You are on page 1of 57

Investment Mechanism of Islami Bank BD ltd

CHAPTER 1

INTRODUCTION

1.1 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.

1.2 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.

1.3 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.

1.4 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.

1.5 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.

1.6 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

2.1 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.

2.2 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.
2.3 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.

2.4 Shariah Council of IBBL:

2.4.1 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.

2.4.2 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.

2.5 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.

2.6 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.

2.7 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)

2.8 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.

2.9 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.

2.10 Islami Bank Bangladesh Limited at a Glance [As on: 31 December 2016 ]:

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 : 41.54%

Foreign Shareholders : 58.46%

BDT (Tk.)
Authorized Capital 20,000.00 Million
paid-up Capital 16,099.90 Million
Equity 50,556.47 Million
Reserve Fund 31,029.05 Million
Deposits 681,352.25 Million
Investment
676,747.80 Million
(including Investment in Shares)
Foreign Exchange Business BDT (Tk.)
Import 339,954 Million
Export 243,647 Million
Remittance 279,980 Million

Organizational Information:

Chairman, Board of Director Mr. Arastoo Khan


Managing Director & CEO Md. Mahbub-ul-Alam
Company Secretary J. Q. M. Habibullah, FCS
Number of Zones 17
Number of Branches 332
Number of AD Branches 59
Number of ATM Booth 410
Number of Shareholders 33,686
Number of Manpower 11,381

Source: IBBL Annual Report 2016

2.11 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.

2.12 IBBL’s World Ranking:


IBBL won ―Bank of the Year Award-2016‖ conferred by ‗The Banker‘, UK‘s premier
financial magazine of Financial Times Group, London. The award is regarded as the
Oscar in banking industry. The Banker has awarded this highly recognized global
recognition upon Islami Bank Bangladesh Limited after a vigorous analysis of the
performances over the years. Islami Bank is the only Bangladeshi Bank awarded ever by
The Banker.
IBBL, being only Bank in Bangladesh, entered into the World‘s Top 1,000 Banks list in
2012. IBBL has made Bangladesh proud of being among the best 1000 banks in the
world, ranked by 'The Banker‘. This prestigious ranking is a clear testimony to IBBL‘s
stability and strength and its leadership in financial sector of Bangladesh. Position in
terms of key indicators in 2016:
 102nd in Performance (Profits on capital)
 376th in Return on Asset (ROA)
 774th in Size (Assets base)
 814th in Soundness (Capital Assets Ratio) and
 939th in Strength of Tier 1 capital.

Source: IBBL Annual Report 2016


CHAPTER 3

INVESTMENT MACHANISAMS AND FOREIGN EXCHANGE POLICY OF


IBBL

3.1 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 1: 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):

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:

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 2016 vis-à-vis corresponding


period of last year is given below:

Table 1: Mode Wise Investment of IBBL

Source: IBBL Annual Report 2016

Figure 2: Mode Wise Investment of IBBL


Table 2: Special Investment Scheme Of IBBL:

Source: IBBL Annual Report 2016

Special Investment Scheme


11.53%
11.73%

2016
2015
2014
2013
11.97% 2012
10.85%

11.68%

Figure 3: Mode Wise Investment of IBBL


Table 3: Sector wise Industrial Position of IBBL from 2015 to 2016

The investment in the industrial sector as on 31.12.2016 is Tk. 616,419 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.

Source: IBBL Annual Report 2016

Sector wise Investment


6.08%
35.59%

Industrial (Excluding SME)


Commercial
Real Estate
Agriculture
Transport
39.70% SME
Others
7.12%
1.23% 7.78%
2.50%

Figure 4: Sector Wise Investment of IBBL


Spinning Industry

Garments Industry
Shariah Compliance: Strict Adherence to Core Value

Being a Shariah based bank, IBBL‘s focus is not only to comply Shariah in terms of
transaction mechanism but also to uphold its spirit and objectives as a whole. Strict
adherence to Shariah principles is the core value of Islamic Banking.
We have been trying to bring doubtful income at zero level. Shariah Secretariat has been
strengthened with capable manpower and appropriate logistics have been provided to
conduct o$ -site audit to enable the Muraqibs to check violation and ensure transparency
in shari‘ah compliance. Awareness for total Shari‘ah compliance among the entire
workforce and clients was emphasized throughout the year. In 2016, Shariah Supervisory
Committee approved two new product of Investment namely ‗Commission Sharing
Mudaraba‘and ‗Forward Sorf‘. Besides, a day-long seminar was held on ‗Role of Islamic
Scholars in development of Islamic Banking system‘ arranged by the Shariah Secretariat.

Foreign Exchange policy of IBBL

Any branch of IBBL deals with the three parts of activities. Threes are:

A. General banking (GB)

B. Investment And

C. Foreign Exchange.

My topics are performance on foreign exchange transaction of IBBL. Accordance to the


topic, my discussion is only foreign exchange mechanism of IBBL.

Basically there is no difference of foreign exchange mechanism of he commercial there


is no difference of foreign exchange mechanism of other commercial bank like IBBL.
Because foreign exchanges acts, rules and regulations are maintained by the Bangladesh
Bank according to the UCPDC 500 (Uniforms customs practices for documentary
credit). But only difference the operations of IBBL. It will be discussed in Later.

IBBL deals with the customers/clients only by the three mechanisms. These are:

1. Import
2. Export and
3. Remittance.

Before discussion on foreign mechanism, we need to define what foreign exchange is &
how can they deal?

What is Foreign Exchange?


Foreign Exchange means currency & trade exchange say conversion of one to another.
This is a part of economic & Science. This is a big deal divided into different currencies
instrument such as Draft, Traveler Cheque, Bill of Exchange business including sell,
purchasing of currency notes & TC etc.

Currency Exchange means the conversion of one Currency into another.

Foreign Exchange Market:

Foreign Exchange market means the places where foreign currency is bought & sold. In
this more that supply, currency value & v.z.

Alternately following are the features of foreign exchange market:-

1. Bank & client.


2. Different Banks in the same foreign exchange market.
3. Different Bank & Schedule Bank of the same country.
4. Different Control Bank.

Islami Bank follows the following the two craters in respect & payment of foreign
exchange:-

1. Local currency market value &


2. Foreign currency market value.

EURO Dollar, Petro Dollar, Asian Dollar :

EURO Dollar is virtually no paper dollar, but mark in dollars, it‘s a new name in the
currency market in the world Similarly petro Dollar means the Dollar earn from sale of
fuel. Particularly oil based midilists countries. Thirdly Asian Dollar means the dollar of
Singapur, Hongkong, Tokyo, Baharin etc-Asian Dollar move or less control EURO &
Petro dollars.

Islamic Bank can buy or sale foreign currency from the foreign exchange market for
profit. This bank posses license from Bangladesh bank to deal foreign currency business
in the currency exchange market in the world. Islami Bank maintains overseas inter A/C,
with different a Banks in different countries. In the world for network system for Import,
Export & Remittance purpose foreign exchange currency may be created a commodity
for which Islamic Bank can sell or purchase the same to the party or other bank with
some profit (exchange).

Why Exchange is being controlled?

1. To stabilize the rate of exchange.


2. To protect domestic industries.
3. For proper implementation of plans.
4. To increase the bargaining strength
5. To check over invoicing & Under invoicing
6. To check the Blank marketing and smuggling
7. For regulating the international movements of goods
Authorized Dealer Branch:

Bangladesh bank in exercise of the power under section 3 of Foreign Exchange


regulation Act. 1947 issues a license to schedule Bank where they have adequate trained
Officer/Staff to deal in Foreign Exchange. The banks that are authorized to deal in
foreign exchange are called authorized dealers.

Money Exchanger:

License are granted by Bangladesh bank for hanged of Foreign Currency such as notes,
coins and TC to a person or firm a corporation strictly maintains in accordance with
exchange control regulation.

1. Hotel.
2. Bangladesh Biman
3. Parjatan Corporation etc.

Rate of Exchange:

The rate at which one currency is exchanged with another is known as rate of exchange.

Rate will be quoted in accordance with demand and supply. Bangladesh Bank Quote rate
based on New York money market.

Exchange Position:

Relation between sale & purchase either in spot or forward purchase in a particular date
in a particular currency. This relationship which in known as exchange position.

Arbitrage of Foreign Exchange:

Arbitrage can be defined as simultaneous buying and selling of foreign currencies for the
purposes of making profit Arbitrage is carried out mostly by banks, They keep constant
watch over the latest development in the financial market of the world.

Foreign Exchange Regulation Items:

1. Bangladesh Bank Manual.


2. Foreign Exchange Circular.
3. Public Notice
4. Import & Export Policy Gazette
5. Ministry of Commerce Circular
6. BCD circular.
7. Guide lines for foreign exchange regulation.
8. Other authorization (i.e. NBC Dept)

Statutory Control Forms:


1. EXP Forms for Export
2. IMP form for Import.
3. C Form for Inward Remittance.
4. TM Form for outward Remittance.

Multiple Exchange Rates:

Various rate quoted for one currency purchase and sale. Our country rate is multiple
exchange rates.

The rate of exchange is the price of one currency in relation to others. Rates are three
types.

1. Currency rate
2. Peens rate
3. Cross rate.

Currency Rate: (Indirect Quotation):

Buy high sell low i.e. local currency fixed and foreign currency variable e.g. India &
London quoted this rate.

In case of currency rates:

1. Buy high
2. Sell low
3. Premium deducted P-
4. Discount added D+
5. Fore Buying in currency rate higher discount is added and lower premium is
deducted.
6. For selling lower discount is added and higher premium is deducted.

The following currency rates are given below:

1. Currency rate (Indirect Quotation)


2. Peens rate (Direct quotation)
3. Cross rate.

Currency rate:

Local currency fixed and foreign currency variable i.e. by & sell high. New York money
market quoted this rate.

Peens rate:

Foreign currency fixed and local currency variable i.e. buy low & sell high. New York
money market quoted this rate.

Cross Rate:
Other currency rate to one another.

There are tow way quotation in exchange rate i.e. (a) Buying Rate & (b) Selling Rate.

Buying Rate:

It is the rate of exchange at which it would put through a purchase transaction i.e. export
& inward Remittance and selling rate is the rate of exchange at which it would put
throughout a sale transaction i.e. Import bills including outward Remittance.

Exchange Rate Rules:

a) In case of Peens Rate-

i) Buying low

ii) Selling High

iii) Premium Added: (p+)

iv) Discount deduction : (D (-D))

b) In case of currency rate:

i) Buy High

ii) Sell Low

iii) premium deduction (P (-)

iv) Discount added �(+)

c) For Buying:

i) In currency rate higher discount is added and lower premium is deducted.

ii) In peens rate higher discount is deducted and lower premium is added.

d) For Selling:

i) In currency rate Lowe discount is added and higher premium is deduced.

ii)In Present rate lower discount is deducted and higher premium is added.

Buy Sell Buy Sell

Low High High Low


LP (+) HP (+) (LP
(+) HP (-)

HD (-) HD (-) HD
(+) LD (+)

Basket of currency in our Country:

1) US Dollar

2) Pound Starling

3) DM (Deutch mark)

4) Yen

5) France Frank.

Our rate quoted based on US Dollar in the year 1986 January instead of pound sterling.

Now the rate in our country is unification from January 1992.

Exchange rate Particulars Buying Selling


Mechanics
m/Exchange &
its Fixation. Date
Say14.6.98 Import Bill – Selling B>S Long or over
brought
position.
― Export Buying S>B Short or over
sold position.
― Export B=S Square
position i. e
open position

* Buying- Selling = Exchange Position.

Apply of Rate:

TT (Telegraphic Transfer) & OD (on demand) rate:

TT & OD rate should be applied for foreigners & Govt. people i.e. other than import. BC
(Bills for Collection) Selling Rate: This rate should be applied for Import Bills only.

IT Clean Rate :

This rate should be applied for other that foreigners i.e. the A/C holders and for
purchasing Cheque, Draft, TT, MT, P.O, TT. Clean rate also will get foreign currency
Account holder and purchasing of foreign currency note
O.D Sight Expert:

When we will purchase the export document in that case rate will apply O.D sight export

O.D Transfer Rate:

This rate should be applied for official people & foreign only. Cheque, Drafts, MT, TT.
P.O- Coupons etc. will be purchased applying OD Transfer rate.

Selling Purchase:

TT, OD Tate:

TT, OD rate will be applied for official people who lived abroad as Bangladeshi
Embassy official foreigners, foreign firms people etc.

BBC Rate:

This rate will be applied to all people of foreign currency account holder and import bills
i.e. selling of fund other than government official and also service holder of Embassy
and foreign firm officials.

TT Doc. Buying Rate:

This rate will apply export process realized after collection bills Islamic Bank introduced
this rate is 1994.

Methods of effecting payment of IBBL:

Islami Bank follows the following methods to make payments between countries.

1. Telegraphic Transfer (TT): This is an instruction for transfer of money by


Telegram, Cable or telex from a bank in one country to another Bank in different
center. This is an instruction form the Importers Bank to the exporters Bank. The
TT charge is realized by us from the partly as per Bank circular.

2. Mail Transfer (M.T): This transfer is the order to pay cash to a 3rd party. This
Transfer is sent by mail & the charge must be realized as per Bank circular.

3. Drafts & Cheque: A draft is pay order issued by one Bank to another Bank or its
branch.

Over Bought: This position known as long position.

Over Sold: This position known as short position.

Libor:London inter Bank offer rate.

SWIFT: Society for world wide Inter Bank financial Tale Communication.
CHIPS: Clearing House Inter Bank payment system

NOSTRO A/C: Our A/C with you i.e. out A/C with American Express

NOSTRO A/C: Our A/C with you, Al- Raji A/C with IBBL

LOROD A/C: This A/C i.e. third Bank Relationship

ACU: Asian clearing Union ACU member countries are Iran, India.
CHAPTER – 04

FINDINGS, RECOMMENDATION AND CONCLUSION

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.
Recommendation

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:

IBBL is trying to develop banking sector through welfare and servicing to the people.
Islami economy and banking are bound together. IBBL has emerged facing the many
obstacles yet. This bank is trying to operate their activities according to Islam.

Most of the people in our country have a bad impression about IBBL‘s operations
regarding indirect generation of interest, which means no difference between investments
of IBBL loan/credit/advance of conventional banks for this reason. They are not much
interested to investment with IBBL because majority of our people have no proper
knowledge about the activities of Islami banking as well as its investment mechanisms.
IBBL through its steady progress and continuous success has, by how, earned the
reputation of being one of the leading private sector banks of the country. The bank has
shown steady progress in this important sector. IBBL‘s capital adequacy, deposits,
reserves, earning per share, export, import and remittances are increasing day by day. So,
no doubt IBBL is a growing profitable financial institution.

Interest free banking system is no more a concept. It is now a Reality, a dynamic system,
embodying a set of superior banking mechanism. More than 300 Islamic bank and
financial institutions are operating in different Countries throughout the world with a
marked success from this inception in our country in 1983. IBBL has been operating
with real and confidence in corporation with other conventional banks. Bringing a new
concept in such business sector, which is growing too rapidly in the world, is rally bold
step. As a large Islamic commercial bank, Islamic bank took various steps to create
employment and socio-economic development for the poor through Islamic shariah as
well as to create an overall climate for the introduction of large scale Islamic banking
environment in Bangladesh.

The significant growing of IBBL has encouraged the traditional banks to open Islamic
banking window, like –HSBC, Dhaka Bank Ltd., Prime Bank Ltd., The city Bank Ltd.
Though IBBL has reached the top position among the PCBs in our country, it has to
more concentrate its customers‘ service to survive in the long run by facing the
competitors‘ strong strategies in banking era.

In my study I have found that IBBL has reached this position by its commitment,
people‘s love and dedicated human resources. Islami Bank has been shown its
supremacy in all kinds of banking operations in our country.

The competent management of IBBL should come forward to take pragmatic strategic
decision like –easy procurement, one stop service, and time savings customers‘ service
with sufficient logistics supports for the future betterment of the Bank.

To conclude we must say that, Islami bank Bangladesh Limited (IBBL) has immense
potential in Bangladesh. It can play vital role in bringing revolutionary changes in our
life with both material and moral world and in individual and collective level.
Bibliography

 Islami Bank Bangladesh Annual Report 2006.


 Brochures Of Islami Bank Bangladesh
 Economic Trends published by Bangladesh Bank
 Branch Managers‘ Conference Book 2008
 Islami Bank 25 Years of Progress, 2007
 Islami Bank 24 Years of Progress, 2007
 Chapra, M. Umar (2000) ―Review of Islami Economics” Pakistan.
 Zvi Bodie, Alex Kane, Marcus, Alan J., (1989) ―Investments‖ 6th edition, published
by Tata Mc Graw – Hill, USA.
 Edna, Carew, (1996) ―The language of Money‖, published by Allen Cunwin,
Australia.
 Sharpe, William F., Alexander, Gordon J., Bailey, Jeffery V. (1978), ―Investments‖
6th edition, published by Prentice Hall India, USA.
 Islami Bank Bangladesh Limited Website- http://www.islamibankbd.com