ISLAMI BANK BANGLADESH LIMITED
Introduction: Bangladesh is one of the largest Muslim countries in the world. The people of this country are deeply committed to Islamic way of life as enshrined in the Holy Qur'an and the Sunnah. Naturally, it remains a deep cry in their hearts to fashion and design their economic lives in accordance with the precepts of Islam. The establishment of Islami Bank Bangladesh Limited on March 13, 1983, is the true reflection of this inner urge of its people, which started functioning with effect from March 30, 1983. This Bank is the first of its kind in Southeast Asia. It is committed to conduct all banking and investment activities on the basis of interest-free profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the Gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh. Origin of the report: The report is being prepared under direct supervision & guidelines of separate instructors of university and IBBL as a requirement to complete the BBA program. Scope and purpose: There are mainly two objectives behind the preparation of this report such as primary objectives and secondary objectives. These are discussed as under: The Primary Objective: The primary objective of preparing this report is to fulfill the partial requirements of the BBA program and to represent the ‘Foreign Exchange Functions & its problems and prospects’ of Islami Bank Bangladesh Limited.
Secondary Objective: The secondary objectives of this report are as below:
•
To co-ordinate between theory and practice and to make a bridge between theoretical and practical knowledge in fulfillment of the internship program.
•
To have an overall idea about Islamic Banking system that is based on Al-Quran and Sunnah.
•
To know about the interest free banking System within the Islamic Shariah and how it could be processed.
•
To identify the formalities maintained by both the bank and client in processing and receiving foreign exchange products.
•
To have a clear idea regarding the requirements and the limitations at the time of apply for foreign exchange procedure and other formalities.
•
To identify the major problems the bank encounters in handling foreign exchange department.
This report has been prepared through extensive discussion with bank employees and with the clients. While preparing this report, we had a great opportunity to have an in depth knowledge of all the banking activities practiced by the Islami Bank Bangladesh Limited. It also helped us to acquire a first hand perspective of a leading private bank in Bangladesh. Sources of data collection: The officials and management body of IBBL primarily provided necessary information in preparing this report. Therefore, other necessary information and data of the report are collected through various documents of IBBL, library work, and web site of IBBL. Limitations of the Report: The sources of the report are collected from different desks, various documents of IBBL. Though the entire stuff member remains busy all the time for their desk work they helped a lot to manage and collect the data & information. But it was very difficult to collect information on the client as it is very sensitive and secret issue for the Bank.
Every task has some limitations. I faced some usual constraints during the course of my internship. Though I have given utmost effort to prepare this paper but there are some limitations of the study. These are as followsShortage of time period: I had to complete this report writing within a shorter period of time since many days have passed during the training session. So the time constraint of the study hindering the course of vast area and time for preparing a report within the mentioned period is really difficult. Busy working environment: The officials had some times been unable to provide information because of their huge routine work. That’s why I do not gather vast knowledge about the critical issues. Lack of sufficient well informed officials: Many officials of the branch are not well informed about foreign exchange problems of IBBL. I had to face many difficulties to collect this information. Insufficient Data: The data required for sufficient analysis for writing report couldn’t be collected due to excessive workload. I had to rely entirely on the data received from the books of statistics, Manifesto, and the Annual Reports of Islami Bank Bangladesh Limited, and I had no opportunity to verify the satisfaction level of clients and receive their suggestions in implementing the Islamic Shariah as well as other foreign exchange banking activities. Secrecy of Management: There some information which are confidential. I am unable to collect these data. Some data could not been collected for confidentiality or secrecy of management. Clear Understanding of some issue: There are some issue which I have no clear idea about it. IBBL does not give me the scope to know about these issues. Objectives of the Report: The present study is intended to provide a clear concept about the basis & problem of Foreign Exchange and Foreign Trade of Islami bank in Bangladesh and the prospect of Foreign Exchange and Foreign Trade of Islami banking. More over the specific objectives of the study are stated below:� To determine the problem of Foreign Exchange and Foreign Trade of IBBL.
● To determine and focus the prospect of Foreign Exchange and Foreign Trade of Islami banking. Methodology: The methodology of the research proposal will include two sources of information, i.e. 01. Primary sources of information and 02. Secondary sources of information: Existing Products and services and all other management related data (secondary Sources of information, such as annual reports, journals, brochures etc). History of IBBL Establishment of Islamic Development Bank (IDB) by the OIC member states in the year 1975 has been proved to be a breakthrough in the expansion of Islamic Shari’ah based finance and specially banking throughout the world. As a founder member of IDB, the Government of Bangladesh also had the commitment to establish Islamic banks which was reflected in different steps taken by the governments of the country. The OIC members consented to the proposals to introduce Islamic economy and banking in their respective countries held in the foreign ministers’ conferences in 1978 and 1980 in Dakar and Islamabad respectively. In the year 1981, OIC in its 3 rd summit held in Makkah approved the proposition submitted by Bangladesh to introduce separate banking system following Islamic ideology. As per decision, the GOB sent representatives to the Middle Eastern countries to learn the existing banking systems in those countries. In the private sector, the Islamic Economics Research Bureau (IERB) was the first organization that took active initiative in this regard. They arranged a national seminar on Islamic Economics and Banking in the year 1979 and inspired by the discussion and the papers presented in the seminars, some local bankers formed ‘Islami Bank Working Group’. The IERB again arranged an international seminar in 1980. After the seminar, Dhaka based ‘Muslim Businessman Society’ (later renamed as ‘Industrialist and Businessmen Association’) under the leadership of renowned industrialist Abdur Razzaque Lasker, took initiative to establish an Islamic bank and applied to the government for permission. At this stage, the GOB provided necessary permission in the year 1983 and at last ‘Islami Bank Bangladesh’ was registered under Company Act in which 19 Bangladeshi national, 4 Bangladeshi institutions and 11 banks, financial institutions and government bodies of the Middle East and Europe including IDB and two eminent personalities of the Kingdom of Saudi Arabia joined hands to make the dream a reality.
Aims and Objectives IBBL has some aim & objectives regarding their activities. These are as follows: •
To conduct interest-free banking
•
To establish participatory banking instead of banking on debtor-creditor relationship
•
To invest on profit and risk sharing basis.
•
To accept deposits on Mudaraba & Al-Wadeah basis.
•
To establish a welfare-oriented banking system
•
To extend co-operation to the poor, the helpless and the low-income group for their economic upliftment
•
To play 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 areas.
•
To contribute in achieving the ultimate goal of Islamic economic system
Overview of IBBL: Islami Bank Bangladesh Limited (IBBL) was incorporated on 13.3.1983 as a Public Company with limited liability under the Companies Act. 1913. The bank started functioning with effect from 30.3.1983. IBBL is the first private sector Islamic bank in South-east Asia. The establishment of this bank ushered a new era in Bangladesh, the 3 rd largest Muslim country of the world. The bank is committed to run all its activities based on Islamic Shariah. IBBL through its steady progress and continued success has, by now, earned the reputation of being one of the leading private sector banks of the country Corporate Information of IBBL (as on 31st March 2008)
Date of Incorporation Inauguration
of
13th March 1983 1st
Branch
30th March 1983
(Local office, Dhaka) Formal Inauguration
12th August 1983
Share of Capital Local Shareholders
42.63%
Foreign Shareholders
57.37%
Authorized Capital
Tk.5,000.00 million
Paid-up Capital
Tk.3,801.60 million
Deposits
Tk.173,210.70 million
Investments (including
investment
in
Tk.183,813.25 million
Shares) Foreign Exchange Business
Tk.111,059.00 million
Number of Branches
189 (27.04.2008)
Number of Shareholders
26,488
Manpower
8,581
Growth and expansion: Since its startup, IBBL is maintaining a steady growth in terms of profitability and geographical coverage. 80s may be termed as ‘Foundation Stage’; during the 90s, the bank passed its ‘Early Growth Stage’ and during the first decade of the 21 st century, its making ‘Rapid Growth’. The growth fact file from 1983 – 2008 is given hereunder:
13-03-1983
-
Incorporation of IBBL.
30-03-1983
-
Inauguration of 1st Branch (Local Office).
12-08-1983
-
Formal inauguration.
1984
-
Establishment of Islami Bank Training and Research Academy (IBTRA).
1985
-
Listed with Dhaka Stock Exchange (DSE) and issue IPO.
1988
-
Introduction of ‘Executive Development Program’. 1st Rights Share Issue.
-
Introduced Zonal concept. Opening of the 50th Branch.
-
‘Sadaqa Tahabil’ converted to form Islami Bank Foundation as a separate
1989
1991 entity. Introduction of annual award for Dhaka University students. 1994 -
Implementation of BEXIBANK as the banking software. Launched Rural Development Scheme.
-
First IBBL representative abroad (KSA). Listed with Chittagong Stock Exchange (CSE).
-
2nd Rights Share Issue.
1997
-
Opening of the 100th Branch.
1998
-
Introduction of Diploma in Islamic Banking at IBTRA. ‘Global Finance’, a New York based financial magazine named IBBL as the best
1995
1996
1999
bank of the country. -
Implementation of IBBS – integrated banking software.
-
Introduction of SWIFT service. 3rd Rights Share Issue.
-
CSE declared IBBL as one of CSE – 30 companies.
-
Head Office shifted to new location (own premises).
-
‘Global Finance’ named IBBL as the best bank of the country. DSE declared IBBL as one of 20 ‘Blue Chip’ companies.
-
Introduction of ATM service.
-
All the branches are computerized.
2000
2001
-
IBTRA shifted to its own premises at Mohammadpur.
-
eIBS project started.
2002
-
New Organogram was implemented.
2003
-
4th Rights Share Issue. LAN has been set up at all the branches.
-
Opening of the 150th Branch.
-
Joining / Agreement with CDBL. Implementation of eIBS – web based banking software developed by in-house
2004
2005
developers.
2006
-
Introduction of REUTERS and dealing service.
-
‘Global Finance’ named IBBL as the best bank of the country.
-
IT Audit came into practice.
-
Introduction of Online banking. Introduction of Mudaraba Perpetual Bond.
-
ICMAB announced IBBL as the ‘First in Best Corporate in the Banking Sector
2007 (Local)’. 2008
-
Starting brokerage house operation.
Functions: The functions of Islami Bank Bangladesh Limited are as under: •
To maintain all types of deposit accounts.
•
To make investment.
•
To conduct foreign exchange business.
•
To extend other banking services. DEPARTMENTS:
Evolution of Islamic Banking For an expanding economy, a developed and efficient banking system is indispensable. Among others, it helps transfer of financial resources from surplus units to deficit units and, hence, helps accelerate the pace of development by securing uninterrupted supply of financial resources to people engaged in numerous economic activities. The tremendous development that the world economy has experienced in the last few decades was contributed by several factors among which, growing institutional supply of loan able funds must have played the pivotal role. The role of banking is comparable to what an artery system does in the human body. Both commercial banks and other development financial institutions provide short-, medium-, and long-term credits to businesspersons and entrepreneurs who usually take the lead in ventures of economic development.
Institutional supply of credit has been made possible by a system of financial inter-mediation organized in a way where conventional banks collect small savings from the public by offering them a fixed rate of interest and advancing the loan able funds out of the deposited money to enterprising clients charging relatively higher rates of interest. The margin between these two rates is the bank's income. In addition, banks also provide many other services to the public for which it receives service
charges.
Despite the outstanding contribution of the conventional banking system (interest-based), several ancient and modern economists are critical about its efficiency level. Some economists consider the role of interest in the conventional banking mechanism as a major negative factor that contributes to cyclical fluctuations in the economy (Minsky 1982). Specifically, the ineffectiveness of interest rate as a stabilization tool during the period of the Great Depression is a case to note. This eventually called for Keynesian prescription of government intervention (Keynes 1964). Similar concern was expressed in a story published in Newsweek regarding Henry Kissinger, the former Secretary of State of USA. To quote, “The instability has persisted and the uncertainty has continued. After going through the throes of painfully high levels of inflation, the world economy has experienced a deep recession and unprecedented rate of unemployment, complicated further by high level of real
interest rates and unhealthy exchange rate fluctuations� (Newsweek 1983). More recent concern over the potential instability of the world monetary and financial system was expressed by Maurice Allais, a Nobel Laureate, who called for an urgent reform of the World Economic Order (Allais 1993, pp.13-16). Others vehemently oppose the argument for using rate of interest as a stabilizing tool in the economy (Saud 1980, p.88). This called for the emergence of a new system of banking capable of tackling new challenges that the present world economy, particularly the financial sector, has been facing. In response, though not exactly to that exigency but for quite a few other reasons, the second half of the twentieth century witnessed a distinctly separate line of thinking on banking. This was institutionalized at the end of third quarter and subsequently emerged as a new system of banking called Islamic Banking {also called Profit-Loss-Sharing Banking (PLS)}. The world has now been experiencing operation of as many as 250 Islamic banks and financial institu tions in more than 50 countries,
Muslim
and
non-Muslim.
There are religious as well as economic reasons, which have contributed to the emergence of PLSbanking as an alternative to its conventional counterpart. It is the prohibition of 'Riba' in the Quran that, according to the proponents of the PLS-system, was the source of inspiration for establishing banks in line with Islamic Shariah (Muslehuddin 1987, pp.24-27). The basic intention behind establishing Islamic banks was the desire of Muslims to reorganize their financial activities in a way that do not contradict the principles of Shariah and enable them to conduct their financial transactions without indulging into Riba (Ahmad 1992). These writers consider rate of interest in the conventional banking mechanism synonymous to Riba, the term as used in the Quran [2:275; 30:39]. One of the reasons for this is that the outcome of the productive effort is uncertain, and so interest necessarily involves an element of Gharar, that is, uncertainty (Chapra 1985, p.64). On this religious ground, proponents of the PLS-system urge the Islamic community to avoid all transactions with institutions that are interest-based. The economic reason derived from a verse of the Quran providing inspiration to devise an interestfree financial system has been substantiated in the way that interest, instead of increasing wealth, reduces it [30:34]. The primary reason of why the Quran has taken such a hard approach towards interest is that Islam stands for establishing a just economic system free from all kinds of exploitation (Chapra 1985). Further, Muslim economists consider depression and stagflation very often found in the capitalist world as an outcome of the financial system based on interest (Rahman 1976).
Thus, Islamic banking emerged as a response to both religious and economic exigencies. While religious exigency calls for avoiding any transaction based on interest, economic exigencies, on the other hand, provide a new outlook to the role of banking in promoting investment / productive activities, influencing distribution of income and adding stability to the economy. Islamic banking is thus perceived as an improved system in all dimensions. Complete Islamization Efforts: A development of complete Islamization of banking at national levels had been gaining momentum since the second half of the 1970s. The movement took basically two forms. First, an attempt was made to establish Islamic financial institutions side-by-side with traditional banking. In such attempts, two types of institutions were evolved: Islamic banks were established mostly in Muslim countries; and Islamic investment and holding companies started operating in some Muslim but mostly in non-Muslim countries. These institutions claimed to be operating without interest in their transactions and competed with conventional banks to attract deposits. The majority of these institutions were established through private initiatives. Second, an attempt was made to restructure the whole financial system of the economy in accordance with the teachings of Islam. Bangladesh: In August 1974, Bangladesh signed the Charter of Islamic Development Bank and committed itself to reorganise its economic and financial system as per Islamic Shariah. In January 1981, Late President Ziaur Rahman while addressing the 3rd Islamic Summit Conference held at Makkah and Taif suggested, ''The Islamic countries should develop a separate banking system of their own in order to facilitate
their
trade
and
commerce.''
This statement of Late President Ziaur Rahman indicated favourable attitude of the Government of the People's Republic of Bangladesh towards establishing Islamic banks and financial institutions in the country. Earlier in November 1980, Bangladesh Bank, the country's Central Bank, sent a representative to study the working of several Islamic banks.In November 1982, a delegation of IDB visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic bank in the private sector. They found a lot of work had already been done and Islamic banking was in a ready form for immediate introduction. Two professional bodies -Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers' Association (BIBA) made significant contributions towards introduction of Islamic banking in the country.
They came forward to provide training on Islamic banking to top bankers and economists to fill-up the vacuum of leadership for the future Islamic banks in Bangladesh. They also held seminars, symposia and workshops on Islamic economics and banking throughout the country to mobilise public opinion in favour of Islamic banking. Their professional activities were reinforced by a number of Muslim entrepreneurs working under the aegis of the then Muslim Businessmen Society (now reorganised as Industrialist & Businessmen Association). The body concentrated mainly in mobilising equity capital for the emerging Islamic bank. At last, the long drawn struggle to establish an Islamic bank in Bangladesh became a reality and Islami Bank Bangladesh Limited was established in March 1983 in which 19 Bangladeshi national, 4 Bangladeshi institutions and 11 banks, financial institutions and government bodies of the Middle East and Europe Including IDB and two eminent personalities of the Kingdom of Saudi Arabia joined hands to make the dream a reality. Later, other three Islamic Banks were established in
the
country.
Islami Bank Bangladesh Limited (IBBL) is considered to be the first interest free bank in Southeast Asia. It was incorporated on 13-03-1983 as a Public Company with limited liability under the companies
Act
1913.
The
bank
began
operations
on
March
30,
1983.
IBBL is a joint venture multinational Bank with 63.92% of equity being contributed by the Islamic Development Bank and financial institutions like-Al-Rajhi Company for Currency Exchange and Commerce, Saudi Arabia, Kuwait Finance House, Kuwait, Jordan Islamic Bank, Jordan, Islamic Investment and Exchange Corporation, Qatar, Bahrain Islamic Bank, Bahrain, Islamic Banking System International Holding S. A., Luxembourg, Dubai Islamic Bank, Dubai, Public Institution for Social Security, Kuwait Ministry of Awqaf and Islamic Affairs, Kuwait and Ministry of Justice, Department of Minors Affairs, Kuwait. In addition, two eminent personalities of Saudi Arabia namely, Fouad Abdul Hameed Al-Khateeb and Ahmed Salah Jamjoom are also the sponsors of IBBL. The total number of branches as of December 2001 stood at 121. The authorized capital of the bank is Tk. 500 million and subscribed
capital
is
Tk.
160
million.
Al-Baraka Bank Limited, often called the second Islamic bank in Bangladesh, commenced banking business as a scheduled bank on May 20, 1987. It is a joint venture enterprise of Al-Baraka Investment and Development Company a renowned financial and business house of Saudi Arabia, Islamic Development Bank, a group of eminent Bangladesh industrialists and the Government of Bangladesh. The authorized capital of the bank is Tk 600 million and the paid up capital is Tk. 204.07 million. The Bank currently operates 34 branches throughout the country. Apart from extending
conventional commercial banking facilities to its customers, the bank has also given substantial financial
support
to
the
development
of
industrial
and
real
estate
projects.
Al-Arafa Islami Bank Bangladesh Limited commenced its business as a scheduled bank on September 27, 1995. The authorized capital of the bank is Tk. 1,000 million while its paid up capital is Tk. 101.20 million. The Bank follows the Shariah principles in investment and invests its funds under Mudaraba, Musharaka, Bai-Muajjal, Bai-Salam, etc. Up to 2001, the Bank has been operating its business through 40 branches all over the country. Social Investment Bank Limited is another bank guided by the Islamic principles. It started its journey in November 1995. Its authorized capital is Tk. 1,000 million and paid-up capital is Tk. 118.36 million. Up to September 2001, the Bank has been operating its business through 15 branches. Islamic Banking: Some Conceptual Issues What is Islamic Banking? Islamic banking has been defined in a number of ways. The definition of Islamic bank, as approved by the General Secretariat of the OIC, is stated in the following manner. “An Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations”(Ali & Sarkar 1995, pp.20-25). Shawki Ismail Shehta viewing the concept from the perspective of an Islamic economy and the prospective role to be played by an Islamic bank therein opines: “It is, therefore, natural and, indeed, imperative for an Islamic bank to incorporate in its functions and practices commercial investment and social activities, as an institution designed to promote the civilized mission of an Islamic economy” (Ibid). Ziauddin Ahmed says, “Islamic banking is essentially a normative concept and could be defined as conduct of banking in consonance with the
ethos
of
the
value
system
of
Islam”
(Ibid).
It appears from the above definitions that Islamic banking is a system of financial intermediation that avoids receipt and payment of interest in its transactions and conducts its operations in a way that it helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system whose operation is based on Islamic principles of transactions of which profit and loss sharing (PLS) is a major feature, ensuring justice and equity in the economy. That is why Islamic banks are often known as PLS-banks. RIBA and its basic features
The word used by the Quran concerning ‘interest’ is Riba. The literal meanings of Riba are money increase, increase of anything or increment of anything from its original amount (Maududi 1979, p.84). However, all increases are not considered as Riba in Islam. Money may increase in business activities as well. This increase is not at all considered as Riba. The increase, instead of being prohibited (Haram), is approved (Halal) in Islam. Islam prohibits only those
increases
that
are
charged
on
the
loan
with
a
prefixed
rate.
Muslim scholars equate interest with Riba. In the Shariah, Riba technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity (Chapra 1985, p.64). In other words, Riba is the predetermined return on the use of money. In the past there has been dispute about whether Riba refers to interest or usury, but there is now consensus among Muslim scholars that the term covers all forms of interest and not only “excessive” interest(Khan1985,p.52). In the era of Ignorance (Jahiliah) moneylenders in Arabia charged a prefixed extra amount on their money lent out. Some of them lent goods or crops and took back prefixed extra amount on and above the principal amount. In those days the extra amount charged on the principal amount of money or goods was also termed as
Riba.
The
term
Riba
in
the
Quran
has
been
used
in
the
same
sense.
Imam al Rajhi describes, “During the era of Jahiliah people invested their money and charged Riba on a monthly basis, though the invested amount remained unchanged. Money so invested was called back at the time of repayment. In case of the borrower being unable to pay back, the lender extended the period of repayment enhancing the amount to be paid on and above the principal amount.” Abu Bakr al Jasas writes, “During the period of Ignorance the lender and borrower came to an agreement that the borrower would pay back within a specified period the principal amount along with the agreed upon excess.” Ibne Hajar Askalani says, “Excess goods or money charged on and above principal is Riba.” Thus, any prefixed extra amount charged on a specific amount of money or goods lent out is called Riba.
The most important characteristic of Riba is that it is the positive and definite result of money when changed. In other words, when money begets money, without being exchanged for goods or services, it is called Riba. Its basic characteristics are:
•
It must be related to loan;
•
A prefixed amount of money to be paid when due;
•
A time is fixed for the repayment; and
•
All these elements for repayment are taken as conditions for loan.
Riba and Profit: There are persons who try to equate Riba with profit. In effect, they are fundamentally different from each other as can be seen from the following:
Riba
Profit
1. When money is “charged”, its imposed
1. When money is used in trading (for e.g.) its
positive and define result is Riba
uncertain result is profit.
2. By definition, Riba is the premium paid by the
2. By definition, profit is the difference between
borrower to the lender along with principal
the value of production and the cost of
amount as a condition for the loan.
production.
3. Riba is prefixed, and hence there is no
3. Profit is post-determined, and hence its
uncertainty on the part of either the givers or
amount is not known until the activity is done.
the takers of loans. 4. Riba can not be negative, it can at best be very
4. Profit can be positive, zero or even negative.
low or zero. 5. From Islamic Shariah point of view, it is
5. From Islamic Shariah point of view, it is Halal.
Haram. Prohibition of RIBA: On religious perspective: The religious restriction on interest is quite explicit and unequivocal. All transactions based on Riba are strictly prohibited in the Quran. The prohibition of Riba appears in the Quran in four different revelations. The first of these [30:39] in Makkah, emphasized deprivation of God’s blessing for a man making interest transaction and charity having the essence of manifold rise. The second revelation
[4:161] concerning the subject took place in the early Madinah. It severely condemned interestreferring prohibitions taken place in the previous scriptures. The third revelation [3:130-2] enjoined Muslims to keep away from Riba. The fourth revelation [2:275-81] reveling nears the completion of the Prophet’s mission. The verses giving strong verdict against Riba are as follows: Those who devour Riba will not stand except as stands one whom the devil hath driven to madness by [his] touch [2:275]. Condemnation of the system of interest is so strong and without any doubt can be reflected in the following verse which imposes penalties on those who hesitate in observing the verdict: O ye who believe! Observe your duty to Allah and give up what remains (due to you) from Riba, if you are (in truth) believers. And if you do not, then be warned of war (against you) from Allah and His Messenger. And if you repent then you have your principal (without Riba). Wrong not, and you shall not be wronged [2:278-9]. The strong disapproval of interest by Islam and the crucial role it plays in the modern commercial banking has led Muslim thinkers to explore ways and means by which commercial banking could be organized on an interest-free basis. However, for a long time, the idea of Islamic banking remained a mere wish. Some papers were written and some professional economists even worked out theoretical models of Islamic banking. However, they were quickly dismissed by highbrow economists who described them as wishful thinking and attempts to put history into reverse gear. On Socio Economy Perspective: The Islamic law of prohibition of interest was originally not based on economic theory but on divine authority, which considered charging of interest as an act of injustice. Early Muslim scholars considered money as a medium of exchange, a standard of value and a unit of account but rejected its function as a store of value. Lending upon interest was prohibited because it was an act of ungratefulness and considered to be unjust since money was not created to be sought to be itself but
for
other
objects.
Recent Muslim scholars, however, place the major emphasis of their explanation of the Law on the lack of a theory of interest. They have countered the arguments that interest is a reward for saving, a productivity of capital and an inevitable consequence of the difference between the value of capital goods today and their value a year hence. The basic arguments are summarizes below:
Interest and savings: To the argument that interest is a reward for saving, Muslim scholars (see, for example, Mirakhore 1995, pp.31-34) respond that such payments could only be rationalized if savings were used for investment to create additional capital and wealth. According to them, the mere act of abstention from consumption should not entitle anybody to a return. Interest and the productivity of capital: To the argument that interest is justified as productivity of capital, they respond that although the marginal productivity of capital may enter as one factor into the determination of the rate of interest, interest, per se, has no necessary relation with the capital productivity. Interest, they argue, is paid on money, not on capital, and has to be paid irrespective of capital productivity. In distinguishing between interest as a charge for the use of money and a yield from the investment of capital, Muslim scholars argue that it is an error of modern theory to treat interest as the price of, or return for, capital. Money, they argue, is not capital, it is only ‘potential capital’ which requires the service of the entrepreneur to transform the potentiality into actuality; the lender has nothing to do with the conversion of money into capital and with using it productively. Interest as a time value of capital: To the argument that interest arises as an inevitable consequence of the difference between the value of capital goods today and their value a year hence, they respond that this only explains its inevitability and not its rightness. Even if the basis for time preference is the difference between the value of commodities this year and the next, Muslim scholars argue, it seems more reasonable to allow next year’s economic conditions to determine the extent of the reward. Muslim scholars maintain that when a person lends out, the funds are used to create either a debt or an asset (i.e., through investment). In the first case, there is no justifiable reason why the lender should receive a return. Further, there is no justification from the point of view of the smooth running of the economy, or from the point of view of any tenable scheme of social justice. The state should attempt to enforce an unconditional promise regardless of the use of borrowed money. If the money is used to create additional capital wealth, the question is raised as to why the lender should be entitled to only a small fraction (represented by interest rate) of the exchange value of the utilities created by the use made of loaned-out money. Justice demands that he should be remunerated to the extent of the involvement of his financial capital in creating the incremental wealth.
The elimination of interest from the economic system is intended to promote economically just, socially fair and ethically correct dealings according to Islamic principles. This harmonious trade creates powerful economic incentives, and brings about co-operation and co-participation in all walks of life. Moreover, prohibition of the practice of hoarding in the Quran applies to money also. Islam wants to make it sure that one’s money is used productively for oneself and the community. Objectives of Islamic Banking: The primary objective of establishing Islamic banks all over the world is to promote, foster and develop the application of Islamic principles in the business sector. More specifically, the objectives of Islamic banking when viewed in the context of its role in the economy are listed as following: 1. To offer contemporary financial services in conformity with Islamic Shariah; 2. To contribute towards economic development and prosperity within the principles of Islamic justice; 3. Optimum allocation of scarce financial resources; and 4. To help ensure equitable distribution of income. These objectives are discussed below: Offer Financial Services: Interest-based banking, which is considered a
practice of Riba in financial transactions, is
unanimously identified as anti-Islamic. That means all transactions made under conventional banking are unlawful according to Islamic Shariah. Thus, the emergence of Islamic banking is clearly intended to provide for Shariah approved financial transactions. Islamic Banking for Development: Islamic banking is claimed to be more development- oriented than its conventional counterpart. The concept of profit sharing is a built-in development promoter since it establishes a direct relationship between the bank’s return on investment and the successful operation of the business by the entrepreneurs. Optimum Allocation of Resources:
Another important objective of Islamic banking is the optimum allocation of scarce resources. The foundation of the Islamic banking system is that it promotes the investment of financial resources into those projects that are considered to be the most profitable and beneficial to the economy. Islamic Banking for Equitable Distribution of Resources: Perhaps the must important objective of Islamic banking is to ensure equitable distribution of income and resources among the participating parties: the bank, the depositors and the entrepreneurs. Distinguishing features of Islamic Banking An Islamic bank has several distinctive features as compared to its conventional counterpart. Chapra (1985, PP.154-57) has outlined six essential differences as below: Abolition of interest (Riba): Since Riba is prohibited in the Quran and interest in all its forms is akin to Riba, as confirmed by Fuqaha and Muslim economists with rare exceptions, the first distinguishing feature of an Islamic bank must be that it is interest-free. Adherence to public interest: Activity of commercial banks being primarily based on the use of public funds, public interest rather than individual or group interest will be served by Islamic commercial banks. The Islamic banks should use all deposits, which come from the public for serving public interest and realizing the relevant socio-economic goals of Islam. They should play a goal-oriented rather than merely a profitmaximizing role and should adjust themselves to the different needs of the Islamic economy. Multi-purpose bank: Another substantial distinguishing feature is that Islamic banks will be universal or multi-purpose banks and not purely commercial banks. These banks are conceived to be a crossbreed of commercial and investment banks, investment trusts and investment -management institutions, and would offer a variety of services to their customers. A substantial part of their financing would be for specific projects or ventures. Their equity-oriented investments would not permit them to borrow short-term funds and lend to long-term investments. This should make them less crisis-prone compared to their capitalist counterparts, since they would have to make a greater effort to match the maturity of their liabilities with the maturity of their assets. More careful evaluation of investment demand: Another very important feature of an Islamic bank is its very careful attitude towards evaluation of applications for equity oriented financing. It is
customary that conventional banks evaluate applications, consider collateral and avoid risk as much as possible. Their main concern does not go beyond ensuring the security of their principal and interest receipts. Since the Islamic bank has a built in mechanism of risk sharing, it would need to be more careful in how it evaluates financing requests. It adds a healthy dimension in the whole lending business and eliminates a whole range of undesirable lending practices. Work as catalyst of development: Profit-loss sharing being a distinctive characteristic of an Islamic bank fosters closer relations between banks and entrepreneurs. It helps develop financial expertise in non-financial firms and also enables the bank to assume the role of technical consultant and financial adviser, which acts as catalyst in the process of industrialization and development. Conventional and Islamic banking Conventional banking is essentially based on the debtor-creditor relationship between the depositors and the bank on the one hand, and between the borrowers and the bank on the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money. Islam, on the other hand, considers a loan to be given or taken, free of charge, to meet any contingency. Thus in Islamic Banking, the creditor should not take advantage of the borrower. When money is lent out on the basis of interest, more often it happens that it leads to some kind of injustice. The first Islamic principle underlying such kinds of transactions is that “deal not unjustly, and ye shall not be dealt with unjustly� [2:279]. Hence, commercial banking in an Islamic framework is not based on the debtor-creditor relationship. The second principle regarding financial transactions in Islam is that there should not be any reward without taking a risk. This principle is applicable to both labor and capital. As no payment is allowed for labor, unless it is applied to work, there is no reward for capital unless it is exposed to business risk (Ausaf Ahmed 1995, P.17). Thus, financial intermediation in an Islamic framework has been developed on the basis of the above two principles. Consequently financial relationships in Islam have been participatory in nature. Several theorists suggest that commercial banking in an interest-free system should be organized on the principle of profit and loss sharing. The institution of interest is thus replaced by a principle of participation in profit and loss. That means a fixed rate of interest is replaced by a variable rate of return based on real economic activities (Mangla & Uppal 1990. pp.179-215, 185). The distinct
characteristics which provide Islamic banking with its main points of departure from the traditional interest-based commercial banking system are: (a) the Islamic banking system is essentially a profit and loss sharing system and not merely an interest (Riba) banking system; and (b) investment (loans and advances in the Conventional sense) under this system of banking must serve simultaneously both the benefit to the investor and the benefit of the local community as well. The financial relationship as pointed out above is referred to in Islamic jurisprudence as Mudaraba. For the interest of the readers, the distinguishing features of the conventional banking and Islamic banking are shown in terms of a box diagram as shown below:
Conventional Banks
Islamic Banks
1. The functions and operating modes of
1. The functions and operating modes of Islamic
conventional banks are based on manmade
banks are based on the principles of Islamic
principles.
Shariah.
2. The investor is assured of a predetermined
2. In contrast, it promotes risk sharing between
rate of interest.
provider of capital (investor) and the user of funds (entrepreneur).
3. It aims at maximizing profit without any
3. It also aims at maximizing profit but subject to
restriction.
Shariah restrictions.
4. It does not deal with Zakat.
4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to collect and distribute Zakat.
5. Leading money and getting it back with
5. Participation in partnership business is the
interest is the fundamental function of the
fundamental function of the Islamic banks.
conventional banks. 6. Its scope of activities is narrower when
6. Its scope of activities is wider when compared
compared with an Islamic bank.
with a conventional bank. It is, in effect, a multipurpose institution.
7. It can charge additional money (compound
7. The Islamic banks have no provision to charge
rate of interest) in case of defaulters.
any extra money from the defaulters.
8. In it very often, bank’s own interest becomes
8. It gives due importance to the public interest.
prominent. It makes no effort to ensure growth
Its ultimate aim is to ensure growth with equity.
with equity. 9.
For
interest-based
commercial
banks,
9. For the Islamic banks, it is comparatively
borrowing from the money market is relatively
difficult to borrow money from the money
easier.
market.
10. Since income from the advances is fixed, it
10. Since it shares profit and loss, the Islamic
gives little importance to developing expertise in
banks pay greater attention to developing
project appraisal and evaluations.
project appraisal and evaluations.
11. The conventional banks give greater
11. The Islamic banks, on the other hand, give
emphasis on credit-worthiness of the clients.
greater emphasis on the viability of the projects.
12. The status of a conventional bank, in relation
12. The status of Islamic bank in relation to its
to its clients, is that of creditor and debtors.
clients is that of partners, investors and trader.
13. A conventional bank has to guarantee all its
13. Strictly speaking, and Islamic bank cannot do
deposits.
that.
ISSUES AND PROBLEMS: The implementation of an interest-free banking raises a number of questions and potential problems if seen from the macro and micro operational point of view. A partial list of the issues confronting Islamic banks includes: Issues related to Macro Operation: •
Liquidity and Capital
•
Valuation of Bank Assets
•
Credit Creation and Monetary Policy
•
Financial Stability
•
The Ownership of Banks
•
Lack Capital Market and Financial Instruments
•
Insufficient Legal Protection
Issues Related to Micro Operation of Islamic Banks: •
Control over Cost of Funds
•
Mark-up Financing
•
Increased Cost of Information
•
Financing Social Concerns
•
Excessive Resort to the Murabaha Mode
•
Utilization of Interest Rate for Fixing the Profit Margin in Murabaha Sales
•
Lack of Positive Response to the Requirement of Government Financing
These are some of the immediate problems confronting policy makers and regulators. Of course, it has to be kept in mind that these issues are at their elementary level of discussion. Much work has to be undertaken in terms of procedures, infrastructure and allowing a new framework to develop and mature. The ensuing analysis should make some these issues clearer, but the progress so far has been less than substantial. Foreign Exchange operations of IBBL According to the Article 2nd Foreign Exchange Act 1947: Foreign Exchange means Foreign Currency i.e. Currencies other then Local Currency. It includes any instrument drawn, accepted, made or issued all deposit, credit and balances payable in any foreign currency. A.
Foreign exchange deals with trading of foreign currency.
B.
Foreign trade deals with trading of goods and financing in
import and export.
Dealing in foreign currency or foreign exchange is done by way of: 1. Cash over the counter: Cash currencies in the form of notes/coins/Travelers’ cheques are sold/purchased over the 2.
counter on spot basis Bank earns exchange income and commission.
Corporate dealing arising out of foreign trade import/export/foreign remittance.
3
Independent trading to gain from the
market
Shariah Principle: The shariah principle in foreign Exchange i.e.currencies, gold, silver etc. of similar nature is Bai-asSarf. Hadith of Prophet Mohammad (PBUH).Preconditions for Bai-as-Sarf ( for cash transactions): 1.Must be hand to hand i.e. on spot basis. 2.Must be of equal amount in case of same currency. 3. Contract must not be conditional. 4. Should not be speculative. 5. Should not involve riba, rishwah,garar, mysir and jahl. Foreign Exchange Business of IBBL: 1983 to 2007
Comparison of F. Ex. Business of the Bank 2006 vs. 2007
Growth over 2006
Import : 42% Export : 30% Remittance : 56% Foreign Trade & Remittance performance(March 2007 compared to March 2008):
Growth of import business from 2001-2007: IBBL vs. National
Growth compared : Import : Country highest in 2006 : 24.48% IBBL highest in 2007 : 42%
Growth of Export Business from 2001- 2007: IBBL vs. National position
Growth compared : Export : Country highest in 2006 : 34.00% IBBL highest in 2006 : 41.37% Growth of Remittance Business from 2001-2006 & 2007: IBBL vs. National position Remittance:
Country highest in 2006 : 38.41%
IBBL highest in 2007 : 56% Contribution of IBBL to Country Import Business: (Figure in Million)
Period
National
Growth
IBBL
Growth
%
of
IBBL
national import 2001
492140
6.07%
25907
27.02%
5.26%
2002
495200
0.62%
33788
30.42%
6.82%
2003
606720
22.52%
46237
36.84%
7.62%
2004
722440
19.07%
59804
29.34%
8.28%
2005
890220
23.22%
74525
24.61%
8.37%
2006
1108170
24.48%
96870
30.00%
8.74%
2007
1265130
14.16%
137086
42.00%
10.83%
(approx.)
Contribution of IBBL to Country Export Business: Figure in Million Tk.
in
Period
National
Growth
IBBL
% of IBBL in national export Growth
2001
319115
11.30%
16082
-4.78%
5.04%
2002
314540
-1.43%
16673
3.67%
5.30%
2003
361850
15.04%
21738
30.37%
6.01%
2004
461530
27.54%
29151
34.10%
6.32%
2005
547550
18.63%
36169
24.07%
6.61%
2006
733720
34.00%
51133
41.37%
6.97%
16.10%
66690
2007 851890
7.82% 30.00%
(approx.) Contribution of IBBL to Country Remittance Business Figure in Million Tk.
Year
National
Growth
IBBL
Growth
% of IBBL in national remittance
2001
115908
13.65%
9879
29.24%
8.52%
2002
164845
42.22%
14670
48.50%
8.90%
2003
184851
12.14%
16668
13.62%
9.02%
2004
212860
15.15%
23669
42.00%
11.12%
2005
273043
28.27%
36948
56.10%
13.53%
2006
377924
38.41%
53819
45.66%
14.24%
84143 2007
452640
19.77%
Position of IBBL with other Banks in Import business:
18.59% 56.00%
Top Banks in Import business in 2007
Top Banks in Export business in 2007
Position of IBBL with other Banks in Export Business: Top Banks in export business in 2007
:
Position of IBBL with other Banks in Remittance Business: Top Banks in Remittance business in 2007
Import Product Mix (IBBL & Nation compared)
Country
Country
share
of
National Country Share of IBBL Remittance
Share of IBBL
Remittance (up to February' 08 )
(upto February' 08)
USD
BDT
Share
USD
BDT
Share
KSA
438.46
30034.51
31.32%
165.61
11344.55
57.24%
37.77%
UK
152.52
10447.62
10.89%
35.41
2425.65
12.24%
23.22%
Kuwait
140.20
9603.70
10.01%
27.94
1913.89
9.66%
19.93%
UAE
196.82
13482.17
14.06%
26.05
1784.47
9.00%
13.24%
Malaysia
17.60
1205.60
1.26%
5.31
363.61
1.83%
30.16%
Qatar
50.44
3455.14
3.60%
5.97
408.95
2.06%
11.84%
USA
239.15
16381.78
17.08%
6.22
425.85
2.15%
2.60%
Oman
39.23
2687.26
2.80%
5.68
388.85
1.96%
14.47%
Bahrain
20.60
1411.10
1.47%
4.22
289.15
1.46%
20.49%
Korea
4.24
290.44
0.30%
2.92
200.02
1.01%
68.87%
Italy
34.19
2342.02
2.44%
0.34
23.29
0.12%
0.99%
Singapore
32.55
2229.68
2.33%
0.68
46.49
0.23%
2.09%
Others
34.00
2329.00
2.43%
3.01
205.89
1.04%
8.84%
Total
1400
95900.00
100.00%
289.35
19820.66
100.00%
Country Share in National and IBBL Remittance : 2007
on
National
Remittance
Country w ise Share of IBBLRemittance: 2007 Bahrain, 1.14% Oman, 1.83%
Others , 0.69%
Qatar, 2.42% USA , 2.47% UA E, 8.43%
Kuw ait, 9.95%
UK, 17.00%
KSA , 56.06%
Country
Share
in
National
Up to February 2008
Foreign Exchange Problem: Lack of Capital Market and Financial Instruments:
and
IBBL
Remittance
:
Islamic banks working under conventional banking framework in different countries lack capital market and instruments for investment of their surplus liquidity. Availability of Islamic capital market and instruments help growth of these banks otherwise they are constrained. Growth of Islamic capital market and financial instruments also helps creating environment for government financing. Insufficient Legal Protection: A comprehensive system of Islamic banking requires legal protection. That means a thorough review of all relevant laws having a bearing on banking business is needed. Laws relating to companies, commerce, investment and the courts and legal procedures need to be reviewed and reformulated to suit the requirement of the efficient functioning of Islamic banks. It is not acceptable that company law continues to talk about bonds and interest while ignoring participation deeds and profits. Investment promotion laws should accommodate rules regulations which permits Islamic banks to apply their profit/loss sharing modes so that they can participate in partnership businesses either in the form of or Musharaka or direct investment. Financing Social Concerns: Islamic banks are accused of following the same course of line as pursued by conventional banks as regards financing of social aspects. These banks are usually found to be interested in extending credit facilities to well-established commercial establishments, which often obtain credit facilities from both conventional as well as Islamic banks without real commitment or attempt to free themselves from the prohibited means of finance. In this way, Islamic banks have in general become a figure that is added to the number of traditional banks, which do business in the country concerned. No clear prescription has so far emerged on the role of Islamic banks in the promotion of new projects needed by the society as follows: 1. Enabling those who have no property, providing employment opportunities to all categories of people; 2. Demonstrating the impact of Islamic investment on the solution of the unemployment problem; and, 3. Lack of Positive Response to the Requirement of Government Financing Failure of Islamic Banks to Establish Co-operation among Themselves:
Not all-Islamic banks are members of the International Association of Islamic Banks. The idea of establishing a “Bank of Islamic Banks� is still a mere idea, although there is an urgent need for its establishment. As a result of its absence, Islamic banks have lost hundreds of millions with the collapse of the BCCI. Islamic funds continue to sneak out by hundreds of millions into investment houses doing business in the West while the Muslim world remains thirsty for investment resources. Funds of expatriates from Islamic countries do not find their way back to their own countries to contribute to the development of their original homelands. Trade among countries of the Muslim world is completely paralyzed as the Islamic financing system goes along with the traditional trend in financing imports from foreign countries without giving any preference to products of the Muslim world. Only the Islamic Development Bank has been paying due attention and care to the need for preferential treatment for the products of Muslim countries. ISLAMIC BANKS OPERATING UNDER CONVENTIONAL BANKING SYSTEM: Problems faced by Islamic banks operating under conventional banking framework have been identified in a recent study are as follows (IBID). Failure of Islamic banks to finance high-return projects: Islamic bank fails to appropriate high profit from high-return projects since the owners of these projects prefer borrowing from conventional banks where cost of borrowing turns out to be lower. That means, only the projects with rates of return equal to or below the market rate of interest are left with the Islamic banks. At this situation, Islamic banks are not able to invest on the projects having rates of return below the prevailing rate of interest thereby limiting their capacity to utilize investment opportunity to the level of their conventional counterpart. This leads to limiting the application of profit-loss-sharing modes such as Mudaraba and Musharaka. In other words, Islamic banks, at that situation, switch over to other modes of financing such as Murabaha, hire purchase, leasing, etc. Sacrifice of allocative efficiency: Allocative efficiency of Islamic bank, if it is truly a profit-loss-sharing bank, is built-in to its financing mechanism. But failing to finance high return projects in a situation when entrepreneurs switch over
from Islamic banks to conventional banks to avoid high cost borrowing allocative efficiency of an Islamic bank is not likely to be in the desired level. Profitability of projects being the ideal device of efficient resource allocation, at this situation, does not apply to Islamic banking system as it, considering the rational behavior of the borrower, takes recourse to modes other than profit-losssharing. This situation continues as long as Islamic banks operate side by side with the conventional banks. Experts are very much worried about this situation of Islamic banking. Up till now no effective policy prescription is available to the Islamic banks to ameliorate the situation. Loss of distributive efficiency: It has also been found that distributive efficiency of Islamic banking is lost when an Islamic bank starts operation under conventional banking framework. Any shift from profit-loss-sharing modes leads the system break the direct relationship between the incomes of the entrepreneurs, the bank and the depositors. The inefficiency of conventional banking about distribution is neither influenced nor modified by the introduction of Islamic banking in the economy. CONSTRAINTS FACED BY ISLAMIC BANKS IN BANGLADESH Constraints faced by Islamic banks in Bangladesh are analyzed as below: Problem with legal reserve requirement: Islamic banks in Bangladesh have to keep 10% of its total deposits as liquidity. Of this, 5% is required to be kept in cash with Bangladesh Bank and the rest 5% is to be kept either in approved securities or in cash (in case of problem with securities) with Bangladesh Bank. Legal reserve requirement for conventional banks is 20%. They have to keep 5% in cash with Bangladesh Bank and the rest 15% is invested in Bangladesh Bank approved securities. Traditional banks can earn interest on their deposits with Bangladesh Bank but Islamic banks can not since they cannot receive interest as earning. Compared to interest-based traditional banking, Islamic banks, in this case, are in disadvantageous position. However, Islami Bank Bangladesh Limited has been receiving interest against its deposit with Bangladesh Bank and crediting it to its Sadaqa fund since 1993. It should be noted that the interest earning are not considered as bank income and added to profit. The proceeds are spent on welfare activities. Lack of opportunities for profitable use of surplus funds:
Conventional banks can invest their excess liquid amount in approved securities and or in other bank in crisis. Islamic banks cannot take this opportunity due to the existence of interest element in the transaction process. Apprehension of liquidity crisis and possibility of liquidity surplus: Islamic banks have to be more cautious and vigilant in managing their funds since it can not resort to call money provision at times of fund shortages or crisis. As a result Islamic banks may have always left with a sizeable amount of cash as liquidity surplus. Conventional banks can borrow in the form of call money among themselves even at an exorbitant rate of interest. Problems in capital market investment: Conventional banks can invest 30% of their total deposits in shares and securities. Islamic banks have their problem in this case as they avoid any transaction based on interest. Following examples may be cited for illustration. (a) Islamic banks do not purchase shares of companies undertaking interestbased business; (b) Shares of companies taking loan from commercial banks on interest are not also purchased by Islamic banks; and, (c) Islamic banks can not purchase shares ofcompanies involved in businesses not approved by Shariah. The above restrictive environment in the capital market of Bangladesh has limited substantially the investment opportunities for Islamic banks and hence the avenues of lawful earning. In the absence of Islamic money and capital market these banks cannot obtain funds from capital market at times of need. There are some other constrains: •
Absence of inter-bank money market
•
Predominance of Murabaha financing
•
Absence of legal framework
•
Absence of Islamic insurance company
FUTURE POLICY DIRECTIONS: It is evident from the research findings (Akkas 1996) that Islamic banking could be the most efficient system if it were allowed to operate as a sole system in an economy. However, when it starts
operation within the conventional banking framework, most of its efficiencies are lost. The study demonstrates that it is not the inherent shortcomings of Islamic banking system that is responsible for its relative inefficiency. Rather it is the continuation of legacies of the conventional banking system that jeopardizes an efficient operation and functioning of Islamic banks in the economy. The policy implication is not that Islamic banks should never be floated within the conventional banking framework. Rather it is the conventional banking system whose operational mechanism needs to be reviewed into PLS-system considering beneficial impact of the latter on the economy. However, as long as Islamic banks are to operate within the conventional banking framework, the recommendations under the following heads may be taken note of. Banking Philosophy: There seems to be a gap between the ideals and actual practice of Islamic banks. In their reports, booklets, bulletins and posters these banks express their commitment to striving for establishing a just society free from exploitation. The present study shows that a little or no progress has been achieved so far in that regard. Though this failure is attributed mainly to the pervasive influence of conventional banking system itself, lack of vigilance of the promoters of Islamic banking in realizing the objective is no less to blame. The shortcomings need to be identified. Particularly, it has to be seen whether there is any scope to open up alternative avenues to arrest the causes of efficiency erosion. There should be a thorough review of policies that have been pursued by these banks for about a decade, and points of departure have to be identified to redesign their course of action. This is a very crucial issue because of the fact that people at the mass level find very little difference between the banking operations of Islamic banks and that of their conventional counterparts. Until and unless a quick change in policy followed by clear actions takes place, the credibility that Islamic banks have achieved so far may be tarnished away very soon. The first action that deserves immediate attention is the promotion of the image of Islamic banks as PLS-banks. Strategies have to be carefully devised so that the image of Islamic character and solvency as a bank is simultaneously promoted. The following strategies are suggested for immediate application: (a)
Pilot schemes in some much selected areas should be started to test innovative ideas with
profit-loss -sharing modes of financing as major component. This type of scheme may be experimented both in urban and rural areas. The strategy will serve as a ready reference that Islamic banks are in the process of transforming themselves as PLS-banks. Side by side, they will gain
experiences from real situation as to the problems that might come up while implementing profitloss-sharing modes on trial and error basis. (b)
Islamic banks should clearly demonstrate by their actions that their banking practices are
guided by profitability criterion thereby establishing that only Islamic banking practices ensure efficient allocation of resources and provide true market signals through PLS-modes. (c)
Islamic banks should continuously monitor and disseminate through various media the impact
of their operations on the distribution of income primarily between the bank and the other two parties: the depositors and the entrepreneurs and then on different income groups of the society. These presuppose establishment of a fully equipped research academy in each Islamic bank. Stepping up for Distributional Efficiency: The task is more challenging for Islamic banks, as they have to promote their distributional efficiency from all dimensions together with profitability. Islamic banks, step by step, have to be converted into profit-sharing banks by increasing their percentage share of investment financing through PLSmodes. The Islamic banks, to do that, can be selective in choosing clients for financing under PLSmodes. Islamic banks should establish a direct functional relationship between the income of the bank and that of the depositors and between the income of the bank and that of the entrepreneurs. The relationship improves with the share of bank financing under PLS-modes increases. Islamic banks should immediately take measures to revert the trends of resource transfer from both low-income groups to high-income groups and from rural to urban areas. This is extremely important from the viewpoint of their banking philosophy as well as for their tacit commitment for distributional equity. They should develop a monitoring mechanism by which distributional impact of their banking operation could be traced out and necessary policy can be formulated to continuously improve the equity situation. Banking inequality index developed in the present study might be useful for this purpose particularly in the case of inter group transfer of incomes. The Islamic banks should actively 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. Promotion of Allocative Efficiency:
The Islamic banks can improve their allocative efficiency by satisfying social welfare conditions in the following manner. (a) They should allocate a reasonable portion of their investible funds to social priority sectors such as agriculture (including poultry and fishery), small and cottage industries and export-led industries such as garments, shrimp cultivation, etc. (b) When the percentage shares of allocation of investible funds are determined, profitability of the projects should be the criterion for allocating loanable funds. The criterion would be best satisfied if more and more projects were financed under PLS-modes. Foreign Exchange and Foreign Trade Problems REMITTANCE The followings are the problems: 1. All types of SWIFT messages are handled by a single Operator instead of authorized officials. 2. Swift operators are transferred/ changed without proper substitute. 3. PC Connect at Branches sometimes become inoperative due to inept handling by the operator. 4. Branches do not maintain security password properly. 5. Branches are not taking archive, backup of their message. 6. Branches do not log in timely to receive message from SWIFT server. 7. Some Branches do not send their message in standard formats. 8. Branches do not show their actual income from SWIFT in the statements. 9. There is negative Propagation against Islami Bank Bangladesh Limited. 10. Because of the volatility of the Foreign Exchange Market the remittance inflow has been affected substantially & encouraged remitters to send money through illegal channel. 11. Introduction of new Islamic Banks is another cause of loss. 12. IBBL is facing stiff competition because third generation Bank is entering to the business.
13. Some Banks are marketing aggressively. 14. Due to non automation of all remittance services and logistics supports in some Branches customer services have not yet fulfilled the requirement of Exchange houses. 15. Unskilled manpower is another problem to achieve higher income in remittance. 16. Shortage of manpower. 17. Concentration of remittance operation through a single location. 18. No conduction of the proper market research. 19. Lack of innovation of foreign exchange products. 20. Absence of Client profile and planned steps to be taken. 21. Proper Marketing of the bank in foreign countries. 22. In some Branches mass marketing is being proven problematic to handle. 23. Absence of promotional effort to keep pace with the stiff competition. 24. The higher Exchange rate causes lose in more remittance. 25. Limited transaction to be made. 26. Handling a lot of inactive accounts with no transaction causes problem. . 27. Decrease/fall in foreign currency occurs in huge loss though it happens rarely. EXPORT AND IMPORT 1.
Chambers of Commerce may not permit the sub-section or any of the conditions of the L.C issuing bank. So the exporter may not export the goods to the importer.
2. Some profitable goods are prohibited. 3. Some rules and regulations of government work as barrier for the free flow of remittance, export and import of profitable goods.
4. Unholy intervention of the superior members of various sectors. 5. Some foreign buyers ask for discount showing the reason that quality of goods has not been maintained. 6. Rate is very competitive. 7. Untimely shipment due to lack of backward linkage. 8. Labor problem causes huge problem for the bank. 9. Proprietors do not pay wages to the labor which results in dissatisfaction though they receive the investment from the bank. 10. WTO imposes unjust rules on the transaction system. 11. Uneasiness exists due to handling new IT system. 12. Discontinuity of same type of transaction which occurs in infrequency of work resulting in slow dynamics of work. 13. Delay payment in export. 14. Delay or cancelled shipment. 15. Bonded warehouse restricts the sell of export quality products in the local market rather letting it to rot which protocol is not suitable for our economy. 16. Technical problems reduce the performance of the branch and extend the span of time resulting in loss (financial) and providing less service to both the bank and customers. 17. Environmental problem also causes slow pace. 18. Restrictions imposed for sometimes on new investment due to the sudden rise of assets of the Bank. 19. Restrictions imposed by the Indian govt. on export of food items of Bangladesh, in which IBBL has a good share, led to decline in business growth from April to August and it went down to 20%.
20. Weak monitoring squad for RMG sector. 21. Discretionary power for L/C and MPI is not same. 22. Some faults and irregularities exist in the AD branches. 23. AD branches have to deal the L/C of the non- AD branches. 24. Fall in product price in the market than the price at the time of order causes loss. Overall: 1.Over customer according to service capacity. 2. Lack of technological assistance. 3. Lack of co-ordination among department. 4. Customer can not identify their needs & assessment properly for lacking sufficient information & desk set up system with in the bank 5. It has not sufficient manpower according to their responsibility. 6. There are no government special rules for Islami banking system in our country. 7. It has to face serious criticism & mocking of Islami advisory group. 8. Most of employee doesn’t have any initial knowledge about banking. They come form other subjects than commerce. Foreign Exchange and Foreign Trade: PROSPECTS The Prospects of foreign exchange & foreign trade are as follows: 1. Restrictions imposed by Chambers and Commerce make the dealing fair and thus authenticate and guarantee the dealing and in this way reduce risk. 2. Foreign currency of IBBL is very strong which lets the Bank to invest without the help of other banks. 3. Poverty of Bangladesh is cut by 6% by remittance constituting 6% of the GDP & 42% of national export. 4. The foreign countries can be targeted for more remittance through skilled manpower business.
5. More knowledgeable employees are recruited and existing employees are trained in regular basis by IBTRA. 6. IBBL is trying to get more licenses for AD branches through creating more pleasing rapport with Bangladesh bank. 7. Expanding various services like spot cash etc. 8. Specially driving for increasing Import and export business initiated through Zones and AD / Forwarding branches. 9. Introduction of web based global remittance. 10. Enhancement of Internet and E-mail connectivity that is gearing the speed of income gain. 11. Placement of new Representative. 12. Open Position limit enhancement that will let the Bank invest more largely. 13. Utilization of FC fund in overseas investment. 14. Utilization of FC funds effectively and efficiently 15. Automated reconciliation of all NOSTRO A/C. 16. Computer ledger posting and balancing. 17. Centralization of Foreign Trade process that will decrease the loss of time. 18. Major steps have been taken to make solution of the technical and managerial problems. 19. Preparation of client profile which will help to take decision if any problem arises and other things concerning investment in export and import. 20. Hunting EPZ clients will open new sectors for investment which ultimately increases fund. 21. Innovation of foreign exchange products is going on. 22. IBBL is going to expand the coverage countries.
23. IBBL is going to open Exchange House abroad. 24. IBBL is going to manage round the clock remittance operation. 25. Offering Competitive terms to cope with the competition. 26. Entrepreneurship development is another prospect of F-Ex department. 27. Steps are thought to be taken to survey the market for potential import/export business and constitute strong monitoring squad for RMG sector. 28. Steps are going to be taken to supervise & give technical support for Bulk import from Head office. 29. Concentration is being taken to encourage export non-traditional items. 30. Steps have been taken to abolish the national rate, minimize F-EX risk. 31. The growth of import business is increasing day by day. 32. To remove the communication gap a pool of leading Foreign Exchange officials has been formed to arrange interaction amongst them on different issues relating to development of Foreign Trade. 33. The number of Foreign Trade dealing branches is increasing. 34. In order to increase export business of the bank and avoid loss incurred by the bank/ client and to facilitate maximum services to the clients by changing existing system of Inland Bill Purchase (IBP), a committee was formed comprising executives/ officials of Head Office. The committee is working on the matter. Report of the committee will be submitted very soon. 35. It has obtained permission from Bangladesh Bank for new AD Branches. 36. Developed software on C & F Agent. 37. IBBL has taken plan for technical up-gradation through Service Bureau. 38. On-line banking facilities.
39. Opening New Branches at the major remittance receiving localities. 40. Enforcement of Anti Money Laundering Act. 41. Floating and attractive Exchange Rate. 42. IBBL has the plan to increase investment, to broaden the sources of foreign currency, enhance the ancillary business which is very much prospective. 43. IBBL has a strong base of well-wisher. 44. Terms & conditions is easy & it will increase the business. 45. Promotion of products quality is very important for sustainable business. 46. Participation is foreign trade fair to exhibit its product. 47. Good negotiation is estabilished for increasing export. 48. Political environment should keep in favorable position for increasing export. 49. Proper utilization of raw material which are imported from other countries & established those product based industries. Recommendation It is not unexpected to have problems in any organization. There must be problems to operate an organization. But there must be remedies to follow. The following commendations can be suggested to solve the above mentioned problems: 1. IBBL should increase its manpower level. Additional and skilled manpower in the officer and staff level should be recruited in an urgent basis. 2. Efficient manpower should be recruited with having strong academic background of the related subjects. 3. ATM Booth should be established. 4. More equipment like Note Counting Machine, photocopier etc. should be brought.
5. IBBL should appoint a Customer Relation Officer at Branch level. 6. Specialized services to be undertaken to the customers. 7. IBBL should try to reduce their disbursement timing. 8. Arrangement of monthly /quarterly training courses /workshops for the selected by the authority in order to promote employee to their desired level. 9. More technological instruments should be brought for smooth working speed. 10. More furniture should be brought to the Branch, like chairs, cabinet etc. 11. To avoid the gathering of customers during the first hour of the working days, shift working system of the employees should be started. Shift- wise working may also reduce over work pressure on one’s own account. 12. Proper job appreciation should be done by providing performance based awards etc. 13. Marketing expertise should be recruited. 14. IBBL needs to increase the job satisfaction level of its employees by providing several performance based awards. 15. Enhancement of remuneration package should be competitive and attractive. 16. Employees should be properly learnt about the mission and vision of Islami Banking, thus will implement their job in that way. 17. The authority of IBBL should Conveyance pressure on Government bodies to run proper and sufficient application of Islamic Banking law in Bangladesh. 18. The Bank should arrange wide varieties of regular programs about Islamic Banking Function countrywide to remove the negative impression about IBBL. 19. IBBL should utilize "Internship Program" as one kind of promotion policy. To do so this Bank should provides facilities to the internees through proper placement and practical operations as well as job certainty to those who bring introduce themselves the best performers in doing their particulars.
20. IBBL should try to attend different types of target customer. 21. Maximum clients do not know about IBBL’s Foreign exchange policy. They should carryout more promotional activities to make clients aware about their offers. 22. It was observed that, IBBL is absent in various marketing activities like TV, Print Media, Bill Boards, and Sponsorships etc. Bank should advertise about itself so that it can attract more clients that will increase the business volume of the bank. 23. Making the Shariah Inspection strong regarding all type of foreign exchange activities of the bank. CONCLUSIONS Islamic banks can satisfy most of the efficiency conditions if they can operate as a sole system in an economy. Conventional banking, on the other hand, does not satisfy any of the efficiency conditions analyzed in the present study. However, when Islamic banks start operation within the conventional banking framework, their efficiency goes on decreasing in a number of dimensions. The deterioration is not because of Islamic bank's own mechanical deficiencies; rather it is the efficiencyblunt operation of the conventional banking system that puts a negative impact on the efficient operation of Islamic banks. This does not mean that the survival of Islamic banks operating within the conventional banking framework is altogether threatened. Evidence from Bangladesh indicates that Islamic banks can survive within the conventional banking framework by switching over from PLS to trade related modes of financing. Even under the conventional banking framework Islamic banks can operate with certain level of efficiency by applying in a reasonable percentage the PLS-modes - the distinguishing features of Islamic banking. This has been possible in some countries of the Muslim world where the management of Islamic banks was cautious about possible impacts of every policy measure. Particularly, the management of these banks was judicious in selecting sectors or areas as major of their operations. Sudan Islamic Bank is a typical example in this respect. Islamic banks in Bangladesh have much to learn from experience of this successful bank. Having been considered the pro-efficiency character of Islamic banking and its beneficial impacts on the economy, government policy in Muslim countries should be in favor of transforming conventional banking system into Islamic banking. From the practical implementation of customer dealing procedure during the whole period of our practical orientation in IBBL we have reached a
firm and concrete conclusion in a very confident way. We believe that our realization will be in harmony with most of the banking scholar. Performance of IBBL during the last five years has proved that with strong desire and will power one achieve whatever target he may have. Almost all the leading banks in our country have various extra facilities in offer for the customers in comparison with IBBL. But it has succeeded in achieving more customer than many other competitors. This has been possible only because of strong customer relation and excellent customer service. Though there are some drawbacks in implementing Foreign Exchange and Foreign Trade in Islami Bank Bangladesh Limited, it can be overcome through involvement of more financial expert in the decision making process and utilizing the tools to judge integrity of the customers and most of all by taking the prospective steps followed up in this report. Bibliography 1. Annual Report of Islami Bank Bangladesh Limited 2. Foreign Trade & Remittance –Vision and Achievements-Quarterly Branch Managers’ Conference October 2007 3. Overview on Foreign Exchange operations of IBBL Prepared by Md. Mahbub-ul-Alam, EVP, IBW, IBBL. 4. Several Booklets from Islami Bank Bangladesh Limited 5. Several Newsletters from Islami Bank Bangladesh Limited 6. Islami Bank Bangladesh Limited Web site. 7. Training Materials of IBTRA. 8. A Text Book on Islamic Banking by Dr. MD. Kabir Hasan 9. Principles & Practice of Islamic Banking by Abdur Raquib 10. Islamic Banking & Insurance 11. Islamic Economics Research Bureau 12. Different Investment Modes of IBBL
13. Annual Reports of IBBL (Last five Years) 14. Five Years Strategy Planning of IBBL 15. Different Types of Products of IBBL i.e. Leaflets, Brochures, Synopsizes etc.