General Investments

of
Islami Bank Bangladesh Limited

by,

G.M. Shovon
ID: B-150203080
Session: 2015-16
Department of Finance (10th Batch)
Jagannath University, Dhaka

An internship report submitted to the Department of Finance

in partial fulfillment of the requirements for the degree of
B.B.A. in Finance

Department of Finance
Jagannath University
Date of Submission: July 25, 2020

c 2020. Jagannath University
All rights reserved.
Declaration
It is hereby declared that,

1. The report submitted is my own original work while completing degree at

Jagannath University.

2. The report does not contain material previously published or written by a

third party, except where this is appropriately cited through full and accurate
referencing.

3. The report does not contain material which has been accepted, or submitted,
for any other degree or diploma at a university or other institution.

4. I have acknowledged all main sources of help.

Students’ Full Name & Signature:

G.M. Shovon
ID: B-150203080 (10th Batch)
Department of Finance
Faculty of Business Studies
Jagannath University

i
Letter of Transmittal
31st March, 2020
Mokta Rani Sarker
Assistant Professor,
Department of Finance
Jagannath University
Subject: Submission of Internship report on General Investments of IBBL.

Dear madam,
I want to thank you for giving me chance to prepare the Internship report on this
topic, “General Investments of Islami Bank Bangladesh Limited”. I have prepared
the report highlighting the different schemes under Investment analyzed it from
business, financial prospective points of view. I have tried my best to make the
report excellent and gather relevant information for preparing a complete report.
Without the proper guidance of you, it was not possible for me to prepare the report.

I hope you will assess my report considering the limitations and mistakes of the
study, and I sincerely believe you will find the study very interesting and informa-
tive.

Thank you.
Sincerely yours,

G.M. Shovon
ID: B-150203080 (10th Batch)
Department of Finance
Faculty of Business Studies
Jagannath University

ii
Supervisor’s Certification
The internship report titled “General Investments of Islami Bank Bangladesh Lim-
ited” submitted by G.M. Shovon, Student Roll: B-150203080, 10th batch, Depart-
ment of Finance, Jagannath University has been accepted as satisfactory in partial
fulfillment of the requirement for the degree of B.B.A. in Finance on July 25, 2020.

I wish every success in his life.

Supervisor:

Mokta Rani Sarker

Assistant Professor
Department of Finance
Faculty of Business Studies
Jagannath University

iii
Acknowledgement
I am deeply indebted to a large number of people for their kind suggestion and co-
operation. I would like to give special thank you to my Academic supervisor Mokta
Rani Sarker Mam, who was very kind to supervise, instruct and direct me to com-
plete my Internship report.

I would like to thank the Director General K.M. Munirul Alam (EVP), Course co-
ordinator K.M. Rahmatullah (FAVP FM), IBTRA; for giving me the opportunity
to know about IBBL, support direction to make this report. I profoundly grate-
ful to A.S.M. Jahangir Hossain Vice President and Head of Branch, Md. Abdus
Salam (SPO), Manager Operations, Md. Abdus Sattar (PO) Operation in charge of
GB and Md. Nizam Uddin (PO), Investment Incharge of Islami Bank, Dholaikhal
Branch for their supervision, guidance and cooperation.

This report, with all the interpretation on practical orientation in bank with the
function and mechanism in the field of banking activity, would not be possible
without help and cooperation of the officers engaged in the Dholaikhal branch of
IBBL. They have willingly supplied all the practical knowledge and interpretation
for making this report so convenient with the purpose of our BBA program. The
acknowledgement is made especially to Md. Rubayet Hossain (Officer), Md. Abdul
Baten(JO) and Md. Mezbah Uddin(JO) as well as the authors, researchers and
articles writer whose books, reports, thesis papers and journals that have helped me
to prepare my internship report.

iv
Executive Summary
This report is prepared as a requirement of the BBA program of Jagannath Univer-
sity. This focus on 15 days training program in Islamic Bank Training and Research
Institute and 45 days working experiences in Dholaikhal Branch, Dhaka. This re-
port will give a clear idea about investment modes and process of IBBL. The report
also describes the existing investment sectors of IBBL and their prospects.

In this report, findings highlighted in the chapters. The first chapter is the introduc-
tory part of the study; the second chapter is focused on IBBL’s history and corporate
profile that is an organizational overview as the study required. Investment division
is a very crucial part of any banking institution. In chapter three, different sorts
of investment modes and mechanisms of IBBL are described. Besides, the total
investment procedure of IBBL is described with attachments of real documents.

In chapter four of the report, the influence of each investment modes on the prof-
itability of the bank is shown by conducting a multiple linear regression analysis.
Nine years of historical data is taken as input to run the analysis. The goal of the
analysis is to identify the investment modes that have the most influence on the
profitability of IBBL so that that appropriate attention can be drawn at them. At
the end of the report is Conclusions. Findings, recommendations and conclusion on
the overall investment of Islami Bank Bangladesh Ltd. are provided in summary.

v
 TABLE OF CONTENTS

Executive Summary v

List of Tables vii

List of Figures viii

1 Introduction 1
1.1 Origin of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Objectives of the Report . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Scope of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Methodology of the Report . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Limitations of the Report . . . . . . . . . . . . . . . . . . . . . . . . 3

2 Overview Of Islami Bank Bangladesh Limited 4

2.1 Historical Background . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2.1 Deposit Products . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2.2 Investment Products & Schemes . . . . . . . . . . . . . . . . . 6
2.2.3 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Corporate Social Responsibilities . . . . . . . . . . . . . . . . . . . . 8
2.4 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

3 General Investents of Islami Bank Bangladesh Ltd. 11

3.1 Investment modes and mechanisms of IBBL . . . . . . . . . . . . . . 12
3.1.1 Bai Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.1.2 Share Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.1.3 Ijara Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.1.4 Other Modes . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.2 Investment Process of Islami Bank Bangladesh Limited . . . . . . . . 19
3.3 Mode wise Investment Portfolio . . . . . . . . . . . . . . . . . . . . . 24
3.4 Sector wise Investment Portfolio . . . . . . . . . . . . . . . . . . . . 25

vi
4 Analysis: Influence of individual investment modes on the prof-
itability of the bank. 30
4.1 Model (Tools for Analysis) . . . . . . . . . . . . . . . . . . . . . . . . 31
4.2 Data sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.3 Variables for the Model . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.4 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.5 Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.6 Analysis & Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.7 Interpretation of Results . . . . . . . . . . . . . . . . . . . . . . . . . 33

5 Conclusion 35
5.1 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.2 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Bibliography A

Annexes B

LIST OF TABLES

2.1 Sector wise CSR expenditure of IBBL from 1983-2018 (Amounts in

million Tk.) Source: Annual Report 2018 . . . . . . . . . . . . . . . 8
2.2 Financial Highlights, Source: Company Annual Report . . . . . . . 10

3.1 Parties in ”Bai-Murabaha on order and promise.” . . . . . . . . . . . 13

3.2 Mode wise investment of IBBL. Source: IBBL Annual Report 2018 . 24
3.3 Sector wise investments of IBBL in 2018. Source: Annual Report 2018 25

4.1 Variables for the regression model. . . . . . . . . . . . . . . . . . . . 31

4.2 Descriptive Statistics for Variables . . . . . . . . . . . . . . . . . . . 32
4.3 Determinants of Net Income Generated from General Investments . . 33

vii
 LIST OF FIGURES

2.1 Year wise CSR Expenditures . . . . . . . . . . . . . . . . . . . . . . 9

2.2 Sector wise CSR Expenditures (2018) . . . . . . . . . . . . . . . . . . 9

3.1 Investment modes and mechanisms of Islami Bank Bangladesh Ltd. . 12

3.2 Graphical Illutration of a Musharaka Contract . . . . . . . . . . . . . 15
3.3 Graphical Illutration of a Mudaraba Contract . . . . . . . . . . . . . 16
3.4 HPSM Investment Model . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.5 Khidmah Card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.6 Investment Process of Islami Bank Bangladesh Limited . . . . . . . . 19
3.7 Screenshot of Centralized Investment Proposal Processing System . . 20
3.8 Mode wise investment of IBBL. Source: IBBL Annual Report 2018 . 24
3.9 Sector wise investments of IBBL in 2018. Source: Annual Report 2018 25
3.10 Bangladesh’s Total Export Earnings with % of Contribution . . . . . 26
3.11 Bangladesh GDP from Agriculture. . . . . . . . . . . . . . . . . . . . 26
3.12 Hoam Loan Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.13 Phamaceutical Exports of Bangladesh. . . . . . . . . . . . . . . . . . 28
3.14 Bangladesh GDP from Transportation. . . . . . . . . . . . . . . . . . 28
3.15 SME Disbursement in Bangladesh. . . . . . . . . . . . . . . . . . . . 29

4.1 Model Summary of the Test . . . . . . . . . . . . . . . . . . . . . . . 34

4.2 Analysis of variance and coefficients table. . . . . . . . . . . . . . . . 34

1 Investment Products of IBBL (Screenshot) . . . . . . . . . . . . . . B

2 Modewise Investments of IBBL, Annual Report 2018 (Screenshot) . . B
3 Regression inputs in SPSS (Screenshot) . . . . . . . . . . . . . . . . . C
4 Closing ceremony of IBTRA Internship Program (142nd batch) . . . . C

viii
CHAPTER 1
INTRODUCTION

1
1.1 Origin of the Report
The internship program is an integral part of the Bachelor of Business Administra-
tion (BBA). During the internship period, an intern gets a chance to work closely
with the resource people of an organization and learn about the functions, respon-
sibility and corporate culture of that organization. This program helps a student to
improve their analytical skills and scholastic aptitudes and to have a real-life orien-
tation of academic knowledge. At the end of the internship program, the intern is
required to place the accomplishment and findings of the project and covering the
relevant topic. This report on “General Investment of Islami Bank Bangladesh Lim-
ited” is the result of the internship program in The Islami Bank Bangladesh Limited
(IBBL), Dholaikhal Branch. As the report is based on the General Investment of
IBBL, so analyses on that particular investment practice of IBBL are shown through
findings. The reasons for preferring this bank by customers, how it is helpful to our
economy and our country are tried to find out in the study.

1.2 Objectives of the Report

The main objective of this report to explain the Investment Modes and Process,
and interpret results of regression analysis of investment modes from the financial
statement of Islami Bank Bangladesh Limited. The objectives of the report are
listed in the following way:

i. To know the investment products of IBBL.

ii. To know the consumer investment process of IBBL.

iii. To evaluate the performance of each mode of investment in the profitability of

the bank.

iv. To identify the future prospect of IBBL in consumer investment.

1.3 Scope of the Report

The field of the study is the general investments of Islami Bank Bangladesh Limited.
For conducting this study, the overall knowledge of the total banking system is nec-
essary because the departments of banking are linked with each other. The scope of
the introductory part covers the organizational background, objective, function, de-
partmentalization and product and services of the Islami Bank Bangladesh Limited
as a whole. The main part covers the investment modes and mechanisms of IBBL
and the process of making those investments. The analytical part in chapter four
is a multiple regression analysis that tells how influential each mode of investments
is in determining profit. This refers to how the bank is performing over the years.
This study is confined to only this bank than other conventional banks.

2
1.4 Methodology of the Report
The study is based on secondary data collected from following sources:

i. Training materials.

ii. Bank Documents.

iii. Annual Report of Islami Bank Bangladesh Limited.

iv. Different text books & materials.

v. Website of the Islami Bank Bangladesh Limited.

vi. Internet.

• Data Processing & Analysis: Collected information has been processed &
compiled with the aid of MS Word, Excel, IBM SPSS other related computer
software. Necessary tables and figures have been prepared based on collected data,
and various statistical techniques have been applied to analyses based on classified
information. Detail explanation and analysis have also been incorporated in the
report.

1.5 Limitations of the Report

i Confidentiality of data was the major limitation faced in preparing this report
that confronted during the conduct of this study.

ii Lack of time.

iii The depth of the analysis has been limited to the extent of information collected
from different sources.

3
 CHAPTER 2
OVERVIEW OF ISLAMI BANK
BANGLADESH LIMITED

4
2.1 Historical Background
In the late seventies and early eighties, Muslim countries were awoken by the emer-
gence of the Islamic Bank, which provided interest-free banking facilities. There are
currently more than 614 interest-free institutions all over the world. Today Islamic
Bank not only operates in almost all Muslim countries but have extended their wings
to the western world to serve both Muslim and non-Muslim customers. In the case
of Islamic Banking, the establishment of Mit-Ghamr Local Savings Bank in 1963 in
Egypt is said to be a milestone for modern Islamic Banking. Dubai Islamic Bank
(DIB) created history in 1975 when it became the first modern commercial Islamic
bank in the world.

In 1974, Bangladesh signed the Charter of Islamic Development Bank (IDB) and
committed itself to reorganize its economic and financial system as per Islamic
Shariah. In 1978, Bangladesh recommended in Islamic Foreign Minister Confer-
ence in Senegal towards systematic efforts to Islamic Banking. In 1980, Foreign
Minister Conference in Pakistan, where Bangladesh Foreign Minister Prof. Shamsul
Hoq, proposed for taking steps for Islamic Banking. Further, Bangladesh Bank sent
representation abroad to study Islamic Banking System. In 1981, President of the
Peoples Republic of Bangladesh addressed the 3rd Islamic Summit Conference held
at Makkah and Taif suggested, ”The Islamic countries should develop a separate
banking system of their own in order to facilitate their trade and commerce. In
1982, IDB visited Bangladesh for study. They found contributions done by Islamic
Economics Research Bureau (IERB) and Bangladesh Islamic Bankers Association
(BIBA); they mobilized the seminars, public opinion through symposia workshop.
Professional activities reinforced by the Muslim Businessman Society (now reorga-
nized as Industrialists and Businessman Association). The body mobilized mainly
equity capital for emerging Islamic banks.

Finally, in 1983, Islami Bank Bangladesh Limited (IBBL) came out to take the
challenge of doing banking business. Islami Bank Bangladesh Limited (IBBL) is
considered to be the first Islamic bank in Southeast Asia. It was incorporated on
13-03-1983 as a Public Company with limited liability under the Companies Act
1913. The bank began operations on March 30th, 1983, with major share by the
foreign entrepreneurs. IBBL is a joint venture multinational Bank with 63.92% of
equity being contributed by the Islamic Development Bank and financial institutions.
It has 36.91% local and 63.09% foreign shareholders. Up to Nov 2019, IBBL has
350 branches including 59 AD Branches 03 Offshore Banking Units as well as has
more than 13,500 staffs. (WIKIPEDIA, 2020)

UK based century-old magazine ’The Banker’ has been conducting rating of the top
1000 world banks setting the industry benchmark since 1790 providing comprehen-
sive intelligence about the health and wealth of the banking sector. The magazine
publishes the list in July every year on the basis of data and evaluation of more
than 5 thousand leading banks from 163 countries, which is appreciated and recog-
nized worldwide. By securing this position, IBBL has got recognition as a global
standard bank and brought glory for Bangladesh. This prestigious ranking signifies
the strength and progress of financial sector of the country.

5
2.2 Products and Services
2.2.1 Deposit Products
i. Al-Wadiah Current Account (AWCA)

ii. Mudaraba Savings Account (MSA)

iii. Mudaraba Term Deposit Account (MTDR)

iv. Mudaraba Special Notice Account (MSNA)

v. Mudaraba Hajj Savings Account (MHSA)

vi. Mudaraba Special Savings (Pension) Account (MSSA)

vii. Mudaraba Savings Bond (MSB)

viii. Mudaraba Monthly Profit Deposit Account (MMPDA)

ix. Mudaraba Muhar Savings Account (MMSA)

x. Mudaraba Waqf Cash Deposit Account (MWCDA)

xi. Mudaraba NRB Savings Bond (MNSB) Account

xii. Mudaraba Foreign Currency Deposit Account (MFCD)

xiii. Students Mudaraba Savings Account (SMSA)

xiv. Mudaraba Farmers Savings Account (MFSA)

xv. Mudaraba Payroll Account (MPA)

xvi. Mudaraba Industry Employees Savings Account(MIESA)

2.2.2 Investment Products & Schemes

i. Murabaha Import LC

ii. Murabaha Post Import (MPI)

iii. Car Investment Scheme

iv. Transport Investment Schemes

v. Investment Scheme for Doctors (ISD)

vi. Small Business Investment Scheme (SBIS)

vii. Micro Industries Investment Scheme (MIIS)

viii. Household Durables Scheme (HDS)

6
 ix. Housing Investment Scheme (HIS)

x. Real Estate Investment (Commercial Working Capital)

xi. Agricultural Implement Investment Scheme (AIIS)

xii. NRB Entrepreneurs Investment Schemes

xiii. Women Entrepreneurs Investment Scheme(WEIS)s

xiv. Rural Development Schemes (RDS)

2.2.3 Services
i. Foreign Remittance

ii. Inward Remittance

iii. Outward Remittance

iv. Corporate Services

v. Payment Order (PO)

vi. Demand Draft (DD)

vii. Locker Service

viii. Quard against TDR/MSS/MMPDS/MSD/MNSB

ix. Letter of Credit (LC)

x. Back to Back L/C

xi. Bank Guarantee

xii. Foreign Bank Guarantee

xiii. Export Bills Collection

xiv. Bonded Warehouse Facilities for Exporters

xv. Duty Draw Back Facilities to Exporters

xvi. SWIFT

xvii. Electronic Fund Transfer (EFT)

xviii. ATM Services

xix. Agent Banking Services

xx. School Fees Payment Service

7
2.3 Corporate Social Responsibilities
As the pioneer of Welfare Banking Stream in Bangladesh and first Islamic Bank,
Islami Bank Bangladesh Limited (IBBL) widens its contribution in Corporate So-
cial Responsibilities (CSR) since inception through creation of “Sadaqah Tahbil”.
Thereafter, it has done through IBF converting the Sadaqah Tahbil into a full fledged
foundation since May 20, 1991. Further to its activities under IBF, IBBL established
Corporate Social Affairs Department (CASD) under operations Wing on 16th July
2009 in compliance with the instruction of the Central Bank.

• The Triple Bottom Line

The CSR program of IBBL aims at the welfare and well-beings of the people of
the earth, the planet itself and all its stakeholders.

i People

ii Planet

iii Stakeholders

Table 2.1: Sector wise CSR expenditure of IBBL from 1983-2018 (Amounts in million
Tk.) Source: Annual Report 2018

8
• Year wise CSR Expenditures

Figure 2.1: Year wise CSR Expenditures

Above bar-chart shows the year wise expenditure in CSR expenditure by Islami
Bank Bangladesh Limited. It can be easily interpreted that CSR expenditures have
significantly increased over the last few years. The Compound Annual Growth Rate
(CAGR) of the last five years is 39.89%. The trend is upward and the CSR budget
is likely to follow the trend and increase in the upcoming years.

• Sector wise CSR Expenditure (Year-2018)

Figure 2.2: Sector wise CSR Expenditures (2018)

Above pie-chart shows the sector wise expenditure in CSR expenditure by Islami
Bank Bangladesh Limited. The major portion (75%) of Islami Banks CSR fund
is employed in the educational sector. Humanitarian Relief gets the second most
funding’s (23%) in 2018 and also in preceding years. Other sectors get minor shares
of this fund.

9
2.4 Financial Highlights

Sl.
Particulars 2018 2017 2016 2015 2014
No.

1 Paid-up Capital 16,099.91 16,099.91 16,099.91 16,099.91 16,099.91

2 Total Capital (equity) 69,618.58 57,958.08 50,556.47 48,701.51 48,579.67

3 Capital surplus/ (deficit) 571.99 234.57 3835.22 6,812.10 10,695.59

4 Total Assets (Excluding contra) 997,429.60 899,959.77 797,699.66 725,821.12 652,422.04

5 Total Deposits 822,573.12 755,022.25 681,352.25 615,359.21 560,696.30

Total investments
6 805,759.98 710,728.93 616,418.91 530,194.50 463,475.47
(excluding Investment in shares/ securities)

7 Total contingent liabilities and commitments 172,992.66 169,749.30 139,246.03 133,379.93 112,819.23

8 Investment Deposit Ratio 90.80% 87.80% 86.43% 83.59% 79.88%

Percentage of classified investment

9 4.12% 3.59% 3.83% 4.25% 4.92%
against total general investments

10 Profit after Tax & Provision 6,075.14 4,692.95 4,464.98 3,290.75 4,013.03

Amount of classified investment

11 7,650.69 1,917.02 1,060.35 (266.00) 7,865.34
during current year

12 Provision kept against classified investments 28,246.83 24,746.52 20,553.83 17,751.49 13,354.72

13 Provision surplus/ (deficit) 22.08 0.03 3.84 0.72 0.18

14 Cost of Fund 8.06% 7.62% 7.50% 7.62% 8.55%

15 Profit Earning Assets 745,514.70 717,957.77 623,545.19 512,714.85 506,579.98

16 Non-profit Earning Assets 251,914.90 182,002.01 174,154.47 213,106.27 145,842.06

17 Return on Investments 8.60% 8.14% 8.29% 8.20% 9.86%

18 Return on Assets 0.64% 0.55% 0.59% 0.48% 0.67%

19 Income from Investments 68,653.59 58,030.84 54,155.01 48,954.43 51,010.20

20 Earnings Per Share (Taka) 3.77 2.91 2.77 2.04 2.49

21 Net Income Per Share (Taka) 3.77 2.91 2.77 2.04 2.49

22 Price Earning Ratio (Times) 6.87 12.24 10.11 11.54 11.24

23 Net Asset Value (NAV) 54,896.30 50,328.98 48,738.95 47,461.29 46,622.62

24 Net Asset Value (NAV) per Share (Taka) 34.10 31.26 30.27 29.48 28.96

Net Operating Cash Flow per Share

25 (3.31) 1.20 (6.77) 7.20 29.52
(NOCFPS) (Taka)

26 Dividend Yield per share 4.13% 2.73% 3.37% 7.19% 6.41%

27 Dividend Payout Ratio per share 26.50% 34.31% 36.06% 97.85% 60.39%

28 Dividend Cover Ratio (Times) 3.77 2.91 2.77 1.02 2.75

Table 2.2: Financial Highlights, Source: Company Annual Report

10
 CHAPTER 3
GENERAL INVESTENTS OF ISLAMI
BANK BANGLADESH LTD.

11
3.1 Investment modes and mechanisms of IBBL
Definition of investment funds given by the Accounting and Auditing Organization
of Islamic Financial Institutions (AAOIFI) is- ”Funds are investment vehicles, which
are financially independent of the institutions that establish them. Funds take
the form of equal participating shares/units, which represent the shareholders/unit
holders share of the assets, and entitlement to profits or losses. The funds are
managed on the basis of either Mudaraba or agency contract.” IBBL invests its
money in various sectors of the economy through different modes permitted by
Shariah and Bangladesh Government. All of its investments are real investments.
Investment modes and mechanisms used by Islami Bank are as follows:

Figure 3.1: Investment modes and mechanisms of Islami Bank Bangladesh Ltd.

3.1.1 Bai Mechanism

The word Bai means both “purchase and sale”. Majority of investments of Islamic
banks are extended through this mechanism. A good number of investment prod-
ucts have been designed to facilitate mainly working capital financing which goes as
follows:

• Bai-Murabaha: The terms, Bai-Murabaha have deprived from Arabic words

Bai and Ribhun. The word Bai means purchase and sale and the words, Ribhun
means an agreed upon profit. Bai Murabaha means sale on 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 an agreed upon profit payable today or on
some date in the future in lumpsum or by installments. The profit may be either a
fixed sum or based on a percentage of the price of the goods. In respect of dealing
parties Bai-Murabaha may be of two types-

i Ordinary Bai-Murabaha: Transaction between two parties (Buyer Seller) with-

out any promise.

12
 ii Bai –Murabaha on order and promise: There are three parties in Bai-Murabaha
on order and promise.

Parties Roles
1st Party(Buyer) Promises to buy some goods placing order to 2nd party.
2nd Party(Intermediary Trader) Procures the goods from the 3rd party.
3rd Party(Supplier) Receives payment from 2nd party and delivers the goods.

Table 3.1: Parties in ”Bai-Murabaha on order and promise.”

a. Bank act as 2nd party in murabaha agreement where,

b. 1st party choses the supplier and negotiates the price.

c. Bank purchase from the supplier as per the order of 1st

d. The 1st party usually pays the bank within a future date (Due date) either in
lump sum or by installments.

Murabaha Agreement must be signed and fill-up at the time of disbursement.The

cost of goods sold and profit mark-up will separately and clearly have mentioned in
the agreement.It is permissible for the bank to authorize any third party or client
himself to buy and receive the goods on bank’s behalf. It is also permissible to take
collateral security from the client.

• Bai-Muajjal: The mode is very similar to bai-murabaha. Key differences are-

a. Sale on credit.

b. Profit is not a requirement of this investment mode.

Islami bank usually provides this investment facility to its staff. The price is fixed
at the time of the agreement and cannot be differed, but the bank is not required
to disclose the profit made on the transaction.

• Bai-Salam: Bai Salam is an Islamic contract in which full payment is made in

advance for specific goods to be delivered at a future date.

a. Advance purchase/sale of certain commodity at an agreed upon price.

b. Much like commodity forwards, exceptions are that the whole price must be paid
at the time of execution of the contract and the product must be permissible
under shariah.

Agriculture and industrial goods or products are sold in advance under Bai-Salam
mode of investment. It is permissible to obtain collateral security from the seller
client to secure the investment from any hazards via non-supply/ partial supply of
commodity/product(s), a supply of low-quality commodity /product(s). It is also
permissible to obtain Mortgage and/or Personal Guarantee from a third party as se-
curity before the signing of the Agreement or at the time to signing the Agreement.

13
Under this investment mode bank is the “Buyer” and the client is “Seller”. After
making the contract, bank supplies in advance price of products (Salam Capital).
At the time of contract, product price fixing based on two parties consent. If the
buyer fails to supply the products in that case seller take return in advance price. To
ensure getting the right product at the right time bank may take primary security
from the client.

• Bai-Istisna (Purchase Order): This is a sale and purchase agreement whereby

the seller undertakes to manufacture or construct according to the specification given
in the agreement. It is similar to bai-salam the main distinction being the nature
of the asset and method of payment. Istisna generally covers those things which
are customarily made to order and advance payment of money is not necessary as
required in bai-salam. To meet up the manufacturing cost of the product, some-
times price may be paid in advance. Buyer has the option for payment in future on
instalments basis. If the transaction is half done, in that case, the contract cannot
be cancelled.

• Bai- as-Sarf: Bai- as-Sarf is a contract of exchange of money for money(currency

exchange). This contract is tightly regulated under Shari‘ah because it can be easily
manipulated for the purpose of producing an interest-bearing loan, which is prohib-
ited in Islam.

In pre-Islamic times gold was exchanged for gold, silver for silver and gold for
silver or vice versa. In Islamic law such exchange is regarded as sale of price for
price and each price is consideration of the other. It also means sale of monetary
value for monetary value i.e. currency exchange.In respect of Bank, Bai-as-Sarf is
a contract/agreement between the Bank and the Client under which the Bank pur-
chase the foreign currency against the Foreign documentary bill in advance from
the Client at specified/agreed exchange rate. “Bai-as-Sarf (FDB) ” is practiced for
providing post shipment finance facility against Foreign Currency export Bills and
“Bai-as-Sarf (FCD) ” is done for providing advance finance facility against Foreign
Currency Cheque /Draft

• Bai-Istijrar: The term ”Bai-Istijrar” has been derived from Arabic words Bai
and Zarra. The word Bai means to purchase and to sell and the word Zarra means
to hoist, to lift up, pick up, bring up. ”Istijrar” means to purchase goods from time
to time in different quantities. In Islamic jurisprudence ‘Istijrar’ is an agreement
where a buyer purchases something under a single agreement in different instalments.
However, no offer and acceptance or bargain is required each time. The deal will be
considered as a single agreement where all terms and conditions are finalized. ”Bai-
Istijrar” is called such a buying and selling where a person keeps on taking delivery
of required commodities part by part from time to time from a supplier and no offer
acceptance and bargaining between them is taken place each time of making and
taking delivery. In case of purchasing the goods/commodities in numerous deals
from a single/few supplier(s), the Bank may exercise Istijrar with the supplier. In
case of selling the goods/commodities under Bai-Murabaha by purchasing through
Letter of Authority against the dealership, the Bank may exercise Istijrar with the
supplier.

14
3.1.2 Share Mechanism
Profit and Loss Sharing (also called PLS or ”participatory” banking) is a method of
finance used by Islamic financial or Shariah-compliant institutions to comply with
the religious prohibition on interest on loans that most Muslims subscribe to. Many
sources state there are two varieties of profit and loss sharing used by Islamic banks
–
i. Mudaraba (”trustee finance” or passive partnership contract)
ii. Musharaka (equity participation contract).
Other sources include Sukuk (also called ”Islamic bonds”) and direct equity invest-
ment (such as purchase of common shares of stock) as types of PLS. The profits and
losses shared in PLS are those of a business enterprise or person which/who has ob-
tained capital from the bank (the terms ”debt”, ”borrow”, ”loan” and ”lender” are
not used). As financing is repaid, the provider of capital collects some agreed-upon
percentage of the profits (or deducts if there are losses) along with the principal of
the financing.
Note: Unlike a conventional bank, there is no fixed rate of interest collected along
with the principal of the loan.

• Musharaka: Musharaka is an agreement under which bank provides capital

which are mingled with the funds of the business enterprise and others. All of
the providers of the capital are entitled to participate in the management but not
necessarily required to do so. The profit is distributed among the partners in pre-
determined ratio, while the loss is born by each partner in proportion to his/her
contribution.
Shariah permits that the Bank may take part in a business with its Client(s), where
both the Client(s) and the Bank provide capital in fixed proportions, take part in the
management of the business and share the profit in proportion to their respective
capital ratio or at pre-agreed ratio and bear the loss, if any, in proportion to their
respective capital/equity ratio.

Figure 3.2: Graphical Illutration of a Musharaka Contract

15
• Mudaraba: Mudaraba is contract of partnership where one of the contracting
points called ”Shahib-al Mall” or Rabb-ul-Maal(The financier) provides a specified
amount of capital and acts like a sleeping/silent/dormant partner while the other
party, called the Mudarib (entrepreneur), provides the entrepreneurship and man-
agement for caring on any venture, trade, industry or service with the objectives of
earning profits.The Mudarib is in the nature of a trustee as well as an agent of the
business. Profit is distributed as per the pre-agreed ratio while the loss is entirely
borne by the Shahib-al-Maal.

Figure 3.3: Graphical Illutration of a Mudaraba Contract

3.1.3 Ijara Mechanism

Under HPSM, 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 autho-
rized 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 Sirkatul Melk is a special type of contract which has been developed through
practice and approved in Shariah. Actually, it is a combination of 3 contracts:
i. Shirkat: Shirkat means partnership and melk means ownership. When two or
more persons supply equity, purchase asset and own the same jointly and share
the benefit as per agreement and loss proportion to their respective equity, the
contract is called Shirkatul Melk.
ii. Ijarah: The term Ijarah has been derived from Arabic word Ajr which means
Consideration, Return, Wages or Rent. It is a lease agreement under which a
certain asset is leased by the lessor (bank) to a lease (customer) against specific
rent for a fixed period.

16
iii. Sale: This is a sale contract between a buyer and a seller under which the
ownership of certain goods or asset is transferred by seller to the buyer against
agreed upon price paid / to be paid by the buyer.

In HPSM mode,
a. Both the bank and the client supply equity in equal or unequal proportion for
purchase of an asset like land, building, machinery, transports etc.
b. Own the asset jointly.
c. Share the benefit as per agreement and bear the loss in proportion to their re-
spective equity.
Thus Hire Purchase under Shirkatul Melk Agreement has got three stages:
Stage 1: Purchase under joint ownership.
Stage 2: Hire and
Stage 3: Sale and /or transfer of ownership to the other partner Hirer.

Figure 3.4: HPSM Investment Model

There should be a separate sale contract for payment of part of asset sold to the
Hirer and the amount of rent should be decreased proportionately with decrease of
Hire’s ownership and increase of Hirer’s ownership on the property/asset. Most of
the time, the periodic rental payments are calculated first and averaged to create
an equivalent periodic payment (much like EMI).
Popular Investment schemes of IBBL under HPSM mode are listed below:
i Transport Investment Scheme (TIS)
ii Car Investment Scheme (CIS)
iii Micro Industries Investment Scheme (MIIS)
iv Agricultural Implement Investment Scheme (AIIS)
v Real Estate Investment Program (REIP)
vi Real Estate Investment (Commercial Working Capital)

17
3.1.4 Other Modes
• Quard: It is a mode to provide financial assistance/ loan with the stipulation
to return the principal amount in the future without any increase thereon. Islami
Bank Bangladesh Limited provides quard in its welfare oriented programs. Deposi-
tors of the bank can also avail this investment facility against their savings and term
deposit account.

• Khidmah Card: Shariah-based credit cards—Khidmah, first in Bangladesh

(Introduced 7 March, 2015), in an effort to provide customers with a wide range
of payment services. People can use a credit limit of Tk 50,000 with the Khidmah
silver card, Tk 1 lakh with the gold card and Tk 2 lakh with platinum. The bank
will not charge any interest on cardholders’ expenditure if unable to pay back in
time. Instead, it will charge a fee of Tk. 500 for the silver card for a delay of one
month, Tk 1,500 for gold and Tk 2,000 for platinum.

Features:
• A Shariah Compliant Card Based on “Ujrah Concept” (fixed fee based con-
cept).
• Global usage privilege.
• No risk is associated in buying.
• Payment of gas, electricity and WASA bill.
• Exclusive Shopping Travel Discounts within VISA global offering.
• Hotel and Hospital booking, Bus, Train and Airplane Ticketing.
• Exclusive discount on the purchase of Superstore.
• Lowest charge.
• First Supplementary Card Free.
• Card Cheque Facility.
• Advance Salary Facility.

Figure 3.5: Khidmah Card

18
3.2 Investment Process of Islami Bank Bangladesh
Limited

Figure 3.6: Investment Process of Islami Bank Bangladesh Limited

• Stage 1: Induction of Clients

In order to avail investment facilities from IBBL, which is known as loan in conven-
tional banking, applicant must physically visit a branch of the bank and apply for
such facilities. At this stage, bank conducts primary discussion with their prospec-
tive clients regrading investment needs, business experience and viability of the
project and shariah permissibility of business and use of the assets. Investment
Policy and Branch’s verify record of Hire purchase under Shirkatul Melk, brief him
on the salient features, usual term and conditions under such particular investment
mode. For knowing the client, bank may look at his previous performance. If the
Proposal is eligible for getting permissible under Islamic principles and suitable,
bank advise the client to submit formal Application. If it is found unsuitable, regret
politely. Bank Request Potential Client to open an Al-Wadeeah Current account.
Let the client maintain the Current account. Let him maintain the current Account
satisfactorily for a reasonable period. (This will generally mean six month)

• Stage 2: Application
In this stage, bank generally collects the necessary information from the perspective
clients. Here, all the necessary documents for taking investment have to prepare by
the client himself. Documents that are necessary for getting investment of Islami
Bank Bangladesh Limited are prescribed here:

i. Party’s application on letter head pad.

ii. Photographs of directors/partners/proprietor/client.

iii. Trade License

iv. Stock Report

v. List of Manpower

19
 vi. List of existing machinery with price.

vii. Copy of TIN VAT

viii. Copy of IRC ERC. (In case of Murabaha Post Import)

ix. List of competitors (at least five).

x. List of expected earnings (3 years forecast).

xi. List of debtors.

xii. List of creditors.

xiii. Three years audited financial statements. (Where applicable)

xiv. Form 167-A duly filled in.

Depending on the nature of business of the client and purpose of the use of fund, the
required documents varies. For each client, a digital verification certificate (DVC)
and investment limit is passed from which the client can avail investments in lump
sum or in revolving basis (Depending on the mode of investment). Branch itself
cannot issue DVC. At branch level, client’s documents are scanned and then elec-
tronically sent to head-office for approval. Head-office verifies and issues DVC for the
client. The process of issuing DVC is facilitated by CIPPS (Centralized Proposal
Processing System).Clients original documents then stored in branch for further
circumstances.

Figure 3.7: Screenshot of Centralized Investment Proposal Processing System

• Stage 3: Categorization
Investment proposals can be individual /firm/company /society for commercial pur-
poses. Each proposal may have different degrees of risk associated with it. Therefore,
proposals are needed to be categorized depending on several bases to understand
how to treat it. IBBL has a specific guideline(Confidential Circulars), based on
which each investment proposal is categorized and treated.

20
• Stage 4: Processing & Appraisal
Investment processing steps followed by Islami Bank Bangladesh Limited:

a. Enter the Application in the “Investment Proposal Received and Disposal Reg-
ister (B-53) and allot a Serial Number to it.

b. Examine Shariah permissibility of the goods. Reject the proposal outright, if not
permitted by Islamic Shariah.

c. Check-up Credit Restriction Schedule of Bangladesh Bank and Head Office Cur-
rent Investment Policy Guidelines.

d. Visit the Business establishment of the Client. Talk to the business and impor-
tant personalities of the locality to ascertain the Honesty, Integrity and Business
dealings of the Client.

e. Request for confidential report of the client from local Bank Branches. Confident
Report from Credit Information Bureau (CIB) of Bangladesh Bank through Head
Office Investment Division as per Instruction Circular of Head Office in this
Regard.

f. Effective demand, price of the goods, short or long-term duration, quality and
other specifications of the goods, availability, etc. of the said or projected goods.

Sanction advice(Appraisal) is made after verifying the followings:

i. DVC

ii. CIB Report

iii. Outstanding Position.

iv. Past Performance.

v. Income Earned by the Branch.

vi. Bank statement (last 03 years.)

vii. Valuation Certificate- Surveyor

viii. Valuation Certificate- Bank

ix. Legal Opinion

x. Genuineness Certificate.

xi. Credit Rating Certificate. (where applicable)

xii. Audit observation and compliance.

xiii. Justification.

xiv. Checklist of SBS3.

21
On the basis of this stage, bank usually goes for sanctioning the proposed invest-
ment limit/proposal. If anything goes wrong here, the bank suddenly stops to make
payment of investment.

• Stage 5: Sanction
On the basis of the list submitted by the Field Officers, the Investment Committee of
the Branch carefully scrutinizes the applications and sanction the investment at the
Branch level. The Investment Committee consists of Manager, Project Officer and
the Field Officer. At this stage, the bank officially approves the particular invest-
ment proposal of the respective client. In this case client receives bank’s sanction
letter. Sanction letter contains the following elements:
i. Investment Limit in million.

ii. Mode amount of investment.

iii. Purpose of investment.

iv. Period of investment.

v. Rate of return.

vi. Securitiy.
Illustration of a sanction letter is provided in the annexes.

• Stage 6: Documentation
After DVC of a particular client is issued for a period with an investment limit,
further transactions within the limit do not requires much paperwork as required
initially. Documents required for issuing DVC are kept in a file which is known as
‘master file’. Although the process of approval and disbursement is made electron-
ically using eIBS (Electronic Integrated Banking System), bank requires and keep
the following charge documents to meet the requirements of ‘law of contract’ and to
be able to take legal action against the client for recover of fund in case the client
do not pay within the due date of payment.
List of charge documents:
i. Authorization Letter (F-188)

ii. Demand Promissory Note (CF-1)

iii. Demand Promissory Note Delivery Letter. (CF-3)

iv. Balance Confirmation Letter. (CF- 16)

v. Letter of Disbursement. (CF-6)

vi. Trust Receipt. (CF-11)

vii. Letter of Arrangement (CF-20)

viii. Letter of Guarantee (CF-14)

ix. General Agreement (AF-1)

22
 x. Delivery order. (F-39)

xi. Buy Sell Statement. (F-190)

Applicant is required to sign in required charge documents with seal of his/her or-
ganization.

Mortgage Documents: Stock of goods is the primary security. Bank obtains lien
on it from the client. In addition to client’s regular business product, bank’s invest-
ments are secured by taking additional form of security which is known as collateral
security. This collateral security usually consists of, i. Registered Mortgage of Land
Building valued TK. . . Million (FSV-Force Sale Value) ii. Fixed Deposit Receipt
(FDR)

• Stage 7: Disbursement

At this stage bank decides to pay out money. Here the clients get his/her desired
goods. Islami Banks never supply cash to its investment clients. After purchase of
the goods and handing over the same to the clients, investment is made by adjusting
Purchase A/c. In most of the cases, funds are remotely disbursed to sellers/suppliers
bank account. It is to be noted that before disbursement a “site plan” showing the
exact location of each mortgage property needs to be physically verified. In all the
cases, Branch must ensure strict adherence to the banking and Shariah norms.

• Stage 8: Monitoring & Recovery

End use monitoring: Every investment contract has a specified time period and
terms of payment. The end date of a contract is known as due date and the buyer
must make the payment in full on or before it. If the buyer (client) does not pay
in full on the due date, the bank takes every possible step to recover the amount
of money that is overdue.Steps that are taken by the bank to recover the overdue
amount are given bellow:

i.Immediately make a contract with the client and inform the matter.
ii.If the client doesn’t respond immediately then an official letter is issued by the
bank and sent to the client (See in annexes) .
iii.The bank files a suit against the client if the letter is not responded within time
frame given by the bank.

Recovery: Bank sues the defaulting client with the “Negotiable Instruments Act
1881” and all the charge documents that were previously signed by the client to
get the investment facility from the bank are presented as proof. Islami Bank has
a panel of lawyers for handling these cases. The government and law enforcement
agencies assist all the banks and financial institutions with rapid responses because
of the importance of a sound financial system for the country. It does take some
time, but in one way or another, the effectiveness of bank investment policies recov-
ers all of their investment funds. For example, if the client suffers a liquidity crisis,
the court permits the bank to sell off the assets of the client in order to recover the
fund.

23
3.3 Mode wise Investment Portfolio
Investment of Islami Bank Bangladesh Limited is mainly concentrated in Bai Mode
HPSM. Share of Bai-mode is 62% in IBBL’s total investment in 2018. On the other
hand, HPSM which is related shirkat and Bai-Muajjal contributes 23%, and 7% re-
spectively in IBBL investment. Share of Mudaraba and Musharaka is not significant
in the investment of IBBL.

SL No. Mode 2018 2017

Amount % of Amount % of Amount
(in millions ) Total Investment (in millions ) Total Investment (in millions)
1 Bai-Murabaha 61.71% 497231 61.67% 438281
2 HPSM 23.46% 188992 22.79% 161985
3 Bai-Muajjal 6.83% 55015 8.55% 60789
Bill purchased &
4 2.58% 20764 1.93% 13704
Negotiation
5 Quard 3.45% 27815 2.81% 19983
6 Bai-Salam 1.33% 10733 1.47% 10477
7 Mudaraba 0.58% 4700 0.70% 5000
8 Musharaka 0.06% 510 0.07% 510
Total 100.00% 805760 100.00% 710729

Table 3.2: Mode wise investment of IBBL. Source: IBBL Annual Report 2018

Graphical Representation:

Figure 3.8: Mode wise investment of IBBL. Source: IBBL Annual Report 2018

24
3.4 Sector wise Investment Portfolio
Islami Bank Bangladesh Ltd. has always maintained a balanced investment port-
folio to support the sustainable growth of different sectors of the economy. In this
section, sector wise investments of IBBL are presented with introduction, impor-
tance and prospect of each sector.

SL 2018 2017
Sector
No. % of Total Investment Amount % of Total Investment Amount
Industrial
1 42.44% 341938 36.26% 258867
(Excluding SME)
2 Commercial 16.18% 130352 7.36% 52552
3 Real Estate 7.52% 60611 7.09% 50626
4 Agriculture 2.45% 19754 2.37% 16944
5 Transport 1.05% 8427 1.17% 8374
6 SME 24.92% 200815 40.75% 290869
7 Others 5.44% 43863 5.00% 32497
Total 100.00% 805760 100.00% 710729

Table 3.3: Sector wise investments of IBBL in 2018. Source: Annual Report 2018

Graphical Representation:

Figure 3.9: Sector wise investments of IBBL in 2018. Source: Annual Report 2018

25
A. RMG Industry: RMG exports has contributed $34.13 billion to Bangladesh’s
total export earnings this year, growing by 11.49% compared to last fiscal year. As
per Export Promotion Bureau (EPB) data, the RMG sector has contributed 84.21%
to Bangladesh’s total exports of $40.53 billion, growing by 10.55% in FY19. The
figure-1 depicts that in last 5 years the RMG exports added additional 10 billion
dollars in the export basket that means growing at a rate on average 2 billion each
year. Although the growth rate is magnificent it is too optimistic to reach 50 billion
mark by 2021 which is the target set by the government.

Figure 3.10: Bangladesh’s Total Export Earnings with % of Contribution

B. Agricultural sector : Agriculture is the largest employment sector in Bangladesh.

The performance of this sector has an overwhelming impact on major macroeco-
nomic objectives like employment generation, poverty alleviation, human resources
development, food security, etc. A plurality of Bangladeshis earn their living from
agriculture. Therefore, it is both economically and socially significant. As a welfare
bank, IBBL has special investment schemes like RDS and UPDS to support the peo-
ple and facilitate the growth of agriculture. GDP from Agriculture in Bangladesh
increased to 10739.10 BDT Million in 2019 from 10468.80 BDT Million in 2018.

Figure 3.11: Bangladesh GDP from Agriculture.

26
C. Real Estate Industry: Every year over 120,000 household units are required
to house the added population in Dhaka. In this situation, the supply of housing
in the city is only around 25,000 units in private sector. The private sector con-
tributors include formal private sector (Real Estate Development Companies) and
informal private sector (Individual Initiatives). Among these 25,000 units, 15,000
units (appx.) are developed by real estate developers per year and the rest are
developed by individual developers
• 55% of total outstanding home loans are disbursed by PCB’s whereas NBFI’s
disbursed 8%

• Non-performing loan of Home Loan accounts for 3.12% against 8.16% NPL in
total loan in FY16

• Target group mostly upper class /upper middle class.

Figure 3.12: Hoam Loan Growth

Bangladesh’s real estate sector is growing steadily on the back of rapid development
of the country, rising demand for housing, expanding middle class and soaring per-
capita income. “The sector is quite stable,” said Alamgir Shamsul Alamin (Kajal),
president of the Real Estate Housing Association of Bangladesh. So as it appears,
real-estate is a lucrative sector for all financial institutions. At present, real estate
sector of Bangladesh is a leading growth sector and is providing remarkable con-
tributions to the GDP in Bangladesh and creating employment opportunities for
the unemployed people of Bangladesh. Islami Bank Bangladesh Limited designed
’Ijarah’ mode of investment to participate in this market. ’HPSM’ investments are
made under this mode which is discussed earlier in this paper.

D. Pharmaceutical Industry: Once largely dependent on imports and multina-

tional companies to meet the local demand, Bangladeshi pharmaceutical industry
is growing very fast meeting 98% of domestic demand and posting a 27% growth in
export earnings. In 2018, the country’s domestic pharmaceutical market size stood
at Tk. 20,511.8 crore with 15.6% compound annual growth rate (CAGR) for the

27
last five years. On top of that, the sector is expected to grow at 15% year-on-year to
reach $5.11 billion by 2023, propelled by high investment by local companies as they
seek to grab a bigger share of the global market. According to Export Promotion
Bureau (EPB) data, Bangladesh’s medicine exports registered a 25.60% rise to $130
million in FY19, which was $103.46 million the previous year.

Figure 3.13: Phamaceutical Exports of Bangladesh.

E. Transport Sector:The commercial vehicle market refers to vehicles used to

transport goods and passengers or provide a service, and it includes trucks, buses,
and coaches. Road transport is the most popular form of commercial transport in
Bangladesh, carrying 70% of passengers and cargo(Source: IFAD Autos Limited)
. It is significantly cheaper and easier to access than water, air, or rail transport.
The commercial vehicle market was valued at around $500 million in 2017, with an
estimated CAGR of 12.5% (Source: The Daily Star). This high growth is likely to
be sustained in the future due to rising regional trade, a booming economy that
is feeding greater urbanization and industrialization, and road network expansion.
While it is currently dependent on imports, steps are being taken to shift the industry
to local manufacturing. GDP from Transport in Bangladesh increased to 11671.90
BDT Million in 2019 from 10920.80 BDT Million in 2018.

Figure 3.14: Bangladesh GDP from Transportation.

28
F. SME Sector: Small and Medium Enterprises (SMEs) is the backbone of Bangladesh
economy with an estimated 6 million establishments across the country according to
Asian Development Bank, accounting for 25% of country’s Gross Domestic Product
(GDP), 45% of manufacturing value addition, around 90% of industrial units and
30% of labor force.

Figure 3.15: SME Disbursement in Bangladesh.

Central Bank has played an important role in driving the Financial Institutions
to spice up their SME Portfolio. As per the instruction by Bangladesh Bank,
Banks/Financial Institutions are sure to maintain 20% of their loan portfolio as
SME lending. so as to facilitate women-run business financing, financial organi-
zation instructed the banks to charge single-digit lending rate. apart from these,
Bangladesh Bank, together with UNCDF (United Nations Capital Development
Fund), has started a CGS with USD 2 lacs USD grant provided by UNCDF for
girl’s entrepreneurs. Under this scheme, titled as “Credit Guarantee Scheme”, a
complete number of 12 guarantees are issued against Tk.1.11 crore in 12 different
clusters of 8 districts in Bangladesh. As per the instruction the financial organiza-
tion, Banks/FIs founded a “Women Entrepreneurs’ Dedicated Desk” with necessary
and suitable manpower so as to facilitate the women entrepreneurs”.

G. Other Sectors: IBBL advocates balaced growth and since it is a welfare oriented
bank, following industries and sectors also get small amount of investment facility
from IBBL:

a. Trade commerce

b. Cements industry

c. Chemicals, toiletries petroleum

d. Petrol pump & CNG filling station

e. Power (electricity)

f. Hotel & restaurant

g. Ceramic & bricks

29
 CHAPTER 4
ANALYSIS: INFLUENCE OF
INDIVIDUAL INVESTMENT MODES
ON THE PROFITABILITY OF THE
BANK.

30
4.1 Model (Tools for Analysis)
Linear regression is a basic and commonly used type of predictive analysis. The
overall idea of regression is to examine two things:
i. Does a set of predictor variables do a good job in predicting an outcome (de-
pendent) variable?

ii. Which variables in particular are significant predictors of the outcome variable,
and in what way do they–indicated by the magnitude and sign of the beta
estimates–impact the outcome variable?
These regression estimates are used to explain the relationship between one depen-
dent variable and one or more independent variables. Formula for multiple regression
model:

Y i = β0 + βi Xi + 

W here,
Yi = Dependent Variable
β0 = y-intercept (Constant Term)
Xi = Independent/Explanatory Variables
βi = Slope coefficients for each explanatory variable
 = Residuals

A Multiple regression was conducted to find out modes of investment that contribute
significantly to the profitability of IBBL. Six variables, including one dependent
variable and five independent variables, were taken as input. ‘IBM SPSS Statistics’
computer program was used to conduct the analysis.

4.2 Data sources

The data for this study has been collected from a secondary source—the audited
annual financial reports published by Islami Bank Bangladesh Limited.

4.3 Variables for the Model

Variables Notation
Dependent variable: Net Profit NP
Income on Bai Murabaha Investment Bai-Murabaha
Income on Bai Muajjal Bai-Muajjal
Independent variables: Income on Musharaka Musharaka
Income on Mudaraba Investment Mudaraba
Income on HPSM HPSM

Table 4.1: Variables for the regression model.

31
In our model, Y=β0 + β1 X1 + β2 X2 + β3 X3 + β4 X4 + β5 X5 + 

W here,
Y = N et P rof it
X1 = Bai − murabaha
X2 = Bai − muajjal
X3 = M usharaka
X4 = M udaraba
X5 = HP SM

The five independent variables are elaborately described in chapter three. These
are the most popular investment modes of IBBL. The purpose of the analysis is to
statistically find out the most influencing mode/modes so that proper attention can
be drawn at them.

4.4 Descriptive Statistics

The 4.2 table represents descriptive statistics of mean, standard deviation, minimum
and maximum values for each variable of IBBL. Total of nine years of data has been
collected for this analysis from 2010 to 2018.

Minimum Maximum Mean Std. Deviation

NP 3,412,042,793 6,310,300,055 4,760,810,302 855,438,129
Bai-Murabaha 13,436,201,951 38,020,415,856 27,426,559,978 7,476,284,328
Bai-Muajjal 1,170,333,487 5,619,193,528 3,692,953,983 1,653,401,384
Musharaka 738,308,960 2,013,000,424 1,250,822,836 448,745,928
Mudaraba 0 284,569,341 108,030,520 109,846,880
HPSM 8,032,618,765 15,648,446,095 11,449,919,420 2,250,925,817

Table 4.2: Descriptive Statistics for Variables

4.5 Hypothesis
The null hypothesis states that the net profit of the firm is indifferent to the type of
investment mode selected. The alternative hypothesis states that net profit depends
on the type of investment mode selected.

H0 : β1 = β2 = β3 = β4 = β5 = 0
H1 : βi 6= 0 for at least one i where i= 1, 2 , 3, 4 or 5.

32
4.6 Analysis & Findings
The results indicated that the five independent variables in aggregate were significant
predictors of the net income, explaining 96.4% of the variance(R2 = .964), F (5, 3) =
16.28, p = .022.

For all five independent variables, Higher scores corresponds to higher amount of net
profit. When the variables were examined to evaluate their individual contribution
to the model, it was found that only Bai-murabaha have positive values for β , other
four variables have negative values for β . Among all five variables, Bai-murabaha
(β = 4.319, p =.063), Bai-muajjal (β= -1.072, p=.015) and Musharaka (β = -1.014,
p =.017) made a significant contribution to the model that predicted net income.
Mudaraba (β = -0.286, p =.223) and HPSM (β = -0.296, p =.749) were not signif-
icant predictors of the model. Based on the results, we reject the null hypothesis
that the total amount of investment income is indifferent to the type of investment
mode selected.

Unstandardized Standard Standardized

P-value Comments
Coefficients Beta Error Coefficients Beta
(Constant) 2936893090 1302848813 - 0.110
Bai-Murabaha 0.494 0.171 4.319 0.063 ???
Bai-Muajjal -2.107 0.416 -4.072 0.015 ?
Musharaka -1.934 0.594 -1.014 0.047 ?
Mudaraba -2.224 1.452 -.286 0.223
HPSM -0.113 0.321 -0.296 0.749

Table 4.3: Determinants of Net Income Generated from General Investments

4.7 Interpretation of Results

Financial institutions hold a limited amount of fund for investing purpose, and they
should allocate their funds to most profitable investment opportunities while con-
sidering liquidity, diversification, risk and public welfare. According to the analysis
results, Bai-Murabaha mode of investment has the most positive influence on in-
vestment income. Islami Bank Bangladesh Ltd. should emphasis on this mode the
most. Bai-Muajjal and HPSM have a negative slope, but since Bai-muajjal mode
isn’t created for profit and result of HPSM is insignificant(p=0.749), so the bank
must not ignore them. Policy changes to these two modes may yield higher and
significant returns in the future.

Islami bank has already taken actions against Mudaraba and Musharaka mode.
They only exist in pen and paper, barely used it practice. Islami bank give loans
on these modes only considering welfare for the people. Yielding profit is not the
primary purpose for these modes anymore, and their size had already shirked. Islami
bank should continue these modes as a welfare bank in a limited scale.

33
Chapter Appendix: Regression Outputs

Figure 4.1: Model Summary of the Test

Figure 4.2: Analysis of variance and coefficients table.

34
CHAPTER 5
CONCLUSION

35
5.1 Findings
”An Islamic bank is a financial institution whose status, rules and procedures ex-
pressly state its commitment to the principle of Islamic Shariah and to the banning
of the receipt and payment of interest on any of its operations”(Ali & Sarkar 1996,
pp.20-25). The early theoretical models of Islamic Banking were based on the con-
cept of profit and loss sharing (PLS) through Mudaraba and Musharaka modes of
finance. In practice, while on the liabilities side of the balance sheet of Islamic
banks interest has been replaced by PLS, on the asset side the alternative modes of
financing being used by these banks are dominated by fixed-return modes such as
Bai-mode and HPSM. Islami Bank assumes the role of traders and use the modes
of trade but remain financier.

The real and ideal instruments of financing in Shariah are musharaka and mudaraba.
While the original Islamic banking proponents hoped profit-loss sharing (PLS) would
be the primary mode of finance replacing interest-based loans, long-term financing
with PLS mechanisms is far riskier and costlier. The exacts reasons behind this are
very complicated. Most of the cases, the Mudarib does not keep proper accounting
of the usage of the investment fund and lies about the amount of profit. Therefore,
Musharaka and Mudaraba financing has declined to almost negligible proportions.
At the beginning, IBBL practised Mudaraba and Musharaka modes but could not
continue due to these problems.

In IBBL’s asset portfolios, short term asset-backed financing, notably Murabaha and
HPSM account for the vast bulk of it is investments.Financial leases and muraba-
hah, are not originally modes of financing. But, in order to meet some needs they
have been reshaped in a manner that they can be used as modes of financing. Every
financing in an Islamic system creates real assets. This is true even in the case
of Murabaha and HPSM, even though they are not believed to be ideal modes of
financing and are often criticized for their being close to the interest-based financing
in their net results. Our Regression Analysis of the investment modes proved that
investment modes influence the profitability of the bank. It is all about decisions and
actions that determines profit. If investment funds can be mode-wise distributed at
an optimal ratio, banks net profit should increase.

The objective of Islamic banking is not only to earn profit, but also to do good
and bring welfare to the people” According to Islam, money, income and property
belong to Allah and this wealth is to be used for the good of the society. With the
philosophy of a Islamic Welfare Bank, IBBL is continuing its non-profitable modes
of investment on a limited scale. The result of the analysis conducted in this paper,
4 out of the five modes showed negative slopes; among them, two of them were
statistically significant. The banks’ officials speech and annual reports support the
result of the analysis.

36
5.2 Recommendations
Though Islami Bank Bangladesh Ltd. (IBBL) is performing well, it has some crucial
areas to improve which are prescribed below:
i. It is a modern banking era. Every commercial bank is properly utilizing tech-
nological innovations. So, IBBL needs to utilize more modern technologies to keep
pace with the changing time while keeping its cyber security intact.
ii. The bank can consider employing more female employees in the branch, espe-
cially in the investment sector, to attract more female customers.
iii. The bank needs to open more ATM booths in different places as it has a massive
number of customers.
iv. Most of the people of our country have a wrong impression about IBBL ”s opera-
tion regarding the indirect generation of interest, which means no difference between
conventional banking IBBL because people have no proper knowledge about activ-
ities of IBBL as well as its mechanism. It should improve through various seminars
and Islamic discussion.
v. The bank should diversify their investment into different modes such as Bai-
Salam, Bai- Muajjal, SME, instead of concentrating on Bai- Murabaha and HPSM
investment mode.
vi. To fulfill the vision of mass banking, IBBL should grant investment portfolios
to new entrepreneurs.
vii. IBBL has to promote its distributional efficiency from all dimensions, together
with profitability.
viii. The bank should reduce its classified investment more by maintaining invest-
ment carefully in the safe sectors choosing the most creditworthy borrowers.
ix. The authority of IBBL should exert pressure on Government bodies to run prop-
erly and sufficient application of Islami banking laws in Bangladesh.
x. IBBL should make its investment schemes more attractive for availing high-return
projects.
xi. IBBL should consider the utilization of rural potentials from both efficiency
and equity grounds in the context of the present-day socio-economic conditions of
Bangladesh. Firm commitments and stepping up through the experiment and im-
plementation of innovative ideas are the appropriate ways to do that.
xii. IBBL should give more emphasis on their marketing effort take promotional
activities to get broad geographic coverage.
xiii. The authority of IBBL should introduce more innovation new customer service
through the appointment of a customer relationship officer at the branch level.
xiv. IBBL should appoint a sufficient number of women employees to deal with
women entrepreneurs and professionals to understand their needs and thus create
demand for investment.
xv. Legal framework and government rules regarding Islamic Banking should be-
come more flexible.

37
5.3 Conclusion
Islam is a complete code of life where the detailed regulation for maintaining a proper
economic life is given. Therefore, Islami Bank Bangladesh Ltd. (IBBL) is trying to
establish the maximum welfare of society by maintaining the principles of Islamic
Shariah, which is based on the Quran and Sunnah. Both Islam and Bangladesh
bank discouraged luxurious lifestyle. Therefore, in terms of consumer investment
IBBL also discourages luxurious lifestyles and always tries to give investment only to
those consumers who really need it. As a result, at a time, it reduces the extensive
usage of luxurious products and also upgrades the lifestyle of society by serving the
deserved people.

IBBL’s secret marketing vehicle is religion, and that alone helped the bank to attract
depositors and investors. Their spending on traditional marketing policies is small
and inefficient, which needs to be emphasized by the bank’s authorities. When it
comes to digitalization, IBBL is far behind compared to conventional banks, which
are a matter of grave concern in this era of technology.

Islami Bank Bangladesh Ltd. is the pioneer of the welfare activities in Bangladesh.
It is emphasizing equally in developing the rural areas of the country. The special
feature of the Investment Policy of the Bank is to invest on the basis of the profit-
loss sharing system in accordance with the tenets and principles of Islamic Shariah.
Earning of profit is not the only motive and objective of the Bank’s Investment Pol-
icy; instead, the emphasis is given in attaining social goals and objectives in creating
employment opportunities. Having been considered the pro-efficiency character of
Islamic banking and its beneficial impacts on the economy, government policy in
Muslim countries should be in favor of transforming the conventional banking sys-
tem into Islamic banking.

38
 BIBLIOGRAPHY

[1] Hassan, M. K., & M. Ahmed, “Islamic versus conventional banking: A survey
of their apparent similarities and differences. ”, Working Paper, 2001.
[2] Ali, M. M., & Sarker, ”Islamic Banking: Concept, Features and Operational
Methodology”. 1996, pp. 20–25.
[3] Chapra, M.U., ”Why has Islam prohibited interest: rationale behind the prohi-
bition of interest.” 2000, pp. 5–20.
[4] T. D. Star. (2016). 32 thrust sectors could fetch billions., [Online]. Available:
https : / / www . thedailystar . net / frontpage / 32 - thrust - sectors - could - fetch -
billions-1333828.
[5] M. Ahmed, “Practice of mudaraba and musharaka in islamic banking”, 2020.
[Online]. Available: http://ibtra.com/pdf/journal/v2 n1 article3.pdf.
[6] BBS. (2020). Bangladesh bureau of statistics, [Online]. Available: http://www.
bbs.gov.bd/.
[7] IBBL. (2020). Financial report, [Online]. Available: https://www.islamibankbd.
com/abtIBBL/financial report.php.
[8] ——, (2020). Investment products, [Online]. Available: https://www.islamibankbd.
com/prodServices/invScheme.php.
[9] IBTRA. (2020). Islami bank training and research academy ., [Online]. Avail-
able: http://ibtra.com/.

[2] [3] [1] [8] [7] [6] [9] [5] [4]

A
Annexes
• Website of Islami Bank Bangladesh Ltd.

Figure 1: Investment Products of IBBL (Screenshot)

• Annual Report of IBBL

Figure 2: Modewise Investments of IBBL, Annual Report 2018 (Screenshot)

B
• Dataset of Regression Analysis

Figure 3: Regression inputs in SPSS (Screenshot)

• IBTRA Internship Program

Figure 4: Closing ceremony of IBTRA Internship Program (142nd batch)