1.0.

Introduction
Banks among other financial institutions are contributing most to the economic development
of a country. Commercial banks are a profit-making institution that collects the deposits from
the surplus unit of the society and then lend the deposits collected to the deficit unit of the
society. So the people of the society and the government are very much dependent on the
commercial banks as the financial intermediary. As banks are profit-earning concern they
collect deposit at the lowest possible cost and provide loans and advances at higher. The
differences between two are the profit for them.

1.1. Background of the Report

For in completion of four years BBA Program, internship is mandatory for a student. It gives
an opportunity to the student to be acquainted with the real life situation. Bank deals with
diversified work. Here, many things have to learn quickly which later helps to build career
decision. So, I have selected Islami Bank Bangladesh Limited for internship. The topic of my
study is Different Modes of Investment of Islami Bank Bangladesh Limited.

1.2 Justification and significance of the study

The economy of our country has a group absent to be desired and there are lots of scopes for
massive improvement. In an economy like this, banking sector can play a vital role to
improve the overall social-economic condition of the country. As our country is an
underdeveloped country, the banks can play the role of an intermediary and can mobilize the
excess fund of surplus sectors to provide necessary finance, to those sectors, which are
needed to promote for the sound development of the economy. The banks provide different
types of product and services to the customers like, general banking, foreign exchange and
investment department. This report will be helpful to understand the different modes of
investment of Islami Bank Bangladesh Limited compare to some other local islamic banks
and as well their strengths and weaknesses.

1.3 Statement of the problem

Banks among other financial institutions are contributing most in the economic development
of a country. Banking sector is, therefore, called the lifeblood of the economy of a nation.
Islami Bank Bangladesh Limited is playing an important role in the economic development of
the country through earning profit and providing services to the people in terms of investment
facility. Islami Bank Bangladesh Limited is carrying its business without the adoption of

interest as Islam has prohibited it. This study is an attempt to be familiar with the mechanisms
by which the investment operations of IBBL are being discharged.

1.4 Scope of the study

Though there are several Islamic Banks in the country, Islamic Bank Bangladesh Limited is
the focus of the study. In particular the investment of Islami Bank Bangladesh Limited is the
subject of research and analysis. This report gives a narrative overview of Islami Bank
Bangladesh Limited. This report also elaborates the different modes of investment.

1.5 Objectives of the study

1.5.1. Broad objectives: The broad objective of this study is to know the different modes of
investment.
1.5.2 Specific objectives
To achieve the main objective the present study covers the following specific points:
o

To observe the recent performance of Islamic Bank and realize the theoretical knowledge
through handling the day-to-day activities of IBBL for a specified time.

To highlight the Modes of investment as well as their practical uses.

To know about the process of recovery of the investment facility by the bank;

o To identify the growth and trend of investment;

1.6. Methodology
o

Nature of the research: The nature of research is exploratory.

Sample size: The sample size of my survey is 23 officers and 7 customers of Islami Bank
Bangladesh Limited.

Sample Design: Every research work requires design of samples. The procedures of
designing samples is non- probability convenience sampling.

Selection of the Study year and duration: To measure and evaluate the modes of
investment of Islami bank Bangladesh Ltd. To analyze the financial performance of
Islami Bank Bangladesh Limited have selected year 2003 to 2007. The present study was
carried out during the period from 01.07.08 to 01.09.08.

Types and sources of Data: Data can be collected by two ways:

Primary data

Secondary Data

Collection of Primary Data

Face to face conversation with the bank officer and staffs.

File study of different section.

Practical experiences gained during performing duties in different desks and department
of the Mirpur Branch office of Islami Bank Bangladesh Limited.

Interview.

Collection of Secondary Data

Annual Reports of IBBL from 2003 to 2007, various books, journals, manuals, and also
from the web sites.

Branch managers Conference ranging 2004 to 2006

Thesis on Islamic Banking.

Asset and liability statement of the branch and profit and loss account of the branch.

Data Analysis techniques: All the collected data in some table regarding different
modes, sectors and areas and I have used some statistical tools to analyze the
data.

Statistical tools: The following descriptive statistical tools have been used in the
study that are: tables, bar chart, pie chart, percentage, ratio analysis.

1.7. Limitations of the study

No work is free from any drawbacks. For preparing the report a lot of problems are faced by
the researcher. These are as follows:
o

Due to limited time it was not possible to prepare the report properly.

Undisciplined record of file of previous years of the branches.

Branches have no system for recording and searching necessary information.

Lacking of needed information, which is the main obstacle we have faced to prepare this
report.

Difficult to collect the needed information.

Lacking of practical experience.

2.1. Background of the company

Bangladesh is one of the largest Muslim countries in the world. The people of this country are
deeply committed to Islamic way of life as enshrined in the Holy Qur'an and the Sunnah.
Naturally, it remains a deep cry in their hearts to fashion and design their economic lives in
accordance with the precepts of Islam. The establishment of Islami Bank Bangladesh Limited
on March 13, 1983, is the true reflection of this inner urge of its people, which started
functioning with effect from March 30, 1983. This Bank is the first of its kind in Southeast
Asia. It is committed to conduct all banking and investment activities on the basis of interestfree profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a
new silver lining of hope towards materializing a long cherished dream of the people of
Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With
the active co-operation and participation of Islamic Development Bank (IDB) and some other
Islamic banks, financial institutions, government bodies and eminent personalities of the
Middle East and the Gulf countries, Islami Bank Bangladesh Limited has by now earned the
unique position of a leading private commercial bank in Bangladesh.

2.2. History and Growth of Islamic Banking

The Islamic Banking movement as we know it to day is recent phenomenon. The history of
modern Islamic Banking dates to the 1950s when a small private Islamic Bank appeared in
Pakistan but subsequently wound up. In the decade of 1950s the concept of Islamic Banking
was a matter of thinking & research and the result was preserved in the papers of different
scholars of the Muslim World. The 1960s was the decade for practical experiment and 1970s,
1980s, and 1990s, were the decade for establishment. The current millennium is expected to
be the decade of success and expansion at a faster rate. During 1960s it was observed that the
Muslims of Malaysia used to save primarily for performing Hajj and such saving were mostly
kept idle in pillows, under mattresses and avoiding interest, which was unproductive and
damaging for the growth & development of the economy. For utilizing these savings the
Malaysia Govt. in 1962 established and interest free financial institution knows as Pilgrims
Savings Corporation. Though it was not a full fledged bank, even we can say that it was the
beginning of an institution free of interest, which is unconditionally prohibited in Islam.
Mitgham Bank is the pincer of modern Islamic Banking, which was established by Dr. Ahmed
El- Nagger in 1963 by his personal endeavor at Mitgharms in Egypt with a view to bringing
some development in socioeconomic field in the process of Islam. The bank conducted its
banking operation successfully in the light of Islamic Shariah for about five Years. Now the
Islamic banking of the world has treated the short Life of Mitghamr Bank as the first model of

Islamic Banking. A survey repot by the National Institute for Management Development,
Cario, Egypt, shows that the Mitghams Bank was tremendously successful in achieving it
objective and the tremendous success of the Bank was the cause of its closure by the vested
interest in 1967.
Islamic Development Bank was established in 1975 and during the following three years
7(Seven) Islamic Banks & financial institutions namely (i) Dubai Islamic Bank, (ii) Kuwait
Finance House, (iii) Faisal Islamic Bank, Sudan, (iv) Jordan Islamic Bank for Finance and
Investment, (v) Islamic Banking System International holding S.A, Luxembourg, (vi) Faisal
Islamic Bank of Egypt, (vii) Islamic Investment Co. Ltd., Sarjah was established.
In 1978 Islamic Foreign Ministers Conference in their Dakar (Senegal) met recommended to
the members of OIC to make systematic efforts to establish Islamic Banks gradually and
during the next three years of their recommendation 20 Islami Banks and financial institutions
came into existence.
Source: Lecture Sheet supplied by Asheque Ahmed Jabel, Vice President & Feculty Member,
IBTRA, Dkaha.

2.3. IBBL at a glance

Table: 1
13th March 1983

Date of Incorporation
Inauguration

of

1st

Branch 30th March 1983

(Local office, Dhaka)

12th August 1983

Formal Inauguration
Share of Capital
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.179,379.45 million

Investments (including

Investment

in Tk.191,728.64 million

Shares)
Foreign Exchange Business

Tk.186,586.00 million

Zones

6 (Six)

Number of Branches

196

Number of Shareholders

26,993 (30.04.2008)

Manpower

8,578 (30.04.2008)

(01.08.2008)

2.4. Islami Bank Mirpur Branch at a Glance

Table-2
Name

Islami Bank Bangladesh

Ltd

Mirpur

Branch.

Year of establishment

27.09.1989

Inaugurating manager

Mr. Md. Mashiur Rahman

Present Manager

Mohammod Ullah (VP)

Executive and Employees

66 (on August 2008)

No of client in Deposit

55566 (As on August

2008)

NO. Of client in investment

1709 (As on August 2008)

2.5. Vision
o

Investment is made through different modes as per Islamic Shari,ah

Investment income of the Bank is shared with the Mudaraba depositors according to an
agreed upon ratio ensuring a reasonable fair rate of return on their deposits.

Aims to introduce a welfare- oriented system and also to establish equity and justice in
the field of economic organization.

o Plays a vital role in human resources development and employment generations

particularly among the educated unemployed youths.
o

Portfolio of investment and Investment Policy have been specially tailored to achieve
balanced growth and equitable development through diversified investment operations
particularly in the priority sectors and in the less developed areas of the national
economy.

2.6. Mission
To establish Islamic Banking through the introduction of welfare oriented banking system and
also ensure equity and justice in the field of all economic activities, achieve balanced growth
and equitable development through diversified investment operations particularly in the
priority sectors and less developed areas of the country.

2.7. Goal

To conduct interest-free banking.

To investment through different modes permitted under Islamic Shariah.

To accept deposits on profit-loss sharing bans.

To establish a welfare-oriented banking system.

To extend co-operation to the poor, the help Len and the low-income group for their
economic enlistment.

To contribute towards balanced growth and development of the country through

investment operations particularly in the less developed areas.

2.8. Special Features of Islamic Bank

o

Islami Bank is not to earn profit, but to do good and welfare to the people. Islam upholds
the concept that money, income and property belong to Allah and this wealth is to be used
for the good of the society.

Islami banks operate on Islamic principles of profit and loss sharing, strictly avoiding
interest, which is the root of all exploitation and is responsible for large-scale inflation
and unemployment.

An Islamic bank is committed to do away with disparity and establishes justice in the
economy, trade, commerce and industry; build socio-economic infrastructure and create
employment opportunities.

IBBL Deals with goods not with money.

Islami Bank is production and value oriented rather than security oriented.

IBBL Extends Quard-e- Hasana (benevolent loan on good faith) facility and maintains
sadeqha tahbil.

2.9. Organogram

Table-3

Chairman

Vice-Chairman

Directors

Executive
president

Secretary

Executives
committee

Audit committee

2.10. Management pattern of IBBL

Islamic Bank (Bangladesh) Limited is being managed by a 24 member Board of Directors. 8
are foreign and 16 are local. A 10 member Executive Committee is formed by the Boar of
Directors for efficient and smooth operation of the Bank. Besides, a Management Committee
looks after the affairs of the Bank. Besides, a Management Committee looks after the affairs
of the Bank.

2.11. Functions
o

The functions of Islami Banks Bangladesh Limited are as under:

To maintain all types of deposits accounts

To make investment

To handle foreign exchange business

To extend other banking services

To conduct social welfare activities through Islami Bank Foundation.

10

2.12. Financial highlights

(Amount in Million Taka)

Table: 4

Particulars
Authorized Capital
Paid-up Capital
Reserves Fund
Total Equity
Total Investments (Including Inv in
Share) Gross
Import Business
Export Business
Remittance
Total Foreign Exchange Business
Total Income
Total Expenditure
Net Profit before Tax
Total Investments (Including Inv in
Share) Gross
Total Assets (including Contra)
Total Assets (Excluding Contra)
Fixed Assets
No. of deposit account holder
No. of investment account holder
Number of Shareholders
Number of Employees
Number of Branches
Book value per Share ( Taka)
Earning per Share (Taka)
Market Value per Share
(Highest)
Capital Adequacy Ratio

2003

2004

2005

2006

2007

3,000.00
1,920.00
3,280.37
5,266.47

3,000.00
2,304.00
4,329.92
6,691.12

5,000.00
2,764.80
5,450.94
8,331.14

5,000.00
3,456.00
6,551.23
10,435.96

5,000.00
3,801.60
8,039.74
15,765.94

62,755.90

83,893.63

102,145

123,959.00 174,365.55

46,237.00
21,738.00
16,668.00
84,643.00
6,710.44
5,908.42

59,804.00
29,151.00
23,669.00
112,624.00
8,262.73
6,419.74

74,525.00
36,169.00
36,948.00
147,642.00
10,586.78
8,424.36

96,870.00
51,133.00
53,819.00
201,822.00
14,038.30
11,129.63

137,086.00
66,690.00
84,143.00
287,919.00
17,699.51
13,918.70

802.02

1,842.99

2,162.42

2,908.67

3,780.82

62,755.90

83,893.63

102,145

123,959.00 174,365.55

98,046.85
81,704.75
2,036.66
1,994,266
223,954
14,196

125,776.94
102,149.28
2,552.70
2,291,269
264,863
15,892

150,959.66
122,880.35
3,067.99
2,705,180
297,943
17,201

188,115.27
150,252.82
3,724.69
3,207,131
421,751
20,960

250,634.48
191,362.35
3,987.23
3,802,709
508,758
26,488

5,306

6,202

7,459

8,426

151
2,904
518.59

169
3,013
487.57

176
3,020
368.42

186
4,147
539.00

4,548.00

5,110.00

5,580.00

4,749.00

6,986.00

9.43%

9.21%

9.44%

9.43%

11.18%

4,673
141
2,743
195.52
(Taka)

2.13. Prospects of Islamic Banking in Bangladesh:

o

IBBL is the pioneer institution for introduction of Islamic Banking in Bangladesh.

The success of IBBL has imbibed other sponsors at home and abroad to establish Islamic
Banking in Bangladesh. Four national, one international Islamic banks have since been
established in the country. A private sector traditional bank has also established two full-

11

fledged Islamic Banking branches. Several other existing and proposed traditional banks
have also expressed their intention to introduce Islamic Banking.
o

IBBL has successfully mobilized deposits from section of people who hither-to-before did
not make any deposit with interest-based banks.

The Islamic Banking products, which are offered by IBBL through its 118 branches,
located at important centers all over the country and spontaneous acceptance of those
products by the people proves the superiority of Islamic banking.

IBBLs market share of deposit investment and ancillary business is steadily increasing.

IBBL though still a tiny bank, handles more than 10% of countrys export and import
trade.

Among the contemporary commercial banks IBBLs position is first in respect of

mobilization of deposit, deployment of fund and earning profit.

Investment in industrial sector occupies nearly 33% of IBBLs investment portfolio. This
is a unique example of industrial finance by a commercial Bank.

More than 115000 workers are employed in the industrial projects financed by IBBL.
IBBL has thus made significant contribution to solving unemployment problem of the
country.

Dhaka the capital of Bangladesh being a Mega city has acute transport problem. IBBL has
joined hands with an enterprising group to introduce afleet of premium bus service, which
has attracted the attention of all section of the people and mitigated transportation
problem of the city to some extent.

3.1. Definition of Islamic Banking

The concept of Islamic Banking represents a radical departure from traditional banking.
Islamic banking has to derive its inspiration from the religious edicts of Islam and has to
mould its operations within the framework of the teaching of Islam. The most distinctive
feature of Islamic Banking is its total abstinence from interest in observance of Islamic

12

Banking and prohibition of all interest based transaction. The Islamic banks organize their
operations on the basis of profit/ loss sharing and other modes which are permitted in Islam.
Islamic Banking Act 1983 of Malaysia (Act No. 4.276) has defined as follows:
Islamic Banking means any company, which carries on Islamic Banking business and holds
a valid license and all the offices and branches in Malaysia of such bank shall be deemed to
be one bank Islamic Banking Business means banking business whose aims and operations do
not involve any element which is not approved by the religion Islam.
Islamic Bank is, therefore, a private financial and social institution whose objectives and
operations as well as principles and practices must conform to the principles of Islamic Sariah
and which must avoid the use of interest in any of its operations.
Source:
Haider Ali Miah (1997). A Hand Book of Islamic Banking & Foreign Exchange Operation.
Sahera Haider Publication, Dhaka. p 10

3.2. Principles of Islamic Banking

Islamic Banks have to operate under strict religious guidelines which are based on different
principles than those of Conventional Banks. These principles are----o

Prohibition of interest in all forms of transactions.

Undertaking business and trade activities on the basis fair and legitimate (halal) profits.
Payment of the poor due (zakat) from their operations.

Co-operation in the development of society by investing only in business and trade which
are not prohibited by Islam.

3.3. Definition of investment

Most of the people of our country think that the terms loan and investment are the same. But
they are not synonymous. There are some differences between them. Loan means taking
something especially goods (e.g. cash, rice salt etc) for a specific period of time with a
condition of returning the same. This kind of loan is also called Quard e- Hasana. If case of
loan there is no transformation of goods into money and vice-versa. The lender provides loan
for the purpose of interest only. S/he does not bear any loss sustained by the loanee. S/he has
not to spend any time or effort. In case of investment, the invested money or goods returns to
the investor with profit or loss through conversion. The investor is involved in the
transformation of goods or money. As a consequence s/he has to bear the risk of profit or loss.
S/he has to make effort to earn profit.

13

Loans may be provided for any sectors. But investment is made to productive & business
sectors. The lender gets a pre fixed rate of interest on loans while the investor expects profit
against investment. But sometimes s/he has to sustain losses. Investment in the purchase of
anything with a view to earn profit. In other words, investment is the transformation of goods
into money or money into goods with business risk.
o

The lexicon meaning of investment is the sum of money that is invested.

o According to Dictionary of Banking and Finance:

Investment is the use of money for the purpose of making more to gain income or increase
capital, or both.
o

According to E.W.Read

The term investment is used to include those both public and private for relatively long
period of time objective of earning income.
In the study investment means deployment of funds by an Islami Bank to all possible Shariah
approved income generating revenues. Shariah mean Islamic jurisprudence. Islamic Bank
cannot invest in interest based business or securities, which are the main criteria or present
financing avenues.

3.4. Classification of investment

o

One the Basis of the Use

Commercial: Investment for purchase & sale of goods for trading on commercial basis.

o Industrial: Investment for purchase of machineries, equipments, raw materials, etc. for
an industrial undertaking.

o Agricultural: Investment for purchase of agricultural equipments, seeds, fertilizer etc.

o Import: Investment for import of goods from abroad. Islamic Bank provides investment
in the name of MPI or Murabaha Post Import.

o Export: Investment for export of goods to abroad. Islamic Bank usually makes
investment in the name of Musharaka Pre-shipment Finance.

o Consumption: Investment for purchase of consumption goods under Murabaha or BaiMuajjal Mode.

o Miscellaneous Scheme: Investment under any specific scheme, such as Doctors Scheme,
Transport Scheme etc.
o

On the Basis of Term

o Short Term: Investment up-to 12 months.

o Medium Term: Investment for the period of more than 1 year but less than 5 Years.

14

o Long-Term: Investment for more than 5 years.

o

On the Basis of Security

o Unsecured: Investment based on the investment clients personal guarantee only

o

Secured: Investment based on the primary and/o collateral security having equal market
value of investment abreast with personal guarantee.

3.5. Importance of investment

Like other banks Islami Banks makes investment from the deposited money and pays a part of
profit there on to the deposit holders and retains the remaining portion as its own profit. It the
bank fails to invest, it along with the deposit holders will be deprived of the profit. In such a
situation, if the deposit holders withdraw their deposited money, the bank will lose its
investment capacity and there by its existence will be vanished. Investment is, therefore, the
lifeblood of a bank. By making more investment in profitable areas a bank can progress
rapidly. A bank usually makes investment 70 to 75 percent from its deposited money. Out of
total deposits the bank is bound to keep 4 percent as cash and 16 percent as security in
Bangladesh Bank. The rest amount is kept for regular transactions.

3.6. Objectives and principles of investment of IBBL

The objectives and principles of investment operations of the Islamic Bank Bangladesh
Limited are--o

To invest fund strictly in accordance with the principles of Islamic Shariah.

To diversify its investment portfolio by size, by sectors (public & private), by economic
purpose, by securities and by geographical area including industrial, commercial and
agricultural.

To ensure mutual benefit both for the Bank and the investment-client by professional
appraisal of investment proposal, judicious sanction of investment, close and constant
supervision and monitoring thereof.

To shun even highly profitable investment in fields forbidden under Islamic Shariah and
are harmful for the society.

3.7. Features of investment

15

The investment of Islamic Bank is quite different from the loan of conventional interest based
banks. The Salient features of investment under Islamic Banking System are mentioned
below.
o

Investment should be sanctioned on profit or loss sharing basis. Interest should be

completely avoided;

In case of proving investment facility the Bank must follow the rules and regulations of
Islamic Shariah. For example, confirmation of trading, written transaction with evidence,
etc.

Investment is to be made on the basis of mutual agreement;

3.8. Characteristics of investment in islamic banking system

The investment policy in Islamic Banking if fully separate from Traditional Banking System.
Some characteristics of investment in Islamic Banking are pointed as below--o

Investment will based on agreed profit and interest will be fully avoided.

Roguery, cheating and forgery must be avoided

Investment is operated by the security of capital possibility of profit.

Investment planning is done considering economic development and creating

employment opportunities.

3.9. Investment Portfolio

The special feature of the Investment Policy of the bank is to invest on the basis of profitloss sharing system in accordance with the tenets and principles of Islamic Shariah.
Pursuant to the Investment Policy adopted by the Bank, a 5- year Perspective Investment
Plan has been drawn up from the year 2003 to 2007 and put into implementation. The plan
aims at diversification of the investment port-folio by:
According to the plan envisages composition of the investment port-folio with
Agriculture
Fishing and factory
Industrial term investment
Industrial working capital
Construction and real estate
Transport and communication
Electricity, gas, water & sanitary services
Trade
Poultry and dairy
Rural Development Scheme
Micro-industries investment Scheme
Household Durables Scheme
Small Business Investment Scheme
Investment Scheme for Doctors

3.00%
3.00%
18.00%
15.00%
10.00%
5.00%
0.50%
40.00%
0.50%
2.00%
0.50%
1.50%
1.50%
0.50%

16

Other special schemes

Miscellaneous purposes

1.00%
1.00%

3.10. Steps of Investment Operations

In case of investment operation, Bank management follows some steps absolutely to avoid the
forgery. The steps are as follows--3.10.1. Proposal Preparation
The investment officer prepares the proposal for a relevant investment-client and sends it to
the authorized officer or executive to permit it. In this case, he has to take some documents
from the relevant investment-client and. He collects various necessary information about the
client. Most of the documents are as follows--o

Appraisal Report prepared by Bank, F-167 B.

Application of Client in his pad.

Application of Client in Banks form, prepared by client, F-167 A.

Audit Reports (last three years) of the related enterprise by Audit Firm including the
following information-----

Balance Sheet.

Schedule of Fixed Assets.

Schedule of Proprietors Capital & Fund A/C.

Profit & Loss A/C.

Trading A/C

Proprietors curriculum vitae with business experience in his pad.

Schedule of movable properties of clients, prepared in his pad.

Schedule of Fixed Assets of the client in his pad, prepared by the client.

Schedule of Sundry Debtors in his pad, prepared by the client.

Schedule of Sundry Creditors in his pad, prepared by the client.

Statistical schedule of Income & Expenditure of last three years the related enterprise in
his pad, prepared by the client.

Schedule of all the enterprises which are related with the relative enterprise for business
purpose, prepared by client in his pad.

17

Schedule of owners Sales Center, prepared by client in his pad.

Schedule of warehouses and its capacity.

Schedule of associate enterprises, prepared by client in his pad.

VAT payment certificate.

Stock Report of Goods including goods securities A/C, prepared by client in his pad,
authorized by inspecting officers and also Investment Officer, 2 nd Officer Manager.

Statements of various accounts of client and its partner concerns, prepared by Bank.

Clients L/C from branch manager of the Bank.

All the above documents are signed by the client, attested by the gazette officer (if any). After
receiving these documents from the client the investment officer prepares the proposal and
sends to the authorized officer or executive for sanctioning the investment.
3.10.2. Sanctioning:
In this step the executive or officer who is responsible for sanctioning the investment, permit
to invest obeying the organizations rules & regulations and considering the documentations
of the relevant client. And he sends the sanctioning letter to the relevant investment officer for
disbursement.
3.10.3. Disbursement:
In this step the investment officer of the relevant branch of bank disburses the permitted
investment. In this case IBBL does not give all the amount of investment; but gives it partially
for banks controlling opportunities. For this purpose the permitted investment is divided into
some parts and the parts are given time to time in step by step by considering the paying
conduct of the client. Here is the basic distinction between IBBL and Traditional Banks.
In case of disbursement, the following charge documents are taken from the client for every
part of investment of the total investment--o

Application of client in his own relevant enterprises pad.

Quotation of goods must be verified including market price from supplier, accepted and
signed by the authorized officer(s) of the Bank.

Bill from supplier (after sale).

Pre-Audit Memo on Investment,F-215.

Form of goods sales,F-191.

18

Demand Promissory Note, CF-1.

Balance Confirmation Letter, CF-16.

Letter of Disbursement, CF-6.

Letter of Guarantee, CF-14.

All the above charge documents are signed by the client, the Investment Officer, 2nd
Officer and Manager.

3.10.4. Recovery:
The Bank invests its fund to the Clients as a rule the Clients generally pays the respective
amount to the Bank timely. If the Client fails to pay the amount, the bank sends a notice three
times to pay to the Bank. After the declaration of final notice, the Bank is bound to go to the
legal action to recover its fund. In this case, the legal charge and fines must be brought by the
Client.

3.11. Investment Mechanism Analysis:

Allah has permitted Bai (Buying and selling i.e. trading) & prohibited Riba. Islamic Bank
Bangladesh Limited in all its transactions restricts Riba and conducts its investment portfolio
under the following mechanism---3.11.1. Bai-Mechanism
o

Bai-Murabaha.

Bai-Muajjal.

Bai-Salam.

Istishnaa.

3.11.2 Ijarah Mechanism

o

Hire Purchase/ Ijarah

Hire Purchase under Shirkatul Melk

3.11.3. Share Mechanism

o

Mudaraba

Musharaka

19

3.12 Operational procedures of investment mechanism in IBBL:

3.12.1. Bai-Mechanism

O Bai-Murabaha
The terms "Bai-Murabaha" have been derived from Arabic words Bai and Ribhun. The word
'Bai' means purchase and sale and the word Ribhun means an agreed upon profit.
Bai-Murabaha may be defined as a contract between a Buyer and a Seller under which the
Seller sells certain specific goods permissible under Islamic Shariah and the Law of the land
to the Buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump
sum or by installments. The profit marked-up may be fixed in lump sum or in percentage of
the cost price of the goods.
o

Types of Murabaha

In respect of dealing parties Bai-Murabaha may be of two types (IBBL 1986, pp.1-2):
- Ordinary Bai-Murabaha, and
- Bai-Murabaha order on and Promise.
o

Ordinary Bai-Murabaha is a direct transaction between a buyer and a seller. Here, the
seller is an ordinary trader who purchases goods from the market in the hope of selling
these goods to another party for a profit. In this case, the seller undertakes the entire risk
of his capital investment in the goods purchased. Whether or not he earns a profit
depends on his ability to find a buyer for the merchandise he has acquired.

Bai-Murabaha order on and Promise involves three parties - the buyer, the seller and
the bank. Under this arrangement, the bank acts as an intermediary trader between the
buyer and the seller. In other words, upon receipt of an order and agreement to purchase
a certain product from the buyer, the bank will purchase the product from the seller to
fulfill the order.

Important Features of Murabaha:

There are some important features of Bai-Murabaha as given below:
o

A client can make an offer to purchase particular goods from the bank for a
specified agreed upon price, including the cost of the goods plus a profit.

20

A client can make the promise to purchase from the bank, that is, he is either to
satisfy the promise or to indemnify any losses incurred from the breaking the
promise without excuse.

Documentation of the debt resulting from Bai-Murabaha by a Guarantor, or a

mortgage, or both like any other debt is permissible. Mortgage/Guarantee/Cash
Security may be obtained prior to the signing of the Agreement or at the time of
signing the Agreement.

Upon acquiring the goods, the bank assumes the risk of ownership. In other
words, the bank is responsible for damages, defects, and /or spoilage to the
merchandise until such time that it is actually delivered to the buyer.

The bank sells the goods at a price above the cost to obtain a profit. The sale
price that is charged by the bank is agreed upon in the Bai-Murabaha. The profit
can be stated in terms of a flat dollar amount or on a percentage of the purchase
price. If a percentage is used, the percentage shall never be expressed in terms
of time, in order to avoid confusion that the price is a form of interest (Riba),
which is not allowed.

Steps of Bai-Murabaha: There are certain steps to accomplish a deal of Bai-Murabaha as

shown below:
First Step: The client submits a proposal regarding his requirements of the bank. The client
sends a proposal with the specifications of the commodity to be acquired from the bank. The
proposal also indicates details regarding the date, time and place of delivery as well as price
and form of payment information. The bank responds by sending a counter proposal either
accepting the buyers price or stipulating a different price.
Second Step: The client promises to buy the commodity from the bank on a Bai-Murabaha
basis, for the stipulated price. The bank accepts the order and establishes the terms and
conditions of the transaction.
Third Step: The bank informs the client (ultimate buyer) of its approval of the agreement to
purchase. The bank may pay for the goods immediately or in accordance with the
agreement.
The seller expresses its approval to the sale and sends the invoice(s).
Fourth Step: The two parties (the bank and the client) sign the Bai-Murabaha Sale contract
according to the agreement to purchase.
Fifth Step: The Bank authorizes the client or its nominee to receive the commodity

21

The seller sends the commodity to the place of delivery agreed upon. The client undertakes
the receipt of the commodity in its capacity as legal representative and notifies the bank of
the execution of the proxy.
Rules of Bai-Murabaha
The Bai-Murabaha has some legal rules. These rules are mentioned below:
o

It is permissible for the client to offer to purchase a particular commodity,

deciding its specifications and committing itself to buy it on Murabaha for the
cost plus the agreed upon profit.

It is permissible that the mutual agreement shall contain various conditions

agreed upon by the two parties, especially with respect to the place of delivery,
the payment of a cash security to guarantee the implementation of the operation
and the method of payment.

It is permissible to stipulate the binding nature of the promise to purchase. Thus,

the agreement can only be satisfied by either fulfilling the promise to purchase
or by indemnifying the bank for any losses incurred if the promise to purchase is
not fulfilled.

It is permissible for the bank to authorize a second party including the buyer to
receive the commodity on its behalf. This authorization must be in a separate
contract, particularly if the buyer is going to receive the goods on behalf of the
bank. This is necessary to avoid any conflicts with the ensuing Murabaha sale.

The legal rules of Bai-Murabaha must be observed in drawing the contract of the
Murabaha sale connected with a promise to purchase. Particularly concerning
the issue of the transparency of the cost of the first purchase and the amount of
profit because discrepancies lead to disputes, which may invalidate the contract.

It is permissible to document the debt resulting from Bai-Murabaha by a

guarantor or a mortgage, like any other sale on credit. Further, it is permissible
that the mortgage accompanies the contract, because it is possible to take a
mortgage on actual debt as well as promised debt before it is realized. However,
the mortgage shall only be in effect if the debt is actually incurred.

Categorization

o Bai-Murabaha Commercial:

Investment

for

Purchase

and

sale

goods

to

individual/Firm/Compay/Society for Commercial purposes shall be termed as BaiMurabaha Commercial.

22

Bai-Murabaha Industrial: Investment to industrial undertakings in the Form of Land,

Buildings, Machineries, Equipments, Raw Material, etc. shall be termed as Bai-Murabaha
Industrial.

Bai-Murabaha Agriculture: Investment to agriculture sector for supply of seeds ,

fertilizer etc. shall be termed as Bai-Murabaha Agriculture.

Bai-Murabaha Import: Investment for Import of goods from abroad shall be termed as
Bai-Murabaha Import. Enter the Application in the Investment Proposal Received and
Disposal Register (B-53) and allot a Serial Number to it.

Bai-Muajjal

The terms "Bai" and "Muajjal" are derived from the Arabic words 'Bai' and Ajal. The word
'Bai' means purchase and sale and the word 'Ajal' means a fixed time or a fixed period. "BaiMuajjal" is a sale for which payment is made at a future fixed date or within a fixed period. In
short, it is a sale on credit.
The Bai-Muajjal may be defined as a contract between a buyer and a seller under which the
seller sells certain specific goods, permissible under Shariah and law of the country, to the
buyer at an agreed fixed price payable at a certain fixed future date in lump sum or in fixed
installments.
Important Features of Bai-Muajjal
There are some important features of Bai-Muajjal as given below:
o

It is permissible and in most cases, the client will approach the bank with an offer to
purchase a specific good through a Bai-Muajjal agreement.

It is permissible to make the promise binding upon the client to purchase the goods from
the bank. In other words, the client is required to either satisfy the promise or to
indemnify the bank for damages caused by breaking the promise without excuse.

o Stock and availability of goods is a basic condition for signing a Bai-Muajjal Agreement.
o

All goods purchased on behalf of a Bai-Muajjal agreement are the responsibility of the
bank until they are delivered to the client.

The bank must deliver the goods to the client at the time and place specified in the
contract.

Some Observations
This type of financing by the bank is considered to be more risky than the other Islamic
modes of investment previously discussed. Therefore, the application/proposal for Bai-

23

Muajjal investment must be reviewed very carefully to ensure the client can ultimately make
payment. . The following steps may be taken to ensure the Bai-Muajjal Investment is a good
proposition for the bank:
o

The bank may meet with the prospective client regarding his investment needs and
business experience prior to an application /proposal is submitted.

The bank may review the clients past performance and other financing arrangements he
may have had with the bank in the past.

The bank may review its current investment policy regarding this type of financing
arrangement to ensure the proposal meets bank guidelines.

Special points
The following points should receive attention before making any investment decision under
Bai-Muajjal.:
o

Whether the goods that the client intends to purchase are marketable and have steady
demand in the market.

Whether the price of the goods is subject to frequent and violent changes.

Whether the goods are perishable in short or in long-term duration.

Whether the quality and other specifications of the goods as desired by the client can be
ensured.

Whether the sale price of the goods is payable by the client at the specified future date in
lump sum or in Installments as per the agreement.

Bai-Salam:

Bai-Salam is a term used to define a sale in which the buyer makes advance payment, but the
delivery is delayed until some time in the future. Usually the seller is an individual or
business and the buyer is the bank.
Bai-Salam may be defined as a contract between a Buyer and Seller under which the Seller
sells in the certain commodity(ies)/ product(s) permissible under Islamic Shariah and the law
of the land to the Buyer at an agreed price payable on execution of the said contract and the
commodity(ies)/ product(s) is/ are delivered as per specification, size, quality, quantity at a
future time in a particular place.
In other words, Bai-Salam is a sale whereby the seller undertakes to supply some specific
commodity(ies)/ product(s) to the buyer at a future time in exchange of an advanced price
fully paid on the spot.

24

The Bai-Salam sales serve the interests of both parties.

The seller receives advance payment in exchange for the obligation to deliver the
commodity at some later date. He benefits from the Salam sale by locking in a price for
his commodity, thereby allowing him to cover his financial needs whether they are
personal expenses, family expenses or business expenses.

The purchaser benefits because he receives delivery of the commodity when it is needed
to fulfill some other agreement, without incurring storage costs. Second, a Bai-Salam
sale is usually less expensive than a cash sale. Finally a Bai-Salam agreement allows the
purchase to lock in a price, thus protecting him from price fluctuation.

Steps of Bai-Salam
o

Cash sale or Sale on Credit - The bank pays the agreed upon price at the time of the
contracts inception. The seller agrees to the delivery of the commodity some specified
date in the future.

Delivery and Receipt of the Commodity on the Specific due Date: There are several
options for delivery available to the bank

The bank may receive the commodity and resell it to another party for cash or
credit.

The bank may authorize the seller to find another buyer for the commodity.

The bank may direct the seller to deliver the commodity directly to a third party
with whom the bank has entered into another agreement.

The Sale Contract: The bank agrees to sell the commodity for cash or a deferred
price, which is higher than the Salam purchase price. The buyer agrees to
purchase and to pay the price according to the agreement.

Rules of Bai-Salam
o

It is a condition that the commodity known by both parties to the agreement.

Misunderstandings about the commodity may lead to disputes, which could void the
contract.

It is a condition that the commodity be deliverable on the due date. If there is uncertainty
about the ability to deliver the commodity at the due date, a Salam transaction is
impermissible.

It is permissible to draw a Salam sale contract for a total to be delivered increments on

different specified future dates.

25

It is a condition that the commodity is a liability debt. The seller is obliged to deliver the
commodity when it is due, according to the specifications stipulated in the contract,
whether or not his firm produces the commodity or obtained from other firms.

Salam sales are impermissible on existing commodities because damage and

deterioration cannot be assured before delivery on the due date.

Salam is impermissible on Land lots and real estates.

Application of Bai-Salam
o

Salam sales are frequently used to finance the agricultural industry. Banks advance cash
to farmers today for delivery of the crop during the harvest season. Thus banks provide
farmers with the capital necessary to finance the cost of producing a crop.

Salam sale are also used to finance commercial and industrial activities. Once again the
bank advances cash to businesses necessary to finance the cost of production, operations
and expenses in exchange for future delivery of the end product. In the meantime, the
bank is able to market the product to other customers at lucrative prices.

In addition, the Salam sale is used by banks to finance craftsmen and small producers, by
supplying them with the capital necessary to finance the inputs to production in
exchange for the future delivery of products at some future date.

Concluding Remark
The Bai Salam agreement is a combination of debt and trading. The capital provider has no
control over the management of capital provided. However the capital provider takes all of
the risk as profits cannot be determined until the commodity is delivered and the final sale
price is determined. In addition the capital provider incurs the opportunity cost associated
with the capital outlay. Like the other three previously discussed modes of finance there is no
certain rate of return. In addition the cost of capital is uncertain ex-ante. Also, there is no
correlation in the relationship of cost of capital and rate of return on capital.
Categorization:
o

Industrial (Including small and cottage)

Agricultural

Bai-Istisna

Definition of Istisna'a Sale

The Istisna'a sale is a contract in which the price is paid in advance at the time of the contract
and the object of sale is manufactured and delivered later. It is a contract with a manufacturer

26

to make something and it is a contract on a commodity on liability with the provision of

work. The Purchaser is called 'Mustasnia' contractor and the seller is called 'Sania' maker or
manufacturer and the thing is called 'Masnooa', manufactured, built, made. IBBL can utilize
Istisna'a in two ways.
o

It is permissible for the bank to buy a commodity on Istisna'a contract then sell it after
receipt for cash or deferred payment.

It is also permissible for the bank to enter into an Istisna'a contract in the capacity of
seller to those who demand a purchase of a particular commodity and then draw a
parallel Istisna'a contract in the capacity of a buyer with another party to manufacture the
commodity agreed upon in the first contract.

Steps of Istisna'a Sale

o

Istisna'a Sale Contract: The Buyer expresses his desire to buy a commodity and brings
a request to purchase the commodity to the bank. The method of payment, whether cash
or deferred is set forth in the agreement. The bank agrees to deliver the commodity to the
buyer at some agreed upon time in the future.

The Parallel Istisna'a Contract: In order that the bank is able to deliver said
commodity in the Istisnaa agreement, the bank enters into a parallel Istisnaa agreement
with a third party to either manufacture or otherwise deliver-said commodity. Obviously,
the bank stipulates a price that is lower than that agreed to in the original agreement and
requires delivery on or before the date stipulated in the original contract. The seller, in
the parallel agreement, agrees to manufacture the specific commodity and to deliver it on
the due date agreed upon.

Delivery and Receipt of the Commodity: The seller in the parallel Istisnaa agreement,
delivers the commodity to the bank on the agreed upon date. The bank, in turn, delivers
the product to the buyer of the original Istisnaa contract, in accordance with the original
agreement. In this way, all parties fulfill their obligations to the contract.

Application of Istisna'a Sale

The Istisna'a contract allows Islamic banks to finance the public needs and the vital interests
of the society to develop the Islamic economy in accordance with Islamic teachings. For
example Istisna'a contracts are used to finance high technology industries such as the
aviation, locomotive and ship building industries. In addition, this type of business
transaction is also used in the production of large machinery and equipment manufactured in
factories and workshops. Finally, the Istisna'a contract is also applied in the construction
industry such as apartment buildings, hospitals, schools, and universities to whatever that
makes the network for modern life. One final note, the Istisnaa contract is best used in those

27

transactions in which the product being purchased can easily be measured in terms of the
specified criteria of the contract.

3.12.2. Ijarah Mechanism

Hire Purchase/ Ijarah
The term Ijarah has been derived from the Arabic works Ajr and Ujrat which means
consideration, return, wages or rent. This is really the exchange value or consideration ,
return, wages rent of service of na Asset. Ijarah has been defined as a contracty between two
parties, the Hiree and Hirer where th Hirer enjoys or reaps a specific service of benefit
against a specified consideration or rent from the asset owned by the Hiree. It is a hire
agreement under which a certain asset is hired out by the Hiree to a Hirer against fixed rent or
rentals for a specified period.
Fuqaha (jurists) have defined Ijaraha as ownership of a benefit for consideration. This is also
known as lease or Hire contract. Al-Ijarah is an Arabic term. This has been derived from the
Arabic term Ujr or Ujrat which means consideration or return or wages.
According to Islamic Shariah (jurisprudence), Ijarah is a contract between two parties the
lessor and the lessee, where the lessees (Hirer or Mustajir) have the right to enjoy/reap a
specific benefit against a specified consideration/rent/wages from the lessor the owner
(Muajjir).
Elements of Ijarah
According the majority of Fuqaha, there are three general and six detailed elements of Ijarah:
General elements are:
o

The wording: This includes offer and acceptance

Contracting parties: This includes a lessor, the owner of the property, and a lessee, the
party that benefits from the use of the property.

o Subject matter of the contract: This includes the rent and the benefit.
Detailed elements are:

o The lessor (Mujjir) The individual or organization who leases out/rents out the
property or service is called the lessor.

28

o The lessee: (Mustajir) The individual or organization who hires/takes the lease of the
property or service against the consideration rent/wages/remuneration is called the lessee
(Mustajir).

o The Benefit (Maajur) The benefit that is leased/rented out is called the benefit
(Maajur).
o

The rent (Ajr or Ujrat) The consideration either in monetary terms or in quantity of
goods fixed to be paid against the benefit of the goods or service is called the rent or
Ujrat or Ajr.

Rules for Ijarah

o

It is condition that the subject (benefit/service) of the contract and the asset (object)
should be known comprehensively.

It is a condition that the assets to be leased must not be a fungible one (perishable or
consumable) which can not be used more that once, or in other words the asset(s) must
be a non-fungible one which can be utilized more than once, or the use/benefit/service of
which can be separated from the assets itself.

It is a condition that the subject (benefit/service) or the contract must actually and legally
be attainable/derivable. It is not permissible to lease something, the handing-over of the
possession of which is impossible. If the asset is a jointly owned property, any partner,
according to be majority of the jurists, may let his portion of the asset(s) to co-owner(s)
or the person(s) other than the co-owners. However, it is also permissible for a partner to
lease his share to the other partner(s),

The lease contract is permissible only when the assets and the benefit/service derived
from it are within the category of Halal or at least Mobah as per Islamic Shariah.

The lessor is under obligation to enable the lessee to the benefit from the assets by
putting the possession of the asset(s) at his disposal in useable condition at the
commencement of the lease period.

In a lease contract, the period of lease and the rental to be paid in terms of time, place or
distance should be clearly stated.

It is a condition that the rental falls due from the date of handing over the asset to lessee
and not from the date of contract or use of the assets.

It is permissible to advance, defer or install the rental in accordance with the Agreement.

29

It is permissible to review the lease period or the rental or the both, if the lessor and the
lessee mutually agree to do so.

Hire Purchase Shirkatul Melk:under

Under this mode Bank may supply implements/ equipment/goods on rental basis. The
ownership of the implements/equipment/goods will be with the Bank and the client jointly
and the portion of the client will remain to the Bank as mortgage until the closure of the
investment account, but the client will be authorized to possess the equipment for certain
period. The client, after completion of the installments, will be the owner of the implements/
equipment/goods.
Hire-Purchase under Shirkatul Melk has been developed through practice. Actually, it is a
synthesis of three contracts: (a) Shirkat; (b) Ijarah, and (c) Sale. These may be defined as
follows:
Definition of Shirkatul Melk: Shrkat means partnership. Shirkatul Melk means share in
ownership. When two or more persons supply equity, purchase an asset and own the same
jointly and share the benefit as per agreement and loss in proportion to their respective
equity, the contact is called Shirkatul Melk. In the case of Hire Purchase under Shirkatul
Melk, Islamic banks purchase assets to be leased out, jointly with client under equity
participation, own the same and share benefit jointly till the full ownership is transferred to
the client.

o The term Ijara has been defined as a contract between two parties, the lessor and the
lessee, where the lessee enjoys or reaps a specific service or benefit against a specified
consideration or rent from the asset owned by the lessor. It is a lease agreement under
which a certain asset is leased out by the lessor or to a lessee against specific rent or
rental for a fixed period.

o Definition of Sale contract: This is a contract between a buyer and a seller under which
the onwnership of certain goods or asset is transferred by the seller to the buyer against
agreed upon price paid by the buyer. In the case of Hire Purchase under Shirkatul Melk,
the lessor bank sells or transfers its title to the asset under a sale contract on payment of
sale price.

Stages of Hire Purchase under Shirkatul Melk

o

Hire Purchase under Shirkatul Melk Agreement has got three stages:

Purchase of asset under joint ownership of the lessor and the lessee.

Hire, and

30

Sale and transfer of ownership by the lessor to the other partner - lessee.

Important Features
o

In case of Hire Purchase under Shirkatul Melk transaction the asset/property involved is
jointly purchased by the lessor (bank) and the lessee (client) with specified equity
participation under a Shirkatul Melk contract in which the amount of equity and share in
ownership of the asset of each partner (lessor bank and lessee client) are clearly
mentioned. Under this agreement the lessor and the lessee become co-owners of the asset
under transaction in proportion to their respective equity.

In Hire Purchase under Shirkatul Melk Agreement the exact ownership of both the lessor
(bank) and lessee (client) must be recognized. However, if the partners wish and agree
the asset purchased may be registered in the name of any one of them or in the name of
any third party clearly mentioning the same in the Hire Purchase Shirkatul Melk
Agreement.

The share/part of the purchased asset owned by the lessor (bank) is put at the disposal
possession of the lessee (clients) keeping the ownership with him for a fixed period
under a hire agreement in which the amount of rent per unit of time and the benefit for
which rent to be paid along with all other agreed upon stipulations are clearly stated.
Under this agreement the lessee (client) becomes the owner of the benefit of the asset not
of the asset itself, in accordance with the specific provisions of the contract that entitles
the lessor (bank) the rentals.

In Hire Purchase under Shirkatul Melk Agreement, the Shirkatul Melk contract is
effected from the day the equit7y of both parties deposited and the asset is purchase and
continues up to the day on which the full title of lessor is transferred to the lessee.

The hire contract becomes effective from the day on which the lessor transfers the
possession of the leased asset in good order and usable condition, so that the lessee may
make use of the same as per provisions of the agreement.

Rules for hire purchase under shirkatul melk

Hire Purchase under Shirkatul Melk Mode is a combination of three contacts. All rules
governing the lease contract should be applicable in this mode also. Moreover, the rules for
Musharakah and sale contracts will also apply to this.
o

It is a condition that the subject (benefit/service) of the contract and the asset should be
known comprehensively.

31

It is a condition that the asset to be hired must be a fungible one which can not be used
more than once or in other words, the asset must be a non-fungible one which can be
utilized more than once or the use/benefit of which can be separated from the asset itself.

It is a condition that the subject (benefit/service) of the contract must actually and legally
be attainable/derivable.

It is a condition that the Hirer shall ensure that he will make use of the asset as per
provisions of the agreement or as per customs/norms/practice, if there is no expressed
provision.

The hire contract is permissible only when the asset and the benefit/service drived from it
is within the category of Halal or at least MOBAH as per Islamic Shariah.

The Hiree is under obligation to enable the hirer to the benefit from the asset by putting
the possession of the asset at his disposal in useable condition at the commencement of
the hire period.

It is a condition that the rental falls due from the date of handing-over of the asset to hirer
and not from the date of contract or use of the asset.

Categorization:
o

Hire Purchase under Shirkatul Melk Commercial

Investment on Hire Purchase under Shirkatul Melk mode to individual/Firm/Compay

/Society for Commercial purposes shall be termed as Hire Purchase under Shirkatul Melk
Commercial.

Hire Purchase under Shirkatul Melk Industrial

Hire Purchase under Shirkatul Melk investment to industrial undertakings in the Form of
Land, Buildings, Machineries, Equipments, Transport, etc. shall be termed as Hire
Purchase under Shirkatul Melk Industrial.

Hire Purchase under Shirkatul Melk Agriculture

Hire Purchase under Shirkatul Melk investment to agriculture sector in th form of

Agricultural Equipment, Machineries, Shallow Tube-Well, Deep Tube-Well, Tractor,
Trailers, Transport etc. shall be termed as Hire Purchase under Shirkatul Melk
Agriculture.

32

Hire Purchase under Shirkatul Melk Tranport

Hire Purchase under Shirkatul Melk investment in the form of Transport Bus, Truckm
Car, Taxi, Launch, Steamer, Cargo Vessel, Air Transport etc. shall be termed as Hire
Purchase under Shirkatul Melk Transport.

Hire Purchase under Shirkatul Melk Real Estate

Hire Purchase under Shirkatul Melk investment in the form of Land, Building, Market,
Apartments, for use/rental shall be termed as Hire Purchase under Shirkatul Melk Real Estate.
o

Hire Purchase under Shirkatul Melk .Shemes.

Hire Purchase under Shirkatul Melk investment in the form of asset for use/rental under any
scheme shall be termed as Hire Purchase under Shirkatul Melk
Scheme.
Enter the Application in the Investment Proposal Received and Disposal Register (B-53) and
allot a Serial Number to it.
Initiate action for Processing and Appraisal immediately.

3.12.3. Share Mechanism

Mudaraba:
It is a form of partnership where one party provides the funds while the other provides the
expertise and management. The first party is called the Sahib-Al-Maal and the latter is
referred to as the Mudarib. Any profit accrued are shared between the two parties on a preagreed basis, while capital loss is exclusively borne by the partner providing the capital.
Definition of Mudaraba
The term Mudaraba refers to a contract between two parties in which one party supplies
capital to the other party for the purpose of engaging in a business activity with the
understanding that any profits will be shared in a mutually agreed upon. Losses, on the other
hand, are the sole responsibility of the provider of the capital. Mudaraba is also known a
Qirad and Muqaradah (Shirazi 1990, p.31).
Mudaraba is a contract of those who have capital with those who have expertise, where the
first party provides capital and the other party provides the expertise with the purpose of
earning Halal (lawful) profit which will be shared in a mutually agreed upon proportion.
This type of business venture serves the interest of the capital owner and the Mudarib
(agent).

33

The capital owner may not have the ability or the experience to run a profitable business. On
the other hand, the agent (the Mudarib) may not have adequate capital to invest in a business
or project. Therefore, by entering into a contract of Mudaraba each party compliments one
another, allowing a business venture to be financed. The following are the steps of the
Mudaraba contract.
Steps of Mudaraba
The bank provides the capital as a capital owner. The Mudarib provides the effort and
expertise for the investment of capital in exchange for a share in profit that is agreed upon by
both parties.
o

The Results of Mudaraba: The two parties calculate the earnings and divide the profits
at the end of Mudaraba. This can be done periodically in accordance with the terms of
the agreement, subject to the legal rules that apply.

Payment of Mudaraba Capital: The bank recovers the Mudaraba capital it contributed
before dividing the profits between the two parties because the profit is considered
collateral for the capital.

Distribution of wealth resulting from Mudaraba: In the event a loss occurs, the
capital owner (the bank) is responsible for the entire loss. In the event of profits, they
are divided between the two parties in accordance with the agreement between them,
subject to the capital being recovered first.

Rules of Mudaraba
There are some legal rules that govern the business relationship Mudaraba which are as
follows.
o

It is a condition in Mudaraba that the capital be specific in nature. In other words, the
amount of capital must be known at the inception of the contract. The purpose of this
rule is to ensure that there is no uncertainty about the amount of capital and, thus, no
uncertainty about the division of profits.

It is a condition that the capital of the Mudaraba is delivered to the Mudarib. Some of the
jurists permit the capital owner to withhold capital and release it gradually according to
the needs of the Mudarib since the Mudaraba adjudges unrestricted disposal.

It is permissible for the capital owner to deliver capital to two Mudharibs in a single
contract. It is permissible for the capital owner to vary the in profit sharing agreement
between the two Mudharib based upon differences in the services provided

34

The disposal of capital by the Mudarib is restricted to reasons that are conducive to the
Mudaraba. The Mudarib must not lend or donate any of the Mudaraba capital. Further,
he is not allowed to enter into indebtedness nor enter into another partnership agreement
with the Mudaraba capital. However, these activities are permissible if the capital owner
consents and authorizes the agent to use his discretion.

The Mudarib is not required to contribute any capital to the Mudaraba contract except
when he is found to be negligent in the way the funds are handled. It is permissible to
take a surety or mortgage from the Mudarib to guarantee payment in the event of
negligence violation of the contract conditions. However, it is impermissible to take a
mortgage as a guarantee of capital or profit.

It is an investment-based form of financing. The provider of capital in Mudaraba has no

role in the management of the capital. However, he has to bear the risk of capital loss as
well as the opportunity cost of capital for the entire period of the contract. The rate of
return is quite uncertain and the cost of capital is also uncertain. Hence, there is a perfect
correlation between cost of capital and rare of return on capital.

Musharaka
An Islamic financial technique that adopts "equity sharing" as a means of financing projects.
Thus, it embraces different types of profit and loss sharing partnership. The partners
(entrepreneurs, bankers, etc.) share both capital and management of a project so that profits
will be distributed among them as per ratios, where loss is shared according to ratios of their
equity participation.
Meaning of Musharaka
The word Musharaka is derived from the Arabic word Sharikah meaning partnership. Islamic
jurists point out that the legality and permissibility of Musharaka is based on the injunctions
of the Qura'n, Sunnah, and Ijma (consensus) of the scholars. It may be noted that Islamic
banks are inclined to use various forms of Shariakt-al-Inan because of its built-in flexibility.
At an Islamic bank, a typical Musharaka transaction may be conducted in the following
manner.
One, two or more entrepreneurs approach an Islamic bank to request the financing required
for a project. The bank, along with other partners, provides the necessary capital for the
project. All partners, including the bank, have the right to participate in the project. They can
also waive this right. The profits are to be distributed according to an agreed ratio, which
need not be the same as the capital proportion. However, losses are shared in exactly the

35

same proportion in which the different partners have provided the finance for the project
(Hussain 1986, p.61).
Types of Musharaka
Musharaka may take two forms:
o

Permanent Musharaka

The contributions of the partners under this mode may be equal or unequal percentages of
capital for the purpose of establishing a new income-generating project or to participate in an
existing one. In this arrangement, each participant owns a permanent share in the capital
structure and receives his share of the profits accordingly. This type of a partnership is
intended to continue until the company is dissolved. However, one can exit the partnership
by selling his share of the capital to another investor.
The three steps to establishing Permanent Musharaka are discussed below.
o

One - Partnership in Capital:

The bank tenders part of the capital required in its capacity as a partner and authorizes the
customer/partner to manage the project. The Partner tenders part of the capital required for
the project and is entrusted with what he holds from the bank funds.
o

Two - Results of the Projects:

The intent of the project is growth. However, the project may be profitable or it may loss
money.
o

Three - The Distribution of wealth accrued from the Project:

In the event a loss is incurred, each partner bears part of the loss proportionate to his share in
capital. In the event the venture is profitable, earnings are divided between the two parties
(the bank and the partner) in accordance with the agreement.
o

Diminishing Musharaka

Diminishing or Digressive Musharaka is a special form of Musharaka, which ultimately

culminates in the ownership of the asset or the project by the client. It operates in the
following manner.
The Bank participates as a financial partner, in full or in part, in a project with a given
income forecast. An agreement is signed by the partner and the bank, which stipulates each
party's share of the profits. However, the agreement also provides payment of a portion of
the net income of the project as repayment of the principal financed by the bank. The partner

36

is entitled to keep the rest. In this way, the bank's share of the equity is progressively reduced
and the partner eventually becomes the full owner.
After the discharge, the bank withdraws it claims from the firm and it becomes the property
of the partner. The decreasing partnership arrangement is an Islamic bank innovation. It
differs from the permanent partnership only in continuity. It appears that there are four steps
of the diminishing partnership. Those are mentioned below.
o

Steps of Diminishing Musharaka

o Participation in Capital: The bank - tenders part of the capital required for the project
in its capacity as a participant and agrees with the customer/partner on a specific method
of gradually selling its share in capital back to the partner.

o The partner - tenders part of the capital required for the project and agrees to pay the
agreed upon amount in return for the ultimate full ownership of the business.

o Results of the Projects: The intent of the project is capital growth. The project may be
profitable or lose money.
o

The distribution of the Wealth accrued from the Projects: In the event of loss each
partner bears his share in the loss in his exact proportionate share of capital. In the event
that the project is successful, profits are distributed between the two partners (the bank
and the customer) in accordance with the agreement.

37

4.1SOWT Analysis:
4.1.1. Strength
o

Diversified ownership pattern.

Strong market share.

High market share.

Good investment portfolio.

Comfortable Liquidity position.

Improvement in automation.

Wide branch network.

Significant involvement in corporate social responsibility

4.1.2. Opportunities
o

Real time online banking.

Credit card in dual currency.

Creation of Islamic Money market product.

Introduce above 5 years Islamic bond.

A highly profitable market.

Increasing deposit.

Introduce scheme or loan for various service holders. And the scheme should be separate
according to the professions, such as engineers, lawyers, doctors etc.

4.1.3. Weakness

38

Lack of strong advertisement.

-They can not participate in call market.

Lack of supervision.

Customer service is not so much good.

Unmatched asset versus capital growth.

Limited modern customer service facilities.

Moderate recovery of rescheduled investments.

4.1.4. Threat
o

Overall liquidity crisis in money market.

Unfavorable business environment.

Government pressure to reduce investment rate.

A slump in the economy that could have a negative effect on peoples spending of
discretionary income.

4.2.1. Ratio Analysis

Analyzing the financial performance (also called financial analysis) is so much essential for
each and every business institution as well as for the Banking institutions to assess their past
financial performance and to identify the sources, where the necessary improvement is needed
to perform better in the future and to meet the future challenges by taking effective business
strategy. The financial ratios can be divided into five broad categories for convenience and
they are enumerated below -------o

Liquidity ratio

Activity ratio

Debt ratio

Profitability ratio

Market ratio

As a financial organization all ratios are not need to analyze the financial performance.
Liquidity Ratio: It measures a firms ability to meet up or satisfy its short tem obligations, as
they become due. The commonly used liquidity ratios are ---o

Net working Capital: Net working Capital although not actually a ratio is a common
measure of firms overall liquidity. It is calculated by - Net- Working Capital=Total
Current Asset Liabilities.

39

Table: 5.
NAME OF RATIO
2003
Net working Capital

YEAR
2004

2580.699 1094.779

2005

2006

2007

1704.859

2915.484

3027.897

(In million)

Source: Annual reports of IBBL

Figure: 1

The net working capital of this Bank is fluctuating year by year. Although in2003,
2006 and 2007 the net working capital is increased, but the position of overall net
Current
measure
of liquidity,position
calculated
by dividing
the current assets by
workingRatio:
capital A
is good.
So companys
represents
solvency.
current liabilities. So the equation becomesCurrent ratio = Current assets / Current
liabilities. The standard is 2:1
Table: 6
NAME

OF

YEARS

RATIO
Current Ratio

2003

2004

2005

2006

2007

1.03

0.99

1.07

1.1

Source: Annual reports of IBBL

Figure: 2
The current ratio measures a firms liquidity by measuring the portion of its current
asset relative to its liabilities and the standard level is 2:1. IBBLs current ratio is
fluctuating year to year and IBBLs current ratios are below the standard level which
40
is not good and risky for the IBBL.

Quick (Acid - Test) Ratio: The Quick ratio is similar to the Current ratio except that it
excludes Inventory, which is generally the least liquid current asset. In this organization
there is no inventory. It is calculated by: Quick (Acid Test) ratio = (Current assets
Inventory) / Current liabilities. The standard is 1:1

Table: 7.
NAME OF RATIO

YEARS

Quick (Acid - Test) Ratio

2003
1.03

2004
1

2005
0.99

2006
1.07

2007
1.1

Source: Annual reports of IBBL

Figure: 3
The Quick ratio is similar to the Current ratio except that it excludes Inventory, which is
generally the least liquid current asset. A quick ratio of 1.0 or greater is occasionally cited
as acceptable. But in this figure the quick ratio is good except 2005. So the companys
position of liquidity is superior in terms quick ratio.

o Debt Ratios: These ratios analyze a firms debt position, which indicates the amount of
other people money being used in the firm to generate profits. Commonly used debt
ratios are---o

Debt Ratio: This ratio measures the portion of total asset financed by the firms creditor.
It is calculated by ------Debt Ratio = Total Liabilities/Total Assets

Table: 8
NAME

OF

YEAR

RATIO
Debt Ratio

2003

2004

2005

2006

2007

93.64%

93.50%

93.33%

93.34%

93.81%

Source: Annual reports of IBBL

41

Figure: 4
This ratio indicates how much total asset is provided by the creditor. IBBLs debt ratio
in average is 93.52%. This ratio is so high because bank makes business with clients
money.
o

Debt - Equity Ratio: It measures a firms long term debt relative to its stockholders
equity. It is calculated by -Debt Equity Ratio = Long Term Debt/Shareholders equity

Table: 9
NAME OF RATIO

YEAR

Debt Equity Ratio

2003

2004

2005

2006

2007

14.71

14.39

13.96

14.01

14

Source: Annual reports.

Figure: 5
Debt equity ratio indicates how much is provided by the owner of the company and
how much is provided by the creditor. Here in it is decreased in 2005.
Times Interest Earned Ratio: It measures the firms ability to make the interest
payment. For this reason it is also called Interest Coverage ratio It is calculated by -Time
Interest Earned Ratio = EBIT/Interest
Table: 10:
o

NAME OF RATIO
Time

Interest

YEAR
2003 2004
Earned 1.33 1.46

2005
1.37

2006
1.36

2007
1.42

42

Ratio
Source: Annual reports.

Figure: 6
Time interest earned ratio measures the ability to meet its contractual interest payment.
But in islami shariah interest is completely prohibited. Thats why here it is called
Time Investment (Income) Earned Ratio (Times)
Generally 1 or greater than 1 is acceptable. Here 2007 and 2004 is increased but in
2003, 2005 and 2006 it is decreased. So the overall position is adequate.

Profitability Ratios: These ratios help us to evaluate the firms profits with respect to
sales, assets, or equity. Ratios are ----

Operating Profit Margin: Measures the percentage of total sales remains after deducting
all the operating cost. It is calculated by -Operating Profit Margin = Operating Profit
(EBIT)/Sales

Table: 11.
NAME OF RATIO
Operating Profit Margin
(%)

2003

2004

YEARS
2005
2006

28.86

32.09

27.10

23.62

2007
29.5

Source: Annual reports of IBBL.

Figure: 7

43

It measures the percentage of each investment taka remaining after all

cost and expenses other then interest and taxes are deduced. Higher
margin
is preferable.
Here in 2003
2007remains
it is fluctuating.
Socosts and
Net Profitprofit
Margin:
It measures
the percentage
totaltosales,
after all the
overall interest,
position is
shocking.
expenses, the
including
taxes,
and preferred stock dividend, have been paid. It is
calculated by -Net Profit Margin = Net Profit after Tax/Sales

Table: 12.
NAME OF RATIO
Net Profit Margin (%)

2003

2004

5.72

12.27

YEAR
2005 2006
10.63

9.98

2007
11.36

Source: Annual reports of IBBL.

Figure: 8
IBBLs net profit margin is fluctuating year to year or over the time.

Return on Total Assets (ROA): It is also called Return on Investment (ROI) and it
measures the overall effectiveness of management in generating profit with its available
asset. It is calculated by -ROA or ROI = ROA = Net Profit after Tax / Total Asset.

Table: 13
NAME
RATIO
ROA (%)

OF

YEAR
2003

2004

2005

2006

2007

0.48

0.99

0.92

0.93

1.07

Source: Annual reports of IBBL.

44

Figure: 9
It indicates by using total asset how much we can generate. Here from 2004 to 2006 is
almost same position but in 2007 IBBL generate a highest profit within 5 years with its
available assets.
o

Return on Equity (ROE): It measures the return earned by the funds invested by the
common stockholders. It is calculated by - ROE = Net Profit after Tax/Shareholders
Equity

Table: 14.
NAME OF RATIO
ROE (%)

YEAR
2003

2004

2005

2006

2007

7.53

15.28

13.70

14.00

17.30

Source: Annual reports of IBBL.

Figure: 10
It measures the return earned on the owners investments. The IBBLs return on
equity is increasing over the time, which is good for the organization.
o

Earnings per Share (EPS): It represents the amount earned during a specific period on
behalf of each outstanding share of common stock. It is calculated by -

45

EPS = Earnings available for common stockholders/Number of Share Outstanding

Table: 15
NAME OF RATIO
2003
195.52

EPS(Taka)

2004
518.59

YEAR
2005
487.57

2006
485.54

2007

539
Source: Annual reports of IBBL

Figure: 11
EPS indicates for which share how much earning are generate. After having a careful
view on the graph the IBBLs EPS is fluctuating over time. In 2003 EPS is decreased
but present situation is so much good sign for the IBBL.

Price Earnings Ratio (P/E): it measures the amount that the investors are willing to
pay for per taka of firms return. It is calculated by -P/E Ratio = Market Price of
Share/Earnings per Share

Table: 16.
Source:

Annual

reports

NAME OF RATIO

IBBL.

Price Earnings Ratio

2003
23.26

2004
9.85

YEAR
2005
2006
11.44
12.89

of

2007
12.96

Figure: 12
It is commonly used to asses the owners appraisal of share value. Here in 2003 is
high but from 2004 to 2007 is increased.

4.2.2. At a glance of five years Ratios Table: 17

Liquidity Ratios

2003

2004

2005

2006

2007

Net working capital

Current Ratio
Quick (acid-test) Ratio

2580.699
1.03
1.03

1094.779
1
1

1704.859
0.99
0.99

2915.484
1.07
1.07

3027.897
1.1
1.1

46

Debt Ratios

2003

2004

2005

2006

2007

Debt ratio
Debt equity ratio
Time interest earned ratio

93.64%
14.71
1.33

93.50%
14.39
1.46

93.33%
13.96
1.37

93.34%
14.01
1.36

93.81%
14
1.42

Profitability Ratios

2003

2004

2005

2006

2007

Operating profit margin

28.86

32.09

27.10

23.62

29.5

Net profit margin

5.72

12.27

10.63

9.98

11.36

Return on investment(ROI)
Return on equity (ROE)

0.48
7.53

0.99
15.28

0.92
13.70

0.93
14.00

1.07
17.30

Earning per share(EPS)

195.52

518.59

487.57

485.54

Price/Earning ratio

23.26

9.85

11.44

12.89

539
12.96

Source: Annual reports of IBBL

4.3. Analysis of the achievement of level of investment

4.3.1. Mode wise investment performance of IBBL
The mode wise investment performance of IBBL overall and the selected area are outlined
below:
Table: 18.

(Figures are in million)

Modes
Bai-Murabaha
HPSM
Bai-Muajjal
Purchase
and

2003
31138.88
18065.10
5512.13
1801.33

2004
41731.48
23344.46
5735.29
2416.64

2005
51822.28
30046.89
5917.18
3179.81

2006
59465.08
39399.18
6921.37
4846.62

2007
73833.24302
50201.093362
6545.732919
11039.582245

Nego.
Quard-E-Hasana
Bai-Salam
Mudaraba

1765.65
610.27
103.00

1694.32
807.14
102.00

1966.13
641.44
50.00

1974.20
905.61
50.00

1955.473638
1153.036503
50

Musharaka
Total

12.13
59008.49

27.13
75858.46

20.42
94644.15

12.95
113575.01

1424.47908
146202.6

Source: Annual reports of IBBL.

12%
29%

2003
16%

2004
2005
2006

23%

20%

2007

47

Figure: 13
Islami Bank Bangladesh Limited invests in different sector by different modes of investment.
From the figure the volume of investment is increasing. In year 2003 the volume of
investment was 12% but in year 2007 the volume of investment was 29%. It is a good sign for
the organization.

4.3.2. Division wise investment of IBBL for the years:

Table: 19.

(Fig. are in million)

Division

2006

2007

Dhaka

72637.67

91473.70

Chittagong

19020.12

25609.82

Khulna

8336.57

12605.19

Rajshahi

10129.51

11572.61

Barishal

990.28

1077.37

Sylhet

2460.93

2581.93

Total

113575.07

144920.61

Source: Annual reports.

48

Figure: 14
Islami Bank Bangladesh Limited invests a lion portion in Dhaka division.

4.3.3. Mode wise investment performance of Mirpur Branch:

Table: 19
(Figures are million)
Modes

2004

2005

2006

2007

2008 (up to July31 )

Bai-Murabaha

2551

3432

4521

5072

4815

HPSM

4821

5906

6627

6531

6155

Bai-Muajjal

243

720

857

807

797

QTDR

259

139

197

211

303

Musharaka

46

00

00

Baisalam

00

78

136

133

100

Others

94

175

337

483

499

Total

8014

10450

12682

13244

12669

2004

Source: Annual reports of IBBL.

Bai-Murabaha
HPSM
Bai-Muajjal
QTDR
Musharaka
Baisalam
Others

49

Figure: 15
From the analysis between 2004 to 2008 Islami Bank Bangladesh Limited Mirpur Branch
invested by the Hire purchase under serkatul melk and this investment is increasing
.Investments Bai Murabaha is also increasing but Bai-Muajjal, Muraka and Bai salam is
fluctuating.

4.3.4. Percentage of the mode wise investment of Mirpur branch for the years:
Table: 20.
Modes

(In Tk %)
2004

2005

2006

2007

2008(up

to Mean

July 31 )
Bai-

31.83

32.84

35.65

38.30

38.00

38.54

Murabaha
HPSM

60.16

56.52

52.26

49.31

48.58

58.22

Bai-Muajjal

3.03

6.89

6.76

6.09

6.29

6.34

QTDR
Musharaka

3.23
0.57

1.33
0.00

1.55
0.06

1.59
0.05

2.39
0.00

2.20
0.15

Baisalam

0.00

0.75

1.07

1.00

0.79

0.79

Others

1.17

1.67

2.66

3.65

3.94

2.86

Source: Annual reports.

70

Mean

60

58.22

50
40

38.54

Mean

30
20
10
0

Mean

6.34
BaiMurabaha
38.54

2.2

HPSM

BaiMuajjal

QT DR

58.22

6.34

2.2

0.79
0.15
Musharak
Baisalam
a
0.15

0.79

50

Figure: 16
Average investment of Islami Bank Bangladesh was Hire purchase under serkatul melk.

4.3.5. Sector-wise investment performance of IBBL

Table: 21.
Year

(Amount in million Tk)

Comml

Industrial

Agricultu

Real State

Transport

other

Total

re
2002

17534.07

19692.68

2350

3581.72

1851.32

1270.30

46280.61

2003

20467.76

24480.21

2235.29

5204.18

2475.11

4144.94

59007.49

2004

26877.02

35593.03

3537.17

5785.11

2472.46

1593.77

75858.56

2005

29284.21

46063.51

6445.67

6813.70

2975.12

2061.94

93644.15

2006

36835.63

55882.49

7236.52

7625.31

3431.25

2563.81

113575.01

2007

Problem
Source: Annual reports of IBBL.

T otal

120000
100000
80000
60000
40000
20000

51

0
2002

2003

2004

2005

2006

Figure: 17
From the figure sector wise investment of Islami Bank Bangladesh Limited is increasing.

4.3.6. Sector-wise investment performance of Mirpur Branch

Table: 22

(Amount in Lac TK)

Year

Comml

Industrial

Agriculture

Real
State

Transport

Other

2004

2667

1002

000

3404

398

543

2005

3520

1790

000

4189

393

567

2006

5385

2582

000

3570

376

769

2007

5132

2591

000

4324

401

796

2008(up to 4867
July 31)

2362

000

4196

337

907

Mean

2253.14

0.00

4294.47

415.64

781.53

4706.4

Source: Annual reports of IBBL

5000

Mean

4500
4000
3500
3000
2500
2000
1500
1000
500
0
Comml

Industrial

Agriculture

Real State

Transport

Other

52

Figure: 18
Mirpur Branch of Islami Bank Bangladesh Limited the highest amount invest in commercial
sector and real state but no investment in agriculture sector.

4.3.7. Analysis of investment under Commercial Sector:

Table: 23.
Branch

2004

2005

2006

2007

2008

Mean

Mirpur

2667

3520

5385

5132

4867

4269.6

Source: Annual reports of IBBL.

Mirpur Branch

6000
5000
4000
3000
2000
1000
0
2004

2005

2006

2007

2008

Figure: 19
The average investment in commercial sector is satisfactory. In 2006, 2007 total investment
under commercial sector was too much favorable. So overall the commercial investment of
the bank is satisfactory.
4.3.8. Analysis of investment under Real Estate Sector:
Table: 24.
Branch

2004

2005

2006

2007

2008

Mean

Mirpur

3404

4189

3570

4324

4196

4294.47

Source: Annual reports IBBL.

Figure: 20

53

The average investment under Real Estate Sector is Satisfactory. It is so much good for the
bank. Overall the Real Estate investment of the bank is satisfactory.
4.3.9. Analysis of investment under Transport Sector:
Table: 25.
Branch
Mirpur

2004

2005

2006

2007

2008

Mean

398

393

376

401

337

415.64

Source: Annual reports of IBBL.

Figure: 21
The average investment in transport sector is not satisfactory. It has declined in recent years.
IBBL should give attention in transport sector.
4.3.10. Analysis of investment under Industrial Sector:
Table: 26
Branch

2004

2005

2006

2007

2008

Mean

Mirpur

1002

1790

2582

2591

2362

2253.16

Source: Annual reports of IBBL.

Figure: 22
The average investment in industrial sector is increasing. In recent years the investment
situation under this sector is satisfactory.

54

4.3.11. Analysis of investment under Others Sector:

Table: 27.
Branch

2004

2005

2006

2007

2008

Mean

Mirpur

543

567

769

796

907

781.53

Source: Annual reports.

Figure: 23
The average investment in others sector is the most satisfactory. The trend of this sector was
increasing since 2004.

4.3.12. Growth rate of total investment of Islami Bank Mirpur Branch:

Table: 28

(Amount in 000TK)

Branch

2004

2005

2006

2007

2008(Up to July 31)

Mirpur

851900

1149725

1431864

1532342

1461006

Source: Annual reports of IBBL.

Figure: 24
Growth rate of Total credit shows the positive or negative attitude of people to collect their
fund from the respective institutions. The highest growth rate of total credit shows in 2008. It
is good for the organization.

55

4.3.13. Profit and Investment of several year of Mirpur Branch:

Table: 29
(Amount in 000TK)
Year

2004

2005

2006

2007

2008(up to
July)

Total

851900

1149725

1431864

1532342

1461006

68058

89288

139411

156624

89834

62187

74987

124616

161790

88554

130245

164275

264027

318414

178388

Investment
Investment
Income
Profit on
IBG A/C
Net Invest
Income
Total Investment

2000000 Net Invst Income

1500000
1000000
500000
0
2004

2006

2008(upto
J uly)

Figure: 25
Total investment, investment income, profit and net investment income of Mirpur branch is
increasing day by day. This analysis is calculated up to July, 2008. Thats why last portion has
showed lower than previous time.

4.3.14. Profit and Investment Ratio:

Total Profit received on Investment
Profit and investment ratio = * 100

56

Total amount of investment

(Figures in 000 Tk)

Table: 30.
Branch

2004

2005

2006

2007

2008

Mean

Mirpur

15.29

14.29

18.44

20.78

9.99

17.19

Source: Annual reports.

Figure: 26
The profit and investment ratio of the IBBL is in average position.
4.3.15. Distribution of Investment by Sectors (Public & Private):
Table: 31.
Year

(M= Million Taka)

Public Sector

Private Sector

Total

Amount

Amount

2005

3596

95

68317

71912

2006

4315

95

81980

86295

2007

5178

95

98376

103554

Source: Annual reports.

Figure: 27

57

That investment distribution in private and public sector both are more effective for any
country. But the Islami bank distributes the maximum investment in private sector because it
earned comparatively more profit from private sector.
4.3.16. Distribution of Investments by Areas (Rural & Urban):
Table: 32.
Year

(Amount in Taka)
Rural

Urban

Total

Amount

Amount

2005

6.95

6507148439

93.05

87137206135

93644154974

2006

8.68

9862235033

91.32

103712836096

113575071129

Source: Annual reports of IBBL.

Figure: 28
Islami bank invested the maximum money in urban area. Because most of entrepreneurs and
businessmen stay in urban place. However, most of the organization established in urban area.

5. Comparative Analysis with Other Bank:

58

In my report I have tried to scrutinize different modes of investment of IBBL In order to

identify the position of the IBBL I have compared its performance and position between
IBBL and Export Import Bank of Bangladesh Limited (Exim Bank).

5.1Summary Information of Exim Bank Ltd:

EXIM Bank Limited was established in 1999 under the leadership of Late Mr. Shahjahan
Kabir, founder chairman who had a long dream of floating a commercial bank which would
contribute to the socio-economic development of our country. This bank starts functioning
from 3rd August, 1999 with Mr. Alamgir Kabir, FCA as the advisor and Mr. Mohammad
Lakiotullah as the Managing Director. The bank has migrated all of its conventional banking
operation into Shariah based Islami banking since July/2004.
The summary information of the performance of the years 2005, 2006 and 2007 Exim Bank.
Limited is given below the following

Exim Bank Limited at glance

Table: 33
SL

Particulars

2005

2006

2007

Paid up capital
Total asset
Total deposit
Total investment
Total contingent liabilities

878.85
33716.70
28319.21
26046.34
15941.52

1713.75
41793.54
35032.02
32641.27
18994.08

2142.20
51503.03
41546.57
40195.24
22632.65

and commitments
Ratio on investment and 91.97%

93.18%

96.75%

deposits
Debt to Equity
Debt to Total Asset
Return on assets
Earning per share (Taka)
Net income per share

12.43
0.93
1.73%
43.48
37.95

0.92
1.81%
43.45
38.69

7.74
1713.75

9.02
2142.1968

No.
1
4
5
6

13
14
18
20
21

22
23

16.63
0.94
1.65%
48.61
48.61

(Taka)
Price earning ratio (Times) 10.53
Paid up capital
878.85

Source: Annual reports of Exim Bank.

5.2 SWOT Analysis of Exim Bank

59

5.2.1. Strengths:
o

They have their own training center.

Better working environment, which promotes team spirit, creativity, and performance
capabilities of its employees.

Skilled, creative and committed manpower.

They are commanding position in Import and Export business.

EXIM Bank Limited has already established a favorable reputation in the banking
industry sector of the country. It is one of the leading private sector commercial banks in
Bangladesh. The bank has already shown a tremendous growth in the profits and deposits
sector.

EXIM Bank Limited has already achieved a high growth rate accompanied by an
impressive profit growth rate in 2001. The number of deposits and the loans and advances
are also increasing rapidly.

5.2.2. Weaknesses:
o

Export Import Bank of Bangladesh Limited has not introduced online banking system
which has an increasing public demand now a days.

Lots of works are done manually.

They do not have their own Card facilities like Debit/Credit/ATM Card.

The bank couldnt use its full of capacity to give loan. Although Advance to Deposit ratio
increased over 5 years it is very much below the standard. Shortage of spaces.

Most of the branch does not have any car parking facility.

5.2.3. Opportunities:
o

Export Import Bank of Bangladesh Limited has a lot of growth opportunities in the
consumer banking, money market operations and also export-based industries due to
global economic recovery.

They have a big opportunity if they provide online Banking system.

In order to reduce the business risk, EXIM Bank has to expand their business portfolio.
The management can consider options of starting merchant banking or diversify into
leasing and insurance sector.

A large number of private banks coming into the market in the recent time. In this
competitive environment EXIM Bank must expand its product line to enhance its
sustainable competitive advantage. In that product line, they can introduce the ATM to
compete with the local and the foreign bank. They can introduce credit card and debit
card system for their potential customer.

60

5.2.4. Threats:
o

Overburden with regulations and frequent changes of policies create problems in adapting
clients and complying with rules, which adversely affect the business.

All sustaining multinational banks and upcoming foreign and private banks pose
significant threats to EXIM Bank Limited. If that happens the intensity of competition
will rise further and banks will have to develop strategies to compete against these local
and foreign banks.

The low compensation package of the employees from mid level to lower level position is
not able to keep the employee motivation. As a result, good quality employees leave the
organization and it effects the organization as a whole

5.3 Ratio analysis of Exim Bank

1. Current Ratio: Current ratio = Current Assets / Current Liabilities
Table: 34
Name of ratio
2005
2006 2007
Current ratio
1.17
1.25
1.39
Source: Annual reports of Exim Bank.

Figure: 29
Bank's current ratios are always below the standard level (2), which is not good
and risky for the EXIM Bank. In 2007 it was highest. But in the year 2005 to
2006 Bank's current ratio is increasing at slow rate, which is good for the
Bank.

2. Operating Cost to Income Ratio: Total Operating Cost/Total Operating Income

Table: 35.
Name of ratio
2005
Operating Cost to 27.04%

2006
31.54%

2007
32.34%

Income Ratio
Source: Annual reports of Exim Bank.

61

O perating Cost to Income Ratio

34.00%
32.00%

32.34%

31.54%

30.00%

Operating Cost to Income Ratio

28.00%
27.04%

26.00%
24.00%
2005

2006

2007

Figure: 30
During the time period between the years 2005 to 2007 the operating to income ratio
of the EXIM Bank was increasing, which is a good sign.

3. Total Asset Turnover: = Total Operating Income /Total Asset

Table: 36
Name of ratio
2005
2006
2007
Total
Asset 0.048
0.048
0.055
Turnover
Source: Annual reports of Exim Bank.

Figure: 31
The return from per unit of total asset, as well as the Bank's efficiency in generating
income is increasing year to year and the Bank generated the maximum level of turnover
in year 2007 and lowest level of turnover in th e year 2005 but from the year 2006 the
return from per unit of asset is increasing.

4. Investment to Deposit Ratio: Total General Investment/Total Deposit

Table: 37.
Name of ratio
2005
Invest to Deposit 91.97%

2006
93.18%

2007
96.75%

Ratio
Source: Annual reports of Exim Bank.

62

Figure: 32
The Bank's investment to deposit ratio is increasing year to year and in the year 2007 the
Bank has disbursed the highest amount of loan & advances, which is 96.75%. In 2005 and
2006 the Bank disbursed on an average of above 91% of the total deposit collected by the
Bank, which is good for the Bank.

5. Net Interest Margin: (Interest Income - Interest Expense)/Total Earning Assets:

Table: 38.
Name of ratio
Net Interest Margin:

2005
0.022

2006
0.024

2007
0.032

Source: Annual reports of Exim Bank.

Ne t Inte rest Margin

4.00%
3.20%

3.00%
2.00%

2 .20 %

2.40%

Net Interrest
Margin

1.00%
0.00%
2005

2006

2007

Figure: 33
The level of net interest margin of the Bank is increasing year to year, which indicates that the
Bank's operating efficiency in generating interest income is increasing, which is a good sign for
the Bank and the EXIM Bank.

6. Debt Ratio: Total Liabilities/Total Asset

63

Table: 39.
Name of ratio
2005
2006
2007
Debt Ratio
94.33% 92.55%
92.15%
Source: Annual reports of Exim Bank.

Figure: 34
EXIM Bank has financed on an average of above 94% of its total assets with
debt in every year but from the year 2005 the Bank's debt position is started to
fall, as the Bank is now emphasizing on equity capital financing and the Bank
has lowest level of debt ratio in the year 2007 as the Bank increased its paid up
capital of Tk. 214.22 crore.
7. Equity Capital Ratio: Total Shareholders' Equity/Total Asset
Table: 40.
Name of ratio
2005
2006
2007
Equity
Capital 94.33% 92.55%
92.15%
Ratio
Source: Annual reports of Exim Bank.

Figure: 35
From the year 2005 the Bank's equity capital ratio was increasing year to year, which
that the(P/E)
BankRatio:
is emphasizing
on shareholders'
funds to finance
its total
8.indicates
Price-Earnings
Market Price
of Per Share/Earnings
per Share

assets and the Bank has financed on an average of above 5% of its total assets by
Table:
using41.
the shareholders' invested capital.
Name of ratio
2005 2006 2007

64

(P/E) Ratio

8.1

7.4

9.02

Source: Annual reports of Exim Bank.

Figure: 36
The investors has paid maximum amount of price for per unit of earnings, which is Tk.
9.02, of the Bank in the year 2007.

9. Net Profit Margin: Net Profit after Tax/Total operating Income

Table: 42.
Name of ratio
Net Profit Margin

2005
34.46%

2006
32.29%

2007
33.00%

Source: Annual reports of Exim Bank.

Figure: 37
The company's net profit margin is fluctuating year to year or over the time. So I can
conclude that the Bank generates net profit in each year on an average rate of above 32% of
the total operating income.
10. Return on Assets: Net Profit after Tax / Total Asset
Table: 43.
Name of ratios
Return on Asset

2005
1.65%

2006
1.56%

2007
1.81%

Source: Annual reports of Exim Bank.

65

Figure: 38
The Bank's effectiveness to generate return by using its available assets is fluctuating year to
year and the Bank has generated maximum amount of ROA in the year of 2007 and due to lack
of efficiency in utilization of assets the Bank's ROA falls in the minimum level in the year of
2006.

11. Return on Equity: Net Profit after Tax/Shareholder's Equity

Table: 44
Name of ratio
Return on Equity

2005
29.04%

2006
20.90%

2007
23.03%

Source: Annual reports of Exim Bank.

Figure: 39
The Company's return on equity is decreasing over the time, which is not good for
the Bank.

5.4. Comparison between IBBL and Exim Bank Ltd.

1. Volume of Deposits

66

IBBL has the largest market share in terms of deposit among the private sector commercial
banks. The deposit of the banking sector stood at TK. 2,230.06 billion at the end of year 2007
shared by 48 banks. The total deposit of IBBL in year 2007 was TK. 166.33 billion which
constitutes 7.46% (previous year it was 7.24%) of total deposits of banking sector. The
growth rate of deposit of IBBL was 25.61% whereas industry growth rate was 22.18%. In
year whereas industry growth was only 10.05%.
Table: 45
Volume of deposit
IBBL

2005
107,779

2006
132,419.40

2007
166,325.29

Exim bank Ltd

28319.21 35032.02
41546.57
Source: Annual Report of IBBL and Exim Bank.

Figure: 40
The volume of deposit of IBBL is good position in compare to Exim Bank Ltd
within 2005 to 2007.

2. Volume of Investment:
IBBL has the largest market share in terms of investment among the private sector
commercial banks. In 2007 IBBLs total investment was TK. 144.92 billion which was 8.46%
(previously it was 7.28%) of industry investment of TK. 1,713.51 billion. The investment
growth rate of IBBL was 27.62% whereas industry growth was only 10.05%.
Table: 46
Volume of
investment
IBBL

2005

2006

2007

93644

113,575.07

144,920.61

Exim bank Ltd

26046.34
32641.27
40195.24
Source: Annual Report of IBBL and Exim Bank.

67

Figure: 41
The volume of investment of IBBL is good position in compare to Exim Bank Ltd
within 2005 to 2007.

3. Capital and shareholders equity

Capital and shareholders equity of Islami Bank is increasing within this time than Exim Bank
ltd. The amount of capital and shareholders equity is in 2007 Tk million 11841.33 of IBBL
and in Exim bank Ltd is Tk. million 4042.53.
Table: 47
Volume of Capital & 2005
2006
2007
shareholders equity
IBBL
10007.23 8215.74
11841.33
Exim bank Ltd
3111.68 1912.42 4042.53
Source: Annual Report of IBBL and Exim Bank.

Figure: 42
Exim Bank Ltd is far behind from the
IBBL.

68

4. Assets: Assets for Export Islami Bank Bangladesh Limited are Tk. 191362.35 million in
2007 and Tk. 51503.03 million in 2007.
Table: 48.
Volume of Assets 2005
2006
2007
IBBL
122880.35 150252.82
191362.35
Exim bank
51503.03
33716.70 41793.54
Source: Annual Report of IBBL and Exim Bank.

Figure: 43
Assets position of IBBL is good compare to other Banks. The
amount of asset of Exim Bank is much behind than IBBL.

5. Return on Assets:
Return on assts measure overall effectiveness of the management and generating profit by its
available assts. ROA is increasing day by day in IBBL. The present position of ROA of IBBL
is 1.07%. But in Exim Bank is good position than IBBL in terms of ROA. That means Exim
Bank is generating more profit by its available assets than IBBL.
Table: 49.
Return on assets 2005
2006
2007
IBBL
0.92%
0.93%
1.07%
Exim bank Ltd
1.65% 1.56% 1.81%
Source: Annual Report of IBBL and Exim Bank.

69

Figure: 44
ROA is much higher in Exim Bank Ltd than IBBL.

70

6.1. Findings of IBBL

6.1.1. Major findings:
o

The Investment of all modes is increased but the investment of musharaka is decreased
lack of faithful or trust and efficient client. But the overall investment growth of the bank
may be attributed to the thrust given to promote investment sectors.

Banks investment in industrial arena is substantially higher in comparison to others

commercial Investment Bank. The Banks investment portfolio is gradually being based
toward industrial finance against commercial investment of Bank.

The Bank Rural Development Scheme (RDS) investment policy has been drawn to take
care of the requirement of all the economic groups of the society under Mudaraba deposit
towards productive investment.

Incomes which are doubtful as per Shariah are not included in the distribution income of
the Bank. Bank charges compensation on unclassified overdue Bai-Murabaha and BaiMuajjal investment. Such compensation is not permissible by Shariah to take into regular
income of the Bank. Bank transferred it to the Islami Bank foundation according to the
decision of Shariah Council.

IBBL through its steady progress and continued success has earned reputation and has
become the leading private Bank in the country. The volume of investment of this Bank
has been increasing day by day. The network of the branches has widened and the
Investment Portfolio of the Bank has been diversified.

Portfolio of investment and investment policy have been specially tailored to achieve
balanced growth and equitable development though diversified investment operations
particularly in the priority sectors and in the less develop areas of the national economy.

Lack of proper knowledge of the Clients about the mode of investment.

Outstanding amount of investment increased rapidly which is another problem of IBBL.

The existing client sometimes do not properly furnish their past business performance and
Banks income.

Someone criticize that the IBBL impose high rate of profit on investment.

Large portion of investment is invested by mode of Baimorabaha that is 53.26% because

it is more profitable than other modes of investment.

Total investment of Islami Bank Bangladesh Limited is increasing.

71

6.2Findings of Exim Bank Ltd

o

Emphasis on high cost deposits.

Implement separation between credit approval, sales and processes.

Closely monitor problem portfolio.

Rationalize communication cost. Use e-mail for internal communication.

Eliminate unnecessary processes, registers. Recycle paper, re-use envelops.

The Bank tries to provide the products & services best in quality & price in order to
achieve highest customer satisfaction & to face competitors positively.

6.3.

Comparative findings

Exim Banks Return on Asset more than IBBL.

IBBL yet holds the highest profit earning bank among the private commercial banks in
the country.

IBBL has been maintaining strong liquidity position. As per Bangladesh Bank Guidelines
the bank has been maintaining more than required Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR) and the CRR and SLR of IBBL are 6.17% and 21.27% in
2007 respectively. The liquid assets ratio of the bank stood at 24.91% in 2007 compared
to 21.43% in 2006 whereas the peer average was 30.60% in 2006. Investment to customer
deposit ratio has increased to 87.32% in 2007 against 85.86% in 2006, whereas the peer
average was 81.56 % in 2007.

IBBL has their own network server but Exim Bank dont have own network server.

Both are weak for providing a highest customer service like other foreign banks.

Both should to increase promotional activities.

72

7. Conclusion
Ialami Bank Bangladesh Limited (IBBL) is the first bank in the private sector based on the
principle of Islamic shariah to work with other conventional Banks operating in the economic
arena of Bangladesh.
As regards the overall investment position of the Islami Bank Bangladesh it may be
concluded that, since the beginning of banking activities the bank has not invested any
amount in any project on the Mudarab mode of investment. The investment position of the
bank since 1983 shows that investment under the Musharaka mode of investment constitutes a
very insignificant percentage of the total investment. The bank invested a major portion of its
funds under the Murabaha and Bai-Muajjal mode of investment. In spite of the fact that the
bank invests its funds towards various sectors of the nations economy still the sector-wise
investment position indicates that the bank concentrates much in investing towards
commercial sectors.
While interviewing officers in the investment department it was informed that in order to,
make investment under Musharaka mode of investment honest and sincere entrepreneurs are
required. They experienced a hard time in many cases while introduced financing under the
Musharaka mode.
Once upon a time, most of the people didnt understand interest-free banking system. They
never thought that it is possible to provide banking facilities without interest but in passage of
time, now it is clear that in Islam there as a banking procedure though profit / less sharing
basis. In course of time problems have reduced but not delaminated. This bank is trying to
operate their activities according to Islami Shariah. If the Govt. becomes conscious to solve
these problems and the banker become cordial and cooperative, the problems may be reduced
to a greater extent. Recently American Global Finance has said in their last annual conference
Islami Bank Bangladesh Limited is the best bank in Bangladesh

73

8. Recommendation and related justifications

The recommendations given below are not decisions; rather they are only suggestions to
improve the customers service in order to fulfill the customers satisfaction so that customers
give more preference to Islami Bank Bangladesh Limited. The recommendations are given
below:
o

IBBL should increase investment in agricultural sector because Bangladesh is an

agricultural country.

IBBL should increase their investment in public sector because their maximum
investment is in private sector.

Bank should take corrective actions to reduce its upward trend of outstanding amount of
investment and careful to take investment decision.

Attempt should be made for an improved information system within the bank and within
the investment clients unit.

Consider offering both pre-investment and post investment counseling to both potential
and existing investors according to their needs.

Repayment behavior of different types of clients play a important role not only in the
successful implementation of investment plan but also in the cost-benefit analysis for the
banks, there is need to analysis in detail the repayment behavior at micro level. Such a
study provides proper guidance for the banks to be associated with the clients at various
stages of utilization of investment and its repayment.

Investment plan commitment should be included in the budget of each branch of the bank
and progress should be regularly monitored.

Bangladesh is rural base country; So IBBL should increase their investment in rural area.

IBBL should try to improve the deposit investment ratio for higher productivity.

The productivity of the bank may be raised by better funds management and portfolio
management improving recycling of funds and developing other income from the
business activities of the bank.

74

Appendix: 1.
Bibliography
Book
1. Dr. M Omer, Islam and the economic development, Islamabad: International Institute
of Islamic thought and Islamic Research Institute, Translated into Bengali by Dr
Mahmood Ahmed (2000), published by the Bangladesh Institute of Islamic Thought.
2. Rahman, A. A. M. Habibur (April 2001), Islamic Banking, Dhaka.
3. Annual reports of Islami Bank Bangladesh Ltd. ranging 2003-2007
4. Annual reports of Exim Bank limited.
5. Mannual for Investment under Bai-Murabaha Mode, Published by Islami Bank
Bangladesh Ltd, 40, Dilkusha Commercial Area, Dhaka.
6. Mannual for Investment under Bai-Muajjal Mode, Published by Islami Bank Bangladesh
Ltd, 40, Dilkusha Commercial Area, Dhaka.
7. Mannual for Investment under Bai-Salam Mode, (For Export Oriented Industries)
Published by Islami Bank Bangladesh Ltd, 40, Dilkusha Commercial Area, Dhaka.
8. Lecture materials is given from IBTRA.

Internet
1. www.islamibank.bd.com
2. www.eximbank.bd.com
3. www.dhakastockexchange.bd.com

Daily News paper

1. The Daily Naya Diganta (2008, September 16)

75

Appendix: 2.
Organization Analysis: I would like to know the following information in respect of your
organization and the finance related activities for the sake of processing my internship report.
I assure you that, this information will only be used for academic purpose and I will maintain
high confidentially about these.
1. Company policy about investment.
2. What is your target segment for investment?
3. What percentage of market share you owned and the percentage you expect?
4. Do you allow the employee participation in decision-making and problem solving
program.
5. Do you have central monitoring system to monitor the customers problems.

76

Appendix: 3.
1. Process of collecting information about client?
2. Process of charging rate of investment.
3. Helping tendency of the employees:

Yes
No
4. Customer satisfaction:
Complete satisfaction
Not complete satisfaction
5. Are you satisfied with the investment position of IBBL?

High
Moderate
Low
6. What is the rate of defaulter of repayment the loan?
High
Low
Any

comment

to

the

organization

please

feel

free

to

give-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------.

77