cyberstudentsbd.wordpress.com
ASA Tower, 23/3 Bir Uttam A.N.M. Nuruzzaman Sarak, Shymoli,Dhaka. 1207.
Internship Report
On
“Modes of Investment of IBBL”
Submitted To
Dr. Md. Abdul Hye
Professor & Dean
Faculty of Business
ASA University Bangladesh (ASAUB)
Submitted By
Sheikh Refath Jessan
ID. No: 091-12-0293
Section: ACT-6A
Major: Accounting
Batch: 6th
Program: BBA
ASA University Bangladesh (ASAUB)
Date: December 30, 2012
cyberstudentsbd.wordpress.com
December 30,2012
Dr. Md. Abdul Hye
Professor & Dean,
Faculty of Business
ASA University Bangladesh (ASAUB).
Dear Sir:
SUBMISSION OF INTERNSHIP REPORT
I have the pleasure to submit the internship report on ‘Modes of Investment of Islami
Bank Bangladesh Limited (IBBL)’ for your kind perusal and evaluation.
It is a matter of immense pleasure for me to have the opportunity to prepare internship
report on, ‘Modes of Investment of Islami Bank Bangladesh Limited (IBBL)’. I am
grateful to you for allowing me to carry out such work and necessary co-operation and
assistance from you during my report. I believe that the knowledge and experiences
acquired while conducting this study will help me in many ways and the readers as well
in future. I have tried my best to accommodate my ideas and findings as specifically as
you asked about within the time frame and resources available
I would like to mention that there might be some errors in the report that is totally
unintentional and due to professional hazard. I believe that you will consider such
shortcomings while you evaluate the report.
Sincerely Yours
…………………………
Sheikh Refath Jessan
REF/ref
Encl.: Internship Report
cyberstudentsbd.wordpress.com
Acknowledgement
All gratitude and thanks to Almighty Allah, the Gracious, the Most Merciful and
Beneficent who gave me courage to undertake and helped me to complete this task. It is
my great privilege to express my gratitude to Almighty who has given me the great
opportunity to complete the internship program & to conduct the study under the
supervision of Dr. Md. Abdul Hye, Professor & Dean, Faculty of Business, ASA
University Bangladesh.
I also have to put my heartfelt gratitude for his kindness & guidance during the period of
internship to complete my assigned report “Modes of Investment of Islami Bank
Bangladesh Limited”. In preparing this report, I have taken great assistance, support &
guidance from the officials of ‘Islami Bank Research & Training Academy (IBTRA)’ &
‘Local Office’ branch of IBBL.
I would like to give special thanks & express my deep gratitude to my honorable
supervisor, Dr. Md. Abdul Hye for assigning such an important and interesting topic to
me. Through preparing this report I have gained a practical outlook of overall banking
activities of IBBL. I strongly believe this report will help me to develop my career.
I express my heartfelt thanks & gratitude to all faculty members of ‘Islami Bank
Research & Training Academy (IBTRA)’ and all other faculty members as well as all
the employees from top to bottom of IBTRA who gave me necessary information &
excellent guidance to prepare this internship report.
The management of ‘Local Office’ branch had been extremely helpful in providing
necessary documents, annual reports, statements, voucher, advice etc. which helped me to
prepare this ‘Internship Report’. I express a deep sense of appreciation & gratefulness
to the employees of IBBL, Local Office Branch.
cyberstudentsbd.wordpress.com
Executive Summary
Islami Bank Bangladesh Ltd. (IBBL) started its commercial operation on March 30, 1983
under the ambit of Banking Company’s Ordinance 1962, later on Banking Companies
Act, 1991 as the first interest free Shari’ah based commercial bank with an objective of
catering Islamic Shari’ah based financial products. At present IBBL is operating is
operating with 236 branches & 30 SME branches located in different areas of the
country. In conventional bank the investor is assured of a predetermined rate of interest
whereas IBBL promotes risk sharing between provider of capital (investor) & the user of
funds (entrepreneur).
IBBL mobilizes deposit on Mudaraba (Profit Sharing) & Al-Wadiah (Current Account)
basis under the Islamic Shari’ah. The depositors are business partners of it and they share
the profit or loss of the business. For better use of depositor’s fund, the IBBL invests its
funds as per different modes of investment or financing on the basis of the principles of
‘Islamic Shari’ah’ Most of the investments of IBBL are on the Bai Mode ( Buying &
Selling ) & HPSM. In these modes the bank sells specified goods to the clients on cost
plus agreed upon profit or at a negotiable price payable after a certain fixed period. The
other ideal mode of investment is Musharaka ((Partnership). In this mode bank shares
profit & loss of the business with the clients. In 2011 IBBL invested under Bai –
Murabaha mode 57.92%, HPSM 29.12%, Bai Muajjal 5.20%, Bill purchase &
negotiation 0.91%, Quard 1.83%, Bai Salam 1.15%, Mudaraba 0.74% & Musharaka
3.13% of its total investment. The percentage of recovery of the investment of IBBL was
nearly 90% - 95% because bank evaluates the entrepreneurs’ efficiency and integrity as
well as five as well as five C’s such as capacity, character, capital, condition & collateral.
In 2008 investment of eth bank increased to 24% from 20% in 2007. In 2010 it increased
to 23% from 19% in 2010. In 2011 it increased to 16% from in 2010.
So the overall investment performance of IBBL is increasing day by day. Because most
of the people in our country are religious minded and they want to invest their money
according to ‘Islamic Shari’ah’. Moreover people of all walks of life can easily transact
with IBBL comparing to other commercial private banks in the country.
cyberstudentsbd.wordpress.com
Table of Contents
Page No.
Letter of Transmittal
I
Acknowledgement
Ii
Executive Summary
Ii i
Chapter One: Introduction
Page No.
Chapter One: Introduction
1-24
1.1 Rationale of the Study
2
1.1.2 Importance of Banking in the Economy of Bangladesh
3-4
1.1.3 Contribution of Banking Sector to the Economy of Bangladesh
5-7
1.1.4 Growth of Commercial Banking in Bangladesh
7-12
British Period
7
Pakistan Period
8
Private Commercial Bank: Bangladesh Context
8-12
1.1.5 Number of Banks in Bangladesh
13-15
1.1.6 Islamic Banking in Bangladesh
16-21
1.2 Objective of the Study
22
1.3 Methodology of the Study
23
1.4 Limitations of the Study
24
cyberstudentsbd.wordpress.com
Chapter Two: Literature & Profile of Islami Bank Bangladesh Limited
Page No.
Chapter Two: Literature & Profile of
Limited
Islami Bank Bangladesh 25-71
2.1 Related Literature
26-30
2.1.2 Definition of Islamic Banking
31
2.1.3 Historical & Religious Context of Islamic Banking
32
2.1.3 History of Modern Islamic Banking
33-39
2.1.4 Evaluation of Islamic Banking
39-49
Riba & its Basic Features
39
Riba & Profit
41
Objectives of Islamic Banking
42
Basic Properties of Islamic Banking
43
The Relationship between Banking System & Islam
47
Difference between Conventional Bank & Islamic Bank
48
2.2 Profile of Islami Bank Bangladesh Limited (IBBL)
50-71
2.2.1 Introduction
50
2.2.2 The History of Islami Bank Bangladesh Limited
51
2.2.3 Aims & Objectives
52
2.2.4 Vision of IBBL
53
2.2.5 Mission of IBBL
53
2.2.6 Strategic Objectives
54
2.2.7 Core Values
55
2.2.8 Commitments
56
cyberstudentsbd.wordpress.com
2.2.9 General Banking Functions
56
2.2.10 Management of IBBL
57
2.2.11Principle Products or Services of IBBL
58
2.2.12 Corporate Information of IBBL
61
2.2.13 Achievements
62
2.2.14 Membership of Different Organizations / Chambers
64
2.2.15 5 Years’ Financial Performance of IBBL (At a Glance)
65
2.2.16 Graphical Representation of Some Important Indicators of 69-71
IBBL
Chapter Three: Findings of the Study
Page No.
Chapter Three: Findings of the Study
72-134
3.1 Different Modes of Investment of IBBL
73-117
3.1.1 Introduction
73
3.1.2 Investment Objectives of IBBL
74
3.1.3 Investment Modes of IBBL
75
3.1.3.1 Bai Modes
76-90
a) Bai Murabaha
76
b) Bai Muajjal
81
c) Bai Salam
84
d) Bai Istisna’a
88
3.1.3.2 Ijara Modes
Ijara
91-103
91
cyberstudentsbd.wordpress.com
Types of Sale Contract in HPSM
94
Important Features of HPSM
97
Rules for Hire Purchase under Shirkatul Melk
101
3.1.3.3 Share Modes
104-116
a) Mudaraba
104
b) Musharaka
108
3.1.3.4 QARD HASAN
117
3.2 Welfare Investment Scheme of IBBL
118
3.3 Graphical Analysis of the Investment of IBBL
119-134
Trend of Investment of IBBL
119
Investment Growth of IBBL
119
The Share of Investment of IBBL in Banking Sector
120
The Investment Performance of IBBL in Different Modes from 2007- 121-124
2011
The Investment Performance of IBBL in Different Sectors from
125-127
2007-2011
Welfare Oriented Investment (Special Scheme)
128-132
Investment Income of IBBL
133
Investment Plan of IBBL for 2008-2012
133
Growth Target in Various Business Aspects
134
cyberstudentsbd.wordpress.com
Chapter Four: Conclusion
Page No.
Chapter Four: Conclusion
135-136
Conclusion
136
BIBLIOGRAPHY & Appendixes
Page No.
BIBLIOGRAPHY
137-138
Appendixes
139-153
Appendix – A : Internship Approval Letter
140
Appendix – B : List of Private Commercial Banks & Foreign Commercial
Banks Operating in Bangladesh
141-142
Appendix –C : Branch Performance: Local Office Branch of IBBL
143-153
cyberstudentsbd.wordpress.com
List of Tables
Table No.
Particulars
Page No.
Table 2.1
Difference between Riba & Profit
41
Table 2.2
Difference between Conventional Bank & Islamic Bank
48
Table 2.3
Corporate Information of IBBL
61
Table 3.1
Growth Target in Various Business Aspects
134
cyberstudentsbd.wordpress.com
List of Graphs
Graph No.
Particulars
Page No.
Graph 2.1
Financial Performance of IBBL
68
Graph-2.2
Net profit before tax of IBBLduring 2007-2011
69
Graph-2.3
Net profit after tax of IBBLduring 2007-2011
69
Graph-2.4
Classified investment of IBBLduring 2007-2011
70
Graph-2.5
Return on Equity of IBBLduring 2007-2011
70
Graph-2.6
Return on Avearge Asset of IBBLduring 2007-2011
71
Graph-2.7
Earning Per Share of IBBLduring 2007-2011
71
Graph 3.1
Trend of Investment of IBBL: 2007-2011
119
Graph 3.2
Investment growth of IBBL: 2007-2011
119
Graph 3.3
The Share of Investment of IBBL in Banking Sector: 120
2007-2011
Graph 3.4
The Share of Investment of IBBL in total investment: 120
2011
Graph 3.5
Sector wise investment of IBBL in 2011
121
Graph 3.6
Trend of Investment in Bai Murabaha: 2007-2011
121
Graph 3.7
Trend of Investment in HPSM: 2007-2011
122
Graph 3.8
Trend of Investment in Bai-Muajjal: 2007-2011
122
Graph 3.9
Trend of Investment in Bill Purchase & Negotiation: 122
2007-2011
Graph 3.10
Trend of Investment in Quard: 2007-2011
123
cyberstudentsbd.wordpress.com
Graph 3.11
Trend of Investment in Bai Salam: 2007-2011
123
Graph 3.12
Trend of Investment in Musharaka: 2007-2011
123
Graph 3.13
Trend of Investment in Mudaraba: 2007-2011
124
Graph 3.14
Trend of Total Mode Wise Investment: 2007-2011
124
Graph 3.15
Sector Wise Investment of IBBL: 2007-2011
124
Graph 3.16
Trend of Investment in Industrial Sector
125
Graph 3.17
Trend of Investment in Commercial Sector
125
Graph 3.18
Trend of Investment in Real Estate Sector
126
Graph 3.19
Trend of Investment in Agriculture Sector
126
Graph 3.20
Trend of Investment in Transport Sector
126
Graph 3.21
Trend of Investment in SME
127
Graph 3.22
Trend of Total Sector Wise Investment
127
Graph 3.23
Welfare Oriented Investment of IBBL in 2011
128
Graph 3.24
Trend of Investment in Transport Sector
128
Graph 3.25
Trend of Investment in House Hold Durables Scheme
129
Graph 3.26
Trend of Investment in Doctors’ Scheme
129
Graph 3.27
Trend of Investment in Transport Scheme
129
Graph 3.28
Trend of Investment in Car Investment Scheme
130
Graph 3.29
Trend of Investment in Small Business Investment 130
Scheme
Graph 3.30
Trend of Investment in Micro Industries Investment 130
cyberstudentsbd.wordpress.com
Scheme
Graph 3.31
Trend of Investment in Agricultural Implements 131
Investment Scheme
Graph 3.32
Trend of Investment in Housing Investment Scheme
131
Graph 3.33
Trend of Investment in Real Estate Investment Scheme
132
Graph 3.34
Percentage of Welfare Oriented Investment over Total 132
Investment
Graph 3.35
Net Investment Income vs. Total Income of IBBL
133
Graph 3.36
Investment Plan of IBBL : 2008-2012
133
Graph 3.37
Growth Target in Various Business Aspects in 2011
134
cyberstudentsbd.wordpress.com
List of Abbreviations
AD
Authorized Dealer
ATM
Automatic Teller Machine
AWCA
AL Wadiah Current Account
EPS
Earning Per Share
FC
Foreign Currency
FCA
Foreign Currency Account
HPSM
Hire Purchase Under Shirkatul Melk
HDS
House Hold Durable Scheme
IBBL
Islami Bank Bangladesh Limited
IBTRA
Islami Bank Training & Research Academy
IDB
Islamic Development Bank
LO
Local Office
L/C
Letter of Credit
MSA
Mudaraba Savings Account
NAV
Net Asset Value
PCB
Private Commercial Banks
RDS
Rural Development Scheme
ROA
Return on Average Asset
ROE
Return on Equity
SME
Small & Medium Enterprise
SWIFT
Society For Worldwide Interbank Financial Telecommunication
cyberstudentsbd.wordpress.com
cyberstudentsbd.wordpress.com
1.1 Rationale of the study
Internship program is partial requirement for degree of BBA of ASAUB. Every BBA
student is required to learn some practical knowledge within the stipulated period by
observing the day to day activities of an organization. In this regard my internship
program started on October 31, 2012 at Islami Bank Bangladesh Limited (IBBL). I was
placed in the Local Office Branch of this bank.
In the modern society commercial banks occupy a position of economic importance.
They play a significant role to meet the needs of the society such as capital formation,
large scale production, industrialization, growth of trade & economy etc.
Islamic banks are unconventional and specialized financial institutions that perform most
of the standard banking services & investment activities on the basis of profit and loss
sharing system conforming to the principles of ‘Islamic Shari’ah’. Today in our country
seven banks operate their businesses on the basis of worldwide accepted Islamic banking
standards & code of conduct. This paper however attempts to describe the overall
scenario of ‘Islami Bank Bangladesh Limited (IBBL)’ which is performing beneath the
umbrella of ‘Islamic Shari’ah’ and approved welfare oriented principles and especially
narrate the investment activities of IBBL.
cyberstudentsbd.wordpress.com
1.1.2 Importance of Banking in the Economy of Bangladesh
Banking system and the financial institutions play very significant role in the economy.
The health of eth economy is closely related to the soundness of its banking system.
Although banks create no new wealth but their borrowing, lending & related activities
facilitates the process of production, distribution, exchange & consumption of wealth. In
this way they become very effective partners in the process of economic development.
Today modern banks are very useful for the utilization of the resources of the country.
The banks are mobilizing the savings of the people for the investment purposes. If there
would be no bank then a great position of the capital of a economy would remain idle.
A bank as a matter of fact is just like a heart in the economic structure and the capital by
it is like blood in it. As long as the blood will be in circulation, the organs will remain
sound and healthy. If the blood is not supplied to any organ then that part would become
inactive. So if financing is not made in industrial or agricultural sectors, these sectors will
be destroyed. Loan facilities provided by banks work as an incentive to the producer to
increase their production. Many difficulties in the international payments have been
overcome and the volumes of transaction have been increased. The modern economies in
the world have been developed primarily by making the best use of the credit availability
in their systems. An efficient banking system must cater to the needs of high end
investors by making available high amounts of capital for big projects in the industrial,
infrastructures & service sectors. At the same time credit should be made available to the
medium & small ventures.
Development of banking sector is the key to improve the financial condition of a country.
Moreover not only the economy or the financial sector but also all the sectors of a
country are directly or indirectly related to the smooth operation of banking sector.
Let’s analyze some of the key factors which are affected by the banking sector of a
country:
cyberstudentsbd.wordpress.com
An effective commercial banking system makes the credit available to the
entrepreneurs. The entrepreneurs use the credit to produce goods and services. As a
result they can contribute to the growth of the economy.
Mobilization of resources would only be possible if new branches of banks are
opened in both urban and rural areas. This would open doors to the external world
which means development in all aspects.
Banks finance new & innovative ideas. In this way they accelerate the economic
growth.
Banks offer credit facilities which are the driving force for any business project to be
put into action. In a developing nation such as Bangladesh where in agriculture is
main livelihood for a major part of the population, investing in such sectors is of
highly important. So banks can play a vital role for the development of agriculture by
investing in agricultural projects.
Banks are the sources of loans and advances.
The world would come to a standstill if the banks cease their operation. However the
banks are just one aspect of a nation’s financial sector, although the most important one!
1.1.3 Contribution Of The Banking Sector To The Economy Of
Bangladesh
Bangladesh appeared as a new nation on the world map in the year1971. After
independence financial institutions, especially banks played a vital role in re-constructing
the war – torn economy of Bangladesh. The Bangladesh banking sector relative to the
size of its economy is comparatively larger than many economies of similar level of
development and per capita income. The total size of the sector at 26.54% of GD
dominates the financial system, which is proportionately large for a country with a per
capita income of only about US$370. The non-bank financial sector, including capital
market institutions is only 3.22% of GDP, which is much smaller than the banking sector.
cyberstudentsbd.wordpress.com
Commercial banks as the most important functionary of the financial system play a
dynamic role in economic development of the country by providing funds to various
economic sectors like agriculture, industry, power, transport, trade service etc. In mid 80s
Banking & insurance contributed 1.69% of GDP and gradually the figure was increasing.
In the year its contribution to the GDP was 2.09%. Again the sector makes a positive
impact on the economic development of this country by creating employment opportunity
for people. In the year 1980 total number of employees in this sector was 59235 but
within 15 years of time the figure became approximately double to 101,444. The average
growth rate of employment generation was 3.76% (1980-1995).
Countries like Bangladesh have abundance of unemployment, where as banking sector
still keep certain impact on employment generation. Branches of the banks are also
growing significantly. In early 80s for the first time the Government of Bangladesh
(GOB) allowed private sector to operate commercial banks. At that time number of bank
branches was growing rapidly. The number of banks has grown from 17 in 1980 to 47 in
2010 and the number of branches was about 7700. Individuals and business organizations
deposit their savings in the bank and borrow money from it. There are 53 bank branches
per 1000 square km. in Bangladesh as compared with 10 in Pakistan and 24 in India.
There is one bank branch for every 20000 people in Bangladesh as compared with 20340
people per branch in Pakistan and 14485 people in India. Commercial banks are one of
the profit making institutions. They are also making money by investing their deposits to
the profitable ventures through lending to entrepreneurs. Commercial banks earn money
through interest, commission & service charges for the services and it also incurred
expenditures as well. Banks’ income is generated by the effort of their employees.
Efficient employees can earn more which observed a positive impact to profit generation.
Income per employee can be one of the indicators of commercial banks’ performances.
Average income per employee from 1980 to 1995 was Tk. 277046, i.e. per employee’s
contribution to income more than Tk. 2 lacs. The ratio was increasing significantly with
the average growth rate of 12% to Tk. 371,297 in the year 1995.
cyberstudentsbd.wordpress.com
A country leads itself to the economic development by investing and producing more in
the local area. Investment can be ensured through increased savings rate. Monetization
ratio indicates a positive impact to the economic growth. This ratio is Broad Money to
GDP. Average monetization ratio was 28% of GDP, and it was growing significantly
from 17% in the year 1981 to 35% in the year 1995.Commercial banks as a whole
performing well and contributing to the economic development of the country. The
average profitability of all banks collectively was 0.09% during 1980 to 1995, which
means profit Tk. 0.09 earned by utilizing assets of Tk. 100. Total operating profits of all
commercial banks stood at Tk. 197.38 billion by end of December 31, 2011, BB data
showed.
The banks however, earned Tk. 91.21 billion as net profit in 2011 after adjustment of
their requirements for provisioning against bad debts and also making provision for tax
payments, worth Tk. 33.35 billion and Tk. 72.62 billion respectively. In every aspect of
profit, banking sector contributes to national economy as well as to the individual
organization. Despite overall growth of the banking sector was positive, but the
performances of different categories of banks were not equally attractive.
The banking sector especially the private sector banks made significant progress and
growth in terms of significant market share of deposits and advances through customer
service, introduction of new products and switching over to online banking keeping pace
with the globalization process.
The 30 banks in the private sector posted a 24% in operating profits in 2009 over the
previous year. Bangladesh Bank has been playing an important role for bringing out
discipline and dynamism in the banking sector of the country. Due to stringent
supervision and control exercised by central bank, there had been a continuous progress
in reduction of percentage of classified loans in the banking sector with recovery of
default loans.
cyberstudentsbd.wordpress.com
1.1.4 Growth of Commercial Banking of Bangladesh
British Period (1757-1947)
In eighteenth century, modern banking was started in Indian subcontinent. Under the
initiative of English Agency House, first European bank in Calcutta- The Hindustan Bank
was established in1770 followed by Bengal Bank in1785 and General Bank of India
in1786. After that many other banks were also set up. The Reserve Bank of India was
established in 1934 as Central Bank under ‘Reserve Bank of India Act’.
Pakistan Period (1947-1971)
After the partition of sub-continent, Pakistan and India, two separate countries came into
existence in 1947. After the birth of Pakistan, The State Bank of Pakistan, the central
bank of the country, came into being in1948. Later on, The National Bank of Pakistan
and Commercial Bank of Pakistan were set up. Most of these banks were owned by
Pakistanis. Habib Bank and the Australasia Bank had a branch in the then East Pakistan.
During the period from 1950-1958 , three other banks , namely , The Premier Bank, Bank
of Bahawalpur and The Muslim Commercial Bank opened their branches in the then East
Pakistan during 1959-1965. There were only two banks in the then East Pakistan , namely
The Eastern Mercantile Bank (Presently Pubali Bank Ltd.) and Eastern Banking
Corporation (Presently Uttara Bank Ltd.) established in 1956 and 1965 respectively and
were owned by the then East Pakistanis.
Private Commercial Banks: Bangladesh Context
The banking system at independence consisted of two branch offices of the former State
Bank of Pakistan and seventeen large commercial banks, two of which were controlled
by Bangladeshi interests and three by foreigners other than West Pakistanis. There were
fourteen smaller commercial banks. Virtually all banking services were concentrated in
urban areas. The newly independent government immediately designated the Dhaka
branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh
cyberstudentsbd.wordpress.com
Bank. The bank was responsible for regulating currency, controlling credit and monetary
policy, and administering exchange control and the official foreign exchange reserves.
The Bangladesh government initially nationalized the entire domestic banking system
and proceeded to reorganize and rename the various banks. Foreign-owned banks were
permitted to continue doing business in Bangladesh. The insurance business was also
nationalized and became a source of potential investment funds.
Cooperative credit systems and postal savings offices handled service to small individual
and rural accounts. The new banking system succeeded in establishing reasonably
efficient procedures for managing credit and foreign exchange.
The primary function of the credit system throughout the 1970s was to finance trade and
the public sector, which together absorbed 75 percent of total advances.
The government's encouragement during the late 1970s and early 1980s of agricultural
development and private industry brought changes in lending strategies. Managed by the
Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers
and fishermen dramatically expanded. The number of rural bank branches doubled
between 1977 and 1985, to more than 3,330. Denationalization and private industrial
growth led the Bangladesh Bank and the World Bank to focus their lending on the
emerging private manufacturing sector. Scheduled bank advances to private agriculture,
as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY
1987, while advances to private manufacturing rose from 13 percent to 53 percent.
The transformation of finance priorities has brought with it problems in administration.
No sound project-appraisal system was in place to identify viable borrowers and projects.
Lending institutions did not have adequate autonomy to choose borrowers and projects
and were often instructed by the political authorities. In addition, the incentive system for
the banks stressed disbursements rather than recoveries, and the accounting and debt
collection systems were inadequate to deal with the problems of loan recovery. It became
more common for borrowers to default on loans than to repay them; the lending system
cyberstudentsbd.wordpress.com
was simply disbursing grant assistance to private individuals who qualified for loans
more for political than for economic reasons. The rate of recovery on agricultural loans
was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a
result of this poor showing, major donors applied pressure to induce the government and
banks to take firmer action to strengthen internal bank management and credit discipline.
As a consequence, recovery rates began to improve in 1987.
The National Commission on Money, Credit, and Banking recommended broad structural
changes in Bangladesh's system of financial intermediation early in 1987, many of which
were built into a three-year compensatory financing facility signed by Bangladesh with
the IMF in February 1987.
One major exception to the management problems of Bangladeshi banks was the
Grameen Bank, begun as a government project in 1976 and established in 1983 as an
independent bank. In the late 1980s, the bank continued to provide financial resources to
the poor on reasonable terms and to generate productive self-employment without
external assistance. Its customers were landless persons who took small loans for all
types of economic activities, including housing. About 70 percent of the borrowers were
women, who were otherwise not much represented in institutional finance. Collective
rural enterprises also could borrow from the Grameen Bank for investments in tube wells,
rice and oil mills, and power looms and for leasing land for joint cultivation. The average
loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the
maximum was just Tk18,000 (for construction of a tin-roof house). Repayment terms
were 4 percent for rural housing and 8.5 percent for normal lending operations.
The Grameen Bank extended collateral-free loans to 200,000 landless people in its first
10 years. Most of its customers had never dealt with formal lending institutions before.
The most remarkable accomplishment was the phenomenal recovery rate; amid the
prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4
percent of Grameen Bank loans were overdue. The bank had from the outset applied a
specialized system of intensive credit supervision that set it apart from others. Its success,
though still on a rather small scale, provided hope that it could continue to grow and that
cyberstudentsbd.wordpress.com
it could be replicated or adapted to other development-related priorities. The Grameen
Bank was expanding rapidly, planning to have 500 branches throughout the country by
the late 1980s.
Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting
the growth of domestic private credit and government borrowing from the banking
system. The policy was largely successful in reducing the growth of the money supply
and total domestic credit. Net credit to the government actually declined in FY 1986. The
problem of credit recovery remained a threat to monetary stability, responsible for serious
resource misallocation and harsh inequities. Although the government had begun
effective measures to improve financial discipline, the draconian contraction of credit
availability contained the risk of inadvertently discouraging new economic activity.
Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to
slightly more than 2 months worth of imports. This represented a 20-percent increase of
reserves over the previous year, largely the result of higher remittances by Bangladeshi
workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion.
Because of Bangladesh's status as a least developed country receiving concessional loans,
private creditors accounted for only about 6 percent of outstanding public debt. The
external public debt was US$6.4 billion, and annual debt service payments were US$467
million at the end of FY 1986.
In March 1987 Bangladseh Krishi Bank was bifurcated and another specialized bank
emerged as Rajshai Krishi Unnayan Bank for Rajshai Division. Bank of Small Industries
and Commerce Ltd. (BASIC) started its operation as a private bank from September
1988. Later on BASIC was brought under direct control of the government and was
reckoned as a specialized bank with effect from June 1993. From July 1995 again BASIC
was categorized as a 100% state owned bank. In 1997, Government decided to treat this
bank as a specialized bank again. So in it booklet, the BASIC has been treated as a
specialized bank.
cyberstudentsbd.wordpress.com
Now the commercial banking system dominates Bangladesh’s financial sector.
Bangladesh Bank is the central bank of Bangladesh and the chief regulatory authority in
the sector. Its prime jobs include issuing of currency, maintaining foreign exchange
reserve and providing transaction facilities of all public monetary matters. BB is
responsible for planning the government’s monetary policy and implementing it thereby.
The banking system is composed of four state owned commercial banks, five specialized
development banks, thirty private commercial banks and nine foreign commercial banks.
In 2012, the central bank has taken a decision to give licenses to six private banks and
two NRB Banks.
The new private banks are:
 Union Bank.
 Midland Bank.
 Madhumati Bank.
 Farmers’ Bank.
 South Bangla Agriculture and Commerce Bank.
 Maghna Bank.
1.1.5 Number of Banks in Bangladesh
The banking system of Bangladesh is dominated by the 4 Nationalized Commercial
Banks in which 2 is totally controlled by government and 2 (Rupali Bank & Janata Bank)
are controlled by both government and private sector which to gather controlled about
54% of deposits and operated 7536 branches ( 54% of the total ) as of December 31,
2010.
The nationalized commercial banks are:
 Sonali Bank Ltd.
 Agrani Bank Ltd.
cyberstudentsbd.wordpress.com
 Rupali Bank Ltd.
 Janata Bank ltd.
Services provided by nationalized banks are stated below:

Personal Banking.

Corporate Banking.

Project Finance.

SME Finance.

Consumer Credit.

International Banking.

Trade Finance.

Loan Syndication.

Foreign Exchange Dealing.

Rural and Micro Credit.

NGO-Linkage Loan.

Investment.

Government Treasury Function.

Money Market Operation.

Capital Market Operation.

Foreign Remittance.
cyberstudentsbd.wordpress.com
Private Commercial Banks:
These types of banks are regulated by Bangladesh Bank. Private Banks are the highest
growth sector due to the dismal performance of government banks above. They tend to
offer better services and products. Now 32 private commercial banks are running their
operations in Bangladesh. A list of private commercial banks operating in Bangladesh
has been placed in ‘Appendix-B’.
The main services provided by these banks are stated below:

Retail Banking.

Corporate Banking.

SME Banking.

NRB Banking.

Investment Banking.

Merchant accounts and merchant banking services.

Project Finance.

Loan Syndication.

Money Transfer.

Custodial Services.

Brokerage Services.

Locker Service.
Foreign Commercial Banks:
cyberstudentsbd.wordpress.com
Now 10 Foreign Commercial banks are running their operations in Bangladesh. These
banks are also providing modern banking facilities to their clients. A list of foreign
commercial banks operating in Bangladesh has been placed in ‘Appendix-B’.
Development Banks:
A list of development banks or specialized banks operating is given below:
 Bangladseh Krishi Bank.
 Rajshahi Krishi Unnayan Bank.
 Bangladesh Development Bank Limited.
 Bank of Small Industries and Commerce.
Other specialized banks are:
 Ansar VDP Unnayan Bank.
 Bangladseh Samabai Bank Ltd.
 Grameen Bank.
 Karmasansthan Bank.
1.1.6 Islamic Banking in Bangladesh
Islamic Banking has experienced a phenomenal growth and expansion in Bangladesh in
the backdrop of strong public demand and support for the system long with its gradually
increasing popularity across the world. As a result, a number of full fledged Islamic
banks have been established, while a good number of conventional banks have come
forward to offer services complaint with Islamic Shari’ah through opening Islamic
branches along with conventional ones. There is a trend of conversion of conventional
banks into Islamic banks.
Bangladesh has a long and prestigious history of islami banking. In August 1974,
Bangladesh signed the Charter of Islamic Development Bank and committed itself to
cyberstudentsbd.wordpress.com
reorganize its economic and financial system as per Islamic Shari’ah. In January 1981,
Late President Ziaur Rahman while addressing the 3rd Islamic Summit Conference held
at Makkah and Taif suggested, ''The Islamic countries should develop a separate banking
system of their own in order to facilitate their trade and commerce.
This statement of Late President Ziaur Rahman indicated favourable attitude of the
Government of the People's Republic of Bangladesh towards establishing Islamic banks
and financial institutions in the country. Earlier in November 1980, Bangladesh Bank, the
country's Central Bank, sent a representative to study the working of several islamic
banks abroad.
In November 1982, a delegation of IDB visited Bangladesh and showed keen interest to
participate in establishing a joint venture Islamic bank in the private sector. They found a
lot of work had already been done and Islamic banking was in a ready form for
immediate introduction. Two professional bodies -Islamic Economics Research Bureau
(IERB) and Bangladesh Islamic Bankers' Association (BIBA) made significant
contributions towards introduction of Islamic banking in the country. They came forward
to provide training on Islamic banking to top bankers and economists to fill-up the
vacuum of leadership for the future Islamic banks in Bangladesh.
They also held seminars, symposia and workshops on Islamic economics and banking
throughout the country to mobilize public opinion in favor of Islamic banking.
Their professional activities were reinforced by a number of Muslim entrepreneurs
working under the aegis of the then Muslim Businessmen Society (now reorganized as
Industrialist & Businessmen Association). The body concentrated mainly in mobilizing
equity capital for the emerging Islamic bank. At last, the long drawn struggle to establish
an Islamic bank in Bangladesh became a reality and Islami Bank Bangladesh Limited
was established in March 1983 in which 19 Bangladeshi national, 4 Bangladeshi
institutions and 11 banks, financial institutions and government bodies of the Middle East
and Europe Including IDB and two eminent personalities of the Kingdom of Saudi
Arabia joined hands to make the dream a reality. Later, other three Islamic banks were
established in the country.
cyberstudentsbd.wordpress.com
Islami Bank Bangladesh Limited (IBBL) is considered to be the first interest free bank
in Southeast Asia. It was incorporated on 13-03-1983 as a Public Company with limited
liability under the companies Act 1913. The bank began operation on March 30,
1983.IBBL is a joint venture multinational Bank with 63.92% of equity being contributed
by the Islamic Development Bank and financial institutions like-Al-Rajhi Company for
Currency Exchange and Commerce, Saudi Arabia, Kuwait Finance House, Kuwait,
Jordan Islamic Bank, Jordan, Islamic Investment and Exchange Corporation, Qatar,
Bahrain Islamic Bank, Bahrain, Islamic Banking System International Holding S. A.,
Luxembourg, Dubai Islamic Bank, Dubai, Public Institution for Social Security, Kuwait
Ministry of Awqaf and Islamic Affairs, Kuwait and Ministry of Justice, Department of
Minors Affairs, Kuwait. In addition, two eminent personalities of Saudi Arabia namely,
Fouad Abdul Hameed Al-Khateeb and Ahmed Salah Jamjoom are also the sponsors of
IBBL. The total number of branches as of December 2001 stood at 121. The authorized
capital of the bank is Tk. 500 million and subscribed capital is Tk. 160 million.
Al-Baraka Bank Limited often called the second Islamic bank in Bangladesh,
commenced banking business as a scheduled bank on May 20, 1987. It is a joint venture
enterprise of Al-Baraka Investment and Development Company a renowned financial and
business house of Saudi Arabia, Islamic Development Bank, a group of eminent
Bangladesh industrialists and the Government of Bangladesh. The authorized capital of
the bank is Tk 600 million and the paid up capital is Tk. 204.07 million.
The Bank currently operates 34 branches throughout the country. Apart from extending
conventional commercial banking facilities to its customers, the bank has also given
substantial financial support to the development of industrial and real estate projects.
Al-Arafa Islami Bank Bangladesh Limited commenced its business as a scheduled
bank on September 27, 1995. The authorized capital of the bank is Tk. 1,000 million
while it’s paid up capital is Tk. 101.20 million. The Bank follows the Shari’ah principles
in investment and invests its funds under Mudaraba, Musharaka, Bai-Muajjal, Bai-Salam,
etc. Up to 2001, the Bank has been operating its business through 40 branches all over the
country.
cyberstudentsbd.wordpress.com
Social Investment Bank Limited is another bank guided by the Islamic principles. It
started its journey in November 1995. Its authorized capital is Tk. 1,000 million and paidup capital is Tk. 118.36 million. Up to September 2001, the Bank has been operating its
business through 15 branches.
Definitions and terms used in Islamic Banking operation:
The following terms as used, if not repugnant to the subject or affairs, shall have the
following meaning:
 ‘Shari’ah’ means such rules and regulations as have their origin in the Holy
Quran and Sunnah to govern all aspects of human life.
 ‘Islamic Bank’ means such a banking company or an Islamic banking branch(es)
of a banking company licensed Bangladesh Bank, which follows the Islamic
Shari’ah in all its principles and modes of operations amd avoids receiving and
paying interest at all levels.
 ‘Islamic Banking Business’ means such banking business , the goals, objectives
and activities of which is to conduct banking business/ activities according to the
principles of Islamic shari’ah and no part of the business is either in form and
substance has any element not approved by Islamic sharia’ah.
 ‘Branch or Branch Office’ means any branch or branch office of islamic bank
company or office or branch of such interest based conventional banks which run
Islamic banking business
 ‘Depositor’ means some one who holds with any Islamic banking company any
account namely current based Al-Wadiah principles, savings or loan and short
term deposit accounts under Mudaraba Principles.
 ‘Investment’ means any such modes of financing which Islamic banking company
does in accordance with principles of Shari’ah or as per the Shari’ah approved
cyberstudentsbd.wordpress.com
modes like Mudaraba, Musharaka, Bai- Murabaha, Bai- Muazzal, Istisna, lease,
Hire-Purchase under Sharikatul melk, etc.
 ‘Client’ means such a person or institution who/which has any business
relationship with Islamic banking company.
 ‘Compensation’ means such financial penalty as is imposed by a Islamic banking
company over and above the amount of installment when a client fails to repay
bank’s investment on due dates as per agreement executed by him.
Bangladesh is one of the largest Muslim countries in the world. The people of this
country are deeply committed to Islamic way of life as enshrined in the Holy Qur’an and
Sunnah. Naturally it remains a deep cry in their hearts to direct and design their economic
lives in accordance with the precepts of Islam. The establishment and commencement of
Islamic banks in Bangladesh, is true reflection of this inner urge of its people.
In our banking sector there are seven banks which are backed by Islamic Shari’ah and
approved principles according to Qur’an and Sunnah. First Islamic bank of this country
Islami Bank Bangladesh Limited (IBBL) was established in 1983. This was in fact the
only Islamic bank in Southeast Asia. Other Islamic banks in the current market are:
 EXIM Bank Ltd.
 Shahjalal Islami Bank Ltd.
 First Security Islami Bank Ltd.
 Al-Arafah Islami Bank Ltd.
 Social Islami Bank Ltd.
 ICB Islami Bank Ltd.
cyberstudentsbd.wordpress.com
CAMELS Rating Status of Islamic Banks Operating in Bangladesh
 Strong: Islami Bank Bangladesh Limited (IBBL).
 Satisfactory: EXIM Bank Ltd., Shahjalal Islami Bank Ltd.
 Fair: Al-Arafah Islami Bank, First Security Islami Bank.
 Marginal: Social Islami Bank Ltd., ICB Islami Bank Ltd.
Strong
IBBL
Shahjalal
Satisfactory
EXIM,
Marginal
Social Islami
Fair
Al- Arafah, First
ICB Islami
Al-Arafah
Security
Social
Rating
First SecurityFig: CAMELS
ICB Islami
1.2 Objective of the Study
First objective of writing this report if to fulfill the partial requirement of the BBA
Program. In this report an attempt was made to give an overview of ‘Modes of
Investment of Islami Bank Bangladesh Limited’ in particular and ‘Islami Bank
Bangladesh Limited’ (IBBL) in general.
The objectives of this study:
Following are the main objectives of this study-
cyberstudentsbd.wordpress.com
 To study the legal framework of ‘Islamic Banking’ in Bangladesh.
 To study different modes of investment of Islami Bank Bangladesh
Limited (IBBL).
 To make a comparative study of investment under different categories.
 To pin point the profitability of different categories of investment.
1.3 Methodology of the Study
Extensive literature survey was made on this topic to successfully complete the study and
this thing has helped me to gather a clear cut idea about the different modes of investment
of Islami Bank Bangladesh Limited (IBBL) in the context of today’s modern challenging
and advanced banking sector.
Sources of information:
Both primary and secondary data sources were used to complete this report.
 Primary Data Sources: Primary data were collected from bank officials on the
basis of checklist regarding to the different modes of investment of Islami Bank
Bangladesh Limited (IBBL) & its operation.
 Secondary Data Sources: Secondary Data were collected from annual reports of
Islami Bank Bangladesh Limited (IBBL) for a period of five years, other
documents of the IBBL, Bangladesh Bank’s circulars, websites etc.
Analytical Review:
Secondary Data were tabulated and analyzed for drawing conclusion.
cyberstudentsbd.wordpress.com
1.4 Limitations of the Study
The study suffers from the following limitations:
 The study was limited to only one islami bank- Islami Bank Bangladesh Limited
(IBBL).
 This study covered only the ‘Investment’ operation of Islami Bank Bangladesh
Limited (IBBL).
 Inadequate published information about the bank also acted as limiting factor.
 Insufficient information about Islamic banks kept in the database of Bangladesh
Bank also hindered the study.
 Some data could not be collected for confidentiality or secrecy of management.
 Time and resource constraints also acted as limiting factors.
cyberstudentsbd.wordpress.com
cyberstudentsbd.wordpress.com
2.1 Related Literatures:
Many research works have been conducted in the field of Islamic Banking, a brief
summary of some earlier research works relevant to the concept of the operation and
investment mechanism of Islamic banking are stated below:
Dr. Kamran Nadri (2008)1 , in his thesis titled ‘A Critique of Islamic Banking and
Finance: Harmonization of Fatawa (Islamic Opinions) and the Nature of Modern
Economic Life’ stated that from dawn of Islamic civilization, fuqaha (Islamic jurists)
served the Islamic society as the middlemen making inquiry into Qura’n and the tradition
of the prophet (PBUH) to find out the solutions for the growing queries of the everyday
life. The queries of the early Muslims in the primitive Islamic societies would have been
aroused from the expediencies of the era they lived in. The economic life that they were
realizing was an agrarian economy, the concept of wealth in their mind was real assets,
and the circulating money ought to serve the economy as a mere means of exchange. In
these circumstances, the fatwas of the preceding Islamic jurists was quite consistent with
the time span they lived through. Today, however, the state of affairs has vividly altered.
A huge nominal sector alongside with vital institutional changes affects the modern
economic life. A person may be wealthy today without holding any kind of the real
assets. Instead, a personal wealth inventory includes paper assets. The lending process in
the modern time is not informally carried out between two individuals in an uncontrolled
environment. Instead, it is being performed formally under the new institutions protecting
both borrowers and lenders in nearly competitive markets. Nevertheless, the fatwas of the
Islamic jurists are yet as the same as they were in the agricultural era. This implies a
slight change in Muslim scholars’ attitudes towards the underpinnings of the modern era.
1
Kamran Dr. Nadri, A Critique of Islamic Banking and Finance: Harmonization of
Fatawa (Islamic Opinions) and the Nature of Modern Economic Life. Department of
Economics, Imam Sadiq University P.O. Box: 14655-159, Tehran, Iran.
cyberstudentsbd.wordpress.com
Monzer Kahf ( 2004)2, in his paper titled ‘Islamic Banks: The Rise of a New Power
Alliance of Wealth and Shari'a Scholarship’ stated that the rise of Islamic capital may be
looked at in the history of the Middle East and the Muslim World as the economic phase
of independence that followed the political phase. The last three decades of the twentieth
century witnessed the emergence of Islamic banks as growing centres of economic power
in most Muslim and Arab countries. Islamic banks were accompanied by a new alliance
with the ulama, or shari'ah scholars. Such an alliance came about as a result of the
pressing needs of the new Islamic bankers for legitimacy and recognition. While this
alliance benefited its parties in several ways, its growth in many Arab and Muslim
countries created two noteworthy effects on the socio-political scene: an enabling
economic/political power was generated for the implementation of shari’ah, even under
adverse reactions from the dictatorial governments; and a gradual moderation effect on
the political lslamists that allows for reconciliatory compromises with the prevailing
regimes. The bankers' allied ulamas role as leaders of public opinion gained acceptance
from both governments and Islamists. They were instrumental in bringing about these
effects, yet it was, in a sense, a dialectical material development because Islamic bankers
could not afford to ally themselves with either the Islamic intelligentsia or the political
islamists. After centuries of dormancy, the ulama have a new chance to playa crucial role
in the development of events in their countries, without being brushed aside by political
Islamic movements. On the other hand, however, development of Islamic banking and
Islamic capital in Sudan, Turkey, Iran and Pakistan took different paths, unique for each
of these countries, with completely different outcomes with regard to the creation of new
economic and political power centers and structures.
2
Kahf Monzer, Islamic Banks: The Rise of a New Power Alliance of Wealth and Shari'a
Scholarship. Edinburgh University Press, 2004, pp. 17-36.
cyberstudentsbd.wordpress.com
Nasiruddin Ahmed, (1993)3 , presented a paper entitled ‘Working of an Islamic Bank: A
Case Study of Islami Bank Bangladesh Limited (IBBL)’ at a seminar held in U.K. in
May, 1999. He mentioned in his paper that IBBL adopted a seven year plan in 1995 up to
the year 2002. The existing investment products of this bank are: Bai Murabaha, Bai
Muajjal, Hire Purchase Under Shirkatul Melk (HPSM), Mushakara etc. This bank has
side by side; introduced as many as ten special investment schemes and seven more
schemes are in the process of introduction. He showed a comparative position of ‘Islamic
Banks’ in Bangladesh ( IBBL, AL-Baraka, AL-Arafah , Social Islami Bank etc. ) but didi
not make any comparison between Islamic & conventional Banks in his paper.
M.A. Hamid, (1999)4, presented a paper at the international conference on ‘Islamic
Economics’ in the 21st century (held in Malaysia from 9 to 12 August 1999) entitled
‘Islamic Banking In Bangladesh: Expectations and Realities’. He observed that the
Islamic banking that is now being practiced is fundamentally different from conventional
banking system. The author also argued that these two types of banks differ only in
appearance but not in substance.. He wished that for its verification, two things might be
required: a clear picture about expectations out of the true Islamic banking system and an
assessment of its realities.He compared briefly between performance of IBBL and
conventional two banks Arab Bangladesh Bank Ltd. and Pubali Bank ltd
3
Ahmed Nasiruddin, (1999), Working of an Islamic Bank: A Case Study of Islami Bank
Bangladesh Limited (IBBL)- a paper presented at the seminar on ‘Islamic Economies
Finance’, held in U.K. in May 1999 jointly organized by Islamic Foundation, U.K. : The
Islamic Development Bank and Loughborough University, Mark Field Conference
Center, U.K.
4
Hamid, M.A. (1999) , Islamic Banking in Bangladesh: Expectations and Realities, A
paper presented at the international conferences on Islamic Economics in the 21st century
held in Malaysia from 9 to 12 August 1999, Organized jointly by International Islamic
University Malaysia (IIUM) and Islamic Research and Training Institute (IRTI) of IDB,
Malaysia.
cyberstudentsbd.wordpress.com
Ahsan, (1988)5, wrote an article on ‘Islam and Modern Banking System’. He examined
some principles and objectives of Islamic and conventional banking system. He viewed
that Islamic banks performed the essential functions of financial intermediation between
the savers and investors. While the conventional banks assured guaranteed return on the
depositors, leaving the risk of investment entirely to the borrowers. He did not present
any comparative analysis on the modes of investment.
Khan, (2012)6, wrote an article on the profit and loss sharing modes of Islamic finance
namely; Mudharaba and Musharaka, entitled ‘Discourses on Islamic Banking and
Finance: A Review’. He observed that Shari’ah issues related to Islamic finance are still
controversial in nature, as there is no similarity of opinions among the scholars and jurists
on the issues like Tawarruq, Murabaha, Sukuk, etc. While observing the functioning of
various Islamic banks in different countries, it appears that same investment products are
explained differently mainly because of either the maslak of the jurist or socio economic
conditions of those particular countries. In this respect it can also be seen that, what the
jurists of Arab world consider most appropriate to Shari’ah guidelines is found to be
different in interpretation and practice in the south East Asian region Malaysia and
Indonesia. Moreover In the balance sheet of any Islamic bank one can see the share of
Mudarabah and Musharakah is very less whereas the other modes of finance which are
debt-based have got a big share
5
. Ahsan, A.S.M. Fakrul (1988), Islam and modern Banking System. Thoughts on
Economics, Vol. ix, No 1 & 2 Dhaka: Islamic Economic Research Bureau (IERB).
6
. Khan, Kashif Hasan (2012), Discourses on Islamic Banking and Finance: A Review.
International Journal of Business and Management Tomorrow. Vol. II No. 6: Society for
Promoting International Research & Innovation (SIRI).
Chakma and others, (1995)7, made a study on ‘Managerial Performance of Islamic
Banking: A Critical Review’. The author observed that during the periods under review,
the bank followed the policy of expanding its operation through increasing the number of
cyberstudentsbd.wordpress.com
branches and employees which were accompanied by the rising trends of productivity
and profitability. The degree of success of bank however, could probably be further
increased if the system of planning and monitoring of various programs deposits
mobilization and investment were developed. The researchers found that the rate of
return of total investment, varied from one year to another.
7
. Chakma , Pradanendu Bikash, Islam Md. Serajul and Karmakar Shyam Sundar.
Managerial Performance of Islamic Banking: A Critical Review. Journal of Business
Studies. Vol. xvi (2). Dhaka University.pp.85-102.
cyberstudentsbd.wordpress.com
2.1.2 Definition of Islamic Banking
The organization of Islamic Co-operation (OIC) defines Islamic bank as “A financial
institution whose statutes, rules and procedures expressly state its commitment to the
principles of Islamic Shari’ah and to the banning of the receipt and payment of interest on
any of its operation.”
According to Islamic Banking Act 1983 of Malaysia, “Islamic Bank is a banking
company which carries on Islamic Banking Business. Islamic Banking Business Means
banking business whose aims and operations do not involve any element which is not
approved by religion of Islam.”
According to A. Gait & A. C. Worthington, “Islamic finance is defined as a financial
service principally implemented to comply with the main tenets of Sharia (or Islamic
law). In turn, the main sources of Sharia are the Holy Quran, Hadith, Sunna, Ijma, Qiyas
and Ijtihad. The Holy Quran is the book of revelation given to the Prophet Hazrat
Muhammad (PBUH); Hadith is the narrative relating the deeds and utterances of Hazrat
Muhammad (PBUH); Sunna refers to the habitual practice and behaviour of Hazrat
Muhammad (PBUH) during his lifetime; Ijma is the consensus among religion scholars
about specific issues not envisaged in either the Holy Quran or the Sunna; Qiyas is the
use of deduction by analogy to provide an opinion on a case not referred to in the Quran
or the Sunna in comparison with another case referred to in the Quran and the Sunna; and
Ijtihad represents a jurists’ independent reasoning relating to the applicability of certain
Sharia rules on cases not mentioned in ether the Quran or the Sunna.”
So we can conclude in such a way that - Islamic banking (or participant banking)
(Arabic: ‫ )ايمالسية ال م صرف ية‬is banking or banking activity that is consistent with the
principles of sharia law and its practical application through the development of Islamic
economics. Sharia prohibits the fixed or floating payment or acceptance of specific
interest or fees (known as riba, or usury) for loans of money. Investing in businesses that
provide
goods
or
services
considered
also haraam ("sinful and prohibited").
contrary
to
Islamic
principles
is
cyberstudentsbd.wordpress.com
Although these principles have been applied in varying degrees by historical Islamic
economies due to lack of Islamic practice, only in the late 20th century were a number of
Islamic
banks
formed
to
apply
these
principles
to private or
semi-
private commercial institutions within the Muslim community. Alternatively, this is a
banking system whose operation is based on Islamic principles of transactions of which
profit and loss sharing (PLS) is a major feature, ensuring justice and equity in the
economy. That is why Islamic banks are often known as PLS-Banks.
2.1.3 Historical and Religious Context of Islamic Banking
The development process of Islamic finance commenced at the beginning of the 7th
Century when Hazrat Muhammad (PBUH)is professed to have received revelations
directly from Allah (the God of Islam). Moore (1997 p.3) regards the actual date as
613AD when Hazrat Muhammad (PBUH)
was about forty years old. At the time, the
doctrine of financial operations during Hazrat Muhammad (PBUH)’s era was derived
directly from the Holy Quran and the Sunna (traditions) of Hazrat Muhammad (PBUH).
Since then, while Islamic Sharia (Quran and Sunna) has ostensibly coordinated all
financial transactions between Islamic persons, there has been a continuing process of
mutual adjustment between Sharia and the actual financial practices of Muslim societies.
In Hazrat Muhammad (PBUH)’s lifetime, Islamic methods of finance often drew upon
examples from the Prophet’s experiences. Kahf and Khan (1993), for example, have
pointed out that Hazrat Muhammad (PBUH) was the first to use the Mudarabah (silent
partnership) in trade with rich women named Khadijah (R.) (who latter became his wife).
At the time, Muslims used to practice Musharakah (full partnership) when operating
large commercial enterprises under a profit/loss sharing principle. In addition, Hazrat
Muhammad (PBUH) made it permissible for people to use sale on credit (bai salam)
which was to finance consumption or production without usury and he encouraged
Muslims to provide benevolent loans (Quard Hassan) (Kahf and Khan 1993).
The ongoing Islamisation of Arabic countries meant that Sharia rapidly spread to both
Muslims and non- Muslims at this time. After the death of Hazrat Muhammad (PBUH) in
632AD, a great expansion of Islam occurred throughout the Arabic states and in large
cyberstudentsbd.wordpress.com
parts of the non-Arab world. The Islamic state in this ‘golden age’ was dominant in three
continents, Asia, Africa and Europe. According to Moore (1997) the Islamisation of
economic systems during the four centuries following Hazrat Muhammad (PBUH)’s
death reached Morocco and Spain to the west, India and China to the east, central Asia to
the north and Africa to the south. The extension of Islamic tools of finance is also
indicated by historical records of contracts registered between businessmen at the time,
including Mudarabah and Musharakah. Islamic finance practices continued largely
unchanged until the beginning of the 19th Century (Warde 2000).
2.1.3 History of Modern Islamic Banking
For an expanding economy, a developed and efficient banking system is indispensable.
Among others, it helps transfer of financial resources from surplus units to deficit units
and, hence, helps accelerate the pace of development by securing uninterrupted supply of
financial resources to people engaged in numerous economic activities. The tremendous
development that the world economy has experienced in the last few decades was
contributed by several factors among which, growing institutional supply of loan able
funds must have played the pivotal role. The role of banking is comparable to what an
artery system does in the human body. Both commercial banks and other development
financial institutions provide short-, medium-, and long-term credits to businesspersons
and entrepreneurs who usually take the lead in ventures of economic development.
Institutional supply of credit has been made possible by a system of financial intermediation organized in a way where conventional banks collect small savings from the
public by offering them a fixed rate of interest and advancing the loan able funds out of
the deposited money to enterprising clients charging relatively higher rates of interest.
The margin between these two rates is the bank's income. In addition, banks also provide
many other services to the public for which it receives service charges.
Despite the outstanding contribution of the conventional banking system (interest-based),
several ancient and modern economists are critical about its efficiency level. Some
economists consider the role of interest in the conventional banking mechanism as a
cyberstudentsbd.wordpress.com
major negative factor that contributes to cyclical fluctuations in the economy (Minsky
1982). Specifically, the ineffectiveness of interest rate as a stabilization tool during the
period of the Great Depression is a case to note. This eventually called for Keynesian
prescription of government intervention (Keynes 1964).
In response, though not exactly to that exigency but for quite a few other reasons, the
second half of the twentieth century witnessed a distinctly separate line of thinking on
banking. This was institutionalized at the end of third quarter and subsequently emerged
as a new system of banking called Islamic Banking {also called Profit-Loss-Sharing
Banking (PLS)}. The world has now been experiencing operation of as many as 250
Islamic banks and financial institutions in more than 50 countries, Muslim and nonMuslims.
There are religious as well as economic reasons, which have contributed to the
emergence of PLS-banking as an alternative to its conventional counterpart. It is the
prohibition of 'Riba' in the Quran that, according to the proponents of the PLS-system,
was the source of inspiration for establishing banks in line with Islamic Shari’ah
(Muslehuddin 1987, pp.24-27).
The basic intention behind establishing Islamic banks was the desire of Muslims to
reorganize their financial activities in a way that do not contradict the principles of
Shari’ah and enable them to conduct their financial transactions without indulging into
Riba (Ahmad 1992). These writers consider rate of interest in the conventional banking
mechanism synonymous to Riba, the term as used in the Quran [2:275; 30:39]. One of
the reasons for this is that the outcome of the productive effort is uncertain, and so
interest necessarily involves an element of Gharar, that is, uncertainty (Chapra 1985,
p.64). On this religious ground, proponents of the PLS-system urge the Islamic
community to avoid all transactions with institutions that are interest based.
The economic reason derived from a verse of the Quran providing inspiration to devise
an interest-free financial system has been substantiated in the way that interest, instead of
increasing wealth, reduces it [30:34]. The primary reason of why the Quran has taken
such a hard approach towards interest is that Islam stands for establishing a just
cyberstudentsbd.wordpress.com
economic system free from all kinds of exploitation. Further, Muslim economists
consider depression and stagflation very often found in the capitalist world as an
outcome of the financial system based on interest.
The first attempt
Interestingly, the concept of Islamic Banking is several decades old. The first attempt to
establish an Islamic financial institution took place in Pakistan in the late 1950s with the
establishment of a local Islamic bank in a rural area (Wilson 1983). Some pious
landlords who deposited funds at no interest, and then loaned to small landowners for
agricultural development initiated the experiment. The borrower did not pay interest on
the credit advanced, but a small charge was levied to cover the bank's operational
expenses. The charge was far lower than the rate of interest. Although the experience
was encouraging, two main factors were responsible for its failure. First, the depositors'
landlords regarded the deposits as a one-time event. With the increasing number of
borrowers the gap between available capital and credit demanded was huge. Secondly,
the bank staff did not have complete autonomy over its operation; depositors showed
considerable interest in the way of their operation.
The second attempt
The second pioneering experiment of putting the principles of Islamic banking and
finance into practice was conducted in Egypt from 1963 to 1967 through the
establishment of the Mit Ghamr Savings Bank in a rural area of the Nile Delta. The
experiment combined the idea of German savings banks with the principles of rural
banking within the general framework of Islamic values. The bank's operation was based
on the same Islamic principle i.e. no-interest to the depositors or from the borrowers.
Unlike the Pakistani bank, the borrower had to have deposits in the bank in order to
request a loan. The experiment soon became successful; more branches were opened in
different parts of the country, and the amount of deposits increased. Hence, what started
as a single bank operation expanded to form a network of local savings banks. Although
the project made a good start and initial results were more than encouraging, it suffered a
setback owing to changes in the political atmosphere. Nevertheless, the project was re-
cyberstudentsbd.wordpress.com
vived in 1971 under the name of Nasser Social Bank. This was the first Islamic bank in
an urban setting based in Cairo. The bank is a public authority with an autonomous
status. Its purpose was mainly to promote social concerns such as granting of interestfree loans for small projects on a profit-loss-sharing basis, and assistance to the poor and
needy students for university and higher education. Because of these social functions,
Nasser Social Bank was granted an exemption from the Banking and Credit Law of 1957
in its initial stages.
The bank was originated under the Ministry of Treasury but it is now functioning under
the Ministry of Social Welfare and Insurance. Its capital comes from the funds allocated
by the President from extra budgetary resources, appropriation from the state budget, and
contribution from the Ministry of Awqaf .The principles of operation of the Naser Social
Bank are very similar to those of the Mit Ghamr Savings Bank. However, the latter
offers a full range of normal banking services and a wide range of investment activities
through equity participation.
Tabung Hajji: a successful attempt
Islamic banking, with a very different approach contemporary to that in Egypt, emerged
in Malaysia. It was a financial institution developed for the pilgrims of Malaysia. These
institutions were established in response to what was the contention of the Malaysian
Muslims that money spent on pilgrimage must be clean and untainted with 'Riba'. Since
this was not possible by depositing money with the ordinary banks, a special financial
institution had to be created. Consequently, Pilgrims Saving Corporation was established
in 1963, which was later on incorporated into the Pilgrims Management Fund Board
(Tabung Hajji) in 1969 (A. Ahmad 1993).
Other attempts
Next to follow was the Dubai Islamic Bank in 1975. The Dubai Islamic Bank is a public
limited company having its office at Dubai, U.A.E. with capital of 50 million Dirhams.
Since then, a number Islamic banks and financial institutions have been established in
cyberstudentsbd.wordpress.com
different parts of the world and have been functioning successfully
A significant development in Islamic banking has been the granting of an Islamic bank
license in Saudi Arabia to the fifty-year old "Al-Rajhi Company", a firm noted for its
currency, exchange and commercial activities, whose assets exceed $5 billion. The firm
started operation in 1985 under the name of "Al-Rajhi Banking Investment Corporation"
and has since developed active relationships with major manufacturing and trading
companies in Europe and several U.S. corporations. The emerging success of Al-Rajhi in
operating profitably in different regions of the world has increased pressure on the Saudi
government to go for full-fledged Islamic banking.
An example of multi-cooperation at the government level in the field of Islamic banking
is the Islamic Development Bank, which was founded in 1975 as a multi-national
corporation by several Muslim countries. The purpose of the bank is to support social
and economic development in Muslim nations within an Islamic Framework. The
subscribers of the capital are the founder governments and, as such, it was established by
government treaty.
In addition, an Islamic bank/investment company was established in Bahamas in 1977 as
a multi-national holding company under the name of Islamic Investment Company, ICC
limited. Its purpose was to establish 'Mudaraba' (partnership companies) in various parts
of Islamic countries. The company has established two 'Mudaraba' subsidiaries in
Sharjah and Pakistan.
second example of Islamic banking in the West comes from Luxembourg, where the
Islamic Banking System International Holding was established in 1978 as a joint-stock
company. Its purpose was to establish international Islamic banks in different parts of the
western countries where there A are communities of Muslims, and to participate in
investment projects in Islamic and non-Islamic countries. The company's investment
operations are spread over different parts of the world. As a holding company, it
established a new affiliated company in London in June 1983 under the name of Islamic
Finance House, and another in Denmark in 1982 under the name of the Islamic Bank of
Denmark.
cyberstudentsbd.wordpress.com
Dar-al-mal-al-Islami (DMI), based in Geneva, was established in 1981. DMI aims to
foster an Islamic financial system based on equity and social justice by incorporating
three types of institutions - banking, investment and insurance. Thus, DMI may be
considered as a major multi-national company, the activities of which consist of Islamic
investments, Islamic solidarity (insurance) and Islamic banking operations .DMI group
has adopted a high profile and ambitious campaign to open an Islamic bank and
investment in over thirty countries. The second major group is the Kuwait Finance House
(KFH). It was established in 1978. The Kuwait government and the remainder by private
Kuwait investors own Forty-nine percent of the KFH. A total value asset of KFH at the
end of 1987 was $3.92 billion with a deposit of $3.62 billion. The source of KFH's
liquidity is cheap deposits from faithful Muslims. The group has concentrated on large
scale project financing, particularly in real estate. The KFH does have a minimum
account size and, therefore, it could be argued that the institution only caters to the richer
members of the society.
Another dynamic Islamic banking conglomerate is the 'Al-Baraka' group, which operates
banks, investment companies, and financial advisory and management companies in
more than a dozen countries. It launched its activities only in 1982, but the group now
has a total asset of over $2.7 billion. It is considered to be one of the fastest growing
Islamic enterprises. The group has operations in Tunisia, Sudan, Bahrain, Turkey, and
Malaysia. It is the first group to obtain a license to launch Islamic banking in London.
2.1.4 Evolution of Islamic Banking
RIBA and its basic features
The word used by the Quran concerning 'interest' is Riba. The literal meanings of Riba
are money increase, increase of anything or increment of anything from its original
amount (Maududi 1979, p.84). However, all increases are not considered as Riba in
Islam. Money may increase in business activities as well. This increase is not at all
considered as Riba. The increase, instead of being prohibited (Haram), is approved
cyberstudentsbd.wordpress.com
(Halal) in Islam. Islam prohibits only those increases that are charged on the loan with a
prefixed rate.
Muslim scholars equate interest with Riba. In the Shari’ah, Riba technically refers to the
premium that must be paid by the borrower to the lender along with the principal amount
as a condition for the loan or for an extension in its maturity (Chapra 1985, p.64).
In other words, Riba is the predetermined return on the use of money. In the past there
has been dispute about whether Riba refers to interest or usury, but there is now
consensus among Muslim scholars that the term covers all forms of interest and not only
"excessive" interest (Khan 1985,p-52).
In the era of Ignorance (Jahiliah) moneylenders in Arabia charged a prefixed extra
amount on their money lent out. Some of them lent goods or crops and took back
prefixed extra amount on and above the principal amount. In those days the extra amount
charged on the principal amount of money or goods was also termed as Riba. The term
Riba in the quran has been used in the same sense.
Imam al Rajhi describes, "During the era of Jahiliah people invested their money and
charged Riba on a monthly basis, though the invested amount remained unchanged.
Money so invested was called back at the time of repayment. In case of the borrower
being unable to pay back, the lender extended the period of repayment enhancing the
amount to be paid on and above the principal amount." Abu Bakr al Jasas writes, "During
the period of Ignorance the lender and borrower came to an agreement that the borrower
would pay back within a specified period the principal amount along with the agreed
upon excess." Ibne Hajar Askalani says, "Excess goods or money charged on and above
principal amount is Riba.”
Thus, any prefixed extra amount charged on a specific amount of money or goods lent
out is called Riba.
Basic characteristics of Riba:
The most important characteristic of Riba is that it is the positive and definite result of
money when changed. In other words, when money begets money, without being
exchanged for goods or services, it is called Riba. Its basic characteristics are:
cyberstudentsbd.wordpress.com
 It must be related to loan ( Quard or Dayn);
 Riba is excess over and above the principal loan.
 Riba is charged or paid only as a condition of loan or time and no other
recompense, price or exchange value is apid fro the excess or Riba.
 Riba is related with time and become double and redouble and multiple with
passage of time.
 A prefixed amount of money to be paid when due;
 A time is fixed for the repayment.
RIBA and Profit
There are persons who try to equate Riba with profit. In effect, they are fundamentally
different from each other. These misunderstanding will be removed if we look at the
differences between Riba and Profit. These differences are highlighted below:
Differences between Riba and Profit:
Table: 2.01
Riba
Profit
1. When money is "charged", its imposed
positive and define result is Riba
1. When money is used in trading (for e.g.)
its uncertain result is profit.
2. By definition, Riba is the premium paid
by the borrower to the lender along with
principal amount as a condition for the loan.
2. By definition, profit is the difference
between the value of production and the
cost of production.
3. Riba is prefixed, and hence there is no
uncertainty on the part of either the givers or
the takers of loans.
3. Profit is post-determined, and hence its
amount is not known until the activity is
done.
4. Riba can not be negative, it can at best be
very low or zero.
4. Profit can be positive, zero or even
negative.
5. From Islamic Shari’ah point of view, it
is Haram.
5. From Islamic Shari’ah point of view, it
is Halal.
cyberstudentsbd.wordpress.com
Objectives of Islamic Banking
The primary objective of establishing Islamic banks all over the world is to promote,
foster and develop the application of Islamic principles in the business sector. More
specifically, the objectives of Islamic banking when viewed in the context of its role in
the economy can be stated as following:
 To offer contemporary financial services in conformity with Islamic Shari’ah;
 To contribute towards economic development and prosperity within the
principles of Islamic justice;
 Optimum allocation of scarce financial resources; and
 To help ensure equitable distribution of income.
These objectives are discussed briefly:
Offer Financial Services:
Interest-based banking, which is considered a
practice of Riba in financial
transactions, is unanimously identified as anti-Islamic. That means all transactions
made under conventional banking are unlawful according to Islamic Shari’ah. Thus, the
emergence of Islamic banking is clearly intended to provide for Shari’ah approved
financial transactions.
Islamic Banking for Development:
Islamic banking is claimed to be more development- oriented than its conventional
counterpart. The concept of profit sharing is a built-in development promoter since it
establishes a direct relationship between the bank's return on investment and the
successful operation of the business by the entrepreneurs.
Optimum Allocation of Resources:
Another important objective of Islamic banking is the optimum allocation of scarce
resources. The foundation of the Islamic banking system is that it promotes the
cyberstudentsbd.wordpress.com
investment of financial resources into those projects that are considered to be the most
profitable and beneficial to the economy.
Equitable Distribution of Resources:
Perhaps the must important objective of Islamic banking is to ensure equitable
distribution of income and resources among the participating parties: the bank, the
depositors and the entrepreneurs.
Basic Properties of Islamic Banking
Islamic banking is emerging in an era when the world is settling down to a free market
economy and when phenomenal changes are taking place in the global economy. A free
market economy visualizes three essential features- free trade, open capital market and
minimum government intervention. The vagaries of protectionism and regionalism are
transforming the economy to free trade and globalization. The changes could provide
ample scope for the Islamic banking to grow and work in competitive environment.
Islamic banking being an integral part of an Islamic economic system can be practiced
more effectively in an environment, which conforms to the doctrine of Islam. Thus there
are some essential requirements for a successful Islamic banking, such as:
Supportive Legal Framework and swift Judicial System:
An effective legal framework ensuring speedy justice is essential for a good society, it is
more so for the success of Islamic banking, because its investment risk is more than that
of a conventional interest-based bank as its dealings are on profit and loss basis.
Disciplined Entrepreneurship
It would be minimize cases of malfeasance and mismanagement. Besides, a banker must
extend from being merely a financier to a role-player in business, although a murabaha
transaction in Islamic banking does not provide an opportunity to a banker to share in
business, the Islamic banks generally limit themselves to being incentive partners for
their credit risk only. The real entrepreneurial role of Islamic bank needs, therefore, to be
increased.
cyberstudentsbd.wordpress.com
Conceptual Change from Credit Risk to Overall Risk Management
While it is difficult to predict, with any degree of certainty, the operating results of an
enterprise and magnitudes of profit and loss, all the same, it seems unjust if the party
providing the capital is guaranteed a fixed and predetermined rate of return, and the other
party undertaking the enterprise is made to bear the uncertainty alone. Under the
circumstances, an Islamic has not only focus on credit risk but also to view all the
business risks of the enterprises in which he has invested the bank money.
Strong Ethical Values:
The Islamic economic system offers a balance between the two extremes of public or
social and private or individual ownership of property. The success of Islamic banking in
a society is related to the extent of acceptability of the doctrine of trusteeship and
transformation of the self-interested and profit-oriented behavior of people in an altruistic
and value-oriented behavior.
Supreme Shari’ah Council:
The function of Shari’ah Council is maintaining Islamic banking activities in a country
within the orbit of Islamic injunctions are dependent on its legal status and extent of
implementation of its operation.
The opinion of Shari’ah Councils of different countries may not necessarily be uniform.
There is, therefore, a need for Supreme Shari’ah Council representing Muslim
community all over the world to decide about various issues confronted by Islamic banks.
A journey has been made in this direction by establishing the council of Islamic Fiqh
Academy at Jeddah, Saudi Arabia under auspices of the Organization of Islamic Cooperation (OIC) but its role has to be augmented.
Uniform Accounting Standards:
There is need for harmonization of financial reporting of Islamic banks in respect,
particularly of the following:
cyberstudentsbd.wordpress.com
 The significant accounting policies on which the statements are based should be
fully and clearly declared.
 The methods of translating foreign currency transactions would be appropriately
disclosed.
 Appropriate and sufficient disclosure regarding the quality of banks’ assets is of
much concern to the depositors.
 Additional disclosure of the nature of the financial contingencies and commitments
of the banks in their financial statements.
Committed Management
If the management of a bank is determined to step into the business of Islamic banking, it
can easily evolve a strategy for the game, formulate a plan for a specific time-frame and
implement it accordingly.
Progressive and Modern Outlook
In order to ensure successful management in Islamic banks, there is need to apply all the
available modern tools of managing corporate business, including management of human
assets, officers, information resources, marketing etc.
Body to Evaluate Islamic Financial Institutions
In order to ensure quality and standard in management of Islamic financial institutions
and to build confidence of the general public in Islamic banking, there is need to establish
some professional body responsible to define professional standards and ethics and other
aspects of Islamic financial institutions. It may also certify the level of financial health of
such institutions.
Treatment in Case of Loan Default
In time of loan default these banks don’t take any penalty for default which is one of the
major differences between Islamic and conventional banks.
cyberstudentsbd.wordpress.com
cyberstudentsbd.wordpress.com
The relationship between Banking System and Islam1
Islam
Shari’ah
Aqidah
Akhlaq
Ibadat
Muamalat
Political Activities
Economic
Activities
Banking &
Financial
Social Activities
Fig: The relationship between Banking System and Islam
1
Arif , M (1989)
cyberstudentsbd.wordpress.com
Difference between Conventional Bank and Islamic Bank :Table No 2.0
Banks
1. The functions and operating modes of
conventional banks are based on
manmade principles.
2. The investor is assured of a
predetermined rate of interest.
3. It aims at maximizing profit without
any restriction.
4. It does not deal with Zakat.
5. Leading money and getting it back
with interest is the fundamental function
of the conventional banks.
6. Its scope of activities is narrower when
compared with an Islamic bank.
7. It can charge additional money
(compound rate of interest) in case of
defaulters.
8. In it very often, bank's own interest
becomes prominent. It makes no effort to
ensure growth with equity.
9. For interest-based commercial banks,
borrowing from the money market is
relatively easier.
10. Since income from the advances is
fixed, it gives little importance to
developing expertise in project appraisal
and evaluations.
11. The conventional banks give greater
emphasis on credit-worthiness of the
clients.
12. The status of a conventional bank, in
relation to its clients, is that of creditor
and debtors.
13. A conventional bank has to guarantee
all its deposits.
Islamic Banks
1. The functions and operating modes of
Islamic banks are based on the principles of
Islamic Shariah.
2. In contrast, it promotes risk sharing
between provider of capital (investor) and
the user of funds (entrepreneur).
3. It also aims at maximizing profit but
subject to Shari’ah restrictions.
4. In the modern Islamic banking system, it
has become one of the service-oriented
functions of the Islamic banks to collect and
distribute Zakat.
5. Participation in partnership business is
the fundamental function of the Islamic
banks.
6. Its scope of activities is wider when
compared with a conventional bank. It is, in
effect, a multi-purpose institution.
7. The Islamic banks have no provision to
charge any extra money from the defaulters.
8. It gives due importance to the public
interest. Its ultimate aim is to ensure growth
with equity.
9. For the Islamic banks, it is comparatively
difficult to borrow money from the money
market.
10. Since it shares profit and loss, the
Islamic banks pay greater attention to
developing project appraisal and
evaluations.
11. The Islamic banks, on the other hand,
give greater emphasis on the viability of the
projects.
12. The status of Islamic bank in relation to
its clients is that of partners, investors and
trader.
13. Strictly speaking, and Islamic bank
cannot do that.
Conventional Bank
1. Loan
cyberstudentsbd.wordpress.com
Bank
Bank
4. Principle
Investment
3.
Goods
2. Cash
Payme
nt
Supplier
Islamic Bank
4. Cost plus
agreed profit
Bank
3. Goods
2.
Goods
1.
Cash
Payment
Supplier
Bank
Client
cyberstudentsbd.wordpress.com
2.2 Profile of Islami Bank Bangladesh Limited (IBBL)
2.2.1 Introduction
Bangladesh is one of the largest Muslim countries in the world. The people of this
country are deeply committed to Islamic way of life as enriched in the Holy Qur’an and
Sunnah. Naturally, it remains a deep cry in their hearts to fashion and design their
economic lives in accordance with the prospects of Islam. The establishment of Islami
Bank Bangladesh Limited (IBBL) on March 13, 1983, is the true reflection of this inner
urge of its people, which started functioning with effect from March 30, 1983. This bank
is the first in its kind in South-East Asia. It is committed to conduct all banking and
investment activities on the basis of interest free ‘Profit Loss System’. In doing so, it has
unveiled a new horizon and ushered in a new silver lining of hope towards metalizing a
long cherished dream of people of Bangladesh for doing their banking transactions in line
with what is prescribed by Islam. With the active co-operation and participation of
Islamic Development Bank (IDB) and some other Islamic banks, financial institutions,
government bodies and eminent personalities of Middle East and the Gulf countries,
Islami Bank Bangladesh Limited has by now earned the unique position of a leading
private commercial bank in Bangladesh.
2.2.2 The History of Islami Bank Bangladesh Limited (IBBL)
Islami Bank Bangladesh Limited (hereinafter called ‘IBBL’) was established on March
13,1983 as a public limited company under the Companies Act, 1913 (amended in 1994).
The bank started its commercial operation on March30,1983 under the ambit of Banking
Company’s Ordinance 1962, later on Banking Companies Act,1991 as the first interest
free Islamic Shari’ah based commercial bank. IBBL issued share to public in 1985 and
positioned in the Blue Chip Index of country’s both bourses i.e. ‘DSE 20 and CSE 30’.
Its authorized capital and paid up capital is Tk. 20000 Million and Tk. 10007.71
respectively. IBBL is the first ever issuer of Mudaraba Perpetual Bond in the country
worth of Tk. 3000 million. IBBL’s well diversified product line offers a wide range of
commercial banking services both assets based and liability based. It is pioneer in
introducing Islamic banking and created a strong brand image by offering wide range of
cyberstudentsbd.wordpress.com
Islamic investments and deposit schemes. The bank was sponsored by Foreign
Institutions, local institutions, a group of local businessmen representing various business
groups and important personalities of Middle East and Europe. It carries out its business
activities through 276 branches (including 30 SME Branches) situated in both urban and
rural areas. It is playing a pivotal role for development of the society through establishing
Islami Bank Foundation. The corporate head office of the bank is at its own premises at
Islami Bank Tower, 40 Dilkusha Commercial Area, Dhaka.
2.2.3 Aims and Objectives
 To conduct interest-free banking.
 To establish participatory banking instead of banking on debtor creditor
relationship.
 To invest on profit and risk sharing basis.
 To accept deposits on Mudaraba & Al-Wadiah basis.
 To establish welfare oriented banking system.
 To extend co-operation to the poor, the helpless and low income group for their
economic up liftmen.
 To play a vital role in human development and employment generation.
 To contribute towards balanced growth and development of the country through
investment operation particularly in less developed areas.
 To contribute in achieving the ultimate goal of Islamic economic system.
cyberstudentsbd.wordpress.com
2.2.4 Vision of IBBL
The vision of IBBL is to always strive to achieve superior financial performance, be
considered leading Islami Bank by reputation and performance:
Its goal is to establish and maintain the modern banking techniques, to ensure the
soundness and development of the financial system based on Islamic Principles and to
become the strong and efficient organization with highly motivated professionals,
working for the benefit of the people, based upon accountability, transparency and
integrity in order to ensure stability of financial systems.
IBBL will try to encourage savings in the form of direct investment.
IBBL will also try to encourage investment particularly in projects, which are more
likely to lead to higher employment.
2.2.5 Mission of IBBL
To establish Islamic Banking through the introduction of welfare oriented banking
system and also ensure equity and justice in all economic activities, achieve balanced
growth and equitable development through diversified investment operations particularly
in the priority sectors and less developed areas of the country. To encourage the socioeconomic development and financial services to the low-income community particularly
in the rural areas.
2.2.6 Strategic Objectives
 To ensure customers’ satisfaction.
 To ensure welfare oriented banking.
 To establish a set of managerial succession and adopting technological changes to
ensure successful development of an Islamic Bank as a stable financial institution.
 To emerge as a healthier and stronger bank at the top of the banking sector and
continue stable positions in ratings, based on the volume of quality assets.
cyberstudentsbd.wordpress.com
 To ensure diversification of investment by sector, size, economic purpose and
geographical location and expand need based Retail and SME/Women entrepreneur
financing.
 To invest in the thrust and priority sectors of the economy.
 To strive hard to become a employer of a choice and nurturing and developing talent
in a performance driven culture.
 To pay more importance in human resources as well as financial capital.
 To ensure lucrative career path, attractive facilities and excellent working
environment.
 To ensure zero tolerance on negligence in compliance of both Shari’ah and regulatory
issues.
 To provide impeccable and progressively better customer services using changed
technologies.
 To train and develop human resources continuously and provide adequate logistics to
satisfy customers’ need.
 To be excellent in serving the cause of least developed community and area.
 To motivate team members to talk the ownership of every job.
 To achieve global standard.
 To strengthen corporate culture.
 To ensure Corporate Social Responsibility (CSR) through all activities.
 To promote using solar energy and green banking culture and ecological balancing.
cyberstudentsbd.wordpress.com
2.2.7 Core Values
 Trust in Almighty Allah.
 Strict observance of Islamic Shari’ah.
 Highest standard of Honesty, Integrity & Morale.
 Welfare Banking.
 Equity and Justice
 Environmental Consciousness.
 Personalized Service.
 Adoption of Changed Technology.
 Proper Delegation, Transparency & Accountability.
2.2.8 Commitments
 To Shari’ah.
 To the Regulators.
 To the Shareholders.
 To the Community.
 To the Customers.
 To the employees.
 To other Stakeholders.
 To Environment.
2.2.9 General Banking Functions of IBBL
General banking activities of IBBL includes the following:
cyberstudentsbd.wordpress.com
a) Mobilization of deposits.
b) Receipts and payment of cash.
c) Handling transfer transaction.
d) Operations of clearing house.
e) Maintenance of accounts with Bangladesh Bank and other Banks.
f) Collection of cheques and bills.
g) Issue and payment of Demand Draft, Telegraphic Transfer and Payment Order.
h) Executing customers standing instructions.
i) Maintenance of safe deposit lockers.
j) Maintenance of internal accounts of the bank.
For the purpose of doing all the above noted tasks IBBL issues cheque books, Deposit
Account Operating Form, SS Cards, Ledgers, Cash Books, Deposit Account Ledgers,
prepares statements of accounts and pass books, bank statements, balance different
accounts and calculate profits.
2.2.10 Management of IBBL
Islami Bank Bangladesh Limited is being managed by a board of directors comprising
foreigners and local. An executive committee is formed by the board of directors for the
efficient and smooth operation of the bank. Besides a management committee looks
after the affairs of the bank.
Organizational Structure of IBBL
Managing Director
mM
Deputy Managing
Executive Vice
Director
President
cyberstudentsbd.wordpress.com
Assistant Vice
President
Vice President
Senior Principal
Officer
Principal Officer
Senior Vice
President
Section In Charge
& Officer
2.2.11 Principle Products or Services of IBBL
Islami Bank Bangladesh Limited (IBBL) offers all types of commercial banking services
based on Islamic Shari’ah. Major products of this bank are as follows:
Local Currency Deposit Accounts
Al-Wadiah Current Account.
Mudaraba Hajj Savings Account.
Mudaraba Waqf Cash Deposit Account.
Mudaraba Special Savings (Pension) Account.
Mudaraba Muhar Savings Account.
Mudaraba Savings Bond.
Mudaraba Monthly Profit Deposits Account.
Mudaraba Term Deposits Account.
Mudaraba Savings Deposits Account.
Mudaraba Special Notice Deposits Account.
Mudaraba NRB Savings Bond.
cyberstudentsbd.wordpress.com
Students’ Mudaraba Savings Account.
Foreign Currency Deposit Accounts
Foreign Currency Deposit (USD, EURO, GBP).
Mudaraba Foreign Currency Deposit.
FC Deposit ERQ.
Special Products & Services for expatriates
IBBL Online Money Transfer System (Spot Cash).
Central Account Opening System from Head Office for the NRBs.
Introduction of BEFTN System for Settlement of Third Bank Remittance.
SMS Notification to the Beneficiaries.
Investment Products
Bai Murabaha (Sale on agreed upon profit)
Bai Muazzal.
Hire Purchase under Shirkatul Melk.
Mudarabah.
Musharaka.
Bai-Salam.
Bai-As-Sarf.
MDB (Musharaka Documentary Bill).
MFCI (Murabaha Foreign Currency Investment)
cyberstudentsbd.wordpress.com
Welfare-oriented Special Investment Schemes
Household Durables Scheme.
Housing Investment Scheme.
Real Estate Investment Program.
Transport Investment Scheme.
Car Investment Scheme.
Investment Scheme for Doctors.
Small Business Investment Scheme.
Agricultural Implements Investment Scheme.
Rural Development Scheme.
Micro Industries Investment Schemes.
Women Entrepreneurs Investment Scheme.
Palli griha Nirman Beniyog Prakalpa.
NRB Entrepreneurs Investment Scheme (NEIS).
Solar Panel Investment Scheme (SPIS).
Other Services
ATM Services.
Other Banking & Value Added Services.
Foreign Remittance & Treasury Activities.
cyberstudentsbd.wordpress.com
2.2.12 Corporate Information (As on Annual Report 2011 of IBBL)
Table no: 2.03
Date of Incorporation
13th March,1983
Inauguration of 1st Branch
30th March, 1983
(Local Office)
Formal Inauguration
12th August 1983
Local Shareholders
41.32%
Foreign Shareholders
58.68%
Authorized Capital
20000.00 Million
Paid-up Capital
10007.71 Million
Deposits (Including Bills payable)
341,853.67 Million
Investments(Including
Investment
In 322,772.83 Million
Shares)
Total Foreign Exchange Business
716,058.00
Number of Branches
266 (Including 30 SME Service
Centers)
Number of SME Service Centers
30
Number of Shareholders
60550
Manpower
11465
Source: Annual Report of IBBL in 2011
cyberstudentsbd.wordpress.com
2.2.13 Achievements
National and International Rating s of IBBL
IBBL’s performance is evaluated by Bangladesh Bank, several credit rating agencies of
home and abroad as well as local press of both local and international.
International Press
“In the midst of difficult banking system known to be plagued by non- performing loans
(NPLs), one could easily conclude that it would be difficult to find a bank that is different
from norm. However, IBBL provides a refreshing change and is, thus, pleasant surprise.
Although it does not command the market share as the public sector banks, IBBL, which
claims to have little interference in lending from the government, has nonetheless,
managed to find a niche market of its own-says the Bank ATCHa New York based
International Credit Rating Agency in its January 30, 1998 issue.” “As a market leader
offering banking services based on the Islamic rule of Shar’ah , IBBL’s profitability trend
has been quite impressive. The bank’s ability to keep its Return on Asset (ROA) well
above the industry’s average reflected its resilience to possible shocks in the banking
system. Concerns over massive NPLs and under provisioning are common amongst local
banks. But this seems well resolved in IBBL. IBBL’s good performance and solid capital
base have indeed provided refreshing change found within a banking system saddled and
held back by huge NPLs” the above agency continued to comment in the same issue
National Press
“It is one of a few local banks according to CAMEL (Capital, Assets, Management and
Earnings & Liquidity) rating made by the Bangladesh Bank. It holds the highest amount
of liquidity among all banks and its ability to keep return on assets at 1.07 percent is well
above the banking sector’s average of 0.33 percent”- The Financial Express, Dhaka
commented in its issue of May 28, 1998. The Holiday in its 29 August, 1997 issue
carried out a report under the heading ‘Setting a precedence of sound banking’ and
commented “While the country’s banking system is burdened with bad debt portfolios
and also suffers from a liquidity shortage, the Islami Bank Bangladesh Limited (IBBL)
cyberstudentsbd.wordpress.com
has created a unique precedence by improving its reserve and deposit positions
substantially, making handsome profits, and offering attractive dividends to its share
holders and depositors.”
IBBL’s World Rating
As per Bankers’ Almanac (January 2001 edition) published by the Reed Business
Information, Windor Court, England, IBBL’s world Rank is 1771 among 3000 banks
selected by them. This position was 1902 among 4500 selected banks as on January 1999
edition. IBBL’s country Rank is 5 among 39 banks as per ratings made by above
Almanac on the basis of IBBL’S Financial Statements of the year 2001.
Award and Prizes: International & National Perspective
IBBL was awarded for several times by international and national organizations. The
Global Finance, a reputed London based quarterly magazine, awarded IBBL as the best
bank of the country for the year 1999 and 2000. IBBL has got the 2nd prize of National
Export Fair for its pavilion under the category of ‘Service Organization’
2.2.14 Membership of Different Organizations/Chambers
Local
 Bangladesh Institution of Bank Management (BIBM).
 The Institution of Bankers Bangladesh (IBB).
 Bangladesh Association of Banks (BAB).
 Bangladesh Foreign Exchange Dealers’ Association (BAFEDA).
 Central Shari’ah Board for Islamic Banks of Bangladesh.
 International Chamber of Commerce –Bangladesh.
Foreign
 International Association of Islamic Banks (IAIB), Jeddah, K.S.A.
cyberstudentsbd.wordpress.com
 Accounting and Auditing Organizations for Islamic Financial Institutions (AAOIFI),
Manama, Bahrain.
 General Council of Islamic Banks and Financial Institutions (GCIBFI). Manama,
Bahrain (IBBL is a member of its Executive Council).
 Society for Worldwide Inter-bank Financial Telecommunication (SWIFT).
2.2.15 5 Years’ Financial Performance of IBBL: At a glance:
Taka in million
Particulars
2007
2008
1
Authorized
Capital
5000.00
10000.00
2
Paid –up Capital
3801.60
4752.00
3
Total Equity
14957.74
18572.08
4
Deposits
including bills
payable
166325.29 202115.45 244292.14
291934.60 341853.67
5
Investment(inclu
ding investment
in shares &
securities)
165286.32 187586.55 225752.41
275493.94
322772.83
6
Investment
(excluding
investment in
shares &
securities)
144920.61 180053.94
214615.80
263225.13
305840.56
7
Investment
87.85%
90.17%
89.47%
Sl
2009
2010
2011
10000.00
20000.00
6177.60
7413.12
10007.71
23619.81
28400.03
33716.73
no
Deposit Ratio
(Excluding
Investment in
87.13%
89.08%
10000.00
cyberstudentsbd.wordpress.com
Shares &
Securities)(%)
8
Total Assets
250012.79 288017.19
340638.49
443684.79
502613.05
191362.35 230879.14
278302.84
330586.12
389192.12
(Including
Contra)
9
Total Assets
(Excluding
Contra)
10
Fixed Assets
3987.23
4407.22
6512.36
6748.44
7100.19
11
Net Investment
5161.60
7381.74
8293.54
10294.37
13618.31
3127.33
4212.50
4033.33
4362.64
6381.76
Income
12
Non Investment
Income
13
Total Income
17699.52
23756.33
25403.86
30128.90
38401.29
14
Net Profit After
1427.36
2674.80
3403.55
4463.47
4841.45
Tax
15
Import Business
137086.00 168329.00
161230.00
246281.00
301207.00
16
Export Business
66690.00
93962.00
106424.00
148421.00
178244.00
17
Remittance
84143.00
140404.00
194716.00
214629.00
236607.00
18
Number of
265
275
295
295
313
26488
33686
52164
58923
60550
correspondent
banks
19
Number
Shareholders
cyberstudentsbd.wordpress.com
20
Number of
186
206*
231*
251*
266*
23.60
22.76
27.12
23.48
27.78
3.00
4.33
4.59
4.46
4.84
70.00
83.00
89.00
90.00
83.98
46.83%
48.80%
48.52%
51.97%
52.08%
9.06%
9.56%
8.76%
8.65%
8.86%
0.79
0.73
0.74
0.72
0.73
13.00%
19.02%
16.93%
19.00%
17.42%
0.84%
1.27%
1.34%
1.47%
1.35%
17.88
10.78
12.87
13.29
11.27
1.69
2.05
2.18
2.52
1.96
Branches
21
Net Asset
Value(NAV) per
share (Taka)
22
Earning Per
Share (Taka)
23
Market Value
Per Share(Taka)
Highest
24
Gross Profit
Ratio (%)
25
Cost of Fund
(%)
26
Cost Income
Ratio
27
Return on
Equity (ROE)
(%)
28
Return on
Average Assets
(ROA) (%)
29
Price Earning
Ratio (Times)
30
Price Equity
cyberstudentsbd.wordpress.com
Ratio (Times)
*
Including 30 SME/Agriculture Branches.
The denomination of IBBL Shares has been changed from Tk. 100 to Tk. 10-each
with a market lot of 100 Shares with effect from 04.12.2011
Performance of IBBL (In Million Taka)
Graph-2.01: Financial Performance of IBBL
The above graph reflects that the performance of IBBL in 2010 was better than the
previous years. The year 2010 was successful a year of mobilization of deposit. The
deposit stood at Tk. 291934.94 million as on 31st December 2010 as against Tk. 244292
million of the proceeding year registering a growth of Tk. 47642 million, i.e. 19.50% as
compared to the growth rate of 20% of the banking sector during 2010. Investment of the
bank increased to Tk. 275493.94 million as on 31.12.2010 from Tk. 214616 million as on
31.12.2009 showing an increase of Tk. 60,877.94 million, i.e. growth 22.65% growth as
against 23.16% growth investment of the banking sector. IBBL with its sophisticated
software, motivated and efficient employees has consolidated its position as the market
cyberstudentsbd.wordpress.com
leaser in foreign remittance growth in 2009 as against 49% growth in 2010 which was
27.66% of whole banking sector during 2010. In 2011 the growth rate of remittance was
10.24%.
2.2.16 Graphical Representation of Some Important Indicators of IBBL
Graph-2.02: Net profit before tax of IBBLduring 2007-2011
Source: Annual Report of IBBL
Net Profit After Tax: 2007 to 2011
6000
Amount
5000
4000
3000
2000
Amount in Million Taka
1000
0
2007
2008
2009
2010
2011
Year
Graph-2.03: Net profit after tax of IBBLduring 2007-2011
Source: Annual Report of IBBL
cyberstudentsbd.wordpress.com
From the above graphs we can conclude that both the net profit before tax and net profit
after tax are showing an incraesing trend.
Graph-2.04: Classified investment of IBBLduring 2007-2011
Source: Annual Report of IBBL
The above diagram depicts that the classified investment was highest in 2011 among the
past five years.
Graph-2.05: Return on Equity of IBBLduring 2007-2011
Source: Annual Report of IBBL
cyberstudentsbd.wordpress.com
According to the above diagram the Return on Equity(ROE) was 13%, 19.02% ,16.93%,
19.00%, & 17.42% in the years- 2007,2008,2009,2010 & 2011 respectively. So the
highest ROE was in 2008.
Graph-2.06: Return on Average Asset of IBBLduring 2007-2011
Source: Annual Report of IBBL
The above diagram indicates that that ROA was the highest – 1.47% in 2010 but in 2011
it decreased and became 1.35%.
Graph-2.07: Earning Per Share of IBBLduring 2007-2011
The above diagram indicates Earning Per Share(EPS) was highest in 2011.In this year it
was Taka 4.84.
cyberstudentsbd.wordpress.com
cyberstudentsbd.wordpress.com
3.1 Different Modes of Investment of IBBL
3.1.1 Introduction
Various Islamic financial institutions, especially in Islamic countries offer various types
of investment products that are free of Riba or interest. An Islamic investment fund is
usually one in which a number of people pool their money and the money is in turn
invested in an Islamic legal manner.
Investment funds have been defined by the Accounting and Auditing Organization of
Islamic Financial Institutions (AAOIFI) as follows:
"Funds are investment vehicles, which are financially independent of the institutions that
establish them. Funds take the form of equal participating shares/units, which represent
the shareholders’/unit holders’ share of the assets, and entitlement to profits or losses.
The funds are managed on the basis of either mudaraba or agency contract."
Investment is the action of deploying funds with the intention and expectation that they
will earn a positive return for the owner (Brokington 1986, p.68). Funds may be
invested in either real assets or financial assets. When resources are used for purchasing
fixed and current assets in a production process or for a trading purpose, then it can be
termed as real investment. The establishment of a factory or the purchase of raw
materials and machinery for production purposes are examples in point. On the other
hand, the purchase of a legal right to receive income in the form of capital gains or
dividends would be indicative of financial investments. Specific examples of financial
investments are: deposits of money in a bank account, the purchase of Mudaraba
Savings Bonds or stock in a company. Ultimately, the savings of investors in financial
assets are invested by the respective company into real assets in the form of the
expansion of plant and equipment. Since Islam condemns hoarding savings and a 2.5
percent annual tax (Zakat) is imposed on savings, the owner of excess savings, if he is
unable to invest in real assets, has no option but to invest his savings in financial asset.
cyberstudentsbd.wordpress.com
3.1.2 Investment Objectives of IBBL
The objectives and principles of investment operations of the banks are:
 The investment of fund is strictly in accordance with the principles of Islamic
Shari’ah.
 To diversify its portfolio by size of investment, by sectors (public and private), by
economic purpose, by securities and by geographical area covering industrial,
commercial and agricultural activities.
 To ensure mutual benefit both for the Bank and the investment client by professional
appraisal of investment proposals, judicious sanction of investment, close and
constant supervision and montitoring therefore.
 To make invetsment keeping in view the socio-economic requirement of the country.
 To increase the number of potential investors by making participatory and productive
investment.
 To finance various developments schemes for poverty alleviation, income and
employment generation with a view to accelarating sustainable socio economic
growth and up lifment of the society.
 To invest in the form of goods and commodities rather than give out cash m,oney to
the invetsnment clients.
 To encourage social development enterprises.
 To shun even highly profitable investment in fields forbidden under Islamic Shari’ah
and harmful for the society.
cyberstudentsbd.wordpress.com
3.1.3 Investment Modes of IBBL
IBBL invests it smoney in various sectors of the economy through different modes
permitted by Shari’ah and Bangladesh Government. The modes of invetsment are as
follows:
Bai Mechanism
Share Mechanism
a) Bai
Murabaha
c) Bai-Salam.
a) Hire
Purcjhase
Under
Shirkatul
Melk.
d) Bai-Istisna.
b) Ijara
b) Bai Muajjal.
e) Bai-Assarf
These modes are discussed below:
3.1.3.1 Bai Modes
a) Bai Murabaha
a) Mudaraba.
Ijara Mechanism
b) Musharaka.
cyberstudentsbd.wordpress.com
Meaning of Murabaha
The terms "Bai-Murabaha" have been derived from Arabic words Bai and Ribhun. The
word 'Bai' means purchase and sale and the word 'Ribhun' means an agreed upon
profit."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 Shari’ah and the Law of the land to the buyer at
a cost plus an agreed upon profit payable today or on some date in the future in lump-sum
or by installments. The profit may be either a fixed sum or based on a percentage of the
price of the goods.
Types of Murabaha
In respect of dealing parties Bai-Murabaha may be of two types (IBBL 1986, pp.1-2):
-
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.
However, it should be noted here that the Islamic Bank acts as a financier in this
transaction. This is the case, not in the sense that the bank finances the purchase of
goods by the consumers; rather it is a financier by deferring payment to the seller of the
product. Thus, there is a chance that this transaction could resemble nothing more than
a loan for which interest (Riba) is earned, which is contrary to Islamic beliefs.
cyberstudentsbd.wordpress.com
Therefore, to avoid this potential misuse of the Bai-Murabaha relationship, the bank
should purchase the goods on behalf of the bank from the seller and sell the goods to the
buyer, receiving payment on behalf of the bank as well. In this way, the profits
generated by the transaction to each of the parties involved cannot be misconstrued as
interest or (Riba) profits.
There are some important features of Bai-Murabaha as given below.
1.
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.
2.
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.
3.
It is permissible to take cash/collateral security to guarantee the
implementation of the promise or to indemnify any losses that may result.
4. 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.
5. Stock and availability of goods is a basic condition for signing a BaiMurabaha 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.
6. 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.
7. The bank must deliver the goods to the client at the date, time, and place specified
in the contract.
8. 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
cyberstudentsbd.wordpress.com
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.
9. The price agreed to in the agreement is binding on both parties.
10.
It is permissible for the bank to contract with a third party to buy and receive
the goods on its behalf. This agreement must be a separate contract.
Steps of Bai-Murabaha
First Step: The client submits a proposal regarding his requirements of the bank. The
client sends a proposal with the specifications of the commodity to be acquired from the
bank. The proposal also indicates details regarding the date, time and place of delivery
as well as price and form of payment information. The bank responds by sending a
counter proposal either accepting the buyer's price or stipulating a different price.
Second Step:
The client promises to buy the commodity from the bank on a Bai-
Murabaha basis, for the stipulated price. The bank accepts the order and establishes the
terms and conditions of the transaction.
Third Step: The bank informs the client (ultimate buyer) of its approval of the
agreement to purchase. The bank may pay for the goods immediately or in accordance
with the agreement. The seller expresses its approval to the sale and sends the invoice(s).
Fourth Step: The two parties (the bank and the client) sign the Bai-Murabaha Sale
contract according to the agreement to purchase.
Fifth Step: The Bank authorizes the client or its nominee to receive the commodity
The seller
sends the commodity to the place of delivery agreed upon. The
client undertakes the receipt of the commodity in its capacity as legal representative and
notifies the bank of the execution of the proxy.
cyberstudentsbd.wordpress.com
The Bai-Murabaha has some legal rules. These rules are mentioned below (Ibid, pp.1416).
Rules of Bai-Murabaha
1. It is permissible for the client to offer to purchase a particular commodity,
deciding its specifications and committing itself to buy it on Murabaha for the
cost plus the agreed upon profit.
2. It is permissible that the mutual agreement shall contain various conditions
agreed upon by the two parties, especially with respect to the place of delivery,
the payment of a cash security to guarantee the implementation of the operation
and the method of payment.
3. It is permissible to stipulate the binding nature of the promise to purchase.
Thus, the agreement can only be satisfied by either fulfilling the promise to
purchase or by indemnifying the bank for any losses incurred if the promise to
purchase is not fulfilled.
4. It is a condition that the bank purchases the requested commodity (first
purchase contract) before selling it on Murabaha to the buyer. The contract in the
first purchase must be settled, in principle, between the source seller and the
bank.
5. It is permissible for the bank to authorize a second party including the buyer
to receive the commodity on its behalf. This authorization must be in a separate
contract, particularly if the buyer is going to receive the goods on behalf of the
bank. This is necessary to avoid any conflicts with the ensuing Murabaha sale.
6. Once the bank takes ownership of the goods, it is responsible for any
damages or defects. Thus, if the goods are damaged, the bank is liable and must
repair the damage prior to delivering the goods to the purchaser.
7. It is a condition that the Bai-Murabaha contract be drawn at the last phase.
That is after the promise to purchase and the purchase of the commodity in the
name of the bank and receipt of the commodity directly by the bank or through
an agent.
cyberstudentsbd.wordpress.com
8. The legal rules of Bai-Murabaha must be observed in drawing the contract of
the Murabaha sale connected with a promise to purchase.
Particularly
concerning the issue of the transparency of the cost of the first purchase and the
amount of profit because discrepancies lead to disputes, which may invalidate the
contract.
9. It is permissible to document the debt resulting from Bai-Murabaha by a
guarantor or a mortgage, like any other sale on credit. Further, it is permissible
that the mortgage accompanies the contract, because it is possible to take a
mortgage on actual debt as well as promised debt before it is realized. However,
the mortgage shall only be in effect if the debt is actually incurred.
The areas of application of Bai-Murabaha are discussed below:
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.
b) Bai Muajjal
Meaning of Bai-Muajjal
The terms "Bai" and "Muajjal" are derived from the Arabic words 'Bai' and 'Ajal'. The
word 'Bai' means purchase and sale and the word 'Ajal' means a fixed time or a fixed
period. "Bai-Muajjal" is a sale for which payment is made at a future fixed date or
within a fixed period. In short, it is a sale on credit.
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.
cyberstudentsbd.wordpress.com
There are some important features of Bai-Muajjal as given below (ABIIB):
Important Features of Bai-Muajjal
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. All goods purchased on behalf of a Bai-Muajjal agreement are the responsibility of
the bank until they are delivered to the client.
7. The bank must deliver the goods to the client at the time and place specified in the
contract
8. The bank may sell the goods at a higher price than the purchase price to earn profit.
9. The price is fixed at the time of the agreement and cannot be altered.
10. The bank is not required to disclose the profit made on the transaction.
cyberstudentsbd.wordpress.com
Some Observations
This type of financing by the bank is considered to be more risky than the other Islamic
modes of investment previously discussed. Therefore, the application/proposal for BaiMuajjal 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:
1. The bank may meet with the prospective client regarding his investment needs
and business experience prior to an application /proposal is submitted.
2. The bank may review the client's past performance and other financing
arrangements he may have had with the bank in the past.
3. The bank may review its current investment policy regarding this type of
financing arrangement to ensure the proposal meets bank guidelines.
It should be remembered that if the Bai-Muajjal investment is not secured by first class
collateral securities, it becomes more risky than investments under other modes of
Islamic banking.
The following points should receive attention before making any investment
decision under Bai-Muajjal :
1. Whether the goods that the client intends to purchase are marketable and have steady
demand in the market.
2. Whether the price of the goods is subject to frequent and violent changes.
3. Whether the goods are perishable in short or in long-term duration.
4. Whether the quality and other specifications of the goods as desired by the client can
be ensured.
5. Whether the goods are available in the market and the bank will be in a position to
purchase the Goods in time and at the negotiated price.
6. Whether the sale price of the goods is payable by the client at the specified future
date in lump sum or in Installments as per the agreement.
c) Bai- Salam
cyberstudentsbd.wordpress.com
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 in the following ways:
1. The seller receives advance payment in exchange for the obligation to deliver the
commodity at some later date. He benefits from the Salam sale by locking in a price for
his commodity, thereby allowing him to cover his financial needs whether they are
personal expenses, family expenses or business expenses.
2. 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 BaiSalam sale is usually less expensive than a cash sale. Finally a Bai-Salam agreement
allows the purchase to lock in a price, thus protecting him from price fluctuation.
Steps of Bai-Salam
1. 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.
2. Delivery and Receipt of the Commodity on the Specific due Date: There are
several options for delivery available to the bank
cyberstudentsbd.wordpress.com
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.
3. The Sale Contract: The bank agrees to sell the commodity for cash or a deferred
price, which is higher than the Salam purchase price. The buyer agrees to
purchase and to pay the price according to the agreement.
There are some rules for Bai-Salam as given below:
Rules of Bai-Salam
1. It is a condition that the commodity known by both parties to the agreement.
Misunderstandings about the commodity may lead to disputes, which could void
the contract.
2. It is a condition that the quality of the commodity be monitored closely, as very
little variation from specifications in the contract is allowable. If the commodity
cannot be monitored for quality standards, a Salam transaction is impermissible.
3. It is a condition that the commodity be deliverable on the due date. If there is
uncertainty about the ability to deliver the commodity at the due date, a Salam
transaction is impermissible.
4. It is permissible to draw a Salam sale contract for a total to be delivered
increments on different specified future dates.
5. It is a condition that the commodity is a liability debt. The seller is obliged to
deliver the commodity when it is due, according to the specifications stipulated
in the contract, whether or not his firm produces the commodity or obtained
from other firms.
6. Salam sales are impermissible on existing commodities because damage and
deterioration cannot be assured before delivery on the due date.
7. Salam is impermissible on Land lots and real estates.
cyberstudentsbd.wordpress.com
8. Salam is permissible on a commodity of a specific locality if it is assured that it
is almost always available in that locality and it rarely becomes unavailable.
9. It is a condition that the purchase price in Salam is specified and advanced to the
seller at the time of signing of contract.
10. It is a condition in a Salam sale that the due date is known to avoid confusion,
which may lead to a dispute.
11. It is a condition that the place of delivery be stated in the contract if the
commodity requires special handling and delivery arrangements.
12. It is permissible to take a mortgage on Salam debt to guarantee that the seller
satisfies his obligation by delivering the commodity on the due date.
13. It is impermissible for the buyer of a Salam commodity to sell the commodity
before receiving it. It is known that the Salam commodity is a liability debt to
the seller and not a commodity that exists. However, it is permissible for the
buyer to draw a parallel Salam contract without connecting it to the first Salam
contract.
Typical Bai-Salam transactions are discussed below:
Application of Bai-Salam
Salam sales are frequently used to finance the agricultural industry. Banks advance cash
to farmers today for delivery of the crop during the harvest season. Thus banks provide
farmers with the capital necessary to finance the cost of producing a crop. Salam sale are
also used to finance commercial and industrial activities. Once again the bank advances
cash to businesses necessary to finance the cost of production, operations and expenses
in exchange for future delivery of the end product. In the meantime, the bank is able to
market the product to other customers at lucrative prices.
In addition, the Salam sale is used by banks to finance craftsmen and small producers, by
supplying them with the capital necessary to finance the inputs to production in
exchange for the future delivery of products at some future date. Thus as has been
demonstrated, the Salam sale is useful in providing financing for a variety of clients,
cyberstudentsbd.wordpress.com
including farmers, industrialists, contractors and traders. The proceeds in a 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 exante. Also, there is no correlation in the relationship of cost of capital and rate of return
on capital.
d) Bai Istisna’a
Istisna’a Sale
Definition of Istisna'a Sale
cyberstudentsbd.wordpress.com
The Istisna'a sale is a contract in which the price is paid in advance at the time of the
contract and the object of sale is manufactured and delivered later (IDB 1992, p.28). The
majority of the jurists consider Istisna'a as one of the divisions of Salam, Therefore, it is
subsumed under the definition of Salam. But the Hanafie school of Jurisprudence
classifies Istisna'a as an independent and distinct contract. The jurists of the Hanafie
school have given various definitions to Istisna'a some of which are: "That it is a
contract with a manufacturer to make something" and "It is a contract on a commodity
on liability with the provision of work". The Purchaser is called 'Mustasnia' contractor
and the seller is called 'Sania' maker or manufacturer and the thing is called 'Masnooa',
manufactured, built, made (ABIIB). Islamic banks can utilize Istisna'a in two ways.
1. It is permissible for the bank to buy a commodity on Istisna'a contract then sell it
after receipt for cash or deferred payment.
2. It is also permissible for the bank to enter into a Istisna'a contract in the capacity
of seller to those who demand a purchase of a particular commodity and then
draw a parallel Istisna'a contract in the capacity of a buyer with another party to
manufacture the commodity agreed upon in the first contract.
Each transaction is deemed a separate contract with payment being made in cash either
immediately or on a deferred basis. Any disagreements that may arise are settled under
each contract separately according to the provisions therein. The steps of the Istisna'a
sale and the parallel Istisna'a have been discussed below.
Steps of Istisna'a Sale
Istisna'a Sale Contract: The Buyer expresses his desire to buy a commodity and brings a
request to purchase the commodity to the bank. The method of payment, whether cash or
deferred is set forth in the agreement. The bank agrees to deliver the commodity to the
buyer at some agreed upon time in the future.
The Parallel Istisna'a Contract: In order that the bank is able to deliver said commodity
in the Istisna'a agreement, the bank enters into a parallel Istisna'a agreement with a third
party to either manufacture or otherwise deliver-said commodity. Obviously, the bank
cyberstudentsbd.wordpress.com
stipulates a price that is lower than that agreed to in the original agreement and requires
delivery on or before the date stipulated in the original contract.
The seller, in the parallel agreement, agrees to manufacture the specific commodity and
to deliver it on the due date agreed upon.
Delivery and Receipt of the Commodity: The seller in the parallel Istisna'a agreement,
delivers the commodity to the bank on the agreed upon date. The bank, in turn, delivers
the product to the buyer of the original Istisna'a contract, in accordance with the original
agreement. In this way, all parties fulfill their obligations to the contract.
Rules of Istisna'a Sale
1. It is a condition in the Istisna'a contract to clearly define dimensions and
specifications of the product being purchased. This is important to ensure that there is no
room for dispute over what is required.
2. The Istisna'a contract is only used for objects that can be manufactured. It can not be
used to purchase corn, wheat, barley, fruit or any natural product
3. The object sold in a Istisna'a contract is a fixed liability debt and it is permissible for
the object to be a custom manufactured product, made in accordance with certain
specifications.
4. The maker should supply the materials. If they are supplied by the buyer, the contract
is Ijara and not Istisna'a
5. Once the contract is drawn the ownership of the asset is confirmed to the buyer and
the purchase price is confirmed to the manufacturer.
6. It is not a condition in the Istisna'a contract to advance the price. Usually part of the
price is paid in advance and the remainder is withheld until the time of delivery.
7. It is a condition that the time of delivery be specified in the agreement to avoid
confusion that may lead to a dispute over the transaction
8. It is a condition that the place of delivery be stated in the contract if the commodity
requires special handling and delivering arrangements
cyberstudentsbd.wordpress.com
9. The buyer may stipulate in the Istisna'a contract that the commodity shall be
manufactured or produced by a specific manufacturer, or manufactured with specific
materials. This is not permitted in a case of Salam Sale.
Application of Istisna'a Sale
The Istisna'a contract allows Islamic banks to finance the public needs and the vital
interests of the society to develop the Islamic economy in accordance with Islamic
teachings. For example Istisna'a contracts are used to finance high technology industries
such as the aviation, locomotive and ship building industries. In addition, this type of
business transaction is also used in the production of large machinery and equipment
manufactured in factories and workshops. Finally, the Istisna'a contract is also applied in
the construction industry such as apartment buildings, hospitals, schools, and
universities to whatever that makes the network for modern life. One final note, the
Istisna'a contract is best used in those transactions in which the product being purchased
can easily be measured in terms of the specified criteria of the contract.
3.1.3.2 Ijara Modes
Ijarah
Fuqaha (jurists) have defined Ijaraha as ownership of a benefit for consideration. This is
also known as lease or Hire contract. Al-Ijarah is an Arabic term. This has been derived
from the Arabic term "Ujr" or "Ujrat" which means 'consideration' or 'return' or 'wages'.
According to Islamic Shariah (jurisprudence), 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).
cyberstudentsbd.wordpress.com
Hire - Purchase Under Shirkatul Melk or Ijarah Muntahib BIL Tamlek
Hire-Purchase under Shirkatul Melk has been developed through practice. Actually, it is
a synthesis of three contracts: (a) Shirkat; (b) Ijarah, and (c) Sale. These may be defined
as follows:
Definition of Shirkatul Melk: 'Shrkat' means partnership. Shirkatul Melk means
share in ownership. When two or more persons supply equity, purchase an asset and
own the same jointly and share the benefit as per agreement and loss in proportion to
their respective equity, the contact is called Shirkatul Melk. In the case of Hire Purchase
under Shirkatul Melk, Islamic banks purchase assets to be leased out, jointly with client
under equity participation, own the same and share benefit jointly till the full ownership
is transferred to the client.
Definition of Ijara: The term 'Ijara' has been defined as a contract between two parties,
the lessor and the lessee, where the lessee enjoys or reaps a specific service or benefit
against a specified consideration or rent from the asset owned by the lessor. It is a lease
agreement under which a certain asset is leased out by the lessor or to a lessee against
specific rent or rental for a fixed period.
Elements of Ijarah
According the majority of Fuqaha, there are three general and six detailed elements of
Ijarah:
1. The wording: This includes offer and acceptance
2. Contracting parties: This includes a lessor, the owner of the property, and a
lessee, the party that benefits from the use of the property.
3. 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.
cyberstudentsbd.wordpress.com
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 (Aj'r or 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 or Aj'r.
Sale contract
This is a contract between a buyer and a seller under which the onwnership of certain
goods or asset is transferred by the seller to the buyer against agreed upon price paid by
the buyer. In the case of Hire Purchase under Shirkatul Melk, the lessor bank sells or
transfers its title to the asset under a sale contract on payment of sale price.
Thus in Hire Purchase under Shirkatul Melk mode, both the bank and the client supply
equity in equal or unequal proportion for purchase of an asset like land, building,
machinery, transports, etc., purchase the asset with that money, own the same jointly,
share benefit as per agreement and bear the loss in proportion to their respective equity.
The share/part or portion of the asset owned by the bank is leased out to the client
partner for a fixed rent per unit of time for a fixed period. Lastly, the bank sells and
transfers the ownership of its share/part/portion to the client against payment of price
fixed for that part either gradually part by part or as a whole within the lease period or
on expiry of the lease agreement. Hire-Purchase under Shirkatul Melk contract is to a
great extent similar to the contract of Ijarah Montahia Bil Tamlek as termed by
Accounting and Auditing Standards Board of the Account and Auditing Organization of
Islamic Financial Institutions (AAOIFI).
Stages of Hire Purchase under Shirkatul Melk
Hire Purchase under Shirkatul Melk Agreement has got three stages:
cyberstudentsbd.wordpress.com
1. Purchase of asset under joint ownership of the lessor and the lessee.
2. Hire, and
Sale and transfer of ownership by the lessor to the other partner – lessee
Types of Sale Contract in HPSM
As per procedure of transfer of ownership and legal title of the part owned by the bank
is transferred to the other partner, the sale contract may be of various forms. Some of
the major forms are mentioned below:
1. HPSM through gradual transfer of legal title/ ownership of the Hired rent/
property :
Under this type certain rent/property is purchased with equal or unequal equity
participation and owned jointly by the two parties, the bank and the client. The bank’s
share/portion of the asset is hid out to the client partner against fixed period with a
promise that the Hiree bank will sell or transfer the ownership of its portion to the client
Hirer gradually part by part in proportion to the consideration paid. So that the hirer
may acquire the full title of the Hiree’s portion of the asset on payment of the total price
at the end of the price paid.
Under this system the total price of the hired property/asset should be determined and
divided over the period of hire contract (per unit of time) so that the hirer in adition to
the payment of fixed rent/rentals may pay gradually the proportionate consideration of
the total price of the hired property or asset to acquire proportionate ownership of the
same part by part become full owner of the hired out at the end of the hire period.
It should be noted that, there is a separate sale contract for payment acquisition of each
share( per unit of time as per hire deal ) part of asset sold to the Hirer and amount of
rent should be decreased proportionately with decreased Hiree’s ownership and
increase of Hire’s ownership on the property/asset.
If for any reason, the hire contract is revoked prior to the payment/transfer of full title to
the hirer, the hirer will shre that part of the title to the hired property which has been
cyberstudentsbd.wordpress.com
transferred to him against payment made by him and remaining part will be shred by
the hiree bank.If any loss arises to the bank after the sale of bank’s share for the
property or asset that shall be recouped from client/client’s capacity.
2. HPSM through transfer of legal title by gifts/ (For no consideration):
Under this type the portion asset owned by Hiree partners is hired out to the hirer
partner with a prior promise that the Hiree, upon settlement of all the
rent/rentals/installments by the Hirer, will transfer his ownership /title to the property to
the hirer through gift without any further consideration. After that expiry of the hire
period and payment of all the rent/rentals/installments, the title of the property may be
transferred by issuing a gift deed by the Hiree making it conditional on the settlement of
all rental installments. In the later case, the legal title is automatically transferred as
soon as the hire period expires and the fixed rent installments for rent re settled. The
working of the agreement would be, if the agreed upon rental installment are settled
with in agreed upon period, ownership of the asset will be transferred to the Hirer as
gift.
Under this mode the rentals fixed and agreed upon will be sufficient not only to amortize
the capital outlay but also to yield an adequate amount of profit for the Hiree. However,
the rent/rentals agreed upon shall not be considered as price or part of price of the asset
and full ownership of the asset shall lie with the Hiree till final settlement of the
rent/rental installments.
3. Hire Purchase under Shirkatul Melk through transfer of legal title(sale) at the
end of hire period for a token consideration:
Under this contract the possession of the asset owned by the Hiree is hired out to the
hirer for a fixed period against rent/rentals and at the end of the hire period the title to
the asset is transferred to the Hirer by separate sale contract on payment of agreed upon
consideration. The consideration may be equal to the value of the asset or not and it
would be sufficient if a mutual agreement is reached on the consideration.
cyberstudentsbd.wordpress.com
4. Hire Purchase under Shirkatul Melk through transfer of legal title(sale) at the
end of hire period for payment of a specified amount to the Hiree by the Hirer:
This agreement includes an ijarah/hire contract and a sale contract. Under this
agreement a specific asset is hired out for a fixed period against specific rent
mentioning a specific consideration to be paid by the Hirer(buyer) after the expiry of
the hire period and upon payment of the agreed upon consideration. The hired asset to
be sold and its title to be transferred to the Hirer (buyer). Under the agreement, the hire
contract becomes effective firstly and the sale contract will be effective only after the
expiry of the hire contract.
5. Hire Purchase under Shirkatul Melk through transfer of legal title(sale) prior
of the hire term for a price that is equivalent to the remaining ijarah/rental
installment:
This is an ijarah/hire agreement which includes a promise made by the hiree that he will
transfer the title of the hired property to the hirer at any time during the hire period on
payment of the remaining ijarah/rental installments, if the Hirer wishes so until legal
title is transferred to the Hirer. As soon as the title asset is transferred to the Hirer the
Ijarah/Hire Contract lapses for the remaining period, because both the benefit and the
hired property become the Hirer’s property. This type of sale should be executed by a
separate sale contract at the time of sale.
Important Features of HPSM:
1. In case of Hire Purchase under Shirkatul Melk transaction the asset/property
involved is jointly purchased by the lessor (bank) and the lessee (client) with
specified equity participation under a Shirkatul Melk contract in which the amount of
equity and share in ownership of the asset of each partner (lessor bank and lessee
client) are clearly mentioned. Under this agreement the lessor and the lessee become
co-owners of the asset under transaction in proportion to their respective equity.
2. In Hire Purchase under Shirkatul Melk Agreement the exact ownership of both the
lessor (bank) and lessee (client) must be recognized. However, if the partners wish
and agree the asset purchased may be registered in the name of any one of them or in
cyberstudentsbd.wordpress.com
the name of any third party clearly mentioning the same in the Hire Purchase
Shirkatul Melk Agreement.
3. The share/part of the purchased asset owned by the lessor (bank) is put at the
disposal possession of the lessee (clients) keeping the ownership with him for a fixed
period under a hire agreement in which the amount of rent per unit of time and the
benefit for which rent to be paid along with all other agreed upon stipulations are
clearly stated. Under this agreement the lessee (client) 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 (bank) the rentals.
4. As the ownership of leased portion of asset lies with the lessor (bank) 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.
5. In the Hire Purchase under Shirkatul Melk agreement the Lessor (bank) does not sell
or the lessee (client) does not purchase the asset but the lessor (bank) promise to sell
the asset to the lessee only if 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.
6. 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.
7. As soon as any part of lesssor's (bank's) ownership of asset is transferred to the
lessee (client), that becomes the property of the lessee and hire contract for that
share/part and entitlement for rent thereof lapses.
8. In Hire Purchase under Shirkatul Melk Agreement, the Shirkatul Melk contract is
affected from the day the equit7y 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.
9. 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.
cyberstudentsbd.wordpress.com
10. Effectiveness of the sale contract depends on the actual sale and transfer of
ownership of the asset by the lessor to the lessee. It is sold and transferred part by
part it will become effective part by part and with the sale and transfer of ownership
of every share/part, the hire contract for the share/part will lapse and rent will be
reduced proportionately. At the end of the lease, the period when the full title of the
asset will be sold and transferred to the lessee, the lessee will become the owner of
both the benefit and asset, hire contract will fully end.
11. 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.
12. 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.
13. Ownership risk is borne both by the lessor and lessee in proportion to their
ownership equity.
14. 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.
15. 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.
16. 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.
17. 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.
18. Hire purchase under Shirkatul Melk facilities may be for medium-term and longterm 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
cyberstudentsbd.wordpress.com
bank should not normally enter into a Hire Purchase under Shirkatul Melk
transaction for items with useful life of less than two years.
19. 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.
20. HPSM facilities may be for medium-term long term period which may be utilized
for the expansion of production and services as well as housing activities. This
duration of HPSM shall not exceed the useful life of the subject/asset of the
transaction.
21. HPSM transaction facilities the client (hirer) to get benefit from the hired asset in
exchange of rental and also to become full owner of the asset by purchasing it part
by part.
22. If, for any reason the Hire Contract is revoke prior to the transfer of full title of the
asset to the hirer, then the title of the asset will be shared by both Hiree and Hirer.
23. The hirer to secure the bank (hiree) will pledge/hypothecate/mortgage his portion
/part/share in the asset (acquired/to be acquired) and or any other asset/property of
his own/third party guarantor to the bank to fulfill his liabilities/commitments
including the accrued rental, if any.
HPSM categories of proposal as under:
1. HPSM commercial: Investment on HPSM mode to individual/firm/company/society
for commercial purpose shall be termed as Hire Purchase under Shirkatul Melk.
2. HPSM industrial: HPSM investment to industrial undertakings in the form of land,
building, machineries, equipments, transport etc. shall be termed as HPSM
industrial.
3. HPSM agriculture: Hire Purchase under Shirkatul Melk investment to agriculture
sector in the form of agriculture equipments, machineries, shallow tube-well, deep
tube-well, tractor, trailers, transport etc. shall be termed as hire purchase under
shirkatul melk agriculture.
cyberstudentsbd.wordpress.com
4. HPSM transport: Hire purchase under shirkatul melk investment transport-bus,
track, car, taxi, launch, steamer, cargo vessel, air transport etc. shall be termed as
hire purchase under shirkatul melk transport.
5. HPSM real estate: Hire purchase under shirkatul melk investment in the form of
land building, market, apartments, for use/ rental shall be termed as HPSM real
estate.
6. HPSM schemes: Hire Purchase under shirkatul melk investment in the form of asset
for use/rental under any scheme shall be termed as HPSM scheme.
Rules for Hire Purchase under Shirkatul Melk
1. It is condition that the subject (benefit/service) of the contract and the asset (object)
should be known comprehensively.
2. It is a condition that the assets to be leased must not be a fungible one (perishable or
consumable) which can not be used more that once, or in other words the asset(s) must
be a non-fungible one which can be utilized more than once, or the use/benefit/service
of which can be separated from the assets itself
3. It is a condition that the subject (benefit/service) or the contract must actually and
legally be attainable / derivable. It is not permissible to lease something, the handingover of the possession of which is impossible. If the asset is a jointly owned property,
any partner, according to be majority of the jurists, may let his portion of the asset(s) to
co-owner(s) or the person(s) other than the co-owners. However, it is also permissible
for a partner to lease his share to the other partner(s),
4. It is a condition that the lessee shall ensure that he will make use of the asset(s) as
per provisions of the Agreement or as per customs/norms/practice, if there is no
expressed provision.
5. The lease contract is permissible only when the assets and the benefit/service
derived from it are within the category of 'Halal' or at least 'Mobah' as per Islamic
Shariah.
6. The lessor is under obligation to enable the lessee to the benefit from the assets by
putting the possession of the asset(s) at his disposal in useable condition at the
commencement of the lease period.
cyberstudentsbd.wordpress.com
7. In a lease contract, the period of lease and the rental to be paid in terms of time,
place or distance should be clearly stated
8. Everything that is suitable to be considered a price, in a sale, can be suitable to be
considered as rental in a lease contract.
9. It is a condition that the rental falls due from the date of handing over the asset to
lessee and not from the date of contract or use of the assets.
10. It is permissible to advance, defer or install the rental in accordance with the
Agreement
11. It is permissible to review the lease period or the rental or the both, if the lessor and
the lessee mutually agree to do so.
12. The leased asset is a trust in the hands of the lessee. He will maintain the asset(s)
with due prudence and shall not be held responsible for the damage or destruction of the
asset without transgression, default or negligence, otherwise he must be responsible for
the same.
13. The lessor/owner bears all the costs of legally binding basic repairs and
maintenance including the cost of the replacement of durable parts on which the
permanence and suitability of the leased assets depends.
14. It is permissible to make the lessee bear the cost of ordinary routine maintenance,
because this cost is normally known and can be considered as part of the rental
15. It is permissible for the lessee to let the asset to a third party during the lease period
whether for the same rental or more as long as the asset is not affected by the change of
user and not barred/restricted by the Lease Agreement/customs to do so.
16. It is permissible to purchase an Asset bearing a lease contract. The lease contract
may continue since the purchased agrees to its continuity up to the end of the lease
term. All rights and liabilities emanating from the lease contract will transfer to the new
owner. But if the sale-contract is drawn and the purchaser is oblivious of the lease
contract, he has the right to rescind the purchase contract and the lease continues
17. As soon as the lease period terminates the lessee is under obligation to return the
Asset to the owner or if the lessor agrees he may enter into a fresh lease contract or
purchase if from the lessor on payment of agreed upon price as per market rate.
cyberstudentsbd.wordpress.com
18. The lease contract is binding and no one party shall unilaterally rescind except
reasons that abrogate binding contracts such as damage or destruction
19. If the leased asset is damaged or destructed by the act of Allah and if the lessor
offers a substitute with the same specifications agreed upon in the lease contract, the
contract does not terminate.
20. It is permissible to sell the leased Asset by the lessor to the lessee during the tenure
of the lease period either part by part or in full at a time. As soon as any part or in full
the Asset is sold during the tenure of the Lease Agreement, the lease contract for that
part or for the full Asset as the case may be, be lapsed and the rental ceased to apply.
21. It is permissible for the lessee to promise or to give undertaking to purchase the
leased asset during the tenure of the lease period, either part by part or in full or at the
end of the lease period in full. It is also permissible for the lessor to give similar
promise to sell the Asset.
22. The lease with promise to purchase and sale is different from the memorandum of
sale. The rent paid by the lessee cannot, in any way, be considered as part of the price
of the Asset, rather it is the price of the service of the Asset.
23. It is permissible to divide the cost price of the Asset and ownership of the lessor to
the Asset into several parts and to sell each part of ownership on payment of
proportionate price/equity of the lessor under a separate sale contract.
3.1.3.3 Share Modes
a) 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
cyberstudentsbd.wordpress.com
other hand, are the sole responsibility of the provider of the capital. Mudaraba is also
known a Qirad and Muqaradah (Shirazi 1990, p.31).
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 contrac.
Steps of Mudaraba
The bank provides the capital as a capital owner. The Mudarib provides the effort and
expertise for the investment of capital in exchange for a share in profit that is agreed
upon by both parties.
1. 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.
2. 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.
3. 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.
cyberstudentsbd.wordpress.com
Rules of Mudaraba
There are some legal rules that govern the business relationship Mudaraba which are as
follows.
1. It is a condition in Mudaraba that the capital be specific in nature. In other words, the
amount of capital must be known at the inception of the contract. The purpose of this
rule is to ensure that there is no uncertainty about the amount of capital and, thus, no
uncertainty about the division of profits.
2. It is a condition that capital must be in the form of currency in circulation. However,
merchandise can be contributed, so long as both parties to the business arrangement
agree upon its value.
3. It is a condition that the capital cannot be subject to indebtedness.
4. It is permissible for a Mudarib to mix his private capital with the capital of the
Mudaraba, thus becoming a partner. In addition, it is also permissible for the Mudarib to
dispose of capital on behalf of the Mudaraba.
5. It is a condition that the capital of the Mudaraba is delivered to the Mudarib. Some of
the jurists permit the capital owner to withhold capital and release it gradually according
to the needs of the Mudarib since the Mudaraba adjudges unrestricted disposal.
6. It is permissible for the capital owner to deliver capital to two Mudharibs in a single
contract. It is permissible for the capital owner to vary the in profit sharing agreement
between the two Mudharib based upon differences in the services provided
7. It is permissible to impose restrictions on the Mudarib as long as the restriction is
beneficial and does not hinder the agent's ability to make a profit.
8. It is permissible for the Mudarib to hire an assistant to perform difficult work that he
is unable to perform on his own.
9. The disposal of capital by the Mudarib is restricted to reasons that are conducive to
the Mudaraba. The Mudarib must not lend or donate any of the Mudaraba capital.
Further, he is not allowed to enter into indebtedness nor enter into another partnership
agreement with the Mudaraba capital. However, these activities are permissible if the
capital owner consents and authorizes the agent to use his discretion.
cyberstudentsbd.wordpress.com
10. The Mudarib is not required to contribute any capital to the Mudaraba contract
except when he is found to be negligent in the way the funds are handled. It is
permissible to take a surety or mortgage from the Mudarib to guarantee payment in the
event of negligence violation of the contract conditions. However, it is impermissible to
take a mortgage as a guarantee of capital or profit.
11. It is a condition that profits be carefully and properly accounted for to avoid
confusion by the parties to the contract. The contracting parties should stipulate how
profits are to be shared on a percentage basis. It is impermissible to stipulate a fixed
lump sum as profit.
12. Profits in a Mudaraba relationship are distributed according to the agreement of the
two contracting parties. It is a condition that the capital owner be solely responsible for
any losses.
13. The Mudarib shall collect his share of the profit only after obtaining the permission
of the capital owner. In addition, the Mudarib can not collect his share of profit until
after capital outlay is recouped. In the event the profits are split prior to the closing of
the Mudaraba, any losses incurred shall be reimbursed by the distributed profits.
14. The Mudarib does not receive his share of the profits until the final settlement of the
Mudaraba. Once the Mudaraba has been settled, neither party is liable to the other
without a new agreement being made.
15. The Mudaraba agreement may be terminated if one of the two parties decides to
rescind the agreement. This is possible because the Mudaraba is an optional non-binding
agreement. Some of the jurists hold the view that Mudaraba is binding and it cannot be
rescinded if the Mudarib commences work.
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.
cyberstudentsbd.wordpress.com
Fig: Bank finances Mudarabah for client
b) Musharaka (Partnership)
Meaning of Musharaka
The word Musharaka is derived from the Arabic word Sharikah meaning partnership.
Islamic jurists point out that the legality and permissibility of Musharaka is based on the
injunctions of the Qura'n, Sunnah, and Ijma (consensus) of the scholars. It may be noted
that Islamic banks are inclined to use various forms of Shariakt-al-Inan because of its
built-in flexibility. At an Islamic bank, a typical Musharaka transaction may be
conducted in the following manner.
One, two or more entrepreneurs approach an Islamic bank to request the financing
required for a project. The bank, along with other partners, provides the necessary
capital for the project. All partners, including the bank, have the right to participate in
the project. They can also waive this right. The profits are to be distributed according to
an agreed ratio, which need not be the same as the capital proportion. However, losses
are shared in exactly the same proportion in which the different partners have provided
the finance for the project.
cyberstudentsbd.wordpress.com
Types of Musharaka
Musharaka may take two forms:
i)
Permanent Musharaka and
ii)
Diminishing Musharaka.
These are discussed below
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.
Permanent Musharaka is used by Islamic Banks in many income generating projects.
They can provide financing to their customers, in exchange for ownership and profit
sharing in the proportion agreed upon by both parties. In addition, the bank may leave
the responsibility of management to the customer-partner and retain the right of
supervision and follow up.
cyberstudentsbd.wordpress.com
The three steps to establishing Permanent Musharaka are discussed below:
One - Partnership in Capital: The bank tenders part of the capital required in its capacity
as a partner and authorizes the customer/partner to manage the project. The Partner
tenders part of the capital required for the project and is entrusted with what he holds
from the bank funds.
Two - Results of the Projects: The intent of the project is growth. However, the project
may be profitable or it may loss money.
Three - The Distribution of wealth accrued from the Project: In the event a loss is
incurred, each partner bears part of the loss proportionate to his share in capital. In the
event the venture is profitable, earnings are divided between the two parties (the bank
and the partner) in accordance with the agreement.
The
following
is
a
discussion
of
those
legal
rules
that
apply
to
the Musharaka relationship:
Rules for Permanent Musharaka
1. It is a condition that the capital provided by each partner is specific, existent and
easily accessible. It is inappropriate to establish a company with borrowed money, for
the purpose of profit.
2. It is permissible for partners to have unequal ownership in the project. The percent of
ownership is set forth in the agreement.
3. It is a condition that the capital of the company is money and valuables. Some of the
jurists permit contributing merchandise as invested capital. However, the merchandise
must be evaluated, and the value agreed upon by all parties. Once the value has been
established, it is counted as capital and stipulated in the contract as such.
cyberstudentsbd.wordpress.com
4. It is impermissible to impose conditions forbidding one of the partners from work.
The company is built on honor and each partner implicitly permits and gives power of
attorney to the other partner(s) to dispose of and work with capital as is deemed
necessary to conduct business. However, it is permissible for one partner to have full
responsibility for the operations of the company, provided he is granted this authority
by the other partners.
5. A partner is a trustee of company funds in his possession and is held responsible for
their proper use. It is permissible to take a mortgage or a guarantee against company
assets, but it is impermissible to take security for profit or capital.
6. It is a condition that each partners' share of the profits be known to avoid
uncertainty. Also, it is required that the ownership interest be in percentage terms and
not a fixed sum, because this would violate the requirements of a partnership.
7. In principle, profit must be divided among partners in ratios proportionate to their
shares in capital but some of the jurists permit variation in profit shares, so long as it is
agreed to by all of the partners. This may be the case when one of the partners is more
dexterous and more diligent and does not agree to parity, so variation in the sharing of
profits becomes necessary.
8. In principle, a partnership is a permissible and non-binding contract. Thus, if a
partner wishes, he could rescind the agreement provided that this occurs with the
knowledge of the other partner or partners. Rescinding the agreement without the
knowledge of the other partners' prejudices the rescinding partner's interest. On the
other hand, some of the jurists take the view that the partnership contract is binding up
to the liquidation of capital or the accomplishment of the job accepted at the contract.
Application of Permanent Musharaka
Permanent Musharaka is helpful in providing financing for large investments in modern
economic activities. Islamic banks can engage in Musharaka partnerships for new or
established companies and activities. Islamic banks may become active partners in
determining the methods of production cost control, marketing, and other day-to-day
operations of a company to ensure the objectives of the company are met. On the other
hand, they can also choose to either directly supervise or simply follow up on the
cyberstudentsbd.wordpress.com
overall activities of the firm. As part of the agreement, Islamic banks will share in both
profits and losses with its partners or clients in operations of the business.
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 bank's partnership interest.
In this way, as the bank receives payments over and above it's share in partnership
profits, it's partnership interest reduces until it is completely bought out of the
partnership.
After the discharge, the bank withdraws it claims from the firm and it becomes the
property of the partner. The decreasing partnership arrangement is an Islamic bank
innovation. It differs from the permanent partnership only in continuity. It appears that
there are four steps of the diminishing partnership. Those are mentioned below.
cyberstudentsbd.wordpress.com
Steps of Diminishing Musharaka
1. Participation in Capital: The bank - tenders part of the capital required for the
project in its capacity as a participant and agrees with the customer/partner on a
specific method of gradually selling its share in capital back to the partner.
2. The partner - tenders part of the capital required for the project and agrees to
pay the agreed upon amount in return for the ultimate full ownership of the
business.
3. Results of the Projects: The intent of the project is capital growth. The project
may be profitable or lose money.
4. The distribution of the Wealth accrued from the Projects: In the event of loss
each partner bears his share in the loss in his exact proportionate share of
capital. In the event that the project is successful, profits are distributed between
the two partners (the bank and the customer) in accordance with the agreement.
5. The bank sells its Share of Capital: The bank expresses its readiness, in
accordance with the agreement, to sell a specific percentage of its share of
capital.
6. The partner pays the price of that percentage of capital to the bank and the
ownership is transferred to the partner.
This process continues until the bank has been fully compensated for it's capital share of
the business. In this way the bank has its principal returned plus the profit earned during
the partnership and vice versa.
In the first Conference of the Islamic Banks in Dubai, the conferees studied the topic of
partnership ending with ownership (decreasing partnership) and they decided that this
type of business relationship may take one of the following forms.
The First Form: In this form, the bank agrees with the customer on the share of capital
and the conditions of partnership. The Conference decided that the bank should sell its
shares to the customer after the completion of the partnership. Furthermore, they
cyberstudentsbd.wordpress.com
determined that the selling of the banks interest to the partner should be done under an
independent contract.
The Second Form: In this form, the bank participates in financing all or part of the
capital requirements in exchange for sharing in the prospective earnings. In addition, the
bank gains the right to retain the remainder of the income for the purpose of applying it
towards the capital provided by the bank.
The Third Form: In this form, the bank and partner's ownership is determined by
stocks comprising the total value of the asset (real estate). Each partner, (the bank and
the customer) gets its proportionate share of the earnings accrued from the real property.
On an annual basis, the partner may purchase a prescribed number of the bank's shares
until such time that the partner becomes the sole owner of the real property.
There are some legal rules for diminishing Musharaka as given below:
Rules for Diminishing Musharaka
In addition to all the legal rules that apply to the permanent partnership which also apply
to the decreasing partnership, the following rules also must be observed.
1. It is a condition in the decreasing partnership that it shall not be a mere loan
financing operation. In other words there must be shared ownership and all the
parties must share in the profits or losses during the period of the partnership.
2. It is a condition that the bank must completely own its share in the partnership
and all rights of ownership with regard to management of the business. In the
event that bank authorizes its partner to manage the business, the bank shall
have the right of oversight supervision and follow up.
3. It is impermissible to include in the contract of decreasing partnership a
condition that adjudges the partner to return to the bank the total of its shares in
capital in addition to profits accruing from that share, because of resemblance
to Riba (usury).
cyberstudentsbd.wordpress.com
4. It is permissible for the bank to offer a promise to sell its shares in the company
to the partner, if the partner pays the value of the shares. The sale must be
concluded as a separate deal with no connection to the contract of the company.
Application of Diminishing Musharaka
The decreasing Musharaka is suitable for the financing of industrial businesses that
have regular income. It can be considered to be the appropriate mode to finance
collective investment. In this arrangement, the bank earns periodic profits throughout
the year and it encourages the partner to participate in the joint investment. In addition
it fosters individual ownership by allowing the partner to gradually buy the bank's
ownership interest. In terms of society as a whole it corrects the course of the economy
by developing a mode of positive partnership instead of the negative relationship of
indebtedness. In addition, it assists in the equitable distribution of societies’ wealth.
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.
Fig: Musharaka between bank and client
cyberstudentsbd.wordpress.com
Fig: Declining Musharaka between bank and client
3.1.3.4 QARD HASAN (Benevolent loans)
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.
Ausaf Ahmad (1998, p.49) mentioned that since interest on all kinds of loans is
prohibited in Islam, a loan that is to be given in accordance with the Islamic principle,
has to be, by definition, 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.
3.2 Welfare Investment Schemes of IBBL
Islami Bank Bangladesh limited (IBBL) offers twelve welfare investment schemes for the
welfare of population of Bangladesh.
The welfare investment schemes of IBBL are as follows:
 Household Durables Scheme.
cyberstudentsbd.wordpress.com
 Investment Scheme for Doctors.
 Small Business investment Scheme.
 Housing Investment Scheme.
 Transport Investment Scheme.
 Car Investment Scheme.
 Rural Development Scheme (RDS).
 Agriculture Implement Investment Scheme.
 Micro Industries Investment Scheme.
 Mirpur Silk Weavers Investment Scheme.
 Industry Investment Scheme.
 Investment on Real Estate.
3.3 Graphical Analysis of the Investment of IBBL
Trend of Investment of IBBL: 2007-2011 (Taka in Million)
Graph 3.1: Trend of Investment of IBBL: 2007-2011
cyberstudentsbd.wordpress.com
From the above graph, it is clear that the overall trend of investment was positive and
increasing during the period under study.
Investment growth of IBBL: 2007-2011
Graph 3.2: Investment growth of IBBL: 2007-2011
From the above graph we can conclude that in 2010 the growth of investment was highest
among the years under study, but in 2011 the growth of investment was the lowest.
The Share of Investment of IBBL in Banking Sector
Graph 3.3: The Share of Investment of IBBL in Banking Sector: 2007-2011
cyberstudentsbd.wordpress.com
Graph 3.4: The Share of Investment of IBBL in total investment: 2011
Sector wise investment:
IBBL invests its funds in different sectors. The scenario of sector wise investment of
2011 is given below:
Graph 3.5: Sector wise investment of IBBL in 2011
The Investment Performance of IBBL in Different Modes from 2007 to
2011
cyberstudentsbd.wordpress.com
Bai-Murabaha
Graph 3.6: Trend of Investment in Bai Murabaha: 2007-2011
Hire Purchase Under Shirkatul Melk (HPSM):
Graph 3.7: Trend of Investment in HPSM: 2007-2011
Bai –Muajjal:
Graph 3.8: Trend of Investment in Bai-Muajjal: 2007-2011
cyberstudentsbd.wordpress.com
Bill Purchase & Negotiation
Graph 3.9: Trend of Investment in Bill Purchase & Negotiation: 2007-2011
Quard
Graph 3.10: Trend of Investment in Quard: 2007-2011
Bai Salam
Graph 3.11: Trend of Investment in Bai Salam: 2007-2011
cyberstudentsbd.wordpress.com
Musharaka
Graph 3.12: Trend of Investment in Musharaka: 2007-2011
Mudaraba
Graph 3.13: Trend of Investment in Mudaraba: 2007-2011
Total Mode Wise Investment: (2007-2011)
Graph 3.14: Trend of Total Mode Wise Investment: 2007-2011
Sector Wise Investment
cyberstudentsbd.wordpress.com
Graph 3.15: Sector Wise Investment of IBBL: 2007-2011
The Investment Performance of IBBL in Different Sectors from 20072011
Industrial Sector
Graph 3.16: Trend of Investment in Industrial Sector
Commercial Sector
cyberstudentsbd.wordpress.com
Graph 3.17: Trend of Investment in Commercial Sector
Real Estate
Graph 3.18: Trend of Investment in Real Estate Sector
Agriculture Sector
cyberstudentsbd.wordpress.com
Graph 3.19: Trend of Investment in Agriculture Sector
Transport
Graph 3.20: Trend of Investment in Transport Sector
SME
Graph 3.21: Trend of Investment in SME
cyberstudentsbd.wordpress.com
Total Sector Wise Investment
Graph 3.22: Trend of Total Sector Wise Investment
Welfare Oriented Investment (Special Scheme)
cyberstudentsbd.wordpress.com
Graph 3.23: Welfare Oriented Investment of IBBL in 2011
Rural Investment Scheme
Graph 3.24: Trend of Investment in Transport Sector
cyberstudentsbd.wordpress.com
House Hold Durables Scheme
Graph 3.25: Trend of Investment in House Hold Durables Scheme
Investment Scheme for Doctors
Graph 3.26: Trend of Investment in Doctors’ Scheme
Transport Investment Scheme
Graph 3.27: Trend of Investment in Transport Scheme
cyberstudentsbd.wordpress.com
Car Investment Scheme
Graph 3.28: Trend of Investment in Car Investment Scheme
Small Business Investment Scheme
Graph 3.29: Trend of Investment in Small Business Investment Scheme
Micro-Industries Investment Scheme
Graph 3.30: Trend of Investment in Micro Industries Investment Scheme
cyberstudentsbd.wordpress.com
Agricultural Implements Investment Scheme
Graph 3.31: Trend of Investment in Agricultural Implements Investment Scheme
Housing Investment Scheme
Graph 3.32: Trend of Investment in Housing Investment Scheme
cyberstudentsbd.wordpress.com
Real Estate Investment Scheme
Graph 3.33: Trend of Investment in Real Estate Investment Scheme
% of Welfare Oriented Investment over Total Investment
Graph 3.34: Percentage of Welfare Oriented Investment over Total Investment
cyberstudentsbd.wordpress.com
Investment Income of IBBL
Graph 3.35: Net Investment Income vs. Total Income of IBBL
Investment Plan of IBBL for 2008-2012
Graph 3.36: Investment Plan of IBBL : 2008-2012
cyberstudentsbd.wordpress.com
Growth Target in Various Business Aspects
Table: 3.01
Particulars
Target
2011
Achieved
2011
% of
Achievement
Operating Profit
Deposit
General Investment
(Gross)
Import
Export
Foreign Remittance
14000
400000
335000
14062
341361
324099
100%
85%
97%
305000
193000
275000
301207
178244
236607
99%
92%
86%
Graph 3.37: Growth Target in Various Business Aspects in 2011
cyberstudentsbd.wordpress.com
cyberstudentsbd.wordpress.com
Conclusion
Banks play a very vital role in the economic development of a country. The popularity of
banks is increasing day by day. It is accelerating the competition in the banking sector.
All the commercial banks are offering almost the same products and services. But the
way they provide the services are different from each other. So people choose their banks
according to their satisfaction and need. On the other hand, banks innovate new products
and services to the desired customers. Islami Bank Bangladesh Limited (IBBL) is one of
the few fast growing banks in Bangladesh because of its rapid customers’ satisfaction.
The bank is committed to run all its activities as per Islamic Shari’ah. IBBL through its
steady process and continuous success has, by now, earned the reputation of being one of
the leading private sector banks of the country. Islami Bank Bangladesh Limited is also
playing a important role in establishing Islamic Economics by combining the economic
values with social and moral values. By following the novelty of Islamic Economics the
bank is trying to make a balanced development between spiritual and material life. In my
report I have tried to draw a clear cut picture of the modes of investment of the Islami
Bank Bangladesh Limited (IBBL) as a whole as well as the Local Office Branch of
IBBL. From my study it is clear to me that total modern banking system can be run on
the basis of Islamic Shari’ah. A large number of investment products are available in
Islamic economy. Today Islami Bank Bangladesh Limited (IBBL) is offering some of
these investment products due to the lack of rules & regulation as well as present socio
economic situation of our country. But IBBL is trying its best to follow the Islamic
Shari’ah properly. We can hope that the day is not so far when the total economy of our
country will be run by Islamic principles & Islami Bank Bangladesh Limited (IBBL) will
be the modern international banking system by offering up to date investment & deposit
products on the basis of Islamic Shari’ah to develop the standard of living of the people.
The End
cyberstudentsbd.wordpress.com
BIBLIOGRAPHY
Abdul-Gafoor, A. (2006). Mudaraba-Based Investment and Finance. Journal of
Islamic Banking and Finance. Volume-23(4): 78-98 (1)
Ahmed Nasiruddin, (1999), Working of an Islamic Bank: A Case Study of Islami
Bank Bangladesh Limited (IBBL)- a paper presented at the seminar on ‘Islamic
Economies Finance’, held in U.K. in May 1999 jointly organized by Islamic
Foundation, U.K. : The Islamic Development Bank and Loughborough University,
Mark Field Conference Center, U.K.
Ahsan, A.S.M. Fakrul (1988), Islam and modern Banking System. Thoughts on
Economics, Vol. ix, No 1 & 2 Dhaka: Islamic Economic Research Bureau (IERB).
Babikir O. Ahmed , The contribution of Islamic Banking to Economic Development:
the case of Sudan, Ph.D. Thesis , University of Durham . U.K. in Abstarcts of the
Journal of Islamic Social Science, Vol.8, No.1,1991
Chakma , Pradanendu Bikash, Islam Md. Serajul and Karmakar Shyam Sundar.
Managerial Performance of Islamic Banking: A Critical Review. Journal of Business
Studies. Vol. xvi(2). Dhaka University.pp.85-102.
Hamid, M.A. (1999) , Islamic Banking in Bangladesh: Expectations and Realities, A
paper presented at the international conferences on Islamic Economics in the 21st
century held in Malaysia from 9 to 12 August 1999, Organized jointly by
International Islamic University Malaysia (IIUM) and Islamic Research and Training
Institute (IRTI) of IDB, Malaysia.
Kahf Monzer, Islamic Banks: The Rise of a New Power Alliance of Wealth and
Shari'a Scholarship. Edinburgh University Press, 2004, pp. 17-36.
Kamran Dr. Nadri, A Critique of Islamic Banking and Finance: Harmonization of
Fatawa (Islamic Opinions) and the Nature of Modern Economic Life. Department of
Economics, Imam Sadiq University P.O. Box: 14655-159, Tehran, Iran.
cyberstudentsbd.wordpress.com
Khan, Kashif Hasan (2012), Discourses on Islamic Banking and Finance: A Review.
International Journal of Business and Management Tomorrow. Vol. II No. 6: Society
for Promoting International Research & Innovation (SIRI).
Sina, M Abu, The Modes of Investment of Islamic Banks & Nationalized Commercial
Banks: A Comparative Study, Ph. D. Thesis, Islamic University. Kustia.
Annual Reports of IBBL: 2007-2011. Published by IBBL.
Google (2012).http://www.wikipedia.org. Retrieved on November 15, 2012 at 9.30
PM.
Google (2012). http://www.islamibankbd.com/Retrieved on December 5, 2012 at
8.00 PM.
Google (2012). http:// www.bangladesh-bank.org/Retrieved on December 6, 2012 at
7.30 PM.
cyberstudentsbd.wordpress.com
cyberstudentsbd.wordpress.com
Appendix-A: Internship Approval Letter
cyberstudentsbd.wordpress.com
Appendix-B
List of Private Commercial Banks & Foreign Commercial Banks
Operating in Bangladesh
Private Commercial Banks:
Now 32 private commercial banks are running their operations in Bangladesh. A list of
private commercial banks operating in Bangladesh is given below:
 United Commercial Bank Limited.
 Mutual Trust Bank Limited.
 BRAC Bank Limited.
 Eastern Bank Limited.
 Dutch-Bangla Bank Limited.
 Dhaka Bank Limited.
 Islami Bank Bangladesh Ltd.
 Uttara Bank Limited.
 Pubali Bank Limited.
 IFIC Bank Limited.
 National Bank Limited.
 The City Bank Limited.
 NCC Bank Limited.
 Mercantile Bank Limited.
 Prime Bank Limited.
 Southeast Bank Limited.
 Al-Arafah Islami Bank Limited.
 Social Islami Bank Limited.
 Standard Bank Limited.
 One Bank Limited.
 Exim Bank Limited.
 Bangladesh Commerce Bank Limited.
cyberstudentsbd.wordpress.com
 First Security Islami Bank Limited.
 The Premier Bank Limited.
 Bank Asia Limited.
 Trust Bank Limited.
 Shahjalal Islami Bank Limited.
 Jamuna Bank Limited.
 ICB Islamic Bank.
 AB Bank.
 Social Investment Bank Ltd.
Foreign Commercial Banks:
Now 9 Foreign Commercial banks are running their operations in Bangladesh. These
banks are also providing modern banking facilities to their clients. A list of foreign
commercial banks operating in Bangladesh is given below:
10 foreign commercial banks are operating in Bangladesh. These are  Citibank.
 HSBC.
 Standard Chartered Bank.
 Commercial Bank of Ceylon.
 State Bank of India.
 Habib Bank Limited.
 National Bank of Pakistan.
 Woori Bank.
 Bank Alfalah.
 ICICI Bank.
Appendix-C
cyberstudentsbd.wordpress.com
Branch Performance
Local Office Branch of IBBL, 75 Motijheel C/A
I have done my internship in Islami Bank Bangladesh Limited at Local Office Branch.
My internship program’s duration was for total 60 days. It was designed by Islami Bank
Training and Research Academy (IBTRA). First 8 days I took part in theoretical classes
held in IBTRA. Then I went to Local Office Branch for gaining practical experience. I
got a lot of information and gather experience about IBBL as well as interest free banking
system.
Local Office Branch
Local Office Branch is the largest operating unit of IBBL. In this branch there are about
300 employees. This branch is comparatively busier than the other branches of IBBL.
The officials of local office branch were very helpful and they were pleased with my
service. All of them were very co operative with me. I worked in several sections and
tasks performed by me are explained below:
General Banking:
Opening of Accounts: MSA A/Cs, MTDR A/Cs, Mudaraba Hajj A/Cs, MSB A/Cs,
MSS A/Cs, SND A/Cs & AWCA etc. Writing of account opening registers, Issuance
of monthly statement & Check Book etc. Maintenance of AL-Wadeeah Current A/C,
MSA, MSS, BSB, MTDR etc.
Bills: Outward & Inward Bills (OBC & IBC) and clearing.
Remittance: Issuance and payment of D.D., T.T., P.O. etc.
Others: Writing of Clean Cash Book & Posting of General Ledger, Maintenance of
cyberstudentsbd.wordpress.com
Income, Expenditure, Suspense and Sundry Deposit A/Cs, Maintenance of Furniture,
Fixture & Stationary Articles & Relative Registers. Schedule of Telegram &
Preparation of IB General A/C Statement (Return, Statement)
Investment:
Different Modes of Investment of Islami Bank Bangladseh Limited. Procedure of
Bai-Murabaha, Bai-Muajjal, Hire Purchase Under Shirkatul Melk, Musharaka, BaiSalam Investment.
Appraisal & Processing of Investment Proposals, Preparation of Credit Reports etc.
Sanction advice, documentation and all other relative work including profit
calculation. Causes & Remedy of overdue, Procedure of Suit Cases against defaulted
investment client of IBBL.
Foreign Exchange:
L/C Opening, Lodgment & Retirement of Bills etc. Back to Back L/C opening,
Amendment, Endorsement of Bills etc.
Export Section: Purchase of IBP & FBP, Procedure of BC & FBC, Exp reporting,
CIB.
Foreign Remittance: FTT, FDD, TC, FCAD, FCAP A/C, Fund Management.
cyberstudentsbd.wordpress.com
Performance of Different sectors of Local Office branch of
IBBL:
Deposit Scenario: As on 20 Nov. 2012
Deposits
Taka
Al-Wadiah Current Deposit
848,733,623.73
Mudaraba Saving Deposit
2,418,464,102.67
Mudaraba Special Notice Deposits
258,371,298.47
Mudaraba Term Deposit
3,293,135,130.93
Profit-Payable A/C
263,859,481.04
Mudraba Hajj Savings A/C
35,605,949.52
Mudaraba Savings Bond
1,384,085,051.86
Mudaraba Special Savings Scheme
807,269,525.27
Mudaraba Monthly Profit Deposit
258,800,000.00
Scheme (MMPDS)
Mudaraba Muhar Savings A/C
2,866,899.26
Mudaraba Waqf Deposit A/C
14,829,397.30
Mudaraba NRB Savings Bond
231,410,458.20
Student Mudaraba Savings Account
304,880.12
(SMSA)
Sundry Deposits
Investment Scenario
831,685,100.52
cyberstudentsbd.wordpress.com
Mode Wise & Sector Wise Outstanding as on 30/11/2012
Bai Muajjal
Mode
Sector
Outstanding
Overdue
In Tk.
In Tk.
Bai Muajjal
Real Estate
TK.16,946,073.55
3,720,100.55
Bai Muajjal
H.D.S.
410,180.00
0.00
Bai Muajjal
S. H.D.S.
3,973,092.00
0.00
Bai Muajjal
S.H.I.B.S.
129,263.00
129,263
Outstanding
Overdue
In Tk.
In Tk.
Bai Murabaha
Mode
Sector
Bai Murabaha
Industrial
475,374,227.00
58,454,593.00
Bai Murabaha
Commercial
74,318,014.00
0.00
Sector
Outstanding
Overdue
In Tk.
In Tk.
20,050,476.00
0.00
Musharaka
Mode
Musharaka
Others
cyberstudentsbd.wordpress.com
HPSM
Mode
Sector
Outstanding
Overdue
In T k .
In T k .
HPSM
Industrial
8,489,384,702.57
53,194,740.76
HPSM
Real Estate
760,242,471.12
2,249,180.97
HPSM
Transport
439.969,654.44
19,514,497.00
HPSM
H.B.I.S.
2,367,166.00
218,850.00
HPSM
S.H.B.I.S
610.696,109.46
636,283.00
HPSM
Car Investment
2,167,994.00
0.00
Scheme
Bai Salam
Mode
Sector
Outstanding
Overdue
In T k .
In T k .
Bai Salam
Industrial
2,294,585,325.00
771,413,766.00
Bai Salam
Real Estate
11,000,000.00
0.00
QTDR
Mode
QTDR
Sector
Others
Outstanding
Overdue
In T k .
In T k .
293,421,300.00
3,752,400.00
cyberstudentsbd.wordpress.com
MPI
Mode
Sector
Outstanding
Overdue
In T k .
In T k .
MPI
Industrial
6,807,366,252.03
289,215,066.72
MPI
Commercial
314,744,145.95
75,436,518.22
Murabaha TR
Mode
Sector
Outstanding
Overdue
In T k .
In T k .
Murabaha TR
Industrial
1,504,373,167.35
45,432,410.80
Murabaha TR
Commercial
168,866,338.03
17,907,560.39
Others
Mode
Sector
Outstanding
Overdue
In T k .
In T k .
QB F
Others
997,520.00
0.00
QPF
Others
13,412,534.00
0.00
QHG
Others
900,000.00
900,000.00
QMSS
Others
9,796,000.00
0.00
FDB
Industrial
175,995,420.00
45,264,602.00
Bai Murabaha
Industrial
46,464,325.00
0.00
FC Bills
cyberstudentsbd.wordpress.com
Industrial
1,265,847,832.79
214,967,919.00
MDB
Industrial
1,174,088,589.00
13,490,221.00
MFCI
Industrial
935,256,349.00
0.00
Bai Muazzal
RDS
0.00
0.00
Bai Muajjal FC
B ills
Amount of Total, Overdue, Classified, Written Off & Rescheduled
Investment
Particulars
No. of
No. of Deals
clients
Total
1600+
Amount
%
Remarks
186.07%
Over
In Million
Taka
5116
25913.15
Deposit
Investment
Overdue
67
352
1615.90
6.24%
87
398
883.07
3.41%
30
30
507.58
1.96%
37
715
3829.80
14.78%
Investment
Classified
Investment
Written off
Investment
Reschedule
Investment
Foreign Exchange Scenario
186.07
cyberstudentsbd.wordpress.com
Particulars
Taka
Outward Bills Lodged
8,444,776.00
Outward Foreign bills Lodged
2,438,000.00
Inland L/C
53,284,247.40
Import L/C (General)
1,229,167,486.00
Back to Back L/C (Foreign)
3,630,365,372.00
Back to Back L/C (Inland)
2,715,470,736.00
Back to Back Bills (Foreign)
4,157,438,217.00
Back to back to Back bills (Inland)
3,161,877,149.00
Letter of Guarantee (Foreign)
206,244,938.00
Import Bills (Inland)
10,555,771.00
Inland Export Bills for Lodged
1,949,525,526.00
Import Bills (Foreign)
4,528,001,697.00
Foreign Export Bills for Lodged
1,191,969,688.00
Letter of Guarantee (Inland)
981,633,855.06
cyberstudentsbd.wordpress.com
Comparative Business Performance of Local Office as on 31.10.2012
(Figure in Million Tk.)
Position of
Local Office
Position of
IB B L
% Of
share in
IB B L
Position of
Local Office
within the
Bank
Tk.14040
Tk. 400336
3.51
1st
Cost free Deposit
5224
51359
10.17
1st
Investment
26070
371920
7.01
2nd
Overdue
1579
14874
10.62
3rd
Classified
Investment
953
23658
4.03
3rd
Rescheduled
Investment
3829
29715
12.89
1st
Written off
Investment
508
2969
17.11
2nd
Import
40381
237411
17.01
1st
Export
48733
161605
30.16
1st
Remittance
3454
249387
1.38
10th
Investment Income
2255
36090
6.25
2nd
Ancillary Income
493
4871
10.12
1st
Operating Profit
1002
15206
6.59
1st
Per Person
Investment Income
7.72
3.10
248.90
Per Person Ancillary
Income
1.69
0.42
403.18
Particulars
Deposit
cyberstudentsbd.wordpress.com
Per Person
Operating Profit
3.43
1.26
279.46
Amount of fresh
deposit
1226
59052
2.08
Amount of
investment increased
978
47821
2.05
730.93
25756.32
2.5
2.21
Total Expenditure
Expenditure for per
employee
Others:
Particulars
Position of
Local
Manpower
292
Position of
IB B L
% of share in
IB B L
11632
2.51
10001159
0.70
86
0.28
43310
0.91
Position
Number
new
of 7011
deposit
A/C opened
Per
person 24
new
deposit
A/C opened
Number
new
investment
A/C opened
of 396
Position of
Local Office
within the
Bank
1st
cyberstudentsbd.wordpress.com
Per
person 1.36
3.72
0.36
new
investment
A/C opened
So finally we can conclude that the performance of Local Office Branch of IBBL in
2012 is quite good. Local Office Branch is performing its operation in an ideal way. This
branch has already established itself as an example to other branches of IBBL.I hope that
this branch will continue its success in upcoming years.
……………………………………………