View with images and charts “Investment mechanism of Islami Bank Bangladesh Limited” Introduction Definition of Islami banking: An Islamic bank is a financial institution which operates with the objective to implement and materialize the economic and financial principles of Islam in the arena of banking.
“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 of interest on any of its operations”-OIC. Objective of Islamic banking •
Islamic banks operate on Islamic principles of profit and loss sharing ,strictly avoiding interest, which is the root of all exploitation and is responsible for largescale inflation and unemployment
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The objectives of Islamic banking are not only to earn profit, but to do good and welfare to the people. Islam upholds the concept that money, income and property belong to Allah and this wealth is to be used for the good of the society.
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An Islamic bank is committed to do away with disparity and establish justice in the economy, trade, commerce and industry; build socio-economic infrastructure and create employment opportunities.
Special Features of Islamic banking: All activities are conducted on interest-free system according to Islamic Shariah Principles.
Investment is made through different modes as per Islamic Shariah. Investment Income of the Bank is shared with the Mudaraba depositor according to an agreed upon ratio ensuring a reasonably fair rate of return on their deposits. To introduce a welfare-oriented banking system and also to establish equity and justice in the field of all economic operations. Extend socio-economic and financial services to individuals of all economic backgrounds with strong commitment in rural uplift. Plays a vital role in human resources development and employment-generation particularly among the unemployed youths. Portfolio of investment and investment policy have been specially tailored to achieve balanced growth and equitable development through diversified investment operation particularly in the priority sectors and in the less developed areas of the national economy. Comparison between Conventional & 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”. 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. 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. 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. The distinguishing features of the conventional banking and Islamic banking are shown in terms of a box diagram as shown on the next page:
Conventional Banks
Islamic Banks
1. The functions and operating modes of 1. The functions and operating modes of conventional banks are based omanmade Islamic banks are based on the principles of principles. Islamic Shariah. 2. The investor is assured predetermined rate of interest.
of
a 2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).
3. It aims at maximizing profit without 3. It also aims at maximizing profit but any restriction. subject to 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 5. Participation in partnership business is with interest is the fundamental function the fundamental function of the Islamic of the conventional banks. banks. 6. Its scope of activities is narrower 6. Its scope of activities is wider when when compared with an Islamic bank. compared with a conventional bank. It is, in effect, a multi-purpose institution. 7. It can charge additional money 7. The Islamic banks have no provision to (compound rate of interest) in case of charge any extra money from the defaulters. defaulters. 8. In it very often, bank’s own interest 8. It gives due importance to the public becomes prominent. It makes no effort to interest. Its ultimate aim is to ensure growth 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 difficult to borrow money from the money relatively easier. market.
Riba:: ‘Riba’ Arabic word means Excess. Excess in case of spot transaction of one or same kind of goods. General reason – quality. Or, Excess in case of deferred transaction of same goods. Reason is time –basis. The Basic Features Of Riba 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. 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. 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.
Basic difference between Riba & 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 1. When money is “charged�, its imposed positive and define result is Riba 2. By definition, Riba is the premium paid by the borrower to the lender along with principal amount as a condition for the loan. 3. Riba is prefixed, and hence there is no uncertainty on the part of either the givers or the takers of loans. 4. Riba con not be negative, it can at best be very low or zero. 5. From Islamic Shariah point of view, it is Haram.
Profit 1. When money is used in trading (for e.g.) its uncertain result is profit. 2. By definition, profit is the difference between the value of production and the cost of production. 3. Profit is post-determined, and hence its amount is not known until the activity is done. 4. Profit can be positive, zero or even negative. 5. From Islamic Shariah point of view, it is Halal.
Investment of Islami Bank Bangladesh Limited (IBBL) Introduction: On the basis of IBBL investment is a set of strict rules that forbid making or receiving interest payments. To get around this prohibition, trade financing is obtained by buying inventory that will be resold at a pre-determined price on a future date, which is called Murabaha. Financing for capital projects is called Musharaka, which is funding by two or more parties who may be active managers in a partnership. Losses are shared on the basis of the capital contribution. Profits may be shared in any way the partners decide. The special feature of the investment policy of the Bank is to invest on the basis of profit-loss sharing system in accordance with the tenets and principles of Islamic Shariah. Earning profit is not the only motive and objective of the Bank's investment policy rather emphasis is given in attaining social good and in creating employment opportunities. Pursuant to the Investment Policy adopted by the Bank, a '7-year Perspective Investment Plan' has been drawn-up and put into implementation. The plan aims at diversification of the investment port-folio by size, sector, geographical area, economic purpose and securities to bring in phases all sectors of the economy and all types of economic groups of the society within the fold of Bank's investment operations. Accordingly, the plan envisages composition of the investment port-folio with 2.5% for agriculture and rural investment, 18% for industrial term investment, 13% for industrial working capital, 10% for housing and real-estate, 4% for transport and communication, 0.5% for electricity, gas, water and sanitation services, 2% for storage, 43% for import, export and local trade and trade related activities 1% for poultry and dairy,2% for Rural Development Scheme, 2.5% for other Special Scheme, 0.5% for Micro Industry and 1% for other productive purposes by the end of the plan period.
Further, in order to diversify investment portfolio, the Bank engaged itself in investment operations through special schemes introduced during the years. The Bank is planning to introduce yet other new investment schemes in addition to welfare-oriented Investment Schemes, Rural Development Scheme, Transport Investment Scheme, Car Investment Scheme, Small Business Investment Scheme, Doctors Investment Scheme, Household Durables Investment Scheme, Housing Investment Scheme and Agricultural Implements Investment Scheme etc. Objectives and Principles of IBBL: The objectives and principles of investment operations of the Islami Bank are: • • •
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To invest fund strictly in accordance with the principles of Islamic Shariah. To diversify its investment portfolio by size of investment, by sectors (public & private), by economic purpose, by securities and by geographical area including industrial, commercial & agricultural. 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 upliftment of the society. To invest in the form of goods and commodities rather than give out cash money to the investment clients.
Investment Mechanism of IBBL: Allah has permitted Bai (Buying and selling i.e. trading) & prohibited Riba. Islamic Banks in all its transactions follow the verdict of Al-Qur’an and Sunnah and prohibit Riba in all its operations. The Banks conduct investment portfolio under three mechanism, The mechanisms are: (1) Bai Mechanism (2) Share Mechanism (3) Ijara Mechanism Graphical distribution of Investment mechanism Investment Mechanism
Bai Mechanism Bai Murabaha Bai Muajjal. Bai Salam. Bai Istishna’a
Sharing Mechanism Mudaraba. Musharaka
Ijara Mechanism Pure Lease/Ijara. Hire Purchase. Hire Purchase Under Shirkatul Melk.
(a) Bai-Mechanism Bai Murabaha: Meaning of Murabaha The terms "Bai-Murabaha" have been derived from Arabic words Bai and Ribhun. The word 'Bai' means purchase and sale and the word ‘Ribhun’ means an agreed upon profit. “BaiMurabaha" 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. Types of Murabaha In respect of dealing parties Bai-Murabaha may be of two types : •
Ordinary Bai-Murabaha, and
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Bai-Mudabaha order on and Promise.
Ordinary Bai-Murabaha is a direct transaction between a buyer and a seller. Here, the seller is an ordinary trader who purchases goods from the market in the hope of selling these goods to another party for a profit. In this case, the seller undertakes the entire risk of his capital investment in the goods purchased. Whether or not he earns a profit depends on his ability to find a buyer for the merchandise he has acquired. Bai-Murabaha order on and Promise involves three parties - the buyer, the seller and the bank. Under this arrangement, the bank acts as an intermediary trader between the buyer and the seller. In other words, upon receipt of an order and agreement to purchase a certain product from the buyer, the bank will purchase the product from the seller to fulfill the order. However, it should be noted here that the Islamic Bank acts as a financier in this transaction. This is the case, not in the sense that the bank finances the purchase of goods by the consumers; rather it is a financier by deferring payment to the seller of the product. Thus, there is a chance that this transaction could resemble nothing more than a loan for which interest (Riba) is earned, which is contrary to Islamic beliefs. There are some important features of Bai-Murabaha as given below. Important Features of Murabaha
1. A client can make an offer to purchase particular goods from the bank for a specified agreed upon price, including the cost of the goods plus a profit. 2. It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify any losses that may result. 3. 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. 4. The bank must deliver the goods to the client at the date, time, and place specified in the contract. 5. 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. These features make Bai-Murabaha distinctive from all other modes of Islamic Investment. There are certain steps to accomplish a deal of Bai-Murabaha as shown below. Rules of Bai-Murabaha 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. 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. 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. 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. 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. Once the bank takes ownership of the goods, it is responsible for any damages or defects. Thus, if the goods are damaged, the bank is liable and must repair the damage prior to delivering the goods to the purchaser.
It is a condition that the Bai-Murabaha contract be drawn at the last phase. That is after the promise to purchase and the purchase of the commodity in the name of the bank and receipt of the commodity directly by the bank or through an agent. Bai-Muajjal (Deferred Sale): Meaning of Bai-Muajjal The terms "Bai" and "Muajjal" are derived from the Arabic words 'Bai' and ‘Ajal’. The word 'Bai' means purchase and sale and the word 'Ajal' means a fixed time or a fixed period. "Bai-Muajjal" is a sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on credit. The Bai-Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods, permissible under Shariah and law of the country, to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or in fixed installments. There are some important features of Bai-Muajjal as given below: Important Features of Bai-Muajjal •
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.
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It is permissible to make the promise binding upon the client to purchase the goods from the bank. In other words, the client is required to either satisfy the promise or to indemnify the bank for damages caused by breaking the promise without excuse.
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Stock and availability of goods is a basic condition for signing a Bai-Muajjal Agreement. Therefore, the bank must purchase the goods in accordance with the specifications of the client, prior to signing the Bai-Muajjal Agreement with the client.
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All goods purchased on behalf of a Bai-Muajjal agreement are the responsibility of the bank until they are delivered to the client.
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The bank must deliver the goods to the client at the time and place specified in the contract.
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The bank may sell the goods at a higher price than the purchase price to earn profit.
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The price is fixed at the time of the agreement and cannot be altered.
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The bank is not required to disclose the profit made on the transaction.
Some Observations
This type of financing by the bank is considered to be more risky than the other Islamic modes of investment previously discussed. Therefore, the application/proposal for BaiMuajjal investment must be reviewed very carefully to ensure the client can ultimately make payment. The following steps may be taken to ensure the Bai-Muajjal Investment is a good proposition for the bank: 1. The bank may meet with the prospective client regarding his investment needs and business experience prior to an application /proposal is submitted. 2. The bank may review the client’s past performance and other financing arrangements he may have had with the bank in the past. 3. The bank may review its current investment policy regarding this type of financing arrangement to ensure the proposal meets bank guidelines. It should be remembered that if the Bai-Muajjal investment is not secured by first class collateral securities, it becomes more risky than investments under other modes of Islamic banking. Bai-Salam: Meaning of Bai-Salam Bai-Salam is a term used to define a sale in which the buyer makes advance payment, but the delivery is delayed until some time in the future. Usually the seller is an individual or business and the buyer is the bank. The Bai-Salam sales serve the interests of both parties. 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. 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. 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-
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The bank may receive the commodity and resell it to another party for cash or credit. The bank may authorize the seller to find another buyer for the commodity. The bank may direct the seller to deliver the commodity directly to a third party with whom the bank has entered into another agreement.
3. The Sale Contract: The bank agrees to sell the commodity for cash or a deferred price, which is higher than the Salam purchase price. The buyer agrees to purchase and to pay the price according to the agreement. There are some rules for Bai-Salam as given below. Rules of Bai-Salam It is a condition that the commodity known by both parties to the agreement. Misunderstandings about the commodity may lead to disputes, which could void the contract. It is a condition that the quality of the commodity be monitored closely, as very little variation from specifications in the contract are allowable. If the commodity cannot be monitored for quality standards, a Salam transaction is impermissible. 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. 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. Salam sales are impermissible on existing commodities because damage and deterioration cannot be assured before delivery on the due date. 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. Istisna Sale Meaning 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. The majority of the jurists consider Istisna'a as one of the divisions of Salam, Therefore, it is subsumed under the definition of Salam. But the Hanafie school of Jurisprudence classifies Istisna'a as an independent and distinct contract. The jurists of the Hanafie School have given various definitions to Istisna'a some of which are: “That it is a contract with a manufacturer to make something" and "It is a contract on a commodity on liability with the provision of work". The Purchaser is called 'Mustasnia' contractor and the seller is called 'Sania' maker or manufacturer and the thing is called 'Masnooa', manufactured, built, made (ABIIB). Islamic banks can utilize Istisna'a in two ways. 1. It is permissible for the bank to buy a commodity on Istisna'a contract then sell it after receipt for cash or deferred payment. 2. It is also permissible for the bank to enter into a Istisna'a contract in the capacity of seller to those who demand a purchase of a particular commodity and then draw a parallel Istisna'a contract in the capacity of a buyer with another party to manufacture the commodity agreed upon in the first contract. Each transaction is deemed a separate contract with payment being made in cash either immediately or on a deferred basis. Any disagreements that may arise are settled under each contract separately according to the provisions therein. The steps of the Istisna'a sale and the parallel Istisna'a have been discussed below. Steps of Istisna'a Sale
The Buyer expresses his desire to buy a commodity and brings a request to purchase the commodity to the bank. The method of payment, whether cash or deferred is set forth in the agreement. The bank agrees to deliver the commodity to the buyer at some agreed upon time in the future.
The Parallel Istisna'a Contract: In order that the bank is able to deliver said commodity in the Istisna’a agreement, the bank enters into a parallel Istisna’a agreement with a third party to either manufacture or otherwise deliver-said commodity. Obviously, the bank stipulates a price that is lower than that agreed to in the original agreement and requires delivery on or before the date stipulated in the original contract.
Delivery and Receipt of the Commodity: The seller in the parallel Istisna’a agreement, delivers the commodity to the bank on the agreed upon date. The bank, in turn, delivers the product to the buyer of the original Istisna’a contract, in
accordance with the original agreement. In this way, all parties fulfill their obligations to the contract. Rules of Istisna'a Sale o It is a condition in the Istisna'a contract to clearly define dimensions and specifications of the product being purchased. This is important to ensure that there is no room for dispute over what is required. o The Istisna'a contract is only used for objects that can be manufactured. It can not be used to purchase corn, wheat, barley, fruit or any natural product. o The object sold in a Istisna'a contract is a fixed liability debt and it is permissible for the object to be a custom manufactured product, made in accordance with certain specifications. o The maker should supply the materials. If they are supplied by the buyer, the contract is Ijara and not Istisna'a. o Once the contract is drawn the ownership of the asset is confirmed to the buyer and the purchase price is confirmed to the manufacturer. o It is not a condition in the Istisna'a contract to advance the price. Usually part of the price is paid in advance and the remainder is withheld until the time of delivery. o It is a condition that the time of delivery be specified in the agreement to avoid confusion that may lead to a dispute over the transaction. o It is a condition that the place of delivery be stated in the contract if the commodity requires special handling and delivering arrangements. o The buyer may stipulate in the Istisna'a contract that the commodity shall be manufactured or produced by a specific manufacturer, or manufactured with specific materials. This is not permitted in a case of Salam Sale. Application of Istisna'a Sale The Istisna'a contract allows Islamic banks to finance the public needs and the vital interests of the society to develop the Islamic economy in accordance with Islamic teachings. For example Istisna'a contracts are used to finance high technology industries such as the aviation, locomotive and ship building industries. In addition, this type of business transaction is also used in the production of large machinery and equipment manufactured in factories and workshops. Finally, the Istisna'a contract is also applied in the construction industry such as apartment buildings, hospitals, schools, and universities to whatever that makes the network for modern life. One final note, the Istisna’a contract is best used in those transactions in which the product being purchased can easily be measured in terms of the specified criteria of the contract. (b) Sharing Mechanism
Mudaraba Definition of Mudaraba The term Mudaraba refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital. Mudaraba is also known as Qirad and Muqaradah. Mudaraba is a contract of those who have capital with those who have expertise, where the first party provides capital and the other party provides the expertise with the purpose of earning Halal (lawful) profit which will be shared in a mutually agreed upon proportion. This type of business venture serves the interest of the capital owner and the Mudarib (agent). The capital owner may not have the ability or the experience to run a profitable business. On the other hand, the agent (the Mudarib) may not have adequate capital to invest in a business or project. Therefore, by entering into a contract of Mudaraba each party compliments one another, allowing a business venture to be financed. The following are the steps of the Mudaraba contrac. Steps of Mudaraba The bank provides the capital as a capital owner. The Mudarib provides the effort and expertise for the investment of capital in exchange for a share in profit that is agreed upon by both parties. 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. 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. 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. Rules of Mudaraba There are some legal rules that govern the business relationship Mudaraba which are as follows in the next page: 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.
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. It is a condition that the capital cannot be subject to indebtedness. 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. It is a condition that the capital of the Mudaraba is delivered to the Mudarib. Some of the jurists permit the capital owner to withhold capital and release it gradually according to the needs of the Mudarib since the Mudaraba adjudges unrestricted disposal. It is permissible for the capital owner to deliver capital to two Mudharibs in a single contract. It is permissible for the capital owner to vary the in profit sharing agreement between the two Mudharib based upon differences in the services provided.
It is permissible for the Mudarib to hire an assistant to perform difficult work that he is unable to perform on his own.
The disposal of capital by the Mudarib is restricted to reasons that are conducive to the Mudaraba. The Mudarib must not lend or donate any of the Mudaraba capital. Further, he is not allowed to enter into indebtedness nor enter into another partnership agreement with the Mudaraba capital. However, these activities are permissible if the capital owner consents and authorizes the agent to use his discretion. Concluding Remark It is an investment-based form of financing. The provider of capital in Mudaraba has no role in the management of the capital. However, he has to bear the risk of capital loss as well as the opportunity cost of capital for the entire period of the contract. The rate of return is quite uncertain and the cost of capital is also uncertain. Hence, there is a perfect correlation between cost of capital and rare of return on capital. Musharaka (Partnership) Meaning of Musharaka The word Musharaka is derived from the Arabic word Sharikah meaning partnership. Islamic jurists point out that the legality and permissibility of Musharaka is based on the injunctions of the Qura'n, Sunnah, and Ijma (consensus) of the scholars. It may be noted that Islamic banks are inclined to use various forms of Shariakt-al-Inan because of its built-in flexibility. At an Islamic bank, a typical Musharaka transaction may be conducted in the following manner. One, two or more entrepreneurs approach an Islamic bank to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the
project. All partners, including the bank, have the right to participate in the project. They can also waive this right. The profits are to be distributed according to an agreed ratio, which need not be the same as the capital proportion. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project. Types of Musharaka Musharaka may take two forms: Permanent Musharaka and Diminishing Musharaka. These are discussed below: In this case, the bank participates in the equity of a company and receives an annual share of the profits on a pre-rate basis. The period of termination of the contract is not specified. This financing technique is also referred to as continued Musharaka. The contributions of the partners under this mode may be equal or unequal percentages of capital for the purpose of establishing a new income-generating project or to participate in an existing one. In this arrangement, each participant owns a permanent share in the capital structure and receives his share of the profits accordingly. This type of a partnership is intended to continue until the company is dissolved. However, one can exit the partnership by selling his share of the capital to another investor. Permanent Musharaka is used by Islamic Banks in many income generating projects. They can provide financing to their customers, in exchange for ownership and profit sharing in the proportion agreed upon by both parties. In addition, the bank may leave the responsibility of management to the customer-partner and retain the right of supervision. Rules for Permanent Musharaka It is a condition that the capital provided by each partner is specific, existent and easily accessible. It is inappropriate to establish a company with borrowed money, for the purpose of profit. It is permissible for partners to have unequal ownership in the project. The percent of ownership is set forth in the agreement. It is a condition that the capital of the company is money and valuables. Some of the jurists permit contributing merchandise as invested capital. However, the merchandise must be evaluated, and the value agreed upon by all parties. Once the value has been established, it is counted as capital and stipulated in the contract as such. It is a condition that each partners’ share of the profits be known to avoid uncertainty. Also, it is required that the ownership interest be in percentage terms and not a fixed sum, because this would violate the requirements of a partnership. In principle, profit must be divided among partners in ratios proportionate to their shares in capital but some of the jurists permit variation in profit shares, so long as it is agreed to by all of the partners. This may be the case when one of the partners is
more dexterous and more diligent and does not agree to parity, so variation in the sharing of profits becomes necessary. In principle, a partnership is a permissible and non-binding contract. Thus, if a partner wishes, he could rescind the agreement provided that this occurs with the knowledge of the other partner or partners. Rescinding the agreement without the knowledge of the other partners’ prejudices the rescinding partner’s interest. On the other hand, some of the jurists take the view that the partnership contract is binding up to the liquidation of capital or the accomplishment of the job accepted at the contract. Diminishing Musharaka Diminishing or Digressive Musharaka is a special form of Musharaka, which ultimately culminates in the ownership of the asset or the project by the client. It operates in the following manner. The Bank participates as a financial partner, in full or in part, in a project with a given income forecast. An agreement is signed by the partner and the bank, which stipulates each party's share of the profits. However, the agreement also provides payment of a portion of the net income of the project as repayment of The principal financed by the bank. The partner is entitled to keep the rest. In this way, the bank's share of the equity is progressively reduced and the partner eventually becomes the full owner. When the bank enters into a Diminishing Musharaka its intention is not to stay in the partnership until the company is dissolved. In this type of partnership, the bank agrees to accept payment on an installment basis or in one lump sum, an amount necessary to buy the bank’s partnership interest. In this way, as the bank receives payments over and above its share in partnership profits, it’s partnership interest reduces until it is completely bought out of the partnership. Steps of Diminishing Musharaka 1. Participation in Capital: The bank - tenders part of the capital required for the project in its capacity as a participant and agrees with the customer/partner on a specific method of gradually selling its share in capital back to the partner. 2. Results of the Projects: The intent of the project is capital growth. The project may be profitable or lose money. 3. The distribution of the Wealth accrued from the Proje cts: In the event of loss each partner bears his share in the loss in his exact proportionate share of capital. In the event that the project is successful, profits are distributed between the two partners (the bank and the customer) in accordance with the agreement. 4. The bank sells its Share of Capital : The bank expresses its readiness, in accordance with the agreement, to sell a specific percentage of its share of capital.
Application of Diminishing Musharaka The decreasing Musharaka is suitable for the financing of industrial businesses that have regular income. It can be considered to be the appropriate mode to finance collective investment. In this arrangement, the bank earns periodic profits throughout the year and it encourages the partner to participate in the joint investment. In addition it fosters individual ownership by allowing the partner to gradually buy the bank’s ownership interest. In terms of society as a whole it corrects the course of the economy by developing a mode of positive partnership instead of the negative relationship of indebtedness. In addition, it assists in the equitable distribution of societies wealth. (c) Lease Mechanism Ijarah Meaning of Ijarah Fuqaha (jurists) have defined Ijaraha as ownership of a benefit for consideration. This is also known as lease or Hire contract. Al-Ijarah is an Arabic term. This has been derived from the Arabic term “Ujr” or “Ujrat” which means ‘consideration’ or ‘return’ or ‘wages’. According to Islamic Shariah (jurisprudence), Ijarah is a contract between two parties – the lessor and the lessee, where the lessees (Hirer or Mustajir) have the right to enjoy/reap a specific benefit against a specified consideration/rent/wages from the lessor – the owner (Muajjir). Elements of Ijarah According the majority of Fuqaha, there are three general 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. Rules for Ijarah •
It is condition that the subject (benefit/service) of the contract and the asset (object) should be known comprehensively.
•
It is a condition that the assets to be leased must not be a fungible one (perishable or consumable) which can not be used more that once, or in other words the asset(s) must be a non-fungible one which can be utilized more than once, or the use/benefit/service of which can be separated from the assets itself.
•
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 handing-
over 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), •
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.
•
The lease contract is permissible only when the assets and the benefit/service derived from it are within the category of ‘Halal’ or at least ‘Mobah’ as per Islamic Shariah.
•
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.
•
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.
3.4 - Qard-E-Hasana (Benevolent Loans) Qard Hasan is a contract in which one of the parties (the lender) places into the ownership of the other party (the borrower) a definite parcel of his property, in exchange nothing more than the eventual return of something in the same value of the property loaned. Ausaf Ahmad (1998,) mentioned that since interest on all kinds of loans is prohibited in Islam, a loan that is to be given in accordance with the Islamic principle has to be, by definition, a benevolent loan (Qard Hasan) i.e. a loan without interest. It has to be granted on the grounds of compassion, i.e. to remove the financial distress caused by the absence of sufficient money in the face of dire need. Since banks are profit driven organizations, it would seem that there is not much opportunity for the application of this technique. However provisions to provide Qard Hasan besides engaging in income generating activities. Islamic banks also play a socially useful role. Hence they make provisions to provide Qard Hasan besides engaging in income generating activities. There may be slight variations among different Islamic banks in the use of this technique. The Faisal Islamic Bank of Egypt provides interest-free benevolent loans to the holders of investment and current accounts, in accordance with the conditions set forth by its board of directors. The bank also grants benevolent loans to other individuals under conditions decreed by its Board. On the other hand, the Jordan Islamic Bank Law authorizes it to give "benevolent loans (Qard Hasan) for productive purposes in various fields to enable the beneficiaries to start independent lives or to raise their incomes and standard of living. Iranian banks are required to set aside a portion of their resources out of which interest free loans (Qard Hasan) can be given to small producers, entrepreneurs and farmers who are not able to secure financing for investment or working capital from other alternative sources, and needy customers. It should also be noted that Iranian banks are permitted to charge a minimum service fee to cover the cost of administering these funds. Hire-Purchase Under Shirkatul Melk (HPSM)
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: (a) Definition of Shirkatul Melk: ‘Shirkat’ means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset and own the same jointly and share the benefit as per agreement and loss in proportion to their respective equity, the contact is called Shirkatul Melk. In the case of Hire Purchase under Shirkatul Melk, Islamic banks purchase assets to be leased out, jointly with client under equity participation, own the same and share benefit jointly till the full ownership is transferred to the client. (b) 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. (c) Definition of Sale contract: This is a contract between a buyer and a seller under which the onwnership of certain goods or asset is transferred by the seller to the buyer against agreed upon price paid by the buyer. In the case of Hire Purchase under Shirkatul Melk, the lessor bank sells or transfers its title to the asset under a sale contract on payment of sale price. Thus in Hire Purchase under Shirkatul Melk mode, both the bank and the client supply equity in equal or unequal proportion for purchase of an asset like land, building, machinery, transports, etc., purchase the asset with that money, own the same jointly, share benefit as per agreement and bear the loss in proportion to their respective equity. Stages of Hire Purchase under Shirkatul Melk (HPSM): 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. Important Features HPSM: 1. In case of Hire Purchase under Shirkatul Melk transaction the asset/property involved is jointly purchased by the lessor (bank) and the lessee (client) with specified equity participation under a Shirkatul Melk contract in which the amount of equity and share in ownership of the asset of each partner (lessor bank and lessee client) are clearly mentioned. Under this agreement the lessor and the lessee become co-owners of the asset under transaction in proportion to their respective equity. 2. The share 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. 3. 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. Hire Purchase under Shirkatul Melk Mode is a combination of three contacts. All rules governing the lease contract should be applicable in this mode also. Moreover, the rules for Musharakah and sale contracts will also apply to this. In addition, the following should also be followed: Growth of Investment Modes of Islami Bank Bangladesh Limited (IBBL):
YEAR 2005
AMOUNT IN MILLION TAKA 521.385
2006
570.161
2007
636.265
2008
771.13
2009
856.52
2010
1078.96
Graphical Position of Investment Mode AMOUNT IN MILLION TAKA
1000 800 AMOUNT IN MILLION TAKA
600 400 200
Year
1 0 2 0
09 20
0 8 20
0 7
2 0
06 20
0 5
0 2 0
Million Taka
1200
Sector-wise Investment of IBBL: Sector wise investment as on 31.12.2010 is as under: Graphical Position of Investment Sector Sector Wise Investment 3% 0% 3%
31%
34%
Industry Commercial Real Estate Transport H.D.S
29%
Others
Investments: (Figure in million taka)
Mode Wise Investment of IBBL: Mode-wise investment of the Bank as on 31.12.2010 is as under: (Figure in million taka) Mode
Investment
% Total Investment
Bai Muajjal
5,588,875
0.571872221
Bai Murabaha
2,820,687
0.288622046
HPSM
513,731,999
52.56676151
QTDR
25,230,690
2.581687859
Bai Salam
2,100,000
0.214878963
MPI
287,727,505
29.44123229
Murabaha TR
140,094,611
14.33494511
Total
977,294,366
100
Graphical Position of Investment Mode
Special Investment Scheme of IBBL: Household Durable Scheme(HDS) In a developing country like Bangladesh people of middle and lower middle class specially 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. Sector
Investment
% Total Investment
Industry
312,812,380
31.45830038
Commercial
289,522,032
29.11608246
Real Estate
329,463,271
33.13281445
Transport
31,121,820
3.129798002
H.D.S
620,417
0.062392877
Others
30,831,601
3.100611829
Total 994,371,521 100 Islami Bank Bangladesh Limited has, therefore, introduced Household Durables Investment Modecreated Wise Investment Scheme which has already great enthusiasm among the people and received tremendous response from them. Objectives of HDS • •
14%
1% 0%
Bai Muajjal
To assist the service holders with limited income in purchasing household durables. Bai Murabaha To assist the fixed income group in raising the standard of HPSM living. 53%
29%
QTDR Bai Salam MPI
0% 3%
Murabaha TR
•
To create opportunity for the service holders to enjoy the benefit of modern and sophisticated living and at the time lead a decent and honest life.
Items of Scheme: - 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. - Electronic generator: IPS, UPS etc. - Power generator, motor pump/power pump etc. - CI sheet, Rod, Wood etc. - Gold ornaments - Tube-wels Eligibility for HDS Scheme Interested permanent officials of the following organizations may apply for investment: •
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.
•
Doctors, Engineers, Architects, Chartered Accountants/FCMA and other professionals.
• • • • • •
Investment Clients of IBBL. Deposit Clients of IBBL. Shopkeepers and businessman. Wage earners, Panel lawyers of IBBL, C&F Agents enlisted in IBBL etc. 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.
important
Amounts to Invest on different position: •
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 •
Period of Investment: Maximum two years
•
Mode of Investment: Bai-Muajjal
Equity for the HDS Scheme 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 favour 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 : 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. 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.
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. Supervision of Investment Under this Scheme, the Bank, at the initial stage, has engaged M/s. Anudip Services Private Ltd., Ibn Sina Group Investment Company Ltd., Faisal Investment Foundation and Crescent Consultants on commission basis for selection of client, disbursement and recovery of investment and for overall supervision of the Scheme. The concerned investment client shall pay the commission of the supervising agency at the rate of 2% per annum over the investment. Other Terms & Conditions •
The concerned Branch of the Bank shall take possession of the goods supplied to the client in case of his failure to repay 3 (three) installments consecutively.
The client shall bear all necessary expenses relating to license, registration, insurance etc. of the goods supplied. •
The client shall bear cost of all maintenance, repair and preservation. The client shall use and handle the goods with utmost care and he will be liable to pay for any damage of the articles in his possession due to his negligence, carelessness and inefficient use. In case of total damage and destruction of the goods or if it becomes irreparable, the client shall be liable to pay immediately the balance amount of Bank's investment including profit.
•
The client shall use the goods supplied to him personally and under no circumstances he shall let-out or transfers the possession of the goods to others without prior written permission from the Bank.
•
The client shall be bound to allow the Bank's Authorised agent and representative to inspect the goods as and when required.
•
The client, before availing the investment facility, shall execute Bai-Muajjal agreement and other documents as per investment rules and procedure of the Bank.
Housing Investment Scheme(HIS) 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, specially 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, Islami Bank Bangladesh 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. Objectives of Housing Investment Scheme •
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 for HIS
Initially the following categories of people shall be eligible to apply for availing investment facilities under this Scheme: Teachers of the established Universities, University Colleges & Medical Colleges. Graduate Engineers, Doctors and established professionals. Bangladeshi Officials of reputed Multinational Companies, International Financial Organizations, Donor Agencies, Foreign Embassies etc., and Officials of local established & reputed Public Limited Companies. 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 un-expired 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. Rajshahi metropolitan area. Khulna metropolitan area. Sylhet metropolitan area.
Later on the Scheme will be implemented in other district headquarters and business areas in phases. 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.30.00lac 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.
•
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.
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. Transport 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, Islami Bank Bangladesh 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. Aims and Objectives for Transport Investment Scheme: To assist in the development of communication system of the country. To help overcome the existing transportation problem. To assist solvent service-holders and professionals having fixed income for acquisition of private cars and thus to help them to improve their professional efficiency and the standard of living.
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 Defense Forces. Professionals: University Teachers, Doctors and Engineers. Experienced Person/Firm engaged or interested in transport business (Rent-a-car). Preference will be given to those person and firms who are already engaged in transport business. •
Auto Rickshaw/Tempo/Pick-up van:
Persons/Businessmen/Firms who have already proved themselves successful in the transport business and those efficient and potential persons/businessmen/firms who are interested to take small transport as business, may apply for investment to purchase auto-rickshaw, tempo and pick-up van. • Water Transport: Experienced and successful Persons and Businessmen engaged in water transport
business.
Area of the Scheme 1. Road Transport: All Branches of the Bank. 2. Water Transport: Preference will be given to areas adjacent to Branches located in river-ports. Amount of Bank's Investment and Client's Down Payment for HPSM
Type of Transport Bank’s Maximum Investment Client's Down Payment: 1. Private Car/Jeep 70% 30% 2. Bus/Truck/Mini-bus 60% 40% 3. Water Transport 50% 50% 4. Auto Rickshaw/Tempo 50% 50% 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 3 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. 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.
Supervision Bank officials or appointed agents of the Bank reserve the right to inspect the vehicle at any time in any place where it is kept or found in order to ascertain its overall condition. Recovery of 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.
Growth of Special Investment Scheme With Graphical & and Mathematical view
Speacial Investment Scheme 5000.00
Value
4000.00 3000.00 2000.00 1000.00 0.00
Mathematical View: 2006
2007
2008 Year
2009
2010
Rural Development Schemes Household Durable Schemes Investment Schemes for Doctors Transprt Investmetn Scheme Car Investment Schemes Small Business Inv. Schemes Micro Industrial Inv. Scheme Agricultural Implemets Inv. Scheme 2008 Inv.2009 Housing Scheme 2010
Sl. No.Name of Schemes 2006 2007 1 Rural Development Schemes 272.60 371.10 432.04 570.88 789.97 Real Estate Inv. 2 Household Durable Schemes 735.20 865.90 886.79 910.91 878.76 Scheme 3 Investment Schemes for Doctors 81.50 95.10 97.21 101.01 85.54 4 Transprt Investmetn Scheme 967.90 1147.50 1822.38 2311.60 2442.16 5 Car Investment Schemes 22.30 27.40 28.25 33.58 30.30 6 Small Business Inv. Schemes 216.80 244.10 325.06 395.75 501.26 7 Micro Industrial Inv. Scheme 0.80 6.30 6.63 10.10 17.18 8 Agricultural Implemets Inv. Scheme16.70 18.80 13.66 12.76 14.69 9 Housing Inv. Scheme 467.90 499.50 597.64 661.56 672.10 10 Real Estate Inv. Scheme 1507.00 1641.70 2264.35 3418.85 4713.70 Total: 4288.70 4917.40 6474.01 8427.00 10145.66 By the both Graphical and Mathematical chart we can easily understand the growth rate of investment for Islami Bang Bangladesh. They are increasing their position consistently with the year by year. The investment growth rate for Islami bank Bangladesh is higher than the other conventional Banks.
Review of Performance Review of Performance of IBBL on Investment: The bank through its 251 as on 31.12.2010 branches ( including 30 SME/Krishi Branches) successfully mobilized Tk. 291,283 million deposits from 49, 39, 502 depositors and deployed Tk. 292,084 million as investment to 5,25,948 accounts up to 31 st December 2010. Growth rate of deposits of IBBL in 2010was 20%, as against 20.55% in 2009. Growth rate of investment of IBBL in 2010 was 22%, as against 19.20% in 2009. In the year 2010 , total income of the bank was Tk. 30,121 million showing 22% growth in 2010 as against 6.93% growth in 2009 .
Capital formation of IBBL: -Authorized Capital Authorized capital of Islami Bank Bangladesh Limited is Tk. 10,000 million divided into 10,00,00,000 ordinary shares of Tk. 100/- each. -Paid up Capital Paid up capital of IBBL is Tk. 7,413.12 million as on 31.12.2010 ( Local shareholders 41.97% and Foreign shareholders 58.03%as on 31.12.2010 ). Financial Report: ISLAMI BANK BANGLADESH LIMITED Shyamoli Branch 15/4, Mirpur Road, Dhaka, Bangladesh Statement of Affairs as On 31-DEC-2010
CodeLiabilities Taka 1000 DEPOSITS: 2,393,398,272.78 Al-wadeeah Current 1001 119,414,735.83 Deposits Mudaraba Savings 1002 912,265,756.18 Deposits Mudaraba Special 1003 47,790,996.01 Notice Deposits Mudaraba Term 1004 483,291,614.67 Deposits 1005 Profit-payable A/C 40,723,902.03 1006 SUNDRY DEPOSITS 21,038,789.81 Mudaraba Hajj 1009 9,522,186.66 Savings A/c Mudaraba Savings 1010 106,276,563.15 Bond Mudaraba Special 1011 460,490,765.03 Savings Scheme Mudaraba Monthly 1012 Prft Dep189,783,550.00 Schemes(MMPDS) Mudaraba Muhor 1013 1,257,963.65 Savings A/C Mudaraba Waqf 1014 1,541,449.76 Deposit A/C 2000 BILLS PAYABLE; 26,238,892.96 2001 D.D. Payable 3,190,679.00 2002 T.T. Payable 44,700.00 2003 P.O. Payable 23,003,513.96 F.C DEPOSIT 3000 12,416,565.00 ACCOUNTS: Mudaraba Foreign 3011 906,890.00 Currency Deposit Foreign Currency 3021 7,758,538.00 Deposit 3023 FC Deposit ERQ 31,271.00 FC held against B/B 3031 3,189,475.00 L/C 3041 FDD/FTT Payable 530,391.00 OTHER 4000 57,095,723.09 LIABILITIES : Payable Against 4002 71,937.20 Expenditure 4003 Profit Receivable A/c 34,377,475.81
CodeAsset Taka CASH & BANK 0100 13,790,318.91 BALANCES: 0101 Cash In Hand 13,650,234.91 Foreign Currency In 0102 140,084.00 Hand BALANCE WITH 0200 0.00 OTHER BANKS: 0300 INVESTMENT: 981,305,135.92 Bai-Murabaha 0301 142,915,297.73 (General) Bai-Murabaha (Post0302 287,727,504.51 import) 0303 Bai-Muazzal 5,197,938.00 0304 HPSM 443,090,594.55 0307 Quard Against TDR 25,230,690.00 Quard Against P.F. 0308 3,755,780.00 (Staff) Quard-e-Hasana B.F. 0309 254,990.00 (Staff) 0321 Bai-Muazzal (Staff) 390,937.00 0322 HPSM (Staff) 70,641,404.13 0324 BAI SALAM 2,100,000.00 0400 Inland Bills Purchase 89,531,499.00 0401 Musharaka Doc Bill 89,531,499.00 0500 FBN & FBP: 8,123,998.00 Bai-Murabaha FC 0502 5,824,225.00 Bills 0503 Baim-FC Bills 251,004.00 Foreign Bill 0504 2,048,769.00 Negotiated(FBN) FURNITURE, 0600 FIXTURE &3,802,467.07 LIBRARY Furniture,Fixture 0601 3,802,467.07 &Library 0700 OTHERS ASSETS 1,231,910.23 SUSPENSE 0701 670,000.00 ACCOUNT: Stock Of Stationary In 0704 110,750.23 Hand 0705 Stamps In Hand 1,690.00 0706 Security Deposit Paid 18,000.00 0709 Advance Rent 422,470.00 Clearing Adjustment 0710 9,000.00 A/C BRANCHES 0800 1,391,364,124.70 ACCOUNTS:
ASSETS AS PER 444,975,546.15 CONTRA 0901 Outward Bills Lodged 723,808.00 0905 Inland LC 15,797,700.00 0906 Import LC (General) 244,906,702.00 Grand Total 2,934,124,999.98 Grand Total 2,934,124,999.98 Back to Back LC 0907 37,809,525.00 (Foreign) Back to Back LC Findings 0908 17,438,711.00 (Inland) Back to Back Bills faced by IBBL At the time of my Internship program I have found 0909some Problems which are 11,013,532.00 (Foreign) incase of Investment Mechanism are discussed bellow: Back to Back Bills 0910 52,267,307.00 (Inland) • IBBL cannot invest in Shariah prohibited sector, so its investment scope is narrow in Bangladesh. 0912 Import Bills (Inland) 1,200,040.00 Inland Export Bills for 0913Shariah and investment mode. 34,037,305.00 • Entrepreneurs have no clear concept about As a result Lodged they do not want to take investment easily. 0914 Import Bills (Foreign) 2,500,462.00 Foreign Export Bills • IBBL lead their investment operation within mode. 0915 limited number of investment 21,480,378.00 for Lodged Letter of Guarantee • Lack of Islamic Banking Rule in our country, the authority of IBBL faces various 0916 5,800,076.15 (Inland) problems in their investment operation as a result it cannot run smoothly. EXPENDITURE 1100no positive idea about 0.00 • Most of the people of Bangladesh have Islamic Banking A/C: Operation, some of them hold negative aboutExp.Dhaka the philosophy North investment Mechanism 1700 the Banking activities0.00 of IBBL, so they are not interested to generate with this bank. Zone Exp.Dhaka South • IBBL is Shariah based & welfare oriented, so they should engage 1800 0.00 in poverty Zone alleviation & rural development seriously, but they could not reach their operation in eighty five thousand villages of Bangladesh. 0900
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Investment is heart of the Bank and it is the main source of income of IBBL, but lack of sufficient investment scope a large amount of money are being idle, as a result, profit is not increasing.
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Advertisement is the most important factors to introduce any organization, goods products or information to the people, but IBBL is not eager to advertisement that can show their activities in the society.
Recommendation •
IBBL can diffuse its scope of investment through focusing shariah concept regarding investment among the Bank officers; employer and the Clients by strong training, workshops and Clients get - together.
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This Bank should arrange a wide varieties of regular programs like "ISLAMIC JALSA" "OAAZ MAHFIL" "SEMINAR" "MOSQUE -BASED DISCUSSION" etc. about Islamic Banking Function countrywide to remove the negative impression about IBBL.
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The authority of IBBL should manage pressure on Government bodies to run proper and sufficient application of Islamic banking law in Bangladesh.
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Practice amount of doubtful income declined substantially during the year as compared to the past few years, indicating more carefulness of the Management in complying with Shariah. As a result, idle money will be invested to increase potential profit of this Bank.
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Inclusion of more subjects based on the Quran and Sunnah in the Training courses of the Islami Bank Training & Research Academy in order to develop human resources having morally.
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Arrangement of monthly /quarterly training courses /workshops for the clients selected by the Branches in order to promote Investment clients of the desired level.
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IBBL should initiate different investment modes according to changing /diverse needs of clients by conducting huge Research and study.
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IBBL should appoint a sufficient number of women employees to deal women entrepreneurs and professionals and understand their needs and thus create demand for investment.
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To gain success in the programs like "Poverty Alleviation and "Self Reliant" especially in rural areas, this bank should provide investment facilities on the basis of individual position.
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In the context of Bangladesh considering the necessity of Islami Banking system the Government should establish Mudaraba company/bank.
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IBBL needs to finance the needy entrepreneurs who have no money at all and they are newcomer in the business.
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We know there are most important modes of investment is share mechanism but islami bank have no such strong application of that mode though theoretical use of share mechanism is so wide.
SWOT Analysis of IBBL: STRENGTH • • • •
Unique System: 100% supervise credit. Related with shariah. Religious Feelings of the people. Management System. High Morality of the employees and customers WEAKNESS
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Absence of Competitors. Existing are quite weak, Deficiency of experienced manpower. Absence of Islamic money market. Few employee’s attitude towards customers are not satisfactory IBBL still remain under lower position in the world ranking. IBBL does not use the share mode of investment They have no such program to finance to the new entrepreneur or creating the same.
OPPORTUNITY •
IBBL has a verse opportunity to hold the most of the customers of Bangladesh as its banking operation is based upon Islamic Shariah
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Rural Development Scheme of IBBL is a great chance to save the county’s poor people from being taking loan from different NGOs or few banks with higher interest rate. THREATS
• State law defers with the Islami Shariah. • In the money market of Bangladesh there is no call money system of Islami Shariah. • Few other conventional banks have open their Islamic banking branch. Conclusion The concept of Islami banking is several decades old. The first attempt to establish an Islamic financial institution took place in Pakistan in the late 1950′s with the establishment of a local islami bank in a rural area (Wilson 1983). After 42 years, Islamic banking system is established in Bangladesh as a financial institution that is named “Islami bank Bangladesh limited”. Islamic bank Bangladesh limited is a bank which operates it′s activities according to Quaran and Sunnah. It′s banking activities based on profit \ loss sharing. It does not create any illegal pressure on client. The strength of islami bank Bangladesh limited are - employees of Islamic Bank Bangladesh Ltd. are honest because they strongly believes in Islamic rules and Allah and they do not take any types of bribe form clients. So believes of people are increasing on the activities of Islamic bank Bangladesh limited. The weaknesses of Islamic bank Bangladesh limited are - although it is getting bright future but it does not operate it′s activities 100% based on Islamic shariah. Because still there is not existed an Islamic environment in the economic activities of Bangladesh. It is performing it′s daily financial transaction with other financial institution that are not based on Islam. In this case, it is involving with some unislamic activities unintentionally. Threats of Islamic bank Bangladesh limited are - at this time, many financial institutions have commenced their financial activities according to Islamic shariah. This type of organization will create more competition in the financial market. So it is a threat for Islamic bank Bangladesh limited. After all, although it is facing some problem, it has a bright future and day-by-day it is enhancing it′s financial activities over the country. Many organizations are following to IBBL
and they are starting their business based on Islamic shariah in the economy in Bangladesh.