WRITE A REPORT ON ISLAMIC BANKING AND THEIR PROFIT SHARING

METHODS CRITICALLY ANALYZING

Islamic banking system

Abstract/ summary: Bangladesh has already experienced in potential growth in Islamic banking and finances
the rapid expansion of Islamic banking and finance in global banking and finance sector. 1 Over the period , it is
argued that applying Shariah rulings in Islamic banking has witnessed several challenges and difficulties
resulting in some aspects for lack of Islamic banking and finance infrastructure, lack of concrete legal basis, low
attention from the central bank, lack of Islamic capital market and unavailability of shariah law experts and
people’s awareness.

The findings reveal that, Islamic Banking can be manifested through providing an exceptional ruling from
general rulings , considering modern norms of business practices before applying rulings , harmonizing between
shariah and civil laws , adopting Islamic finance within the change of circumstances. This Study utilizes limited
secondary data as well as it focuses on Islamic Banking and profit sharing method.

Keywords: Shariah, Quran, Sunnah, Mudarabah ,Musharakah, Wadeah , Murabahah ,Ijara ,Conventional
Bank, borrower ,Muslim Youth Economist, Partnership

1
(n.d.). Journal of Islamic Finance [Review of Journal of Islamic Finance]. Guidelines for Conducting Islamic Banking, 11(1), 113–120. Retrieved 2022, from

http://www.openscienceonline.com/journal/ajbem

‌
"Islamic bank" means such a banking company or an Islamic banking branches of a banking company licensed
by Bangladesh Bank, which follows the Islamic Shariah in all its principles and modes of operations and avoids
receiving and paying of interest at all levels."Shariah" means such rules and regulations that have their origin in
the holy Quran and Sunnah to govern all aspects of human life.

Introduction- A bank is a business of accepting deposits and lending money. It is carried out by financial
intermediaries, which performs the functions of safeguarding deposits and providing loans to the public.
Conventional Bank’s central objective is profit making but the objective of Islamic banking is not only to earn
profit, but also to do good and bring welfare to the people.

Islamic bank has experienced a phenomenal growth and expansion in Bangladesh in the backdrop of strong
public demand and support for the system along its gradually increasing popularity across the world. As a
result, a number of full fledged Islamic banks have been established, while a good number of conventional bank
have come forward to offer services complaint with Islamic Shariah through opening of Islamic branches along
with conventional ones. The number of branches of Islamic banking sector including Islamic branches or
windows of conventional banks reached to 2154 at the end of March 2022.
 Methodology of the study

The methodology of the study will be described in terms of the following context:

Information to be obtained - To make this report , we have gathered great deal of information about our
selected bank. We have worked with three Islamic banks to gather information about Islamic banking.

Questionnaire development - In developing our questionnaires, we have used different techniques. In our
questionnaires, some questions were multiple choices, some were open-ended, and some were dichotomous.
We have considered multiple choice and dichotomous questionnaire, because it is easy for our respondents to
answer the questions. We asked open-ended questions to find out more information.

Field work or data collection - Methods which we used in data collection are - primary data collection,
secondary data collection.

Primary data have been collected through interviews concerned authorities of the selected banks. Some data
have also been with the collected through observation. Secondary data have been obtained from thedifferent
books, journals, articles, YouTube ,news paper, internet whose names have been given in the references.

Data analysis and presentation: Analysis the data on the subject through a study of books, internet, article,
you Tube, journals, website etc.

Findings- We have made a conclusion & recommendation on the base of our findings.
 History

Islamic bank is a conduct of banking system which is based on Shariah law and does not allow the paying and
receiving of interest while promoting on profit sharing. On the other hand, the main source of revenue of a
conventional bank is to give loan in exchange of interest. The main motto of Islamic bank is to operate the
banking system to achieve all the targets of Islamic economy. It is started from the medieval era during that
time Middle East and European people used to use European banking principle to do their trading. But still had
some challenges like lack of Islamic banking and financial infrastructure, lack of concrete legal basis. By that
time trading was being famous among people. So, European people started to open local banks in Middle-east.
These local banks start a system called interest free financial system or profit and loss sharing method. This
method established for specific regions people (Middle-East). By adopting this system European businessman
can able to serve the Muslim businessman.

According to correct Islamic faith some Islamic scholar named

1. Anwar Qureshi ,

2. Naiem Siddiqui ,

3. Mahmud Ahmed &

4. Muhammed Hamidullah

proposed a interest free Banking system by publishing different publication from 1940 to 1960. In two decades
it become famous worldwide among youth Muslim economist and the number was increasing rapidly. In 70 th
century a conference held by various Muslim countries finance ministers and economist. As a result of which a
new interest free Islamic Bank has been established in 1975 named “Islamic Development Bank. In the same
year, with the help of various Muslim businessmen, they have established world’s first interest free private bank
which is called “Dubai Islamic Bank”.

Later on, more than fifty interest free bank has been established. Afterwards the first Islamic Bank has been
established on 1983 in Bangladesh which is Islami Bank Bangladesh Limited. Some other Islamic Bank
established after getting the clearance under Islamic principle. Hereafter two conventional banks named Export-
Import Bank Limited and First Security Bank totally changed their banking method into Islamic Bank. At
present, 10 full-fledged Islamic banks have been operating with 2154 branches out of total 10942 branches of
the whole banking sector. During last 30years, the Islamic financial industry has shown remarkable progress
both from theoretical and practical perspective.
 Modes and Principle of Islamic banking

There are two fundamental principle of Islamic banking and they are :-

1. The sharing of profit and loss and

2. The prohibition of the collection and payment of interest by lenders and investors.

In short, it is a banking system which expressly state its commitment to the principal of Islamic Shariah and to
the banning of the receipt and payment of interest on any of its operations..

These are Shariah modes for receiving deposit:-

1. Al-Wadeah

2. Mudaraba

Al-Wadeah : According to Shariah principles, the word “ Al-Wadeah means to receive something for safe
custody with the permission to use the same and with the condition to return the same on demand , that means
fund which deposited with Banks by the depositor with clear permission to Utilize/invest the same .

Mudaraba : Mudaraba is a partnership of labour and capital , where one partner provides full capital and the
other one manages the business . Any profits earned are shared between the two parties as per profit ratio agreed
during the agreed during the agreement, while the financial loss is only suffered by the investor.

Mudaraba deposits include:

1. Mudaraba Saving Deposits (MSD)

2. Mudaraba Short Notice Deposits (MSND)
3. Mudaraba Term Deposits (MTD)
On the other hand , Islami banks do not directly disburse money to borrowers. They buy the product as per the
borrower's wishes and sell it to them The funds of Islamic banks are mainly invested in the following modes :

 Mudaraba (Profit And Loss Sharing)

 Musharaka (A Joint Partnership)
 Bai-Murabaha (Murabaha to the purchase orders)
 Ijara 

1.Mudaraba : Mudaraba is a shared venture between labour and capital . Here the bank provides capital and
the investment client conducts the business. The bank providing capital is called Sahib-AL-Maal and the client
is called Mudarib . The profit is distributed between the bank and the investment client at a predetermined ratio
while the bank has to bear the entire loss, if any.
                                                                                                                                                                         
                       

2. Musharaka : Musharaka means partnership business .

Every partner has to provide more or less equity funds in this partnership business .Both the bank and the
investment client reserve the right to share in the management of the business. But the bank may OPT to permit
the investment client to operate the whole business. In practice, the investment client normally conducts the
business . The profit is divided between the bank and the investment client at a predetermined ratio. Loss ,if any
, is to be borne by the bank and the investment client according to capital ratio .

3. Bai- Murabaha :  Contractual buying and selling at a mark-up profit is called Murabaha . In this case , the
client requests the bank to purchase certain goods for him. The bank purchases the goods as per specification
and requirement of the client . The client receives the goods on payment at the price which includes mark-up
profit as per contract . Under this made of investment the purchase or cost price and profit are to be disclosed
separately.

4. Ijarah:  Ijarah is an Arabic term which means to do something on rent or provide services and goods
temporarily for a wage, it is a term of  fiqh  and  a product of Islamic Finance . In this mode , the lessee pays
the Bank rents at a determined rate for using the assets or property and returns the same to the Bank at the
expiry of the agreement.
 
 Profit Sharing Method

When money is deposited in an Islami Bank that is regulated with the Islamic banking system,the bank, in turn,
makes investments in different forms approved by the Islamic Shariah with the intent to earn a profit.

Profit and Loss Sharing (PLS) refers to Sharia-compliant forms of equity financing such as mudarabah and
musharakah. These mechanisms comply with the religious prohibition on interest on loans that most Muslims
subscribe to. Mudarabah refers to "trustee finance" or passive partnership contract, while Musharakah refers to
equity participation contract.

The profits and losses shared in PLS are those of a business enterprise or person which/who has obtained capital
from the Islamic bank/financial institution. As financing is repaid, the provider of capital collects some agreed
upon percentage of the profits along with the principal of the financing. Unlike a conventional bank, there is no
fixed rate of interest collected along with the principal of the loan. Also unlike conventional banking, the PLS
bank acts as a capital partner serving as an intermediary between the depositor on one side and the
entrepreneur/borrower on the other. The intention is to promote "the concept of participation in a transaction
backed by real assets, utilizing the funds at risk on a profit-and-loss-sharing basis".

Profits and Losses Sharing (PLS) involves specificities in the Islamic bank liquidity issues. Using hypothetic-
deductive methodology, this paper tries to examine whether the participative intermediation is responsible for
high exposition to liquidity shortage or leads to less exposition to liquidity risk. Seeing maturity transformation,
we conclude that PLS intermediation leads to a more exposition to liquidity risk since Islamic banks often use
short term deposits to allow financing of musharaka and mudarabah at long term. However, for the risk
transformation, the PLS mechanism between the banks and its depositors ,whereas on the other hand the bank
and the entrepreneurs permits less exposition to liquidity risk. The participative intermediation seems to
generate a limited liquidity function and is characterized by less money creation. Interest is the basic difference
between conventional and Islamic bank. This implies that it is critical to re-enforce the liability management of
liquidity risk. Nevertheless, the impact of PLS intermediation on liquidity risk is influenced by the degree of
development of Islamic money market and the existence of Islamic lender at last resort.
 Profitable investment of Islami Bank

1. Agriculture, Fishing, Forestry

2. Industry

3. Working Capital Investment

4. Pre-Shipment Investment against Export under Confirmed Letter of Credit

5. Trade (Commercial Investment)

6. Transport & Communications (Other than Special Schemes)

7. Real Estate Investment for Developers

8. Musharaka Documentary Bills (MDB) Inland

9. Car Investment

10. House Hold Durable Scheme

Sl. Revised Rate of
No. Sector (Economic Purpose)
Profit/Rent effective
from 08.01.2012
1 2 3 4 5 6 7
1 Agriculture, Fishing & Forestry:
i Cultivation of Crops 12.50%
ii Irrigation, Agricultural Fertilizer & 13.00%
Pesticides to Farmers and
Agricultural Machineries &
Implements to Farmers (Other than
iii Plantation, Nursery, Livestocks, 13.00%
Dairy, Poultry,
Fisheries/Pisciculture etc.(Other than
Special Schemes)
2 Industry (Term Investment):
I Large & Medium Industry
a Clients Rated by ECAIs
. i Clients having Risk Weight at 15.50%
20%
ii Clients having Risk Weight at 15.70%
50%
ii Clients having Risk Weight at 15.80%
i 100%
i Clients having Risk Weight at 16.00%
v. 150%
b Other Clients (unrated) 16.00%
.
II Small Industry (Investment From Tk. 15.00%
0.50 lac to Tk. 50.00 Lac)
II Agro based Industry As defined by
I Bangladesh Bank circulated
vide HO Circular Letter
No.IAMD/IPPD/3363 dated
30.11.2008)
a Clients Rated by ECAIs
. i Clients
20%
having Risk Weight at 15.50%
ii Clients having Risk Weight at 15.70%
50%
ii Clients having Risk Weight at 15.80%
i
100%
i Clients having Risk Weight at 16.00%
v.
150%
 b Other Clients (unrated) 16.00%
.
3 Working Capital Investment:
I Large & Medium Industry (Other
than Bai-Muajjal BB Bills)
a Clients Rated by ECAIs
. i Clients having Risk Weight at 15.50%
20%
ii Clients having Risk Weight at 15.70%
50%
ii Clients having Risk Weight at 15.80%
i 100%
i Clients having Risk Weight at 16.00%
v. 150%
b Other Clients (unrated) 16.00%
.
II Small Industry (Investment From 15.00%
Tk. 0.50 lac to Tk.50.00 lac)
II Bai-Muajjal Back to Back (BB) 11.00%
I Bills
I Agro based Industry As defined by
V Bangladesh Bank circulated vide
HO Circular Letter
No.IAMD/IPPD/3363 dated
30.11.2008)
a Clients Rated by ECAIs
. i Clients having Risk Weight at 15.50%
20%
ii Clients having Risk Weight at 15.70%
50%
ii Clients having Risk Weight at 15.80%
i
100%
i Clients having Risk Weight at 16.00%
v.
150%
b Other Clients (unrated) 16.00%
.
4 Pre-Shipment Investment against Export 7.00%
under Confirmed Letter of Credit
5 Trade (Commercial Investment)
a. Clients Rated by ECAIs
i Clients having Risk Weight at 20% 15.50%
ii Clients having Risk Weight at 50% 15.70%
ii Clients having Risk Weight at 15.80%
i 100%
i Clients having Risk Weight at 16.00%
v. 150%
b. Other Clients (unrated) 16.00%
 Sl. Revised Rate of
No. Sector (Economic Purpose)
Profit/Rent
effective from
08.01.2012
1 2 3 45 6 7
Special Rate of Return 12.00% against Investment /Import of Rice, Wheat, Edible Oil (refined
and crude), Dal,
* Gram, Onion, Date and Sugar has been withdrawn. As such, Rate of Return mentioned at
Serial No. 5 (Column No.
11) shall also be applicable for these items.
Sl. Revised Rate of
No. Sector (Economic Purpose)
Profit/Rent
effective from
08.01.2012
1 2 3 45 6 7
6 Transport & Communications (Other 16.0
than Special Schemes) 0%
7 Real Estate Investment for Developers 16.0
0%
8 Other Investment 16.0
0%
9 Investment under Special Schemes :
i Agricultural Implements Investment 15.0
Scheme (AIIS) * 0%
ii Car Investment Scheme (CIS) 16.0
0%
iii Household Durable Scheme (HDS) * 16.0
0%
iv Housing Investment Scheme (HIS) 16.0
. 0%
v. Real Estate Investment Programme 15.0
(REIP) 0%
vi Transport Investment Scheme (TIS) 16.0
0%
vi Investment Scheme for Doctors (ISD) 15.0
i 0%
vi Micro Industries Investment Scheme 14.5
ii (MIIS) 0%
ix Rural Development Scheme (RDS) ** 12.0
0%
x Micro Enterprise Investment Scheme 14.0
(MEIS) ** 0%
xi Small Business Investment Scheme 15.0
(SBIS) * 0%
xi Women Entrepreneurs' Investment 12.0
i Scheme (WEIS) 0%
xi Palli Griha Nirman Beniyog Prakalpa 15.0
ii (PGNBP) 0%
xi NRB Entrepreneurs Investment 13.0
v Scheme (NEIS) 0%
x Solar Panel Investment Scheme 10.0
v (SPIS) 0%
10 I Musharaka Documentary Bills Revised Rate of
(MDB) Inland Profit/Rent
effective from
08.01.2012
a When When
. Clients Rated by ECAIs proceeds of proceeds
MDB to be of MDB to
realized in be realized
F.C. in BDT
i Clients having Risk Weight at 20% 14.50% 15.00%
ii Clients having Risk Weight at 50% 15.00% 15.50%
ii Clients having Risk Weight at 15.25% 15.75%
i 100%
iv Clients having Risk Weight at 15.50% 16.00.%
. 150%
b Other Clients (unrated) 15.50% 16.00%
.
II Small Industry 14.50% 15.00%
(Investment From Tk. 0.50 lac to
Tk.50.00 lac)

All AD Branches are advised to determine profit distribution ratio of MDB

ensuring above noted ARR accordingly.
Notes

* Including 2.00% Supervision Charge

** Including 1.00% welfare Fund
 Varities of accounts of Islami Bank:
In the perspective of these Accounts the Bank is 'Mudarib' and customers are 'Shahib Al-Mal'. On behalf of
depositors, the Bank invests their deposited money and distributes minimum 65% of investment-income earned
through deployment of Mudaraba funds among Mudaraba depositors after the closing of the year.

Al-Wadeah Current Account (AWCA)

Mudaraba Savings Account (MSA)

Mudaraba Term Deposit Account (MTDR)

Mudaraba Special Notice Account (MSNA)

Mudaraba Hajj Savings Account (MHSA)

Mudaraba Special Savings (Pension) Account (MSSA)

Mudaraba Savings Bond (MSB)

Mudaraba Monthly Profit Deposit Account (MMPDA)

Mudaraba Muhor Savings Account (MMSA)

Mudaraba Waqf Cash Deposit Account (MWCDA)

Mudaraba NRB Savings Bond (MNSB) Account

Mudaraba Foreign Currency Deposit Account (MFCD)

Students Mudaraba Savings Account (SMSA)

Mudaraba Farmers Savings Account (MFSA)

 Discussion about the Islami bank

From a theoretical perspective, Islamic banking is different from conventional banking because interest (Riba)
is prohibited in Islam, i.e., banks are not allowed to offer a fixed rate of return on deposits and are not allowed
to charge interest on loans. As interest-bearing deposits are not permitted by the rules and principles of the
Islamic Shariah, Islamic banks typically raise deposits in the form of profit-sharing investment accounts. These
accounts differ from conventional deposits not merely by virtue of the profit-sharing nature of the returns they
offer, but also because the contact between the depositors and the bank is not a debt contract, and the deposits
are in consequence not ‘capital certain’ . This latter characteristic leads to serious regulatory problems in
jurisdictions where bank deposits are required by legal definition to be ‘capital certain’. More generally, the
presence of such ‘ Putable instruments’ in the capital structure of Islamic banks leads to complications in
assessing their capital adequacy. In addition, the fact that the profit-sharing investment account holders are a
type of equity investor without the governance, rights of either creditors or shareholders raises a major problem
of supervision. This article explains these problems , and proposes a solution in the form of a structural
distinction between the Islamic bank in the narrow sense on the one hand, and the entity that manages the profit-
sharing investment accounts on the other hand.

Islami bank regulates according to shariah law, they tries to settle disputes arises conflicting to common law
according to Quran and Sunnah. But the issues they can't solve by shariah law, they left some technical
loopholes like in case of ijarah ,two contracts cannot be merged into a contract and the contracts must be
independent. We can find several loopholes like that.they actually follows shariah law but the problem
conflicting with shariah law is managed technically. These loopholes makes them profitable always, Islami
bank didn't face any type of loss yet. Islami Bank never invests in projects that is have chances of losing
profit.They have some yearly "Emergency Saving Funds". They recovers the losses from that fund that's why
the never faces any loss. They counts their profits globally that's why they gain most profits, other conventional
banks.
 Conclusion

Even though their banking system have some loopholes but The Islami bank have significant roles in the social
responsibility. Moreover, the core and guidelines of Islamic economics spontaneously achieve the justice and
equality, an example for that, the Zakat payment on annual basis by the Islamic banks which goes to the needy
people and zakat channels as outlined in the Holy Quran, as it helps in alleviation of poverty. Zakat is a
religious levy deducted from the bank net income and to be paid annually. Further, the microfinance products
contribute in achieves some balance in the community by financing the limited income category. They also
contribute in other charitable organization of their own like hospitals, educational institutions etc.

In other words, Islamic banks are responsible and obligated towards community to carry out a fully Shariah
compliant banking and services, and to obey the rules of Islam in all dealings and businesses, this is in regard to
the religious responsibility. In respect to the economic responsibility, Islamic banks should conduct a profitable
and financially viable business and reserve and develop the moneys of the Shareholders and Depositors. Ethical
responsibility refers to the obligation of the Islamic banks to respect and value the community religious and
customary norms which are not codified in laws.
 Reference:
1.J (n.d.). Journal of Islamic Finance [Review of Journal of Islamic Finance]. Guidelines for Conducting Islamic
Banking, 11(1), 113–120. Retrieved 2022, from http://www.openscienceonline.com/journal/ajbem

2.American Journal of Business, Economics and Management.

http://www.openscienceonline.com/journal/ajbem

3.Alizz Islamic Bank,2012. Website.

4. “Guidelines for Conducting Islamic Banking Section I Introduction to ...”

<https://www.bb.org.bd/aboutus/regulationguideline/islamicbanking/guideislamicbnk.pdf> accessed
September 28, 2022

5. IBBL Investment Policy And Planning Department

6.