report whole - 1 2003
TRANSCRIPT
Report
On
Foreign Exchange Principles and Foreign Exchange Transaction under Islamic Framework
Submitted to:
Mr. Md. Emdadul Islam
Lecturer
Department of Banking
University of Dhaka
Submitted by:
MD. Mahtab Hossain
ID no: 12-094
B.B.A 12th Batch
Department of Banking
Letter of transmitter
21th August, 2010
Mr. Md. Emdadul IslamLecturer,Department of BankingUniversity of Dhaka, Bangladesh
Subject: Submission of Internship report.
Dear Sir,
With due respect and great pleasure I submit my internship report, which is a partial requirement
for the Internship program of Islami Bank Training and Research Academy for BBA/MBA
students in University of Dhaka. I have done the report on “Foreign Exchange Principles and
Foreign Exchange Transaction under Islamic Framework”. The report is prepared under
supervision of “Mr. Md. Emdadul Islam”, Lecturer of Department of Banking, and University
of Dhaka. It was a tremendous opportunity as well as highly enlightening experience for me
during my tenure at IBBL, Mouchak Branch. I have taken at most care to present this report and
this report has been excellent outlet for combining theoretical and practical aspect in a real business
environment.
I am pleased and grateful to know for your permission to prepare such a report on “Foreign Exchange Principles and Foreign Exchange Transaction under Islamic Framework”. Program and advice me for completing study, improvement for my performance and career also.
Thanking you very much for your Kind co-operation.
Sincerely yours,
Md. Mahtab HossainID No: 12-094 BBA 12th BatchDepartment of BankingUniversity of Dhaka
DECLARATION
This is to notify that this internship report titled “Foreign Exchange Principles and Foreign
Exchange Transaction under Islamic Framework” has been prepared for academic purpose as
asked by our BBA program curriculum, supervisor Mr. Md. Emdadul Islam, Lecturer,
Department of Banking, University of Dhaka. It is to be evaluated as a part of our examination
on this BBA program. This has not been prepared for any other purpose like reproduce,
investigation or publication. I do here by declare that the entire banking work unless otherwise,
Acknowledged, Submitted as a report in Department of Banking, university of Dhaka is my
independent and original work and all the references have been mentioned here.
------------------------
Md. Mahtab Hossain
ID No: 12-094
BBA 12th Batch
Department of Banking
University of Dhaka
Contents Page No:
Letter of Transmittal
Supervisor’s Declaration
Letter from Bank
Acknowledgement
Executive summary
Chapter 1 : Introduction
1.1 Introduction
1.2 Origin of the Report
1.3 Objective of the Report
1.4 Scope of the Report
1.5 Methodology of the Study
1.6 Limitation of the Study
Chapter 2
2.0 Literature Review
Chapter 3 : Bangladesh Economy
3.1 Overview of Bangladesh Economy
3.2 Role of Private Commercial Bank in the Economic Development of Bangladesh
Table Of Content
Chapter 4 : Islamic Banking 4.1 Evaluation of Islamic Banking
4.2 Islamization in Banking Industry
4.3 What is Islamic Banking
4.4 What is Riba
4.5 Profit and Riba
4.6 Objective of Islamic Banking
4.7 Distinguish Feature of Islamic Banking
Chapter 5 : Background of Islami Bank Bangladesh LTD.
5.1 History of IBBL
5.2 Overview of IBBL
5.3 Mission & vision of IBBL
5.4 Aim & Objective of IBBL
5.5 Distinguish Feature of IBBL
5.6 Growth & Expansion of IBBL
5.7 Branch Arrangement of IBBL
Chapter 6 : Foreign Exchange operation of IBBL
6.1 Meaning of Foreign Exchange
6.2 Foreign Exchange Business
6.2.1 Trading of Foreign Currencies
6.2.2 Foreign Trade operation
6.3 Financing of Foreign Trade
6.4 Foreign Exchange Operation of IBBL
6.5 Performance of IBBL in Foreign Exchange Business
Chapter 6A : Import
6A.1 Import
6A.2 Import Financing of IBBL
6A.3 Import Performance of IBBL
Chapter 6B : Export
6B.1 Export
6B.2 Export Finance of IBBL
6B.3 Export Performance of IBBL
Chapter 6C : Remittance
6C.1 Remittance
6C.2 Mechanism of Foreign Remittance
6C.3 Instrument of Foreign Remittance
6c.4 Foreign Remittance Performance of IBBL
Chapter 6D : Letter of Credit
6D.1 Letter of Credit
6D.2 types of letter of Credit
6D.3 Documentary of Letter of Credit
6D.4 Important Terms of Letter of Credit
6D.5 Parties of Letter of Credit
6D.6 Modes of Letter of Credit
Chapter 6E : Regression & Trend Analysis
6E.1 Regression Analysis
6E.2 Trend Analysis
Chapter 7 : Findings of the Study
7.1 Problems of Foreign Exchange Operation
7.2 Prospects of Foreign Exchange Operation
Chapter 8 : Recommendation & Conclusion
8.1 Conclusion
8.2 Recommendation
Appendices
References
Bibliography
List of abbreviations used in the report
Acronyms
Chapter 1: Introduction
1.1Introduction
Almighty, Omnipotent, Omniscient and Ubiquitous Allah have strictly forbidden investing or earning on the basis of interest (Riba). Because interest (Riba) is out and out prohibited in accordance with Islamic rules band regulation... So every sort of transaction must be free from Riba. But not only in Bangladesh but also over the world all the banks are working basing on
interest. As it is haram in Islam the Muslim scholars thought a plan to establish a banking system that is free from interest and will work on the basis of profit loss shearing. Then depending on this thought, it is decided to establish Islamic banks through the whole world to protect everyone from this curse. So Islamic banks are operating on the basis of Islamic Shariah that is free from interest and Islamic banks also doing their Foreign exchange operation and transaction whit this Shariah Framework.
1.2 Origin of the Report
This report is originated as the course requirement of BBA program, Department of Banking University of Dhaka. As practical orientation is integral part of BBA program requirement, I was sent to the Islami Bank Bangladesh Limited, At first I report to IBTRA (Islami Bank Training and Research Academy) for internship training on Islamic Banking System from July 5 to July 15, then I sent to take the real life exposure of the activities of banking financial institutions at Mouchak Branch from 18.07.2010 to 31.08.2010 After that I submitted a report and presentation in IBTRA and also submitted my internship report at Department of Banking, University of Dhaka.
1.3 Objective of the Report
Objective of the study acts as a bridge between the starting point and the goals of the study. To illustrate the objectives properly, presented into two parts:
General objectives of the Report: The general objective of the report is to complete the
internship. As per requirement of BBA program, a student need to work in a business
organization for two months to acquire practical knowledge about real business operations of a
company.
Specific objectives of the Report:
To fulfill the requirement of the BBA program.
To know the basic principles and framework at which Islami Banks operate their foreign
exchange transaction and procedure.
To co-ordinate between theory and practice and to make a bridge between theoretical and
practical knowledge in fulfillment of the internship program.
To identify the formalities maintained by both the bank and client in processing and
receiving foreign exchange products.
To know about the interest free banking system within the Islamic Shariah and how it
could be processed.
To determine and focus of Foreign Exchange Principle and Foreign Exchange Operations
under Islami Bank Framework.
To have a clear idea regarding the requirements and the limitations at the time of
apply for foreign exchange procedure and other formalities.
To show the comparison of Foreign Exchange Operations between Islami Banking
System that of Conventional Banking System.
To have an overall idea about Islamic Banking system that is based on Al-Quran and
Sunnah.
1.4 Scope of the Report
This report will cover an organizational overview of Islami Bank Bangladesh Limited. It will
give a wide view of the different stages of foreign exchange operational procedure of Islami
Bank Bangladesh Limited under Islami Shariah principles. This study also covers the main
principles and framework of Islamic Banking and economics based on Quran and Sunnah. Based
upon this principle I try to elaborate that the foreign exchange procedure and practice of Islami
Banks and try to show their principles in this area.
1.5 Methodology of the study
The research design is presented below:
Area of Study:
The proposed study has been focused on the Foreign exchange principles and foreign exchange
transaction under Islamic Framework of the Islami Bank Bangladesh Limited. In relation with
the general & specific objectives, the Foreign Exchange Mouchak Branch of the Islami Bank
Bangladesh Limited has been selected to perform my internship program.
Source of information:
Primary Data: Data has been collected primarily through correspondence with the personnel
working in different foreign exchange desks and through questionnaire survey.
Secondary data: Secondary sources consist of several reading materials such as circulars,
journals, brochures, training materials and annual reports.
The required data and information to prepare the assignment have been collected from the
followings sources:
1. Procedures published by the IBBL, Head office.
2. Files and documents of the branch.
3. Personal interview with branch officials and Executives.
4. Circulars issued by the IBBL and Bangladesh Bank.
5. Practical experience gained by visiting and working different desks during the internship
period.
The main source of published data is the annual report of the bank. Data have also been collected
by going through different circulars issued by the head office and Bangladesh bank, the training
instruments of the Bank etc.
Determination of time horizon:
The time horizon has been selected of five years from 2005 to 2009. Over the five year time
period, the related data of the IBBL has been evaluated.
Methods of data collection:
The data presented in this report has been collected from the annual reports of the bank from
2004 to 2008, by taking interview of the senior officer, from the training instruments of the bank,
from published books and through structured questionnaire.
Data Processing & Analysis:
Data has been computerized & processed by using MS Word, MS Excel and SPSS. For the
purpose of analyzing the data we have presented in tabular form, percentage form with necessary
chart and graphs.
1.6 Limitations of the Report:
The sources of the report are collected from different desks, various documents of IBBL. Though
the entire stuff member remains busy all the time for their desk work they helped a lot to manage
and collect the data & information. But it was very difficult to collect information on the client as
it is very sensitive and secret issue for the Bank. Every task has some limitations. I faced some
usual constraints during the course of my internship. Though I have given utmost effort to
prepare this paper but there are some limitations of the study. These are as follows-
a) Shortage of time period: I had to complete this report writing within a shorter period of
time since many days have passed during the training session. So the time constraint of
the study hindering the course of vast area and time for preparing a report within the
mentioned period is really difficult.
b) Busy working environment: The officials had some times been unable to provide
information because of their huge routine work. That’s why we do not gather vast
knowledge about the critical issues.
c) Lack of sufficient well informed officials: Many officials of the branch are not well
informed about foreign exchange problems of IBBL. I had to face many difficulties to
collect this information.
d) Insufficient Data: The data required for sufficient analysis for writing report couldn’t be
collected due to excessive workload. I had to rely entirely on the data received from the
books of statistics, Manifesto, and the Annual Reports of Islami Bank Bangladesh
Limited, and I had no opportunity to verify the satisfaction level of clients and receive
their suggestions in implementing the Islamic Shariah as well as other foreign exchange
banking activities.
e) Secrecy of Management: There some information which are confidential. I was unable
to collect these data. Some data could not been collected for confidentiality or secrecy of
management.
Chapter 2: Literature Review
2.0 Literature Review
Some researchers were conducted on the field of conventional banking as well as Islamic
banking. A brief summary of the researcher relevant to the problem and prospects of the support
the some assumption which are as follows:
Chachi (1989) expressed in Ph.D thesis entitled “Islamic Banking” that Islam may lead to a
more just and more beneficial way of development, through the western and pro-western
economists believe that interest is a must for financial and economic development. The empirical
analysis in the study showed that Islamic banking is more appropriate and more relevant to the
economic growth and development.
Shallah (1989) made a study on Islamic Banking in an interest based economy; A case study of
Jordan “The dissertation examined the viability of Islamic Banks and financial institutions in an
interest based economy which contradicts their ideals. The study was particularly with the
experience of Islamic Banking in Jordan and it provided an examination of the structure of the
economic and financial system of Jordan”. The findings of the research showed that the Jordan
Islamic bank has proved viable compared to interest based banks on Jordan.
Ahmed (1990) has showed in his Ph.D thesis entitled the contribution of Islamic Banking to
economic Development. A case of the Sudan that the Islamic banks investment and in short term
and (trade) finance and have done little to promote long-term (equity) finance. The researcher
also found that these are different factors affecting this role such as the character and strength of
demand for financing productive projects. The attitude of Islamic Bank’s Management, Govt.
policies and the structural rigidities characterizing the Sudanese economy. The finding showed
that the religious element is ranked first in importance for customers. The competitive service
and wide availability of services ranks after the religious element.
Ahsan (1988) stated in his articles Islamic and Modern Banking System “some principle and
objectives of the Islamic and conventional economic system”. He viewed that Islamic banks
perform the essential function of financial intermediation between the savers and investors.
While the conventional banks assure guaranteed return to the depositor, leaving the risk of
investment entirely to the barrowers.
Ahmad1 made an important study entitled "Lending Risk Analysis Implementation: Problem
and Prospects". He discussed objectives, problems & prospects of LRA. The objectives of LRA
are to assist in bringing changes successfully to the existing lending policies, such as to develop
methodology for analyzing lending risk, to improve the LRA for all types of decisions, to ensure
the proper security and implement the whole mechanisms. LRA is the output of FSRP, for the
sanction of loan Tk. 100 core and application of LRA techniques by the bank has been made
compulsory except for BSB, BKB& RAKUB. LRA becomes effective when proper monitoring
is done after sanctioning of any projects. Once the cash flow of the borrower is in consistent with
the earlier period, no risk is there but in the reverse case, deterioration is found, and early
detection is better for early rectification. He realized the major problems related to LRA. There is
lack of homogenicly in LRA manual, lack of industry average, competitor’s data, etc. There are
also problems in judging integrity & honesty of management.
1 Ahmad "Lending Risk Analysis Implementation: Problem and Prospects". Bank Parikrama, BIBM, Vol. XI, No. 1-2, 1988, pp. 23-29.
Chapter 3: Bangladesh Economy
3.1 Overview of Bangladesh Economy
Bangladesh has only been an independent country since 1971, but geologists estimate that the area has been inhabited for over four thousand years based on archeological finds in the country. With this long history, the people and culture of the country is unique and rich. Everywhere you look in the country, you can see pictures of the people's past.
In the early 1600s the British East India Company built a trading post in Gujarat. The Company gained control of the area in 1757. Robert Clive, one of the employees of the British East India Company, eventually became the governor of Bengal. The East India Company ruled the area for the next 100 years. However, the British Crown took over the area in the Sepoy Mutiny, a rebellion that occurred in 1857. The country was ruled by Britain under a viceroy until the 1900s.
Bengal was divided along religious lines in 1947. The eastern part of the area became East Bengal and part of Pakistan. The western area became part of India. Britain no longer controlled the country.
East Bengal, which later was renamed East Pakistan, never functioned well as a part of Pakistan. The people were not happy with being controlled by the Pakistani upper class. The Bengali-speaking population of the area signed a petition for autonomy in the 1960s, but the Pakistani government ignored it. Tensions mounted, until a huge cyclone destroyed the coast of the area in 1970. When the Pakistani government did not respond well, the people rebelled. After a long, bloody revolution, East Bengali won its independence and chose the name Bangladesh.
Sheikh Mujib was the first leader of the country. He was assassinated in 1975 after establishing socialist rule in the country. The three months after his assassination were bloody and confusing, but soon General Ziaur Rahman took power and established a multi-party government. He was also assassinated in 1981. He was followed by Hossain Mohammad Ershad, who ruled for eight years. After his reign, the current parliamentary democratic republic was established.
Current economic conditions in Bangladesh
At Bangladesh's birth, the country embraced socialism as the economic ideology with a dominant role for the public sector. But, since the mid-seventies, it undertook a major restructuring towards establishing a market economy with emphasis on private sector-led economic growth. During the nineties, the country has completed a major stabilization program which has reduced inflation as well as fiscal and current account deficits and established a healthy foreign exchange reserve position with low and sustainable debt-service liabilities. With modest economic growth,
the basic indicators related to health, education and poverty have all shown sustained improvement. The country of Bangladesh is currently rated as the 31st largest economy in the world according to in terms of GNP based on the purchasing power parity method of valuation. As a young country, Bangladesh is doing well in the global economy. However, while the country's economic outlook is strong, many of the workers seeking jobs within the Bangladesh economy are facing significant challenges. The economy has grown 5-6% per year since 1996 despite political instability,poor infrastructure,corruption,insufficient power supplies, and slow implementation of economic reforms. Bangladesh remains a poor, overpopulated, and inefficiently-governed nation. Although more than half of GDP is generated through the service sector, nearly two-thirds of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important product. Bangladesh's growth was resilient during the 2008-09 global financial crisis and recession. Garment exports, totaling $12.3 billion in FY09 and remittances from overseas Bangladeshis totaling $9.7 billion in FY09 accounted for almost 25% of GDP. The country is the largest exporter of jute and jute goods in the world. Readymade garments are among the most exportable items. Tea, frozen shrimp, fish, leather goods and handicrafts are also major exportable commodities.
2007 2008 2009
$216.6 billion $229.1 billion $242.2 billion
GDP(purchasing power parity)
The Bangladesh economy also focuses strongly on agriculture in order to feed an ever-growing population. A majority of the residents of the country have agricultural jobs. Sustenance farming is not uncommon among the lower economic classes. The primary crops are jute and rice. In fact, the country is one of the top four rice producers in the world. Grain is also being successfully produced in Bangladesh. However, even with this increased focus on agriculture, Bangladesh news sources are often reporting a large amount of the population that faces hunger on a regular basis. Due to a number of factors, Bangladesh's labor-intensive agriculture has achieved steady increases in food grain production despite the often unfavorable weather conditions. These include better flood control and irrigation, a generally more efficient use of fertilizers, and the establishment of better distribution and rural credit networks. Population pressure continues to place a severe burden on productive capacity, creating a food deficit, especially of wheat. Foreign assistance and commercial imports fill the gap, but seasonal hunger ("monga") remains a problem. Underemployment remains a serious problem, and a growing concern for Bangladesh's agricultural sector will be its ability to absorb additional manpower. Due to farmers vulnerability to various risks, Bangladeshi poorest face numerous potential limitations on their ability to enhance agriculture production and their livelihoods. These include an actual and perceived risk to investing in new agricultural technologies and activities, a vulnerability to shocks and stresses and a limited ability to mitigate or cope with these and limited access to market information.
As industry grows within the country, new Bangladesh jobs are constantly being created. Many women are finding employment within the textiles market making clothing. In the Bangladesh economy, textiles are the number one export. Textile mills create knit clothing and ready-made items that are worn across the globe. However, because textile workers are so underpaid in the country, Bangladesh news sources are constantly covering demonstrations by the workers as they strive for better wages and work conditions. In response to these protests, the government of Bangladesh has created a Wage Commission to govern the wages paid by textile mills. One goal of the Wage Commission is to decide on an acceptable minimum wage for the country.
2007 2008 2009
6.2% 5.8% 5.7%
GDP(Real growth rate)
Many new jobs mostly for women have been created by the country's dynamic private ready-made garment industry, which grew at double-digit rates through most of the 1990s. By the late 1990s, about 1.5 million people, mostly women, were employed in the garments sector as well as Leather products specially Footwear(Shoe manufacturing unit). During 2001-2002, export earnings from ready-made garments reached $3,125 million, representing 52% of Bangladesh's total exports. Bangladesh has overtaken India in apparel exports in 2009, its exports stood at 2.66 billion US dollar, ahead of India's 2.27 billion US dollar. Bangladesh's textile industry, which includes knitwear and ready-made garments along with specialized textile products, is the nation's number one export earner, accounting for 80% of Bangladesh's exports of $15.56 billion in 2009. Bangladesh is 3rd in world textile exports behind Turkey, another low volume exporter, and China which exported $120.1 billion worth of textiles in 2009. The industry employs nearly 3.5 million workers. Current exports have doubled since 2004. Wages in Bangladesh's textile industry were the lowest in the world as of 2010. The country was considered the most formidable rival to China where wages were rapidly rising and currency was appreciating. After massive labor unrest in 2006 the government formed a Minimum Wage Board including business and worker representatives which in 2006 set a minimum wage equivalent to 1,662.50 taka, $24 a month, up from Tk950. In 2010,following widespread labor protests involving 100,000 workers in June, 2010, a controversial proposal was being considered by the Board which would raise the monthly minimum to the equivalent of $50 a month, still far below worker demands of 5,000 taka, $72, for entry level wages, but unacceptably high according to textile manufacturers who are asking for a wage below $30. Other industries which have shown very strong growth include the chemical industry, steel industry, mining industry and the paper and pulp industry.
3.2 The Role of Private Commercial Banks in the Economics
Development of Bangladesh
A bank is usually defined as a financial institution which deals in money. Today, however, the functions of a bank have increased so much that it is considered a very vital agent of development in country like ours. Because of their positive involvement in trade, industry, business finance and a host of others allied services; banks today form a very important part of an economy.
The nationalized banks, countries margin operational banking units, could not demonstrates and achieve optimistic results in terms of overall economic growth. The gloomy picture of nationalized banks is mainly due to-
Lack of quality of services. Minimum of commitment toward institutions. Management inefficiency. Excessive intervention of collective bargaining agent (CBA). Lack of security. Documentation of loans and advances debarring legal action in case of default. Slow rate of recovery of loan. Lack of supervision and monitoring of loans and advances. Directive loans. Political instability. Transitional inconsistency while formulating policy issues on banking.
Due to inefficient and continuous loosing concern of public sector, the main objective of privatization policy was –
To reduce deficit of the Govt. to meet continuous loss of public enterprises. To improve operative efficiency of enterprises. To introduce competitiveness in all spheres of economic activities except few
areas where Govt. Control of economic activities was unavoidable.
Chapter 4: Islamic Banking
4.1 Evaluation of Islamic Banking
For an expanding economy, a developed and efficient banking system is indispensable. Among
others, it helps transfer of financial resources from surplus units to deficit units and, hence, helps
accelerate the pace of development by securing uninterrupted supply of financial resources to
people engaged in numerous economic activities. The tremendous development that the world
economy has experienced in the last few decades was contributed by several factors among
which, growing institutional supply of loan able funds must have played the pivotal role. The
role of banking is comparable to what an artery system does in the human body. Both
commercial banks and other development financial institutions provide short-, medium-, and
long-term credits to businesspersons and entrepreneurs who usually take the lead in ventures of
economic development. Institutional supply of credit has been made possible by a system of
financial inter-mediation organized in a way where conventional banks collect small savings
from the public by offering them a fixed rate of interest and advancing the loan able funds out of
the deposited money to enterprising clients charging relatively higher rates of interest. The
margin between these two rates is the bank's income. In addition, banks also provide many other
services to the public for which it receives service charges.
Despite the outstanding contribution of the conventional banking system (interest-based), several
ancient and modern economists are critical about its efficiency level. Some economists consider
the role of interest in the conventional banking mechanism as a major negative factor that
contributes to cyclical fluctuations in the economy (Minsky1982). Specifically, the
ineffectiveness of interest rate as a stabilization tool during the period of the Great Depression is
a case to note. This eventually called for Keynesian prescription of government intervention
(Keynes 1964). Similar concern was expressed in a story published in Newsweek regarding
Henry Kissinger, the former Secretary of State of USA. To quote, “The instability has persisted
and the uncertainty has continued. After going through the throes of painfully high levels of
inflation, the world economy has experienced a deep recession and unprecedented rate of
unemployment, complicated further by high level of real interest rates and unhealthy exchange
rate fluctuations” (Newsweek 1983). More recent concern over the potential instability of the
world monetary and financial system was expressed by Maurice Allais, a Nobel Laureate, who
called for an urgent reform of the World Economic Order (Allais 1993, pp.13-16). Others
vehemently oppose the argument for using rate of interest as a stabilizing tool in the economy
(Saud 1980, p.88). This called for the emergence of a new system of banking capable of tackling
new challenges that the present world economy, particularly the financial sector, has been facing.
In response, though not exactly to that exigency but for quite a few other reasons, the second half
of the twentieth century witnessed a distinctly separate line of thinking on banking. This was
institutionalized at the end of third quarter and subsequently emerged as a new system of
banking called Islamic Banking {also called Profit-Loss-Sharing Banking (PLS). The world has
now been experiencing operation of as many as 250 Islamic banks and financial institutions in
more than 50 countries, Muslim and non-Muslim.
There are religious as well as economic reasons, which have contributed to the emergence of
PLS-banking as an alternative to its conventional counterpart. It is the prohibition of 'Riba' in the
Quran that, according to the proponents of the PLS-system, was the source of inspiration for
establishing banks in line with Islamic Shariah (Muslehuddin1987,pp.24-27). The basic intention
behind establishing Islamic banks was the desire of Muslims to reorganize their financial
activities in a way that do not contradict the principles of Shariah and enable them to conduct
their financial transactions without indulging into Riba (Ahmad 1992). These writers consider
rate of interest in the conventional banking mechanism synonymous to Riba, the term as used in
the Quran [2:275; 30:39]. One of the reasons for this is that the outcome of the productive effort
is uncertain, and so interest necessarily involves an element of Gharar, that is, uncertainty
(Chapra 1985, p.64).
On this religious ground, proponents of the PLS-system urge the Islamic community to avoid all
transactions with institutions that are interest-based.
The economic reason derived from a verse of the Quran providing inspiration to devise an
interest-free financial system has been substantiated in the way that interest, instead of increasing
wealth, reduces it [30:34]. The primary reason of why the Quran has taken such a hard approach
towards interest is that Islam stands for establishing a just economic system free from all kinds of
exploitation (Chapra 1985). Further, Muslim economists consider depression and stagflation very
often found in the capitalist world as an outcome of the financial system based on interest
(Rahman 1976).
Thus, Islamic banking emerged as a response to both religious and economic exigencies. While
religious exigency calls for avoiding any transaction based on interest, economic exigencies, on
the other hand, provide a new outlook to the role of banking in promoting investment /
productive activities, influencing distribution of income and adding stability to the economy.
Islamic banking is thus perceived as an improved system in all dimensions.
4.2 Islamization in Banking Industry
A development of complete Islamization of banking at national levels had been gaining
momentum since the second half of the 1970s. The movement took basically two forms. First, an
attempt was made to establish Islamic financial institutions side-by-side with traditional banking.
In such attempts, two types of institutions were evolved: Islamic banks were established mostly
in Muslim countries; and Islamic investment and holding companies started operating in some
Muslim but mostly in non-Muslim countries. These institutions claimed to be operating without
interest in their transactions and competed with conventional banks to attract deposits. The
majority of these institutions were established through private initiatives. Second, an attempt was
made to restructure the whole financial system of the economy in accordance with the teachings
of Islam.
In Bangladesh
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,
Late President Ziaur Rahman while addressing the 3rd Islamic Summit Conference held at
Makkah 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 Late President Ziaur
Rahman indicated favorable attitude of the Government of the People's Republic of Bangladesh
towards establishing Islamic banks and financial institutions in the country. Earlier in November
1980, Bangladesh Bank, the country's Central Bank, sent a representative to study the working of
several Islamic banks. 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 form for
immediate introduction. Two professional bodies -Islamic Economics Research Bureau (IERB)
and Bangladesh Islamic Bankers' Association (BIBA) made significant contributions towards
introduction of Islamic banking in the country.
They came forward to provide training on Islamic banking to top bankers and economists to fill-
up the vacuum of leadership for the future Islamic banks in Bangladesh. They also held
seminars, symposia and workshops on Islamic economics and banking throughout the country to
mobilize public opinion in favors of Islamic banking.
Their professional activities were reinforced by a number of Muslim entrepreneurs working
under the aegis of the then Muslim Businessmen Society (now reorganized as Industrialist &
Businessmen Association). The body concentrated mainly in mobilizing equity capital for the
emerging Islamic bank. At last, the long drawn struggle to establish an Islamic bank in
Bangladesh became 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 make the dream a reality.
Later, other three Islamic Banks were established in the country.
Islami Bank Bangladesh Limited (IBBL) is considered to be the first interest free bank in
Southeast Asia. It was incorporated on 13-03-1983 as a Public Company with limited liability
under the companies Act 1913. The bank began operations on March30, 1983.
IBBL is a joint venture multinational Bank with 63.92% of equity being contributed by the
Islamic Development Bank and financial institutions like-Al-Rajhi Company for Currency
Exchange and Commerce, Saudi Arabia, Kuwait Finance House, Kuwait, Jordan Islamic Bank,
Jordan, Islamic Investment and Exchange Corporation, Qatar, Bahrain Islamic Bank, Bahrain,
Islamic Banking System International Holding S. A., Luxembourg, Dubai Islamic Bank, Dubai,
Public Institution for Social Security, Kuwait Ministry of Awqaf and Islamic Affairs, Kuwait and
Ministry of Justice, Department of Minors Affairs, Kuwait. In addition, two eminent
personalities of Saudi Arabia namely, Fouad Abdul Hameed Al-Khateeb and Ahmed Salah
Jamjoom are also the sponsors of IBBL. The total number of branches as of December 2001
stood at 121. The authorized capital of the bank is Tk. 500 million and subscribed capital is Tk.
160 million.
Al-Baraka Bank Limited, often called the second Islamic bank in Bangladesh, commenced
banking business as a scheduled bank on May 20, 1987. It is a joint venture enterprise of Al-
Baraka Investment and Development Company a renowned financial and business house of
Saudi Arabia, Islamic Development Bank, a group of eminent Bangladesh industrialists and the
Government of Bangladesh. The authorized capital of the bank is Tk 600 million and the paid up
capital is Tk. 204.07 million. The Bank currently operates 34 branches throughout the country.
Apart from extending conventional commercial banking facilities to its customers, the bank has
also given substantial financial support to the development of industrial and real estate projects.
Al-Arafa Islami Bank Bangladesh Limited commenced its business as a scheduled bank on
September 27, 1995. The authorized capital of the bank is Tk. 1,000 million while its paid up
capital is Tk. 101.20 million. The Bank follows the Shariah principles in investment and invests
its funds under Mudaraba, Musharaka, Bai-Muajjal, Bai-Salam, etc. Up to 2001, the Bank has
been operating its business through 40 branches all over the country.
Social Investment Bank Limited is another bank guided by the Islamic principles. It started its
journey in November 1995. Its authorized capital is Tk. 1,000 million and paid-up capital is Tk.
118.36 million. Up to September 2001, the Bank has been operating its business through 15
branches.
4.3 What is Islamic Banking
Islamic banking has been defined in a number of ways. The definition of Islamic bank, as
approved by the General Secretariat of the OIC, is stated in the following manner. “An Islamic
bank is a financial institution whose status, rules and procedures expressly state its commitment
to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on
any of its operations”(Ali & Sarkar 1995, pp.20-25). Shawki Ismail Shehta viewing the concept
from the perspective of an Islamic economy and the prospective role to be played by an Islamic
bank therein opines: “It is, therefore, natural and, indeed, imperative for an Islamic bank to
incorporate in its functions and practices commercial investment and social activities, as an
institution designed to promote the civilized mission of an Islamic economy” (Ibid). Ziauddin
Ahmed says, “Islamic banking is essentially a normative concept and could be defined as
conduct of banking in consonance with the ethos of the value system of Islam” (Ibid).
It appears from the above definitions that Islamic banking is a system of financial intermediation
that avoids receipt and payment of interest in its transactions and conducts its operations in a way
that it helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system
whose operation is based on Islamic principles of transactions of which profit and loss sharing
(PLS) is a major feature, ensuring justice and equity in the economy. That is why Islamic banks
are often known as PLS-banks.
4.4 What is Riba
The word used by the Quran concerning ‘interest’ is Riba. The literal meanings of Riba are
money increase, increase of anything or increment of anything from its original amount
(Maududi 1979, p.84). However, all increases are not considered as Riba in Islam. Money may
increase in business activities as well. This increase is not at all considered as Riba.
Muslim scholars equate interest with Riba. In the Shariah, Riba technically refers to the premium
that must be paid by the borrower to the lender along with the principal amount as a condition for
the loan or for an extension in its maturity (Chapra 1985, p.64). In other words, Riba is the
predetermined return on the use of money. In the past there has been dispute about whether Riba
refers to interest or usury, but there is now consensus among Muslim scholars that the term
covers all forms of interest and not only “excessive” interest (Khan1985, p.52). In the era of
Ignorance (Jahiliah) moneylenders in Arabia charged a prefixed extra amount on their money
lent out. Some of them lent goods or crops and took back prefixed extra amount on and above
the principal amount. In those days the extra amount charged on the principal amount of money
or goods was also termed as Riba. The term Riba in the Quran has been used in the same sense.
The most important characteristic of Riba is that it is the positive and definite result of money
when changed. In other words, when money begets money, without being exchanged for goods
or services, it is called Riba.
Its basic characteristics are:
It must be related to loan;
A prefixed amount of money to be paid when due;
A time is fixed for the repayment; and
All these elements for repayment are taken as conditions for loan.
4.5 Profit and Riba
There are persons who try to equate Riba with profit. In effect, they are fundamentally different
from each other as can be seen from the following:
Riba Profit
1. When money is “charged”, its imposed positive
and define result is Riba
1. When money is used in trading (for e.g.) it’s
uncertain result is profit.
2. By definition, Riba is the premium paid by the
borrower to the lender along with principal amount
as a condition for the loan.
2. By definition, profit is the difference between
the value of production and the cost of production.
3. Riba is prefixed, and hence there is no
uncertainty on the part of either the givers or the
takers of loans.
3. Profit is post-determined, and hence its amount
is not known until the activity is done.
4. Riba cannot be negative, it can at best be very
low or zero.
4. Profit can be positive, zero or even negative.
5. From Islamic Shariah point of view, it is Haram. 5. From Islamic Shariah point of view, it is Halal.
Prohibition of Riba
On religious perspective:
The religious restriction on interest is quite explicit and unequivocal. All transactions based on Riba are
strictly prohibited in the Quran. The prohibition of Riba appears in the Quran in four different revelations.
The first of these [30:39] in Makkah, emphasized deprivation of God’s blessing for a man making interest
transaction and charity having the essence of manifold rise. The second revelation [4:161] concerning the
subject took place in the early Madinah. It severely condemned interest-referring prohibitions taken place
in the previous scriptures. The third revelation [3:130-2] enjoined Muslims to keep away from Riba. The
fourth revelation [2:275-81] reveling nears the completion of the Prophet’s mission. The verses giving
strong verdict against Riba are as follows:
Condemnation of the system of interest is so strong and without any doubt can be reflected in the
following verse which imposes penalties on those who hesitate in observing the verdict: O ye
who believe! Observe your duty to Allah and give up what remains (due to you) from Riba, if
you are (in truth) believers. And if you do not, then be warned of war (against you) from Allah
and His Messenger. And if you repent then you have your principal (without Riba). Wrong not,
and you shall not be wronged [2:278-9].
On Socio Economy Perspective:
The Islamic law of prohibition of interest was originally not based on economic theory but on
divine authority, which considered charging of interest as an act of injustice. Early Muslim
scholars considered money as a medium of exchange, a standard of value and a unit of account
but rejected its function as a store of value. Lending upon interest was prohibited because it was
an act of ungratefulness and considered to be unjust since money was not created to be sought to
be itself but for other objects.
Recent Muslim scholars, however, place the major emphasis of their explanation of the Law on
the lack of a theory of interest. They have countered the arguments that interest is a reward for
saving, a productivity of capital and an inevitable consequence of the difference between the
value of capital goods today and their value a year hence.
4.6 Objectives of Islamic Banking
The primary objective of establishing Islamic banks all over the world is to promote, foster and
develop the application of Islamic principles in the business sector. More specifically, the
objectives of Islamic banking when viewed in the context of its role in the economy are listed as
following:
To offer contemporary financial services in conformity with Islamic Shariah;
To contribute towards economic development and prosperity within the principles of
Islamic justice.
Optimum allocation of scarce financial resources; and
To help ensure equitable distribution of income.
4.7 Distinguish feature of Islamic Banking
An Islamic bank has several distinctive features as compared to its conventional counterpart.
Chapra (1985, PP.154-57) has outlined six essential differences as below:
Abolition of interest (Riba): Since Riba is prohibited in the Quran and interest in all its forms is
akin to Riba, as confirmed by Fuqaha and Muslim economists with rare exceptions, the first
distinguishing feature of an Islamic bank must be that it is interest-free.
Adherence to public interest: Activity of commercial banks being primarily based on the use of
public funds, public interest rather than individual or group interest will be served by Islamic
commercial banks. The Islamic banks should use all deposits, which come from the public for
serving public interest and realizing the relevant socio-economic goals of Islam. They should
play a goal-oriented rather than merely a profit-maximizing role and should adjust themselves to
the different needs of the Islamic economy.
Multi-purpose bank: Another substantial distinguishing feature is that Islamic banks will be
universal or multi-purpose banks and not purely commercial banks. These banks are conceived
to be a crossbreed of commercial and investment banks, investment trusts and investment -
management institutions, and would offer a variety of services to their customers. A substantial
part of their financing would be for specific projects or ventures. Their equity-oriented
investments would not permit them to borrow short-term funds and lend to long-term
investments. This should make them less crisis-prone compared to their capitalist counterparts,
since they would have to make a greater effort to match the maturity of their liabilities with the
maturity of their assets.
Work as catalyst of development: Profit-loss sharing being a distinctive characteristic of an
Islamic bank fosters closer relations between banks and entrepreneurs. It helps develop financial
expertise in non-financial firms and also enables the bank to assume the role of technical
consultant and financial adviser, which acts as catalyst in the process of industrialization and
development.
Chapter 5: Background of Islami Bank
Bangladesh Ltd.
5.1 History of IBBL
Establishment of Islamic Development Bank (IDB) by the OIC member states in the year 1975
has been proved to be a breakthrough in the expansion of Islamic Shariah based finance and
specially banking throughout the world. As a founder member of IDB, the Government of
Bangladesh also had the commitment to establish Islamic banks which was reflected in different
steps taken by the governments of the country. The OIC members consented to the proposals to
introduce Islamic economy and banking in their respective countries held in the foreign
ministers’ conferences in 1978 and 1980 in Dakar and Islamabad respectively. In the year 1981,
OIC in its 3rd summit held in Makkah approved the proposition submitted by Bangladesh to
introduce separate banking system following Islamic ideology. As per decision, the GOB sent
representatives to the Middle Eastern countries to learn the existing banking systems in those
countries.
In the private sector, the Islamic Economics Research Bureau (IERB) was the first organization
that took active initiative in this regard. They arranged a national seminar on Islamic Economics
and Banking in the year 1979 and inspired by the discussion and the papers presented in the
seminars, some local bankers formed ‘Islami Bank Working Group’. The IERB again arranged
an international seminar in 1980. After the seminar, Dhaka based ‘Muslim Businessman Society’
(later renamed as ‘Industrialist and Businessmen Association’) under the leadership of renowned
industrialist Abdur Razzaque Lasker, took initiative to establish an Islamic bank and applied to
the government for permission. At this stage, the GOB provided necessary permission in the year
1983 and at last ‘Islami Bank Bangladesh’ was registered under Company Act 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 make the dream a reality.
5.2 Overview of IBBL
Islami Bank Bangladesh Limited (IBBL) was incorporated on 13.3.1983 as a Public Company
with limited liability under the Companies Act. 1913. The bank started functioning with effect
from 30.3.1983. IBBL is the first private sector Islamic bank in South-east Asia. The
establishment of this bank ushered a new era in Bangladesh, the 3 rd largest Muslim country of the
world. The bank is committed to run all its activities based on Islamic Shariah. IBBL through its
steady progress and continued success has, by now, earned the reputation of being one of the
leading private sector banks of the country.
5.3 Mission and Vision of IBBL
To establish Islamic banking through the introduction of a welfare oriented banking system and
also ensure equity and justice in the field of all economic activity balanced growth and equity
development through diversified investment operations particularly in the priority sectors and
less development areas of the country. To encourage socio-economic uplift and financial
services to the low income community particularly in the rural areas.
Date of Incorporation 13th March 1983
Inauguration of 1st Branch
(Local office, Dhaka)
30th March 1983
Formal Inauguration 12th August 1983
Local Shareholders 42.63%
Foreign Shareholders 57.37%
Authorized Capital Tk.5,000.00 million
Paid-up Capital Tk.3,801.60 million
Deposits Tk.200343.41 million
Investments (including investment in
Shares)
Tk.180053.94 million
Foreign Exchange Business Tk.402695 million
Number of Branches 232
Number of Shareholders 33686
Manpower 10443
The vision of IBBL is to always strive to achieve superior financial performance, be considered a
leading Islamic Bank by reputation and performance. Besides, To establish and maintain the
modern banking technology, to ensure the soundness and development of the financial system
based on Islamic principles and 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 stability of financial system. Try to encourage
savings in the form of direct investment. Try to economic investment particularly in projects,
which are move likely to lead to higher employment.
5.3 Aim & Objectives of IBBL
To conduct interest-free banking. To establish participatory banking instead of banking on debtor-creditor relationship. To invest through different modes permitted under Islamic Shariah. To collect deposits on profit-loss sharing basis. To establish a welfare-oriented banking system. To extend co-operation to the poor, the helpless and the low-income group for their
economic development. To play a vital role in human development and employment generation. To contribute towards balanced growth and development of the country through
investment operations particularly in the less developed areas. To contribute in achieving the ultimate goal of Islamic economic system.
5.4 Distinguish feature of IBBL
The distinguishing features of the conventional banking and IBBL are shown below:
Conventional Banks IBBLThe functions and operating modes of conventional banks are based on manmade principles.
The functions and operating modes of IBBL is based on the principles of Islamic Shariah.
The investor is assured of a predetermined rate of interest.
In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).
It aims at maximizing profit without any restriction.
It also aims at maximizing profit but subject to Shariah restrictions.
It does not deal with Zakat. In the modern IBBL system, it has become
one of the service-oriented functions of the IBBL to collect and distribute Zakat.
Leading money and getting it back with interest is the fundamental function of the conventional banks.
Participation in partnership business is the fundamental function of the IBBL.
Its scope of activities is narrower when compared with IBBL
Its scope of activities is wider when compared with a conventional bank. It is, in effect, a multi-purpose institution.
It can charge additional money (compound rate of interest) in case of defaulters.
The IBBL has no provision to charge any extra money from the defaulters.
In it very often, bank’s own interest becomes prominent. It makes no effort to ensure growth with equity.
It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity.
For interest-based commercial banks, borrowing from the money market is relatively easier.
For the IBBL, it is comparatively difficult to borrow money from the money market.
Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations.
Since it shares profit and loss, the IBBL pay greater attention to developing project appraisal and evaluations.
The conventional banks give greater emphasis on credit-worthiness of the clients.
The IBBL, on the other hand, give greater emphasis on the viability of the projects.
The status of a conventional bank, in relation to its clients, is that of creditor and debtors.
The status of IBBL in relation to its clients is that of partners, investors and trader.
A conventional bank has to guarantee all its deposits.
Strictly speaking, IBBL cannot do that.
5.5 Growth & Expansion of IBBL
Since its startup, IBBL is maintaining a steady growth in terms of profitability and geographical
coverage. 80s may be termed as ‘Foundation Stage’; during the 90s, the bank passed its ‘Early
Growth Stage’ and during the first decade of the 21st century, its making ‘Rapid Growth’. The
growth fact file from 1983 – 2008 is given hereunder:
13-03-1983 - Incorporation of IBBL.30-03-1983 - Inauguration of 1st Branch (Local Office).12-08-1983 - Formal inauguration.1984 - Establishment of Islami Bank Training and Research Academy
(IBTRA).1985 - Listed with Dhaka Stock Exchange (DSE) and issue IPO.1988 - Introduction of ‘Executive Development Program’.1989 - 1st Rights Share Issue.
- Introduced Zonal concept.
1991 - Opening of the 50th Branch.- ‘Sadaqa Tahabil’ converted to form Islami Bank Foundation as a separate entity.
1994 - Introduction of annual award for Dhaka University students.- Implementation of BEXIBANK as the banking software.
1995 - Launched Rural Development Scheme.- First IBBL representative abroad (KSA).
1996 - Listed with Chittagong Stock Exchange (CSE).- 2nd Rights Share Issue.
1997 - Opening of the 100th Branch.1998 - Introduction of Diploma in Islamic Banking at IBTRA.1999 - ‘Global Finance’, a New York based financial magazine named IBBL
as the best bank of the country.- Implementation of IBBS – integrated banking software.- Introduction of SWIFT service.
2000 - 3rd Rights Share Issue.- CSE declared IBBL as one of CSE – 30 companies.- Head Office shifted to new location (own premises).- ‘Global Finance’ named IBBL as the best bank of the country.
2001 - DSE declared IBBL as one of 20 ‘Blue Chip’ companies.- Introduction of ATM service.- All the branches are computerized.- IBTRA shifted to its own premises at Mohammadpur.- eIBS project started.
2002 - New Organogram was implemented.2003 - 4th Rights Share Issue.2004 - LAN has been set up at all the branches.
- Opening of the 150th Branch.- Joining / Agreement with CDBL.
2005 - Implementation of eIBS – web based banking software developed by in-house developers.- Introduction of REUTERS and dealing service.- ‘Global Finance’ named IBBL as the best bank of the country.- IT Audit came into practice.
2006 - Introduction of Online banking.2007 - Introduction of Mudaraba Perpetual Bond.
- ICMAB announced IBBL as the ‘First in Best Corporate in the Banking Sector (Local)’.
2008 - Starting brokerage house operation.
5.7 Branch arrangement of IBBL
IBBL has the largest network of branches among PCBs. IBBL has 209 branches up-to-date
located at different commercially important places. Out of these branches, 162 branches are in
considered as online branches. With the expansion of business, Bank divided their branches in 11
Zones to ensure close supervision, effective monitoring, and quick disposal of business and
optimum utilization of manpower. 52 branches are located in 3 Dhaka Zones (Dhaka Central,
South & North Zones), 31 branches are in Chittagong Zone, 23 branches are in Khulna Zone, 23
branches are in Bogra Zone, 27 branches are in Comilla Zone, 19 are in Sylhet Zone, 18
branches in Barisal Zone, 19 branches in Rajshahi Zone and 17 branches in Mymenshing Zone.
Chapter 6: Foreign Exchange
Operation of IBBL
6.1 Meaning of 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 Cheques, Bill of Exchange business including sell, purchasing of currency
notes & TC etc.
6.2 Foreign Exchange Business
Foreign Exchange Business has two aspects:
I) Trading of Foreign Currencies.
II) Conducting Foreign Trade by using foreign currency as a media of exchange. Foreign
Trade includes Import & Export.
6.2.1 Trading of Foreign Currencies
It includes mainly dealing room operation excluding the money market operation. This is
purchase or sale of one currency in term of another, either Local Currency to Foreign Currency,
or Foreign Currency to Local Currency, or Foreign Currency to Foreign Currency (Cross
Currency).All these purchase and sales are permitted by Islamic Shariah and thereby approved
by Islamic Banking system subject to observing the guidelines as stated below:
Both parties must take possession of the counter values before dispersing, such
possession being either actual or constructive.
The counter values of the same currency must be of equal amount, even if one of them is
in paper money and the other is in coin of the same country, like a note of one pound for
a coin of one pound.
The contract shall not contain any conditional option or deferment clause regarding the
delivery of one or both counter values.
The dealing in currencies shall not aim at establishing a monopoly position nor should it
entail any evil consequences to the interest of individuals of societies.
Currency transaction shall not be carried out on the forward or futures market.
Such trading of foreign currency should not have any speculative motive but to protect
the interest of one and to avoid possible loss due to devaluation of the currency
conversion of currencies can be done on spot basis.
6.2.2 Foreign Trade Operation
This is cross border trading of goods & services. For conduction trade transaction between two
parties of separate territory the following issues are to be resolved.
Seller needs guarantee that he will get payment from the buyer who is almost out of his
reach.
Payments are to be made by the buyer in foreign currency by converting currency of his
own law.
Time required for getting payment by the seller who may need immediate payment.
For a buyer who needs to buy quantity goods as it can be imported frequently. That
means he may need finance for his purchase. In modern banking Foreign Trade is taken
into a shape where customers are provided with various products and services, by the
bank. They get financial assistance at all stages of their Import & Export trade from bank.
Almost all such facilities can be provided under Islamic Banking.
6.3 Financing of Foreign Trade
In modern banking, Foreign Trade is taken into a shape where customers are provided with
various products and services by the bank. They get financial assistance at all stages of their
Import & Export trade from bank. Almost all such facilities can be provided under Islamic mode.
The general principles in financing import and export business are elimination and avoiding of
interest in all operation. Foreign trade are-
A) Import
B) Export
A) Import finance
Mainly three types of import are done purpose wise:
Import of trading item for ultimate user or consumer.
Import of raw materials or industrial item for further processing or further production
Import of Capital Machinery & Capital Item.
In all types of import usually the importer take bank finance. Under Islamic modes, finance can
also be made for the first two types under Bai-Murabaha & Bai-Muajjal mode and for the 3rd
type under Hire-Purchase under Shirkatul Melk (HPSM) mode. Import finance can also be made
under Bai-Salam or Musharaka or Mudaraba modes. Islami Banks have to perform its all
transactions related to import & export by abiding the National and International
rules/regulations in addition to its own rules/regulations/guidelines etc.
B) Export Finance
Export means flow of goods and services produced within Bangladesh but purchased by
economic agent (individuals, firms & government) of other countries. In other words in case of
exports products sold outside the country. So getting payment against such sale usually require
different time span depending on the terms of sale contract or relative payment terms of export
L/C.In view of above exporter require immediate fund and other financial facilities to execute
their export order. It is the bank who extend such facilities as needed by the exporter. And
facilitating export by financing exporter at different stages are now important part of bank’s
activities.
Exporter requires financial assistance at two stages namely
Pre-shipment stage &
Post–shipment stage
6.4 Foreign Exchange Operation of IBBL
According to the Article 2nd Foreign Exchange Act 1947:
Foreign Exchange means Foreign Currency i.e. Currencies other then Local Currency. It includes
any instrument drawn, accepted, made or issued all deposit, credit and balances payable in any
foreign currency.
Foreign exchange deals with trading of foreign currency.
Foreign trade deals with trading of goods and financing in import and export.
Dealing in foreign currency or foreign exchange is done by way of:
Cash over the counter: Cash currencies in the form of notes/coins/Travelers’ cheques are
sold/purchased over the counter on spot basis Bank earns exchange income and
commission.
Corporate dealing arising out of foreign trade import/export/foreign remittance. Independent trading to gain from the market.
6.4.1 Shariah principles
The shariah principle in foreign Exchange i.e. currencies, gold, silver etc. of similar nature is Bai-as-Sarf.
Hadith of Prophet Mohammad (PBUH).Preconditions for Bai-as-Sarf ( for cash transactions):
Must be hand to hand i.e. on spot basis. Must be of equal amount in case of same currency. Contract must not be conditional. Should not be speculative. Should not involve riba, rishwah,garar, mysir and jahl.
6.5 Performance of IBBL in Foreign Exchange Business
2008 has been a very challenging year for IBBL in respect of foreign exchange business.
Although it made a good start in the beginning of the year and made good progress up to the 1 st
half of the year, bank had to curtail the growth due to the compelling situation of bringing down
the investments in line with the capital position of the bank. The financial crisis in the USA &
Europe also played its role. Export & Remittance business were unaffected throughout the year
except in the last 2 months. Summarized performance in F.EX Business is shown as under:
Achievement 2008 Business plan 2009
Business Target Achievement % of achievement
Growth Target
Amount % of growth
Import 199,000 168,329 85% 23% 244100 45%
Export 93,500 93,920 100% 41% 131500 40%
Remittance 126,500 140,420 111% 67% 211000 50%
In 2008 market share stood at 10.25%, 9.56% & 23.07% in import, export & remittance
respectively while in 2007 it was 10.83%, 7.82% & 18.59%. The success is due to the relentless
efforts of the branch managers and their teams.
Bank started 2008 with a slogan “To be the market leader” which the bank have achieved by the
grace of Allah despite the numerous challenges. Bank have taken further challenging target for
2009 specially for Import business which is 45% in spite of the fact that, 2009 would not be an
easy year for foreign exchange business as the investment growth has been fixed at 20% and also
considering the slowdown of the financial activities in the after math of the melt down in the
USA and EU.
F. Ex. Business of IBBL: 2007 vs. 2008(Million Tk.)
2007
2008
2008100000
120000
140000
160000
Foreign Exchange Business of IBBL: 1983 to 2008
Comparison of Foreign Exchange Business of IBBL 2007 VS 2008
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Mill
ion T
aka
Total F.ex 11 1369 1737 3596 3974 4490 5840 7846 11985 15756 16857 25357 34681 32970 36645 41493 43609 49860 51868 65131 84643 112624 147642 201822 287919 402669
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Growth over 2008
Import: 42%
Export: 30%
Remittance: 56%
Foreign Trade and Remittance Performance 2007 vs. 2008
Portfolio 2009 2008 2007
Import 11.33%(Jan-June) 10.25% 10.78%
Export 10.12%(Jan-June) 9.56% 8.22%
Remittance 25.10%(Jan-June) 22.01% 18.59%
Contribution in Country
Import in 2009 (Jan-Jun)
Other Banks
88.67 %
IBBL 11.33%
Foreign Remittance in 2009 (Jan-Jun)
Other Banks
74.90%
IBBL 25.10%
Chapter 6A: Import
6A.1 Import
Import means lawfully carrying out of anything from one country to another county for buying.
It will be occurred according to the Government law. Based on the needs of commodity and
availability of finance, Government declares policy. For import of goods for a particular period,
having approval from the National Assembly is defined as Import policy order. Import policy is a
guideline of a set of rules envisaged by Government Authority i.e. the Ministry of Trade and
Commerce for the registered importer for import of goods inside the country.
6A.2 Import Financing
Mainly three types of import are done purpose wise:
Import of trading item for ultimate user or consumer.
Import of raw materials or industrial item for further processing or further production
Import of Capital Machinery & Capital Item.
In all types of import usually the importer take bank finance. Under Islamic modes, finance can
also be made for the first two types under Bai-Murabaha & Bai-Muajjal mode and for the 3rd
type under Hire-Purchase under Shirkatul Melk (HPSM) mode. Import finance can also
made under Bai-Salam or Musharaka or Mudaraba modes. Islami Banks have to perform its
all transactions related to import & export by abiding the National and International
rules/regulations in addition to its own rules/regulations/guidelines etc.
6A.3 Import Performance of IBBL
The target growth for 2008 in import business was 45%. With the high growth of import in the
first four month of 2008 (167%, 143%, 135%, 173%) from January to April in individual months
which continued up to July in aggregate figures too due to high volume of imports of fertilizers,
food items, industrial raw materials etc., it was presumed that bank would be able to achieve the
target-growth quite comfortably. The figures may be seen from following table:
Top Banks in Import business in 2008
Sonali
IBBL
IBBL
Agrani
Agrani
Janata
Janata100000
120000
140000
160000
Comparison of Import: month to month 2007 & 2008
Sep
Oct
Nov Dec
Sep
Oct N
ov Dec
Feb
07
Jan
07
Mar
07
Apr 0
7
May
07
Jun
07
Jul 0
7
Aug
07
Feb
08
Jan
08
Mar
08
Apr 0
8
May
08
Jun
08
Jul 0
8
Aug
08
0
5000
10000
15000
20000
25000
Mill
ion
Tk.
2007 7235 7537 7811 8602 10112 9634 10760 12281 11206 17,475 16898 17535
2008 19305 18337 18371 23490 14511 13719 10574 10804 10543 7429 9410 10217
Growth in amount 12070 10800 10560 14888 4399 4085 -186 -1477 -663 -10046 -7488 -7318
Growth in % 167% 143% 135% 173% 44% 42% -2% -12% -6% -57% -44% -42%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Contribution of IBBL to Country Import Business
(Figure in Millions)
Period National Growth IBBL Growth% of IBBL in national
import
2002 492140 6.07% 25907 27.02% 5.26%
2003 495200 0.62% 33788 30.42% 6.82%
2004 606720 22.52% 46237 36.84% 7.62%
2005 722440 19.07% 59804 29.34% 8.28%
2006 890220 23.22% 74525 24.61% 8.37%
2007 1108170 24.48% 96870 30.00% 8.74%
20081265130
(approx.)14.16% 137086
42.00%10.83%
Market share of Import Business among the Bank
5.87%
6.04%
6.05%
6.83%
11.33%
Prime
Agrani
Sonali
Janata
IBBL
Chapter 6B: Export
6B.1 Export
Export Business has broken all previous records in terms of growth in percentage and in amount
(41% growth with growth in amount of Taka 14,964 million).The growth is attributable to
induction of new export oriented projects who are contributing largely to the basket of export
proceeds. The high growth in export business inspires to take challenging targets for exports to
optimize export business of the IBBL.
6B.2 Export Finance of IBBL
Export means flow of goods and services produced within Bangladesh but purchased by
economic agent (individuals, firms & government) of other countries. In other words in case of
exports products sold outside the country. So getting payment against such sale usually require
different time span depending on the terms of sale contract or relative payment terms of export
L/C. In view of above exporter require immediate fund and other financial facilities to execute
their export order. It is the bank who extends such facilities as needed by the exporter. And
facilitating export by financing exporter at different stages are now important part of bank’s
activities.
Exporter requires financial assistance at two stages namely
Pre-shipment stage &
Post–shipment stage
6B.3 Export performance of IBBL
Export business achieved 101% of the target and maintained a steady growth all over the year i.e.
more than 41% up to December 2008 as against target growth of 40%.
Comparison of Export: at the end of each month cumulative of 2007 & 2008
07 07 07 07 07 07 07 07 07 07 07
0808
08 08
0808 08
0808
07
0808
080
20000
40000
60000
80000
100000M
illio
n Tk
.
2007 4526 10149 15803
20665 25717 31031 36531 42017 47313 52828 59701 66690
2008 7730 14924 23372 31293 38339 46561 55582 63721 72477 78524 86,494 93,920
Growth in amount 3204 4775 7569 10628 12622 15530 19051 21704 25164 25696 26793 27230
Growth in % 71% 47% 48% 51% 49% 50% 52% 52% 53% 49% 45% 41%
Janup to Feb
up to Mar
up to Apr
up to May
up to Jun
up to Jul
up to Aug
up to Sep
up to Oct
up to Nov
up to Dec
Top Banks in Export business in 2008 (Figure in million Tk.)
SonaliSonali
Sonali
Agrani
Agrani
Agrani
IBBL
IBBL
IBBLJanata
Janata Janata
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
Sonali 64092 70906 75000
Agrani 41710 51713 78748
IBBL 36169 51133 66690
Janata 72912 70000 71863
2006 2007 2008
Market Share of Export Business among the Banks
Export Business under Islamic Framework:
According to the Article 2nd Foreign Exchange Act 1947:
Foreign Exchange means Foreign Currency i.e. Currencies other then Local Currency. It includes
any instrument drawn, accepted, made or issued all deposit, credit and balances payable in any
foreign currency.
Foreign exchange deals with trading of foreign currency. Foreign trade deals with trading of goods and financing in export.
Dealing in foreign currency or foreign exchange is done by way of:
1. Cash over the counter: Cash currencies in the form of notes/coins/Travelers’ cheques are sold/purchased over the counter on spot basis Bank earns exchange income and commission.
2. Corporate dealing arising out of foreign trade /export/foreign remittance.
3 Independent trading to gain from the market.
Export finance means providing financial facilities/supports to the bonafide exporters for procurement, processing, manufacturing, packing, carrying & shipments of the exportable goods.
Conventional Banks allow financial facilities on the basis of interest against their
financial products, for instance packing credit.
Islamic Banks allow Investment for export under different shariah approved modes
such as Bai-Murabaha, Bai-Muazzal, Bai-Salam, Musharaka, Mudaraba etc.
Banks open BB LC against Master L/C where no fund involves and bank receives
only service charges.
Islami Banks are to allow Investment in compliance principles of Shariah.
Chapter 6C: Remittance
6C.1 Remittance
The word “Remittance” originates from the word “remit” which means to transmit money/ fund.
In banking terminology, the work “remittance means transfer of fund one place to another. When
money transferred from one country to another is called “Foreign Remittance”. Foreign
remittance may be classified into:
Inward Foreign Remittance.
Outward Foreign Remittance.
Inward Foreign Remittance:
Inward Foreign Remittance means Remittance received from foreign countries from abroad. In
other words remittance coming into our country from other countries by the remitter by way of
permissible banking channel through freely convertible Foreign Currencies is called ‘Inward
Foreign Remittance’ i.e. payless point of view it is inward foreign remittance. On the other hand
remitter’s point of view it is called outward Foreign Remittance.
Outward Remittance:
Outward remittance of funds be made by means of T.T. D.D. T.T. etc. the remitter has to deposit
money along with the application contains name and address of the payee name of the currency
etc. All outward remittances must cover the transactions approved by the Bangladesh Bank.
Which are usually for exporters travel & educational expenses.
6C.2 Mechanism of Foreign Remittance
FCAD- Foreign currency A/C Dollar.
Foreign currency A/C Dollar.
MFCD- Mudaraba foreign currency deposits.
PFC- Private foreign currency.
FCAD- Exp. - Foreign currency A/C dollar export.
NRO- Non residence dollar.
NRT- No residence Taka.
PDAP- properly development A/C dollar.
PDAP- properly development A/C pound
6C.3 Instruments of Foreign Remittance
Cash for : Dollar, Pound, France Fr. Riyal or any other currency.
T.C. : Travelers Cheque.
F.D.D : Foreign Demand Draft.
T.T : Telegraphic Transfer, Cable transfer or swift transfer.
M.T : Mail Transfer.
I.M.O : International Money Order.
Cheque : By any person & institution..
P.O : Payment Order.
6C.4 Foreign Remittance Performance of IBBL
Remittance increased in 2008 on an average more that 80% upto September compared to
corresponding period 2007.Reason for increasing remittance is expansion of network by
establishment of remittance arrangement with Global Web-based Remittance Institutions, Banks
and Exchange Houses in U.S.A, Malaysia, Singapore, K.S.A, Oman, Bahrain, UAE, Kuwait etc
and Development of Service, Development of Automation including on line facility.
Share of Remittance 2008: Top 8 Banks
8.20% USD 660.10
5.93% USD 577.34
8.21% USD 760.86
5.68% USD 507.74
13.95% USD 1333.92
5.44% USD 497.08
23.07% USD 1995.70
4.40% USD 400.22Pubali
BRAC
Uttara
National
Janata
Agrani
Sonali
IBBL
Figure in million USD
Comparison of Remittance: month to month 2007 & 2008
Sep
Oct N
ov Dec
Sep
Oct
Nov
Dec
Jan
07
Feb
07
Mar
07
Apr
07
May
07
Jun
07
Jul 0
7
Aug
07
Feb
08
Jan
08 Mar
08
Apr
08
May
08 Ju
n 08 Ju
l 08
Aug
08
0
3000
6000
9000
12000
15000M
illio
n Tk
.
2007 5120 5571 5946 6502 6581 6763 7260 6607 7955 7774 8766 9298
2008 10437 9717 12061 11305 10707 12106 12037 12361 13234 10810 13043 11768
Growth in amount 5317 4146 6115 4803 4126 5343 4777 5754 5279 3036 4277 2470
Growth in % 104% 74% 103% 74% 63% 79% 66% 87% 66% 39% 49% 27%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Market share among Banks in remittance Business
IBBL has been maintaining top position among all banks in remittance business since 2007
ahead of Sonali, Agrani, Janata & other banks.
Countrywise Share of IBBLRemittance: 2008
Italy, 0.07%
Korea 0.59%
Singapore, 0.43%
Others , 2.46%
Bahrain 2.28%Oman, 2.12%
USA, 1.79%Qatar, 1.59%
Malaysia, 4.08%
UAE, 9.94%
Kuwait, 11.02%
UK, 10.46% KSA, 53.13%
Country Wise Share of National Remittance
Country Share
KSA 53.13%
Kuwait 11.02%
UK 10.46%
UAE 9.94%
Malaysia 4.08%
Bahrain 2.28%
Oman 2.12%
USA 1.79%
Qatar 1.59%
Korea 0.61%
Singapore 0.43%
Italy 0.07%
Others 2.46%
Share of top 10 Exchange Houses in IBBL Remittance: 2008
Others 26.13%
Bank Al Bilad16.77%
Al Rajhi Bank.32.95%
Milfa Sterling Exc. 1.40%
Kuwait Bahrain Int'l Exc. 1.91%
A.N. Express2.37%
Bangladesh Money Transfer, 2.69%
Bahrain Exchange Co., 3.01%
Al Amoudi Exc. 3.36% IME (M)
4.05% U. A. E. Exc.Center 5.37%
Share of top 10 Exchange House in IBBL Remittance
Chapter 6E: Regression and Trend
Analysis
6E.1 Regression Analysis
I have calculated multiple regressions to understand the relationship among the key component of the Islami Bank foreign exchange operation like profit, export, import & foreign remittance. After calculation we find out the following in formations:
The least square equation is Ŷ=a+b1x1+b2x2
=23.356+0.004x1+0.046x2
This regression equation is Income from Foreign Exchange operation=23.356+0.004(Import) +0.046(Export)
Interpretation:
In this multiple regression equation, I show the relationship between incomes from Foreign Exchange (dependent Ŷ) and Import (independent variable, X1), Export (independent variable X2).
If here export, import is zero then a=Ŷ
i.e. Ŷ=23.356 which is Ŷ intercept. It shows that if banks export, import is 0 then the profit of the bank is positive, because there are other some factors which effects on Income from Foreign Exchange such as Remittance. If there is no change in two variables then Income from Foreign Exchange will increase by 23.356 million. Now, if the value of b1; or the slope X1 is 0.004. It means if the volume of Import increases by TK.1 million then the profit of the bank increases for TK 0.004 million assuming all other variable held constant. Again the value of b2 or the slope of X2 is 0.046 It means if the Export increases for taka 1 million then the profit of the bank will increase for taka 0.046 million assuming all other things remaining the same.
