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The Role of Mudaraba Perpetual Bond (MPB) of IBBL for Development of

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 Thoughts on Economics
Vol. 21, No. 04

The Role of Mudaraba Perpetual Bond (MPB) of IBBL

for Development of Bangladesh Bond Market
Serajul Islam
Nazneen Jahan Chowdhury
Mohammad Rokibul Kabir

Abstract: Islami Bank Bangladesh Limited (IBBL) is a first generation private

commercial bank in Bangladesh under Companies Act, 1913 (Amended in 1994) and
Banking Companies Ordinance, 1962 (Amended in 1991). IBBL is the first of its kind
in South East Asia operates under Islamic Shari’ah with a vision of establishing
interest free economic and Banking system for ensuring the economic and social
justice. Islami Bank Bangladesh Limited had issued a bond named MPB in
Bangladesh bond market to raise fund to meet the Capital Adequacy Ratio (CAR) of
the bank. Since private sector is the engine of economic growth, Government policy
encourages financing for the private sectors. The IBBL being the largest private
sector bank has been providing both long term and short term funds to the private
sectors. Therefore IBBL is always keeping in mind the maintenance of capital
adequacy requirement set by BB as per requirement of BASEL-II and had to go for
right offers and bonus shares for several times to raise capital. Further increase of
capital from the right shares may reduce the value and return of shareholders
investments. Another purpose of the issuance of Mudaraba Perpetual Bond (MPB)
is to enhance the ability of the bank to make further investments by increasing the
CAR. One of the main objectives is to utilize the fund in prospective and profitable
sectors. The paper reveals that through the issuance of the MPB, IBBL has played a
pioneering role in creating a bond market in Bangladesh, as this is the first corporate
bond in the country. Through the issuance of MPB, IBBL has created a new
investment avenue for the investors to help creating an Islamic capital market.
Key Words: Mudaraba, Capital Adequacy Ratio, perpetual, riba, rabb al-mal,
mudarib.


Associate Professor, Department of Business Administration, International Islamic University
Chittagong (IIUC).

Assistant Professor, Department of Business Administration, IIUC.

Lecturer, Department of Business Administration, IIUC.
40 The Role of Mudaraba Perpetual Bond …………

1. Introduction
When a company wishes to borrow money from the public for a long–term
basis, it usually does so by issuing or selling debt securities that is generally
called bonds. A bond is normally a fixed interest-bearing loan instrument,
meaning that the borrower will pay the fixed interest on predetermined time
schedules but the principal will be repaid at the end of maturity. The amount
that will be repaid at the end of the loan period is called the bond’s face value
or par value or maturity value. Government Bonds have much larger face
value. The number of years until the face value is paid is called the bond’s
time to maturity.
Interest rates change over time. The cash flows from a bond, however, stay the
same. As a result, the value of the bond will fluctuate. When interest rate rises,
the present value of the bond’s remaining cash flow declines, and the bond is
worth less. When interest rate falls, the bond worth is more. To determine the
value of a bond at a particular point of time, we need to know the number of
periods remaining until maturity, the face value, and the market interest rate
for bonds with similar features. This interest rate required in the market on a
bond is called the bond’s Yield to Maturity (YTM). But for calculating the
value of Islamic bonds requires average rate of return of market rather than
market interest rate because interest is prohibited in Shari’ah. By using this
information, we can calculate the present value of the cash flows as an
estimate of bond’s current market value.
Islami Bank Bangladesh Limited (IBBL) raised fund of Tk.3, 000.00 million
in the year 2007 by issuing Mudaraba Perpetual Bond (MPB). This bond is a
new instrument in the capital market of Bangladesh. It differs from other
category of securities available in the market, as it has no redemption facility
and predetermined interest rate.

2. Objectives of the study

The objectives of the study are as follows:
i) To highlight the Bond Market status of Bangladesh
ii) To highlight the pioneering role of MPB for the development of
bond market in Bangladesh
iii) To identify the problems that impede the investments in this bond
iv) To suggest some important measures for the development of bond
market in Bangladesh.
Thoughts on Economics 41

3. Methodology of the Study

The researchers have used secondary data only in this study. The sources are
the publications of IBBL regarding MPB, the websites of IBBL, SEC, CSE
and DSE, different types of publications regarding bond & capital market and
books.

4. Literature Review
The development of economy of any country depends mostly on the
establishment of sound, effective and efficient financial system in that country.
A well-developed financial system plays an important role in accelerating
economic growth by mobilizing savings and facilitating investment in an
efficient manner (Mu, 2007). Financial market consists of money market,
capital market, and derivative markets etc and play an important role for the
development of economy.
The debt market being an integral part of financial market plays a
complementary role in developing economy through allocation of funds to
different deficit sectors. The debt market consists of money market, mortgage
market, bond market and derivative market. The debt market of Bangladesh is
very small. An efficient bond market is important for managing public debt
and bank liquidity and for efficient conduct of the monetary policy. Without a
functioning bond market, the monetary transmission processes of policy
measures would be circumvented and the desired impact on the real economy
can not be fulfilled, which compromises the effectiveness of the monetary
policy operations (Jahur, 2009). Bangladesh’s bond market represents the
smallest in South Asia, accounting for only 12 percent of the country’s gross
domestic product (GDP) (World Bank Report). For developing our bond
market, Islami Bank Bangladesh Limited has played a pioneering role by
issuing Mudaraba Perpetual Bond (MPB) in the corporate level.
Conventional bondholders get predetermined rate of interest which is strictly
prohibited in Islamic Shariah. Interest or riba (usury) is a kind of social evil. It
is contrary to the welfare of people (Islam, 2005). As regards nature of usury
Allah SWT says,
42 The Role of Mudaraba Perpetual Bond …………

“Those who devour usury will not stand except as stands one whom the
statan by his touch has driven to madness. That is because they say:
„trade is like usury‟. But Allah hath permitted trade and forbidden usury.
Those who after receiving admonition from their Lord, desist, shall be
pardoned for the past. Their case is for Allah (to judge). But those who
repeat (the offence) are companions of the fire. They will abide therein
(forever).” (2:275)
When in an Islamic framework of society, interest is prohibited and business is
permitted, the banking or financial institutions are permitted to do business
under the same injunction. A business institution, be it trade, commerce,
industry, transportation, power, or agriculture has to work for profit. If
banking institutions are contributing to productivity, they have to share the
productivity in the form of profit; and profit can not be pre-determined before
the costs are booked against business revenue and the profit and loss account
is prepared (Sharif, 1996). IBBL declares the profit of the MPB after
completing income statement at the end of an accounting period.
4.1 About the Issuer
IBBL was established on March 13, 1983 as a public limited company under
the Banking Companies Act, 1913 (amended in 1994). The bank started its
operation on March 30, 1983 under the ambit of Banking Company
Ordinance, 1962 (amended in 1991) as the first interest free Shari’ah based
Commercial Bank with a mission to establish Islamic Banking through the
introduction of welfare oriented banking system. The Bank is enlisted with
DSE & CSE. IBBL has been declared as one of the 20 Blue Chip companies in
the country by DSE and as one of the 30 best companies by CSE. The bank
provides a wide range of Islamic banking services. The major portion of
investment portfolio of IBBL is towards corporate business while the rest is
towards SME, Specialized Schemes and retail investments. The bank carries
out its business activities through 254 branches with the total staff strength of
11,033.
Thoughts on Economics 43

IBBL is holding a diverse shareholding pattern with foreign and domestic

sponsor shareholders. IBBL is a first generation private sector bank in the
country and is one of the best performing banks of the nation. The
management has been taking utmost care maintaining capital adequacy and
liquidity management as per requirement of Bangladesh Bank and maintains
excellent growth with strategic plan to expand branch network, deposit and
investment, develop new products and savings schemes. The bank has been
operating profitably since the beginning of its journey keeping the internal
capital generation high, following very cautious investment policy to keep the
quality of asset strong.
Details of the Issue
Description No. of units Offer in Tk. Amount Tk.
Pre-IPO Placement 1,500,000 1000 1,500,000,000
Public Offering 1,500,000 1000 1,500,000,000
Total Value of Bond after IPO 3,000,000 1000 3,000,000,000

Basic Information of the Issue

Category Description
Name of the Bank Islami Bank Bangladesh Limited
Size of the issue Tk. 3000 million (Tk. 1500 million in private placement and
Tk. 1500 million in IPO)
Unit price Tk. 1000
Market Lot 5
Term Perpetual ( No maturity period)
Profit Distribution i) MPB carries 1.25 weightage for distribution of profit
ii) Not less than 65% of the income generated by
deployment of MPB fund and
iii) An additional rate of profit equivalent to 10% of the
rate of dividend declared by the IBBL every year. No
portion of dividend will be distributed to the MPB
holders.
Minimum Tk. 5000 or Multiple of Tk. 5000
Subscription
Credit Rating MPB has been rated A+ by the rating agency Credit Rating
44 The Role of Mudaraba Perpetual Bond …………

Information and Services Limited (CRISL)

Trustee Investment Corporation of Bangladesh (ICB)
Manager to the Issue ICB Capital Management Limited (A subsidiary company of
ICB)
4.2 Purpose of the Issue
The main purpose of the bond is to raise fund to meet the capital adequacy
ratio of the Bank. Since the raising of Tier-1 Capital has impact on share value
dilution and dividend paying capacity of the bank, the IBBL has been looking
for alternate sources of Tier-2 Capital as a subordinated investment instrument
and identified the issuance of Mudaraba Perpetual Bond to resolve the issue of
capital adequacy.
4.3 The Introduction of Islamic Capital Market Instruments in Pakistan
and in Malaysia
There are no shariah objections to financial markets, only to the interest-based
instruments which are traded in the markets. Therefore, the first attempt to
develop shariah-compliant debt instruments involved securitizing traditional
Islamic financing instruments, as with the mudaraba certificates issued in
Pakistan from 1980 onward after a law was passed giving legal recognition to
the certificates. Mudaraba involves the establishment of partnership
companies with investors, and the company managers share in the profits, but
the financiers alone bear the losses. In 2008 the original law was amended to
bring the mudaraba companies under the regulatory supervision of the
Securities and Exchange Commission of Pakistan, the aim being to ensure
better investor protection.
In Malaysia, where Islamic banking started in 1983, a natural innovation was
to securitize the debt instruments used, mainly murabaha financing, where a
bank would purchase a commodity on behalf of a client and resell it to the
client for a markup, with settlement through deferred payments. The first
instrument was issued by the Shell oil company’s Sarawak subsidiary in 1990,
with Bank Islam Malaysia as the arranger. By attracting third-party investors
interested in benefiting from these deferred payments, the bank could use its
capital for further financing rather than having it committed on a long-term
basis. This debt trading, known as bai al-dayn, is permitted by the Malaysian
interpretation of the Shafii School of Islamic jurisprudence which prevails in
Malaysia and Indonesia, but is not permitted in Saudi Arabia or the Gulf.
Thoughts on Economics 45

4.4 The Corporate Bond Market in Malaysia

The growth of the Malaysian bond market can be traced back to the 1970s,
when the government started issuing bonds to meet the massive funding needs
of the country’s development agenda at the time. By the mid-1980s, the
private sector assumed a more important role in the strategic development of
the Malaysian economy, with the aim of making it the main driver of growth
as well as finance. During that period, the corporate sector was heavily reliant
on finance from banks, which led the government to pursue the development
of the corporate bond market as a key strategic priority. The 1997-98 Asian
financial crises brought home the folly of over-reliance on bank loans. Lessons
learnt from the crisis led the government to step up its efforts to develop the
corporate bond market, in order to offer the private sector alternative sources
of finance and reduce funding mismatches. Historically, because of the lack of
a well-developed bond market, most of the credit intermediation in the country
was done through the banking system. Potential credit withdrawals and the
eventual credit squeeze suffered by the corporate sector during the Asian crisis
highlighted the importance of risk diversification within the financial system.
Consequently, development of the corporate debt market gained greater
importance and was accelerated to allow greater diversification of credit risk
among economic agents, as well as to provide funding with the appropriate
maturity structures. For the past 15 years, efforts to develop the Malaysian
bond market have been fruitful. In terms of relative size of the bond market
versus domestic bank credit, growth in the former has been quite significant.
Another notable achievement is the successful promotion of the Islamic bond
market. Islamic bonds, which comply with Shariah principles, have played a
major role in Malaysia’s capital market development, contributing to the
significant growth of the country’s Islamic financial system.
Through this niche market, Malaysia is poised to play a strategic role in global
Islamic finance.
The increasing demand from the private sector for innovative forms of finance
continues to fuel the development of Malaysia’s corporate bond market.
Growth has also been spurred by the increasing presence of institutional
investors, such as pension funds, unit trust funds and insurance companies.
The Malaysian corporate debt market has enjoyed enormous growth, rising
from MYR 4.1 billion in private debt securities (PDSs) outstanding in 1989 to
approximately MYR 188 billion in 2004, an increase of 45 times. In addition,
the Malaysian corporate bond market represents 37% of the country’s GDP -
by this measure, one of the largest in the world (IMF (2005) and Table 1).
46 The Role of Mudaraba Perpetual Bond …………

Furthermore, the Malaysian bond market accounted for 8% of the total Asian
bond market (excluding Japan) in 2004.
Table 1:
Size of Local Currency Bond Market as a Percentage of GDP
End-March 2005 data
Government Corporate Financial
institutions
China 19.5 0.7 10.8

Hong Kong SAR 9.4 38.1 **

Japan 146.8 16.6 26.1
Korea 26.1 122.0 37.4
Malayasia 40.6 37.3 16.7
Singapore 40.3 31.6 **
Thailand 21.9 13.6 6.5
United States 47.0 21.5 90.2
Note: ** Hong Kong and Singapore: corporate data include financial institutions. For others,
corporate refers to non-financial corporate issuers.
Sources: Asian Development Bank; Asian Bonds Online.
At the end of 1986, the PDS market was virtually non-existent in Malaysia.
This was in contrast to the equity and government debt markets, both of which
had achieved a reasonable level of sophistication and maturity by that time.
PDSs outstanding in 1987 amounted to only MYR 395 million (0.5% of
GDP), versus the market capitalization of the Kuala Lumpur Stock Exchange
(KLSE) of MYR 73.8 billion (91% of GDP) and the outstanding amount of
Malaysian Government Securities (MGS) of MYR 48.8 billion (60.2% of
GDP).
4.5 Overview of Pakistan's Corporate Bond Market
The corporate bond market exists in Pakistan in the form of Term Finance
Certificates (TFC). The following sections present some salient features of the
TFC market along with an international comparison.
Features of the TFC Market
The corporate bond market in Pakistan, in the form of TFCs, has experienced
robust growth since the first TFC issue of Packages Limited for Rs. 232
million in February of 1995. The total amount of outstanding TFCs as of
March 2006 is estimated at Rs. 57.99 billion (US$ dollars 0.97 billion or 1.12
Thoughts on Economics 47

percent of GDP). The TFC issuers include both non-financial and financial
institutions as well as TFCs are based on legislation enacted in 1984, which
authorized the issuance of redeemable capital securities. As a debt instrument,
the TFC is slightly different from the traditional corporate bond because it was
specifically designed to comply with Sharia Law. The key difference is that
the TFC
substitutes the words "expected profit rate" for "interest rate." The amount of
TFCs outstanding is estimated using data on the date of issue, size of issue,
and the maturity date of the public portion of TFCs. This probably
underestimates the amount of TFCs since by law only 25 percent of the issue
has to be raised from the public. Further, it is assumed that amortization
payments are made in the form of a bullet payment on the maturity date.
Although many of the TFCs are amortized through bullet payments some have
different amortization structures.
The coupon rate on the TFCs display a wide variety with different fixed
coupons as well as floating coupons linked to various interest rates including
the discount rate, Pakistan Investment Bond (PIB) rates, and the Karachi Inter-
bank Offer Rate (KIBOR). As early as 1960s and 1970s, prior to
nationalization of the financial institutions, corporate debentures issued by
Pakistani companies were listed on stock exchanges with limited secondary
market trading. TFCs were issued by development finance institutions (DFIs)
as early as 1985, although these were placed privately. In 1988, Water and
Power Development Authority (WAPDA), a government owned statutory
organization, issued a five year bond. Over the period 1988 to 1994, WAPDA
issued Rs. 22.5 billion of bonds to the public. The market experience of
WAPDA bonds was disappointing due to two factors. First, WAPDA had to
delay repayments of its maturing bonds due to insufficient funds. Second, the
secondary market for the WAPDA bonds did not meet market expectations
due to the under capitalization of the market maker resulting in low liquidity
of the bonds. Although the first TFC was issued in 1995, the pace of issuance
did not take off until 2001 when the number of new issues (17) equaled the
total number of issues in the period 1995-2000. The sum of the new issues in
2001 was close to twice the total amount issued in the period 1995-2000. This
sudden surge in TFC issues was partially a result of the Government's decision
to bar institutional investors from NSS in March 2000. Table2 and Figure 1
show the evolution of the stock of outstanding TFCs.
 48 The Role of Mudaraba Perpetual Bond …………

Table:2

Financial TFC Non Financial TFC Total TFC

Year (in Billion Rs) (in Billion Rs) (in Billion Rs)
1995 0.5 0.2 0.7
1997 2.5 1.5 4
1999 2 1.5 3.5
2001 3 2 5
2003 16 10 26
2005 17 20 37

Figure:1- Evolution of the stock of outstanding TFCs

Source: SBP and Authors’ calculations
4.6 Bahrain Corporate Bond Market
The market for listed Islamic bonds (sukuk) is growing significantly in
Bahrain, along with other segments of the Islamic finance industry. The value
of sukuk listed on the Bahrain Stock Exchange (BSE) has doubled in the past
five years to over US$3 billion at
Present. The growth in the Islamic funds and capital markets is reflective of
the surge sweeping through the region’s financial services industry. The
Islamic and conventional fund industry in Bahrain is one of the fastest
growing segments of the overall financial sector. With over US$16 billion in
assets under management, through more than 2,500 funds, the industry has
been growing at an annual average of about 20% in recent years. The Bahrain
Stock Exchange’s (BSE’s) sukuk market has grown significantly, with the
total size of sukuk listings currently in excess of US$3 billion, double that
from five years ago. On its part, the Central Bank of Bahrain (CBB), having
pioneered the development of sukuk, remains active in the sovereign sukuk
market, with a total of US$2.05 billion medium to long term sukuk issued,
complemented by a regular programme of short term issuance. Recently, the
Thoughts on Economics 49

CBB issued its second international sukuk, worth US$350 million, which is
listed on the London Stock Exchange, along with a previous issue of US$250
million. As the financial services regulator, the CBB is fully cognizant of the
importance of the asset management industry and the capital market in
attracting foreign capital and talent, and in facilitating economic development
and the creation of high value-added jobs. The new framework includes
Bahrain’s first-ever rules allowing collective investment undertakings (CIUs)
to target professional investors, such as hedge funds, derivatives and other
alternative investment vehicles. In keeping with Bahrain’s leadership in
Islamic finance, the new CIU rules also provide a solid foundation for the
establishment and management of funds that comply with Islamic principles.
The CBB is actively supporting a number of Islamic capital market-related
development initiatives, being undertaken by the International Islamic
Financial Market (IIFM), which the CBB chairs. Another Bahrain-based
organization, the Accounting & Auditing Organisation for Islamic Financial
Institutions (AAOIFI) has also recently issued a statement on sukuk, providing
important guidelines for sukuk issuers. It is the CBB’s hope that such
initiatives will go a long way in harmonizing market practices and creating a
deep and vibrant Islamic capital market, which though growing significantly,
remains small. There is a limited number of Islamic issuance in comparison to
the conventional fixed income market. The Islamic finance industry should put
substantial resources into creating a vibrant secondary market, including risk
management products for Islamic investors and developing Shari’a compliant
hedging mechanisms.
4.7 Bond Market of Bangladesh
The Bangladesh Bond Market is at a nascent stage. One of the main functions
of a bond market is to provide long term finance by creating alternative source
of finance through capital market. The main purpose of Bond market is to
provide stable source of income to the investors against volatile equity market.
The Bangladesh capital market is yet to develop required ground to create the
environment for a congenial bond market. The high rate of interest in the
market and government savings instrument, soft infrastructure for Bond
market, unrestricted bank finance etc. all are still congenial for a sound Bond
market. In addition the investors are more interested in short term gains
instead of waiting for higher returns. The mentioned scenario together with the
attitude of the Islamic minded investors against interest income is responsible
for non development of Bond market in the country. A number of listed
companies issued some debentures and listed them with stock exchange but
those debentures could not draw the attention of the investors. Some also
50 The Role of Mudaraba Perpetual Bond …………

failed to pay the installments. In recent days IBBL issued MPB and ACI
Company issued Zero Coupon Bonds with attractive tax incentives. BRAC
bank also issued BRAC Bank 25% Subordinated Convertible Bonds to raise
Tier-II capital to comply with the regulatory requirement of Bangladesh Bank.
Credit Rating Agency of Bangladesh (CRAB) Limited has assigned A3
(Single A three) rating to the proposed issuance of BDT 2,000 million 20%
convertible zero coupon bond by Jamuna Bank Limited (hereinafter also
referred to as JBL or the Bank). The objective of the proposed BDT 2,000
million (approximately) zero coupon bonds (ZCB) are to increase the Tier II
capital and thus increase the overall capital adequacy ratio of the issuer (JBL).
The Bank will issue ZCB worth BDT 2,000 million (approximately) having
maturity from 3-7 years having BDT 1,000 face value. Some of the
multilateral agencies operating in Bangladesh are ready to offer technical and
financial assistance to promote Bond market of the country. Bangladesh Bank
and SEC with support of the Ministry of Finance have been exploring the
feasibility and modus operandi to explore the issue for the interest of the
capital market.
4.8 Important Features of Mudaraba Perpetual Bond
The important features of MPB are as under:
a) It is at perpetual nature & will not be redeemed
b) It is listed at Stock Exchanges & is traded in the market
c) Investor is getting profit by deployment of Mudaraba Fund at the
weight 1.25 plus equivalent to 10% of declared dividend
d) The bonds are subordinated to the depositors but remain high
compared to the shareholders in respect of repayment of dividend &
profit
e) It is treated as supplementary capital (Tier-2 Capital) up to the
maximum 30% of Tier- 1 capital
f) It is treated as component of Mudaraba Deposit
g) It is governed by the rule and principle of utilization and distribution
of profit of Mudaraba Fund.
h) It is fully paid up
i) Bond holder is not entitled to any investment facility against the
bonds
Thoughts on Economics 51

j) Tax on profit of the bonds determined in accordance with the

principles of NBR.
4.9 MPB Structure
Globally bond is a debt instrument carrying certain declared percentage of
interest. Considering advantage of Bond being an instrument offering stable
income source for the bond holders, many countries like India, Malaysia,
Pakistan, Sudan, Iran have restructured bonds to bring under the Islamic
principle of Shari’ah, wherein the bonds will not offer fixed rate of interest
rather making the return as a part of profit distribution to the bond holders, a
partner to share profit or loss on the basis of shari’ah but however, keeping the
features of the bond as stable source of income.
Considering the above, IBBL decided to go for Mudaraba Perpetual Bond to
meet the capital adequacy need. At the first instance, the management of IBBL
received the consent of the Shari’ah Council of the Bank for issuing MPB
explaining the features of MPB and its modus operandi of determining
profitability. The shari’ah council approved the above MPB subject to the
condition that the bondholders should be informed about the profit distribution
with weightage before issuing MPB. IBBL invested the fund received through
MPB as general investment of the Bank and it treated as a component of total
Mudaraba Fund. MPB holders share the income derived from total investment
activities. The MPB holders get minimum 65% of the Investment Income
generated from deployment of total Mudaraba Fund with 1.25 weightage. The
gross income generated from the investment is distributed to the bondholders
as under:
 Minimum 65% of the income generated by deployment of MPB fund.
 The MPB will carry 1.25 weightage.
 An additional amount equivalent to 10% of the rate of dividend
declared and payable to the shareholders of IBBL each year.
As the name applies the bond is of perpetual in nature and will not be
redeemed at any time.
4.10 Shari‟ah Compliance
The MPB is a shari’ah based product. The fund being collected on mudaraba
principles through the MPBs is deployed in business activities under shari’ah
principles. Mudarabah arises where a provider of capital called the rabb al-
mal (or a group of such capital providers) enters into a contract with a
manager (called the mudarib) to engage in any specific trade activity with the
52 The Role of Mudaraba Perpetual Bond …………

objective of sharing the potential profit. At the core of any mudarabah contract
there are four basic conditions between the mudarib and the capital provider(s)
as follows:
 Profit, when realized, has to be shared between the two parties in
accordance with a profit-sharing ratio pre-stipulated at the time of the
contract. Loss, in case it arises, would have to be born entirely by rabb
al-mal as the mudarib only loses his or her effort.
 The rabb al-mal cannot interfere in the day-to-day management of the
mudarabah, apart from his or her right to restrict possible fields of
economic activity for the mudarabah. This provision, however, has to
be made clear within the mudarib contract.
 The mudarib has a ‘hand of trust’ (yad amana) in the management of
mudarabah capital, which means he would work to his best effort and,
therefore, cannot guarantee capital or profit to rabb al-mal.
 Loss of capital can be guaranteed by the mudarib only when such loss
proves to be the result of mismanagement or delinquency of the
mudarib; or where such loss results from a breach of the contract, like
violating restricted fields of economic activity.
IBBL Shari’ah board looks into the principles of shari’ah compliance from
time to time along with other investments of the bank. The investment of the
fund being collected against MPB is not ring fenced and is mixed up with the
overall asset pool of IBBL. Since the entire banking operation of IBBL is
based on shari’ah compliance, the additional business created out of the MPB
fund also remains Shari’ah compliant. However, the income against overdue
charges is to be carefully separated from normal income in order to keep the
income absolutely shari’ah compliant.
The MPB will not carry any fixed profit percentage; rather the profit
percentage will vary from time to time depending on the overall profitability
of the asset pool of the bank. That means the investors of MPB are exposed to
certain amount of business risk which is an essential requirement of income of
the MPB holders being shari’ah compliant.
4.11 Legal Status of the Bond Holders
Unlike the interest based traditional Bond; MPB is a subordinate instrument.
As a mudaraba instrument it gets priority over the shareholders in respect of
getting profit and also refund of principal in case of liquidation of the bank.
The bondholders will however, stand subordinated to the depositors in respect
of the payment of both profit and refund of principal. The MPB has been listed
Thoughts on Economics 53

with both the Bourse of the country and it remains freely transferable
depending on the market demand. The Bondholders are not entitled to enjoy
any rights and privilege as enjoyed by the shareholders except statutory
requirements.
4.12 Role of MPB for Development of Bangladesh Bond Market
The basic concept behind issuing MPB, however, is for the holders of the
MPB to share in the profits of large enterprises or in their revenues. Through
the issuance of MPB, IBBL plays a major role in the development of the
Islamic banking business and thereby contribute significantly to the
achievement of the noble objectives sought by the Shariah.
For meeting the essential requirement for developing a bond market, IBBL
issued MPB and enriched the Bangladesh bond market. It is the first corporate
bond in our capital market. Thus it is a milestone for Bangladesh bond market.

5. Problems Related to MPB

Though it has very positive role to play to develop a bond market in
Bangladesh but there are some problems, which are mentioned below:
1. Lack of awareness of investors about the bond’s features and also
about the bond market.
2. As there is no fixed interest rate, so investors who want regular
interest/profit/dividend/return for their regular income- are not
interested to invest in MPB
3. Investors assume a risk that the issuer may fail to satisfy the terms of
the obligation with respect to the timely payment of profit due to
adverse market condition.
4. Entrance of new competitors adversely affects the bond’s price.

6. Problems related with Bangladesh Bond Market

1. Lack of government proper policy regarding development of bond
market, it is still far behind than the Asian other countries as China,
Korea, Malaysia, Philippine, Singapore, Thailand, India , Pakistan and
Srilanka.
2. Shortage of corporate bonds in the market
3. Absence of effective protective laws to ensure the position of investors
in bond market (Akter, Nazma and Mohsin, M., 2010).
54 The Role of Mudaraba Perpetual Bond …………

7. Recommendations
7.1 Recommendations to Overcome the Problems Related to MPB
The following recommendations are put forwarded to solve the problems
related to MPB:
1. IBBL should arrange seminars and workshops for the investors to
increase their awareness about the features (rate of dividend, 1.25
weightage, perpetual etc.) of MPB.
2. IBBL should disclose financial statements to the investors and it will
reduce bondholders’ default risk.
3. Since ACI Company and BRAC Bank offered convertible bonds,
IBBL should introduce convertible feature with the existing features of
the MPB to attract the investors.
4. IBBL should increase the percentage of declared dividend which will
be added with the 1.25 weightage.
5. Other Islamic Banks should come forward to issue their own mudaraba
bonds in the Bangladesh bond market.
7.2 Recommendations for the Development of Bond Market
The suggested ‘Road Map’ under the auspices of IFC to develop a bond
market in a country like Bangladesh is:
i) Rationalization of the Interest Rate Structure whereby the Government
borrows at the lowest possible rate to create a level playing field
ii) Establish benchmarking and long-term Yield Curve.
iii) Provide a Legal Framework of user friendly Rules & Regulations,
conducive to the creation and development of a market.
iv) Develop a system of issuance of future Sovereign Papers (Sanchaya
Patras etc.) of different maturities as Tradable and Transferable
Securities.
v) Fund future infrastructure projects through issuance of Government
and Private Bonds.
vi) Lower Registration and Issue cost of Bonds and Debentures.
vii) Create independent Credit Rating Agencies.
Thoughts on Economics 55

viii) Develop and strengthen market intermediaries like dealers, investment

analysts, investment/ merchant bankers etc.
ix) Facilitate education process of market participants, including the
investors and issuers.
x) Unbundled pension and insurance funds and promote flotation of
private mutual funds, especially Money Market Mutual Funds.
xi) Allow Investment Grade Corporate Bonds and Debentures to form part
of SLR of Banks.
xii) Facilitate Securitization and issuance of Asset Backed Securities and
Collateralized Loan Obligations with the backing of multilateral
agencies and development of Money Market instruments.
xiii) Establish Central Depository and Electronic Settlement and
Registration System.
xiv) Upgrade Accounting and Disclosure Standards as well as Foreclosure
Laws.
The authors think that the above road map is sufficient to develop our bond
market. Therefore security market authorities should implement the road map
properly.

8. Conclusion
The bond market may play a very significant role in developing the economy
of Bangladesh. The Mudaraba Perpetual Bond is being traded in the country’s
capital market to pave the way to creating an Islamic bond market. Being
influenced by IBBL-MPB, ACI Company issued Zero Coupon Bonds with
attractive tax incentives. BRAC bank also issued BRAC Bank 25%
Subordinated Convertible Bonds to raise Tier-II capital to comply with the
regulatory requirement of Bangladesh Bank. Credit Rating Agency of
Bangladesh (CRAB) Limited has assigned A3 (Single A three) rating to the
proposed issuance of BDT 2,000 million 20% convertible zero coupon bond
by Jamuna Bank Limited (hereinafter also referred to as JBL or the Bank). The
Bank will issue ZCB worth BDT 2,000 million (approximately) having
maturity from 3-7 years having BDT 1,000 face value.Thus IBBL-MPB is
playing a role as a catalyst for developing Bangladesh Bond Market.
 56 The Role of Mudaraba Perpetual Bond …………

REFERENCES
1. Akter, Nazma and Mohsin M., (2010), Heterogeneous investors Base in
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Websites:
i) http://www.islamibankbd.com/home.php
ii) http://bd-ipo.blogspot.com/2010/01/aci-limited-aci-20-convertible-zero.html
iii) http://www.dsebd.org/forthcoming/Brac_Bonds.pdf

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