An Appraisal of Social Investment Bank Limited

 Origin of the report

The internship program is an integral part of the BBA program that all the students have to undergo of East West University of Bangladesh. The students are sent to various organizations where they are assigned to one or more projects. At the end of the program, the internships are required to place the accomplishments and findings of the project through the writing of the internship report covering the relevant topics. During this program, supervisor guides each student – one from the university and the other from the organization.

This report is the result of a 3 months (February 10 to May 10, 2004) internship program in Social Investment Bank Limited (SIBL). This report contains Introduction about the report in Chapter 1; Background of Islamic economy and Islamic banking in Chapter 2; To present an overview of SIBL in chapter 3; To appraise the principal activities of SIBL in chapter 4; To appraise performance evaluation of SIBL in chapter 5; Online Banking Operation of Social Investment Bank Limited in chapter 6; To Identify problems of SIBL in chapter 7; To suggest suggestion for the development of SIBL in chapter 8. The topic of the report has been consulted & directed by the internship supervisor from East West University of Bangladesh.

 Objectives of the Study

This study is aimed at providing me invaluable practical knowledge about banking operation system especially Islamic banking in Bangladesh. It will also help me to develop my concept of banking and it operations. The objectives are:

   To relate theoretical knowledge with practical experience in several functions of the bank.

  To be acquainted with how bank perform its operation.

  To know about the modes of investment of Islamic Banks.

  To study strengths & weakness of SIBL compares to competitors.

  To present my observation and suggestions to the bank.

  To make myself more confident and active in future to handle my job.

Purpose

Knowledge and learning become perfect when it is associated with theory and practice. Theoretical knowledge gets its perfection with practical application. As our educational system predominantly text based, inclusion practical orientation program, as an academic component is as exception to the norm. As the parties; educational institution and the organization substantially benefit from such a program, it seems a “win-win situation”. It establishes contracts and networking contracts. Contracts may help to get a job. That is, students can train and prepare themselves for the job market. A poor country like Bangladesh has an overwhelming number of unemployed education graduates. As they have no internship experience they have not been able to gain normal professional experience or establish networking system, which is important in getting a job. That’s why practical orientation is a positive development in professional area. Recognizing the importance of practical experience, School of Management and Business Administration has introduced a three months practical exposure as a part of the curriculum of Bachelor of Business Administration program. In such state of affairs the present aiming at analyzing the experience of practical orientation related to an appraisal of Social Investment Bank Limited, Principal Branch.

Scope

This report will be dealing with an appraisal of Islamic banking system, its history and mechanism, policies, and appraisal of Social Investment Bank Limited.

 Methodology

For collaborating the data and information collected through primary and secondary sources I have used both qualitative and quantitative method which contains the past, present and future situation of Islamic bank system in Bangladesh specially Social Investment Bank Ltd. During my study I followed some methodology to find out the fact and feature of the bank which are given as follows:

Area of study:

My project was limited in overall banking function of SOCIAL INVESTMENT BANK LTD. I studied all the main three functional areas of the bank. They are:

1. 1.           General Banking.
2. 2.           Investment Area.
3. 3.           Foreign Exchange Area.

Sources of Data/Information:

I have collected my information/data from the following sources, which helped me to make this report. The source has divided by two parts. Such as

• Primary source and
• Secondary source

I used both the sources.

Primary Sources:

Primary sources include interviews and conversation with officers and executives of the bank of different divisions and department.

 Secondary Sources:

Secondary sources of information include annual report, general report, investment manual, general banking manual, foreign exchange manual, selected books journals and other publication etc.

 Analysis of data

Two approaches have been mainly used in this report.

• Conceptual Approach
• Empirical Approach.

These two approaches are discussed below:

Conceptual Approach:

A theoretical section is given in this report (i.e. the organization part) to give an insight various information concerning the financial function. It is given in relevance with the organization in context i.e. Social Investment Bank Limited (SIBL). A background of SIBL is given to facilitate the understanding of this report. Every single portion is discussed in order to understand the empirical section.

Empirical Approach:

This refers to the information that has been directly collected and interpreted from the survey on Social Investment Bank Limited (SIBL). The report is prepared by interviewing the officials of SIBL. The reports of SIBL and documents are also been studied to do the report.

Time Allocation

The time, which was given me to prepare the project report, was not enough to make as a big report. Nevertheless I have tried my level best to utilize the time. The time, which I spent to make the report, are given below.

 General Sections                                One month

Investment Sections                           One month

Foreign Exchange                              One month

 Limitations

Banking sector is very sensitive and competitive by its nature. So, data of this report is not available and the interviewees might not disclose accurate facts and figures about foreign exchange and other activities. However I faced the following problems during the study.

1. Insufficiency of valuable data and information
2. Lack of proper books, journals etc.
3. Lack of experience
4. Lack of time and resources.
5. Lack of perfect co-operation.

Report Preview

This paper is a short one providing only the facts and figures of current situation of Islamic Bank and overall activities of Social Investment Bank Ltd.

Background of Islamic Economy & Islamic Banking :

An Islamic economy is a market economy guided by moral values. Economic activities are based on principles of cooperation and responsibility. Cooperation means that an economic exchange will be beneficial to both parties involved in. Transactions in which one party wins at the expense of the other are not permissible in Islam. Thus, monopolistic dealings, usury, and exploitation are prohibited. Transactions that allow both parties to win are permissible, and these include most types of activities needed for economic prosperity. Permissible and these include most types of activities needed for economic prosperity. Performance-based arrangements, like profit sharing or partnership, represent the most cooperative form of beneficial agreements, and thus are highly encouraged in Islam. Responsibility means that each individual is entitled for reward or return based on his effort and contribution. Thus gambling and lotteries are not permissible. Gambling lows an individual to gain based on pure luck, not on merit or effort. It shifts wealth blindly among participants leading to improper distribution of wealth. Gambling is a clear form of zero-sum game where one party wins only if the other loses, and causes hatred and enmity among participants. A society where lotteries or gambling-like activities prevail is a zero-sum society, where the winner takes all, and the rest is doomed to fail.

 Islamic Economics:

Islamic economics is a framework for studying economic activities that allow mutual benefit of exchange to be realized. It provides proper tools and techniques for evaluating economic decisions, showing when and how to achieve win/win outcomes and avoid win/lose or lose/lose ones. Islamic economics is based on the principle that Allah, the Almighty created this world with plenty of resources that satisfy the needs of everyone. Thus one person’s success is not necessarily achieved at the expense or excluding of the success of others. This “win/win” framework leads to better economic behavior and performance, and thus promises better future for mankind.

Islamic Banking:

Islamic banking is an inseparable part of Islamic economy. During the fifty’s it was only a subject matter of research and was limited to the writing of scholars and philosophers. During the sixty’s actual experiment were made and in the seventy’s Islamic Banking Institutions started gaining strength. The eighty’s and ninety’s are the period of consolidation and now Islamic Banking is coming up as the only welfare banking system of the modern world.

There has always been a desire to establish financial institution to operate as per the tenets of Islamic Shariah. A successful Islamic banking venture in My Gamer, Egypt was launched in 1963. Subsequently, Islamic banking movement achieved steady progress and assumed significant dimension and role with the establishment of the Nasser Social Bank (1972), Dubai Islamic Bank (1975), Islamic Development Bank (IDB) (1975), Faisal Islamic Bank in Egypt and Sudan (1977). Emergence of the Islamic Development Bank as and International Islamic Financial Institution with a view to involving all the Islamic Countries in the establishment of Islamic Banks and Financial Institutions was considered as a milestone in the history of Islamic Banking. In August 1974, Bangladesh signed the charter of Islamic Development Bank and committed itself to reorganize its economic and financial system as per Islamic Shariah.

Earlier in November 1980, Bangladesh Bank, the country’s central Bank sent a representative to study the working of several Islamic Bank’s abroad. In January 1981, at the 3rd Islamic summit conference held at Mecca and Taif, a great emphasize were given on that the Islamic countries should develop a separate banking system of their own in order to facilitate their trade and commerce.

In November 1982, a delegation of IDB visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic Bank in the private sector. They found a lot of work had already been done and Islamic banking was in ready for immediate introduction. Islamic Economic Research Bureau (IERB) and Bangladesh Islamic Banker Association (BIBA) made contributions towards introduction of Islamic Banking in the country.

Definition of Islamic Bank:

Islamic banking is a part and parcel of Islamic Economy. It is an interest free financial institute, which is based on Islamic Shariah. OIC (Organization of Islamic Conference-1978) defined Islamic Bank as ‘a financial Institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the principles of Islamic Shariah and to the banking of the receipt and payment of riba (interest) on any of its operations”.

Islamic Banking in Bangladesh

Growth and Present Status:

Background of Islamic Banking in Bangladesh:

Bangladesh is the third largest Muslim country in the world with around 130 million population and 90 percent of them are Muslim. The hope and aspiration of the people to run Banking system on the basis of Islamic Principles came into reality after the OIC recommendation of its Foreign Ministers meeting in 1978 at Senegal to develop separate Banking system of their own. After 4 years of that declaration in 1983, Bangladesh established 1st Islamic Bank. At present, in Bangladesh, out of 51 banks, 6 full-fledged Islamic Banks and 2 Islamic Banking Branches of two conventional Banks have been working in the private sector on the basis of Islamic Shariah. Islamic Banking system has been designed and developed to prevent exploitation, ensure justice and growth in the society. However, Islamic Banks in Bangladesh since their inception have been facing multifarious problems in their operation, which needs to be carefully addressed.

Development of Islamic Banking in Bangladesh:

At present six full fledged Islamic Banks viz.

• Islamic Bank Bangladesh Limited (IBBL).
• Al-Baraka Bank Bangladesh Limited (ABBL).
• Al-Arafah Islami Bank Limited (AIBL).
• Social Investment Bank Limited (SIBL).
• Shahjalal Bank Limited (SBL).
• Shamil Bank of Bahrain EC (Islamic Bankers)

And two Islamic Banking Branches of prime Bank Limited and two Islamic banking branch of EXIM Bank Ltd. are operating in Bangladesh as per Islamic Shariah.

The first Islamic Bank, Islami Bank Bangladesh Limited was established in March, 1983 to conduct banking activities on the basis of the basic tenets of Islamic Shariah.

Later, Al Baraka Bank Bangladesh Limited was established as the second interest free Islamic Bank in March 1987.

The third and fourth Islamic Banks of Bangladesh namely, Al-Arafah Islami Bank Limited & Social Investment Bank Limited has started functioning in Bangladesh from September 27, 1995 & November 25, 1995 respectively.

At last, fifth private sector Islamic Bank “Shahjalal Bank Limited” has been started banking operation very recently from Mid-May 2001.

The only Foreign Islamic Bank “Shamil Bank of Bahrain e.g (Islamic Bankers)” which is the largest Islamic Bank of the world opened a Branch in Dhaka, Bangladesh, in August 1997.

Besides, two Islamic Banking branches of Prime Bank Limited also started operation on Islamic Shariah basis from 18th December, 1995 & 17th December, 1997 respectively and two Islamic banking branch EXIM Bank started operation from on mid-2002.

 Present Status of Islamic Banking in Bangladesh:

The growth of Islamic Banking in Bangladesh is progressing day by day. Islamic Banking is a brighter reality now days in the competitive business and financial world. The present status of the Islamic Baking in Bangladesh has been highlighted in the ongoing passage.

Growth of Deposits of the Islamic Banks:

The Islamic Banks in Bangladesh started from a very limited resource base right from the beginning. But with the passage of time, they have shown strong performance in respect of growth of deposits. Total deposits of the Islamic Banks stood at Tk. 4893.89 crores in December 2000. This was 6.39% of the deposits of the total Banking system at the end of December 2000. The Islami Bank Bangladesh Limited had total deposit of Tk. 63.59 crores in December 1984, increased to Tk. 3211.16 crores in December 2000. The Deposits of Al Baraka Bank Bangladesh Limited also increased from Tk. 385.73 crores in December 1990 to Tk. 1073.64 crores in December 2000. The Deposits of the other Islamic Banks i.e; Al-Arafah Islami Bank Limited, Social Investment Bank Limited, Prime Bank Limited & Shamil Bank of Bahrain EC (Islamic Bankers), Dhaka stood at Tk. 503.04 crores, Tk. 214.69 crores, Tk. 96.15 crores and Tk. 89.58 crores respectively in December, 2000. The Share of deposits, which was 3.82% in December 1990, increased to 6.39% in December 2000.

Growth of Investments of the Islamic Banks:

The Islamic Banks make their investments through various modes of financing, especially on mark-up basis like Mudaraba, Bai-Muajjal and are yet to involve themselves in Mudaraba/Musharaka financing which are treated and authorized as best financing techniques by Shariah experts. Total Investment of the Islamic Banks stood at Tk. 4537.67 crores at the end of December 2000. This was 7.72% of the total banking system of the country. Investments of the Islami Bank Bangladesh Limited increased from Tk. 40-57 crores in December 1994 to Tk.2956.32 crores in December 2000. The investments of Al Baraka Bank Bangladesh Limited also increased from Tk. 376.90 crores in December 1990 to Tk. 811.1 crores in December 2000. The investments of Al-Arafah Islami Bank Bangladesh Limited also increased from Tk. 376.90 crores in December 1990 to Tk. 732.41 crores in December 2000. Total Investments of Al-Arafah Islami Bank Limited, Social Investment Bank Limited, Prime Bank Limited & Shami Bank of Bahrain EC (Islamic Banders), Dhaka stood at Tk. 372.84 crores, Tk. 365.57 crores, Tk. 27.22 crores and Tk. 83.31 croeres respectively in December 2000.

Total investment of Islamic Banks, which had stood at Tk. 40.57 crores in, December 1984 increased to Tk. 4616.36 crores in December 2000. This Share of investment of the Islamic Banks to total bank, which was 3.38% in December 1990, increased to 7.72% in December 2000.

 Liquidity position of the Islamic Banks

The Saturate Liquidity Requirement (SLR) for the Islamic Banks is fixed at 10% instead of 20% fixed for the traditional commercial Banks. Some of the Islamic Banks e.g. Islami Bank Bangladesh Limited are facing excess liquidity problems while some other banks are maintaining liquidity position at the marginal level. There is excess liquidity of the Islamic Banks to the tune Tk. 524.79 crores as on December 2000, which originated mainly due to the absence of interest free financial instruments in the country.

Branch Expansion of the Islamic Banks

The total number of branches of Islami Banks in the country stood at 202 in December 2000 of which 162 are urban and 40 are in rural. The number of branches of Islamic Banks as on December 2000 is 3.30% of all branches of the banking system.

 Problems of Islamic Banking in Bangladesh

Presently 60%-70% investment of Islamic Banks is made on mark-up profit basis (Murabaha & Bai-Muajjal etc.). As a result, ideal mode of investment (Mudaraba & Mushraka) is quite absent. Some of the typical problems faced by the Islamic Banks are:

   Absence of Islamic Money Market.

  Absence of Legal framework for Islamic Banking

  Shortage of support and link institutions

  Shortage of trained Manpower, and

  Lack of co-ordination and co-operation among Islamic Banks.

 Some areas to be developed to popularize      Islamic Banks in Bangladesh

 Islamic Money Market:

In absence of Islamic Money Market in Bangladesh, the Islamic Bank can not invest their surplus fund (temporary excess liquidity) to earn any income rather than keeping if as idle. Because all the Government Treasury Bills, approved securities and Bangladesh Bank Bills in Bangladesh are interest bearing. Naturally, the Islamic Banks cannot invest the permissible part of their Statutory Liquidity Reserve and Liquid Surplus in those securities. As a result, they deposit their whole reserve in cash with the Bangladesh Bank. Similarly, the liquid surplus also remains UN invested. But the conventional banks of the country do not suffer from this sort of limitation. As such the profitability of the Islamic Banks in Bangladesh is adversely affected.

Legal Framework for Islamic Banking:

Another constraining factor for the Islamic Banks is the absence of necessary legal framework. Due to absence of separate legal framework of Islamic Bank in Bangladesh these banks are facing problems to handle Islamic based contracts. All the financial and commercial laws of the country are interest oriented. Even the tax structure has a bias towards loan financing. Interest cost on borrowed funds is exempted from taxes whereas dividend paid on funds mobilized as equity is subject to tax at borrowing rates. Under Islamic Framework the loan mechanisms are required to be replaced by Shariah laws like Mushraka, Mudaraba etc. But there is no enactment of Shariah laws to validate these modes of contracts.

 Support and link institutions:

Any system, however integrated it may be, cannot thrive exclusively on building elements. It has to depend on a number of link institutions and so is the case with Islamic Banks. For identifying suitable projects, Islamic Banks Can not profitably draws the services of economists. Similarly they need the services of lawyers, Insurance companies, Management Consultants, Auditor and so on. They need also training forums for prompting entrepreneurship amongst their clients. Such support services properly oriented towards Islamic Banking are yet to be developed in Bangladesh.

Dual Quality Manpower for Islamic Banks:

In Bangladesh, for smooth implementation and successful replication of Islamic Banking, we need a band of people having modern Banking knowledge, skill and orientation of the Shariah Methodology. Such people are needed for Islamic Banks as well as for link institutions. The trainers engaged in imparting training to such people at the training academies of the respective banks, should be very clear about the required profile so that can channel their efforts accordingly.

Lack of Co-ordination & Co-operation among the Islamic Banks:

Lack of Co-operation, Co-ordination and collaboration among the Islamic Banks has created a lot of problems, particularly in the following fields:

  Identification, promotion and establishment of joint projects

  Exchange of Shariah views in different banking issues.

  Promotion of Islamic inter-bank money market

  Inter-Islamic Bank exchange of personnel for promotion of expertise in various fields.

Some achievements of Islamic Banks

Formation of Islamic Banks Consultative Forum:

Under the auspices of Islamic Banks and supervision of Bangladesh Bank (Central Bank), Islamic Bank Consultative Forum has been formed for establishing effective interaction and foster and strengthen the bond of co-operation for all Islamic Banks, so far the Forum met five times and took some important decisions.

Formation of Central Shariah Board

The Central Shariah Board of Islamic Banks has been formed recently for supervision of Shariah principles of Islamic Banks and Islamic Banking Branches of Traditional Banks operating in Bangladesh. The Board will advise and co-operate with Islamic Banks relating all kind of Shariah Issues.

Identified areas of Co-operation

Development of an Islamic Money Market:

In the Islamic Banks Consultative Forum it was decided to work for developing an Islamic Money Market in Bangladeshi mechanism.

 Common Islamic Insurance Company:

All Islamic Banks have taken initiative for establishing of a common Islamic Insurance Company. Details modus operandi has been formulated.

Islamic Banking Act:

It was agreed upon that full-fledged Islamic Banking Act is essential for smooth operation of Islamic Banking in the country. Draft Islamic Banking act has been prepared and now it is under active consideration of Bangladesh Bank (The Central Bank).

 New Financial Product:

It was decided to put in the best efforts for development of New Financial Products approved by Shariah Board by all Islamic Banks and all other Banks will share Expenditure of one Bank.

 Consortium/Syndication:

Consortium/Syndication Financing by Islamic Banks was approved possibility for suitable project for syndicate is going on.

 Development of Training Institute:

It was decided to establish of Central Training and ResearchAcademy and Central Library for the Islamic Banks.

Distinction between interest and profit

Interest:

Any additional benefit charged on loan/credit as per condition of the credit is known as interest. The additional amount charged on credit has no relation with the economic activities such credit may either in the form of cash or in the form of goods and commodities. In Arabic interest is known as “Riba” which means additional expansion, growth etc. Owner of capital gets the interest that bears no risk. Interest is fixed, certain and predetermined.

 Features of interest :

  Interest arises in case of credit – the credit may be in the form of cash or in the form of goods and commodities.

  Principal increases as per condition of the credit.

  Amount or limit of increase is proportional to time.

  Three factors/terms as mentioned above are considered as pre-condition of the credit.

 Profit :

In capitalistic economy profit is the contribution of business to the organization. In capitalism four factors of production are land, labour, capital & organization. Under this system business proceeds or benefit from the production process is distributed among this factors where rent for land, wages for labour interest for capital and profit for organization are allocated.

In Islamic concept factors of production are three in number. They are land, labour, and capital. Here business proceeds are distributed among the above three. Where rent for land, wages for labour, and rest of the income is profit for capital. Under this system profit is such growth in assets which is derived from economic activities. Capital and organization i.e. owner of the capital and the entrepreneur jointly share the common fact of profit or loss which is absolutely uncertain, so risk is involved in the earning process of profit.

Interest vs. Profit

 MODE OF INVESTMENT UNDER ISLAMIC BANKING SYSTEM

 Introduction:

Islam is not just a religion but a complete, comprehensive, exhaustive worldview providing exact answers to all questions and queries of mankind-spatial and practical. The primary sources knowledge is concept and guidelines and the Quran the authentic revelation of the words of Allah, which were caused through Prophet Mohammad S.M (peace be upon him) and the Sunnah. If any problem crops up and is solved in conformity with the Islamic World View, reference has to be made to the primary sources – The Quran and Sunnah and then the Shariah.

It is commonly known and acknowledged that Islam has strictly prohibited interest. It restricts both the giving and charging interest. The Arabic Word in the Quran against interest is Riba. Riba is also termed as usury. Whoever pays more or taken more has indulged in Riba.

The Islamic fiqah Academy, established by the organization of Islamic Conference (OIC) in it’s second session in 1985 declared that “any increase or profit on a loan which has matured, in turn for an extension of the maturity date in the case of borrower is unable to pay and any increase or profit on the loan at the inception of the loan agreement are both forms of usury Riba, which is prohibited under the Shariah” The definition of the Islamic Bank as approved by OIC is “an Islamic Band is a financial institution whose status, rules and procedures expressly states it’s commitment to the principle of Islamic Shariah and to banning of the receipt and payment of interest of interest on any of it’s operations”. Islamic banking may therefore, be termed as partnership/profit and loss sharing banking and is an economic and financial system that is based upon operation according to the strict compliance of the Islamic Shariah and rules of the economics and social order of Islam. Islamic banking are banking institutions that extend all types of modem banking services within and in conformity with the Islamic principles. It is clear that an Islamic Banks is not only a financial intermediary but it also involves direct participation in business as partner into the deals/business on the principles of sharing profit & loss in order to ensure social equity and justice.

Nature of investment:

Agreement:This will be a temporary agreement of partnership between bank and the parties from trade and industry, both agreeing to contribute their respective share in the form of capital and labor. The partnership will come into existence through Musharaka Agreement to be entered into between the bank and the party.

• Murabaha :

“Murabaha” is a kind of sale transaction Under this system of investment a sale transaction is arranged between the bank’s client and the bank. The client will request the bank on standard form to purchase for upon his request certain goods with a certain price from a supplier/seller in the country or abroad. Murabaha is a double sale and buy. The bank buys the goods upon request of the customer then sells to him. The client from the bank will purchase the goods within a determined period of time with a cost, which includes cost of goods and fixed margin of profit. Sellers offer must be substantial by proforma Invoice and / or other documents. The buyer client should give a purchase offer supported by L/C or like. Bank thus, buys from the seller with a confirmed sales offer and sells to the buyer/ client with an equally confirmed purchase offer In this system pledge goods remains under effective control of the bank. The delivery of goods will be given in cash or by promissory notes. Part delivery may also be given on proportionate payment of principal and mark-up price. The operation may be compared to pledge mechanism of conventional banks. The profit mark-up once fixed before the deal cannot be increased; even if the does not take delivery of the contracted goods within specified period of time. If the client lifts goods before the stipulated time he may be allowed a rebate with prior approval of Head Office.

• Bai-Muajjal :

It is a contract of credit sale under which the price of the involved is payable on or before a specified future date either in lump sum or in installment, where in the client desires to purchase raw materials, finished goods, spares, machines or any other goods/ items, requests the bank to procure the items and sell it to him/ then at a price with profit. The ownership including possession of the sold item is transferred to the client. This system is widely used in Pakistan and Bangladesh. Although this mode of financing is permissible under the Shariah as a very special case; but it should not be advisable to use indiscriminately since the fixed mark-up profit attached to it is nearer to interest / riba. (i) This bank is not under obligation to advise the cost of goods/ items and    profit margin separately to the client.

(ii) Sale price of the goods/ items is payable by the client at a certain future date in lump sum or in installments.

(iii) The deal being credit sale, ownership and possession of the sold items   is transferred to the client by the bank prior to receipt of sale price.

(iv) There should be there distinctly separate partners involved in the sale agreement (a) The bank (b) the client (c) the supplier of goods / items.

(v) Once the agreement is made then bank will not share in any loss or re-fix the sale price of commodity at a lower rate, even if the goods / item nor it can add any profit when the client earns high rate of profit due to increase of the price of goods.

• Bai-Salam (Advance Purchase):

Salaam is a sale of a commodity whose delivery will be taken place in a near future date for a cash price, which means, it is a sale of a deferred commodity against a present price or purchase of a deferred commodity for a present price is called a salaam of a forward trade transaction. Under these transaction the cost of a commodity is advanced in cash to the seller who agrees to deliver commodity on a definite due date. The deferred is the commodity sold & described & the immediate is the price. The salaam sale serves the interest of both the parties as under.

These sellers get in advance that money he wants in exchange of his commitment to deliver the commodities at a definite future date. From the salaam sale, the seller gets benefit covering his financial needs, which may be spent for productive, personal expenses or family expenses as the case may be.

• Hire Purchase:

It is a contact under which the bank invests in equipment, machinery, building, transport or other desirable articles for the client against agreed rental together with an undertaken form the client to make full payment of price to the bank either in lump-sum or in a periodical installment for the purpose of eventual purchase of the concerned rented articles.

Banks retains ownership of the asset & is entitled to receive agreed rental until full payment of purchase price thereof by the client is meet-up. Possession of asset is passed on to the client for their exclusive use. In case of investment in transport sector, the vehicle is registered in the joint name of the bank & the client, bank as the owner & the client as their heirs.

In case of hire purchase the heirs acquires the ownership by the asset on full payment of agreed value but in case of leasing operation ownership of assets not transferred to the lessee.

• Quard-E-Hasana (Musq) :

Quard-e-Hasana is allowed by the bank against security of Mudaraba Tern Deposit receipt or against secured Guarantee subject to credit restriction imposed by Bangladesh Bank from time to time.

Special feature:

(a)  No profit is charged from Quard-E-Hasana party.

(b)  Quard should not be allowed against security of interest bearing fixed deposit of other conversional Banks.

(c)  Service charge is recovered from the client as fixed by the Bank from time to time (at present it is 2%).

 Funds advanced by Islamic Bank under Quard-E-Hasana are for humanitarian & welfare ground. However practices differ in this respect. Some Islamic Bank provides Quard-e-hasana (interest free loan) to the holder of investment account of the bank on compassionate ground. Other bank also extends this loan to the needy students & other economically weaker section of society. These interest free loans are also given to small producers, marginal group of farmers & entrepreneurs who are not qualified to get loan from other sources. The purpose of the loan is to help the needy society to become independent as to raise their income & standard of living. However these loans are repayable as & when borrower is able to pay without any profit.

• Lease Finance (Ijarah):

Al Ijarah in Arabic is defined as a contract entered into between a leasing company (called the lesser) of the one part and the user of the equipment (Called the Lessee) of the other part whereby the lessee agrees to pay the lesser a specified sum of rentals over and obligatory period of time in consideration for the use of capital equipment owned by the lesser without the lessee having to purchase or own the equipment plus a profit margin out of the lease rentals receivable during the period of the lease. There are two types of leases are two types of leases are recognized under this system of investment: operational lease and Lease purchase.

• Operational Lease:

Under this system of finance Islamic Banks holds number of various assets to respond to the needs of different customers. These assets have usually high degree of marketability. The bank rents these assets to clients who desirous to utilize the same for a term to be agreed upon on payment of rental. After expiry of lease period, the assets are returned to the bank, the bank then looks for a new lessee. The distinguishing features of this mode of finance is that the assets remains the property of the lesser (i.e. Islamic Bank) to put them up for rent every time the lease period expires so as not to remain unutilized for long period of time.

• Capital Lease:

Under the system bank does not hold the assets but purchase the assets as response to and empathic request from one of the customers to own the assets through lease that ends with possession. Therefore the assets will not remain as the property of bank at the end of lease period as the case in the operation leases. As soon as the purchase amount of the household goods along with rental is paid within the lease period; the ownership of the leasehold items transferred to the lessee automatically as per contact.

• Auction Investment:

Under this system, the bank may announce a project with the offer of sale on credit, of plant & machinery etc. needed for the project & call for bids from prospective investors for the purchase or project. The bank may fix a reserve price, which may include a reasonable profit margin. It may also reserve the right to accept or reject any bid. The plant & machinery may then be sold on credit/cash to the highest bidder if party is considered to be a sound one. The amount of bid accepted would be repayable in installments over the agreed period.

An overview of Social Investment Bank Limited :

3.1 Corporate information:

A public limited company incorporated in Bangladesh on 5^th July 1995 under the companies Act, 1994 and listed in Dhaka Stock Exchange limited and Chittagong Stock Exchange limited.Registration NumberC 28763 (44) / 95Date of commencement22^nd November, 1995Registered Office15, Dilkusha C/A, Dhaka-1000, BangladeshTelephone9554855, 9554822Facsimile880-2-9559013Telex671557-8 SIBL BJSWIFT CodeSOIVBDDHE-mailsibl@bdonline.comWeb pagewww.siblbd.comAuditorsHowladar Yunus and Co.

Chartered Accountants

67, Dilkusha C/A, Dhaka-1000LawyerMr. Feroz Shah, Advocate Room-303

SupremeCourtBarBuilding, Dhaka.Company secretaryMr. Mohammed Monwar

Executive Vice President and Secretary to the

Board.

Background of Social Investment Bank Ltd.

 Introduction:

Social Investment Bank Ltd. (SIBL) became operational on 22nd November, 1995 with a clear manifesto to demonstrate the operational meanings of participatory economy, banking and financial activities as an integrated part of an Islamic code of life. It is an alternative concept of Islamic Banking with a unique human face approach to credit and Banking based on interest free economics and financial transactions and income generating program for the millions of the urban and rural poor and a profitable investment option for the rich to invest, earn and live in a better society with greater security and peace at the operational level, SIBL is operating three-sector Banking, such as, Formal, Non-Formal and Voluntary sector, SIBL is beginning a new era of Islamic Banking having social, ethical and moral dimension in each of its activities ranging from credit to construction, trading to transport, farming to fishing, manufacturing to mining and so on. Some renowned personalities and institutions are sponsors and directors of this bank, specially, the Founder Chairman Prof. Dr. M. A. Mannan, who is an internationally reputed Islamic thinker and Professional Economist. He served in different important capacities in different International Organizations including Asian Development Bank and Islamic Development Bank. With his heartiest efforts and inspiration Ex-Secretary General of O.I.C Dr. Hamid AI-Gabid and Deputy Speaker of Saudi Arabia and former Secretary General of Rabeta, Dr. Abdullah Omar Nasseef, and Ex-Commerce Minister of Saudi Arabia Salah Jamjoom took part in the establishment of the Bank. Besides, International Solidarity Fund (IFS) and International Islamic Relief Organization (IIRO) also took part as Sponsors.

Aims and objective:

1. The ultimate objective of Social Investment Bank Ltd. is to establish a caring and compassionate society in which everybody can participate in all socio-economic activities together to help each other and share ones due.

1. The cultural tradition and heritage of the vast human resources of the country will be deployed with a view to providing finance and through proper training increase the participation of the people in new production oriented projects in order to build a caring society.

1. The economic co-operation among different Muslim countries will be expanded to strengthen the prosperity and solidarity of Islamic Urnmah.

1. Employment opportunities for women, minority community and people of other religions will be inducted in Bank’s activities and thus establish universal brotherhood among the people having a human touch.

Capital:

The Authorized share capital of Social Investment Bank is Taka 100 crore (Taka one thousand million) divided into Ten Lac shares of Taka 1,000 (Taka one thousand) only. The paid-up capital is Taka 200 million.

Activities:

Social Investment Bank has efficient and experienced staff for giving better service to its clients along with modern technology.

 ISLAMI SHARIAH BASHEL BANKING ACTIVITIES OF THIS BANK AREAS FOLLOWS

 Formal Sector:

 A. Deposit

  AI-Wadiah Current Deposit Account

  Mudaraba Savings Deposit Account

  Mudaraba Term Deposit Account

  Mudaraba Notice Deposit Account

  Foreign Currency Account

  Mudaraba Monthly Profit Deposit Account

  Mudaraba Hajj/ Umrah Savings Account

  Mudaraba education Savings Scheme Account

  Mudaraba Special Savings (Pension) Scheme Account

  Mudaraba Millionaire Scheme Account

  Basasthan Savings Account

  Social Fund Deposit Account

  Shelter Finance Deposit Account

  Cash-Waqf Deposit Account

  Voluntary Sector Development Deposit Account

 B. Investment

  Mudaraba-Trust Finance Partnership

  Musharaka-Participation Financing /Equity Financing

 Murabaha- Cost Plus Sale

  Bai- Muajjal – Sale under deferred payment

  Bai- Salam – Forward Purchase

  Leasing -The Bank leases out Machineries, Transport, Houses, Ship etc. for an agreed period of time, the company being the legal owner and the lessee having the right to use the property for the duration of the contract.

ü  Direct Investment- This Bank directly invests capital on medium and long term basis in Industry, Agriculture, Trade, Transport, Immovable property and for construction of houses etc.

  Hire Purchase- In this system of business the bank invests for purchasing durable assets like machineries, equipment, transport, land and building etc. along with the client with the stipulation that the client shall pay off the principal amount with rent (at the agreed rate) in installment.

C. Foreign Exchange

  To purchase and sell foreign currencies and carry on business of import through opening of L.C.

D. Remittance

  This bank remits client’s money both at home and aboard, completes all formalities of remittance in respect of Bangladeshi living abroad and other customers.

E. Special Banking Services:

  In addition to sale and purchase of foreign currencies the Bank issue Guarantees, accept certificate and shares, accept articles & valuable documents, for safe custody locker service, discharge responsibility as investment trustee, act as client’s agents for recovery of client’s demand and carry on transactions on their behalf within the stipulated period, work as correspondent of local and Foreign Banks and other Financial institutions, act as; Banker to the issue on behalf of the companies, provide consultancy service to the customers and all other Banking Services.

F. Special services for Bangladesh} living abroad :

  Provide financial assistance to the Bangladeshis for the travel to the place of employment outside the country, prepare projects for investment of wage earners,accept housing projects and provide other necessary services to them.

G. Social Fund

  The Social investment Bank considers man not with money but with a human face approach. So, this Bank is firmly committed to provide a human face approach in all its activities. This Bank builds a Social fund with the part of the profit earned by the bank and collects all kinds of gifts, Zakat and Sadakah from clients. This fund is invested in projects for betterment of the less fortunate and poor people of the society.

Non-Formal Sector :

The Bank’s special program is directed mainly to up-lift the socio-economic conditions of rural and urban poor. In order to achieve this objective, Social Investment Bank Ltd. is involved in the mobilization and utilization of local resources and the surplus labor mainly from within and provide employment opportunities to the unemployed and the landless besides investing in N.G.O. activities, educational, health expansion activities etc. Social Fellowship Program for Students has already been introduced; Family health service cheque is being introduced.

 Islamic Voluntary Sector :

This Bank has a special program of development of various religious and social service oriented institutions. Within this program, Mosque, Maktab, Waqf, Charitable organizations etc. will be modernized and activated. All properties under this program will be utilized in productive activities on participation basis. Besides, Hajj (pilgrimage) and Kurbani (sacrifice of animals according to dictates of Islam) schemes are included in the program of Social Investment Bank Ltd Cash Waqf Certificate has already been introduced for the first time in history. Various methods of compulsory and voluntary Islamic distribution of finance, such as, Zakat, Sadakah, Waqf etc. will be institutionalized

Model of Social Investment Bank Limited

Natures and Scope:

Social Investment Bank Ltd. (SIBL) intends to demonstrate the operational meanings of participatory economy, banking and financial activities as an integrated part of code of life. It is an alternative concept of Islamic Banking with a unique human face approach to credit and banking based on interest-free economic transaction, mutual participation and sharing of profit and loss through various modes of finance and humanism as reflected in its general name.

In the context of labor-surplus economy of Bangladesh, it represents a comprehensive alternative concept and an operational model meant to combine together: (a) real material benefits, (b) visible social advantages and (c) clear spiritual vision-all three in one package to the benefit of not merely its clients and shareholders but also to the advantages of vast poor masses at the grass-root level. Because Islam knows no distinction between a spiritual and temporal realm nor between religious or secular activities in a society. Thus, there will be clear manifestation of human and moral dimension in each of its interest-free banking, financial and economic Activities ranging from credit to construction, trading to transport, farming to fishing, manufacturing to mining and so on. This Bank is expected to offer an alternative income-generating program for the millions of urban and rural poor and a profitable investment option for the rich to invest, earn and live in a better society with greater security and peace.

At the operational level, this Bank will provide a clear linkage among three sector of the real economy :(a) monetized formal sector, (b) non-monetized informal sector and (c) Islamic voluntary third sector. It will offer the modern banking services and undertake projects in the formal, non-formal. Voluntary third sector as well as provide special services for the Bangladeshi living abroad. The concept of depositor in this model of social banking Is different. Here depositors participate in a variety of participatory modes of financial, commercial and project specific investment activities such as profit- loss-sharing, rent-sharing, cost-plus trading, dividend- sharing hire-purchase arrangements, installment sale, forward of Salam sale as well as various financial instruments (i.e., ‘Mudarabah’ Bond), Co-operative Insurance (Takaful) and so on.

It offers a socio- economic action program that conveys life in its totality so that it will not only generate economic and social opportunities for work but also to foster the spirit of voluntary sharing and participation, collective social responsibility, mutual concern and reliance rather than self-reliance likely to promote acquisitive behavior and individualism. This involved participation is expected to create an environment of economic security and viable social peace through a sense of belongingness that, in turn, breeds loyalty and encourages people to do their best sense.

Each project is to be designed in a manner so that income earning, spending and non-spending activities become economic, social and moral necessities all at one, Work is viewed as an extension of prayer through the diverse programs of this Bank. This comprehensive economic and social banking program goes much beyond the mere replacement of interest rate by profit-sharing ratio. It is expected to introduce inter-dependency and mutual concern into the life-style, effecting the behavior of savers, investors, consumers, producers, labors, farmers, poor and rich members of the society. The bank is expected to provide and institutional frame work for implementing these, ideas, Ideas die without institution.

Operational Strategies:

This Bank’s program will be directed mainly to uplift the socio- economic conditions of rural and urban poor with a view to eventual elimination of poverty. In the process, this Band intends to empower the family as a basic unit of the society. Thus investment program of this Band will be geared to generate profits, a percentage of which will be set aside to support social projects on a non-profit basis. Thus all activities of the Bank will be subject to social Assignments, thereby making social and moral preferences transparent and revealed in all its financial and economic operations. The concept of social welfare will then have a different meaning. Here right will be linked to duties. The operational strategies of the Band would, therefore, involve mobilization and utilization of:

1. Local resources at the grass-root level mainly from within;
2. Surplus labor wherever possible;
3. Human and money capital of beneficiaries of earlier programs;
4. Unemployed and underemployed in the informal sector;
5. Islamic voluntary sector and voluntary labor for social capital accumulation and welfare;
6. Adoption of class-harmony extended family approach to industrial relations through employment buy participation; and
7. Participation of women, minorities, and people or other religions to operationally the concept of brotherhood of man and humanism.

The management of such a Bank would mainly be participatory in nature so that employees feel that the enterprise belongs to them.

The program of this Bank would include commercial, agricultural, small industrial, educational, health and grass-root level social banking activities. The will be designed in a manner so as to make finance, production, marketing, training and moral suasion in one package. While basic human endowments and God-loving or God-fearing criteria will be used as fundamental collateral, in all operations of this Bank, it will give particular emphasis on programs dealing with the problem of absolute rural and urban poor, the various mechanics of partnership, equity-based and profit-sharing operations (i.e., Mudarabah, Musharaka, Murabaha) and other tools will be operational zed in manner so that economic, human and moral dimensions are clearly manifested in order to hive them a distinctive character of Islamic finance.

Seven Distinctive conceptual features:

At the conceptual level, seven distinctive features of this Bank are as follows:

1. To develop an alternative human face approach to credit and finance based on participation and sharing of profit and loss.
2. To implement projects, targeting absolute poor on a priority basis;
3. To involve the poor and all beneficiaries of the program in the recycling process for mitigating the poverty of relatively less fortunate people around him though contribution into a “social Fund”.
4. To foster the notion of sharing and participatory management designed to raise the level of self-respect and mutual reliance rather than self-reliance likely to promote individualism;
5. To raise the level of human qualities and potentialities of the participants of the program through required de-education, re-education, new –education and programs for non-formal training on –the –job;
6. To provide a clear sense of economic, social and moral purpose to each of the participants of the Bank’s programs; and
7. To design and implement programs that conveys life in its totality with a view to developing a sense of humanism and a caring society.

Ten unique operational features:

At the operational level, ten unique features of this Bank are as follows:

1. To develop a built-in provision for a contribution to a “Social Fund” in all financial contracts and transactions with the Bank’s clients either on individual or group or family basis as well as to operational zed the notion of integration between secular economic and non-secular activities.
2. To involve local public and workers in the decision-making process in the management of cottage, small or medium scale industries. The poor will be placed at the focal point of an integrated package.
3. To develop training program for generation and updating the required skill of the employs.
4. To enable selected target groups of people to have an access to non-formal banking facilities on a continuous basis.
5. To identify and execute finance and business programs / deals involving absolute poor and destitute people having no physical asset as collateral.
6. To organize door-to –door mobile banking.
7. To develop income-generating programs specially suited for women and disadvantages groups of minority too.
8. To design programs for utilizing surplus labor as well as voluntary labor services in rural and urban areas.
9. To organize programs intended to institutionalize the various obligatory and voluntary tools of Islamic distributive measures such as Zakat, Sadaqa, Waqf Fund, etc.
10. To establish links between the formal, informal and voluntary sectors of the real people in area economy.

AT A GLANCE OF SOCIAL INVESTMENT BANK LIMITED

Followings are the important historical events of this unique model Bank:

February 02, 1989: The concept and three-sector model of Social Investment Bank Limited was formally presented and discussed with his Excellency Late. Prof. Dr. Ahmed Al- Nagger of Egypt, who is considered to be the father of modern Islamic Banking as well as Prof. Dr. A. Wadoed Shalaby of AL- Azhar University, Cairo.

April 21, 1989: The concept of this Bank was presented and then a series of discussions took place with His Excellency Dr. Abdullah Omar Nasseef of Saudi Arabia, Vice Chairman, Majlish e- Shura, the Kingdom of Saudi Arabia, former President of the King Abdul Aziz University and Secretary General of the World Muslim League.

July 04, 1989:  This model of Banking was presented   and then a serious of discussions took place with His Excellency Dr. Hamid AL- Gabid, Secretary General of the Organization of Islamic Conference (OIC) of 53 Muslim Countries.

July 27, 1989: Memorandum (85) on this Bank was formally submitted to the Prime Minister of the Government of the People’s Republic of Bangladesh.

August 01, 1989: Formal memorandum on this Bank was formally submitted to the Hon’ble President of the People’s Republic of Bangladesh.

September 24, 1989: Formal presentation of this model was made before the full council of ministers at President House fro about two hours with the President in the Chair.

September 30, 1989: The proposal of this Bank was submitted to Governor, Bangladesh Bank.

December 6, 1994: The Letter of intent for establishing this Bank was issued by Bangladesh Bank.

July 05, 1995:  The Memorandum and Articles of Association were duly incorporated under the Companies Act of 1994 to implement this Model of this Bank as conceivedand developed by Prof. Dr. M.A. Mannan.

August 21, 1995: Permission to open First Branch of the Social Investment Bank Limited at Dhaka was given by Bangladesh Bank.

November 22, 1995: After a long journey, SIBL was formally opened at 15, Dilkusha C/A, Dhaka by the Hon’ble President of the People’s Republic of Bangladesh in a grand ceremony.

Authorized capital of the company is taken 1,000 million.

 Mudaraba Saving Deposit (MSD)

These are profit bearing deposit accounts. The drawings are restricted in respect of both the amount of withdrawal and the frequency thereof so that the payment of interest does not become any compensating for the banker. Some time the restrictions are ignored against the depositor’s written confirmation to forgo his claim for interest on the total balance for the whole month of withdrawal.

When a client wants to open a MSD accounts, s/he fill up a form. Any account holder introduces him. He signed form & signature card where needed his signature and give his own 3 copy pp photo & 1 copy pp nominee’s photo. Nominees also fill up nominee form & put his/her signature nominee form. Then the officer gives him a accounts number against money.

** Enclosed original Mudaraba Saving Deposit (MSD) form.

Special Savings Scheme

1. Mudaraba Hajj Savings Scheme

Hajj is one of the basic pillars of Islam—the complete code of life. Social Investment Bank Limited has introduced a scheme in the name & style “Mudaraba Hajj Savings Scheme” to facilitate the intending Muslims to perform Hajj properly at appropriate age. This is purely a savings Scheme for Hajj. Any Muslim intending in perform Hajj by building-up deposit required for meeting Hajj expenses will select one of the 20 (Twenty) alternative choices based on duration of period from 1 year to 20 years for building-up savings by monthly installments under this Scheme.

** Enclosed original Mudaraba Hajj Savings Scheme form.

2001 & next 19 years savings and Hajj / Umrah’s approximate expenditure (Tk.) chart:

2. Mudaraba Education Savings Scheme

Social Investment Bank Limited, being encouraged by the success of the Mudaraba deposit accounts, has introduced another savings scheme namely “Mudaraba Education Savings Scheme “. Savings money Tk.25,000/=  aged 7 year, 10 year, 15 year, 20 year. After Maturity Bank will pay 55,000/=, 77,000/=, 1,36,000/=, 2,40,000/=. If any client deny to received the amount at a time, bank will monthly pay Tk. 1,000/=, 1,500/=, 2,500/=, 4,500.

Mudaraba Education Savings Scheme :

** Enclosed original Mudaraba Education Savings Scheme form.

3. Mudaraba Special Savings (Pension) Scheme

Considering increasing demands from the clients of the bank as from the people of the all walks of the country for special and attractive savings scheme on the basic of the Islamic Shariah so as to enable and encourage them to save as per their capacity in Islamic way for their old age when they will normally retire from their active economic life, Social Investment Bank Limited has introduced “Mudaraba Special Savings (Person) Scheme” in which a person gets the opportunity to build-up savings by contribution small monthly installments for getting an attractive amount  at the end of a specified term or a monthly amount for a specific period after the expiry of the term.

Mudaraba Special Savings (Pension) Scheme:

** Enclosed original Mudaraba Special Savings (Pension) Scheme form.

 4. Mudaraba Monthly Profit Deposit Scheme

Social Investment Bank Limited 1.mined has launched a new, deposit product under the name and style “Mudaraba Monthly Profit Deposit Scheme” in accordance with the principle of Islamic Shariah Any individual may open account under the- Scheme by depositing a minimum amount of Taka 50,000/=, 1,00,000/=, 1,50,000/=, 2,00,000/=, 2,50,000/=, 3,00,000/= and multiple thereof at a time for 3 years. Monthly provisional profit shall be given to the account just after completion of 30 days from the dale of opening the account. The profit amount will be adjusted on completion of each accounting year after declaration of final rate of profit.

** Enclosed original Mudaraba Monthly Profit Deposit Scheme form.

5. Mudaraba Millinery Deposit Scheme

Social Investment Bank Limited 1.mined has launched a new, deposit product under the name and style “Mudaraba Millinery Deposit Scheme” in accordance with the principle of Islamic Shariah Any individual may open account under the- Scheme by monthly depositing amount of Taka 550/= @ 25 years, 1,50/= @ 20 years, 2,050/= @ 15 years, the profit amount will be Tk. 10,00,000/= after maturity.

  Mudaraba Millionaire Scheme :

** Enclosed original Mudaraba Millinery Deposit Scheme form.

6. Mudaraba Home Savings Scheme

Considering increasing demands from the clients of the bank as from the people of the all walks of the country for special and attractive savings scheme on the basic of the Islamic Shariah so as to enable and encourage them to save as per their capacity in Islamic way for their old age when they will normally retire from their active economic life, Social Investment Bank Limited has introduced “Mudaraba Home Savings Scheme” in which this scheme gets the opportunity to build-up shelter by contribution small monthly installments for getting an attractive amount  at the end of a specified term or a monthly amount for a specific period after the expiry of the term.

Under this Scheme account may be open for monthly deposit of, Tk. 500/-, Tk. 1000/. Tk 1500/-. Tk. 2000/-. After 15 years he will get total amount of Tk. 260000/-, 520000/-, 780000/- &1040000/-.

** Enclosed original Mudaraba Home Savings Scheme form.

Mudaraba Term Deposit

Mudaraba Term Deposit are accepted by the bank with a  sum of Tk. 5000 or above from individual (single and joint), firms (proprietorship/partnership), limited companies, autonomous bodies, charitable institution, association, educational institution, local bodies, trust etc. against issuance of nontransferable receipts in acknowledgement of MTD received. MTD Account may be opened in the name of minors jointly with their guardians.

The Mudaraba Term Deposits are accepted for period of 3, 6, 12, 24, & 36 months. Weightage on the rate of return is given to deposits of longer maturity. Mudaraba Term Deposit Accounts holders will share the profit of investment with Social Investment Bank Limited, at the rate declared by the bank from time to time.

** Enclosed original Mudaraba Term Deposits form

 Mudaraba Term Savings Scheme Based on Monthly Deposit:

Mode of Deposits and Profit Rate

Rate (%) a. 36 Months@ 10.55% b. 24 Months@ 10.35% c. 12 Months@ 10.15% d.   6 Months@   9.70% e.   3 Months@   9.25%   2. Mudaraba Savings Deposits@   7.45%   3. Mudaraba Notice Deposits@   6.15%4. Deposit under Special Schemes a. Hajj Deposit Schemes@ 10.55% b. Monthly Profit Deposit

Scheme
(Minimum Tk.50,000/- &

Maximum Tk.10,00,000/-)@ 12.00% c. Cash Waqf@ 10.70%

Opening of different types of Al-Wadia Current Accounts

Drawings are allowed from such an account without any restriction within the funds available in its credit. Ordinarily, no interest is paid on this deposit.

If some one open AWCD, he fill up form and enclosed this type of paper shown as bellow:

1. For Sole Proprietorship

• Trade License
• Trade License
• Partnership Deed
• A Certificate Copy Of The Memorandum And Articles Of Association Duly Attested By The Signatory Of The Amount
• Certificate Of Incorporation
• Certificate Of Commencement Of Business
• Copy Of The Last Balance Sheet
• List With Name Designation And Specimen Signature Of Person Authorized To Operate The Account Duly Certified By The Chairman
• Minutes Of Board Of Directors Meeting Authorizing The Opening Of Accounts With Us Duly Certified By The Chairman/ Managing Director
• List Of Directors With Address

2. For Partnership

3. For joint Stock Company

** Enclosed original Al-Wadia Current Accounts form.

Cheque Book

Negotiable Instrument Act, 1881, says that Cheques, Bills of Exchange and Promissory’ notes are negotiable instruments (Section 13). The term cheque is defined under section 6 of Negotiable Instrument Act 1881 which states that “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.” It we analyze this section; a cheque has the following characteristics:

i)     A cheque is a bill of exchange.

ii)   A cheque is always drawn upon a banker.

iii)  A cheque is always payable on demand.

As cheque is a bill of exchange, it is necessary to understand what is understood by bill of exchange. As per section 5 of Negotiable Instrument Act, 1881, a bill of exchange in an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to a certain person or to the order of that certain person or to the hearer of the instrument. If we apply this definition of a bill of exchange to understand the meaning of a cheque, a cheque is an instrument in writing containing an unconditional order signed by the maker directing a certain banker to pay a sum certain money, on demand to or to the order of a certain person or to the bearer of the instrument. From above, we can summarize the characteristics of a cheque as under;

1) A cheque is a negotiable instrument

2) A cheque is a bill of exchange, hut every bill of exchange is not a cheque.

3) A cheque is always drawn upon a specified banker.

4) A cheque is always payable on demand.

5) There are three parties to a cheque:

a) Drawer i.e. a person who draws the cheque on a bank, such a person is usually a customer of the bank.

b) Drawee of a cheque i.e. a bank on which a cheque is drawn by the drawer (Customer).

c) Payee i.e. a person to whom the payment is to be made by the bank on whom the cheque is drawn.

6) A cheque is always drawn in the form of an order and that order is unconditional in nature. That means the drawer of a cheque can not direct a banker to make payment to the payee of the cheque subject to a certain condition to be fulfilled by the payee to receive payment.

7) A cheque is an unconditional order from the drawer of a cheque to the drawee bank to make payment of money only.

8) The amount to be paid as indicated in the cheque must be certain & specific, the amount should not be left to be determined by the drawee bank for payment. For example, the drawer can not ask the bank to pay as much as is demanded by the payee but he must specifically indicate the exact amount say Tk. 50,000/- (Taka fifty thousand only).

9) The cheque must contain the name of the person to whom the payment is to be made. The name of the person must be certain and it should not be ambiguous. The payment can be made to an individual or to a partnership firm, to a limited company, to a club or association or to any person who may be indicated by the official designation. The payment may be made to such person or to the order of such persons as indicated above.

10) The cheque can also be payable to the bearer.

Payment of cheque

A cheque is payable on due presentation for payment if it is drawn in proper form duly signed by the drawer or his authorized agent, subject to the crossing, if any, and the sufficient credit balance in the concerned account or the arrangement made for an advance and the drawee banker is discharged from liability by payment thereof in due course.

Bearer cheque

A bearer cheque is payable to the bearer and the banker is discharged from liability by payment m due course to the bearer thereof. Unless the form of drawing ‘bearer’ is changed to ‘order’, a bearer cheque is always a bearer one and no endorsement can make it payable otherwise than to the bearer thereof.

Order cheque

In case of ail order cheque it should purport to be endorsed by or on behalf of die payee. Where an order cheque has been endorsed by the payee in favor of another, the endorsee must also sign it to receive the payment and the drawee banker is discharged from liability by payment in due course. In practice, the banker insists on identification of the payee while making payment of such a cheque in cash. This is done to avoid any chance of being charged with payment out of due course.

Stale or outdated cheque

As per banking custom a cheque becomes ‘stale’ when it remains in circulation for more that six months, though there is no legal sanction in this respect. Such an instrument is not honored by the drawee banker unless invalidated by the drawer.

Post dated cheque

A post-dated cheque is one, which bears a future date as its date of issue. Such a cheque is valid and its negotiability is not inspired simply because it is post dated. But the banker can not pay it earlier than its date because the drawers mandate is not to pay it earlier. It the banker pays it before its ostensible date, the payment is not a payment in due course and as such, he loses legal protection and is liable to his customer for any loss that may arise out of his action. A post dated cheque is not invalid by reason of only being post dated unless it involves any illegal or fraudulent purpose or transaction.

Antedated cheque

Where a cheque bears a date before the date of its issue it is known as an antedated cheque and is not invalid because of only antedating provided this does not involve any illegal or fraudulent purpose or transaction. A cheque antedated for more than six months becomes stale or out of date as per banking practice.

Stop payment

The drawer of a cheque has the right to countermand the payment thereof. To be effective Hire notice of slop payment should be given in writing under his proper signature giving frill description of the cheque to reach the banker before its actual payment. If the drawer sends notice which is duly received, then the banker will have to bear any loss that may ensue should he pay the cheque thereafter until the stop payment instruction is cancelled. A stop payment by telephone requires written confirmation. Immediately on receipt of a telephone in this regard, the banker should communicate with the customer asking for confirmation in writing and meanwhile, if the cheque is presented, payment thereof should be tactfully avoided taking care that this nonpayment may not be construed as causing damage to tile customer’s credit. The holder of a cheque can not atop payment but on receipt of such a request, the holder should be advised to obtain the drawer’s written instruction. If the cheque in question requires endorsement and the holder reports to have lost it without any endorsement, the banker should take precaution so that he is not charged for payment thereof out of due course and not In good faith.

Date

The mandate of the drawer as conveyed through the cheque requires being dated. It appeals probable that any holder of a cheque may insert the date where it was issued undated but in practice, the banker dishonors an undated cheque. The date as appears on a cheque is presumed to be the date on which it was made or drawn.

Crossing of cheque

A cheque can be crossed generally or specially to a banker by the drawer, or the holder thereof. The crossing must be on the face of the cheque, there must be two lines drawn transverse and parallel. There can not be any general crossing without His two transverse lines, with or without the words ‘and company’ or abbreviation thereof though the name of a banker without the lines is sufficient to constitute a special crossing. The crossing of cheque is a material part of the cheque.

Cancellation of crossing

The drawer of a cheque (not any body else) sometimes cancels the crossing for making it payable over the counter. This must be done by writing ‘crossing cancelled’ under his signature as recorded with the banker and by an indication of having cancelled it. The cancellation is done in practice and not under sanction of law. This is being an immaterial alteration, the paying banker must be very cautious lest he pays a crossed cheque over the counter.

Payment in due course

Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence. Apparent tenor means what appears on the face of the instrument and comprises date, payee, form of drawing (order or bearer), amount, signature of drawer and crossing.

Payee of cheque

There must be a person entitled to receive the payment of the cheque either as a payee or his endorsee or bearer. The drawer himself may also be the payee by writing his name self or pay cash. In the absence of the payee’s name, the cheque can not be treated as a bearer one nor it can be looked upon as a cheque at all and the better course would be to return it for completion under authentication of the drawer.

Amount of cheque

The law does not specify whether the amount of a cheque is required to be expressed both in words and figures. But as per banking practice the amount is stated both in words and figure. Where the amount in words and figure differs, the amount stated in words shall prevail if the banker pays the amount of cheque expressed in words even though it is higher than that expressed in figure, the banker may be protected under law but in practice, he does not pay a cheque with discrepancy. To pay the smaller amount is also not the general custom.

Sufficient balance

The payment of a cheque is subjected to the drawer’s having sufficient credit balance in his account unless an arrangement has been made by the drawer for an overdraft. When the balance is not sufficient to meet the whole amount of the cheque, the payee can not demand a part payment nor His banker is bound to make such a payment the cheque can not be considered as an assignment of funds in order to enable the payee have an equitable claim on the drawer’s balance.

Drawer’s signature

The banker can not debit his customer’s account with the amount of cheque if the customer’s signature thereon is forged, as this is not the order of the customer. It is the duty of the banker to acquaint himself with the customer’s specimen signature and before payment of a cheque, he must compare the signature with the specimen one on his record. Where a forgery is detected subsequent to the debit of the account and the forgery is found to be directly due to or is mundanely cumulated with negligence of the customer in the safe keeping of the cheque book, the banker is entitled to debit his account.

Material alteration

A material alteration to negotiable instrument is one, which in any way alters the operation of the instrument materially i.e., which causes it to speak differently than originally. The most common material alterations include all those of the date, crossing, and place of payment, amount, and name of payee. The Negotiable Instrument s Act in s.3 (f) provides ” material alteration in relation to a promissory note, bill of exchange or cheque includes any alteration of date, the sum payable, the time of payment, the place of payment, and where any such instrument has been accepted generally, the addition of a place of payment without the acceptor’s assent”. Any material alteration renders the instrument void against all those who were already parties to it but not against those who were parties subsequent to the alteration. Where a material alteration is not apparent, the payment in due course and according to the apparent tenor of the instrument at the time of payment, would discharge the payer from all liability on the instrument.

Alteration by drawer

All material alterations in a cheque must he made with the drawer’s assent, evidenced by his signature and not initials as an initial is easier lo forge than the full signature for which reason the banker does not maintain record of the initials of the account holders. If there are two or more signatories to the cheque all must join in authentication of the alteration. Amy material alteration made without drawer’s assent renders the cheque void. An order cheque may be turned into a bearer one by the drawer substituting the word order with ‘bearer’ under signature. No other person has authority to make the alteration. But any holder may alter a bearer cheque to an order cheque without drawer’s verification by simply scoring the word ‘bearer’. Similarly, crossing of and uncrossed cheque by the holder does not require die drawer’s authentication.

Banker’s Liability on altered cheque

If the banker pays a cheque with a material alteration without drawer’s consent, he does so at his own risk, for he can not generally debit his customer with the amount of such a cheque.

Mutilation

Sometimes, a cheque may be torn accidentally or otherwise in such a way as its condition may not afford sufficient evidence that the drawer or a holder did not intend to cancel it. As such, in such a case the paying banker would be justified in dishonoring the cheque for the reason of mutilation and should not pay such a cheque without drawer’s confirmation w collection banker’s guarantee. A slight slit on a cheque should not. However, be taken as a mutilation unless there is reasonable doubt whether the drawer or a subsequent holder intended to cancel it.

Account payee cheque

A cheque marked ‘account payee’ or ‘payee’s account only’ between the two parallel lines of general crossing is said to be crossed ‘account payee’ and ceases to be negotiable. These words by themselves without the general crossing do not form a crossing but the instrument which contains such a marking, may better be treated as such as the intention or the mandate of the drawer could not be other than that conveyed by these words. The significance of the marking is not minimized even if the cheque is a bearer one. The duty of the paying banker is fulfilled by payment of such an instrument in good faith and without negligence, as he can not be expected to follow the money after it has reached the collecting banker to ensure credit to the proper account. But the paying banker should refuse to make payment of such a cheque if there appears an indication of the amount being credited to other than the named payee’s account.

Cheque can not he paid

A cheque does not become payable even if it is otherwise in order, where its payment has been slopped by the drawer in writing, there is notice of customer’s death, bankruptcy, insanity, there is knowledge of defective title of the holder, court injunction or any other court order restraining the customer form operation the account.

Customer’s death

Upon receipt of the news of a customer’s death all operations on the account should be suspended by the banker as with the death of the customer the title of his property passes to his legal heirs unless otherwise provided for in a trust deed or a will left by the deceased or in letters of administration. Cheque marked at the request of die deceased or paid before receipt of the news of the death can however be debited to the account.

Inland Remittance

Bank is a service oriented industry and deals with public money. They provide services to their clients through different ways. “Transfer of money/fund of one person /customer to another person/ firm/ organization through the bank is called remittance. Any Person can remit funds to any one within the country through any of the branches of the some bank by the following means with nominal charges:

i)     Pay order

ii)   Demand draft.

iii)  Telegraphic Transfers

iv)  Mail Transfers.

Payment order

This is an instrument issued by the branch of a bank for enabling the Customer/ purchaser to pay certain amount of money to the order of a certain person/ firm/ organization/ deptt./ office within the same clearing house area of the pay order issuing branch.

The payment order is used for making a remittance to the local creditor. As prevalent, the payment orders are in the form of receipts, which are required to be discharged by the beneficiaries, where applicable on revenue stamps of appropriate value, against payment in cash or through an account. The payment order is not a negotiable instrument and can not be endorsed or crossed like a banker’s draft.

Characteristics

  a) The issuing branch and the paying branch is same. (self drawing)

  b) Applicable for payment with the clearing house area of the issuing branch.

  c) This is may be open or can be crossed.

Procedure for issuing

  a) Obtain P.O. application form (F-44) duly failed in and signed by the      purchaser/applicant.

  b) Receive the amount in cash/transfer with commission amount.

  c) Issue P.O.

  d) Enter in P.O. Register

Procedure for Payment

  a) Examine genuinely of the Pay Order

  b) Enter in P.O. Register, give contra entry.

  c) Debit if found ok for payment.

** Enclosed The Copy of Pay Order instrument

Demand Draft

The demand draft is a written order by one branch of a bank upon another branch of the same bank to pay a certain sum of money to or to the order of a specified person. This is an order instrument in which the issuing branch gives instruction to the payee/drawee branch to pay certain amount of money to the order of certain person /firm/organization.

A draft is always an order and never a ‘bearer’ instrument.

– It is a negotiable instrument like a cheque i.e. it can be endorsed, collected, and delivered to the endorsee.

– D. D. may be issued to any person and it can also be issued in favor of a firm, company or local authority on written request duly signed by the purchaser.

Issue of a Demand Draft:

The purchaser is asked to complete the press ribbed form which is treated as an application as well as credit voucher for Gen. Account (Branch Concerned) – Amount and commission. The amount of D.D. commission is .15%.

If against cash- the application is given to the customer to deposit the cash with the cashier.

If against cheque (with commission/ without commission) Dr. Party’s Account (Amount + Commission) Cr. AIB General A/C (Drawee br) Cr. Income A/C Commission on D.D.

Voucher (Application form) passed duly signed & sealed is delivered to remittance department for preparation of DD. Transfer cheque for issuance of remittance by in the name of the Bank or Yourselves. The application for remittance is to be signed by the drawer of cheque.

Care in Writing a Demand Draft

sssss(a) DD leaves are consumed serially (b) written correctly in a neat hand writing (c) Payees name (d) Issuing branch name (e) Date, Serial number (branch wise, beside the printing number putting an oblique (7) Amount in words and figures (f) Name of drawee branch (g) Protectograph (h) Test for Tk. 25,000/- & above (i) Signed by two PA holders & handover with cost memo to the purchaser d) Preparation of IBCA and despatch.

Letter of Introduction

To be handed over to a client under sealed cover to enable payment of cash to the payee of the draft who is usually not known to drawee branch.

Payment of Demand Draft:

After Receipt of IBCA: The IBCA received from issuing branch is responded by the drawee branch and then this becomes voucher.

Dr. General A/ C- Drawer Br.

Cr. Bills Payable A/c-D.D. Payable.

Particulars of DD is entered in D.D. Payable Register under initial of an officer.

Payment of D.D. Through Suspense A/C: Sometimes it happens that a D.D. is presented to a branch for payment before the IBCA for the same is received. The draft is then paid with extreme care by giving the following entries

Dr : Suspense A/C D.D. paid without advice (instead of D.D.  Payable A/C.)

Cr : Party’s A/C/ Clearing banks A/C/ Cash (Stamp is affixed on the draft and in the register)

Then after receipt of IBCA.

Dr. H.O Gen. A/C (Drawer Branch)

Cr. Bills payable A/C-DD. Payable.

Dr. Bills payable A/C-D.D. payable.

Cr. Suspense A/c-D.D. paid without advice

Date of entry reversed is noted by in the register and initialed by the incharge.

Cash payment:

Satisfy as to the identity and respectability of the presenter and particularly the genuineness of signatures of the drawing officials. Signature of Letter of introduction issued by Drawer Branch Identification by a constituent/ respectable gentleman known to the branch would normally be acceptable.

Cancellation of a D.D:

Steps / Care to be taken:

(i)          Written application from the purchaser

(ii)          Signature verification of the purchaser. The D.D. which bears any endorsement should not be accepted for cancellation until No objection from the payee / endorsee is given.

(iii)       Commission not refunded.

(iv)        Debit the Drawee branch and pay proceeds on identification of purchaser.

(v)         Torn Signature but not to be destroyed.

(vi)        Mark the D.D. across the face ‘Cancelled’ by red ink.

Duplicate D.D: Steps:

(1) Written application by the purchaser.

(2) Signature verification (of the purchaser as per form).

(3) Indemnity bond.

(4) If payee is a company/semi govt./Govt. authority letter should also be obtained from the payee.

(5) Confirmation from drawee branch that D.D. is still unpaid and have marked caution (message by quickest means duly tested and charges from the party.) If by letter to be signed by two P.A. holders from both ends. Head Office approval for issuance if duplicate D.D to be obtained.

(6) Duplicate D.D. remain identical to the original except printed number and affix stamp “Duplicate D.D. issued in lieu of original D.D. No. —–— Dated —-—” reported lost”, and noted on D.D. issue register, D.D. application, counter foil of both D.D. at issuing Br. and in D.D. payable register of drawee Br.

(7) Intimate issuance of Duplicate D.D. to the drawee branch.

(8) In case original is presented, the same should not be paid under intimation to Head Office.

** Enclosed  Demand Draft. Application form

Telegraphic Transfer (T.T.)

It is an instruction duly tested sent by telex/fax/telegram/ telephone/ express mail etc. to the drawee branch for paying a certain sum of money to a specified person. This mode of transfer of fund may be effected at the written request an account holder of the branch and against value received from him. It is preferable to obtain a confirmatory cheque from the customer.

Characteristic :

  a) Issued by one branch to another branch and massage is tele-communicated

  b) Remittance / transfer of money is done through tested tele messages.

  c) Remittance is effected on the basis of tested message.

  d) Test key apparatus is required.

Issue of T. T:

Obtain T.T. application form (form No.  F17) duty failed in and signed by the purchaser/applicant with full account particulars of the beneficiary. Receive the amount in cash/transfer with prescribed commission, postage, and telephone/telex charge. Prepare T.T. message inserting test number (code number). Enter in T.T. issue register (B-30). Issue advice to the payee branch.

Dr. : Cash or Cheque

Cr. : Gen. A/C Paying Branch

Cr. : Income A/C – Commission on T. T.

Cr.: Telegram charges. Cost Memo given to the purchaser.

T. T. message prepared in duplicate, checked and signed by the in charge and Manager, tested and transmitted. IBCA prepared in duplicate. The original sent to paying branch as confirmation of message.

T.T. commission is .15%

Vat is 15% of  T.T. Commission.

Telex / Postage charge is 50 tk.

T. T. Receiving and payment:

Go through text of the T. T. carefully and ‘Decode’ the text and tally the test. – If the test agrees – Pass the Following Vouchers:

(A) T.T. Advise and Credit

Dr. Gen. A/c – Issuing Br. (Responding)

Cr. Bills Payable – T.T. Payable

Dr. Bills Payable – T.T. Payable

Cr. Party A/c.

(B) T.T. Advise & PAY :

Dr. Gen. A/c Issuing Branch (Respond)

Cr. Bills payable A/c – T.T. payable (T.T. PO is issued and delivered to the Payee)

Dr. Bills Payable A/c – T.T. Payable (T.T. PO)

Cr. B/P Cash /Clearing (Duly signed by the payee on revenue stamp and identification)

** Enclosed T.T. application form

M.T. :

In the prescribed format the purchaser / the drawer branch instruct the drawer branch to pay a specified sum of money to the payee named in the IBCA preferably by crediting his account.

Issuance Procedure;

–                    Application in writing in prescribed form

–                    Deposit of money including commission

–                    Issue of cost memo

–                    Entry in M.T. issue register serially

–                    M.T. advice in IBCA (in block letters) with Test.

Vouchers:

Dr. Cash / Party A/c

Cr. General A/c (Drawee Br)

Cr. income A/c. Commission

Cr. Postage Charge.

Receiving / paying Branch:

Test decode / Signature verified

Vouchers;

Dr. Gen. A/c – Issuing Branch

Cr. Bills Payable A/c – M.T. Payable

Dr. Bills Payable A/c – M.T. Payable

Cr. Party’s A/c – Advice and Credit.

 Clearing Hose

Functions, procedures and accounting entries

Clearing stands for mutual settlement of claims made in among member banks at an agreed time and place in respect of instruments drawn on each other.

Clearing house is an arrangement under which member banks agree to meet, through their representative, at the appointed time and place to deliver instruments drawn on themselves.

The net amount payable or receivable as the case may be, is settled through an account kept with the controlling bank (Bangladesh Bank/Sonali Bank)

Types of clearing :

• Outward clearing
• Inward clearing

Types of returns :

• Outward return
• Inward return

Clearing (outward) process: tier

First tire :  Collecting Branch

Second tire : Principal Branch/local office

Third tire: clearing house (Bangladesh bank/Sonali bank)

Procedures of outward Clearing : Flow sequence

First tire: Collecting Branch

• Instrument received
• Instrument checked
• Instrument deposited in second payee’s account : guarantee.
• stamping

                              Special Crossing

                              Clearing Stamp

                              Endorsement

• Return of counterfoil to the customer
• Particulars entered in the out. Clearing register/computer
• Register Balanced, Vouchers separated from the instruments
• Prepare voucher :

                                  Dr. Sundry Assets A/C : Clearing house

                                  Cr. All pay-in-slips / Vouchers

• Sorting of instruments, prepares sub & main Schedules
• Prepare House page according to main schedules
• Tallied house page with outward clearing register
• Instrument sent to Pr. Br/local office/main branch (2nd tire)
• Voucher passed.
• For return and unpaid instrument

                                  Dr. Party A/C

                             Cr. Sundry assets A/C : Clearing house

• Advice received from Principal/Local office

                            Dr. Head Office A/C

                            Cr. Sundry Assets A/C : Clearing house

Second tire : Pr. Branch/LO/main branch

Instrument received by this office :

Lodgment by this branch :

• Received house pages with instruments.
• Recorded the amount in a register from house page.
• Prepare bank-branch wise main schedule.
• Prepare house page.
• The instrument with house page & house book sent to the clearing house.

Third tire : Clearing house (B bank/ Sonali bank)

• The instrument are delivered to the respective banks

* everyday 5 to 10 cror tk are in outward

Clearing (inward) process : tire

First tire : Clearing house (B bank/ Sonalibank)

Second tire : Principal branch/LO/Main branch

Third tire : Paying branch

Procedures of inward Clearing : Flow sequence

First tire : Clearing house (B bank/ Sonali bank)

• Instrument received from other banks in the clearing house.
• The amount and number of instruments received are entered in the house book from the main schedule of respective banks.
• Instruments delivered, received and the difference are written on a figure slip provided in the clearing house.

Second tire : Pr. Br/LO/Main br.

• Instruments with schedules arranged branch wise.
• The amount of each schedule received entered in the house pages of the respective branches.
• The respective house pages are totaled and check the amount with total amounts of instrument received from all banks.
• The instruments are sent to respective branches with the slip showing total amount and number of instruments.
• The instrument sent to the branches concerned for clearance and advice are collected from them for honored cheques.

Third tire : Paying branch.

• Particulars of the instruments are compared with the schedule.
• Instruments sent to the respective dept for honoring them.
• From honored cheques pass the following vouchers :

                                 Dr. Party A/C (already debited by instruments)

                                 Cr. Head Office A/C

• Dishonored cheques (if any) with reason memo and credit advice sent to principal branch.
• Every day 3 to 7 cror tk in inward.

** Enclosed objection memo for cheque return

Crossing on cheque:

It is a direction to the paying banker by the drawer that payment should not be made across the counter. The payment on a crossed cheque can be collected only through a banker.

Significance of crossing :

• Serves as a measure of safety against theft, loss of cheque in transit.
• A person, who is not entitled to receive its payment, is prevented from getting the cheque enchased at the counter of the paying banker.

Types of crossing:

1. General
2. Special

General crossing:

Where a cheque bears across its face an addition of the words and company or any other abbreviation thereof, between two parallel transverse lines, or two parallel transverse lines simply, either with or without the words not negotiable, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.

 Specimens of General crossing :

Special crossing:

Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.

Specimens of Special crossing :

Drawing two parallel lines is not necessary in case of specially crossed cheque.

Endorsement :

The chief characteristic of negotiable instrument is its negotiability i.e. it can be negotiated from one person to another. The essence of negotiation this lies not in the transfer of the instrument from one person to another, but in the fact that the transferee must get the right as the holder of the instrument. An instrument may be negotiated in any of the following two ways.

a)        By delivery : “A promissory note, Bill of exchange or cheque payable to bearer is negotiable by delivery thereof”. Thus in case of bearer instrument merely delivery thereof constitutes its negotiation.

b)       By endorsement and delivery: “A promissory note, Bill of exchange or cheque payable to order, is negotiable by the holder by endorsement and delivery thereof”. Thus negotiation of an order instrument requires endorsement and delivery thereon by its holder.

Vault :

All cash, instruments (PO, DD, check) and other valuable documents are kept in the vault, which is insured by a local insurance company. If there is shortage of cash during transaction period money is transferred to drawn from the central bank. There are three keys of vault, which are given to three most senior officers. Daily an estimated amount (25 lacs, which is insured by a local insurance company) of cash is brought out from the vault for transaction purpose. No more than Tk. 25 lacs brought at once from the vault on a single day.

Deposit mobilization

A strong deposit base is a critical for success of a bank. During the last years the bank has mobilized a substantial amount in deposits in transactional and savings accounts. The highest deposit is seen to be in the year 2002 & the lowest in 1998.

Deposit mobilization :

 Sources : Annual Reports of Social Investment Bank Limited.

                 Deposit for the year 1998 was Tk. 2068.85 million.

Loans and advances of a banking/financial institution. In other words, investment of Islamic Banking Institution account for its vital portfolio activity. This is the activity, which the bank / financial institution must carry with care and prudence so that it can earn on the investments and get back the money as per planning. Without such earning, it is not possible for a bank to sustain by meeting the profit payable on deposits and the overall cost of fund including administrative cost. Since the bank has to plan to invest the owners capital and depositors time fund in short or mid or long term financing and get back the same as per schedule, a banker has to be very much careful in selecting the client and the line of trade and while industry while committing for the investment.

A banker must have its strategy of investment operation and sectoral credit budget and the features of selecting sponsors/prospective client and the system of appraisal of any investment proposal. A branch manager wile choosing a credit commitment need to consider the following major points:

1. Character, Capacity and credit worthiness of the applicant to be critically ascertained.
2. Past business records and trend to be examined with reference to the different books of accounts/financial statements bank accounts turnover.
3. Applicants previous banking exposure and tax paying (TIN) capacity to be examined to assess the financial solvency.
4. self declaration of applicants moveable and immovable assets and any liability has to be obtained and checked up with reference to valid documents and ownership/ possession and liability if any either in the name of the applicant or business.
5. Applicants business license whether obtained from recognized competent authority and whether the same is valid to be seen.
6. proposed investment if has the compatibility to the credit norms and criteria.
7. collaterals, if any the applicant has offered to additionally secure the facility prayed for, the status and value thereof to be assessed with reference to valid ownership and possession document and the adequacy thereof to be determined.
8. Primary security under the facility if has the ready marketability to be examined. The go down or storing house should have the location of easy access.
9. Whether the concerned business is being operated at applicant’s own shop or at rented business. If rented rental agreement and the up to date rent paid receipt to be examined.

1. The business shop and the items of goods and merchandise of primary security can be easily inspected by bank official.
2. In case of applicant, where partnership firm, is has to be seen whether the same is registered and the partnership deed to be examined to ascertain whether any detrimental clause is contained therein.
3. If proposed client is Private Limited Company, M/A, A/A and certificate of incorporation to be studied including company’s Board resolution to obtain credit facility.
4. There must be not any classified loan either in the name of the applicant or in the name of his business establishment or any concern of his interest.
5. Credit needs of the applicant/ business firm/company with reference to production/service strength and sale to be assessed in the line of circulated credit norms.
6. In case of higher investment limit, lending risk analysis to be made to determine the extent of risk in management or financial commitments/security aspect.
7. In case of long term investment proposal, detailed feasibility to be examined with reference to technical, financial and commercial viability and economic justification before going for the commitment.
8. where there is any credit norms fixed up by the central bank for assessing the working capital needs of industrial enterprise those to be followed for the fixing up of investment limit favoring of the applicant.
9. In cases where there is guarantors their worth and creditability and the relationship of the guarantors with the client to be ascertained and kept on record.
10. In case of HPSM investment for House Building (Commercial or residential), in addition to legal security of the land, the prospect of recovering the periodic installment of loan out of the monthly rental income of the house or market to be specially verified from reliable source and physical assessment.
11. After satisfying the requirements as highlighted above, investments to be sanctioned by competent authority/authorized officer.

 Investment of SIBL

Investment for the year 1998 was tk 2455.56 million.

Modes of Investment of SIBL

Bai- Muajjal.

Bai-Muajjal word are came from Arabic word Baiun and Ajalun, Baiun means purchase and sale and Ajalun means fixed time or fixed period. Therefore, Bai-Muajjal means sale for which payment is made at a future fixed date or within a fixed period, i.e. sale on credit.

SIBL treated – Bai-Muajjal as a contract between the bank and the client under which the bank sells to the client certain specified goods purchased as per order and specification of the client at an agreed price payable within a fixed future date in lump sum or by fixed installments. So it is a credit sale of goods by which ownership of the goods in transferred by the bank to the client but the payment of sale price by the client is deferred for a fixed period.

Features:

1. It is an offer from the client to bank for purchase particular goods by the bank deciding clients specification and client committing himself to buy the same from the bank on cost plus agreed upon profit.
2. Bank generally charge 14% profit for this investment, but it can be less for good client.
3. Bank may sell the goods at one agreed price, which will include both the cost price and the profit.
4. Bank takes cash or collateral security to guarantee the implementation of the promise or to identify the damages.
5. Client make the promise biding that he is either satisfy the promise or to identify the damages caused by breaking the promise without excuse.
6. Mortgage/Guarantee/Cash Security or all may be obtained prior to the signing of the agreement at the time of signing the agreement.
7. Stock and availability of goods is a basic condition for signing agreement, therefore, the bank must purchase the goods as per specification of the client to acquire ownership of the same before signing the agreement with the client.
8. After purchase of goods the bank must bear the risk of goods until those are actually delivered to the client.
9. The bank must deliver the goods to client on a specified date and a specified place as per contract.
10. The bank sells the goods at a higher price then the purchase price to earn profit.
11. The price one fixed as per agreement and deferred cannot be further increased.

Categories of Bai-Muajjal:

    Bai-Muajjal investments have five categories in SIBL:

1. Bai-Muajjal Commercial : Investment for purchase and sale goods to individual or firm or company for trading purpose.
2. Bai-Muajjal Industrial     : Investment in industrial sector for purchase and  sale Machineries, Equipments, Raw-Materials etc.
3. Bai-Muajjal Agriculture  : Investment in Agriculture area for purchase and sale seeds, fertilizers etc.
4. Bai-Muajjal Post import  : Investment for import of goods from abroad.
5. Bai-Muajjal Scheme.       : Investment under any specific scheme such as Doctors scheme etc.

But currently SIBL Principal Branch mainly allowed and investing in Bai-Muajjal Commercial and Bai-Muajjal Trust Receipt area.

Processing procedure / Induction of client:

1. Client need to open an Al-Wadia Current A/C, generally maintaining it six months.
2. Client need to apply with description and their objective clearly.
3. Company goal, budget, performance, experience and other matters are attached.
4. Client  need to filled up application form are fully by:
   1.                                          I.    Full personal information
   2.                                        II.    Mortgage / Security
   3.                                       III.    Signature
   4.                                      IV.    Attached all necessary documents.
   5. Bank will inspect the land, building or other assets.
   6. Obtain Financial Statement or Balance Sheet of last three consecutive years.
   7. Bank will collect confidential report from local, financial, credit & leasing institutions.
   8. Lawyers opinion about the deed or other papers.
   9. Goods are        legal, valid, quality and other are specified and also availability in the market will check up.
   10.  After all necessary steps bank will offer a certain amount against clients application.
   11. If client agreed bank will proceed and call for necessary documents.

Documentation: 

        Before disbursement of loan bank will finally chechk the following  document :

1. Bai-Muajjal sanction accepts by the client.
2. Bai-Muajjal agreement.
3. Letter of pledge.
4. Single party D. P. Note, if there is no guarantor.
5. Double party D. P. Note, if there is guarantor(s) to be made by the client in the favour of the bank.
6. D. P. Note Delivery paper.
7. Letter of Hypothecation for clients Stock-in-Trade / Work-in-Progress.
8. Letter of Disclaimer, if stored in party’s own / hired godown.
9. Insurance policy (If stored in partys godown under banks effective control).
10. Trust Receipt dully executed by the client.
11. Letter of guarantee.
12. Balance confirmation letter
13. Letter of installments.

After all necessary steps and collection of documents bank will disburse the loan and then client can use the investment amount for his desire purpose. For security of the investment bank sometimes investigate the borrower company for checking how company using the loan fund and their activities.

Bai-Murabaha:

Bai-Murabaha word are came from Arabic word Baiun and Ribhun, Baiun means purchase and sale and Ribhn means an agreed upon profit. Therefore, Bai-Murabaha means sale on agreed upon profit

SIBL treated – Bai-Murabaha as a contract between the bank and the client under which the bank sells to the client certain specified goods purchased as per order and specification of the client at an agreed price payable within a fixed future date in lump sum or by fixed installments. So it is a credit sale of goods by which ownership of the goods in transferred by the bank to the client but the payment of sale price by the client is deferred for a fixed period.

Features:

1. It is an offer from the client to bank for purchase particular goods by the bank deciding clients specification and client committing himself to buy the same from the bank on cost plus agreed upon profit.
2. Client make the promise biding that he is either satisfy the promise or to identify the damages caused by breaking the promise without excuse.
3. Bank takes cash or collateral security to guarantee the implementation of the promise or to identify the damages.
4. Mortgage/Guarantee/Cash Security or all may be obtained prior to the signing of the agreement at the time of signing the agreement.
5. Bank generally charge 14% profit for this investment, but it can be less for good client.
6. Bank may sell the goods at one agreed price, which will include both the cost price and the profit.
7. Stock and availability of goods is a basic condition for signing agreement, therefore, the bank must purchase the goods as per specification of the client to acquire ownership of the same before signing the agreement with the client.
8. After purchase of goods the bank must bear the risk of goods until those are actually delivered to the client.
9. The bank must deliver the goods to client on a specified date and a specified place as per contract.

1. The bank sells the goods at a higher price then the purchase price to earn profit.
2. The price one fixed as per agreement and deferred cannot be further increased.
3. Bank can authorize any third party to buy and receive the goods on bank behalf. The authorization must be in a separate contract.

Categories of Bai-Murabaha:

    Bai-Murabaha: investments have five categories in SIBL:

1. Bai- Murabaha Commercial : Investment for purchase and sale goods to individual or firm or company for trading purpose.

2. Bai- Murabaha Industrial      : Investment in industrial sector for purchase and sale Machineries, Equipments, Raw-Materials  etc.

3. Bai- Murabaha Agriculture  : Investment in Agriculture area for purchase and sale seeds, fertilizers etc.

4. Bai- Murabaha Post import  : Investment for import of goods from abroad.

Processing procedure / Induction client:

  Client need to open an Al-Wadia Current A/C, generally maintaining it six months.

  Client need to apply with description and their objective

     clearly.

  Company goal, budget, performance, experience and other matters are attached.

  Client  need to filled up application form are fully by:

1. Full personal information

1. Mortgage / Security
2. Signature
3. Attached all necessary documents.

  Bank will inspect the land, building or other assets.

  Obtain Financial Statement or Balance Sheet of last three consecutive years.

  Bank will collect confidential report from local, financial, credit & leasing   institutions.

  Lawyers opinion about the deed or other papers.

   Goods are legal, valid, quality and other are specified and also availability in the market will check up.

  Goods are perishable on short or long term durations.

  Goods quality and specialization.

  Goods are available in the market.

  After all necessary steps bank will offer a certain amount against clients application.

  If client agreed bank will proceed and call for necessary documents.

Documentation: 

Before disbursement of loan bank will finally check the following document :

1. Bai-Muajjal sanction accepts by the client.
2. Bai-Muajjal agreement.
3. Letter of pledge.
4. Single party D. P. Note, if there is no guarantor.
   1. Double party D. P. Note, if there is guarantor(s) to be made by the client in the favour of the bank.
5. D. P. Note Delivery paper.
   1. Letter of Hypothecation for clients Stock-in-Trade / Work-in-Progress.
   2. Letter of Disclaimer, if stored in party’s own / hired go down.
   3. Insurance policy (If stored in party’s go down under banks effective control).
6. Trust Receipt dully executed by the client.
7. Letter of guarantee.
8. Balance confirmation letter
9. Letter of installments.

Purchase of goods:

After agreement and acceptance of deed by the client then bank will purchase goods for client as per clients requirements. The following steps are followed by the bank in this steps:

1. Purchase goods.
2. Open a new investment a/c in investment area.
3. Maintain a register to describe the transaction with money and quantity of goods in credit and fraction purchase.
4. Incase of cash purchase another register can be maintain.

After all necessary steps and collection of documents bank will disburse the loan and then client can use the investment amount for his desire purpose. For security of the investment bank sometimes investigate the borrower company for checking how company using the loan fund and their activities.

Hire Purchase & Sirkatul Milk (HP & SM)

Joint participation

Categories of HP & SM:

    HP & SM investments have five categories in SIBL:

1. HP & SM Commercial : Investment for purchase and sale goods to individual or firm or company for trading purpose.
2. HP & SM Industrial     : Investment in industrial sector for purchase and sale Machineries, Equipments, Raw-Materials etc.
3. HP & SM Agriculture  : Investment in Agriculture area for purchase and sale seeds, fertilizers etc.
4. HP & SM Post import  :  Investment for import of goods from abroad.
5. HP & SM Scheme.       : Investment under any specific scheme such as Doctors scheme etc.

 Documentation:

Before disbursement of loan bank will finally check the following  document :

1. HP & SM sanction accepts by the client.
2. HP & SM agreement.
3. Letter of pledge.
4. Single party D. P. Note, if there is no guarantor.
5. Double party D. P. Note, if there is guarantor(s) to be made by the client in the favour of the bank.
6. D. P. Note Delivery paper.
7. Letter of Hypothecation for clients Stock-in-Trade / Work-in-Progress.
8. Letter of Disclaimer, if stored in party’s own / hired go down.
9. Insurance policy (If stored in party’s go down under banks effective control).
10. Letter of guarantee.
11. Balance confirmation letter
12. Letter of installments.
13. Letter of disbursement.

Murabaha:

1. Murabaha Post Import (MPI): Under this method SIBL import goods for client. After importing goods client will buy full lot or he can buy certain portion with a certain amount with calculated price. Price will calculated with predetermine method. In MPI bank takes 14% profit. Here price determine by following method:

Investment amount + Profit (14%) + Other Charge (Import Tax, Processing fee, Custom Duty, Warehouse rent etc.).

Profit will be calculate by time i.e. difference between after sanctioning loan and return of the loan.  In MPI generally bank share 70% of total cost of import goods but for reliable and good client bank may share more than 70% or fully. Good customer are defined:

          a)   Good Mortgage/ Collateral.

b)     Good previous transaction record.

1. Murabaha General: This method is same as MPI but only used in purchasing  goods locally.

For Murabaha investment the following documents are needed:

1. Apply to bank ( filling the SIBL application form) for a certain amount
2. Include documents of mortgage assets with application
3. After justification bank can agree and determine the loan amount with a certain profit rate.
4. After acceptance banks offer, client can start his Mudaraba loan.
5. Then client need to open an L/C for MPI investment.
6. Bank takes charge of purchasing goods and store goods.
7. Client can deliver goods by clearing payment or he can buy certain portion by paying certain amount.

 Age Limit:

According to the Instruction circular No. INV/PID- 11/613 dated 08/06/2000,

1. Age limit of the persons other than service holders will be 27-60 years.
2. Age of the students shall be minimum 18 years but not exceeding 25 years.

Application and Selection:

1. The interested person shall apply in the prescribed Form enclosed herewith (category wise) to the branch concerned, duly filled in along with required papers/documents/quotation/catalogue.

1. After getting the application from the client the Branch Officials / Supervisors (where applicable) shall physically inspect the residence/business office/institution of the client & his guarantor for proper verification and to authenticate the genuinely of the client.

1. If the proposal seems to be reasonable, viable and the genuinty of the client is acceptable to the Branch, they may allow investment as per norms of the scheme with the approval of the Investment Committee constituted for the scheme.

 Security:

According to the Instruction circular No. INV/511 dated 11-08-98, to make the investment of the Bank safe and risk-free besides the guarantee of the colleague of same status or above of the client the guarantee of any of the following persons has to be taken:

1. from the spouse of the client.
2. If the client is a married woman, then guarantee from her husband.
3. If the client is unmarried, then guarantee from the parents.

 Procedure for Investment under different modes

Shortly the following are the list for investment procedure:

1. Introduction of Client.
2. Application.
3. Required papers to be obtained along with application.
4. Processing and appraisal.
5. Sanction.
6. Fixation of terms and conditions.

a)    Security.

b)   Repayment Period

c)    Rate of return

d)   Others.

1. Documentation.
2. Purchasing of goods by the bank.
3. Taking Delivery of goods by the bank.
4. Sale and delivery of goods by the bank.
5. Maintenance and storage of Murabaha / MPI goods.
6. Taking stock report for Bai-Muajjal goods.
7. Insurance.
8. Engaging Buying Agent.
9. Compensation of Investment Account.
10. Rebate for Early Payment/Adjustment of Murabaha / Bai-Muajjal Investment.
11. Follow-up, Supervision and Recovery of Investment.
12. Book-keeping and Accounting.

Procedures and Guidelines followed by SIBL for evaluation of requests for financial assistance

Papers/Documents to be submitted with investment proposal:

The following papers/documents are required to be submitted to a branch while submitting any investment proposal:

1.   An application form or printed application form in bank’s standard

      form IF-48 and IF-49 along with Photographs of the applicants,

      proprietor partners/directors and guarantors, if any.

2.    Filled in letter of undertaking as per Bangladesh Bank Format.

3.    Brief educational, professional and business background.

4.    Photocopy of valid Trade License and TIN Certificate.

5.    Stock report duly signed (to be verified by the branch official).

6.    Statement of Sundry Debtors and Creditors signed by the client, if

       any

7.   Last 3 (three) years business performance (i.e. item-wise sales

      (both quantity & value) cost and net profit.

8. Valuation certificate, site map/ Mouza map of the proposed

    collateral securities.

9. Photocopy of all deeds papers/documents related to property offered

    for mortgage.

10. Statement of accounts with SIBL (both for C/A & Investment A/C).

11.  Statement of Accounts with previous bank(s).

12   Copy of the sanction letter(s) issued by the existing banker(s).

13.  A declaration to be obtained from the client regarding their bank

       liabilities (with detail breakup) with any bank financial institution

       in Bangladesh in the name of the  client or in  the name of

       allied/sisters concerns. If they do not have bank liabilities the

       same shall have to be stated in the declaration.

14.  A declaration to be obtained from the party to the effect that there

       no overdue/stuck-up liability in the name of the of the client or

       any of its sisters/allied concerns with any   banks/financial

       institutions in Bangladesh.

15.  A declaration whether the party have any sister/allied concerns or not ( name, owners name and brief  business description of the

      sister/allied concerns shall have to be  incorporated in the declaration.

16.  In case of partnership firm the following papers shall have to be

       obtained :

          a) Copy of partnership deed.

          b) Authority of partners regarding investment sought from SIBL.

17.  In case of limited company the following papers shall have to be

       obtained:

          a) Last 3 years audited Balance sheet and P/L A/C.

          b) Certified copy of Memorandum & Articles of Association.

          c) Latest shareholding certificate is sued by Register of Joint

             Stock Companies.

          d) Resolution of the Board regarding investment sought from

             SIBL.

          e) Statement of personal assets and liabilities of all the directors.

18.  In case of project investment proposal following additional papers

        shall have to be obtained:

a)    Copy of the Feasibility Report.

b)   Three sets of quotation for machinery/ equipments to be procure.

c)    Building/Machinery layout plan if required.

d)   Approval/Permission of the respective Gov. Authorities.

e)     In case of BMRE proposal, detail particulars of existing machineries with value and production capacity.

19.  In case of Real Estate proposal following additional papers shall

       have to be obtained:

          a) Approved Layout Plan.

          b) Approved Site Plan.

          c) Approved of the respective Gov. Authority.

          d) Details cost estimation of the construction.

20.  In case of proposal for working capital Finance following

       additional papers shall

       have to be obtained:

a)    List of Machinery with present resale value.

b)   Item-wise production capacity and last year actual production.

c)    Item-wise Raw Materials price requirement of Raw Materials at 100% capacity utilization.

21. CIB inquiry form alongwith clients undertaking.

22.  Filled in L.R.A form in case of investment proposal for Tk. 100.00

       lac and above.

23.  Any other information/paper supporting the proposal.

Selection of the client and assessment of the amount of investing/ financing:

The following points are scrutinized /assessed while evaluating financing proposals:

1. Examine Shariah permissibility of the items/project.
2. Value of stock/investment in business and net-worth of the party and its sister concerns / group.
3. Immovable personal property of the owners/partners/directors of the concern.
4. Volume of business handled during last three yeas and experience in the relative trade.
5. Existing business condition of the party and future prospect.
6. Existing financing facilities/limit with SIBL/other banks.
7. Repayment performance of the party with SIBL as well as with other/previous banks.
8. Current Account transaction of the party with SIBL/previous banks.
9.  Banking track record of the party as a borrower and whether the party is a defaulter with any bank/financial institutions.
10. Market reputation of the party as a borrower.
    1. Honesty & integrity of the party.
11. Current demand and supply position, price competitiveness and future marketability of the goods to be purchased/procured.
12. Assessment of working capital requirement in case of working capital finance against existing industrial project.
    1. Detailed feasibility study in case of project financing.

To assess the above points the respective branch usually collects the following papers/data in addition to papers received from the client:

1. Pay visit to the business establishment/site of the client and prepared visit report.
2. collect market report on the respective items/business.
3. collect confidential report on the client from banks/ financial institutions and local brances including the previous banker of the client.
4. Collect report from Credit Information Bureau(CIB) of Bangladesh Bank through Head Office.
5. Inspect land, buildings, other assets and properties proposed to be mortgaged or hypothecated and prepared inspection report.
6. Obtain site plan of the land/building to be offered as security.
7. Obtain Lawyer’s opinion regarding acceptability of the proposed collateral securities.

4.2.9 Non-Performing Investment as % of total Investment :

Graphical Presentation of Non-Performing Investment as % of Total Investment

 Bank Guarantee:

A bank can make loan guarantee whereby it guarantees the repayment of a loan made from party A to party B. that is, a guarantee is an undertaking by a bank to stand behind the current obligations of a third party, and to carry out that obligation if the third party fails to do so.

Social Investment Bank also involved in such activities.

Guarantee from the year 1999 – 2003

TYPE OF INVEST TO BE REPORTED IN CLSFORM:

For application of classification criteria, loans are divided into the following types:

BASIS FOR LOAN CLASSIFICATION:

According to BRPD Circular No. 16, 1998 all loans & advances are classified on the basis of two criteria via:

  Objective Criteria &

  Qualitative Judgment (QJ) criteria.

The above criteria along with definitions are described in the following table:

According to qualitative Judgment, a bank can classify any lone if it forecasts the uncertainty of recovery of the loans due to the following reasons:

  Credit extended without approval of competence authority or without any logical basis (under pressure)

  Incomplete documentation.

  Insufficient security or drastic fall in the value of security

  Borrower sustains heavy loss in capital due to natural calamity or business condition.

  Frequent overdrawn of limit.

  Rescheduling terms are not maintained.

  Borrower cannot be traced out or death of the borrower.

  Filing of suit against the borrower & against recovery of credit.

May classify under qualitative criteria:

List of eligible securities with their percentage of value:

 Rate of Provisioning and the basis for calculation:

 Amount of Provision against Classified & Unclassified Investment :

From the above table it is observed that both types of investment have been increasing through out the years 2001 to 2003. but the increase is seen in more in unclassified especially in the year 2003, representing a growth rate of 90.37%. But if unclassified loans increase at this rate the risk of bad debts also increase too. But on the other hand the increase in both classified and unclassified may be also due to the fact that Social Investment Bank has also increased its volume of investments.

Foreign Exchange

Amongst early communities and prohibitive thrives the only way in which a man could satisfy a want, which he could not himself supply, was by exchanging the products of his own personal effects for those of his neighbors. In international trade the seller wants to make sure that the buyer is able to pay in time once the goods have been shipped and that risk of non-payment is minimized. He therefore, wants to find out how a third party, i.e. the bank can help him in the practical arrangements for these transactions. Similarly, the buyer is interested that he gets possession of goods before he pays for them and he is able to make sure that the goods are exactly those he ordered.

It is important to decide in advance how seller is going to get payment before handing over possession of goods and how the buyer is going to get constructive possession of the goods before making payment. This is more so because the parties are located in two different countries separated by distance, with different political, legal, monetary and trading system and possibly without knowing each other well. The two trading partners wish to reconcile the conflicting interests and converging them into one acceptable solution. This object led to research for a system, which is mutually convenient, reliable and safe, taking into, accounts their own individual problems, apprehensions and requirements.

The solution resulted in the evolution of Documentary Credit method where a bank acts as a fiduciary agent to safeguard the interest of both the parties, namely, ensuring constructive delivery of goods by the seller to the buyer and payment being made by the buyer on presentation of documents complying with the terms and conditions of the Credit.

 MEANING OF Foreign EXCHANGE

Money as earlier stated is a common denominator in which the relative values of goods and services can be expressed. When a person makes a payment to another person living in the same country, he uses any of the different forms of money currency in the country.

Foreign Exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country. Foreign Exchange is the means and methods by which rights to wealth in a country’s currency are converted into rights to wealth in another country’s currency. In banks when we talk of foreign exchange. We refer to the general mechanism by which a bank converts currency of one country into that of another. Foreign trade gives rise to foreign exchange. Foreign trade is transacted either in the currency of the exporter’s country or that of the importer’s country. Or that of a third country acceptable to both the exporter and the importer.

Dr. Paul Eingiz defines Foreign Exchange as the system or process of converting one national currency into another and of transferring the ownership of money from one country to another.

In the words of Mr. H. E. Evitt. “Foreign Exchange is that section of Economic Science which deals with the means and methods by which rights to wealth in one country’s currency are converted into rights to wealth in terms of another country’s currency. It involves the investigation s of the method by which the currency of one country is exchanged for that of another, the causes, which render such exchange, may take, and the ratios or equivalent values at which such exchange are effected.

The expressions “Foreign Exchange” are also popularly used to denote a foreign currency. A bank is said to buy or sell foreign exchange, which deals in claims on foreign currency or the actual legal tender money of other countries. But this is not the only meaning of the expressions. In the study of foreign exchange as a branch of foreign trade, it has been given a much wider interpretation. It covers all method by which the claims expressed in terms of one currency are converted into another currency and the rate at which exchange take place.

The term “currency” as earlier stated includes not only such notes and coins as are legal tenders, but also bank balances and deposits in foreign currency and all instruments –credit instruments which are capable of being used as currency. Such as bill of exchange, cheques, drafts, airmail transfers, telegraphic (cable) transfer and all other instruments, which convey to holder a right to wealth.

Thus foreign exchange means foreign currency and includes All deposits, credits and balances payable in any foreign currency and any drafts, traveler cheques, letters of credit and bills of exchange, expressed or drawn in local currency but payable in any foreign currency; and Any instruments payable, at the option of the drawee or holder thereof or any other party thereto, either in local currency or in foreign currency or partly in one and partly in the other.

Foreign exchange is concerned with the settlement of international indebtedness, the methods of effecting the settlements and the instruments used in this connection, and the variation in the rates of exchange at which settlements of international indebtedness is made.

Foreign Exchange is concerned with the settlement of international indebtedness. the methods of effecting the settlements and the instruments used in this connection, and the variation in the rates of exchange at which settlement of international indebt ness is made.

The Central Bank of country, being the controller of currency and credit and head of the money market is vested with the responsibly to ensure internal as well as external stability of its currency. The internal stability is controlled by its monetary and credit policy while the external stability by bringing and maintaining equilibrium in country’s balance of payment with rest of the world, which includes control of gold, dollar and sterling reserves of the country.

In terms of Foreign Exchange Regulation Act. 1947, as adapted in Bangladesh, Foreign Exchange means foreign currency and includes all deposits, credits and balances payable and foreign currency instruments, such as, Drafts, Travelers, Cheques , Bills of Exchange , Hundi and Promissory Notes payable in any foreign country.

 FUNDAMENTALS OF FOREIGN EXCHANGE

There are 3 fundamental aspects of the general mechanism of Foreign Exchange:

  Every country has its own currency – legal tender/ distinctive unit of account.

  Banks by book- keeping entry carried out into two centers concerned effect the conversion of one currency into another.

  These exchanges are affected by means of credit instruments visa, Draft, Mail Transfer, Telegraphic Transfer etc.

Each country has its own currency distinct from the others and useful possession of any such distinctive unit of account can be had only within that country in which it is in circulation; that is so, because it discharges the functions of money in the country of which it is legal tender. Foreign currency for us is like any other commodity. This “commodity character” of foreign currency is very significant and should be borne in mind at all times. The only peculiarity which distinguishes foreign currency from other commodities is that in the country where it is legal tender. It is money.

ADMISTRATION OF FOREIGN EXCHANGE IN BANGLADESH

The statute for administration o foreign currency in Bangladesh is the Foreign Exchange Regulation Act, 1947 as adapted in Bangladesh. Under the Act, 1947 as adapted in Bangladesh. Under the Act, the responsibility and authority of administration of foreign exchange invested by the government with the Bangladesh Bank. Central Bank the country. Any who deals with foreign exchange has to abide by the directions given by Bangladesh Bank in that behalf. Foreign exchange is a highly specialized business and is, therefore, concentrated in selected branches of the schedule banks situated in metropolitan cities and other places where either import or export predominates or inflow of foreign remittances is expected to be high. Such branches can, however, function within the guidelines prescribed by HEAD office of the Banks from time to time. A senior executive of the bank having deep knowledge of the rules and regulations of foreign exchange business and particulars and banking in the international economic and political fields heads Foreign Exchange Department, which is also called International Division.

 AUTHORISED DEALERS

In exercise of the powers conferred by of the Foreign Exchange Regulation Act, 1947 on certain schedule banks, which are authorized to deal in foreign exchange by Bangladesh Bank, the selected branches of the bank can transact such businesses. They are known, as “Authorized Dealers” Bangladesh Bank does not directly wit the members of the public; the transactions are done by Authorized Dealers in accordance with the guidelines given by Bangladesh Bank.

Authorized Dealership License:

License to deal in foreign exchange are normally granted only to schedule banks that have offices in Bangladesh, after being satisfied that they have adequate number of staff/officers properly trained in handling foreign exchange transactions and will be able to comply with the requirements of the administration of exchange control. Authorized Dealership License can at any time be withdrawn by Bangladesh Bank if the bank in whose favor it is issued fails to conduct its business to the satisfaction of the Bangladesh Bank. License to deal in foreign exchange is given in respect of individual branch of Authorized Dealers. The licenses are of two types:

Universal Limited:

A universal license authorizes the bank to conduct all types of permitted foreign exchange transactions in all permitted currencies. A limited license, on the other hand, authorizes Handling of only those transactions, which are specially mentioned in the license by the Bangladesh Bank.

Responsibility of Authorized Dealers:

Authorized Dealers act as agent of Bangladesh Bank. It is, therefore, very important for the authorized dealers to familiarize themselves with the underlying objectives of exchange control and various instructions issued from time to time with regard to operations of exchange control. They should carefully follow the instructions contained in the Exchanged Control Manual / Guidelines for Foreign Exchange Transactions issued by Bangladesh Bank through Foreign Exchange Circulars, Circular Letters, and Local Circulars etc.

Authorized Dealers should be careful in scrutinizing applications received from the customers for the purpose of, say. Import payments, issue of export performance benefit, release of foreign exchange for invisible payments etc., to ensure correctness of the information given in the applications.

Authorized Dealers should also bring to the notice of the Bangladesh Bank any attempt, direct or indirect, of evasion of any provision of Foreign Exchange Regulations Act, 1947 or any orders, directions or instructions issued there under.

 FOREIGN TRADE

The Foreign trade of a country refers to its imports and exports of merchandise from and to other countries under contract of sale. No country in the world produces all the commodities it requires. On the contrary, a country may produce more of those commodities in the production of which it has a greater or comparative advantage, and may or may not produce smaller quantities o those in the production of which it has a greater or comparative disadvantage.

NEED FOR FOREIGN TRADE:

A country may decide to be- sufficient but that would force its people to forgo the use of many commodities, which they cannot produce either because they have no capacity and the resources to produce them or the production of which is possible only at a tremendous cost. Foreign trade enables a country to have much larger flow and much more diversified form of wealth than are possible without it.  There is a wide difference in respect of the material and human resources, stage of technical and scientific progress, and possession of capital equipment in difference countries.

—–The first of these differences is that of natural resources. A country, which lacks in mineral products, has to import them from other countries. Climate and soil conditions may not suit the production of some essential raw materials and foodstuffs.

—–Secondly, differences in size and density of population also give rise to trade between countries. A country with a population which is too large and dense in relation to its recourses has to import food, clothing, and other consumer goods.

—–Thirdly, the stage of industrialization and technical and scientific development generates foreign trade. A highly industrialized country exports capital goods but may have to import raw materials and semi- processed goods.

—–Fourthly, the high and rising standards of living of a country necessitate large imports or various commodities. A country with mass consumption maintains a high level of foreign trade.

BALANCE OF TRADE:

Balance of trade refers to the net difference between the values of export import of commodities from/into a country. The movement of goods or commodities between countries is known as the “visible trade” Therefore balances trade refers to the net value of the visible trade of the country. When the country exports commodities it gains foreign exchange. When it imports it has to pay in foreign exchange, or it loses foreign exchange.

COMPOSITION OF IMPORTS AND EXPORTS

The composition of imports and exports is an important aspect of a country’s foreign trade. The gain from trade depends on both its total value and commodity structure. The types of goods imported and exported indicate stage of development of the economy, the standard of the living of the people, and nature of economic activity in the country.

Imports of Bangladesh may be classified into three categories:

1. Capital goods
2. Industrial raw materials
3. Consumer goods

The capital goods comprise of machinery, plant and spares, transport equipment etc. The raw materials imported are raw cotton, cotton ware, mineral oil, dyes, chemicals etc. The consumer goods are electronic goods, drugs and medicines, milk power etc.

4.3.8 TERMS OF TRADE

Terms of trade are the rate at which a country obtains its imports in exchange for its exports. It is the quantity of import the country gets for a unit of its exports, or the quantity of export it has to pay fro a unit of import. A simple and convenient definition of terms of trade is the volume of imports that can be bought with a given volume of exports, the ratio of export prices to import prices.

Movements in the terms of trade, therefore, are expressed by index numbers. The value of the index method is, of course, historical rather than prophetic. The ratio between two index numbers of average prices is instructive when trend of international trade are interpreted and it explains the degree of physical efforts required to improve a country’s external trade.

 BALANCE OF PAYMENT

Foreign trade, in its broad sense, includes not only visible trade involving import and export of commodities but invisible items also. These invisible items include shipping, banking, insurance, tourist traffic, gifts, investment, interest on investments, technical know how, consultancy etc. The balance arrived at taking into account both the visible and invisible items in foreign trade is known as the balance payments. Thus balance of payments is more comprehensive than balance of trade and other invisible items of foreign trade.

 Import Restrictions

When imports are restricted the balance of payments position no doubt improves and the reductions in imports is easier but when imports consists of raw materials for the manufacture of export goods at may not be wise to restrict such imports. Imports restrictions is effected trough such measure as imposition of tariffs or import duties, fixing of quotas, allowing imports only against license. Tariffs are import duties levied on goods entering    the country. Tariffs thus make imports dearer and are intended to discourage imports.

Import Business of SIBL From 1999 to 2003

Import business for the year 1998 was tk. 2455.70

Graphical Presentation Of Import Business

It can be seen from the table and the graphical presentation that the import business of SIBL is increasing every year at a very high rate. In the year 2002 and 2003 the increase is more compared to the other three years. The increasing trend reflects that the import business will also keep increasing in the coming years. But alternatively we can also observe that the percentage of growth in import business has decreased. Eeven though the growth rate is lower but the volume of import is highest in 2003 being the amount of Tk. 18446.10 million.

 Export Promotion

Concerted efforts may be made towards promotion of exports. Various concessions and incentives may be given by the government to encourage exports from the country. Measures adopted towards this end may include reducti9on of export duties, export incentives, facilities of commercial, technical and financial nature being made available at cheaper rates and an adequate measure to export- oriented projects, allowing duty drawbacks or cash incentives to exporters etc.

Export Business of SIBL From 1999 to 2003

Export Business for the year 1998 was tk. 565.00 million

Graphical Presentation of Export Business

As the above graph shows that the export business of SIBL has an increasing trend. In the year 2003 the business is seen to be the highest compared to other years. On the other hand the following graph shows its decreasing trend in growth of export business. Although the growth rate in the year 1999 was more that 71.30% but in the year 2002 it has resulted to a increasing growth rate of 141.04%. But in 2003 it is decreasing 16.22%.   The main reason being that the export sector of the country experienced a downtown caused by the worldwide recessing during the year 2003. The bank handle an export volume of Tk. 6385.50 million during the year 2003 as compared to Tk. 5494.00 million in the previous year (2002), which is the highest volume of export in five years.

SALE AND FOREIGN TERMS IN FOREIGN TRADE

Every foreign trade transaction is the result of foreign sale contract between the seller and buyer. Ina sale contract, the seller agrees to sell and the buyer agrees to buy a specified quantity of goods on terms mutually agreed upon. However, the exact form of the sale contract varies from transaction to transaction. A sale contract need not necessarily be a formal and legally executed document as is often believed. It can be an exchange of correspondences between the seller and buyer. In some trades legally drafted contracts may be used.

PAYMENTS TERMS

The payment terms, on the other hand, stipulate when, where and how the payment will be effected. The terms relating to payments for the goods constitute the most important part of a sales contract. Great is taken in   a sale contract to clearly specify when payment will be made, where it will be made and how it will be made.

Terms involving payment within a period of 6 months from the date of shipment are deemed as short- term payment terms, while those involving a period beyond 6 months but within five years are medium terms payment terms. If goods sold on credit terms extending beyond five years the y are considered as long-term payment terms.

 Short- term payment terms

Documentary Letter of Credit:

In simple terms, a documentary credit is a conditional bank undertaking of payment. Expressed more fully, it is a conditional Undertaking given by a bank (Issuing Bank) at the request of a customer (Applicant) or on its own behalf to pay a seller (Beneficiary) against stipulated documents provided all the terms and conditions of the Credit is complied with.

These stipulated documents are likely to include those required for commercial, regulatory, insurance or transport purposes, such as commercial invoice, certificate of origin, insurance policy or certificate and a transport document of a type appropriate to the mode (s) of transport used.

Documentary credits offer both parties to transactions a degree of security, combined with possibility, for creditworthy party, of securing financial assistance more easily.

Documentary credits therefore:

  Are an arrangement by banks for settling international commercial transactions

  Provide a form of security for the parties involved.

  Ensure payment provided that the terms and conditions of the credit have been fulfilled.

  Mean that payment by such means is based on documents only, and not on merchandise or services involved. (Article 4, UCPDC 500).

Types of Documentary Letter of Credit:

Documentary Credits are basically two types. It may be either

  Revocable

  Irrevocable.

  Confirmed Irrevocable Credit.

1. Revocable Credit:

This type of credit can be revoked or cancel at any time without consent of, or notice of the beneficiary. As per Article 8 (a) of UCPDC 5000 “A revocable Credit may be amended or cancelled by the issuing Bank at any moment and without prior notice to the Beneficiary”. In case of seller (Beneficiary), Revocable Credit involves risk, as the Credit may be amended or cancelled while the goods are in transit and before the documents are presented, or although presented, before payment has been made. The seller would then face the problem of obtaining payment. On the other hand, Revocable Credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of payment by the issuing bank at which the issuing bank has made the Credit available. In modern banking, the use of revocable credit is not widely spread.

2. Irrevocable Credit:

The Irrevocable Credit is a commonly used type of documentary credit. The Credit which cannot be revoked varied or changed/amended without the consent of all parties-buyer (Applicant), seller (Beneficiary), Issuing Bank and Confirming Bank (in case of confirmed LC). As per Article 9 (a) of UPCDC 500, an irrevocable Credit constitutes a definite undertaking of the issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the issuing Bank and that the terms and conditions of the Credit are complied with. Irrevocable Credit gives the seller greater assurance of payments, but he remains dependent on an undertaking of a foreign bank. Irrevocable Credit may be unconfirmed.

 3. Confirmed Irrevocable Credit:

It is a Credit of issuing bank, which is opened at the request of buyer/importer upon an exporter/seller abroad through an advising bank with a request to add confirmation. Advising bank, the agent/correspondent of issuing bank add their confirmation under credit line arrangement already existing between issuing bank and advising bank, i.e. in addition to the commitment of the issuing bank the advising bank makes its own, independent payment commitment when it add its confirmation. (Article 9 (b), UCPDC (500)

Confirmed Credit gives the setter a double assurance of payment. Under confirmed credit, the seller has not only get the undertaking of issuing bank; but also enjoy the protection/assurance from a bank in his own country with definite undertaking for payment and acceptance. Confirmed irrevocable credit represents additional requirements, hence it is more costly. However, the confirmation charges is payable either by buyer or seller as per agreed arrangement between them.

Special Types of Documentary Credit

Revolving Credit:

A revolving Credit is one where, under the terms and conditions thereof, the amount of the Credit is renewed or reinstated without specific amendment to the credit being needed. Revolving credit may be revocable or irrevocable. It can revolve in relation to time or value. But Credit that revolves in relation to value is not in common use.

In case of a Credit that revolves in relation to time, e.g. which is available for up to $15,000 per month during a fixed period of time, say, six months, the Credit is automatically available for $15000 each month irrespective of whether any sum was drawn during’ the previous month. A credit of this nature can be cumulative or non cumulative. If the credit is stated to be “cumulative”, any sum not utilized during the first period carries over and may be utilized during a subsequent period. If the credit is “non cumulative”, any sum not utilized in a period ceases to be available, i.e. it is not carried over to a subsequent period.

 Back to Back Credit:

One credit backs another. It may so happen that the beneficiary/seller of an L/C is unable to supply the goods direct as specified in the Credit as a result of which he needs to purchase the same and make payment to another supplier by opening a second letter of credit. In this case, the second credit called a “Back to Back Credit”. This concept involve opening of second credit on the strength of first credit, i.e. mother L/C opened by foreign importers.

Under Back-to-Back concept, the mother L/C stands as security for opening of second credit, i.e. Back to Back Credit. The beneficiary/seller of the first credit as applicant of the second credit remains responsible to the bank for payment whether payment against first credit is made or not.

Back-to-Back Credit is opened in conformity to the terms and conditions as stipulated in mother credit except the price of the goods, shipment period and validity of L/C. In Back to Back Credit the negotiated price is quoted. The shipment period and validity of Back to Back Credit are given earlier the original validity as stipulated in the mother L/C which helps the seller of the first credit to substitute his drafts, commercial invoices and other documents, if any, with that drawn by the seller of Back to Back Credit.

 Transferable Credit:

A Transferable Credit is one, which can be transferred by the original beneficiary to one or more parties. In transferable credit, the original beneficiary becomes the middleman and transferee becomes the actual supplier of the goods. It is normally used when the first beneficiary does not supply the merchandise himself, but is a middleman and thus wishes to transfer part, or all, of his rights and obligations to the actual supplier (s) as second beneficiary (s). This type of credit can only be transferred once, i.e. the second beneficiary (s) can not transfer to a third beneficiary. (Article 48, UCPDC 500).

Red Clause Credit:

A Red Clause Credit is credit with a special clause incorporated into it that authorizes the advising bank or confirming bank to make advances to the beneficiary before presentation of documents. The clause is incorporated at the specific request of the applicant, and the wording is dependent upon his requirements. It is so called because the clause was originally written in red ink to draw attention to the unique nature of this credit. It specifies the amount of the advance that is authorized, in some instances it may be for the full amount of the credit.

A Red clause Credit is used for example b a wool importer in England to enable an wool shipper in Australia to obtain funds to pay the actual suppliers by direct purchase by obtaining a loan from the proceeds due to the Australian Beneficiary when the wool was shipped and documents presented in accordance with the terms of the credit. If, however, the beneficiary failed to ship the wool and so repay the loan by presenting documents called for the credit, the Australian bank would have the right to demand repayment, with interest, from the issuing bank and that bank would have a similar right of recourse against the applicant for the credit.

 Green Clause Credit:

A Green Clause Credit is a credit with a special clause incorporated into it that which not only authorizes the advising bank to grant pre-shipment advances but also storage cost for storing the goods prior to shipment. It is useful in situations where shipping space is no—daily available, i.e. some African countries. It is so called because the clause was originally written in green ink to draw attention to the unique nature of this Credit. At present this type of Credit is not in use.

Standby Letter of Credit:

The Standby Letter of Credit is very similar in nature to a guarantee. The beneficiary can claim payment in the event that the principal does not comply with its obligations to the beneficiary, payment can usually be realized against presentation of sight draft and written statement that the principal has failed to fulfill his obligations.

With this instrument the following payments and performances, among others, can be supported:

       -Repay funds borrowed or advanced.

        -Fulfill subcontracts.

       -Undertake payment of invoices made on open account.

Standby Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500. This types of credits are issued by the banks where the issuance of bank guarantees are prohibited by the law, e.g. some North American countries mainly in USA.

Letter of Credit–Operational Mechanism

Documentary Letter of Credit:

Letter of credit is an undertaking by the importers bank that if the exporter exports the goods and produce documents as a stipulated in the letter, the bank would make payment to the exporter. An importer in a country requests his bank to open a credit in foreign currency in favor of the exporter at a bank in the latter country. The Letter of Credit is issued against payment of the amount by the importer or against satisfactory security.

The Letter of Credit is a superior method devised for settlement of debts which could assure the exporter that if he exports the goods as per the contract entered into with importer and produces drafts, shipping documents and such other papers, he would receive payment without default. This arrangement gives security to both the exporter and the importer. The exporter is assured of his payment because of the credit while the importer is protected because documents in respect of export of goods have to be delivered by the exporter to the paying bank before the payment is made. Letter of Credit has, therefore, been acknowledged to be the best form of settlement of international debts.

A letter of credit may be a commercial or non- commercial one. When it relates to a mercantile transaction, i.e. buying and selling of goods, it is called commercial letter of credit. In simple terms, a documentary credit is a conditional bank undertaking of payment.

Expressed more fully, it is a conditional Undertaking given by a bank (Issuing Bank) at the request of a customer (Applicant) or on its own behalf to pay a seller (Beneficiary) against stipulated documents provided all the terms and conditions of the Credit is complied with.

These stipulated documents are likely to include those required for commercial, regulatory, insurance or transport purposes, such as commercial invoice, certificate of origin, insurance policy or certificate and transport document of a type appropriate to the mode (s) of transport used.

Opening of Letter of Credit:

Opening of Letter of Credit means, at the request of the Applicant (importer) issuance of a L/C in favor of the Beneficiary (exporter) by a bank. The bank, which open or issue L/C is called L/C opening bank or Issuing Bank.

On receipt of the Importer’s L/C Application supported by the firm contract (Indent/Proforma Invoice) and Insurance Cover Note, the bank scrutinizes the same thoroughly and fix up a margin on the basis of banker-customer relationship.

Before opening a L/C, the Issuing Bank must check the following:

1. L/C Application properly stamped, signature verified and margin approved and properly retained.
2. Indent/Proforma Invoice signed by the Importer and Indenter/Supplier.
3. Ensure that the relevant particulars of L/C application correspond with those stipulated in Indent/ Proforma Invoice.
4. Validity of LCA entitlement of goods, amount etc. conforms to the L/C application.
5. Conversion and rate of exchange correctly applied.
6. Charges like commission, F.C.C., postage, telex charge, if any, recovered.
7. Insurance Cover Note – In the name of Issuing Bank –A/C Importer covering required risks and voyage route.
8. Incorporation of instructions for Negotiating Bank as per bank’s existing arrangement.
9. Reimbursement instructions for Reimbursing Bank.
10.  If foreign bank’s confirmation is required, necessary permission should be obtained and accordingly advising bank is advised as per bank’s existing arrangement.
11. If add confirmation is required on account of the applicant- charges should be recovered from the applicant.
12. In case of issuance L/C, mention rate of interest clearly in the Letter of Credit.

Liability of Issuing Bank :

As per Article 9 a of UCPDC 500, An Irrevocable Credit constitute a definite undertaking of the Issuing Bank, provided that the stipulated documents…. comply with the terms and conditions of the Credit.

Advising, of Letter of Credit :

Advising means forwarding of a Documentary Letter of Credit received from the Issuing Bank to the Issuing Bank to the Beneficiary (exporter).

Before advising a L/C the Advising Bank must see the following:

  Natures of Issuing Bank officials on the L/C, verified with the Specimen Signatures Book of the said bank when L/C received by airmail.

  The Export L/C is intended to be an operative cable L/C, Test Code on the L/C invariably be agreed and authenticated by two authorized officers.

  L/C scrutinized thoroughly complying with the requisites of concerned UCPDC provisions.

  Entry made in the L/C Advising Register.

  L/C advised to the Beneficiary (exporter) promptly and advising charges recovered.

Advising Bank’s Liability:

Advising Bank’s liability is fix up in Uniform customs and practice for Documentary Credits, publication 500.

Article 7 (a) :         A Credit may be advised to a Beneficiary through another bank (the “Advising Bank”) without engagement on the part of the Advising Bank, but that bank, if it elects to advise the Credit, shall take reasonable care to check the apparent authenticity of the Credit which it advises. If the bank elects not to advise the Credit, it must so inform the Issuing Bank without delay.

Article 7 (b) :         If the Advising Bank cannot establish such apparent authenticity it must inform, without delay, the bank from which the instructions appear to have been received that it has been unable to establish the authenticity of the Credit and if it elects nonetheless to advise the Credit it must inform the Beneficiary that it has not been able to establish the authenticity of the credit.

Amendments to Letter of Credit:

After issuance and advising of a Letter of Credit, it may be felt necessary to delete, add or alter some of the clauses of the Credit. All these modifications are communicated to the Beneficiary through the same Advising Bank of the Credit. Such modifications to a Credit are termed as amendment to a letter of credit.

There may be some of the conditions in a Credit are not acceptable by the Beneficiary. In that cases beneficiary contact applicant and request for amendment of the clauses. On receipt of such request applicant approaches his banker i.e., issuing bank with a written request for amendment to the Credit. The issuing bank scrutinize the proposal for amendments and if the same are not in contravention with the Exchange Control Regulation and bank’s interest, the bank may then process for amendment. There can be more than one amendment to a Credit. All the amendments form an integral part of the original Credit.

L/C amendments are to be communicated by telex, SWIFT or mail. If there are more than one amendment to a Credit, all the amendment must bear the consecutive serial number so that the missing f any amendment can be identified by the advising bank of by the beneficiary.

What is to be done by the Issuing Bank before advising amendments?

The Issuing Bank has to

a)    Obtain written application from the applicant of the credit duly signed and verified by the bank.

b)    In case of increase of value, application for amendment is to be supported by revised Indent/Proforma Invoice evidencing consent of the beneficiary.

c)    In case of extension of shipment period, it should be ensured that relative LCA is valid/revalidated/increased up to the period of proposed extension.

d)    Amendment on increases of Credit amount and extension of shipment period-both the cases amendment of Insurance Cover Note also to be submitted.

e)    Proper recording and filing of amendment is to be maintained.

f)       Amendment charges (if on account of applicant) will be recovered and necessary voucher is to be passed.

The following clauses of L/C are generally amended:

  Increase/ decrease value of L/C and Increase/decrease of quantity of goods.

  Extension of shipment/negotiation period.

  Terms of delivery i.e., FOB, CFR, CIF, etc.

  Mode of shipment.

  Inspection clause.

  Name and address of the supplier.

  Name of the reimbursing bank.

  Name of the shipping

FOB=Free on Board

CFR=Cost and Freight.

CIF=Cost, Insurance & Freight.

UCPDC 500 regarding amendment to a Credit:

Article 9 (d) i: Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor cancelled without the agreement of the Issuing Bank, the confirming Bank, if any, and the Beneficiary.

Article 9 (d) ii: The Issuing Bank shall be irrevocable bound by an amendments(s) issued by it from time to time of the issuance of such amendment(s). A Confirming Bank may extend its confirmation to an amendment and shall be irrevocable bound as of the time of its advice of the amendment. A Confirming Bank may, however, choose to advise an amendment to the Beneficiary without extending its confirmation and if so, must inform the Issuing Bank and the Beneficiary without delay.

Article 9 (d) iii: The terms of the original Credit (or a Credit incorporating previously accepted amendments(s) will remain in force for the Beneficiary until the Beneficiary communicates his acceptance of the amendment to the bank that advised such amendment. The Beneficiary should give notification of acceptance or rejection of amendments(s). If the Beneficiary fails to give such notification, the tender of documents to the Nominated Bank or Issuing Bank, that conform to the Credit and to not yet accept amendment(s), will be deemed to be notification of acceptance by the Beneficiary of such amendment(s) and as of that moment the Credit will be amended.

Article 9 (d) iv: Partial acceptance of amendments contained in one and the same advice of amendment is not allowed and consequently will not be given any effect.

Article 11 (b): If a bank uses the services of an advising Bank to have the Credit advised to the Beneficiary, it must also use the services of the same bank for advising and amendments(s).

Letter of Credit – Settlement:

Settlement means fulfilling the commitment of issuing bank in regard to effecting payment subject to satisfying the credit terms.

Settlement may be done under 3 (three) separate arrangements as stipulated in the credit.

Settlement by Payment:

Here the seller presents the documents to the nominated bank and the bank scrutinizes the documents. If satisfied, the nominated bank makes payments to the beneficiary and in case this bank is other than the issuing bank, then sends the documents to the issuing bank and claim reimbursement as per arrangement.

Settlement by Acceptance:

Under this arrangement, the seller submits the documents evidencing the shipment to the accepting bank (nominated by the issuing bank for acceptance) accompanied by a draft drawn on the bank at the specified tenor.

After being satisfied with the documents, the bank accepts the documents and the draft and if it is a bank other than issuing bank, then sends the documents to the issuing bank stating that it has accepted the draft and at maturity the reimbursement will be obtained in the pre-agreed manner.

Settlement by Negotiation:

This settlement procedure starts with the submission of documents by the seller to the negotiating bank. In a freely negotiable credit any bank can negotiate documents and if negotiation restricted by the issuing bank, only nominated bank can negotiate documents. After scrutinizing that the documents meet the credit requirements, the negotiating bank then sends the documents to the issuing bank. As usual, reimbursement will be obtained in the pre-agreed manner.

Parties to a Letter of Credit:

The parties are:

  The Issuing Bank,

  The Confirming Bank, if any, and

  The Beneficiary.

Other parties, which facilitate the Documentary Credit Operations, are:

  The Applicant,

  The Advising Bank,

  The Nominated Paying/Negotiation/Accepting Bank, and

  The Transferring Bank, if any.

  Opening/Issuing Bank is the bank which opens/issues a LC on behalf of the importer. It is also called the importer’s/buyer’s bank.

  Confirming Bank is bank, which adds its confirmation to the credit and it is done at the request of the issuing bank. The confirming bank may not be advising bank.

  Exporter/seller/Beneficiary is the party in whose favor the LC is established.

  Applicant is the person who request/ instruction the opening bank to open a LC. He is also known as importer/buyer.

Advising Bank is the bank through which the LC is advised to the exporter. It is a bank situated usually in the exporting country and it may be a branch of the opening bank or a correspondent bank. It may also assume the role of confirming and/or negotiating bank depending upon the conditions of the credit.

Negotiating Bank is the bank, which negotiates the bill and pays the amount to the beneficiary. It has to carefully scrutinize the documentary credit before negotiation in order to see whether the documents apparently are in order or not. The advising bank and the negotiating bank may or not be one and the same. Sometimes it can also be the confirming bank.

Bank Paying/Accepting is the bank on whom the bill will be drawn (as per conditions of the credit), it is nominated in the credit to make payments against stipulated documents complying with the terms of the credit. It may or may not be the issuing bank.

Reimbursing Bank is the bank, which would reimburse the negotiating bank. It is to be nominated by the issuing bank.

Transferring Bank is the bank, which will transfer the LC, being instructed by the original beneficiary.

Lodgment of import Documents

Responsible officer should open all foreign mails containing documents. Bill negotiated by foreign correspondents and received under credits established by opening branch should be examined thoroughly with reasonable time to ensure that they comply with the terms and conditions given in the L/C.

It must be ensured by reference to the relative letter of credit that:

Full set of documents as stipulated in the credit has been received.

Documents have been negotiated within the country of the beneficiary on or before the expiry of the credit; the B/L Post Parcel Receipt/Airway Bill RR is not dated later than the date of shipment/dispatch/raiment mentioned in the credit;

The amount does not exceed amount available under the credit.

The credit has been amended or subjected to special instructions which might alter the value or character of the credit;

Generally the import bills consist of the following documents and the order of their scrutiny should be as under;

1. Bill of Exchange/ Commercial Documents
2. Invoice.
3. Bill of Lading/Transport Documents
4. Insurance.
5. Certificate of origin.
6. Any other documents.

Scrutiny of Documents:

On receiving the documents from the Negotiating Bank, the L/C opening branch will scrutinize the documents with the terms and conditions of L/C:

Forwarding Schedule of NEGO. BANK:

  Whether there is any instruction

  Whether there is any instructions can be complied with

  Whether the negotiation commission realized.

Bill of Exchange (Draft):

  Whether it is in order.

  Whether the amount of draft corresponds with L/C amount. Draft

  Amount should be equal or less than the L/C amount.

  Whether the date is within the date as stipulated in the L/C.

  Whether the amount in figures corresponds exactly with the amount in words.

  Whether the draft is in good order, without erasures and properly endorsed.

  Whether the draft is enfaced with profit clause if indicated in the credit.

Commercial Invoice:

  Whether the merchandise is invoiced by the beneficiary or by the assignee if the credit is assigned.

  Whether the merchandise is invoiced to the party on whose account the credit is opened.

  Whether the description and the unit price of the goods correspond with that given in the credit that all calculations in the invoice are correct.

  Whether the invoice does not include extraordinary expenses such as cable, storage commission etc, unless specifically authorized in the terms of the letter of credit.

  Whether the Import License number mentioned in the letter of credit advice appears on the invoice and that the invoice is strictly in accordance with the proforma invoice if furnished with Letter of Credit advice.

  Whether as many copies of the invoices (s) as the credit stipulates, are presented.

 Bill of Leading:

  Whether the Bill is ‘Clean’ and ‘On Board’.

  Whether signature of the shipping authority is there.

  Whether the date of B/L is within the date of shipment as per L/C.

  Whether the freight is pre-paid.

  Whether the port of shipment and that of destination are similar as per L/C.

  Whether title of B/L belongs to L/C opening Bank.

  Whether the bills of lading cover the merchandise described in the invoice, by description, quantity, marks and number;

  Whether the dates on the bills of lading (or other documents) are not ‘Stale’ i.e. not dated in unreasonably long time prior to negotiation;

  Charter party Bills of Lading are not acceptable unless so stipulated in the latter of credit;

  Whether full set of B/L dispatched by Nero Bank.

  Goods are sometimes dispatched by means other than- steamer-such as post, air or rail and examination of the documents resultant there from such as Post Parcel Receipts/Air Consignments Notes/Railway Receipts should also be complied with the above requirements as applicable;

Insurance:

Under the existing Exchange Control Regulations, insurance on the imports is to be covered in Bangladesh. The risks to be insured are mentioned in our Letter of Credit Application form. The branch opening the Letter of Credit obtains insurance cover, covering all risks mentioned in the Letter of Credit Application from before advising the Letter of Credit. Such cover stipulates the address to which advice of shipment is to send. In the Letter of Credit Advice full address to which the advice of shipment is to be sending and the latest date for such intimation should be given. The beneficiary should further be required as mentioned in the letter of Letter of Credit Advice to endorse a copy of such intimation to the opining branch and to forward a copy with a certificate that the intimation was duly dispatched to the given address along with other documents. On receipt of documents under a credit, the opening branch should check to see that the certificate and the intimation given by the beneficiary correspond exactly with the stipulations laid down in the Letter of Credit Advice.

Certificate of Origin:

  Whether the merchandise covered therein is the merchandise covered by the invoice;

  Whether it has been issued by our Consul unless it is definitely known that this is not required;

  Whether the weight and description shown in the Consular documents are identical with those shown.

Other Documents:

  Whether al other documents prepared as per L/C. After scrutiny, the official concerned may find the following:

  Documents in order i.e. no discrepancy;

  Minor discrepancy-Acceptable to the importer;

  Major discrepancy-may be acceptable to importer but not permissible as per Exchange Control Regulations.

Documents having no discrepancy and those having minor discrepancy (if accepted by the importer) to be lodged.

In case of major discrepancy, the L/C opening Bank to send Cable/Telex to Negotiation Bank with instruction to reverse the entry.  Also to seek instruction regarding disposal   of the documents.

Procedure of Lodgment :

  If found in order, documents to be branded with “Cheeked and found correct” and initiated by authorized officer;

  The amount in foreign currency to be converted into Bangladesh Taka at B.C. Selling rate prevailing on the date of lodgment;

  Intimation should be given to the party in time;

  Entry into PAD register and PAD number to be inserted on all shipping documents;

  Entry into L/C opening register by rounding the L/C number. With date

Passing of Vouchers:

  Liability reversal vouchers i.e. Debit Bankers Liability for L/C Credit Customers Liability for L/C:

  Debit PAD Credit IBD Head Office, Dhaka;

  Appropriation of L/C margin in PAD Account;

Steps for Retiriment :

  Calculation of profit;

  Determination of other charges;

  Certifying Invoices; endorsement in the B/E and Transport document i.e. B/L, AWB, TR etc;

  Entry into the register;

Passing the vouchers :

Debit- Party A/C

Credit –PAD A/C

Credit – 1/A Profit, other charges.

Steps for Shipping Guarantee:

  Checking of the Non-Negotiable copy documents with the L/C.

  Realizing of 100% margin and other charges.

  Certifying Invoices; endorsement in the Transport document i.e. B/L, AWB, TR etc;

  Entry into the shipping guarantee registers.

 Number of foreign Correspondent / Bank

Graphical  Presentation of No. of Foreign Correspondent / Bank.

As the table and graph reflects the number of foreign correspondent / bank is gradually increasing every year.

The Banks special program is directed mainly to up-lift the socio-economic conditions of rural and urban poor. In order to achieve this objective, Social Investment Bank Ltd. is involved in the mobilization and utilization of local resources and the surplus labour mainly from within and provide employment opportunities to the unemployed and the land less besides investing in N.G.O. activities, educational, health expansion activities, Social Fellowship Program for students etc.

Family Empowerment Social Financial Programs of Social Investment Bank Ltd.:

To the best of our knowledge, Social Investment Bank Ltd. (SIBL) is the only Bank in Bangladesh, perhaps in the world which starts with the very phrase, “Targeting Poverty“, while starting its objects in memorandum and articles of association for achieving a goal of participatory economy for a caring society. Clearly, this Bank intends to implement Micro Credit and Micro Enterprise program much beyond the scope of market economics.

Linking Micro-Credit and Micro-Enterprises to Family Empowerment:

Credit can transfer power to powerless and help alleviation of poverty. It can reinforce power of the powerful and help in concentration and inequitable distribution of income and thus aggravating the poverty. Seen from this prospective, it can empower a family or disintegrate it. The family is basic foundation of human society. The foundation of a family is laid through marriage and the relationship between husband and wife is viewed in Islam as that of garment and its weaver, it is a civil contract, imparting mutual rights and duties. This is true Christianity also. In Hinduism it is a sacrament. The fact is that the family remains a bedrock of a society. So the management of Micro-credit and Micro-enterprise financing have profound impact on Micro economic sociology of the family involving the individual in the family, organization and activity within the family and the relationship among family members consisting mainly of husband, wife and children as well a macro economic sociology of the family involving interchange and transactions between the family and society in which it operates. Because families are linked together with other social structure in extended family, neighborhood, villages, communities, kinship groups, the family performs a vital part of the function essential to the individual and group life.

The following table will show that on-going micro-credit and micro-enterprises program of Social Investment Bank is indeed fundamentally different and deeply rooted in Shariah compared to Non Banking Financial Institutions and other NGO approaches, operating in Bangladesh.

TABLE:

2Non ceiling and floor: Micro-credit covers hard core poor also (i.e. street children in the urban slum and is tailor made)2Main criterion for membership in many NGO’s disbursing loans is a ceiling on land holding of no more than half an acre and no less real in practice and a floor on the level of income.3Credit linked to culture as rooted in Islamic values provisioning for perpetual social capital accumulation.3Credit is interest based, not in conformity with Shariah.4Credit provisioning on a nominal profit or non-profit basis (i.e. flat rate 09% and public health credit @ 6% per annum. At present formal banking expected profit/ return rate varies from 16% to 18%4Interest rate 25% to 35% for the poor. In many cases defaulters are forced to sell their meager assets or to go to local money lenders who could charge up to 120 percent interest.5In the event of loss ( due to factors beyond control) there is a provision for shearing the loss and Social subsidy out of “Social Fund”5There is no such provision of sharing of loss rather there are reports of ruthless force to defaulters.6Providing Deposit saving and Investment services and schemes to up scale their operations

6This facility in limited in scope and coverage.7Assisting Micro-credit/ enterprise with provision for credit access to the Formal Banking of SIBL thereby allowing the poor to cross the frontiers of Non-formal Banking.7Working on the threshold and does not provide credit access to formal Banking.8Credit based on Deposits fund and no external grant /loan.875-100% based on external grant.9Recovery of loan about 97% (confirmed by external Auditor)9Recovery reported to be 95-97%10Financial Accountability subject to security by statutory External Auditors and Central Bank.10They are not subject to such control.

The above comparative analysis shows that here is a built in provision for vertical social mobility with provisioning for social subsidy.

 Micro-Credit Line of Social Investment Bank Ltd

Currently Social Investment Bank Ltd. (SIBL) is investing a maximum amount of Tk. 25,000/- equivalent to US $ 500 per family without collateral security under Micro-Credit program as permissible by the Central Bank of the country. This amount is considered insufficient for the purpose of crossing the border of poverty line. The credit ceiling should be raised to at least Tk. 50,000/- equivalent to US $ 1,000 per family. The maximum amount of Tk. 2.5 lac equivalent to US $ 5,000 is allowed for investment per micro enterprise borrower under existing Banking law. This ceiling of investment for Islamic Bank in other countries will of course vary depending on the stage of the development of the country, its per capita income and offer related socio economic indicators.

Besides , Bank has already introduced Rotating Family Savings and Credit Net and Group installment credit Scheme (**) for any group of individual. In the light of this experience, SIBL is also in the process of developing program to assist Agriculture co-operatives in providing tailor-made credit package to achieve their objectives in rural settings.

In the case of non-formal banking operation, it is the bank which goes to the clients, organize and motivate them into viable income generating household, family or groups. In an effort to achieve the corporate objectives of SIBL, it has under its Non-Formal Banking Sector, started implementing (a) Environmental Friendly Business Program with small traders of Tokai ( mainly street children of distressed parents ) with recovery rate of 100% (b) Real Life Tokai Non-formal School of Management, (c) Empowerment and Humanizing family credit program.

Ongoing SIBL’s Special Credit lines for Small Entrepreneurs and Businessmen, Educated unemployed and senior citizens

The programs of Social Investment Bank Ltd. cover all sections of society. At the grass root village and local level, the Bank’s program is directed towards landless laborers, marginal farmers, fisherman, small artisans (e.g., blacksmith, carpenter, potter and handicraft-producer), urban unemployed small traders, small and rural industries. This Bank’s participatory finance tend to be different both in their form and substance as their motivational properties are fundamentally different. In an important sense, it is also an investment option for the relatively richer section of Bangladesh society. There is a built-in provision is Islam for obligatory transfer of funds from rich to poor.

 Proposed Rural Branch Model for Micro Enterprises (Sabuj Haat) of Social Investment Bank Ltd.

The proposal Rural Branch for micro enterprises (Sabuj Haat i.e. Village mini mall) of Social Investment Bank Ltd. consisting of a cluster of micro enterprise shops, community center, health care unit attached with a Rural bank branch subject to approval of Bangladesh Bank for instant credit, marketing and non-formal education and training support in one package will provide a powerful ” Push and Pull” effect. It will also generate and humanize local economic activities, reduce internal migration and diffuse the benefits of development. It would be a rural struggle of the invisible poor, not covered by the market, for regaining their lost social power. It will provide a local challenge at the same time offer global opportunities.

 Financing SMEs (Small and Medium Enterprise) under SIBL Family Enpowerment Micro-Enterprise program.

Social Investment Bank (SIBL), a joint venture three sector private commercial Bank integrating Formal, Non-formal, Voluntary Sector Banking, is successfully operating Family Enpowerment Micro Credit and Micre Enterprise Programs under SMEs financing through its 21 (twenty one) branches aound the country since its inspection in 1995. Besides formal (commercial) banking, it aims at “Enpowering Family” through these programs, which is one of the corporate objectives of the bank. Micro-credit is provided without collateral and minimum/ no collateral is required in the Micro Enterprise Program.

Family Empowerment Micro-Enterprise Program:

Family Empowerment Micro-enterprise program is introduced to enhance the Socio-economic condition of the potential entrepreneur, small and medium businessmen, successful Micro-Credit graduates into Micro enterprise program through income generating activities.

 Objectives:

  To promote and develop Micro and small enterprises to generate employment on a self sustainable basis.

  To create savings habit and to provide resources to invest the potential entrepreneur to increase their business who have no access to the formal banking.

  To provide necessary investment to the new entrepreneurs who want to be self-employment.

  To enroll the successful Micro-Credit graduates into Micro-Enterprise Program.

Target Group:

  New entrepreneurs or existing and small business having no collateral and who cannot expand their business due to shortage of capital.

  On going small business having ownership/possession of firm/firms/ shop or any other holding.

  Micro-credit graduates who are interested to expend their business.

Modes of Investment:

The following mode may be selected depending upon the expand upon the sector and purpose of investment.

1. Bai-Muajjal
2. Murabaha
3. Mudaraba
4. Musharaka
5. HPSM
6. Bai-Salam

Ceiling of Investment:

–          Collateral security is not required for investment ceiling upto Tk. 50,000. However guarantees of two solvent persons are required.

–          Collateral security to be ontained for investment ceiling above Tk. 50,000 up to TK. 2,50,000.

Period Investment:

Generally one year and maximum three years depend the nature and amount of investment.

Eligibility for Investment:

  Each entrepreneur client/Businessman should obtain trade license from the concerned authority.

   Each entrepreneur /Businessman havig experience of at least one year will be given preference to the investment facilities.

  The equity ratio of all the entrepreneurs is usually 80:20. the entrepreneurs having equity ratio 60:40 will be given preference.

  The client who have performed their Micro-Credit investment satisfactorily, will be given preference to promote their business in Micro Enterprise program provided they are in a position to fulfill to criteria of this program.

Profit and other charge:

Rate of profit                  : 8% per annum (approximate)

Risk fund                       : 2% per annum on the net investment.

Purpose of investment:

Client will have the liberty to choose the purpose relating to small and medium enterprises either from the following projects or any other suitable projects under family empowerment Micro Enterprise Program objectives:

1. Agriculture projects
2. Poultry and live stock projects
3. Fishery project
4. Processing & manufacturing   projects
5. Transport & communication projects
6. Trading Projects
7. Different types of small trading projects
8. Shop keeping projects
9. Readymade garments project
10. Medicine shop keepers projects
11. Sewing machine projects.

Security:

Under this program, collateral securities in the form of mortgage against properties and of 3^rd party personal guarantee is needed:

1. In case of investment up to Tk.50000.00 goods (raw materials/ finished goods, machinery’s) will be treated as security.

2. In case of investment exceeding Tk.500000.00 collateral security in the form of equitable mortgage shall be obtained as per bank’s rule.

3. In all case clients must sign bank charge documents i.e. promissory note etc.

Recovery of Investment:

Generally the repayment of the investment shall be made on monthly installment basis. However, in special cases, repayment shall start depending on the nature of investment subject to recommendation of the branch giving specific reasons.

Conclusion:

To us, SMEs is an energetic sector, which can play a vital role towards economic emancipation of a large section of underprivileged people including existing and potential entrepreneurs. There is a provision for upgrading Micro-credit graduate into Micro-Credit Enterprise program and subsequently successful Micro-Enterprise (SMEs) graduates have opportunity to enroll them in the formal banking where sky is the limit.

It is the right time for globalization of Islamic voluntary sectors activities. In this process Islamic Bank in the 21st Century can play a very vital role in reactivating and institutionalizing the role of Islamic Socio- Economic institutions and various voluntary and obligatory tools of redistribution of income through innovative financial instruments and management of fund.

This Bank has a special program of development of various religious and social service oriented institutions. Within this program, Mosque, Maktab, Waqf, Charitable organizations etc will be modernized and activated. All properties under this program will be utilized in productive activities on participation basis. Besides, Hajj (pilgrimage) and Kurbani (sacrifice of animals according to dictates of Islam) schemes are included in the program of Social Investment Bank Ltd. Cash Waqf certificate has already been introduced for the first time in history. Various methods of compulsory and voluntary Islamic distribution of finance, such as Zakat, Sadakah, Waqf etc. will be institutionalized.

Social Investment Bank Ltd. is in the process of organizing Voluntary Capital Market Operation for mobilization of necessary fund and in the process of developing the following financial instruments with different sets of rules in conformity with Shariah:

          1.       Waqf Properties Development Bond (Special and General)

          2.       Cash Waqf Deposit Certificate (special and general)

          3.       Family Waqf Certificate

          4.       Mosque Properties Development Bond (special and

general)

          5.       Mosque Community Share

          6.       Qard-e-Hasana Certificate (special and general)

          7.       Zakat / Ushar Payment Certificate

          8.       Haji Savings Certificate

          9.       Non-Muslim Trust Property Development Bond (special

and general)

          10.     Municipal Property Development Bond (Special and

general)

The value of all the Bonds and Qurd-e-Hasana Certificate are guaranteed by the Bank against surrender of the instrument on maturity.

 Cash Waqf Certificate Scheme:

“Man’s work ends upon his death except for three things: (a) contribution to knowledge , (b) on going charity and (c) faithful child (Al-Hadith)”

The introduction of Cash Waqf Certificate Scheme is intended to monetize Islamic Voluntary Sector for the first time in history for mobilization and capitalization of social savings. It would perhaps, be the most effective and perpetual mode of deposit mobilization and use of its profit for perpetual social investment and benefits.

Its introduction is highly suggestive in the context of present fiscal system of Bangladesh which is heavily dependent on indirect tax ( i.e. 85% of the total tax revenue in 1995-1996). A great part of direct tax can be privatized and converted to social assignments and Cash-Waqf Certificate can partially substitute a substantial part of the income tax for financing social projects in education, health, social welfare activities. A new beginning can be made for a participatory economy and a caring society.

The guidelines governing the operation of the Cash Waqf Certificate are as follows:

1.      Cash waqfs shall be accepted as endowment in conformity with Shariah. Bank will manage the waqf on behalf of the waquif.

2.      Waqfs are done in perpetuity and the Account shall be opened in the Title given by the waquif.

3.      Waquif will have the liberty to choose the purpose(s) to be served either from the list of 32 purposes identified by SIBL as given below or any other purpose(s) permitted by shariah.

Family Rehabilitation:

1.       Improving the conditions of absolutely poor living below the poverty line.

          2.       Rehabilitating physically handicapped, and disadvantaged

          3.       Rehabilitating beggars.

          4.       Rehabilitation of destitute women

          5.       Upliftment of urban slum dwellers

Education & culture:

1. Education of orphans i.e. supplying books free of cost
2. Expansion and development of appropriate education for skill development
3. Informal education facilities of children at home (i.e. mother’s education program, children literature)
4. Physical education and sports facilities
5. Supporting local culture and heritage and art promotion
6. Conducting Dawah activities
7. Supporting education of deserving students in the form of scholarship
8. Supporting vocational education in general
9. Supporting education of a specific area
10. Financing specific Madrasha /school / colleges of a particular area.
11. Educating deserving descendants
12. Supporting any projects in the area of education , research, religious and Social services in the memory of father, mother and any descendants.
13. Establishing educational chair.

Health & Sanitation:

1. Village health care and sanitation
2. Supplying pure drinking water (to households, schools, mosques, slums, etc.)
3. Establishing hospitals, clinics, health care programs specially for the poor.
4. Health research grant, Research in particular disease.

Social utility service:

1. Settling disputes (e.g. Village litigration)
2. Providing legal aid to deserving women to establish their lawful rights.
3. Assist in arranging dowryless marriages to poor girls.
4. Maintenance of public roads and tree plantation in the village
5. Providing assistance to peace loving non-Muslims and solving their problems
6. Creating social awareness to prohibit gambling and other social activities
7. Construction, installation and development of public utility services
8. Maintenance of a specific mosque(s) with an income generating projects(s)
9. Maintenance of a specific Eidga(s) with an incom generating project(s).

1. Maintenance of a specific Eidga(s) with an income generating project(s).

4.      Cash waqf amount will earn profit at the highest present profit rate (10.70%) offered by the Bank from time to time.

5.      The waqf amount will remain intact and only the profit amount will be spent for the purpose(s) specified by the waquif. Unspent profit amount will automatically be added to waqf amount and earn profit to grow over the time.

6.      Waquif may also instruct the Bank to spend the entire profit amount for the purpose specified by him/ her.

7.      Waquif will have the opportunity to create cash waqf at a time. Otherwise he /she will declare the amount he/ she intends to build up and will start with a minimum deposit of Tk. 1000/=(Taka one thousand) only. The subsequent deposits shall also be made in thousand or in multiple of thousand.

8.      Waquif shall also have the right to give standing instruction to the bank for regular realization of cash waqf at a rate specified by him /her from any other a/c maintained with SIBL.

9.      Cash waqf shall be accepted in specified endowment Receipt voucher and a certificate for the entire amount shall be issued as and when the declared amount is built.

10.    The principles and rules of Cash Waqf Account are subject to amendment and to be reviewed from time to time.

Social Fund

The Social Investment Bank considers man not with money but with a human face approach. So, this Bank is firmly committed to provide a human face approach in all its activities. This bank builds a Social Fund with the part of the profit earned by the bank and collect all kinds of gifts, Zakat and Sadakah from clients. This fund is invested in projects for betterment of the less fortunate and poor people of the society.

Social Investment Bank Ltd. (SIBL), a concept of 21st Century Banking for all by all intends to cover all sections of Bangladesh Society.

At the operational level, all three sectors activities would be mutually interdependent and collectively reinforcing, through contribution to Social Fund and Social Assignment Schemes linked with Social Entitlements, thereby making all these activities economically, socially and ethically transparent and revealed, once they are operationalized.

SIBL has already established its Social Fund by mobilizing Voluntary social savings, linked to its all Formal, Non-formal and Voluntary sector Banking operations. It is limited but exciting experience, contrary to popular belief SIBL within a very short time has been able to mobilize a surplus Social Fund for social investment purposes in family empowerment action program, Social education fellowship program, health as well as social services sector. A modest beginning has already been made. A step ahead is the beginning of thousand miles journey.

Social Fund has, among others, twin objectives to achieve: (a) Capitalization of social savings and (b) Socialization of capital, through different price of capital to different target group of people. This social subsidy or social loan will generate further savings for investment purposes. Because, one of the objectives of the Social Fund is to pool together individual voluntary contribution for planned social investment as well as to bring social meanings and transparency in financial and banking transactions, thereby linking social entailments to social assignments.

By the grace of almighty Allah and with the heartiest cooperation SIBL management, executives, and officers SIBL is ready to start Online Banking System. Meanwhile, for the Smooth operation and efficient functioning of the system they have completed the proper training to the related personnel, testing online transactions in both test data and live data by using staff accounts at all SIBL designated branches.

 Branches Under On-line Banking Service

It is planned that the following Branches and head office will come under the umbrella of on-line any branch-banking network in the 1^st phase, which will be online from January 07, 2004. other branches will come under the umbrella as per decision of the bank management.

Dhaka City:

1. Head Office
2. Principal Branch
3. Gulshan Branch
4. Dhanmondi Branch
5. Babubazar Branch
6. Moulovi Bazar Branch
7. IDB Bhaban Branch
8. Panthapath Branch
9. Foreign Exchange Branch
10. Nawabpur Road Branch
11. Uttara Branch
12. Mirpur Branch

Khulna City :

1. Khulna Branch

Rajshahi City :

1. Rajshahi Branch

Chittagong City:

1. Agrabad Branch
2. Khatungang Branch
3. Halishahar Branch
4. Jublee Road Branch

Sylhet City :

1. Sulhet Branch

Bogra City :

1. Bogra Branch

Sirajgang City :

1. Sirajgang Branch

Facilities of Online Banking System

Customers of one Branch of SIBL will be able to make transaction like cash withdrawals and deposits, electronic fund transfer, balance inquiry, account statements etc. from any of the SIBL Branches Under the Umbrella of Online Banking across the country.

Categories of the Account Holder under Online Banking System

a)    All kind of account holder except scheme account and MTDR.

b)   Customers of AWCD, MND and MSD account will be able to make deposit and withdrawal transactions either in cash or transfer. Cheque leaf will be only the instrument for withdrawal purpose either cash or transfer.

c)    Customers of all kinds of investment account will be able to make deposit transaction either in cash or transfer.

Accounting Entries for ON-Line Banking

 Cash Withdrawal:

If account holder of Branch ‘A’ withdraws money from Branch ‘B’ through cheque (Operator of Branch ‘B’ will login into Branch ‘A’, Debit the account by cash, Exit from branch ‘A’, Pay cash taka from counter) the following transaction will place

–by Which cash is payable to bearer of the cheque.CashWithin the accumulated cash voucher    at the end of the day.

Cash Deposit:

If account holder of Branch ‘A’ deposits money at Branch ‘B’ for crediting his/her account at Branch ‘A’  (receive the cash with deposit slip, Operator of Branch ‘B’ wiil login into Branch ‘A’, Credit the customer / Payee A/C by cash, Exit from Branch ‘A’)

The following transaction will take place:

Fund transfer:

1.      I.        If Account holder of Branch ‘A’ transfer money from his/her account to an account with Branch ‘B’ through cheque, the cheque is placed at Branch ‘A’ (Operator will debit Customer account by Transfer of Branch ‘A’, Login to Branch ‘B’, Credit Payee A/C of Deposit Slop by transfer) the following transaction will take place:

      II.    If account holder of Branch ‘A’ gives an Account Payee Cheque to an Account holder of Branch ‘B’, the cheque placed at Branch ‘B’ (Operator will login to Branch ‘A’, Debit customer account by transfer, Exit From Branch ‘A’, Credit Payee A/c of Branch ‘B’ as per Deposit Slip By Transfer) the Following Transaction will take Place:

Note : Online transaction performs 3 (three) transaction at a time, 2 in remote and 1 in local. During the Remote cash transaction, though the operators select cash as reference, remote Branch transaction (2 transaction) automatically will be Converted to transfer transaction and the rest (1 transaction) local SIBG transaction will be converted to cash transaction for the contra equilibrium.

Management hierarchy:

Number of Employees

Social Investment Bank believes that the driving force behind them has always been their employee. They are proud to have a dedicated band of people to whom the commitment to provide Excellence in Banking is imbued in the way of their life.

SIBL has also recognized that the professional development of the staff is essential in establishing as a provider quality Service. And therefore they have set up Training Institute. In 2003, the institute has conducted 24 courses attended by 488 participants.

No. of Employee From 1999 to 2003

 Total Income of Social Investment Bank Limited

SIBL generally generates its income in the form of profit from Bai-Muajjal Commercial, Bai-Muajjal Industrial, Bai-Muajjal Agriculture,  Bai-Muajjal Post import , Bai-Muajjal Scheme,  Bai- Murabaha Commercial, Bai- Murabaha Industrial ,  Bai- Murabaha Agriculture ,  Bai- Murabaha Post import , HP & SM Commercial, HP & SM Industrial, HP & SM Agriculture, HP & SM Post import, HP & SM Scheme  Investment. It also generates income from its investment made in Treasury Bills/Bonds, Debentures, Dividend on Share.

Income of SIBL  

 Income for the year 1998 was Tk. 156.12 million.

Graphical Presentation of Growth of Total Income

As the table presents and the Graph Shows that the total income of SIBL does not have an increasing trend. Rather, the total income is increasing trend. Rather, the total income is increasing or Decreasing every year.

6.6 Total Expenditure of Social Investment Bank Limited

 Total Expenditure for the year 1998 was tk. 186.28

Total Income Vs Total Expenditure

 Graphical Presentation of Income Vs Expenditure

Both the Income and Expenditure of Social Investment Bank has increased every year. But the total expenditure has never exceeded total income. We can see from the above table that the highest income and highest expenditure is the year 2003.

 Net Profit After Tax

Net profit after tax of SIBL

 Net profit after tax for the year 1998 was tk. 59.84 million.

The growth rate of net profit of is seen to fluctuate in the five years. The maximum growth was in the year 2001 but then in the year 2002 and 2003 the growth rate of profit has fallen. On the other hand it is also observed from the table that the volume of net profit has not decreased rather it is increase year after year.

Fixed Assets

Fixed assets of SIBL from 1999to 2003

 Fixed Asset for the year 1998 was tk. 33.49

The volume of fixed Assets of SIBL seems to be having a decreasing trend from the year 2000. The above graph shows how the rates have been fluctuating in the year 1999 to 2003. So, its very hard to predict that whether there will be an increase or Decrease of fixed assets in the following years. The highest volume of fixed assets is in the year 2003 of tk. 77.31 million.

Earning per Share (EPS)

An earning per share is the net income divided by the number of shares of common stock outstanding. So, the EPS of SIBL for the year 2003 can be calculated as follows:

Earnings per share = Tk. 290.39 million

                                  Tk. 303.47 million

Social Investment Limited calculates Earnings per share in accordance with BAS 33.

“Earnings Per Share”.

Earning per share from the Year 1999 to 2003

 From the above table it can be seen that earning for each Share (Face value tk. 100 each) of Social investment Bank for year 2003 is tk.75.69. that is, if a shareholder has 100 shares of SIBL, his/her share of total profit would be Tk. 7569.00 for the year 2003.

The highest EPS was 75.69% in 2003 and the lowest was 25.48% in 1999.

Earning per share are very important for shareholders. A shareholder will always try to invest in those shares having the high EPS. Therefore, as the graph shows the EPS of SIBL is increasing trend. One can predict that the EPS will increase in the following years and may be interest to invest.

Dividend

The above table Suggests that although SIBL does not have a fixed dividend policy. Dividend is paid to shareholders the reason being that shareholders usually desire the payment of some portions of bank earnings in the form of cash dividends. This is because they entire wish to consume part of their investment income to because they want to diversify their investment holdings.

Bonus shares are those given to existing shareholders free of cost. For the year the ratio of bonus share was 10:1, this means that for every 10 shares 1 shares is given free. Therefore a share holder having 100 shares would receive 10 shares free.

Bonus share are often issued when a company does not want to pay cash dividend. But most shareholders prefer cash dividend rather than bonus share.

 Return on Equity (ROE)

Return on equity measures the rate of return on the stockholders investment. It is calculated by dividing net income by total Stockholders Equity.

 ROE for the year 1998 was 18.56%

Both the table and graph shows that the growth rate of return on equity had been fluctuating every year. And it is very difficult to predict for investors to predict what will be the return in the year next. As because, we see that there had been a decline in growth rate in the year 2000 and 2002, therefore, one can predict that the growth rate will also decrease in the following year. But what actually happened is that, there had been a huge increase in growth rate in 2003.

Return on Assets (ROA)

The rate of return on assets measures the ability of management to utilize the real and financial resources of the bank to generate returns. ROA is commonly used to evaluate bank management. It is calculated by dividing net income by total assets.

ROA for the year 1998 was 0.62 %

Graphical Presentation of ROA

ROA of SIBL has an Increasing trend. But it decreased in the year 2000, but now it is increasing every year. But the growth rate of ROA is not very impressive every year. But the growth rate of ROA is not very impressive. In 2000 it had a negative rate and in 2002 the growth rate is only 1.34 %. It can be said that the bank management is not filly utilizing the banks real and financial resources

6.14 Investment  / Deposit Ratio

From the above graph and the graph below it is observed that for continuous four years SIBL is having nearly a 50:50 ratio in advance and deposits. This ratio enables Social Investment Bank to be in the safe side in case of any future loss.

The following problems are mainly on my observations at Principal Branch of Social Investment Bank Limited.

1. Number of officers are few in General Banking Division therefore sometimes customer have to wait for their turn in very busy hours.
2. The customer has to submit various types of documents for a loan proposal. So, sometimes they find it very troublesome to gather all the papers in time.
3. For opening an account to the branch, they want introducer who have account in the same branch. This is very difficult for the customer to find an account holder.
4. Sometime online banking is out of service.
5. The Bank lacks a division for customer service, cause there are customers who have no banking knowledge. So need to be properly guided. Sometimes the officers are so busy they do not have enough time to spare.
6. The Bank does not continue its schemes.

Suggestion for SIBL

It has been only nearly 08(eight) years that Social Investment Bank is in Service. So one cannot expect that the bank would perform like any other banks that are in service decades or so. The following suggestion are my own ideas put into words.

1. The bank should open up more branches in coming years to meet customer demands.
2. Open up customer service department to attract new customers.
3. Engage in more promotional activities.
4. Continue new schemes to avoid customer confusion
5. ATM service needs.
6. Online Banking system needs to be upgraded.
7. A little more service quality up gradation may help the bank to hold on to old customers and avail more new customers.
8. Expand their export business for more export financing to minimize the difference between export & import financing.
9. Number of officers may be increased in branches to allow them to work in a stress free environment so that the officers can give out their best in their performance.

I believe these steps will be helpful to improve the performance of Social Investment Bank Limited and the financial sector of Bangladesh as well.

Conclusion

Lot of new commercial bank has been established in last few years and these banks have made this banking sector very competitive. So, now banks have to organize their operation and do their operations according to the need of the market. Banking sectors no more depends on a traditional method of banking. In this competitive world this sector has trenched its wings wide enough to cover any kind of financial services anywhere in this world. The major task for banks, to survive in this competitive environment is by managing its assets and liabilities in an efficient way.

Through this report I have tried to present the overall performance of Social Investment Bank Ltd (SIBL) in comparison with its closest competitor whish were established lot of private bank.. From my analysis I have found that the performance of SIBL is not a very satisfactory one. The bank should try to overcome the consequences to improve its performance.

The training institute of Social Investment Bank is one of the main aspect because every worker in the bank is being trained. Therefore everyone knows their job very well and can perform efficiently to produce the best output.

One of the major problems for SIBL is not possessed with good marginal efficiency in ROA. And their return on equity (ROE) ratio is not so high compare to other banks. But for foreign trade section they are doing good business. Especially SIBL has more import business than its rivals. If SIBL can concentrate on import business, it will give the opportunity to circulate the profit more rapidly than other sources. Besides these SIBL should also increase the export business. Because if SIBL can reduce the difference between import financing to export financing, bank can use it’s own foreign exchange for import financing.

For the client point of view, they think, they are more satisfied with import business at SIBL rather than export business. But at the same time they found some lacking in this department that can be over come at no time.

For the pricing policies I found that Social Investment Bank Limited is providing on of the best pricing rate in compare to other banks. And the clients’ response is very much positive in it.

References

1. Balance sheet and Income statement for the Year 1999 to 2003 of Social Investment Bank Limited.

2. Website of Social Investment Bank Limited – www.siblbd.com

3. Commercial Banking by D R Fraser

4. What Banker does(Second Edition) by Abul Hashem

5. General Banking Nitimala & its operation by Mhd Mubarak Hussain
6. Foreign Exchange By  L.R. Chowdhury