka):

Public SectorPrivate SectorGrand Total
2.23 %7.71 %9.94 %90.06 %100 %

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If advances were distributed account size wise, it would look like table 13:

Table 13: Account Size Wise Advances as on 30.09.2002 (Amount in million Taka):

Up to Tk. 10,00037,78041,0604,34624983,435
Tk. 10,001 – Tk. 100,00040,9894,83222,6483,34571,816
Tk. 100,001 – Tk. 1,000,00061,55616,73359,1066,067140,462
Tk. 1,000,001 – Tk. 10,000,00080,48129,55869,19314,834194,066
Tk. 10,000,001 and above72,9949,26726,0878,485116,831

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If amounts of advances were distributed area wise, it would look like the following table:
Table 14: Area Wise Advances as on 30.09.2002 (Amount in million Taka):

Types of BankUrbanRuralTotal

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

Industry Trends

Market capitalization

Market capitalization of NCBs exists for only Rupali Bank Limited though the Government owns the majority stake. The total market capitalization of Rupali Bank stood at Tk. 1,078.12 million on September 22, 2001 and the book value of equity was Tk. 5,118 million. This huge difference depicts that public’s acceptability of NCB is not good at all.
The total market capitalization of 1st generation PCBs is TK. 5,420.87 million as on September 22, 2001 with the highest capitalization of IBL of Tk. 1,649.76 million and the lowest capitalization of Tk. 298.24 million of Uttara Bank Ltd. In the table (table 15) below it can be seen that for all the banks market value is lower than the book value, which implies that public cannot trust these banks.

Table 15: Market Capitalization of 1st Generation Banks:

1st Generation BanksNo. of Shares

(in million)



(in million)

Book Value of


Pubali Bank Ltd.1.60386.80804.00
Uttara Bank Ltd.0.99298.24679.00
IFIC Bank Ltd.2.80980.001,107.00
National Bank Ltd.4.301,043.831,556.50
Islami Bank Ltd.0.641,649.762,394.88
The City Bank Ltd.1.60417.60423.12
Al-Baraka Bank Ltd.0.26314.60320.00
Total 5,420.87 

Source: Scheduled Bank Statistics, Bangladesh Bank, September 22, 2002.

The total market capitalization of 2nd generation PCBs is Tk. 6,988.15 million as on Eastern Bank Ltd. and the lowest capitalization of Tk. 322.38 million of Al-Arafa Islami Bank. In the table below (table 18) it can be seen that the market value is greater than the book value for most of the banks, which implies that public’s acceptability for these bank is higher.

Table 16: Market Capitalization of 2nd Generation Banks:

2nd Generation BanksNo. of Shares

(in million)



(in million)

Book Value of


Eastern Bank Ltd.6.001,680.001,700.50
Prime Bank Ltd.4.001,444.00897.00
Dhaka Bank Ltd.2.70858.60419.00
South-East Bank Ltd.3.00765.75564.64
Al-Arafa Islami Bank Ltd.0.25322.38298.00
Dutch-Bangla Bank Ltd.1.80728.55361.12
Total 6,988.15 

Source: Scheduled Bank Statistics, Bangladesh Bank, September 22, 2002.


No financial system can operate if banks do not function according to commercial criteria. While supervisory and regulatory measures can help in this regard, on their own they will not be enough. They must be accompanied by a Government commitment, publicly announced and backed at the highest political level, that banks will be allowed to operate without any direct Government interference in their commercial decisions and that banking laws and financial discipline must be rigorously enforced without regard to persons. Implementation of reforms may involve pain and costs. But experience elsewhere in the world suggests that the longer the delay, the greater the pain, sacrifice and costs.


Perspective of Islamic Banking:

Banking plays a pivotal role in the development process of a country. It helps accelerate the pace of development by securing uninterrupted supply of financial resources to people engaged in numerous economic activities. The tremendous development that the present world experienced in the last few decades was contributed by several factors among which growing institutional supply of loan able funds must have played the pivotal role. The role of the banking is comparable to what an artery system does in human body. Banks both commercial and other development financial institutions provide short, medium and long term credits to business persons and entrepreneurs who usually take the lead in ventures of economic development.
Institutional supply of credits has been made possible by a system of financial intermediation organized in a way where conventional banks collect small savings from the public by offering them a fixed rate of interest and advancing the loanable funds out of the deposited money to enterprising clients charging relatively higher rate of interest. The margin between these two rates is bank’s income. Bank provides many other services to the people against service charges as well.
Despite the outstanding contribution of conventional banking system (interest based), several ancient and modern economists are critical about its efficiency level. Some economists consider role of interest in the conventional banking mechanism as a major destabilizing factor that contributes to cyclical fluctuations in the economy. Specifically, the ineffectiveness of interest rate as a stabilization tool during the period of Great Depression is a case to note. This eventually called for Keynesian prescription of Government intervention. Similar concern was expressed in a story published in Newsweek referring Henry Kissinger, the former Secretary of State of USA. To quote him, ‘The instability has persisted and the uncertainty has continued. After going through the throes of painfully high level of inflation, the world economy has experienced a deep recession and unprecedented rate of unemployment, complicated further by high level of real interest rates and unhealthy exchange rate fluctuations. More recent concern over the potential instability of the world monetary and financial system was expressed by Maurice Allais, a Nobel Laureate, who called for an urgent reform of the World Economic Order. Others vehemently oppose the argument for using rate of interest as a stabilizing tool in the economy. This called for emergence of a new system of banking capable of tackling new challenges that the present world economy particularly the financial sector has been facing.
In response though not exactly to that exigency but for quite a few other reasons, a new system of banking known as Profit-Loss-Sharing has emerged in as many as 45 countries of the world. Another study provides a list of 248 Islamic financial institutions that are now in operation in different parts of the world.
The second half of the twentieth century witnessed a distinctly separate line of thinking on banking. The thought later on got institutionalized at the end of third quarter and subsequently emerged as a new system of banking called Islamic Banking. The world now has been experiencing operation of as many as 250 Islamic banks and financial institutions in more than 50 countries.
At the stage, it is important to note the factors responsible for the emergence of PLS system of banking. There are religious as well as economic reasons that have contributed to the emergence of PLS banking as an alternative to its conventional counterpart. It is the prohibition of ‘Riba’ in the holy Quran that, accounting to the proponents of the PLS system, was the source of inspiration for establishing banks in line with Islamic Shariah. The basic intention behind establishing Islamic banks was the desire of Muslims to recognize their financial activities in a way that do not contradict to the principles of Shariah and enable them to conduct their financial transactions without indulging into Riba. These writers consider rate of interest in the conventional banking mechanism synonymous to Riba, the term as used in the Holy Quran. One of the reasons for this is that the outcome of the productive effort is uncertain and so interest necessary involves as element of gharar, that is, uncertainty. On this religious ground urge for avoiding all transactions and institutions run based on interest and recognize them in the line with the teaching of Islam. The economic reason derived from a verse of the holy Quran providing inspiration to devise a interest-free financial system has been substantiated in the way that interest, instead of increasing wealth, reduces it. The primary reason of why the Quran has taken such a hard approach towards interest is that Islam stands for establishing a just economic system free from all kinds of exploitation. Further, Muslim economists consider depression and stagflation very often found in the capitalist world as an outcome of the financial system based on interest.
Thus, Islamic banking emerged as a response to religious as well as economic exigencies. While religious exigency calls for avoiding any transaction based on interest, economic exigencies on the other hand, provide new outlook to the role of banking in promoting investment/production activities, influencing distribution of income and stability in the economy. Islamic banking is perceived as an improved system in all dimensions just mentioned above.

Attitude of Islam towards Interest:
Muslim scholars equate interest with Riba, the term used in the holy Quran. In the Shariah, Riba technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. In other words, Riba is the predetermined return on the use of money. In the past there has been dispute about whether Riba refers to interest or usury, but there is now consensus among Muslim Scholars that the term covers all forms of interest and not only “excessive” interest.
The Islamic restriction on interest is quite explicit and unequivocal. All transactions based on Riba are strictly prohibited in the Quran. The prohibition of Riba appears in the Quran in four different revelations. The first of these in Makkah; emphasized deprivation of God’s blessing for a man making interest transaction and charity having the essence of manifold rise. The second revelation concerning the subject took place in the early Madinah. It severely condemned interest-referring prohibitions taken place in the previous scriptures. The third revelation enjoined Muslims to keep away from Riba. The forth revelation revealing near the completion of the Prophet’s mission.



Islamic banking has been defined in a number of ways. The definition of Islamic bank approved by the General Secretarial of the OIC is staled in the following manner. “An Islamic bank is a financial institution whose status, rules and procedures expressly state commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations.” Dr Shawki Ismail Shehta viewing the concept from perspective of an Islamic economy and the prospective role to be played by an Islamic bank therein opines that “It is therefore, natural and, indeed, imperative for an Islamic bank incorporate in its functions and practices commercial investment and social activities, an institution design to promote the civilized mission of an Islamic economy.” Dr. Ziaul Ahmed says, “Islamic banking is essentially a normative concept and could be define conduct of banking in consonance will the ethos of the value system of Islam.”

It appears from the above definitions that Islamic banking is a system of financial intermediation that avoids receipt and payment of interest in its transactions and conducting operations in a way that it helps achieving the objectives of an Islamic economy. Alternatively, this is a banking system whose operation is based on Islamic principle transactions of which profit and loss sharing (PLS) is a major feature ensuring justice equity in an economy. That is why Islamic banks are often known as PLS-banks.

Theoretical Basis of the Concept of Islamic Banking:
Conventional banking is essentially based on debtor-creditor relationship between depositors and the bank in the one hand and between the borrowers and the bank on the interest is considered as the price of credit, reflecting the opportunity cost of money. Islam, on the other hand, considers loan to be given or taken, free of charge, to meet contingency and that the creditor should not lake any advantage of the borrower. The money is lent out on the basis of interest, more often it happens that it leads to some kind of injustice. The first Islamic principle underlying such kinds of transactions is that “deal not unjustly and ye shall not be dealt with unjustly”. Hence, commercial banking in an Islamic framework is not based on debtor-creditor relationship.
The second principle regarding financial transactions in Islam is that there should not be any reward without risk-taking. This principle is applicable both to labor and capital. As no payment is allowed to labor unless it is applied to work, no reward for capital should be allowed unless it is exposed to business risks.
Thus, financial intermediation in an Islamic framework has been visualized on the basis of the above principles. Consequently financial relationships in Islam have been participatory in nature. Several theorists suggest that commercial banking in an interest-free system should be organized on the principle of profit and loss sharing. The institution of interest is thus replaced by a principle of participation in profit and loss. That means, a fixed rate of interest is replaced by a variable rate of return based on real economic activities. The distinct characteristics which provide Islamic banking with its main points of departure from the traditional interest-based commercial banking system are: (a) the Islamic banking system is essentially a profit and loss sharing system and not merely an interest-free (Riba) banking system; and (b) investment (loans and advances in conventional sense) under this system of banking must serve simultaneously both the interest of the investor and those of the local community. The financial relationship as pointed above is referred to in Islamic jurisprudence as Mudarabah.

Distinguishing Features of Islamic Banking:
An Islamic bank has several distinctive features as compared to its conventional counterpart. Six essential differences as below:

I. Abolition of Interest (Riba): Since Riba is prohibited in the Holy Quran and interest in all its form being akin to Riba as, confirmed by Fukaha and Muslim economists with rare exceptions, the first distinguishing feature of an Islamic bank must be that it is interest-free, while the abolition of Riba would be the first and essential difference between the conventional interest-based commercial banks and Islamic banks, if would not the constitute the only difference between them. The nature, outlook and operations of an Islamic bank would have to undergo a complete transaction.
II. Adherence to Public Interest: Activity of commercial banks being primarily based on the use of public funds, public interest rather than individual or group interest will be served by Islamic commercial banks. The Islamic banks should use all deposits, which come from the public for serving public interest and realizing the relevant socio-economic goals of Islam. They should play a goal-oriented rather than merely a profit-maximizing role and should adjust themselves to the different needs of the Islamic economy.
III. Multi-Purpose Bank: Another substantial distinguishing feature is that Islamic banks will be universal or multi-purpose banks and not purely commercial banks. These banks are conceived to be a crossbreed of commercial and investment banks, investment trusts and investment management institutions and would offer a variety of services to their customers. A substantial part of their financing would be for specific projects or ventures. Their equity-oriented investments could not permit them to borrow short and lend long. This should tend to make them less crisis-prone compared to their capitalist counterparts. Since the overnight, call loan or very short-term inter-bank market may be available to them only to a limited extent, they may have to make a greater effort to match the maturity of their liabilities with the maturity of their assets.
IV. More Careful Evaluation of Investment Demand: Another very important feature of an Islamic bank is its very careful attitude towards evaluation of applications for equity oriented financing. It is customary that conventional banks evaluate applications, considers collateral and avoids risks as far as possible. Their main concern does not go beyond ensuring the security of their principle and interest receipts. Since the Islamic bank has in built mechanism of risk-sharing, it would need to be careful more careful. It adds a healthy dimension in the whole lending business and eliminates a whole range of undesirable lending practices.
V. Work as Catalyst of Development: Profit-Loss-Sharing being a distinctive characteristic of an Islamic bank, if fosters closer relations between banks and entrepreneurs. It helps develop financial expertise in non-financial firms also enables the banks to assume the role technical consultants and financial advisors and act as catalysts in the process of industrialization and development. The bank would take care of all the responsible and agreed financial needs of their clients thus relieving them of the need to run around for funds to overcome their normal liquidity shortages.

Objectives of Islamic Banking:
The primary objective of establishing Islamic bank all over the world is to promote, foster and develop the application of Islamic principles, law and tradition to the transaction of financial, banking and related business affairs and to promote investment companies, enterprises and concerns which shall themselves be engaged in business as are acceptable and consistent with Islamic principles, law and traditions. But the objective of Islamic bank when viewed from the context of its role in an economy, its specific objectives may be enlisted as following:

• To offer contemporary financial services in conformity with Islamic Shariah;
• To contribute towards economic development and prosperity within the principles of Islamic justice;
• To facilitate efficient allocation of resources;
• To help achieving stability in the economy;
Offer Financial Services:
Interest-based banking considered to be practicing riba in financial transaction has
Islamic banking is clearly meant for creation of provision for Shariah approved financial transactions.

Islamic Banking for Development:
Islamic banking is claimed to be more development oriented than its conventional counterpart. The mechanism of Profit-Sharing is build-in development promoter since it establishes a direct relationship between the benefit of the bank and the entrepreneurs.

Optimum Allocation of Recourses:
Another important objective of Islamic banking is the optimum allocation resources. The basic mechanism of Islamic banking system is such that financial resources are allocated to projects which are considered to be more profitable.
The means, in the case of Islamic banking profitability of projects works as deciding factor as to where the financial resources will go and to what extent.

Islamic Banking for Equitable Distribution of Resources:
Another important objective of Islamic banking is to ensure equitable distribution of income and resources among the participating factors: the bank, the depositors and the entrepreneurs. This is done through its built-in mechanical arrangement as well as other welfare activities pursued through Zakah fund.



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.


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.


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%.


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.


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.


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%.


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

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
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.


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.


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.


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.


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.

3.2 Basis for Consolidation
A 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 schemes

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.


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.

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