Credit Management in Islami Bank Case Study of Shahjalal Islami Bank Limited

1.0 Introduction:

Banking is the backbone of national economy. All sorts of economic and financial activities revolve around the bank. As the industry produces goods & commodities, bank creates & controls money-market and promotes formation of capital. Banking is a powerful medium to bring socio-economic changes in a developing country like Bangladesh. Three important sectors like Agriculture, Commerce and Industry provide the bulk of the country’s wealth. So the nourishment of these sectors is only possible through satisfactory banking facility. The banking service facilitates the integration of these three. For rapid economic growth, a fully-developed banking system can provide the necessary boost. Banks provide both short and long term credits. The customers come from all walks of life, from a small business to a multi-national corporation having its business activities all around the world. The banks have to satisfy the requirements of different customers belonging to various social groups. The banking business has, therefore, become complex and requires specialized skills. It functions as catalytic agent for bringing about economic, industrial growth and prosperity of the country. As a result different types of banks have come into existence to suit specific requirements.

Regardless of the number of banks and nature of their functions & activities, central bank regulates the activities of all other banks. In Bangladesh, the role of the central bank is performed by  Bangladesh Bank.

The private banks had concentrated their activities only in a few areas. The new banks try to share the most potential market, forcing others to face tougher competition. This also restricts 2others to expand fast to cater for the banking needs of the people in other areas. The International Monetary Fund (IMF) and The World Bank earlier asked the government to reconsider its decision to permit new banks without restoring discipline in the sector, crippled by huge amount of bad debts.

1.1 Background of the Study

Shahajalal Islami Bank Limited is a private commercial bank, which is 6th Islamic Shariah based bank in Bangladesh. The Bank started its operation on 10th May 2001; during this period it could improve its image in the society as an Islamic Bank. Now it has 26 branches in Bangladesh. All branches are situated in the highly demanded areas.

As a new bank, Shahjalal Islami Bank Ltd. has been competing with other private banks where all the banks are adopting different incentive programs to attract the customers. Accordingly, Shahjalal Islami Bank Ltd.  is offering different type of deposit scheme bearing highest rate of return. Mudarabah Deposit Scheme, Monthly income scheme and Millionaire scheme are the most popular offers that are completely new innovation in the banking sector and widely accepted by the clients.

With crumble down of the world economy caused by nine eleven attack. It is observed that the competition becomes intensive in the globalization process. Our country has also participated in the race for its existence. Therefore, it becomes obvious for us to increase the field industrialization. Shahjalal Islami Bank Ltd.  is playing a vital role in developing industry of the country and putting the national economy competitive with world economy. Developing country like Bangladesh urges a huge amount of investment both in the private and public sectors. Shahjalal Islami Bank Ltd. has been providing a lot of assistances regarding this investment process through its investment and Foreign Trade Department.

1.2 Problem Statement

The credit analysis is a necessity for all financial institutions. Shahjalal Islami Bank is issuing on an average 15 to 20 different types investment every month among customers of different target markets. Official sources estimate around 2% of these investment have a chance of resulting bad. As the credit analysis methods of Shahjalal Islami Bank Ltd. are practiced very extensively to evaluate investment applications it is asked: ‘‘How Credit Control analysis is used as a tool for borrower evaluation for SJIBL, Bangladesh? A number of simple and practical ways in which corporations can use credit analysis to manage risk are explored and the practical strengths and weaknesses of following such approaches are emphasized.

1.3.1 Broad Objective:

Emphasizing on credit operation, credit management and credit performance including the credit payment system.

1.3.2 Specific objective:

To present an over view of  Shahjalal Islami Bank Ltd. (SJIBL)

To analysis the Lending procedures maintained by the SJIBL

To observe principal Lending activities of Shahjalal Islami Bank Ltd.

To evaluate Lending performance of Shahjalal Islami Bank Ltd.

To measure the actual position in classified investment and provisions maintained

by the SJIBL.

To appraise the actual Recovery position of the SJIBL

To compare the classified conditions of the NCBs vs. PCBs vs. FCBs in

Bangladesh.

To evaluate the success of credit operations compare with other Banks.

To identify problems in credit operations of Shahjalal Islami Bank Ltd.

To recommend suggestions for the successful Lending Operations of the Shahjalal

Islami Bank Ltd.

1.4 Methodology:

1.4.1 Area of Study:

The area of the study covered the operational area, particularly investments & Credit, and Financial Aspects of Shahjalal Islamic Bank Ltd Dhanmondi Corporate Branch.

1.4.2 Target Group:

Departmental heads and other concerned officials, particularly those associated with the credit division and FCAD Department of the bank, were consulted to get the required data & information.

1.4.3 Sources of Data:

The sources of data are given below.

1.5 Scope of the Report:

In order to complete the entire report it will be needed to observe the whole process step by step. After completion of a trade payment the process can be expressed fully. And the problems can be sort out easily. However, this report will contain the complete process documentary credit operation explained step by step including the explanation of all related parties and documents. Successfully accumulation of the report needs a fully observation of the process and fully observation requires a certain time period.

1.6 Rationale of the Study:

This study is descriptive. The main Rationale of this study is as follows:

Have an idea about the banking sector of Bangladesh.

Investigate the bank’s credit functions

Understand the recent trend & practices in managing credit.

Have an idea about the overall performance of Shahjalal Islami Bank Ltd

(SJIBL) and its position in the banking industry.

Providing an overview of SJIBL’s Credit Management System/Investment

Management System.

Recommendation on further betterment & improvement of the business.

1.7 Limitation of the Study:

The main problem faced in preparing the paper was the inadequacy and lack of availability of required data. This report is an overall view of Credit Operations of Shahjalal Islami Bank Ltd. but there is some limitation for preparing this report.

Firstly this bank is not so much old, so they do not have enough data, that’s why I did not make vast compare this bank with other banks.

Secondly when I was doing my internee then there auditing is going on that’s why I did not get the after closing data that is available data of 2007. With all of this limitation I tried my best to make this report as best as possible. So readers are requested to consider these limitations while reading and justifying any part of my study.

Organization overview

2.0 Corporate Information:

Name of the Company                        :           Shahjalal Islami Bank Limited

Legal Form                                          :           A public limited company incorporated in

Bangladesh on 1^st April 2001 under the companies Act 1994 and listed in Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited.

Commencement of Business               :           10^th  May  2001.

Registered office                                :           Jiban Bima Bhaban

Front Block (4^th Floor)

10, Dilkusha Commercial Area

Dhaka-1000

Telephone No.                                     :           88-02-9570812, 7160591

Fax No.                                              :           88-02-9570809

Website                                              :           www.shahjalalbank.com.bd

SWIFT                                               :           SJBL BD DH

E-mail                                                 :           sblho@shahjalalbank.com.bd

Chairman                                            :           Alhaj Sajjatuz Jumman

Managing Director                             :           Alhaj M.Kamaluddin Chowdhury

Company Secretary                             :           Md. Emran Hossain

Auditor                                              :           M/S Hoda Vasi Chowdhury & Co.

Chartered Accountants

Ispahani Building (3^rd Floor)

14-15 Motijheel C/A, Dhaka,

Tel: 9567587, 9551028

No. of Branches                                 :           26

No. of Employees                              :           466

Authorized Capital                            :           Tk. 2000 million

Paid up Capital                                  :           Tk. 935.83 million (Before IPO)

Tk. 1871.65 million (After IPO)

Face Value per Share                          :           Tk. 100

2.1 A Brief Profile of Shahjalal Islami Bank Ltd:

Shahjalal Islami Bank Ltd is based on Islamic Shariah. SJIBL is named after the name of a saint Hajrat Shahjalal (R) who dedicated his life for the cause of peace in this world and hereafter and served the humanity. It was incorporated as a Public limited company on 1st April 2001 under companies Act 1994. It started its Banking operation on May 10, 2001 with the 1st branch (main branch) opened at 58, dilkusha C/A, Dhaka obtaining the license of Bangladesh Bank, for enlistment of economic condition of its customers as well as to contribute sustainable economic growth and development in trade and industry of the country. Its corporate head quarter is situated at 10 Dilkusha C/A, Jiban Bima Bhaban, Dhaka-1000, Bangladesh

At present, the bank has a network of 26 branches with around 466 employees stationed in both rural and urban areas of the country. Since inception, the Bank has been making significant profit every year and positioning itself as second highest profit-making bank in the country for last five consecutive years. This has been possible due to significant growth of the bank. This has also been possible due to minimize the risks of the bank successfully.

2.2 Organization Structure:

2.4 Mission:

High quality financial service with the latest technology.

First, accurate and satisfactory customer service.

Balance & sustainable growth strategy.

Optimum return on shareholder’s equity.

Introduction innovative Islamic banking products.

Attract and retain high quality human resource.

Empowering real poor families and create local income opportunities.

Providing support for social benefit organization- by way of mobilizing fund and social services.

2.5 Vision:

Shahjalal Islami Bank Limited stared its journey with the concept of 21^st century Islamic participatory three sector banking model:

a)      Formal Sector-Commercial banking with latest technology

b)      Non Formal Sector-Family empowerment Micro-credit & Micro-enterprise program

c)      Voluntary Sector – Social capital mobilization through CASH WAQF and other.

Finally, “Reduction of Poverty Level” is there Vision, which is a prime object as stated in Memorandum of Association of the Bank with the commitment “Working Together for a Caring Society”

2.6 Core Values:

For the customers

To become most helpful Bank-by providing the most well-mannered and efficient service in every neighborhood of business.

For the Shareholders

By ensuring flaxen return on their investment through generating established profit.

For the Community

By presumptuous the role as a socially conscientious corporate entity in a physical manner through close obedience to national policies and objectives.

2.7 Philosophy of the SJIBL:

At present the bank has as many as 26 branches, 13 branches are in Dhaka and rest 13 branches are in Chittagong, Sylhet and Gazipur. The sponsors of SJIBL are leading business personalities and renowned industrialist of the country. Now this bank has paid up capital – 46.83 million and No. Of Directors – 13 (source Internet).

2.8 Performance of the SJIBL:

SJIBL a blend of expertise and technological excellence is in place to meet varied needs of modern customers. The bank aims at mobilizing untapped money of the country and prudent deployment for productive activities in the form of lending at a competitive profit rates/investment pricing. Towards attainment of its goals and objectives, the bank pursues diversified credit policies and strategic planning in credit management. To name a few, the bank has extended micro credit, consumers durable scheme investments, house building investments etc. to cater to the needs of the individuals, which in turn has helped thousands of families. The bank also extends investment in the form of trade finance, industrial finance, project finance, export & import finance etc. The bank’s credit polices aimed at balanced growth and harmonious development of all the sectors of the country’s economy with top most priority to ensure quality of lending by averting growth of non-performing assets.

2.9 Products and Services:

The SJIBL serves its massive clientele with a variety of services apart from the conventional ones. Its frequent improvement and introduction of new products and services has given it a margin over the competitors.

a)      Different Types of Scheme:

Monthly Deposit Scheme (MDS)

Mudarah Term Deposit Receipt (MTDR)

Monthly Income Scheme (MIS)

Double Profit Deposit Scheme (DPDS)

Millionaire Scheme.

Hajj Palon Scheme etc

b)     Different Types of Investment (Lone) Facilities:

Trade.

Working Capital Financing.

Industry.

Agriculture, Fishing and Forestry.

Transport and communication.

Water works and sanitary service.

Construction.

Storage.

Miscellaneous etc.

2.10 Reserves of SJIBL:

In accordance with the provision of Bank Companies Act, 20% of operating profit before tax is required to be transferred to statutory reserve. As such an amount of Tk.267.13 million has been transferred to statutory reserve during the year.

2.11 Deposits:

Total deposit of Shahjalal Islami Bank stood Tk.18090.65 million as on 31.12.2007 as against Tk. 12204.63 million of 31.12.2006 registering an increase of Tk.5886.02 million, 48.23% growth. Deposit is the ‘life-blood’ of a Bank. Bank has given utmost importance in mobilization of deposits introducing some popular and innovative sche

2.12 Profit and Operating Results:

2.12.1 Income:

1. Investment income:

Total investment of the bank as at 31^st December 2007 was Tk. 2158 million as against Tk. 1357 million of the preceding year registering 59% growth over last year which was 84% of the total income as also equal to 84% of 2005.

2. Non-investment income:  

Total non-investment income of the bank as at 31^st December 2007 was Tk. 405 million as against Tk. 263 million of preceding year registering 54% growth over last year which was 16% of the total income compared to 16% of 2006.

2.12.2 Expenditure:

Profit Paid on Deposits:

Bank distributed profit of Tk. 1491 million the Mudaraba Depositors in the year 2007 against Tk. 944 million in the year 2006 which being 70% of the investment income earned from deployment of Mudaraba fund and 87% of the total expenditure of 2007 against 84% of 2006.

Operating Expenses:

Total operating expenses as on 31.12.2007 was Tk. 227 million as against Tk. 174 million of 2006, which was 13% of the total expenditure of the year 2007 against 16% of 2006.

Operating Profit:

During the year 2007, the Bank earned an amount of Tk. 2563 million and spent an amount of Tk. 1718 million, resulting a total Operating Profit of Tk. 845 million which increased by Tk. 343 million over last year i.e. 2006. After deduction investment provision and income taxes net profit stood at Tk. 463 million as against Tk. 256 million of 2006. As appropriation of net profit, Tk. 158 million transfers to statutory reserve as per Bank Company Act 1991 and remaining Tk. 306 million transfers to retained earning to adjust previous negative balance.

A summery of operating result of the bank as on December 2007 vis-à-vis the position of December, 2006 is shown below

(Amount in million) Taka                          Taka

2.13 Equity of the Bank:

The authorized capital of the bank is Taka 2000 million, and paid-up capital of the bank is Tk. 936 million as on 31.12.2007. Total equity was Tk. 1,363 million as on 31.12.2007. The bank has already raised its paid up capital of Tk. 936 million through Initial Public Offering (IPO) in January-February 2007. After IPO Bank’s paid up Capital stands at Tk. 1872 million in February 2007. Comparative position of Equity for the year 2007 & 2005 is given below:-

(Amount in million Taka)

2.14 Capital Adequacy:

Total equity of the bank as on 31.12.2006 was Tk. 848.35 million and the total equity stood to Tk. 1362.57 million on 31.12.2006m, which was 10.36% of the Risk Weighted Assets as against the requirement of 9.00%. The core capital was 9.19% of Risk Weighted Assets as on 31^st December 2007 as against requirement of 4.50%. After IPO, as on 30.062007 total equity stands at Tk. 2545.30 million which was 17.73% of  Risk Weighted Assets as against total requirement of 9%.

2.15 Investments (Lone):

Total investment of the bank stood at Tk.15515.79 million as on 31.12.2007 as against Tk. 10590.27 million of 31.12.2006 registering as increase of Tk. 4925.52 million, i.e. 46.51% growth. The bank is careful in deployment of the fund. Mode wish investment portfolio as on 31.12.2007 is given below:

The bank entertains good investment clients having credit-worthiness and good record. The bank has got a few investment schemes to provide financial assistance to comparatively less advantaged group of people which are.

Household Durable Scheme.

Small Business Investment Program

Small Entrepreneur Investment Program

Medium Entrepreneur Investment Program

Housing Investment program

The following two investment schemes are going to be introduced shortly.

Car Investment scheme.

Women Entrepreneur Investment Scheme.

2.16 Liquidity of SJIBL:

Liquidity in the form of balance with Bangladesh Bank, Sonali Bank (as the agent of Bangladesh Bank) and in hand including foreign currency stood at Tk. 1670.12 as at 31^st December 2007 as against Tk. 1702.27 million in last year to maintain cash & statutory liquidity. The Bank is committed to maintain the cash and statutory liquidity requirement to effectively manage the asset & liability portfolios of the bank in order to maximize the profit. As per guideline of the Bangladesh Bank ALCO (assets liability committee) was formed in 2005, which is highly concerned with proper liability management under the close supervision of senior management. The bank has a policy guideline on liquidity management as approved by its board of directors. We have able to maintain required CRR and SLR throughout the year without fail as per Bangladesh Bank’s norm.

2.17 Information Technology (IT) & Automation:

All the branches of the SJIBL are fully computerized. New software is now in use to provide faster, accurate and efficient service to the clients. The bank is continuously striving for better services through extensive automation of its branches. We are soon going to launch “One Branch Banking” through on-line connectivity. The bank has set up a full-fledged IT division to keep abreast of the latest development of IT for better service in the days to come.

2.18 Corporate Governance:            

In recent times, corporate governance has been considered most essential aspect for efficient management of a business house. SJIBL gives much emphasis on the corporate governance in promoting a sound management. The object of the bank is to comply with all regulatory requirements, ensure equitable treatment of all stakeholders. It confirms full & fair disclosure of financial and other material information and show respect for norms of business ethics and social responsibility. The Board of director, Executive committee, Audit committee and other committee of the management perform their respective tasks with accountability and transparency.

2.19 Foreign Correspondents:

Foreign correspondent relationship facilities foreign trade operation of the bank, mainly in respect of export, import and foreign remittance. The number of foreign correspondents and agents of the bank in the year 2007 stood at 244, which covers important business and trade centers of the world. The bank maintains excellent relationship with the leading international banks, for handling all foreign correspondent and maintaining all foreign business there is an International Division, which is called ID.

2.20 Investment (Credit)  Rating Report:

Credit rating information and service limited (CRISL) has assigned “A” (pronounced as single A) rating in the Long Term and ST-2 rating in the Short Term to the Shahjalal Islami Bang Limited.

The above rating has been done in consideration of its significant improvement in asset quality, capital adequacy, financial performance. Financial institution rated “A” in the long term are adjudged t offer adequate safety for timely repayment of financial obligations. This level of rating indicates a corporate entity with an adequate credit profile. Risk factors are move variable and greater in periods of economic stress then those rated in the higher categories. Bank rated ST-2 in the short term is characterized by high certainty of timely payment, liquidity factor are strong and supported by good fundamental protection factors. Risk factors are very small

3.0 Topic Introduction:

Investment comprises a very large portion of a bank’s total activities. Investment operation of a Bank is, as such, of vital importance as the greatest share of total revenue is generated from it. The very existence of a bank mostly depends on prudent management of its investments port-folio. Sound investment practice, therefore, is very important for profitability and success of a bank.

For efficient deployment of mobilized resources in profitable, safe and liquid investments, a sound, well-defined, well-planed and appropriate investment policy framework is a prerequisite for achieving the goal of the bank. It is, therefore, essential to have a clearly defined and balanced investment policy prescribing the procedures for implementation thereof on the basis of which the bank’s investment port-folio shall be planned and budget shall he prepared for promotion of investments.

For the sake of sound investment it is necessary to develop a sound policy. Modern investment techniques have be to adopted to ensure that investments are safe and the money will come back within the time set for repayment. For this purpose, proper and prior analysis of investment proposals is required to assess the risk. Investment itself is risky and the very purpose of analyzing the risk is to locate/identify the risk for obtaining possible cover/precaution. While deciding an investment proposal we are to judge the degree of risk a given situation. Investment is judgments, which depend upon our ability to assess the shortcomings in the proposal and to indentify the risk. Therefore, the ability in taking proper/prior measures to minimize the risk is very important.

Investment risk is an essential factor that needs to be managed. Investment risk is the possibility that the client will fail to meet its obligations in accordance with agreed terms. Investment risk, therefore, arises from the bank’s dealings with the investment clients, the corporate, individuals, and other banks or financial institution.

Investment risk management, therefore, needs to be a robust process that enables banks to proactively manage investment portfolios in order to minimize losses and earn an acceptable level of return for shareholders. Central to this is a comprehensive IT system, which should have the ability to capture all key customers data, risk management and transaction information including trade & foreign exchange transaction. Given the fast changing dynamic global economy and the increasing pressure of globalization, liberalization. Consolidation and dis-intermediation, Shahjalal Islami Bank Ltd has formulated a robust investment risk management policy and procedures that are sensitive and responsive to these changes.

The manual sets out the basic procedures to be followed throughout SJIBL for sanctioning and controlling investment facilities. These procedures are intended to provide bank management with an accurate and detailed information base for investment decision. This manual deals with systems and will from time to time be supplemented by circulars, which would then form a part of the manual. These circulars should be maintained in a separate file after being appropriately cross-referred to the manual and would remain valid until such time as the manual is revised and reprinted.

3.1 Credit Defined:

The word “Credit” is derived from the Latin word “credo” meaning, “I believe”. The term credit may be defined either broadly or narrowly. Speaking broadly, credit is finance made available by one party (lender, seller, or shareholder/owner) to another (borrower, buyer, 7 corporate or non-corporate firm). More generally the term credit is used narrowly for debt finance. Credit is simply the opposite of debt. Debt is the obligation to make future payments. Credit is the claim to receive these payments. Both are created in the same act of borrowing and lending.

Credit is the means of investment made by the bank to the entrepreneurs and business community. Alternatively this is the way of channeling fund to the deficit units where various risks and uncertainties are involved. Therefore every decision on credit matter should be taken with utmost care that can be ascertained through in-depth analysis, meticulous calculation and prudent judgment. A detailed and very comprehensive credit policy can guide the dealing credit officer to successfully maneuver the credit portfolio.

3.2 Credit Management:

One of the two primary functions of a commercial bank is to extend credit to the deficit economic unit that comprises borrowers of all types. Bank credit is a catalyst of economic development. Without adequate finance, there can be no growth in the economy. Bank lending is important for the economy in the sense that it can simultaneously finance all of the sub-sectors of financial arena, which comprises agricultural, commercial and industrial activities of a nation. Therefore, a bank is supposed to distribute its investment fund among economic agent-in-deficit in a manner that it will generate sufficient income for it and at the same time benefit the borrower to overcome his / her deficit.

3.3 Islamic Banking Concepts:

According to Islamic Banking Act of Malaysia, an Islamic Bank is “company, which carries on Islamic Banking business. Islamic Banking business means banking business whose aims and operations do not involve any element which is not approved by the religion Islam.”

Dr. Ziauddin Ahmed says, “Islamic banking is essentially a normative concept and could be defined as conduct”

3.4 Literature Review:

 (Stulz, 1984), (Smith, Smithson and Wolford, 1990), and (Froot, Sharfstein and Stein,1993) Credit management dominates the theoretical literature on Islamic finance. Broadly, CM is a contractual arrangement between two or more transacting parties, which allows them to pool their resources to invest in a project to share in profit and loss. Most Islamic economists contend that CM based on two major modes of financing, namely Mudaraba and Musharaka, is desirable in an Islamic context wherein reward-sharing is related to risk-sharing between transacting parties. Almost all theoretical models of Islamic banking are either based on Mudaraba or Musharaka or both, but to-date actual practice of Islamic banking is far from these models. Nearly all Islamic banks, investment companies, and investment funds offer trade and project finance on mark-up, commissioned manufacturing, or on leasing bases. CM features marginally in the practice of Islamic banking and finance. However, there is now a growing literature on the reasons for active credit management including the work of name but a few of the more notable contributions.

Dr Ho (24 may, 2004, 08:48a.m) Credit management, to make it simple, refers to fund and working capital management. However, most people have some misconnects. They only consider credit management is a short-term process. In fact, if it relates to working capital, it may be right. However, if it relates to fund management, it can be a long-term basis. You may imagine asset valuation for credit evaluation, i.e. a credit management step, refer to fixed assets usually. Value of fixed assets will change over its life. In other words, your credit evaluation will adjust all the time.

(Fama and Jensen, 1983) Credit management is defined as initiation of projects (demand and feasibility studies, project proposals etc.) and implementation of these proposals by active involvement in the production process.

(Tah and Carr, 2000). Traditionally the focus has been on inductive methods with quantitative credit management based on estimating probabilities and probability distribution for time and cost analysis. A rational profit-maximizing banker would not lend the maximum acceptable amount of loans even if the borrower was willing to pay higher profit rates. Since credit monitoring, though reducing the problem of asymmetric information, is costly to the bank. On the other hand, the bank can rely on some objective criteria to judge the credit-worthiness of borrowers; credit rationing cannot be monitored without cost.

(Deakins and Hussain, 1991) English bank managers placed emphasis on financial information, gearing and security. Further, the bankers adopted a non-specialist approach, relying on information such as balance sheet ratios and income forecast, which could be generally interpreted across different types of industries. Lack of experience with similar propositions or knowledge of the industry.

Marcel de Koning, Manager Credit & Collections Telfort(2009) Telfort regards credit management as a vital instrument that enables the company to compete successfully in an almost saturated Dutch telecoms market.

3.5 Types of investment (Lone) Facilities in SJIBL:

Shahjalal Islami Bank Ltd shall extend all types of investment facilities in compliance with Islamic Shariah. Priority basis investment types as well as applicable modes are furnished below. Investment and advances have primarily been divided into three major groups:

Investment for Trading:

In Shahjalal Islami Bank Limited investment in trading is one of the most vital sectors. Applicable modes are furnished below.

Working Capital:

It allows to individuals or firm for trading as well as whole-sale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending.

HPSM (Transport):

For purchasing of non-commercial, new and reconditioned vehicles, this investment is given for personal use of the individual.

HPSM (Machinery):

For providing support to installation or purchase of machinery equipment to the borrower if it is individual or firms this sort of investment is very common in SJIBL.

Hire purchase/Lease:

Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. A Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price.

Commercial Lending

Advances allowed for purchasing foreign currency for opening L/C for imports of goods fall under this type of leading. This is also an advance for a temporary period, which is known as preemptor finance and falls under the category Commercial Lending.

Bai-Muajjal commercial/HPSM;

Literally bai muajjal means a credit sale. Technically, a financing technique adopted by Islami banks takes the form of murabaha muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments.

Murabaha L/C :

This investment is most popular to the both banks and clients. Murabaha is paid against different types of imports of goods i,e. Show-piece, Household goods, watch, lamp different gift items etc. from inside or outside the country. The margin of investment is 10% in cash.

HPSM industrial project:

These types of investment’s maximum tenor, maximum size is given below.

Quard:

This is a invest extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the investment (without promising it) as a token of appreciation to the investor.

Bai salam:

Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute.

L/C Bank Guarantee:

The exporters pay of the imported goods on behalf of the importer through bank guarantee. If the exporter fails to make the fulfill payment at the moment the bank will take the liability and pay to the exporter. This type of guarantee is also needed to attend in any tender.

3.6 Credit Analysis:

The division of the bank responsible for analyzing and recommendations on the fate of most investment applications is the investment department. Experience has shown that this department must satisfactorily answer three major questions regarding each investment application:

Is the borrower creditworthy? How do you know?

Can the investment agreement are adequately protected and the customer has a high probability of being able to service the investment without excessive strain?

Can the bank perfect its claim against the assets or earnings of the customer so that, in the event of default, bank funds can be recovered rapidly at low cost and with low risk?

Let’s look in turn at each of these three key issues in the “yes” or “no” decision a bank must make on every investment request.

Thus question that must be dealt with before any other is whether or not the customer can service the investment-that is, pay out the credit when due, with a comfortable margin for error. This usually involves a detailed study of six Cs aspects of the investment application- character, capacity, cash, collateral, conditions, and control. All must be satisfactory for the investment to be a good one from the lender’s point of view.

Character:

The investment officer must be convinced that the customer has a well-defined purpose for requesting bank credit and a serious intention to repay. If the officer is not sure exactly why the customer is requesting a investment, this purpose must be clarified to the bank’s satisfaction. Responsibility, truthfulness, serious purpose, and serious intention to repay all monies owed make up what a investment officer calls character.

Capacity:

The investment officer must be sure that the customer requesting credit has the authority to request a investment and the legal standing to sign a binding investment agreement. This customer characteristic is known as the capacity to borrow money. For example, in most states a minor (e.g., under age 18 or 21) cannot legally be held responsible for a credit agreement; thus, the bank would have great difficulty collectors on such a investment.

Cash:

This key feature of any investment application centers on the question: Does the borrower have the ability to generate enough cash, in the form of cash flow, to repay the investment? In general, borrowing customers have only three sources to draw upon to repay their investment: or

(a) Cash flows generated from sales or income,

(b) The sale or liquidation of assets, or

(c) Funds raised by issuing debt or equity securities.

Any of these sources may provide sufficient cash to repay a bank Investment.

Collateral:

In assessing the collateral aspect of an investment request, the investment officer must ask, does the borrower possess adequate net worth or own enough quality assets to provide adequate support for the investment? The investment officer is particularly sensitive to such features as the age, condition, and degree of specialization of the borrower’s assets.

Conditions:

The investment officer and credit analyst must be aware of recent trends in the borrower’s line of work or industry and how changing economic conditions might affect the investment

Control:

Last factor in assessing a borrower’s creditworthy status is control which centers on such questions as whether changes in law and regulation could adversely affect the borrower and whether the investment request meets the bank’s and the regulatory authorities’ standards for investment quality.

3.7 Investment Policy Guidelines:

This section details fundamental investment management policy that has been formulated for adoption in Shahjalal Islami Bank Ltd as per recommendation made by the focus group of Bangladesh bank. The guidelines contained herein outline general principal that are designed to govern the implementation of more detailed investment procedures grading systems within the bank.

3.7.1 Lending guidelines:

Shahjalal Islami Bank Ltd has formulated a detailed invested guidelines wish clearly identifies the business/industry sector that should constitute the majority of the bank’s investment portfolio. Indication the type of investment that are permitted such as working capital, trade finance, team investment etc. Details the bank’s single customer/group limits as per Bangladesh banks guidelines specifies industry sector exposure cap to avoid over concentration in anyone industry sector, outline industries or investment activities that are discouraged, states the facility parameters (e.g. maximum size, maximum tenor, and covenant and security requirements) & policy regarding management of Cross Boarder Risk.

Any departure or deviation from the investment guidelines should be explicitly identified in the Investment Application/ Investment Memo and justification for Approval (if required) to be given.

Investment proposal to be forwarded placed as per enclosed Investment Application/ Memo format.

Required documentation/paper as per to be accompanied with each investment application form and shall be kept in the investment files.

Appraising and evaluation the investment proposal by the branch, the concerned officials of the branch should comply the KYC procedures positively in case of all customers. One of them must be authorized signatory the head of investment.

Top 25 clients obligor to be rated preferable by outside i.e. credit rating agency.

Bank will follow asset liability matching policies as per Bank’s asset liability matching policy.

Bank will participate with other banks in syndicated facility & may act as lead bank also on best effort /club deal basis.

The management of the bank may deviate relax any of the clause of the guidelines/manual as per permission of the Ec/Board of directors of the banks.

Bangladesh bank circulars, policies, guidelines shall supersede this manual/guidelines at any point of time.

3.7.2 Internal Audit:

Shahjalal Islami Bank Ltd has a segregated internal audit/control department charge with conduction audit of all departments. An audit is usually carried out annually, and ensures compliance with regulatory guidelines, internal procedures, investment risk grading guidelines and Bangladesh bank requirements. In this regard Bangladesh bank core risk guidelines to be followed.

3.8 Investment Proposal of SHIBL:

Following Papers /Documents are required to process the investment proposal.

1. Request for investment limit of customer.
2. Account opening form along with copies of clients photograph.
3. CIB reports.
4. Project profile/profile of business.
5. Copy of trade license duly attested (up to date)
6. Copy of TIN certificate.
7. Certified copy of Memorandum & Articles of Association.
8. Certificates of incorporation.
9.  Partnership deed (where applicable)
   1. Resolution of Board of Directors for taking investment facilities from shahjalal Bank Ltd.
   2. Personal net worth statement of the Owner/Proprietor/Partner/Director in banks    format
   3. 3(three) years Balance Sheet, Income statements and Cash Flow statement/Projected.
   4. Bio-Data of Directors/Partner/proprietor
   5. Photograph of the Directors/Partner/proprietor duly attested.
   6. Photograph of the site.
   7. Indent/Pro-forma Invoice/Quotation.
   8. Statement of Account (C/D, S/B, CC) for the last 12 months.
      1. In case of renewed/enhanced of the investment facilities total income earned, detail      position of the existing liabilities of the customer i.e. Date of expense, Date of expiry, present outstanding, remarks, if any.
      2. Declaration of the customers of the name of sister/allied concern and liability with other banks, if any and an undertaking of the effect that they have no liability beyond those declared.
      3. CIB inquiry form.
      4. Valuation certificate in the Bank’s format along with photograph of collateral.
         1. Inspection/visit report of the factory/establishment/landed property of the   customers.
         2. Lending risk analysis (for investment facilities of TK. 1.00 core and above).
         3. Credit report from the bank.
         4. Price verification report.
         5. Background of the customers.
         6. Total financing plan & source of finance of the project.
         7. History of relationship with SJIBL.
         8. Status of factory land & building (including title holder & areas)
         9. Trade checking (from major buyers & sellers)
         10. Major competitors and competitive position for the customer.
         11. Working capital assessment.
         12. All sister concern information.
         13. List of equipment/machineries.
         14. Total employment strength with back up.
         15. Security with detail particulars.
         16. TIN certificate of the director.
         17. LC performance for the last 3(three) years.
         18. Sanction advice for existing investment facilities of different banks.
         19. Details of business of sister/allied concern.

3.9 Sources of Information about Investment Customers:

The bank relies principally on outside information to assess the character, financial position, and collateral of a investment customer. Such an analysis begins with a review of information supplied by the borrower in the investment application. The bank may contact other lenders to determine their experiences with this customer. Were all scheduled payments in previous investment agreements made on time? Were deposit balances kept at high enough levels? How much was borrowed previously and how well were those earlier investment handled? Is there any evidence of slow or delinquent payments? Has the customer ever declared bankruptcy?

Physical Investigations

Customer financial statements

Experience of other lenders with this customer

Customer Annual Report

Local or regional credit bureaus

Local Newspapers

Local chamber of commerce

3.10 Investment approval process:

The approval process must reinforce the segregation of Relationship Management/Marketing from the approving authority. The responsibility for preparing the Investment Memorandum should rest with the RM within the retail/corporate unit at branch. Investment memorandum should be recommended for approval by the RM team based on branches and forwarded to the Investment Approval at head office and approved by individual executives.

The recommending or approving executives should take responsibility for and be held accountable for their recommendation or approval. There is limited delegation of approval limits in favor of the managing director and some executives of the bank. The following diagram illustrates the approval process at  Shahjalal Islami Bank Ltd.

Memorandum forwarded to Head Office for approval/decline.

HOI advises the decision as per delegated authority to branches

Managing director advises the decision as per delegated authority to HOI

1. Managing director presents the proposal to EC/Board
2. EC/Board advises the decision to HOL

3.10.1 Investment administration:

The investment administration and monitoring function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of investment facilities. For this reason, it is essential that the function of investment administration and monitoring is strictly segregated from relationship management/marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level. Investment administration procedures are in place to ensure the following.

3.10.2 Investment Disbursement:

Security documents are prepared in accordance with approval terms and are legally enforceable. Standard investment facility documentation that has been reviewed by legal counsel should be used in all cases. Exceptions should be referred to legal counsel for advice based on authorization from an appropriate executive in IRM.

Disbursements under investment facilities are only be made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit & outstanding. All formalities regarding large investments & investments to directors should be guided by Bangladesh bank circulars & related section of banking companies Act. All investment approval terms have been met.

3.11.3 Custodial Duties:

Investment disbursements and the preparation and storage of security documents should be centralized.

Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets hypothecated/pledged as security.

Security documentation is held under strict control, preferably in locked fireproof storage.

3.10.4 Compliance Requirements:

All required Bangladesh bank returns are submitted in the correct format in a timely manner.

Bangladesh bank circulars/regulations are maintained centrally, and advised to all relevant departments to ensure compliance.

All third party service providers (values, lawyers, insurers, CPAs etc) are approved and performance reviewed on a annual basis. Bangladesh bank circular outlining approved external audit firms are accepted.

3.11 Investment Classification Process:

For the purpose of seminal the classified status of an account, following guidelines are to be observed. The process of classification of an account will start with strict application of the risk rating appraisal that is Sub-standard, Doubtful & Bad or Loss However unpaid profit or Principal or Expired Limit for a period of 180 days or more or frequent past dues will remain the most significant rules for classification.

3.11.1 Substandard:

An investment is classified as substandard if any one of the following conditions is met:

If an advance or any portion of an advance thereon remains overdue for 180 days or more but less than 270 days then the advance is classified as substandard.

For an advance of a continuing nature, even if the investment is not overdue as much as 180 days, but the limit stands overdrawn by move than 50% for a period of 45 continuous days preceding the reference date for the classification, then it is classified as substandard.

If an investment has been renewed or rescheduled at least three times but is not overdue, and any of the required payments for the required period have not made when they fall due, then the investment is classified as substandard.

3.11.2 Doubtful:

An investment is classified as doubtful if any one of the following conditions is met:

The advance or any portion of the advance thereon remains overdue for 270 days or more but less than 360 days.

An investment classified as substandard per clause 6 (b) above has remained substandard for 180 days or more.

An investment classified as substandard per clause 5 (c) above has remained substandard for 180 days or more. Legal action has been initiated. (e) Qualitative criteria based on judgment.

3.11.3 Bad or loss:

An investment is classified as bad if any one of the following conditions is met:

The advance or any portion of an advance or profit thereon remains overdue for 360 days or more.

An investment classified as doubtful per clause 6 (b) above has remained doubtful for 180 days or more.

An investment classified as doubtful per clause 6 (c) above has remained doubtful for 180 days or more. If legal action has been initiated and no court decision has been obtained within 360 days of initiation of action then the investment is classified as bad.

3.12 Investment Monitoring:

To minimize investment losses, monitoring procedures are system should be in place that provide an early indication of the deteriorating financial health of a customer. At a minimum the following are looked into.

Past due principal or profit payments, past due trade bills, account excesses, and branch of investment covenants.

Investment terms and condition are monitored, financial statements are received on a regular basis, and any covenant breaches or expectation are referred to IRM and the RM team for timely follow-up.

Timely corrective action is taken to address finding for any internal, external or regulator audit.

All customer relationship facilities are reviewed and approved through the submission of an investment management at least annually.

Exception to be followed up on the corrective action taken in a timely manner before the account deteriorates further.

3.13 Early alert process:

An early alert account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision or close attention by management.

If these weakness are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the bank’s investment position at some future date with a likely prospect of being downgraded to CG 5 or worse (impaired status), within the next twelve months.

Spite a prudent investment approval process, investment may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating investment signs be done to ensure swift action to protect the bank’s interest.

Moreover, regular contact with customer will enhance the likelihood of developing strategies mutually acceptable accept to both the customer and bank. Representation from the bank in such discussions should include the local legal adviser when appropriate.

3.14 Investment Recovery:

The recovery Unit (RU) of investment Administration and monitoring unit should directly manage accounts with sustained deterioration (a risk rating sub standard (6) or worse). The RU’s functions are as follows.

Determine account action plan/recovery strategy

Pursue all option to maximize recovery, including placing customers into receivership or liquidation as appropriate.

Ensure adequate and timely investment loss provisions are made based on actual and expected losses.

Regular review of grade 6 or worse accounts.

3.15 Non performing investment (NPI) Accounting Management:

The management of problem investment must be a dynamic process, and the associated strategy together with the adequacy of provision must be regularly reviewed. A process should be established to share the lessons learned from the experience investment losses in order to update the investment guidelines.

3.16 Investment-pricing Method Used by the SJIBL:

In pricing a business investment, Bank management must consider the cost of raising investment funds and the operating costs of running the Bank. This means that Banks must know what their costs are in order to consistently make profitable, correctly priced investment of any type. There is no substitute for a well-designed management information system when it comes to pricing investment.

The Shahjalal Islami Bank Ltd is generally used the simplest investment-pricing model which assumes that the rate of interest charged on any investment includes four components:

1)      The cost to the Bank of raising adequate funds to lend.

2)      The Bank’s non funds operating costs (including wages and salaries of investment personnel and the cost of materials and physical facilities used in granting and administering a investment).

3)      Necessary compensation paid to the Bank for the degree of default risk inherent in a investment request.

4)      Bank’s desired profit margin.

Following formula to be applied in determining the required amount of provision.

1.         Gross Outstanding                                                                              XXX

2.         Less: (I)           Cash margin held or fixed

Deposit/SP under lien                                                 (XXX)

(II)           Profit in Suspense Account                                        (XXX)

3.         Investment Value

(For which provision is to be created before considering

estimated realizable value of other security/collateral held)               XXX

4.         Less: Estimated salvage value of security / collateral held                 (XXX)

Net Investment Value                                                                                    XXX

3.17 Investment (Credit) Risk:

Credit risk is the primary financial risk in the banking system. Identifying and assessing credit risk is essentially a first step in managing it effectively. In 1993, Bangladesh Bank, as suggested by the Financial Sector Reform Project (FSRP), first introduced and directed to use Credit Risk Grading system in the Banking Sector under the caption “Lending Risk Analysis (LRA)”. The Banking sector since then has changed a lot as credit culture has been shifting towards a more professional & standardized Credit Risk Management (CRM) approaches. Keeping the above objective in mind, the Lending Risk Analysis Manual of Bangladesh Bank has been amended, developed and re-produced in the name of “Credit Risk Grading Manual (CRGM)”.

David H. Pyle (1997) identified the necessities of risk management. Recent financial disasters in financial and non-financial firms and in governmental agencies indicate the need for various forms of risk management. Financial misadventures are hardly a new phenomenon. However the rapidity with which economic entities can get into trouble is the real concern. Risk, in this context, may be defined as reductions in firm value due to changes in the business environment. Typically, the major sources of value loss are identified as follows:

3.18 Types of Risk:

There are many risks in financial organization. Most of the risks are related to financial. Investment (Lending) is the principal function of a Bank. At the same time there is an underlying/inherent risk in any investment (Credit). Investment comprises a very large portion of a Bank’s total activities. As such, due diligence and prudential judgment/decision is a precondition for a sound investment practice and therefore, is very important for profitability and success of a Bank.

Market Risk:

Expert opinion to choosing core business area, finding out new business sector, arranging low cost fund to invest at lower rate, steps to avoid under and unfair competition with the commercial banks etc. are effective measure to reduce the market risk.

Liquidity Risk:

Liquidity risk is more important area to think by the banking company to match with the financial and investment (lending). Long term and stable financing is required for long-term investment. Beside, inflow of cash through collection of dues against investment in time as also essential. Effective monitoring and follow-up is the important tools to ensure the required collection.

Investment Risk:

The management of specific investment risk is developed according to individual business units. The investment risk management function ensure that appropriate policies are established and ensures compliance with the related sanction monitoring procedures and control at the business unit level. Investment exposures are aggregated from individual business unit and are on a regular basis. Investment involved risk may be summarized as under.

Difficulty in choosing core business.

Failure in business of the customer.

Encompassing a blend of banking and non-banking service.

Investment either too liquid or of questionable quality.

Competition from other commercial banks.

Security control risk.

Portfolio monitoring is carried out by asset quality, background of the customer, soundness and viability of his business and cash flow etc. sector of the economy and country, cost of long-term financing to match with the return on long-term investment.

SJIBL has established control mechanisms to identify, measure and monitoring the exposure to investment, market and liquidity risk, in this context, to have a brief idea on the quality of assets of the bank a calculation is given here under.

Number and Short Name of grades used in the CRG:

The CRG scale consists of 8 categories with short names and numbers provided as follow

3.4 Table: The CRG Scale

Assumptions:

This grading system is applicable for only corporate clients i.e. for any business investment. No personal investment, scheme investment, micro investment, consumer investment will come under the purview of this grading system.

Calculation should be made on the basis of annual or half yearly accounts. Preference will be given to the audited balance sheet. In case of non-availability of the audited balance sheet, un-audited balance sheet may, however, be used.  In case, the client does not prepare any financial statements, then the information required for preparing investment score, May be collected from the clients books of accounts or from the discussion with the client. Because every client irrespective of maintenance of accounts, knows well about his total tangible assets, total debt, total sale, total operating profit, current assets, current liability and some others. Therefore, the grading can be easily prepared for those clients who even do not prepare financial statement. The gearing ratio is based on the borrower’s total debt to tangible net worth. Liquidity ratio is based on the borrower’s current assets to current liability.

The profitability ratio is based on the borrower’s operating profit to sales. Operating profit is that profit which is derived after deducting operating expenses from the gross profit. While considering business outlook, factors related to industry, market share, and economic scenario will have to be taken into consideration. The quality of Management is based on the aggregate number of years that the senior management team i.e. top five executives.

3.19 Objective of Investment Skill Assessment:

Introduction to Accrual Accounting

Describe the information provided by the balance sheet and profit and loss account

Identify the connecting links between the two statements

Prepare and manipulate simply financial statements that reflect the business activity of a small company

Apply the correct criteria to determine the point at which sales and expenses should be recognized on the profit and loss account

Using financial statement information, calculate purchases of stock and fixed assets.        

3.20 Industry risk analysis:

Management should be addressing:

Cost structure

Maturity

Cyclicality

Profitability

Dependence

Vulnerability

Regulatory environment (like Bangladesh Bank guidelines, Judiciary, Tax authority    guidelines e.g. work hazard, child labor etc.)

3.21 Business Risk Analysis:

Determine whether the business’s strategy increase or decrease the risk faced by all businesses in its industry

State what additional risk are inherent in the company’s strategy and practices on its financial statement-state how you would expect those statement to look 

3.21.1 Identifying Borrowing Causes:

Use financial statement to diagnose probable borrowing needs.

Determine, based on the probably borrowing causes, whether investment should be short or long-term, and identify the probable repayment sources.

3.21.2 Financial Reporting and Full Disclosure:

Describe the influencing of accounting organization government agencies on the presentation of financial information.

Describe the scope of an accountant’s roll in compiling, reviewing, and auditing financial statement

Recognize the different assurances of accuracy and fairness given in auditor’s reports, and the extent of the accountant’s legal liability

Recognize the importance of full disclosure.

Use notes to accounts to find valuable information on a company’s financial position

3.21.3 Investment Structure and Documentation:

Identify the most appropriate investment facility

Determine the timing for disbursing fund and establish a repayment schedule

Determine whether support is needed, such as security or guarantees, and if so, the appropriate type

Recognize how the risk characteristics of a investment should be reflected

3.21.4 Investment Management:

Management investments effectively by focusing on risk and opportunities in the underwriting process and supported by investment documentation

Preserve investment quality by recognizing and responding to early warning signals

Recognize how to evaluate and choose the best option of resolving a weak investment and exploiting a good investment

2.22 Ratio Analysis:

Financial ratio analysis is a enthralling topic to study because it can train us so much about accounts and finance. When we use ratio analysis we can work out how profitable a business is. We can tell if it has sufficient money to pay its bills and we can even tell whether its shareholders might be happy! Ratio analysis can also help us to ensure whether a business is doing better this year than it was previous year; and it can tell us if our business is doing better or not as good as than other businesses doing and selling the same things. We can use ratio analysis to try to tell us whether the business is profitable, has enough money to pay its bills, could be paying its employee’s higher wages, is paying its share of tax, is using its assets efficiently and is a candidate for being bought by another company or investor.

2.23 Different Types of Ratio Analysis:

2.23.1 Profitability Analysis: 

Profitability is apprehensive with how effectively an organization has used its obtainable resources. Profitability ratios are normally obtainable as a percentage and in general, the higher the profitability percentage, the better is the organization’s performance and management as shown by the return generated on sales and investment. Following the formula of profitability ratios:

Shahjalal Islami Bank’s performance

3.23.2 Measuring Efficiency:

The efficiency ratio is defined as operating expenses divided by fee income plus tax equivalent net interest income. Not everyone calculates the ratio in the same way. However the focus on the efficiency ratio in the banking industry is not surprising given that the industry is mature with modest growth prospects for traditional financial intermediation activities.

Efficiency ind icators measure how effectively certain assets and liabilities are being used. Not all banks calculate the efficiency ratio the same way. Efficiency of different category of

the bank has been examined by using the following ratios:

Shahjalal Islami Bank’s performance

3.6 Table: Measuring Efficiency of SJIBL

3.23.3 Risk Ratio:

a) Advance -Deposit Ratio (AD Ratio):

Advance deposit ratio, typically calculated as the ratio of investment (loans) & advances against deposits, is the most common way to see a bank’s liquidity position. In an ideal scenario, investment (loan) deposit ratio should not exceed 82% (as 18% is required for statutory requirements). However, a bank may decide to lend out its capital or raise funds from the interbank with a view that market interest rates would be low. But excessive lending (a high AD Ratio) may expose a bank in serious liquidity and profit rate risk as the market liquidity may tighten any time

AD Ratio =Total Advance/Total Deposits

b) Provision for Loss Ratio

Each bank provides an estimate of future investment (loan) losses as an expense on its income statement.

This expense may be related to the volume of investment (loans) as:

Provision for Loss Ratio (%) =     (Provision for investment (Loan) Losses / Total investment (Loan) sand Leases) ×100

c) Investment (Loan) Ratio:

The investment (loan) ratio indicates the extent to which assets are devoted to investment (loans) as opposed to other assets, including cash, securities and plant & equipment. The ratio is:

      Investment (Loan) Ratio =   ( Net investment (Loans) / Total Assets) × 100

d) Percentage of Classified investment (Loans) to Total investments (Loans) & Advances

To determine the percentage of classified investments (loans) against total investments (loans) & advances the following

ratio is used:

% of classified investment (loan) to

Total investments (Loans) & Advances = Classified investment (Loans)/Total investment (Loans) & Advances

Explanation: As mentioned earlier, investment (loan) deposit ratio should not exceed 82% (as 18% is required for statutory requirements), while excessive lending (a high AD Ratio) may also expose a bank to serious liquidity & profit (interest) rate risk as market liquidity may tighten any time.

SJIBL AD ratio has been satisfactory over the period except in 2004 when the bank vastly expanded it’s investment (credit) portfolio covering all major sectors of the economy to implement the policy guidelines of the new management. Provision for loss ratio, though having a decreasing trend, is also within permissible extent Increase in the investment (Loan) ratio over the period indicates a healthy growth encompassing different sectors of the economy as mentioned earlier.

Finally, better than the peer average and far below the industry standard of 05%, the percentage of SJIBL non-performing investment (loans) (NPL) having a decreasing trend onward 2004 indicates prudent management of its investment (credit) portfolio.

1. Case Study of Mr.Gour Harei Saha about his Lending Procedure Step by Step.

Information on the Client

Background of the Client:

Mr.Gour Hari Saha is the son of Hara Lal Saha and late Shymoli Saha of House# B-6, Flat-904, Manoshi Lakeview complex, Shine pukur holding Ltd. Mirpur-01, Dhaka-1216. He been serving at Nitol Insurance Company Ltd, since june, 2008 & working as Additional Managing Director. His major responsibility is with top management for policy making, Visiting Branches offices, working for company’s business development, corresponding with branches, monitoring the branches & branch performance and other related work. He worked about 07 years in Standard Charted Bank (SCB) & 13 years in National Bank Ltd. (NBL) in various responsible capacities. After the successful completion of 20 years with SCB & NBL he joined renowned insurance Company named Federal Insurance Company Ltd. as Assistant Vice President & General Manager, then worked about 01 year at Rupali Insurance Company Ltd. as Assistant General Manager, Dhaka Insurance Company Ltd. as Senior Deputy General Manager & Branch In charge for 01 year, in republic Insurance Company Ltd. as Deputy Managing Director for 03 years. He is graduate from ChittagongUniversity, Chittagong. Mr. Gour Hari saha is well known to us with his honesty and integrity. His gross income is Tk. 1, 74,000/- per month. His salary is sufficient enough to pay the installment.

Particular of the Apartment:

Mr.Gour Hari Saha Annul income is as follows: (As per information given by the client) the main source of income of Mr.Gour Hari Saha is his service & house rent.

Income – Expenditure Statement (Monthly):

So, the total monthly income is Tk. 174000/- So his monthly income is Tk. 174000/-, beside expected rental income from the proposed apartment will be Tk. 20,000/- per month or Tk. 240000/- per year.

Sequence of Approval: New client.

Purpose of the facility:

CIB: CIB inquiry from has been forwarded to Head Office vide latter dated 09.07.2008 for up to date CIB report. Liability of the client and its allied concerns with other Bank’s/Financial Institutions)

Structuring and Term & Condition:

Description of Apartment:

Forced Sale Value of Property-1= Tk. 71.00 Lac (as per purchase price).

Declaration of the Branch:

The Branch hereby declare that:

1) The proposal/memo made as per guideline as per guideline of investment (Credit) Risk Management policy of the Bank.

2) All circular, guidelines and policy of Head Office, Bangladesh Bank and other regulator have been complied in related to the said proposal.

3) Due diligence have been done while processing the memo.

4) All information, date given in the memo are correct.

5) The proposal forwarded after compliance of Banking Company Act & Islamic Shariah.

6) All terms & condition have been complied as per sanction advice including obtaining of charge document and execution Registered Mortgage of the property. (In case of Renewal with enhancement proposal)

7) The building so far constructed as per approved plan of RAJUK/ CHUK / competent authority and the remaining portion shall also be constructed as per approved plan.

Recommendation of the Branch:

Mr.Gour Hari Saha is an experienced service holder. So he is solvent enough to adjust the monthly installment. So, we thing he is eligible for getting this investment facility

2. Case study of Mr. Md. Obaidur Rahman about Some Rules and Regulation of SJIBL.

Information on the Client

Background of the Client:

Mr. Md. Obaidur Rahman is the son of Mr. Imtez Ahmmed and Nurun Nahar of House# 180, Hjazaribag, Gegatola, Dhaka-1209. His factory is situated on Rupganz, Naraenanz, House#77, Flat#04, Road-11/a/A. his factory is one kind of international structure.

Structuring and Term & Condition:

Collateral & Control of the investment:

Murabaha L/C application & agreement from duly signed and filled in. b. Cash

Margin at the rate of 10% on L/C value.

Shipping (import) documents.

A post dated master cheque, covering the L/C Value.

Post dated cheque against each L/C.

The Facilities are given below:

a)      Registered mortgage along with registered irrevocable power of Attorney authorizing the bank to deposit of the following property, without intervention of the count:

7.84 katha of land located at Dist: Dhaka, PS: Mohammadpur, Mouza, Ramchandrapur, khation: CS-702, SA-441/8, Dag: CS & SA-219. Owners of the land are 1) Mr. Md. Obaidur Rahman & 3) Mr. Mahbubur Rahman & Ms. Shamsunnahar Rahman.

b)    Personal Guarantee of proprietor of the firm.

c)    Personal Guarantee of the owner(s) of the property.

d)    Personal Guarantee of the property of the firm, his spouse and adult son(s) and      daughter(s), of the property.

The document to be Executed:

The terms and condition of this investment:

i.            The Disbursement will be made under the principal of Shariah.

ii.            The disbursement will be made only after full satisfaction of the bank and completion of documentation and all other formalities as per terms of sanction.

iii.            Drawings exceeding the approved limit not be allowed under any circumstances

.iv.            All precaution and protection to be taken in consultation with the panel lawyer against property belonging to 3^rd parry.

v.            All legal/documentation formalities shall be completed under direct supervision of Bank’s panel lawyer and a satisfaction certificate to be executed by him.

vi.            Balance confirmation certificate must be submitted to us regularly confirming the balance as on 30^th December of each year.

vii.            All legal fees, insurance premium and other costs (if any) shall be borne by the client.

viii.            Client will not divert Bank’s Investment under circumstances.

ix.            An undertaking to be provided by client stating that Client’s do not have any overdue/classified liability with any other banks/ financial institution in clients name or in the name or in the name of client’s sister/allied concerns.

x.            If any deal/ installment become overdue compensation will be charged at the rate decided by the Bank.

xi.            Separate Bai-Muajjal agreement must be signed by client for each disbursement under Bai-muajjal facility.

xii.            Quality, quantity, price and storage of Bai-Muajjal goods shall be ensured by the branch.

xiii.            There must not be any fictitious buying and selling of goods by way of creating a new investment i.e. the goods one sister concern must not be brought by another sister concern of client for purpose of adjustment.

xiv.            Stock report must be submitted on monthly basis and inspection thereof should be conducted by the branch officials at regular intervals.

xv.            Supplier’s credit report to be submitted before opening L/C

xvi.            Duty, VAT, AIT and other port dues shall be borne by client from own sources.

xvii.            An undertaking will be submitted by client stating that client will bear the risks of exchange rate fluctuation, if any

xviii.             Insurance policy/cover note to be submitted from enlisted insurance company of the bank against stock of merchandise & on fixed & floating assets of the company covering necessary risk (facility wise where applicable)

5.1 Major Findings:

Investment (Credit) Management is an integral part of business and the main role of risk management is to find the optimal balance of risk & return, In accordance with Bangladesh Bank’s instruction to put in place a core Investment (Credit) Management system in banks, SJIBL has substantially established the guidelines for Investment (Credit) Management.  Investment (Credit) risk arises from the possible of customer & counter parties failing to meet their obligations to the bank and represents the most significant category of risk. CRM capability of 39 SJIBL is certainly outstanding since the classified loans & advances accounted for only 1.32% of total LDOs in 2007 vis-à-vis previous year’s 1.32%, which indicates SJIBL strong supervision & monitoring of the post-disbursement scenario to ensure recovery of the loans on time for facilitating lending to others.

5.2 The Boston Consulting Group (BCG) Matrix:

Autonomous division (or profit center) of an organization make up what is called a business portfolio. When a firm’s divisions compete in different industries, a separate

strategy often must be developed for each business. The Boston Consulting Group Matrix is designed specifically to enhance a multidivisional firm’s effort to formulated strategies.

The BCG Matrix graphically portrays

Conclusion:

ES Average is -13.0/3 =-4.33              IS Average is + 10.0/3 =3.33

CA Average is -9.0/3 = -3.00              FS Average is + 9.0/4 = 2.25

Direction Vector Coordinates x-axis: -3.00+(3.33) = +0.33

Y-axis: -4.33+(2.25) = -2.08

The Shahjalal Islami Bank Ltd. Should pursues Competitive strategies.

Question Marks:                                

Division in quadrant (I) SJIBL have a low relative market share position, yet they compete in a high growth industry. Generally these firm’s cash needed are high and there cash generating is low. These businesses are called question Marks because SJIBL must decide whether to strengthen them pursuing an intensive strategy (market penetration, market development or product development) or to publish them.

Stars:

Quadrant (II) businesses represent the SJIBL best long-run opportunities for growth and profitability. Division with high relative market share and a high industry growth rate should receive substantial investment to maintain or strengthen their dominant position.

Cash cows:

Divisions positioned in quadrant (III) SJIBL have a high relative market share position but compete in a low-growth industry. Called cash cows because they generate cash in excess of their needs, they are often milked.

Dogs:

Quadrant (IV) division of any organization who have a low relative market share position and compete in a slow-or no-market-growth industry, they are dogs in the firm’s portfolio. SJIBL has high market growth rate and relative market share is also strong so the bank doesn’t come in this sector.                

Investment (Lone) Processing Time:

In this short period of my internship I found that, SJIBL take long time to process an investment. That is very harmful for a client. In some case the client need vary quick money to his/her purpose but the bank delays a disbursement of an investment. So some time it’s losing the goodwill of the bank.

Limitation of publicity:

Today’s world is very much depend on the media, so if the institutions are not think about the advertisement or any kind of activities which is related some kind of advertisement then it will not earn so much popularity. A media can rise or fall an institution within very short time. So if we see to other developed country then we can find that every business institution has a huge budget for the advertisement purpose. SJIBL do not take this expense as an expense; they always take it as a huge investment, because if the people do not know about my organization then how they will do business with us (it dose not matter which type of organization is this), it may be big manufacturing company or a bank. Here I realized for The SJIBL that they do not have any kind of vast advertisement or any kind of social activities, so most of the people do not have any idea about SJIBL.

Lack of information of a client:

Some time clients are hide there information about investment because of some client’s benefit. In that case SJIBL handle vary raffle to that situation. An investment procedure the clients have to provide the full information about related to the investment.        

Powers are limited to the Managers:

The managers and other high officials have no power for decision-making. The branch managers have no power to sanction loans. In every bank there is a certain amount that a branch manager can sanction, but in this bank if anyone wants to take a single Taka for loan then the manager has to for the head office approval. Some times it may be the cause of losing customer, because it will take time to sanction a loan.

Limited Product and Service:

In my short period of internship I fund that SJIBL has no credit card facility. And also there have no ATM booth around the country. But in this competitive market other banks provide lots of Debit Card, Credit Card and ATM booth facilities to the customers.          

6.0 Recommendations:

Quick loan system:

SJIBL is one of the promising banking sectors in Bangladesh. The customers are allows willing to get a loan very quick. It will better if SJIBL setup a quick lone system department. So if the client need emergency loan then he or she get it very superiorly.

Develop the Monitoring Division:

I think SJIBL should develop there investment monitoring department. Because the default rate of investment is very high in the bank. The bank should create some parser to those client whose are vary irregular about investment installment.

Introducing any purpose loan in Special financing:

Some time clients need some loans which are not situated in the bank. If the bank arrange some finance in special purpose than the client’s are benefited for this system. Most of the banks practice that sort of thing. SJIBL must follow this structure.          

Increase Advertisement:

Firstly the bank has to increase their advertisement and also increase their social activities. They have to go with the people’s needs and demands. They have to explore their name to the people that every one can know about Shahjalal Islami Bank Ltd.

Increase Number of Branches all around the country:

In this time there is so much competition between each other that a single step can change the all direction. Today’s people are very much willing to do banking, which one is near to them. So if the number of branches will not increases than it can lose the customer.

Provide Online Facilities:

In this global world online system much more needed in every organization. The bank may implement the modern online banking for meet-up the current modern banking system.

Increase Product and Service:

SJIBL have to increase there product and service such as credit card, ATM booth, sachem, etc. If a bank performs there business very limited product in this competitive market they can’t do business for long run.

Modify To The Manager’s power:

If the authority gives some power to the managers like: for the purpose of loan sanction then it will be good for the bank. Because when a penitential customer will want to take a loan in emergency basics then the manger can sanction to a certain limit. It can earn of that customer’s satisfaction and in future, he or she may be do vast business with the bank.

7.0 Conclusion

The performance of a Banks today competitive business is important. Just few years Ago the number of bank was very small. So the competition was not a strong as it is today. Things have changed with the emergence of many new banks now the Customers have option to take the one that the best so the current banking business scenario is simply highly competitive. The performance of Shahjalal Islami Bank Limited during the Last five years has proved that with strong desire and will power one achieve whatever target he may have. Almost all the leading banks in our country have various Extra facilities in offer for the customers in comparison with other Banks but SJIBL has succeed in achieving more customer than other competitors. This has been possible only because of strong customer relation and excellent customer service.

After taking effective and time defeating measures regarding efficient employees and instruments will help the local office of Shahjalal Islami Bank Limited to reach the pinnacle of success with high profit and productivity. A new bank they should be stronger in financial side because there is too much competition and new banks are growing up. If Shahjalal Bank adopts professionalism within the framework of Shariah, they will be able to earn handsome “Halal” profit and pay higher return to the depositors and share holders. Ultimately, public will get more confidence on this type of banking.