Banking Operation Under the Islamic Banking Framework

The prime objective of this report is to analysis Banking Operation under The Islamic Banking Framework, here focus on Jamuna Bank Limited, Nayabazar Islami Banking Branch. Other objectives are to get a clear idea about day to day banking operation, transactions and functions also progress and growth of banking operation of Jamuna Bank. Finally find out the problems and prospects of banking operation and transactions under Islami Banking system. Also recommend actions that may be necessary to redesign the islami banking procedure.

Introduction

Islamic Banking has emerged as innovation in the banking sector in almost all the member countries of the organization of Islamic conference (OIC). Like other member nations of OIC, Bangladesh also took the initiative to promote a bank based on Islamic Shariah. Jamuna Bank Limited (JBL) is a Banking Company registered under the Companies Act, 1994 with its Head Office at Printers Building (2nd  & 8th Floor), 5, Rajuk Avenue, Dhaka-1000. The Bank started its operation from 3rd June 2001.  JBL is an unconditional and specialized financial institution that performs of the standard banking service, General Banking, investment and foreign exchange activities in modern way. Jamuna Bank offers different types of Corporate and Personal Banking Services involving all segments of the society within the purview of rules and regulations laid down by the Central Bank and other regulatory authorities.

The islami banking of JBL performs all banking operation and transactions according to the basis of profit-loss sharing system conforming to the principles of Islamic Shariah.

The most distinctive feature of Islamic banking is its abstinence from interest in observance of Islamic banking and prohibition of all interest based transactions. The Islamic banking of Jamuna Bank limited organizes their operations on the basis of profit/loss sharing and other modes, which are permitted in Islam. Considering the importance of banking operation and performance of JBL, an attempt has been made in this paper to study the existing banking procedures under Islamic Framework with especial emphasis on JBL, Nayabazar Islami Banking Branch Branch. This paper however attempts to analyze the Fundamentals, Principles, Operational procedures, problems & prospects of foreign exchange and foreign trade under Islamic banking system.

Objectives of the Report

The prime objectives of this report are –

1. To acquaint with day–to–day banking operation, transactions & functions of Jamuna Bank Ltd.
2. To know the progress & growth of banking operation of JBL.
3. To gain in-depth knowledge of standard banking services of JBL highlighting the islami banking activities of “Nayabazar Islami Banking Branch”.
4. To find out the problems & prospects of banking operation & transactions under Islami Banking system.
5. To compare the performance of NIB Branch with the performance of JBL.
6. To recommend actions that may be necessary to redesign the islmi banking procedure of Jamuna Bank Limited.

Methodology of the Report

Methodology includes direct observation, face-to-face discussion with employees of different departments, study of files, circulars etc. and practical work. This study includes both quantitative and qualitative data. However, this report is basically qualitative in nature. In all the cases depending on the requirements data have been collected from different sources.  In fact, our report has incorporated the following aspects in completing the research work:

Source of Data:

This report is based on both primary & secondary source of information. For theoretical development of this research paper the data has been collected from the various sources like different publications, library sources, books, articles, etc.

For collecting primary data, we had to ask the respective officer(s). Others are like –

• Exposure on different desk of the bank;
• File study.

The secondary sources are –

• Annual Report of Jamuna Bank Ltd.;
• Visit the JBL website “ jamunabankbd.com ”
• Periodicals published by the Bangladesh Bank;
• Different publications regarding banking functions, operation, and transactions policies.

Data analysis:

Data that are collected through the primary investigation or from secondary sources have been analyzed through statistical tools (such as Excel), tables, trends etc. depending on the nature of data and the requirements. Where possible, the data have been verified from different sources such as from Periodicals published by the BB.

Based on the notes taken from the entire above sources a report was then written up gradually. However, we have made necessary discussion among us regarding report preparation. The necessary improvements & changes in the thesis then made if it is required. At the time of the interview we have found that the Nayabazar Branch of JBL is offering a full-fledged islami banking including foreign exchange services because this branch is an AD of islami banking & foreign exchange. We have also found that in respect of transactional dealings this branch has a good reputation among other branches of JBL. The banks are also keeping a close eye on relevant developments & changes in banking policies, procedures and rules & regulations.

GENERAL BANKING

Account Opening:

Islami Banking system of Jmuna Bank Limited Gives special importance on savings. The objectives and principles of the savings policy are:

• To encourage people to save for self and for the country as a whole.
• To develop a sustained savings habit among the people.

To mobilize deposits through the operation of the following accounts :

1. Al-Wadeeah Current Account
2. Mudaraba Savings Account
3. Mudaraba Term Deposit
4. Mudaraba Special Notice Account
5. Mudaraba Hajj Saving Scheme
6. Mudaraba Savings Bond Scheme
7. Mudaraba Foreign Currency Deposit (Savings) Scheme
8. Mudaraba Monthly Profit Deposit Scheme

To operate Current Account on Al-Wadeeah principle and all other deposit accounts on Mudaraba principle of Islamic Shariah.

The bank distributes minimum 65% of its investment income, earned through deployment of Mudaraba deposits, among the Mudaraba Depositors.

Al-Wadeeah Current Account

Rules For Opening:

• The deposit is accepted in the AWCA under Al-wadeah principle of Islamic Shariah. The deposited money is invested along with other deposits by the Bank according to Islamic Shariah.  Here, the customer does not have any share in the profit.  The transaction can be made more than once during the banking hour.
• The account can only be opened with the introduction of any acceptable client/ current account holder of the Bank. In order to open Al-wadeah Current Account, a minimum amount of T 1000/= is to be deposited and   the minimum balance with minimum amount of Govt. tax is to be maintained in the account. The Bank reserves the authority to return cheque, if otherwise.
• Withdrawal may be made through the cheques supplied by the Bank. In that case all articles of Negotiable Instrument Act are applied.
• Incidental charge @ Tk.400.00 half yearly basis is deducted from the account where minimum balance is not maintained. Closing charge @Tk.50.00 will be realised while closing the account
• For the first chequebook, the customer has to apply   in a specified form and then for new cheque book the customer shall have to apply through the requisition slip supplied with the previous chequebook.
• The customer has to count the pages of the chequebook at the time of receiving the same. The book   should be maintained safely so that no cheque may be misused or stolen or destroyed. The Bank will not be responsible for any forgery if occurred by the stolen cheque(s).
• The account holder shall have to use the specimen signature put in the Bank while withdraw money and in case of other correspondence with the Bank. In order to change the specimen signature put earlier the operator shall have to apply in writing before well in time.
• The Bank supplies statement of account every month.
• The bank has right to deduct any account to realise necessary expenditure/postal charge. Moreover, any tax imposed by the Govt. will be deducted from the account.
• The Bank preserves the right to close the account without showing any cause.
• The Bank consciously sums up the credit/debit of the account. If any amount is credited/debited through mistake, Bank can re-write the balance.   The account holder(s) can select nominee’s) to receive the balance of the account in.
• Any bonafide citizen of Bangladesh of eighteen years or above with sound mind may open account in his name under this scheme by application in Bank’s printed application form designed for this purpose.
• The applicant shall have to be introduced by a bonafide account holder of the Branch where he intends to open account or any client of any Branch of NIBB or any respectable person known to the Bank and shall have to give two passport size photographs at the time of opening the account.
• Separate account number shall be allotted for each account.

Mudaraba Savings Account 

Individual savings purposes open this type of account. Savings bank account also requires   proper introduction. Deposits are made through deposit slips and withdrawals are made through printed cheques supplied while opening the account. No new account can be opened with cheque only but there must be some initial cash deposits. As per existing rules, a depositor can withdraw from his SB account not more than twice in a week. If cash withdrawals are made violating the aforesaid prescribed limit, no profit is to be paid on such account for that month in which the default takes place. These SB account rules are subject to changes from time to live. Statement of account is to be dispatched to the account holder on quarterly basis or the customer may request for.

Mudaraba Term Deposit Receipt: 

Such type of deposit is repayable after the expiry of a predetermined period fixed by the customer himself. The period varies from 3 months to 36 months. As usual, the prospective fixed deposit holder is expected to fill up an application form which contains the rules and regulations of the deposit .A banker does not insist upon a letter of introduction or reference for opening a fixed deposit account.

Mudaraba Special Notice Account 

Mudaraba. Special notice deposit shall be credited to the account half yearly in June and December .No profit is to be charged if the balance stands in minimum. Individuals are permitted to deposit money in every working day. Withdrawals from this type of account require a prior notice of 7 days. It is also noted that JBL are promised to invest this deposited money according to the Islami shariah.

Mudaraba Special Savings (Pension) Scheme 

Jamuna bank Limited, in keeping with its welfare-oriented ideals based on Shariah Principles, has developed a deposit pension scheme named “Mudaraba Special Savings (Pension) Scheme”, in order to mobilize and encourage the middle and lower middle class professional and service holders to save as per their capacity for their old age when they will normally retire from their active service life who otherwise do not like to keep and invest their savings and funds in interest bearing deposit pension schemes.

Mudaraba Hajj Saving Scheme: 

Over twenty five thousand devoted Muslims from Bangladesh perform holy Hajj every year. Financial solvency and physical fitness are the pre-requisites of performing Hajj. The majority of the people, however, reach the fag end of their life in arranging the required amount of money for Hajj. Jamuna Bank Limited has, introduced “Hajj Savings Scheme” so that persons eager to perform holy Hajj may build-up savings through ‘Mudaraba Hajj Savings Account’.

Mudaraba Foreign Currency Deposit (Savings) Scheme :

Islami Banking of JBL has introduced a new deposit product titled ‘Mudaraba Foreign Currency Deposit Scheme (Savings)’ under Mudaraba principle and endeavoring to invest the foreign currency funds in profitable way through its Foreign Correspondent Banks under Shariah Principle so as to enable the Bank to pay profit to its FC/PFC depositors, who will intend to open/maintain Mudaraba Foreign Currency Deposit (MFCD) Account.

Mudaraba Fixed Deposit Receipts

These are time deposit A/C with maturation period of 3 months, 6 months, 1 year, 2 years and 3 years. Fixed deposits are repayable along with profit on or after maturation period. At the request of the depositor a matured F.D.R. may be renewed for any of the periods mentioned above. If the depositor does not issue any instruction to branch within on month of the date of maturity of the FDR, the same will be automatically treated as renewed from the date of expiry for a period of three months at the rate of profit applicable on the renewal. In case of premature encasement of FDR, no profit is paid to depositor. FDR can be for any amount money.

Duplicate Chequebook

A new chequebook can be issued to a customer in lieu of lost. But the account holder should have to approach personally to the bank with application/ letter of indemnity in the prescribed Performa agreeing to indemnify the bank for the lost chequebook. Fresh cheque book in lieu of the lost one should be issued after verifying the signature of the account holder from the specimen signature card only prior approval of the manager / sub-Manager of the branch.

Closing of Accounts

A customer may close out his A/C at any time by submitting an application to the branch. The customer should be asked to draw the final cheque for the amount standing to the credit of his A/C less the amount of closing and/or other incidental charges and surrender the unused cheques. The A/C should be debited for the account closing charges etc. and an authorized officer of the branch should destroy unused cheque leaves.

In case of joint A/C the application for closing the a/c should be singed by the entire joint a/c holder, even if the a/c is operated by either of them. The last cheque fir withdrawal of the available balance in the a/c should also be singed by all the jointly holders.

Growth Of Deposits:

The total deposit of the Branch stood at Taka 32,99,16,353 as on 30.06.2003 as against Tk.  33,76,71,485 as on 31.12.2004. The growth rate in this respect is 2% much more the last year. The Bank has a sound deposit-base as it mainly comprises of small and medium size deposits.

The Total deposit stands at Taka 28,75,84,977 as on 31st December 2005. Evidently, the deposit of the Bank has increased remarkably over the last 5 years.

Growth of Deposit in Taka.

LOCAL Remittance Department

Cash remitting from one place to another is risky. So, Banks remit funds on behalf of the customer(s) to save them from any awkward happening through network of their branches. There are three modes of remitting funds. These are –

• Pay Order (PO)
• Demand Draft (DD)
• Telegraphic Transfer (TT)

Pay Order (PO)

Pay order is an instrument, used to remit fund within a clearing zone. Unlike cheque, there is no possibility of dishonoring PO. The PO can only be encashed through the branch that has issued the instrument.

Collection And Clearing Section

Collection

In modern banking the mechanism has become complex as far as smooth transaction and safety is concerned. Customer does pay and receive bill from their counterpart as a result of transaction. Commercial bank’s duty is to collect bills on behalf of their customer.

Receiving Cheques For Collection:

In Jamuna Bank Ltd. cheques of its customers are received for collection from other banks. In case of receiving cheques, following points should be checked very carefully-

1. The check should not carry a date older than the receiving date for more than 6 months. In that case it will be a ‘Stale Check’. Again the check should not be a ‘Post dated’ one.
2. The amount both in words and figures of the pay-in-slip should be the same and also it should be in conformity with the check’s amount both in figures and words.
3. The name mentioned both in the check and the pay-in-slip should be the same.
4. The check must be crossed.
5. Collecting banker must check whether endorsement is done properly or not.

Types Of Bills For Collection

1. Outward Bills for Collection
2. Inward Bills for Collection.

A.Outward Bills For Collection (OBC)

If the bill is beyond the clearing range then it is collected by OBC mechanism. Customer deposits cheques, drafts etc. for collection, attaching with their deposit slip. Instruments outside the clearing range are collected through OBC mechanism. A customer of Jamuna Bank Ltd. Nayabazar Branch is depositing a check say of Janata Bank, Kotchandpur branch, Jhenidah. Now as a collecting bank, Nayabazar Branch will perform the following tasks-

1.Procedure of OBC

Depositing the cheque along with deposit-slip.

1. Crossing of cheques are done indicating Nayabazar Br. as a collecting bank.
2. Endorsement “Payee’s A/C will be credited on realization” is given.
3. Entries are given in the Outward Clearing Register.

Collecting bank can collect it either by its branch or by the drawer’s bank. They will forward the bill to that particular branch. OBC number will give on the forwarding letter. Now following procedures will take place in case of the following two cases.

2.The Process Of Collection Is Described Bellow:

• If the bill is drawn on Jamuna Bank Bangladesh Ltd. Nayabazar Branch –
• Bills are sent to that branch through mail or courier;
• Branch collects the bills and sends an IBCA to that Branch;
• Depositor’s account is credited.
• If the bill is drawn on another Bank and there is a branch of JBL –

1. Branch sends the bill direct to the branch of JBL by OBC schedule.
2. Request them to send the proceeds by IBCA and collect the bill.

B.Inward Bills For Collection (IBC)

When the banks collect bills as an agent of the collecting branch, the system is known as IBC. In this case the bank will work as an agent of the collection bank. The branch receives a forwarding letter and the bill. Next steps are as follows-

1. Entry in the IBC register
2. An IBC number is given on the bill.
3. Endorsement given- “Our branch endorsement confirmed”
4. The instrument is sent for clearing.

If Dishonored, the instrument is returned to the collecting branch along with a return memo.

CLEARING

According to the Article 37(2) of Bangladesh Bank Order, 1972, the banks which are a member of the clearing house are called as Scheduled Banks. The scheduled banks clear the cheques drawn upon one another through the clearing house. This is an arrangement by the central bank where everyday the representative of the member banks sits to clear the cheques. For clearing there is a department in every Bank. This department receives cheques, drafts and like instruments from its customers for the purpose of collection with a deposit slip over the counter crediting their accounts. Clearing of cheque is done through the clearing house in Bangladesh Bank. Everyday the first hour starts at 10:00 a.m. and returns house at 5:00 p.m.

Types of Cheques For Clearing:

1. Inward Clearing Cheques
2. Outward Clearing Cheques

A.Inward Clearing Bills

It refers the instument drawn on Islami Bank Bangladesh Ltd. Paltan Branch Limited, received from other banks in the clearing house by their representative(s).

B.Outward Clearing Bills

It refers the instruments drawn on the other banks received by Jamun Bank Ltd. NIBB. Branch.

Cash Section

Cash is the lifeblood of all financial activities. Cash section is a very sensitive point of the branch. This section deals with all types of negotiable instruments and it includes vault, used as the store of cash, instruments. The vault is insured up to Tk. 20 lac. Insured amount yet to be enhanced to Tk. 40 lac. Operation of this section begins when the banking hour starts. Cash officer begins his/her transaction with taking money from the vault, known as the opening cash balance. Vault is kept in a more secured place. The amount of opening cash balance is entered into a register. After whole days’ transaction, the surplus money remains in the cash counter is put back in the vault and known as the closing balance. If the cash stock goes beyond this limit, the excess cash is then transferred to Islami Bank Bangladesh Ltd. main branch. The main functions of this section are –

• Cash Receipt
• Cash Payment

Accounts  Section

Accounts department maintains all records of transactions and all types of statement. At the end of transaction hour all concerned section sends vouchers of transactions to this department. Accounts department compares all figures/ amount, contents of transactions with supplementary statement prepared by computer. If any discrepancy arises regarding any transaction then this department reports to the concerned department. Following are the activities of accounts department:

• To record all transaction in the cash book.
• To prepare daily, weekly, monthly, half-yearly and yearly fund position.
• To prepare all kinds of statements related to Bangladesh Bank, Head office and National Board of Revenue (NBR).
• To prepare monthly salary statement, provident fund statement and administrative expenditure statement.
• To make charges for different types of duty.

Statements Prepared By The Branch

1. Weekly fund position (CRR-4% and SLR-16%)
2. Monthly sector corporation
3. Monthly Schedule Bank Statements-1 (SBS-1)
4. Quarterly Schedule Bank Statements-2 (SBS-2)
5. Quarterly statement of exchange of torn/ dirty notes
6. Half-yearly Schedule Bank Statements-3 (SBS-3)
7. Half-yearly deposit insurance pension scheme

INVESTMENT OPERATIONS AND MANAGEMENT

The special feature of the Investment policy of Islami Banking of Jamuna Bank Limited is to invest on the basis of profit loss sharing system in accordance with the tenets and principles of Islamic Shariah. Earning of profit is not only the motive and objective of the bank’s investment policy rather emphasize is given in attaining social good and in creating employment opportunities.

The investment and credit department is very important department of a Bank. The money mobilized from ultimate surplus units are allocated through this department to the ultimate deficit unit (Borrower). The success of this department keeps a great influence over the profit of a bank. Failure of this department may lead the bank to huge losses or even to bankruptcy. So special care should be given to this department.

Investment and credit department receive application from clients in a prescribed application form supplied by the Janata Bank Limited. This application form contains detail about the borrowers such as names address of the borrowers/ directors/partners/proprietors, type and nature of the business, security offered, market of the borrower product, annual sales and production etc. The applicant must duly sign the application form. The branch officer after receiving the application form scrutinize the information provided in the form, collect additional financial information of the proposed firm, detail financial and other relevant information of sister concern, if any.

After appraising the investment request and its securities the branch makes an investment proposal with detail information to the head office for approval. The officer in-charge and manager must sign this investment proposal as well. If head office approves the investment proposal, the branch prepares all documentation and make arrangement for investment disbursement.

At present JBL have the following types of investment modes:

1. Bai-Muajjal
2. Bai-Murabaha
3. Hire Purchase Under Sirkatul Meelk
4. Mudarabah
5. Musharaka

Objectives And Principles

The objectives and principles of investment operations of the Bank are :

• To invest fund strictly in accordance with the principles of Islamic Shariah.
• To ensure mutual benefit both for the Bank and the investment-client by professional appraisal of investment proposals, judicious sanction of investment, close and constant supervision and monitoring thereof.
• To increase the number of potential investors by making participatory and productive investment.

Growth of Investment:

The investment of the Branch demonstrated steady growth over the years. The total investment of the Branch stood at Taka =……………….. in 2005. It was Taka ………………… in 2004. By December 31, 2005 No. of investment client stood at ………..

Growth of Investment (Taka in million)

Bai-Muajjal

Bai‑Muajjal 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 country), to the buyer at an agreed fixed price payable at a certain fixed future date in lump-sum or within a fixed period by fixed installments. The seller may also sell the goods purchased by him as per order and specification of the buyer.

Meaning

The terms “Bai” and “Muajjal” have been derived from two Arabic words. The word “Bai” means purchase and sale and the word “Muajjal” means a fixed time or a fixed period. “Bai‑Muajjal” means sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on Credit.

Important Features

• It is permissible for the Client to offer an order to purchase by the Bank particular goods deciding its specification and committing himself to buy the same from the Bank on Bai-Muajjal i.e. deferred payment sale at fixed price.
• It is permissible to make the promise binding upon the Client to purchase from the Bank, that is, he is to either satisfy the promise or to indemnify the damages caused by breaking the promise without excuse.
• It is permissible to take cash / collateral security to Guarantee the implementation of the promise or to indemnify the damages.
• The Bank must deliver the specified Goods to the Client on specified date and at specified place of delivery as per Contract.
• The Bank may sell the goods at a higher price than the purchase price to earn profit.

Bai-Murabaha

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.

Meaning

The terms “Bai-Murabaha” have been derived from two Arabic words “Bai” and “Ribhun”. The word “Bai” means purchase and sale and the word “Ribhun” means an agreed upon profit. “Bai-Murabaha” means sale on agreed upon profit.

Important Features 

It is permissible for the Client to offer an order to purchase by the Bank particular goods deciding its specification and committing him to buy the same from the Bank on Murabaha, i.e.cost plus agreed upon profit.  It is permissible to make the promise binding upon the Client to purchase from the Bank, that is, he is to either satisfy the promise or to indemnify the damages caused by breaking the promise without excuse. It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the damages.
It is also permissible to document the debt resulting from Bai-Murabaha by a Guarantor, or a mortgage, or both like any other debt.  Mortgage/ Guarantee/ Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.

Stock and availability of goods is a basic condition for signing a Bai-Murabaha Agreement. Therefore, the Bank must purchase the goods as per specification of the Client to acquire ownership of the same before signing the Bai-Murabaha agreement with the Client.

After purchase of goods the Bank must bear the risk of goods until those are actually sold and delivered to the Client, i.e., after purchase of the goods by the Bank and before selling of those on Bai-Murabaha to the Client buyer, the Bank shall bear the consequences of any damages or defects, unless there is an agreement with the Client releasing the Bank of the defects, that means, if the goods are damaged, Bank is liable, if the goods are defective, (a defect that is not included in the release) the Bank bears the responsibility.

The Bank must deliver the specified Goods to the Client on specified date and at specified place of delivery as per Contract.

The Bank shall sell the goods at a higher price (Cost + Profit) to earn profit. The cost of goods sold and profit mark-up therewith shall separately and clearly be mentioned in the Bai-Murabaha Agreement. The profit mark-up may be mentioned in lump sum or in percentage of the purchase/cost price of the goods. But, under no circumstances, the percentage of the profit shall have any relation with time or expressed in relation with time, such as per month, per annum etc.

The price once fixed as per agreement and deferred cannot be further increased.

It is permissible for the Bank to authorize any third party to buy and receive the goods on Bank’s behalf. The authorization must be in a separate contract.

HIRE Purchase Under Sirkatul Meelk

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.

Meaning And Definition

Hire Purchase under Shirkatul Meelk is a Special type of contract which      has been developed through practice.

Shirkatul Meelk

Shirkat means partnership. Shirkatul Meelk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul Meelk contract.

Important Features

In case of Hire Purchase under Shirkatul Meelk transaction the asset / property involved is jointly purchased by the Hire (Bank) and the Hirer (Client) with specified equity participation under a Shirkatul Meelk Contract in which the amount of equity and share in ownership of the asset of each partner (Hire Bank & Hirer Client) are clearly mentioned. Under this agreement, the Hire and the Hirer become co-owner of the asset under transaction in proportion to their respective equity participation.

In Hire Purchase under Shirkatul Meelk Agreement, the exact ownership of both the Hire (Bank) and Hirer (Client) must be recognized. However, if the partners agree and wish that 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 Meelk Agreement. However, in JBL, IB no third party registration shall be allowed.

In the Hire Purchase under Shirkatul Meelk Agreement the Hire (Bank) does not sell or the Hirer (Client) does not purchase the asset but the Hire (Bank) promise to sell the asset to the Hirer (Client) part by part only, if the Hirer (Client) pays the cost price / equity / agreed price as fixed for the asset as per stipulations within agreed upon period on which the Hirer also gives undertakings.

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

Hire Purchase under Shirkatul Meelk is a binding contract for the parties to it – the Bank and the Client who are committed to fulfill / meet their undertakings / obligations in accordance with the relevant agreement.

Under this agreement the Bank acts as a partner, as a Hire and at last as a seller ;on the other hand the Client acts as a partner, as a Hirer and lastly as a purchaser.

In a Hire Purchase under Shirkatul Meelk agreement any stipulation may be made, provided it is not against the nature and requirements of the contract I itself, nor does it violate the /this may be the last one Devine laws of Islam and is also acceptable to both the parties.

Hire Purchase under Shirkatul Meelk transaction facilitates the Client (Hirer) to get benefit from the hired asset in exchange of rental and also to become full owner of the asset by purchasing it part by part.

If, for any reason, the hire contract is revoked prior to the transfer of full title of the asset to the Hirer, then the title of the asset will be shared by both Hire and Hirer – the Hirer will share that part of title which has been transferred to him against payment and the Hire will share the remaining part.

Mudarabah:

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 pre-agreed basis, while capital loss is exclusively borne by the partner providing the 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.

Selection Of A Borrower

In lending, the most important step is the selection of the borrower. Due to the asymmetric information and moral hazard, banks have to suffer a lot due to the classified investments and advances, which weakens the financial soundness of the bank. If the selection of borrower is correct, that is, the borrower is of good character, capital and capacity or of reliability, resourceful and responsible; the bank can easily get the return from the lending. Consequently, monitoring is made much more easier for the banker. From this point of view, IBBL follows the following procedures.

Studying Past Track Record : After getting an application for an investment, an IBBL Official studies the past track record of the applicant. Generally the study includes.-

1. Account balances and the past transactions.
2. Credit report from other banks.
3. Information of the Industry by studying market feasibility.
4. Financial statements (balance sheet, cash flow statement, and income statement). If the borrower is a sole-proprietor, then the single entry accounting treatment is concerted to double entry system.

Report from Credit Information Bureau of Bangladesh Bank if the amount is more than Tk. 10 lac.

Borrowers ANALYSIS: Borrower analysis is done from the angle of 3-C (character, capital, capacity) or 3-R (reliability, resourcefulness, responsibility). It follows that the bank forms a rational judgment about the integrity of the borrower, which should be undoubted. The human skill, conceptual skill, operational skill is qualitatively analyzed.

Business ANALYSIS: Business analysis is done from two angles-terms and conditions and collateral securities.

Sanction

On completion of Appraisal as provided here in above, if the proposal is found viable, issue Sanction Advice mentioning all the terms and conditions in duplicate to the Client and endorse copies to Head Offices retaining one copy in the Client’s file duly accepted by the Client.

If the Client duly accepts the Sanction terms and conditions, the particulars of the sanctioned proposal is Allotted a Fixed Serial number for Client in the Limit Register as per limit Register which shall remain permanent irrespective of the Mode(s) so long as the limit remains valid and the Client continues business with the Bank.

A Client-wise file affixing the fixed number is allotted to him as per Limit Register and Client’s particulars be recorded prominently in the inner side of the Investment

In case of Investment to the existing Client, obtain required papers, ocuments/application with the past performance & outstanding liabilities of the Client, if any & rocess/sanction the proposal as per instruction laid down here-in-above after due evaluation/study.

Documentation

Documentation can be described as the process or technique of obtaining the relevant documents. In spite of the fact that banker lends credit to a borrower after inquiring about the character, capacity and capital of the borrower, he must obtain proper documents executed from the borrower to protect him against willful defaults. Moreover, when money is lent against some security of some assets, the document must be executed in order to give the banker a legal and binding charge against those assets. Documents contain the precise terms of granting investments and they serve as important evidence in the law courts if the circumstances so desire. That’s why all approval procedure and proper documentation shall be completed prior to the disbursement of the facilities.

Charge documents required by different types of advances are mentioned bellow:

• Stock report
• Trade license (Up-to-date)
• Photograph proprietor/partner/directors (two copy each)
• Income Tax clearance certificate /TIN certificate.
• Declaration of liability position with other Banks (Up-to-date).
• Particulars of assets of the firm /company.
• Personal Assets of the proprietor/partners.
• Statement of receivable and payable.
• Partnership Deed (in case of partnership firm).
• Credit Report.
• Statement of profit calculation.
• Banks statement for prior 12 months from previous Bank (for new customer).
• Business plan.
• Bio-Data of the proprietor/partner.
• Rental Agreement (in case of rented premises).

Registered company related documents:

• Certified copy of Memorandum & Articles of Association.
• Certified copy of papers/ documents from Registrar of joint stock

Companies regarding allotment of share and change in the Director :

• Photocopy of share certificate (Attested by the managing Director).
• Certificate of incorporation.
• Certificate of commencement (in case of public Limited Company).
• Resolution in respect of availing investment facility from IBBL (Amount to be specified.
• Bio-data of the Directors / Executive of key post.
• Balance sheet for the last three consecutive years.

Security related documents (Land & buildings) :

• Original title deeds / Bia-deeds.
• CS & RS parcha.
• Mutation khatian with DCR.
• Up-to-date rent receipt.
• Non-Encumbrance certificate with SFR.
• Valuation certificate.
• Site map.
• Mouza map.
• Other Collateral: TDR etc.

Before purchasing the goods by the Bank, sufficient collateral/securities along-with the following Charge Documents be properly executed, i.e. duly filled in, singed, stamped, verified and witnessed, where necessary:

• Murabaha Sanction Advice deal-wise duly accepted by the Client.
• Bai-Murabaha Agreement after purchase of the goods by the Bank.
• Agreement for pledges of goods
• Single Party if there is no Guarantor
• Double Party D.P. note, if there is Guarantor, to be made by the Client in favor of the Guarantor and endorsed by latter in favor of the Bank.
• Joint and Several D.P. note singed by all the Directors in case of Limited Company.
• P. note delivery Letter duly singed by the maker and the endorser.
• Letter of Hypothecation for Client’s Stock in Trade/Work-in-Process, if the Investment allowed in additionally secured by Hypothecation of Stock/Stock-in-trade.
• Letter of Disclaimer, if stored in Party’s own/hired godown.
• Trust Receipt duly executed by the Client if goods delivered under TR.
• Balance Confirmation Letter
• Letter of Guarantee singed by the Guarantor as per terms of sanction.
• Letter of Installments if sales price is payable on installments.

If the Investment is made collaterally secured by Mortgage of Property, bank must obtain the following documents:

• Personal Guarantee of the owner(s) of the Property.
• Original Title Deed(s) with CS, RS, SA Mutation Parcha, DCR of the property and mutation record.
• Up-to-date rent Receipts.
• Non-encumbrance Certificate along-with Search Fee Paid Receipt.
• Site Plan of the proposed mortgaged property.
• Valuation Certificate countersigned by the Manager certifying the Market value and the Forced sale value. Value of the Land and Construction to be shown separately taking the depreciated value of the Construction/Building into consideration as per standard norms.
• Lawyer’s Certificate about verification of the Title Deed.

Where the Investment is secured by Hypothecation of Stock-in-trade, Machinery etc., and bank also obtains the following Documents:

• Letter of Hypothecation for Client’s Stock-in-trade/Work-in-process/Stores/Mills & Machinery etc.
• Trust Receipt.
• Legal Mortgage of Machinery with full details of each Machine.
• Agreement for Pledge of Shares along-with original Share Certificates.
• Share Transfer Deed in Duplicate – one copy singed, dated and another copy singed undated.
• Share Delivery Letter addressed to the Bank.
• Letter to the concerned Company to register lien in Bank’s favor.

This notice shall be sent by Registered Acknowledgement Due Post and confirmation of recording the Lien shall be obtained from the concerned Company.

Letter of Authority in Bank’s favor duly singed by the shareholder to collect Dividend and Bonus on his behalf of the Share pledged to the Bank.

In case of Investment to Partnership Firms, bank obtains the following documents:

• Letter of Partnership singed by all Partners
• Copy of Partnership Deed duly attested by the Incumbent-in-charge of the Branch

In case of Investment to Private or Public Limited Company, bank obtains the following additional Documents:

• Certified copy of the Memorandum and Articles of Association to ensure that the Company has necessary power to borrow/take Investment from any Bank.
• Resolution of the Board of Directors of the Company to do business and authorizing the office bearers to execute necessary documents.
• Personal Guarantee of all the Directors of the Company.
• If the Investment is allowed on Hypothecation basis, in addition to other Charge Documents, 1st charge under relevant section of the Company’s act shall be created in Bank’s favor in respect of Company’s Assets prescribed as security.
• These charges are created with the Register of Joint Stock Companies and firms within 21 days from the date of execution of the relative Charge Documents.
• Certificate issued by the registrar of Joint Stock Companies & Firms under section 114 of the Companies Act, 1994 in respect of creation of Charges
• Copies of Memorandum and Articles of Association with latest amendments, if any, duly certified by the Registrar of Joint Stock Companies & Firms and attested by the Managing Director on every page with Officials Seal of the Company duly verified by the Branch Incumbent.
• A certified copy of Certificate of Incorporation
• A copy of Certificate of Commencement of Business in case of Public Limited Company

In case of Investment to a Trust Organization obtain the following Documents in addition to other Charge Documents:

• Copy of Trust Deed duly attested by 1st class gazetted officer and verified by the Incumbent-in-charge of the Branch with the original copy. The Trust Deed must have power to do business with Banks.
• Resolution of the Board of Trustee to do Business with Islami Bank Bangladesh Ltd.
• Charge Documents shall be singed either by persons authorized by all members of the Trust Committee.
• Personal Guarantee of all the Office Bearers of the Trust in their personal Capacity.

In case of Investment to Co-operative Society, bank obtains the following documents also:

• Clearance from the Registrar of Co-operative Societies for doing business with Islami Bank Bangladesh Ltd.
• Letter to be issued to the concerned Registrar of Co-operative Societies under Registrar A/D Mail informing about Bank’s allowing of Investment/Facility to the concerned Society as per clearance accord by him.
• Personal Guarantee of the Office Bearer of the Society in their personal capacity.
• A copy Byelaws of the Society duly certified by the Registrar of the Co-operative Societies.

Rebate For Payment/Adjustment Of Investment Account

Rebate may be allowed to the Investment Account (at the calculated rate of profit) in lump sum but very nearest to the rate of R.R. for earlier adjustment of the concerned amount(s) within due date. A monthly Statement of Rebate Allowed showing the amount of rebate allowed and profit earned with the rate of R.R. be furnished to Investment Division, Head Office with a copy to Branch file for verification by the “Audit Team” in their visit to the Branch.

Follow-Up, Supervision, Recovery And Adjustment

To proper follow-up, supervision, recovery & adjustment bankers are filing client-wise with the Copies of Application, Appraisal Report, Sanction Advice and other Documents and Papers viz. Trade License, Income Tax Payment Certificate, Partnership Deed/Memorandum and Articles of Association etc. submitted by the Client with the Original Application. Copy of all correspondences made and reply received thereto is chronologically preserved in this file.

Findings & Analysis:

In Nayabazar Islami Banking Branch I have seen these types of improvement & problem-

• Total Deposit was increase in 2003 to 2004 but in 2005 it has decrease.

• Total Advance in 2003 was 37,16,676 but it has increase too much like 75 times (aproxy.), It Means Company’s Asset has been increased.
• Total Bill payable was increase in 2003 to 2004 but in 2005 it was decrease.
• Total deposit including Bill payables also increase in 2003 to 2004 but decrease in 2005.
• Due to absence of legal framework of IBBL, the bank is facing problems in its transactions to handle Shariah based contract regarding foreign exchange business.
• Lack of computer literacy of the employees.
• Inner side of the branch is very much congested; there is no enough space to stand the customers freely.
• Employee- Customer relationship is not so good. Customers are not satisfied of their service. Employees are too much slow.
• Interpersonal relationships of the employees (Top to bottom) are not satisfactory level.
• Lack of enough business communication skills of the employees.
• Lack of better coordination between IBTRA and Shariah council for foreign exchange business.
• Due to absence of Govt. Shariah board many aspect of Islamic financing technique remains unsolved such as in case of delay of payment of murabaha export and Import.
• SEC does not permit to introduce the separate index for the company’s run within the Islamic Shariah principles.
• Lack of Islamic education for foreign exchange business.
• The relationship among other countries about import, export and remittance is not so good.
• The electronic media operators are not trained such as SWIFT, Telex etc.
• Conventional banks used foreign fund to gain interest but IBBL cannot invest foreign fund in Islamic way.
• NIBB take profit from delivery date but conventional banks take interest from the negotiating date. It is problem for foreign exchange business of NIBB.
• NIBB cannot show the interest as income received from NOSTRO A/C.
• Reserve fund of foreign currency can^’t utilize.

Recommendations­:

We have seen in the previous section that NIBB has many problems but the problems are not uncomfortable, where there is problem there must be a solution. Some solution, which I recommend to improve the performance of NIBB are as follows: –

• NIBB has been facing space problem. So they need another floor for solve the problem finally they manage another floor, I think this is the right decision in right moment.
• NIBB need to improve interpersonal relationship of the employees.
• NIBB need to train up their employees like computer operation, Communication skills & others needs.
• The employees of the NIBB need to be very fast; customers come to the private Bank for fast service; because Time is Money.
• To establish Islamic legal framework for conducting foreign exchange Business.
• To establish Islamic capital market for conducting foreign exchange business.
• NIBB needs to recruit expert manpower with computer literacy & business communication skills.
• To handle foreign exchange business, business communication skill should be developed.
• To establish institution to make expert for international trade and foreign exchange business.
• To conduct research for Islamic capital market.
• A better coordination between IBTRA and Shariah council of IBBL should be ensured in order to evolve new avenues of activities under Islamic Shariah and innovate new Islamic financial instruments. The AC of IBTRA and Shariah council may hold joint meetings from time to time.
• Islamic guidelines are required for foreign exchange investment.
• A study team may visit Malaysia, Pakistan and other countries to study the operations of Islamic capital market in those countries.
• To build up interest free economy system recognized by the state so as to cope with the conventional banks.
• To create syndicate banking system for foreign exchange business.
• To establish partnership relation with exporter and importer on a profit loss-sharing basis so as to avoid the undesirable effects of interest based transaction and necessary steps to establish justice in the economic system.
• Shariah cell should be in dealing foreign exchange business with Islamic Banks.
• To conduct foreign exchange smoothly govt. support is required to get IRC and ERC.
• The bank should ultra- modernize its foreign trade and remittance.
• Literature on Islamic capital market may be preserved at IBTRA library and important copies of those may be supplied to the researchers, internee and thinkers on the subject from time to time.
• NIBB should introduce update technology to render competitive banking service, Increase ATM booth, and Launching credit card.
• NIBB should take hand various advertisement programs.
• To gather the Social image NIBB needs to participate in the Social welfare.
• NIBB need to change the tea boy, behavior of the tea boy is unacceptable

Conclusion:

Interest free banking system is no more a concept. It is now a Reality, a dynamic system, embodying a set of superior banking mechanism. More than 300 Islamic bank and financial institutions are operating in different Countries throughout the world with a marked success from this inception in our country in 2001 but Jamuna Bank Limited has been operating with real and confidence in corporation with other conventional banks. Bringing a new concept in such business sector, which is growing too rapidly in the world, is rally bold step. As a large Islamic commercial bank, Jamuna bank took various steps to create employment and socio-economic development for the poor through Islamic shariah.