Moderator's Note: As mentioned before, this poster's credentials, which were described earlier, have now been specifically addressed by himself.
WRT: http://groups.yahoo.com/group/mukto-mona/message/46378
Dear members,
Assalamu Alaikum.With reference to the letter below, you can see this
article also.
Shah Abdul Hannan
By
Shah Abdul Hannan,
Former Secretary, Ministry of Finance, Government of Bangladesh
and
M. Fariduddin Ahmad
Executive President
Islami Bank Bangladesh Limited
________________________________________________
SECTION – I
Banking Scenario in Bangladesh
When Bangladesh came into existence on the 16th December, 1971, the banking
sector of Bangladesh was in a total disarray. With the exception of two
local banks incorporated in then East Pakistan, all the bigger local banks
became inoperational.. Starting with such a humble condition, the Banking
Sector of Bangladesh has grown to a great extent.
At present there are 49 Banks in Bangladesh. The structure of Banking in
Bangladesh is as under:
1. Nationalized Commercial Banks ---
4
2. Specialized
--- 5
3. Private Sector Commercial Banks :
a) Conventional
--- 25
b) Islamic
--- 5
4. Foreign Commercial Banks
a) Conventional
--- 9
b) Islamic
--- 1
----------------------
Total
49
----------------------
SECTION – II
Genesis of Islamic Banking in Bangladesh
In August 1974, Bangladesh signed the Charter of Islamic Development Bank
and committed itself to reorganize its economic and financial system as per
Islamic Shariah.
In January 1981, the then President of People's Republic of Bangladesh 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 the President 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 mobilise public opinion in
favour of Islamic banking.
Their professional activities were reinforced by a number of Muslim
entrepreneurs working under the aegis of then Muslim Businessmen Society
(now reorganised as Industrialist & Businessmen Association). The body
concentrated mainly in mobilising 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 on 30th
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 5 Islamic Banks were established in the country. 7 conventional
banks have so far established Islamic Banking branches in some major cities.
SECTION – III
Comparative Position of Islamic Banking and Conventional Banking in
Bangladesh.
Deposits:
Total deposits of the Banking Sector of Bangladesh stood at Taka 1,415,877
million as on 30.06.2005 of which Islamic Bank mobilized deposit to the tune
of Taka 3031897 million i.e. their share in total deposits of the Banking
system is 11.98%. A detail analysis of deposits of all Banks vis-a-vis
deposits of Islamic Banks by Type of Accounts is given in the following
Table:
Table – I
Deposits distributed by Types of Accounts
Amount in Million Taka
(US $ 1=Taka 67.50)
Sl. No.
Types of Accounts
All Banks
Islamic Banks
Share of Islamic banks (%)
Nos. of Accounts
Amount
Nos. of Accounts
Amount
Nos. of Accounts
Amount
1
Current Deposits
2,994,299
144,098
440,327
9,797
14.71
6.80
2
Savings Deposits
23,670,486
382,290
1,590,600
45,759
6.72
11.97
3
Fixed Deposits
973,356
514,195
134,371
66,108
13.80
12.83
4
Other Deposits
4,874,926
375,294
866,599
48,027
17.78
12.80
Total
32,513,067
1,415,877
3,031,897
169,691
9.33
11.98
Islamic Banks' Share of Deposits
Islamic Banks, upto 30.06.2005, mobilised 11.98% of total deposit. This
share crossed 12% as on 31.12.2003. The growth of deposit of some of the
Islamic Banks particularly, the Islamic Bank Bangladesh Limited, the first
established Islamic bank in Bangladesh, is more than 30%.
Advances/Investments:
Total Advances/Investments of the Banking Sector stood at Taka 1,117,321
million as on 30.6.2005. Islamic Banks Investments on that date reached to
Taka 156,411 million i.e. 14% percent of the total advances/investments of
the Banking Sector. A detail analysis of Advances / Investments of all Banks
vis-a-vis Islami Banks classified by Securities, Economic Purposes, Rates of
Interest/Profit & Securities, Size of Accounts, Geographical areas are
presented in the following Tables:
Table – I
Advances / Investment classified by Securities
Amount in Million Taka
(US $ 1=Taka 67.50)
Sl. No.
Types of Accounts
All Banks
Islamic Banks
Nos. of Accounts
% of total
Amount
% of total
Nos. of Accounts
% of total
Amount
% of total
1
Gold & gold ornaments
7,492
0.09
522
0.44
12
0.00
18
0.01
2
Shares & Securities
23,359
0.28
4,516
0.40
78
0.02
178
0.11
3
Merchandise
76,171
0.92
179,632
16.08
7,196
2.21
15,584
9.96
a) Export
Commodities
17,707
0.21
51,049
4.57
1,568
0.48
2,311
1.48
b) Imported
Commodities
19,697
0.24
106,595
9.54
2,925
0.91
9,953
6.36
c) Other
Commodities
38,767
0.47
21,988
1.97
2,703
0.83
3,319
2.12
4
Machineries with other fixed assets & Financial obligations
67,802
0.82
135,505
12.13
9,320
2.86
33,259
21.26
5
Real Estate with financial obligations
1,013,692
12.24
379,271
33.94
91,196
28.00
87,075
55.67
6
Financial obligations only (Insurance, Bank & Deposit etc.)
733,564
8.86
101,939
9.12
12,033
3.69
6,110
3.91
7
Miscellaneous
5,693,718
68.75
292,332
26.16
194,453
59.70
13,785
8.81
8
Unsecured
665,738
8.04
23,602
2.11
11,456
3.52
415
0.27
Total
8,281,536
100
1,117,321
100
325,744
100
156,411
100
Financing by Islamic Banks in the Real Estate is 55.67% of total investments
followed by 21.26% and 9.96% against machineries with the fixed assets and
merchandise. This is because of the fact that Islamic Banks have so far
introduced rent sharing & trading modes of investments.
Table – II
Advances / Investments classified by Economic Purposes:
Amount in Million Taka
(US $ 1=Taka 67.50)
Sl. No.
Types of Accounts
All Banks
Islamic Banks
Nos. of Accounts
% of total
Amount
% of total
Nos. of Accounts
% of total
Amount
% of total
1
Agriculture, Fishery, Poultry
5,814,134
70.21
106,746
9.55
31,530
9.68
655
0.42
2
Industry
a) Long Term
Project Finance
91,664
1.11
199,521
17.86
2,073
0.64
26,966
17.24
b) Working
Capital
50,196
0.61
220,689
19.75
8,073
2.48
33,320
21.30
3
Constructions
100,643
1.22
74,562
6.67
8,613
2.64
11,5635
7.44
4
Water works & sanitary services
765
0.01
56
0.01
15
0.00
4
0.00
5
Transport & Communications
11,294
0.14
13,837
1.24
3,841
1.18
4,013
2.57
6
Storage
10,922
0.13
7,793
0.70
47
0.01
165
0.11
7
Trade
759,298
9.17
394,935
35.35
135,426
41.57
73,290
46.86
8
Miscellaneous
1,442,620
17.42
99,180
8.88
136,126
41.79
6,360
4.07
Total
8,281,536
100
1,117,321
100
325,744
100
156,411
100
Due to small net work, the Islamic Banks could not yet make substantial
amount of Investments in the Agriculture Sector. However, Islami Bank
Bangladesh Limited (IBBL), the pioneer Islami Bank, has introduced a Micro
Investment Scheme in the year 1995. Under this Scheme, Islami Bank
Bangladesh Limited has so far provided finance to 1,64,116 clients in the
rural areas. Islamic Banks Finance in industrial Sector is 38.54% of their
total investment portfolio. This is very commendable as such finance is
contributing a lot to real economy of the country.
Table – 111
Advances classified by Geographical Areas
Amount in Million Taka
(US $ 1=Taka 67.50)
Geographical areas
All Banks
Islamic Banks
Share of Islamic Bank (%)
Amount
% of total
Amount
% of total
Urban
999,742
89.48
152,146
97.27
15.22
Rural
117,579
10.52
4,264
2.73
3.63
Total
1,117,321
100
156,410
100
Islamic Banks
All Banks
Advances classified by Geographical Areas
The Islamic Banks In Bangladesh could not yet make much headway in providing
finance to rural areas as their operations are still limited to urban areas.
The Islami Bank Bangladesh Limited, the first established Islamic Bank in
Bangladesh, has reached to 4560 villages (out of 68,000 villages) of the
country through their 101 branches and have so far provided finance
amounting to Taka 4362 million to 164,116 rural poors, the recovery rate of
which is 99%.
Section – IV
Operations of Islamic Banking in Conventional Banks
In Bangladesh 6 conventional Banks namely, Prime Bank Limited, Dhaka Bank
Limited, City Bank Limited, Premier Bank Limited, South East Bank Limited,
Jamuna Bank Limited have taken the initiative of providing Islamic banking
facilities within their existing set-up. They have established full-fledged
Islamic branches and mobilized substantial amount of deposit, making
investment and providing all types of banking services under Islamic modes.
A Bank namely 'Exim Bank' was incorporated in 2002 as a conventional Bank
but subsequently converted to an Islamic Bank. More conventional Banks are
contemplating to establish Islamic branches in the near future. The above
Banks have formed Shariah Council to oversee the operations of their Islamic
Branches and they are also member of the Central Shariah Board for Islamic
Banks of Bangladesh. The growth trend of deposit and investment of Islamic
branches of the above 6 conventional Banks is highly satisfactory.
Section – V
Evaluation of Performance of Islamic Banks:
Tools & Instruments employed.
1.00 Concept and definition of Islamic Banking:
General Secretariat of the OIC defined Islamic Banking as "An
Islamic Bank is a financial institution whose statutes, rules and procedures
expressly state its commitment to the principles of Islamic Shariah and to
the banning of the receipt & payment of interest on any of its operations."
6.02 Modes of Deposit:
Deposits are accepted by the Islamic Banks under the
following Modes:
6.02.1 Al-Wadeeah:
The word 'Al-Wadeeah' has been derived form the Arabic word
'Wadyun' which means to keep/to deposit to give up, leave off etc. In
Islamic Banking, the principle of Al-Wadeeah means, the Bank receives money
from the clients for safe-custody with the condition to return the money on
demand by the customer. Current Accounts are opened under this principle.
Depositors authorise the Bank to use the money at Bank's risk. The customer
is not entitled to receive any benefit from the Bank.
6.02.2 Al-Mudarabah:
The word 'Mudaraba' has been derived from the Arabic word
'Darb'/'Darbun' which means movement to earn rahmat (Munafa) of Allah.
Mudaraba is a form of partnership where one of the contracting parties
called the 'Shahib-al-Maal' or the 'Rabb-ul-Maal' (the financier) provides a
specified amount of capital and acts like a sleeping or a dormant partner
while the other party, called the 'Mudarib' (entrepreneur), provides the
entrepreneurship and management for currying on any venture, trade, industry
or service with the objectives of earning profits. The Mudarib is in the
nature of a trustee as well as an agent of the business. Profit is
distributed as per preagreed ratio while the loss is entirely borne by the
Shahib-al-Maal.
6.02.3 Al Mudarabah deposit Products:
There can be many types of Mudarabah deposit products. The
following are the title of some of the Mudarabah Products so far introduced
by the Islamic Banks in Bangladesh:
? Mudarabah Special Notice Deposit
? Mudarabah Savings Deposit
? Mudarabah Term Deposit
? Mudarabah Savings Bonds
? Mudarabah Special Savings (Pension)
? Mudarabah Monthly Profit Deposit Scheme
? Mudarabah Muhar Savings
? Mudarabah Cash Waqf Deposit
? Mudarabah Hajj Deposit.
6.03 Modes of Investment:
Investment can be made by the Islamic Banks under the
following Modes: However, the Islamic Banks in Bangladesh have so far
introduced Bai-Murabaha, Bai-Muajjal, Bai-Salam & Hire purchase under
Shirkatul Meelk Modes.
6.03.1 Profit & Loss Sharing Mode
? Shirkat/Musharaka
The term refers to a financing technique adopted by Islamic Banks. It is an
agreement under which the Islamic bank provides funds which are mingled with
the funds of the business enterprise and others. All providers of capital
are entitled to participate in the management but not necessarily required
to do so. The profit is distributed among the partners in pre-determined
ratios, while the loss is borne by each partner in proportion to his
contribution.
6.03.2 Profit sharing Loss bearing Mode:
? Al-Mudarabah
The word 'Mudaraba' has been derived from the Arabic word 'Darb'/'Darbun'
which means movement to earn rahmat (Munafa) of Allah. Mudaraba is a form of
partnership where one of the contracting points called the 'Shahib-al-Maal'
or the Rabb-ul-Maal' (the financier) provides a specified amount of capital
and acts like a sleeping a dormant partner while the other party, called the
Mudarib (entrepreneur), provides the entrepreneurship and management for
caring on any venture, trade, industry or service with the objectives of
earning profits. The Mudarib is in the nature of a trustee as well as an
agent of the business. Profit in distributed as per preagreed ratio while
the loss is entirely borne by the Shahib-al-Maal.
6.03.3 Bai-Mode (Buying & Selling):
? Bai-Murabaha:
Literally, sale on profit. Technically, a contract of sale in which the
seller declares his cost and profit. This has been adopted as a mode of
financing by a number of Islamic Banks. As a financing technique, it
involves a request by the client to the bank to purchase a certain item for
him. The bank does that for a definite profit over the cost which is settled
in advance.
? Bai-Muajjal:
Literally, a credit sale. Technically, a financing technique adopted by
Islamic Banks. It is a contract in which the seller allows the buyer to pay
the price of a commodity at a future date in a lump sum or in installments.
The price fixed for the commodity in such a transaction can be the same as
the spot price or higher or lower than the spot price.
? Bai-Salam:
This term refers to advance payment for goods which are to be delivered
later. Normally, no sale can be effected unless the goods are in existence
at the time of the bargain. But this type of sale forms and exception, to
the general rule provided the goods are defined and the date of delivery is
fixed. The objects of this type of sale are mainly tangible things but
exclude gold or silver as these are regarded as monetary values. Barring
these, bai-salam covers almost all things which are capable of being
definitely described as to quantity, quality and workmanship.
One of the conditions of this type of contract is advance payment; the
parties cannot reserve their option of rescinding it but the option of
revoking it on account of a defect in the subject matter is allowed. It is
also applied to a mode of financing adopted by Islamic Banks. It is usually
applied in the agricultural sector where the bank advances money for various
inputs to receive a share in the crop, which the bank sells in the market.
? Bai-Ishtisna:
Istisna'a is a sale contract by which al-sani' (the seller) on the basis of
the order placed by al-mustasni' (the buyer) after having manufactured or
otherwise acquired al-masnoo' (the goods) as per specification sells the
same to al-mustasni' for an agreed upon price and method of settlement
whether that be in advance, by instalments or deferred to a specific time.
It is a condition of Istisna'a contract that al-sani should provide either
the raw material or the labour.
? Bai-Istijrar:
Istijrar means purchasing goods from time to time in
different quantities. In Islamic jurisprudence Istijrar is an agreement
where a buyer purchases something from time to time; each time there is no
offer or acceptance or bargain. There is one master agreement where all
terms and conditions are finalized. There are two types of Istijrar:
? Whereby the price is determined after all transactions of purchase are
complete.
? Whereby the price is determined in advances but the purchase is
executed from time to time.
The first kind is relevant with the Islamic mode of financing. This kind is
permissible with certain conditions.
a. In the case where the seller discloses the price of goods at the time
of each transaction; the sale becomes valid only when the buyer possess
the goods. The amount is paid after all transactions have been completed.
b. If the seller does not disclose each and every time to the buyer the
price of the subject matter, but the contractors know that it is being
sold on market value and the market value is specified and determined in
such a manner that it does not vary and it does not lead to differences
of the contractors.
c. If at the time of possession, the price of subject matter was unknown
or contractors agree that whatever the price shall be, the sale will be
executed. However, if there is significant difference in the market price
and the agreed price, it may cause conflict. In such a case, at the time of
possession, the sale will not be valid. However, at the time of
settlement of the payment, the sale will be valid.
? Bai-Musawamah:
It refers to normal sale in which cost price is not known.
? Bai-Surf:
It refers to the sale of gold, silver and currency.
? Bai-Muqayada:
It refers to barter sale excluding currency sale.
6.03.4 Rent Sharing Mode:
? Ijarah (Lease)
The term Ijarah has been derived from the Arabic works '' (Ajr) and '????'
(Ujrat) which means consideration, return, wages or rent. This is really the
exchange value or consideration, return, wages, rent of service of an asset.
Ijarah has been defined as a contract between two parties, the Hiree and
Hirer where the Hirer enjoys or reaps a specific service or benefit against
a specified consideration or rent from the asset owned by the Hiree. It is a
hire agreement under which a certain asset is hired out by the Hiree to a
Hirer against fixed rent or rentals for a specified period.
? Ijarah wa iqtina (Hire Purchase):
This term refers to a mode of financing adopted by Islamic Banks. It is a
contract under which the Islamic Bank finances equipment, building or other
facility for the client against an agreed rental together with an
undertaking from the client to purchase the equipment or the facility. The
rental as well as the purchase price is fixed in such a manner that the bank
gets back its principal sum along with some profit which is usually
determined in advance.
? Hire purchase under Shirkatul Melk (HPSM):
Hire Purchase under Shirkatul Melk is a special type of contract which has
been developed through practice. Actually, it is a combination of three
contracts viz: Shirkat, Ijarah and Sale. Shirkat means partnership.
Shirkatul Melk means share in ownership. When two or more persons supply
equity, purchase an asset, own the same jointly, and share the benefit as
per agreement and bear the loss in proportion to their respective equity,
the contract is called Shirkatul Melk contract.
6.03.5 Production Sharing Mode:
? Mozarah:
It is a contract in which one person agrees to Till the land of the other
person in return for a part of the produce of the land.
? Musaqah:
A contract in which the owner of the garden shares its produce with another
person in return for his services in irrigating the garden.
6.03.6 Quard-al-Hasana:
A virtuous loan. A loan with the stipulation to return
the principal sum in the future without any increase.
7.00 Steps in the investment operations:
? Induction of the client
? Application
? Processing & Appraisal
? Sanction
? Documentation
? Disbursement
? Monitoring, End-use, Supervision & Recovery
8.00 Fixation of sale price of Bai-Murabaha goods:
A. Purchase price of the Goods
Plus (+)
B. Other expenditure incurred by the Bank in connection
with the purchase, transportation and storage before sale of the goods to
the client viz:
i) Conveyance
ii) Commission, if any, paid to agent
iii) Cost of remittance of Fund
iv) Transportation cost
v) Insurance
vi) Godown rent
vii) Other expenses if any.
C. Total Cost Price (A+B)
D. Profit Mark up
E. Sale Price
8.01 Fixation of Rent under 'Rent Sharing Mode:
8.01.1 Diminishing Balance Method:
In this method the installments are not equal.
Principal installment remains equal.
Rent unequal i.e. calculated on the outstanding principal.
As at the initial stage principal outstanding remain higher so rent is
higher which make the installment size larger.
8.01.2 Equal Installment Method (Annuity Method):
In this method the installments are equal.
Principal & Rent are unequal.
Rent is calculated on the outstanding principal and the rest
amount of installment is adjusted against Principal.
At the initial stage principal outstanding remain higher so rent is higher
and decreased gradually.
At the initial stage principal adjustment is less and increases
gradually.
The main difference between the Diminishing Balance Method and Annuity
Method is that the Principal adjustment is not equal.
As at the initial stage Principal adjustment is less the total Rent in this
method is more than the Diminishing Balance Method.
8.01.3 Equal Installment Method (Equal Rent Method):
In this method the installments are equal.
Principal & Rent remain equal.
Rent is calculated for the whole period of Investment considering
diminishing balance of Principal & equally distributed all over the
repayment period.
Though the total rent on the investment in this case is equal to that of
Diminishing Balance Method but the effective R.R. is less due to opportunity
loss on the calculated but not realized rent for the 1st half of the
repayment period.
9.00 Nature of Shariah Lapses generally occur in Investment
Operations:
9.01 Cash facilities are allowed to the client instead of investment
through buying and selling of goods.
9.02 Fresh investments are allowed for adjustment of previous liability
of the client without proper buying and selling of goods.
9.03 Letter of authority is not obtained from the client in case of
investment against Bai-Murabaha (Post Import) and Bai-Murabaha under
dealership license in the name of Investment Clients.
9.04 Rent/Profit is charged and recovered for the gestation period under
Hire Purchase Sunder Shirkatul Melk investment.
9.05 Pre-fixed profit is recovered in the Pre-shipment Musharaka
Investment instead of actual profit.
9.06 Cash Memo obtained in the name of Client instead of in the name of
the Bank.
9.07 Cash Memo is not at all obtained.
9.08 Agreements are kept blank and undated.
9.09 Back dated/Post Dated cash Memo is obtained.
9.10 The application for Payment Order/Demand Draft/T.T. etc. is signed by
the Client instead of signing the same by the Bank.
9.11 The amount of disbursement does not agree with the amount of Cash
Memo.
9.12 Goods are received directly by the Client instead of receipt of goods
first by the Bank and then by the Client.
9.13 Documents of receiving goods by the Branch are not available in the
Branch record:
9.14 Bai-Muajjal investment is allowed in case of Stock-lot items.
10.00 Distribution of Profit to Mudaraba Depositors:
The principles of calculation and distribution of profit to
Mudaraba Depositors generally followed by different Islami Banks are as
under:
10.01. Mudaraba Depositors share income derived from investment of their
fund.
10.02. Mudaraba Depositors do not share any income derived from
miscellaneous banking services where use of their fund is not involved, such
as commission, exchange, service charges and other fees realised by the
Bank.
10.03. Mudaraba Deposits get priority in the matters of investment over
Bank's equity and other cost free funds.
10.04. The gross income derived from investments during the accounting
year is, at first, allocated to Mudaraba Deposits and Equity &
cost-free-funds according to their proportion in the total investment.
10.05. The share of gross investment income of Mudaraba Deposits as
worked out in terms of principle shown against serial No 10.04 is
distributed as under:
a) Bank retains a preagreed portion (say 20%) as
management fee for managing the investment.
b) Bank retains another preagreed portion (say 15%) for
off-setting investment loss or with a view to maintaining a general
level of return on Mudaraba Deposits.
c) The remaining portion (say 65%) is distributed to
Mudaraba Depositors applying weightages.
10.06. Let us suppose that an Islami Bank applies the following
weightages to Mudaraba Deposits.
a) Mudaraba Hajj Savings Deposit
110%
b) Mudaraba Term Deposits 36
Months 100%
24 " 98%
12 " 96%
06 " 92%
03 " 88%
c) Mudaraba Savings
75%
d) Mudaraba Short Notice
55%
10.07. On the basis of the above principles, let us work out the rates
of profit using the information and figures given below:
a) Total Investment
Tk. 1000
b) Total Investment Income
Tk. 150
c) Total fund employed
i) Banks equity and Al-Wadeeah Deposits
Tk. 200
ii) Mudaraba Deposits
Tk. 800
Tk. 1000
Therefore the share of investment income of Mudaraba
Deposit will be
(150 ¸ 1000 ´ 800)
Tk. 120.00
Less:
a) 20% Management Fee
Tk. 24.00
b) 15% Loss Off-setting Reserve
Tk. 18.00
Tk. 42.00
Distributable Investment Income
Tk. 78.00
Sl. No
Type of Mudaraba Deposit
Yearly Product
Weightage %
Weighted Product
Share of Distributable Profit
Rate of Profit
1
2
3
4
5
6
7
1
Mudaraba Hajj Savings
120
110
132.00
11.71
9.75%
2
Mudaraba Term Deposit
36 Months
100
100
100.00
8.88
8.88%
24 Months
110
98
107.80
9.56
8.69%
12 Months
80
96
76.80
6.81
8.51%
06 Months
125
92
115.00
10.20
8.16%
03 Months
95
88
83.60
7.41
7.80%
3
Mudaraba Savings
220
75
165.00
14.64
6.65%
4
Mudaraba Short Notice
180
55
99.00
18.79
4.88%
TOTAL
1030
879.20
78.00
11.00 Foreign Trade & Foreign Exchange business under Islamic
Framework:
Musharaka can be used for Import Financing as well. There are
two types of bank charges on the letter of credit provided to the importer:
11.01 Import Financing
a. Service charges for opening an LC
b. Interest charged on LCs, which are not opened on full margin.
Collecting service charges for this purpose is allowed, but as interest
cannot be charged in any case, experts have proposed two methods for
financing LCs:
a. Based on Musharakah/Mudarabah.
b. Based on Murabaha.
11.01.1 Musharakah/Mudarabah:
This is the best substitute for opening the LC. The Bank and
the importer can make an agreement of Musharakah or Mudarabah modes before
opening the LC.
If the LC is being opened at zero margin then an agreement of Mudarabah can
be made, in which the bank will become Rab-ul-Mall and the importer Mudarib.
The bank will own the goods that are being imported and the profit will be
distributed according to the agreement.
If the LC is being opened with a margin then a Musharakah agreement can be
made. The bank will pay the remaining amount and the goods that are being
imported will be owned by both of them according to their share of
investment.
The bank and the importer, with their mutual consent can also include a
condition in the agreement, whereby; Musharaka or Mudarabah will end after a
certain time period even if the goods are not sold. In such a case, the
importer will purchase the Bank's share at the market price.
11.01.2 Bai-Murabahah:
At present Islamic banks are using Bai-Murabaha, to finance LC. These banks
themselves import the required goods and then sell these goods to the
importer on Bai-Murabahah agreement.
Bai-Murabahah financing requires the bank and the importer to sign at least
two agreements separately; one for the purchase of the goods, and the other
for appointing the importer as the agent of the bank (agency agreement).
Once these two agreements are signed, the importer can negotiate and
finalize all terms and conditions with the exporter on behalf of the bank.
11.02 Export Financing:
A bank plays two very important roles in Exports. It acts as
a negotiating bank and charges a fee for this purpose, which is allowed in
Shariah. Secondly, it provides export-financing facility to the exporters
and charge interest on this service. These services are of two types:
a. Pre shipment financing
b. Post shipment financing
As interest cannot be charged in any case, experts have
proposed certain methods for financing exports.
11.02.1 Pre Shipment Financing:
Pre shipment financing needs can be fulfilled by two methods
a. Musharaka/Mudarabah
b. Bai-Salam
The most appropriate method for financing exports is
Musharakah or Mudarabah. Bank and exporter can make an agreement of
Mudarabah provided that the exporter is not investing; other wise
Musharakah agreement can be made. Agreement in such case will be
easy, as cost and expected profit is known.
The exporter will manufacture or purchase goods and the
profit obtained by exporting it will be distributed between them
according to the predefined ratio.
A problem that can be encountered by the bank is that if the
exporter is not able to deliver the goods according to the terms and
conditions of the importer, then the importer can refuse to accept the
goods, and in this case exporter's bank will ultimately suffer. This problem
can be solved by including a condition in Mudarabah or Musharakah agreement
that, if exporter violates the terms and conditions of export agreement then
the Bank will not be responsible for any loss which arises due to this
negligence. This condition is allowed in Shariah as the Rabb-ul-mal is not
responsible for any loss that arises due to the negligence of Mudarib.
11.02.2 Bai-Salam:
Bai-Salam is being used in Islamic Banks for export
financing. Banks purchases goods that are to be exported at price that is
less than the price agreed between the exporter and the importer. It then
exports goods at the original price and thus earns profit.
Bai-Salam financing requires bank and exporter to sign at
least two agreements separately, one for the purchase of goods and the other
for appointing the exporter as the agent of the bank (that is agency
agreement). Once these two agreement are signed, the exporter can negotiate
and finanlize all the terms and conditions with the importer on behalf of
the bank.
Post Shipment Financing:
Post shipment finance is similar to the discounting of the bill of exchange.
Its alternate Shariah compliant procedure is discussed below:
The exporter with the bill of exchange can appoint the bank as his agent to
collect receivable on his behalf. The bank can charge a fee for this service
and can provide Quard-al-Hasana to the exporter, which is equal to the
amount of the bill, and the exporter will give his consent to the bank that
it can keep the amount received from the bill as a payment of the loan.
Here two processes are separated, and thus two agreements will be made. One
will authorize the bank to collect the bill amount on his behalf as an
agent, for which he will charge a particular fee. The second agreement will
provide Quard-al-Hasana to the exporter, and authorize the bank for keeping
the amount received through bill as a payment for Quard-al-Hasana.
Section – VII
National & International ratings of the Pioneer Islamic Bank
"Islami Bank Bangladesh Limited".
IBBL's past performances have been evaluated by Bangladesh Bank,
several credit rating agencies home & abroad and by the local press.
International Press
"In the midst of a difficult Banking system known to be plagued
by high non-performing loans (NPLs), one could easily conclude that
it would be difficult to find a bank that is different from norm.
However, IBBL provides a refreshing change and is, thus, a pleasant
surprise. Although it does not command the market share as the 4
public sector banks, IBBL, which claims to have little interference
in lending from the government, has nonetheless, managed to find a
niche market of its own-says the 'BANK WATCH' a New York based
international Credit Rating Agency in its January 30, 1998 issue.
"As a market leader offering banking services based on the Islamic
rule of Shariah, IBBL's profitability trend has been quite impressive.
The Bank's ability to keep its return on asset (ROA) well above the
industry's average, reflected its resilience to possible shocks in
the banking system. Concerns over massive NPLs and under provisioning
are common amongst local banks. But this seems well resolved in IBBL.
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, 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 29th 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 Ltd.(IBBL) has created a unique precedence
by improving its reserve and deposit positions substantially, making
handsome profits, and offering attractive dividends to its share
holders and depositors."
IBBL's World rating
As per Bankers' Almanac (2006 edition) published by the Reed Business
Information, Windsor Court, England, IBBL's world Rank is 1620 among
3000+ banks selected by them and country rank 5 among 49 Banks. CRISL, a
Joint Venture credit rating Agency, operating in Bangladesh rated IBBL 'ST-I',
highest grade which means highest certainty of timely payment. Short term
liquidity including internal fund generation is very strong and access to
alternative sources of funds is outstanding. Safety is almost like risk free
government short term obligations.
Success Stories of Islamic Bank Bangladesh Limited:
The IBBL has many success stories of achievements. These are
summarised below :
One : IBBL is the pioneer institution for introduction of
Islamic Banking in Bangladesh.
Two : The success of IBBL has imbibed other sponsors at home and
abroad to establish Islamic Banking in Bangladesh. Four national, one
international Islamic banks have since been established in the
country. 6 private sector traditional banks have also established
several Islamic Banking branches. Several other existing traditional
banks have also expressed their intention to introduce Islamic
Banking.
Three: IBBL has successfully mobilised deposits from a section of
people who hither-to-before did not make any deposit with interest
based banks.
Four : The Islamic Banking products which are offered by IBBL
through its 169 branches located at important centres all over the
country and spontaneous acceptance of those products by the people
proves the superiority of Islamic banking.
Five : IBBL's market share of deposit investment and ancillary
business is steadily increasing.
Six : IBBL, though still a tiny bank, handles more than 10% of
country's export and import trade.
Seven: Among the contemporary commercial Banks IBBL's position is
first in respect of mobilisation of deposit, deployment of fund and
earning profit.
Eight: Investment in industrial sector occupies about 38% of IBBL's
investment portfolio. This is a unique example of industrial
finance by a commercial Bank.
Nine: More than 2,00,000 workers are employed in the industrial
projects financed by IBBL. IBBL has thus made significant
contribution to solving unemployment problem of the country.
Ten: Dhaka- the capital of Bangladesh being a Mega city- has acute
transport problem. IBBL has joined hands with an enterprising group to
introduce a fleet of Premium Bus service which has attracted the
attention of all section of the people and mitigated transportation
problem of the city to some extent.
Eleven: IBBL has introduced several other welfare oriented investment
schemes, such as Small Transport Investment Scheme, Small Business
Investment Scheme, Agriculture Implements Investment Scheme, Poultry
Investment Scheme, Household Durable Investment Scheme, Housing
Investment Scheme etc.
Twelve : IBBL launched a Rural Development Scheme for providing
finance to drown trodden section of the populace - an area where no
other Commercial Bank has extended any finance. IBBL's mission is
to reach to all 68,000 villages of the country as early as
possible.
Thirteen : IBBL has contributed 3000 million Taka as income tax to the
Government Exchequer on its net profit over the last 22 years.
Fourteen : At the initiative and drive of IBBL, several Universities in
Bangladesh have introduced Courses on Islamic Banking and finance.
Fifteen : IBBL has organised a good number of national and
international Seminars on Islamic Banking and Economics. Importantly,
IBBL sponsored a Seminar at Dhaka with a view to forming an Islamic Common
Market.
Sixteen : IBBL has earned reputation in the country as a corruption
free Institution.
Seventeen : IBBL is held in high esteem in the banking circle
as a good managed bank.
Eighteen : Under the leadership of IBBL, Bangladesh Association
of Banks (BAB) has been formed. This is a platform to ventilate the
stand-points on banking issues of the private sector banks.
Nineteen : IBBL has established a foundation called 'Islami
Bank Foundation' for carrying out social welfare activities. The
foundation has taken up a number of schemes covering the whole of
Bangladesh. A sum of Taka 1000 million has so far been spent in
social welfare activities. Some important Schemes of the Foundation
are -
Welfare Activities of Islami Bank Foudnation
Income generating scheme
The objective of this scheme is to encourage unemployed youths in
nation building activities and to make them self reliant. This scheme
has been taken up to train rural health workers and to fund
poultry, pisci-culture, cottage industry, small trading, in addition to
providing rickshaws, sewing machines etc. for income and employment
generation.
Educational Scheme
Scholarship & stipend are awarded to the poor and meritorious
students under this scheme.
Health Scheme
This scheme has been taken up to establish child and maternity
centres, charitable dispensaries, provide grants for medical treatment
of the poor, install tube-wells for the supply of pure drinking water
and build sanitary latrines in order to fulfill health needs of the
rural people.
Humanitarian Assistance
Humanitarian assistance are provided to the poor, disabled persons,
families affected by river erosion and for marriage of poor girls.
Emergency Relief Operations
Financial assistance to the people affected by natural calamities is
provided under this scheme.
Service Centre
The Foundation has been establishing permanent service centres in
coastal areas and off-shore islands to be used for the purpose of
integrated social development as well as safe shelter during
natural disaster.
HRD Programme
Under HRD programme, the foundation has established several
Technical Training Centres for imparting vocational training and
kindergarten Schools. Projects like mosque based income generating
centres and prisoner rehabilitation projects are expected to be
established in the near future.
Assistance to Mosque
Financial assistance for construction, extension and renovation of
mosques are provided under this scheme.
Sales Centre
Foundation has established sales centres to encourage poor women folk
for self employment and for marketing home made garments,
handicrafts and other items produced by them.
Islami Bank Hospital
The Foundation has set up hospitals for providing modern medical
treatment to all sections of the people at reasonable cost. By
now, the Islami Bank Hospitals have earned good reputation in the
society.
Problems Specific to Islamic Banking in Bangladesh
1. Shortage of Supportive and Link Institutions
Any system, however well integrated it may be, cannot thrive exclusively on
its built-in elements. It has to depend on a number of link institutions and
so is the case with Islamic banking. For identifying suitable projects,
Islamic banking can profitably draw the services of economists, lawyers,
insurance companies, management consultants, auditors and so on. They also
need research and training forums in order to prompting entrepreneurship
amongst their clients. Such support services properly oriented towards
Islamic banking are yet to be developed in Bangladesh.
2. Lack of Organising Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to
organise their relationships with foreign banks, and more generally, how to
conduct international operations. This is, of course, an issue closely
related to the creation of financial instruments, which would be
simultaneously consistent with Islamic principles and acceptable to
interest-based banks, including foreign banks.
3. Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government.
They can not benefit from hidden costs and inputs, which elevate the level
of prices by certain entrepreneurs without any justification. On the other
hand, Islamic banks as financial institutions are even more directly
affected by the failure of the projects they finance. This is because the
built in security for getting back their funds, together with their profits,
is in the success of the project.
Prospects of Islami Banking in Bangladesh
Despite the above problems and shortcomings the Islamic Banks have the
following further prospects to grow:
a) Islamic bank investment portfolio can be diversified and extended for
long term financing under Musharaka and Mudaraba.
b) The clients of the Islamic Bank may be equipped with
knowledge of Islamic banking through seminars and symposia.
c) Islamic banks can develop unanimous Shariah Manual or guide
lines for day to day consultation and clientele motivation.
d) Islamic Banks can expand their network in the rural areas of
Bangladesh.
e) The research and development (R & D) for Islamic Economics,
Banking and Finance can be geared up.
f) Co-operation among Islamic banks can be extended throughout
the world.
g) Muslim countries, who have established Islamic banks, if
involve with international trade on Islamic principles, that would
contribute to grow international transactions under interest-free
system. This will further help developing an Islamic Common Market.
h) The central banks of the Muslim Countries can help creation of
environment for Islamic Banking with more responsibilities.
i) Uniform accounting systems and standards already developed by
the Accounting & Auditing Organisation for Islamic Financial Institutions
for providing consistency in accounting treatment of various
operations and products of Islamic banks may be introduced by all
concerned.
j) New and 'innovative' products can be designed for financing on Profit
and Loss sharing basis.
References:
1. Ahmad, Ausaf, Development and Problems of Islamic Banks, Islamic
Research and Training Institute, Islamic Development Bank, Jeddah, Saudi
Arabia, 1407-H-1987.
2. Ahmed, Dr. Mahmood, "Scope for Micro Enterprise Development in
Bangladesh Under Islamic Finance." Journal of Islamic Banking & Finance, Vol
15, No. 1, the Association of International Islamic Banks, Karachi (Asian
Region), (Jan-Mar, 1998).
3. Chapra, M.Umar, Islam and the Economic Challenge, The Islamic
Foundation, Nairobi, Kenya and the International Institute of Islamic
Thought. London and USA 1416H(1995).
4. Hamud, Sami Hasan, Progress of Islamic Banking : The Aspirations and
the Realities, Islamic Economic Studies, Vol. 2, No. 1, Rajab 1415H
(December 1994), Islamic Research and Training Institute, Islamic
Development Bank, Jeddah, KSA.
5. Huq, M. Azizul, Islamic Banking in Bangladesh with a brief overview of
Operational Problem, A paper presented at the seminar held at BIBM on June
24, 1996.
6. Islam, Md. Muzahidul (Associate Professor of Finance & Banking, D.U.)
Islamic Banking in Bangladesh : Success, Problems and Potentialities (in
Bangla), unpublished.
7. Khan A.R. Towards Identification of the Problems of Shariah-based
Commercial Banking, Dhaka University Journal of Business studies, Vol. 12,
No. 2, December 1991.
8. Rahman, Dr. Md. Ataur (Associate Prof. of Management, DU) Islamic
Banking : A Challenges to interest-based banking (in Bangla), unpublished.
9. Readings in Islamic Banking – Bangladesh Islamic Banker Association,
1984.
10. Text Book on Islamic Banking: M. Kabir Hasan Ph.D., June 2003.
11. Meezan Bank's Guide to Islamic Banking, Karachi, Pakistan.
12. Bangladesh Bank Annual Report 2002-2003.
13. Scheduled Banks Statistics: Bangladesh Bank Jan – March, 2003.
14. Bangladesh Bank Economic Trends, April, 2003.
15. Annual Reports of Islamic Banks operating in Bangladesh.
16. Islami Bank 18 year of progress.
17. IBBL – Principles of Distribution of profit to Mudaraba Depositors.
18. The Social dimension of IBBL, July 1996.
19. The Bank Companies Act – 1991.
20. The Income Tax ordinance 1984.
21. Bank Parikrama – A Journal of the Bangladesh Institute of Bank
Management, Sept – December, 1989.
22. IBBL – Memorandum & Articles of Association.
23. BANK WATCH, Newyork – Jan, 30, 1998.
24. The Financial Express, Dhaka – May 28, 1998.
25. The Holiday, Dhaka – August 29, 1997.
26. Bankers' Almanac, UK-2006.
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