General Banking Activities and Financial Performance on Social Islami Bank Limited (Part 2)

FOREIGN EXCHANGE BANKING AREA

Foreign trade constitutes a sizable portion of international transactions of a country. Payment received for exports and made for imports form a substantial part of its remittances from and to other countries. In our country a major share of the current balance of payments is made up of exports and imports of merchandise on private and government account. Thus, trade is the most important factor giving rise to payments between countries. Foreign trade is a type of specialization, which like other forms of specialization increases productive efficiency and standard of living of the people of the country concerned.

Foreign trades are mainly of two types. These two are: Import Trade & Export Trade. The import and export trade of Bangladeshis is controlled under the Import and Export Control Act, 1950. In normal sense the imports involve outward remittances and the export involves inward remittances. The terms and conditions of contracts between the importers and the exporters and the eventual remittances in foreign countries are subject to such restrictions and formalities as are laid down from time to time by the Import and Export Control and Exchange control in their respective jurisdiction which the importers and exporters must comply with.

Import of goods into Bangladesh is regulated by the ministry of commerce in terms of the import and export control act 1950, with import policy orders and public notice issued from time to time by CCI and E. it also follows the guidance of foreign exchange circular of Bangladesh bank. Controls the financial aspects, such as payments imports, rates of exchange, methods of remittances against imports, under the provision of F.E.R. act 1947.

All AD branches shall have to comply the instructions of head office and principle of Islamic shariah for importation of goods into Bangladesh.

Sources of finance and items permissible for import against:

1. Cash foreign exchange
2. Foreign aids/grants/barter and under

Import may be defined as bringing of visible item to the country from abroad through letter of credit or the authorization from paying foreign currency to that exporting country.

1. Classification of importers:

1. a.      Personal importers (User): they need no registration form CCI & E. For import up to USD 5000/= needs no permission. For above USD 5000/= permission has to be taken form CCI & E.
2. b.      Commercial importer: those who import the goods to sell out the same to the market for earning profit is called commercial importer.
3. c.       Industrial importer: those who import the goods for their industrial consumption is called industrial importer.

 2. Registration of importer:

In terms of the importers, exporters and indenter (registration order 1981) no person can import goods Bangladesh unless registered with the CCI & E or exempted from the provision of the said order. Personal user needs no registration. They may import beyond USD 5000/= with the permission from CCI & E.

Persons exempted from registration:

1. Government departments.
2. Local authorities an statutory bodies.
3. Recognized educational institutions.
4. Hospitals.
5. Imports of goods, which does not involve remittance of foreign exchange.
6. Reading materials or medicine imported for personal use within permissible limit given in the policy in force.
7. Capital machineries and spare parts for new industry.

The interested persons/institutions submit application to the CCI & E along with the following papers for registration as importer.

1. Nationality certificate.
2. Certificates from the chamber of commerce and industry/registered trade association
3. Bank solvency certificate
4. Any order documents required by CCI & E

3. Import formalities and procedures:

Letter of credit: credit means any arrangement, however named or described, that is irrevocable and thereby constitutes and undertaking of the issuing bank to honor a complying presentation.

Import may be done without letter of credit (L/C) against LCAF up to a certain amount, fixed by the CCI & E from time to time. But in general import must be done through L/C to be issued by an AD bank.

1. The AD branches should open L/C only on behalf of their own customers who maintain A/Cs with them and are known to be participating in trade.
2. It is not permissible to open L/C for imports in favour of a beneficiary in countries form where imports are banned.
3. L/Cs covering imports against valid LCA form are required to be opened within the period prescribed by the CCI & E in the import policy order or through public notice issued from time to time.
4. Under the existing instructions issued by board of investment(BOI), L/Cs for import of merchandise by the investors are required to be opened within six months formthe date of receipt of permission letter issued by the director general, BOI (industries), govt. of Bangladesh.

4. Letter of credit and its classification:

A letter of credit is a conditional undertaking of payment by the issuing bank to the beneficiary. In consideration of source of payment there are mainly two types of L/C, Sight L/C and deferred L/C. if a third bank adds their undertaking for payment in addition to the undertaking of issuing bank then the L/C is called add confirmed L/C.

Types of L/Cs are:

1. Irrevocable
2. Revocable
3. Confirmed
4. Transferable
5. Back to back

5. Concern party’s to an L/C

i)                    Importer/applicant/buyer

ii)                  Exporter/beneficiary/supplier

iii)                Issuing bank/opening bank

iv)                Advising bank/notifying bank

v)                  Negotiating bank

vi)                Reimbursement bank

vii)              Confirming bank

6. Application for Import:

a) A valid importer will submit the following paper/documents to his bank for opening L/C.

                    i.            L/C application form duly signed by the importer; with adhesive stamp for tk. 150/-

                  ii.            Indent / proforma invoice

                iii.            Insurance cover note with money receipt

                iv.            LCAF duly filled in & signed by the importer

                  v.            Membership certificate form chamber of commerce / trade association

                vi.            TIN certificate and up to date tax payment declaration

              vii.            Charge documents, including Musharaka/ Murabaha agreement

            viii.            IMP

                ix.            IRC

                  x.            VAT certificate

                xi.            Trade license

              xii.            Memorandum & articles of association

            xiii.            Partnership deed

            xiv.            Resolution of the board

              xv.            Photograpn

            xvi.            Others, if any

b) The following issues are to be checked carefully:

                    i.            Checking of L/C application an verification of the signature of the importer.

                  ii.            Checking of IMP form and verification of signature of the importer.

                iii.            Checking of the renewal of IRC and its permissible limit.

                iv.            Goods must be importable an permissible by the import policy against Pro forma invoice/indent.

                  v.            Pro forma invoice/indent must be accepted by the importer

                vi.            In case of indent, Bangladesh Bank permission for indenting should be obtained.

              vii.            Proper H.S. code No. should be incorporated in LCAF.

            viii.            Insurance policy should cover all the required clauses and premium paid certificate/money receipt should be along with the policy.

                ix.            Business experience of the importer should be counted.

                  x.            Price and market demand of the goods must be verified.

                xi.            Credit report of the supplier should be obtained prior to opening L/C for indent tk. 5 lac & above and proforma invoice tk. 2 lac and above.

c) Authentication/Registration of LCAF:

When the importer submits LCAF (Letter of Credit Authorization Form) with other papers to the bank to open L/C, bank will authenticate the LCAF, confirming the following:

                    i.            IRC is valid, renewal fee paid (if required)

                  ii.            Item to be imported is eligible as per import policy/Pass book.

                iii.            LCAF is duly filled in & signed by the importer

                iv.            H.S> code to be inserted into LCAF

The LCA forms are required to be properly filled in and duly signed by the importer in presence of concerned official of the branch. The branch is required to keep proper records of the stocks and issuance of each set of LCA form.

LCAFs remain valid for remittance for 09 (nine) months in case of commercial items and 17 months in case of capita machineries & spares.

d) Distribution of LCAF:

e) Sanctioning for opening L/C:

Upon receipt of the application dealing officer will issue office note stating the following:

a)      Whether the client has valid head office sanctioned limit

b)      Whether the proposal is within the limit or within the power of branch incumbent

c)      The item to be imported is permissible

d)     Whether credit report of the supplier obtained if the value of the credit exceeds tk. 200000/- against proforma invoices issued directly by foreign suppliers and tk. 500000/- against indents issued by the local agents of the suppliers.

e)      Market report of the goods to be obtained

f)       Permission from Ministry of Commerce in case of CIF value.

g)      Competitive price of goods to be taken.

h)      The indent bears the IRC number & registration number of indenter.

i)        The indent bears the signature of agent & importer.

If the bank satisfies then it will issue a letter of credit on behalf of the importer, to the beneficiary, through an Agent/Correspondent bank in supplier’s country.

L/C may be sent by airmail duly signed by authorized officials or by telex authenticated by test number or SWIFT.

The following necessary clauses should be incorporated in the L/C at the time of issuance of L/C:

                    i.            Name and address of the applicant and beneficiary.

                  ii.            TIN of applicant

                iii.            Tenor (sight/deferred)

                iv.            Shipment date

                  v.            Validity of the L/C with place of expiry (presentation/negotiation period)

                vi.            Negotiation( restricted/freely)

              vii.            Amount of L/C in word and figure

            viii.            Reimbursement/payment clause

                ix.            Description of goods with quantity and unit price must be quoted in the L/C

                  x.            Bill of lading / AWB/TR must be consigned to the order of L/C issuing bank.

                xi.            Insurance clause

              xii.            PSI clause should be incorporated in the L/C for taxable items and as per import policy/SRO.

            xiii.            Requirement of the invoice, packing list, CO and other necessary papers/documents/certificate as per import policy/customers requirements should be incorporated in the L/C.

            xiv.            Charges on account of beneficiary/applicant should be mentioned

              xv.            Without/with confirmation of AD confirming bank.

            xvi.            The L/C should be advised/transmitted through the correspondent bank of the L/C issuing bank or to beneficiary’s bank subject to UCPDC-600 ICC publication-2007

f) Issuing bank will pass the folloing voucher at the time of opening cash L/C:

a)      Passing of contra liability voucher:

Dr. Customers liability for L/C (cash) (foreign/local)                   Tk.

Cr. Bankers liability for L/C (cash) (foreign/local)                                   Tk.

b)      Realization of margin and charge:

Dr. Party’s A/C                                                                             Tk.

Cr. Sundry deposit A/C –margin on L/C (Cash)                          Tk.

Cr. Income A/C –commission on L/C (Cash)                               Tk.

Cr. Income A/C –SWIFT/Telex/Currier service etc.                     Tk.

Cr. Others, stamp if any                                                                Tk.

g) Receiving, security, lodgment and retirement of import document:

The AD branch will carefully look into the following main points of each of the documents keeping in view the terms of L/C and it is observed that following are the common discrepancies of the documents:

General

                    i.            Late shipment effected

                  ii.            Late presentation of documents

                iii.            Shipment made prior to issuance of L/C or time stipulated in the L/C

                iv.            L/C expired

                  v.            L/C over drawn

                vi.            Partial or transshipment effected in the contrary to the L/C terms.

Bill of exchange:

                    i.            Not properly drawn and signed by gthe beneficiary as per L/C term

                  ii.            Amount of bill of exchange differs with that of invoice

                iii.            The amount drawn does exceed the amount available under the credit

                iv.            Not drawn on L/C issuing bank

                  v.            Tenor of bill of exchange not identical with L/C.

Invoice:

                    i.            Not issued by the beneficiary

                  ii.            Not signed by the beneficiary

                iii.            Not made out in the  name of the applicant

                iv.            Description of goods, price, and quantity not correspond with the L/C.

                  v.            Required number of invoice is  not submitted.

                vi.            The relevant LCA form number, IRC number of importer along with the registration number of indenter with Bangladesh bank, are correctly incorporated in the invoice.

Packing list:

                    i.            Gross wet, net wet, and measurement, number of cartons/packaged differ with those of B/L.

                  ii.            Not marked “Original”

Bill of lading/AWB:

                    i.            Full set of B/L not submitted

                  ii.            B/L not drawn or endorsed to the order of issuing bank/negotiating bank.

                iii.            “Shipped on Board”, freight prepaid, etc notifications are not marked.

                iv.            Name and address of the notify party not mentioned.

                  v.            B/L does not indicate the name of carrier or master or on whose behalf the agent is signing the B/L.

                vi.            Short form, charter party B/L.

              vii.            Description of goods in B/L does not agree with that of invoice

            viii.            Loaded on deck

                ix.            The bill of lading is stale.

Other documents:

                    i.            Weight list

                  ii.            Certificate of origin

                iii.            Pre shipment inspection certificate

                iv.            Certificate to the effect that shipment/ Transshipment has not been made on the port of a country expressly prohibited in the L/C.

There is an unfavorable trade balance in our economy due to higher import and lower export. To overcome the situation government has taken various steps to promote the export. In handling export business we must follow the export trade control regulation and export policy issued by Ministry of commerce form time to time.

Uniform customs and practice for documentary credit (UCPDC) issued by international chamber of commerce is another guideline for import.

All AD branches shall have to comply the institutions of head office and principle of Islamic Shariah for importation of goods into Bangladesh.

As a banker we may define export as sending of visible and invisible things outside the country for sale through letter of credit or against firm contract in exchange of foreign exchange.

Export Policy 1997-2011

 Target

1. To attain highest national growth by increasing export to regional and international markets;

2. To reduce gradually the gap between export and import expenditure;

3. To produce export commodity at a competitive price aimed at market retention and promotion;

4. To avail the opportunity to enter in liberalized and globalize ‘Post-Uruguay Round International Market’;

5. To make goods exportable and more suitable for foreign markets by diversification and quality improvement;

6. To establish backward linkage industry and services and identify higher value added goods;

7. To develop infrastructure for exports;

8. To create skilled manpower in export sector;

9. To upgrade the quality and grading of commodity to an internationally recognized level.

10. Providing adequate guidance to trade bodies, business organizations, business people and related individuals in understanding the changing international trading system, etc.

The normal export mechanism is much like the procedure maintained in a typical import mechanism. Whereas in case of import the party is the importer and the bank acts as the opener of his credit, in case of export the party is the exporter and the bank acts as the negotiator of his documents. In our country the most promising exporters are the garments industries. About 76% of the total exports of our country are made by the garments sector. The underlying reason of success of this sector in exports is the availability of the huge amount of cheap labor. But because of inadequate supply of locally produced quality fabrics and accessories, we have to import about 60% of the fabrics and accessories from abroad for use in the garments industry. This is actually a time consuming and costly process for the garments sector. So considering the significant contribution of the garments sector in the export trade the private commercial banks have undertaken an especial arrangement to provide them with export finance, which is called the foreign Back to Back Letter of credit (BTB).

 1. Types of export:

Export must be done as under:

1. Export against L/C or firm contract
2. Export against advance payment
3. Export under consignment basis

2. The exporter must obtain export registration certificate (ERC) form the CCI & E. except the following institution:

        i.            Government departments

      ii.            Recognized educational institutions

    iii.            Hospitals

    iv.            Statutory bodies or local authorities

3. General formalities of export:

        i.            No person can export any goods from Bangladesh unless he is duly registered as an exporter with the CCI &E.

      ii.            Al export must be declared on the EXP form, which consists of 4 copies, except in the following cases such as:

a)      Bona fide trade samples up to the value prescribed in the export policy in force

b)      Personal effects, whether accompanied of travelers.

c)      Gift packets valued less than tk.50/-

a. Advising of Export L/C

The bank may issue a credit through SWIFT or by airmail.

Upon receipt of an Export L/C the banker should advise the same to the beneficiary or beneficiary’s bank on satisfaction of the apparent authenticity of the export L/C.

An exporter receive an Export L/C form any bank and submit the same to the Negotiation bank upon receipt of an Export L/C from the exporter the Bankers should check the following before permission of execution of export order or to open Bangladesh Bank L/C.

              i.            Status of issuing Bank of the Export L/C.

            ii.            L/C must be subject to UCPDC-600, ICC Publication-2007.

          iii.            Whether the L/C is advised, authenticated properly.

          iv.            Tenor( Sight/deferred), shipment date, Negotiation (restricted/freely), presentation period and validity of the Export L/C with place of expiry.

            v.            Reimbursement/Payment clause.

          vi.            Amount of L/C in word and figure.

        vii.            Description of goods with quantity and unit price  must be quoted n the L/C.

      viii.            Bill of lading must be consigned to the order of Negotiating Bank in Bangladesh and AWB consigned to the L/C issuing Bank.

          ix.            Insurance clause must be in L/C

            x.            Inco term.

          xi.            Foreign commission, if any within 5%

        xii.            Export L/C should have validity period adequate to cover the time needed for importation of raw material.

      xiii.            Bangladesh Bank (BB) L/C not exceed the admissible percentage of net FOB value of the relative Export L/C (net FOB=Total L/C value-freight charge-insurance cost-foreign Commission)

      xiv.            BB L/C shall be opened on up to 180 days deferred basis and interest shall not exceed LIBOR or equivalent to the rate of the currency of the country.

        xv.            No BBL/C will be opened under Proceeds Realization Clause without prior approval from Bangladesh Bank.

      xvi.            No BBL/C will be opened against Export L/C received under Barter/STA without prior approval from Bangladesh Bank.

    xvii.            Other clause and condition of the L/C whether can be complied or not as per rule of the state of the country.

If the bank satisfied then it will issue a letter of credit on behalf of the importer to the beneficiary, through an Agent/Correspondent Bank in supplier’s country.

L/C may be sent by Airmail duly signed by Authorized officials or by Telex authenticated by test number or SWIFT.

b. Issuance of Export

Full particulars of the export form should be entered in the Export Register.

Bank will certify export form only ager confirming:

        i.            Arrangements made for realization of Export proceeds.

      ii.            Bona fides of the importer/consignees abroad.

    iii.            Arrangements have been made for receipt by authorized dealers of documents of title to goods.

    iv.            The export has been signed by the exporter.

c. Distribution of Export form:

Original: Form custom Authority to Bangladesh Bank (FEPD) ager shipment of the goods.

Duplicate: from negotiating Bank to Bangladesh Bank ager negotiation along with one copy of invoice within 14 days from the date of shipment.

Triplicate: From Negotiation Bank to Bangladesh Bank after realization of the proceeds of the export bill.

Quadruplicate: retained by the negotiating Bank as an Office copy.

d. Negotiation/Collection of Documents:

After shipment of the goods the exporter shall submit export documents to Authorized Dealer for negotiation of the same or to send the same on collection basis.

There is a time gap between export of the goods and realization of the proceeds. So exporter may require finance in that period to continue his business. Confirming the following, bank may purchase/negotiate the export documents.

1. Export documents comply the credit terms
2. Buyer is bonafide.
3. Party’s past performance is satisfactory.
4. Any other security in case of export under contract

e. Security of Export Document:

The AD branch will carefully look into the following main points of each of the documents keeping in view the terms of L/C and it is observed that the following are the common discrepancies of the documents:

General:

        i.            Late shipment effected.

      ii.            Late presentation of documents.

    iii.            Shipment made prior to issuance of L/C or time stipulated in the L/C.

    iv.            L/C expired.

      v.            L/C over drawn.

    vi.            Partial or transshipment effected in the contrary to the L/C term.

Bill of Exchange:

        i.            Not properly drawn and signed by the beneficiary as per L/C term.

      ii.            Amount of bill of exchange differs with that of invoice.

    iii.            The amount drawn does exceed the amount available under the credit

    iv.            Not drawn on L/C issuing bank

      v.            Tenor of bill of exchange not identical with L/C

Invoice:

        i.            Not issued by the beneficiary

      ii.            Not signed by the beneficiary

    iii.            Not made out in the name of the applicant.

    iv.            Description of goods, price, and quantity not correspond with the L/C.

      v.            Required number of invoice is not submitted

    vi.            The relevant LCA form number, IRC number of importer along with the registration number of indenter with Bangladesh Bank, are correctly incorporated in the invoice.

 They are playing important role in the Foreign Remittance sector also. They have correspondent relationship with almost all major 122 Banks of 109 countries of the world like Standard Chartered Bank, American Express Bank Limited, HSBC, HBZ Finance, Mashreq Bank PSC, Dresdner Bank AG and with local banks in Pakistan, India, Nepal and Bhutan etc with whom they have advising, reimbursing and add confirming arrangement.

Visitors of our website can download our Foreign Currency Current Account (FCCA) Opening Form from the Download Section and also can take a print of the Form in Legal Size Paper.

According to Foreign Exchange Regulation Act 1947, the commercial banks or the authorized dealer who has the Bangladesh Bank authorization can do Foreign Exchange. According to this Act, TC (Traveler Cheque), Drafts are included in Foreign Exchange. SIBL, Foreign Exchange Branch provides its customer with the foreign remittance facilities by issuing Foreign Demand Drafts, Traveler Cheque, Endorsing passport for cash etc.

Traveler’s Cheque

 It is the safest way to carry money from one country to another. It can be change in any country of the world. Even if the Traveler Cheque (TC) is lost then the holder of the T.C can inform it to the bank and the bank will inform it to the agencies so that no one can en-cash the T.C while issuing a Traveler Cheque (T.C) a signature is needed, so that no one can en-cash it except the holder and also another signature is needed in encashment in front of the banker. So Traveler Cheque (T.C) is the safest way to carry outside the home country. A customer is permitted to endorse maximum US$ 3000 per year for travel in countries other than SAARC countries and US$ 1000 for travel in SAARC countries. If SAARC countries are to be visited by road then maximum US$ 500 can be endorsed per passport per year. At a time cash cannot be endorsed over US$ 500.

Issue of Travelers Cheque

There are some requirements, which are to be fulfilled by the TC publisher:

1 .Passport holder himself to be present to issue TC purchasing.

2. The passport has to be a valid one.

3 .Air ticket has to be confirmed.

4. Steps involved in issue of TC:

5. After verifying all these documents, the customer as asked to fill up prescribed application form.

6. In the application the customer states the amount he is willing to endorse and it is to be verified that his required amount is within the stipulated amount.

7. Then the customer pays cash or by debiting hid account the Travelers Cheque is issued.

8. Endorsement is given on the passport and on the ticket. Customer fills up the Travel and miscellaneous form.

9. Purchase application form is prepared and handed over to the purchaser along with the Traveler Cheque.

10. Entry is given in three registers: Foreign Currency Issue Register, Travelers Cheque “On Hand” Register and Foreign Currency “In Hand” Register.

 Payment of Travelers Cheque

 When a customer wants to encase his TC, he has to show his passport and it is to be verified from the passport that he has traveled outside the country. Then –

1. The TC will have to be scrutinized very strictly;

2. If everything in the TC is in order then the customer will be asked to give signature on the place of “Counter Signature”;

3. If the signature agrees with the one in place of “the signature of the holder” then the payment will be made through giving cash to the customer or crediting his A/c;

4. Travelers Cheque will be crossed and endorsement given on the back of the received TC.

Endorsement of Cash

Cash Foreign Currency can also be remitted through endorsement in the passport. In case of endorsing cash on passport, the requirements are same as in case of traveler’s cheque. But the only exception is that the passport holder is not required to be present by himself.

 Foreign Currency Account

The accounts maintained in foreign currencies are known as foreign currency account. The Authorized Dealers may open foreign currency accounts in the names of followings without prior approval from Bangladesh Bank.

a) Bangladesh nationals residing abroad.

b) Foreign nationals residing in Bangladesh and also the foreign firms registered abroad and operating in Bangladesh or abroad.

c) Foreign Missions and their expatriate employees.

Branches are mainly deals with two types of foreign currency accounts, namely:

a)Non-Resident Foreign Currency Deposit Account (NFCD).

b)Resident Foreign Currency Deposit Account (RFCD).

Non-Resident Foreign Currency Deposit Account (NFCD)

All nonresident Bangladesh nationals and persons of Bangladesh origin including those having dual nationality and ordinarily residing abroad, may maintain interest bearing time deposit accounts named “Not-Resident Foreign Currency deposit (NFCD)”Accounts with the Ads.

Eligible persons

a. Bangladesh nationals working and earning abroad.

b. Bangladesh nationals serving with Embassies /High Commission of Bangladesh in foreign countries including officers /Staff of Govt. / Semi Govt. Autonomous/nationalized sector posted/ deputed abroad.

c. Shore staff posted abroad (Crew of BSC not entitled).

d. Foreign nationals and companies registered and /or incorporated abroad, institutional investors and 100% (Hundred Percent) Foreign owned industrial unit of EPZ(Minimum Amount USD 25000/- or equivalent).

Resident Foreign Currency Deposit (RFCD)

Ordinary resident of Bangladesh may open and maintain Resident Foreign Currency Deposit (RFCD) accounts with foreign exchange brought-in at the time of their return from travel abroad. Any amount brought in with declaration to Custom Authorities inform FMJ and up to US$ 5000/- brought in without any declaration can be credited to such accounts.

Deposit

The depositors must submit a declaration mentioning the date of return from abroad and the amount of Foreign exchange brought in at the time of crediting to RFCD account to the effect that Foreign exchange (i) is not a receipt against export of goods or services from Bangladesh (ii) is not a commission due from abroad arising from business in Bangladesh.

 One of the core functions of commercial banks is to create the claim against individual borrower or real the purpose of sanctioning credit. Bank grants loan in the form of different securities. By the primary security, we mean the financial claim of holder against the real sector of economy. In banking the sector, the financial claim of bank against issuer, (called investors, borrowers and deficit units). This core function of a bank is performed by the investment department of the bank. In this case, the relationship of bank and customer is that of the creditor and debtor.

                   I.            Bai-Muazzal

Bai-Muajjal is a contract between Buyer and Seller under which the seller sells certain specific goods ( permissible under Shariah and Law of the country ), to the Buyer at an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installments. The seller may also sell the goods purchased by him as per order and specification of the Buyer. This mode is applicable for working capital finance. In conventional Banks, the allow loan in the from of cash credit against hypothecation of goods & collateral security.

                II.            HPSM

Hire purchase (participatory Ownership) is a special type of contract which has been developed through practice. Actually it is a synthesis of three contracts:

• Shirkatul Melk

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

• Ijarah

The term Ijarah has been derived from the Arabic words Ajr and Ujrat which means consideration, return, wages or rent. This is really the exchange value or consideration, return, wages, rent of services of an ASSET. Ijarah has been defined as a contract between two parties, the Hiree and Hirer where the Hirer enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the Hiree. It is a hire agreement under which a certain asset is hired out by the Hiree to a Hirer against fixed rent or rentals for a specified period.

• Sale

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

Thus in hire purchase (participatory ownership) mode both the bank and the client supply equity in equal or unequal proportion for purchase of an asset like land, building, machinery, transport etc. purchase the asset with that equity money, own the same jointly, share the benefit as per agreement and bear the loss in proportion to their respective equity. The share, part or portion of the asset owned by the bank is hired out to the client partner for a fixed rent per unit of time for a fixed period. Lastly the bank sells and transfers the ownership of its share/part/portion to the client against payment of price fixed for that part either gradually part by part or in lump sum within the hired period after the expiry of the hire agreement.

             III.            Murabaha

Bai-Murabaha is a contract between a Buyer and Seller under which the Seller sells certain specific goods permissible under Islamic Shariah and Law of the land to the Buyer at a cost plus agreed profit payable in cash on any fixed future date in lump sum or by installments. The profit marked-up may be fixed in lump-sum or in percentage of the cost price of the goods.

In case of Bai-Murabaha Banks procure the goods as per indent of the customer, retain it in its custody and sell the same part by part or at a time to the client who gave indent for the goods. This mode is applicable for working capital finance. In conventional Banks, they allow Loan against pledge of goods against fixed rate of interest.

Investment can be classified in to two types:

1. 1.      Classified

                                i.            Continuous loan: the loan accounts in which transactions may be made within certain limit and have an expiry date for full adjustment will treated as continuous loans. Examples are: Bai muajjal, murabaha.

Any continuous loan will be classified as:

1. A.    Sub standard: if it is past due for 6 months or beyond but less than 9 months.
2. B.     Doubtful: if it is past due/overdue for 9 months or beyond but less than 12 months.
3. C.    Bad/loss: if it past due/ overdue for 12 months or beyond.

                              ii.            Demand loan: The loans that become repayable on demand by the bank will be treated as demand loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as regular loan) those too will be treated as demand loans. Such as Payment against deposit.

Any continuous loan will be classified as:

1. A.    Sub standard: if it remains past due/overdue for 6 months or beyond but not over 9 months from the date of claim by the bank or from the date of creation of forced loan.
2. B.     Doubtful: if it remains past due/overdue for 9 months or beyond but not over 12 months from the date of claim by the bank or from the date of creation of forced loan.
3. C.    Bad/loss: if it remains past due/overdue for 12 months or beyond form the date of claim by the bank or from the date of creation of forced load.

                            iii.            Fixed term loan: the loans which are repayable within a specific time period under a specific repayment schedule will be treated as fixed term loans.

In case of any installment or part of installment of a fixed term loan is not repaid within the due date the amount of unpaid installment will be termed as ‘defaulted installment’.

In case of fixed term loans, which are repayable within maximum five years of time:

  If the amount of defaulted installment is equal to or more than the amount of installment due within 6 months, the entire loan will be classified as “sub standard.”

  If the amount of defaulted installment is equal to or more than the amount of installment due within 12 months, the entire loan will be classified as “doubtful”

  If the amount of defaulted installment is equal to or more than the amount of installment due within 18 months, the entire loan will be classified as “bad/loss”

In case of fixed term loans, which are repayable more than five years of time:

  If the amount of defaulted installment is equal to or more than the amount of installment due within 18 months, the entire loan will be classified as “sub standard.”

  If the amount of defaulted installment is equal to or more than the amount of installment due within 12 months, the entire loan will be classified as “doubtful”

  If the amount of defaulted installment is equal to or more than the amount of installment due within 18 months, the entire loan will be classified as “bad/loss”

                            iv.            Short term agricultural and micro credit: short term agricultural credit will include the short term credits as listed under the annual credit programme issued by the agricultural credit and special programmes department of Bangladesh bank. Credits in the agricultural sector repayable within 12 months will also be included herein. Short term micro credit will include any micro credits not exceeding tk. 25000/= and repayable within 12 months, be those termed in any names such as non agricultural credit, self reliant credit, weavers credit or bank’s individual project credit.

2.      Unclassified

(Revolving limit)HPSM (Commercial)

16%Tk. 50,00,0002-5 yearsFor asset purchase and long term investment.

(Equal monthly installment)HPSM (Transport)16%Tk. 50,00,0002-5 yearsVehicles uses or purchase for commercial purpose.

(Equal monthly installment)Bai-Muazzal

(Commercial Installment)

18%Tk. 50,00,0004 yearsFor meet the working capital (Equal monthly installment)Murabaha (Commercial)18%Tk. 50,00,0001 yearFor meet the working capital (Equal monthly installment)Bai-Muazzal (Micro Enterprise)

18%Tk. 2,00,0003 yearsFor raw materials purchase

(Equal monthly installment)

 This report is from borrower’s point of view. He prepares this report and submitted to the bank.

 In this step of the term loan the branch sends a credit line proposal to the head office for approval of the term loan. The credit line proposal contains the following particulars:

  Fresh/Renewal/Revision of the term loan

  Borrower name

  Types of business

  Capital structure

  Particulars of previous transaction

  Movement of the accounts

  Liabilities of sister concerns

 It is the reinvestment analysis done by the banker before a project he approved. Project appraisal in the banking sector needed for the following reasons:

  To justify the soundness of an investment

  To ensure repayment of bank finance

  To achieve organizational goals

  To recommend if the project is not designed properly

 An appraisal is a systematic exercise to establish that the proposed project is a viable preposition. The appraising officer checks the various details submitted by the promoter in first information sheet, credit application form, feasibility report. SIBL considers the following aspects in apprising:

1. Entrepreneur

2. Viability of the project

A. Technical viability (location and site of the project).

B. Commercial viability (This study indicates evaluation of a project’s feasibility in terms of market).

C. Financial viability.

D. Economic Viability.

E. Management and organization viability

  Lending Risk Analysis (LRA) is a technique by which the risk of the loan is calculated. Banker must analyze LRA when loan application is above 1 core. This analysis is done by experienced people of Credit department in SIBL. It is a ranking whose total score is 140.Among this score, 120 is for Total Business Risk and 20 for Total Security Risk.

In case of business risk, if the score falls———

Between 13-19, then——- Poor risk

Between 20-26, then ——–Acceptable risk

Between 27-34, then—–Marginal risk

Over 34, then —— Good risk.

In case of security risk, if the score fall

Between – 20 to – 15 then

Between – 14 to 0, then ———— Acceptable risk

Between 0 to 10, then ————-Marginal risk

Over 10, then —————–Good risk.

In LRA, following aspects are analyzed Supplies risk

1) Sales risk

2) Performance risk

3) Resilience risk

4) Management ability.

5) Level of Managerial teamwork

6) Management competent risk

7) Management integrity risk

8) Security control risk

9) Security risk cover.

 SIBL charges the following two types of security,

1. Primary security

2. Collateral security.

 A document is a written statement of facts of proof or evidence arising out of particular transaction which placement may bind the parties there to answerable and liable to the court of law for satisfaction of the change in question. The execution of documents in proper form and according to the law is known as documentation.

Steps in documentation

• Obtaining the documents.
• Stamping (Stamp Act-1899)
• Witnessing.
• Execution of Documents.
• Registration of Documents (assignment on the body of an insurance Policy, Mortgage deed, Advance to a limited company etc.)

 Common Compulsory Documents

• Letter of Acceptance about the terms and conditions laid down in Sanction Advice.
• D.P. Note (Depending on the types of borrowers)
• Letter of Arrangement.

Besides, there are other documents that are to be obtained depending on the types of Advance. Such as-

In case of loan

1. Letter of Disbursement.
2.  Letter of Authority (if required)
3. Letter of Hypothecation (when goods are hypothecated as security)
4. Insurance Policy (if required).
5. Any other document as stated in Sanction Advice.

In case of overdraft

1. Letter of Continuity.
2. Letter of Authority (if required)
3. Letter of Hypothecation (when goods are hypothecated as security)
4. Insurance Policy (if required)
5. Any other document as stated in Sanction Advice.

In case of cash credit

1. Letter of Continuity.
2. Letter of Authority (if required)
3. Letter of Pledge/Hypothecation.
4. Insurance Policy under Bank’s Mortgage clause.
5. Letter of disbursement incase of renewed go down.
6. Any other document as stated in Sanction Advice.

Transport Loan

1. Letter of hypothecation of vehicles (in separate form)
2. Photocopy of blue book
3. Photocopy of rote permit
4. Insurance policy under Bank’s mortgage clause

Legal Mortgage

1. Mortgage deed (certified copy)
2. Registration receipt in
3. Chain of documents for title (original if available)
4. C.S,S.A and R.S parcha
5. Up to date Rent Receipt
6. Non-encumbrance certificate
7. Power of Attorney (if asked for)
8. Legal opinion
9. Valuation Certificate
10. Location plan etc./Site plan etc

Equitable mortgage

1. Chain of documents for title
2. Original title deed
3. C.S, S.A A and R.S parcha
4. Up to date Rent Receipt
5. Memorandum of deposit of title deed
6. Registered power of Attorney
7. Legal opinion
8. Valuation Certificate
9. Location plan etc
10. Non-encumbrance Certificate

  SIBL Officer checks on the following points:

1. The borrower’s behavior of turnover
2. The information regarding the profitability, liquidity, cash flow situation and trend in sales in maintaining various ratios.

 Like other banks, all types of loans of SIBL fall into following four scales:

1. Unclassified: Repayment is regular.
2. Substandard: Repayment is stopped or irregular but has reasonable prospect of improvement.
3. Doubtful debt: Unlikely to be repaid but special collection efforts may result in partial recovery.
4. Bad/Loss: very little chance of recovery.

• Monthly Statements prepared by Credit Department for Bangladesh Bank.
• Quarterly Statements prepared by Credit Department for Bangladesh Bank.
• Monthly Statements prepared by Credit Department for Head Offic

NON-FORMAL SECTOR

Family empowerment credit programs come under Non-formal Banking Non-formal Banking deals with finance in non-corporate sector. The popular view of non-formal sector activities are primarily those of petty traders, street hawkers, shoeshine boys and confined to employment peri-urban and urban areas, SIBL’s target areas are however determined by following criteria:

Micro-Credit Program is designed to develop the Socio-economic condition of the grass-root people committed to build a caring society by reducing poverty through income generation for small and low-income families, under which financing is provided without collateral.

Micro-Credit Program is a group-based lending. Investment is provided for maximum three years @ 10% return per annum at flat rate where maximum ceiling of Investment is Tk.25,000/=.

I.            Family empowerment micro-enterprise program

Family Empowerment Micro-Enterprise program is introduced to enhance the Socio-economic condition of the potential entrepreneur, small and medium Businessmen, successful Micro-Credit graduates through income generating activities. Ceiling of investment is from Tk.50,000/= to Tk.5,00,000/= @ 10% return per annum at flat rate for maximum three years. Investment upto Tk.50,000/= is provided without collateral. In case of investment of above Tk.50,000/= minimum collateral security is required.

 II.            Family empowerment micro-enterprise program (SMES)

Considering the potentiality of SMEs sector, SIBL has launched Family Empowerment Micro-enterprise program (SMEs) to fulfill the diversified need of SMEs clients. Investment ceiling under this program is from Tk.2,50,000/= to Tk.5,00,000/=@ 14% return per annum for one year on revolving basis.

 III.            Small, medium and micro-enterprise development program jointly JOBS project, USAID

On the basis of Memorandum of Understanding (MoU) signed in 2001 between Social Islami Bank Ltd. and Job Opportunity and Business Support (JOBS), collaborative efforts are being made to create easy access to business capital for the Small Medium and Micro-Enterprises (SMEs) through enhancing the capacity and performance of the entrepreneurs with available technical assistance from JOBS to be financed through Social Islami Bank Ltd. (SIBL) under Family Empowerment Micro-Credit and Micro-Enterprise Program.

 Small, Medium and Micro-Enterprise Development Program jointly with JOBS project, USAID. On the basis of Memorandum of Understanding (MoU) signed in 2001 between Social Investment Bank Ltd. and Job Opportunity and Business Support (JOBS), collaborative efforts are being made to create easy access to business capital for the Small Medium and Micro-Enterprises (SMEs) through enhancing the capacity and performance of the entrepreneurs with available technical assistance from JOBS to be financed through Social Investment Bank Ltd. (SIBL) under Family Empowerment Micro-Credit and Micro-Enterprise Program.

Displaced Garments Child Workers Students Stipend Disbursement Program Aiming To Eliminate Child Labor From The Garments Sector Implemented Jointly With The International Labor Organization (ILO). On the basis of the agreements signed between SIBL & ILO during 1996 and 1998, SIBL has successfully completed the stipend disbursement program among the displaced garments child worker’s to eliminate child labour in Bangladesh within the frame work of international program on the elimination of child labour.

I.            Micro credit program to the garments workers (parents)/adult family member jointly with ILO under project finance from govt. of Italy & Norway

In view of the SIBL’s satisfactory performance of Stipend Disbursement Program, two agreement on “Family Empowerment Micro-Credit Program” have been signed between SIBL and ILO under project BGD/98/01/PO50/ITA and BGD/99/02/PO70/NORAD on 12.09.2000 and 19.11.2000 respectively for implementing the Program among the parents of the displaced garments child worker for self employment to their parents. It was an action program, against the child labour in garments sector. The recovery under these programs is continuing.

                II.            Financial assistance among the 100 parents/guardian of former garments working children under project UNICEF to continue their education.

A memorandum of Understanding (MoU) had been signed between the UNICEF & SIBL on December 15, 2002 for the project entitled “Family Empowerment Program among the 100 parent/guardian of former garments working children”.

The purpose of the project is to develop a regular source of income for the families of the former garments child workers so that their parents could provide monthly school fees to continue their children’ education. By the financial support from unicef, sibl provided assistance of maximum tk. 10,000/- to-individual member. Recovery under the program is continuing.

             III.            Family empowerment micro credit program for self employment of HTR (Hard to Reach) graduates to implement micro credit program in connection with the letter of exchange signed with UNICEF.

On the basis of the previous MoU with UNICEF signed in the year 2002 , both the organization has signed a Letter of Exchange (LoE) on 29.05.2005 to provide Micro-credit to a good number of parents/guardians of HTR (Hard to Reach) graduates who have received Livelihood Skill Training from Dhaka Ahsania Mission under a project supported by UNICEF.

VOLUNTARY SECTOR

In the voluntary sector SIBL has also introduced Cash Waqf Certificate, a new product for the first time in the history of banking. Together, a new beginning can be made for a participatory economy.

Cash Waqf provides a unique opportunity for making investment in different religious, educational and social services. Savings made from earning by the well off and the rich people of the society can be utilized in our organized manner. Income earned from these funds will be spent for different purposes like the purposes of the waqf properties itself. This scheme has been well received by the public in general due to its unique feature. The guidelines for operation of this scheme are stated below:

1. a.      Cash waqf is an endowment in conformity with shariah, bank manages the waqf on behalf of the waquif.
2. b.      Waqfs are done in perpetuity and the A/c is opened in the title given by the waquif.
3. c.      Waquif have the liberty to choose the purpose(s) to be served either from the list of 32 purposes identified by the bank, covering (a) family empowerment credits (b) Human resource development (c) Health and sanitation and social utility services or any other purpose(s) permitted by shariah.
4. d.      Cash waqf amount earns profit at the highest rate offered by the Bank from time to time.
5. e.      Cash waqf amounts remain intact and only the profit amount is spent for the purpose(s) specified by the waquif. Unspent profit amounts automatically added to waqf amount and earn profit to grow over the time.
6. f.       Waquif can also instruct the Bank to spend the entire profit amount for the purpose specified by him/her.
7. g.      Waqif have the opportunity to create cash waqf at a time. Otherwise he/she may declare the amount he/she intends to build up and may start with a minimum deposit of Tk. 100/-(one hundred) only. The subsequent deposits may also be made in thousand or in multiple of thousand.
8. h.      Waquif have the right to give standing instruction to the bank for regular realization of cash waqf at a rate specified by him/her from any other A/c maintained with SIBL.
9. i.        The amount in Cash Waqf Account is a perpetual deposit

As a declared corporate policy, the Bank intends to help mosjid and waqf property holders with free consultation & technical support so as to make it economically & socially self-sustained. Meanwhile, the bank has completed a small project for development of a mosque property at Uttar Khan, Dhaka.

Chapter: 4

Financial Performance and SWOT Analysis of SIBL

The authorized capital of the Bank is Tk. 10,000 million, whereas paid up capital of the bank stood at taka 2,987.81 million as at 31^st December 2010 compared to Taka 2,691.72 million of 2009.

Graph 4.1: Capital of SIBL (Table 4.1)

Table 4.1    Capital of SIBL

Liquidity in the form of balance with Bangladesh Bank (as the agent of Bangladesh Bank) and cash in hand including Foreign Currency stood at Tk. $,451.59 million as at 31^st December 2010 as against Tk. 2217.70 million  in last year to maintain cash and statutory liquidity. The bank is committed to maintain the cash and statutory liquidity requirement to effectively manage asset and liability portfolios of the Bank in order to maximize the profit.

Graph 4.2: Liqidity (Table 4.2)

Liquidity

                   4,451.59

               2,217.70

            1,670.12

             1,702.27

Table 4.2: Liquidity

Deposit of the bank shows a tremendous increasing trend. Total deposit of the bank stood at Tk. 44850.77 million compared to Tk. 31,588.16 million of 2009 which is sharp 41.99% higher. To keep the deposit cost within the limit, the bank could successfully maintain its deposit mix which is the most important in long term and short term deposit planning. The following graph has shown the deposit trend of the bank:

Graph 4.3: Deposit of SIBL (Table 4.3)

Table 4.3: Deposit of SIBL

Global investment of SIBL in the year 2010 showed a very favorable growth both in quantity as well as in quality. The total investments of the Bank stood Tk. 36680.28 million in various sectors as at 31^st December 2010 against Tk. 26,580.58 million of 2009 registering a growth by 38.00% that signifies the confidence of the clients on the bank. The increase in investment by Tk. 10099.70 million as compared to 2009 was due to expansion of business.

Graph 4.4: Investment of SIBL (Table 4.4)

Table 4.4: Investment of SIBL

The bank has registered an income from investment by Tk. 3886.18 million under different mode of investment account in the year under review compared to Tk. 3,078.98 million of 2009 which increased 26.22% from the previous year. a comparative position on income received from different mode of investment in the year 2010 to 2007 is given below:

Graph 4.5: Investment Income ( Table 4.5)

Table 4.5: Investement Income

Foreign exchange business stood at Tk. 61931.00 million in 2010 against Tk. 39110.00 million in 2009. The breakup of the foreign exchange business is given below:

Graph 4.6: Forign Exchange ( Table 4.6)

Table 4.6: Foreign Exchange

Earning net profit is increasingly of SIBL. In the year 2010, the net profit after tax of the Bank was Tk. 643,019,720 and the growth rate of net profit was 149.01% in 2010.

Graph 4.7: Growth in net profit ( Table 4.7)

Table 4.7: Growth in net profit

Table 4.8: Ratio

Though Social Islami Bank Limited is a new bank, which started its operation in the last half of the year 1995; it has now become a reputed bank. Its deposits and investment are increasing rapidly. Its number of branches has increased. Its foreign exchange business is also very credible. In a few days, it is well known in the banking sector that SIBL gives a higher standard of banking services.

Every organization is composed of some internal strengths and weaknesses and also has some external opportunities and threats in its whole life cycle.

-SIBL provides its customer excellent and consistent quality is every service.

-SIBL is financially sound company.

– SIBL utilizes state of the art technology to ensure consistent quality and operation.

-SIBL provides its works force an excellent place to work

-SIBL already achieved a good will among the clients

-SIBL has research and training division.

-SIBL lacks well trained human resource in some area.

-SIBL lacks aggressive advertising.

-The procedure of credit facility is to long compare to other banks.

-Employees are not motivated in some areas.

-Emergence of on line banking will open more scope for SIBL.

-SIBL can introduce more innovative and modern customer service.

-Many branches can be opened in local remote area as its high demand.

-SIBL can recruit experienced, efficient and knowledgeable officers and staffs as it offers good working environment.

-The worldwide trend of mergers and acquisition in financial institutions is causing problems.

-Frequency taka devaluation and foreign exchange rate fluctuation is causing problem.

-lots of new banks are coming in the scenario with new service.

– Local competitors can capture huge market share by offering similar products

                           Chapter: 5

Findings, Recommendations and Conclusion

   Lack of strong monitoring unit.

  Sometimes the process of information transferring to the management is lengthy.

  Bank has limited ATM booth.

  Lack of central AC for better working environment.

  Generally investment clients do not come to the Islamic Banks only for Shariah purpose rather for low transaction cost.

  Lack of training facility of junior officers.

  Fewer clients for trade business.

  PC Bank server problem.

• Proper and sufficient training is required for each and every staff to work with full capability in the best way.
• Proper monitoring is the pre-consideration for good collection. So monitoring unit is required to be efficient enough to collect more deposit.
• Staffs of branches require being sincere enough in their jobs. This will help in banking procedure.
• The brochures of the products and services of the branch can be mailed through the welcome letters along with the status of the customers via courier.
• Interpersonal relationship needs to be built among the employees and superiors.
• Customer must be convinced to use token system, which will help the personnel of the customer service work smoothly.
• Complain of the customers should be decreased on zero level.
• Assurance the accuracy of online banking.
• Increase the SIBL’s own ATM booth.
• SIBL requires resorting to massive image re-engineering in order to capture the public perception to take the lead role in this sector.
• SIBL’s investment processing should become easier than other conventional banks.
• SIBL should make its investment schemes more attractive for availing high-return projects.
• SIBL should consider utilization of rural potentials from both efficiency and equity grounds in the context of the present-day socio-economic conditions of Bangladesh. Strong commitments and stepping up through experiment and implementation of innovative ideas are the appropriate ways to do that.

• SIBL should deserve immediate attention in the promotion of the image of Shariah based banks as PLS (Profit-loss-sharing)-banks.

Social Islami Bank (SIBL) action program is directed towards development of an authentic participatory Economy beyond Market Economy. The family empowerment credit program of SIBL is gaining ground at the grass root level in Bangladesh. Family empowerment micro Credit and micro enterprises program has been designed in a manner so as to make finance, production, marketing, trading, local specific survey and research as well as moral suasion in one package. In SIBL credit conveys the totality in life and clearly linked to social context and cultural setting in conformity with Shariah. There is a built in provision vertical social mobility with provisioning for social subsidy. It is thus felt that the linking credit to social goals and assignments will have far-reaching implications for development of an alternative concept of new participatory economics in the 21^st Century and thereby laying the foundation of new theories of income, output and employment.

This Bank begins from the understanding that 120 million people are Bangladesh’s most precious resource. It is rooted in the confidence that cultural heritage and legacy of Bangladesh can be reactivated for motivating people to work that earn Bangladesh a living coupled with necessary finance, training and the backing of a government that is committed to encouraging new initiatives, enterprise, innovation and change, thereby making Bangladesh more efficient, less dependence on aid, more socially just and compassionate.

1. Social Islami Bank Annual Report 2010, 2009, 2008, 2007

2. Social Islami Bank Limited- Operational manual

3. www.siblbd.com

4. www.bangladeshinfo.com

5. www.valki.com

6. www.bangladesh-bank.org

7. Book:

  Crafting and Executing Strategy 6^th Edition – Thomson/Strickland/Gamble

  Fundamentals of Corporate Finance 8^th Edition – Stephen A Ross/Bradford D Jordan

 Some are parts:

General Banking Activities and Financial Performance on Social Islami Bank Limited (Part 1)

General Banking Activities and Financial Performance on Social Islami Bank Limited (Part 2)