Investment Mechanism of Islami Bank BD ltd

August 10, 2012 | Author: | Posted in Operational Banking

Table of Contents

Chapter 1: INTRODUCTION

Introduction:

Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core of the money market in an advanced country. In recent times the banking sector over the world has been undergoing a lot of changes due to deregulation, technological innovation, globalization etc. Bangladesh banking sector is lagging for behind in adopting these changes. To thrive well in this changing environment, not only development of appropriate infrastructure is necessary but also infusion of professionalism in to banking service is essential. The Banking sector is one of the highly regulated sectors in our country. It is governed by the rules and regulation of Central Bank of the country i.e. Bangladesh Bank and Security and Exchange Commission. The bank companies are forced to comply the best accounting practices. It strictly follows International Accounting Standard (IAS) norms. It publishes the financial statement every year getting it duly audited by recognized audit firms. Every bank of our country has a division named Financial Administration Division (FAD) which takes care of the accounting issues of the Bank. Most of the personnel who lead these divisions are of accounting background. Among the accounting based FAD personnel who know the banking operation better can contribute more in the banks.

Islami bank Bangladesh Limited is an unconditional and specialized financial institution which is first of its kind in South East Asia performs most of the standard banking service and investment activities on the basis of profit-loss sharing system conforming to the principles of Islamic Shariah. Islami Bank does not pay interest to depositor. Instead depositors participate in the profitability of the bank. The Bank participates in financing long-term projects on the basis of profit-loss sharing instead of granting credit facilities with interest. IBBL also performs various social welfare activities through its subsidiary organ named Islami Bank Foundation (IBF).

Career in Banking has become very lucrative over the last few years considering the work environment and remuneration package. As a student of BBA, I cherish to be a banker and that is why I had chosen a banking organization for my internship. I chose IBBL because it has a good reputation in the banking community.

My internship program specially based on Islami Bank Bangladesh Limited and I want to focus the convergence in lending (investment) performance between IBBL vs. other conventional bank in Bangladesh. For my study purpose I choose National Bank Limited as an example of conventional bank. 

History behind the Report:

For Dissertation report each student has to prepare a report on their choice. According to this requirement, I have already completed my Dissertation report on the Investment Mechanisms of Islami Bank Bangladesh Ltd., because I am a staff of Islami Bank Bangladesh Ltd. And as a Muslim I should know the Islamic Banking system. For my reporting purpose a lot of time I went IBTRA to collect necessary information. On the basis of my practical experience as well as theoretical knowledge, I have completed the report regarding “Investment Mechanisms of Islami Bank Bangladesh Ltd.The main focus of my study is to analyze the investment procedure of IBBL. Islami Bank does not lend money or issue securities with fixed interest. Instead it finance in various schemes approved by Shariah Board to achieve its goal.

Objective of the Study:

The main objective of the study is to gather practical knowledge regarding banking system and operation. This practical orientation gives us a chance to Co-ordinate out theoretical knowledge with the practical experience. The following are of objective for this practical orientation in bank:

  • To apply theoretical knowledge in the practical field.
  • To fined out the overall pictures of investments of IBBL.
  • To identify strength and weakness of lending and investments of overall banking system.
  • To identify the problems related to investments faced by IBBL and other conventional banks.
  • To find out the reason why people go to IBBL. 

Rationale of the Study: 

There are three types of schedule commercial banks are in operation in our economy. They are Nationalized Commercial Banks, Local Private Commercial Banks and Foreign Private Commercial Banks. Islami Bank has discovered a new horizon in the field of banking area, which offers different General Banking, Investments and Foreign Exchange banking system. So I have decided to study on the topic “Investment Mechanisms of Islami Bank Bangladesh Ltd.”. Because the Dissertation report of the university is an integral part of the MBA program. So it is obligatory to undertake such task by the students who desirous to complete and successfully end-up their MBA degree. This also provides an opportunity to the students to minimize the gap between theoretical and practical knowledge. During the Dissertation report the teachers of the department are attached to actively and constantly guide the students. Students are required to work on a specific topic based on their theoretical and practical knowledge acquired during the period of the internship program and then submit it to the teacher. That is why we have prepared this report.

 Methodology of the Study:

 For smooth and accurate study every one have to follow some rules & regulation. The study impute were collected from two sources:

(a)      Primary sources

(i)                 Practical desk work

(ii)               Face to face conversation with the officer

(iii)             Direct observations

(b)      Secondary sources

(i)                 Annual report of IBBL

(ii)               Files & Folders

(iii)             Memos & Circulars

(iv)             Various publications on Bank,

(v)               Websites,

(vi)             Different circulars sent by Head Office and Bangladesh Bank.

Limitation of the Report: 

There were some problems while I conducting the orientation program. A wholehearted effort was applied to conduct the orientation program and to bring a reliable and fruitful result. In spite of having the wholehearted effort, there exit some limitations, which acted as a barrier to conduct the program. The limitations were —

  • Sometimes I was assigned to do some jobs without explaining why this work is to be done. This situation has created a lot of problems to understand why a specific function is being performed.
  • All the branches of the sample bank were not physically visited.
  • All the concerned personnel of the bank have not been interviewed.
  • Lack of in-depth knowledge and analytical ability for writing such report.
  • Lack of experience.
  • Learning all the banking functions about credit within just two and half months was really tough.
  • Another limitation of this report is Bank’s policy of not disclosing some data and information for obvious reason, which could be very much useful.

Chapter 2: An Overview Of Islami Bank Bangladesh Limited

An Overview of Islami Bank Bangladesh Limited (IBBL):

We are very familiar with the interest based banking system and its mechanism. At the time of independence Bangladesh inherited an interest-based banking system introduced by the British government during the colonial period. At present four nationalized banks, five specialized banks, sixteen foreign banks and some private banks are operating in the financial market of Bangladesh. But the Islamic banking in Bangladesh dates back to 1983 when Islamic bank Bangladesh Limited (IBBL) was established with a view to conducting its banking activities based on the principle of Islamic Bank shariah. In 1987 Oriental Bank (Al-Baraka Bank) Bangladesh Limited the second Islamic Bank was established. There are six Islamic Banks in Bangladesh. These are:

  • Islami Bank Bangladesh Limited (1983)
  • Social Invested Bank Limited (1995)
  • The Oriental Bank Limited (1987),
  • Al-Arafah Islamic Bank Limited (1995)
  • Shahajalal Bank Ltd.
  • Exim Bank Ltd.

Also Prime Bank Ltd. Dhaka Ltd., Southeast Bank Ltd., Premier Band Ltd. And some other Banks are thinking about the opening of Islamic Branches.

Historical Background of IBBL:

In August 1974, Bangladesh signed the Charter of Islamic Development Bank and committed itself to reorganize its economic and financial system as per Islamic Shariah.

In January 1981, the President of People’s Republic of Bangladesh While addressing the third Islamic conference held at Mecca and Taif suggested “The Islamic countries should develop a separate banking system of their own in order to facilitate their trade and commerce”

This statement of the president indicated favorable attitude of the government of the People’s Republic of Bangladesh towards establishing Islamic banks and financial institution in the country.

In early November 1980, Bangladesh bank, the country’s Central Bank, sent a representative to study the working of several Islamic Banks abroad.

In November 1982, a delegation of IDB visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic bank in the private sector. They found a lot of work had already been done and Islamic banking was in a ready from for immediate introduction. Two professional bodies of Islami Economics Research Bureau (IERB) and Bangladesh Islami Bankers’ Association (BIBA) made significant contribution towards introduction of Islami banking in the country.

They came forward to provide training of Islamic banking to top bankers and economists to fill up the vacuum of leadership for the future Islami bank in Bangladesh. They also had seminars, symposiums and workshops on Islami economic and banking throughout the country to mobilize public opinion in favor of Islami banking.

Their professional activities were reinforced by a number of Muslim entrepreneurs working under the support of the then Muslim Businessmen society (now reorganized as Industrialist & Businessmen Association). The body concentrated mainly in mobilizing equity capital for the emerging Islami bank.

At last, the long drawn struggle to establish an Islami bank in Bangladesh become a reality and Islami bank Bangladesh limited was established in march 1983 in which 19 Bangladeshi national, 4 Bangladeshi institutions and 11 banks, financial institutions and government bodies of the middle East and Europe including IDB and two eminent personalities of the kingdom of Saudi Arabia joined hands to made the dream a reality.

Later, other Islami Banks, Islami Insurance Companies and Financial Institution were established in the country. Some traditional banks opened Islamic banking branches in some major cities. 

Mission and Vision of IBBL:

□ Mission of IBBL:

To establish Islami Banking through the introduction of a welfare oriented banking system and also ensure equality and justice in the field of all economic activities, achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less development areas of the country to encourage socio-economic upliftment and financial services to the low-income community particularly in the rural areas.

□ Vision of IBBL:

Vision of IBBL is to always strive to achieve superior financial performance, be co considered a leading Islami Bank by reputation and performance.

►        Goal of IBBL is to establish and maintain the modern banking techniques, to ensure the soundness and development if the financial system based on Islami principles and to become the strong and efficient organization with highly motivated professionals, working for the benefit of people, based upon accountability, transparency and integrity in order to ensure the stability of financial system.

►      IBBL will try to encourage saving in the form of direct investment.

►      IBBL will also try to encourage investment particularly in projects, which are more likely to higher employment.

Shariah Council of IBBL: 

Profile of Council Members:

The Shariah Council of Islamic Bank generally consists of experts from the following four areas:

1. Fuqaha: Persons representing this group must be well versed in the Quran, Sunnah and fully conversant with the opinion of all schools of islami thought and Islami law and jurisprudence. They must view Islam as a total way of life and a living religion.

2. Banker: There must be a member who is fully conversant with banking law and practices and has practical experiences in Banking business including foreign trade.

3. Economist: A member from this group need not necessarily be an Islami economist to start with. But if he is an Islami Economist it is an added advantage. What is important is that he must be really proficient in modern economies with an in depth study of the community, which a bank is going to solve. He must have up to date knowledge in the development of the contemporary world.

4. Lawyer: A member representing this group should be a successful practitioner lawyer. He must be proficient in commercial law including company law. In consultation with the Fuqaha and Economist members of the council, he should be able to draft such innovating contracts, which will have the sanction of Islami principles and a banking law of the land.

Objectives of Shariah Council:  

The functions of the council are to offer views and opinions on matters related to the bank from time to time. The council may require any paper document from the bank and examine the same to see whether it is according to see whether it is according to Islamic principles.

      The shariah council assists the Board of Directors by advising them on matters related to shariah.

      The opinion of the majority of members is taken as the opinion of the council provided that the said opinion is supported by at least three Muftis of the council.

      The council maintains its secretariat and a well-equipped library as the Head Office of the bank where it keeps proper records of all of its proceedings and decisions.

      The council elects a chairman and a secretary from amongst them. The chairman will normally preside over the meetings. In his absence the members present elect one of them to preside over the meetings.

      The council may whenever it thinks necessary, constitutes a sub committee to help the council.

The council issues Shariah Certificate in the Annual Report of the bank. 

Features of IBBL:

The bank is committed to run all its activities as per Islami Shariah. IBBL through its steady progress and continuous   success has earned the reputation of being one of the leading private sector banks of the country. The distinguishing feature s of IBBL is as follow:

ü  All its activities are conducted on interest-free banking system according to Islamic Shariah.

ü  Establishment of participatory banking instead of banking on debtor-creditor relationship.

ü  Investment is made through different modes permitted under Islami shariah

ü  Investment income of the Bank is shared with the Mudaraba depositors according to a ratio to ensure a reasonable fair rate of return on their depositors.

ü  Its aims are to introduce a welfare-oriented banking system and also to establish equity and justice in the field of all economic activities.

ü  It extends Socio-economic and financial services to the poor, helpless and low-income group of the people for their economic up liftmen particularly in the rural areas.

ü  It plays a vital role in human resource development and employment generation particularly for the unemployed youths.

ü  Its aim is to achieve balanced growth and equitable development of the country through diversified investment operations particularly in the priority sectors and in the less developed areas.

ü  It extends co-operation to the poor, the helpless and the low-income group for their economic development.

Function of IBBL:

 The operation of Islamic Bank Bangladesh limited can be divided into three (3) major categories:

General Banking: it includes: -

a. Mobilization of deposits

b. Receipts and payment of cash.

c. Handling transfer transaction.

d. Operations of clearing house

e. Maintenance of accounts with Bangladesh bank and other bank.

f. Collection of cheque and bill.

g. Issue and payment of Demand Draft, telegraphic transfer and payment Order.

h. Executing customers standing instructions.

i. Maintenance of safe deposit lockers.

j. Maintenance of internal accounts of the bank.

While doing all the above noted work IBBL issue cheques-book, Deposit account operating form, SS card, Ledgers, Cash book, Deposit account ledgers, preparation statement of accounts, Pass book, Balance of different accounts and calculates profits.

IBBL offers to open the following account to the depositors:

  1. Al-Wadeeah Current Account.
  2. Mudaraba Savings Account.
  3. Mudaraba Term Deposit Account. (3 month / 6 month / 12 month / 36 months term)
  4. Mudaraba Special Notice Account
  5. Mudaraba Hajj Savings Account (1 year to 25 year term)
  6. Mudaraba Special Savings (pension) Account (5 year to 10 year term)
  7. Mudaraba Savings Bond Scheme (5 year & 8 year term)
  8. Mudaraba Foreign Currency Deposit Account.
  9. Mudaraba Monthly Profit Deposit Account.
  10. Mudaraba Moharana Account.
  11. Mudaraba Waqf Cash Deposit Account (MWCDA)

Foreign Exchange Business:

Foreign Exchange Business plays a vital role in providing substantial reveneu in the bank income pool. Like all modern Banks IBBL operates in the area of the foreign Exchange business. IBBL performs the following tasks:

a)      Opening letter of credit (LC) against commission for importing industrial, agricultural and other permissible items under Islamic Shariah and Import policy.

b)      Opening letter of credit on the principle of Mudaraba sale, on the principle of Musharaka sale and under wage earner scheme.

c)      Handling of export/import document.

d)     Negotiation of export / import document when discrepancy occurs.

e)      Financing in import under MPI (Mudaraba Post Import)

f)       Financing to export on profit or loss sharing.

g)      Handling Inward and outward remittance. 

Other activities:

The IBBL performs the following task for the welfare of the society:

  • Income generating scheme for the unemployed youth of the nation.
  • Monorom sale center for marketing homemade garments, handicrafts and other items.
  • Education scheme for assisting poor scholar student to case and help them to continue their study.
  • Health scheme for fulfillment of health needs of rural people.
  • Islamic bank hospital was established to extend first hand modern and contemporary medical service to the people on non-profit business.
  • Humanitarian assistance is being provided to the poor, families affected by river erosion and for marriage of poor girls.
  • Energy relief operations are provided to the people affected by natural calamities.
  • Assistance to mosque for construction, repair and renovation.

Islami Bank Bangladesh Limited at a Glance:

Date of Incorporation                         :                       13th March 1983
Inauguration of 1st Branch                 :                       30th March 1983
(Local Office, Dhaka)

Formal Inauguration                           :                       12th August 1983
Share of Capital

Local Shareholders                             :                       42.12%

Foreign Shareholders              :                       57.88%

Authorized Capital                                    Tk.5,000.00 million

Paid-up Capital                                          Tk.3,801.60 million

Deposit                                                      Tk.166,637.00 million

Investment                                                 Tk.174,068.00 million

Foreign Exchange Business:                     Tk.287,919.00 million

Number of Branches                                   186

Number of Shareholders                             20,960

Manpower                                                   8426

 

Source: Islami Bank 25 years of progress 2008

Successful Achievements of IBBL:

IBBL is the pioneer institution for introduction of Islamic Banking in Bangladesh. The success of IBBL has embedded other sponsors at home and abroad to establish Islamic Banking in Bangladesh. Several existing and proposed traditional Banks have also expressed their intention to introduced Islamic Banking. Achievements of IBBL can be given as under:

q  IBBL has successfully mobilized deposits for a section of people hither to before do any deposit with interest-based Banks.

q  The Islamic Banking products, which are offered by IBBL through its 144 branches, located at important centers all over the country and spontaneous acceptance of those products by the people proves the superiority of Islamic Banking

q  IBBL’s market share of deposit, investment and ancillary business is steadily increasingly.

q  IBBL, through still a tiny bank, handles more than 10 of country’s export and import.

q  Among the contemporary commercial Banks IBBL’s position is first in respect of mobilization of deposit, deployment of fund and earning profit.

q  Investment in industrial sector occupies 25 of IBBL’s investment portfolio. This unique example of industrial finance by a commercial Bank.

q  More than 115000 workers are employed in the industrial projects financed by IBBL. IBBL has thus made significant contribution to solving unemployment problem of country.

q  IBBL has earned reputation in the country as a corruption free institution.

q  IBBL has introduced several other welfare oriented investment schemes, such as small transport investment scheme, household Durable investment scheme, Housing investment scheme etc.

q  IBBL launched a rural development scheme for overall development of the rural people.

q  At the initiative of IBBL, several universities in Bangladesh have introduced course on Islamic Banking and Finance.

q  IBBL has been continuously persuasion the Government to allow formation of more Islamic Insurance Company.

q  Under the leadership of IBBL, Bangladesh Association of Banks (BAB) has been formed.

q  This is platform to ventilate the standpoints on banking issues of the private sector banks.

q  IBBL has taken initiative to form on Association of Islamic Banks in Bangladesh for furtherance of the cause of Islamic Banking.

IBBL’s World Rating:

As per Banker’s Almanac (January 1999 edition) published by the Reed Business information, Windsor Court, England, IBBL’s world rank is 1902 among 4500 banks selected by them. IBBL’s country rank is 5 among 39 banks as per ratings, made by the above Almanac on the basis of IBBL’s financial statements of the year 1997.

World ranking of IBBL amongst top 3000 International Banks:

Serial No.

Year

World rating

1994

1447

1995

2314

1996

2303

1997

2262

1998

2119

1999

2100

2000

1999

2001

1902

2002

1771

2003

1755

2004

1581

2005

2006

1490

2007

1591

 

Source: The Bankers Almanac: World Ranking Road Business Information, U.K.


CHAPTER 3:Literature Review

INVESTMENT MACHANISAMS OF IBBL

One of the significant and revolutionary development in the banking area of the world during last four decades is the emergence and extra ordinary development of Islamic Banking in different countries of the world which has drown the attention of the scholars and general public of the Muslim and non-Muslim countries including the world bodies like International Monetary Fund, World Bank etc. 

Objectives and Principles: 

The special feature of the investment policy of Islamic Banks is to invest based on profit-loss sharing system in accordance with the tenets and principles of Islamic Sharia. Earning of the profit is not the only motives and objectives of the Islamic Bank’s investment policy rather emphasis is given in attaining social good and in creating employment opportunities.

Investment Mechanism of IBBL:

Figure No – 01: Investment Mechanisms of IBBL

Source: Investment Manual of IBBL


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

 

  • To invest fund strictly in accordance with the principles of islamic shariah.
  • To diversify its investment portfolio by size of investment portfolio 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 accelerate 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.
  • To encourage social upliftment enterprises.
  • To ensure avoid all the investment forbidden by the islami shariah.
  • The bank extends investment under the principles of Bai-murabaha, Bai-Muazzal, Hire Purchase Under Shirkatul Melk and Musharaka.

Investment Policy of IBBL:

Investment policy of Islamic Bank and non Islamic bank are fully different. The investment policies of Islamic bank are

  • Strict observance of Islamic shariah principles.
  • Investment to national priority sectors.
  • Diversified investment portfolio: Diversification by size, sector, geographical area, economic purpose, securities and mode of investment.
  • Preference to short-term Investments.
  • Preference to investment of small size.
  • To ensure safety & security of investments
  • To look profitability of investments.
  • To give support to government denationalization industrial program.
  • Investment to trade and commerce sector.
  • Investment to industrial sectors.
  • Investment to Foreign Trade (import & export).
  • Exploration of the possibility of investment in the existing Money & capital Market and help organization of Islamic Money & Capital Market

Investment Strategy of IBBL: 

Investment strategy of Islamic Bank and interest-based bank are contradictory. The investment strategies of Islamic Bank are:

  • To check exodus of investment clients.
  • To induct new investment clients.
  • To induct good investment clients of other Banks.
  • To enhance existing limits of good investment clients.
  • Extension of investment transport sector.
  • Extension of investment to backward as well as forward linkage industries.
  • Extension of investment to real Estate Sector.
  • Extension of investment to Jute sector; particularly for trading and export purpose.
  • Strengthening supervision, control and monitoring mechanism.
  • Training and motivation of manpower to handle increased and diverse volume of investment s.
  • To give due consideration to high risk, high return and low risk, low return investment proposals.
  • Adaptation of modern technology

Growth of Investment:

The investment of the Bank demonstrated steady growth over the years. The total investment to the Bank stood at TK.123950.40 million in 2006.It was TK.102144.51 million in 2005.

Investment Instrument of IBBL:

IBBL invests its money in various sectors of the economy through different modes permitted by shariah and approved by the Bangladesh Band. The modes of investment are as follows:

1) Bai-Mechanism:

  • Bai-Murabaha
  • Bai-Muazzal
  • Bai-Salam
  • Istishana

2) Leasing, Ijara,Hire Purchase (HP) , Hire purchase under shirkatul Melk (HPSM)

3) Shirkat Meechanism:

  • Musharaka
  • Mudaraba


1. Bai-Mechanism (Trading mode):

 

Chart No – 03: Investment Trend of IBBL in Bai Murabaha

 

Source: Branch Managers’ Conference Book 2008

Bai-Murabaha:

Bai- murabaha may be defined as a contract between a buyer and a seller under which the sells certain specific goods (permissible under Islamic shariah and the law of the land) to the buyer at a cost plus agreed profit payable in cash or on any fixed future data in lump sum or by installments. The marked up profit may be fixed in lump sum or in percentage of the cost price of the goods.

 Important features:

¨ It is permissible for the client to offer an order to purchase by the bank particular goods deciding its specification and committing him to buy same from the bank on murabaha, i.e. cost plus agreed upon profit.

¨ It is permissible to make the promise binding upon the client to purchase from the bank, that is, he is to satisfy the promise or to indemnify the damages caused by breaking the promise without excuse.

¨ It is also permissible to take cash / collateral security to guarantee the implementation of the promise or indemnify the damages.

¨ Stock availability of goods is a basic condition for signing a Bai-murabaha agreement. Therefore, the bank must purchase the goods as per specification of the client to acquire ownership of the same before signing the Bai-Murabaha agreement with the Client.

¨ After purchase of goods the Bank must bear the risk of goods until those are actually sold and delivered to the Client, i.e., after purchase of the goods by the Bank and before selling of those on Bai-Murabaha to the Client buyer, the bank bear the consequences of any damages or defects, unless there is an agreement with the Client releasing the bank of the defects, that means, if the goods are damaged, bank is liable, if the goods are defective, (a defect that is not included in the release) the Bank bears the responsibility.

¨ The Bank must deliver the specified Goods to the Client on specified date and at specified place of delivery as per Contract.

¨ The bank shall the goods at a higher price (Cost + {profit) to earn profit. The cost of goods sold and profit markup therewith shall separately and clearly be mentioned in the Bai-Murabaha agreement. The profit Mark-up may be mentioned in lump sum or in percentage of the purchase/cost price of the goods. But, under no circumstance, the percentage of the profit shall have any relation with time or expressed in relation with time, such as per month, per annum etc.

¨ The price once fixed as per agreement and deferred cannot be further increased.

¨ It is permissible for the bank to authorize any third party to buy and receive the goods on Bank behalf. The authorization must be in a separated contract.

Cost and Sale Price of the Goods:

A.   Purchase Price/Landed Cost of the goods PLUS

 B.   Other expenditures incurred by the Bank in connection with the Purchase, Transportation and Storage before sale of the Goods to the Client:

        a. Conveyance – TA/DA of Bank Official or the Agent, if any.

        b. Commission Paid to the Agent, if any.

        c. Cost of Remittance of Fund.

        d. Transportation Cost up to Bank’s Godown (if not sold just after purchase).

        e. Transit Insurance and Incidental Charges.

        f. Other Expenses, except interest incurred (if any). Interest element, if any, is to       be paid by the Client himself.

        g. Godown Rent and Godown Staff Salary (if the Goods are kept in the Bank’s         Godown before sale to the Client).

        C. Total Cost Price (A+B) Tk…………………………

        D. Estimated Profit of the Bank  Tk…………… (Percentage of Profit …………%)

        E.            Sale Price (C+D) Tk………………………. (                                                   )

Bai-Muajjal:

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  within a fixed period by fixed instalments. The seller may also sell the goods purchased by him as per order and specification of the Buyer.

In this Bank, Bai-Muajjal is treated as a contract between the Bank and the Client under which the Bank sells to the Client certain specified goods, purchased as per order and specification of the Client at an agreed price payable within a fixed future date in lump sum or by fixed instalments.

IMPORTANT FEATURES

It is permissible for the Client to offer an order to purchase by the Bank particular goods deciding its specification and committing himself to buy the same from the Bank on Bai-Muajjal i.e. deferred payment sale at fixed price.

01                 It is permissible to make the promise binding upon the Client to purchase from the Bank, that is, he is to either satisfy the promise or to indemnify the damages caused by breaking the promise without excuse.

02                 It is permissible to take cash / collateral security to Guarantee the implementation of the promise or to indemnify the damages.

03                 It is also permissible to document the debt resulting from Bai-Muajjal by a Guarantor, or a mortgage. or both like any other debt. Mortgage / Guarantee / Cash security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.

04                 Stock and availability of goods is a basic condition for signing  a  Bai-Muajjal Agreement, Therefore, the Bank must purchase the goods as per specification of the Client to acquire ownership of the same before signing the Bai-Muajjal Agreement with the Client.

05                 After purchase of goods  the Bank must bear the risk of goods until those are actually delivered to the Client.

06                 The Bank must deliver the specified Goods to the Client on specified date and at specified place of delivery as per Contract.

07                 The Bank may sell the goods at a higher price than the purchase price to earn profit.

08                 The price once fixed as per agreement and deferred can not be further increased.

09                 The Bank may sell the goods at one agreed price which will include both the cost price and the profit. Unlike Bai-Murabaha, the Bank may not disclose the cost price and the profit mark-up separately to the Client.

Cost and Sale Price of the Goods:

     A.   Purchase Price/ Landed cost of the goods

            PLUS

     B.   Other expenditures in connection with the Purchase, Transportation and Storage of the Goods incurred by the Bank before sale to the Client:

a. Conveyance – TA/DA of Bank Official or the Agent, if any.

            b. Commission Paid to the Agent, if any.

            c. Cost of Remittance of Fund.

            d. Transportation Cost up to Bank’s Godown (if not sold just after purchase).

            e. Transit Insurance and Incidental Expenses.

f. Other Expenses except interest incurred (if any). Interest element, if any, is to be paid by the Client himself.

g. Godown Rent and Godown Staff Salary (if the Goods are kept in the Bank’s Godown before sale to the Client).

C. Total Cost Price (A+B) Tk………………….

D. Estimated Profit of the Bank Tk…………. (Percentage of Profit ……….%)

E. Sale Price (C + D) Tk………………..             (                                           )


Chart No – 04: Investment Trend of IBBL in Bai Muajjal

Source: Branch Managers’ Conference Book 2008 

Bai-Salam: 

Definition

Bai-Salam may be defined as a contract between a Buyer and a Seller under which the Seller sells in advance the certain commodity(ies)/product(s) permissible under Islamic Shariah and the law of the land to the Buyer at an agreed price payable on execution of the said contract and the commodity(ies)/product(s) is/are delivered as per specification, size, quality, quantity at a  future time in a particular place.

In other words, Bai-Salam is a sale whereby the seller undertakes to supply some specific Commodity(ies) /Product(s) to the buyer at a future time in exchange of an advanced price fully paid on the spot. Here the price is  paid in cash, but the delivery  of the goods is deferred.

IMPORTANT FEATURES 

  1. Bai-Salam is a mode of investment allowed by Islamic Shariah in which commodity(ies)/product(s) can be sold without having the said commodity(ies)/ product(s) either in existence or physical/constructive  possession of the seller. If the commodity(ies)/product(s) are ready for sale, Bai-Salam is not allowed in Shariah. Then the sale may be done either in Bai-Murabaha or Bai-Muajjal mode of investment.
  2. Generally, Industrial and Agricultural products are purchased/sold in advance under Bai-Salam mode of Investment to infuse finance so that production is not hindered due to shortage of fund/cash.
  3. It is permissible to obtain collateral security from the seller client to secure the investment from any hazards viz. non-supply/partial supply of commodity(ies)/product(s), supply of low quality commodity(ies)/Product(s) etc.
  4. It is also permissible to obtain Mortgage and/or Personal Guarantee from a third party as security before the signing of the Agreement or at the time of signing the Agreement.
  5. Bai-Salam on a particular commodity(ies)/product(s) or on a product of a particular field or farm cannot be effected. [for Agricultural Product(s) only]
  6. The seller (manufacturer) client may be made agent of the Bank to sell the goods delivered to the Bank by him provided a separate agency agreement is executed between the Bank and the Client (Agent).

Istishna’a:

DEFINITION

Istisna’a is a contract between a manufacturer/seller and a buyer under which the manufacturer/seller sells specific product(s) after having manufactured, permissible under Islamic Shariah and Law of the Country after having manufactured at an agreed price payable in advance or by instalments within a fixed period or on/within a fixed future date on the basis of the order placed by the buyer.

In Istisna’a contract, the buyer is called ‘al-mustasni’, the seller ‘al-sani’ and the goods or the subject matter of the contract ‘al-masnoo’.

PARALLEL ISTISNA’A

If the ultimate buyer does not stipulate in the contract that the seller will manufacture the product(s) by himself, then the seller may enter into a second Istisna’a contract in order to fulfil his contractual obligations in the first contract. This new contract is known as Parallel Istisna’a, whereby the obligations of the seller in the first contract are carried out.

ISTISNA’A IN ISLAMI BANK

01        Islami Bank can utilise Istisna’a in the following ways:

  1. Islami Bank may buy a commodity under Istisna’a contract and then sell it on cash or deferred payment basis to a Client of the Bank without receiving prior order from the Client.
  2. Islami Bank in the capacity of a seller may receive order from a Client for manufacturing and supplying certain specified goods under an Istisna’a contract and then enter into a Parallel Istisna’a contract in the capacity of a buyer with a Manufacturer for having the Product(s) manufactured by him i.e. the Islami Bank may obtain an order from a buyer to supply goods under Istisna’a and by a Parallel Istisna’a contract may have the goods made by a Manufacturer by an order.
  3. Bank may pay the price to the Manufacturer of the Product(s) in advance or by instalments or on deferred payment basis. They also may receive price of the Product(s) from the ultimate buyer in advance or by instalments or on deferred payment basis.

02        The obligations of Islami Bank as a ‘Seller’ in the first contract and as a ‘Buyer’ in parallel contract are as under:

a)             The Islami Bank as a seller in the first contract will remain solely responsible for the execution of its obligations as if the parallel contract is non-existent. Hence, Islami Bank in the first contract would remain liable for any default, negligence or breach of contract ensuing from the parallel contract.

b)             In the parallel Istisna’a, the Manufacturer is accountable to Islami Bank in the way and manner by which he performs his obligations. He has no direct legal relationship with the ultimate buyer in the first contract.

c)             The second Istisna’a is a parallel contract, but not a contingent transaction on the first contract. Legally speaking they are different contracts with respect to rights and obligations.

d)            The Islami Bank as a seller is liable to the ultimate Buyer with regard to any mal-execution of the sub-contractor and any guarantees arising therefrom. It is this very liability that justifies the validity of the Parallel Istisna’a and which also justifies the charging of profit by the Islami Bank, if any.

RULES AND CONDITIONS 

  1. There must be a contract between the Manufacturer and the Buyer, which shall be the principal instrument to govern the advance selling and buying under Istisna’a.
  2. The name, specification, brand, quantity, quality, size, etc. of the Product(s) must be clearly specified in the Contract leaving no ambiguity.
  3. Unit price and total price of the product(s) must be fixed and mentioned in the Contract.
  4. The time and place of delivery should be mentioned in the contract.
  5. Mode of transportation, transportation cost, storage charge/godown rent, insurance etc., if any, should be specified in the Contract.
  6. The name of party who will bear the cost of transportation, storage charge/godown rent, insurance etc. also be mentioned in the contract.
  7. The seller shall remain responsible for quantity, quality, and specification of the product(s) till physical/constructive delivery of the same to the buyer.
  8. Under Istisna’a transaction advance payment of price of the Product(s) under order is not compulsory. The Buyer may pay the price of the goods in advance in full or part as agreed upon, which should be clearly mentioned in the contract.
  9. Remaining price, if any, may be paid after receipt of the Product(s) or at any future date(s) or in instalments, if so agreed, and mentioned in the contract.
  10. After taking delivery of the Product(s), the Buyer shall be the owner and shall bear all risks till disposal / sale of the Product(s).
  11. The Buyer has the right to obtain security, in any form, from the Manufacturer for

a)             The total amount that he has paid.

b)             The delivery of al-masnoo’ in accordance with the specifications and on due time.

  1. The Manufacturer has also the right to obtain security, in any form, to guarantee that the price is payable on due time.
  2. It is permissible for the Buyer to insert a fine/penalty / compensation clause in the contract against unfulfilment of obligations by the Manufacturer at a fixed rate per day as mentioned in the contract.
  3. If the Product(s) is/are the Product(s) not in conformity with specification, the Buyer has the following options:

            Reject or

a)                  Accept it without seeking damages.

15        The contract of Istisna’a may be terminated under the following conditions:

a)                  Normal fulfilment of obligations by both the parties.

b)                  Mutual consent of both the parties.

c)                  Judicial rescission of the contract. This is if a reasonable cause arises to prevent the execution of the contract or its completion, and each party may sue for its rescission.

IMPORTANT FEATURES OF ISTISNA’A

  • Stisna’a is an exceptional mode of investment allowed by Islamic Shariah in which product(s) can be sold without having the same in existence. If the product(s) are ready for sale, Istisna’a is not allowed in Shariah. Then the sale may be done either in Bai-Murabaha or Bai-Muajjal mode of investment. In this mode, deliveries of goods are deferred and payment of price may also be deferred.
  • It facilitates the manufacturer sometimes to get the price of the goods in advance, which he may use as capital for producing the goods.
  • It gives the buyer opportunity to pay the price in some future dates or by instalments.
  • It is a binding contract and no party is allowed to cancel the Istisna’a contract after the price is paid and received in full or in part or the manufacturer starts the work.
  • Istisna’a is specially practised in Manufacturing and Industrial sectors. However, it can be practised in agricultural and constructions sectors also. 
  • Leasing, Ijara, Hire Purchase (HP), Hire purchase under Shirkatul Melk “HIRE PURCHASE UNDER SHIRKATUL MELK” (HPSM)

MEANING AND DEFINITION

Hire Purchase under Shirkatul Melk is a Special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts:

i)                    Shirkat

ii)                  Ijarah and

iii)                Sale

These may be defined as follows: 

SHIRKATUL MELK

Shirkat means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul Melk contract.

IJARAH

The term Ijarah has been derived from the Arabic works. Which means consideration, return, wages or rent. This is really the exchange value or  consideration, return, wages, rent of service of an asset. Ijarah  has been defined as a contract between two parties, the Hiree and Hirer where the Hirer enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the Hiree. It is a hire agreement under which a certain asset is hired out by the Hiree to a Hirer against fixed rent or rentals for a specified period. 

RELATED TERMINOLOGIES OR ELEMENTS OF IJARAH

  • According to the majority of Fuqaha, there are three general and six detailed elements of Ijarah.
  • The wording :  This includes offer and acceptance.
  • Contracting parties : This includes a Hiree, the owner of the property, and a Hirer, the party that benefits from the use of the property.
  • Subject matter of the contract : This includes the rent and the benefit.
  • The Hiree (Muajjir)-    The individual or organization hires/rents out the property of service is called the Hiree (muajjir).
  • The Hirer (Mustajir)- The individual or organisation hires/takes the hire of the property or service against the consideration rent / wages / remuneration is called the Hirer (mustajir).
  • The benefit / asset (Maajur) -  The benefit which is hired / rented out is called the benefit (maajur).

SALE

This is a sale contract between a buyer and a seller under which the ownership of certain goods or asset is transferred by seller to the buyer against agreed upon price paid / to be paid by the buyer.

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 equity money, own the same jointly, share the benefit as per agreement and bear the loss in proportion to their respective equity. The share, part or portion of the asset owned by the Bank is hired out to the Client partner for a fixed rent per unit of time for a fixed period. Lastly the Bank sells and transfers the ownership of it’s share / part / portion to the Client against payment of price fixed for that part either gradually part by part or in lump sum within the hire period or after the expiry of the hire agreement.

 

STAGES OF HIRE PURCHASE UNDER SHIRKATUL MELK

Thus Hire Purchase under Shirkatul Melk Agreement has got three stages:

  1. Purchase under joint ownership.
  2. Hire and
  3. Sale and /or transfer of ownership to the other partner Hirer.

IMPORTANT FEATURES:

01        In case of Hire Purchase under Shirkatul Melk transaction the asset / property involved is jointly purchased by the Hiree (Bank) and the Hirer (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 (Hiree Bank & Hirer Client) are clearly mentioned. Under this agreement, the Hiree and the Hirer become co-owner of the asset under transaction in proportion to their respective equity participation.

02      In Hire Purchase under Shirkatul Melk Agreement, the exact ownership of both the Hiree (Bank) and Hirer (Client) must be recognised. However, if the partners agree and wish that the asset purchased may be registered in the name of any one of them or in the name of any third party, clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement. However, in IBBL, no third party registration shall be allowed.

03        The share / part of the purchased asset owned by the Hiree (Bank) is put at the disposal / possession of the Hirer (Client) keeping the ownership with him (Bank) 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 also to be clearly stated. Under this agreement, the Hirer (Client) becomes the owner of the benefit of the asset but not of the asset itself, in accordance with the specific provisions of the contract which entitles the Hiree (Bank) is entitled for the rentals.

04        As the ownership of hired portion of  the asset lies with the Hiree (Bank) and rent is paid by the Hirer (Client) against the specific benefit, the rent is not considered as price or part of price of the asset.

05        In the Hire Purchase under Shirkatul Melk Agreement the Hiree (Bank) does not sell or the Hirer (Client) does not purchase the asset but the Hiree (Bank) promise to sell the asset to the Hirer (Client) part by part only, if the Hirer (Client) pays the cost price / equity / agreed price as fixed for the asset as per stipulations within agreed upon period on which the Hirer also gives undertakings.

06     The promise to transfer legal title by the Hiree and undertakings given by the Hirer to purchase ownership of the hired asset upon payment part by part as per stipulations are effected only when it is actually done by a separate sale contract.

07        As soon as any part of Hiree’s (Bank’s) ownership of the asset is transferred to the Hirer (Client) that becomes the property of the Hirer and hire contract for that share / part and entitlement for rent thereof lapses.

08     In Hire Purchase under Shirkatul Melk Agreement, the Shirkatul Melk contract is effected from the day the equity of both parties deposited and the asset is purchased and continues upto the day on which the full title of Hiree (Bank) is transferred to the Hirer (Client).

09        The hire contract becomes effective from the day on which the Hiree transfers the possession of the hired asset in good order and usable condition to the Hirer, so that the Hirer may make use of the same as per provisions of the agreement.

10        Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the Hiree to the Hirer. It is sold and transferred part by part, it will become effective part by part and with the sale and transfer of ownership of every share / part. The hire contract for that share / part will lapse and the rent will be reduced proportionately. At the end of the hire period when the full title of the asset will be sold out and  transferred to the Hirer (Client), the Hirer will become the owner of both the benefit and the asset consequently the hire contract will fully end.

11        Hire Purchase under Shirkatul Melk is a binding contract for the parties to it – the Bank and the Client who are committed to fulfill / meet their undertakings / obligations in accordance with the relevant agreement.

12        Under this agreement the Bank acts as a partner, as a Hiree and at last as a seller ;  on the other hand the Client acts as a partner, as a Hirer and lastly as a purchaser.

13        Ownership risk is borne by both the Hiree and Hirer in proportion to their retained ownership / equity.

14        Under this agreement the role of Hirer is one that of a trustee, the hired asset being a trust property in his hands; he will manage, maintain the asset in favour of the interest of the Hire at his own cost as the exact subject of hirer except in cases of any accident due to any event entirely beyond control of the hirer and natural calamity/disaster (acts of Allah) to be determined by the Bank after proper investigation within the knowledge of the hirer.

15        The Hirer is responsible for keeping the hired asset(s) in good condition throughout the whole period of hire and if the asset is damaged or destroyed due to mismanagement, corruption, negligence, transgressions, default, etc. of the Hirer, he shall be responsible to compensate the Hiree (Bank) for that. Of course, such mismanagement, corruption, negligence, transgressions, default, etc.  of the hirer shall be determined by the Hiree (Bank) after proper investigation within the knowledge of the hirer.

16        The Hirer cannot, without obtaining prior written permission of the Hiree (Bank) make any changes in the exact item of the hire, and / or remove it from its place of installation and transfer it to another location.

17        In a Hire Purchase under Shirkatul Melk agreement any stipulation may be made, provided it is not against the nature and requirements of the contract itself, nor does it violate the /this may be the last one devine laws  of Islam and is also acceptable to both the parties.

18        Hire Purchase under Shirkatul Melk facilities may be for medium-term or long-term period which may be utilised for the expansion of production and services, as well as housing activities. The duration of Hire Purchase under Shirkatul Melk contract shall not exceed the useful life of the subject / asset of the transaction. The Bank should not normally enter a Hire Purchase under Shirkatul Melk transaction for items with useful life of less than two years.

19        Hire Purchase under Shirkatul Melk transaction facilitates the Client (Hirer) to get benefit from the hired asset in exchange of rental and also to become full owner of the asset by purchasing it part by part.

20        If, for any reason, the hire contract is revoked prior to the transfer of full title of the asset to the Hirer, then the title of the asset will be shared by both Hiree and Hirer – the Hirer will share that part of title which has been transferred to him against payment and the Hiree will share the remaining part.

21        The Hirer to secure the Bank (the Hiree) will pledge / hypothecate / mortgage his portion / part / share in the asset (acquired / to be acquired) and or any other asset / property of his own / third party guarantor to the Bank to fulfill his all liabilities / commitments including the accrued rental, if any.

RULES FOR HIRE PURCHASE UNDER SHIRKATUL MELK

 

It is a condition that the subject (benefit/service) of the contract and the asset (object) should be known comprehensively.
It is a condition that the asset(s) to be hired must not be a fungible one (Perishable or consumable) which can not be used more than once or in other words, the asset(s) must be a non-fungible one which can be utilized more than once or the use/benefit/service of which can be separated from the asset(s) itself.
It is a condition that the subject (benefit/service) of the contract must actually and legally be attainable/derivable. It is not permissible to hire something, the handing-over of the possession of which is impossible. If the asset is a jointly owned property, any partner, according to the majority of the jurists, may let his portion of the asset(s) to co-owner(s) or the person(s) other than the co-owner(s). However, it is also permissible for a partner to hire his share to the other partner(s).
It is a condition that the Hirer 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 hire contract is permissible only when the asset(s) and the benefit/service  drived from it is within the category of ‘Halal’ or at least ‘Mobah’  as per Islamic Shariah.
The Hiree is under obligation to enable the Hirer to the benefit from the asset(s) by putting the possession of the asset(s) at his disposal in useable condition at the commencement of the hire period.
In a hire contract, the period of hire and the rental to be paid per unit of time be clearly stated.
Everything that is suitable to be considered a price, in a sale, can be suitable to be considered as rental in a hire contract.
It is a condition that the rental falls due from the date of handing-over of the asset to Hirer and not from the date of contract or use of the asset.
It is permissible to advance, defer or install the rental in accordance with the Agreement.
It is permissible to review the hire period or the rental or the both, if the Hiree and the Hirer mutually agree to do so.
The hired asset is a trust in the hands of the Hirer. He will maintain the asset(s) with due produce and shall not be held responsible for the damage or destruction of the asset without transgression, default or negligence, otherwise he must be responsible for the same.
The Hiree/owner bears all the costs of legally binding basic repairs & maintenance including the cost of replacement of durable parts on which the permanence and suitability of the hired asset(s) depend or as per Contract.
It is permissible to make the Hirer to bear the cost of ordinary routine maintenance, because this cost is normally known and can be considered as part of the rental.
It is permissible for the Hirer to let the asset to a third party during the hire period whether for the same rental or more or less as long as the asset is not affected by the change of user and not barred / restricted by the hire agreement/customs  to do so.
It is permissible to purchase an asset bearing a hire contract. The hire contract may continue since the purchaser agrees to its continuity up to the end of the hire term. All rights and liabilities emanating from the hire contract will transfer to the new owner. But if the sale-contract is drawn and the purchaser is oblivious of the hire contract, he has the right to rescind the purchase contract and the hire continues.
As soon as the hire period terminates, the Hirer is under obligation to return the asset to the owner or if the Hiree agrees he may enter a fresh hire contract or purchase it from the Hiree on payment of agreed upon price as per market rate.
The hire contract is binding and no one party shall unilaterally rescind except reasons that abrogate binding contract such as damage or destruction.
If the hired asset is damaged or destructed by the act of Allah and if the Hiree offers a substitute with the same specifications agreed upon in the hire contract the contract does not terminate.
It is also permissible to sell the hired asset by the Hiree to the Hirer during the tenure of the hire period either part by part or in full at a time. As soon as any part or in full the asset is sold during the tenure of the hire agreement the hire contract for that part or for the full asset as the case may be, be lapsed and the rental ceased to apply accordingly.
It is permissible for the Hirer to promise or to give undertaking to purchase the hired asset during the tenure of the hire period, either part by part or in full or at the end of the hire period in full. It is also permissible for the Hiree to give similar promise to sell the asset.
The hire with promise to purchase and sale is different from the memorandum of sale. The rent paid by the Hirer can not, in any way, be considered as part of the price of the asset, rather it is the price of the service of that asset.
In a Hire Purchase under Shirkatul Melk contract, it is permissible to divide  the sale/cost price of the asset or ownership of the Hiree to the asset into  several parts and to sell each part of ownership on payment of proportionate sale/cost price of the Hiree.
Under Hire Purchase under Shirkatul Melk Agreement, both the Hiree and the Hirer must pay their respective equity as agreed upon to purchase the demised asset under joint ownership.
Ownership of the asset of both the Hiree and the Hirer should be recognized as per law of the land.

Share Mechanism:

 Mudaraba: Definition

Mudaraba is a partnership in profit whereby one party provides capital and the other party provides skill and labour. The provider of capital is called “Shahib al-maal” while the provider of skill and labour is called “Mudarib”.

So, Mudaraba may be defined as a contract of partnership where the Shahib al-maal provides capital to the Mudarib for investing it in a commercial enterprise by applying his labour and endeavor. Both the parties share the profit as per agreed upon ratio and the losses, if any, being borne by the provider of funds i.e. Shahib al-maal except if it is due to breach of trust i.e. misconduct, negligence or violation of the conditions agreed upon by the Mudarib. If there is any loss incurred due to the reasons mentioned above, the Mudarib becomes liable for that.

 TYPES OF MUDARABA

Mudaraba Contracts may be divided into 2 types:

Restricted Mudaraba (Al Mudaraba Al Muqayyadah)

A restricted Mudaraba (Al Mudaraba Al Muqayyadah) is a contract in which the Shahib al-maal impose any restrictions on the actions of the Mudarib but not in a manner that would unduly constrain the Mudarib in his operations.

Restricted Mudaraba may further be divided into three types:

  1. Restriction in respect of time or period:
  2. In this type of Mudaraba, the Mudaraba contract include a clause on duration of the business. After expiry of such period, the Mudaraba shall become void.
  3. Restriction in respect of place or location:
  4. In this type of Mudaraba, the Mudaraba contract include a clause on place or location of the business. The Mudarib shall bound to do the business within the area of such place or location.
  5. Restriction in respect of business:
  6. In this type of Mudaraba, the Shahib al-maal restricts the actions of the Mudarib to a particular type of business as he (Shahib al-maal) considers appropriate.

Unrestricted Mudaraba (Al Mudaraba Al Mutlaqah)

An unrestricted Mudaraba (Al Mudaraba Al Mutlaqah) is a contract in which Shahib al-maal permits the Mudarib to administer the Mudaraba capital without any restrictions. In this case, the Mudarib has a wide range of trade or business freedom on the basis of trust and the business expertise he has acquired. Such unrestricted business freedom must be exercised only in accordance with the interests of the parties and the objectives of the Mudaraba contract.

But, if Mudarib wants to have an extraordinary work, which is beyond the normal course of business, he cannot do so without express permission from Shahib al-maal. He is also not authorized to:

  • Keep another Mudarib or a partner
  • Mix his own capital in that particular Mudaraba without the consent of the Shahib al-maal.

Shariah Rules for Mudaraba

Rules relating to Mudaraba Contract

  1. There are two contracting part+-ies in Mudaraba Contract :

The provider of the capital i.e. ‘Shahib al-maal’ and the Mudarib. Both parties should possess the legal capacity to appoint agents and accept agency.

  1. The general principle is that a Mudaraba contract is not binding, i.e. each of the contracting parties may terminate it unilaterally except in two cases:
    1. When the Mudarib has already commenced the business, in which case the Mudaraba contract becomes binding up to the date of actual or constructive liquidation.
    2. When the contracting parties agree to determine a duration for which the contract will remain in operation. In this case, the contract cannot be terminated prior to the end of the specified duration, except by mutual consent of the contracting parties.
    3. A Mudaraba contract is one of the trust based contracts. Therefore, the Mudarib invests Mudaraba capital on trust basis in which case the Mudarib is not liable for losses except in case of breach of trust, such as misconduct, negligence and breach of the terms of Mudaraba contract. In committing any of the above, Mudarib becomes liable for the Mudaraba capital.

Rules relating to Offer and Acceptance

The wording-”Offer and Acceptance” – by which both the contracting parties express their willingness to conclude a contract and must conform to the following:

  1. The wording should explicitly or implicitly indicate the purpose of the contract.
  2. Acceptance of the offer is contingent (NUbvPµRvZ) on its taking place during the time which both the parties are negotiating agreement to the contract. However, acceptance is not valid if one party refuses          the terms of the offer or leaves the place where the negotiation of the contract is being made before the deal is concluded.

Contract is permissible by verbal utterance or in writing and signing it. It is also permissible through correspondence or by the use of modern communication means, e.g., Telex, Fax, E-mail or Internet.

Musharaka:

Chart No – 05: Investment Trend of IBBL in Bai Musharaka

Source: Branch Managers’ Conference Book 2008

Definition of Musharaka

Musharaka may be defined as a contract of partnership between two or more individuals or bodies in which all the partners contribute capital, participate in the management, share the profit in proportion to their capital or as per pre-agreed ratio and bear the loss, if any, in proportion to their capital/equity ratio.

In Islami Bank Bangladesh Limited (IBBL), the Bank may take part in a business with its Client(s), where both the Client(s) and the Bank provide capital in fixed proportions, take part in the management of business and share the profit in proportion to their respective capital ratio or at pre-agreed ratio and bear the loss, if any, in proportion to their respective capital/equity ratio.

Important Features:

  • The investment client will normally run manage the business.
  • The bank shall take part in the policy and decision making as well as overseeing (supervision and monitoring) the operation s of the business of the client. The bank may appoint suitable personal(s) to run the manage business and to maintain books of accounts of the business property.
  • As the investment client shall manage the enterprise, the bank may more share of profit to him than that of his proportion capital contribution.
  • Loss, if any, shall be shared on the basis of capital ratio.

Mode Wise Investment: 

Mode wise distribution of investment as on 31st December 2003 vis-à-vis corresponding period of last year is given below:


Figure No – 02: Mode Wise Investment of IBBL

                                                                                                                   (Million in Taka)

Mode

2005

% of Total Investment

Difference

2006

% of Total Investment

Bai-Murabaha

51,822.28

55.34%

7,642.81

59,465.09

52.36%

HPSM

30046.89

32.09%

9,352.30

39,399.19

34.69%

Bai-Muajjal

5917.18

6.32%

1,004.22

6921.4

6.09%

Purchase & Negotiation

3179.81

3.40%

1,666.81

4846.62

4.27%

Quard

1966.13

2.10%

8.07

1974.2

1.74%

Bai-Salam

641.44

0.68%

264.18

905.62

0.80%

Mudaraba

50

0.05%

0.00

50

0.04%

Musharaka

20.42

0.02%

-7.47

12.95

0.01%

Total

93644.15

100.00%

19,930.92

113575.07

100.00%

Source: Islami Bank 25 Years progress 2008

3.7 Investment Sectors:

Figure No – 03: Investment Sectors of IBBL

Amount in Million

Sector

Taka

USD

Percentage

Industrial

54486.49

789.66

45.25%

Commercial

44473.48

644.54

36.93%

Real estate

7719.36

111.87

6.41%

Transport

2720.42

39.43

2.26%

Agriculture

3412.88

49.46

2.83%

Others

7589.05

109.99

6.30%

Total

120401.68

1744.95

100%

Source: Islami Bank 25 Years progress 2008

Special Investment Scheme Of IBBL:

Name of Scheme

Eligibility

Maximum invested money

Clients equity

Period of investment

Mode of investment

Household durables scheme Govt. , semi govt, autonomous official, teachers, doctors, engineers etc. 500000 25% 2 years Bai muazzal
Housing Investment Scheme Govt. , semi govt, autonomous official, universities teachers, doctors, engineers etc. 3000000 50% 15 years HPSM
Transport Govt. , semi govt, autonomous official, universities teachers, doctors, engineers, business man, etc. 2000000 30% 3 years HPSM
Car Govt. , semi govt, autonomous official, universities teachers, doctors, engineers, business man, etc. 350000 30% 4 years HPSM
Investment for Doctors New, experienced, specialized doctors 1000000 20-30% 5 years HPSM, Bai- muazzal
Small Business Fishery, livestock, manufacturing. 100000 0-20% 1-2 years HPSM, Bai- muazzal
Agriculture Implements Farmer, half educated rural youth 200000 20% 2 years HPSM
Micro Industries Diploma, skilled & semi skilled youth 200000 Nil 5 years HPSM, Bai- muazzal

Source: Islami Bank 25 Years progress 2008

 

 

 

 

 

 

 

 

 

 

Sector wise Industrial Position of IBBL from 2004 to 2007

The investment in the industrial sector as on 31.12.2007 is Tk.78, 788.15 million (approximately), which signifies the commitment of the Bank towards rapid growth of the economy and to increase the per capita income of the people by creating employment opportunities and greater contribution to the national economy.

Sector wise Industrial Position of IBBL from 2004 to 2007

(Figure in Million Taka)

Name of the sector

2004

% to total Indus. Investment

2005

% to total Indus. Investment

2006

% to total Indus. Investment

2007

% to total Indus. Investment

Textile Mills

12897

36

17409

38

24338

39

35415

45

Steel, Re-rolling & Engineering

7127

20

6836

15

7680

12

7706

10

Agro based Industry

4759

13

5490

12

7337

12

9421

12

Garments Industry

4065

11

3959

9

5019

8

8694

11

Food & Beverage

1683

5

2742

6

3788

6

5027

6

Cement Industry

1288

4

1657

4

1489

2

1562

2

Pharmaceuticals

727

2

589

1

1171

2

1531

2

Poultry, Poultry Feed & Hatchery

517

1

574

1

767

1

468

1

Sanitary Wares

330

1

409

1

432

1

588

1

Chemicals, Toiletries & Petroleum

260

1

177

0

243

0

882

1

Printing & Packaging

242

1

596

1

498

1

708

1

Power (Electricity)

217

1

546

1

359

1

609

1

Ceramic & Bricks

210

1

320

1

552

1

747

1

Health Care (Hospital & Others)

113

0

216

0

294

0

691

1

Plastic Industry

109

0

528

1

598

1

302

0

Petrol-Pump & CNG Filling Station

66

0

114

0

127

0

310

0

Information Technology

56

0

9

0

10

0

22

0

Hotel & Restourant

4

0

4

0

9

0

138

0

Other Industries

923

3

3891

8

7931

13

3967

5

Total

35593

100

46064

100

62642

100

78788

100

Source: Islami Bank 25 Years progress 2008

Shari’ah Compliance in IBBL

Alhamdulillah, by the grace of Almighty Allah, IBBL is proceeding towards continuous progress and success with due commitment for compliance of Islamic Shari’ah Principles. Since very inception of IBBL, Shari’ah Council was formed to provide necessary counsel and guideline to the management for effective Shari’ah Compliance in the Bank. During the period January–December, 2007, the Muraqibs of Shari’ah Council had conducted Shari’ah inspection at 176 branches. During the period the doubtful income was detected by the Muraqibs of the Shari’ah Council Secretariat to the tune of Tk. 6,08,14,190/- out of total inspected amount of Tk. 67,80,60,471/- and percentage of doubtful income is 8.97%.

Investment Plan for 2008-2012

Currently a “5 year perspective Investment Plan” has been porposed for the year 2008-2012 in continuation of 7 years Plan from 1996-2002 and 5 Years Plan from 2003-2007. The plan has been formulated keeping in view of the national economic priorities and aiming at diversification of the investment portfolio by size, sector, geographical area, economic purpose and securities to bring in phases all sectors of the economy and all types of economic activities and different economic strata of the society within the fold of Bank’s investment operations.

Chart No – 06: Investment Plan of IBBL: 2008 – 2012

 

Source: Branch Managers’ Conference Book 2008

Chapter – 04:Analysis and Findings

Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin “vest’s”, meaning garment, and refers to the act of putting things (money or other claims to resources) into others’ pockets. The basic meaning of the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset parse.

Investment is a term, which can be used in a number of contexts. Meaning investment or the meanings of investment are closely connected according to different theories. Investment means savings or savings made through delayed consumption.

According to economics, investment is referred as the utilization of resources in order to increase income or production output in the future.

An amount is deposited into a bank or machinery is purchased in the anticipation that this will yield some income in the long run or more money can be made with the help of these investments. The term investment carries different meanings to different industrial sectors.

According to economists, investment refers to any physical or tangible asset, for example, a building or machinery and equipments. On the other hand, finance professionals define investment as money utilized for buying financial assets, for example stocks, bonds, bullion, real properties, and precious items. People get involved in this type of investment in the expectation that it will generate cash flows in the future.

According to finance, investment refers to the buying of a financial product or any valued item with anticipation that positive returns will be received in the future.

The most important feature of financial investments is that they carry high market liquidity. The method used for evaluating the value of a financial investment is known as valuation.

According to business theories, investment is that activity in which a manufacturer buys a physical asset, for example stock or production equipment in expectation that this will support the business to prosper in the long run

Investment is a term, which is frequently used in the field of economics, business management, finance and it means savings or savings made through delayed consumption. Investment can be divided into different types according to various theories and principles.

A particular amount of money is invested in the bank or an asset is bought in the anticipation that some return will be received from the investment in the future.

There can be a number of definitions of Investment. While dealing with the various options of investment, the definitional variations of investment need to be kept in mind.

What is investment in terms of Economics?

According to economic theories, investment is defined as the per unit production of goods, which have not been consumed, however, will be used for the purpose of future production. Examples of this type of investments are tangible goods like construction of a factory or bridge and intangible goods like 6 months of on-job training. In terms of national production and income, Gross Domestic

What is investment in terms of Business Management?

According to business management theories, investment refers to tangible assets like machinery and equipments and buildings and intangible assets like copyrights or patents and goodwill. The decision for investment is also known as capital budgeting decision, which is regarded as one of the key decisions.

What is investment in terms of Finance?

In finance, investment refers to purchasing securities or any other financial assets from the capital market or money market or purchasing real properties with high market liquidity for example, gold, silver, real properties, and precious items. Financial investments are investment in stocks, bonds, and many other types of security investments. Indirect financial investments can also be done with the help of mediators or third parties, such as pension funds, mutual funds, commercial banks, and insurance companies.

Personal Finance:

According to personal finance theories, an investment is the implementation of money for buying shares or mutual funds or purchasing an asset with the involvement of the factor of capital risk.

Real Estate:

According to real estate theories, investment is referred to money utilized for buying property for the purpose of ownership or leasing. Also in this case, the factor of capital risk is involved.

Investment Meaning refers to the definition of investment or how investment can be defined. Investment can be defined in many ways according to different theories and principles. In general purview, investment is the application of money for earning more money.

Investment bank:

Investment banks are those financial bodies that help the governments and big enterprises to raise money by issuing and selling the securities in the primary market. The main objective of investment banks is to assist the public and private corporations to raise capital.

The investment banking firms generally act as the underwriter or agent while acting as an intermediary between the issuer of securities and the investors. The investment bankers take care and handle the distribution of previously issued financial securities and at the same time maintain the market for the securities that are already distributed. The investment banks also provide the private and public corporations with strategic advices on acquisitions, mergers and other types of financial transactions.

The Investment Banking Division in an investment bank, which handles the raising of funds for the corporations both in debt and equity. There are very few banking firms that only offer this service as most of the investment banks are now providing other additional financial services to the clients like fixed income, trading of derivatives, equity securities, commodities and foreign exchange.

Edna Carew in his The Language of Money define Investment Bank as “A financial intermediary which operates at the ‘wholesale end’ of the financial markets; the ‘middleman’ between companies issuing securities to raise funds and the investors who buy the paper. Investment banks derive their income chiefly from fee-based activities or profits from trading securities rather than from a margin between borrowing and lending costs. Investment banks help their clients by underwriting and distributing securities and devising innovative finance packages (in return for fees). Investment banking skills rely on market knowledge and expertise rather than on the strength of the bank’s balance sheet”.

Sharpe, Alexander and Bailey in his Investment define investment as “the sacrifice of certain present value for possibly uncertain future value”.

Sharpe, Alexander and Bailey in his Investment define investment policy as “a component of the investment process that involves determining an investor’s objectives, particularly as regards his or her attitude toward the tradeoff between expected return and risk”.

Chapter – 05: Recommendation regarding Investment IBBL

Despite various problems and shortcomings, the Islamic Banks have the potentiality to grow and expand its area of activities to bring good to the humanities. Some suggestive measures are appended below:

  1. Educational institutions may introduce ‘Islamic Finance & Banking’ & other related courses to supply need based manpower for Islamic Banks.
  1. Scope for training, motivation & orientation programs for Islamic Bankers be widened & strengthened.
  1. Training Needs Assessment should be made to cover three different forms of training aspects of an Islamic banker. These include a) ideological and it is related to the Quran and Sunnah b) theoretical which covers the technical aspects of banking in equipping an employee with knowledge about Islamic values and way of life and c) Practical.

iv.        Group discussions, case study on Islamic economics, banking and finance may be introduced for the officials at different level of operations on regular basis.

v.         A common web portal may be developed to facilitate clients in providing tips regarding Islamic banking, finance and economics.

vi.        Introduction of Islamic Banking Diploma Course be introduced for all Islamic bankers.

vii.       The clients of the Islamic Banks be equipped with knowledge of Islamic banking through discussions, seminars, symposia etc.

viii.      Islamic banks can develop unanimous Shariah Manual or guidelines for day-to-day consultation and clientele motivation.

ix.        The research and development (R & D) for Islamic Economics, Banking and Finance be geared up.

x.         Islamic Banks in Bangladesh may expand their network in the rural areas.

xi.        Investment of the Islamic bank portfolio be diversified and extended for long term financing under Musharaka and Mudaraba.

xii.       Co-operation among Islamic banks be extended at national level and throughout the world.

xiii.      The central banks of the Muslim countries can help creation of environment for Islamic Banking with more responsibilities.

xiv.      Uniform accounting systems and standards already developed by the Accounting & Auditing Organisation for Islamic Financial Institutions for providing consistency in accounting treatment of various operations and products of Islamic banks may be introduced by all concerned.

xv.       New and ‘innovative’ products be designed for financing under Profit and Loss sharing   basis.

xvi.      Muslim countries, which have established Islamic banks, if involve themselves with international trade on Islamic principles, could contribute to grow international transactions under interest-free system. This will further help developing an Islamic Common Market.

Conclusion:

Banks play a very vital role in the economic development of the country. The popularity of banks is increasing day by day which leads to increase competition as well. Currently 48 Scheduled Banks are operating in Bangladesh. All the Commercial banks are offering almost the same products and services and almost same their operation system. But the ways they provide the services are different from each other. So people choose their Bank according to their satisfaction and need. And they will prefer the bank of which service is easily accessible and understandable. One the other hand, Bank innovate new products and services to attract their desired customers. In conventional banking system loan is granted on the basis of interest, which is fixed. In Islami banking system investment is going on with profit-loss sharing system. In this system no fluctuation comes between growth of economy as well as growth of IBBL. In Islami banking system it is possible to create balance between money supply and the production of goods. On the other hand, conventional banking system creates inflationary problem. In conventional banking system, investment does not ensure employment opportunity besides Islamic banking system directly work with unemployment problem. At the time of increasing interest rate, investment decreases and at the same time unemployment also increases. In conventional banking system interest rate always fluctuates and events unrest in economy. Besides Islami bank always helps economic growth. In Islami banking system the collection of invested money is easier that the conventional banking because Islami bank concerns with the purpose of investment not with only the invested money. I also think that there is bright future waiting for the Islami banking in Bangladesh. And IBBL is in a position to go as a catalyst for this development in the banking sector in Bangladesh.

Bibliography

Ü  Islami Bank Bangladesh Annual Report 2006.

Ü  Brochures Of Islami Bank Bangladesh

Ü  Economic Trends published by Bangladesh Bank

Ü  Branch Managers’ Conference Book 2008

Ü   Islami Bank 25 Years of Progress, 2007

Ü  Islami Bank 24 Years of Progress, 2007

Ü   Chapra, M. Umar (2000) “Review of Islami Economics” Pakistan.

Ü  Zvi Bodie, Alex Kane, Marcus, Alan J., (1989) “Investments” 6th edition, published by Tata Mc Graw – Hill, USA.

Ü  Edna, Carew, (1996) “The language of Money”, published by Allen Cunwin, Australia.

Ü  Sharpe, William F., Alexander, Gordon J., Bailey, Jeffery V. (1978), “Investments” 6th edition, published by Prentice Hall India, USA.

Ü  Islami Bank Bangladesh Limited Website-       http://www.islamibankbd.com

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