Types investment in Islamic Banking and Risk in First Security Islami Bank Ltd. by lawjuris

Types of Investment and Risk in First Security

Chapter – 01 INTRODUCTION Chapter -1 1. Introduction 1.1

Background of the study

As the requirement of the report first we need to know about investment & Types investment in Islamic Banking and Risk in First Security Islami Bank Ltd. Investment is a term frequently used in the fields of economics, business management and finance. It can mean savings alone, or savings made through delayed consumption. In generally Investment means deploying of fund in a profitable sector to get more returns. Islamic Economic system is based on equitable treatment of assets. Islamic Shari’ah prevents injustice in the acquisition and disposal of material resources and required full utilization of these resources in order to allow satisfaction of worldly needs of human beings in the optimal manners; thus avoiding wastage and enabling human beings to perform their obligations to Allah and the society. In today’s modern world the banking sector is uprising and playing a vital role in our economic development. It is also playing a significant role in expanding investment operation of the country. It builds up the country day by day and rural people increasing their daily life. Islamic Banking system is one of the most effective systems in banking sector. Islami Banking a new role of banking that operates on principles adhering to the Quranic norms forbidding usury and transactions, including granting of loans or credits for interest. The economic rationale for eliminating riba (interest) and establishing the Islamic BANKING SYSTEM is based on values of justice, efficiency, stability and growth. First Security Islami Bank Ltd. is one of the largest commercial bank and Islamic financial institution of the country. It operates all its activities under the obligation of Islamic Shariah including. As an Islamic Bank FSIBL has some differences in investment modes along with regular activities.

It has some unique products & services in financing Investment. Such as Bai-Murabaha, Musaraka, HPSM, Bai Salam, Bai-Asraf etc. According to the principle of Islamic Shariah, interest is strictly prohibited. So FSIBL is conducted based on profit & loss sharing approach rather than interest basis. So, to operate the financing on the basis of “Profit & Loss Sharing Approach” FSIBL considers financing investment under different Islamic modes and executes “Buy & Sell” operation with the clients. In my report I try to find out the Islamic ideas regarding investment & function of investment field and also try to find out problem of investment sector in FSIBL.

1.2 ORIGIN OF THE STUDY: As an obligatory requirement of BBA Internship program, I have prepared this report for the partial fulfillment of our BBA internship program. In my report entitled “Types of Investment and Risk in First Security Islami Bank Ltd (FSIBL)”, here I am supposed to analyze investment banking as a whole scenario of First Security Islami Bank Ltd (FSIBL) particularly in terms of its precise definition, problems, factors, contributions, and inventions on the economic of Bangladesh.

1.3 1.3.1

Methodology Data collection

This report is prepared based on the information extracted from different sources. Sources of data: All the information in the study has been incorporated and collected from the primary sources as well as secondary sources.

Primary Sources: 1. 2. 3. 4.

Interviewing officers and staffs. Sharing practical knowledge of officials. Relevant file study provided by the officers concerned. Face to face conversation with the respective officers and staffs.

Secondary Sources: 1. 2. 3. 4. 5.

Annual report of First Security Islami Bank Ltd. Manuals for investment published by the bank. Website of the bank. Internet Relevant books, Research papers, Newspapers, Articles and Journals.

1.3.2 Analysis of the Data All the collected data were edited, coded and classified before making the final report.

1.4

SCOPE OF THE STUDY:

In this report I have focused on all the qualitative which include profiles of FSIBL, investment modes like Bai mode, Profit & loss sharing, bearing mode, Rent sharing mode, different schemes of investment such as household durable schemes, housing investment scheme, transport investment scheme, car investment scheme, investment scheme for doctors small business investment scheme, rural development scheme, etc. and lastly financial performances have been depicted.

1.5

Limitation

To ready this report I am getting face some problem which are obstacle for my report. Which are given below; • •

All updatable news is not available. Time is the main problem because it is very important for me but I could not get enough time to make this report.

•

FSIBL website is not getting enough information for me. So I collect information from different source, so it impossible for all students to collect all information.

•

Since the bank personnel were very busy, they could not pay enough time.Lack of information in our library.

1.12 WORK PLAN, SUMMARY AND ACTIVITY CHART

Activity chart of the research: Report preparation as a BBA Program

Going under the supervision of the respective Internship Supervisor

Formal acknowledgement of research topic Receiving approval of research proposal

Chalk out over all plans for report preparation

Collecting information from secondary sources

Interviewing employees of FSIBL Bank, Corporate Banking

Understanding their present anddata previous work procedure Analyzing

Drafting report contents Successfully assembling Report by imputing Achievement knowledge from FSIBL Final approval of report by the Supervisor Preparation and submission of the final report

Chapter-2 Literature Review For Islamic Banking 2.1 “Islamic banking is an area that has mushroomed to become an increasingly substantial segment within the global financial market. It has been recognised as a viable and competitive form of financial intermediation not only in Muslim countries but also outside the Muslim world and offering a wide range of financial products and services. The industry that started on a modest scale since its inception in the mid-1970s has shown a rapid expansion and evolution over the past three decades. It is in fact one of the fastest growing industries, having posted double-digit annual growth rates for almost 30 years (Iqbal and Molyneux, 2005). According to information released by Council for Islamic Banks and Financial Institutions (CIBAFI), there are over 284 financial institutions operating in 38 countries and managing US$250 billion. This does not include conventional banks offering Islamic financial products and services through window operations, which CIBAFI estimates to manage about US$200 billion.”(Paper published in International Journal of Islamic and Middle Eastern Finance and Management; Vol.1, Issue 2. 2008 (Published by Emerald Group Publishing, Understanding the Objectives of Islamic Banking: A Survey of Stakeholders' Perspectives By: Dr. Asyraf Wajdi Dusuki) 2.2 “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 and payment of interest on any of its operations.” Organization of Islamic Conference (OIC) 2.3 “Islamic Bank is essentially a normative concept and could be defined as conduct of banking in consonance with the ethos of the value system of Islam.”( Dr. Ziauddin Ahmed) 2.4 “There are two reasons for establishing the right philosophies for any Islamic bank. First, the philosophies will be used by the management or policy makers of the banks in the process of formulating corporate objectives and policies. Secondly, these philosophies serve as an indicator as to whether the particular Islamic bank is upholding true Islamic principles. (Haron in 1996)

Chapter – 3 Concept about the Islamic Banking Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively.An Islamic Bank is a financial institution that operates with the objective to implement and materialize the economic and financial principles of Islam in the banking arena. The Islamic banks organize their operation on the basis of profit/loss sharing and other modes which are permitted in Islam. The fundamental differences between Islamic banking and conventional banking, not only in the ways they practice their businesses, but above all the values which guide Islamic banking whole operation and outlook. These values prevailed within the ambit of Shariah (Islamic law) are expressed not only in the minutiae of its transactions, but in the breadth of its role in society. In other words, as a Shariah-based firm, Islamic banks need to fulfil social obligations that go beyond the conventional capitalist worldview aiming at only maximizing profits. 3.1 Objectives & Aims of Islamic Banking: To understand Islamic banking in its entirety requires full comprehension of its objectives and philosophy. As a Shariah-oriented business entity, Islamic bank is vigorously expected to be guided by the philosophy of Islamic business. There are given the objectives of Islamic banking: •

To conduct interest free banking.

•

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

•

To invest through different modes permitted under Islamic Shariah

•

To accept deposits on profit-loss sharing basis.

•

To establish a welfare-oriented banking system.

•

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

•

To pay a vital role in human development and employment generation.

•

To contribute towards balanced growth and development of the country through investment operations particularly in the less developed country for achieving ultimate goal of Islamic economic system.

the

Table I summarises the fundamental differences between FSIBL Islamic banks and conventional banks. Table I: Fundamental Conventional Banks

Distinctions

between

Islamic

Banks

and

Islamic Banks

Conventional Banks

FSIBL Functions and operations are guided by sources of Shariah (Islamic Divine Law) namely the Quran and the Sunnah (traditions of the Prophet Muhammad p.b.u.h.). FSIBL aim at balancing between profitmaximization doctrine and social responsibility.

Functions and operations are guided by secular principles and not based on any religious doctrines and values.

In the modern FSIBL system, it has become one of the service-oriented functions of the IBBL to collect and distribute Zakat. Financing instruments of FSIBL are based on either asset-backed trading contract or equity financing with risk sharing. FSIBL Deposits are not interest-oriented but profit-loss sharing oriented whereby investors' principal repayment is not guaranteed but entitled to a predetermined share of actual profit realized by the business.

It does not deal with Zakat

Institutions that emphasis on profits maximization and low risk.

Financing instruments are based on interest-bearing mechanism.

Conventional banks Deposits are interest oriented and the investor is assured of a predetermined rate of interest with a guaranteed principal repayment. Normally It can charge additional The FSIBL has no provision to charge any extra money (compound rate of interest) in money from the defaulters. case of defaulters. Islamic banks are restricted to participate in There are no such restrictions for economic activities which are unethical and conventional banks. prohibited by Shariah such as businesses involving alcohol, prostitution, pork, environmental pollution etc. Islamic banks need to do charity by paying zakah There are no such requirements to do (compulsory religious levy) out of charity. The FSIBL give greater emphasis on the viability of The conventional banks give greater the projects. emphasis on credit-worthiness of the clients. Strictly speaking, FSIBL cannot do that A conventional bank has to guarantee all its deposits.

3.2 The Origin of Islamic Banking The origins of Islamic banking can be traced back to the practice of mudaraba by the Prophet Muhammad (Sm) himself. The Prophet (Sm) was mudarib (agent) for his wife, who entrusted her capital or merchandise to him for trading and got back the principal plus an agreed share of the profit. As a reward for his labor (and entrepreneurship), the Prophet (mudarib) received his share of the same. The mudarib, however, was not liable for losses resulting from the exigencies of travel or from an unsuccessful business venture. This form of partnership is called mudaraba. There is another form of partnership called musharaka, in which the musharik (agent) has a contribution to the capital and can therefore, claim a higher percentage of profit. As early as in the seventh century, the tax revenue from Iraq was sent across the desert to Medina in the form of a mudaraba. Caliph Umar is known to have invested orphans' money in merchant trading between Medina and Iraq. Musharaka partnerships were practised in the north-south trade between Egypt and Jeddah during the eleventh century. As many as 32 mudaraba contracts were practised in the 17th century in the Turkish city of Busra. Mudaraba was in practice in Tunisia, Indonesia, Arabian Peninsula and India.

3.3 The concept of Modern Islamic Banking: Modern Islamic banking concepts came from the historical practice of the concept of a 'threetier mudaraba'. The first tier, there is the individual, rab-al-mal, who wishes to invest capital. The second tier is the mudarib (agent), to whom the rab al-mal entrusts his capital by contract and finally, The third tier, there is the entrepreneur, with whom the mudarib signs a contract, and to whom the mudarib passes the capital originally entrusted to him by the rab-al-mal.

3.4 The first attempt to establish an Islamic financial institution: The first attempt to establish an Islamic financial institution took place in Pakistan in late 1950s with the establishment of a local Islamic bank in a rural area. Borrowers of the bank did not pay interest on the CREDIT advanced, but a small charge was levied to cover the bank's operational expenses. Although the experience was encouraging, two main factors were responsible for its failure. First, the deposits made in the bank were to be held for long and the depositors, who were mostly the landlords found that with increasing number of borrowers the gap between the amounts of capital available and that of the credit demanded had become very large. Secondly, the depositors showed considerable interest in the way their money was lent out but the bank staff did not have complete autonomy over the bank's operations and therefore, could not always satisfy the customers in this regard.

3.5 Starting of Islamic banking in Bangladesh:

First, Islamic banking started in Bangladesh through establishment of the ISLAMI BANK BANGLADESH Ltd. (IBBL), which is considered to be the first interest-free bank in Southeast Asia. It was incorporated on 13 March 1983 as a public limited company under the COMPANIES ACT 1913. In December 2001, IBBL had 121 branches, its authorised capital was Tk 1000 million and paid up capital Tk 640 million. Second, AL BARAKA BANK Ltd, often called the second Islamic bank of Bangladesh, commenced banking business on 20 May 1997. It is a joint-venture enterprise of Al-Baraka Investment and Development Company, a renowned financial and business house of Saudi Arabia, Islamic Development Bank, a group of eminent industrialists of Bangladesh, and the government of Bangladesh. The authorised capital of the bank is Tk 600 million and its paid up capital is Tk 259.55 million. The bank has now 35 branches in different parts of the country. (banglapedia). Dr. Seyed Nezamuddin Makiyan has mentioned about the operational risk of Islamic banking in the article on “Risk Management and Challenges in Islamic Banks” which was published in the Journal of Islamic Economics, Banking and Finance. These are given belowOperational risk may arise from various sources: a) The unique activities that Islamic banks must perform. b) The non-standardized nature of some Islamic products. c) The lack of an efficient and reliable Shari’ah legislation system to enforce financial contracts. From the viewpoint of Islamic Shariah, in order to be justified islamically the banking system has to avoid interest. Consequently, financial intermediation in Islamic banking between the bank and the client takes place as a partner rather than a debtor-creditor. The financial activities of modern conventional banks are based on a creditor-debtor relationship between depositors and bank on the one hand and between the borrower and the bank on the other Interest is regarded by conventional banks as the price of credit reflecting the opportunity cost of money. As interest is prohibited in Islam, commercial banking in an Islamic framework could not be based on the creditor-debtor relationship. The other aspect of the theoretical basis of Islamic banking is that the interest free bank is not risk free. This principle is applicable to two main factors of production, i.e. labor and capital. According to this principle, as no payment is allowed to labor, unless it is applied to work, no reward for capital should be allowed unless it is exposed to business risk. From these two principles of the theoretical basis of Islamic banking, it may be said that Islamic financial relationships are of a participatory nature (Ahmad, 1993). (ISLAMIC BANKING IN BANGLADESH: A CASE STUDY OF IBBLMohammed Nurul Alam, International Journal of Islamic Financial Services Vol. 1 No.4).

Chapter – 04 Overview of the FSIBL

4.1 Overview of FIRST SECURITY ISLAMI BANK LIMITED

First Security Islami Bank Limited (FSIBL) was incorporated in Bangladesh on 29 August 1999 as a banking company under Companies Act 1994 to carry on banking business. It obtained permission from Bangladesh Bank on 22 September 1999 to commence its business as a name of First Security Bank Limited which conducted their banking operation as conventional Banking. After Nine year conventional banking operation 1 st January,2009 it converted into a full fledged islamic Bank rename as “ First Security Islami Bank Limited. The Bank carries banking activities through its FIFTY TWO (53) branches through out the country. The commercial banking activities of the bank encompass a wide range of services including accepting deposits, making investment, discounting bills, conducting money transfer and foreign exchange transactions, and performing other related services such as safe keeping, collections and issuing guarantees, acceptances and letter of credit.

4.1.1 Business philosophy of FSIBL: The philosophy of First security Islami Bank Limited is to the principles of Islamic Shariah. The organization of Islamic conference (OIC) defines an Islamic Bank as "a financial institution whose status, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banking of the receipt and payment of interest on any of its operations. The sponsor, perception is that FSIBL should be quite different from other privately owned and managed commercial bank operating in Bangladesh, FSIBL to grow as a leader in the industry rather than a follower. The leadership will be in the area of service, constant effort being made to add new dimensions so that clients can get "Additional" in the matter of services commensurate with the needs and requirement of the country growing society and developing economy.

4.1.2 Objective of FSIBL To be a provider of high quality products and services to its potential market, the bank also caters to the needs of its corporate clients and provides a comprehensive range of financial services to national & multinational companies.

4.1.3 Vision: • •

•

To become the Bank of choice in serving the Nation as a progressive and Socially Responsible financial institution by bringing credit & commerce together for profit and sustainable growth. In accomplishing this mission, the bank has now been free from all the natures of a problem bank through fulfilling all the conditions set by the central bank. They proudly say: “FSIBL is profit making and problem free.

To establish FSIBL as a role model in the banking sector in Bangladesh and to be a part of the national development by providing the needs of customers , to give customers inspirational strength, dependable support and the most comprehensive

range of business solutions, through the team of professionals who work passionately to be outstanding in everything to do.

4.1.4 Mission: o To be the most caring and customer friendly and service oriented bank. o To create a technology based most efficient banking environment for its customers. o To ensure ethics and transparency in all levels. o To ensure sustainable growth and establish full value of the honorable shareholders and o Above all, to add effective contribution to the national economy. o Maintaining the highest ethical standards and a community responsibility worthy of a leading corporate citizen. o Continuously improving productivity and profitability and thereby enhancing shareholder value.

4.1.5 Special Features of First Security Islami Bank: All activities are conducted on interest-free system in accordance with Islamic Shariah Principles. o Investment is made through different modes as per Islamic Shariah. o Investment-income of the Bank is shared with the Mudaraba depositors according to an agreed upon ratio ensuring a reasonably fair rate of return on their deposits. o

Aims to introduce a welfare-oriented system and also to establish equity and justice in the field of economic operators.

o Extends socio-economic and financial services to individuals of all economic background with strong commitment in rural advancement uplift.

4.2 Corporate information (as on Dec 31, 2010)

First Security Islami Bank Limited Highlights For the ended year of Dec31, 2010 Name of the Company

First Security Islami Bank Ltd.

Chairman

Mohammad Saiful Alam

Vice Chairman

Alhaj Mohammad Abdul Maleque

Managing Director

A.A.M. Zakaria

Company Secretary

Abdul Hannan Khan

Legal Status

Public Limited Company

Date of Incorporation

29 August1999

Date of Commencement of Business

29 August 1999

Date of Permission from Bangladesh Bank 22 September 1999 Date of Opening of First Branch

25 October 1999

Registered Office

23, Dilkusha Commercial Dhaka-1000, Bangladesh

Line of Business

Banking

Authorized Capital

Tk.4,600 Million

Paid up Capital

Tk.2,300 Million

Date of consent of IPO

04 June 2008

Phone

9560229 (Hunting),9550334,7171029-30 9565594 (Share Division)

Fax

880-02-9561637

E-mail Website

bcs@fsblbd.com www.fsblbd.com

SWIFT

FSEBBDDH

Auditors

Syful Shamsul Alam & Co . Chartered Accountants Corporate Office Paramount Heights 65/2/1 Box Culvert road (Level-6) Purana Paltan, Dhaka-1000, Bangladesh Phone: 9555915, 9560332 Email: syful@intechworld.net

Legal Advisor

The Law Counsel Barrister & Advocates City Heart (7th Floor) Suit No. 8/8, 67, Naya Paltan, Dhaka-1000

Area,

Phone: 9349647-8 Fax: 9349866, 9567029 E-mail: l.counsel@bdonline.com Tax Consultant

K.M. Hasan FCA K.M. Hasan & Co. Chartered Accountants Dhaka Office Home Tower Apartment (8 th & 9 th Floor ) 87, New Eskaton Road , Dhaka - 1000 Phone: 9351457,9351564 Fax: 9345792-112

4.2.1Information Technology: First Security Bank Limited (FSIBL) started its Banking operations with strong Information Technology(IT) based Software “PcBank2000”from the very beginning of Banking operation of its all the branches. Recently they have plan to upgrade their software into “BANK ULTIMUS” which will cover the all current issues of banking solutions to the customer with a single server. It maintains the Local Area Network (LAN).

4.2.3 Address of the Head Office:

First Security Islami Bank Limiteder 23,

Dilkusha

Commercial

Area

Dhaka-1000, Bangladesh Telephone

9560229(Hunting),9550334, 7171029-30

Fax

880-2-9561637

Swift

FSEBBDDH

Cable

First Security Islami BANK

E-Mail

info@islamibankbd.com

Web

http://www.fsiblbd.com

4.2.4 Branch Location in FSIBL FSIBL has the largest network of branches among PCBs. FSIBL has 66 branches up-to-date located at different commercially important places. All branches are in considered as online branches. With the expansion of business, Bank divided their branches in 6 Zones to ensure close supervision, effective monitoring, and quick disposal of business and optimum

utilization of manpower. 26 branches are located in 3 Dhaka Zones (Dhaka Central, South & North Zones), 25 branches are in Chittagong Zone, 04 branches are in Khulna Zone, 06 are in Sylhet Zone, 02 branches in Barisal Zone, and 03branches in Rajshahi Zone.

HEAD OFFICE : 23, Dilkusha Commercial Area, Dhaka-1000, Bangladesh Tel:(8802) 9560229 (Hunting), 9550334, 7171029-30Fax: 880-2-9561637, 7162566 Swift: FSEBBDDH, E-Mail: md@fsblbd.com

Dhaka

GULSHAN BRANCH 122 Gulshan Avenue, Gulshan-2, Dhaka,Bangladesh Tel: (8802)8861829, 9895381, 8814438, 9897915 Fax: 88-02-9887931 E-Mail: gulshan@fsblbd.com

BANGSHAL BRANCH 121/2 Lutfar Rahman Lane North South Road (2nd Floor), Dhaka.Bangladesh Tel: (8802)7176745-7, 9558944 Fax: 88-02-7176745 E-Mail: bangshal@fsblbd.com

DHANMONDI BRANCH House # 38/1, Road # 02, (Opposite Rifle Square) Dhanmondi R/A, Dhaka,Bangladesh Tel: (8802) 9670975, 9670976 Fax: 880-2-9670977 E-Mail: dhanmondi@fsblbd.com

MOHAKHALI BRANCH 95, Mohakhali C/A, Dhaka. Bangladesh Tel: (8802)8852488, 9888046 Fax: 88-02-9886334 E-Mail: mohakhali@fsblbd.com

MIRPUR BRANCH House # 793 (1st Floor) Kazi Para, Begum Rokeya Sharani, Mirpur, Dhaka. Bangladesh Tel: (8802)8033664,Fax: 8033664 E-Mail: mirpur@fsblbd.com

BANANI BRANCH Plot # 80, Block # B, Kamal Ataturk Avenue Banani Model Town, Dhaka,Bangladesh Tel: (8802) 9892164, 9889754 Fax: 880-2 -8851140 E-Mail: banani@fsblbd.com

DILKUSHA BRANCH 23, Dilkusha Commercial Area Dhaka,Bangladesh Tel: (8802) 9560229 (Hunting), 9550334, 7171029-30 Fax: 880-2-9561637, 7162566 E-Mail: dilkusha@fsblbd.com

TOPKHANA ROAD BRANCH Bengal Centre 28, Topkhana Road, Dhaka,Bangladesh Tel: (8802)9553593, 9553149, 7161905 Fax: 880-2-7161905 E-Mail: topkhana@fsblbd.com

SHAFIPUR BRANCH Union: Mouchak, Mouza- Shafipur, P. S- Kaliakoir, Dis. Gazipur ,Dhaka, Bangladesh. Tel:(88) 0682252134-35 (PABX), Fax: 88-0682252133 E-Mail:shafipur@fsblbd.com

MOTIJHEEL BRANCH First Security Islami Bank Ltd. Plot # 9/i, Motijheel C/A Dhaka City Corporation Dhaka-1000 Tel: 9570423, 9570531 Fax: 9572261 Mobile: 01191195024, 01713375002

AZAMPUR BRANCH First Security Islami Bank Ltd. 65, MuktiJodda Road Panna Plaza, Ajampur super Market, DOKKHIN KHAN, UTTARA, DHAKATel: 7911307-8 Fax: 7911309 Mobile: 01713375086 E-mail: azampur@fsiblbd.com

BISWA ROAD BRANCH 224, Maiddah Bashaboo, P.S- Shabujbag, Dhaka. Bangladesh Phone: (8802)7218020, 7218021 Fax: 880-2 -7218020 E-Mail: biswaroad@fsblbd.com

RING ROAD BRANCH First Security Islami Bank Ltd. 16/A/3 (Ground & 1st floor) Block # F ,Mohamadpur Housing Estate Ring Road, Mohammadpur, Dhaka. Tel: 9133621,9118036 Fax: 8142555 Mobile: 01713043757, 01711908432 E-mail: ringroad@fsiblbd.com

BANASHREE BRANCH First Security Islami Bank Ltd. Road # 2 Block # C Eastern Housing Banashree Project Rampura, Dhaka. Tel: 7287394 Fax: 7287394 Mobile: 07175022150, 01713375000 E-mail: banashree@fsiblbd.c

DHONIA BRANCH Plot No-454, Nayapara, Dhonia, Shyampur,Dhaka. Bangladesh Tel: (8802)7553807 Fax: 880-2 -7553800 -Mail: dhonia@fsblbd.com

COLLAGEGATE BRANCH Auspara College Gate Tongi, Gazipur. Dhaka,Bangladesh Tel: (8802)9816212-3 (PABX), Fax: 9880-2 -816211 E-Mail: collagegate@fsblbd.com

SENANIBASH BRANCH 234/6 (1st Floor), Kachukhat. P.S: Kafrul, Dhaka,Bangladesh Tel: (8802)8714615 Fax: 880-2 - 8714614 E-Mail: senanibash@fsblbd.com

MADHABDI: Kashipur, Madhabdi, Norsindi Ph: 9446879, 9446878 Fax: 9446880 E-mail: madhabdi@fsiblbd.com

MUKSUDPUR BRANCH First Security Islami Bank Ltd. P.O. Muksudpur, P.S. Dohar Dist- Dhaka Tel: 03-894450028, FAX: 03894450400 Mobile: 01713375082 mail: muksudpur@fsiblbd.com

ISLAMPUR: Mabud Mension (2nd floor), Islampur Road, Old Dhaka Ph: 7392464, 01714453411 Email: Islampur@fsiblbd.com

Savar: Savar City Center, 2nd Floor, Porasava: Savar, Dhaka Ph: 7744657, 7744656 Fax: 7744658 Email: savar@fsiblbd.com Date of Inaguration:26th Octover 2009

SHREEPUR BRANCH First Security Islami Bank Ltd. U.P- Shreepur P.S-Shreepur, Gazipur. Tel: 06825-51767 Fax: 0682551769 Mobile: 01818027399, 01191313998 E-mail: shreepur@fsiblbd.com Zirabo: Yearpur Union, Ps: Ashulia, Savar, Dhaka Ph: 01713375034 E-mail: zirabo@fsiblbd.com Date of Inaguration: 25th October2009

MYMENSING: Brojalal Niketon, Holding No-62 (1st Floor), ChotoBazar, Kotowali Model Thana, Mymensing Ph: 091-64043 Fax: 091-64033 E-mail: mymensing@fsiblbd.com

FARIDPUR: Holding No-15/A, Mojib Road, Word No-4, Kotwalli, Faridpur Ph: 0631-67166 Fax: 0631-67165 E-mail: faridpur@fsiblbd.com Chittagong KHATUNGONJ BRANCH 142, Chand Miah Lane Khatungonj, Chittagong, Bangladesh Tel:(88) 031-620729, 031-619414 (PABX), 031-616850, 031-624844,

KERANIHAT BRANCH Keranihat, Satkania, Chittagong,Bangladesh

01819319965, 01711846086 Fax: (88)031-622702 E-Mail: khatungonj@fsblbd.com . PROBORTAK MOR BRANCH 1281, Bayzid Bostami Road, Probartak Sangha Turning (Adjacent To Kollol Super Market), Tel: (88)-01199708141, Fax: (88)-03036-56566 E-Mail: keranihat@fsblbd.com Tel:(88) 031-2570823, Fax:(88) 031-2570825 E-Mail: nazumeahhat@fsblbd.com Panchlaish, Chittagong Bangladesh. Phone : (88)031-2552295, 031-2552786, 031-2552296 (PABX) Fax: (88)031-2552785 E-Mail: probortakmor@fsblbd.com

JUBILEE ROAD BRANCH 365, Jubilee Road Chittagong Bangladesh Tel: (88)031-627026, 031-2855734, 031-635658, 031-635664 (PABX) Fax: (88)031-627024 E-Mail: jubileeroad@fsblbd.com

AGRABAD BRANCH 75, Hossen Court Agrabad C/A, Agrabad, Chittagong,Bangladesh Tel: (88)031-723863 (PABX), 031-2522099, 031-2514590 Fax: (88)031-716828 E-Mail: agrabad@fsblbd.com

ANDERKILLAH BRANCH First Security Islami Bank Limited House # 10 (1st floor), Anderkillah Road, Thana-Kotoyali, Chittagong. Tel: 031-2858651-3 Fax: 0312858651 Mobile: 01912417513,01555432066 E-mail: anderkillah@fsiblbd.com NAZIR HAT: H Plaza, NagirHat, Fatikchari, Chittagong. Ph: 01720060872 E-mail: nazirhat@fsiblbd.com

CHAWKBAZAR: Holding No- 182/183, Lalchand Road,Chittagong City Corp., Kotowali, Chittagong. Ph: 01729097354 E-mail: Chawkbazar@fsiblbd.com

Cox’s bazar Ph: 03432-58413 Fax: 03432-58414 E-mail: eidgoan@fsiblbd.com Date of Inaguration: 12th November 2009

COX’S BAZAR BRANCH First Security Islami Bank Limited 940, Koral Reef Plaza. Cox’s Bazar Main Road Cox’s Bazar

HAT HAZARI BRANCH First Security Islami Bank Limited Solaiman Tower (1st floor) P.O+P.S- Hat Hazari, Chittagong.

Tel: 0341-51584 0341-51582 Fax: 0341-51583 Mobile: 01819332100, 01713375071 E-mail: coxsbazar@fsiblbd.com

Tel: 031-2601361-2 Fax: 0312601363 Mobile: 01818860651, 01713375075 E-mail: hathazari@fsiblb.com

MOHRA: Hossain Building, Aracan Road, Mohra (Kaptai Rasta Matha), Chandgaon, Chittagong. Ph: 031-2572006 Fax: 031-2572007 E-mail: mohra@fsiblbd.com

Patiya: N.J. Complex, 1280, Shahid Sabur Road, Patiya, Chittagong. Ph: 01746060280, 01199708141 E-mail: patiya@fsiblbd.com Date of Inaguration:23rd November 2009

NAZU MEAH HAT BRANCH Nazu Meah Hat, Nur Ali Bari, Hat Hazari, Chittagong,Bangladesh

Lohagara Branch: Karnafuly City Complex, (1st floor) P.O+P.S-Lohagara, Chittagong. Ph: 03034-56591 Fax: 03034-56592 E-mail: lohagara@fsiblbd.com Date of Inaguration: 22th October 2009 DOVASHI BAZAR BRANCH R.S.Plot-1958 Dovashi Bazar P.O- Chandraghona (Lichu Bagan)P.S-Ranguniya, Chittagong, Bangladesh Tel:(88) 01819968286, (88)01717332116 Fax: E-Mail: dovashibazar@fsblbd.com

PATHER HAT BRANCH First Security Islami Bank Limited Noyapara, P.S- Rawjan, Chittagong. Tel: 031-2572441 031-2572442 Fax: 031-2572443 Mobile: 01815825778, 01713375062 E-mail: patherhat@fsiblbd.com

RAMGONJ BRANCH First Security Islami Bank Limited Rafat Mansion Kalabagan(1st floor) P.O- Ramgonj P.S- Ramgonj, Laxsmipur Tel: 03824-75112 ,03824-75115 Fax: 03824-75112 Mobile: 01191785920, 01552440087 E-mail: ramgonj@fsiblbd.com

CHAKARIA BRANCH First Security Islami Bank Limited

RANIR HAT: Amiruzzaman Sawdagor Market (1st Floor) Moddha Gagra,

Al-Rahmat Shoping Complex Chakaria, Cox’s Bazar. Tel: 03422-56490 Fax: 0342256480 Mobile: 01713375084, 01813824601 E-mail: chakaria@fsiblbd.com

Razanagor, RanirHat, Rangunia, Chittagong. Ph: 01744655655 E-mail: ranirhat@fsiblbd.com

PAHARTALI: 440/504, Torab Arcade, Dhaka Trank (D.T) Road, Pahartali, Chittagong. Ph: 031-2773041 Fax: 031-2773043 E-mail: Pahartali@fsiblbd.com

COURT BAZAR BRANCH First Security Islami Bank Limited Court Bazar Shadar (1st floor) P.O- Ratna Palong, P.S-Ukhiya, Cox’s Bazar. Tel: 03427-56151 Fax: 0343756155 Mobile: 01713375078, 01819381077 E-mail: courtbazar@fsiblbd.com

BOHADDARHAT BRANCH 4070/4523, Bismillah Complex (1st Floor) P.O&P.S- Chandgaon Chittagong Bangladesh Tel: (88)031-2571531-2, Fax: (88)031-2571531 E-Mail: bohaddarhat@fsblbd.com Comilla: Aiyub Manson (1st floor) Chawk Bazar, Comilla-3500 Ph: 081-64899, 081-61912 Fax: 081-73291 E-mail: comilla@fsiblbd.com Date of Inaguration:8th November 2009 Eidgoan: Eid goan bus stand, P.O- Eid goan P.S- Cox’s bazar Sylhet SYLHET BRANCH SalimMansion (1st Floor) Mendibagh C/A, Biswa Road, Asian Highway, Sylhet Bangladesh Tel: (88)0821-813101, Fax: (88)0821-813102 E-Mail: sylhet@fsblbd.com

FENI: Holding No- 322 (1st & 2nd floor), SSK Road, Feni Model Town, Feni Ph: 01711123436 E-mail: feni@fsiblbd.com

BISWANATH BRANCH Haji Abdul Khalique Super Market Natun Bazar, Rampasha Road Biswanath, Sylhet Bangladesh Tel: (88)03891188319, Fax:(88) 08224-56014 E-Mail: biswanath@fsblbd.com

.com TALTALA BRANCH First Security Islami Bank Ltd. Probaha 17 Taltala Sylhet Tel: 0821723136 Fax: 723145 E-Mail: taltola@fsiblbd.com AMBERKHANA Rangpur BRANCH RANGPUR First Security Islami Bank BRANCH Ltd. Aziz Supper Market M/s. Moyen complex, (1st Holding # 640,641, Floor) Station Road Wayebs B88 (Nawabgonj Bazar), West Amberkhana, Rangpur, Bangladesh. Sylhet-3100 Tel: (88)0521-61736, Tel: 0821-2832238, Fax: Fax: (88)0521-61735 0821E-Mail: 2832238 rangpur@fsblbd.com Mobile: 01713375083 , 01713300056 Email:amberkhana@fsiblbd MOULOVIBAZAR BRANCH 61,Central Road (Saifur Rahman Road) (1st Floor) P.O-& P.SMoulovibazar Moulovibazar , Bangladesh. Tel:(88)0861-63095, Fax:(88) 0861-63096 E-Mail: moulvibazar@fsblbd.com

GOBINDAGONJ BRANCH First Security Islami Bank Ltd. 1st floor, Hazi Abdus Salam Market Gobindagonj Chatak, Sunamgonj Mobile: 01711357689, 01713375083 E-mail: gobindagonj@fsiblb.com

Rajshahi RAJSHAHI BRANCH First Security Islami Bank Ltd Saheb Bazar Zero Point P.O- Ghoramara, P.SBoyalia, Rajshahi. Tel: 0721-775653, 0721775654 Fax: 0721-775647 E-mail: rajshahi@fsiblbd.com

Barishal PATUAKHALI BRANCH First Security Islami Bank Ltd Patuakhali Natun Bazar, Sadar Road P.OPatuakhali P.SPatuakhali., Patuakhali Tel: 0441-64287, 044164290 Fax: 0441-64290 Mobile: 01713375087, 01716358393 E-mail: patuakhali@fsiblbd.com

BOGRA BRANCH First Security Islami Bank Ltd. Plot# 1717, Santahar Road Baragola, Bogra. Tel: 051-67623, 04476401313 Mobile: 01199473401, 01718524232 Mobile: 01713375079, 01712528899 E-mail: bogra@fsiblbd.com BARISHAL: Holding No- 463/464, Hemayet Uddin Road, Barishal City Corp., Kotawalli, Barishal. Ph: 0431-2177278 Fax: 0431-2177279 E-mail: barishal@fsiblbd.com

Date Of Inauguration: April 8, 2010

4.3 Organization Structure of IBBL:

Board of Directors of FSIBL: Chairman

Vice Chairman

Directors

Executive Committee

Audit Committee

4.3.1 There are given the name of Board of Directors in First Security Bank Limoted

4.4 Shariah Council of FSIBL: For accomplishing real islami banking service to its customer FSIBL consist a high powered Shariah Board which comprises of islamic Scholars who ensure the shariah based service to the community. There are given the chart Shariah Board and also name of the members.

Chairman

Members Secretary

Vice Chairman

Sl# Name 1.

Position

Address

Sheikh (Moulana) Mohammad Baitush Sharaf Complex Shah Qutubuddin Chairman Abdul Jabbar (R) Road Dhanialapara Chittagong-4100 Mufti

Sayeed

Ahmed

2. Moulana

Md.

Shamaun

Ali

Members

Moulana Naseem

Abdus

Markaze Vice 2/2 Darus Chairman Dhaka

Member 491, Wireless Railgate Secretary Bara Moghbazar Dhaka-1217

Shaheed Member

2/C Green Valley Apartment 493 Moghbazar Wireless Railgate Dhaka-1217

Member

Room # 616, Sir P. J. Hortog International Hall, University of Dhaka Dhaka-1000

Janab Mohammad Azharul Islam 5.

Observers Members Sl# Name

Salam

Eshaete Mirpur,

Position

Address

Alhaj Md. Abdul Maleque Vice Chairman, Board 8/A, OR Nizam Road of Directors FSIBL & Panchlaish R/A Observer Member, Chittagong . Shariah Council

Prof. Md. Sharif Hussain Board of Directors 57, East Hajipara (5 th FSIBL Floor) Rampura, & Observer Member, Dhaka-1219 Shariah Council

Prof.

Dr.

Muhammad Board

Directors Road

02,

Loqman

Mr.

FSIBL & Member, Council Shahidul

Islam Board of FSIBL & Member, Council

Observer House # Shariah Dhanmondi Dhaka-1205

22/B R/A,

Directors Home# 7, Road# 1, Observer Nasirabad Housing Shariah Society, Post: Medical

Organ gram of FSIBL bank: Chairman Board of Directors

Chief Advisor Managing Director (HRD) Deputy Managing Director

Deputy Managing Director GSD, CAD, A&I, GB, D&M

Senior Vice President

ID, IT, Credit, R&D

Executive Vice President/ Company Secretary

Senior Vice President

Vice President Senior Astt. Vice President Astt. Vice President Senior Principle Officer Principle Officer Senior Officer Officer Junior Officer Astt. Astt. Officer Officer

Senior Vice President

Flowchart 1: Organ gram of FSIBL

4.4.2 Designations of employees of the FSIBL A. Executives of the Bank 1.

Managing Director

Deputy Managing Director

Executive Vice president (EVP)

Senior Vice President (SVP)

Assistant Vice President (AVP)

Officials of the Bank

Senior Principal Officer

Principal Officer

Senior Officer

Officer

Assistant officer Grade -I

Assistant Officer Grade 窶的I

Assistant Officer Grade 窶的II

Sub Staffs of IBBL:

Messenger

Warehouse Guard

Driver

Cleaner

4.3 Management Efficiency Senior Management FSIB is functioning with professional management team headed by the Managing Director Mr. A. A. M. Zakaria. Among other senior executives currently two DMD, One Principle(Training Center), two SEVP, eleven SVP, ten VP, five FVP, twelve SAVP, five AVP and eight FAVP are discharging their services in progression of the banks business.

Managing Director Mr. A. A. M. Zakaria, Managing Director of the bank is an eminent banking personality having long 30 years of experience in banking industry. After successful completion of his B.A. (Hons) M.A. in Economics from Dhaka University , Mr. A. A. M. Zakaria has started

his banking career in 1977 as Senior Officer of Rupali Bank. Before the current responsibility, Mr. A. A. M. Zakaria was the Deputy Managing Director of Dutch-Bangla Bank Limited. In his multi-greeted banking service, Mr. A. A. M. Zakaria participated in many courses, training program and workshops on banking at home and abroad. Mr. A. A. M. Zakaria joined in FSIB in 7 th August 2005 as Managing Director in a crucial moment when the bank had fallen into Problem Bank with lots of great complex situations. Within a short span of time FSIB under his proper guidance recovered from the â&#x20AC;&#x153;Problem Bankâ&#x20AC;?. Top management of the bank is supported by human resource strength of 421 executives and officers. For smooth functioning of the Bank, following committees have been formed: 1. Management committee (MANCO) comprises of senior members of the management headed by Managing Director of the bank. All divisional heads are the member of the committee. MANCO meets on regular basis to discuss relevant agenda. 2. Asst Liability Management Committee (ALCO) headed by the Managing Director, is responsible for balance sheet risk management. The committee participate is the monthly ALCO meeting and review the liquidity position, review rate of interest on deposit and lending, and review the ALCO papers on presentation by treasury back office on the position of profit, deposit, advance, cost analysis, maturity bucket of deposit & advance, balance sheet, profit and loss account and many other issues relating to banks business and assets-liability management. Five relevant divisional heads including DMD are the members and FVP & Head of Treasury of the Bank is the member secretary of the committee

4.4 Human Resources Development FSIB has a separate Human Resources Division (HRD) to manage the employee policies and practices. As on FYE 2009, Total 900 executives & officers of the bank have been working for smooth banking operations. Bank follows a standardized human resources policy. HRD of the Bank follow a transparent and free & fair system to ensure the standard recruitment, training & development of human resources of the bank. The bank has defined HR policies including recruitment, training & development, promotion, leave, transfer and disciplinary action policy. Usually internal recruitment procedures are considered to fill up the mid and top management positions, while entry-level positions are filled with regularly through competitive recruitment exams. They follow transparent, well-defined and strict rules for appointment of officers and staff in the Bank.

The tasks of Human Resource Management are given below: i.

Preparing human resource plan and maintaining data card for the employees of the bank. ii. Preparing training and human resource development plan, programmer and formulating, reviewing and ensuring implementation of policies for promotion, job rotation, and disciplinary action. iii. Formulating and ensuring implementation of policies for employeeâ&#x20AC;&#x2122;s appraisal and performance rating. Maintenance of centralized service record and confidential reports up to grade level as may be determined form time to time. Periodical staff appraisal and formulating policies for skill development.

iv. Providing all support services for effective and meaningful training of bankâ&#x20AC;&#x2122;s employees. Preparation of retirement list, collecting of date from of all employees and officers and updating data cards. Maintenance and updating the human resource register officers and employees.

4.5 Corporate Governance Corporate governance is about how corporation is running its operations to achieve its corporate objectives. Bangladesh Bank (BB) gives emphasis on implementing corporate governance among the financial institutions and to do that, BB emphasises implementation of the guidelines issued by them for improving corporate governance in banking. Good Corporate Governance practices enhance an entity's corporate image and market credibility, which attract capital and increase its borrowing power. These can be reflected in the quality of financial reporting and disclosures; strength of internal control system and internal audit function induction of professionally competent, independent non-executive Directors on corporate Board; formation of Audit Committee; delegation of authority to executives and staff; protection of corporate governance for strengthening organizational strength. With a view to ensure effective participation and deep interest in the affairs of the company and as per Articles of Association of the Company and as per Bangladesh Bank Circular No. 16 dated March 24, 2003 the bank has set up the following 2 committees: 1. Executive committee 2. Audit Committee

4.5.1 Executive Committee: FSIB has constituted 09 members executive committee of the board as per Bangladesh Bank guidelines to ensure corporate goverance in the business of which managing director of the Bank is Ex-officio Member. The executive committee of the board are responsible for developing policy and strategy for smooth operations of business and business development of the bank to ensure maximization of shareholders wealths protecting other stakeholders interest in the company Mr. Alhaj Md. Saiful Alam, Chairman of the board of Directors is the Chairman of the present Executive Committee of the bank. He is very dynamic person and leading the executive committee of the bank in a very manner.

4.5.2 Audit Committee: FSIB has formulated an audit committee can play an effective role in formulating an efficient and secured banking system. The Audit Committee has been formed comprising three members of the Board of Directors. As per corporate governance guidelines the Chairman of the Audit Committee should have sound knowledge and expertise in finance & accounting or auditing. Mr. Hamidul Haq, who is also a Director of the Bank, is Convener of the committee. He is associated in banking field over long years.

4.6 PRODUCT & SERVICE OF FSIBL First Security Islami Bank offers all types of modern, progressive and dynamic business product as well as banking services to the customers of all strata of society. All customers get 100% services from First Security Bank. First Security Bank has already 66 branches in

different commercially important places all over the country. Now dayâ&#x20AC;&#x2122;s First Security Bank offers online services. First security Islami Bank Ltd. successfully marked its products designed to fulfill the needs of various socio-economic strata. Attractive feature of the products have given a distinctive image among the private banks. They has been continuous endeavor to offer new products and services. However , the Product & Services of the bank as following: a.Deposit Products Al-Wadiah Current Deposit Mudarabah Savings Deposit Mudarabah Short Term Deposit Non-resident Foreign Currency Deposit Resident Foreign Currency Deposit b. Scheme Mudarabah Monthly Savings Schemes Mudarabah Monthly Benefit Deposit Schemes Mudarabah Double Benefit Deposit Schemes

C . Investment / Deployment of Funds: a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. i.

Bai-Murabaha (Deferred Lump Sum/ Installment Sale) Bai-Muajjal (Deferred Installment / Lump Sum Sale) Ijara (Leasing) Musharaka (Joint-Venture Profit-Sharing) Mudaraba (Trustee Profit-Sharing) Bai-Salam (Advance Sale and Purchase) Hire-Purchase Direct Investments Post Import Investment Purchase and Negotiation of Export Bills Inland Bills Purchased Murabaha Import Bills Bai-Muajjal Import Bills Pre Shipment Investment Quard-ul-Hasan (Benevolent Investment)

Letter of Guarantee: a. Tender Guarantee b. Performance Guarantee c. Guarantee for Sub-Contracts d. Shipping guarantee e. Advance Payment guarantee f. Guarantee in lieu of Security Deposits g. Guarantee for exemption of Customs Duties h. Others

Specialized Schemes

Services

      

Consumer Investment Scheme, SME Investment Scheme, Lease Investment Scheme, Hire Purchase, Earnest Money Investment Scheme, Mortgage Investment, Employees House Building Scheme,



Payment of Utility Bills (Electricity, Water, Phone and Gas etc

•

Full Fledged Online Banking

• • • • • • •

ATM Services SMS Banking ELDOREDO Lockers Utility Bills Ready Cash Card Western Union Money Transfer

Sectors under SME Investments: 1. Manufacturing 2. Trading 3. Service

ATM services: 1. Cash Withdrawal 2. Fund Transfer 3. Mini Statement of Accounts 4. Balance Enquiry

Treasury Activities: Dealing Room Operation

Other Banking and Value Added services: 1. The Bank Issues Payment order

2. Locker services is available in selected Branches 3. The Bank gives counseling on different issues 4. Online Banking 5. SMS Banking 6. Swift 7. Reuter 8. The Bank issues Demand Draft (DD) and telegraphic transfer (TT)

Training services: 1. International; Training to Foreigners on Islamic Banking 2. National: Training to others on Islamic Banking 3. Islamic Banking Diploma.

4.7 Deposit Mobilization in FSIBL Islam disapproves holding of savings and encourages its productive investment. It puts emphasis on savings and the productive use of savings. Thus, the bank assembles the small deposits and savings of individuals into a common pool and makes these deposits available for large investment opportunities, ensuring the productive use of societyâ&#x20AC;&#x2122;s savings. Islamic banking is a response to such exigencies. It mobilizes savings of the common people in line with Islamic Shariah. Techniques employed by Islamic banks for savings mobilization are as follows.

4.7.1 Al Wadeeah Account: The term Al-Wadeeah means deposit of money allowing somebody to claim the funds in the account. The bank as trustee preserves and safe keeps the funds deposited. Thus, depositors feel safe keeping their money with the bank because the bank provides assurance of returning their money on demand. When an individual opens and Al-Wadiah account, he agrees to allow the bank to lend these funds to entrepreneurs seeking financing for their products or activities. In addition, the depositor understands that the bank may earn a profit from its lending activity; however, any losses incurred from this investment activity are totally borne by the bank. The depositor is not liable for any losses incurred from this lending activity.

As the depositors do not take the risk of losses with Al-Wadiah accounts, they are not entitled to any profit form the use of their deposits by investors. On the other hand, the bank is entitled to all of the profits, if any, as the bank bears all of the risk. Depositors are provided with a checkbook. They can withdraw any amount up to the balance at any time. The bank may charge a fee o the account to cover transaction costs. Al-Wadiah Deposits are short –term funds. Due to the liquidity to the depositor, they are not reliable sources of deposits to the banks. Thus, banks have to be very careful as to what type of projects is financed.

4.7.2 Mudaraba Accounts: Mudaraba is a form of business contract where one party supplies money and the other manages the business by investing labor and time. Profits generated

form the venture are

shared by both in a proportion agreed upon at the time of contract. However, in this arrangement, the financier is solely responsible for any loss that may be incurred. The financier of the business is known as Sahib al Mal, Rabbul Mal or owner of the capital and the manager of the business is called Mudarib or entrepreneur. IBBL receive deposits in Mudaraba accounts that are invested into business ventures by the bank directly or through some other third party. Any profit earned form these investments are distributed among the Mudaraba depositors at a predetermined percentage and the bank retains the residual amount as its profit. In the event no profits are earned, the depositors receive nothing for their deposit. In addition, should a loss be incurred, the Mudaraba depositors are liable to share in the losses in the proportionate share of their deposits. However, if the loss incurred is due to the fault, negligence or non-adherence of bank rules on behalf of the bank or bank personnel, liability of loss is the banks sole responsibility.

4.7.2.1 The Products offered Under Mudaraba Mode are as follows: •

MSA-Mudaraba Savings Account

•

MHSA-Mudaraba Hajj Savings Accounts

•

MSB-Mudaraba Saving Bonds

•

MSS-Mudaraba Special Scheme

•

MTDR-Mudaraba Term Deposit receipt

•

MMPDS –Mudaraba Monthly Profit distribution scheme

•

MMS-Mudaraba Mohor Savings A/c

•

MSNA-Mudaraba Short Notice A/c

•

Mudaraba Waqf Cash Deposit Account

Trend of Deposits The deposit base of the Bank continues to register steady growth and stood at Tk.23504. million as on December 31, 2007 as against Tk 17592.00 million as on December 31,2006. This is an increase of 33.61Yo. The bank has achieved a stable and sizable deposit base to fund its business and maintain appropriate liquidity. In addition to the normal deposit products, the bank has introduced athactive deposit schemes, to the needs of low and mid income group. The growth of bank deposit isshown given below: Deposit Amount In Millio n (TK)

60000 50000 40000 30000 20000 10000 0 2005

2006

2007

2008

2009

2010

Figure: Trend of Deposit of FSBL

4.8 Profit rate in Different Account or Scheme Normally the money on a fixed deposit is not repayable before the exprry of a fixed period. In case of Fixed Deposit Account the Bank needs to maintain a cash reserve. So FSBL offers a high interest rate in Fixed Deposit accounts. The interest rates followed by FSBL in Fixed Deposit accounts are:

Profit Rate & Charges Rate: There are given Profit Rate in FSIBL:

• • • •

Current Account profit rate: Nill Saving Account profit rate: 6.5% if closing balance amount Tk 5000 Short Notice Deposit (SND): Daily basic 6.5% Fixed Deposit: 12% (must be 5 year fixed)

There are given Charges rate: • •

Current Account Charges rate: Tk500 Saving AccountAverage - tk5000 “ - tk5000-2500 “ - 25000-Above -

•

Nill Tk 100 Tk 300

Short Notice Deposit (SND) Average –Tk 500 if efficient Balance are available

•

Fixed Deposit: Below- Tk 100000 – Tk 120 - Tk 100001+ 10 Lac – Tk 350 - Tk 10 Lac + 1 Core - Tk 1000 - Tk 1 Core + 5 Core - Tk 5000 - Tk 5 Core above - Tk 10000 There also 10% government Tax including.

4.9 Investment: The bank always tries to extend credit facilities to the various sector of the economy. In distributing loans the bank mainly concemed on wholesale/ Retail Trading, Textile and 100% export oriented garments, Real estates and services sector etc. Different types of loan scheme are:• • • • • • • • • • •

Term Loan General Secured Overd raft Transport Loan Cash Credit House Buliding Loan Payment Against documents Loan Against Trust Receipt Consumers Finance Scheme Hire Purchase Scheme Small Enterprise Fiancing

Credits of the bank during the year ended December 31, 2009 stood at Tk.38J25, 874,774 million from Tk. 25, 094, 658,077 a year ago. In 2010 only third quarter bank invest Tk 48628423760. The bank has comminuted to diversify its credit portfolio to the various sectors of the economy. In disbursing Credits the bank mainly concerned on wholesale/ Retail trading, textile and l00% export oriented Ready Made Garments, and service sector etc.

60000 50000 40000 30000 20000 10000 0

2004 2005 2006 2007 2008 2009 2010

Amount in Million (TK)

Figure: Trend of Credit of FSBL

Chapter â&#x20AC;&#x201C; 05 Theoretical Framework Investment is the action of deploying funds with the intention and expectation that they will earn a positive return for the owner. Funds may be invested in either real assets or financial assets. When resources are used for purchasing fixed and current assets in a production process or for a trading purpose, then it can be termed as real investment. Specific examples of financial investments are: deposits of money in a bank account, the purchase of Mudaraba Savings Bonds or stock in a company. Since Islam condemns hoarding savings and a 2.5 percent annual tax (Zakat) is imposed on savings, the owner of excess savings, if he is unable to invest in real assets, has no option but to invest his savings in financial assets.

5.1 Investment Policy under Islamic Banking

The Bank will give emphasis to diversify its business portfolio commensurate with economic and business trend, life cycle of the products, demand supply gap, social and national obligation etc

5.2 Policy Guidelines The Investment Policy guidelines of the Bank describes details fundamental Investment risk management policies, outlines general principles that are designed to govern the implementation of more detailed Investment procedures and Investment risk analysis / risk grading system.

5.3 Objectives and Principles of Investment The objectives and principles of investment operations of the Bank are: •

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

•

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

•

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.

•

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

•

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

•

To finance various development schemes for poverty alleviation, income and employment generation with a view to accelerating sustainable socio-economic growth and uplift of the society.

•

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

5.4

Industry and Business Segment Focus

As a general practice First Security Islami Bank Limited will definitely concentrate its business in Trade Investment / Export – Import business and all types of Commercial Investment, Industrial / Project Investment / Syndication and structured Investment / SME Investment and other specialized programs except otherwise restricted by the Government or indicated as unethical and banned items.

The Bank will give emphasis to diversify its business portfolio commensurate with economic and business trend, life cycle of the products, demand supply gap, social and national obligation etc. The Bankâ&#x20AC;&#x2122;s policies for Investment in different major sectors are summarized as follows: SL 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12)

13) 14) 15) 16) 17) 18) 19) 20)

Sectors Textile/Spinning/Sweater/Knitting/Denims & Garments Cement Construction / Real estate / House building Telecommunication Communication Information Technology (IT) Project Agro-based Industry Hospital / Clinic / School / College / University Healthcare / Pharmaceuticals / Medicine Electrical / Electronic appliance Investment to NBFI Special Program: Consumer Investment Scheme, SME Investment Scheme, Lease Investment Scheme, Hire Purchase, Earnest Money Investment Scheme, Mortgage Investment, Employees House Building Scheme, ATM, VISA Investment Card, EEF, etc. Plastic / Packaging Leather Steel and Engineering Edible oil Scrap Vessel Paper / Pulp / Partex Chemicals Others

Policies To expand To maintain To maintain To maintain Selective basis To expand To expand Selective basis To expand To expand Selective basis Selective basis Selective basis To expand To expand To maintain Restricted way To expand To maintain Based on merit

The Bankâ&#x20AC;&#x2122;s policy is to handle the specialized business sectors / segments by setting up separate units in Head Office Investment Division. In view of this, Bank has a plan to set up the following units in Head office Investment Division: a. b. c. d. e. f.

Corporate Banking (already implemented), Project Investment, Syndication Investment, Garments Sector, SME (already implemented), Specialized Schemes like a. Consumer Investment Scheme, b. Lease Investment Scheme, c. Hire Purchase, d. Earnest Money Investment Scheme, e. Mortgage Investment, f. Employees House Building Scheme, g. ATM, VISA Investment Card, EEF, etc.

The Policies for the above specialized segments / sectors have been / to be circulated to all concerns from time to time.

5.5

Investment Modes Of First Security

When money is deposited in the FSIBL, the bank, in turn, makes investments in different forms approved by the Islamic Shariah with the intention to earn a profit. Not only a bank, but also an individual or organization can use Islamic modes of investment to earn profits for wealth maximization. Some popular modes of FSIBLâ&#x20AC;&#x2122;s Investment are discussed below. 5.5.1 BAI-MURABAHA (Contract Sale on Profit) 5.5.1.1 Meaning of BAI-Murabaha â&#x20AC;&#x153;Bai-Murabaha" means sale for an agreed upon profit. Bai-Murabaha may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods permissible under Islamic Shariah and the Law of the land to the buyer at a cost plus an agreed upon profit payable today or on some date in the future in lump-sum or by installments. The profit may be either a fixed sum or based on a percentage of the price of the goods.

5.5.1.2 Features of Murabaha 1. 2. 3. 4.

5. 6.

A client can make an offer to purchase particular goods from the bank for a specified agreed upon price, including the cost of the goods plus a profit. A client can make the promise to purchase from the bank, that is, he is either to satisfy the promise or to indemnify any losses incurred from the breaking the promise without excuse. It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify any losses that may result. Documentation of the debt resulting from Bai-Murabaha by a Guarantor, or a mortgage, or both like any other debt is permissible. Mortgage/Guarantee/Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement. The bank must deliver the goods to the client at the date, time, and place specified in the contract. The bank sells the goods at a price above the cost to obtain a profit. The sale price that is charged by the bank is agreed upon in the BaiMurabaha. The profit can be stated in terms of a flat dollar amount or on a percentage of the purchase price. If a percentage is used, the percentage shall never be expressed in terms of time, in order to avoid confusion that the price is a form of interest (Riba), which is not allowed. The price agreed to in the agreement is binding on both parties.

It is permissible for the bank to contract with a third party to buy and receive the goods on its behalf. This agreement must be a separate contract.

5.5.1.3 Steps of Bai-Murabaha First Step: The client submits a proposal regarding his requirements of the bank. The client sends a proposal with the specifications of the commodity to be acquired from the bank. The proposal also indicates details regarding the date, time and place of delivery as well as price and form of payment information. The bank responds by sending a counter proposal either accepting the buyerâ&#x20AC;&#x2122;s price or stipulating a different price. Second Step:

The client promises to buy the commodity from the bank on a Bai-

Murabaha basis, for the stipulated price. The bank accepts the order and establishes the terms and conditions of the transaction. Third Step: The bank informs the client (ultimate buyer) of its approval of the agreement to purchase. The bank may pay for the goods immediately or in accordance with the agreement. The seller expresses its approval to the sale and sends the invoice(s). Fourth Step: The two parties (the bank and the client) sign the Bai-Murabaha Sale contract according to the agreement to purchase. Fifth Step: The Bank authorizes the client or its nominee to receive the commodity. The seller sends the commodity to the place of delivery agreed upon. The client undertakes the receipt of the commodity in its capacity as legal representative and notifies the bank of the execution of the proxy.

5.5.1.4 Rules of Bai-Murabaha 1. It is permissible for the client to offer to purchase a particular commodity, deciding its specifications and committing itself to buy it on Murabaha for the cost plus the agreed upon profit. 2. It is permissible that the mutual agreement shall contain various conditions agreed upon by the two parties, especially with respect to the place of delivery, the payment of a cash security to guarantee the implementation of the operation and the method of payment. 3. It is permissible to stipulate the binding nature of the promise to purchase. Thus, the agreement can only be satisfied by either fulfilling the promise to purchase or by indemnifying the bank for any losses incurred if the promise to purchase is not fulfilled.

4. It is a condition that the bank purchases the requested commodity (first purchase contract) before selling it on Murabaha to the buyer. The contract in the first purchase must be settled, in principle, between the source seller and the bank. 5. It is permissible for the bank to authorize a second party including the buyer to receive the commodity on its behalf. This authorization must be in a separate contract, particularly if the buyer is going to receive the goods on behalf of the bank. This is necessary to avoid any conflicts with the ensuing Murabaha sale.

5.5.1.5 Application of Bai-Murabaha Murabaha is the most frequently used form of finance in IBBL throughout the world. It is suitable for financing the different investment activities of customers with regard to the manufacturing of finished goods, procurement of raw materials, machinery, and other required plant and equipment purchases. It is used widely about 53%.

5.5.2 BAI-MUAJJAL (Deferred Sale) 5.5.2.1 Meaning of Bai-Muajjal The Bai-Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods, permissible under Shariah and law of the country, to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or in fixed installments.

5.5.2.2 Features of Bai-Muajjal 1. It is permissible and in most cases, the client will approach the bank with an offer to purchase a specific good through a Bai-Muajjal agreement. 2. It is permissible to make the promise binding upon the client to purchase the goods from the bank. 3. It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the bank for damages caused by non-payment. 4. It is also permissible to document the debt resulting from Bai-Muajjal by a Guarantor, or a mortgage or both, like any other debt. Mortgage/Guarantee/Cash security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement. 5. All goods purchased on behalf of a Bai-Muajjal agreement are the responsibility of the bank until they are delivered to the client. 6. The bank must deliver the goods to the client at the time and place specified in the contract. 7. The bank may sell the goods at a higher price than the purchase price to earn profit. 8. The price is fixed at the time of the agreement and cannot be altered. 9. The bank is not required to disclose the profit made on the transaction.

5.5.2.3 Some Observations The following points should receive attention before making any investment decision under Bai-Muajjal. 1. Whether the goods that the client intends to purchase are marketable and have steady demand in the market. 2. Whether the price of the goods is subject to frequent and violent changes. 3. Whether the goods are perishable in short or in long-term duration. 4. Whether the quality and other specifications of the goods as desired by the client can Be ensured. 5. Whether the goods are available in the market and the bank will be in a position to purchase the Goods in time and at the negotiated price. 6. Whether the sale price of the goods is payable by the client at the specified future date in lump sum or in Installments as per the agreement.

5.5.3 HIRE-PURCHASE UNDER SHIRKATUL MELK Hire-Purchase under Shirkatul Melk has been developed through practice. Actually, it is a synthesis of three contracts: (a) Shirkat; (b) Ijarah, and (c) Sale. These may be defined as follows:

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

5.5.3.2 Definition of Ijara: The term ‘Ijara’ has been defined as a contract between two parties, the lessor and the lessee, where the lessee enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the lessor. It is a lease agreement under which a certain asset is leased out by the lessor or to a lessee against specific rent or rental for a fixed period.

5.5.3.3 Definition of Sale contract: This is a contract between a buyer and a seller under which the ownerships of certain goods or asset is transferred by the seller to the buyer against agreed upon price paid by the buyer. In the case of Hire Purchase under Shirkatul Melk, the lessor bank sells or transfers its title to the asset under a sale contract on payment of sale price.

5.5.3.4 Stages of Hire Purchase under Shirkatul Melk Hire Purchase under Shirkatul Melk Agreement has got three stages: 1. Purchase of asset under joint ownership of the lessor and the lessee. 2. Hire, and 3. Sale and transfer of ownership by the lessor to the other partner - lessee.

5.5.3.4 Important Features 1. In case of Hire Purchase under Shirkatul Melk transaction the asset/property involved is jointly purchased by the lessor (bank) and the lessee (client) with specified equity participation under a Shirkatul Melk contract in which the amount of equity and share in ownership of the asset of each partner (lessor bank and lessee client) are clearly mentioned. Under this agreement the lessor and the lessee become co-owners of the asset under transaction in proportion to their respective equity. 2. In Hire Purchase under Shirkatul Melk Agreement the exact ownership of both the lessor (bank) and lessee (client) must be recognized. However, if the partners wish and agree the asset purchased may be registered in the name of any one of them or in

4. 5.

6. 7. 8. 9.

the name of any third party clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement. The share/part of the purchased asset owned by the lessor (bank) is put at the disposal possession of the lessee (clients) keeping the ownership with him for a fixed period under a hire agreement in which the amount of rent per unit of time and the benefit for which rent to be paid along with all other agreed upon stipulations are clearly stated. Under this agreement the lessee (client) becomes the owner of the benefit of the asset not of the asset itself, in accordance with the specific provisions of the contract that entitles the lessor (bank) the rentals. As the ownership of leased portion of asset lies with the lessor (bank) and rent is paid by the lessee against the specific benefit, the rent is not considered as price or part of price of the asset. In the Hire Purchase under Shirkatul Melk agreement the Lessor (bank) does not sell or the lessee (client) does not purchase the asset but the lessor (bank) promise to sell the asset to the lessee only if the lessee only if the lessee pays the cost price/equity price of the asset as fixed and as per stipulations on which the lessee also gives undertakings. The promise to transfer legal title by the lessor and undertakings given by the lessee to purchase the ownership of leased asset upon payment part by part as per stipulations are affected only when it is actually done by a separate sale contract. As soon as any part of lesssor's (bank's) ownership of asset is transferred to the lessee (client), that becomes the property of the lessee and hire contract for that share/part and entitlement for rent thereof lapses. The hire contract becomes effective from the day on which the lessor transfers the possession of the leased asset in good order and usable condition, so that the lessee may make use of the same as per provisions of the agreement. Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the lessor to the lessee.

5.5.4 MUDARABA (Investment made by the entrepreneur) 5.5.4.1 Definition of Mudaraba The term Mudaraba refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital. Mudaraba is also known a Qirad and Muqaradah

5.5.4.2 Steps of Mudaraba The bank provides the capital as a capital owner. The Mudarib provides the effort and expertise for the investment of capital in exchange for a share in profit that is agreed upon by both parties. 1. The Results of Mudaraba: The two parties calculate the earnings and divide the profits at the end of Mudaraba. This can be done periodically in accordance with the terms of the agreement, subject to the legal rules that apply.

2. Payment of Mudaraba Capital: The bank recovers the Mudaraba capital it contributed before dividing the profits between the two parties because the profit is considered collateral for the capital. 3. Distribution of wealth resulting from Mudaraba: In the event a loss occurs, the capital owner (the bank) is responsible for the entire loss. In the event of profits, they are divided between the two parties in accordance with the agreement between them, subject to the capital being recovered first.

5.5.4.3 Rules of Mudaraba There are some legal rules that govern the business relationship Mudaraba which are as follows. 1. It is a condition in Mudaraba that the capital be specific in nature. In other words, the amount of capital must be known at the inception of the contract. The purpose of this rule is to ensure that there is no uncertainty about the amount of capital and, thus, no uncertainty about the division of profits. 2. It is a condition that capital must be in the form of currency in circulation. However, merchandise can be contributed, so long as both parties to the business arrangement agree upon its value. 3. It is a condition that the capital cannot be subject to indebtedness. 4. It is permissible for a Mudarib to mix his private capital with the capital of the Mudaraba, thus becoming a partner. In addition, it is also permissible for the Mudarib to dispose of capital on behalf of the Mudaraba. 5. It is a condition that the capital of the Mudaraba is delivered to the Mudarib. 6. It is permissible to impose restrictions on the Mudarib as long as the restriction is beneficial and does not hinder the agentâ&#x20AC;&#x2122;s ability to make a profit. 7. It is permissible for the Mudarib to hire an assistant to perform difficult work that he is unable to perform on his own.

5.5. 5. MUSHARAKA (Partnership based investment) 5.5.5.1 Meaning of Musharaka The word Musharaka is derived from the Arabic word Sharikah meaning partnership. At an IBBL, a typical Musharaka transaction may be conducted in the following manner. One, two or more entrepreneurs approach an IBBL to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the project. All partners, including the bank, have the right to participate in the project. They can also waive this right. The profits are to be distributed according to an agreed ratio, which need not be the same as the capital proportion. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project.

5.5.6. BAI-SALAM (Advance payment) 5.5.6.1 Meaning of Bai-Salam

Bai-Salam is a term used to define a sale in which the buyer makes advance payment, but the delivery is delayed until sometime in the future. Usually the seller is an individual or business and the buyer is the bank. The Bai-Salam sales serve the interests of both parties. 1. The seller receives advance payment in exchange for the obligation to deliver the commodity at some later date. He benefits from the Salam sale by locking in a price for his commodity, thereby allowing him to cover his financial needs whether they are personal expenses, family expenses or business expenses. 2. The purchaser benefits because he receives delivery of the commodity when it is needed to fulfill some other agreement, without incurring storage costs. Second, a Bai-Salam sale is usually less expensive than a cash sale. Finally a Bai-Salam agreement allows the purchase to lock in a price, thus protecting him from price fluctuation.

5.5.6.2 Steps of Bai-Salam 1. Cash sale or Sale on Credit - The bank pays the agreed upon price at the time of the contracts inception. The seller agrees to the delivery of the commodity some specified date in the future. 2. Delivery and Receipt of the Commodity on the Specific due Date: There are several options for delivery available to the bank a) The bank may receive the commodity and resell it to another party for cash or credit. b) The bank may authorize the seller to find another buyer for the commodity. c) The bank may direct the seller to deliver the commodity directly to a third party with whom the bank has entered into another agreement. 3. The Sale Contract: The bank agrees to sell the commodity for cash or a deferred price, which is higher than the Salam purchase price. The buyer agrees to purchase and to pay the price according to the agreement.

5.5.6.3 Rules of Bai-Salam 1. It is a condition that the commodity known by both parties to the agreement. 2. It is a condition that the quality of the commodity be monitored closely, as very little variation from specifications in the contract is allowable. 3. It is a condition that the commodity be deliverable on the due date. If there is uncertainty about the ability to deliver the commodity at the due date, a Salam transaction is impermissible. 4. It is permissible to draw a Salam sale contract for a total to be delivered increments on different specified future dates. 5. It is a condition that the commodity is a liability debt. The seller is obliged to deliver the commodity when it is due, according to the specifications stipulated in the contract, whether or not his firm produces the commodity or obtained from other firms. 6. Salam sales are impermissible on existing commodities because damage and deterioration cannot be assured before delivery on the due date.

5.5.6.4 Application of Bai-Salam Salam sales are frequently used to finance the agricultural industry. Banks advance cash to farmers today for delivery of the crop during the harvest season. Thus banks provide farmers with the capital necessary to finance the cost of producing a crop. Salam sale are also used to finance commercial and industrial activities. Once again the bank advances cash to businesses necessary to finance the cost of production, operations and expenses in exchange for future delivery of the end product. In the meantime, the bank is able to market the product to other customers at lucrative prices. In addition, the Salam sale is used by banks to finance craftsmen and small producers, by supplying them with the capital necessary to finance the inputs to production in exchange for the future delivery of products at some future date.

5.5.7. ISTISNA'A SALE 5.5.7.1 Definition of Istisna'a Sale The Istisna'a sale is a contract in which the price is paid in advance at the time of the contract and the object of sale is manufactured and delivered later. It is a contract with a manufacturer to make something and it is a contract on a commodity on liability with the provision of work. IBBL can utilize Istisna'a in two ways. 1. It is permissible for the bank to buy a commodity on Istisna'a contract then sell it after receipt for cash or deferred payment. 2. It is also permissible for the bank to enter into a Istisna'a contract in the capacity of seller to those who demand a purchase of a particular commodity and then draw a parallel Istisna'a contract in the capacity of a buyer with another party to manufacture the commodity agreed upon in the first contract.

5.5.7.2 Steps of Istisna'a Sale Istisna'a Sale Contract: The Buyer expresses his desire to buy a commodity and brings a request to purchase the commodity to the bank. The method of payment, whether cash or deferred is set forth in the agreement. The bank agrees to deliver the commodity to the buyer at some agreed upon time in the future. Delivery and Receipt of the Commodity: The seller in the parallel Istisnaâ&#x20AC;&#x2122;a agreement, delivers the commodity to the bank on the agreed upon date. The bank, in turn, delivers the product to the buyer of the original Istisnaâ&#x20AC;&#x2122;a contract, in accordance with the original agreement. In this way, all parties fulfill their obligations to the contract.

5.5.7.3 Application of Istisna'a Sale The Istisna'a contract allows IBBL to finance the public needs and the vital interests of the society to develop the Islamic economy in accordance with Islamic teachings. For example Istisna'a contracts are used to finance high technology industries such as the aviation, locomotive and ship building industries. In addition, this type of business transaction is also used in the production of large machinery and equipment manufactured in factories and workshops. Finally, the Istisna'a contract is also applied in the construction industry such as apartment buildings, hospitals, schools, and universities to whatever that makes the network for modern life. One final note, the Istisnaâ&#x20AC;&#x2122;a contract is best used in those transactions in

which the product being purchased can easily be measured in terms of the specified criteria of the contract.

5.5.8. IJARAH 5.5.8.1 Definition of Ijarah According to Islamic Shariah, Ijarah is a contract between two parties – the lessor and the lessee, where the lessees (Hirer or Mustajir) have the right to enjoy/reap a specific benefit against a specified consideration/rent/wages from the lessor – the owner (Muajjir).

5.5.8.2 Elements of Ijarah According the majority of Fuqaha, there are three general and six detailed elements of Ijarah: 1. The wording: This includes offer and acceptance. 2. Contracting parties: This includes a lessor, the owner of the property, and a lessee, the party that benefits from the use of the property. 3. Subject matter of the contract: This includes the rent and the benefit. The lessor (Mujjir) – The individual or organization who leases out/rents out the property or service is called the lessor. The lessee: (Mustajir) – The individual or organization who hires/takes the lease of the property or service against the consideration rent/wages/remuneration is called the lessee (Mustajir). The Benefit (Maajur) – The benefit that is leased/rented out is called the benefit (Maajur). The rent (Aj’r or Ujrat) – The consideration either in monetary terms or in quantity of goods fixed to be paid against the benefit of the goods or service is called the rent or Ujrat or Aj’r.

5.5.8.3 Rules for Ijarah 5.5.8.3.1 It is condition that the subject (benefit/service) of the contract and the asset (object) should be known comprehensively. 1. It is a condition that the assets to be leased must not be a fungible one (perishable or consumable) which cannot be used more than once, or in other words the asset(s) must be a non-fungible one which can be utilized more than once, or the use/benefit/service of which can be separated from the assets itself. 2. It is a condition that the subject (benefit/service) or the contract must actually and legally be attainable/derivable. It is not permissible to lease something, the handingover of the possession of which is impossible. If the asset is a jointly owned property, any partner, according to be majority of the jurists, may let his portion of the asset(s) to co-owner(s) or the person(s) other than the co-owners. However, it is also permissible for a partner to lease his share to the other partner(s), 3. It is a condition that the lessee shall ensure that he will make use of the asset(s) as per provisions of the Agreement or as per customs/norms/practice, if there is no expressed provision.

4. The lessor is under obligation to enable the lessee to the benefit from the assets by putting the possession of the asset(s) at his disposal in useable condition at the commencement of the lease period. 5. In a lease contract, the period of lease and the rental to be paid in terms of time, place or distance should be clearly stated. 6. It is a condition that the rental falls due from the date of handing over the asset to lessee and not from the date of contract or use of the assets.

5.6 Single Borrower / Group Limits / Syndication The Bank may extend the maximum Investment facilities (funded/non-funded) to a single Client/enterprise/group as per guidelines of Bangladesh Bank BRPD circulars issued / to be issued from time to time on the following criteria: • Clients falling under Grade 1 category as per Bank's Risk Grading System. • Covered by adequate collateral security or Guarantee. • Established long term business / Banking relationship. • The total outstanding investment facilities by the Bank to any single client or enterprise or organization / group shall not at any point of time maximum ceiling as stipulated by the extreme Banking Authority i.e. Bangladesh Bank or as advised by Bangladesh Bank from time to time. • Total large Investment portfolio of the Bank will not exceed the limit as stipulated by the Bangladesh Bank depending on the capital base and the volume of the nonperforming Credits of the Bank in the portfolio or as advised by Bangladesh Bank from time to time. In line with basic principles of Credit, the Bank always discourages to lend its maximum ceiling to a single client / group to minimize the risk. The Bank will prefer as a policy guideline to arrange syndicated Credit / participate in the syndicated / consortium Credit arrangement or in a club Credit.

5.7 Investment Caps The Bank Management will establish a specific industry sector exposure cap to avoid over concentration in any one-industry sector. Sector-wise allocation of Credit shall be made annually with the approval of the EC of the Board / Board of Directors. Diversification of Credit Portfolio will be encouraged so as to reduce the risk of dependence on a particular sector for balanced socio-economic development of the country. Branches shall submit a report outlining trend and outstanding to the Head of Credit Administration Division on quarterly basis for onward submission to the Executive Committee of the Board of Directors / Board of Directors for information/ perusal guidance.

5.8

Discouraged business types (areas of business) 1. 2. 3. 4.

Military Equipment / Weapons Investment, Companies listed on CIB black list or known defaulters, Highly Leveraged Transactions, Investment of Speculative Investments,

5. Tobacco Sector / Logging, Mineral Extraction / Mining or other activity that is Ethically or Environmentally Sensitive, 6. Counter parties in countries subject to UN sanctions, 7. Bridge Investment [Equity/Debt issuance as a source of repayment], 8. Investment to Holding Companies.

5.9

Pricing Policy

Profit rates/pricing of Investments, charges, commissions, etc. on various Investment categories will depend on the level of risk, period of Investment and type of security offered. The higher the risk, the higher will be the Profit rate. However, exceptions shall be made in case of Investment in national priority sectors. The Bank from time to time circulate the Profit rate / pricing of Investments / charges / commissions, etc. to its branches with the approval of competent authority and as per guidelines of Bangladesh Bank. As on date the Bank fixes a mid rate for Investment based on the Average Cost of Fund. All pricing of Investments shall, however, have relevance to the market condition and be approved by the appropriate authority of the Bank.

5.10 Investment and Marketing Fundamentals 1. To place a high priority on the quality of Investment exposure, new proposals must meet Bank’s Investment criteria review for improving risk positions. 2. Maximization of profit is the basic aim of the bank, as such every profit opportunity should be explored and professional skills be employed in this direction. 3. To avoid unnecessary wastage of time, energy and ambiguity a clear, concise and summary type communications shall be used. 4. To be thoroughly familiar with the Bank’s policies and functions. 5. To keep the expense burden of Investment operations to the barest minimum and endeavor to improve the cost efficiency of Investment operations. 6. To contribute one’s best in all matters where his approval, concurrence or other action is involved. 7. To apply strong common sense in all Investment matters by raising questionsdoes this make sense? Is there a better way? How to improve this? 8. To avoid all temptations which may jeopardize or compromise the Bank’s risk assets?

5.11 Approval Authority 5.11.1 Basics of Approval Authority All powers of the Bank are vested in the Board. They are the source of all powers, and any person or body can exercise only the powers delegated by the Board in ways and manners specified by them.

1. First Security Islami Bank Limited believes in decentralization of powers. With a view to ensuring prompt and efficient services to its multitude of clients spread far and wide, the Bank envisages delegation of optimum powers to its Executives and Officials at different levels of operations. But, while delegating powers, the Board is also aware of the followings: • • •

The Board can delegate the authority, not its responsibility. The evil of dual sub-ordination may creep in the chain of command if authority is not well defined and properly implemented. Exercise of the delegated authority must commensurate with the shouldering of the responsibility.

2. In order to implement the system of delegation of powers effectively, and to derive the desired benefit for the Bank as well as the Executives concerned, the Bank must develop a system to ensure that the delegated authority exercised by the Executives can be evaluated realistically and qualitatively. For that purpose, the Bank will have to develop a Management Information System (MIS) so that the Board gets prompt and systematic feed back as to how effectively and efficiently the delegated authority is being exercised by the Executives. For the purpose of investment of Bank’s Fund, the cardinal principle is ‘Safety first, Business next’. Delegation of power shall test the ability of the Executives to take decisions judiciously with honesty and integrity to achieve the objectives of the Bank. 3. The Investment approval function has been separated from the marketing/relationship management function.Unless personally authorized by a separate letter, mere mention of delegation in these guidelines shall not entitle an official falling under the category to exercise the powers. 4. Delegated approval authorities shall be reviewed annually by Managing Director & CEO/ Executive Committee of Directors / Board of Directors 5. All Investment risks must be authorized by executives within the authority limit delegated to them by the Managing Director & CEO/ Executive Committee of Directors / Board of Directors. The “pooling” or combining of authority limits is not permitted. 6. The aggregate exposure to any borrower or borrowing group is used to determine the approval authority required. 7. Any Investment proposal that does not comply with Investment Guidelines, regardless of amount, has to be referred to Head Office for Approval. 8. Managing Director & CEO/Head of Investment Risk Management / Board as per the delegated power shall approve and monitor any cross border exposure risk / exceptional case. 10. Any breaches of Investment authority to be reported to Managing Director & CEO, Head of Internal Control and Head of IRM.

5.11.2

Training and Experience

It is essential that Executives/member of the Committee authorized to exercise delegation of business power must have relevant training and experience to carry out their responsibility effectively and a minimum they should have: 1. At least 5 years experience working in Corporate / Commercial banking as a Relationship Manager / Head of Branch / Head of Investment, etc. 2. Training and experience in financial statement, cash flow and risk analysis. 3. A thorough working knowledge of Accounting 4. A good understanding of the local industry/market dynamics 5. Adequate knowledge of the following areas:  Introduction of accrual accounting.  Industry / Business Risk Analysis.  Borrowing causes.  Financial reporting and full disclosure.  Financial Statement Analysis.  The Asset Conversion/Trade Cycle.  Cash Flow Analysis.  Projections.  Investment Structure and Documentation.  Investment Management.

5.11.3

Organizational Structure And Responsibilities

The appropriate organizational structure must be in place to support the adoption of policies described in Chapter-I of these guidelines. The key feature is the segregation of the Marketing / Relationship Management function from Approval / Risk Management / Administrative Functions. Investment approval shall be centralized within the IRM function. Investment application shall be approved by the Managing Director / Deputy Managing Director / Head of Investment at Head Office / Head of Branches as per their delegation of business powers approved by the Board of Directors and beyond their authority, the proposals are to be placed before the Executive Committee of the Board of Directors / Board of Directors for approval.

Organizational Structure

B o a rd

E C

o f D ir e c t o r s

o f th e B o a rd

M a n a g in g

o f D ir e c t o r s

D ir e c t o r a n d

D e p u t y M a n a g in g

C E O

D ir e c t o r

H e a d o f C r e d it ( A p p r a is a l & A p p r o v a l ) H e a d o f C o rp o ra te / C o m m e r c ia l B a n k in g

R e l a t io n s h ip

M a n a g e m e n t

B u s in e s s D e v e l o p m e n t H e a d

o f C r e d it A d m in is t r a t io n

H e a d o f C r e d it M o n it o r in g , R e c o v e r y a n d C o m p l ia n c e

5.12 Investment Processing Of FSIBL Generally a bank takes certain steps to deliver its proposed investment to the client. But the process takes deep analysis. Because banks invest depositors fund, not banksâ&#x20AC;&#x2122; own fund. If the bank fails to meet depositors demand, then it must collapse. So, each bank should take strong concentration on investment proposal. However, First Security Islami Bank Limited (FSIBL) makes its investment decision through successfully passing the following crucial steps:

5.13 Selection of the client Here, investment taker (client) approaches to any of the branch of First Security Islami Bank Limited (FSIBL). Then, he talks with the manager or respective officer (Investment). Secondly, bank considers five C’s of the client. After successful completion of the discussion between the client and the bank, bank selects the client for its proposed investment. It is to be noted that the client/customer must agree with the bank’s rules & regulations before availing investment. Generally, bank analyses the following five C’s of the client:

• • • • •

Character; Capacity; Capital; Collateral; and Condition.

5.13.1 Application stage At this stage, the bank will collect necessary information about the prospective client. For this reason, bank informs the prospective client to provide and/or fill duly respective information which is crucial for the initiation of investment proposal. Generally, here, all the required documents for taking investment have to prepare by the client himself. Documents that are necessary for getting investment of FSIBL is prescribed below: I. II. III. IV. V. VI. VII. VIII. IX. X. XI.

Trade License photocopy (for proprietorship); Abridged pro forma income statement; Attested copy of partnership deed (for partnership business); Prior three (03) years’ audited balance sheet (for joint stock company); Prior three (03) years’ business transactions statement for the musharaka/mudaraba investment; Abridged pro forma income statement for the musharaka/mudaraba investment; Attested copy of the Memorandum of Association (MOA) & Articles of Association (AOA) for the joint stock company; Attested copy of the Tax Identification Number (TIN)- including final assessment; Tenders of the proposed assets (in case of HPSM); Detailed summary of the sundry debtors and creditors (including both time & schedule); Summary of the personal movable & immovable assets; and others.

5.13.2 Appraisal stage At this stage, the bank evaluates the client and his/her business. It is the most important stage. Because, on the basis of this stage, bank usually goes for sanctioning the proposed investment limit/proposal. If anything goes wrong here, the bank suddenly stops to make payment of investment. In order to appraise the client, Islami Bank Bangladesh Limited (IBBL) provides a standard

F-167B Form (Appraisal Report) to the client for gathering all the information. The original copy of the appraisal report is enclosed in the appendix chapter. However, the following contents are presented from that appraisal report: A. Company’s/Client’s Information. B. Owner’s Information. C. List of Partners/Directors. D. Purpose of Investment/Facilities. E. Details of Proposed Facilities/Investment. F. Break up of Present Outstanding. G. Other Liabilities of the Client/Group. H. Previous Banker’s Information. I. Details of Sister/Allied Concerns. J. Allied Deposit as on. K. Business/Industry Analysis. L. Relationship Analysis. M. Asset-Liability position of the client as per Audited Balance Sheet. N. Working Capital Assessment. O. Risk Grade. P. Particulars of the godown for storing MPI/Murabaha goods. Q. Insurance Coverage. R. Audit Observation. S. Security Analysis.

5.13.3 Sanctioning stage At this stage, the bank officially approves the investment proposal of the respective client. In this case client receives bank’s sanction letter. First Security Islami Bank Limited (FSIBL)’s sanction letter contains the following elements: 1. Investment Limit in million. 2. Mode & amount of investment. 3. Purpose of investment. 4. Period of investment. 5. Rate of return. 6. Securities: a. Primary- Stock of goods is the primary security. i. LC/Bills: Related Documents. ii. Murabaha Post Investment (MPI)/Bai-Murabaha: Pledge of MPI/Bai-Murabaha goods. iii. MPI/Bai-Bai Murabaha-TR: Lien on goods to be released.

b. *Cash/Goodsi. Bai-Murabaha: 25% cash security on cost price to be subsequently converted to goods security. ii. TR (Trust Receipt): Without cash security. c. Collateral: Immovable properties.

Cash/Goods security

In allowing Murabaha investment and amount of cash security is generally realized from the client (amount depends on the nature of goods, creditworthiness of the client, collateral security obtained etc.) which is converted to goods security after purchase of goods purchased out of bank’s investment and client’s cash security is pledged to the bank, kept under bank’s custody before its delivery to the client on payment.

Example: If, for a Murabaha investment cash security is fixed at 25% Bank’s investment stands at 75% on the total goods purchased. For example, if cost of total goods purchased is Tk.100000 Bank’s investment will be Tk.75000 and client’s cash security will be Tk.25000. Bank Tk. 75000 (75%)

Client Tk. 25000 (25%)

Total cost of goods Tk. 100000 (100%)

5.13.4 Documentation stage At this stage, usually the bank analyses whether required documents are in order. In the documentation stage, First Security Islami Bank Limited (FSIBL) checks the following documents of the client: I. Tax Payment Certificate. II. Stock Report. III. Trade License (renewal). IV. VAT certificate V. Liability statement from different parties. VI. Receivable from different clients. VII. Other assets statement. VIII. Aungykar Nama. IX. Ghosona Potra. X. Three (03) years net income & business transactions. XI. Performance report with the bank. XII. Account Statement Form of the bank. XIII. Valuation Certificate a. Particulars of the Proposal. b. Particulars of the Mortgagor. c. Particulars of the Properties. II. Outstanding liability position of the bank. III. CIB (Credit Information Bureau) Report.

5.14.5 Disbursement stage At this stage, bank decides to pay out money. Here, the client gets his/her desired fund or goods. It is to be noted that before disbursement a “site plan” showing the exact location of each mortgage property needs to be physically verified.

5.14.5.1 APPROVAL PROCESS FLOW CHART

BRANCH MARKETING TEAM (EXECUTIVES) OFFICERS)

HEAD OF BRANCH (APPROVAL / DECLINE)

BOARD OF DIRECTORS (APPROVAL / DECLINE)

BEYOND CAPACITY RECOMMENDED TO

AS PER DELEGATION

BEYOND CAPACITY

RECOMMEND ED TO

EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS (APPROVAL / DECLINE) AS PER DELEGATION

HEAD OF CORPORATE COMMERCIAL BANKING (MARKETING)

FORWARDED TO

BEYOND CAPACITY RECOMMENDE D TO MD & CEO

(APPROVAL / DECLINE) HEAD OF INVESTMENT(APPROV AL / DECLINE)

AS PER DELEGATION

BEYOND CAPACITY

RECOMMENDED TO DMD (APPROVAL / DECLINE) AS PER DELEGATION

BEYOND CAPACITY RECOMMENDED

5.14.5.2 Appeal Process Any declined Investment proposal may be represented to the next higher authority for reassessment / approval. However, there shall be no appeal process beyond the Managing Director & CEO.

5.14.5.3 Renewal and Status Verification On expiry of a facility, the borrower may come forward with a proposal either for renewal of the facility for a further period or for enhancement of the existing facilities or for both. He may also agree to offer additional stocks/securities or even furnish a guarantor. The Head of Branch (Branch Manager) should examine all such proposals and if he is satisfied, the proposals should be sent to Sanctioning Authority at Head Office as, as the case may be, if beyond his business delegation power, duly supported by full fledged Investment analysis including report of verification of Stocks/status of Collateral Securities etc. as is done in case of fresh proposals. The Head Office in turn will process the renewal/enhancement proposal after verifying the following factors: a) b) c) d)

Justification for renewal / enhancement. Reasons for non-payment / adjustment of the Investment in time. Security aspect in terms of outstanding Investment. Investment worthiness of the client.

Chapter â&#x20AC;&#x201C; 06 An Overview of Islamic Banking Investment

6.1 Islamic Investment Islamic investments are a unique form of socially responsible investments because Islam makes no division between the spiritual and the secular. The establishment of an Islamic investment policy, be it for the institutional or individual investor, starts with the Sharia Board, a group of Islamic scholars (jurists) that vests investment products for compliance with Islamic Law and conducts ongoing due diligence of them. Sources for interpretation follow a hierarchy of authority: the Quran, believed by Muslims to be the words of Allah verbatim as revealed to his prophet Muhammad in the seventh century; the Sunnah which are rules from the prophet's sayings (Hadiths) and actions; Qiyas which are scholarly legal deductions; and Ijma, the consensus of scholars on a particular issues The challenges that a Sharia-compliant portfolio faces would appear to be no different than those that any other portfolio manager would come up against. A manager formulates an investment thesis which drives portfolio selection criteria. He or she then needs to decide against the appropriate benchmark against which to measure performance. Managing assets in accordance with Islamic precepts is a bit more unique in that the practice is a form of socially responsible investing with the unique specification of avoiding interest bearing investments of any kind.

6.2 Investment Schemes of FSIBL

The salient features of the investment policy of First Security Islami Bank Limited are to invest on the basis of profit and loss sharing system in accordance with the tenets and principles of Islamic Shariah. Profit earning is not the only motive and objective of the bank’s investment policy rather emphasis is given in attaining social good and in creation employment opportunities. In fact, the bank since its inception has been working for the uplifted and emancipation of the unprivileged, downtrodden, and neglected section of the people and has taken up various schemes for their well being. The objectives of these schemes are to raise the standard of living of low-income group, development of human resources, and creation of awareness for self employment.

6.2.1 Household Durable Scheme In a developing country like Bangladesh people of middle and lower middle class especially service holders with limited income find it difficult to purchase articles like refrigerator, television, cot, almirah, wardrobe, sofa-set, pressure cooker, sewing machine etc. which are part of modern and decent living. They can not enhance the standard and quality of life to the desired level due to the constrain of their limited income. First Security Islami Bank Limited has, therefore, introduced Household Durables Investment Scheme which has already created great enthusiasm among the people and received tremendous response from them.

Objectives •

To assist the service holders with limited income in purchasing household durables. To assist the fixed income group in raising the standard of living.

• •

modern and and honest life.

To create opportunity for the service holders to enjoy the benefit of sophisticated living and at the time lead a decent

Items a. b. c. d. e. f. g. h. i. j. k. l.

Refrigerator/Deep freeze. Television. Radio/Two-in-one/Three-in-one. Motor cycle/Bi-cycle. Air cooler/ Air conditioner. Personal computer. Washing machine. Furniture, viz. cot, almirah, sofa-set, wardrobe, carpet etc. Sewing machine. Kitchen appliances like oven, toaster, blender, pressure cooker etc. Electronic generator: IPS, UPS etc. Power generator, motor pump/power pump etc.

m. n. o. p. q. r. s.

sheet, Rod, Wood etc. Gold ornaments Tube-wells Mobile telephone set Medical/Engineering Equipment/Machinery Educational equipment/Machinery, books Any other item considered suitable by the Bank.

etc.

Eligibility Interested permanent officials of the following organizations may apply for investment: a. b. c. d. e. f. g. h. i.

Government Organizations. Semi-Government Organizations and Autonomous Bodies. Banks and Financial Institutions Armed Forces, BDR, Police and Ansars. Teachers of Universities, Government Colleges and Schools and Senior Madrashas. Officers of International Financial & Relief Organization. Officers of the multinational companies. Officers of the local established and renowned public limited companies. Permanent Teachers & Officers of established & prominent Private Universities, Medical Colleges & University Colleges.

Scope of Investment •

House Owners

•

Doctors, Engineers, Architects, Chartered Accountants/FCMA and other important professionals.

•

Investment Clients of FSIBL

•

Deposit Clients of FSIBL

•

Shopkeepers and businessman

•

Wage earners, Panel lawyers of FSIBL C&F Agents enlisted in FSIBL etc.

•

Graduate & Post-Graduate Students of Universities, Medical Colleges, Engineering Colleges, University Colleges for purchase of PC, Medical/Engineering Equipment/Machinery, Books etc.

•

In case of Government, Semi-Government and Autonomous Organisations the age of the investment clients must be 25 and above with at least three years of service and he must have at least three years of service prior to his retirement. In case of private organisations, teachers of school, collage and madrashas the age of investment clients must be in between 30-50, with at least five years of service and he must have five years of confirm service prior to his retirement in the same organisation.

•

In case of others except service holders the age limit must be within 27-60 years.

•

In case of students the minimum age must be 18 years and maximum 25 years.

Amount for investment •

• • • •

For doctors, Engineers, Architects, Chartered Accountants, FCMAs the Ceiling of the investment of the Bank will be a. Dhaka City: Maximum Tk.3,00,000.00 b. Other Metropolitan Cities: Maximum Tk.2, 00,000.00 c. Other Municipal Areas: Maximum Tk.1,00,000.00 For Depositors Tk. 2,00,000.00 For others: Tk.1,00,000.00 NCOs of Bangladesh Armed Forces, Teachers of Primary Schools, Private School & Colleges and other professionals: Maximum Tk. 35,000.00 For Students : Maximum Tk. 40,000.00

Rate of Return: 16% Period of Investment: Maximum two years Mode of Investment: Bai-Muajjal Equity Minimum 25% of the total value of the articles. The client shall have to deposit the amount of equity in his Mudaraba Savings/Investment Account with the concerned branch before the disbursement of investment.

Disbursement • •

After sanction of investment and deposit of required equity by the client, the Branch shall supply to the concerned investment client the desired articles within seven days by procuring them by way of pay-order/cheque/draft etc. favouring the supplier. For ensuring the ownership of the Bank over the goods, all papers and documents related to the procurement of the goods shall remain in the name of the Bank and Bank's sticker shall remain affixed over the same. The ownership shall be transferred in favor of the client after full adjustment of the dues to the Bank.

Mode of Recovery The Bank's investments and profit thereon shall be recovered in 24 monthly instalments within a period of 2 (two) years. The monthly installment shall be payable by the first week of every month. The first instalment shall be due for payment in the first week of the subsequent month of the disbursement/delivery of goods/articles. Dues payable to the Bank shall be recovered in the following manner depending on the nature of the organization and the status of the client: i. On request of the employee, the employer shall deduct the monthly installment from his salary and remit the amount to the Bank. In this connection, the client shall have to furnish a letter of consent from the employer. ii. Before the delivery of goods, the client shall deposit to the Bank 24 post-dated cheques giving specific dates against each monthly installment. The cheques shall be presented to the concerned bank on due dates for encashment and adjustment of proceeds towards repayment of installment.

Security • • • • •

The investment client shall execute/provide the following documents in order to secure the investment. All required charge documents as per rules of the Bank. A written undertaking to the effect that the monthly installments shall be paid regularly. Personal guarantee of an official of the same rank or of superior rank. The guarantee shall have to be duly authenticated by the competent authority of the concerned organization. Personal guarantee of another person, preferably family member

Procedure for Application Interested clients shall apply in prescribed form to the concerned Branch. The application shall have to be duly recommended by the Divisional Chief of the organisation where the applicant serves. Form and booklet outlining the rules and procedures of the Scheme may be obtained from the selected Branches of the Bank on payment of Tk. 25.00 only.

Risk Fund A risk fund shall be created under this Scheme by charging the investment account @ 2% at a time against the total investment at the rate of 1% per annum for 2 years. In case of any

genuine damage or if the concerned client is totally incapable to the Bank, then the amount shall be covered or adjusted from the risk fund.

6.2.2 Housing Investment Scheme One of the basic human needs is to have a house to live in. A house is an abode of peace and happiness. Housing has now become an acute problem in the country, especially in the towns, cities and metropolis. With their limited income, it has become almost impossible on the part of the lower middle class, middle class and sometimes, even for upper middle class to solve their housing problem. To meet this basic human need, First Security Islami Bank Limited is committed to contribute to this end to provide a peaceful and happy living. The Bank has introduced 'Housing Investment Scheme' with the objective to ease and minimize the housing problem and assist service holders and professionals with limited income in materializing their dream of becoming owner of houses. When used in home financing, Musharaka is applied as a diminishing partnership. In home financing, the customer forms a partnership with the financial institution for the purchase of a property (Saeed 2001). The financial institution rents out their part of the property to the client and receives compensation in the form of rent, which is based on a mutually agreed fair market value. Any amount paid above the rental value increases the share of the customer in the property and reduces the share of the financial institution. The application of diminishing Musharaka in home financing can be illustrated with the help of the following example, which the LaRiba bank in the U.S. follows: Let us assume that a potential buyer is interested in purchasing a home worth $150,000. The buyer approaches an Islamic financial institution for the purchase of the property and puts 20 per cent of the price ($30,000) as down payment (the down payment required differs between financial institutions. In some cases it is as low as 5 percent). The financial institution pays for the other 80 per cent of the price ($120,000). This agreement results in 20 per cent of the home ownership belonging to the client and the remaining 80 percent to the financial institution. The next step for both parties would be to determine the fair rental value for the property. One way to determine the rental value is for both the client and financial institution to survey the market to obtain estimates for similar properties in the same neighborhood and negotiate an agreement. This fair rental value will remain constant over the life of the agreement. For this example, we will assume $1,000 per month as the rental value. A rental value of $1,000 means that the client will pay $800 as rent for the 80 per cent share the financial institution holds. The two parties then agree on the period of financing. In this example we will assume that the financing period is 15 years (180 months). Based on the rental value and the financing period, the financial institution then determines the fixed monthly payments the client would have to make to own the house. Table 1 Example of payment schedule for a home-loan under Musharaka is given below-

Month

Extra Payment Total Fixed Rent $ $ Payments $ Bank's Ownership $

Opening 1 800 2 798 … …… 176 37 177 30 178 22 179 15 180 7

347 349 ….. 1110 1117 1125 1132 1065

1147 1147 ….. 1147 1147 1147 1147 1072

120,000 119,653 119,304 …… 4,439 3,322 2,197 1,065 0

In this example the client starts by paying $1147, which includes the required 80% of the $1,000, and extra payment of $347. By doing so the client reduces the share of the financial institution by $347, and increases their own share by the same amount. The next month’s rental payment of the client would be reduced to $798, and again the payment made above the rent amount will result in an increase in the client’s ownership of the property. This continues on till the client buys back all the shares of the home that the financial institution holds at the end of the agreed financing period. This example does not take into account fees and charges that the financial institution may charge such as insurance and taxes. In the event of non-payment of rent from the client, the financial institution has to take into consideration the reason for the non-payment. If the client has a valid excuse for nonpayment, the financial institution has to show leniency so that the client does not feel overburdened, and the client should give more time to make the payment. In theory, if the financial institution charges any extra amount as compensation for the late payment, the amount would be considered as interest and therefore is not permitted in Islam. If there is no genuine reason for the late payment, the financial institution can ask the client to make a payment to a charity as penalty (Usmani, M.T. 1998, p.172). This prohibition of charging late fees makes it even more important for Islamic financial institutions to carefully evaluate each application before entering into an agreement.

Objectives • •

• •

To extend the benefits of the investment of the Bank under the Scheme to different sections of the people. To assist in solving the existing housing problem of the country

To assist the service holders and professionals with fixed income to arrange for houses of their own. To extend the investment facilities of the Bank to every nook and corner of the country, by size of investment, by sector of investment and on the basis of geographical area.

•

To make investment facilities easily available under Islamic Shariah to those people who do not want to avail investment facilities from interest-based financial institutions.

Eligibility •

Initially the following categories of people shall be eligible to apply for availing investment facilities under this Scheme:

1. 2.

Officials of the Defense Forces. Permanent Officials of Government, Semi-Government and Autonomous Organizations. 3. Teachers of the established Universities, University Colleges & Medical Colleges. 4. Graduate Engineers, Doctors and established professionals. 5. Bangladeshi Officials of reputed Multinational Companies, International Financial Organizations, Donor Agencies, Foreign Embassies etc., and Officials of local established & reputed Public Limited Companies 6. Wage earner professionals like Doctors, Engineers, Accountants, Teachers and any other profession doing good job abroad with hand-some pay-package. • The client must have exclusive and undisputed possession and ownership title over the land on which the proposed house will be constructed. The leased property must be on lease for 99 years and must be legally acceptable for mortgage to the Bank. If the investment client is a service holder then he must have at least 5 years unexpired service prior to retirement. • Bank will select the client on the basis of the following criteria: Percentage of Bank's investment is less than the client's investment; amount of Bank's investment is comparatively smaller in size, quality of construction & value of the property; constructed house/apartment is in good location & the price is reasonable; return from the property (rented income) & other known sources of income of the applicant; investment servicing capacity of the client is quite satisfactory.

Target Area: At the initial stage, the Scheme is being implemented in: • •

Dhaka metropolitan area. Chittagong metropolitan area.

Scope of Investment •

Investment is to be extended to build new houses on the client's own land, to purchase built houses/ apartments/flats and for extension/ completion of the house constructed/under construction.

• •

The building to be constructed on the land must be as per approved plan of the competent authority of that area, viz. RAZUK, CDA, RDA, KDA etc. The amount of investment will be limited to the following: a) In case of construction on land owned by the client: maximum 60% of the total cost of the construction of the building. Maximum ceiling of the Bank's investment will be Tk. 30.00 lac b) In case of purchase of apartment/flat/ready-made house: maximum 50% of the value including purchase related cost. Maximum ceiling of the Bank's investment will be Tk. 20.00 lac. c) If any client intends to provide the following securities to the Bank duly discharged/ completing necessary formalities by him, Bank may allow further or additional investment in excess of the aforesaid ceiling to the extent of 100% of the value of the securities: TDR & Mudaraba Savings Bond of Islami Bank Bangladesh Limited, TDR/Fixed Deposit of any scheduled Bank, Wage Earners Bond, ICB Unit Certificates, National/Defence Savings Bonds/ Sanchaypatra etc., Bank Guarantee from any scheduled Bank.

Rate of Return: 16%

Mode of Investment

•

Hire Purchase under Shirkatul Melk (HPSM)

Period of Investment •

•

The maximum period of investment shall be generally 15 years. However, the period investment shall be determined on the basis of the proposal of the client, the amount investment (for which the client has applied) and the ability of the project or client repay the dues. Reasonable gestation period for construction be allowed considering the size construction and Bank's investment.

of of to of

Disbursement Procedure of Investment Bank will pay the sanctioned money through Pay-Order directly or through investment client to the supplier of construction materials/owner of the apartment/owner of the built house. However, the following points shall be taken into consideration in disbursing the investment: •

In case of purchase of apartment/flat/built house, the client shall have to deposit the equity money in the Branch or produce

documentary evidence in support of his investment upto the satisfaction of the concerned Branch.

•

In case of construction of house on the client's own land or for extension of the existing house, the valuation of the Bank as regards client's investment shall be considered final.

•

The client shall have to submit to the Bank, the construction plan approved by the competent authority and also the required permission to mortgage the property, where necessary.

•

The client must execute all necessary documents including mortgage deed and complete all necessary documentation formalities to avail the investment. Related documents of mortgage, agreement of sale and other documents must be vetted by the penal lawyer of the Bank.

Recovery of Bank's Investment •

The client shall have to pay the Bank's dues by monthly instalment immediately after the expiry of the period of construction. To ensure payment as per stipulation of sanction the client, shall have to deposit post-dated cheques to the Bank for the amount of each monthly instalments covering the entire period of investment. The Bank shall realize the amount of monthly instalment by depositing the cheque of a particular month on the first week of every month.

•

The client shall have to execute irrevocable power of attorney in favour of the Bank authorizing the Bank to collect monthly rent from the tenants in case of failure of the client to pay the monthly instalment.

Security •

Personal guarantee of the clients, his/her spouse, adult son(s) and daughter(s) shall have to be obtained.

â&#x20AC;˘ â&#x20AC;˘

Mortgage of land and building to be constructed thereon, apartment/flat/house in favor of the Bank till the full payment of dues to the Bank. An undertaking from the client as well as from the dependants (nominees) to the effect that the retirement benefits including Provident Fund will be appropriated towards adjustment of the house building investment liability of the client prior to any other appropriation, if the liability relating thereto or any part of it remains unadjusted at the time of getting the retirement benefits.

Procedure for Application Interested persons shall have to apply in prescribed form of the Bank through the Branch of the concerned area. The Bank shall sanction investment if the proposal is found acceptable after examination of its viability and profitability. The Bank reserves the right to sanction or reject any investment proposal.

Real

estate

Investment

Program

Professionals, Service-holders, Businessmen, Real Estate Developer and other categories of people who are not entitled for availing investment facilities under Housing Investment Scheme, shall be eligible under this programme. Investment is to be extended to build new houses and for extension/ completion of the house already constructed, commercial building, shopping complex, flat/apartment etc.

Rate of Return: 14.5% Mode of Investment: HPSM Investment Limit: No specific limit Duration:

years

6.2.3Transport Investment Program The role of modern communication is most vital for the socio-economic growth and uplift of a developing country like Bangladesh. A sound and efficient communication network is the pre-requisite for sustained development through the expansion of trade, commerce and industry. In this backdrop the demand for road and water transports has increased manifold throughout the country. Moreover, the use of modern transports has increased keeping pace with the rise of the standard of living of the professionals. Considering all these facts, First Security Islami Bank Limited has introduced 'Transport Investment Scheme'. Under this scheme investment on easy terms is being extended to the existing successful businessmen in road and water transports and potential entrepreneurs in this sector for different types of road and water transports. Besides, Multinational companies, established business houses and well to do officials and professionals can become owner of various kinds of transports through Hire Purchase under this scheme.

Mode of Transports •

•

Road Transports > Private car, microbus, jeep, pick-up van. > Bus, truck, minibus. > Auto-rickshaw, tempo. > Ambulance. Water Transports > Cargo vessel of maximum 500 ton capacity. > Ocean going vessel of maximum 800 ton capacity.

Target Group •

Bus/Truck/Minibus > Successful individual/businessman/firm engaged in transport business and potential individual/ businessman/firm who intends to take-up transport as business. • Private Car/Microbus/Jeep > Permanent Officials of Government, Semi-government, Autonomous Bodies, Corporations, Banks and Financial Institutions. > Established Businessman and Business Establishments. > Officials of Defence Forces. > Professionals: University Teachers, Doctors and Engineers. > Experienced Person/Firm engaged or interested in transport business (Rent-acar). Preference will be given to those person and firms who are already engaged in transport business.

Rate of Return: 15% Mode of Investment: Hire-Purchase Shirkatul Meelk (HPSM). Amount

Bank's

Type of Transport 1. 2.

Private Car/Jeep Bus/Truck/Mini-bus

Investment

and

Client's

Down

Bank's Maximum Investment 70% 60%

Payment

Client's down Payment 30% 40%

While ascertaining Bank's investment to service holders it should be kept in view that the amount of monthly instalment does not exceed 40% of his total salary.

Period of Investment: •

Maximum 4 years from the date of delivery of the vehicle.

Rent of Investment

The Bank as per existing rules shall charge rent on investment. Clients, who will repay the entire investments within the stipulated period or earlier by way of regular payment of instalments, shall be given rebate over the rent.

Security •

The ownership of the vehicle shall remain in Bank's name till full repayment of investment including rent.

•

The client shall have to mortgage immovable properties as collateral security.

•

In case of Officials of Government, Semi-Government and Autonomous Bodies, personal guarantee of the officer of the same grade or of superior grade and in case of officials of public limited company or business houses, corporate guarantee of the employer/ chairman/managing director shall have to be provided.

Mode of disbursement •

Bank's sanctioned amount shall be disbursed directly to the supplier of the vehicle.

•

The client shall have to complete all documentation formalities including mortgage of property before disbursement of the Bank's investment.

•

The cost of chassis and bodybuilding shall be taken into consideration in ascertaining the price.

Recovery

Bank's

investment

•

The client shall have to repay the dues to the Bank in monthly instalment starting immediately after the expiry of the gestation period fixed by the Bank.

•

Required number of post-dated cheques for the whole period of investment mentioning the amount of monthly instalments shall have to be deposited to the Bank. The Bank shall collect the monthly instalment of a particular month through encashment of the cheque in the first week of the concerned month.

•

If a client fails to pay 3 consecutive instalments, the Bank can take back the possession of the vehicle from the client and sell or transfer it to another client as per the rules of the Bank. If any amount remains outstanding after sale or transfer of the vehicle, the client shall remain liable to repay the same to the Bank.

6.2.4 Small Business Investment Scheme First Security Islami Bank, as welfare oriented financial institution, is committed to generate employment and bring about an overall improvement in the socio-economic condition of the people and the quality of their life. The Bank, to make effective contribution in this respect, has taken-up a special programme and introduced 'Small Business Investment Scheme' to make the small traders, entrepreneurs and neglected unemployed youths of urban and rural areas self-reliant by providing them required financial support. The following benefits will be achieved through implementation of this Scheme. • Gradually it will help to alleviate poverty and minimize unemployment.

•

It will help small traders and entrepreneurs to become self-reliant and to improve their quality of life through capital formation.

•

It will create opportunity for the unemployed youths to engage themselves in in-come generating activities.

•

It will help to expand the market for locally produced goods by increasing productivity of small traders and entrepreneurs.

Eligibility of the Clients •

Investment clients must be permanent residents of the command area of the branch through which they intend to avail investment facilities and they must have valid trade license and shops or selling centers.

•

Small business and entrepreneurs, who are already engaged in trade and business but cannot run their operations smoothly for shortage of fund/capital, will also be eligible to avail investment facilities under the Scheme.

•

Investment shall also be extended to those poor and asset-less unemployed youths who are honest, efficient, physically and mentally capable with drive and initiative, especially those who have ability to run business.

•

Besides the above categories, investment facilities under this Scheme shall also be extended to small and cottage industries and service sector.

Sectors of Investment •

Livestock

•

Fishery

•

Agro-processing

•

Manufacturing

•

Trading/shop keeping

•

Transport

•

Services

•

Agriculture Implements and Forestry

•

Others.

Rate of Return: 14 % Ceiling of Amount • • •

For Dhaka & Chittagong : Maximum upto Tk. 1,50,000/- per client Metropolitan Branches depending upon their requirements. Branches in other Divisional : Maximum upto Tk. 75,000/- per client District Head Quarters depending upon their requirements. Branches other than Divisional: Maximum upto Tk. 50,000/- per client & District Head Quarters depending upon their requirements.

Mode of Investment A. Hire Purchase Shirkatul Meelk B. Bai-muajjal-TR

Period of Investment

: For all kinds of machineries i.e. equipments & transport sector. : For trading shop keeping, agro-processing and raw materials for manufacturing purposes.

•

In case of HPSM: Maximum 24 months.

•

In case of Bai-muajjal-TR: Maximum 12 months.

Client's Equity •

For HPSM investment : Maximum 20% on cost price of the Machineries/vehicles.

•

For Bai-muajjal-TR :

Nil.

Security For Investment up to Tk. 30,000.00 •

Hypothecation of existing and future stock of goods. Ownership of machines & equipments shall remain in Bank's name.

•

Personal guarantee of financially sound respectable 2 (two) persons/prominent businessmen acceptable to the Bank shall have to be given.

•

Collateral security may be relaxed considering the feasibility of investment and client's ability and sincerity.

For Investment over Tk. 30,000.00 •

Hypothecation of existing/future stock of goods. Ownership of machines & equipments shall remain in the Bank's name.

•

The client shall have to give mortgage of immovable properties to the Bank.

Recovery Procedure •

For HPSM investment: Monthly installment basis

â&#x20AC;˘

For Bai-muajjal-TR: Monthly/Quarterly/Half-yearly installment/lump-sum/ at a time - within the date of expiry (which ever is deemed suitable by the Branch depending on the nature of business of payment capacity of the client.)

Risk Fund The Risk Fund shall be 1% per annum. This shall be debited on Bank's principal investment at the time of disbursement. In case of investment for 2 years, it shall be 2% i.e. 1% per year.

Mudaraba Savings Account It is compulsory that every client must open a Mudaraba Savings account. Each client should built savings by way of deposit in this account a sum of Tk. 10.00 each month for every Tk. 1,000.00 of investment. No chequebook shall be issued against this account. Money can be withdrawn from this account if there is no liability against the client.

Supervision For effective supervision and smooth operation of the scheme, required number of supervisors shall be engaged at the field level. For this purpose the investment client shall have to pay at the time of investment a sum at the rate of 2% per annum of investment as supervision fee. In case of investment for 2 years, supervision charge shall be 4% i.e. 2% per year.

Review and Evaluation The concerned branch shall arrange meetings of the investment clients occasionally and evaluate the performance of the scheme and discuss problems and take steps to solve those problems.

Some other financing mode of investment are practiced by Islamic banking are as follows1. 2. 3. 4. 5. 6. 7. 8.

Direct Investments Post Import Investment Purchase and Negotiation of Export Bills Inland Bills Purchased Murabaha Import Bills Bai-Muajjal Import Bills Pre Shipment Investment Quard-ul-Hasana (Benevolent Investment)

6.3 Application and Processing The Branch receives investment applications and accord approval in the following manner as soon as the Investment Committee of the Branch is satisfied that the Group members conform

to the principles of Group activities and it is ensured that such Group activities are carried out without any hindrances in future. a. The application as per Bank's approved format is distributed among the eligible members of the Group. The Bank officials help in filling the forms. b. The application after properly filled-in is submitted to the Branch. c. Upon receipt of the applications from the members, the Bank officials verify them and discuss in the weekly meeting with other members and ascertain whether the Group will take responsibility in recovery of the instalments. Applicant’s past behaviour in the Group meetings is also taken in to consideration to provide him investment facilities. The Group Leaders recommend the application along with Bank's Field Officer and Project Officer of the Branch for sanction. d. The application, thereafter, is presented to the Branch for sanction of the investment. e. The Investment Committee of the Branch gives its observation and sanction of the investment if found suitable. Chapter – 07 Risk of Islamic Investment

7.1 Investment Assessment and Risk Grading All financial activities involve a certain degree of risk and particularly, the financial institutions of the modern era are engaged in various complex financial activities requiring them to put proper attention to every detail.

7.2 Investment Assessment A thorough Investment and Risk assessment shall be conducted for all types of Investment proposals. The results of this assessment to be presented in the approved Investment Appraisal Form that originates from the Investment Officer / Relationship Manager (RM) and is to be approved by the Investment Committee / Executive Committee of the Board of Directors / Board of Directors. The Investment Officers / RM is the owner of the customer relationship and must be held responsible to ensure the accuracy of the entire Investment application / proposal submitted for approval. The Investment Officer / RMs must be familiar with Bank’s Investment Guidelines and should conduct due diligence on new borrowers, principals and guarantors in line with policy guidelines. Investment Appraisal should summarize the results of Investment Officers / RMs risks assessment and includes, as a minimum, the following details: 7.2.1 7.2.2 7.2.3 7.2.4 7.2.5

Amount and type of Investment(s) proposed Purpose of Investment(s) Results of Financial analysis Investment structure (Tenor, Covenants, Repayment schedule, Profit) Security Arrangements

KYC Concept (Know Your Customer) The Investment Officers/RM must know their customers and conduct due diligence on new borrowers, principals and guarantors to ensure such parties are in fact who they represent themselves to be i.e., Know Your Customer (KYC). The Banker – Customer relationship would be established first through opening of CD/ STD / SB accounts. Proper introduction, photographs of the account holders / signatories, passport, Trade License, Memorandum and Articles of the Company, certificate of incorporation, certificate of commencement of business, List of Directors, resolution, etc. i.e. all the required papers as per Bank’s policy and regulatory requirements are to be obtained at the time of opening of the account. A declaration regarding approximate transaction to the account is to be obtained during opening of account. Information regarding business pattern, nature of business, volume of business etc. is to be ascertained. Any suspicious transaction must be timely addressed and brought down to the notice of the Head Office / Bangladesh Bank as required and also appropriate corrective measures to be taken as per the direction of Bank Management/Bangladesh Bank.

7.3 Risk Management/Investment Risk Assessment-

Investment Decision.

A comprehensive and accurate appraisal of the risk in every Investment proposal of the Bank is mandatory. No proposal can be put on place before approving authority unless there has been a complete analysis. In order to safeguard Bank’s Profit over the entire period of the Investment, a comprehensive view of the capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all regulatory /legal formalities, condition of all documentation and finally a continuous and constant supervision on the account are called for. It is absolute responsibility of the Investment Officer / RM to ensure that all the necessary documents are collected before the proposal is placed for approval. Where Investments are granted against the guarantee of the third party, that guarantor must be subject to the same Investment assessment as made for the principal borrower.

7.4 Investment Principles: While making Investment decisions, attention shall be given to the analysis of Investment proposals received from heavily leveraged companies and those dealing in non-essential consumer goods. Special care regarding their debt servicing abilities is to be taken. Emphasis shall be given on the following several Investment principles: 1. Present and future business potentiality for optimum deployment of Bank’s fund to increase return on assets, 2. Preference for self liquidating quality business, 3. Avoiding marginal performers, 4. Risk depression is basic to sound Investment principles and policies. Bank shall be careful about large and undue concentration of Investment to industry, one obligor and common product line etc., 5. Managing the amount, size, nature and soundness of one-obligor exposures relative to the size of the borrower and Bank’s position among his other lenders,

6. Personal guarantee of the principal partners or the Directors of the Company shall be obtained.

7.5 Basics of Investment Risk The following risk areas shall be considered for analyzing a Investment proposal.

7.5.1. Borrower Analysis (Management / Ownership / Corporate Risk) The majority shareholders, management teams and group or affiliate companies shall be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall be addressed, and risks to be mitigated.

The following questions may be asked to assess the Management Risk: 1. Who is the borrower? Does any particular/special characteristic of borrower need particular attention? For example, if the borrower is a Trust, this calls for examination of Trust Deed. 2. Are there adequate abilities and experience in senior management? 3. Is there adequate depth and succession planning? 4. Is there any conflict amongst owners / senior managers that could have serious implications? 5. Is the Manager/Investment Officer satisfied about the character, ability, integrity and experience of the borrower?

7.5.2 Industry Analysis (Business and Industry Risk) The key risk factors of the borrowerâ&#x20AC;&#x2122;s industry shall be assessed. Any issues regarding the borrowerâ&#x20AC;&#x2122;s position in the industry, overall industry concerns or competitive forces (demand supply gap) shall be addressed and the strengths and weaknesses (SWOT Analysis) of the borrower relative to its competition to be identified. For the above purpose the Investment Officers/RM may obtain / collect data from the statistical yearbook / economic trends of Bangladesh Bank / public report / newspaper/ journals etc. The following questions may be asked to assess the Business and Industry Risk: i. Are there any significant concentrations of sales (by customer, industry, country, region)? ii. How does the borrower rate with its competitors in market share? iii. Can increased direct production costs be passed on to customers? iv. Does the borrower deal in products that are subject to obsolescence? v. Is the purpose of borrowing consistent with the objectives of the Company? vi. Is the purpose legal? Does it contravene any laws of the country and any instruction issued by the vii. Bangladesh Bank/Head Office?

7.5.3 Supplier / Buyer Analysis / Market Risk Any customer or supplier concentration shall be addressed, as these could have a significant impact on the future viability of the borrower.

7.5.3.1 Market Risk The sufficient market data is to be obtained to identify clients/borrowers’ market share in the industry / demand-supply gap in the market.

7.5.3.2 Technological Risk The product that is manufactured must be technologically viable i.e. whether the technology applied is updated. The product’s stage in its life cycle must be understood. Technical Aspects of the products must be addressed. The Investment Officer/RM must be satisfied with the mitigating factors of technical and technological risk, associated with the products.

7.5.3.3 Financial Analysis (Historical / Projected) An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor’s financial statement should also be analyzed. The analysis should address the duality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. In this regard the Investment Officer / RM must look into the status of chartered accountant audit firm. Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Investments shall not be granted if projected cash flow is insufficient to repay debts. In this regard the possibilities of cost overrun and sensibility analysis shall be done. The following questions may be asked to assess the Financial Risk: I. Does the borrower produce financial statements on time? II. Is working Capital Adequate? III. Has the customer actual title to stock? IV. Have financial covenants been met? V. Has there been any major sale of shares by directors? VI. Any significant change in asset conversion cycle? (Account Receivables/ payables Inventory etc.)

7.5.3.4 Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, Profit and principal payments, etc.) shall be assessed. In this regard the Investment Officer / RM may look into the account turnover like debt summation / Investment summation / highest debit balance/ highest Investment balance (or lowest debit balance), no. of debit entries/ no. of Investment entries for last three years (year wise). 7.5.3.5 Adherence to Investment Guidelines

The Investment Applications/ Appraisals must be prepared in line with Bank’s Investment guidelines. It must be clearly stated whether or not the application/proposal is in compliance with Bank’s Investment Policy Investment guidelines.

Related questions to be addressed are: i. Is proposed application in compliance with Bank’s guidelines? ii. Does the Investment to clients also compliant with Central Bank’s guideline? iii. What are the Niche Products?

7.5.3.6 Profit Rate Risk The Profit rate must be fixed based on different risk factors associated with the type of business such as liquidity risk, commodity risk, equity risk, and Investment period risk. Profit rate also arises from the movements of Profit rate in the market. In assessing the pricing and profitability, the Investment Officer/RM must consider the income from ancillary business like foreign exchange business, group business, volume of business etc. Related questions to be addressed are: i. What is the rate of Profit charged? ii. Is the rate fixed in consideration to the risk factors? iii. Will the rate charged be profitable to the Bank?

7.5.3.7 Foreign Exchange Risk The foreign exchange transaction is associated with foreign currency fluctuation risk. Therefore the Investment Officer/RM must take care of for the Fore risk. The questions to be addressed are: 1. Does the business involve foreign currency dealings? 2. What are trends of foreign currency fluctuation?

7.5.3.8 Cost overrun Risk This type of risk is generally involved in taking project Investment decision. A high degree of cost overrun may cause the failure of the project. Therefore the Investment officer must consider the cost components of the project and their chance of devaluation. The questions to be addressed are1. Whether the construction cost may increase? 2. Whether the imported machinery cost may increase for the fluctuation of the foreign currency. 3. Are all types of cost components addressed during preparation of feasibility report? 4. Does sensitivity analysis prove sufficient shock absorbing capability?

7.6 Mitigating Factors

The Investment Officer/RM must address to different risks associated with the proposal. The possible risk include but not limited to market risk, financial risk, foreign exchange risk, risk of cost overrun, margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues, rapid growth, acquisition or expansion, new business line/product expansion: management changes or succession issues, customer or supplier concentrations, and lack of transparency or industry issues. Mitigating factors for risks identified in the Investment assessment shall have to be described and understood. The Bank must assess the critical risks of facilities given / to be given and ways / factors of mitigation of those risks.

Some of the critical factors are: 1. 2. 3. 4. 5. 6. 7.

Volatility High debt Overstocking Rapid growth Acquisition Debtors issues Succession

7.6.1 Investment Structure The amounts and tenors of Investment proposed should be justified based on the projected repayment ability and Investment purpose. Excessive tenor or amount relative to business needs increase the risk of fund diversion and may adversely impact the borrower’s repayment ability.

Related questions to be addressed are: 1. Are facilities justified by the borrower’s business? 2. Are any capital / long term expenditure being Investment by short time borrowing (either OD or TR)? 3. What is the amount required? Is it sufficient or excess for the purpose mentioned?

7.6.2 Security Bank’s approved enlisted surveyors must make a current valuation of collateral and the quality and priority of security being proposed shall be assessed properly. Investment shall not be granted solely on security consideration. Adequacy and the extent of the insurance coverage shall be assessed. The Investment Officer/RM must look into the client’s Profit / dependability on the collateral offered as security. 1. 2. 3. 4.

Is security offered acceptable and adequate? Has all the security been perfected in accordance with the Investment application? Have any valuation and inspection been undertaken since the last application? If you hold a guarantee, do you consider it has value?

5. 6.

Has the Investment rating of the Borrower deteriorated and has you considered the requirement for additional security? Can a valid charge be obtained on the security?

7.6.3 Name Investment (Relationship Assessment) Investment proposals shall not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations shall be discouraged and treated with great caution. Rather, Investment proposals and the granting of Investments will be based on sound fundamentals supported by a thorough financial and risk analysis. Related questions to be addressed are: i.

Has the borrower complied with the terms of the

facility? ii. Adverse feature include: any past dues / excesses / delays / cheque returns and or default in covenants and / or failure to meet Profit. iii. Does the account fluctuate with the seasonality of the business? iv. Has the relationship strategy and earnings for the last twelve months been met?

7.7 Risk Grading Risk grading is a key measurement of a Bank’s asset quality and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Investment Applications. Presently the Bank is following/conducting the Investment Risk Analysis to assess the risk grade. The concerned Investment Officer / RM must clearly indicate the risk grade (as per the finding) in the specific column of Investment appraisal form so that the authority can take decision on the matter.

A standard Risk Grading Matrix is depicted as under based on the Risk Grade Scorecard attached Risk Rating

Grade Details  Investment facilities, which are fully secured i.e. fully cash covered. Superior (SUP)  Investment facilities fully covered by government guarantee. – 1  Investment facilities fully covered by guarantee of a top tier Low Risk international Bank Good (GD) – Satisfactory

 

Strong repayment capacity of the borrower The borrower has excellent liquidity and low leverage.

Risk Rating

Risk

Grade Details  The company demonstrates consistently strong earnings and cash flow.  Borrower has well established, strong market share.  Very good management skill & expertise.  All security documentation should be in place.  Investment facilities fully covered by the guarantee of a top tier local Bank.  Aggregate Score of 85 or greater based on the Risk Grade Score Sheet   

Acceptable (ACCPT) – Fair Risk

3     

Marginal Watch List (MG/WL)

/ -

      

Special Mention 5 (SM)

  

Substandard (SS)

  

These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record. Borrowers have adequate liquidity, cash flow and earnings. Investment in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property). Acceptable management Acceptable parent/sister company guarantee Aggregate Score of 75-84 based on the Risk Grade Score Sheet This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Weaker business Investment& early warning signals detected. The borrower incurs a loss Investment repayments routinely fall past due Account conduct is poor, or other untoward factors are present. Investment requires attention Aggregate Score of 65-74 based on the Risk Grade Score Sheet. This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Severe management problems exist. Facilities should be downgraded to this grade if sustained deterioration in financials (consecutive losses, negative net worth, excessive leverage), An Aggregate Score of 55-64 based on the Risk Grade Score Sheet. Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of Investments. Bangladesh Bank criteria for sub-standard Investment shall apply

Risk Rating

Grade Details  An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.  

Doubtful(DF) (Non -performing)

7     

Bad and Loss (BL) 8 (Nonperforming)



 

Full repayment of principal and Profit is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss. Bangladesh Bank criteria for doubtful Investment shall apply. An Aggregate Score of 35-44 based on the Risk Grade Score Sheet. Investment of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation. Prospect of recovery is poor and legal options have been pursued. Proceeds expected from the liquidation or realization of security may be awaited. The continuance of the Investment as a bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad Investments must be adhered to. Legal procedures/suit initiated. Bangladesh Bank criteria for bad & loss Investment shall apply. An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

7.8 Monitoring, Recovery and Compliance Division At this final stage of investment processing of the First Security Islami Bank Limited (FSIBL), bank will contact with the client continually, for example- bank can obtain monthly stock report from the client in case of micro investment. Here, the bank will keep his eye on over the investment taker. If needed, bank will physically verify the client’s operations. Also if bank feels that anything is going wrong then it tries to recover its investment fund from the client. The key responsibilities of the Head of Monitoring, Recovery and Compliance Division are as follows: 1) Directly manage all Special Mentioned, Substandard, Doubtful and Bad and Loss accounts in order to standardize/regularize/maximize recovery and ensure that appropriate and timely Investment loss provisions have been made. 2) Provide early signals/warning to the Branches/Marketing Division/Account Relationship Managers/Officers. 3) Determine Account Action Plan/Recovery Strategy. 4) Pursue all options to maximize recovery. 5) Deal with all legal matters.

6) Process branch proposals regarding rescheduling of classified accounts. 7) Collect CIB report from Bangladesh Bank and be responsible for sending CIB, CL returns to Bangladesh Bank on time. 8) Ensure all required Bangladesh Bank returns and statements to other regulatory authorities are submitted with accurate statistics in the correct format in a timely manner. 9) Ensure that Bangladesh Bank circulars/regulations are maintained centrally and advised to all relevant divisions to ensure compliance. 10) Enlist surveyors, lawyers, and insurers with approval of the Bank Management and to monitor and review their performance periodically. Chapter â&#x20AC;&#x201C; 08 Analysis & Findings Recommendations

8.1 Analysis 8.1 FSIBL Market Share The FSIBL holds the huge market share of deposits and investments among Private Commercial Banks (PCBs). The banking industry of Bangladesh had a deposit of Tk. 201.05 billion and loans & advances of Tk. 166.7 billion as 2009, shared among 48 banks consisted of 04 Nationalized Commercial Banks (NCBs), 05 specialized banks, 9 foreign banks, 24 conventional PCBs, and 06 Islamic banks. The FSIBLâ&#x20AC;&#x2122;s customer deposits stood at Tk. 139.07 billion and Tk. 191 billion in YE 2009 and YE 2008 respectively. The investments (loans & advances) of FSIBL stood at Tk. 124 billion and Tk. 103 billion respectively during the same period. The FSIBL held 5.32% of total market deposits and 5.89% of total market investment (loans & advances) as on 31st December 2009.

8.1.1 Capital in First Security Islamic Bank Ltd

4000 3500 3000 2500 2000 1500 1000 500 0 2005

2006

2007

2008

2009

In Million Tk

8.1.2 Paid â&#x20AC;&#x201C; Up Capital in First Security Islamic Bank Ltd 3000 2500 2000 1500 1000 500 0

2005

2006

2007

2008

2009

2010

In Million Tk

8.1.3 Investment & Advances 60000 50000 40000 30000 20000 10000 0

2005

2006

2007

2008

2009

2010

In Million Tk

8.2 FSIBLâ&#x20AC;&#x2122;s Private Sector Focus The focus of Bangladesh industrial policy is to consider the private sector as the engine of growth. The FSIBL has been financing and promoting private sector very extensively. The FSIBL shariah based products such as Bai-Murabaha, Bai-Muajjal, Hire Purchase under Shirkatul Melk, all are basically meant for private sector business financing. Therefore, FSIBL as the leader of private sector financing has been contributing substantially in the private sector development. The FSIBL by this time has developed a base of loyal customers who are paying regularly and enjoying the services of the bank. A Bank of FSIBL stature needs this customer base to maintain its growth.

8.3 SWOT ANALYSIS OF IBBL Every organization has some internal Strengths and Weaknesses as well as they have also some external opportunities and threats. To survive in world competitive market, every organization should emphasize on SWOT analysis that help to take proper decision and to achieve the ultimate goal of the organization. As a internee of FSIBL New Market Branch, I have tried to find out what are their Strengths and Weakness as well as opportunities and threats are stated below:

1. STRENGTHS S1 Adequate Finance: First Security Islami Bank Ltd. has adequate finance. That is why; they need not to borrow money from Bangladesh Bank or any other financial sources. S2

More funds for Investment: For adequate financial ability, they can provide

more investment facility to their clients compared to other Banks. S3 Honest and Reliable Employees: All of the employees of First Security Islami Bank Ltd. are honest and reliable. They are always devoted to their clients for better services. S4 Religious Feelings of the people: Most of the people of Bangladesh are Muslim and they are trusted in superior performance of FSIBL as a Sariah based-Islamic Banking.

2. WEAKNESSES W1 Centralized Decision Making: First Security Islami Bank Ltd. has very limited human resources compared to its vast financial activities. W2 Lack of up-to-date equipments: FSIBL has lack of modern technologies and equipments. Most of the Branches are not well decorated. Number of ATM Booth is not sufficient compared to their vast banking operation.

W3 Deficiency of expertise: Many of the employees are unskilled and from them, superior performance is unexpected to survive in the national economy as well as in the world economy. W4 Lack of Advertising: FSIBL has lack of advertising like other banks. They donâ&#x20AC;&#x2122;t telecast any attractive advertisement in the media. W5 Lack of adequate employees: The decision making of the bank is too much centralized. No decision is made without the authorization of the head office.

3. OPPORTUNITIES O1

Innovative and modern customer service: This bank can introduce more

Innovative and modern customer services to its customers to survive better in the competition market O2 Retaining vast customers: FSIBL has a vast opportunity to hold most of the customers by extending its banking operation all over the country as most of the people of Bangladesh are religious minded. O3 Poverty alleviation: FSIBL has a great opportunity to save the countyâ&#x20AC;&#x2122;s poor people from being taking loan from different NGOs or few banks with higher interest rate. O4 Special image: FSIBL has created special image to the people as a more reliable bank. People believe that if they keep their money in Islami bank it will be more secured than other banks.

4. THREATS T1

Rules and regulations: Rules and regulations of Bangladesh Bank defers with

Islamic Banking System. So they have to face various problems to operate their activities according to the Islamic Shariah. T2

Lower salary structure: Now many of the Banks are hiring young talent and

expertise employees with higher remuneration where FSIBL could not hire skilled manpower because of lower salary structure compared to other banks. T3 Call money system: In the money market of Bangladesh, there is no call money system of Islami Banking. Few other conventional banks have started to open their Islamic Banking operation shortly. T4 Islamic Banking operation introduced by conventional Banking

8.4 Findings:

1. First Security Islami Bank Ltd. Momentum Gather on its performance after weak image by establishing its quality services & wider operations specially in financing area both in SME & Corporate Finance. 2. Islamic Banking operation runs on profit loss sharing basis which needed real knowledge on Islamic philosophy and Islamic economy, but First Security Islami Bank Ltd. Just stated its business on shariah based from 2009 , therefore they have to face number of problem in operation, although they have improve their service from the on job experiment. 3. FSIBL have started its operation as an Islamic bank with the previous executives & staff, therefore they takes time to acquaintance with shariah related rules & regulation, it impire the operation. 4. Human resources are not as much efficient as needed for improvement of the service. 5. Islamic Economy is required to executed real islami banking practice , Bangladesh economy does not cover real practice of islami banking. 6. Profit Loss Sharing based Banking does not have the chance to bankruptcy of one party but it must be compile properly. 7. Investment system of First Security Islami Bank Ltd. has highly time consuming from the borrower perspective to hamper their operation.( from application to disbursement has time consuming ) 8. First Security Islami Bank Ltd. is not well acquainted by the community due to proper advertisement & focus. 9. Significant thing is that it perform its operation robustly for example last year they open 25 branches successfully & operating profit also increase by 3 times. 10. Sequential working process is clumsy & time consuming, sometime it may cause to dissatisfied customer. 11. Investment rules& regulations are not so much flexible. 12. Borrowers are not highly acquaintanend with Islamic mode of investment.

8.5 Recommendation: Though First Security Islami Bank Ltd. (FSIBL) is performing well but it has some crucial areas to improve which are prescribed below: 1. It is a modern banking era. Each and every commercial bank is properly utilizing technological innovations. So, FSIBL needs to utilize these modern technologies to keep pace with the modern time. 2. FSIBL needs to recruit skilled human resources which can turn the bank ahead. 3. The bank should offer facilities such as Credit card, Visa card. 4. FSIBL’s investment processing should become easier than other conventional banks. 5. FSIBL should make its investment schemes more attractive for availing high-return projects. 6. FSIBL should consider utilization of rural potentials from both efficiency and equity grounds in the context of the present-day socio-economic conditions of Bangladesh. Strong commitments and stepping up through experiment and implementation of innovative ideas are the appropriate ways to do that. 7. FSIBL should deserve immediate attention in the promotion of the image of Shariah based banks as PLS (Profit-loss-sharing)-banks. 8. Since 90% population of Bangladesh is muslim, therefore it is easier to make understand the real Islamic banking system to the community. First Security Islami Bank Ltd. can get the chance to make understand islami banking practice to the community. 9. Investment policy & procedure should be flexible, easier & understandable so that business people can understand and cope with that. 10. Investment processing time should be reduced so that businessman can avail the real business opportunity. 11. Information regarding the organization is most important thing for proper growth of an organization; First Security Islami Bank Ltd. should take effective & efficient measure to publicize their information with using proper media & other means. 12. In current digital world website is an important tools for highlighting oneself, but website of First Security Islami Bank Ltd. does not contain sufficient information by which it may represent itself. 13. With increasing number of branch, it has a chance to decrease the quality service; top level management should concentrate regarding that matter.

8.8 Conclusion: Islam is a complete way of life and Allah’s guidance extents into all areas of our lives. Islam has given detail regulations for our economic life. Therefore, First Security Islami Bank Limited (FSIBL) is trying to establish the maximum welfare of the society by maintaining the principles of Islamic Shariah which is based on “Quran” and “Sunnah”. Since 1983, FSIBL is the pioneer in welfare banking in this subcontinent and it is trying to do all its activities for the betterment of its depositors. For the greater interest of the depositors the investment policy of FSIBL is to invest on the basis of profit and loss sharing in accordance with the tents and principles of Islamic Shariah. Profit earning is not the only motive and objective of

the bank’s investment policy rather emphasis is given in attaining social good and in creation employment opportunities. FSIBBL is not secular in its orientation. FSIBL does not finance any project which conflicts with the moral value system of Islam. FSIBL does not strictly consider the credit worthiness of the entrepreneur. FSIBL receives a return only if the project succeeds and produces a profit. FSIBL considers the soundness of the project and business acumen and managerial competency of the entrepreneur. Therefore, the rate of return of investment of FSIBL is greater comparing to that of conventional banks. Finally, First Security Islami Bank Limited (FSIBL) has been established with a view to conduct interest free banking to establish participatory banking instead of debtor-creditor relationship and finally to establish welfare oriented banking through its investment operations that would lead to a just society.

Bibliography 1. Several Newsletters From FSIBL Bank 2. Annual Report of FSIBL Bank Limited 3. Different type of brochures of FSIBL Bank. 4. Articles of FSIBL Bank 5. Business Communication.

Johan V. Lesiker.

6. Strategic Management- Concept and Cases (Ninth Editor). Arther a. Thompson Jr A. J. Strickland 7. Principles of Management (Eighth Editor) Terry and Franklin 8. Principles of Marketing (Millennium Editor) Philip Kotler. 9. Design and Operation of Customer service System. Paul S. Bender. 10. Foreign Exchange and Financing of Foreign Trade. Syed Asraf Ali 11. Background of FSIBL Bank Ltd,, fsiblbd.com\backgroundt.htm 12. Branch Information of FSIBL http:\\www.fsiblbd.com\branches.htm

Web Sites • •

www.fsiblbd.com www.dsebd.org

available

Bank

Ltd,,

http:\\www. available

â&#x20AC;˘

www.bangladeshbank.org.bd

Reference of persons: Helped by the manager Mohammad Yamin uttara branch of FSIBL and also thanks manager oparetion Kazi Anwarul Azam sir, & especially thanks to Officers of Uttara branch likes, 5. Jalal Uddin sir, 6. B.M.Zahidul sir 7. .Md.Shahariar sir 8. Jahangir Hossain sir 9. Shakur sir