General Banking Operation of Exim Bank Ltd

EXECUTIVE SUMMARY

Banking system of Bangladesh has gone through three phases of development- Nationalization, Privatization, and Lastly Financial Sector Reform. Export Import (EXIM) Bank of Bangladesh Limited has started its journey as a private commercial bank from 1999.

The report portrays the overall operation of EXIM Bank Limited, including the operations of different divisions and departments, the different types of products and services offered. Then, the report focuses on the financial performance of banks in five years considering the key banking ratios for evaluating banking performance through a comparison among them and the difference from the category average. From the literature review I found the key ratios that are relevant for the bank, such as, liquidity ratio, asset management ratios, cost management ratios, profitability ratios, etc. The focus of the report is on the Islamic mode of operation of banking in Bangladesh. As my internship placement was at EXIM Bank Ltd, Shimrail Branch, I have used my practical experience to prepare this report.

In the 1^st chapter of the report has presented information about the background, objectives, scope, methodology & limitation of the report.

The 2^nd chapter has introduced Islamic Banking features. I tried to show the basic features of the Islamic banking. Since the inception of Islamic Banking in Bangladesh, some initiatives have been taken to promote & regulate Islamic Banks, which are also addressed here.In the 3^rd  chapter of the report, I have presented the details about the EXIM Bank Ltd. The focus is on the background of EXIM Bank Ltd, vision, mission, strategy and services provided by EXIM Bank Ltd.In the 4^th chapter of the report, I have discussed about the financial performance analysis of five local commercial bank – EXIM bank Ltd, Shahjalal Islami Bank Limited, Al-Arafah Islami Bank limited, Bangladesh Islami Bank Limited, and Social Islami Bank Limited for five consecutive years – 2006, 2007, 2008, 2009, 2010.

In the 5^th chapter of the report, I have discussed about the findings, makes some recommendations & policy options conclusion of the report.

From the study, I found the category average of the banks for the category A Islami bank in Bangladesh. I hope the industry average will work as an indicator for this bank and it will help the banks to determine the future performance. In my study I found the present performance of the Category-A Islami banks in Bangladesh by comparing their output with the industry average and show a comparison. It will help the banks to find their strengths, weaknesses, opportunities and threats. And it will also help the banks to determine the necessary action that should take to improve the performance.

The Islamic Banking operations are completely separate from the conventional banking. Islamic banking system based on Shariah has been introduced considering sentiments and sensitivities of particular group of customers. It follows the principles and the mode of operation guided by the rules and regulation of Islam. By Islamic banking EXIM bank Limited offers various types of product and service different in nature from its traditional banking side to its clients.

Nature of Islamic banking is the main focus of the report. All the features of the offerings of Islamic banking of Prime Bank Limited are included. Some common reasons for which the some conventional commercial banks have shown their interest in Islamic banking are also discussed. Some problem of Islamic banking operation is identified. And finally some recommendations have been proposed for Prime Bank Limited for its conventional and Islamic banking operation.

CHAPTER: ONE

PREFACE

Introduction         

Commercial banks play an important role in economic development of developing country. Economic development involves investment in various sectors of economy. The banks collect savings from the people and mobilize saving for investment in industrial project. The investors borrow from banks to finance the projects. Promote the growth rate through the reorientation of loan policy. Special funds are provided to the investors for the completion of projects. The banks provide a guarantee for industrial loan from international agencies. The foreign capital flows to developing countries for investment in projects.

Besides normal banking, the banks perform agency services for the client. The banks buy and sell securities, make rent payments, receive subscription funds and collect utility bills for the Government departments. Thus these banks save time and energy of busy peoples. Banks arrange foreign exchange for the business transaction with other countries. The facility of foreign currency account has resulted in an increase of foreign exchange reserves. By opening a letter of credit the banks promote foreign trade. So, the banks are not simply collecting funds but also serve as a guide to the customer investment of their funds. In Bangladesh, The commercial banking system dominates the financial sector with limited role of Non-Bank Financial Institutions and the capital market. The Banking sector alone accounts for a substantial share of assets of the financial system.

Objective of the study:

The main objectives of the study are follows:

•  To identify and compare the financial performance of Category A Islami Banks in Bangladesh.
•  To find out a category average for the Category A Islami Banks in Bangladesh.
• To explore the profitability position, Liquidity Management position, Interest rate risk position, Credit risk position, Capital account management position, Cost management position on the basis of ratio analysis of Category A Islami Banks in Bangladesh.
•  To find out the Strengths and weaknesses by ratio analysis of Category A Islami Banks.
• To explore the position of Export Import Bank of Bangladesh limited in a comparison with other Category A Islami Banks in Bangladesh.

Methodology of the study

Different data and information are required to meet the goal of this report. Those data and information were collected from various sources. Such Primary and secondary sources are shown below:

Primary sources:

• Interview of the officers of banks and credit rating agencies.
• Relevant file study provided by the officers concerned

Secondary sources:

• Annual report of Islami Banks.
• Internet
• Different publications regarding banking functions
• News papers, Journals, etc.

Scope of the Study

The scope of the study revolves around the evaluation of financial performance of Category A Islami banks and comparison among the financial performance of the banks and identification of Industry Average that affect the financial performance of the banks.

Limitations of the Study

From the beginning to end, the study has been conducted with the intention of making it as a complete and truthful one. However, many problems appeared in the way of conducting the study.

During the study, following limitations were present:

–                Three months time in not enough for such an extensive study. It is very difficult to collect all the required information in such a short period.

–                Due to some legal obligation and business secrecy, banks are reluctant to provide data. For this reason, the study limits only on available published data and certain degree of formal and informal interview.

–                The bankers are very busy with their job which lead me little time to consult with.

CHAPTER: Two

OVERVIEW OF ISLAMI BANKING

Evolution of Islamic Banking

Emergence of Islamic Banking

For an expanding economy, a developed and efficient banking system is indispensable. Among others, it helps transfer of financial resources from surplus units to deficit units and, hence, helps accelerate the pace of development by securing uninterrupted supply of financial resources to people engaged in numerous economic activities. The tremendous development that the world economy has experienced in the last few decades was contributed by several factors among which, growing institutional supply of loan able funds must have played the pivotal role. The role of banking is comparable to what an artery system does in the human body. Both commercial banks and other development financial institutions provide short-, medium-, and long-term credits to businesspersons and entrepreneurs who usually take the lead in ventures of economic development.

Institutional supply of credit has been made possible by a system of financial inter-mediation organized in a way where conventional banks collect small savings from the public by offering them a fixed rate of interest and advancing the loan able funds out of the deposited money to enterprising clients charging relatively higher rates of interest. The margin between these two rates is the bank’s income. In addition, banks also provide many other services to the public for which it receives service charges.

Despite the outstanding contribution of the conventional banking system (interest-based), several ancient and modern economists are critical about its efficiency level. Some economists consider the role of interest in the conventional banking mechanism as a major negative factor that contributes to cyclical fluctuations in the economy. Specifically, the ineffectiveness of interest rate as a stabilization tool during the period of the Great Depression is a case to note. This eventually called for Keynesian prescription of government intervention (Keynes 1964). Similar concern was expressed in a story published in Newsweek regarding Henry Kissinger, the former Secretary of State of USA. To quote, “The instability has persisted and the uncertainty has continued. After going through the throes of painfully high levels of inflation, the world economy has experienced a deep recession and unprecedented rate of unemployment, complicated further by high level of real interest rates and unhealthy exchange rate fluctuations” (Newsweek 1983). More recent concern over the potential instability of the world monetary and financial system was expressed by Maurice Allais, a Nobel Laureate, who called for an urgent reform of the World Economic Order. Others vehemently oppose the argument for using rate of interest as a stabilizing tool in the economy. This called for the emergence of a new system of banking capable of tackling new challenges that the present world economy, particularly the financial sector, has been facing.

In response, though not exactly to that exigency but for quite a few other reasons, the second half of the twentieth century witnessed a distinctly separate line of thinking on banking. This was institutionalized at the end of third quarter and subsequently emerged as a new system of banking called Islamic Banking {also called Profit-Loss-Sharing Banking (PLS)}. The world has now been experiencing operation of as many as 250 Islamic banks and financial institutions in more than 50 countries, Muslim and non-Muslim.

There are religious as well as economic reasons, which have contributed to the emergence of PLS-banking as an alternative to its conventional counterpart. It is the prohibition of ‘Riba’ in the Quran that, according to the proponents of the PLS-system, was the source of inspiration for establishing banks in line with Islamic Shariah. The basic intention behind establishing Islamic banks was the desire of Muslims to reorganize their financial activities in a way that do not contradict the principles of Shariah and enable them to conduct their financial transactions without indulging into Riba. These writers consider rate of interest in the conventional banking mechanism synonymous to Riba, the term as used in the Quran. One of the reasons for this is that the outcome of the productive effort is uncertain, and so interest necessarily involves an element of  uncertainty. On this religious ground, proponents of the PLS-system urge the Islamic community to avoid all transactions with institutions that are interest-based.

The economic reason derived from a verse of the Quran providing inspiration to devise an interest-free financial system has been substantiated in the way that interest, instead of increasing wealth, reduces it. The primary reason of why the Quran has taken such a hard approach towards interest is that Islam stands for establishing a just economic system free from all kinds of exploitation. Further, Muslim economists consider depression and stagflation very often found in the capitalist world as an outcome of the financial system based on interest.

Thus, Islamic banking emerged as a response to both religious and economic exigencies. While religious exigency calls for avoiding any transaction based on interest, economic exigencies, on the other hand, provide a new outlook to the role of banking in promoting investment / productive activities, influencing distribution of income and adding stability to the economy. Islamic banking is thus perceived as an improved system in all dimensions.

 The first attempt

Interestingly, the concept of Islamic Banking is several decades old. The first attempt to establish an Islamic financial institution took place in Pakistan in the late 1950s with the establishment of a local Islamic bank in a rural area. Some pious landlords who deposited funds at no interest, and then loaned to small landowners for agricultural development initiated the experiment. The borrower did not pay interest on the credit advanced, but a small charge was levied to cover the bank’s operational expenses. The charge was far lower than the rate of interest. Although the experience was encouraging, two main factors were responsible for its failure. First, the depositors’ landlords regarded the deposits as a one-time event. With the increasing number of borrowers the gap between available capital and credit demanded was huge. Secondly, the bank staff did not have complete autonomy over its operation; depositors showed considerable interest in the way their money was lent out (Ibid).

The second attempt

The second pioneering experiment of putting the principles of Islamic banking and finance into practice was conducted in Egypt from 1963 to 1967 through the establishment of the Mit Ghamr Savings Bank in a rural area of the Nile Delta. The experiment combined the idea of German savings banks with the principles of rural banking within the general framework of Islamic values. The bank’s operation was based on the same Islamic principle i.e. no-interest to the depositors or from the borrowers. Unlike the Pakistani bank, the borrower had to have deposits in the bank in order to request a loan. The experiment soon became successful; more branches were opened in different parts of the country, and the amount of deposits increased. Hence, what started as a single bank operation expanded to form a network of local savings banks. Although the project made a good start and initial results were more than encouraging, it suffered a setback owing to changes in the political atmosphere. Nevertheless, the project was revived in 1971 under the name of Nasser Social Bank. This was the first Islamic bank in an urban setting based in Cairo. The bank is a public authority with an autonomous status. Its purpose was mainly to promote social concerns such as granting of interest-free loans for small projects on a profit-loss-sharing basis, and assistance to the poor and needy students for university and higher education. Because of these social functions, Nasser Social Bank was granted an exemption from the Banking and Credit Law of 1957 in its initial stages. The bank was originated under the Ministry of Treasury but it is now functioning under the Ministry of Social Welfare and Insurance. Its capital comes from the funds allocated by the President from extra budgetary resources, appropriation from the state budget, and contribution from the Ministry of Awqaf. The principles of operation of the Naser Social Bank are very similar to those of the Mit Ghamr Savings Bank. However, the latter offers a full range of normal banking services and a wide range of investment activities through equity participation.

 Tabung Hajji: a successful attempt

Islamic banking, with a very different approach contemporary to that in Egypt, emerged in Malaysia. It was a financial institution developed for the pilgrims of Malaysia. These institutions were established in response to what was the contention of the Malaysian Muslims that money spent on pilgrimage must be clean and untainted with ‘Riba’. Since this was not possible by depositing money with the ordinary banks, a special financial institution had to be created. Consequently, Pilgrims Saving Corporation was established in 1963, which was later on incorporated into the Pilgrims Management Fund Board (Tabung Hajji) in 1969.

Other attempts

Next to follow was the Dubai Islamic Bank in 1975. The Dubai Islamic Bank is a public limited company having its office at Dubai, U.A.E. with capital of 50 million Dirhams. Since then, a number Islamic banks and financial institutions have been established in different parts of the world and have been functioning successfully.

A significant development in Islamic banking has been the granting of an Islamic bank license in Saudi Arabia to the fifty-year old “Al-Rajhi Company”, a firm noted for its currency, exchange and commercial activities, whose assets exceed $5 billion. The firm started operation in 1985 under the name of “Al-Rajhi Banking Investment Corporation” and has since developed active relationships with major manufacturing and trading companies in Europe and several U.S. corporations. The emerging success of Al-Rajhi in operating profitably in different regions of the world has increased pressure on the Saudi government to go for full-fledged Islamic banking.

An example of multi-cooperation at the government level in the field of Islamic banking is the Islamic Development Bank, which was founded in 1975 as a multi-national corporation by several Muslim countries. The purpose of the bank is to support social and economic development in Muslim nations within an Islamic Framework. The subscribers of the capital are the founder governments and, as such, it was established by government treaty.

A second example of Islamic banking in the West comes from Luxembourg, where the Islamic Banking System International Holding was established in 1978 as a joint-stock company. Its purpose was to establish international Islamic banks in different parts of the western countries where there are communities of Muslims, and to participate in investment projects in Islamic and non-Islamic countries. The company’s investment operations are spread over different parts of the world. As a holding company, it established a new affiliated company in London in June 1983 under the name of Islamic Finance House, and another in Denmark in 1982 under the name of the Islamic Bank International of Denmark.

Dar-al-mal-al-Islami (DMI), based in Geneva, was established in 1981. DMI aims to foster an Islamic financial system based on equity and social justice by incorporating three types of institutions – banking, investment and insurance. Thus, DMI may be considered as a major multi-national company, the activities of which consist of Islamic investments, Islamic solidarity (insurance) and Islamic banking operations. DMI group has adopted a high profile and ambitious campaign to open an Islamic bank and investment in over thirty countries.

The second major group is the Kuwait Finance House (KFH). It was established in 1978. The Kuwait government and the remainder by private Kuwait investors own Forty-nine percent of the KFH. Total value assets of KFH at the end of 1987 was $3.92 billion with a deposit of $3.62 billion. The source of KFH’s liquidity is cheap deposits from faithful Muslims. The group has concentrated on large scale project financing, particularly in real estate. The KFH does have a minimum account size and, therefore, it could be argued that the institution only caters to the richer members of the society.

Another dynamic Islamic banking conglomerate is the ‘Al-Baraka’ group, which operates banks, investment companies, financial advisory and management companies in more than a dozen countries. It launched its activities only in 1982, but the group now has a total asset of over $2.7 billion. It is considered to be one of the fastest growing Islamic enterprises. The group has operations in Tunisia, Sudan, Bahrain, Turkey, and Malaysia. It is the first group to obtain a license to launch Islamic banking in London.

Complete Islamization Efforts

A development of complete Islamization of banking at national levels had been gaining momentum since the second half of the 1970s. The movement took basically two forms. First, an attempt was made to establish Islamic financial institutions side-by-side with traditional banking. In such attempts, two types of institutions were evolved: Islamic banks were established mostly in Muslim countries; and Islamic investment and holding companies started operating in some Muslim but mostly in non-Muslim countries. These institutions claimed to be operating without interest in their transactions and competed with conventional banks to attract deposits. The majority of these institutions were established through private initiatives. Second, an attempt was made to restructure the whole financial system of the economy in accordance with the teachings of Islam. This second approach was accomplished in two distinct ways, as exemplified by the changes in Iran and Pakistan. Complete Islamization efforts of some leading countries are now discussed.

 Islamic Banking in Bangladesh

In August 1974, Bangladesh signed the Charter of Islamic Development Bank and committed itself to reorganise its economic and financial system as per Islamic Shariah. In January 1981, Late President Ziaur Rahman while addressing the 3rd Islamic Summit Conference held at Makkah and Taif suggested, ”The Islamic countries should develop a separate banking system of their own in order to facilitate their trade and commerce.”

This statement of Late President Ziaur Rahman indicated favourable attitude of the Government of the People’s Republic of Bangladesh towards establishing Islamic banks and financial institutions in the country. Earlier in November 1980, Bangladesh Bank, the country’s Central Bank, sent a representative to study the working of several Islamic banks abroad.

In November 1982, a delegation of IDB visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic bank in the private sector. They found a lot of work had already been done and Islamic banking was in a ready form for immediate introduction. Two professional bodies -Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers’ Association (BIBA) made significant contributions towards introduction of Islamic banking in the country. They came forward to provide training on Islamic banking to top bankers and economists to fill-up the vacuum of leadership for the future Islamic banks in Bangladesh. They also held seminars, symposia and workshops on Islamic economics and banking throughout the country to mobilise public opinion in favour of Islamic banking.

Islami Bank Bangladesh Limited (IBBL) is considered to be the first interest free bank in Southeast Asia. It was incorporated on 13-03-1983 as a Public Company with limited liability under the companies Act 1913. The bank began operations on March 30, 1983.

IBBL is a joint venture multinational Bank with 63.92% of equity being contributed by the Islamic Development Bank and financial institutions like-Al-Rajhi Company for Currency Exchange and Commerce, Saudi Arabia, Kuwait Finance House, Kuwait, Jordan Islamic Bank, Jordan, Islamic Investment and Exchange Corporation, Qatar, Bahrain Islamic Bank, Bahrain, Islamic Banking System International Holding S. A., Luxembourg, Dubai Islamic Bank, Dubai, Public Institution for Social Security, Kuwait Ministry of Awqaf and Islamic Affairs, Kuwait and Ministry of Justice, Department of Minors Affairs, Kuwait. In addition, two eminent personalities of Saudi Arabia namely, Fouad Abdul Hameed Al-Khateeb and Ahmed Salah Jamjoom are also the sponsors of IBBL. The total number of branches as of December 2001 stood at 121. The authorized capital of the bank is Tk. 500 million and subscribed capital is Tk. 160 million.

Al-Baraka Bank Limited, often called the second Islamic bank in Bangladesh, commenced banking business as a scheduled bank on May 20, 1987. It is a joint venture enterprise of Al-Baraka Investment and Development Company a renowned financial and business house of Saudi Arabia, Islamic Development Bank, a group of eminent Bangladesh industrialists and the Government of Bangladesh. The authorized capital of the bank is Tk 600 million and the paid up capital is Tk. 204.07 million. The Bank currently operates 34 branches throughout the country. Apart from extending conventional commercial banking facilities to its customers, the bank has also given substantial financial support to the development of industrial and real estate projects.

Al-Arafa Islami Bank Bangladesh Limited commenced its business as a scheduled bank on September 27, 1995. The authorized capital of the bank is Tk. 1,000 million while its paid up capital is Tk. 101.20 million. The Bank follows the Shariah principles in investment and invests its funds under Mudaraba, Musharaka, Bai-Muajjal, Bai-Salam, etc. Up to 2001, the Bank has been operating its business through 40 branches all over the country.

Social Investment Bank Limited is another bank guided by the Islamic principles. It started its journey in November 1995. Its authorized capital is Tk. 1,000 million and paid-up capital is Tk. 118.36 million. Up to September 2001, the Bank has been operating its business through 15 branches.

 Principle of Islamic Finance

Islam categorically prohibits it followers from dealings that involve riba or interest. Muslims also need banking services as much as anyone and Islam shows the guide line of banking services. The principles of Islamic finance are quite simple and can be summed up as follows:

A  Any predetermined payment over and above the actual amount of principle is     

     Prohibited:

Islam allows only one kind of loan that is qard hassan (benevolent loan), whereby the lender does not charge any interest or additional amount over the money lent.

 B. The lender must share in the profits or losses arising out of the enterprise for

     which the money was lent:

 Islam encourages the Muslims to invest their money and become partners in order to share profits and risks in the business instead of becoming creditors. Islamic finance is based on the premise that the provider of capital and the user of capital should equally share the risks of business ventures. Translated into banking terms, the depositor, the bank, and the borrower should all share the risks and the rewards of financing business ventures. This is a sharp contrast to the interest based commercial banking system, where all the pressure is on the borrower who must payback the loan with the agreed interest, regardless of the success or failure of bank financed venture.

The principle, which thereby emerges is that Islam encourage investment so that the community may benefit. However, it is not willing allow a loophole to exist foe those who do not willing to invest and take risk but rather content with depositing money in a bank in return for receiving an increase on this fund for no risk.

C. Making money for money is not acceptable in Islam

As Islam views money as a medium of exchange; a way of defining the value of a thing; it has no value itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put is a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it. Islam considers money as potential capital when it is invested in business. Accordingly, money advanced to a business as a loan is regarded as a debt of the business and not capital and, as such, it is not entitled to any return (interest). Muslims are encouraged to purchase and discouraged from keeping money idle as such hoarding money is regarded unacceptable. In Islam money represents purchasing power, therefore can not be used to make more purchasing power (money) without undergoing the intermediate step of it being used for the purchase of goods and services.

D. Uncertainty, Risk or Speculation is also prohibited

Any contract entered into, should be free from uncertainty, risk and speculation. Contracting parties should have perfect knowledge of the counter values of intended to be exchanged as a result of their transaction. Also parties can not predetermine a guaranteed profit. This is based on the principle of ‘uncertain gains’, which, on strict interpretation, does not even allow an undertaking from the customer to repay the borrowed principal plus an amount to take into account inflation. The rationale behind the prohibition is the wish to protect the weak from exploitation.

E. Investment should only support practices or products that are not forbidden in Islam.

Investments, according to the rules set by Islam should not be made for the products which are forbidden in Islam. Trade in alcohol, for example would not be financed by an Islamic bank; a real-estate loan could not be made for the construction of a casino; and the bank could not lend money to other banks at interest.

The Shariah Principles of Operation in Islamic Banking System

Like any other financial institutions, the main function of Islamic banks is to mobilize savings and idle funds in the economy and make them available to those who can make better use of them. Since the main reason of Islamic banking is to conduct financial matters in the line with religious provisions thereby conduct worldly affairs in accordance with Gods commandment and to achieve benefits both in this world and ere after, Islamic banks should be based on elimination of riba.

The most common principles of business transactions which are widely envisaged in theoretical literature on Islamic banking are the principle of Mudarabah, Musharakah, Murabahah, Ijarah, Bai muajjal, Bai Salam and Istisna.

Mudarabah   

Mudarabah is one of most quoted financial instruments used by Islamic Banks. Muslim scholars have used different terminology for this Arabic word when translating into English such as profit sharing, trust financing, trustee profit sharing, equity sharing, funds management, sleeping partnership and commaenda.

The Mudarbah is defined as a contract between at least two parties whereby one party, the financier entrust fund to other party, the entrepreneur, to undertake a business activity. The entrepreneurs return the principal to the financiers with a predetermined share of profit. In this case if any loss occurs, the financier lose some or all of their capital and the entrepreneurs do not receive any remuneration for their labor and effort. In Islamic Banking, the Mudarabah contract has been extended to include three parties: The depositor as financers, the bank as a intermediary, and the entrepreneurs who require fund. The bank act as a entrepreneur when it receives fund from depositors, and as financer when it provide the funds to entrepreneur. Both profit and loss will be split between the two parties.

The main conditions related to a Mudarabah contract are as follows:

1. The bank receive funds from financiers where no restrictions can be imposed on the banks concerning the kind, the duration and location of business activity. However, in this contract, deposited funds can not be invested in activities that are forbidden in Islam. Involvement with such activities would make the contract null and void.
2. The banks have the right to invest the funds directly in the form of own investment or to offer them to other entrepreneurs.
3. The banks have the right to aggregate the profits from different investments, and share the net profit with depositors according to a predetermined ratio. In the event of losses the depositors will lose a partial or entire amount of their funds.
4. The banks have the right to determine the kind of activities, the durations and the locations of projects and supervise the investments when the funds are provided to entrepreneurs. However when a project is undertaken, the banks may not interfere with the management of the investment.
5. The banks can not seek any guarantee from the entrepreneurs to secure their capital against an eventual loss.
6. The liability of financiers is exclusively limited to the amount provided, whereas the entrepreneur’s contribution is restricted solely to their labor and effort. If negligence or mismanagement of entrepreneurs can be proven, they may be made liable for the financial loss and thus be obliged to compensate the financiers.
7. The entrepreneurs share the profit with the banks according to a previously agreed ratio.

 Musharakah

Musharakah means “partnership in English language. The Musharakah means “participating financing” or equity participation. Literally it means a joint-venture agreement between two parties to engage a specific business activity with a aim of making profit. In case of Musharakah profit is to be distributed among the partners in ratio agreed to by the partners in advance and loss is born by each partners strictly in proportion to the capital contribution.

There are two kinds of Musharakah:

1. Mufawadah: It means universal partnership where complete equality of investment, profit or loss is obligatory.
2. Inan : It means limited investment partnership into which all other types of partnership fall. Under an Inan agreement, each partner is the agent but not the guarantor of the other, and the agency applies only to the field of business for which the partnership has been established.

The generally agreed terms of the Musharakah are as follows:

1.      All partners must contribute capital to the partnership.
2.      The contribution of capital can be made either in the form of cash or in material provided that its cash value can be establish prior to employment in the partnership.
3.      The contribution must be subject to profit sharing in any ratio agreed to partners. A fixed amount of profit must not be agreed as part of the profit sharing agreement.
4.      The partner’s losses are to be shared according to the financing share of each partner and may not be limited to the value of their capital contributions.
5.      The partnership may be agreed for a particular period of time or be indefinite. It can be establish as permanent Musharakah in which invested funds are not subject to repayment in the short term or as diminishing partnership where invested funds are repaid over time as profitability allows. Such divestment funds are agreed at the outset.
6.      The termination of Musharakah can only occur with the mutual agreement of all partners, though some jurists argue that one partner on his or her own may require to dissolution of the Musarakah. There is controversy among the jurists on this issue.
7.      Partner must receive regular accounting and other information on business activity.
8.      Permission from existing partners is required before raising capital from new partners.
9.      Partners may negotiate fixed wages at the outset of Musharakah.

Murabahah

The Murabahah, variously translated as fixed profit sale and cost plus profit, is particularly well suited to importers who need to finance goods from the moment of their order or the shipment of goods, until they receive them and can sell them. The most common form of sell in medieval Islam was the musawamah, or sale at a price mutually agreed upon by buyer and seller.

The word Murabahah comes from root meaning of profit, and a murabahah sale involves the purchaser agreeing to buy an item from the vendor with a fixed surcharged or profit added to the original cost. Customer requests the bank to buy an item they require at a specific price, which in practice they have probably negotiated by themselves. Later they buy it from the bank at the agreed higher price. However, Murabahah usally follows the following terms:

1.      The end user settles the mount outstanding in one lump sum upon delivery or thereafter.

2.       The settlement date must be specified.
3.      The financer maintains ownership of the purchased items until delivery.
4.       The financer bears all the costs and risks of ownership until delivery.
5.      The end user and financer must pre-agree and specify the mark-up to be applied.
6.      The mark-up applies to all relevant costs incurred by the financer.
7.      The goods subject to the transaction must be specified.
8.      The cost of the required items, and other relevant costs, must be specified prior to contracting.
9.      In the event of default by the end user, the financer only has recourse to the terms financed, and no further markup or penalty may be applied to the sum outstanding.
10.  The item purchased by the financer can not be under the ownership of the financer but must instead belong to a third party at the time of contracting.
11.  The seller may require the buyer to furnish security for the payment due but only at the time when delivery of purchased items to the buyer is made.

 Ijarah

The literally means to give something on rent’. Ijarah is a ownership of  a specific benefit, wile caring a known cost. From  Islamic point if view ‘a specific benefit’  means an identifiable and actual economic benefit from assets. The second part of the definition ‘a known cost ‘means a pre agreed and non variable cost unless as part of a new lease contract. Specifically Ijarah or  true lease, which represents an exchange transaction in which a known benefit arising from a specific asset is made available in return for a payment, but the ownership of asset is not transferred. There is anoter type of Ijarah, which  is called ‘ijarah wa iqtina’ which means ‘lease and ownership’. This is a lease whereby the lessee derived economic use and ultimate ownership on the nature of a higher purchase. The leasing contract must meet certain conditions. They are:

1.      Asset leased must have a active and physical use. An asset that lies dormant and has no real use can not be leased.
2.      A real benefit must be derived from the asset leased.
3.      Te service that the leased property is supposed to provide and for which it is being leased should be defined and pre agreed.
4.      The  tenure of the lease must be related to the actual econo0mic life of the assets.
5.      The leased property remains in the ownership of the lesser who is responsible for the maintenance and insurance throughout so that it continues to give the service for which it was leased.
6.      The leasing contract is terminated as soon as the asset becomes damaged during the period of the contract, the contract will remain valid.
7.      Leases must not be used on any form of riba.

Bai  Muajjal

The term Bai Muajjal literally means ‘sale on a deferred basis.’ In the modern Islamic banking system it is a variant form of trade dealing, in which the seller allows the buyer to pay the price of the commodity purchased on deferred basis in lump sum or installment. The seller may sell on deferred basis with or without a profit margin, with a profit margin above or below the current market rate of profit, or even below cost as may be agreed to between seller and the buyer. Thus Bai Muajjal does not necessarily involve a mark up on price for the time involved till actual payment, although mark up is permissible in principle. Moreover, no extra charge on agreed price is permissible if the buyer defaults on the due date of payment. The seller has only two choices: either he allow further time to the buyer to pay the agreed price or ave recourse to the court of law.

Since the concept of bai muajjal is based on mark up in price it is also known as murabahah. But in some countries like Malaysia and Bangladesh it is used separately and distinctly for its specific purpose. The classical difference between these two contracts is, in murabahah, the buyer needs to be informed by the bank as to the cost price of the commodity. Otherwise the buyer may terminate the contract. But it is not requirement for bai muajjal contract. In case of bai muajjal the following terms are applicable:

1.      Object must be in existence. Otherwise the contract is void.
2.      Object must be owned and possessed by the seller (Bank).
3.      Sale is instant and absolute. It is not pending on future date.
4.      The price is certain, otherwise it will equivalent to two sales in one sale, which is prohibited in Islam.
5.      No condition attached.

Bai Al-Salam

The term Bai al Salam means ‘advance payment ‘or ‘forward buying’. It is a contract for deferred delivery that was originally sanctioned during the time of the prophet, to facilitate trading activities of farmers who are waiting  for harvest of crops. In more modern times it has also been applied to the production of raw materials and fungible goods in general.  The conditions of bai al salam are as follows:

1.      The goods sold need not be in existence at the time of contracting.
2.      The delivery date must be specified.
3.      Full advance settlement of the agreed sale price is required at the time of  contracting, otherwise the contract would  sanction the trading of one debt for another, which is not permitted in Islam.
4.      The quality of items delivered should be defined. Items must be fungible in nature. Hence, rare items ore those that are not precisely specifiable, can not be the subject of bai al salam contract. If the quality of items upon delivery is found to be other than specified, the buyer has the right of refusal.
5.      The delivery site and delivery date should be defined and fixed.
6.      The buyer does not enjoy ownership of goods until delivery has taken place.
7.      The buyer has the right to take surety from the seller as a form of performance bond.
8.      Where the seller is unable to produce the contracted items on the delivery date, the buyer may nullify the contract and exercise the performance bond.
9.      The seller may deliver the contract items irrespective of buyer’s circumstances on the delivery date.    

Istisna

Istisna is a new concept in modern Islamic Banking and finance that offers a number of future structuring possibilities for trading and financing. It is basically a contractual agreement for processed goods and commodities, allowing cash payment in advance and future delivery, or a future payment or future delivery. This flexibility allows the bank to pre-sell to its clients for future delivery on a cash–on-delivery basis and then negotiate the purchase. General agreement upon principles of the practice of istisna is difficult to identify. However it is often stated that:

1.      The nature and quality of the item to be delivered must be specified.
2.      The manufacturer must make a commitment to produce the item as described.
3.      The delivery date is not fixed, item is deliverable upon completion by the manufacturer.
4.      The contract is irrevocable after the commencement of manufacture except where delivered goods do not meet the contract items.
5.      Payment can be made on one lump sum or installments, and at any time up to or after the time of delivery.
6.      The manufacturer is responsible for the sourcing of inputs to the production process. 

 Islamic & Conventional Banking: A Comparison

Perhaps the most striking feature in the structure of modern banking and finance is the use of credit institutions of accumulated wealth. Loans based on deposit fund provide financial support the varied business of industrial enterprises in whish men engage. Trough credit, the accumulation of wealth, represented by bank deposits, has become a dynamic force in the modern world. Banking systems not only make the actual value of their deposit services available to the society, but they have also multiplied the effective use of such funds by the system of discount and reserve. Commercial banks perform all these functions and are considered to be the chief product of this age.

Therefore, the banks occupy very important position in a modern economy. Through the process of financial intermediation between savers and investors, they exert immense employment and income generation effects, which ultimately help in economic advancement and social welfare. Another social welfare aspect of banks is through the provision of a return to the depositors, who are mainly small savers and include such weaker sections of the society such as widows, disabled orphans, and the aged who could otherwise make no profitable use of their savings. Furthermore, the banks are manufacturer of credit, which serves the community and keeps the wheels of commerce and industry revolving By offering opportunities of investments and safe custody of deposits, they stimulate the habit of saving, and discourage hoarding  the unproductive use of surplus wealth, the promoting investment and the growth of capital. A wise banking policy may go a long way toward mitigating the shocks of a economic crisis, while a banking system, if badly constructed or badly handled is capable of inflicting great harm on trade on industry and may even upset the whole economy.

The philosophical foundation of an Islamic financial system, where the banking is the most developed part of this system goes beyond the interaction of factors of production and economic behavior. Whereas the conventional financing system focuses primarily on the economic and financial aspects of transactions, the Islamic system places equal emphasis on the ethical, moral, social, and religious dimensions, to enhance equality and fairness for the good of society as a whole. The similarities between two systems are that, in Islamic system, banks, although controlled by the rule of Islam essentially perform the same functions as those in a conventional system; that is they act as administrators of the economy’s payment system and financial intermediaries. They are needed in the both systems for same reasons- for the exploitation of imperfections in financial markets. These imperfections include imperfect divisibility of financial claims, imperfect information, transaction cost of search and acquisition, diversification by the surplus and deficit units, and existence of expertise and economies of scale in monitoring transaction. Financial intermediaries in an Islamic system which operate by the laws of Islam, can reasonably expected to exhibit economies of scale with respect to these cost, as do their counterparts in a conventional system.

Due to the nature of their operation, on the other hand there is lot of differences between Islamic and conventional banking. Conventional banking can be defined as ‘ accepting, for the purpose of lending or investing, deposits of money from the public, repayable on demand or otherwise, and withdraw able be cheque, draft, or otherwise.’ But Islamic banks basically implements a new banking concept in that it adheres strictly to the rules of Islamic Shariah in the fields of finance and other dealings. Bank functions in such way that the Islamic principle can be reflected in real life. So, we can see that Islamic banking system is different than the conventional system in terms of mission and ojectives. Therefore the obligations of Islamic banking toward society are greater than the conventional banks for following reasons:

1.   Islamic banking have certain mission to achieve. That is, since God is the creator and ultimate owner of all resources, institutions and persons have a responsibility in society. Therefore, Islamic banks are not free to do as they wish. They have to integrate moral values with economic action.
2. To provide credit to those who have talent and expertise but can not provide collateral to the conventional financing institutions, thereby strengthening the grass-root foundation of society.
3. To create harmony in society based on the Islamic concept of sharing and caring in order to achieve economic, financial and political staility.

The basic important departure of Islamic banking from conventional banking is the prohibition of riba (interest) and the promotion of bai or trade. From this perspective the major difference between Islamic banking and conventional banking are as follows:

    1. A conventional bank finances its customers based on the contract of loan where the bank is the creditor and the customer is debtor. Thus, it is a creditor-debtor relationship. On the other hand, in an Islamic bank, it is run by a contract of sale, a deferred sale contract on which the bank itself, or the bank appoints the customer to, purchase te goods needed and later sales them to the client with a profit margin. The payment will be made on installments over a specified period of time.

     2. An Islamic bank is said to made legitimate profit from its trading activity as it involves risk and effort compared to a conventional bank, which merely finances the customer at a fixed interest rate.

    3. The nature of Islamic banking is not merely lending the money like a conventional bank; rather it is involved in buying and selling the commodity. Thus the selling price is cost + profit margin, is the contracted amount.

    4.  Profit margin imposed by an Islamic bank in some modes of investment. In murabahah or cost + profit is fixed at the time of contract and must be agreed upon by the customer. Once it is agreed upon and stipulated in the contract, it becomes and remains fixed throughout the duration of agreed period of repayment. As a result, even if a client does not pay on time the bank can not ask for a higher price due to delay in settlement of dues. While in case of interest rate, which is also prefixed at the time of contract either would be unchangeable or changed according to the based lending rate that constantly monitored by the central bank.

     5.  Under the Islamic banking system, no penalty is charged for the late payment of installments. On the contrary, it is the usual practice of every conventional bank to chare penalty for every late payment. There will be compound interest. The longer the delay the bigger would be the compounding effect.

    6.   In Islamic financing, no money is advanced to the clients by the bank. Instead, the bank, murabahah, for example, itself purchase the commodity for its clients. Since these transaction can not take place unless the client assure the bank of the willingness of purchasing the commodity, therefore it is not possible at all, unless the bank creates the inventory. In this manner financing is always backed by assets.

    7.  Islamic banks face some risks which are not faced by the conventional banks. Although both have to take credit risks, capital adequacy, liquidity risk etc, the risk under Islamic banking system is higher. Because in case of Islamic banking, both profit and loss are possible in every single deal. More clearly the risk is, loss can be occurred in any deal. But in case of conventional banking, the risk of loss is entirely borne by the borrower (client), but the lender (the bank), safeguard itself from any possibility of loss.

      8.  The focus of financial-accounting is different in Islamic banking. While in  Islamic banking system the emphasis on asset allocation, and return from investment and trade, in conventional banking system the emphasis on interest-spread, provision loan portfolios and maturities of the liabilities.

9.  Islamic banks can not invest on those fields which are forbidden in Islam even though they may be very profitable. For example an Islamic bank can not invest money for the purpose of building a gambling casino, alcohol factory etc. But a conventional bank can advance money for any profitable purpose because it is not bound by any religious restriction.

CHAPTER: Three

ORGANIZATIONAL

PROFILE

Overview of EXIM Bank Ltd.

Economy is the backbone of a nation and financial institutions constitute the backbone of the national economy. And among all the financial institutions, Bank is the most potential one to make substantial contribution. EXIM Bank Ltd. is a 3rd generation scheduled Bank registered by the Bangladesh Bank. Hence the Bank abides by the rules and regulations prescribed by the Bangladesh Bank. The function of the Bank covers a wide range of Banking and functional activities to individuals, farms, corporate bodies other multinational agencies featuring – Safety, liquidity and profitability of savings.

Export Import Bank of Bangladesh Limited, commencing its business since the 3rd August 1999, has boldly made its way through overcoming all its obstacles with extreme efficiency and achieved a place from where it stirs the part of economic role it is allocated with. In the organization part of my report I try to give a little sort of overview about EXIM Bank Ltd from my short-term practical Banking experience.

The Authorized Capital of EXIM Bank is BDT 350.00 crore and total operating profit is 251.84 crore. It may be mentioned that the paid up capital of BDT 267.78 crore, Statutory reserve funds of total BDT 153.26 crore, foreign exchange business is 15643.46 crore, The total deposit of the Bank including Bills Payable of BDT 4154.66 crore of last year is rose to BDT 5758.70 crore. The total investment of the EXIM Bank stood at BDT 5653.17.

As a commercial Bank, EXIM Bank Ltd. do all traditional Banking business including the wide range of savings and credit scheme products, retail banking and ancillary services with the support of modern technology and professional Excellency. But the main focus is, for obvious reason, on export and import trade handling and the development of entrepreneurship and patronization of private sectors.

The bank has migrated all of its conventional banking operation into Shariah based Islami banking since July/2004.

Corporate information

Date of Incorporation                                        : June 02, 1999

Inauguration of First Branch                            : August 03, 1999

Authorized Capital                                                              : Tk. 350.00 crore ( Initial)

Paid-up-Capital                                                   : Tk. 267.774 crore ( Initial)

Number of Branches                                                           : 52 (Fifty Two)

Credit Rating                                                        : Long Term- A (Adequate Safety)

                                                                                                   Short Term- ST_2 (High Grade)

                                                                                                   Notification of Reporting- May 26, 2009.

Registered Office                                                               : ‘SYMPHONY’

 Plot No. SE(F),Road No.142 Gulshan Avenue, Dhaka-1212, Bangladesh.

PABX: 880-2-988 9363, FAX: 880-2-988 9358

Website                                                                  : www.eximbankbd.com

SWIFT                                                                  : EXBKBDDH

Auditors                                                                : Hoda Vasi Chowdhury & Co.

                                                                                Chartered Accountants

                                                                                BTMC Bhaban (8^th Level)

                                                                                7-9, Karwan Bazar, Dhaka-1215.

The Vision of  EXIM Bank Ltd.

The gist of our vision is “Together Towards Tomorrow”. Export Import Bank of Bangladesh Limited believes in togetherness with its customers, in its march on the road to growth and progress with service. To achieve the desired goal, there will be pursuit of excellence at all stages with a climate of continuous improvement, because, in EXIM Bank, we believe the line of Excellence is never ending. Bank’s strategic plans and networking will strengthen its competitive edge over others in rapidly changing competitive environment. Its personalized quality services to the customers with the trend of constant improvement will be the cornerstone to achieve our operational success.

 The Mission of EXIM Bank Ltd.

EXIM Bank’s  missions are stated in the following :

• To be the caring and customer friendly and service oriented bank.
• To create a technology based most efficient banking environment for its customers.
• To ensure ethics and transparency in all level.
• To ensure sustainable growth and establish full value to the honourable shareholders and,
• To be the finest bank in the banking arena of Bangladesh under the Shariah guidelines.
• Above all, to add effective contribution to the national economy

•  Maintaining Corporate and bEventually the bank also emphasizes on:usiness ethics.
•  Being trusted repository of customers’ money and their financial advisor.
•  Making its product superior and rewarding to the customers.
• Display team spirit and professionalism.
• Sound Capital Base.
•  Provide high quality financial services in export and import trade.
•  Provide efficient  Customer service.
• Enhancement of Shareholder’s Wealth.

Corporate Culture of EXIM Bank Ltd.

This bank is one of the most disciplined Banks with a distinctive corporate culture. Here The EXIM Bank believes in shared meaning, shared understanding and shared sense making. Our people can see and understand events, activities, objects and situation in a distinctive way. They mould their manners and etiquette, character individually to suit the purpose of the Bank and the needs of the customers who are of paramount importance to us. The people in the Bank see themselves as a tight knit team/family that believes in working together for growth. The corporate culture we belong has not been imposed; it has rather been achieved through our corporate conduct.

 Highlights of the EXIM Bank Ltd.

• § Implementation of the world renowned Core Banking Software (TEMENOS T24):

In order to provide IT enabled products and services to our valued customers, bank has implemented a world renowned shariah based centralized core banking software named TEMENOS T24. This software is capable enough to provide all sorts of electronic banking services to the valued customers through various electronic delivery channels.

• § Conversion from Conventional Banking to Shariah Based Islami Banking:

It is a great pleasure that by the grace of Almighty Allah, the EXIM Bank have migrated at a time all the branches from its conventional banking operation into Shariah based Islami banking operation without any trouble. Lot of uncertainties and adversities were there into this migration process. The officers and executives of our bank motivated the valued customers by counseling and persuasion in light with the spirit of Islam especially for the non-Muslim customers.

• § ATM Networks:

With a view to establish ATM network of 50 machines, the job of installation of 10 ATMs is going on in full swing. Inshallah, by the end of June 2010, these 10 ATMs will come under our own ATM network. Rest of the machines will come into operation very soon. EXIM Bank Ltd is very keen to provide their customer a 24/7 hours banking service through its ATM Networks.

Financial summary of the EXIM Bank Ltd.

Table 1: Financial highlights of The EXIM Bank Ltd. (Figures in crores)

Hierarchy of Position Structure of EXIM Bank Ltd.

 Products and Services of EXIM Bank Ltd.

Deposit Products

  Super Savings Scheme

  Monthly Savings Scheme

  Monthly Income Scheme

  Multiplus Savings

  Hajj Deposit

Investment Products

  Corporate Finance

  Commercial Finance

  Industrial Finance

  Project Finance

  Lease Finance

  Syndicate Finance

  Hire Purchase Finance

  Real State Finance

• Grameen Phone Bill Deposit
• Electricity Bill Deposit
• Remittance Service
• L/C (Import & Export) Products

EXIM Bank is posed to extend L/C facilities to its importers / exporters through establishment of correspondent relations and Nostro Accounts with leading banks all over the world.

• Other Products

Functional units of EXIM Bank Ltd.

EXIM Bank Motijheel branch is located at Sharif Mansion, 56-57,Motijheel C/A, Motijheel, Dhaka. It monitors and controls the banking operations of the branches scattered in different strategic business locations in Bangladesh. As a commercial Bank, EXIM Bank Ltd. do all traditional Banking business including the wide range of savings and credit scheme products, retail banking and ancillary services with the support of modern technology and professional Excellency. But the main focus is, for obvious reason, on export and import trade handling and the development of entrepreneurship and patronization of private sectors. The Exim Bank limited classifies its whole banking Operation in 3 broad classes. They are:

• § General Banking
• § Export and Import Banking
• § Investment Banking

 General Banking:

• Credit Division

The Credit Division is one of the most essential and valuable divisions of every commercial bank. The Credit Division of the bank deals with issues regarding corporate finance, general credit, and special schemes such as House Building Loan (HBL) and Consumer Credit Scheme (CGS) etc.

• Credit  Inspection Recovery Distribution

Although the loan Administration Division is not at per with the Credit Division of the bank in terms of human resource, the performance of the bank relies heavily on this division. It is responsible for credit monitoring, documentation, distribution L.D.O’s (Loans, Discounts and Overdrafts), preparing MSOCF (Monthly statement of outstanding credit facilities) and dealing with TR (Trust Receipt) etc.

• Human Resource Division

The necessary of having an efficient Human Resource Division is one of the unique requirements for the success of any business organization. EXIM Bank Ltd. unlike other commercial banks has a proficient Human Resource Division that deals with recruitment and manpower planning, performance evaluation, disciplinary actions, promotion, employee service rules and benefits, training and development. An Executive Vice President leads this division with the assistance of a senior Vice President.

• International Division

The role of the International Division is very vital to providing various banking service to the clients. This division also maintains the mutual relationship with many corresponding banks on several issues such as agency and credit line arrangement, reconciliation, authorized signature control, TKC (Test key control), issuance of power of attorney, fund management and treasury operations (foreign) etc.

• Information Technology Division

It is very significant to adapt with the ongoing information technology revolution to provide faster services to the clients. The Information Technology Division supervises the overall computerization of the banking operations and networking, provides system support, deals with data processing and data entry, procures and maintain hardware, maintain and develop software required by the bank to facilitate and support the day to day operations.

• Training Division

The main objective of this division is to make the employees efficient. Usually this division offers training to their employee time to time. This is helpful to the employee to do their job efficiently and effectively.

• Treasury Division

The key responsibility of this division is to utilize its fund to various profitable businesses. Usually financial organization has huge capital and they invest these capitals in various business.

• Cheques Clearing Section

In Clearing Section cheques, dividend warrants and other forms of financial instruments, which are easy for encashment, are received. The clearing department sends these instruments to the Clearing House of the Bangladesh Bank for collection. As soon as cash is received the amount is deposited in the client’s account. Negotiable instrument Law provides protection to a banker who collects s cheque or a draft if the banker fulfils the following conditions:

• He collects the instrument for customer
• The instrument be crossed
• The Account Department

This is the most confidential department of a bank. Recording all kinds of transactions of the branch, confirming their accuracy and preparing statements are the main job of this department. It deals with accounts, financial planning, budget and monitoring, preparation of returns and statement, reconciliation, maintenance of PF (Provident Fund), gratuity fund, local treasury etc.

• Remittance Department

This is one of the busy departments of EXIM Bank ltd. The functions of this department are:

–                To disburse the external remittances to the distinctive branches

–                To manage the internal  remittances

–                To issue pay order, DD, TT

–                To manage MTD and MID account

• Audit Department

The function of this department is to make a continuous audit of the organization. It includes both financial audit and non-financial audit. Generally two types of audit are performed in   here – External Audit and Internal Audit.

§   Card Division

The bank being a service oriented organization offers ATM card and various types of credit card mentioned as below:

–         ATM Card/Debit Card/E-cash

EXIM bank Ltd is extending ATM facility through its 10 ATM machines and with   E -cash shared ATM Network.

–                Credit Card

EXIM bank Ltd. has launched Credit card of International VISA brand in august 2005, with access in local market Card for international market will be issued soon.

Type of Credit card:

• Gold International
• Gold Silver
• Classic Local

 Export and Import Banking :

Bank handle foreign trade in which it has comparatively large share despite it is small size. EXIM provides various facilities  related to L/C and post import finance like loan against imported merchandise (LIM), Loan against trust receipt (LTR), back to back L/C and pre shipment finance facilities like export credit and packing credit to exporters. So far the bank has established correspondence relationship with as many as foreign banks in order to facilities foreign trade. The bank handled total export business of 76465.62 million tk. And import business 78540.49 million tk in 2008. The import business is increased by 27.92 percent and export business is increased by 37.06 percent. Major items of exports are garment and jute products. Items of import included mainly industrial raw materials, garment accessories and capital machinery.

                                   Table 2: Export and Import Banking of EXIM Bank Ltd. (Amount in million)

                                                             (Source: Annual Report 2008)

Investment Banking:

In an effort to secure more stable and predictable earnings from its investment, the bank focused its attention on investment in Govt. securities, shares and call money market. Recently they go with huge investment to the SME sector of Bangladesh. The total investment of the bank stood at Taka 56531.70 million as on June 2008 as against taka 42652.96 million in the previous year showing an increase of 32.54%.

         Table 3: Investment banking of EXIM Bank Ltd.                (Amount in millions)

Strategic and Operations Issues

Internal Control and Compliance

EXIM Bank Limited always keeps it in mind the importance of compliance. For this purpose, Bank constantly reflects its awareness of those requirements. Through these actions the Bank observes all laws and regulations and uphold moral standard in its business practice. Through Bank’s compliance functions, it seeks to ensure that internal operating procedures are in accordance with the legal and regulatory requirements that are applicable in its business.

Bank’s Internal Control and Compliance Division monitors operating procedures, work flows, risk management, risk control and internal control system. The objectives of bank’s auditing are to detect and prevent lapses and irregularities and to restore accuracy. The ethical principles associated with it are the following:

• Independence
• Integrity
• Professional excellence
• Confidentiality
• Professional attitude
• Maintenance of standard

Customer Service

Customer satisfaction is the cornerstone of the Bank’s business strategy and it continues effort to improve quality of customer service. Now-a-days banking is more than a day-to-day transaction; it is all about building relationship with the customers. EXIM Bank and its customers share gains. Resultantly, Bank’s relationship with customers has taken the shape of a true partnership. EXIM Bank creates a comprehensive financial plan and tailor solutions that take into account every aspect of client’s finances. Bank satisfies customers; needs distinctively because EXIM Bank knows that not everybody’s needs are same. EXIM Bank always keep it in mind that the choice of customers continues to multiply.

Risk Management

Asset management is a high growth and high yielding area of business. Awareness, evaluation, and effective management of risks as the central policy of the Board are the highest priorities of EXIM Bank Limited. Bank funds projects which are fundamental to the country’s economic development. The improvement of Credit Portfolio will continue to receive Bank’s constant attention. EXIM Bank implement the recommendations arising from vigorous analysis of the entire credit review process relating to risk assessment and credit authorization, lending has built into Bank’s system. Already EXIM Bank Ltd. Is in a process to implement the worldwide risk management procedure Basel – II.

Human Resources Policy

 EXIM Bank Limited recognizes that its employees are its greatest asset. They are the major contributors to the image of the bank. EXIM Bank also helps them to climb step by step through the terrain of banking acquiring professionalism, experience, acumen and vision. The Bank invest in its own staff and thus in the future the Bank. A fundamental conviction of Bank’s human resource policy is that good performers should be rewarded. Accordingly, Bank continues to encourage high performance culture among employees by providing rewards and good compensation package. EXIM Bank provides its employees with the tool, and training and development opportunities to build rewarding career. One of the competitive strengths of EXIM Bank is its dedicated and capable team of true professionalism.

IT Operation Policy

Exim Bank Limited offers online banking services to its customers through WAN (Wide Area Network) connectivity between maximum of its branches. The Bank has revamped its IT infrastructure and team to ensure maximum system up time, smooth IT operations, faster response time, better capacity planning and higher system and operational security. To encourage skills in IT within the Bank, a separate IT training program is operated so as to make all the staff adaptable to the chances and reap better benefit of the IT services. To compliment the learning and increase better operational efficiency, the Bank has deployed new IT services such as: Windows 2000 Active Directory networking environment, E-mail Messaging (Both Internal and Internet), Centralized File and Print Server, centralized high-speed Broadband connectivity etc.

Information Policy

EXIM Bank Limited pursues a clear-cut policy about information management in the Bank. It reports to the Shareholders, the regulatory authorities and the public in an open, transparent and timely manner concerning its corporate performance and progress about achievement of goals. EXIM Bank holds dialogue with its Customers, Shareholders based on mutual respect and trust.

 EXIM Bank Foundation and CSR Activities

EXIM Bank Limited is guided by a profound sense of responsibility to the society and to the environment in which it is operating. EXIM Bank feels encouraged to finance in projects which are environment friendly and generate employment opportunities. EXIM Bank has founded EXIM Bank Foundation to undertake social work. At least 2% of our annual profit of every year is put aside for the foundation to conduct Corporate Social Responsibilities (CSR) activities. The mainstream CSR activities that are carried out through this foundation are:

• Healthcare service.
• Scholarship program for brilliant poor student.
• Education Promotion Scheme (Interest free loan).
• Helping people affected by natural calamities.
• Helping people in slum areas.
• Donation to educational institutions to setup computer lab.
• Beautification of Dhaka City.
•  Assistance for rehabilitation of disable poor people in the society.
•  Self employment support to poor people by way of providing Rickshaw, Rickshaw Van, Sewing Machine, cash for poultry and livestock, etc.

Exim Bank Limited is going to establish ‘EXIM Islami Hospital Ltd.’ From the Exim Bank Foundation. The aim is to “help the people and serve the people”.

EXIM Bank Branches

Table 4: Information of EXIM Bank’s Branches

CHAPTER: four

FINANCIAL OVERVIEW

AND ANALYSIS

Concept of the study

Financial analysis involves a comparison of a bank performance with that of other banks in the same line of business or category, which usually is identified by the bank’s industry classification. Financial analysis is used to determine the firm’s financial position so as to identify its current strengths and weaknesses and to suggest actions the firm might pursue to take advantage of the strength and to correct any weaknesses.

Financial analysis applies analytical tools using financial data to assess a bank’s performance and trends in that performance. Financial analysis also helps to make financing and investment decisions to maximize the bank’s value with the comparison of other banks within the industry or category. Besides stockholders and creditors financial data is also analyzed to evaluate the attractiveness of the bank by examining its ability to meet its current and expected future financial obligations and returns.

There are many tools used by Financial Managers and Financial Analyst to analyze the financial performance of a bank. Some tools are quantitative and some are qualitative in nature. Ratio Analysis is a useful tool used by the Financial Analysts to analyze the performance of an organization. Ratios express one quantity in relation to another. The relation may be expressed in percentage or in times.  Notable academic research has examined the importance of ratios in predicting stock returns (Ou and Penman, 1989b; Abarbanell and Bushee, 1998) or credit failure (Altman, 1968; Ohlson, 1980; Hopwood et al., 1994). Research has found that financial statement ratios are effective in selecting investments and in predicting financial distress. Practitioners routinely use ratios to determine the value of companies and securities.

One very important aspect of ratio analysis is important to understand. The computed ratio is not “the answer.” The ratio is an “indicator” of some aspect of a company’s performance, telling what happened but not why it happened?

Now, the question is, Return on Equity (ROE) is 10%. What does it indicating? The fact is this, in this case the ratio is answering, not indicating. The ratio indicates only when it is compared with a benchmark or industry average. In Bangladeshi Banking industry there is no such industry benchmark or average with whom a bank can compare its financial ratio to find its financial performance or position. According to the banking experts there are some reasons behind that for which it is not possible to determine a general banking ratio average in Bangladesh. First, in Bangladesh the fields of operation of banks are not same. For example, some emphasizes on SME financing and some are emphasizing Industrial and infrastructural financing. Second, the philosophies of the banks operated in Bangladesh are not same. For example there are some Islami Banks in Bangladesh which are operated under islami banking guidelines. Third, there are some specialized banks in Bangladesh which are emphasizing on individual industry. For example, Bangladesh Krishi Bank. Fourth, the rules and regulations for the category banks are not same by Bangladesh bank. For example, the SLR (Statutory liquidity Reserve) for conventional banks is 18% where the rate is 10% for Islami Banks operated in Bangladesh.   Finally, there are some foreign banks operated in Bangladesh whose performance is measured globally. These are the reasons for which it is not possible to find out the overall banking industry average for ratio analysis. But it is possible to find out a category average for a category within the industry. Because, the operations and philosophies of the banks are almost similar within the category. But to find out the category average the total population within the category should be considered to get most accurate result.

Now, the second question, how can I determine the category, within the industry? In my study I try to find the financial performance of islami banks in Bangladesh and show a comparison among them on the basis of ratio analysis. This can be a category within the industry. The Islami bank is a category within the banking industry. I identify the category because my host organization, Export Import Bank of Bangladesh Limited is shariah based islami banking. In Bangladesh there are seven Islami banks operating under the shariah guideline. But there exists another problem. The Islami banks in Bangladesh are not operating with the same efficiency or performance and some are very new in the industry. For these reasons the industry average that I will find in this study will not reflect the whole industry. To avoid this problem, I take a sub-category within the category. The sub-category is Category A Islami Banks. Now another question, how I will identify the Category A islami banks in Bangladesh? To identify the Category A islami banks in Bangladesh I use another indicator, “Credit Rating”. “Credit Ratings, usually expressed as symbols, are a simple and easily understood tool helping the investors to make judgments on investment decisions in different securities including debt and equity instruments on the basis of their underlying quality”. In Bangladesh, Bangladesh Bank give authority to two credit rating agency to rate the commercial banks of Bangladesh. One is Credit Rating Agency of Bangladesh (CRAB) and another is Credit Rating Information and Services Limited (CRISL). After conducting both quantitative and qualitative study the agency assigned a Rating to a bank which usually makes a sense about the current position of the bank. The rating scales are same for both CRAB and CRISL. In the below I summarize and accumulate the rating scale and its meaning of CRAB and CRISL. For definition purpose, I assigned a relative grade to each scale.

Table 5: The accumulated rating scale of CRAB and CRISL

 [Source: CRISL: Rating Methodology – Bank Loan/ Facility Rating (2010), CRAB: Long Term Credit Rating (2010)]

From the above discussion we can categorize the overall banking industry in four classes, on the basis of credit rating assigned by CRAB or CRISL in Bangladesh. They are:

• Category A Banks: The banks whose long term rating is AAA/Blr AAA or AA1,AA2,AA3/Blr AA+,AA,AA- or A1,A2,A3/Blr A+,A,A-. These banks capacity varies from extremely strong to strong to meet its financial commitments and credit risk varies from minimal credit risk to low credit risk. And these banks have a grade minimum 3.50 to maximum 4.00.

• Category B Banks: The banks whose long term rating is BBB/Blr BBB or BB1,BB2,BB3/Blr BB+,BB,BB- or B1,B2,B3/Blr B+,B,B-. These banks capacity varies from adequate to week to meet its financial commitments and credit risk varies from Moderate to high. And these banks have a grade minimum 2.75 to maximum 3.25.

• Category C Banks: The banks whose long term rating is CCC/Blr CCC or CC1,CC2,CC3/Blr CC+,CC,CC- or C1,C2,C3/Blr C+,C,C-. These banks capacity varies from very week to near to default to meet its financial commitments and credit risk varies from Very high to near to default. And these banks have a grade minimum 2.00 to maximum 2.50.

• Category D Banks: The banks whose long term rating is D/Blr D. These banks are now in a default position. These banks have no capacity to meet its financial obligation and its credit risk is above the extremity. And these banks have a grade 1.00.

In Bangladesh, There are seven islami banks. CRAB rated three of them and the rest are rated by the CRISL. The current credit rating positions of Islami Banks in Bangladesh is given in the below.

Table 6:  The credit Rating position of Islami Banks in Bangladesh

 From the above discussion and current credit rating position of islami banks in Bangladesh, I find, among the seven islami banks five banks can be categorize as Category A Bank. Those banks are:

Table 7: Category A Islami Banks in Bangladesh

In my study, I try to find the financial performance of the Category A Islami Banks in Bangladesh by ratio analysis. To do so, at first I find the financial ratios of every individual banks. Then, I find the category average for the category (Category A) for individual ratio. As, the population size of Category A Islami Banks in Bangladesh is five. So, the average of the five islami banks is the category average for this category for individual ratio. After that, I find the performance of individual banks by subtracting the category average from the actual outcomes for individual ratio. Here, the performance will indicate how much positive/negative the bank is from the category average. At last, I show a comparison between the financial performances of Category A Islami Banks in Bangladesh.

Literature review

Several studies have been done in the relevant area to find out the performance of banks. Many of them used ratio analysis as a tool to analyze the performance. Some studies related with banks performance and ratio analysis are summarized in the below:

Halkos and Salamouris (2004) showed that financial accounting ratios and non-parametric techniques can be used as a complement to each other for the evaluation of bank performance. For this reason they employed both ratio analysis and data envelopment analysis techniques (DEA) to measure the performance of Greek commercial banks.  DEA is a non-statistical method using linear programming. It provides a measure of relative technical efficiency of different decision-making units (DMUs) operating and performing the same or similar tasks. The technique’s main advantage is that it can deal with the case of multiple inputs and outputs as well as factors, which are not controlled by individual management. It is the first time that financial-banking efficiency ratios are used as variables to evaluate efficiency, instead of the typically used input–output variables in almost all banking applications based on input quantity, output quantity and prices. The efficiency of a bank is measured by using ratios such as return on equity (ROE), return on total assets, the difference of interest bearing elements of assets and liabilities, profit/loss per employee, the efficiency ratio and the net interest margin ratio.

Parkan and Wu (1997) focused on the construction of the bank’s performance profile using a new performance measurement method called operational competitiveness rating analysis (OCRA). They also included comparisons of OCRA and DEA ratings and profit scores to show the validity support among the three approaches as well as underscore their differences. Here, OCRA is a nonparametric method whose application requires simple, no iterative computations to obtain ratings that gauge the production units (PU) relative operational performance. The concept of efficiency and inefficiency are used in here to investigate the performance and negative performance, respectively, of operating entities. They adopt the positive performance as efficiency and in the negative perspective and use the term inefficiency to represent negative performance. They classified the performance measurement techniques into three groups: 1) Ratios and Index Numbers, 2) Econometric Models, 3) Modern techniques including non-parametric approaches. They also discussed, “The primary purpose of performance measurement in an organization is control. Unless strategic planning for effective performance measurement and improvement systems is implemented successfully, management techniques such as total quality management, just-in-time, material requirements planning, business process redesign and reengineering and automation are unlikely to produce the expected result”.

Murthy (2003) calculated the important financial ratios of major commercial banks in Oman and compared their financial management practices as indicated by the ratios. The study also compared ratios of commercial banks in Oman with ratios of other banks in developed countries so that it throws up not only intra country performance comparisons but also cross country comparisons. The banks included in the study were: Bank Muscat, National Bank of Oman, Oman International Bank, Oman Arab Bank, Bank Dhofar Al Omani Al Fransi, Majan International Bank. For the purpose of analysis the banks were mentioned as Bank A, Bank B, Bank C, Bank D, Bank E and Bank F but are not in the same order as the list given above. He divided the ratios into six broad groups. They are:

–                Liquidity Management Ratios

–                Interest Rate Risk Management Ratios

–                Credit Risk Management Ratios

–                Capital Account Management Ratios

–                Cost Management Ratios

–                Profitability Management Ratios

He also discussed, “Any bank which successfully manages these six critical variables will be able to achieve success in profitability management which is what bank financial management is all about. While comparing different banks on the above facets, it is important to also recognize that there are tradeoffs between the variables. For example a bank may be successful in liquidity management by maintaining a high level of liquidity but in the process will be able to lend less and may in the process make less of profits. Comparing the profitability management of banks can to some extent reveal how the tradeoffs can be managed”.

Analysis and Findings

 Profitability Management Ratio

Profitability is the net result of a number of policies and decisions. The ratios examined thus far provide some information about the way the firm is operating, but the profitability ratios also show the combined effects of liquidity, asset management, and debt management on operating results. For the measurement of profitability of the banks I use the popular profitability measurement ratios like ROA, ROE, ROI etc. The profitability position of Category A Islami Banks in Bangladesh is analyzed in the below:

 i.Return on Asset (ROA):

Return on assets (ROA) is a measure of the return a bank generates on its assets. Total assets include all balance sheet asset items such as cash, inventory, property, buildings, and machinery. Managers and investors can use this ratio to determine how efficiently the bank uses its assets to generate income.

ROA increases as net income increases. In other words, the more income a company earns with its assets, the better the ROA. Managers and shareholders like to see very large ROAs. This typically indicates efficient management and use of banks assets. High ROA values generally indicate good performance although management should understand the reasons for a higher or lower trending ROA. A bank may not want higher ROAs if the bank must assume too high risk in its product offering.

The return on total assets after interest and taxes is computed as follows:

Table 8: ROA position (percentage) of Category A Islami Banks

From the above analysis I find, the category average in 2010 was 2.082, which is 3.85% higher then 2009. In 2009, it was 2.074 which was 8.13% higher from 2008. In 2008 it was 1.918 which was 1.32% lower rom 2007. In 2007 it was 1.924 which was 19.8% higher from 2006. In 2006, the category average was 1.606 for ROA.

The highest ratio value is the highest performer to determine the financial performance of bank. In 2010, the EXIM bank was the highest performer with a financial performance of 2.33. In 2009, the EXIM bank was the highest performer with a financial performance of 2.38. In 2008, the EXIM bank was the highest performer with a financial performance of 2.47. In 2007, the EXIM bank was the highest performer with a financial performance of 2.02. In 2006, the EXIM bank was the highest performer with a financial performance of 1.88.

         ii.        Return on Equity (ROE):

Return on equity (ROE) is a measure of return a bank generates on shareholder equity. Shareholder equity includes all balance sheet shareholder equity items such as common stock, additional paid-in capital, and retained earnings. Investors can use this ratio to determine how efficiently a bank employs shareholders’ equity to generate income. It figures out the net benefit that the stockholders receive from investing their capital in the bank.

ROE increases as net income increases. In other words, the more income a bank can earns from an equity investment, the better. Shareholders like to see very large ROEs. High ROEs typically drive up share prices since the company is efficiently earning money with its equity capital.

Basically the net income, as mentioned earlier, for a bank is computed by deducting all types of expenses from the all types of incomes that it generates. On the other hand, total equity includes the amount of capital the owners have invested.

Table 9: ROE position (percentage) of Category A Islami Banks

 From the above analysis I find, the category average in 2010 was 20.674, which is 4.84% higher then 2009. In 2009, it was 20.42 which was 19.7% higher from 2008. In 2008 it was 17.06 which was 19.87% lower from 2007. In 2007 it was 21.29 which was 6.39% higher from 2006. In 2006, the category average was 20.012 for ROE.

The highest ratio value is the highest performer to determine the financial performance of bank. In 2010, the Shah Jalal Islami Bank was the highest performer with a financial performance of 25.10. In 2009, the Shah Jalal Islami bank was the highest performer with a financial performance of 25.58. In 2008, the Shah Jalal Islami bank was the highest performer with a financial performance of 23.21. In 2007, the Shah Jalal Islami bank was the highest performer with a financial performance of 38.44. In 2006, the Shah Jalal Islami bank was the highest performer with a financial performance of 34.46.

      iii.        Return on Investment (ROI):

The relation between income and invested capital, referred to as return on invested capital or return on investment (ROI), is probably the most widely recognized measure of banks performance. It allows comparing banks on their success with invested capital. It also allows assessing a company’s return relative to its capital investment risk.

ROI increases as net income increases for a fixed amount of invested capital (Here invested capital is equivalent to long-term investments plus equity). In other words, the more income a bank earns with its invested capital, the better, assuming acceptable risk levels. Managers and shareholders like to see large ROI values. This typically indicates efficient management and use of the capital entrusted to the bank.

Table 10: ROI position (percentage) of Category A Islami Banks

From the above analysis I find, the category average in 2010 was 1.996, which is 10.15% higher than 2009. In 2009, it was 1.812 which was 7.99% higher from 2008. In 2008 it was 1.678 which was 6.88% lower from 2007. In 2007 it was 1.802 which was 3.32% higher from 2006. In 2006, the category average was 1.744 for ROI.

The highest ratio value is the highest performer to determine the financial performance of bank. In 2010, the EXIM bank was the highest performer with a financial performance of 2.38. In 2009, the Shah Jalal Islami bank was the highest performer with a financial performance of 2.40. In 2008, the Shah Jalal Islami bank was the highest performer with a financial performance of 3.01. In 2007, the the Shah Jalal Islami bank was the highest performer with a financial performance of 2.89. In 2006, the Shah Jalal Islami bank was the highest performer with a financial performance of 2.37.

Trend Analysis Of Investment

As of December 2010 total deposits of the bank stood at Tk. 93296.65 million as against Tk. 68609.91 million excluding call/overnight of the previous year. In the year 2010 we emphasized on lowering the rate of interest on deposits to achieve a lower cost of fund. The initiative is intended to encourage investment at lower rate of interest. The focus will continue in future as a part of our support towards economic developments.

Table of trend of Investment

 Tend analysis of Cash

From the above table, significant changes have occurred in cash amount in each year. As here, FY 2005 is the base year, so the changes in amount have been increased from FY 2006-FY 2009. Also from the column – Chart it has been clear that there is an increasing trend in the changes of cash. But in FY 2009 the highest increased in cash amount have been occurred compared with the other FY. So with the cash or liquidity the bank will be able to make payments

Tend Analysis Of Total Assets

Trend Analysis of Profit

As of December 2009 total operating income of the bank stood at Tk. 2829.18 million as against Tk. 1937.76 million excluding call/overnight of the previous year.

 Tend analysis of deposit

 Deposit is the principal source of fund invested to generate revenue in banking business. The total deposit of the stood at Tk.94949.40 million as on 31 December 2010 against Tk.73835.46 million of the previous year with an increase of Tk.21113.94 million at a growth rate of 28.60%.

 Liquidity Risk Management Ratio

Liquidity risk management refers to the ability of a bank to strike the right balance between avoiding the problem of “excess cash” while at the same time ensuring that the bank does not run into a problem of “deficit cash”. A bank maintaining a high level of cash that is excess cash suffers from a problem of profit sub-optimization. More specifically the bank will be losing on profit which it could have otherwise made, had its cash management been better. The reason is that excess cash earns a zero interest. If such cash is invested in the form of commercial loans or securities then the bank would earn a return which directly contributes to profit. Further we should also note that the cash is funded by raising a deposit which has a cost in the form of interest paid to depositors. For the measurement of Liquidity of the banks I use the popular liquidity measurement ratios like Liquid Asset Ratio, Loans to Deposit Ratio and Current Ratio. The liquidity position of Category A Islami Banks in Bangladesh is analyzed in the below:

i. Liquid Asset Ratio:

Liquid Assets Ratio indicates what percentage of assets a bank maintains in the form of liquid assets which are available to meet any possible shortage of cash. The ratio is based on the concept that a bank facing cash problems can easily convert the T-Bills into cash or draw down on amounts lent to other banks in the inter-bank market. A low liquid assets ratio indicates that a bank is managing its liquidity more profitably, but at the same time if the liquidity is too low there is a risk of cash deficit.

The Liquid Asset position of Category A Islami Banks is shown in the below:

Table 11: The Liquid Asset position of Category A Islami Banks

From the above analysis I find, the category average in 2010 was 8.28, which is 2.38% lower then 2009. In 2009, it was 8.482 which was 10.99% higher from 2008. In 2008 it was 7.642 which was 14.12% lower from 2007. In 2007 it was 8.898 which was 3.68% higher from 2006. In 2006, the category average was 8.582 for Liquid Asset Ratio.

The closest ratio value is the highest performer to determine the financial performance of bank. In 2010, the Al-Arafa Islami bank was the closest performer with a financial performance of 7.51. In 2009, the EXIM bank was the closest performer with a financial performance of 9.62. In 2008, the Social Islami bank was the closest performer with a financial performance of 6.69. In 2007, the Al-Arafa bank was the closest performer with a financial performance of 8.22. In 2005, the EXIM bank was the closest performer with a financial performance of 8.35.

ii. Loans to Deposit Ratio:

Loan to Deposit ratio is an indicator of the ability of the bank to convert deposits into loans. This ratio has a variety of meanings. From a liquidity point of view a high loan to deposit ratio indicates a bank’s ability to manage with a low level of cash and marketable investments. An implicit assumption here is that loans are more profitable than investments ( in government securities and other securities).

The Loans to Deposit position of Category A Islami Banks is shown in the below:

Table 12: The Loans to Deposit position of Category A Islami Banks

 From the above analysis I find, the category average in 2010 was 92.734, which is 0.338% higher than 2009. In 2009, it was 92.422 which was 0.078% lower from 2008. In 2008 it was 92.494 which was 0.332% lower from 2007. In 2007 it was 92.802 which was 1.15% higher from 2006. In 2006, the category average was 93.886 for The Loans to Deposit position.

The highest ratio value is the highest performer to determine the financial performance of bank. In 2010, the Social Islami bank was the highest performer with a financial performance of 96.08. In 2009, the Shah Jalal Islami bank was the highest performer with a financial performance of 96.03. In 2008, the Al-Arafa bank was the highest performer with a financial performance of 99. 55. In 2007, the Al-Arafa bank was the highest performer with a financial performance of 103.86. In 2006, the Social Islami bank was the highest performer with a financial performance of 105.26.

 Capital Account Management Ratio

Capital account management refers to the ability of the bank to ensure that there is enough capital both to satisfy the regulations as well as to provide an adequate base for asset growth. Regulations require that every bank should have enough capital to maintain the minimum capital adequacy requirement as defined by the BIS (Bank of International Settlements). Further it is also recognized that capital is required for asset growth. If a bank does not have enough capital which is above the minimum required by the regulators, then further asset growth will have to constrain or stopped by the bank’s management, as further asset growth will worsen the Capital Adequacy. The capital structure of a bank is also a consideration of capital account management.

      i.        Leverage Multiplier:

Leverage multiplier is divided by dividing assets by capital or assets by equity. Here, capital is same as shareholder funds or equity. Leverage Multiplier is also called “Asset to Equity Ratio”. It is a number which shows how much of assets the bank has created for every one rial of equity. A high leverage indicates a higher level of risk compared to a low leverage figure. Capital helps a bank to withstand the impact of bad times when a bank faces losses. To the extent a bank is heavily capitalized its ability to withstand the pressure of bad years is much more than a bank which is thinly capitalized. Financial leverage multiplier indicates the extent to which a bank is willing to take risk. A low leverage figure indicates that the bank prefers to follow a safe path as it grows, while a high leverage indicates that the bank is following a risky policy. However a higher leverage helps a bank to improve its profitability. At the same time, finance experts, say that cost of equity is high compared to cost of deposits and therefore a bank’s management may prefer to finance its asset growth with more of deposits and less of capital (equity) which naturally results in a high leverage ratio.

The Leverage Multiplier position of Category A Islami Banks is shown in the below:

Table 17: The Leverage Multiplier position of Category A Islami Banks

 From the above analysis I find, the category average in 2010 was 12.7, which is 11.87% lower then 2009. In 2009, it was 14.41 which was 3.67% higher from 2008. In 2008 it was 13.9 which was 11.86% lower from 2007. In 2007 it was 15.77 which was 9.05% lower from 2006. In 2006, the category average was 17.34 for The Leverage Multiplier.

The closest ratio value is the highest performer to determine the financial performance of bank. In 2010, the EXIM bank was the highest performer with a financial performance of 12.85. In 2009, the Al-Arafa bank was the highest performer with a financial performance of 13.74. In 2008, the Social Islami bank was the highest performer with a financial performance of 14.74. In 2007, the Islami bank was the highest performer with a financial performance of 15.01. In 2006, the EXIM bank was the highest performer with a financial performance of 17.63.

   ii.        Capital Asset Ratio:

The capital asset ratio implies what is the percent of capital in a comparison of total asset. It shows the equity position of the banks and it also shows what percentage of asset is financed by the capital or equity. The capital asset ratio implies the reverse result meaning of Leverage Multiplier.

Table 18: The Capital Asset Ratio position of Category A Islami Banks

From the above analysis I find, the category average in 2010 was 0.08, which is 14.29% higher then 2009. In 2009, it was 0.07 which was equal to 2008. In 2008 it was 0.07 which was equal to 2007. In 2007 it was 0.07 which was 16.67% higher from 2006. In 2006, the category average was 0.06 for The Capital Asset Ratio.

The closest ratio value is the highest performer to determine the financial performance of bank. In 2010, the EXIM bank was the highest performer with a financial performance of 0.08. In 2009, the EXIM bank was the highest performer with a financial performance of 0.07. In 2008, the Social Islami bank was the highest performer with a financial performance of 0.07. In 2007, the EXIM bank was the highest performer with a financial performance of 0.07. In 2005, the EXIM bank was the highest performer with a financial performance of 0.06.

Cost Management Ratio

      i.        Productivity Ratio:

Productivity or cost / income ratio is the most popular ratio to analyze cost management in banking. The ratio is simple to interpret: it shows the cost involved in producing one Rial of income. If a bank’s staff, admin and other costs are high then the cost involved in producing one Rial of income would be high, and therefore cost productivity would be seen to be low. It is important to note the interest cost has already been netted out in arriving at the net interest income and therefore interest cost does not get reflected in this ratio. The ratio focuses on non-interest costs. The ratio is also called productivity ratio – the lower the ratio the higher is the productivity. This is also called Cost to Income Ratio.

Table 20: The Productivity Ratio position of Category A Islami Banks

From the above analysis I find, the category average in 2010 was 0.6, which is 3.22% lower then 2009. In 2009, it was 0.62 which was 11.43% lower from 2008. In 2008 it was 0.70 which was 6.06% higher from 2007. In 2007 it was 0.66 which was 8.33% lower from 2005. In 2006, the category average was 0.72 for The Productivity Ratio.

The lower ratio value is the higher performer to determine the financial performance of bank. In 2009, the EXIM bank was the highest performer with a financial performance of 0.57. In 2008, the Shahjalal Islami bank was the highest performer with a financial performance of 0.62. In 2007, the Al-Arafa bank was the highest performer with a financial performance of 0.75. In 2006, the Islami bank was the highest performer with a financial performance of 0.76. In 2005, the Social Islami bank was the highest performer with a financial performance of 0.73.

SWOT Analysis

SWOT analysis is the detailed study of an organization’s and potential in perspective of its Strength, Weakness, Opportunity and Threat. This facilitates the organization to make their existing line of performance and also forces the future to improve their performance in comparison to their competitions. EXIM Bank Ltd. operates its Islamic Banking activities by five branches. In conducting Islamic Banking operation together with conventional Banking, EXIM Bank Ltd. has some strength & weaknesses. Also EXIM Bank Ltd. can take some opportunities & might have to face some threat.

Strength

• EXIM Bank Ltd. is the pioneer in providing Islamic Banking Service in collaboration with conventional banking.
• Branches of EXIM Bank Ltd. are providing services efficiently in terms of automation & information technology.
• Branches are connected with Core Banking Software (CBS)-TEMENOS T24 & Providing ATM services.
• EXIM Bank Ltd. has the strong ‘Shariah Council‘leaded by renowned Islami Scholars to regulate and supervise Islamic Banking operation.

Weakness

• Sometimes it seems that Islamic Banking cannot operate efficiently within a conventional banking Framework as in case of EXIM Bank Ltd.
• EXIM Bank Ltd. has lacks of branches to implement Islamic Shariah Principals while providing services according to Qur’an & Hadith.
• Yet no formal Islamic Banking guidelines have been declared by Bangladesh Bank (BB).
• Sometimes it seems to be a just change of name under Islamic Banking.
• As the Islamic Banking is based on the profit & loss sharing (PLS), Investment under Islamic Banking is normally made for short-term.

Opportunities

• Recently Bangladesh Bank has decided to set up formal Islamic banking guidelines to control & regulate Islamic Banking Industry.
• Islamic Banking since their inception has been gaining much popularity hope is to do banking according to Shariah.
• Since the inception of Islamic Banking sector of EXIM Bank Ltd., it is able to switch customers from conventional banking.

Threats 

• The number one threat for EXIM Bank Ltd. Islamic Banking sector is the increasing competition with other Islamic banks & Islamic banking branches of conventional banks.
• The changing rules and regulations of Bangladesh Bank are sometimes really inflexible to implement among clients.
• The rules & regulations of the Head Office sometimes create problems for the Branch Officials.
• Difference in the application of Shariah Principles among different Islamic banks, which may impose negative impact on the customer.

CHAPTER: Five

FINDINGS,RECOMMENDATIONS  AND CONCLUSION

Findings 

While working at EXIM Bank. Shimrail Branch, I have attained to the newer kind of experience. After the collecting and analyzing of data I have got some findings. These findings are completely from my personal point of view. Those are given below.

• Based on my experience, it can be said that EXIM Bank should reconsider its services that better satisfy customer needs and requirements Bank should be more tactful in dealing with the customers and launch new products that fully meet customer expectations.
• EXIM Bank can open some more branches in strategically important place and by doing that they can enhance their business volume. EXIM Bank should give emphasize on technological advancement and try to convert manual tasks into computerized system.
• Each and every branch should establish an information cell which will be able to provide all sort of information regarding banking and respective branch.
• EXIM Bank should try to increase their performance by engaging efficient decision maker in the managerial level.
• EXIM Bank Limited has already established a favorable reputation in the banking industry of the country. It is one of the leading private sector commercial banks in Bangladesh. The bank has already shown a tremendous growth the profits and deposits sectors.
• The bank follow the online banking system to provide the customer better services.
• The consistent and increasing growth trend of the above mentioned performance indicators has increased depositors’ confidence as well as good will/reputation of the bank to a great extent and these have contributed to increase the shareholders value.
• The bank focused on building high-quality human resources with expertise and professional skills adopting the Human Resources Re-engineering and Development Plan with a view to creating an excellent clientele service environment for ultimate achievement of sustained profit growth making no comprises with the quality asset creation.
• The bank focuses on customer-friendly marketing approaches by offering various efficient delivery of personalized banking services at the clients door steps and caters to the ever-growing financing needs of clientele at a competitive price.
• The company philosophy to workout best solutions for customers and clients as a business and customer friendly Bank.

Recommendation

EXIM Bank is one of the most flourishing Banks of Bangladesh with wide growth opportunities of the industry This report gave valuable insights as to where improvements were necessary to improve the quality of service. They should open the on-line banking system all the branches. EXIM Bank should focus on its promotional activities on its Islamic banking operation. When people know more about Islamic banking operation of the bank, they would be more interested to get service from the bank. EXIM Bank with its strong corporate image and organization strength can successfully utilize the presented based on the findings.

Conclusion

From the above discussion, I found the financial performance of category A Islami banks in Bangladesh. Most important I found the industry average for this banking category. I think this average will be a key indicator for these banks in future. From the above discussion the performance of individual banks in individual ratio is clear. And I think from my study, each bank can understand their strengths, weaknesses, opportunities and threats. And they can take necessary actions for improving their financial performances. One thing that is very important, the industry average will change year to year due to the financial environment change. I think, the banks can be successful in improving their financial performance that can anticipate the environment, follow the environment efficiently and make decisions effectively.

Bibilography

Al-Arafah Islami Bank Limited (2006-2010). Annual Report: Al-Arafah Islami Bank Limited .Dhaka: Al-Arafah Islami Bank Limited

Halkos, G., & Salamouris, D. S. (2004). Efficiency measurement of the Greek commercial banks with the use of financial ratios: a data envelopment analysis approach. Management Accounting Research, 15(2), 201-224. doi: 10.1016/j.mar.2004.02.001.

Export Import Bank of Bangladesh Limited (2006-2010). Annual Report: Export Import Bank of Bangladesh Limited. Dhaka: Export Import Bank of Bangladesh Limited

Islami Bank Bangladesh Limited (2006-2010). Annual Report: Islami Bank Bangladesh Limited. Dhaka: Islami Bank Bangladesh Limited.

Parkan, C., 1987. Measuring the efficiency of service operations: an application to bank branches. Eng. Costs Prod. Econ. 12, 237–242.

Shahjalal Islami Bank Limited (2006-2010). Annual Report: , Shahjalal Islami Bank Limited .Dhaka: , Shahjalal Islami Bank Limited

Social Islami Bank Limited (2006-2010). Annual Report: Social Islami Bank Limited. Dhaka: Social Islami Bank Limited.