Report on Al-Arafah Islami Bank Ltd

1.1 Origin of the Report

Al-Arafa Islami Bank Limited is a place where I could learn the business dealings. This organization has created a positive image to the customer mind by providing better service. This Bank has introduced some Modern Islamic Banking Scheme that has high market demand. As it maintain the pace with the competitive business world, its activities, culture, philosophy and style leads an intern student to be the best at any field of working life. With this view, during my internship I was assigned to Dilkusha branch, Al-Arafah Islami Bank Ltd, with other activities I specially tried to observe the overall banking procedure and function of this branch.

1.2 Background

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.

1.3 Objective

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.

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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.

1.4 Methodology

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. Websites. Statement affairs.

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1.5 Limitation

The report is accompanied with the following limitations-

Access to data regarding different performance indicators of Al-Arafah Islami bank Ltd.

The report is mainly based on the secondary data which published by different organization as annually, half-yearly, monthly, weekly and daily.

Time constraints are additional limitations of this report.

Due to some legal obligation and business secrecy banks are reluctant to provide data. For this reason, the study limits only on the available published data and certain degree of informal interview.

The bankers are very busy with their jobs which lead a little time to consult with.

Finally, some recent data which were needed to enrich this report but the unwillingness of the executives of the bank due to confidentiality was made my report limited to data content.

1.6 Scope of the Report

This report will cover an organizational overview of Al-Arafah Islami Bank Limited.it will give a wide view of different stages of operational procedure of Al-Arafah Islami Bank Limited, starting from the investment application to investment disbursement and the comparison between standard and existing credit appraisal system of a Bank. Then the report covers Foreign exchange operation and General Banking as an Islamic Bank.

2.1 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

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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.

2.2 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

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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.

2.3 Distinguishing Features of Islamic Banking

An Islamic bank has several distinctive features as compared to its conventional counterpart. Six essential differences as below

I. Abolition of Interest (Riba): Since Riba is prohibited in the Holy Quran and interest in all its form being akin to Riba as, confirmed by Fukaha and Muslim economists with rare exceptions, the first distinguishing feature of an Islamic bank must be that it is interest-free, while the abolition of Riba would be the first and essential difference between the conventional interest-based commercial banks and Islamic banks, if would not the constitute the only difference between them. The nature, outlook and operations of an Islamic bank would have to undergo a complete transaction.

II. Adherence to Public Interest: Activity of commercial banks being primarily based on the use of public funds, public interest rather than individual or group interest will be served by Islamic commercial banks. The Islamic banks should use all deposits, which come from the public for serving public interest and realizing the relevant socio-economic goals of Islam. They should play a goal-oriented rather than merely a profit-maximizing role and should adjust themselves to the different needs of the Islamic economy.

III. Multi-Purpose Bank: Another substantial distinguishing feature is that Islamic banks will be universal or multi-purpose banks and not purely commercial banks. These banks are conceived to be a crossbreed of commercial and

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investment banks, investment trusts and investment management institutions and would offer a variety of services to their customers. A substantial part of their financing would be for specific projects or ventures. Their equity-oriented investments could not permit them to borrow short and lend long. This should tend to make them less crisis-prone compared to their capitalist counterparts. Since the overnight, call loan or very short-term inter-bank market may be available to them only to a limited extent, they may have to make a greater effort to match the maturity of their liabilities with the maturity of their assets.

IV. More Careful Evaluation of Investment Demand: Another very important feature of an Islamic bank is its very careful attitude towards evaluation of applications for equity oriented financing. It is customary that conventional banks evaluate applications, considers collateral and avoids risks as far as possible. Their main concern does not go beyond ensuring the security of their principle and interest receipts. Since the Islamic bank has in built mechanism of risk-sharing, it would need to be careful more careful. It adds a healthy dimension in the whole lending business and eliminates a whole range of undesirable lending practices.

V. Work as Catalyst of Development: Profit-Loss-Sharing being a distinctive characteristic of an Islamic bank, if fosters closer relations between banks and

VI. 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.

2.4 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

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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:

a. The Islamic banking system is essentially a profit and loss sharing system and not merely an interest (Riba) banking system; and

b. 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.

2.5 Distinction between the Conventional & Islamic Banking

Conventional Banking Islamic Banking

1. The functions and operating modes of conventional banks are based on manmade principles.

1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.

2. The investor is assured of a predetermined rate of interest.

2. In contrast, it promotes risk sharing between provider of capital and the user of funds.

3. It aims at maximizing profit without any restriction.

3. It also aims at maximizing profit but subject to Shariah restrictions.

4. It does not deal with Zakat. 4. Islamic banks collect and distribute Zakat.

5. Leading money and getting it back with interest is the fundamental function of the conventional banks.

5. Participation in partnership business is the fundamental function of the Islamic banks.

6. Its scope of activities is narrower when compared with an Islamic bank.

6. Its scope of activities is wider when compared with a conventional bank. It

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is, in effect, a multi-purpose institution.

7. It can charge additional money in case of defaulters.

7. The Islamic banks have no provision to charge any extra money from the defaulters.

8. In it very often, bank’s own interest becomes prominent. It makes no effort to ensure growth with equity.

8. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.

9. For interest-based commercial banks, borrowing from the money market is relatively easier.

9. For the Islamic banks, it is comparatively difficult to borrow money from the money market.

10. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations.

10. Since it shares profit and loss, the Islamic banks pay greater attention to developing project appraisal and evaluations.

11. The conventional banks give greater emphasis on credit-worthiness of the clients.

11. The Islamic banks, on the other hand, give greater emphasis on the viability of the projects.

12. The status of a conventional bank, in relation to its clients, is that of creditor and debtors.

12. The status of Islamic bank in relation to its clients is that of partners, investors and trader.

13. A conventional bank has to guarantee all its deposits.

13. Strictly speaking, and Islamic bank cannot do that.

3.1 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

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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.

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.

3.2 Vision

To be the pioneer bank in the banking arena of Bangladesh under the Shariah guidelines and contribute significantly to the national economy.

3.3 Mission

To launch a welfare-oriented banking system.

To invest through different modes that is acceptable under Islamic Shariah.

To allow customer deposits on profit-loss sharing basis.

To perform interest free banking.

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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.

3.4 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.

3.5 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.

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AIBL regularly arranges its AGMs (Annual General Meeting). Whenever needed EGMs (Extraordinary General Meeting) are also arranged.

We regularly pay 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 towards 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 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 promotion of rural areas to ensure a balance 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.

3.6 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.

3.7 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.

3.8 Capital Adequacy

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

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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.

3.9 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.

3.10 Deposits

The total deposit of the bank was TK. 23009.13million at 31st December 2008, of which bank deposit was 611.72 million taka and general deposit was 16163.61 million taka. At the same time in the year 2007, the amount of total deposits was 16775.34 million taka. In this area the growth rate is 44.07%.

3.11 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

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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 have visited all the 50 branches of the bank over the year to observe the Shariah compliance, give necessary instructions on the spot and submitted report to the council. They have also submitted corrective measures to rectify the laws in implementing Shariah guidelines into the banking operations and placed those to the bank management for further follow up. 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 to set 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.

3.12 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 collects their deposits from the clients:

A. Al-WADIA CURRENT DEPOSIT (CD)

B. MUDARABA SHORT NOTICE DEPOSIT (MSD)

C. MUDARABA SAVINGS DEPOSIT

D. MUDARABA TERM DEPOSIT (MTD)

E. DEPOSIT UNDER OTHER SCHEMES

F. MONTHLY PROFIT BASED TERM DEPOSIT (PTD)

G. MONTHLY INSTALLMENT BASED TERM DEPOSIT (ITD)

H. MONTHLY INSTALLMENT BASED HAJJ DEPOSIT (MHD)

I. ONETIME HAJJ DEPOSIT (THD)

J. MARRIAGE & INVESTMENT DEPOSIT (MIS)

K. AL-ARAFAH SAVINGS BOND (ASB)

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L. FOREIGN CURRENCY DEPOSIT (FCD)

M. PENSION DEPOSIT SCHEME (PDS)

N.   CASH WAQFA DEPOSIT SCHEME (CWD)

O. MUDARABA MILLIONAIRE DEPOSIT SCHEME

P. MUDARABA DOUBLE DEPOSIT SCHEME

Q. MUDARABA LACPOTI DEPOSIT SCHEME

R. MUDARABA KOTIPOTI DEPOSIT SCHEME

A. Al-WADIA CURRENT DEPOSIT (CD):

Al-Arafah Islami bank Limited receives deposits in their Al-Wadiah current account. Usually business people runs Al-Wadiah current account. In Al-Wadiah current account customers can deposit and withdraw money, whenever they want. In this account, there is no restriction of withdrawing money. But in Al-Wadiah current account customers do not get any profit. Bank with take some money as service charge.

AIBL position regarding AL-WADIA CURRENT DEPOSIT as on 30 June, 2008 is shown below:

Particulars Amount

Total Deposit 26,685,444,177

AL-WADIA current deposit 3,227,406,729

Contribution of current deposit to total deposit 12.09%

B. MUDARABA SHORT NOTICE DEPOSIT (MSD):

Mudaraba Short Notice Deposit account is similar like Al-Wadiah current account. In

Mudaraba Short Notice Deposit account customers can deposit and withdraw money any time

whenever they want. But there is a restriction in withdrawing money. They have to inform

the manager if they want to withdraw big amount. Like Mudaraba Savings Deposit account

the customer’s get profit here. This profit is given every year at a predefined rate of last year. 14

AIBL position regarding MUDARABA SHORT NOTICE DEPOSIT (MSD) as on 30 June, 2008 is shown below:

Particulars Amount

Total Deposit 26,685,444,177

MUDARABA SHORT NOTICE DEPOSIT (MSD) 870,061,313

Contribution of current deposit to total deposit 3.26%

C. MUDARABA SAVINGS DEPOSIT:

Al-Arafah Islami bank Limited also receives deposits by Mudaraba Savings Deposit. General people run this accounts. In Mudaraba Savings Deposit account customers can deposit money any time whenever they want. But they cannot withdraw money whenever they want, there is some restriction. Customers can withdraw money two times in a week and ten times in a month. But if they want to withdraw any big amount they have to give notice to the manager. If bank earn any profits the depositors will get at a predetermined percentage and the bank retains the residual amount as its profit.

AIBL position regarding MUDARABA SAVINGS DEPOSIT as on 30 June, 2008 is shown below:

Particulars Amount

Total Deposit 26,685,444,177

MUDARABA SAVINGS DEPOSIT 3,987,237,105

Contribution of current deposit to total deposit 14.95%

D. MUDARABA TERM DEPOSIT (MTD):

Interest-based banks receive different kinds of Term Deposits from the depositors. The deposits are generally for 3 months, 6 months, 9 months, one year, 2 years, or 3 years, and the

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bank pays a stated interest rate on each of these deposits, which varies depending on the term.   In general, the bank pays a higher rate of interest the longer the term of the deposit and lower rates for shorter time periods. In addition, a higher rate of interest is generally paid on term deposits than on saving deposits. Depositors are not generally allowed to withdraw money from a term deposit until the term matures. Premature withdrawal may result in penalties in excess of the interest earned, resulting in a negative return. Once a time deposit matures, the depositor may wish to reinvest for a new term.

AIBL position regarding MUDARABA TERM DEPOSIT (MTD) as on 30 June, 2008 is shown below:

Particulars Amount

Total Deposit 26,685,444,177

MUDARABA TERM DEPOSIT (MTD) 13,779,831,791

Contribution of current deposit to total deposit 51.64%

AIBL Special Savings Scheme:

This scheme is well known in the market as a well named Deposit Pension Scheme in other banks. If a client deposit an amount of fixed on the monthly basis often a few years i.e. 5 and 10 years he gets amount at a time. The bank offers approx 12% interest for this scheme particulars of which as follows:

SL NO

Amount to be Deported

Total Amount After 5 Years

Total Amount After 5 Years

Rate of Interest

01 500.00 40,500.00 1,14,000.00 11%

02 1000.00 81,000.00 2,28,000.00 12%

03 2000.00 1,62,000.00 4,56,000.00 -do-

04 5000.00 Cumulative Basic -do-

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Monthly Profit Based Term Deposit (PTD):

Under the above scheme, deposit of tk.1.00 lac and multiple thereof are accepted for a term of 5 (five) years and the bank gave profit thereon tk. 885 per month per lac and proportionately on the rest amount of deposit under the category during the year under review. The aforesaid rate shall, however, be adjustable at the close of calendar year on finalization of accounts.

Monthly Hajj Deposit:

Hajj deposit at monthly installment from 1 (one) year to 20 (twenty) years are accepted under the above scheme to enable the account holder to perform hajj out of the accumulated saving with profit.

Savings Investment Deposit (MHD):

Deposit under the scheme is accepted by monthly installment and after expiry of the term; double amount of such savings is given as investment in feasible sectors by the bank as per choice of the depositors without any collateral security. Any one by saving under the scheme can take business venture on utilization the amount saved under the scheme as well as availing bank investment.

Al-Arafah Savings Bond:

Under this scheme, the bank has introduced saving bonds for Tk. 10,000/-, Tk. 25,000/- and Tk. 100,000/- for 3, 5 and 8 years. After the completion of the tenure the deposited money may increase by 1.5 or even double.

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AIBL Regular Deposit Program:

RDP is a special services plan that follows to save a monthly basic and get a handsome

amount at maturity. RDP account gives you the convenience of saving regularly in time with

cherished dream RDP in the right solution

To open RDP account all you need is to be over 18 Years of age and a Bangladesh citizen

you can open a RDP account within 10 days of the month by filling up a prescribed account

opening form at any branch of AIBL.

Term of AIBL Regular Deposit Program:

You need to open a RDP account for 3 or 5 Years i.e. 36 and 60 equal monthly deposits

respectively.

Minimum and Maximum Monthly Deposit Amount:

Under the RDP you can chose between a minimum monthly deposit amount of TK.300 and

maximum amount of TK.1000.

Grameen & Small Investment Scheme:

AIBL has introduced a new investment project as grameen and small investment. The objective of this project is to introduced Shariah based banking system in rural and village area, creating employment through financing in low income group, build up savings attitude, improvement of living standard of rural low income mass people, creating opportunity to carry out Islamic lifestyle by way of alleviating poverty and at the same time financially establish career men/women by investing in small investment projects. Initially, this scheme is introduced in two branches of AIBL i.e. Gallai, Comilla and Ruposhpur, Srimongol. There is a plan to expand gradually this project in other rural branches. Thus, within the scope of grameen and small investment scheme, the following sectors have been invested:

1. Fisheries l0.Vegetables business

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2. Poultry 11. Cultivation of bettle leaf

3. Cattle 12. Tailoring business

4. Goat 13. Work of bamboo and cane

5. Cow 14. Cultivation of pineapple

6. Poultry Finn 15. Earthen ware

7. Preparing Muree 16.Purchasing rickshaw

8. Preparing sweets 17.Cultivation of lemon

9. Cosmetics items 18. Small business i.e. rice, paddy, grocery, medicine shop, cloth shop, shoe business, library, etc.

• Under this method, after getting the demand and the giving assurance of credit payment by the customer, bank takes the authority to purchase the specific goods on behalf of its customer and after that sells them to that customer.

• In this case bank obviously has to purchase the goods from a third party and has to keep them under its authority for an instance. After that, a sale agreement is accomplished between the bank and the customer.

• Here, goods are firstly delivered to the customer and payment is made on a specific future time. It is clear that in this method, goods are reached under the authority before payment is done.

• In this method, bank is not liable to inform about the buying price and the amount of profit respectively to the customer. The only tiling mat is mentioned to that client is the selling price of those goods.

• If the customer fails to pay the payment of the goods on a specific time and therefore if that customer takes some extra time to pay it fully, then in that sort of case, bank can not charge any more profit due to that overtime period.

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3.14 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.

3.15 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 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 centre to develop its employees. Al-Arafah Islami Bank sent 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.

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3.18 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 at 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 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.

3.20 Banking activities of AIBL

Bank performs as an intermediary between lender (surplus unit) and borrower (deficit unit). Savings and deposits are the core strength of the banks to provide loan. And the interest earned from the difference borrowing and lending is the major portion of banks income. Banks also earns from 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.

4.1 General Banking

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.

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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-

4.1.1) Account opening,

4.1.2) Cheque clearing Section

4.1.3) Remittance Section

4.1.4) Deposit and Cash Section

4.1.1 Account opening

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.

There are several steps to open the account. The steps are shown by the table-

Step 1 Receiving filled up application in bank’s prescribed form mentioning what type of account is desired to be opened.

Step 2 The form is filled up by the applicant himself/herself.

Two copies of passport size photographs from individuals are taken.

Applicants must submit required documents.

Introducer’s signatures and accounts number – verified by legal officer

Step 3 Authorized officer accepts the application.

Step 4 Account is opened and a chaque book and Pay-in-slip book is given.

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Necessary documents to open an account:

Special caution or the documents from the account opener of the following types:

Proprietorship

Trade license Photograph

Partnership

Trade license Photograph Partnership Deed

Private Limited

Trade license Photograph of Directors Certificate copy of Memorandum and Articles of Association Certificate of incorporation List of Directors as per return of joint stock company with signature Resolution for opening account with the bank.

4.1.3 Remittance Section

Remittance of fund is ancillary services of ABIL like other commercial Banks. It aids to remit fund from one place to another place on behalf of its customers as well as non-customer of bank. AIBL has its branches in the major cities of the country and therefore, it service one of the best mediums for remittance of funds from one place to another.

The main instruments used by AIBL Principle Branch for remittance of funds.

Pay order/ Bankers Cheque Demand Draft Telegraphic Transfer

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Pay Order (P.O.):

In the prescribed from the purchaser instruct the issuing branch to pay a specified sum of money to the payee preferably by crediting his account or in cash by the same branch.

Demand Daft (D.D.):

A bank draft is an unconditional order issued by one branch of a bank on its branch to pay a

certain sum of money to the named person or order on demand. Hence, a bank draft is always

payable on demand it is also known as demand draft.

Essential features of Demand Draft:

It is drawn by one office of a bank upon some other office of the same bank

It is payable on demand

Its payment is to be made to the person whose name is mentioned or according to his

order

In other words, it cannot be made payable to the bearer

Issues of Demand Draft:

The person intending to remit the funds though a bank draft has to deposit the money to be

remitted together with the commission, which the banker charges of its services. The amount

of commission depends on the account to be remitted. On receipt of the required amounts

along with due filled in prescribed form, the banker issues a draft and hand over it to the

purchaser.

Payment of Demand Draft:

If the draft is not crossed, the payee can draw the amount in cash upon presentation of the

same to the draw branch with satisfactory evidence of his identify or can draw the money by

depositing to his account there of any other bank. The draft being payable to certain particular

person or order the banker must satisfy himself as to the title of the person presenting it for

receiving the payment. The banker is discharged from liability only payment in due course.

Dishonor of Demand Draft:

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Normally a banker cannot refuse to make the payment to make the payment of a draft, as it is

his own obligation to pay unless the presented draft is a forged one or there is double as to the

identity of the person presenting it for payment. He cannot also refuse to make the payment

of a draft of the plea of non-receipt of the relative advice from the issuing office.

Loss of Draft:

If the issuing branches reported about loss, theft or damages of any draft it must promptly

inform the matter to the Drawee branch and request to stop payment order such draft. Being

reported by the issuing branch, the Drawee branch will note it to guard it sell against the

fraudulent encasement of the lost draft. This is essential so that the banker is not held

responsible for making payment otherwise than in due course.

Telegraphic Transfer (T.T):

Telegraphic transfer, it may branch telephone or telex. Transfer means fund/money transfer

from one branch to another branch not in same area.

Sometimes the remitter of the funds requires the money to be available to the payee

immediately. In that case, the banker is requested by him to remit the funds telegraphically.

The Bank passes T. T by a secret code, which input by the GB in charge and branch

Manager.

The charges of T.T:

Mail Transfer Advice:

Where the remitter desires the banker to remit the funds to the payee instead of purchasing a

draft himself, the banker does it through a Mail Transfer Advice. The payee must have an

Commission 1% but not less than Tk. 10

Telex Tk.30(fixed)

Sundry VAT Tk.10%

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account with the paying office as the amount remitted in such a manner, is meant for credit to

the payee’s account and not for cash payment.

The charges of M.T.A:

Commission 1% but not less than Tk. 10

Mailing cost Tk.30(fixed)

4.1.4) Deposit and Cash Section

Deposit Section:

Fixed deposit is one which is repayable after the expiry of a predetermined of a predetermined period fixed by him where as normal deposit may be independent. The period varies from 3 months, 6 month, 1 year and 3 year. These deposits are not repayable on demand but they are withdrawing able subject to a period of notice. Hence it is a popularly know as ‘’Time Deposit’’ or ‘’Time Liabilities’’ Normally the money on a fixed deposit is not repayable before the expiry of a fixed period.

Cash Section:

The cash section of any branch plays very significant role in general banking department because it deals with most liquid assets. The principle branch has an equipped cash section with modern electronic machinery with fully computerized environment and gives one stop counter service. This section services cash from depositors and pay cash against chaques, draft, P.O and play in slip over the counter.

Cash Payment

Cash payment is made only against Cheque

This is the unique function of the banking system which is known as “payment on demand”

It makes payment only against its printed valid Cheque.

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Cash Receipt

It receives deposits from the depositors in form of cash.

So it is the “mobilization unit” of the banking system.

It collects money only its receipts forms.

5.1 Investment and Advance/ Credit Division

One of the core functions of commercial banks is to create the claim against individual borrower or real the purpose of sanctioning credit bank grants loan in the form of different securities. By the primary security we mean the financial claim of holder against the real sector of economy. In banking the sector the financial claim of bank against issuer called investors, borrowers and difficult units. This core function of a bank is performed by the credit department of the bank. In this case the relationship of bank and customers is that of the creditors and debtor.

Type of Investment and Advances offered by AIBL:

a) Secured Overdraft (SOD)b) Loan (General)c) House Building Loan (Staff)d) Demand Loane) Transport Loanf) Industrial Creditg) House Building Loan (General)h) Transport Loan (Staff)i) Cash Credit (Hypothecation)j) Past Due Billsk) Loan against Trust Receipt (LTR)

5.2 Investment products of AIBL

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A. BAI-MUAJJAL

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 mark-up 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 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 agreement.

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 Agreement. 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.

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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 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.  

Some Observations:

This type of financing by the bank is considered more risky 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. 

 

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B. BAI-MURABAHA

Meaning of Murabaha:

The terms “Bai-Murabaha" means sale for an agreed upon profit. Bai-Murabaha may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods permissible under Islamic Shariah and the Law of the land to the buyer at a cost plus an agreed upon profit payable today or on some date in the future in lump-sum or by installments. The profit 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.

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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 Agreement. 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.

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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 counter proposal either accepting the buyer’s price or stipulating a different price.   Second Step: The client promises to buy the commodity from the bank on a Bai-Murabaha basis, for the stipulated price. The bank accepts the order and establishes the terms and conditions of the transaction. 

Third Step: The bank informs the client (ultimate buyer) of its approval of the agreement to purchase.  The bank may pay for the goods immediately or in accordance with the agreement. The seller expresses its approval to the sale and sends the invoice(s).  

Fourth Step: The 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.  

C. MUSHARAKA

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

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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.

Permanent Musharaka:

In this case, the bank participates in the equity of a company and receives an annual share of the profits on a pre-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 under 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 Musharaka:

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

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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.

Concluding Remark:

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 perfect correlation between the relationship of cost of capital and rate of return on capital.   

D. MUDARABA

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 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.  

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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 being recovered first.   

Concluding Remark:

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 cost of capital and rare of return on capital.  

E. BAI-SALAM

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. 

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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

a. The bank may receive the commodity and resell it to another party for cash or credit.b.  The bank may authorize the seller to find another buyer for the commodity. c. The bank may direct the seller to deliver the commodity directly to a third party with

whom the bank has entered into another agreement. 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 are also used to finance commercial and industrial activities. Once again the bank advances cash to businesses necessary to finance the cost of production, operations and expenses in exchange for future delivery of the end product. In the meantime, the bank is able to market the product to other customers at lucrative prices. 

In addition, the 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 in a Bai-Salam sale may be used to cover the finance of operation costs and capital costs.

 Concluding Remark:

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.

F. IJARAH 36

 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 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 (Maajur): The benefit that is leased/rented out is called the benefit (Maajur).

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.    

G. HIRE-PURCHASE

Hire-Purchase under Shirkatul Melk has been developed through practice. Actually, it is a synthesis of three contracts:

Shirkat Ijarah and Sale.

Definition of Shirkatul Melk:

‘Shirkat’ means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset and own the same jointly and share the benefit as per agreement and loss in proportion to their respective equity, the contact is called Shirkatul Melk. In the case of Hire Purchase under Shirkatul Melk, Islamic banks purchase assets to be leased out, jointly with client under equity participation, own the same and share benefit jointly until the full ownership is transferred to the client. 

Definition of Ijara37

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 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.

Important Features:

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 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

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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 ownership of 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 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 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 partner, as a lessee and lastly as purchaser.

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Under this agreement the role of 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 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 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 prior written permission of the bank make changes in the exact item of 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 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 useful life of less than two years.

Hire Purchase under Shirkatul Melk transaction facilitates the client (lessee) to get benefit from the lease asset in exchange of 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

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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.

Accept Proposal:

Before submit 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 loan to the manager. The proposal also includes the documents of his mortgage property.

Verifying Customers:

Manager will give the documents of Mortgage properties, Trade license etc to the investment

officer. Investment officer then verify the documents.

Manager, Assistant Manager, Investment officer will visit customers property to make a

value of mortgage property.

Manager also gives the documents of property to the advocate for legal advice and the

valuation of the property. Advocate will verify the documents of mortgage property. In

addition, advocate gives a legal opinion of the property.

41

Than Manager, Assistant Manager, Investment officer will adjust the opinion of advocates

with their own opinion about the value of mortgage property.

Customer’s get loan about 50% of the mortgage property. The bank takes 14%interest from

this loan.

Lease Finance:

AIBL offered Lease finance facilities to its valued clients with a view to facilitate clients to

acquire equipments 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 of Lease:

1. Free the Capital tied in capital expenditure

2. Leasing allows utilizing the capital elsewhere to general higher profits it also reduce

cash out flow

3. The equipment that leased does not appear on clients balance sheet, clients financial

ratios improve

4. To avoid budgetary constraints in capital expenditure

5. Lease rentals are treated as revenue expenditure and are entirely deduct able for tax

purpose.

Item of Leasing:

1. Any category of equipment and Machinery

2. Office automation equipments

3. Medical Treatment diagnosis

4. Vehicles for transportation etc

Restricted Business:

1. Production, Marketing, Trading of alcoholic, narcotic and other intoxicating drug of

liquor

2. Production and Trading of any item banned by the Government

3. Any activity not permissible by the law of the land

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Loan Ceiling:

1. For small enterprise : Maximum TK.50,00,000/-

Purpose:

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

Loan Renewal:

Successive loans depend on track record of previous loan. Usually, repayment behavior and

expansion of business by the borrower are the main consideration renewal and enhancement

of the loan amount.

Interest:

9 % above Bank Rate Presently 14% (changeable)

Penal Interest:

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.

Securities:

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)

a. Registered mortgage of land and building.

b. Mortgage/assignment of possession right

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c. Assignment of security money advance rent if any

d. Assignment of Trade Receivable not older than 90 days

e. Hypothecation of machinery, equipment, vehicles, stock-in-trade, raw materials,

work-in-process and finished goods.

f. Personal Guarantee from persons acceptable to the Bank.

g. Post dated chaques

h. Lien on deposits/saving certificates/financial obligations

i. 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:

a. In case of continuous Loan: 01 (One ) year

b. In case of Term Loan: Maximum 05 (five) years.

Mode of Repayment:

a. 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.

b. In case of term loan, the loan should be repaid by monthly installments through post-

date chaques as per amortization scheduled.

Sale proceeds should be deposited in the account regularly.

6.1 Introduction

One of the largest businesses carried out by the commercial bank is foreign trading. The trade

among various countries falls for close link between the parties dealing in 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:

a) Import section

b) Export section.

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c) Foreign remittance section.

6.2 Import Financing

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:

1. Application form

2. Nationality certificate

3. Income tax registration certificate

4. Trade License from the municipal or the local authority

5. Membership Certificate

6. partnership Certificate (for partnership concern)

7. Certificate of Registration with the registrar of joint stock Company.

8. Memorandum of Association in case of limited Company.

9. Bank Certificate.

10. Ownership documents or rent receipts of the place of business.

11. Original Copy of Treasury Challan being payment of registration fees.

12. Other documents prescribed in the import policy.

45

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”.

6.3 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:

1. Commercial Importer

2. Industrial Importer.

3. 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:

46

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.

Govt. Sector Importer.

Import under Bonded Ware-House System.

Import by Actual Users.

Import by E.P.Z.

Import Formalities/Procedures:

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.

6.4 Definition of Letter of Credit

L/C means Letter of Credit or Documentary credit. As per Uniform Customs and Practice for

Documentary Credits (UCPDC) meaning of credit as under:

Article No. 2 of UCPDC. For purpose of these articles the expressions “Documentary

Credit” and “stand by Letter of Credit” mean any arrangement however named or described,

whereby a bank (the “Issuing Bank”) acting at the request and on the instructions of a

customer (the “Applicant”) or on its won behalf.

i) Is to make a payment to or to the order of a third party ( the “Beneficiary” ) or is to accept

and pay bills of exchange [Draft) (s)] drawn by the Beneficiary.

OR

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ii) Authorizes another bank to effect such payment or to accept and pay such bills of

exchange [Draft (s)]

OR.

iii) Authorizes another bank to negotiate, against stipulated document (s) provide that the

terms and conditions of the Credit are complied with.

Generally, a Letter of Credit is a conditional Bank undertaking of payment. In other words

L/C is a letter from the Importer Bankers to the exporter that the bills if drawn as per terms

and conditions are complied with will be honored on presentation.

6.5 Classification of L/C

Various types of Letter of Credit are as follows:

Revocable L/C.

Irrevocable L/C.

Confirmed L/C.

Transferable L/C.

Divisible L/C.

Back to Back L/C.

Revolving L/C.

Restricted L/C

Red clause L/C.

Green Clause L/C

With Recourse

Without Recourse

Parties to a Letter of Credit:

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As per terms and conditions of the L/C, the seller is required to be routed through some

intermediary banks in order to get his claim. So, we see that there are a number of parties

involved in a L/C. The involved parties to a L/C are as under:

Importer / Buyer:

Seller who applies for opening an L/C.

Exporter / Seller / Beneficiary:

It is the bank on which the bill will be drawn (As per condition of the credit). Usually it is the

issuing bank.

Opening / issuing Bank:

It-is the bank which opens/issues a L/C on behalf of the importer.

Advising / notifying Bank:

It is the bank through which the L/C is advised to the exporters. This bank is actually situated

in exporter’s country. It may also assume the role of confirming and / or negotiating bank

depending upon the condition of the credit.

Confirming Bank (for Add confirming L/C):

It is the bank, which adds its confirmation to the credit and it, is done at the request of issuing

bank. Confirming bank may or may not be advising bank.

Exporter’s Bank i.e. negotiating Bank:

It is the bank, which negotiates the bill and pays the amount of the beneficiary. The advising

bank and the negotiating bank may or may not be the same. Sometimes it can also be

confirming bank.

Reimbursing Bank or paying Bank:

It is the bank, which would reimburse the negotiating bank after getting payment -

instructions from issuing bank.

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Procedure for Opening L/C:

An importer desirous 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. For Letter of Credit limit following

information are to be furnished by the applicant.

The full particulars of bank account.

Types of business ( Proprietorship, Partnership, Limited Co. ) in case of Ltd. Co.

Balance sheet of last 3 (three) years and the names of directors.

Historical background.

Amount of limit required.

Goods to be imported.

Security to be offered.

Re-payment schedules a source of fund.

Other liabilities of the customer with the bank.

Statements of Assets and liabilities.

Account position (Balance).

Trade License and import registration number with renewal date.

Terms of payment: Whether the import documents would be retired against payment

on receipt or against acceptance or whether post import finance is required in the form

of MPI / LTR etc.

On receipt of above particulars the import section of the bank will prepare credit report of the

concerned importer the report should be collected from the previous banker of the party also.

Bank will supply the following paper/documents before opening of the L/C.

(a) L/C. application form

(b) ICA form.

(c) IMP from.

(d) Murabaha Agreement.

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The above paper must be completed duly filled and signed by the party and verified the

signature.

Accounting Procedure for Opening L/C:

The following accounting system is followed in documentary creditors. The register shall be

posted immediately on receipt or approval form the Manager to open a L/C. This register

shall control the numbers of the L/C.

Entries are to be passed:

Dr. Party’s A/c.

Cr. Commission A/c.

Cr. P & T A/c.

Currency Vouchers:

Dr. Assets as per Contra (L/C WES) at B.C. Selling

Cr. Liability as per contra (L/C WES) ,

Dr. F.C. Deposit (WES fund held A/c) at national rate

Cr. F.C. Deposit A/c (WES L/C cover) ,

(If is purchased Fund at the time of opening L/C)

Taka Voucher:

Dr. Party's A/c (Current A/c).

Cr. Sundry Deposit (Security dep. L/C WES A/c).

Cr. Telex recovery A/c (at the L/C is transmitted by telex or cable).

Cr. Commission (As per Bangladesh Bank Circular).

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Cr. P & T A/c.

Dr. Murabaha Import L/C @ B.C selling.

Cr. WES Find purchase A/c.

Cr. Profit Receivable A/c WES.

Dr. Profit Receivable A/c (monthly credited by daily product basis).

Cr. Investment Income A/c.

L/C Amendment:

Amendment of irrevocable latter of credit is not permissible without the joint consent of the

entire patron involved in documentary credit operation.

Time Extension:

A written application from the opener of L/C and signature of the opener is verified. A

relevant license / LCA / Permanent of the loan / Barter must remain valid unto that period the

extension is sought. Increase of L/C amount may be done provided the LCA covers the

increase in amount.

L/C amount can be decreased provided the relevant indent is amended accordingly and with

the consent of the beneficiary

Import Financing For The last Three Years:

(Million In Taka)

Particulars Year 2006 Year 2007 Year 2008

Import 12631.60 1882.40 27042.72

6.6 Export Financing

Bangladesh exports a large quantity of goods and services to foreign households. Readymade

textile garments (both knitted and woven), Jute, Jute-made products, frozen shrimps, tea are 52

the main goods that Bangladeshi exporters exports to foreign countries. Garments sector is

the largest sector that exports the lion share of the country's export. Bangladesh exports most

of its readymade garments products to U.S.A and European Community (EC) countries.

Export means our carrying of any thing from one country to another for sale with the

stipulated period for to earn foreign exchange; make favorable balance of payment position &

stabilize marketability.

What Is Export L/ C:

The L/C against which the goods and services are exported is called export L/C. The foreign

L/Cs are export L/Cs.

Formalities for Export L/C:

There are a number of formalities, which an exporter has to fulfill before and after shipment

of goods. These formalities or procedures are enumerated as follows:

Obtaining Export Registration Certificate ERC:

No exporter is allowed to export any commodity permissible for export from Bangladesh

unless he is registered with Chief Controller of Imports and Exports (CCI & E) and holds

valid Export Registration Certificate (ERC). After applying to the CCI&E in the prescribed

from along with the necessary papers, concerned offices of the Chief Controller of Imports

and Exports issues ERC. Once registered, exporters are to make renewal of ERC every year

Securing the order:

After getting ERC, the exporter may proceed to secure the export order. He can do this by

contracting the buyers directly through correspondence.

53

Obtaining EXP:

After having the registration, the exporter applies to AIBL with the trade license, ERC and

the Certificate from the concerned Government Organization to get EXP. If the bank is

satisfied, an EXP is issued to the exporter.

Signing of the contract:

After communicating with buyer the exporter has to get contracted for exporting exportable

items from Bangladesh detailing commodity, quantity, price, shipment, insurance and mark,

inspection, arbitration etc.

Receiving the Letter of Credit:

After getting contract for sale, exporter should ask the buyer for Letter of Credit clearly

stating terms and conditions of export and payment.

Procuring the materials:

After making the deal and on having the L/C opened in his favor, the next step for the

exporter is to set about the task of procuring or manufacturing the contracted merchandise.

Endorsement on EXP:

Before the exporter with the customs or postal authorities lodges the export forms, they

should get all the copies endorsed by AIBL. Before shipment, exporter submits EXP. form

with commercial invoice. Then AIBL officer checks it properly, if satisfied, certifies the

EXP. Without it exporter cannot make shipment. The customer must declare all export goods

on the EXP issued by the authorized dealers

Shipment of goods:

Exporter makes shipment according to the terms and condition of L/C.

a. Presentation of export documents for negotiation: After shipment, exporter submits the

following documents to AIBL for negotiation.

Bill of Exchange or Draft;

54

Bill of Lading

Invoice

Insurance Policy/Certificate

Certificate of origin

Inspection Certificate

Consular Invoice

Packing List

Quality Control Certificate

G.S.P. certificate

Photo

Examination of Document:

Banks deal with documents only, not with commodity. As the negotiating bank is

giving the value before repatriation of the export proceeds it is advisable to scrutinize and

examine each and every document with great care whether any discrepancy(s) is

observed in the documents. The bankers are to ascertain that the documents are strictly as per

the terms of L/C Before negotiation of the export bill. Bank officers assigned for examining

the export documents may use a checklist for their convenience.

Negotiation of export documents:

Negotiation stands for payment of value to the exporter against the documents stipulated in

the L\C. If documents are in order, AIBL purchases (negotiates) the same on the basis of

banker- customer relationship. This is known as Foreign Documentary Bill Purchase

(FDBP).If the bank is not satisfied with the documents submitted to AIBL gives the exporter

reasonable time to remove the discrepancies or sends the documents to L/C opening bank for

collection. This is known as Foreign Documentary Bill for Collection (FDBC).

Settlement of Local Bills:

The settlement of local bills is done in the following ways, -

The customer submits the L/C to AIBL along with the documents to negotiate

55

SBL official scrutinizes the documents to ensure the conformity with the terms and

conditions.

The documents are then forwarded to the L/C opening bank.

The L/C issuing banks gives the acceptance and forwards an acceptance letter.

Payment is given to the customer on either by collection basis or by purchasing the

document.

Mode of Payment of Export Bill under L/C:

As per UCP 500, 1993 revision there are four types of credit. These are as follows:

a. Sight payment

b. Deferred payment

c. By acceptance

d. Negotiation

a. Sight Payment Credit:

In a Sight Payment Credit, the bank pays the stipulated sum immediately against the

exporter's presentation of the documents.

b. Deferred payment Credit:

In deferred payment, the bank agrees to pay on a specified future date or event, after

presentation of the export documents.

c. Acceptance credit:

In acceptance credit, the exporter presents a bill of exchange payable to him and drawn at the

agreed tenor (that is, on a specified future date or event) on the bank that is to accept it. The

bank signs its acceptance on the bill and returns it to the exporter. The exporter can then

represent it for payment on maturity. Alternatively he can discount, it in order to obtain

immediate payment.

d. Negotiation Credit:56

In Negotiation credit, the exporter has to present a bill of exchange payable to him in addition

to other documents that the bank negotiates.

6.7 Back-to-back L/C

A Back-to-Back mechanism involves two separate L/Cs. One is master Export L/C and

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

6.8 Features of Back-to-Back L/C

Is an Import L/C to procure goods /raw materials for further Processing?

Is opened 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 Usance.

No margin is required to open Back to back L/C

Papers Required Opening Back-to-Back L/C:

Import registration certificate & export registration certificate

L/C application and LCA form

Proforma invoice or indent

Insurance policy

IMP form

Bonded warehouse license

Quota allocation letter from export processing Bureau (EPB)

Payments under back-to-back L/C:

Payment at maturity out of exports proceeds.

In case of export failure or non-realization/short

realization of export proceeds, forced loan i.e. has to be created in order to settle the Back-to-

Back L/C payment.

6.9 Flow Chart for Export:

57

Goods ready for shipment.

Inspection of the goods from the competent authority as per L/C.

Prepared invoice and packing list and vessel booking particulars.

Papers to be sent to C & F agent for shipment.

C & F agent will do the custom formalities i.e. Noting / entry. Checking the goods as per

invoice & packing list inspection report etc.

C & F agent will take permission for shipment / Hanover the goods to shipping co.

After completion of all customs formalities the nominating shipping co received the

goods for sail/ loads in the ship and issued a receipt which is known as mates receipt.

C & F Agent hands over the shipping receipt to the exporter or they can take the original

B/L in payment of freight and other expenditure etc.

Exporter may dispatch the shipment advice to the importer directly as per L/C terms.

C & F Agent recipes the original B/L from the relative shipping co and dispatches he

same to the bank for negation of receives the (exporter) from the shipping co directly.

Exporter spits the all original and duplicate sets of document to the bank for negotiation.

After negotiation bank should dispatch the documents to the opening bank for delivers of

from the part.

Opining bank lodged the documents and make payment to the negotiation bank A/c

terms.

Export Financing For Last Three Years:

(Million in Taka)

Particulars Year 2006 Year 2007 Year 2008

Export 4932.90 9142.70 12714.91

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6.10 Remittance:

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.

6.11 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:

1. Opening forms i.e. Application, Signature Card, nomination form if any, to be duly filled

in and signed by the applicant and the nominee.

2. Original passport to be submitted for verification and Photocopy of 1st seven pages to be

submitted for preservation.

3. 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.

59

4. Service contract in English or Bengali person to be submitted with the A/C Opening

form.

5. 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.

FCAD (FXP) A/C:

FACD A/C Export is opened by the exports only 7.5% FOB value? Realized amount is

deposited in this account and the fund is used for the promotion of business. Establish of

business, Payment of credit card bill, Export fair, to attend the seminar and of purchase of

Machinery and Spare parts.

Private Foreign Currency (PFC) A/C:

Private Foreign Currency A/C is opened by the Alien who serve in Bangladesh Foreign

mission, Foreign NGO and Foreign consultation firm. Photograph, photocopy of passport,

work permit, NGO permission etc, are to be submitted to open the A/C.

Convertible Taka (CT) A/C:

The private Foreign Currency Account holders are to open Convertible taka Account. The

entire funds of the PFC A/C are to be routed through the related convertible taka Account.

Inward Remittance:

The remittances, which are received from abroad and paid to the beneficiary, are Inward

Remittance. In ward remittance are mainly received in US Dollar, pound sterling and Taka

Currency. Very few remittances in miscellaneous currencies are also received.

60

Outward Remittance:

The Remittance in Foreign Currency which is effected from our country to abroad is called

outward remittance. Form remitter's point of view is called outward Remittance and from

payee's point of view is called Inward Remittance.

Interpretation:

The above graphical presentation shows comparison imports between Al-Arafah Islami Bank

Ltd (AIBL) and the Islami Bank Bangladesh Ltd (IBBL). The trend of import business of the

IBBL is increasing from 2004 to 2008 on the other hand AIBL also increasing but they are

now standing in initial point. The growth of AIBL in 2007 to 2008 was Tk.6189.8 and the

growth of IBBL in 2007 to 2008 was Tk.8177 million. So the growth of AIBL is lower than

IBBL. They are not comparing with IBBL because they have a few levels of branches and

few branches level of foreign business.

Interpretation:

The above graphical presentation shows comparison exports between AIBL and the Islami

Bank Bangladesh Ltd (IBBL). The trend of export business of the IBBL and AIBL is

increasing and experiencing from 2004 to 2008. The growth of AIBL in 2007 to 2008 was

Tk.4209.8 and the growth of IBBL in 2007 to 2008 was Tk.513 million. So the growth of

export business of AIBL is higher than IBBL in 2008. So they should continue their

increasing.

Interpretation:

61

The above graphical presentation shows comparison remittance between Al-Arafah Islami

Bank Ltd (AIBL) and the Islami Bank Bangladesh Ltd (IBBL). The trend of remittance

business of the IBBL is increasing that is very higher than AIBL. Because AIBL can not take

leading point of remittance business through only 46 braches. So they should take necessary

steps.

Interpretation

The above graphical presentation shows comparison total foreign business between Al-

Arafah Islami Bank Ltd (AIBL) and the Islami Bank Bangladesh Ltd (IBBL). The total

foreign business of IBBL and AIBL is increasing continuously but total foreign business of

IBBL is higher then AIBL because AIBL operate total foreign business through 20 branches

that are fewer then IBBL. So they should increase there foreign exchange branches.

7.1 SWOT Analysis

7.1.1 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”

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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.

7.1.2 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

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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.

7.1.3 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.

7.1.4 Threats of AIBL

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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.

8.1 Problem identification

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.

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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.

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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.

8.2 Recommendation of Overall Banking System of AIBL

I. 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.

II. AIBL should use the latest banking technology to provide better services to the customers. It will also attract the customer’s of international banks.

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III. 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.

IV. 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.

V. 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.

VI. 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.

VII. The dependency on Head Office in every step should be waived. They should permit the branches to work independently.

VIII. 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.

IX. 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.

X. 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.

XI. 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.

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XII. 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.

XIII. Bank should offer more facilities to the customers such as credit card, visa card, ATM machine etc to survive in the competition.

XIV. Al-Arafah Bank Ltd (AIBL) should introduce more female employees.

XV. 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.

XVI. The management should take immediate decision to take the current opportunities.

XVII. 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.

8.3 Conclusion

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.

Bibliography

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A. Books, Periodicals & Journals:

Banks and legal environments by Dr. R.M Dev Nath, page no-103

An application of Islamic banking principles to Microfinance by Rahul Dhumale and Amela Sapcanin.

Human Resource Management, Low Price Edition (5th Edition), William B, Wenther, Keith Davis.

Strategic Human Resource Planning, New Edition, Kenneth J. Mcbey, Monica

Belcourt.

Gupta, K.N; Lease Financing- Concept and Practice, Bikash Publishing House, New Delhi, India, 1993.

Anu, Mahmood 1998. Inside Bangladesh Economy. Published by BIBM, 63 New Eskaton, and Dhaka-1000. PP 9-21.

Annual Reports of Al- Arafah Islami Bank Ltd.(AIBL)

Bangladesh Bank Circular

UCP-600/ Uniform Custom and Practice.(Latest Edition)

B. Websites:

www.al-arafahbank.com.

www.bangladeshbank.com.

www.wikipedia.org.

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