Assignment Presentation : Assignment on Islamic Bank part 1 of 3

HISTORIES AND GROWTH OF ISLAMIC BABKING AROUND THE WORLD

In the 20^th century ,the financial and Banking world come to acquainted with a new member in the money market known as Islamic Bank with some special features.Islami banking gradually evolded during the last thirty years in some parts of the Muslim world.During 1960’s it was observed that Muslims of Malayasia used to save miney primarully for performing Hazz.Such savings mostly kept idle in pillows,under mattresses and floor for avoiding interest,which was unproductive and damaging for the growth and development of ecnomy.For utilizing such saving the Government of Malayasia in 1962 established an interest free financial institution known as “Pilgrims Saving Corporation”.In 1963 Ahmed El Nujjar established a bank at MITGAMAR inegypt by his personal endeavor with a view to bring some development in socio-economic field in the process of Islam.this Mitgrambank is considered as the Father of Modern Islamic Banking and A.E Niffar is considered as the Father jof Islamic Banking System.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 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 inter-mediation 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 banks income. In addition, banks also provide many other services to the public for which it receive 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 major negative factor that contributes to cyclical fluctuations in the economy (Minsky 1982). More recent concern over the potential instability of the world monetary and financial system was expressed by Maurice Allais, a Noble Laureate in the called for an urgent reform of the World Economic order (Allais 1993, pp13-16) . Others vehemently opposes the argument for using rate of interest as a stabilizing tool in the economy (Saud 1980, p. 88) . This called for the emergence of a new system of banking capable of tacking new challenges that the present world economy , particularly the financial sector, has been facing.

To create a sound economic system all the nations of the world urge to fashion and design their economic lives in accordance with the precepts of Islam. In this regard all the conventional banks are trying to reform their financial structure according to the light of Islam.

Now More than 50 Islamic Banks and Islamic institutions have been operating their business all over the world.Besides Muslim countries,Islamic Banks are operating their banking business in non- Muslim countries.

ISLAMI BANK AS A FINANCIAL INSTITUTION

Islamic bank is a financial institution that performs ;most of the standard banking activities oj the basis of profit-loss sharing system conforming the principles of Islami shariah.It operates with the objectives to implement and materialize the economic and financial principles of Islam in the banking arena.According to Islami Banking Act 1983 of Malaysia,Islami Bank is a Company which carries on Islami banking business…,Islami Banking bisomess means baking business whose aims and operations do not involve any element which is not approvedby the religion of Ilsam”.Islamic Banking is essentially normative concept and could be defined as the conduct of in consonance with the ethos and to the value system of Islam.”

The Organisation of (Ali & Shaskar 1995, pp-20-25) Islamic bank is a "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 the religion Islam" (Act No 4.276).

Shawki Ismail Shehta viewing the concept from the perspective of an Islamic economy and the prospective role to be played by an Islamic bank therein opines. "It is, therefore, natural and, indeed, imperative for an Isamic bank to incorporate in its functions and practices commercial investment and social activities, as an institution designed to promote the civilized mission of an Islamic economy" (lbid) .

Ziauddin Ahmed says, "Islamic banking is essentially a nomative concept and could be defined as conduct of banking in consonance with the ethos of the value system of Islam" (lbid).

It appears from the above definitions that Islamic banking is a system of financial intermediation that avoids receipt and payment of interest in its transactions and conducts its operations in a way that it helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system Whose operation is based on Islamic principles of transactions of which profit and loss sharing (PLS) is a major feature, ensuring justice and equity in the economy. That is why Islamic banks are often know as PLS-banks.

Four elements of Islamic Bank:

1 To avoid Bank interest.

2 Invest money on profit.

3 Invest money in Halal business.

4 follow shariah principles.

PROFIT AND RIBA

Profit : Profit on loss comes from investment in business activities. Profit is the result of ownership transaction and risk following the fours stages :

· Transformation through Bai /Buying Selling of goods.

· Risk of Transformation and Ownership.

· Other Condition of Shariah.

· Result-Profit on loss

Profit is the difference between the value of production and the cost of production which is Halal according to Islami Shariah

Interest : Interest come from loan, credit, advance of money. 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.

From the Islamic Shariah point of view, Riba is Harram.

OBJECTIVE OF ISLAMIC BANKING

· To eliminate interest

· To develop human resources for enhancing economic growth and quality of life.

· To cover the fulfillment of the basic needs of the people.

· The objectives of Islamic banking is not only to earn profit, but to do good and welfare to the people. Islam upholds the concept that money, income and property belong to Allah and this wealth is to be used for the good of the society .

· Islamic banks operate on Islamic principles of profit and loss sharing ,strictly avoiding interest, which is the root of all exploitation and is responsible for large-scale inflation and unemployment.To avoid economic instability

· An Islamic bank is committed to do away with disparity and establish justice in the economy, trade, commerce and industry; build socio-economic infrastructure and create employment opportunities.To provede safety net for the weak, poor and distressed.

ISLAMI BANK 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 system as per Islamic Shariah.

In Jnuary 1981, Late President Ziaur Rahmank while addressing the 3^rd 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 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 of immediate introduction. Two professional bodies Islamic Economics Research Bureau (ERB) 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.

At last, in March 1983, the long drawn struggle to establish an Islamic Bank in Bangladesh become a reality and Islami Bank Bangladesh Limited was established; which including - 19 Bangladeshi national, 4 Bangladeshi institutions and 11 banks, Financial institutes and government bodies of the Middle East & Europe including IDB, Two eminent personalities of the kingdom of Saudi Arabia.

Later, other four Islamic Banks, Islamic insurance companies and Financial institution were established in the country some traditional banks opened Islamic Banking Branches in some major cities.

Al-Baraka Bank Limited, called the second Islamic Bank in Bangladesh, commenced banking business as a scheduled bank on May 20, 1987.

Superiority of Islami Bank Bangladesh Ltd. than OVER TRADITIONAL BANKING

Isaamic bank is superior over the traditionai bank for the following reasons:

o Abolition of interest based loan market

o All activities are conducted on interest-free system according to Islamic Sharia principles.

o There is no fixed cost of capital

o Stimulation for acceleratingsaving and capital formation

o Efficient allocation of investment ,production and profit

o Lower inflationary situation.

o Investment is made though different modes as per Islamic Shariah.

o Investment-income of the Bank is shared with the Mudaraba depositors according to an agreed upon ration, ensuring a reasonably fair rate of return on their deposits.

o Establishment of adal to attain Ehsan and Falah in this life and the life hereafter.

o Easy recovery of investment capital.

o Aims to introduce a welfare-oriented banking system and also establish equity and justice in the field of all economic operations.

o Extend socio-economic and financial services to individuals of all economic backgrounds with strong commitment in rural uplift.

o Plays a vital role in human resources development and employment-generation particularly among the unemployed youths.

o The possibility of bank faillureis remote.

Vision

The vision of IBBL is to always strive to achieve superior financial performance, be considered a leading Islamic Bank by reputation and performance.

· 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 people, based upon accountability, transparency and integrity in order to ensure stability of financial system.

· Try to encourage savings in the form of direct investment

· Try to encourage investment particularly in projects which are more likely to lead to higher employment.

Mission

To established Islamic Banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the field of all economic activities, achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less development areas

of the county. To encourage socio-economic upliftment and financial services to the low-income community particularly in the rural areas.

Management of IBBL

Islami Bank Bangladesh Limited is managed by a 24-member Board. Of the Directors 8 are foreigners and 16 are local. A 9-member Executive Committee is formed by the Board of Directors for efficient operation of the Bank, a Management Committee looks after the affairs of the Bank.

REGISTERED OFFICE

Islami Bank Tower

40, Dilkusha Commercial Area

Dhaka-1000, Bangladesh, GPO Box No. : 233

Phone : PABX-9563040 (Hunting 8 Lines), 9560099, 9567161, 9567162,9559417

Telex : 671620 IBANK BJ

Fax : 9564532, 9568634, Cable : ISLAMIBANK

S.W.I.F.T : IBBLBDDH

E-mail : ibbl@ncll.com, ibbl@agni.com

web.site : www.islamibankbd.com

Board of Directors

Chairman

Shah Abdul Hannan

Vice-Chairman

Yousuf Abdullah Al-Rajhi

Repr. of Al-Rajhi Co. for Industry & Trade, K.S.A

Mir. Quasem Ali

Repr. of Ibn Sina Trust

Directors

A.N.M.A Zaher

Repr. of Ibn Sina Pharmaceutical Industry Ltd.

Mohammad Mosharraf Hussain, MP

Moulana Mohammad Kutubuddin

Repr. of Islami Economics Research Bureau

Engr. Mustafa Anwar

Engr. Md. Eskander Ali Khan

Nazir Ahmed

Md. Shahidul Islam

Engineer Muhammad Dawood Khan

Professor Korkut Ozal

Repr. of Islamic Development Bank, K.S.A.

Engr. Mohammad Fouad Al-Khateeb, K.S.A.

Repr. by :

Nur Mohammad Akon

Alternate Director

Abdullah Abol Fatih

Repr. of Bahrain Islamic bank, Bahrain.

Mohammad Saeed Al-Sharif

Repr. of Dubai Islamic Bank, U.A.E.

Abdel Al-Banwan

Repr. of Kuwait Finance House, Kuwait

Sheikh Abdul Wahab A. Al-Houti

Repr. of Kuwait Awqaf Public Foundation, Kuwait

Md. Fazle Azim

Mominul Islam Patway

Repr. of Maruf Foundation

Md. Fayekuzzaman

Repr. of Investment Corporation of Bangladesh

Abdur Raquib

Ex-Officio Director

Executive President

Membership in International and National Bodies

International Affiliations

This Bank is a member of the under noted Foreign Organisations :

i) Accounting and Auditing Organizations for Islamic Financial Institutions (AAOIFI), Manama, Bahrain.

ii) General Council for Islamic Banks and Financial Institutions (GCIBFI), Manama, Bahrain and has also become member of the Executive Committee of GCIBFI.

iii) International Chamber of Commerce-Bangladesh.

Local Affiliations

The Bank is also member of the under noted Local Organsations :

i) Bangladesh Institute of Bank Management (BIMB)

ii) The Institute of Bankers, Bangladesh (IBB)

iii) Bangladesh Foreign Exchange Dealers’ Association (BAFEDA)

v) Central Shariah Board for Islamic Banks in Bangladesh

vi) Islami Banks Consultative Forum (IBCF) and

vii) Dhaka Chamber of Commerce & Industry.

Table-1 : Five Years Performance of Ibbl At A Glance

Particulars	1998	1999	2000	2001	2002
Authorised Capital	500.00	500.00	1,000.00	1,000.00	1,000.00
Paid-up Capital	317.98	320.00	320.00	640.00	640.00
Reserved Fund	1,011.84	1,115.61	1,759.65	1,998.04	2,852.07
Total Equity	1,517.55	1,659.26	2,671.06	2,993.24	3,540.52
Deposits (including Bills Payable)	20,021.69	25,190.65	32,112.81	41547.29	55,461.62
Investments (including Inv. in Shares) (Gross)	17,366.27	22,198.26	29,563.20	37,648.75	49,185.92
Import Business	20,238.30	20,396.00	25,327.00	25,907.00	33,788.00
Export Business	14,894.30	14,798.00	16,889.00	16,082.00	16,673.00
Remittance	6,360.60	8,415.00	7,644.00	9,879.00	14,670.00
Total Foreign Exchange Business	41,943.20	43,609.00	49,860.00	51,868.00	65,131.00
Total Income	1,629.38	1,966.24	3,207.81	4,259.55	5,234.07
Total Expenditure	1,480.99	1,787.93	2,877.57	3,683.43	4,240.02
Net Profit before Tax	148.39	178.31	330.24	576.12	994.05
Payment to Govt. (Income Tax)	51.94	62.41	104.03	181.48	397.62
Dividend	21%	21%	25%	25%	25%
Total Assets (including Contra)	30,843.90	39,133.40	49,250.36	58,550.81	78,360.74
Total Assets (excluding Contra)	23,025.33	31,314.82	39,362.27	49,458.22	65,080.70
Fixed Assets	363.47	498.90	1,121.15	1,276.89	1,723.43
Number of Foreign Correspondents	650	675	775	815	830
Number of Shareholders	6,989	7,185	7,549	9,917	10,757
Number of Employees	2,171	2,302	2,685	3,060	3,297
Number of Branches	105	110	116	121	128
Book Value per Share (Taka)	4,772	5,185	4,174	4,677	5,532
Earning per Share (Taka)	270	362	353	617	932
Market Value per Share (Taka) Highest)	2,65	2,300	3,305	3,205	3,956
Capital Adequacy Ratio	11.39%	8.90%	10.59%	9.24%	8.64%

Note : One Million = Ten Lac

Functions of IBBL

The functions of Islami Bank Bangladesh Limited are as under :

A)GENERALBANKING

It includes-

Mobilization of deposits

Rreceipts and payment of cash

Handling transfer transaction

Operations clearing house

Maintenance of accounts with Bangladesh Bank and other Banks

Vollections of checks and bills

Issue and payment of Demand Draft ,telegraphic transfer and Payment Order

Executing customers standing instructions.

Maintenance of safe deposit lockers

Maintenanceof internal accounts of the bank.

While doing all the above noted work IBBL issue cheques-book ,Deposite account

operating forms,Sscards, cheque book,ledger,cash books Deposit account ledger,

preparation statements of accounts and passbook, balance different accounts and

calculates profits.

Islami Bank Bangladesh Limited offers to open the following account to the

depositor

i.Al-Wadeeah Current Account.

ii. Mudaraba Savings Account.

iii. Mudaraba Term Deposit Account : 3 month /6 moth /12 month /24 month /36 moth term.

iv. Mudaraba Special Notice Account.

v. Mudaraba Hajj Savings Account (a special account to facilitate performance of Hajj by fixed income groups) : 1 year to 25 year term.

vi. Mudaraba Special Savings (Pension) Account-5 year and 10 year term.

vii. Mudaraba Savings Bond Scheme : 5 year and 8 year term.

viii.Mudaraba Foreign Currency Deposit (Savings) Monthly Profit Deposit Account : encourages foreign wage earners to remit foreign currencies

ix. Mudaraba Monthly Profit Deposit Account : earn profit on a monthly basis

x. Mudaraba Muhar savings Account : enables Muslims to build up fund to pay to their wives the Muharana fixed at the time of marriage

o To operate Current Account on Al-Wadeeah principle and all other deposit accounts on Mudaraba principle of Islamic Shariah.

o The Bank distributes minimum 65% of its investment-income, earned through deploymnet of Mudaraba deposits, among the Mudaraba Deposits.

Weightages of Different Mudaraba Accounts :

Name of Account	Weightage
1. Mudaraba Special Savings (Person) A/C : 10 years	1.30
2. Mudaraba Special Savings (Person) A/C : 5 years	1.10
3. Mudaraba Savings Bond : 8 years	1.25
4. Mudaraba Savings Bond : 5 years	1.10
5. Mudaraba Hajj Savings A/C	1.10
6. Mudaraba Monthly Profit Deposit A/C	1.05
7. Mudaraba Term Deposit A/C : 36 Months	1.00
8. Mudaraba Term Deposit A/C : 24 Months	0.98
9. Mudaraba Term Deposit A/C : 12 Months	0.96
10. Mudaraba Term Deposit A/C : 6 Months	0.92
11. Mudaraba Term Deposit A/C : 3 Months	0.88
12. Mudaraba Savings A/C	0.75
13. Mudaraba Special Notice A/C	0.55

The year 2002 was another year of mobilization of deposits. Total deposits stood at Tk. 55,462. million as on 31^st December 2002 as against Tk. 41,647.00 million of the preceding year registering an increase of Tk. 13,915.00 million, i.e., 33% as compared to the growth rate of 12% of the banking sector. Total number of depositors rose to 1,651,122 as on 31^st December 2002 from 1,355,053 of the preceding year, registering an increase of 22%.

Table-2 : Growth of Deposit : 1998 to 2002

Year	Deposit (Tk in Million)
1998	20,022
1999	25,191
2000	32,113
2001	41,547
2002	55,462

(b Investment

IBBL invests its moneyin various sectors of the economy through different modes are permitted by the Shariah and approved by theBangladesh Bank.The mdes of investmentare as follows:

A)Ba-Mechanism

Bai-Murabaha

Bai-Muazzal

Bai-Salam

Istisna

B)Leasing, Ijara,Hire Purchase(HP),Hire Purchase under Shirkatul Meilk(HPSM)

C)Shirkat Mechanism

Musharaka

Mudaraba

Investment of the Bank stood at Tk. 46,281.00 million as on 31.12.2002 as against Tk. 35,238.00 million as on 31.12.2001 showing an increase of Tk. 11,043.00 million, i.e. 31% as against 18% growth of investment of the Banking sector. This increased investment growth of the Bank in 2002 may be attributed to the thrust given to promote investment in order to deploy the surplus liquidity.

Table-3 : Growth of Investment : 1998 to 2002

Year	Growth of Investment (Tk in Million)
1998	13,435
1999	20,585
2000	27,437
2001	35,238
2002	46,281

c) To Conduct Foreign Exchange Business

The foreign trade handled by the Bank may be classified as under :

(i) Import Business

(ii) Export Business

(iii) Foreign Remittance

(iv) Necessary services relating foreign Business & Trade.

The achievement of Islami Bank in the area of foreign exchange business has been quite phenomenal. The Bank has been providing services to import and export trade and for repatriation of hard-earned foreign exchange of Bangladeshis living and working abroad and has by now, consolidated its position in these areas.

Table-4 : Foreign Exchange Business

Year	Import	Export	Remittance	Total Foreign Exchange Business	Growth Rate
1998	20,238.30	14,894.30	6,360.60	41,493.20	13%
1999	20,396.00	14,798.00	8,415.00	43,609.00	5%
2000	25,327.00	16,889.00	7,644.00	49,860.00	14%
2001	25,907.00	16,082.00	9,879.00	51,868.00	4%
2002	33,788.00	16,673.00	14,670.00	65,131.00	26%

International Correspondence

At the end of the year 2002 the number of foreign correspondents were 830 with 225 Banks in 72 countries. This correspondent relationship accrued substantial benefit to the Bank by way of expansion in its services areas related to foreign trade and foreign exchange business. The Bank endeavours to increase its banking relationship with international financial institution to institution to offer smooth and efficient service to the customers.

d) To extend other banking services

à Human Resources Development

à Training & Motivation

à Staff Welfare Schemes

à Automation & Information Technology

à Shared ATM network

à Swift

à Results

Operating Result and Profits

Income

Investment Income : Total Investment Income of the Bank stood as on 31^st December, 2002 at Taka 4,334.00 million as against Taka 3,482.00 million of preceding year registering 24% over last year and which was 83% of the total income compared to 82% of the year that ended 2001.

Non-investment income : Total Non-Investment Income of the Bank as on 31^st December, 2002 was Taka 900.00 million as against Taka 778 million of preceding year registering 16% growth over last year and which was 17% of the total income compared to 18% of the year 2001.

Expenditure

Profit Paid on Deposits (PPD) : The Bank has distributed Tk. 2,714.00 million among the Mudaraba Deposits as Profit in 2002, being 72% of the Investment Income earned through development of Mudaraba Fund as against minimum 65%, which was Tk. 2,187.00 million in 2001 out of the Investment Income of Tk. 4,334.00 million and tk. 3,482.00 million in 2002 and 2001 respectively.

Administrative & Other Expenses : Total Administrative and other expenses as on 31^st December, 2002 was Taka 1,000.00 million as against Taka 850.00 million of preceding year showing 18% growth over last year and which was 24% of the total Expenditure compared to 23% of the year 2001.

Table-7 : Operating Result : 1998-2002

(in million Tk.)

Year	Total Income	Total Expenditure	Gross Profit
1998	1629	1481	148
1999	1966	1788	178
2000	3208	2878	330
2001	4260	3683	576
2002	5234	4240	994

Dividend

The Board of Directors recommended 25% cash dividend for 2002, on the paid-up Capital of Tk. 640.00 million, for approval by the Shareholders in this Annual General Meeting.

It may be mentioned here that, total 19 Non-Resident Shareholders held 380,040 Shares during the year 2002. Total amount of Dividend of Tk. 95,010,000/- @ 25% was due to them for the year 2001 out of which an amount of Tk. 14,626,575/- has been deducted as Income Tax, an amont of Tk. 430,687.50 has been paid to a Local Academy as per advice of the Foreign Shareholder and the balance amount of Tk. 79,952,737.50 equivalent to US$ 1,386,864.48 has already been remitted to the Foreign Shareholders during the year 2002. It may be mentioned here that the Bank has a good-track record in paying cash dividend.

Table-8 : Ratio of Dividend

Year	Rate of Dividend
1998	21%
1999	21%
2000	25%
2001	25%
2002	25%

Branch Network

7 (seven) new Branches have been opened during the year 2002 raising the total number of Branches to 128 from 121 of the previous year. The Bank plans to gradually open more Branches covering important commercial places both in urban and rural areas. 7 (seven) Administrative Officers /Zones are functioning all over the country for effective control, close supervision and proper monitoring of the total operations of the Branches as well as assisting them in the development of business.

Shariah Council of the Bank

There is a Shariah Council of the Bank that consists of prominent Ulema, reputed Bankers, renowned Lawyers and eminent Economists to advise and guide on the implementation and compliance of Shariah principles in all the activities of the Bank particularly on the modes of investments. The Council enjoys a special status in the structure of the bank who meets frequently and plays a vital role. Total number of meetings of the Shariah Council was during 2002. There is also a sub-Committee of the Shariah Council and they met on 11 occasions during 2002.

It also conducts Shariah inspection of Branches to ensure that the Shariah principles are implemented and complied with by the Branches of the Bank.

IBBL’s World rating

As per Banker’s Almanac (january 2001 edition) published by the Reed Business Information, Windsor Court, England, IBBL’s world Bank is 1771 among 3000 banks selected by them. This position was 1902 among 4500 selected banks as on January T1999 edition.

IBBL’s country Rank is 5 among 29 banks as per ratings made by the above Almanac on the basis of IBBL’s Financial Statements of the year 2001.

1. Preliminary discussion may have with the prospective client regarding his line of business, experience & investment needs.

2. The past performance of the client to be studied and Branch’s track record of proposed investment.

3. If the proposal found suitable the client may be asked to submit a formal application along with necessary papers/documents.

Call for Islamic Banking in the World

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 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 inter-mediation 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 banks 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 major negative factor that contributes to cyclical fluctuations in the economy (Minsky 1982). More recent concern over the potential instability of the world monetary and financial system was expressed by Maurice Allais, a Noble Laureate in the called for an urgent reform of the World Economic order (Allais 1993, pp13-16) . Others vehemently opposes the argument for using rate of interest as a stabilizing tool in the economy (Saud 1980, p. 88) . This called for the emergence of a new system of banking capable of tacking new challenges that the present world economy , particularly the financial sector, has been facing.

WHAT IS ISLAMIC BANK ?

An Islamic bank is a financial institution that operates with the objective to implement and materialise the economic and financial principles of Islam in the banking arena.

Ziauddin Ahmed says, "Islamic banking is essentially a nomative concept and could be defined as conduct of banking in consonance with the ethos of the value system of Islam" (lbid).

MEANING OF INTEREST

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 1997, 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 (Hala) 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 Shariah, 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 or usury, but there is now consensus among Muslim scholars that the term covers all forms of interest and not only " excessive " interest ( Khan 1985,52).

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 :

· It must be related to loan.

· A prefixed amount of money to be paid when due.

· A time is fixed for the repayment.

· All these elements for repayment are taken as conditions for loan.

PROFIT AND RIBA

Profit : Profit on loss comes from investment in business activities. Profit is the result of ownership transaction and risk following the fours stages :

· Transformation through Bai /Buying Selling of goods.

· Risk of Transformation and Ownership.

· Other Condition of Shariah.

· Result-Profit on loss

Profit is the difference between the value of production and the cost of production which is Halal according to Islami Shariah

From the Islamic Shariah point of view, Riba is Harram.

Comparison between Riba and Profit

Riba	Profit
1. One goods-fungible	1. Two goods
2. Loan-Ownership retained	2. Ownership Exchanged
3. Excess-without exchange value	3. Equity of Value
4. No transformation	4. Transformation
5. No Risk of Transformation and ownership	5. Risk home
6. No relation with result imposed	6. Is the result
7. Certain	7. Uncertain

OBJECTIVE OF ISLAMIC BANKING

· An Islamic bank is committed to do away with disparity and establish justice in the economy, trade, commerce and industry; build socio-economic infrastructure and create employment opportunities.

Islamic Banking Movement Throughout The World

The expansion and unfolding of islamic banking alongwith traditional interest based banking is a recent phenomenon . Islamic banking is an inseparable part of Islamic banking is an inseparable part of Islamic economy. During the fifties it was only a subject matter of research and was limited to the writings of scholars and philosophers. During the sixties actual experiments were made and in the seventies Islamic banking institutions started gaining strength .The eighties and nineties are the period of consolidation and now Islamic banking is coming up as the only welfare banking system of the modern world.

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.

The second attempt : The second pioneer experiment of putting principles of Islamic banking and finance into practice was conducted in Egypt from 1963 to 1967 through the establishment of the Mit Ghamar Savings Bank in a rural area of the Nile Delta. The experiment combined the idea of German savings bank with the principles of rural banking within the general framework of Islamic values (Ahmed 1992). 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 charges in the political atmosphere. Nevertheless, the project was revived 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 (Ahmed 1992). 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 (Ashker 1987, pp. 18-35).

Tabunq 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 untained ‘with Riba’. Since this was not possible created. Consequently, Pilgrims Savings Corporation was established in 1963, which was later on incorporated into the Pilgirims 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 Dubai, U.A.E. with capital of 50 million Dirhmas. Since then, a number Islamic bank and financial institutions have been established of 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 film 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. (Mangla, Uppal & Swamy 1988, p. 54).

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 and economic development in Muslim nations within an Islamic Framework.

A 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 were there are communities of Muslims, and to participate in investment projects in Islamic and non-Islamic countries.

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 of the 1970s. The movement took basically two forms. First, an attempt was made to estabish Islamic financial institutions side-by-side with traditional banking. In such attempts, two types of institutions were evolved: Islamic banks were established mostly in Muslim countries; and Islamic investment and holding companies started in some Muslim but mostly in non-Muslim countries.

Iran : The process of Islamization of Islamic banking in Iran has proceeded in three distinct phases. Nationalization, restructuring and reorganization of the entire banking system characterized phase one taking place between 1979 and 1982. (Khan & Mirakhor 1989). the second phase began in 1982 and lasted until 1986. It was a phase primarily characterized by adoption of legislative and administrative steps in order to implement a clearly articulated model of Islamic banking (Iqbal & Mirakhor 1987, p. 106). The third phase , which continues till now, began in 1986. This phase defines the role of the Islamic banking system differently from the earlier phases. The system is now expected to be an integral part of the Islamic government, and thus a direct instrument of its policies.

Pakistan Pakistan adopted a policy of gradual transformation of its banking system from February 1979 after several years of study and preparation by the government-appointed Council of Islamic Ideology (CII). The process started when the President of Pakistan announced that interest was to be removed from the economy within a period of three years. Three of the specialized credit institutions - the House Building Corporation, National Investment Trust, and Mutual Trust Funds of Investment Corporation of Pakistan - were to remove interest from their financing operations immediately.

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 system as per Islamic Shariah.

Earlier in November 1980, Bangladesh Bank, the country’s Central Bank, sent a representative to study the working of several Islamic banks abroad.

Later, other four Islamic Banks, Islamic insurance companies and Financial institution were established in the country some traditional banks opened Islamic Banking Branches in some major cities.

Al-Baraka Bank Limited, called the second Islamic Bank in Bangladesh, commenced banking business as a scheduled bank on May 20, 1987.

Superiority of Islami Bank Bangladesh Ltd. than other conventional Banks of Bangladesh

Through its steady progress and continuous success, IBBL has earned the reputation of being one of the leading private sector banks of the country. The distinguishing features of IBBL which are made it superior than any other conventional banks are mentioned below :

o All activities are conducted on interest-free system according to Islamic Shariah principles.

o Investment is made though different modes as per Islamic Shariah.

o Investment-income of the Bank is shared with the Mudaraba depositors according to an agreed upon ration, ensuring a reasonably fair rate of return on their deposits.

o Aims to introduce a welfare-oriented banking system and also establish equity and justice in the field of all economic operations.

o Extend socio-economic and financial services to individuals of all economic backgrounds with strong commitment in rural uplift.

o Plays a vital role in human resources development and employment-generation particularly among the unemployed youths.

o Portfolio of investment and investment policy have been specially tailored to achieve balanced growth & equitable development through diversified investment operations particularly in the priority sectors and in the less developed areas of the national economy.

Superiority of Islami Bank Bangladesh Ltd. then any other Islami Banks of Bangladesh.

· Islami Bank Bangladesh Limited is treated as leading Islami Banks of Bangladesh. Because this Bank is too much committed to Islami Shariah through an organisation with highly motivated and qualified professionals toward Islami Shariah than any other Islami Banks of Bangladesh.

Islami Bank Bangladesh Limited (IBBL) was incorporated as the first Shariah based interest free bank in South East Asia an the 13^th March 1983 as a public limited company under the Companies Act, 1913.

Vision

The vision of IBBL is to always strive to achieve superior financial performance, be considered a leading Islamic Bank by reputation and performance.

· Try to encourage savings in the form of direct investment

· Try to encourage investment particularly in projects which are more likely to lead to higher employment.

Mission

of the county. To encourage socio-economic upliftment and financial services to the low-income community particularly in the rural areas.

Aims and Objective

o To conduct interest-free banking.

o To establish participatory banking instead of banking on debtor-creditor relationship.

o To invest through different modes permitted under Islamic Shariah.

o To accept deposits on profit-loss sharing basis.

o To establish a welfare-oriented banking system.

o To extend co-operation to the poor, the helpless and the low-income group for their economic upliftment.

o To play a vital role in human development and employment generation.

o To contribute towards balanced growth and development of the country through investment operations particularly in the less developed areas.

o To contribute in achieving the ultimate goal of Islamic economic system.

Management of IBBL

Islami Bank Bangladesh Limited is managed by a 24-member Board. Of the Directors 8 are foreigners and 16 are local. A 9-member Executive Committee is formed by the Board of Directors a Management Committee looks after the affairs of the Bank.

Table-2 : Growth of Deposit : 1998 to 2002

Year	Deposit (Tk in Million)
1998	20,022
1999	25,191
2000	32,113
2001	41,547
2002	55,462

(b) To make Investment

Islami Bank Bangladesh Limited being an ideological banking organisation is firmly committed to implement and materialize the economic and financial principles of Islam in the banking arena and thereby to do disparity and establish justice in the trade, commerce, and industry and build socio-ecnomic infrastructure, create opportunities for employment and income generation and property alleviation, contribute to the socio-economic enlistment and sustained economic growth of the country by providing different types investment facilities.

Keeping the same in view, side by side with Commercial and Industrial Investment operations, many special Investment Schemes have been introduced by the Bank over the years like -

(i) Rural Development Scheme

(ii) House-hold durables Scheme

(iii) Investment Scheme for Doctors

(iv) Transport Investment Scheme for Doctors

(iv) Transport Investment Scheme

(v) Mirpur Silk-weavers’ Investment Scheme

(vi) Small Business Investment Scheme

(vii) Agricultural Implements Investment Scheme

(viii) Car Investment Scheme,

(x) Poultry Investment Scheme Investment Scheme,

(xi) Small Transport Investment Scheme

(xii) Micro-Industries Investment Program, targeting different economic groups.

Table-3 : Growth of Investment : 1998 to 2002

Year	Growth of Investment (Tk in Million)
1998	13,435
1999	20,585
2000	27,437
2001	35,238
2002	46,281

c) To Conduct Foreign Exchange Business

The foreign trade handled by the Bank may be classified as under :

(i) Import Business

(ii) Export Business

(iii) Foreign Remittance

(iv) Necessary services relating foreign Business & Trade.

Table-4 : Foreign Exchange Business

Year	Import	Export	Remittance	Total Foreign Exchange Business	Growth Rate
1998	20,238.30	14,894.30	6,360.60	41,493.20	13%
1999	20,396.00	14,798.00	8,415.00	43,609.00	5%
2000	25,327.00	16,889.00	7,644.00	49,860.00	14%
2001	25,907.00	16,082.00	9,879.00	51,868.00	4%
2002	33,788.00	16,673.00	14,670.00	65,131.00	26%

International Correspondence

(d) To extend other banking services

à Human Resources Development

à Training & Motivation

à Staff Welfare Schemes

à Automation & Information Technology

à Shared ATM network

à Swift

à Results

à Human Resources Developments

Total number of employees of the Bank stood at 3,297 as on 31^st December 2002 as against 3,060 as on 31^st December 2001.

Table-5 : Human Resource Position : 1998 to 2002

Category	1998	1999	2000	2001	2002	% to Total
Officer	1,846	1,823	2,186	2,552	2,692	82%
Staff	2	1	0	0	0	.--
Sub-Staff	323	478	499	508	605	18%
Total Human Resource	2,171	2,302	2,685	3,060	3,297	100%
Total Branch	105	110	116	121	128	--
Per Branch employee	21	21	23	25	26	--

In 2002, total 237 officials were recruited to meet the additional requirement of human resource to handle the increased volume of business, man new branches and also bring all the officials within the training program of the Bank. In order to keep pace with the additional human resource requirement and to enhance the employment opportunity of the country, periodic recruitment is done as per need of the Bank.

à Training & Motivation

Islami Bank Training & Research Academy (IBTRA) was established simultaneously with the establishment of the Bank in the year 1983 for the purpose of training to human resource at all levels and conducting research programs. To cater to the increasing training and research needs, the Academy has been up-graded in 1994. For ensuring academic Council has been formed with reputed Bankers, prominent Ulema, eminent Economist, Executive Director of Bangladesh Bank Training Academy (BBTA) and Director General of Bangladesh Institute of Bank Management (BIBM). These illustrious individuals formulate policies to provide special emphasis on (i) Islamic Economics and Banking and (ii) practical operations on both Conventional and Islamic Banking system.

The Bank has its own 8 (eight) stored training complex at Mohammadpur, Dhaka were the residential training courses are conducted.

Table-6 : Various human resources training activities during 2002

Serial No.	Program	No. of Training Facilitated	No. of Officials Trained
1	Academy Training	40	1,041
2	Workshops	7	174
3	Executive Development Programs	3	285
4	Training at other Organizations (BIBM, IBIT) Information Technology Division of Head Office & Other Organizations	55	348
5	International Training (Thailand, Dubai, India, Hong Kong, China, and Malaysia)	--	48

Besides the above training, 5 Internships Programs for 130 BBA & MBA students were awarded. The list is shown below :

o Department of Finance & Banking Department, University of Dhaka

o Department of Management, University of Dhaka

o Asian University of Bangladesh, Dhaka

o Ahsanullah University of Science and Technology, Dhaka

o Darul Ihsan University, Dhaka

o Queens University, Dhaka

o Peoples University, Dhaka

o International Islamic University, Chittagong.

à Staff Welfare Schemes

The Bank believes in supporting its employees and offering incentives and motivation for its continued profitability and prosperity. With a view to supporting these lofty objectives, the Bank operates a contributory Provident Fund, Social Security fund, Gratuity Fund and a Benevolent Fund for the employees of the Bank. These Funds are managed by separate Board of Trustees.

à Automation & Information Technology

To meet the growing demand for rendering prompt and tailor made services to the customers; the Bank experts its efforts continuously to automate all sorts of transactions in the Branches. I.T. Division has equipped Branches and Departments with required number of computers and related peripherals and is developing and implementing required software programs. Specially, the Integrated Branch Banking System (IBBS) is offering enormous support for the cause of expansion of the Bank by adding huge value to its services and by saving a lot of time and manpower. I.T. Division has developed and implemented the Share Management, Central Store Management and Inventory control Software, an internet (ibblnet) which is providing various information to the Officials of IB Tower. An integrated Human Resources Management System for the Human resources Division has been designed and developed. The Automated Time Attendance System (ATAS) has been developed and installed in the Had Office. The would help to introduce accuracy, efficiency and one-stop service in the branches. Besides, the Bank has approved a plan for developing WAN (Worldwide Area Network) enabled banking software by in-house developers. Presently, all 128 Branches are conducting their deposit and investment operation through the support of computer automated software. 35 (thirty five) new Branches have come under Local Area Network (LAN) in the year 2002, raising LAN facilities to 82 Branches. Training programs have been arranged on IBBS (Integrated Branch Banking System) during this year and several training program for basic computer operation were conducted both in-house and outside computer training institutes.

à Shared ATM (Automated Teller Machine) Network

Islami Bank has made giant strides in the field of Technology enabled Banking with its introduction of E-Cash Service – a shared Automated Teller Machine (ATM) network comprising 9 (nine) banks of the country. Islami Bank Bangladesh Limited may withdraw cash, check balance, pay BTTB and Grameen Phone bills and deposit money instalments of Hajj, Pension, Muhor and HDs schemes of IBBL sold 3,650 ATM cards by its Card Cell. Above 5,000 transactions are made by IBBL card holders every month through which an amount of Tk. 5,00,000.00 + is drawn per day which saves a lot of time and money for the Bank besides a good amount of cost free deposit could be collected for the Bank.

à SWIFT :

IBBL has become member of SWIFT (Society for Worldwide Inter-Bank Financial tele-communication) in 1000 and thus providing a secured and accurate communication network for financial transactions including L/C, Remittance etc. SWIFT has been installed in 29 (twenty nine) AD (Authorised Dealer in Foreign Exchange Business) Branches upto 31.12.2002 for rendering better services to the exporters, importers and remittance business.

à REUTERS

In today’s globally connected world, information faster than the speed of light brings organizational success. For ensuring maximum strategies through access to global information, the Bank has also become member of REUTERS. This membership allows the bank to receive regular updated information regarding exchange rates, metal markets and other commodity prices, which help IBBL in making correct and prompt business decisions.

(e) To conduct Social welfare activities through Islami Bank Foundation

With a vies to providing financial assistance to the poor and needly people through various income generating, health care, relief and rehabilitation, education, humanitarian, dawa and special programmes, the Islami Bank Foundation was established. It has established the followings :

1. Four modern Islami Bank Hospitals at (i) two in Dhaka, (ii) one in Rajshahi and (iii) one in Khulna.

2. Three Islami Bank Community Hospitals at (i) Satkhira, (ii) Manikganj and (ii) Rangpur.

3. The Service Centres in the district of (i) Noakhali, (ii) Manikganj and (iii) Feni and several other projects for socio-economic development of the country.

4. Five Vocational Training Institute named Islami Bank Institute of Technology (i) two at Dhaka; (ii) one at Bogra, (iii) one at Sylhet and (iv) the other at Chittagong.

5. Islami Bank Physiotherapy and Disabled Rehabilitation Centre (IBPDRC) at Mohammadpur, Dhaka - enabling the physically retarded individuals to be self-reliant through proper physiotherapy treatment and by imparting special skills.

6. Bangladesh Sangskritic Kendro - a Cultural Center in Dhaka to save the younger generation from derailment and uphold & promote our own culture.

7. Distressed Woman Rehabilitation Center - a facility for shelter, training and rehabilitation of destitute and shelterless widows and divorced women.

The Islami Bank Foundation has also advanced its activity in the following areas :

a. Islami Bank International School & College in Dhaka city giving stress on values & moral teachings, essential for the students to become responsible citizens.

b. Monorom-Islami Bank Crafts & Fashions - a sales center at Dhaka that plays a significant role for economic upliftment of poor and distressed women through providing sales opportunities of their products.

The Foundation has also drawn up a plan to look after the education, health and medicare requirements of the people of the area where the Bank has launched Rural Development Scheme. The authority has also decided to establish a Medical College in Rajshahi subject to the approval of the Health Ministry.

The Foundation has spent Taka 79.20 million during the year 2002 for (a) Income Generating Projects (b) Education (c) Health & Medicare (d) Humanitarian (e) Relief & Rehabilitation (f) Dawah Activities etc.

Operating Result and Profits

Income

Expenditure

Table-7 : Operating Result : 1998-2002

(in million Tk.)

Year	Total Income	Total Expenditure	Gross Profit
1998	1629	1481	148
1999	1966	1788	178
2000	3208	2878	330
2001	4260	3683	576
2002	5234	4240	994

Dividend

The Board of Directors recommended 25% cash dividend for 2002, on the paid-up Capital of Tk. 640.00 million, for approval by the Shareholders in this Annual General Meeting.

Table-8 : Ratio of Dividend

Year	Rate of Dividend
1998	21%
1999	21%
2000	25%
2001	25%
2002	25%

Branch Network

Shariah Council of the Bank

It also conducts Shariah inspection of Branches to ensure that the Shariah principles are implemented and complied with by the Branches of the Bank.

Corporate Communication, Publicity and Public Relations

For the development of a dynamic organization, especially ideological commercial financial house like Islami Bank Bangladesh Limited, corporate communication and public relations, planned publicity and motivational publication are essential. Islami Bank Bangladesh Limited is always advanced front-runner in managing the perceptions of the society and educating them on the competitively advantageous modes of Islami banking. Under its multi-pronged approach, since its inception, the Bank has been relentlessly working to familiarize the people with the concepts and operations of Islamic banking. For this purpose, publicity and public relations occupy an important place in the day-to-day activities of the Bank. Towards gradual attainment of this objective, a good number of booklets, brochures, folders and magazines were published. Additionally, a number of seminars & and functions were organized to disseminate the concepts of Islamic economics and Banking. The leading newspapers and magazines of the country have published editorials, features and in-depth reports on the reports on the performances of different types of welfare oriented schemes and progress of the Bank during the course of the year. Besides research-oriented journal 'Islamic Banking' and quarterly in-house Bangla magazine 'Islami Bank Parikrama', a half-yearly English news bulletin 'Islam Bank Newsletter' was published this year.

Achievement

National and international ratings of IBBL

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 ATCH’ a New York based interrelation 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 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 29^th 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

IBBL’s country Rank is 5 among 29 banks as per ratings made by the 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 & national organizations. The Global Finance, a reputed London based quarterly magazine, awarded IBBL has the best bank of the country for the year 1999 and 2000.

IBBL has got the 2^nd prize of National Export Fare for its pavilion of Service Organisation in 1985.

Slogan of the year 2003

“Quality investment for development and Growth.”

Investment Policy

Investment operation of a Bank is vital importance the greatest share of total revenue is generated from it, maximum risk is centered in it and the very existence of a Bank mostly depends on prudent management of its Investment Port-folio.

As such, for efficient deployment of mobilized resources in profitable, safe and liquid investments, a sound, well-defined, well-planned and appropriate Investment Policy framework is necessary prerequisite for achieving the goal of the Bank.

The special feature of the investment policy of the Bank is to invest on the basis of profit-loss sharing system in accordance with the tenets and principles of Islami Shariah Earning of profit is not the only motive and objective of the Bank’s investment policy rather emphasis is given in attaining social good and in creating employment opportunities.

Pursuant to the Investment Policy adopted by the Bank a 7-year Perspective Investment Plan’ has been drawn-up for the year 1995 to 2002 and put into implementation. Recently a further 5-year perspective investment plan has been drawn up for the year 2003 to 2007 and put into implementation. The plan aims at diversification of the investment port-folio by size sector geographical area, economic purpose and securities to brings in phases all sectors of the economy and all types of economic groups of the society within the fold of Bank’s investment operations.

Objectives and Principles

The objectives and principles of investment operations of the Bank are :

à To invest fund strictly in accordance with the principles of Islami Shariah.

à To diversity its investment portfolio by size of investment, by sectors (public and private) by economic purpose, by securities and by geographical area including industrial, commercial & agricultural.

à 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 monitoring thereof.

à To make investment keeping the socio economic requirement of the country in view.

à To increase the number of potential investors by making participatory and productive investment.

à To finance various development schemes for poverty alleviation, income and employment generation with a view to accelerate sustainable soico-economic growth and for upliftment of the society.

à To invest in the form of goods and commodities rather than give out cash money to the investment clients.

à To encourage social upliftment enterprises.

à To shun even highly profitable investment in fields forbidden under Islamic Shariah and are harmful for the society.

à The Bank extends investments under the principles of Bai-Murabaha, Bai-Muazzal, Hire Purchase under Shirkatul Meelk and Mudaraba. The Bank is making sincere efforts to go for investment under Mudaraba principle in near future.

Importance of Assessing of Investment Needs

Assessment of Investment needs is necessary for the following reasons.

1. To detect actual Investment limit of Bank.

2. To detect actual Investment against obsolete /out dated/non trading items.

3. To assess the quality, quantity, price and marketability of the commodities

4. To ensure proper follow-up supervision and monitoring of the Investment.

5. To ensure capacity of the client in handling Investment activities.

6. to over come the situation of Division of found by the clients

7. To ensure trading instead of lending of money.

8. To ensure payment against delivery of goods.

9. To ensure actual buying and selling of goods.

10. To select proper & genuine Investment client.

11. To ensure viability/profitability of the project.

12. To ensure compliance of Shariah Principles.

13. To maintain discipline in the Investment port-folio of the Branch.

14. To secure the Investment.

15. To allow Investment for appropriate period.

16. To handle the Investment proposal efficiently.

17. To ensure investment for productive purpose.

18. To identify the tenure of investment to be made i.e. for short term /mid term /long term.

19. To know the objective of Investment.

20. To ensure profitability of all concerned.

21. To ensure welfare of the society.

22. To ensure Business ethics.

23. To minimize the risk of investment.

24. To ensure national interest.

25. To ensure recovery of investment in time.

26. To comply the Bank’s target regarding diversification of Investment.

Induction of Investment Clients

Why of Induction

Potential clients may be advised to open Al-Wadiah Current Account, if there is no such account. The client should maintain the current account, satisfactorily for a reasonable period.

1. Preliminary discussion may have with the prospective client regarding his line of business, experience & investment needs.

2. The past performance of the client to be studied and Branch’s track record of proposed investment.

3. If the proposal found suitable the client may be asked to submit a formal application along with necessary papers/documents.

Criteria for selection

Clients of the Bank for following Investment are to be selected with prudence and good judgement. It should be kept in mind that the person are important than their properties. They must have good character, commitment, capability, integrity and means. Their past performance must be verified first. None should be entertained without verification of his background, experience in the line of business, credit worthiness, financial needs, capacity to handle the finance applied for. Favouratism, personal relationship with a client must not get any consideration for providing Bank’s Investment. A detailed credit report of the client must be prepared and all necessary information’s should be collected and verified at the time of selection of the client. Client’s of distant area/beyond control should not be entertained.

The following factors/qualities /information may be considered at the time of selection of investment client.

1. Brief history of financial /credit transaction of the client.

2. Social and financial behaviour of the client should be verified /assessed.

3. Ability of the client of utilization of credit / Investment fund.

4. Ability of the client regarding repayment of Investment.

5. Equity of the client.

6. Effect of National & International Economic problems/crisis.

7. Analysis of Investment Risk.

The above mentioned factors may be categorized under 5-C’s.

1. Character

2. Capacity

3. Capital

4. Collateral

5. Condition

1. Character

a) The Human Factor

· Personal Circumstances (nationality, age, health condition, etc.)

· Credit Track Record

· Technical Qualifications (including business experience).

· Capacity to deal with people (or to manage relationships).

b) Management Assessment

· Business Experience

· Management Succession

· Credit Displine.

· “Lifestyle”.

c) Experience

Every account officer believes that experience in business is an extremely strong test of credit worthiness.	i. Age of applicant
	ii. Years in current business/company
	iii. Total number of years business experience.

d) Succession

Stability of business leadership in the event of the owner’s incapacity	i. Is spouse involved in the business
	ii. Are adult children and/or relatives involved in the business.
	iii. Is there a succession plan in place.

e) Personal Finance /Credit Discipline

The objective is to measure the applicant’s discipline in personal and business finance.	i. Credit cared bills payments.
	ii. Others : Power, telephone, Water bills (business & personal)
	iii. Existing relationships with other bank’s lenders.

f) Lifestyle

Lifestyle variables are an attempt to measure integrity which is turn is (potentially) positively correlated with investment/ loan repayment	i. Personal feed back from employees, customers and suppliers.
	ii. Personal feedback from neighbors, community members and Bank personal.
	iii. Membership in local or National industry association.
	iv. Membership in community or religious institution.

2. Capacity :

a) The Performance Factor

· Deployment of Resources (How much is the Investment need and how will it be used ?)

· Profitability Prospects of the project and the Enterprise (How will the project impact on the enterprise ?)

b) Financial Assessment

· Profitability.

· Liquidity.

· Solvency.

· Profitability

Because of the deficiencies in measuring and evaluating net income, the idea is to measure the trend and not the absolute value.	i. Sales growth
	ii. Net income margin pattern

· Liquidity

Current ratio is the only indicator measured as an absolute value, the other two are measured by the trend.	i. Current ratio.
	ii. Days receivables outstanding.
	iii. Days inventory holding.

· Solvency

There is a considerably high risk in making Investment to highly leveraged organizations	i. Debt-to-equity ratio.
	ii. Operation cash flow to Investment amount.

3. Capital

The Financial Factor

· Client’s stake in business.

· Solvency of the enterprise.

· Availability of reserve resources.

· Other sources of income.

4. Collateral :

The Security Factor

· Ensuring the Critical Success Factors of the Business.

· Quality of Collateral’s.

· Value of Collateral’s.

· Location of Collateral’s.

· Ease of Marketability of Collateral’s.

Necessary for preparation of credit report

Preparation of credit report of the investment client is necessary and very much important for the for the following reasons /purposes.

1. To select investment client carefully and judiciously.

2. To ensure quality investment.

3. To ascertain credit worthiness of the client.

4. To ensure adequate securities both primary and collateral.

5. To ensure clients business establishment and line of business.

6. To ensure proper valuation of Assets and liabilities.

7. To ensure prompt disposal of Investment proposals.

8. To Stoop Malpractices.

9. To handle investment activities efficiently.

10. To administer accountability.

11. To ascertain Joint responsibility of Bank Officials and Investment client.

12. To recover Invested amount in time.

13. To maximize profitability of all concerned.

14. To safeguard interest of the Bank and the Client.

15. To avoid classification of Investment.

16. To avoid stuck-up situation of invested fund.

Present Status of Bank’s Investment Portfolio

1. The Bank should go for investment in large-scale dairy farming and other milk processing projects and poultry farming which is not worth mentioning at present.

2. The quantum of Bank’s investment against fishing is very negligible. There is scope for investment in :

· Shrimp culture.

· Sweet water fishery including pond fishery.

· Marine fishing.

3. The Bank’s investment for construction purpose shall continue to be made within the ceiling prescribed in the Plan.

4. Presently the Bank’s export Investment is mostly centered in readymade garments and the Bank is yet to enter into the area of investment in major traditonal and non-traditional exportable items like jute & jute goods, frozen foods, hosiery products, tea, leather and leather products knitwear (Textile), basic chemical products/pharmaceuticals, electric goods (wires and cables), electronic goods/components, handicrafts, fruit juice concentration projects (small and medium scale only), other.

5. Besides the existing items of import, the Bank should go for investment in import in the following areas :

· CDSO being imported by edible refineries.

· Cotton yarn.

· Coal and hard coke.

· Fresh fruits.

· Spices.

· Dry fruits

· Pulses

· Onions

· C.I. sheets

· B.P. sheets

· Motor vehicles

· Bi-cycle spares

· Tyres & tubes

· Bitumen

· Other items

6. A. Investment against real estate of the Bank shall continue to be made within the ceiling prescribed in the plan.

B. The bank’s investment against agriculture, fishery, forestry, (other than working capital investment) and working capital investment are not significant compared to other private commercial banks. As such, the Bank shall make attempt for extension of investment in these sectors.

C. Bulk investment of all banks (nationalized commercial banks and private commercial banks) is in the hand of limited number of borrowers, though the position of Islami Bank is to some extent better, yet efforts need to be made for further diversification of investment by size of investment accounts and concentration of investment in the hands of limited few clients is to be avoided.

Assignment Presentation

April 12, 2016

Assignment on Islamic Bank part 1 of 3

ISLAMI BANK IN BANGLADESH

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