View with images and charts Islamic and conventional banking: Differences Background of Islamic Banking History During the Islamic Golden Age, early forms of proto-capitalism and free markets were present in the Caliphate where an early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as "Islamic capitalism". A vigorous monetary policy was created on the basis of the expanding levels of circulation of a stable, high-value currency and the integration of monetary areas that were previously independent. A number of economic concepts and techniques were applied in early Islamic banking, including bill of exchange, the first forms of partnership such as limited partnership and the earliest forms of capital, capital accumulation, cheques, promissory, trusts, transactional accounts, loaning, ledgers and assignments. Organizational enterprises independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards. Concept: Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for loans of money for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community. Principles: Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba . Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar).In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid.An innovative approach applied by some banks for home loans,
called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.There are several other approaches used in business transactions. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.Islamic banking is restricted to Islamically acceptable transactions, which exclude those involving alcohol, pork, gambling, etc. The aim of this is to engage in only ethical investing, and moral purchasing.In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio. However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed. Shariah Advisory Council: Islamic banks and banking institutions that offer Islamic banking products and services are required to establish a Shariah Supervisory Board to advise them and to ensure that the operations and activities of the banking institutions comply with Shariah principles. On the other hand, there are also those who believe that no form of banking that involves interest payments can ever comply with the ShariIn Malaysia, the National Shariah Advisory Council, which has been set up at Bank Negara Malaysia, advises BNM on the Shariah aspects of the operations of these institutions and on their products and services.In Indonesia the Ulama Council serves a similar purpose.A number of Shariah advisory firms have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. Issue of independence, impartiality and conflicts of interest have also been recently voiced. The WDIBF World Database for Islamic Banking and Finance has been developed to provide information about all the websites related to this type of banking. Riba as the key dimension The word "Riba" means excess, increase or addition, which according to Shariah terminology, implies any excess compensation without due consideration. The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart", or "to ensure equivalency in real value", and that "numerical value was immaterial." During this period, gold and silver currencies were the benchmark metals that defined the value of all other materials being traded. Applying interest to the benchmark itself made no logical sense as its value remained constant relative to all other materials: these metals could be added to but not created. Applying interest was acceptable under some circumstances. Currencies that were
based on guarantees by a government to honor the stated value or based on other materials such as paper or base metals were allowed to have interest applied to them. When base metal currencies were first introduced in the Islamic world, the question of "paying a debt in a higher number of units of this fiat money being riba" was not relevant as the jurists only needed to be concerned with the real value of money rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight. Goals of Islamic Bank: • •
To eliminate riba from all sectors of the economy To establish Baiya
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To mobilize savings for productive purposes
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To earn reasonable profit through Halal transactions
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To create more employment opportunity by increasing economic activities
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To ensure equitable distribution of resources
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To safeguard excess money lying idle in the hands of customers
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To contribute towards economic development
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To establish balance trade and welfare
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To develop human resources and self- assessment
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To prevent allowing of concentration of wealth
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To establish justice and humanity
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To serve all classes of people in general and specially to favor the weaker classes.
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To establish good and eliminate evils
Goals of Conventional Bank: • •
Maximizing profit without any interruption To establish man made rules and procedures
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To spread the wings of capitalism
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To violet the laws of Shariah
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To encourage the base of interest or riba
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To strong the convention of wealth concentration.
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To capture the economy with manmade principles instead of following Shariah.
Company profile Islami Bank Bangladesh Limited Islami Bank Bangladesh Ltd., which was incorporated on 14th March, 1983, went into operation on 30th March, 1983 and introduced a full package of banking services in August 1983, Islami Bank Bangladesh Limited is considered to be first Islami-bank in South East Asia. 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.
The primary objective of Islami Bank Bangladesh limited is to conduct interest-free banking. For doing so, it is engaged to establish participatory banking instead of banking on debtorcreditor relationship, invest on profit and risk sharing basis, establish a welfare-oriented banking system, extend co-operation to the poor, the helpless and the low-income group for their economic development. IBBL is a public limited company with limited liability under the companies Act, 1913; it is a joint venture multinational bank with sixty four percent of equity being contributed by the foreign sources. Regarding shareholding structure of the bank, the local shareholders hold shares in the ratio of thirty six to sixty four. In December, 1997 the number of its shareholders stood at 6863, its shares are quoted in the two stock markets of the country namely Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE), Being in high demand the shares are presently sold at three time higher than the face value. Authorized capital of this bank is Tk. 500 million. At present IBBL has a paidup capital of Taka 317.98 million and Reserve Fund to Taka 930.17 million. The Bank is managed by 23-member Board of Directors elected by the shareholders, An Extensive committee consisting of 8 Directors and a Management Committee consisting of the top Executives of the Bank also oversee the day-to-day function of the Bank. A representative from the Shariah Council also takes part in the above committee. Powers and functions are suitably distributed amongst these bodies. The bank has also a 10 -member Shariah council consisting of Fuquah, Islamic Economists and a Lawyer. The council gives decision on Islamic issues, which are generally followed in the Bank. The Council conducts audits the operation of Bank branches each year on selective basis and put forward report identify the deviations and suggestions for purification of the banking transactions. Besides these
committees and Council, IBBL performs all relevant types of activities for improvement of the Bank’s overall position.
Prime Bank Limited In the backdrop of economic liberalization and financial sector reforms, a group of highly successful local entrepreneurs conceived an idea of floating a commercial bank with different outlook. For them, it was competence, excellence and consistent delivery of reliable service with superior value products. Accordingly, Prime Bank Ltd. was created and commencement of business started on 17th April 1995. The sponsors are reputed personalities in the field of trade and commerce and their stake ranges from shipping to textile and finance to energy etc. As a fully licensed commercial bank, Prime Bank Ltd. is being managed by a highly professional and dedicated team with long experience in banking. They constantly focus on understanding and anticipating customer needs. As the banking scenario undergoes changes so is the bank and it repositions itself in the changed market condition. Prime Bank Ltd. offers all kinds of Commercial Corporate and Personal Banking services covering all segments of society within the framework of Banking Company Act and rules and regulations laid down by our central bank. Diversification of products and services include Corporate Banking, Retail Banking and Consumer Banking right from industry to agriculture, and real state to software. Prime Bank Ltd., since its beginning has attached more importance in technology integration. In order to retain competitive edge, investment in technology is always a top agenda and under constant focus. Keeping the network within a reasonable limit, our strategy is to serve the customers through capacity building across multi delivery channels. Our past performance gives an indication of our strength. We are better placed and poised to take our customers through fast changing times and enable them compete more effectively in the market they operate. Factors to Comparison: we are going to comparison between Islamic and conventional banking system in respect of the following factors: • •
Different types of Schemes Deposit Management
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Foreign exchange including remittance
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General banking
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Liquidity and performance management
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Financial performance
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Return on deposit and investment
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Export-import financing
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Corporate banking
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Retail banking
Products & service offered by Islami Bank Bangladesh Ltd:
Deposit Schemes Investment mode
Special Schemes
Rural Development Schemes
Special services
Foreign exchange Schemes
Products & service offered by Prime Bank Ltd:
Deposit Schemes Loan Schemes
‘Deposit Schemes’ as the mode of differentiation: Amongst various product and services which are provided both Islamic and conventional bank, we have just taken deposit schemes as the mode of differentiation as there is no similarity most of the cases of these two types of banks. Now we are going to mention the schemes maintained by Islami bank Bangladesh Ltd and Prime Bank Ltd consecutively. Deposit Schemes of Islami Bank Bangladesh Ltd: Islami bank Bangladesh Ltd Provides the following deposit schemes: • •
Al- Wadeeah current account Mudarabah savings account
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Mudarabah term deposit receipt
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Mudarabah special notice account
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Mudabarah special savings (pension fund) account
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Mudabarah Hajj Savings Account
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Mudabarah Savings Bond Schemes
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Mudarabah foreign currency deposit account Scheme
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Mudabarah cash Waqf deposit account
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Mudabarabh monthly profit deposit scheme
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Mudarabah Muhor savings deposit scheme
Deposit Schemes of Prime Bank Ltd: Prime bank Ltd. Provides the following deposit schemes: • •
Contributory Savings Scheme Education Savings Scheme
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Short term deposit Account
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Double benefit deposit scheme
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Resident foreign currency deposit Account
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Non-resident taka account
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House building deposit scheme
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Monthly benefit deposit scheme
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Fixed deposit Scheme
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Lakhopoti deposit Scheme
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Foreign currency account
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Non-resident foreign currency deposit account
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Non-resident investors taka account
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Prime millionaire Scheme
The features of these accounts: Al- Wadeeah current account: This account is similar to conventional current account. The owner of the fund can’t enjoy any profit or not bear any loss. But the can use the fund as the bank wants. Rules for opening • The deposit is accepted in the AWCA under Al-wadeah principle of Islamic Shariah. The deposited money is invested along with other deposits by the Bank according to Islamic Shariah. Here, the customer does not have any share in the profit. The transaction can be made more than once during the banking hour. • The account can only be opened with the introduction of any acceptable client/ current account holder of the Bank. In order to open Al-wadeah Current Account, a minimum amount of Tk.500/= is to be deposited and the minimum balance with minimum amount of Govt. tax is to be maintained in the account. The Bank reserves the authority to return cheque, if otherwise.
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Incidental charge @ Tk.50.00 half yearly basis is deducted from the account where minimum balance is not maintained. Closing charge @Tk.50.00 will be realised while closing the account
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The account holder shall have to use the specimen signature put in the Bank while withdraw money and in case of other correspondence with the Bank. In order to change the specimen signature put earlier the operator shall have to apply in writing before well in time.
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The Bank records the instruction of ‘Stop Payment` with care. But the Bank will not be held responsible if any fraudulent withdrawal is/are made through stopped cheque (s).
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The Bank supplies statement of account every month.
Mudarabah savings account: Mechanism is almost similar to conventional saving account. The basic difference is profit from the investment will be shared by the bank and the owner but the owner of the fund while the loss from the investment will be borne by the owner of the fund unless loss is incurred due to the negligence of the bank. Mudarabah term deposit receipt: The terms and condition Mudarabah is same as general Mudabarah excepting one that under this arrangement the owner of the fund agrees keep the deposit remain with the islmic bank for a particular time period. Special Mudarabah account: Under this arrangement ate terms and conditions of Mudarabah is same as general Mudabarah. The only specialty of this arrangement is that the owner of the fund species a particular type of business for the purpose of investment. The depositor can also specify the sectors where the fund should not be invested. Mudarabah special notice account: Any company, business entity, dpt of the government organization and trust or any person can open this account as this account opened under mudabarah principles. That’s why interest rate is lower than other accounts. Notice must be submitted to withdraw any large amount money. Mudabarah special savings (pension fund) account: This arrangement is the combination of the term mudarabah and spcial mudabarah account. Under this arrangement the owner of the fund agrees keep the deposit remain with the islami bank for a particular time period. This accounts specifies particular type of business purpose by using pension fund in order to large investment. Mudabarah Hajj Savings Account: A person intended to perform Hajj within 1 year to 10 years can open this account for a period at his convenience. A year is divided into 12 installments. Profit id given for the daily balance based on a weight age 1.1% and there is no provision for withdrawal. Mudabarah cash Waqf deposit account: A person above 18 years in single or in joint name and nonprofit earning institutions can buy these bonds for 5 or 8 years of tk.1000, tk. 5000,
tk.10000, tk.25000, tk 50000, tk100000,tk 500000. The owners of the bond can receive profits for their proportionate investment in bond at 65% of their income from investment based on weight age as follows: Mudarabah savings bond of 8 years: weight age of 1.5 Mudarabah savings bond of 5 years: weight age of 1.1 Mudabarabh monthly profit deposit scheme: Under this system the procedure of deposit is like the DPS of conventional banking system. The scheme is taken for a period of time say 5 years. A provisional monthly profit is given and at the end of the year the profit is adjusted with the actual profit for the year. Mudabarah savings bond Schemes: In this case the waqf concept of Islam has been borrowed by the Islamic bank for deposit mobilization purpose. The nature of account is donation type. Account holders operate the account for benevolent purposes. He can not withdraw any amount from the account for personal use of consumption. The highest weight age is given to this account in distributing profit. Mudarabah Muhor savings deposit scheme: Eligibility This Scheme has been designed for all classes of people married particularly the professionals & service holders creating an opportunity for them to save in monthly installments according to their capability for rectifying their marriage life and to protect the human right of the women. Objectives: • •
To help the people raising awareness about Muhor, a basic Islamic principle. To help the women protecting their basic rights determined by Allah.
Term: The scheme may be of 2 different terms: • •
5 years 10 years
Amount of Deposit Installments: Accounts under this Scheme may be opened for monthly deposits of Tk.500/-, Tk1,000/Tk.2,000/-, Tk.3,000/-,Tk.4,000/- and Tk.5,000/- only. The deposit will be received on Mudaraba principle. Opening of Account • Any married bonafide citizen of the country with sound mind may open account in his wife's name under MMSS by application in Bank's printed application form to be designed for this purpose.
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Account under the Mudaraba Muhor Savings Account shall only be opened in the name of wife.
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The applicant shall have to be introduced by a bonafide account holder of the Branch where he intends to open account or any client of any Branch of the Bank or any respectable person known to the Bank
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2(two) passport size photographs will be required to open this account.
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Account may be transferred from one branch to another of the Bank at the written request of the account holder.
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Separate account number shall be allotted for each account.
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At the time of opening of the account the client has to give his specimen signature in a separate card.
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Account may be also opened by thumb impression in case of illiterate woman. In such a case the introducer has to submit a suitable declaration to this effect in a form to be prescribed for this purpose.
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No Cheque Book shall be issued to the account holder before full deposit of Muhor money.
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If the address of account holder as well as the depositors is changed that must be informed to the Bank immediately.
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Instalment must be deposited within 6th to 25th of each month. If the 25th of any month is a Govt. holiday then instalment may be deposited on the preceding working day.
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The depositor shall be allowed to fix the monthly instalment of deposit at the rate of his choice from the options as mentioned above (i.e. Tk.500/-, Tk.1,000/-, Tk.2,000/-, Tk.3,000/-,Tk.4,000/- and Tk.5,000/-) so that it covers the payment of total Muhor within the scheduled period of time.
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12 (twelve) installments of deposit shall be counted for a year. As such, there will be 60 (sixty) installments for 5 (five) years, 120 (one hundred twenty) installments for 10 (ten) years.
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Monthly statement, signed by the Manager or by Authorised Officer on his behalf, shall be given to the depositor showing progressive balance of the respective account.
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Instalment may be also deposited by cheque. In such case proceeds against the cheque must be collected within the 25th day of the month. If the cheque is dishonoured then the cheque shall be returned to the depositor observing due formalities and the instalment shall be treated as overdue.
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Advance Instalments may be allowed to be deposited.
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The depositor may issue written standing instruction for monthly transfer of instalment amount from any other account maintained with the same branch for credit to his MMSS account. In that case the client must ensure sufficient credit balance in
her Savings or Current account and she has to pay a charge of Tk.5/- only for each such transfer. •
If any husband wants to pay the Muhor before fixed term, he may be allowed to deposit the rest amount of money at a time.
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If the deposited amount and the profit given by the Bank stands insufficient, at the end of the term, to pay the total amount of the Muhor it can be paid by depositing the rest amount at a time.
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The amount of Muhor may be determined more by the husband or less by the wife than the amount mentioned in the Kabin Nama for opening MMSS Account.
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The amount of instalment and the duration of Account can not be changed or returned.
Profit Sharing and Weightage The Mudaraba Muhor Savings Scheme account holders shall share income derived from investment made out of the Mudaraba funds in economic activities permitted by Islamic Shariah. This includes profit, dividend, capital gains, rent and any other income derived from investment. The account holders under this scheme along with other Mudaraba depositors shall get minimum 65% of the income derived from the deployment of Mudaraba Fund in the investment during any accounting year according to their proportion in the total investment on daily product basis applying weightage of 1.10 for 5 (five) years term and 1.30 for 10 (ten) years term. Benefits of full weightage with yearly cumulation of profit shall become payable if withdrawn on maturity. If the account is matured before declaration of annual final rate of profit for the relevant year the profit shall be paid to the concerned account as per provisional rate and then the surplus amount of profit, if any, shall be paid after declaration at the written request of the account holder (wife). Nature of the accounts under conventional banking: Contributory Savings Scheme: This is a Savings Scheme in which a person gets the opportunity to build up savings by contributing monthly installments and receives an attractive fixed amount at the end of a specified term. The Scheme is designed to help the fixed income group to save money and build up sizable funds with which they can go for some income generating venture to improve the quality of their life and/or meet any future financial obligations. The salient features of the Scheme are given below: 01. Minimum size of monthly installment shall be Tk. 500/- and multiplies of Tk. 1000/-. Maximum installment size shall be Tk. 25,000/-
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The Deposit shall be for a period of 5 years.
03. Normally no statement of the account will be served to the depositor, in case of need of any depositor, charges @ Tk. 10/- per year / per statement shall be realized as cost of paper. 04. At the time of opening account under CSS customer shall refer his/her SB account number for transferring his/her pension amount or may open SB A/C at the time of maturity for getting monthly pension amount. Education Savings Scheme: Education Savings Scheme in accordance with the principles of Islamic Sariah on the basis of profit and loss sharing. The scheme provides a unique opportunity to the parents to make a future provision for the educational expenses of their children when they enter into Schools, Colleges and Universities out of the benefit of a small amount of savings with the Bank at an opportune moment. The salient features of the Scheme are given below: 01. 02.
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Name of the Scheme shall be "Education Savings Scheme". The Scheme shall be implemented through our Islamic Banking Branch. Deposit under the Scheme is acceptable at any branch of the Bank. The fund shall be transferred to Islamic Banking Branch. Similarly, the issuing Branch shall also make the payment of the Instrument under the Scheme on behalf of the Islamic Banking Branch. Deposit of Tk. 50,000/- and multiples thereof at a time will be accepted under the Scheme
Short term deposit Account: A short term deposit (STD) account is a running account with amounts being paid into and drawn out of the account continuously. These accounts are called Demand Deposits or Demand Liabilities since the banker is under obligation to pay the money in such deposits on demand. These accounts are generally opened by Business Organization, Public Institution, Corporate Bodies. An STD account may be opened by an individual person Double benefit deposit scheme: The Scheme shall be implemented through all the branches of Prime Bank Limited. Deposit of Tk. 25,000/- and multiplies thereof but maximum limit of Tk. 25, 00,000/- (Taka twenty five lac) at a time will be acceptable under the scheme. A specially designed Receipt shall be issued for the deposit under the Scheme in the same manner as issued in case of FDR. Branches shall use the existing SDS receipts for issue of instruments under this scheme till separate receipts are supplied. The instrument shall be issued for 7.5 years term. 05. At maturity after 7.5 years double the amount of deposit will be paid to the depositor. Photograph of Nominee, duly attested by the depositor, shall be obtained at the time of opening the account.In case of instrument is lost the procedure for the issuance of a duplicate receipt will be the same as applicable in case of loss of FDR.
Resident foreign currency deposit Account: Persons ordinarily resident in Bangladesh may open and maintain Resident Foreign Currency Deposit (RFCD) accounts with foreign exchange brought in at the time of their return from travel abroad. Any amount brought in with declaration to Customs Authorities in form FMJ and up to US$ 5000 brought in without any declaration can be credited to such accounts. Proceeds of export of goods or services from Bangladesh or commission arising from business deals in Bangladesh shall not be credited to such accounts. Balances in these accounts shall be freely transferable abroad. House building deposit scheme: The tenor of the House Building Deposit Scheme will be 5/7/10 years. Minimum Equity building amount shall be Tk. 10.00 lac.When a depositor fails to deposit any installment, he/she will have to pay a fine @5% of the overdue amount payable at the time of depositing the next installment or maximum Tk. 500/.In case of death of a depositor, the A/C. will cease to be operative and the amount deposited so far shall be paid to the nominee, and in the absence of nominee, to the legal heirs of deceased as per rules in force. Prime millionaire Scheme: Monthly installment shall be Tk. 12,810.00 /Tk. 8200.00 /Tk. 4,845.00 for the tenor of 5/7/10 years respectively. Terminal amount on maturity shall be Tk. 10.00 lac. Income Tax on interest amount shall be as per Government rule on taxation and the Bank reserves the right to deduct Income Tax. The depositor will have the option to choose any installment size at the time of opening of the A/C. and will not be allowed to change the size of installment afterwards. Normally no statement ot the account will be served to the depositor. In case of need of any depositor, charge@ tk.10 per year/per installment shall be realized as cost of paper. The dissimilarity between Islamic and conventional banks in terms of Accounts: After analyzing deposit Scheme of Islamic and conventional banks we get that there is a great difference between these two types of banking. Islamic bank offers such schemes that is closely related to the Shariah while conventional banking out of Shariah. Islamic bank considers mass banking activities whereas conventional banking welcomes classical banking. Islamic bank never go to offer such accounts which are directly related to the interest. But conventional banks offer all kinds of schemes as they wish and which would be increased their profit. They never think either it is related to the interest or not, even they execute their activities in respect of interest. Comparison between Islamic and conventional banking in terms of Foreign exchange services: Activities of Foreign Department of Islamic Bank: Letter of credit In order to execute import business bank offer guarantee to the exporter in favors of importer for paying the value of the products to the exporter. This paying system is most acceptable system to the international trade. Now a day this system is also used in domestic trade. In
brief, a documentary credit is an undertaking by a bank to pay, subject to conformity of the documents of the required items to contractual instructions. The parties of the Letter of Credit:
Importer: the party in favor of or request of the bank opens letter of credit. Exporter (Beneficiary): the party L/C is open in favor of that party. Issue Banks: the bank in which open letter of credit is called issue banks or opening bank. Advising Bank: the bank through its send letter of credit to the exporter or seller. Negotiating or Receiving Bank: the bill prepared against letter of credit are taken through the bank is called negotiating or receiving bank. Documentary Credit Based on Shari’ a: Legality of documentary credit: There are two ways use of documentary credit.These is as follows: •
Checking of document and work as a representative.
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Offers guarantee to pay money.
The stated above both representative and guaranteeing activities are acceptable to the Islam. So this standard has the legality in Islamic shari’a.
In context of clients application or bank’s own interest this types of documentary letter of credit can open, issue or conformation is acceptable to Islam. The Causes for not be legal activities.
If contracted product forbidden in Islamic shari’a.
If the parties of letter of credit directly or indirectly engage in riba or interest. For examples if the parties take loan for paying value of the product and take extra charge as interest. On the other hand for bill of discounting or unmeasured bill of discounting provide certainty of extra charge. For permissibility of bill of contract it is obligatory for legality of selling contract.
1) Previous contract before opening letter of credit: o The value of the product will be paid through letter of credit is acceptable to the Islamic shari’a. o If in contract have international explanation, but that explanation must be based on shari’a or not contradictory to shari’a.
2) Commission and others cost of letter of credit: a) Imposing cost for issuing letter of credit is acceptable to the Islamic sari’s. For providing service imposing fee is acceptable to Islamic shari’a. These types of fees may be percentages of the value of letter of credit. For evaluating the commission of letter of credit time valuating is not acceptable. This system is same in both cases.
The aspect of guarantee parse must be taken into account when estimating the fees for a documentary credit. For thinking interest based system it is not permissible to increase fee. In context of letter of credit one more contract(combination of contracts) is not acceptable b) For providing guarantee to pay the value of the contract that the contract are made by other banks acceptable to the Islamic shari’a. if found any fault in contract then it would be void. Investing to the letter of credit by Banks: Bank accept selling contract if it documentary contract. Bank can invest through murabah, musharakah or any shari’a permitted system. These points need to considered before investing.
After complied selling contract between buyer and seller there is no chance to invest by Islamic bank. In this situation investing is not acceptable to the Islamic bank.
In murabah investing system before completing selling contract and opening letter of credit buyer need to offer bank for investing. In this situation bank act as a buyer and then sell it to the original buyer.
In context of musharakah investing contract, here create selling contract. Before opening letter of credit the buyer need to apply for investing by the bank. After accepting the product bank can sell the product to the third party or the partner. Here can not contact with the partner for selling the product.
Bill discounting is not acceptable to the Islamic banks. It is not permissible to buy discounting bill before maturity.
Business of foreign currency in perspective of shari’a: trading in currencies: Accounting and auditing organization for Islamic finance institutions’ Shari’a Standard(2002) It is permissible to trade in currencies provided that it is done in compliance with the following Shari’a rules and percepts: •
Both party must take possession of the counter values before dispersing, such possession being either actual or constructive..
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The counter values of the same currency must be of equal amount even if one of them is in paper money and the other is in coin of the same country, like a not of one pound for a coin of one pound..
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The contract shall not contain any conditional option or deferment clause regarding the delivery of one or both counter values.
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The dealing of currencies shall not aim at establishing a monopoly position nor should it entail any evil consequences to the interest of individuals or societies.
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Currency transactions shall not be carried out on the forward or future market.
The Islamic thinkers announce individual thinking about forward bookingInternational Institute of Islamic Economics (IIIE’S) Blue print of Islamic Financial System, here stated thatForward trading of foreign exchange does not constitute a violation of the Ahkam on Riba if the exchange is carried out at the rate fixed at the time of initiating the transaction such that obligation of the would be indebted party/parties are precisely determined and do not change later on.Accounting and auditing organization for Islamic finance institutions’ Shari’a Standard(2002), here stated that It is prohibited to enter into forward currency contract s. this rules applies whiter such contracts are effected through the exchange of differed transfers of debt or through the execution of a deferred contract in which the concurrent possession of both of the counter values by both parties does not take place.It is also prohibited to deal in the forward currency market even if the purpose is hedging to avoid a loss of profit on a particular transaction effected in a currency whose value is expected to decline. It is permissible for the institution to hedge against the future devaluation of the currency by recourse to the following: To execute back to back interest free loans using different currencies without receiving or giving any extra benefit provided these two loans are not contractually connected to each other. Where the exposure is in respect of an account payable, to sell goods on credit or by Murabaha in the currency of the exposure. Forward contract only a contract for buying and selling of foreign currency. This types of buying and selling contract have the permissible to Islamic shari’a But the question is that the contract compulsory or not. If the forward contract end in usual process. If the value of letter of credit within fixed time and pay specific piece for foreign currency that stated before in contract. If in any situation cancel the forward contract in that situation buyer extra charge if necessary for foreign exchange change. But if increase value of currency then the buyer will not get benefit from here.Here main factor is compulsory contract in perspective of shari’a. because if future contract compulsory then it not be a contract, it take as a completed buying and selling. Islamic thinkers agreed that for buying and selling of foreign currency spot transaction is acceptable to Islam.Our currency is weak compare to the others currency. So it variant more than others currency. All of the country don’t follow this system. As for Malaysia follow forward banking. For benefit of Islamic banks’ customers the shari’a council reached consensus.
It the contract end with usual process then it would be acceptable to Islamic shari’a.
If contract fail or void and contract newly then this income is not fair.
Payment and Settlement System in of Conventional Bank in Bangladesh:
Bangladesh Bank has undertaken efforts to upgrade existing payment systems With focus on the capacity building necessary to define a long-term strategy for payments in Bangladesh. This is important for the healthy growth of the financial settlements through a safe and efficient payment and settlement systems ensuring fast and secured transfer of money and financial instruments using modern technological innovation. Bangladesh is currently processing cheques in both manual and semi-automated fashion entailing lengthy settlement times. Cash is still the major payment mode in Bangladesh. Cheques form the second most important payment instrument. In other words, cheques, banker's demand drafts, pay orders and other negotiable instruments are commonly used for settlement of claims. The level of computerizations in the payment and settlement system is also very low. Only a few banks have their branches in the capital city brought under computer network. Payment & settlement through electronic media in the domestic market is uncommon. Bangladesh Bank operates a regional clearing system in Dhaka and similar systems exist at the 7 other centers where Bangladesh Bank has a branch enabling the banks in that area to settle their mutual claims arising out from customer and inter-bank transactions. Each clearing house operates as a local clearing center with all non local clearing items being treated in a collection basis. All the scheduled banks are eligible for membership of the clearing house provided they agree to comply with the rules of the clearing house. Members bear the maintenance charges of a clearing house on proportional basis. A member ceases to be a member if it stops or suspends payment of its debts generally or ceases to carry on business voluntarily or compulsorily. In the district level whereBangladesh Bank has no branch, Sonali Bank, the largest state owned commercial bank in the country operates the clearing house on behalf of Bangladesh Bank for that locality. At present 37 branches of Sonali Bank areperforming clearing and settlement operation. Operating procedure of the clearing house has been outlined by Bangladesh Bank in terms of which all the clearing houses operate their day to day business. In areas where there is no clearing house, instruments presented/deposited to a bank account are settled through collection from the original drawer banks and accounted for through an inter-bank reconciliation system among them. However, this involves a longer collection time. In the central bank, all transactions in the current accounts of the scheduled banks are settled either by cash or transfer instruments. No electronic settlement system is operative. Similarly, transactions in the government accounts maintained with the central bank are also settled through cash and transfer instruments. The clearing activities of the banks: Currently Bangladesh Bank is receiving the information of cheques/instruments on diskettes from all member banks of clearing house and processes the same using a software 'NIKASH' developed in-house. • Branches of each bank dealing with the clearing house use the above Software provided by Bangladesh Bank to capture the data of cheque into Floppy disks. • Where branches do not have suitable hardware for data input the "Local" (Service Branch) office of that bank will perform the data capture job on behalf of those branches. • Cheques are physically sorted by bank/branch. • A clearing schedule is printed for each bank. • This outward clearing schedule, sorted cheques and data disks are then taken to the clearing house. First Clearing (Morning)
• Each bank attends the clearing house physically and hands its outward cheques to each of the other respective banks. • Each bank carries out a check to ensure that the listing of inward cheques received matches the physical cheques received. • Diskettes containing the data are passed to the Bangladesh Bank supervisor who feeds each disk into a PC based system. This system consolidates all the data on the disks and calculates a 'settlement' figure for each bank. • Schedules of cheques now being cleared to each bank are printed out of the computer system and passed to each bank representative. • Each bank then checks the schedules against the cheques received to confirm accuracy. • Each bank receives a diskette of all cheques that have been 'cleared ' (inwato that bank. • Debit/credit vouchers are prepared in the computer for updating the member bank's account. Bangladesh Bank effects settlement by manually posting the debit/credit to each individual clearing bank account at BB. Same-Day Clearing: To improve and facilitate quick processing of cheques and prompt settlement 'Same-Day' clearing of high-value cheques (Tk. 500000 or above) has been introduced. Clearing operation of high-value cheques at BB starts at 11.00am and closes at 2.00pm and is participated by members close to Motijheel area. The settlement is done on the same day. Clearing Houses at Sonali Bank Branches: In regions where BB does not have branches, Sonali Bank carries out a clearing house service on behalf of BB. The clearing activities are done manually by Sonali Bank as those have not been computerized using the 'NIKASH' software. Volumes There is an estimated average of 40,000 to 50,000 cheques and demand drafts in Dhaka, 25,000 in Chittagong per day being cleared. The peak number of cheques in Dhaka clearing house region is around 70,000. Comparison in terms of General banking services: Micro Finance vs. Micro Investment •
Basically conventional concept of financing
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Small size of credit
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Target Group is marginal farmer, trader and self employed persons
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Credit provided against interest or service charge
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Generally trading mode is not practiced
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Generally collateral free
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Repayment on the basis of installments
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Supervised in nature
Superiority of Islamic Micro Investment
Introducing Total Investment Program (Investment +Donation/Quard-EHasana)
Targeting Hard core poor.
Providing fund for productive investment on Mudarabah basis
Incorporation of Zakat with the Poverty Alleviation Program to ensure net transfer of wealth.
Free from all types of implicit cost
Ensuring least transaction cost
Providing cost free education and health for the target group from Zakat fund
Supervising and regular monitoring of investment
Creating a vast network Collateral-free investment
Low cost housing investmentProviding cost -free formal education for kids
Providing cost -free informal education for the elder members of the family.
Providing low-cost sanitation facility for slum dwellers and rural poor
Providing marriage loan (interest free) /Donation
Preferring male for quard/investment
Motivation to build strong family in all respect
Findings and Recommendation Banking sector is the key financial arena of our economy. It comprises of Conventional banking system and Islamic Banking system. In our analysis we have considered Islami Bank Bangladesh Ltd and Prime Bank Ltd. We have made the comparison based on some criterias. We have found that both the bank is growing at an increasing rate. But nowadays Islami Banks are getting more profitable as they are operating on participatory basis. Our comparison comprises of several perspectives. Islami bank offers less deposit schemes in compare to prime bank as islami banks has some bindings of sharih. Islami bank cannot do anything whatever it wants like prime bank Ltd. In Bangladesh islami bank has great potentiality as the great muslim country. If this bank raise their service maintaining the line of sharia and can convince the customers as a non-interest based bank then this bank can get more popularity which will increase their profitabily. Still now islami bank is the better position than other commercial conventional bank as their service is unique and they are lying within the sharia’s boundary.
To continue this dynamic expansion, 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. On the other hand the conventional banks should bring more secured banking products. More diversified products should be evolved. These banks have to be more customers oriented so that they can get the more public acceptance. Thus the conventional bank can achieve its maximum success. Reference and Appendix •
www.primebank.com.bd
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www.dse.gov.bd
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www.ibbl.com.bd
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www.investopedia.com
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Islam banking------- the book of Islamic economic research institution