Main purpose of this report is to analysis Overall Performance of Islami Bank Bangladesh Limited. Other objectives are analyze the differences between Islamic banking system and Commercial banking systems and analyze how an Islami Bank runs its business without interest. Report also focus on to find out whether the investment mode of the Islami Bank helps economy. Finally find out the risk and profitability of different modes theoretically.
The first objective of writing the report is fulfilling the partial requirement of the MBA program. In this report, we have attempted to give an overview of Islamic Bank Bangladesh Limited in general banking, investment, and foreign exchange operation. The study aims at some objectives, which are as follows:
- Understanding the differences between Islamic banking system and Commercial banking systems
- Understanding how an Islami Bank runs its business without interest
- How an Islami Bank earns its profits through investment . What are its general banking system
- What are its investment objectives
- Finding out whether the investment mode of the Islami Bank helps economy
- Assessing the ratio of mode wise investment
- Understanding the impact of the Islamic investment on society
- Finding out the risk and profitability of different modes theoretically
- What is its foreign exchange operation.
For carrying out this report I had to observe the actual banking operation of IBBL local Branch Motijheel. Some practical deskwork and interviewing officers of the bank are the primary material sources of this report. Moreover, annual report of IBBL training materials and books are the secondary sources of our report.
SCOPE OF STUDY
The scope of the organization part covers the organizational structure, background, and objectives, functional departmentalization and business performance of IBBL as a whole and the main part covers operational set-up of IBBL.
Features of Islami Bank Bangladesh Limited:
The distinguishing features of Islamic Bank are:
- All activities are conducted on interest-free system according to Islamic Shariah principles.
- Investment is made through different modes as per Islamic Shariah.
- Investment-income of the Bank is shared with Mudaraba depositors according to an agreed upon ratio, ensuring a reasonably fair of return on their deposits.
- Aims to introduce a welfare-oriented banking system and also establish equity and justice in the field of all economic operations.
- Extend socio-economic and financial services to individuals of all economic backgrounds with strong commitment in rural enlistment.
- Plays a vital role in human resources development and employment–generation, particularly among the unemployed youths.
- Portfolio of investment and investment policy have been specially tailored to achieve balanced growth & equitable development through diversified investment operations particularly in the priority sectors and in the less developed areas of the national and international economy.
- Regular and effective guidance of powerful and highly esteemed Shariah Council consisting of appropriate number of members representing Shariah Scholars.
Functions of Islami Bank Bangladesh Limited
The most important objective of Islamic banking system to establish equity and justice in arena of business and ensure equitable distribution of wealth and income. The sources of fund of the Islamic Bank include paid up capital and deposits. Deposits mobilized by the Islamic Bank may be categorized into three: Current deposits, ordinary savings deposits and investment term deposits (Chakma, Islami and Karmker, 1995). Like conventional banking no return is payable on current deposits while ordinary savings deposit holders are entitled to profit earned according to the return realized by the Bank on investment / use of proceeds of such deposits (chakma, Islami and Karmker, 1995). Investment on term deposit holders are entitled to proceeds from investment on the basis of signed agreement.
Islamic Bank’s modes of financing can be broadly classified into equity and debt instruments. While equity instruments are Mudarabah and Musharakah, debt-instruments arise from sale transactions. These fixed income instruments include Murabahah (cost-plus or mark-up sale), Bai-muajjal (price-deffered sale), Istisna / Salam (object deffered sale or prepaid sale) and Ijarah (leasing ) (khan, 1991, Khalf and Khan, 1992, Ahmed, 2004 and Usmani, 1999). We outline the basic concepts and properties of these mode of investment below:
- Musharakah: Sharikah is a partnership between parties in which financial capital and / or labor act as shared inputs and profit is distributed according to the capital share of the partners or in some agreed upon ratio. The loss, however, is distributed according to the share of the capital. Though there can be different kinds of partnerships based on money, labor, and reputation, one case of Sharikah is participation financing or Musharakah in which partners share both in capital and management of the business enterprise. Thus partners in Musharakah have both control right and claims to the profit.
- Mudarabah (or qirad or muqadarah) : Mudarabah is similar to the concept of silent partnership in which financial capital is provided by one or more partner(s) (Rabul mal) and the work is carried out by the other partner(s) Mudarib. The funds are used in some activity for a fixed period of time (Siddiqi, 1987). The financiers and the managers of the project share the profits in an agreed upon ratio. The loss, however, is borne by the financiers according to their share in the capital. The manager’s loss is not getting any reward for his services, as the ‘Rabul mal’ is sleeping partner, he/she has a claim on profit without any say in the management of the firm.
- Murabahah / Bai Muajjal : Murabahah is a sale contract at a mark-up. The seller adds a profit component (mark-up) to the cost of the item being sold. When the purchase is on credit and the payment for a good / asset is delayed, the contract is called Bai-muajjal. A variant would be a sale where the payments are made in installments. These contracts create debt that can have both short and long –term tenors. In these debt contracts, the supplier of the good has claims on a fixed amount that must be paid before arriving at profits.
- Salam / Istisna : ‘Salam sale’ is an advance purchase or product-deferred sale of a generic goods . In a Salam contract, the buyer of a product pays in advance for a goods that is produced and delivered later. The contract applies mainly for agricultural goods.
e) Istisna contract is similar to the Salam contract with the difference that in Istisna the goods is produced according to the specifications given by the buyer. This applies mainly to manufactured goods and real estate. Furthermore, in Istisna the payments can be made in installments over time with the progression of the production.
Ijarah : Ijarah is a lease contract in which the lessee pays rent to the lessor for use of asset (usufruct). In Ijarah the ownership and the right to use an asset (usufruct) are separated. It falls under a sale-based contract as it involves the sale of asset( usufructs). A lease contract that results in the transfer of an asset to the lessee at the end of the contract is called ‘Ijarah wa iqtina’ or ‘Ijarah muntahia bittamleek’.
‘Ijarah wa iqtina’ combine sale and leasing contracts and use the hire-purchase or rent-sharing principles. The ownership of the asset is transferred to the lessee as payments for the asset are also made along with the rent.
After the contract period is over, the lessee assumes the ownership of the asset. Note that in a simple Ijarah, the rental payments made are captured in the current liabilities in the iqtinah’, however, the leased item would be in the form of a debt during the period of lease.
Profile of the Organization:
Bangladesh is one of the Largest Muslim countries in the world. The People of this country are deeply committed to Islamic way of life as enshrined in the Holy Quran and the Sunnah. Naturally, it remains a deep cry in their hearts to fashion and design
their economic lives in accordance with the precepts of Islam. The establishment of Islami Bank Bangladesh Limited on March 13, 1983, is the true reflection of this inner urge of its people, which stared functioning with effect from March 30, 1983. This Bank is the first of its kind in Southeast Asia. It is committed to conduct all banking and investment activities on the basis of interest –free profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver linig of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the Fulf countries, Islami Bank Bangladesh Limited has b now earned the unique position of a leading private commercial bank in Bangladesh.
Aims and objectives:
To Conduct interest-free banking.
- To Establish participatory banking instead of banking on debtor-creditor relationship.
- To Invest on profit and risk sharing basis.
- To Accept deposits on Mudaraba & Al-Wadeah basis.
- To establish a welfare-oriented banking system.
- To Extent co-operation to the poor, the helpless and the low-income group for their economic enlistment.
- To play a vital role in human development and employment generation.
- To contribute towards balanced growth and development of the country through investment operations particularly in the less developed areas.
To contribute in achieving the ultimate goal of Islamic economic system.
National and international ratings of IBBL:
Bangladesh Bank, several credit rating agencies, has evaluated IBBL’s past performances home & abroad and by the local press.
“In the midst of a difficult Banking system known to be plagued by high non performing loans (NPLs), one could easily conclude that it would be difficult to find a bank that is different from norm. However, IBBL provides a refreshing change and is, thus, a pleasant surprise. Although it does not command the market share as the 4 public sector banks, IBBL, which claims to have little interference in lending from the government, has nonetheless, managed to find a niche market of its own-says the ‘BANK ATCH’ a New York based international Credit Rating Agency in its January 30, 1998 issue. “As a market leader offering banking services based on the Islamic rule of Shariah, IBBL’s profitability trend has been quite impressive. The Bank’s ability to keep its return on asset (ROA) well above the industry’s average, reflected its resilience to possible shocks in the banking system. Concerns over massive NPLs and under provisioning are common amongst local banks. But this seems well resolved in IBBL. IBB’s good performance and solid capital base have indeed provided refreshing change found within a banking system saddled and held back by huge NPLs” the above agency continued to comment to comment in the same issue.
It is one of a few local banks according to CAMEL (Capital, Assets, Management, Earnings & Liquidity) rating made by the Bangladesh Bank. It holds the highest amount of liquidity among all banks and its ability to keep return on assets at 1.07 percent is will above the banking sector’s average of 0.33 percent – the financial Express, Dhaka commented in its issue of May 28, 1998.
“The Holiday “ in its 29th August, 1997 issue carried out report under the heading “ Setting a precedence of sound banking” and commented “ While the country’s banking system is burdened with bad debt portfolios and also suffers form a liquidity shortage, the Islami Bank Bangladesh Ltd. (IBBL) has created a unique precedence by improving its reserve and deposit positions substantially, making handsome profits, and offering attractive dividends to its share holders and depositors”.
IBBL’s World rating:
As per Bankers Almanace ( January 2001 edition) published by the Reed Business Information, Windsor Court, England, IBBL’s world Rank is 1771 among 3000 banks selected by them. This position was 1902 among 4500 selected banks as on January 1999 edition.
IBBL’s country Rank is 5 among 39 banks as per ratings made by the above Almanac on the basis of IBBL’s Financial Statements of the year 20001.
Perspective: Award and Prizes: International & National
IBBL was awarded for several times by international & national organizations.
The Global Finance, a reputed London based quarterly magazine, awarded IBBL as the best bank of the country for year 1999 and 2000. IBBL has got the 2nd prize of National Export Fare for its pavilion of service Organization in 1985.
Membership of Different Organization/ Chamber
- Bangladesh Institution of Bank Management (BIBM)
- The Institution of Bankers Bangladesh (IBB)
- Bangladesh Association of Banks (BAB)
- Bangladesh Foreign Exchange Dealers’ Association(BAFEDA)
- Central Shariah Board for Islamic Banks of Bangladesh
- International Chamber of Commerce – Bangladesh
- International Association of Islamic Banks (IAIB), Jeddah, K. S . A.
- According and Auditing Organization for Islamic Financial Institutions (AAOIFI), Manama. Bahrain.
- General Council of Islamic Banks & Financial Institutions (GCIBFI)
- Manama, Bahrain (IBBL is a member of its Executive Council)
TO OPEN A NEW ACCOUNT
This is a period of keen competition among banks. Most of the commercial banks compete with one another in tapping the savings of the public by means of purchasing of different types of financial product. These products are known as secondary securities, which shows claim against the financial institutions. Popularly these products are known as deposit; of different kinds and of various maturities. The most popular products are current-deposit (CD), savings bank deposit (SD), fixed deposit, short-term deposit etc.
GENERAL PRACTICE AT REGARDING ACCOUNTS
Ac-count Opening Register
After fulfilling all the requirements for opening account necessary entries are given in the account opening register. There are several registers for several accounts as MSA, AWCA and MTDR etc. Date of opening, name of the account holder, nature of the business, address, initial deposit and introducer’s information are recorded in that register. New accounts number is given from the list of new numbers provided by the computer department.
Checkbook is issued to the new customer after seven days of opening account. Two separate checkbooks are given for current and saving accounts. AWCA accounts check book consists 25 and 50 leafs, while MSA account checkbook has 10 leafs. There has a check book issue register in this regard; where check book number, leaf number, date issue etc. information are kept on the register. All the necessary numbers are the sent to the computer department to give entry in the program.
Taka 10 or 50 = each for twice a year is debited from customers AWCA account for rendering service to him. Taka 50 = each is debited from customers account for providing him solvency certificate.
Profit is the price of product, which is determined by the market forces. Every bank offers a competitive price to attract depositors.
GENERAL CHARACTERISTICS OF DEPOSIT ACCOUNT
Al-Wayadia Current A/C (AWCA)
AWCA accounts are unproductive in nature as far as banks loan able investment fund is concerned sufficient fund has to be kept in liquid form, as current deposits are demand liabilities. Thus huge portion of this fund becomes nonperforming. For this reason banks do not pay any of AWCA account holder. Business and companies are the main customers of this product.
Mudaraba Savings Account (MSA)
As per Bangladesh Bank instruction 90% of SA deposits are treated as time liability and 10% of it as demand liability. In EBL there is a restriction about drawing money from SB account but anytime holder may draw money of any amount with prior notice, generally householder and individuals are the clients of this account.
Mudaraba Short Notice A/C (MSN)
MSNA accounts can be treated as semi term deposit. Deposit should be kept in these accounts for at least seven days to get interest of MSNA accounts is less then SB accounts. 5.5% generally profit, but may increase to 6% or more depending on the fund. Check book is issued them but frequent use of checkbook is discouraged. Government organization, big corporate house and banks are generally the clients of this account. The volume of this account is generally large and notice has to be given to draw money.
Mudaraba Term Deposit Receipt (MTDR)
Fixed deposit is of two kind midterm deposit (MTD) and term deposit (TD) instrument whose maturity period is within one year are know as midterm deposit MTD and those above one year are considered as term deposit (TD). Calculation of profit TDR and provisioning regarding this is quite complicated issue. Profit is calculation at each maturity date and provision is made on that. Also at the month and provision of profit is mode.
IBBL sells and purchase P.O., D.D. and T.T. to its customers only. IT does not offer remittance service frequently to those other than its customer.
Pay Order (P.O.)
Pay order is and instrument that is used to remit money within a city through banking channel the instruments are generally safe as most of them are crossed.
- Issuing Of A Pay Order (P.O.):
A customer can purchase pay order in different ways:
Bills Payable (P.O.) A/C. ………….. .Cr.
Income A/C commission on Remittance. ………………………. . ..Cr.
By Account Client A/C… …………….. ……Dr.
By Transfer Head Office/ Other department’s client A/C. . …… . …Dr.
- Charges For issuing P.O.:
Tk. 1 to Tk. 10,000 Þ Tk. 10/-
Tk, 10,001 to Tk, 1,00,000 Þ Tk, 20/-
Tk. 1,00,001 to Tk. 5,00,000 Þ Tk. 30/-
Tk, 5,00,001 to Tk, 10,00,000 Þ Tk, 40/-
Tk. 10,00,001 and above Þ Tk. 50/-
15% of principle amount
4,4,2 ‘Demand Draft (D.D.)
Demand Draft is very much popular instrument for remitting money from one corner of a country another. The instrument is basically used for transfer and payment. Difference between pay order and demand draft is in terms of place only P.O. is used for remitting money within the city whereas D.D. is used for within the country. D.D. too constitutes current liability on the part of a bank. At IBBL D.D. is not sold to people other than its customer.
- Charges For Issuing D.D.:
Tk. 1 to Tk. 10,000 Þ Tk. 107-
Above Tk. 10,000 Þ 1 Tk. for every 1,000
15% of principle amount
Telegraphic Transfer (T.T.)
Telegraphic transfer is one of the fastest means of transferring money from one branch to another or from one to another. The T.T. issuing bank instructs its counterpart by tested telex message regarding remittance of money. No instrument is given for T.T. unless both parties have account, as money is transferred.
- Charges For Issuing T.T.:
Tk. 1 to Tk. 10,000 Þ Tk. 107-
Above Tk. 10,000 Þ 1 Tk. for every 1,000
15% of principle amount
As far safety is concerned customers get crossed check for the transaction. As we known crossed check cannot be enchased for counter, rather it has through been collected through banking channel i.e. clearing. A client of IBBL received a check of another bank, which is located within the clearing rage; deposit the check in the account at IBBL. Now IBBL will he will not the money until the check is honored.
Outward Bill For Collection (OBC)
Customers deposit check, drafts etc. for collection, attaching with their deposit sleep. Instrument within the range of clearing are collected through local clearing house, but the other which are outside the clearing range are collected through OBC mechanism. A customer of IBBL principal branch Local Office Dhaka is depositing a check, of Sonali Bank, Coxs Bazar. Now as a collecting bank IBBL principal branch will perform the following task;
- Received seal on deposit slip.
- IBBL Local Office Principal Branch crossing indicating them as collecting banks,
- Endorsement given “Payees A/C will be credited on realization.
- Entry on register, from where a controlling number is given.
Collecting bank can collect it either by its branch of by the drawer’s bank. They will forward the bill then to that particular branch. OBC number will be given on the following letter. Now following procedures will take place in case of the following two cases.
Bills (Toileted Through Branch:
If the bill is forwarded to a branch they will collect it through IBC procedure. Collecting branch will receive and I.B.C.A from that particular agent branch according treatment from the angle of collecting branch will be.
Ho> A/C concerned branch……………………….Dr.
Customer A/C ……………………………………Cr.
Income A/C commission; postage………………..Cr
In this case commission will be charged by the collecting branch, not the agent branch.
Bills Collected Through Drawer’s Bank:
Accounting treatment for the collecting branch will be
- Clearing ………………………………………..Dr.
- b. Customer A/C………………………………….Cr.
4.5.3 Inward Bills For Collection (IBC)
In this case bank will work as an agent of the collection bank. The branch receives a forwarding letter and the bill. Next steps are
- Entry in the I.B.C. registers number given
- Endorsement given -“Our branch endorsement confirmed”
- The instrument is sent to clearing for collection……………………Dr.
- Miscellaneous Creditor A/C OBC………………………………….Cr.
|ENDORSEMENTS||IN CASE OF|
|Payees A/C Credited||Pay to Mr. X|
|Received payment payees A/C Credited||PaytoIBBLMr.X|
|Payees A/C Credited||Pay to Mr. XIBL|
|Payees A/C will be credited on realization||Bills for collection|
|Our Banks endorsement confirmed|
|Received Payment||EBL or Cash|
|First payees endorsement confirmed second payees|
|Our collecting agents endorsement confirmed|
Cash section demonstrates liquidity strength of a bank. It also sensitive as it deals with liquid money. Maximum concentration is given while wording on this section. As far as safety is concerned special precaution is also taken. Tense situation prevails if there is any imbalance in the case account.
AH cash, instruments (P.O., D.D. and Check) and other valuables are kept in the vault is insured up to Tk. 4 crore with local insurance company. If cash stock goes beyond its limit of Tk. 4 crore, the excess money is transferred to Bangladesh Bank if there is shortage of cash during transaction period money is transferred to drawn from the central bank. There are three keys of the vault, which are given to three seniors most officers. Daily, as estimated amount of cash brought out from the vault, for transaction purpose. No more than Tk. 4 crore brought at once from the vault, on a single day.
Teller Customer Relationship
In a bank a person who delivers and receives cash from the cash counter is known as teller, a customer meets most of the time in a bank with a teller on the counter. So, teller should hold certain quality
- Should be friendly.
- Provide prompt service.
- Be accurate in his task.
In short a teller should be efficient, otherwise he has to pay.
Cash Packing And Handling
Cash packing and handling needs a lot of care as any mistake may lead to disaster. Packing after banking hour when the counter is closed, cash are packed according to denomination. Notes are counted several times and packed in bundle, stetted and stumped with initial.
After the banking hour the cash counter is closed. But sometimes customers come to draw or deposit money after the service hour. However, their money is received or aid recorded in the next daybook. This is known as evening banking.
LEADERSHIP MANAGEMENT APPROACH AND STYLE
IBBL and Eastern Bank Ltd. follow participation leadership approach. Work accomplishment is from committed people with interdependence through a common stake in organization purposed with trust and respect. They are the managers who display in their actions the highest possible dedication both to people and to dork. They are the real term manager’s who are able to mesh the service needs of the enterprise with the needs of the individuals.
TECHNOLOGY AT ISLAMI BANK BANGLADESH LIMITED
With rapid change in communication banking worldwide has experienced a tremendous transformation and it continually being shaped to shit changes of industrialization of the society. Unfortunately, Bangladesh has missed much of the excitement and we are virtually unaware of the improvements in banking services hi other developed countries.
IBBL has now brought a part of that development made through improved computer and communication technology. Clients of IBBL will now enjoy service quality service quality that is quite upgraded and to some extent unique.
Personal policies at IBBL are not clearly defined in Dhaka. However the broad outlines of the policy ate
- To establish contingency plants for local staff protection
- To develop programs to cross train personal for added flexibility
CORPORATE CULTURE (Ideology, Values, Beliefs, Philosophy, etc.)
They have standard set of rules for ethical guidelines. The core idea of it is to “Do the right thing”. The right thing may not obvious at all the time. They are to look after community and serve them, avoid conflict of interest whenever possible. The idea at the Citicorp is to build a congenial atmosphere and encourage teamwork and progress collectively.
IBBL has a good corporate citizen abided by a set of core values. Some can be classified as traditional values such as security, trust worthiness, integrity and confidentiality. Others are perhaps more temporary. They reflect IBBL to it’s customers to be
- Responsible to their needs.
- Flexible in approach
- Professional in manner
- Always striving excellence
The major corporate philosophy of IBBL is to efficiently manage the risk involved and maintain the stability of the bank to the greatest extent possible.
IBBL is quite conservation in their organization polices. These policies are followed by Citicorp and are intended to protect the interest of stakeholders. They go through extensive market research before launching any new product. They try to minimize risk by acquiring as much information as possible.
MANAGING PUBLIC AFFAIRS
They have a very definite view about public affairs management. The bank wants the name franchise to be a symbol of status. Retail bank is still not in operations and individual account is discouraged with high minimum balance requirements.
They also have a clear view of press relations. They are not going for an advertisement in the national dailies. Their motto is to be focused to a target group. First they identify their target customers and they approach him/ her directly. So, they do not need any promotion to attract the customers.
Investment Policy Of IBBL
Investment operation of the bank is of vital importance as the greatest share of total revenue is generated from it. Maximum risk is centred in it and the very existence of a bank mostly depends on prudent mgt.
A sound well defined, well planned and appropriate investment policy frame work is a pre-requisite for achieving the goal of the bank i.e. implementation and materialization of the economic and financial principle of Islam in the banking area and justice in trade, commerce and industry and to build socio-economic infrastructure, create opportunity for income and sustained economic growth of the country.
Investment Perspective Plan Up To 2005
In accordance with the policy guidelines contained in banks investment policy and to ensure fullest utilization of banks projected investable fund/ deposit to be mobilized in future in planned way to maximize banks profit gradually consolidating the financial strength of the bank and to achieve overall objective/ goal of the bank and taking in view the long term perspective and investment perspective plan up to 2003 as under:
|As per plan (%)||Actual (%)||Actual as on 30/09/2000 (%)|
|Agriculture fishing and forestry||3||3.16||0|
|Industry (Other than working capital financing)||18||19.50||18|
|Working capital financing||15||24.49||13|
|Construction and Real Estate||10||7.82||8|
|Electricity^ Gas,, Water and Sanitary||0.5||0||0|
|Transport and Communication||5||3.77||3|
SOME L/C RELATED TERMS AND ITS BRIEF DESCRIPTION
Letter Of Credit:
Letter of credit is an arrangement whereby bank (issuing bank) acting on the instruction of the customer (importer), undertakes to make payment, or to accept drafts, or authorizes of another bank to pay, accept or to negotiate draft drawn by the beneficiary (exporter) against stipulated documents, provided that the terms and condition of the credit are compile.
LETTER OF CREDIT ISSUE PROCESS:
The issuing process of letter of credit is one of the vital point for a bank engaged in foreign exchange operation. In one side it has to satisfy the client on the other hand it needs to care the order of the Bangladesh Bank rules and regulations very care fully. After all the steps are as like
- When importer wants to import goods he request issue bank (his bank) to issue a L/C.
- To do that the importer gives an application to the bank for the L/C.
- Checking out the permissibility of that item that is going to import by the importer and the required rules and regulation of both by the Islami Sharia and by the Bangladesh Bank
- So the issuing bank issues a L/C and sends it to the advising nominated bank.
- If the beneficiary wants confirmation of the L/C the L/C may be confirmed usage-confirming bank to confirm payment.
The advising bank authenticates the L/C and advises the same to the beneficiary. The exporter submits the necessary documents to the advising bank after execution of export.
ADVANTAGES OF LETTER OF CREDIT:
There are lots of advantages that are basically derived by opening of an LC while Export and Import activities are taking place. In the report it is mentioned from different perspective such as
To The Exporter
- A letter of credit is generally a very safe method of obtaining payment provided the exporter complies with the terms of credit.
- An irrevocable credit cannot be amended without his knowledge agreement.
- An irrevocable credit carries a definite undertaking on the part of the issuing bank to pay.
- A confirmed irrevocable undertaking of a bank generally in the exporter’s country.
- A credit open in his favour can often lead to a credit being opened on his behalf in favour of his supplier (to-back credit); alternatively the credit may be transferable.
- Finance may be available b means of: – negotiating of his bills.
- The exporter has indirect control of the document of title.
- Better than collection as a means of securing payment.
To The Importer
- Protect own position by stating the precise documentation required.
- He should consider making a status report on the supplier and in the case of a large order call for a performance bond.
- Credit can be obtained from the exporter by insisting on the use of a term bill or exchange.
- The advising bank will only make payment when the exact document specified has been received.
- Once the specified documents which will usually be the documents of title are in the hands of the advising bank then it will only a matter of time before they sent to the issuing bank allowing him to collect the goods to their safe arrival.
- Finance may be available by means of:-
- Ordinary bank loan/ overdraft.
- Loan against imported merchandise,
- Acceptable credit.
TYPES OF LETTER OF CREDIT
- Document credit
- Stand-by letter of credit
- Revocable credit
- Irrevocable credit
- Counter credit
- Letter of credit
- Back-to-back credit
- Transferable credit
- Government by ICC 500 (ART 48)
- Transferable if indicted ‘transferable”
- Transferable with or without substitution of documents (ART 481)
- Can be transferred once only (ART 48G)
- Can be transferred to one or more second beneficiaries. (ART 48E)
- Transfer is affected at the request of the first beneficiary by the bank where the credit is available.
- Transfer must be effected in accordance with the terms of the original credit subject to certain exceptions (ART 48H)
Some vital things that should be mentinod while talking about the LC are as follows
- Middlemen who buys and sells on a letter of credit basis
- Usually the export letter of credit is not transferable
- The Master L/C is a source of repayment
- The baby L/C is a separate undertaking from that of the issuing bank
Matching of the terms and conditions of both credits in order to produce the required documents within time limits stipulated in the master L/C, with the following exception:-
- Applicant’s name
- Unit price
- Documents can be substituted
PARTIES OF LETTER OF CREDIT:
- Issuing bank
- Advising bank
- Credit applicant
- Nominated bank
- Negotiating bank
- Reimbursement bank
DIFFERENT PARTIES ROLES:
Role Of Issuing Bank
- The credit and amendments must be complete and precise
- Indicating credits irrevocable or revocable
- Definite undertaking of the issuing bank
- Such undertaking cannot be amended or cancelled without consent of all parties.
- State how the credit will be available and nominate the bank where it will be available
- Advice the credit and subsequent amendments through the same bank
- Reimburse nominate bank
- Determined to take documents or not on the basis of documents alone
- Reasonable time to examine documents
- If refusing documents issuing banks should without delay telex advice the presenter stating discrepancies and hold documents at its disposal return them
- Despite presenter pointing out the discrepancies, the issuing bank still have to follow the procedures as per art (14B), (14C) and (14F)
- No need for certificate of compliance
- If incomplete or unclear instructions are received to issue or amend the credit bank may give preliminary notification to beneficiary and seek clarification from the applicant
6.5.2 Role Of Advising Bank:
- Without engagement and responsibility
- Exercise reasonable care in checking the apparent authenticity of the credit.
- If incomplete or unclear instruction received to advice the credit bank may give preliminary notification to beneficiary and seek clarification from thinning bank
- Services to the corresponding banker
- Services to existing/ potential customer
Role Of Negotiating Bank:
- Offering temporary finance fro the exporter awaiting reimbursement from the issuing bank
- Check documents with reasonable care and within reasonable time
- Ensuring that documents are presented as per L/C terms and conditions and ICC-40Q requirements
- Ensuring it as being the nominated bank
- Source of repayment
- Issuing bank
Role Of Confirming Bank:
- Definite undertaking of the confirming bank in addition to that of the issuing bank
- Advise the credit without adding confirmation and inform issuing bank if not willing to confirm the credit
- Such undertaking can be amended nor cancelled without the consent of all parties.
- If incomplete or unclear instructions are received to confirm the credit bank may give preliminary notification to beneficiary and seek clarification from the issuing bank
Transport document is a document issued by the transport company or the fright forwarder stating the goods will be delivered to the intended destination as per agreed perms and conditions. Depending on the mode of movement of the cargo on appropriate transport document will be called for.
DEFINITION OF BILL OF LADING:
Bill of lading means a document, which evidences a contract of carriage by sea and taking over or loading of the goods by the carrier, and by which the carrier undertakes to deliver the goods against surrender of the document. A provision in the document that the goods are to be delivered to the order of named person, or to order, or to bearer, constitutes such an undertaking.
Transport Document Services Three Purchases;
- Receipt for goods
- Contract for transport and storage
- Title document that proves ownership of goods
Various Types Of Bill Of Leading:
- Marine bill of lading
- Short form bill of lading
- Through bill of lading
- Combined transport bill o f lading
- Line bill of lading
- Charter party bill of lading
- Container bill
IMPORT MECHANISM OF L/C:
As per import and export control Act, 1950, the person engaged in foreign trading should obtain registration from the office of chief controller of import and export. Thus and importer needs to collect Import Registration Certificate (IRC) from the aforesaid office. On the next step importer needs to obtain Letter of credit Authorization (LCA) from Bangladesh Bank. Having both IRC and LCA, the importer steps into a bank. Regular steps or procedures for import mechanism are as follows.
6.8.1 Importer’s Application For L/C Limit Or Margin:
An importer desirous to have an import L/C limit must apply to the import department with following:
- Full particulars of bank account
- Types of business-historical background
- Amount of limit required
- Terms of payment
- Goods to be imported
- Security to be offered
The L/C Application:
For opening L/C the client must submit to the bank an application in the printed format of IBBL and this L/C application is also agreement between ANZ (Bank) and the importer. Along with L/C application importer must submit:
- Performa invoice
- Insurance cover note importer should provide following information in the application form
- Full name and address of the beneficiary
- Brief description of the goods keeping conformity of the L/C
- Unit price quality of goods
- Origin of the goods
- Mode of transport and last date of shipment
- Port of shipment and destination
- Insurance cover note, number and name of the issuing company
- Tenor of draft (site/ insurance/ deferred)
- Sale terms
- Negotiation period
- Mode of advising
- Weather shipment/ transhipment allowed
- Instruction to add confirmation
- Full name and address of importer
- LCA no
- Opening of L/C under UCPDC publication no. 500
- Any other relevant information
Application Must Be Checked In The Following Manner:
- That the terms and conditions of L/C application are consistent with the exchange control
- That the goods are eligible to import
- That it is not difficult for the beneficiary to comply with all the terms and conditions to be incorporated in the L/C
- That the L/C must by the importer, agreeing terms and condition
- Goods are not of Israel and vessels to be used are not of Israel.
- Indenting registration no
- Insurance cover note with date of shipment
- Radioactivity report in cases of food item
- Whether IMP from dully filled in and signed
- That the goods are marketable
- Whether liability is under appropriate limit
- In case of car the life is not more than of 5 year
- In case of old machinery survey or certificate whether asked
- After scrutinizing all these legal aspects and taking clearance from ANZ correspondent banking department, necessary entry is give to the margin register and charges commissions and margin is realized.
Transmitting The L/C
The L/C is transmitted to the advising bank for advising the L/C to the beneficiary. L/C is generally transmitted through tested telex of fax. Before transmission a final examination of the L/C contents is necessary for the issuing bank.
Very often advising banks receive request from the issuing bank to add their confirmation while advising credit to the beneficiary. The advising bank can do it, if there is prior arrangement between advising and issuing bank or if it feels that the issuing bank is a reputed and reliable institution, good enough to discharge its obligation. By being involved as a confirming agent, the advising bank undertakes to negotiate beneficiary a bill without recourse to him. In IBBL, if the L/C value is more that or equal to USD 20,0007- then the bank asks for the credit information report of the beneficiary. The purpose of which is whether beneficiary has the capacity or capital to produce or supply the goods. Credit report can be sought from the buyer, from the seller’s bank or from any other place.
Amendment Of L/C:
L/C is based on an agreement between buyer and seller. Any amendment they want to bring in L/C should be informed to this issuing bank, which will transmit the amendment to the advising bank with test. Service and telex charge is debited from the party account.
In case of revocable L/C amendment can be brought without prior notice of the beneficiary or issuing bank. But in case of irrevocable L/C, which is very much popular, cannot be amended without informing beneficiary or the issuing bank. However, any instruction regarding amendment should be complete and precise.
Presentation Of Documents:
Having been advising bank, the seller then proceeds to dispatch the goods to the buyer. The seller then presents the document evidencing shipment of gods, to the negotiating bank. Negotiating bank then forwards all the documents with a schedule to the issuing bank. Most common documents are:
- Bill of lading on the receipt
- Certificate of origin
- Packing list
- Weight list
- Shipping advice
- Non of negotiable copy of B/L
- Bill of exchange, Phytosanitary, inspections certificate.
- Letter of insurance cover note
- Pre-shipment inspection certificate
- Shipment certificate.
- On the receipt of the documents, the bank will enter the some in the inward receive register branded with rubberstamp. Showing the date of receipt
EXAMINATION OF DOCUMENTS BY BANK
As already pointed out earlier the issuing bank’s undertaking a letter of credit to pay, accept or negotiate is conditional to the presentation of documents which are strictly as per the terms and conditions the credit. A careful examination of documents is, therefore, the major bank on which the whole edifice of documentary credit reset. Banks therefore must examine all documents stipulated in the credit with reasonable care. The check paints points for the banks are given in the box
Check List For Document Examination By Banks:
- Documents should appear on their face to be compliant with the stipulation in the documentary.
- Documents are not being inconsistent with each other.
- Non-stipulated documents should not be presented. Banks should either return such papers to the presenter or pass them on without responsibility.
- Examination of documents is completed within seven banking days following the day of receipt of documents.
- “Conditions” in the documentary credit which do not sates the documents to be presented in compliance are ignored.
- Documents dated prior to the date of credit are accepted, unless specifically prohibited by the credit.
- If documents other that transport documents, insurance documents and commercial invoice are called for the name of the issuer and content (wording or data) are to the clearly specified. If not, banks will accept documents as presented. Even the beneficiary will be accepted.
- Original credit accompanies the presentation.
- Documents musts be presented within banking hours.
- Endorsement, whenever required, must be checked especially on issuance certificate, transport documents and bill exchange.
- If credit says “original documents”. Documents produced by reprographic, automated or computerized systems. Carbon copies are acceptable if marked as original and appear to have been signed if required.
- Signature can be by handwriting, perforation, stamp, facsimile symbol, or any mechanical or electronic method of authentication.
- If credit requires copy (s) documents marked as copy ace acceptable. Copy need not be signed unless specifically stipulated otherwise.
- If multiple documents required like “Duplicate”, “Two Copies”, only one original and rest copy (s) is acceptable.
- If credit requires documents to be authenticated, validated, legalized, vases, certified etc, any signature, stamps or label which appears to satisfy it is acceptable.
Protection To Banks finder UCP:
Banks have been given several protections under UCP provision. While it may seem that they are overprotected, there is one alternative as the banks, liability under the credit would become very risky and very costly if these protections were not available. This also focuses on the fact that the credits are not foolproof and the best protection in trade is to have good knowledge of standing and status of the other party to the contract.
Banks Assume No Liability Or Responsibility:
- Form sufficiency, accuracy, genuineness, falsification or legal effect of any document.
- General and/ or particular conditions stipulated in the document.
- Description, quantity, weight, quality, condition, packing, delivery, value or existence of goods represented by documents.
- Goods, faith acts omission, solvency, performance or standing of consignor, courier, forwarder, consignee insurer, or any other person,
- Consequences of delay, loss in transit, mutilation, error of any message, letter, document.
- Errors in translation,
- Interpretation of technical terms.
- Interruption of technical terms.
- Strikes or lockout.
- Acts of an instructed party.
Examination Of Specific Document:
Procedure for the examination of following documents is given below:
- Commercial invoice
- Partial shipments
- Expiry date
- Insurance documents
- Bill of lading
- Non negotiable sea way bill
- Multi model transport document
- Charter party bill of lading
- Air transport document
- Surface transport document
- Courier charges
- Recourse for discrepant documents.
- Need not be signed. Must be issued by beneficiary (Except in transferable credit if first beneficiary does not provide his invoice).
- Should be in the name of applicant (except in transferable credits if first beneficiary does not provide his invoice).
- Need no be signed.
- Description of goods in invoice must correspond with description in the credit.
- If amount of invoice is in excess of the excess of the credit, banks may refuse to accept the invoice.
- If credit requires a “certification of weight”, superimposition on transport documents is acceptable, unless credit stipulates a separate document.
- Include exact license and/ or certificate number in invoice if required by the credit.
- Should show terms of shipment mentioned in the credit.
- If “about”, “approximately” or “circa” is used with amount credit, quantity or unit price, allow 10% plus or minus is allowed.
PARTIAL OR INSTALMENT SHIPMENTS:
- If partial shipment is prohibited 5% less (or more) in the amount of drawing acceptable provided, quantity and unit price stipulated are in full.
- Partial shipments are acceptable unless prohibited.
- Similarly post or courier receipts acceptable in same date and place of dispatch.
- All credits must stipulate an expiry date and the place where it expires. The banks must, therefore, make sure that the documents are presented on or before expiry.
- Documents must be presented on or before expiry.
- If credits are available for “one month”, “six month”, first day is the date of issuance of credit.
- If last day falls on a holiday expiry extended to next working date (not period after shipment).
- Disregard “Prompt”, immediately as soon possible, etc. to be disregarded.
- On or about means plus or minus 5 days.
- To”, “until”, “till”, “from” includes date mentioned.
- Issued and signed by insurance companies or underwriters or their agents.
- Broker’s cover note is not acceptable but insurance certificate or declaration under open cover is acceptable.
- All originals must be included.
- Insurance should be in the same currency as credit.
BILL OF LADING:
Of Lading (B/L) To Acceptable If It-
- Indicates the name of carrier
- Indicates goods loaded on board or shipped on named vessel
- Full set of originals is included.
- Indicates port of shipment and port of discharge stipulated in the credit.
- No indication that vessel is propelled by sail only.
NOT NEGOTIABLE SEA WAYBILL
Accept If Sea Waybill:
- Indicates the name of carrier.
- Indicates goods loaded on board or shipped on named vessel.
- Full set of originals is included.
- Indicates port of shipment and port of discharge stipulated in the credit.
- Contains all terms and conditions or reference to another document.
- There is no indication of charter party.
- No indication that vessel is propelled by said
MULTIMEDIA TRANSPORT DOCUMENT:
Accepted If Document
- Indicate the name of carrier or multimedia transport operator.
- Indicates goods have been dispatched, taken in charge or loaded on board.
- Consists of fall set.
- No indication of charter party.
- No indication of propagation by only sails.
CHARTER PARTY BILL OF LADING:
Accepts If Document
- Contains any indication that it is subject to charter party.
- Authenticated by owner/ master or agent
- To avoid misunderstanding, it is advised that the credit clearly indicate which expenses are on account of the applicant and which expenses on account of the beneficiary.
RECOURSE FOR DISCREPANT DOCUMENT:
In case of discrepant document, all bank keeps recourse if the credit has compliant document presented the confirming bank to have no recourse but the negotiating bank has recourse unless negotiating bank has confirmed the credit.
- Requisition for foreign currency is given to the international department (ID) for arranging necessary find before final payment.
- A telex copy forwarded; addressed to the nearest correspondent (reimbursement section) that payment is being made.
- Confirmation letter to the negotiating bank confirming remittance.
Sale memo prepared given exchange rate:
TT and OD rate paid to head office.
B.C. rate taken from customer.
- The difference is exchange-trading project.
- Operating a payment against document (PAD) account. Entry given to PAD register.
- 5 % rate of interest charged from the negotiating date up to retirement. In case of discrepant document profit is charged from the lodgement date till the retirement date.
- Inter Branch Exchange Trading Credit Advice (IBETCA) sent to ID.
Sundry Deposit L/C Margin A/C……………………………………….Dr.
Pad A/C …………………………………………………………….Cr.
(Margin Amount transferred to PAD A/C)
PAD A/C …………………………………………………………..Cr
(Customer A/C debited for rest of the amount)
PAD A/C …………………………………………………………..Dr.
H.O.I.D. A/C + Ex. Trading A/C ………………………………….Cr.
Income A/C Profit on PAD ………………………………………..Cr.
(Amount given to head office ID and Profit credited).
Banker’s Liability ……………………………………………….Dr.
Customer’s liability …………………………………………….Cr.
Guidelines On Back To Back Letter Of Credit: Transaction (Back To Back L/C);
A Back to Back mechanism involves two separate L/C. One is master export L/C another is Back to Back L/C. On the strength of Master Export L/C bank issues Back to Back L/C. Back to Back L/C is commonly known as buying L/C. On the contrary Master Export L/C is known as selling L/C.
Features Of Back To Back L/C:
- It is an import L/C to procure goods/ raw materials for further import.
- It is operand based on export L/C.
- It is a kind of export Finance.
- Export L/C is at sight, but Back to Back L/C is at unasked scrutiny.
- No margin is required to open back to Back L/C.
Check List To Open Back To Back L/C
- Application is registered with CCI & E and has bounded warehouse license,
- The Master L/C has adequate validity period and has a defective clause.
- L/C value shall not exceed the admissible percentage of net FOB value of relative master L/C.
- Unasked period wills up 180 days.
Seniritization Of Master L/C:
Presence (P) absence (A) of following clause in Master L/C may require amendment.
- Usage clause is not mentioned. (A)
- Negotiation restricted to other bank (P).
- Cash Benefit Analysis Of L/C.
Islamic Bank Limited is one of the leading local’s banks in Bangladesh. This instrument of financing is very handy tool for generation of earning. Every year IBBL earn quite large amount of commission from L/C from its total volume of L/C issued. From the table below we can see the L/C volume each year and commission earned from it.
|Total L/C Volume||12,798||11,821||11,977||12,678||12,666|
|Commission From L/C||19.87||17.87||21.12||22.08||22.03|
Amounts Are C’r. Tk.
From table we can see that L/C volume is increasing which indicates that business in IBBL is managed quite efficiently and from the trend analysis we observe that growing trends also indicates efficiency if IBBL and give a clue to increasing economic transaction.
|Commission From L/C||19.87||17.87||21.12||22.08||22.03|
From the table above we observe one important thing i.e., over the period of time earning from L/C operation is almost constant proportionate to operating income. Even though the bank is highly efficient but proportion of L/C commission earned and operating profit is almost same.
Islami Bank Bangladesh Limited (IBBL) was incorporated on 13, March, 1983 as a public company with limited liability under the companies act, 1913. The bank started functioning with effect from 30, March, 1983. IBBL is the first interest free banking in South Asia. The establishment of this bank conducted new age in Bangladesh, the 3rd largest Muslim country in the world.
The bank is committed to run all its activities as per Islamic Shariah. IBBL through its steady process and continued success has, by now, earned the reputation of being one of the leading private sector banks of the country. The bank has shown steady process in this important sector. Main items of import (by the help of IBBL) are machinery, garments, fabrics and accessories, ships for scarping, rice pharmaceuticals etc. Whereas main items of exports are jute goods, readymade garments, leather, frozen fish, fertilizer, etc. Still now hear about 301 Islamic banking and financial institutions in about 49 countries of Asia, Africa, Europe, America and countries like Pakistan, U.K., U.S.A., Germany, Argentina, Denmark, Luxembourg, Switzerland and India have been established. The banking system of Pakistan and Iran was totally remodelled on the basis of Islamic Shariah services.
IBBL will be more effective in our economy by lunching new financial products to attract deposit as Consumer Credit Scheme, Pension Scheme, Child Education Scheme, Plastic Money ATM etc.
After observing the operation procedure of IBBL, I recommend the following:
IBBL should launch new financial products to attract deposit, as Consumer Credit Scheme, Child Education Scheme, and Plastic Money etc. IBBL can also lunch ATM as diversification.
Marketing Division: To increase the faith of former mentioned depositors and people, IBBL should convince them in the best manner, so that market share can be captured. A separate marketing division should be set up for this matter.
Diversify Assets Portfolio: Leading portfolio of IBBL should be diversified. Not to concentrate or give weight only in working capital financing.
IT Facilities: IT facilities of IBBL are not satisfactory good. Computer system which owned by branch are not up to date, not sufficient and moreover some of computer system not work properly when they are needed. There is no sufficient and high bandwidth Internet connection available in the bank. So, IBBL should develop Information Technology to ensure better service for the customer and support communication with outside