PART 1 1 PART INTRODUCTION OF OF REPORT REPORT INTRODUCTION

1.1

Introduction:

Achievement of high economic growth is the basic principles of present economic policy. In achieving the objectives, the banking sector plays an important role. The banking sectors channel resources through deposit mobilization and providing credit for different business venture. The successful running of a bank business depends upon how effectively the credit management recovered the funds. Shahjalal Islami Bank Limited as new commercial banks in Bangladesh responsibility bestows upon it to ensure efficient and effective banking operation in a sound manner.

Shahjalal Islami Bank Limited is always ready to maintain the highest quality services by upgrading Banking technology prudence in manage and applying high standard of business ethics through its established commitment and heritage. Objectives of a private institution like SJIBL are to maximize profit through optimum utilization of resources by providing best customers service.

1.2

Significance of the report:

The prime reason of this study is to become familiar with the practical business world and to attain practical knowledge about the Banking and Corporate world, which is so much essential for each and every student to meet the extreme growing challenges in job market. It is also known to all of us that there is no alternative of practical knowledge and the practical knowledge is much more durable and useful than the theoretical knowledge. This study will help us to get a true picture of the practical business world, particularly of banking business and also to attain practical knowledge on the various spheres of banking business. So this study is of paramount importance for each and every student regardless of his/her study area or disciplines 1.3 Origin of the Report

As a partial fulfillment of the BBA program University ofASA, We got placement as a report at the dividend policy of Shahjalal Islami Bank Limited on a 3 weeks. This report is the outcome of 2

our experience at the Dividend Policy. One report is an attempt to provide business students an orientation to a real life business situation in which we can observe and evaluate the use and applicability of the theoretical concepts, which were taught in the classroom. As a student of business administration, we preferred to complete our report. 1.4 Topic of the Report:

To write a report it is necessary to select a topic. A well-defined topic reflects what is going on to be discussed throughout the report. The topic that has been assigned by our course teacher is Dividend Policy of Shahjalal Islami Bank Ltd.. 1.5 Scope of the Report

As we were working at the dividend policy of Shahjalal Islami Bank. We got the opportunity to learn different types of dividend policy.

I had the opportunity to gather information about An overview on Shahjalal Islami Bank Limited. Financial Performance of Shahjalal Islami Bank Limited. Dividend Policy of Shahjalal Islami Bank Limited. Which dividend policy follow the Shahjalal Islami Bank Limited.

1.6

Objective of the Report:

1.6.1 General objective of the Report

The general objective of this report is to complete the report. As per requirement of BBA program of University Of ASA, student need to work in a dividend policy for three weeks to acquire practical knowledge about real Business operation.

1.6.2

Specific objective of the Report

To present an overview of Shahjalal Islami Bank Limited. 3

A general description of the banking activities of Shahjalal Islami Bank Limited. To submit a brief description about the Investment Department or Credit Division and their activities. To suggest remedial measurement for the improvement of the whole process of the Investment Department.

1.7 Methodology of the Study: Although there were so many limitations, it was tried to use both the primary and secondary sources of collecting information to make the report presentable with as less abstraction as possible.
1.7.1 Type of Research:

In this report we will describe the which dividend policy follow the Shahjalal Islami bank limited. So according on the base of objective this research is called exploratory research, 1.7.2 Sources of Information: A. Primary data Primary data is always known as survey data. This type of data is collected from the respondent. For this project personal Interview with the customer has been conducted. When it became impossible to conduct face to face interview I collected the primary data by using the Telephone Interview B. Secondary data Data that were published before for some other reason can be collected using internal and external sources. i) Internal Secondary data: To furnish the report properly some papers has been collected form the officials of Shahjalal Islami Bank Limited. Information from annual reports, journals, newspapers and other published documents have been used.. ii) External Secondary Data: For better interpretation some data has been collected from Bangladesh Bank. Internet Browsing is also one source of external Secondary data. Others are4

Brochures of Shahjalal Islami Bank Ltd. Annual Report (2006-10) of SJIBL Deferent types of journals on SJIBL Leaflets of SJIBL Net browsing

1.8 Limitations of the Report:

Budgeted times for the Study:

The first obstruct is time itself. Due to the time limit, the scope and dimension of the study has been curtailed. Due to the short time it was not possible our to do random sampling and conduct with the respondent by going everywhere. Data Insufficiency:

For better interpretation I had to collect some information from the Head office. But because of some divisional and confidential problem, I could not get enough information about the dividend policy.. So for better interpretation we could not get sufficient data. Lack of Records:

Sufficient books, publications, facts and figures are not available. Lack of structured data flow:

Lack of structured and current information as the Banks policy does not permit to disclose various data related to our study and this is the major problem among all the problems, We have encountered with.

PART 2 2 PART ORGANIZATIONAL PROFILE PROFILE OF OF ORGANIZATIONAL SHAHJALAL ISLAMI ISLAMI BANK BANK LTD. LTD. SHAHJALAL

2.1 History & Background: The Shahjalal Islami Bank Limited was incorporated as a public limited company as on 1 st day of April 2001 under the Companies Act. 1994. The Bank started its commercial operation on May 10, 2001. The Bank has made a significant progress within a very short period of its existence and occupied an enviable position among its competitors after achieving remarkable success in all areas of business operation. The authorized capital of the Bank is Tk. 6000 million and Paid up capital of the Bank stood at Tk. 3425.12 million as on 31 December 2011. The total equity (capital and reserves) of the Bank as on December 31, 2010 stood at Tk. 7746 million.

Name of the Company Legal Form Commencement of Business Head Office Telephone No. Fax No. Website SWIFT E-mail Chairman Managing

Shahjalal Islami Bank Limited A public limited company incorporated in Bangladesh on 1st April 2001 under the companies Act 1994 and listed in Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited. 10th May 2001 Uday Sanz, Plot No. SE (A) 2/B Gulshan South Avenue, Gulshan 1, Dhaka-1212. 88-02-8825457,8828142,8824736,8819385,8818737 88-02-8824009 www.shahjalalbank.com.bd SJBL BD DH sblho@shahjalalbank.com.bd Alhaj Mohammed Solaiman Md. Abdur Rahman Sarker 7

Director M/S. Syful Shamsul Alam & Co. Chartered Accountants Paramount Heights 65/2/1 Box Culvert Road (level-6) Purana Paltan, Dhaka-1000 Phone: 88-02-9555915, 9560332 M/S K.M Hasan & Co. Chartered Accountants 87, New Eskaton Road Dhaka. Phone: 88-02-9351457, 9351564 Hasan & Associates Chamber of Commerce Building (6th floor), 65-66 Motijheel C/A, Dhaka 63 14 06

Auditors

Tax Advisor

Legal Advisor No. of Branches No. of ATM Booth No. of SME Centers

Off-Shore banking 01 Unit No. of Employees 1671 Stock Summary: Authorized Capital Paid up Capital Face Value per Share Tk. 6,000 million Tk. 3425.12 million Tk. 10

2.2 Our Vision

To be the unique modern Islami Bank in Bangladesh and to make significant contribution to the national economy and enhance customers trust & wealth, quality investment, employees value and rapid growth in shareholders equity.

2.3 Our Mission

To provide quality services to customers. To set high standards of integrity. To make quality investment. To ensure sustainable growth in business. To ensure maximization of Shareholders wealth. To extend our customers innovative services acquiring state-of-the-art technology blended with Islamic principles. To ensure human resource development to meet the challenges of the time.

2.4 Our Strategies

To strive for customers best satisfaction & earn their confidence. To manage & operate the Bank in the most effective manner. To identify customers needs & monitor their perception towards meeting those requirements. To review & update policies, procedures & practices to enhance the ability to extend better services to the customers. To train & develop all employees & provide them adequate resources so that the customers needs are reasonably addressed. To promote organizational efficiency by communicating company plans, polices & procedures openly to the employees in a timely fashion. To cultivate a congenial working environment. To diversify portfolio in both the retail & wholesale markets.

2.5 Our Motto

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Committed to Cordial Service.

2.6 Organizational Structure

There are different wings to consist the organizational structure of SJIBL. There are Board of Directors Board Committees
Board ofExecutive Directors Committees Sponsors Chairman

Policy Committees Management Team

Managing Director

Deputy Managing Director Deputy Managing Director GSD, CAD, A&I, GB, D&M ID, IT, CREDIT, R&P Organization Chart of Shahjalal Islami Bank Ltd. Executive Vice President/ Company Secretary

2.6 Structural Management of SJIBL:

Senior Vice President

Senior Vice President

Senior Vice President

Vice President Senior Asst. Vice President

Asst. Vice President First Asst Vice President

Executive Officer Senior Officer Trainee Senior Officer Officer

Abbreviations: GSD General Service Division CAD Central Account Division ASI Audit and Inspect CB Central Bank D&M Developing and Marketing ID International Division R&P Research & Planning

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Trainee Officer

2.7 Branch Expansion: The Bank commenced its business on May 10, 2001 by opening its 1 st branch, i.e. Dhaka Main Branch at 58, Dilkusha, Dhaka obtaining the licence from Bangladesh Bank, the central bank of Bangladesh. Its corporate Head Office is situated at 10, Dilkusha Commercial Area, Jiban Bima Bhavan, Dhaka - 1000. The Bank opened 2 (Two) branches in 2001, 6 (Six) branches in 2002, 2 (Two) branches in 2003, 2 (Two) branches in 2004, 4 (Four) branches in 2005, 5 (Five) branches in 2006 & 2007,2008. Upto September 31, 2010 SJIBL established 63 branches to all over the country. to give a cordial service to their customers. Branch Network of Shahjalal Islami Bank Ltd.:
RAJSHAHI 4 DHAKA 28 Branch

SYLHET
4 Branch

KHULNA
3 Branch

CHITTAGONG BARISHAL 1 br 1br11 branch

10 Branch

11

Figure: 2-9 Branch Network of SJIBL

Management of SJIBL:

The Board of Directors consists of eminent personalities from commerce and industry of the country. Mr. Sajjatuz Jumma, the founder Chairman of the Board of Directors, is a businessman besides being an eminent personality of the country. The Bank is manned and managed by highly qualified and efficient professionals. The Managing Director of the Bank Mr. Md. Abdur Rahman Sarker who has rich experience of managing both the nationalized and the private sector banks as Managing Director. 2.8 Human Resources Development SJIBLs policy on human resources management is proactive. SJBL believes that investment in human resource development is the key to maintaining sound health of the bank. The employees of the bank attend training program/ seminar, workshop both in home and abroad. The training center of the bank has been arranging various courses, workshop and seminars on important aspect of banking. This bank invites experts of banking sector for imparting training to its employees to meet the above challenges. To keep the employees motivated, incentives, performance award, promotion and accelerated promotion are given on a regular basis. 2.9 Information Technology Main objective of the bank is to take care of different economic group of the society and meet their all type of banking requirements stretching its service to the door step of the people with the help of information technology gradually. SJBL is providing customer service through online 12

facilities. SJIBLs ultimate aim is to enable its respected and valued clients to shop under the same roof. In line with that JBL VISA DEBIT CARD, SMS/push pull services have already been introduced. Besides clients are also being facilitated by the service of REUTERS, SWIFT, Western Union Money Transfer etc. 2.10 Corporate Governance The Board of Directors of the bank consists of successful distinguish personalities emerging from area of trade, commerce and industries. The bank conducts its business and operations under the policy, directions and guidelines of the Board. The bank has also a Shariah Council consisting of prominent Faquih, Economists, Lawyers, Bankers to advise and guide the Board and the Management of Shariah matters relating to the business and operations. Under the able guidance of the Board of Directors and the Shariah council, the professional management team carries out the business operation of the bank, ensuring good governance practicing sound, best corporate and risk management process. The result that was achieved by the bank so far is due to the constant guidance, cooperation and support of the Board and Shariah Council and devoted, dedicated and hard work of the management team and all functionaries of the bank. 2.11 Products Bank means mobilizing fund from surplus unit and deployment of fund for deficit unit. SJIBL mobilize its fund from surplus unit through different types of deposit schemes and deployment this fund for deficit unit through various investment schemes. So the main products of SJIBL are different kinds of deposits and investment schemes 2.11.1 Deposit Scheme The mobilized deposits were ploughed back in economic activities through profitable and safe investment. These types of deposit schemes of SJIBL are: Mudaraba Monthly Income Scheme Mudaraba Double/Triple Benefit Scheme Mudaraba Monthly Deposit Scheme 13

 Mudaraba Millionaire Scheme Mudaraba Hajj Scheme Mudaraba Housing Deposit Scheme Mudaraba Cash Waqf Scheme Other than these deposits schemes SJIBL also operate some traditional deposit schemes these are: Al-Wadia Current Deposit Mudaraba Saving Deposit Mudaraba Short Notice Deposit Mudaraba Term Deposit Mudaraba Scheme Deposit The Deposit-mix of the Bank as on 31.12.2010 was as bellow:Sl.No 1 2 3 4 5 6 Nature of Deposit Al-Wadia Current Deposit Mudaraba Savings Deposit Mudaraba Short Notice Deposit Mudaraba Term Deposit Mudaraba Schemes Deposit Other Deposits Total Taka in million 2,541.19 3,861.42 3,612.78 38,104.07 11,193.86 3,651.63 62,964.95 Percentage of Total Deposit 4.03% 6.13% 5.74% 60.52% 17.78% 5.80% 100.00%

Analysis of Deposit: 2010 2009 2008 2007 2006

S
1 2 3 4 5

Nature of Deposit
Al-Wadia Current Deposit Mudaraba Savings Deposit Mudaraba Short Notice Deposit Mudaraba Term Deposit Mudaraba Schemes Deposits 2,541.19 3,861.42 3,612.78 38,104.0 7 11,193.8 14 1,609.95 3,072.78 1,886.96 27,578.7 4 10,602.7 1,266.56 1,863.52 765.11 21,190.1 6 9,426.65 734.71 519.69 1,832.75 913.16 608.75 366.76 11,341.5 10,252.66 1 6,869.13 5,131.30

Others Deposits

Total

6 3,651.63 62,964.9 5

8 2,708.02 47,459.2 3

1,972.24 36,484.2 4

1,231.35 907.08 22,618.1 18,090.65 9

Deposit Mix of 2010

18%

6%

4%

Al-wadia Current Account Mudaraba Savings Deposit Mudaraba Short Notice Deposit Mudaraba Term Deposit Deposit in Scheme Other Deposits

6%

6%

60% Exhibit 2.12.1: Deposit Mix of 2010

Trend of Deposit from 2006 to 2010 71,000.00 61,000.00 51,000.00 41,000.00 31,000.00 34,279.74 18,090.65 22,618.18 47,459.23

Total Deposit

62,964.95

k a T o l i m n I

21,000.00 11,000.00 1,000.00 2006

2007

2008

Year

2009

2010

2.11.2 Investment Schemes Total investment of the Bank stood at Tk. 61,440.08 million as on 31.12.2010 as against Tk. 43,958.26 million of 31.12.2009 registering an increase of Tk. 17,481.82 million, i.e. 39.77% 15

growth. The Bank is careful in deployment of the fund. Mode wise investment portfolio as on 31.12.2010 are given below: Sl. No 1 2 3 4 5 6 7 8 Modes of Investments Murabaha Bi-muajjal Hire-purchase & Ijara Investments against L/C Bill purchased & discounted Investment against scheme deposits Quard Others Total Taka in Percentage of million Total Investment 9,569.65 15.57% 27,335.68 44.49% 14,343.70 23.35% 36.50 0.06% 7,145.00 11.63% 1424.86 2.32% 159.18 0.26% 1425.51 2.32% 61,440.08 100.00%

The bank entertains good investment clients, having credit worthiness and good track record. The bank has different profitable investment projects these are: Mudarabaha Bi-Muajjal Hire Purchase and Ijara Investment Against L/C Bill Purchase/Discounted Investment Against Scheme Deposit Quard

The bank has got a few investment schemes to provide financial assistance to comparatively less advantage group of people; which are: Household Durable Scheme Small Business Investment Scheme Small entrepreneur Investment Program Medium Entrepreneur Program Housing Investment Scheme Rural Investment Program Car Investment Scheme Woman Entrepreneur Investment Scheme 16

Analysis of Investment trend: SL Modes of Investment 1 Murabaha 2 Bi-muajjal 3 4 5 6 7 8 Hire-purchase & Ijara Investment against L/C Bill purchased/discounted Investment against scheme deposit Quard Others Total 2010 9,569.65 27,335.6 8 14,343.7 0 36.50 7,145.00 1,424.86 159.18 1,425.51 61,440.0 8 2009 8,261.10 19,855.0 0 10,520.7 2 17.32 3,588.62 810.61 132.55 771.59 43,958.2 6 2008 7,353.61 13,224.9 4 5,463.44 106.13 3,721.76 557.61 168.33 2,322.95 32,918.7 7 2007 5,844.81 8,882.60 3,581.92 19.15 1,588.00 17.25 2006 4,687.36 5,774.57 3,009.46 219.72 1,308.55 428.78

29.65 59.27 653.23 28.08 20,616.61 15,515.79

Investment Portfolio of 2010

Murabaha Bi-Muajjal Hire-Purchase

0.26% 2.32% 11.63% 2.32% 0.06%

15.57%

Investment Against L/C Inland Bills Purchase

23.35%

44.49%

Figure: Investment Portfolio 2010

17

Trend of Investment from 2006 to 2010

70,000.00 60,000.00 50,000.00 40,000.00 30,000.00 43,958.26 32,918.77 20,616.61 15,515.79 2006 2007 2008 Year 2009

Total Investment

61,440.08

k a T o l i M n I

20,000.00 10,000.00 -

2010

Figure: Trend of Investment from 2006-2010

Deposit & Invesrment Position 70,000.00 60,000.00 50,000.00 40,000.00 30,000.00

22,618.18 20,616.61 34,279.74 32,918.77 47,459.23 43,958.26

Deposit Investment
62,964.95 61,440.08

k a T o l i M n I

20,000.00 10,000.00 -

18,090.65 15,515.79

2006

2007

2008 Year

2009

2010

Figure: Deposit and Investment Position

2.12 Services
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Shahjalal Islami Bank Limited is an industry standard, Islami Shariah and latest technology based modern bank. The bank is equipped with state-of-the-art technology and committed to provide technology based modern banking to its valuable customers. Services provided by SJIBL are: On Line Banking SJIBL VISA Card SMS / Pull Push Service SWIFT 2.13 Departments of SJIBL: All branches of Shahjalal Islami Bank Limited are divided into three departments: General Banking Department. Foreign Exchange Department. Investment Department. 2.13.1General Banking Department General banking department is one of the most important departments of Shahjalal Islami Bank Limited. Basically bank provides the main services to the customer through this department. In general this section of the Shahjalal Islami Bank Limited is divided into five sections.

Accounts opening section Cash section Remittance section Bills and clearing section Accounts section

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2.13.2 Foreign Exchange Department Banks play a very important role in effecting foreign exchange transaction of a country. Mainly transactions with overseas countries are in respect of imports; exports and foreign remittance come under the purview of foreign exchange department. Banks are the vital sectors by which such transactions are effected /settled. Central Bank records all sorts of foreign exchange transactions. The other banks dealing with foreign exchange are to report to Bangladesh Bank regularly (viz. daily, monthly, quarterly, yearly etc.). The foreign exchange department consists of three sections. They are:

Import section Export section Foreign remittance section

2.13.3 Investment Department Banking business consists of borrowing and lending. Bank act as an intermediary between surplus and deficit economic units. Thus a banker is a dealer in money and credit. Banks accept deposit from large number of customers and then lend a major portion of the accumulated money to those who wish to borrow. In this process banks secure reasonable return to the savers, make funds available to the borrowers at a cost and earn a profit after covering the cost of funds. Banks, besides their role of intermediation between savers and borrowers and providing an effective payment mechanism, have been allowed to diversify into many new areas of better paying business activities.

2.14 SJIBL Activities:

2.14.1 Membership of Different Organization / Chamber 1. Bangladesh Institute of Bank Management (BIBM) 2. The Institute of Bankers Bangladesh (IBB) 3. Bangladesh Association of Banks (BAB) 4. Bangladesh Foreign Exchange Dealers' Association (BAFEDA) 20

5. Central Shariah Board for Islamic Banks of Bangladesh 6. Islamic Banks Consultative Forum (IBCF) 7. International Chamber of Commerce- Bangladesh 8. Society for Worldwide Inter-bank Financial Telecommunication (SWIFT)

2.14.2 Corporate Banking We provide personalized solutions to all our customers. The Bank distinguishes and identifies corporate customers' need and designs appropriate solutions accordingly. Shahjalal Islami Bank Limited offers a complete range of financing and operational services to its corporate client groups combining trade, treasury, investment and transactional banking activities. We offer accurate solution whether it is project finance, term Investment, import or export deal, working capital requirement. We are pledged bound to render efficient services to satisfy customer needs. Our experience in handling Corporate Banking business covers a wide span of businesses and industries. We hold leverage on our expertise in the following sectors particularly: Textile Spinning, Dyeing / Printing Ready Made Garments Agro processing industry Edible Oil, Consumer and Diversified Industries Industry (Import Substitute / Export oriented) Food & Allied products Paper & Paper Products Engineering, Steel Mills Chemical and chemical products etc. Telecommunications. Information Technology 21

Real Estate & Housing Wholesale trade Project Finance Lease Finance, Hire Purchase, International Banking Transport Pharmaceuticals Export Finance Import Finance

PART 3 3 PART THEORETICAL Backgrounds Backgrounds THEORETICAL

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3. THEORETICAL BACKGROUNDS
3.1 Introduction: Islami 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 operation. For millions of Muslims, banks were institution to be avoided. Islam is a religion, which keeps Believers from the tellers window. Their Islamic beliefs prevent them from dealings that involve usury or interest (Riba). Yet Muslim needs banking services as much as anyone and for many purposes: to finance new business ventures, to buy a house, to facilitate capital Investment to undertake trading activities and to offer safe place for saving. Muslims are not averse to legitimate profit as Islam encourages people to use money in Islamic ally legitimate ventures not just to keep their funds idle.

However in this fast moving world more than 1400 years after the Prophet (S.A.W) can Muslims find room for the principles of their religion? The answer comes with the fact that a global network of Islamic banks investment house and other financial institution have started to take shape based on the principals of Islamic finance laid down in the Quran and the Prophets traditions some 14 centuries ago. Islamic banking based on the Quranic prohibition of changing interest has moved from a theoretical concept to embrace more than 100 banks operating in 40 countries with multibillion-dollar deposits worldwide. Islamic banking is widely regarded as the fastest growing sector in the Middle Eastern financial services market. Exploding onto the 23

financial scene barely thirty years ago an estimated $US100 billion worth of funds are now managed according to Shariah. The best-known feature of Islamic Banking is the prohibition on interest. The Holy Quran forbids the charging of Riba on money lent. It is important to understand certain principles of Islam that underpin Islamic finance. Muslim scholars accepted the word Riba to mean any fixed or guaranteed interest payment on cash advances or on deposits.

3.2 Evolution of Islamic Banking: Islamic Banking comes into reality through a long theoretical exercise of several renowned Islamic scholars and economists. The first attempt to establish an Islamic financial institution took place in Pakistan in 1950. In the modern world, the pioneering role in establishing the first Islamic Bank in 1963 named Mit- Ghamar Saving Bank in Egypt at rural area of Nile Delta. As on today, there are many Islamic financial institutions operating throughout the world covering both Muslim and non-Muslim countries of various socio-economic environment. 3.3 Common Practices of Islamic Banks in Mobilization of Funds: The common practices of Islamic banks in the sources of funds may be described as follows: 3.3.1 Current Accounts: All Islamic banks operate current account on behalf of their client individuals and business firms. These accounts are operated for the safe custody of deposits and for the convenience of customers. 3.3.2 Saving Account: 1. Savings accounts are opened with the condition that deposits provide the bank with an authorization to invest and 2. Depositors have the right to deposit and withdraw funds.

24

3. The profits in savings accounts are calculated on the minimum balance maintained during the month 4. A minimum balance has to be maintained in order to qualify for a share in profit. 3.3.3 Investment Deposit: Investment deposits are Islamic banks counterparts of term deposits or time deposits in the conventional system. They are also called profit and Loss-Sharing (PLS) Accounts or Participatory Account. However they can be distinguished from traditional fixed term deposits in the following manner:

3.4 Islamic Financial Vehicles: Islamic banks around the world have devised many creative financial products based on the risk sharing and profit sharing principles of Islamic banking. For day to day banking activities a number of financial instruments have been developed that satisfy the Islamic doctrine and provide acceptable financial returns for investors. 3.4.1 Al-Mudaraba (Profit sharing): Important features of Mudaraba are as follows: 1. The division of profits between the two parties must necessarily be on a proportional basis and cannot be a lump sum or guaranteed return. 2. The investor is not liable for losses beyond the capital he has contributed. 3. The mudarib does not share in the losses except for the loss of his time and efforts. 3.4.2 Murabaha: This is the sale of a commodity at a price, which includes a stated profit, which includes a stated profit known to both the vendor and the purchaser. This can be called a cost plus profit contract. The buyer in deferred payments usually pays the price back. 3.4.3 Musharaka (Profit and loss sharing) 25

This is a partnership normally of limited duration formed to carry out a specific project. It is therefore similar to a western- style joint venture, and is regarded by some as the purest from of Islamic financial instrument, since it conforms to the underlying partnership principles of sharing in and benefiting from risk. 3.4.5 Ijarah (Lease financing) Another popular instrument is leasing which is designed for financing an asset or equipment. It is a manfaah (benefit) or the right to use the asset or equipment. The lessor leases out an asset or equipment to the client at an agreed rental fee for a pre-determined period pursuant to the contract.

3.4.6 Ijara Wa Iktina (Hire Purchase) Equivalent to the leasing and installment loan, hire- purchase, practices that put millions of drivers on the road each year. 3.4.7 Muqarada This technique allows a bank to flat what are effectively Islamic bonds to finance a specific project. Investors who buy muqaradah bonds take a share of the profits of the project being financed, but also share the risk of unexpectedly low profits or even losses. 3.4.8 Bai-Salam
A buyer pays in advance for a specified quality of a commodity, deliverable on a specific date at an agreed price. This financing technique, similar to a futures or forward- purchase contract is particularly applicable to seasonal purchase but it can also be used to buy other goods in cases where the seller needs working capital before he can deliver.

3.4.9 Istisna (Purchase order) This is a sale and purchase agreement whereby the seller undertakes to manufacture or construct according to the specification given in the agreement. It is similar to bai salam the main distinction being the nature of the asset and method of payment. Istisna generally covers those

26

things which are customarily made to order and advance payment of money is not necessary as required in bai salam. 3.4.10 Bai-Muajjal In short, it is a sale on credit. Bai-Muajjal may be defined as a contract between a buyer and seller under which the seller sells specific goods to the buyerat an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installments.

3.4.11 Hire Purchase under Shirkatul Melk Shirkat means partnership. Shirkatul Melk means share in ownership when two or more persons supply equity to purchase an asset own the same jointly and share the benefit as per agreement and bear the loss in proportion to their equity, the contract is called Shirkatul Melk contract. 3.4.12. Quard-Al-Hasan It is a virtuous loan. Through this mode, Bank provides loan to its customer for a certain period, which bears no profit/loss/compensation. 3.4.13. Direct Investment Islamic Bank without the help/assistance of any client may directly invest its fund/capital in share, securities, business and industry. Profit and loss in this business is exclusively, the internal matter of the Bank. 3.5 Tools for Appraisal Credit The Cs of Good and Bad Loan In addition to the formal credit appraisal, the credit officers of SJIBL try to judge the possible client based on some other criteria. These criteria are called the Cs of good and bad loans. The Cs are described below.

27

Character Capacity Conditions Capital Collateral Complacency Carelessness Communicatio n

Make sure that the individual or company you are lending to have Outstanding integrity. Make sure that the individual or company you are lending to have the capability of repaying your loan. Understanding the business and economic conditions can and will change after the loan is made. Make sure that the individual or company you are lending to have an appropriate level of investment in the company. Make sure that there is a second way out of a credit but do not allow that to drive the credit decision. Do not rely on past history to continue. Stay alert to what can go wrong in any loan. Remember that documentation, follow-up and consistent monitoring is essential to high quality loan portfolios. Share credit objectives and credit decision-making both vertically and laterally within the bank. Make sure that you understand the risks; particularly the downside possibilities and that you structure and price the loan consistently with that understanding. Do not get swept away by what others are doing.

Contingencies Competition

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PART 4 4 PART
SWOT ANALYSIS ANALYSIS OF OF SHAHJALAL SHAHJALAL SWOT ISLAMI BANK BANK LTD. LTD. ISLAMI

29

8.SWOT ANALYSIS OF SHAHJALAL ISLAMI BANK LTD

A particular SWOT analysis discloses the following issues for an organization that an organization achieved over the time of its operation by analyzing its both internal and external environment:
S- STRENGTHS W-WEAKNESS O-OPPORTUNITIES T-THREATS

The SWOT analysis of Shahjalal Islami Bank Ltd. is shown below:

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8.1 STRENGTHS:

Provides of good quality services: Having the reputation of being the provider of good quality services among its potential customers. Differentiated Islamic Banking Products: SJIBL has several types of differentiated Islamic Banking Products (both deposit and investment) with unique features and facilities, which are so much helpful for enhancing the economic growth.

Wide range of financial products/services: Having wide range of financial products/services. Particularly the GB department has obtained most of the clients reliability in providing services by offering various financial schemes.

Good investment portfolio: SJIBL never invest all types of business area for that case their portfolio is very good. Low Balance Requirement: Relatively low minimum balance/deposit requirement to maintain an account with the Bank. Satisfactory business growth: From the star of the business in 2001 SJIBL run their business successfully and their business growth is very much satisfactory. Experienced Top management: Management of SJIBL is very efficient and they always take correct decision for give better service to the customer. Strong correspondent relationship: SJIBL maintains strong relationships with other commercial banks & a member of SWIFT service. Strong Capital: SJIBL has strong capital base and maintain all the statutory requirements to be a good Bank. Comfortable liquidity position: Shahjalal Islami Bank Limited always maintains a comfortable liquidity position in the market. Achieve goodwill from the clients: SJIBL has already achieved a strong goodwill among the clients. Strong concentration on Investment: Investment Division is the heart of SJIBL and main business area of the bank. Bank gives loans to the client by judging their business and concern how the clients repay the loan 31

Strong monitoring Process: Investment terms and conditions are monitored, financial statements are received on a regular basis, and any covenant exceptions are referred to the branch manager for timely follow up.

Strictly follow rules and regulations: The terms and conditions strictly followed by the authority of the bank thats why SJIBL has low risk in loan defaultation.

Co-operative & skilled personnel: SJIBL has skilled personnel who are very much specialized in interacting with clients, (particularly in Investment department).

8.2 WEAKNESSES:

Complexity in account opening: Various complex requirements demanded by the Bank to open a new account. Low geographic coverage: SJIBLs branch expansions growth is not in satisfactory level. Outside the Dhaka division they have only 8 branches.

Limited delegation of power: For the sanction the loan branch has no power. All power in handed in the head office. Lengthy Process for sanction the loan : All power in the head office for that case for sanctioning loans it takes more time. No bank guarantee power: No branch has any bank guarantee power. Conservative mind setting in working: SJIBL working structure is very much conservative and for that case its growth is slow than other bank. Lack of strong and attractive promotional activities: It is an Islami perspective bank, so it spends money for promotional activities in a low rate.

8.3 OPPORTUNITIES:

Perception of Islami bank: Strong appetite for Islamic financial services among the people of Bangladesh. Give higher interest rate: Possibility to generate very high rate of return as compared to fixed rate of interest from other bank 32

Demand Endless: Banking industry is an industry with an endless demand in the future. Concentration in Other business area: It has an opportunity in SME and Agro based business. Credit card Facility: If in future SJIBL provide to the client credit card in dual currency then it can be differentiated from other commercial bank. Merge with Same nature bank: Expansion of existing Banking networks through merge with other Islamic Banks will facilitate the bank to enjoy the competitive advantage.

Be Prepare in competitive advantage: A large number of private Banks coming into the market in the recent time. In this competitive environment Shahjalal Islami Bank must expand its product line to enhance its sustainable competitive advantage.

Wide Banking networks: The bank should establish a wide range of banking network in the country and outside the country.

8.4 THREATS:

Lack of awareness: Lack of awareness regarding the Islamic Banking system among the people of Bangladesh. Products name difficulty: Name of the products is so much difficult to understand and very much confusing, such as Mudaraba, Murabaha. Increase financial institutions merging: The worldwide trend of mergers and acquisition in financial institutions causing problem. Money rate devaluation: Frequent taka devaluation and other rate fluctuation is causing problem for the bank. Guideline: Lack of adequate guideline by the Central Bank on the basis of Islamic Shariah. Competition increase: Increased competition from fellow Islamic Banks and Other Commercial Private Banks (PCBs).

33

Lacking in fund collection procedure: Limitation (as an Islamic Bank) to borrow from the money market (short term funds), which may produce a threat to the liquidity of the Bank.

Market pressure: Market pressure for dollar ($) crisis is increasing day by day. Government rules and regulations: Unfavorable Government rules and regulation created regarding Banking business that hampers their business procedure.

PART 5 5 PART DIVIDEND POLICY POLICY DIVIDEND

34

Dividend Policy
5.1 Dividend:
Dividend refers to that portion of a firms earnings which are paid out to the shareholders. Net Income alternative 1) 100% net income can be declared as dividend 2) 100% net income can be lets as retained earnings 3) Some part of net income can be declared as dividend and some let as retained earnings

5.2 Pros of Dividends

Dividends certainly do have a place within the financial world. They provide a way for investors to place a large amount of capital that can then be used as a source of income, since it regularly brings in money. When you choose dividends, you can look forward to: Profit while retaining a stake in the company - Normally, a stockholder would have to sell his or her stock in order to profit from his or her investment in a company. Dividends allow investors to profit from their investment in the company without selling their stock. This means you can look forward to regular returns. Short-term results and long-term opportunities - An investor can continue to receive dividend payments from the company as long as the investor continues to hold stock. This can lead to significant dividend payments for a long-term investment, even though you're seeing results over a short-term time frame.

35

Visible indications of your investment's security - A continued, increased dividend payout is considered to be a good indicator of a company's continued success. This allows you to quantify your gains easily.

5.3 Cons of Dividends

Despite their benefits, dividends aren't for everyone. Before you and your financial advisor decide on this course of action, you'll want to consider the following: Dividends are not universally available - The Board of Directors is responsible for deciding whether or not a dividend is to be paid out to its investors. However, even if a company makes a significant profit, it is under no obligation to pay a dividend. Tax repercussions - Dividends are often criticized as being subject to double-taxation, as the company is taxed on its income and the individual shareholder is also subject to paying taxes on the dividend payout. In the United States, dividends are subject to a 15 percent dividend tax rate. This is higher than what you can expect to pay on other types of investment windfalls.

5.4 Cash dividend payment procedures:

Board of Directors Meeting: Dividend decision- whether to declare dividend and what amount to pay cash dividends to stockholders is decided by the board of directors of a corporation. Usually dividend decision is derived from the financial position, future growth expectation as well as recent trend in dividend declaration. Amount of Dividend: What amount or percentage of net income will be declared as dividend and payment period is a key decision of the board meeting. Relevant Date: If the directors of the firm declare a dividend, they also typically issue a statement indicating the dividend decision, the record date and the payment date. Ex dividend Date is the date that the value of the firms common shares will reflect the dividend payment (ie. fall in value) Ex means without. At the start of trading on the ex-dividend date, the share price will normally open for trading at the previous days close, less the value of the dividend per share. This reflects 36

the fact that purchasers of the stock on the ex-dividend date and beyond WILL NOT receive the declared dividend.

5.5Dividend Reinvestment Plans:

Plans that enable stockholders to use dividends received on the firms stock to acquire additional shares- even fractional shares- at little or no transaction cost. Two approaches for dividend reinvestment(1) Shareholders con buy share from secondary market, equal amount that they received as dividend and they take brokerage house for purchasing the share from stock market and brokerage house will get some commission. Actually, when large number of group of shareholders is doing this type of business, then the firm can treat it as reinvestment of dividend. 2. Shareholders can buy share directly from the firm, without going through a broker. From its point of view, the firm can issue new shares to participants more economically, avoiding the under-pricing and flotation costs. The existence of a DRIP may enhance the market appeal of a firms shares.

5.6The Relevance of Dividend Policy:

The relevance of dividend policy was established through numerous theories and research. But to a finance manager, capital budgeting and capital structure decisions are far more important than dividend decision. In other words, good investment and financing decision should not be sacrificed for a dividend policy. Before establishing the relevance or importance of dividend policy, some key question have to be resolved:

Does dividend policy matter? What effect does dividend policy have on share price? Is there a model that can be used to evaluate alternative dividend policies in view of share value? 37

5.7 The Residual Theory of Dividends:

Residual dividend policy (Residual Theory of Dividends), is a theory that suggest that the dividend paid by the firm should be the amount left over after all acceptable investment opportunities have been undertaken.

Using this approach the firm would treat the dividend decision in three steps, as follows:

Step 1: Determine optimal level of capital expenditures

Step 2: Determine the optimal capital structure. Optimal capital structure- the capital structure where the weighted average cost of capital will be lower. Its basically the estimation of the total amount of equity financing needed to support the expenditures estimated in step 1. Step 3: Determine the source of equity financing- retained earnings or new common stock. As because, cost of retained earnings is less compare to the cost of new common stock, so firm should use retained earnings to meet the equity requirement determined in step 2. If retained earnings are inadequate to meet this need, firm should raise equity by selling new common stock. If the available retained earnings are in excess of this need, distribute the surplus amount the residual- as dividend. According to this approach, there will be no dividend declaration, if firms equity needs exceeds the amount of retained earnings. This view of dividend suggest that the required return of investors, Ks, is not influenced by the firms dividend policy that the dividend policy is irrelevant. For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity). Now, suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300) and two-thirds ($600) by using equity. 38

In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity portion that was greater than the company's available levels, the company would issue new stock.

5.8 Dividend Irrelevance Theory:

Dividend irrelevance theory was developed by Merton H. Miller and Franco Modigliani (M and M). They argue that the firms value is determined solely by the earning power and risk of its assets (investments). M and Ms theory suggest that in the perfect world (certainty, no taxes, no transactions cost, and no other market imperfections), the value of the firm is unaffected by the distribution of dividends. But our world is not perfect (there is uncertainties, taxes, transactions cost and some market is imperfect), studies have shown that, the increase in dividend result in increased share price, and decrease in dividend result in decreased share price. In response, M and M argue that these effect are attributable not to the dividend itself but rather to The informational content of dividend, and Clientele effect.

Informational content: Information provided by the dividend of a firm with respect to

future earnings. Investors view a change in dividends, up or down as a signal about future earnings. An increase in dividends is viewed as a positive signal, and investors bid up the share price and a decrease in dividends is a negative signal that cause a decreased in share price.

Clientele effect: A firm attracts share holders whose preferences for the payment and stability
of dividends correspond to the payment pattern and stability of the firm itself. In summary, dividend irrelevance argue that, all else being equal, an investors required returnand therefore the value of the firm- is unaffected by dividend policy for three reasons:

(1) The firms value is determined solely by the earning power and the risk of its assets. 39

(2) If dividend do affect value, they so solely because of their informational content. (3) A clientele effect exists that causes a firms shareholders to receive the dividends they expect. The proponents of dividend irrelevance conclude that because dividends are irrelevant to a firms value, the firm does not need to have a dividend policy.

5.9 Dividend Relevance theory:

The theory, advanced by M. J. Gordon and J. Lintner, who suggest that there is, in fact, a direct relationship between the firms dividend policy and its market value. Fundamental of this theory is their Bird-in-hand argument, in support of dividend relevance theory, that investors see current dividends as less risky than future dividends or capital gains. A bird in the hand is worth two in the bush. Gordon and Lintner argue that current dividend payments reduce investors uncertainty, causing investors to discount the firms earnings at a lower rate (Ks) and to place a higher value on the firms stock. Conversely, if dividends are reduced or are not paid, investor uncertainty will increase, raising the required return (Ks) and lowering the stocks value. But, they fails to provide conclusive evidence in support of dividend relevance arguments.

In practice, the action of both financial managers and stockholders tend to support that belief that dividend policy does affect stock value. That means, dividends are relevant- each firm must develop a dividend policy that fulfils the goals of its owners and maximizes their wealth as reflected in the firms share price.

Another model
Walter's Dividend Model Walter's model supports the principle that dividends are relevant. The investment policy of a firm cannot be separated from its dividend policy and both are inter-related. The choice of an appropriate dividend policy affects the value of an enterprise. Assumptions of this model: 40

1. Retained earnings are the only source of finance. This means that the company does not rely upon external funds like debt or new equity capital. 2. The firm's business risk does not change with additional investments undertaken. It implies that r(internal rate of return) and k(cost of capital) are constant. 3. There is no change in the key variables, namely, beginning earnings per share(E), and dividends per share(D). The values of D and E may be changed in the model to determine results, but any given value of E and D are assumed to remain constant in determining a given value. 4. The firm has an indefinite life.

Formula: Walter's model P = D K g

e

Where:

P = Price of equity shares D = Initial dividend K = Cost of equity capital g = Growth rate expected
e

After accounting for retained earnings, the model would be: P = D K rb

e

Where: r = Expected rate of return on firms investments b = Retention rate (E - D)/E Equation showing the value of a share (as present value of all dividends plus the present value of all capital gains) Walter's model: P = D + r/k (E - D) k
e e

Where: D = Dividend per share and E = Earnings per share

41

Example: A company has the following facts: Cost of capital (ke) = 0.10 Earnings per share (E) = $10 Rate of return on investments ( r) = 8% Dividend payout ratio: Case A: 50% Case B: 25% Show the effect of the dividend policy on the market price of the shares. Solution: Case A: D/P ratio = 50% When EPS = $10 and D/P ratio is 50%, D = 10 x 50% = $5 5 + [0.08 / 0.10] [10 5] P = 0.10 => $90

Case B: D/P ratio = 25% When EPS = $10 and D/P ratio is 25%, D = 10 x 25% = $2.5 P = 2.5 + [0.08 / 0.10] [10 2.5] 0.10 => $85

Conclusions of Walter's model: 1. When r > k , the value of shares is inversely related to the D/P ratio. As the D/P ratio increases, the market value of shares decline. Its value is the highest when D/P ratio is 0. So, if the firm retains its earnings entirely, it will maximize the market value of the shares. The optimum payout ratio is zero. 2. When r < k , the D/P ratio and the value of shares are positively correlated. As the D/P ratio increases, the market price of the shares also increases. The optimum payout ratio is 100%. 3. When r = k , the market value of shares is constant irrespective of the D/P ratio. In this case, there is no optimum D/P ratio.
e e e

Limitations of this model: 1. Walter's model assumes that the firm's investments are purely financed by retained earnings. So this model would be applicable only to all-equity firms. 2. The assumption of r as constant is not realistic. 3. The assumption of a constant ke ignores the effect of risk on the value of the firm. 42

5.10 Factors Affecting Dividend Policy:

There are number of external and internal factors which affect dividend policy. External factors which affect dividend policy Contractual constraints refer to restrictive provisions in a loan agreement and may include dollar or percentage of earnings limit on dividends and an inability to make dividend payments until certain levels of earnings is reached. Legal constraints - this type of constraints depends on the location of the firm. Usually, due to legal constraints, firms are not able to pay out any dividends if the firm has any overdue liabilities or if it is bankrupt. Market reactions a firm needs to consider how markets will react to its dividend decisions. For example, if dividends are not paid or decreasing then markets will see it as a negative signal and the stock price will likely to drop. This will decrease shareholders wealth. If dividends are paid out consistently or even increasing in amounts, this can be seen as a positive signal by the market participants and stock price will likely to increase. This will increase shareholders wealth. Shareholders generally prefer fixed or increasing dividends. This decreases uncertainty and investors are likely to use lower rate at which earnings will be discounted. This will lead to an appreciation of share and an increase in shareholders wealth. Current and expected state of the economy If state of the economy is uncertain or heading downward than it may be wise for management to pay smaller or no dividends to prepare a safety reserve for the company which can help to deal with future negative economic conditions. However, if the economy is growing very fast then the firm may have more acceptable investments to take advantage of. It can be best not to distribute dividends but rather use these funds for investments. Changes in government policies and state of the industry must also be taken into account. Internal factors which affect dividend policy Financing needs of the firm Mature firms usually have better access to external financing. Therefore, they are more likely to pay out a large portion of earnings in dividends. If a company is young and rapidly growing than it will likely be unable to pay a large portion of earnings in dividends as it will require retained earnings to finance acceptable projects and its access to external financing is likely to be limited. Preference of the shareholders a firm should consider the needs and interests of the majority of its shareholders when making dividend decisions. For example, if shareholders will be able to earn higher returns by investing individually then what firm can earn by reinvesting funds than a higher dividend payment should be considered. 43

If the firm will have to issue more stock to be able to pay out dividends than it may be in the best interest of the current stakeholders not to issue dividends to avoid potential dilution of ownership. Dilution of ownership occurs because after issuing of additional stock, retained earnings will have to be distributed over a larger amount of the shareholders. This leads to dilution of earnings for existing shareholders. This also leads to dilution of control. Firms also need to consider the wealth level of the majority of its shareholders. If the majority of shareholders are lower income earners than they likely will need dividend income and will prefer payment of dividends. However, if the majority of shareholders are high income earners then they will likely to prefer appreciation of share as it will defer tax payment even if the tax applicable on dividends and capital gains is the same. Stability of earnings If earnings of the company are not stable from period to period than it is wise to follow conservative payments of dividends. Earnings requirement this constraint is imposed by the firm. It consists of a firm not being able to pay out in dividends more than the sum of the current and the most recent past retained earnings. However, the firm still can pay out dividends even if it incurred losses in the current financial period. Lack of adequate cash and cash equivalents occurs when firm do not have adequate cash and cash equivalents, such as marketable securities, to make dividend payments. Borrowing with intention to use funds to pay out dividends is usually not welcomed by lenders because the use of funds is not aligned with activity that would help firm to pay back debt to the lender. Borrowing to pay dividends is also usually not a wise business decision.

Growth Prospects:
The financial requirements are directly related to how much it expects to grow and what assets it will need to acquire. A large, mature firm has adequate access to new capital, whereas a growing firm may not have sufficient funds available. A growing firm like to have to depend on internal financing, so it is likely to pay out less amount of income as dividend. On the other hand, a more established firm is in batter position to pay out large amount of income as dividend.

Owner Considerations:
Before establishing the dividend policy, the firm must consider some subject which are related to its majority of shareholders. (1) Tax status: If a firm has a large percentage of wealthy stockholders who are in high tax bracket, it may decide to pay out a lower percentage of its earnings. (2) Owners investment opportunities: A firm should not retain funds for investment in projects yielding lower returns than the owners could obtain from external investments of equal risk.

44

(3) Potential dilution of ownership: If a firm pays out a high percentage of earnings, new capital will have to be raised with common stock. The result of a new stock issue may be dilution of both control and earnings for the existing owners. The firm can minimize the possibility of such dilution by paying low dividend.

Market Consideration:
Shareholders often view a dividend payment as a signal of the firms future success. A stable and continuous dividend is a positive signal, conveying the firms good health. Shareholders are likely to interpret a passed dividend payment due to loss or to very low earnings as negative signal. The non payment of dividend creates uncertainty about future, which is likely to result in lower stock value.

5.11Types of Dividend Policies:

The firms dividend policy must be formulated with two basic objectives in mind: providing for sufficient financing and maximizing the wealth of the firms owners.

5.11.1Constant-Payout-Ratio Dividend Policy:

The dividend payout ratio indicates the percentage of each dollar earned that is distributed to the owners in the form of cash. It is calculated by dividing the firms cash dividend per share by its earnings per share With a constant-payout-ratio dividend policy, the firm establishes that a certain percentage of earnings is paid to owners in each dividend period. Although some firm use a constant-payout-ratio dividend policy, it is not recommended.

5.11.2 Stability
The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy. With the stability policy, companies may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In either case, the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them with income. Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings of $300, $200, $100, $400). If CBC decided on a stable policy of 10% of yearly earnings ($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter. Alternatively, if CBC decided on a cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and 45

$40 respectively. In either instance, companies following this policy are always attempting to share earnings with shareholders rather than searching for projects in which to invest excess cash.

5.11.3 Regular Dividend Policy:

The regular dividend policy is based on the payment of a fixed dollar dividend in each period. This policy provides the owners with generally positive information thereby minimize their uncertainties. Under this policy dividends are almost never decreased.

5.11.4 Low-Regular-and-Extra Dividend Policy:

Under this dividend policy, a firm is paying a low regular dividend, supplemented by an additional dividend when earnings are higher than normal in given period. By giving the low regular dividend the firm gives investors a stable income necessary to build confidence in the firm, and the extra dividend permits them to share in earnings from an especially good period. The extra dividend should not be regular event, otherwise, it becomes meaningless.

5.11.5 Expectations Theory

As the time approaches for management to announce the amount of the next dividend, investors form expectations as to how much the dividend will be. The investor then compares the actual dividend announced with the expected dividend. If the amount of the dividend is as expected, even if it represents an increase from prior years, the market price of the stock will remain unchanged. However, if the dividend is higher or lower than expected, the investors will reassess their perceptions about the firm and the value of the stock.

5.11.6 Other Forms of Dividends:

Dividend can be paid in the forms other than cash: Stock Dividend Stock Repurchases 46

5.12 Stock Dividend (Bonus Share):

A stock dividend is paid in stock rather than in cash. Many investors believe that stock dividends increase the value of their holdings. In fact, from a market value standpoint, stock dividends function much like stock splits. The investor ends up owning more shares, but the value of their shares is less. From a book value standpoint, funds are transferred from retained earnings to common stock and additional paid-in-capital. If Tramline declares a 10% stock dividend and the current market price of the stock is $15/share, $150,000 of retained earnings (10% x 100,000 shares x $15/share) will be capitalized. The $150,000 will be distributed between the common stock (par) account and paid-incapital in excess of par account based on the par value of the common stock. The resulting balances are as follows. From a shareholders perspective, stock dividends result in a dilution of shares owned. For example, assume a stockholder owned 100 shares at $20/share ($2,000 total) before a stock dividend. If the firm declares a 10% stock dividend, the shareholder will have 110 shares of stock. However, the total value of her shares will still be $2,000. Therefore, the value of her share must have fallen to $18.18/share ($2,000/110).

5.12.1Disadvantages of stock dividends include:

The cost of issuing the new shares. Taxes and listing fees on the new shares. Other recording costs.

5.12.2 Advantages of stock dividends include:

The company conserves needed cash.

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Signaling effect to the shareholders that the firm is retaining cash because of lucrative investment opportunities.

5.13 Stock Repurchase:

The repurchase by the firm of outstanding common stock in the market place. Stock repurchase enhance shareholders value by; (1) Reducing the number of share outstanding and thereby raising earnings per share, (2) Sending a positive signal to investors in the market place that management believes that the stock is under valued, and (3) Providing a temporary floor for the stock price, which may have been decline.

5.13.1Alternative Reasons for Stock Repurchases

To use the shares for another purpose To alter the firms capital structure To increase EPS and ROE resulting in a higher To reduce the chance of a hostile takeover market price

5.14 Right Share:

Existing shareholders will get priority to purchase share at the time of issuing of new common stock. This right is known as Pre-emptive Right. Existing shareholders can exercise that right or not. If shareholders dont want to buy, then right will go to general investors.

5.15 Stock Splits:

A stock split is a recapitalization that affects the number of shares outstanding, par value, earnings per share, and market price. The rationale for a stock split is that it lowers the price of the stock and makes it more attractive to individual investors. 48

 For example, assume a share of stock is currently selling for $135 and splits 3 for 2. The new share price will be equal to 2/3 x $135, or $90. Continuing with the example, assume that the investor held 100 shares before the split with a total value of $13,500. After the split, the shareholder will hold: $13,500/$90 = 150 shares worth $90 each

A reverse stock split reduces the number of shares outstanding and raises stock pricethe opposite of a stock split. The rationale for a reverse stock split is to add respectability to the stock and convey the meaning that it isnt a junk stock. Not only do stock splits leave the market value of shareholders unaffected, but they also have little affect from an accounting standpoint as this 2-for-1 split demonstrates. 5.16 Arguments

against Dividends

First, some financial analysts feel that the consideration of a dividend policy is irrelevant

because investors have the ability to create "homemade" dividends. These analysts claim that this income is achieved by individuals adjusting their personal portfolios to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don't change), rather than a dividend-paying stock (in which value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.
The second argument claims that little to no dividend payout is more favorable for

investors. Supporters of this policy point out that taxation on a dividend are higher than on a capital gain. The argument against dividends is based on the belief that a firm that reinvests funds (rather than paying them out as dividends) will increase the value of the firm as a whole and consequently increase the market value of the stock. According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets. In opposition to these two arguments is the idea that a high dividend payout is important 49

for investors because dividends provide certainty about the company's financial wellbeing; dividends are also attractive for investors looking to secure current income. In addition, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security. Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends. Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends

5.17 Shahjalal Islami Bank Limited Dividend policy

The Board of Directors of the Bank has recommended dividend @30% i.e. to issue 03 shares as against holding of every 10 shares to its shareholders for the year 2010. Record date for the issuance of such dividend has already been fixed on 21.04.2011.

Financial Summery: Five Years of SJIBL at a Glance

SL 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Items Authorized Capital Paid up Capital Total Equity (Core & Supplementary) Core Capital Supplementary Capital Total Deposits Total Investment (Loans & Advances) Import Business Export Business Inward Foreign Remittance
Total Contingent Liabilities and Commitment

Total Income Total Expenditure Operating Profit Profit/(Loss) before Tax Profit/(Loss) after Tax Fixed Assets Total Assets (excluding off-balance sheet items)
Volume of Non-performing Investment Amount of Provision against classified

2010 6,000 3,425 7,747 6,748 999 62,965 61,440 60,066 48,857 6,156 27,665 9,509 5,980 3,529 2,960 2,072 1,473 78,800 1,173 268 50

2009 4,000 2,740 5,430 4,676 754 47,459 43,958 39,543 29,434 10,473 14,475 7,117 5,076 2,041 1,795 1,071 620 58,921 413 118

Figures in million Taka 2008 2007 2006 4,000 2,000 2,000 2,246 1,872 936 4,069 3,041 1,363 3,605 2,788 1,205 464 253 158 34,280 22,618 18,091 32,919 20,617 15,516 42,551 25,490 18,684 26,347 15,084 11,282 9,498 4,295 3,535 10,771 6,403 6,020 5,285 3,589 2,563 3,475 2,274 1,718 1,810 1,315 845 1,566 1,216 788 818 647 463 339 127 93 44,110 28,347 21,343 143 28 128 23 30 21

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

Investment Amount of Provision against unclassified Investment Amount of Provision against Off Balance Sheets Exposures

720 278 6.05 10 19.70 97.58 30%* 30.71 2.63 37.11 21.79 1.91 9.78 7.91 10.15 11.90 63 8 6 1,671 54,549 637

480 148 39.07 100 179.80 92.62 25% 25.10 2.08 28.68 15.04 0.94 13.98 9.13 11.07 13.46 51 5 7 1,299 36,675 610

355 108 29.84 100 160.53 96.03 22% 25.58 2.26 34.24 15.47 0.44 13.81 9.31 10.99 14.18 33 1 5 878 39,971 590

215 38 28.81 100 148.95 91.15 20% 23.21 2.60 36.64 18.03 0.62 16.42 9.00 10.40 14.68 26 555 40,966 550

157 49.50 100 128.75 85.77 38.44 2.17 32.96 18.07 0.19 10.39 9.55 10.83 14.08 21 377 19 490

Earning Per Share (Taka) Book Value per Share (Taka) Net Asset Value per Share (Taka)
Investment to Total Deposit Ratio (%)

Dividend Per Share Cash Dividend Bonus Dividend Return on Equity (%) Return on Assets (ROA) (%) Operating Income Ratio (%) Net Income Ratio (%)
Classified Investment as % of Total Investment

Capital Adequacy Ratio (%) Cost of Deposit (%) Cost of Fund (%) Return on General Investment (%) Number of Branches Number of Brokerage House Number of SME Center Number of Employees Number of Shareholders Number of foreign Correspondents

Below Graphically Represents The Financial Position

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5.17.1 Equity of the Bank

The Banks Equity is divided into two parts i.e. Tier-I and Tier-II capital. Tier-I includes Paid-up Capital, Statutory Reserve, and Retained Earnings. Tier-II includes General Provision on unclassified investments & Off-Balance Sheet items. The Authorized Capital of the Bank is Tk. 6,000 million and paid-up capital of the Bank is Tk. 3,425.12 million as on 31.12.2010. Total equity was Tk. 7,747 million as on 31.12.2010. Comparative position of Equity for the year 2010 & 2009 is given below:-

Tier-I capital (Core Capital) : SL. No a) b) c) Particulars Paid-up capital Statutory Reserve Retained Earnings Sub total (Amount in million Taka) 2010 2009 3,425.12 1,774.63 1,548.60 6,748.35 2,740.10 1,182.58 753.33 4,676.01

Tier-II capital (Supplementary): SL. No a) b) c) Particulars General Provision Exchange Equalization Assets Revaluation Reserve 54 2010 998.48 2009 628.48 0.17 125.31

Sub total Total Equity

998.48 7,746.83

753.96 5,429.97

Equity Movement from 2006 to 2010

Total
8200 7200 6200 5200 4200 3200 3040.88 4069.09 5,429.97 7,746.83

k a T o l i M n I

2200 1200 200

1362.57

2006

2007

2008 Year

2009

2010

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Net Income Raion (%)

Net Income Ratio

30.00% 25.00% 20.00% 18.07% 18.03% 15.47% 15.04% 21.79%

g a t n c r e P

15.00% 10.00% 2006 2007

2008 Year

2009

2010

5.18 Dividend of SJIBL at a Glance

Cash Stock Total % Tk. % Tk. % Tk. 2006 nil nil nil 463216712 2007 nil 20% 374330000 374330000 646992691 57.86% 2008 nil 22% 494115600 494115600 817709533 60.43% 2009 nil 25% 685023900 685023900 1070568293 63.99% 2010 nil 30% 1027535850 1027535850 2072340363 49.58%

Net income % of Total earnings dividend/net income

No. of 9358250 share Dividend Total per share dividend/ No. of share

18716500 Tk.20

22459800 Tk.22

27400956 Tk.25

342511950 Tk.3

Interpretation
At the time of interpretation we considered those things: 56

1)Economic position of country as well as recession. 2)Political stability of the country. 3)And we assume internal situation of company.

2006:
Shahjalal Islamic Bank Limited established in 2001. From 2001-2006 they didnt pay any dividend because they have much more investment opportunities as a result they did not pay the cash dividend as well as the stock dividend.

2007:
There is a time of caretaker government the economic stability of the country was poor so to face calculated risk the company can have provide stock dividend.

2008:
That time the world economy suffered by recession and our country is affected by it also. At the time of recession most of the company try to protect the liquidity because to face initial situation so we assume that the company not pay cash dividend rather than stock dividend by 22%.

2009:
In 2009 our country escape from recession so company had lot of investment opportunities so we assume that company provide stock dividend rather than cash dividend.

2010:
The income of the company is more than 2009,but the company also provide stock dividend from our financial report of 2010.There are lot of investment opportunity in2011that we identify so the company provide stock dividend. Finally, we can say that SJIBL follow the constant pay out ratio to the dividend payment because every year they paid same percentage of stock dividend each per share. From the above chart we can see 2007-2010 dividend per share(Total dividend/ No. of share) 20%, 22%, 25%, 30% at that time percentage of income (Total dividend/net income )57.86%, 60.43%, 63.99%, 49.58% also number of share increasing year by year.SJIBL established in 2001 and from that time they did not pay any cash dividend because they stand in growth stage for this reason they need huge money for future investment opportunities.

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Below Graphically Represent Percentage of Earning:

Figure: Percentage of Earning Dividend per Share:

Net Income:

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Figure: Net income(In Million) Number of Share:

Figure: Number of Share

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From our interpretation we have found that the company can have lot of opportunity to provide cash dividend. After increasing their net income year by year they provide stock dividend, We know as a investor you prefer cash dividend. SJBL could have been internal problem of the Shahajalal islami Bank. So at the time of dividend Payment Company follow constant payout ratio. We recommended that SJBL net income increasing year by year so we assume that company can pay the cash dividend if they want or the company can change the dividend policy or method of dividend payment.

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We might add here that we are the stockholder in a few companies of good standing in the commercial market. We had always been a little doubtful before investing in any stock or shares. Somehow, going by the sea changes that have been happening in the economic scenario, we have always opted for cash dividend instead of stock dividend. Cash dividend is one way of ensuring that you have ready cash on your hand at the end of the year based on the companys earnings. This money can be utilized for reinvesting, if need be. What if you opt for stock dividend, and suddenly the company does not perform well and reports sick, all your shares will nothing but worthless pieces of paper. You will have to again wait with bated breath and hope that the company is revived with a rehabilitation package in place.

However, a company which does not pay constant dividend does not necessarily mean that the company is doing badly. Certain companies, particularly growth companies usually try to pay little or close to no dividends as they believe that their own growth opportunities are better than that of other available opportunities to the investors.

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SL No.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Terms
SJIBL FI BB IBCF IBBL BIBM IBB BAB BAFEDA SWIFT AWCD MSD MSND MDS DBS MS MTDR NPI MBDS FO TR

Elaborations
Shahjalal Islami Bank Limited Financial Institution Bangladesh Bank Islamic Banks Consultative Forum Islami Bank Bangladesh Limited Bangladesh Institute of Bank Management Institute of Bankers Bangladesh Bangladesh Association of Banks Bangladesh Foreign Exchange Dealers' Association Society for Worldwide Inter-bank Financial Telecommunication Al-Wadiah Current Deposit Mudaraba Savings Deposit Mudaraba Short Notice Deposit Monthly Deposit Scheme Double Benefit Scheme Millionaire Scheme Mudaraba Term Deposit Scheme Non Performing Investment Multiple Benefit Deposit Scheme Financial Obligation Trust Receipt

22 23 24 25 26 27 28 29 30 31

HPSM HDIS MIS L/C CIB RM IRM RU IDBP HIS

Hire Purchase under Shirkatul Meel Household Durable Investment Scheme Monthly Income Scheme Letter of Credit Credit Information Bureau Relationship Manager Investment Risk Management Recovery Unit Inland Documentary Bill Purchased Housing Investment Scheme

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Annual reports (2006-2010) of Shahjalal Islami Bank Ltd. Credit Manual of Shahjalal Islami bank Ltd. Management guideline of Bangladesh Bank

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http://www.shahjalal Islami Bank.com.bd/ http://banglapedia.search.com.bd/HT/E_0080.htm http://www.google.com.bd/ http://www.exim.com.bd/ http://www.exim.com.bd/Financial_Highlights/Annual_Report.htm www.yahoo.com www.report.com BOOK Reference 1: A HANDBOOK OF BANKS ADVANCES BY L.R. Chowdhury Edition: 1983

BOOK Reference 2: PRINCIPALS OF MANAGERIAL FINANCE BY Lawrence J. Gitman Edition: 2001

BOOK Reference 3: DISCOVERY OF FINANCE

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