The main objective on this report is about Al-Arafah Islami Bank Ltd . The sponsors with the financial institution are generally top enterprise personalities as well as eminent industrialists with the region obtaining limits in various pieces with the nation’s economic system. One of several tasks with the company were being to supply the customers together with top quality monetary companies with the help of the latest technologies, and provide innovative checking companies from competitive prices.
Financial institution and banks play an important role in financial inter mediation and thereby contribute to the overall growth in the economy. Presently the financial system in Bangladesh consists of the central bank, nationalized commercial/specialized banks, private banks, foreign banks and other non-bank financial institution. This report is based on one commercial Bank that is the Al-Arafah Islami Bank Ltd or AIBL.
The primary objective of writing the report is fulfilling the partial requirements of the BBA program. In this report, I’ve attempted to give an overview of Al-Arafah Islami Bank Limited in general. Also in the major part, I have shown the practical approach of Foreign Exchange. Some following objectives of the report are as shown:
- To present an overview of Al-Arafah Bank Ltd.
- To present the current situation of Dilkusha branch.
- To show Islamic banking background of this era as well as of this country.
- To present Islamic perspective of credit.
- To show present condition of investment.
- To gain or achieve the practical Idea of banking System of AIBL
- To observe the economic condition of AIBL
- To explain the general banking activities of AIBL.
- To explain the activities of foreign exchange of AIBL
- To identify the problems of AIBL prevailing in its banking system
- To suggest some possible recommendations to overcome the problems.
To complete this report I’ve followed a systematic study which include working, inspecting and talking to the executives at different levels of the organization to know the present scenario of the banking practice. To facilitate make the report more meaningful and presentable two sources of data and information have been used widely-
The primary sources which are as follows-
- Unceremonious conversation with the client.
- Realistic work exposures from the different desks of the various departments of the Branch covered.
- Relevant file study as provided by the officer’s concerned.
- Face to face conversation with the Executives and officers of bank.
The Secondary Sources of data and information are as follows-
- Annual Report of Al-Arafah Islami Bank Ltd.
- Periodicals published by Bangladesh Bank
- Various books, articles, compilations etc, regarding general banking functions.
- Statement affairs.
Definition of Islamic Banking
Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Shariah) and its practical application through the development of Islamic economics. Shariah prohibits the payment of fees for the renting of money (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.
The World Islamic Banking Conference held annually in Bahrain since 1994 is the unique platform internationally recognized as the largest and most significant gathering of Islamic banking and finance leaders in the world.
According to Islamic Banking Act of Malaysia, an Islamic bank is a “company, which carries on Islamic banking business, Islamic banking business means banking business whose aims and operations don’t involve any element which is not approved by the religion Islam.”
Dr. Ziauddin Ahmed says, “Islamic banking is essentially a normative concept and could be defined as conduct off banking in consonance with the ethos of the value system of Islam.”
It appears from the above definitions that Islamic banking is systems of financial intermediation that avoids receipts and payments of interest in its transactions and conduct its operations in a way that it helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system whose operation is based on Islamic principles of transactions of which profit and loss sharing is major feature, ensuring justice and equity in the economy. That is why Islamic banks are often known as profit and loss sharing banks.
Theoretical 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
- 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.
- 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.
- 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.
- 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.
- 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.
Conventional Banking Vs Islamic Banking
Conventional banking is based on the debtor-creditor relationship between the depositors and the bank on the one hand, and between the borrowers and the bank on the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money.
Islamic Banking, on the other hand, considers a loan to be given or taken, free of charge, to meet any contingency. Thus in Islamic Banking, the creditor should not take advantage of the borrower. When 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 he shall not be dealt with unjustly”. Hence, commercial banking in an Islamic framework is not based on the debtor-creditor relationship.
The second principle regarding financial transactions in Islam is that there should not be any reward without taking a risk. This principle is applicable to both labor and capital. As no payment is allowed for labor, unless it is applied to work, there is no reward for capital unless it is exposed to business risk.
Therefore, financial intermediation in an Islamic framework has been developed on the basis of the above two 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:
- The Islamic banking system is essentially a profit and loss sharing system and not merely an interest (Riba) banking system; and
- Investment (loans and advances in the Conventional sense) under this system of banking must serve simultaneously both the benefit to the investor and the benefit of the local community as well. The financial relationship as pointed out above is referred to in Islamic jurisprudence as Mudaraba.
Background of the Organization
Islam provides us a complete lifestyle. Main objective of Islamic lifestyle is to be successful both in our mortal and immortal life. Therefore in every aspect of our life we should follow the doctrine of Al-Qur’an and lifestyle of Hazrat Muhammad (Sm.) for our supreme success. Al-Arafah Islami Bank started its journey in 1995 with the said principles in mind and to introduce a modern banking system based on Al-Qur’an and Sunnah.
Al-Arafah Islami Bank incorporated in Bangladesh as a banking company in 1995 with limited liability by shares. It started business on 27 September of that year with an authorized capital of Tk 1,000 million. At inception, its paid-up capital was Tk 101.20 million divided into 101,200 ordinary shares of Tk 1,000 each. 23 sponsors of the bank subscribed the total issued capital. In 2000, the paid up capital of the bank increased to Tk 253 million, of which Tk 126.50 million were paid by the promoters/sponsors and Tk 126.50 million by the general public. The bank is listed in the two of the country and has offered 126,000 shares for subscription and trading by the public. Al-Arafah Bank is an interest-free Shariah bank and its modus operandi is substantially different from those of regular commercial banks. The bank however, renders all types of commercial banking services under the regulation of the Bank Companies Act 1991. It conducts its business on the principles of musharaka, Bai-Murabaha, bai-muajjal and hire purchase transactions. A Shariah Council of the bank maintains constant vigilance to ensure that the activities of the bank are being conducted according to the precepts of Islam.
A group of established, dedicated and pious personalities of Bangladesh are the architects and directors of the Bank. Among them a noted Islamic scholar, economist, writer and ex-bureaucrat of Bangladesh government Mr. A.Z.M Shamsul Alam is the founder chairman of the bank. His progressive leadership and continuous inspiration provided a boost for the bank in getting a foothold in the financial market of Bangladesh
A group of 13 dedicated and noted Islamic personalities of Bangladesh are the member of Board of Directors of the bank. They are also noted for their business acumen. Al-Arafah Islami Bank Ltd. has 46 branches and a total of 1033 employees (as of December 2008). Its authorized capital is Taka 2500 millions and the paid-up capital is Taka 1153.18 millions.
The wisdom of the directors, Islamic bankers and the wish of Almighty Allah make Al-Arafah Islami Bank Ltd. most modern and a leading bank in Bangladesh.
To be the pioneer bank in the banking arena of Bangladesh under the Shariah guidelines and contribute significantly to the national economy.
- To launch a welfare-oriented banking system.
- To invest through different modes that are acceptable under Islamic Shariah.
- To allow customer deposits on the profit-loss sharing basis.
- To perform interest-free banking.
- To found participatory banking instead of banking on debtor-creditor relationship.
- To display team spirit and professionalism.
- To provide high-quality financial services in export and import trade.
- To maintain corporate and business ethics.
Goal and Objective of AIBL
The maxim of the Al-Arafah Islami Bank Ltd (AIBL) is to discover a new horizon of innovative contemporary banking creating an automated and computerized environment providing one-stop service and prepare itself to countenance the new challenges of globalization and 12th century. One of the main objectives of the bank is to be a provider of high products and services to cater to the needs of its corporate clients and provides a comprehensive range of financial services to national and multinational companies. The growing technological revaluation in the bank is not so-outlying future. It has previously introduced Swift, Online Banking.
Special features of the AIBL
As an Islami bank, we are singular in every positive aspect. We provide a bunch of state-of-art banking services within the wide bracket of Shariah. We are unique with our products, strict with our principle and uncompromising with our honesty. Here are some special features of us that make us notable in Islami banking sector.
- All activities of AIBL are conducted under a profit/loss based system according to Islamic Shariah to get the nation rid of Usury.
- Its investment policies under different modes are fully Shariah compliant and well monitored by the board of Shariah Council.
- During the year 2007, 70% of the investment income has been distributed among the Mudaraba depositors.
- In 2008, AIBL has included online banking in its wide range of services. Bangladeshi software has been introduced in this feature to promote the local developers.
- AIBL regularly arranges its AGMs (Annual General Meeting). Whenever needed EGMs (Extraordinary General Meeting) are also arranged.
- We regularly pay the dividend to our valued shareholders. For the year of 2007, we declared 20% bonus dividend to our shareholders.
- We believe in providing dedicated services to the clients imbued with Islamic spirit of brotherhood, peace and fraternity.
- The bank is committed to establishing a welfare-oriented banking system to meet the needs of low income and underprivileged class of people.
- The Bank upholds the Islamic values of the establishment of a justified economic system through social emancipation and equitable distribution of wealth.
- Following the Islamic traditions, it is assisting in the economic progress of the socially deprived people; in the creation of employment opportunities and in the promotion of rural areas to ensure a balanced development of the country.
- The Bank believes in social and philanthropic activities and has established AIBL English Medium Madrasha and AIBL Library. More endeavors will inshallah follow in future.
Correspondent Banking Relationship
The main aim of Al-Arafah Islami Bank Ltd is to increase its foreign exchange business and in this connection, we are doing international banking with all major banks of the world. At present we are maintaining correspondent banking relationship with 20 major reputed banks of the world.
Foreign exchange risk Management
Foreign exchange risk is defined as the potential change in earnings arising due to change in market prices. International Division independently conducts the transactions and passing of their entries in books of accounts. All foreign exchange transactions are revalued at Mark-to-Market rate as determined by Bangladesh Bank at the month-end. All Nostrum accounts are reconciled on monthly basis and outstanding entry beyond 30 days is reviewed by the Management for its settlement.
The Bangladesh Bank has fixed the ratio of capital adequacy against Risk-Weighted Assets at 9.00% in place of 8% in the month of September 2002. In 2002, the amount of total equity of the bank was 41.57 Crore taka, which stood at TK.85.56 Crore in the year 2003 and Taka 104.27 Crore in the year 2004. This year it stood at taka 130.56 Crore. At 31 December 2005, the capital adequacy ratio of the bank is 12.16 % against 14.56% at the same period of 2004.
Authorized and Paid-Up Capital
The Bank Company Act 1991 which amended in March 2004 includes a provision of raising the capital to a new level of TK.100 Crore for the commercial banks within March 2006. In compliance with the new provision, the bank has raised its capital from TK.41.56 crore in the year 2003 to TK.85.56 crore in 2004 by issuing a right share against each of the existing share in the year 2004 and declared 16% bonus dividend from the profit of the year 2004. The bank again declared 15.50% bonus dividend from the profit 2005. As a result the paid up capital of the stood at TK.67.79 Crore as at 31st December 2006.Bank declared 26.00% Bonus dividend for the year 2006. As a result the paid up capital of the Bank stood at taka 85.42 crore as at 31st December 2007.
The total deposit of the bank was TK. 23009.13million at 31st December 2008, of which bank deposit was 611.72 million taka and the general deposit was 16163.61 million taka. At the same time in the year 2007, the number of total deposits was 16775.34 million taka. In this area, the growth rate is 44.07%.
Activities of Shariah council for the year-2008
Shariah council consists of 6 members specialized in Fiqhul Muamalat as guideline given by Bangladesh bank to ensure whether all banking operations are transacted in accordance with Islami Shariah i.e. Quran, Sunnah, Ijma, and Iztihad.
Shariah council has managed, by the grace of almighty Allah, to contribute a lot to run all the business activities of the bank according to Shariah guidelines., honorable members of the Shariah council sit in 7 meetings in the year 2008 to discuss the matters placed before them by the board and management of the bank to give directive and suggestions in the field of Shariah principles, Shariah council advised everybody concerned to comply Shariah requirements and render all out effort to increase the standard of service rendered to the standard of service rendered to the standard of service rendered to the clients.
Muraqibs of the council has visited all the 50 branches of the bank over the year to observe the Shariah compliance, give necessary instructions on the spot and submitted the 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. Besides, compensation received from different branches, interest received from correspondence bank of Nostro a/c as well as doubtful income amounting to Tk.14052662 advised setting aside from bank total halal income.
The auditors continuously review the Bank’s transactional procedures to ensure adherence to the framework created by the Fatwa & Shariah Supervision Board. The Shariah auditors submit periodic reports to the Shariah supervisor so as to monitor and maintain Shariah compliance.
Products of AIBL as an Islamic bank
The AIBL (Al-Arafah Islami Bank Ltd) offers their customers general banking facilities, which ensures the safety of their money. following are the ways through which banks collect their deposits from the clients:
- Al-WADIA CURRENT DEPOSIT (CD)
- MUDARABA SHORT NOTICE DEPOSIT (MSD)
- MUDARABA SAVINGS DEPOSIT
- MUDARABA TERM DEPOSIT (MTD)
- DEPOSIT UNDER OTHER SCHEMES
- MONTHLY PROFIT BASED TERM DEPOSIT (PTD)
- MONTHLY INSTALLMENT BASED TERM DEPOSIT (ITD)
- MONTHLY INSTALLMENT BASED HAJJ DEPOSIT (MHD)
- ONETIME HAJJ DEPOSIT (THD)
- MARRIAGE & INVESTMENT DEPOSIT (MIS)
- AL-ARAFAH SAVINGS BOND (ASB)
- FOREIGN CURRENCY DEPOSIT (FCD)
- PENSION DEPOSIT SCHEME (PDS)
- CASH WAQFA DEPOSIT SCHEME (CWD)
- MUDARABA MILLIONAIRE DEPOSIT SCHEME
- MUDARABA DOUBLE DEPOSIT SCHEME
- MUDARABA LACPOTI DEPOSIT SCHEME
- MUDARABA KOTIPOTI DEPOSIT SCHEME
Management of AIBL
Management is the process of planning, leading and controlling the work of organizations members and of using all available organizational resources to reach stated organizational goals.
The strength of a bank depends on the strength of its management team. Al-Arafah Islami Bank Ltd. is proud to have a team of highly motivated, well-educated and experienced executives who have been contributing substantially to the continued progress of the bank. The management is ably supported and assisted by well motivated and experienced officers and members of staff.
Human Resource Department of AIBL
In today’s aggressive business environment, only the quality of human recourses makes the difference. The bank’s assurance to attract the best persons to work for it and the adoption of the latest information technologies is reflected in the efforts of the bank in the in the development of its human resources. In the faces of today’s global competition Bank envisages to develop the highly motivated workforce and to equip them with latest skills and technologies. A good working environment promotes a high level of faithfulness and assurance, devotion and dedication on the part of the employees.
Al-Arafah Islami Bank has a training center to develop its employees. Al-Arafah Islami Bank sent the number of officers to Bangladesh Institute of Bank Management and other training institutes for specialized training on various aspects of banking. The bank has set up a Training Institute for providing training facilities of its executive’s officers. The training institute has already conducted a number of courses. A number of officers have been sent for foreign training. Al-Arafah Islami Bank believes in professional excellence and considers its working force as its most valuable assets and the basis of its competence and power.
Dilkusha branch of Al-Arafah Islami bank Ltd. (AIBL)
The 42nd branch of AIBL is the Dilkusha; this branch is situated in 36, Dilkusha C/A, Dhaka. This branch is inaugurated on 15th December 2005; the manager of this branch is Md. Nazmus Saadat. He also got the position of AVP of AIBL. This branch has also got 40 efficient and responsible employees. Although this branch has past only three years, it has created the positive image not only to the AIBL but also among the customer. The management of this branch always tries to provide better service to its customer and behave well with them. Basically, this branch’s major portion of customers is corporate.
Banking activities of AIBL
Bank performs as an intermediary between the lender (surplus unit) and borrower (deficit unit). Savings and deposits are the core strength of the banks to provide a loan. And the interest earned from the difference borrowing and lending is the major portion of banks income. Banks also earn from the variety of operation. There are mainly three departments exist in AIBL, Dilkusha Branch. These are as follows-
- General Banking (GB).
- Loan and Advance/ Credit Division.
- Foreign Exchange.
Among the four departments of a bank, General Banking Department is most important Department. The General Banking Department serves their client by Opening different types of account, by providing the facilities Cash Transaction, Transferring Transaction, Clearing Transaction, Pay Order, TT, DD, and Remittance money from one branch to other branches.
General banking is the front side banking service department. It provides those customers who come frequently and those customers who come one time in banking for enjoying ancillary services. General Banking is divided into several sectors. These sectors are as follows-
- Account opening,
- Cheque clearing Section
- Remittance Section
- Deposit and Cash Section
The banking activities usually begin through the opening of the account with the bank by their clients. Bank always selects their customers very carefully because the success of the bank depends on their customers. So this section takes extreme caution in selecting its customer base.
Investment products of AIBL
Meaning of Bai-Muajjal:
Bai–Muajjal means credit sale of goods by the bank to the customer. Such contracts provide for a margin of profit or markup to the bank as mutually agreed upon by the buyer (client) and the seller (bank). Goods are kept at the disposal of the customer/buyer and the sale price can be paid either in the lump sum or in installments.
The Bai-Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods, permissible under Shariah and law of the country, to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or in fixed installments.
Important Features of Bai-Muajjal:
- It is permissible and in most cases, the client will approach the bank with an offer to purchase a specific good through a Bai-Muajjal
- It is permissible to make the promise binding upon the client to purchase the goods from the bank. In other words, the client is required to either satisfy the promise or to indemnify the bank for damages caused by breaking the promise without excuse.
- It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the bank for damages caused by non-payment.
- It is also permissible to document the debt resulting from Bai-Muajjal by a Guarantor, or a mortgage or both, like any other debt. Mortgage/Guarantee/Cash security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
- Stock and availability of goods is a basic condition for signing a Bai-Muajjal Therefore, the bank must purchase the goods in accordance with the specifications of the client, prior to signing the Bai-Muajjal Agreement with the client.
- All goods purchased on behalf of a Bai-Muajjal agreement are the responsibility of the bank until they are delivered to the client.
- The bank must deliver the goods to the client at the time and place specified in the contract. The bank may sell the goods at a higher price than the purchase price to earn the profit.
- The price is fixed at the time of the agreement and cannot be altered.
- The bank is not required to disclose the profit made on the transaction.
This type of financing by the bank is considered riskier than the other Islamic modes of investment previously discussed. Therefore, the application/proposal for Bai-Muajjal investment must be reviewed very carefully to ensure the client can ultimately make payment. .
The following steps may be taken to ensure the Bai-Muajjal Investment is a good proposition for the bank:
- The bank may meet with the prospective client regarding his investment needs and business experience prior to an application /proposal is submitted.
- The bank may review the client’s past performance and other financing arrangements he may have had with the bank in the past.
- The bank may review its current investment policy regarding this type of financing arrangement to ensure the proposal meets bank guidelines.
Meaning of Murabaha:
The terms “Bai-Murabaha” means the sale for an agreed upon profit. Bai-Murabaha may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods permissible under Islamic Shariah and the Law of the land to the buyer at a cost plus an agreed-upon profit payable today or on some date in the future in lump-sum or by installments. The profit either may be a fixed sum or based on a percentage of the price of the goods.
Types of Murabaha:
In respect of dealing parties, Bai–Murabaha may be of two types
- Ordinary Bai-Murabaha and
- Bai-Murabaha Order on and Promise.
Ordinary Bai-Murabaha is a direct transaction between a buyer and a seller. Here, the seller is an ordinary trader who purchases goods from the market in the hope of selling these goods to another party for a profit. In this case, the seller undertakes the entire risk of his capital investment in the goods purchased. Whether or not he earns a profit depends on his ability to find a buyer for the merchandise he has acquired.
Bai-Murabaha Order on and Promise involves three parties – the buyer, the seller and the bank. Under this arrangement, the bank acts as an intermediary trader between the buyer and the seller. In other words, upon receipt of an order and agreement to purchase a certain product from the buyer, the bank will purchase the product from the seller to fulfill the order.
Important Features of Murabaha:
- A client can make an offer to purchase particular goods from the bank for a specified agreed upon price, including the cost of the goods plus a profit.
- A client can make the promise to purchase from the bank, that is, he is either to satisfy the promise or to indemnify any losses incurred from the breaking the promise without excuse.
- It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify any losses that may result.
- Documentation of the debt resulting from Bai-Murabaha by a Guarantor, or a mortgage, or both like any other debt is permissible. Mortgage/Guarantee/Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
- Stock and availability of goods is a basic condition for signing a Bai-Murabaha Therefore, the bank must purchase the goods in accordance with the specifications of the client, thereby taking ownership of the goods before signing the Bai-Murabaha agreement with the client.
- Upon acquiring the goods, the bank assumes the risk of ownership. In other words, the bank is responsible for damages, defects, and /or spoilage to the merchandise until such time that it is actually delivered to the buyer.
- The bank must deliver the goods to the client at the date, time, and place specified in the contract.
- The bank sells the goods at a price above the cost to obtain a profit. The sale price that is charged by the bank is agreed upon in the Bai-Murabaha. The profit can be stated in terms of a flat dollar amount or on a percentage of the purchase price. If a percentage is used, the percentage shall never be expressed in terms of time, in order to avoid confusion that the price is a form of interest (Riba), which is not allowed.
- The price agreed to in the agreement is binding on both parties.
- It is permissible for the bank to contract with a third party to buy and receive the goods on its behalf. This agreement must be a separate contract.
Steps in Bai-Murabaha:
First Step: The client submits a proposal regarding his requirements of the bank. The client sends a proposal with the specifications of the commodity to be acquired from the bank. The proposal also indicates details regarding the date, time and place of delivery as well as price and form of payment information. The bank responds by sending a counterproposal either accepting the buyer’s price or stipulating a different price.
Second Step: The client promises to buy the commodity from the bank on a Bai–Murabaha basis, for the stipulated price. The bank accepts the order and establishes the terms and conditions of the transaction.
Third Step: The bank informs the client (ultimate buyer) of its approval of the agreement to purchase. The bank may pay for the goods immediately or in accordance with the agreement. The seller expresses its approval to the sale and sends the invoice(s).
Fourth Step: The Bank authorizes the client or its nominee to receive the commodity. And the seller sends the commodity to the place of delivery agreed upon. The client undertakes the receipt of the commodity in its capacity as legal representative and notifies the bank of the execution of the proxy.
Application of Bai-Murabaha:
Murabaha is the most frequently used form of finance in Islamic banking throughout the world. It is suitable for financing the different investment activities of customers with regard to the manufacturing of finished goods, procurement of raw materials, machinery, and other required plant and equipment purchases.
Meaning of Musharaka:
The word Musharaka is derived from the Arabic word Sharikah meaning partnership. In Al-Arafah Islami Bank, a typical Musharaka transaction may be conducted in the following manner.
One, two or more entrepreneurs approach an Islamic bank to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the project. All partners, including the bank, have the right to participate in the project. They can also waive this right. The profits are to be distributed according to an agreed ratio, which need not be the same as the capital proportion. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project.
Types of Musharaka:
In respect of dealing parties, Musharaka may take two forms
- Permanent Musharaka and
- Diminishing Musharaka.
In this case, the bank participates in the equity of a company and receives an annual share of the profits on a pro-rate basis. The period of termination of the contract is not specified. This financing technique is also referred to as continued Musharaka.
The contributions of the partners in this mode may be equal or unequal percentages of capital for the purpose of establishing a new income-generating project or to participate in an existing one. In this arrangement, each participant owns a permanent share in the capital structure and receives his share of the profits accordingly. This type of a partnership is intended to continue until the company is dissolved. However, one can exit the partnership by selling his share of the capital to another investor.
Diminishing or Digressive Musharaka is a special form of Musharaka, which ultimately culminates in the ownership of the asset or the project by the client. It operates in the following manner.
The Bank participates as a financial partner, in full or in part, in a project with a given income forecast. An agreement is signed by the partner and the bank, which stipulates each party’s share of the profits.
However, the agreement also provides payment of a portion of the net income of the project as repayment of the principal financed by the bank. The partner is entitled to keep the rest. In this way, the bank’s share of the equity is progressively reduced and the partner eventually becomes the full owner.
When the bank enters into a Diminishing Musharaka its intention is not to stay in the partnership until the company is dissolved. In this type of partnership, the bank agrees to accept payment on an installment basis or in one lump sum, an amount necessary to buy the bank’s partnership interest. In this way, as the bank receives payments over and above its share in partnership profits, it’s partnership interest reduces until it is completely bought out of the partnership.
Financing through a Musharaka partnership is investment-based. The capital provider has full control in the management of the business. In addition, he shares proportionately in both the profits and losses of the business. Therefore, the rate of return is uncertain and can be either positive or negative. The cost of capital is also uncertain and there exists the perfect correlation between the relationship of cost of capital and rate of return on capital.
Definition of Mudaraba:
The term Mudaraba refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital.
Mudaraba is a contract of those who have capital with those who have the expertise, where the first party provides capital and the other party provides the expertise with the purpose of earning Halal (lawful) profit which will be shared in a mutually agreed upon proportion.
This type of business venture serves the interest of the capital owner and the Mudarib (agent).
The capital owner may not have the ability or the experience to run a profitable business. On the other hand, the agent (the Mudarib) may not have adequate capital to invest in a business or project. Therefore, by entering into a contract of Mudaraba each party compliments one another, allowing a business venture to be financed. The following are the steps of the Mudaraba contract.
Steps in Mudaraba:
The bank provides the capital as a capital owner. The Mudarib provides the effort and expertise for the investment of capital in exchange for a share in profit that is agreed upon by both parties.
One-The Results of Mudaraba: The two parties calculate the earnings and divide the profits at the end of Mudaraba. This can be done periodically in accordance with the terms of the agreement, subject to the legal rules that apply.
Two-Payment of Mudaraba Capital: The bank recovers the Mudaraba capital it contributed before dividing the profits between the two parties because the profit is considered collateral for the capital.
Three-Distribution of wealth resulting from Mudaraba: In the event a loss occurs, the capital owner (the bank) is responsible for the entire loss. In the event of profits, they are divided between the two parties in accordance with the agreement between them, subject to the capital is recovered first.
It is an investment-based form of financing. The provider of capital in Mudaraba has no role in the management of the capital. However, he has to bear the risk of capital loss as well as the opportunity cost of capital for the entire period of the contract. The rate of return is quite uncertain and the cost of capital is also uncertain. Hence, there is a perfect correlation between the cost of capital and rate of return on capital.
Meaning of Bai-Salam:
Bai-Salam is a term used to define a sale in which the buyer makes advance payment, but the delivery is delayed until some time in the future. Usually the seller is an individual or business and the buyer is the bank.
The Bai-Salam sales serve the interests of both parties:
- The seller receives advance payment in exchange for the obligation to deliver the commodity at some later date. He benefits from the Bai-Salam sale by locking in a price for his commodity, thereby allowing him to cover his financial needs whether they are personal expenses, family expenses or business expenses.
- The purchaser benefits because he receives delivery of the commodity when it is needed to fulfill some other agreement, without incurring storage costs. Second, a Bai-Salam sale is usually less expensive than a cash sale. Finally a Bai-Salam agreement allows the purchase to lock in a price, thus protecting him from price fluctuation.
Steps in Bai-Salam:
One-Cash sale or Sale on Credit: The bank pays the agreed upon price at the time of the contracts inception. The seller agrees to the delivery of the commodity some specified date in the future.
Two-Delivery and Receipt of the Commodity on the Specific due Date: There are several options for delivery available to the bank
- The bank may receive the commodity and resell it to another party for cash or credit.
- The bank may authorize the seller to find another buyer for the commodity.
- The bank may direct the seller to deliver the commodity directly to a third party with whom the bank has entered into another agreement.
Three-The Sale Contract: The bank agrees to sell the commodity for cash or a deferred price, which is higher than the Bai-Salam purchase price. The buyer agrees to purchase and to pay the price according to the agreement.
Application of Bai-Salam:
Bai-Salam sales are frequently used to finance the agricultural industry. Banks advance cash to farmers today for delivery of the crop during the harvest season. Thus banks provide farmers with the capital necessary to finance the cost of producing a crop.
Bai-Salam sale is also used to finance commercial and industrial activities. Once again the bank advances cash to businesses necessary to finance the cost of production, operations, and expenses in exchange for future delivery of the end product. In the meantime, the bank is able to market the product to other customers at lucrative prices.
In addition, the Bai-Salam sale is used by banks to finance craftsmen and small producers, by supplying them with the capital necessary to finance the inputs to production in exchange for the future delivery of products at some future date.
Thus as has been demonstrated, the Bai-Salam sale is useful in providing financing for a variety of clients, including farmers, industrialists, contractors, and traders. The proceeds from a Bai-Salam sale may be used to cover the finance of operation costs and capital costs.
The Bai-Salam agreement is a combination of debt and trading. The capital provider has no control over the management of capital provided. However the capital provider takes all of the risk as profits cannot be determined until the commodity is delivered and the final sale price is determined. In addition the capital provider incurs the opportunity cost associated with the capital outlay. Like the other three previously discussed modes of finance there is no certain rate of return. In addition the cost of capital is uncertain ex-ante. Also, there is no correlation in the relationship of cost of capital and rate of return on capital.
Meaning of Ijarah:
According to Islamic Shariah, Ijarah is a contract between two parties – the lessor and the lessee, where the lessees (Hirer or Mustajir) have the right to enjoy/reap a specific benefit against a specified consideration/rent/wages from the lessor – the owner (Muajjir).
Elements of Ijarah: According to the majority of Fuqaha, there are three general and six detailed elements of Ijarah:
- The Wording: This includes offer and acceptance
- Contracting Parties: This includes a lessor, the owner of the property, and a lessee, the party that benefits from the use of the property.
- Subject Matter of the Contract: This includes the rent and the benefit.
- The Lessor (Mujjir): The individual or organization who leases out/rents out the property or service is called the lessor.
- The Lessee: (Mustajir): The individual or organization who hires/takes the lease of the property or service against the consideration rent/wages/remuneration is called the lessee (Mustajir).
- The Benefit (Major): The benefit that is leased/rented out is called the benefit (Major).
- The rent (Ujrat): The consideration either in monetary terms or in quantity of goods fixed to be paid against the benefit of the goods or service is called the rent or Ujrat.
Hire-Purchase under Shirkatul Melk has been developed through practice. Actually, it is a synthesis of three contracts:
- Ijarah and
Definition of Shirkatul Melk:
‘Shirkat’ means partnership. Shirkatul Melk means to share in ownership. When two or more persons supply equity, purchase an asset and own the same jointly and share the benefit as per agreement and loss in proportion to their respective equity, the contact is called Shirkatul Melk. In the case of Hire Purchase under Shirkatul Melk, Islamic banks purchase assets to be leased out, jointly with the client under equity participation, own the same and share benefit jointly until the full ownership is transferred to the client.
Definition of Ijara
The term ‘Ijara’ has been defined as a contract between two parties, the lessor and the lessee, where the lessee enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the lessor. It is a lease agreement under which a certain asset is leased out by the lessor or to a lessee against specific rent or rental for a fixed period.
Definition of Sale Contract
This is a contract between a buyer and a seller under which the ownership of certain goods or asset is transferred by the seller to the buyer against agreed upon the price paid by the buyer. In the case of Hire Purchase under Shirkatul Melk, the lessor bank sells or transfers its title to the asset under a sale contract on payment of sale price.
Stages of Hire Purchase under Shirkatul Melk:
Hire Purchase under Shirkatul Melk Agreement has got three stages:
- Purchase of asset under joint ownership of the lessor and the lessee.
- Hire, and
- Sale and transfer of ownership by the lessor to the other partner – lessee.
- In case of Hire Purchase under Shirkatul Melk transaction, the asset or property involved is jointly purchased by the lessor and the lessee with specified equity participation. In which the amount of equity and share in the ownership of the asset of each partner are clearly mentioned. Under this agreement, the lessor and the lessee become co-owners of the asset under transaction in proportion to their respective equity.
- In Hire Purchase under Shirkatul Melk Agreement, the exact ownership of both the lessor and lessee must be recognized. However, if the partners wish and agree the asset purchased may be registered in the name of any one of them or in the name of any third party clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement.
- The share of the purchased asset owned by the lessor is put at the disposal possession of the lessee keeping the ownership with him for a fixed period under a hire agreement in which the amount of rent per unit of time and the benefit for which rent to be paid along with all other agreed upon stipulations are clearly stated. Under this agreement, the lessee becomes the owner of the benefit of the asset not of the asset itself, in accordance with the specific provisions of the contract that entitles the lessor the rentals.
- As the owner of the leased portion of asset lies with the lessor and rent is paid by the lessee against the specific benefit, the rent is not considered as price or part of the price of the asset.
- In the Hire Purchase under Shirkatul Melk agreement the Lessor does not sell or the lessee does not purchase the asset but the lessor promise to sell the asset to the lessee only if the lessee pays the cost price/equity price of the asset as fixed and as per stipulations on which the lessee also gives undertakings.
- The promise to transfer legal title by the lessor and undertakings given by the lessee to purchase the ownership of leased asset upon payment part by part as per stipulations are affected only when it is actually done by a separate sale contract.
- Shirkatul Melk contract is effected from the day the equally of both parties deposited and the asset is purchase and continues up to the day on which the full title of the lessor is transferred to the lessee.
- The hire contract becomes effective from the day on which the lessor transfers the possession of the leased asset in good order and usable condition, so that the lessee may make use of the same as per provisions of the agreement.
- Hire Purchase under Shirkatul Melk are binding contracts, and the parties to it – the bank and the client – are committed to meet their obligations in accordance with the relevant agreement.
- Under this agreement, the bank acts as a partner, as a lessor and at last as a seller; on the other hand, the client acts as a partner, as a lessee and lastly as a purchaser.
- Under this agreement, the role of the lessee is one of a trustee, the leased asset being a trust in his hands: he will manage, in favor of the interest of thee lessor at his own cost the exact subject of the lessee, except in cases of emergencies and acts of Allah.
- The lessee is responsible for keeping the leased asset (s) in good condition throughout the whole period of the lease, and if the asset is damaged or defrayed due to transgressions default or negligence of the lessee, he shall be responsible to compensate for that.
- The lessee cannot without obtaining the prior written permission of the bank make changes in the exact item of the lease, and or remove it from its place of installation, and transfer it to another location.
- In a hire-purchase under Shirkatul Melk agreement, any stipulation may be made, provided it is not against the nature and requirements of the contract itself, nor does it violate the Lessee laws of Islam, and is also acceptable to both parties.
- Hire purchase under Shirkatul Melk facilities may be for the medium-term and long-term period, which may be utilized for the expansion of production and services. as well as housing activities. The duration of hire purchase under Shirkatul Melk contract shall not exceed the useful life of the subject asset of the transaction. The bank should not normally enter into a Hire Purchase under Shirkatul Melk transaction for items with a useful life of fewer than two years.
- Hire Purchase under Shirkatul Melk transaction facilitates the client (lessee) to get benefit from the leased asset in exchange for rental and also to become full owner of the asset by purchasing it.
Hire Purchase under Shirkatul Melk Mode is a combination of three contacts. All rules governing the lease contract should be applicable in this mode also. Moreover, the rules for Musharaka and sale contracts will also apply to this.
H. QARD HASAN
Meaning of QARD HASAN:
Qard Hasan is a contract in which one of the parties (the lender) places into the ownership of the other party (the borrower) a definite parcel of his property, in exchange nothing more than the eventual return of something in the same value of the property loaned.
Interest on all kinds of loans is prohibited in Islam, so a loan that is to be given in accordance with the Islamic principle, has to be, a benevolent loan (Qard Hasan) i.e. a loan without interest. It has to be granted on the grounds of compassion, i.e. to remove the financial distress caused by the absence of sufficient money in the face of dire need. Since banks are profit driven organizations, it would seem that there is not much opportunity for the application of this technique. However, Islamic banks also play a socially useful role. Hence they make provisions to provide Qard Hasan besides engaging in income-generating activities.
Before submitting a proposal the customer should run a current account for minimum 3 months and maximum 6 months to satisfy the bank that his flow of money transaction is legal. After running the current account, he can submit the proposal for the loan to the manager. The proposal also includes the documents of his mortgage property.
The manager will give the documents of Mortgage properties, Trade license etc to the investment officer. Investment officer then verifies the documents.
Manager, Assistant Manager, Investment officer will visit customers property to make a value of mortgage property.
The manager also gives the documents of property to the advocate for legal advice and the valuation of the property. The advocate will verify the documents of mortgage property. In addition, advocate gives a legal opinion of the property.
Than Manager, Assistant Manager, Investment officer will adjust the opinion of advocates with their own opinion about the value of mortgaged property.
Customer’s get loan about 50% of the mortgaged property. The bank takes 14%interest from this loan.
AIBL offered Lease finance facilities to its valued clients with a view to facilitating clients to acquire equipment and machineries without investing any fund in spite of playing fixed lease rentals. Fixed fewer rentals can be tailored both in terms of amount and timing to the profit and cash flow position of the Lease-Holder. At the end of the lease contract the lease assets back to the clients with a nominal and depreciated value.
Facilities for Lease:
- Free the Capital tied to capital expenditure
- Leasing allows utilizing the capital elsewhere to general higher profits it also reduce cash outflow
- The equipment that leased does not appear on clients balance sheet, clients financial ratios improve
- To avoid budgetary constraints in capital expenditure
- Lease rentals are treated as revenue expenditure and are entirely deductible for tax purpose.
Item of Leasing:
- Any category of equipment and Machinery
- Office automation equipment
- Medical Treatment diagnosis
- Vehicles for transportation etc
- Production, Marketing, Trading of alcoholic, narcotic and another intoxicating drug of liquor
- Production and Trading of any item banned by the Government
- Any activity not permissible by the law of the land
- For small enterprise: Maximum TK.50,00,000/-
- Working Capital
- Capital machinery
- Delivery Van/ Transport for business purpose
- Re-furnishing office/Business Premises
Mode of Finance:
- Cash Credit (Hypo/Pledge)
- Hire Purchase/ Lease Finance
- Term Loan
Successive loans depend on the track record of the previous loan. Usually, repayment behavior and expansion of business by the borrower are the main consideration renewal and enhancement of the loan amount.
9 % above Bank Rate Presently 14% (changeable)
If any borrower fails to adjust loan within validity period or to repay consecutive 02 (two) installments penal interest 0.25% per month shall be charged on the defaulted amount.
It is supervisory credit scheme. Tangible security in the form of mortgage may not be available in all the cases. So mortgages will not be mandatory. Security will be stipulated on a case to basic as under (one or several of the following)
- Registered mortgage on land and building.
- Mortgage/assignment of possession right
- Assignment of security money advance rent if any
- Assignment of Trade Receivable not older than 90 days
- Hypothecation of machinery, equipment, vehicles, stock-in-trade, raw materials, work-in-process and finished goods.
- Personal Guarantee from persons acceptable to the Bank.
- Post dated cheques
- Lien on deposits/saving certificates/financial obligations
- Any other securities to be demand suitable by the Bank depending on the situation like Insurance Guarantee, Corporate Guarantee, Assignment of Contract, Security Money etc
Period of Loan:
- In case of continuous Loan: 01 (One ) year
- In case of Term Loan: Maximum 05 (five) years.
Mode of Repayment:
- In case of continuous loan credit turnover in the account must be equal to the limit in a quarter and full adjustment within the validity period.
- In case of the term loan, the loan should be repaid by monthly installments through post-dated cheques as per amortization scheduled.
Sale proceeds should be deposited in the account regularly.
One of the largest businesses carried out by the commercial bank is foreign trading. The trade among various countries falls for the close link between the parties dealing in the trade. The situation calls for expertise in the field of foreign operations. Foreign exchange department of Al-Arafah Islami Bank is one of the most important departments of all departments. This department handles various types of activities by three separate sections:
- Import section
- Export section.
- Foreign remittance section.
Import means bringing merchandise to country from any place rest of the world. Two things mainly involves with import of merchandise; bringing of commodities physically into the country any making payment towards the cost of the merchandise and services connected with its dispatch to the importer.
Procedure for obtaining IRC (Import Registration Certificate):
To perform the import business registration with the licensing authority of the area is an urgent. Through public notice the chief controller of Imports and Exports invites applications usually for registration of importers. For getting this registration the following papers/ documents are required for submission to CCI&E (Chief Controller of Import and Export) or area office of CCI &E for import registration certificate:
- Application form
- Nationality certificate
- Income tax registration certificate
- Trade License from the municipal or the local authority
- Membership Certificate
- partnership Certificate (for partnership concern)
- Certificate of Registration with the registrar of joint stock Company.
- Memorandum of Association in case of limited Company.
- Bank Certificate.
- Ownership documents or rent receipts of the place of business.
- Original Copy of Treasury Challan being payment of registration fees.
- Other documents prescribed in the import policy.
Fees shall be paid in Bangladesh Bank or in the Government Treasury or in Shonali Bank under the Head “42 Trade & Commerce fees realized under Import and Export Control Act, 1950”.
Classification of Importer:
Importers are those who are authorized by the import Trade Control Authority that is CCI& E for import of goods essential for consumption or for production purposes.
There are mainly three types of Importer:
- Commercial Importer
- Industrial Importer.
- Importer under Wage Earner Scheme. (WES)
(1) Commercial Importer:
It means an importer registered under the importers, exporters and indenture registration order 1981 who import goods for sale.
(2) Industrial Importers:
When issued to an industrial consumer, gives the items of import as raw materials and packing materials and spare parts, the value of entitlement and ITC classification.
(3) Importers under WES:
It means registered importers who import only under the WES. WES importers can be importing all permissible items as declared by the import policy and notification. Besides all registered commercial and industrial importer also can import under WES.
Other Importers are as follows:
- Lease Financing Import.
- Sector Importer.
- Import under Bonded Ware-House System.
- Import by Actual Users.
- Import by E.P.Z.
For conducting world trade documentary credit or letter of credit is an essential implement. It is important for the beneficiary of a documentary credit to know that payment will be made only if the documents are in absolute conformity with the required terms and that the bank has to decide on the basis of the documents alone. An importer desires to have an import L/C limit must have apply to the designated bank in prescribed forms for sanction of margin, L/C limit etc.
Remittance means transfer of fund. If we pronunciation of the word “Remittance” we under stand transfer of fund through a Bank from one place to another place which may be executed the country or between two countries. Remittance which is effected within the country is called Local Remittance and which is effected between two countries is called Foreign Remittance. Remittance plays a vital role in the development of the country. Without effect of remittance no country can develop herself. Bangladesh is rich enough in respect of human resources. So Inward Remittance has great importance in our country.
Opening of Foreign Currency A/C.:
Accounts are phenomena through which transaction is routed. All banking transactions are settled through Accounts. So A/C. is essential for setting our day transactions Foreign Currency A/C. has a great important on overall Foreign Exchange. Only the Authorized Dealer Branches can open F.C. A/C .without prior permission of Bangladesh Bank F.C. A/C. is opened by Bangladeshi nationals serving and earning abroad i.e. having Income from sources other than Bangladesh. To open an FCAD/FCAP A/C the formalities mentioned below are to be observed:
- Opening forms i.e. Application, Signature Card, nomination form if any, to be duly filled in and signed by the applicant and the nominee.
- Original passport to be submitted for verification and Photocopy of 1st seven pages to be submitted for preservation.
- Passport photographs of both A/C holder and the nominee are to be submitted Photo graphs of Nominee to be attested by the A/C holder & A/C holder’s photo be attested by the authored by the authorized office of the Band.
- Service contract in English or Bengali person to be submitted with the A/C Opening form.
- If the intending person desire to open A/C from abroad the necessary papers are to be sent duly attested by the authorized official of Bangladesh Embassy working there. All signatures are by same as that of Passport. It may be mentioned that no initial fund is required at the time of opening of the Foreign Currency account.
Core strength of Islamic bank, Al-Arafah Islami Bank as well
The followings are the core strength of Islamic bank for which it is now considered to be the emerging sector for success:
- In accordance with Islamic Shariah, all actions of the bank are conducted where profit is the legal substitute to interest.
- The total deposit of the bank was TK. 26,685,444,177million at 31st December 2008. At the same time in the year 2007, the amount of total deposits was 23,009,128,287million taka. In this area the growth rate is 86.22%. So deposit is a good strength of AIBL.
- Experienced manpower and efficient employees are being involved in busy subsection of this section to meet the client’s satisfaction.
- One of the core strength of Islamic bank is that it distributes a significant amount of profit that they earn by investing different areas. On the other hand, in case of conventional banking they provide a fixed amount of return which is called “RIBA” or Interest that may not be consistent with the profit positioning of bank’s operations. So, in case of conventional banking, they either sacrifice by bearing losses or deprived the depositors by not paying them the part of profit.
- Islamic bank collect deposits by Murabaha mode whereas they invest by Musharaka mode that increase the intimacy with the bank and with the depositor.
- Islamic bank works to the development the socio-economic and value system of the people that is not seen in case of conventional banking.
- Islamic bank doesn’t incur losses as it provides the return under the scientific process whereas the conventional banks provide interest though they incur losses that ultimately reduce the deposit of the client.
- Islamic bank invest in the human welfare sector. So, Islamic bank practices mainly welfare banking. These banks invest only those sectors where human welfare can be ensured.
- Therefore, it can be said that the benefits that the Islamic banks has it significant which give the new era t the banking sector around the world as well as the Al-Arafah Islami Bank Ltd.
Major weakness of Islamic Banking, Al-Arafah Islami Bank as well
Islamic banking is guided by some principles but it has some weakness, some of the major weaknesses are discussed in below:
- Profit and loss sharing (PLS) dominates the theoretical literature on Islamic finance. Broadly PLS is a contractual agreement between two or more transacting parties, which allows them to pool their resources to invest in a project to share in profit and loss. Most Islamic economists contend that PLS based on two major modes of financing, namely Mudaraba and Musharaka, is desirable in an Islamic context wherein reward sharing is related to risk sharing between transacting parties. Almost all theoretical models of Islamic banking are either based on Mudaraba or Musharaka or both, but now actual practice of Islamic banking is far from these models. Nearly, all Islamic banks, investment companies and investment fund offers trade and project finance on mark-up 3, commissioned manufacturing, or on leasing bases. PLS features marginally in the practice of Islamic banking and finance..
- Islamic bank deposited 10% cash amount against the Bangladesh Bank (BB) requirement of SLR and CRR, on which the Islamic banks has no chance to earn profit. On the other hand the conventional banks deposited only 4% of CRR on without profit basis. From the observation it will be clear that Islamic banks are not getting any profit on 6% on cash deposits.
- Risk Management system is not strong. The bank has already exposed to a variety of risks the most important of which are credit risk, market risk and liquidity risk.
- Liquidity risk is the risk that the Bank in unable to meet payments obligations and potential payment obligation as and when these fall due without incurring unacceptable losses. AIBL is not out of this weakness.
- IT Division is not strong because bank put due importance to utilization of technology-based service to the customers. In line with this, IT Division of the Bank is engaged in designing various Software’s to facilitate services. Through this Division a number of Branches have already been brought under On-Line Banking and some other Branches will also be brought under this umbrella soon.
Some opportunity of AIBL
Some opportunity of AIBL may be as follows:
- Rate of interest is so high. Therefore, PCB’s are making well done in regards of lending and besides deposit collection from the market. Govt. Banks are not able to fulfill market demand and this opportunity is taking by the PCBs.
- Finding cost is far above the ground for lending is great opportunity for the bank. By reason of lack of poor performance of NCB’s in our country though they are grabbing an huge deposits from the market, PCB’s are fulfilling the high demand of the financial marketing lending money towards deficit sources.
- Complimentary business climate for commercial banks in the country in comparison with other business.
- The concern of new banks is very crucial point. Anybody or organization cannot easily establish a commercial collecting paid-up capital and govt. is fully retracted in regards of giving permission to commercial bank in the country. In addition, in our country there are no closing rules for commercial banks. Consequently of which as an existing commercial banks AIBL have a great opportunity and potential for its favorable business opportunity.
- An additional mentionable opportunity of the PCB’s is high grades of services in regards of customer service. What’s more the NCB’s service is very poor and so much traditional. Therefore of which it has easily achieved public respond easily creating their positive approach gradually.
Threats of AIBL
Some threats that may face in conducting Islamic banking by AIBL are:
- The financial market strength of our country is not well-built. By itself to recover the lending money is a great threat. Since in our country’s business chain like other countries is dependable each other. As a result, if the monetary flow faces any obstacle it hampers the running of full chains. Consequently recovery face a great threat for commercial banks and AIBL is in boundary of this threat.
- An additional major hindrance for banks is its classified loan. Through this picture is not new for this particular bank it is exists to all commercial banks throughout the world. But in our country this bad culture created by the NCBs and its impacts comes to the PCBs also. But over viewing the bank’s performance we found that it is still in safe side in comparison with others but in should be careful to overcome this threat.
- Corporate Governance establishes specific responsibility to ensure accountability and fairness in functions of the company and also to comply with the requirements of regulatory agencies; care has been taken to improve Corporate Governance. As part of this AIBL should now follow the corporate governance principles.
- Corporate Governance establishes specific responsibility to ensure accountability and fairness in functions of the company and also to comply with the requirements of regulatory agencies; care has been taken to improve Corporate. As part of this AIBL should now follow the corporate governance principles.
Reviewing this SWOT analysis from time to time would help evaluate the bank’s position. It would help the management in comparing their strengths of the past with those of the present and to what extent the management has been able to overcome the weaknesses.
Many of these problems are affecting healthy growth of the sector and eating up the potentials the economy as well. Major problems of the banking sector are as follows:
- Understanding Customer & Banker: There is a gap between the customers and bankers. Customers are unaware about the moral of Islamic Banking System. Sometimes they are not familiar with the rules of Islamic Banking.
- Lack of State-of-art: Technology that AIBL is using for their banking system is not up dated. Now there is some international bank in Bangladesh, they are very fast and very up dated. AIBL is losing their clients because of lack of technology.
- Management Problem: The management of AIBL takes no risk when they give loans to their clients. They are very slow in decision-making. They sometimes fail to take the current opportunities for this slow decision making process.
- Centralization: The Al-Arafah Islami Bank is too much centralized. For each and every work branch office has to get permission from the head office. The head office tightly controls each and every branch office. This dependency on head office causes slow down their activities.
- Advertising and Promotion: Advertising and promotion are the weak points of Al-Arafah Islami Bank Limited. AIBL does not have any effective marketing activities. Other banks have better marketing strategy.
- Employee’s Dissatisfaction: Lack of promotion and longer probationary period are the main causes of dissatisfaction among the employees. Late increment in salary is another cause of dissatisfaction.
- Lengthy Investment process: In Islamic Banking System Loan is very lengthy process. But it is lengthier in AIBL, because branch managers do not have the power to give loan. For every loan, managers have to send proposal to head office. Management does not want to take any risk.
- Lack of Personal Loan: AIBL does not give any personal loan, because it is against the rules of Islamic Banking System. However, personal loan is very popular in other banks, because the rate of interest is very high for personal loan.
- Loan Recovery System: Most of the times, the clients do not repay the loan in time. However, the bank has no right to take interest for extra time, because interest is not allowed in Islamic Banking System. They just take the amount that is mentioned in contract.
- Investment Ratio is Low: Investment ratio in respect of deposit is very low in AIBL. AIBL is not able to take the risk right now like other banks. The management of AIBL does not risk in investment.
- AIBL Invests in Halal Business: AIBL does not invest in Hotel business. But this business has high rate of returns. AIBL mostly invest is purchase and sales business. They also invest in Real-Estate business.
- LC for Halal Products: AIBL does not open LC for the products like Energy Drinks, CD, VCD, and DVD. However, other banks make high profit by opening these types of LC recently.
- Does Not Buy Savings Bonds: Some international and local savings bonds give high rate of returns. AIBL does not buy these because it is against the rules of Islamic Banking System.
- Manager’s Power: Manager of any branch of AIBL does not have the power of giving any loan to the clients without the permission of Head Office. However, in other banks manager have the power to give small loans.
- House Building Loan: AIBL, Mirpur Branch now stops giving House Building Loan. However, in Mirpur there are a lot of customer’s of House Building Loan. In addition, the recovery from House Building Loan is very easy.
- No Locker Services: AIBL, Mirpur branch does not provide any locker service to its customer. So they are losing some valuable customers.
- Problems in loan repayment process: The client has to repay the money in the particular branch from where he/she take the loan. Sometimes customers fail to repay the installment. If customers have the facilities to repay the loan in any branch it will be better for them.
- AD Branch License: AIBL, Mirpur branch does not have AD license. For this reason, they have to depend on other AD branches of AIBL for international trade dealing. For that reason, they are losing expected customers.
- High Interest on Loan: Interest rate on deposit is much higher than other banks, which increase their cost of fund and it diminish the opportunity to provide loan at a lower interest rate. It makes high demand on short-term deposit and manages these liabilities with loan they might need to borrow from call money market.
- Staff Loans: AIBL offers loan to its own staffs after a long period of job. However, the rate is higher where other banks give loan to their staffs at a chief rate. Therefore, staffs lose concentration in work.
Recommendation of Overall Banking System of AIBL
- One of the most important limitations is that it has no much of advertisement of its Islamic banking operations. It can gain dual benefit of attracting deposit and credit. Therefore, AIBL should give a mass advertisement mentioning the different offerings like BRAC Bank, Standard Chartered bank and HSBC and other local bank is doing.
- AIBL should use the latest banking technology to provide better services to the customers. It will also attract the customer’s of international banks.
- AIBL should pursue advertising campaign in order to build a strong image among the people. They should carry out aggressive marketing campaign to attract clients.
- AIBL should offer different types of loans to their own staffs immediately after confirming their job. This loan will influence them for better performance. The interest rate on this loan must be less than other banks interest rate.
- AIBL should increase the ratio of investment. Now they should take risk when they give loans to their clients, because there is a lot of idle money in their every branch.
- The management of AIBL should give their employees more increments in salary. In addition, probationary period should decrease. It would motivate the staff to perform well in the organization.
- The dependency on Head Office in every step should be waived. They should permit the branches to work independently.
- Managers of AIBL should have the power of giving small loans to the clients. It is very important for the banks to increase the investment.
- In Islamic Banking System loan is very lengthy process. AIBL should take steps to minimize the process of loan system. Because Customers dislike lengthy process.
- AIBL can pursue a diversified strategy in expanding its current line of business. The management can consider options of starting merchant banking for minimizing the risk and getting more return, they should prepare portfolio management.
- The client has to repay the money in the particular branch from where he/she got the loan. That is way, whenever a customer wants to repay the installment in time. Communication problem sometimes force him/her to become defaulter. If the AIBL allows the clients to repay money at any branches she/he wants, it will be better for them.
- The Human resource management of the bank is done as it is done by the conventional banks. The banks should made a collaborate effort to improve the ways of human resource management.
- Bank should offer more facilities to the customers such as credit card, visa card, ATM machine etc to survive in the competition.
- Al-Arafah Bank Ltd (AIBL) should introduce more female employees.
- On-line banking should be introduced for better customer services and to eliminate risk of sending document via post and risk of loss. It also increases quick fund transfer and better satisfaction from customer.
- The management should take immediate decision to take the current opportunities.
- Payment to the workforce should be such that will encourage the employees to work more. Remuneration package must be impressive and inconsistent with work performance.
The AIBL has been trying to operate its business successfully in Bangladesh since 1995. AIBL has already developed an image of goodwill among its clientele by offering its excellent services. The success has resulted from dedication, commitment and dynamic leadership of its management over the periods. During the short span of time of its operation, the bank has successfully grabbed a position as progressive and dynamic financial institution in the country. If the bank goes this way, it is expected that in the near future AIBL may become one of the top performers in the banking sector. The bank should take necessary actions for increasing their investment and maintaining this deposit figure in future.
As a new branch, Dilkusha Branch of AIBL has been able to maintain its recovery position in sector wise credit financing is up to the satisfactory level. At least AIBL should give more emphasis on this sector to acquire more profit.