Banking Sector of Alarafah Islami Bank

 It is an account like all Mudaraba accounts. In this account, clients may save their money as many times they wish. And, similarly accountholders can withdraw their money from this account on a short notice (seven days) any time they want. Basically, educational or other institutions who do not need funds for a regular period, try to keep money in this account therefore.

Monthly Profit Based Term Deposit (PTD):

Under the above scheme, deposit of tk.1.00 lac and multiple thereof are accepted for a term of 5 (five) years and the bank gave profit thereon tk. 885 per month per lac and proportionately on the rest amount of deposit under the category during the year under review. The aforesaid rate shall, however, be adjustable at the close of calendar year on finalization of accounts.

 Monthly Hajj Deposit:

Hajj deposit at monthly installment from 1 (one) year to 20 (twenty) years are accepted under the above scheme to enable the account holder to perform hajj out of the accumulated saving with profit.

Savings Investment Deposit (MHD):

Deposit under the scheme is accepted by monthly installment and after expiry of the term; double amount of such savings is given as investment in feasible sectors by the bank as per choice of the depositors without any collateral security. Any one by saving under the scheme can take business venture on utilization the amount saved under the scheme as well as availing bank investment.

Al-Arafah Savings Bond:

Under this scheme, the bank has introduced saving bonds for tk. 10,000/-, tk. 25,000/- and tk. 100,000/- for 3, 5 and 8 years. After the completion of the tenure the deposited money may increase by 1.5 or even double.

Grameen & Small Investment Scheme:

AIBL has introduced a new investment project as grameen and small investment. The objective of this project is to introduced Shariah based banking system in rural and village area, creating employment through financing in low income group, build up savings attitude, improvement of living standard of rural low income mass people, creating opportunity to carry out Islamic lifestyle by way of alleviating poverty and at the same time financially establish career men/women by investing in small investment projects. Initially, this scheme is introduced in two branches of AIBL i.e. Gallai, Comilla and Ruposhpur, Srimongol. There is a plan to expand gradually this project in other rural branches. Thus, within the scope of grameen and small investment scheme, the following sectors have been invested:

1. Fisheries                                     l0Vegetables business

2. Poultry                                       11. Cultivation of bettle leaf

3. Cattle                                         12. Tailoring business

4. Goat                                           13. Work of bamboo and cane

5. Cow                                           14. Cultivation of pineapple

6. Poultry Finn                              15. Earthen ware

7. Preparing Muree                       16.Purchasing rickshaw

8. Preparing sweets                       17.Cultivation of lemon

9. Cosmetics items                        18. Small business i.e. rice, paddy, grocery, medicine shop, cloth shop, shoe business, library, etc.

•    Under this method, after getting the demand and the giving assurance of credit payment by the customer, bank takes the authority to purchase the specific goods on behalf of its customer and after that sells them to that customer.

•    In this case bank obviously has to purchase the goods from a third party and has to keep them under its authority for an instance. After that, a sale agreement is accomplished between the bank and the customer.

•    Here, goods are firstly delivered to the customer and payment is made on a specific future time. It is clear that in this method, goods are reached under the authority before payment is done.

•    In this method, bank is not liable to inform about the buying price and the amount of profit respectively to the customer. The only tiling mat is mentioned to that client is the selling price of those goods.

•    If the customer fails to pay the payment of the goods on a specific time and therefore if that customer takes some extra time to pay it fully, then in that sort of case, bank can not charge any more profit due to that overtime period.

Investment Methods Followed By Al-Arafah Islami Bank:

Bai Mudaraba:

Bai Mudaraba means limited partnership. In general sense, contract to make sharing in profit amount occurred in partnership business. In this method, one side provides the capital needed to start the business and the other side, after using that capital and employing the labor, time and experience, gets the right to participate into the sharing of profits earned by the business by directly maintaining the business.

In short, Mudaraba is the main investment policy of Islam. In this method, the person; who opens the account simply called as ‘Rb-Al-MaT and the bank is known as ‘Mudareb’ in case of capital earning. On the other hand, in case of investment bank is regarded as the ‘Shahib-Al-Mal’ and the client of the bank is known as ‘Mudareb’. Here, this bank (AIBL) supplies the needed capital to do business and the client directs its business by employing its labor, time and experience. And the profit that is earned in this investment is distributed at a pre-determined rate (for example, 60%:40%, 50%:50%, 70%:30%) regarding to the contract between the bank and the client.

In this method, bank does not charge any advance profit on its provided capital. Rather, profit that is earned is shared also by the bank, itself. Here, Mudareb can participate only into the sharing of profit of the business. If any loss occurs in this sort of investment then that loss goes to the bank to bear, as it becomes the ‘Shahib-Al-Mal’.

Overall Features of Bai Mudaraba Investment Method:

•    Here, the bank supplies the capital needed for business and the client directs that business by using his own labor, time and experience.

•    In this method, AIBL does not directly participate into the authority of business and in general can not. Rather it gives advises to the Mudareb in any necessary condition.

•    Profit of this kind of investment is distributed at a pre-fixed rate between the bank and the client due to the contract and bank takes the duty of caring any loss if it occurs in it.

•    Two parties exist in this kind of investment method. They are: a) bank (Shahib- Al-Mal) and b) customer (Mudareb),

Bai Musharaka:

Bai Musharaka means partnership business i.e. to share in company’s profit-loss and in the ownership of business. It is the second major investment method in Islam and for all islami banks. In this method, islami banks provide funds on investment purposes to direct Islami Shariah based businesses with its well known clients or institutions on the basis of its partnership profit-loss sharing ratio. Since AIBL follows this investment method, therefore, to invest here, both AIBL and its client provide the needed funds.

Discussions are made in case of fixing funds that would be provided by the participating parties. In general, each participant or partner has the right to directly participate into the business of the client and the bank, respectively. In this method of investment, all related expenses regarding the controlling of business are beard from the business, itself. All profitable earnings regarding the actual agreement are distributed between the bank and the client on a pre-fixed rate (for example, 50%:50%, 60%:40%) according to consideration by both parties. Similarly, if loss is occurred, both the bank and the client bear their respective losses on the rationale basis of their funds.

Bai Salam:

Bai Salam is an advance purchase & sales investment mode. In this method firstly, the price of goods demanded is repaid. And in a specific future date, the demanded goods are going to be delivered by the seller to the buyer (bank). In this method, Islamic banks repay the price of goods by paying in advance to the client (seller) on a given condition of buying the goods by fixing a exact value of goods demanded. This investment is generally made by the bank in case of agriculture and industry sector.

Overall Features of Bai Salam Investment Method:

•    It is an agreement to make purchase & sales in advance. Here the bank repays the client first for buying the goods needed, And on a specific date, that client delivers that demanded goods to the bank on a fixed time in future.

•    Two parties participate in this kind or purchase agreement. They are: a) bank (buyer) and b) client (seller).

•    Name   of  the   goods,   quantity,   price,   kind,   date   to   be   delivered,   place, transportation cost are clearly mentioned in the agreement for this kind of investment business.

 Hire Purchase under Shirkatul Melk:

Goods those, whose selling price is fixed for the purpose of paying their purchase, price into some installments and on a giving assurance of their selling and purchasing at a fixed rental rate is called the procedure of hire purchasing. Islamic banks firstly, purchased the specific goods of its clients and rent them to that client on a given condition, that if the client pays the price of goods in installment and pays the rental charges at the fixed rate, after that, the client will get the complete ownership of that goods regarding the contract.

In common sense, by ‘Hire Purchase’ we mean to say that durable items, like vehicle, machinery, equipment, etc. are purchased on equity participation by both the bank and the client and the same is handed over to the investment client on rental basis entering into an agreement with the client that principal amount shall be paid within a certain period of time by installments. Here, rent is to be paid on the principal outstanding till the ownership is transferred to the client on payment of the entire principal amount.

Thus, Al-Arafah Islami Bank offers following categories of HPSM:

1.   Industrial

2.   Commercial

3.   Transport

4.   DDIS

5.    SSBI

6.   HPSM real state

7.    Staff house building investment

8.   HPSM car (for executives of AIBL)

Overall Features of Hire Purchase Investment Method:

•     In this method, asset is reached to the client as the contract is made for a time.

•    Here, asset is placed under the authority of the client, but the ownership goes to the bank.

•    After the payment of asset and the payment of rents by the client, the ownership is finally transferred to the client.

•    Until the payment of the asset’s price is done by the client, the bank charges rents on a specific rate.

•    Regarding the contract, the client uses the asset and gets the duty to authorize it. But, ownership is maintained by the bank.

•    The client would not have the ability to sell the assets somewhere else or to take as a mortgage until the price of the asset and the specific rent is paid up by him.

Overall Features of Bai Murabaha Investment Method:

•    A certain promise given by a bank itself to sell some specific goods to its specific client on demanded from a specific party for getting some profit by entering in a contract.

•    This kind of investment contract involves three parties. They are: a) commodity seller (third party), b) bank (commodity seller or first buyer) and c) client (second or final commodity buyer).

•    Here, obviously bank has to buy the goods and at the some time it takes the duty of keeping them (goods) all under its authority. Then the bank and the specific client enter into a written contract to accomplish between them.

•    After that, bank takes the duty to put those purchased goods in its own or the customer’s warehouse under the authority of it.

•    Here, either customer can receive total commodity by paying the total amount of purchasing price or get the amount of commodities up to his current payoff.

•    The cost price of commodities and profit amount are respectively mentioned in the contract.  Beside these, transportation of goods,  insurance,  and’ cost of warehouse, security wages and other related costs is beard by the customer itself, according to the contract.

•    The amounts of profit do not increase since selling price is fixed once for a time.

Bai Muazzal:

Bai Muazzai means to seli goods someone on credit. In this kind of investment method first of all, goods that have been demanded are being delivered to its customer before any payment and after getting the goods a specific future time is fixed by that specific customer for paying the purchase value of those goods. In case of AI-Arafah Islami Bank, customer of this bank applies to it for purchasing goods by itself for its applying customer and gives the assurance to pay the value on a specific future date. A sale agreement between the bank and the customer occurs therefore.

Overall Features of Bai Muazzal Investment Method:

•    Three parties enter into this kind of investment procedure.

They are:

a) Commodity seller (third party),

b) Bank (commodity seller or first buyer) and

c) Customer (second buyer of commodity).

•    Under this method, after getting the demand and the giving assurance of credit payment by the customer, bank takes the authority to purchase the specific goods on behalf of its customer and after that sells them to that customer.

•    In this case bank obviously has to purchase the goods from a third party and has to keep them under its authority for an instance. After that, a sale agreement is accomplished between the bank and the customer.

•    Here, goods are firstly delivered to the customer and payment is made on a specific future time. It is clear that in this method, goods are reached under the authority before payment is done.

•    In this method, bank is not liable to inform about the buying price and the amount of profit respectively to the customer. The only tiling mat is mentioned to that client is the selling price of those goods.

•    If the customer fails to pay the payment of the goods on a specific time and therefore if that customer takes some extra time to pay it fully, then in that sort of case, bank can not charge any more profit due to that overtime period.

Qard:

A1BL also allows Qard in very special cases on obtaining proper security. Here, the bank’s service charge is equal to cost of funds is recovered on Qard amount.

Special Investment:

This bank also closely supervises and reviews the investment operation of the bank with a view interalia to alk out policy which would not only be innovative but also covers all sectors of the economy including income-generating activities. The bank has, in the meantime, introduced the following schemes for enlistment of the fixed wage earners as small traders and for income generating activities of the poor people:

1.   Desired Durable Investment Scheme (DDIS)

2.   Masjid Madrasha Based Investment Scheme (MMIS)

3.    Small business Investment Scheme (SBIS)

4.    Special pally Biniyog Prakalpa

5.   Transport Investment Scheme

Provisions on Investments by AIBL:

a) In case of this bank, provision for investment is made on the basis of year end review by the management and of instructions contained in Bangladesh Bank BCD circular no. 34 dated 16 November 1989, BCD circular no. 20 dated 27 December 1994, BCD circular no. 12 dated 4 September 1995, BRPD circular no. 16 dated 6 December 1998 and BRPD circular no. 9 dated 14 may 2001. The provision rates are given below:

General provision on unclassified investment @ 1% Specific provision on substandard investment @ 20% Specific provision on doubtful investment @ 50% Specific provision on bad/loss investment @ 100%

b) Investment is written off to the extent that (i) there is no realistic prospect of recovery, (ii) against which legal cases are pending for more than five years as per guidelines of Bangladesh bank.

STATUS OF THE BANK

Al-Aralah In I ami Bank Limited was established in 1995 under die companies Act, 1994 as a banking Company with Limited Liability by shares. It is an interest free Shariah bank of Bangladesh rendering all types of commercial banking services under the regulation of Bank Companies Act, 1991. The Bank conducts its business on [lie principles of Musliaraka, Bai-Murabaha, Bai-muazzal and Hire Purchase transactions approved by Bangladesh Bank. Naturally, its modes and operations are substantially different from those of other conventional commercial banks. There is a Shariah Council in the bank who maintains constant vigilance to ensure that the activities of the bank are being conducted on the precepts of Islam. The Shariah Council consists of prominent i llema. reputed Bankers, renowned Lawyers and eminent Economist.

NATURE OF BUSINESS

All kinds of commercial banking services are provided by the bank to the customers following the provisions of Banking Companies Act, 1991, Bangladesh Bank’s directives and the principles of Islamic Shariah.

SIGNIFICANT ACCOUNTING PRINCIPLES

Preparation of financial statement

These accounts have been prepared on a going concern basis under the historical cost convention and on (iLMierally Accepted Accounting Principles consistently widi those of previous year. Although the operation of (he Bank are in strict compliance with the rules-of Islamic Shariah, the Financial Statements have been prepared basically as per Bank Company Act 1991, Bangladesh Accounting Standard (BAS), Financial Accounting .Standard issued by the Accounting and Auditing Organization for Islamic Financial Institutions.

Basis for ConsolidationA separate set of records for consolidating the statement of Affairs and Income & .Expenditure Statement of die- ts randies are maintained at the Head Office of the Bank in Dhaka from which the financial statement are drawn up.

Provisions on Investment

a) Provision of investment is made on the basis of year end review by the management and of instructions contained in Bangladesh bank BCD Circular no. 34 dated 16 November \I-WK BCD Circular no. 20 dated 27 December 1994, BCD Circular no. 12 dated 4 September 1995. BRPD Circular no. id dated 6 December 1998 and BRPD Circular no. 9 dated 14 May 2001. The provision rates are given below:

General provision on unclassified Investment @  1%

Specific provision on substandard Investment @ 20%

Specific provision on doubtful Investment @ 50%

Specific provision on bad/loss Investment @ 100%

b) Investment, arc written off to the extent that (i) there is no realistic prospect of recovery, (ii) and against which legal cases are pending for more than five years as per guidelines of Bangladesh Bank.

Fixed assets and depreciation

a) All fixed assets are stated at cost or revaluation less accumulated depreciation. The following assets were revalued ai 31 st December 2004 on the basis indicated below:

i) Land

By a professional valuer on the basis of market value at 31st December 2004. The valuer was independent of the company. The property is located within Dist ; Dhaka, P. S Motijheel, Sub – registry office : Sulrapur, Dhaka collectors Touzi # 141-B-l, Mouza : Sabek Shahar Dhaka, Sheet # 22, Ward # 03, Sabek Kliatian # 6947, 6947 [KA1, 6947[Jha], Sabek Dag #97, 100,101,102 and 110, SA Mouza: Ramna, Sheet # 10, SA Khatian # 362, SA Dag # 1979,1980,1981,2025,1997,1998 and 1979/2039, RS Mouza : Motijheel, RS Kliatian # 420, RS Dag # 1314 and 1322, D.P Khatian # 619, D.P Dag # 812 and 804. The area of land measuring about 27.10 decimal. Mutation Khatian # 362/3 and Dag # 1979 and 1980. The land was revalued at Tk. 5,000,000 per decimal. The cost of which was Tic 2,116,116 per decimal. The Bank accounted for 90% of book value of revaluation. Total Capital gains amounting Tk. 64.603,248 out of Which 50% was included capital revaluation A/C. as per Bangladesh bank Circular.

b)  Depreciation is charged at the following rates on a reducing balance method on all fixed assets other than

Assets                                                                   Percentage

Furniture and Fixture                                                     10

Motor Vehicles                                                              20

Mechanical Appliances                                                  15

Books                                                                             20

Computer                                                                       20

Building                                                                         2.5

c) Maintenance and repairs cost when incurred are charged to Profit and Loss Account.

Allocation ol1 distributable profit

Total investment income (except exchange and coin miss inn income) is shared between depositors and the bank @ 70:30.

Exchange rates

 a) The transactions in foreign currencies arc converted into equivalent Taka currency using Qis ruling exchange rates prevailed on the dates of such transactions.

b) The assets and liabilities denominated in foreign currencies as on 31 December 2004 are translated into Taka currencies at the prevailing selling and buying rates of the concerned foreign currencies. el Gains and loss of translation are dealt with through exchange account.

Basic Earning per share

This has been calculated by dividing the basic earning by the weighted average number of ordinary shares miisianding during the year. Diluted earning per share is required lo be calculated, for the year, as there is scope I or dilution during the year under review.

Cash flow Statement

Cash How statement is prepared principally .in accordance with “B AS-7 Cash flow Statement” and the cash flow I mm the operating activities have been presented- under direct method as prescribed by die securities and exchange rules 1987 and considering the provision of paragraph is(b) of BAS-7 which provides that enterprise ,ire encouraged lo report cash flow from operating activities using the direct method.

Retirement benefit and staff welfare scheme

I lie Rank operates a contributory Provident fund, Sofia] Security Fund, Gratuity Fund and a Benevolent Fund,

These lunch are managed by separate Board of Trustees.

Taxation

Provision for income tax has been made @459fc as prescribed in finance act 2004 of the profit made by the bank without considering taxable add- backs of income and isallowances of expenditure but considered provision on classified investment during the year. No deferred tax is currently maintained by the Bank however, the Bank considering changes in accounting policies for implementation of the same.

Tax return for the income year 2003 (Assessment year 2004-2005) has been filed but assessment is to be done by ihc lax authority. Bank filled an appeal for the income year 2002 (Assessment year 2003-2004) before the commissioner of [axes (appeal) against the order of disallowances of deputy commissioner of tuxes. Bank also filled iin appeal before the appellate tribunal against the order of commissioner of taxes (appeal) for the income year 2(100 and 2001 (Assessment year 2001-2002 & 2002-2003).

Reconciliation of inter bank/books of accounts

Books of accounts in regard to ■Inter-Bank (In Bangladesh and outside Bangladesh) are reconciled and there are no material differences, which may affect the financial statements significantly. Unreconciled entries in case of inter- Brandi transactions as on the reporting date are not raenlionable due to the time gap before finalizing the same.

Risk Management

The risk of Al-Arafah Islami Bank limited is defined as the possibility of losses, financial or otherwise. The risk management of the Bank covers 5 (five) Core risk Areas of banking i.e Credit risk management, Foreign risk management. Assets Liability Management, prevention of money laundering and establishment of Internal Control and Compliance. The prime objective of the risk management is that the Bank lakes well ealculative business risks while safeguarding the Bank’s capital, its financial resources and profitability from various risks. hi this conlexi. the Bank took steps to implement the guidelines of Bangladesh Bank as under :