Policy Implication of Islamic Banking in Bangladesh

Main objective of this report is to analysis Policy Implication of Islamic Banking in Bangladesh, here focus on the Al-Arafah Islami Bank Limited. This report is covered by the structure, functional and overall performance of Al-Arafah Bank Limited. Other objectives are to show the Islami Banking system and evaluate the performance of Islami Banking of AIBL. Finally draw SWOT analysis and suggest recommendation.

Objectives of the Study:

Broad/General Objective: This study will help me to understand the real scenario as a Marketing student. This study will help me to take better Marketing decisions in future as a Marketer professional.

Specific Objectives: After the end of this study I will be able to-

• T0 take proper initiatives to train and develop employees.
• To pay employees the market value.
• To show the Islami Banking system.
• To evaluate the performance of Islami Banking of AIBL.

Methodology of the Study

I have used interview and observation method to collect information. I have also randomly interviewed Seven Employees categories among 13 employees in Uttara branch of AIBL and other official categories to find information about HR related issues in Uttara branch of AIBL. I have used sampling method in collecting information. I have used some statistical tools like percentage and pie chart to conduct my study. The sources of information are as below-

Primary Sources:

• Discussion with Bank Officers.
• Personal observation.
• Desk work in different sections/departments.

Secondary Sources:

• Annual report of the Bank.
• Consultation of related book and publications.
• Different Statements.
• File, Balance sheet and various documents.

History of Islami Banking and Company Information of AIBL

Definition of Islamic Banking

The General Secretariat of Organization of the Islamic Conference (OIC) defines on Islamic Banks, as Islamic bank is a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic shariah and to banning of the receipts and payments of interest on any of its operation.

All OIC countries including Bangladesh have approved the above definition of Islamic Bank. The Islamic Development Bank and others national and Multinational Islamic Banks have also adopted the above definition as their operating guide. Islamic Banking Acts 1983 of Malaysia (Act No.276) has given the following definition “Islamic banking means any company which carries on Islamic Banking business and holds a valid license and all the offices and branches in Malaysia of such a bank shall be deemed to be one bank.

Islamic Banking Characteristics

The following features characterize Islamic banks:

• Transactions those are free from the payment and receipt of a fixed or predetermined rate of interest.
• Transactions those are based on profit and loss sharing (PLS) arrangements where the rate of return is not fixed prior to the undertaking of the transactions. Business activities and investments those are undertaken on the basis of permissible activities.
• Transactions those are free from elements of unreasonable uncertainty. Payments of Zakat (alms or taxes) by the Bank. Transactions that operate through shariah-compliant modes of financing. Establishment of Shariah supervisory boards. These boards are responsible for reviewing, scrutinizing and endorsing the activities and operations of Islamic banks to ensure that their activities are in line with Shariah principles.

Corporate Information

Date of Registration                :         18 June, 1995

1^st Branch Opening                  :         Motijheel Branch, Dbaka

Opening Ceremony                 :         27^th September, 1995

Local Partnership of Capital   :         100%

Chairman

Md. Badiur Rahman

MD Md. Ekramul Haque

History

Islam provides us a complete lifestyle. Main objective of Islamic lifestyle is to be successful both in our mortal and immortal life. Therefore in every aspect of our life we should follow the doctrine of Al-Qur’an and lifestyle of Hazrat Muhammad (Sm.) for our supreme success. Al-Arafah Islami Bank started its journey in 1995 with the said principles in mind and to introduce a modern banking system based on Al-Qur’an and Sunnah. A group of established, dedicated and pious personalities of Bangladesh are the architects and directors of the Bank. Among them a noted Islamic scholar, economist, writer and ex-bureaucrat of Bangladesh government Mr. A.Z.M Shamsul Alam is the founder chairman of the bank. His progressive leadership and continuous inspiration provided a boost for the bank in getting a foothold in the financial market of Bangladesh.  A group of 13 dedicated and noted Islamic personalities of Bangladesh are the member of Board of Directors of the bank. They are also noted for their business acumen. They are also noted for their business acumen. Al-Arafah Islami Bank Ltd. has 78 braches and a total of 1711 employees (upto December 2011). Its authorized capital is Taka 5000 millions and the paid-up capital is Taka   4677.28 millions.The Bank is committed towards establishing welfare oriented banking system, economic uplift of the lower-income group of people, create employment opportunities. Wisdom of the directors, Islamic bankers and the wish of Almighty Allah make Al-Arafah Islami Bank Ltd. most modern and a leading bank in Bangladesh.

Company Vision:

To establish an interest free transaction in the economy.

Mission:

• To conduct interest free banking.
• To establish participatory banking instead of banking on debtor creditor relationship.
• To invest through different modes permitted under Islamic Shariah.
• To accept deposits on profit-loss sharing basis.
• To establish a welfare-oriented banking system.

Objectives of AIBL:

• To establish an interest free economy.
• To establish an modern banking system for all kinds of people
• To take part in the economic growth of the country.
• To eradicate the poverty and to do social services by establishing Schools, Madrashas, University, Hospitals, Public Library etc.

PRODUCTS AND SERVICE

• Mudaraba Savings Deposit Account (MSD)
• Mudaraba Current Deposit Account (CD)
• Mudaraba Term Deposit Receipt Account (MTDR)
• Short Notice Deposit Account (SND)
• Installment Term Deposit (ITD)
• Mudaraba Hajj Account
• Mudaraba Pension   Scheme
• Mudaraba Lakhpoti Scheme
• Mudaraba milliner Scheme
• Mudaraba Kotipoti Scheme
• Mudaraba Double Deposit Schem

General procedure of opening account:

Step1  :    Bank provides account opening form to the prospective customer or applicant.

Step 2 :    Applicant fills up the form

Step 3 :    Application submits the form dully signed by a introducer and along with 2 passport size photo signed by the introducer.

Step 4 :    The authorized officer scrutinizes the application form and

Step 5 :    If they are satisfied, they will open the account

Step 6 :    They issue deposit slip and deposit must be made  it

Step 7 :    After deposition one checkbook is issued

Step 8 :    Bank preserves the specimen Signature card to verify the signature of the client

Step 9 :    Account is opened

Current Account

Current account facilitates the account holder to draw money at any times but no profit is given to the current account deposited money. Current accounts can be opened by any individual or joint or any name of proprietorship business, private limited company or public limited company, association, clubs, societies, trusts etc. Generally, current account is opened for businessman and traders for easy transaction. By taking this liability, AL-ARAFHA-ISLAMI Bank takes service charge 250/- for six months. Minimun deposit of opening amount is tk. 20000/ . Closing of account charge is tk. 300/. (Those charge is start From 01/07/2010)

Mudaraba Term Deposit Receipt Account (MTDR)

It’s a certain period deposited system, which is not repayable before the maturity date of a fixed period. AL-ARAFHA-ISLAMI Bank offers higher rates of profit on such deposits. Usually customers are allowed to open this account for a certain period and the rate of profit in accordance with the terms of the deposit. The features of MTDR as follows:

Minimum balance: TK 10000.00

Savings Account

To maintain smooth and certain life in future Savings account is very suitable for middle class groups. The attributes of Savings Account are:

• 500/- is the minimum amount of initial deposit. (From 01/07/2010)
• Service charge is tk. 150/ (1/2 year). (From 01/07/2010)
• Account closing charge is tk. 300/. (From 01/07/2010)
• Client cannot withdraw money more than twice a week,
• The profit rate is 4% against MD account

For opening of this type of accounts following requirements are necessary:

a) The introducer must be attested photograph.

b) The introducer must be account holder of MD of AL-ARAFAH-ISLAMI Bank Bangladesh Ltd

Short Term Deposit (SND)

Short Term Deposit has following attributes:

• 5% profit rate against STD.
• No restriction over withdrawal of money
• 5000/- is the minimum balance.(From 01/07/2010)
• Service charge is tk. 250/. (From 01/07/2010)
• Account closing charge is tk. 150/. (From 01/07/2010)

Installment Term Deposit (ITD)

It’s a sure investment for a steady return. It can be opened for 5, 8, 10, or 12 years for Tk.200, Tk.300, Tk.500, Tk.1000, Tk.1500 and Tk2000. The savings amount is to be deposited any day of the month. If the depositor has a separate account in the bank for which a standing instruction can be given to transfer the monthly deposit in the scheme’s account. Incase of failure to make the monthly installment in the schedule time 5% on overdue installment amount will be charged. The lowest charge will be Tk. 10 and this will be added with the following month’s installment. After 3 years of savings in this schemed the depositor is eligible for a loan up to 80% of his deposited amount.

 Highlights of the Scheme

• Mudaraba Lakhpoti Scheme
• Mudaraba milliner Scheme
• Mudaraba Kotipoti Scheme

 Mudaraba Kotipoti Scheme

This is the most popular & target oriented schemes. One can open for 3,4,5,6,7,10,12,15,18,20 years and have to pay (Monthly installment) 2,39,500/- 1,69,500/- 1,27,500/- 99,500/- 80,000/- 46,000/- 33,450/- 21,485/- 14,330/- 11,100/- respectively and will get 1corror.

Mudaraba milliner Scheme

For Mudaraba milliner Scheme 3,4,5,6,7,10,12,15,20 year’s monthly installments are 23,950/- 16,950/- 12,750/- 9,950/- 8,000/- 4,600/- 3,345/- 2,170/- 1,150/- respectively and will get 10million.

Mudaraba Lakhpoti Scheme

For Mudaraba Lakhpoti Scheme 3,5,8,10,12 year’s monthly installments are 2,375/- 1,275/- 670/- 460/- 335/-/- respectively and will get 1lak.

Conditions of the Scheme:

1) By filling up a form an account is opened.

2) A non-transferable deposit receipt will provide to the customer after opening the account.

3) If the deposit is withdrawn before a 5-year term, then saving interest rate will be applicable and paid to the depositor. However, no in profit paid if the deposit is withdrawn within 1 year of opening the account and Monthly Income paid to the customer will be adjusted from the principal amount.

4) This scheme will be credited to the loan account until liquidation of the loan amount inclusive of profit. A depositor can avail loan up to 80% of the deposit amount under this scheme.

Mudaraba Double Deposit

Savings works as the very foundation of development. Savings is the prime source of business investment in a country. So it helps to build up capital. To create more awareness and motivate people to save, AL-ARAFAH-ISLAMI Bank offers Mudaraba Double Deposit. Here people put their money for double return after 6years.

Conditions of the Scheme:

a) The deposit can be made in multiplies of TK. 10000.00.

b) This is 6 years period deposit. The deposit cannot be withdrawn at any time with in the maturity date.

c) Al-Arafah monthly deposited Hajj account.

d) Pension scheme.

Product Service and Activities of AIBL

GENERAL BANKING

Bank is nothing but an intermediary between lender (surplus unit) and borrower (deficit unit). Savings and deposits are the main strength of the banks to provide loan. And the interest earned from the difference borrowing and lending is the major portion of banks income. Banks also earns from variety of operation. Branch banking includes four operational divisions in Al-Arafah Islami Bank Limited.

General banking is the front side banking service department. It provides those customers who come frequently and those customers who come one time in banking for enjoying ancillary services. In some general banking activities, these are no relation between banker and customers with who bank are doing its business frequently. Al-Arafah Islami Bank Ltd General Banking is divided into five sectors.

1. Account opening section
2. Bills and clearing Section
3. Remittance Section
4. Deposit Section
5. Cash Section

Initially all the accounts are opened through deposit money by the customer and these accounts are called deposit account. Normally a person needs to open an account to take services from the bank. Without opening an account, one cannot enjoy variety of services from the bank.  Thus, the banking usually begins through the opening of the account with the bank.

TRANSECTION:

Transaction is a financial event, which changes the financial position of a company. There are three types of transaction that is performed by the Al-Arafah Islami Bank Limited.

• Cash Transaction
• Transferring Transaction
• Clearing Transaction

Cash Transaction:

Cash department is a sensitive and important place of Bank. Cash receiving and cash payment is the first and important duty. A Bank should member that the image of a Bank is dependent on cash officer of Bank. If the Cash officer is not smart, outstanding and handsome person, then it is meant this does not care for its customers.

Cash Receipt:

Receiving cash officer should draw his attention to avoid from these types of notes when he /she taken money from the customers”

• Mutilated note
• Mismatched note
• Discolor note
• Forged note
• Incorrect note
• Burn note

Cash payment:

The officer should enough care when he/she makes payment of a cheque. Some of the important checkpoints are given below:

• Amount of the cheque
• Who is the draw of the cheque
• Verifying the signature
• Posted and cash paid sale on the cheque
• Name of the branch
• Is it a fraud cheque?

After payment, the cheque the officer should maintain/noted account number, name of the draw, and withdrawal amount in a register book.

Clearing Transaction:

There are two types:

Inward Clearing:

When any client of any Bank gives cheque to the creditors, the creditor generally gives deposit to their respective Bank account for collection. Then the banks will send those cheques to Bangladesh Bank. The Bangladesh Bank then sends this type of cheques to their respective Bank main branch this type of transaction is called inward clearing.

Outward Clearing:

When the bank gets different types of cheques of different banks from their client for collection, they then send cheques to their main branch. The main branch then sends those cheques to Bangladesh Bank. The Bangladesh Bank sends those to the respective banks.

Financial performance

Investment

The Total investment of the bank stood at Tk.5079.21 million against Tk.3728.41 million during the corresponding period of last year. The percentage of increase is 36.23% as against 13.00% in banking sector. The bank extends investments to the clients under the following modes of investment under Islamic Shariah:

Bai-Murabaha or simply Murabaha: The terms “Bai-Murabaha” have derived form Arabic words Bai and Ribhum. The word “Bai” means purchase and sale and the word ‘Ribhum’ means an agreed upon profit. So Bai-Murabaha means sale for an agreed upon profit. It may be defined as a contract between a Buyers and a Seller under which the seller sells certain specific goods permissible under Islamic Shariah and the word Law of the land to the Buyer at a cost plus and agreed upon profit payable today or some date in the future in lump-sum or by installments. The profit may be either a fixed sum or based on a percentage of the price of the goods.

Musharaka: The word Musharaka is derived from the Arabic word Sharikah meaning partnership. Islamic jurists point out that the legality and permissibility of Musharakah is based on the injunctions of the Holy Qura’n, Sunnah and Ijma (consensus) of the scholars. Musharaka transaction may be conducted in the following manner:

One, two or more entrepreneurs approach an Islamic Bank to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the project. All partners including the Bank have the right to participate in the project. The profit is distributed according to an agreed ratio. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project.

Mudarabah: The term Mudarabah refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital. The first party provides capital and the other party provides the expertise with the purpose of earning lawful profit (approved by Islamic law) which will be shared in a mutually agreed upon proportion.

Bai-Muajjal: The term ‘Bai’ and ‘Muajjal’ are derived from the Arabic words ‘Bai’ and ‘Ajal’ where ‘Bai’ means purchase and sale and ‘Ajal’ means a fixed time or a fixed period. So Bai-Muajjal is a sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on Credit. It is basically a contract between a buyer and seller under which the seller sells certain specific goods, permissible under Shariah and law of the country to the buyer at an agreed fixed price payable at a certain fixed future date in lump-sum or in fixed installments.

Bai-Salam: The term Bai-Salam is used to define a sale in which the buyer makes advance payment, but delivery is delayed until some time in the future. Usually the seller is an individual or business and the buyer is the bank.

Foreign Exchange Division

Foreign exchange is the means and methods by which rights to wealth in a country’s currency are converted into rights to wealth in another country’s currency. In banks when we talk of foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another. Foreign Exchange Department (FED) is the international department Bangladesh Bank issues license to scheduled banks to deal with foreign exchange. These banks are known as Authorized Dealers. If the branch is authorized dealer in foreign exchange market, it can remit foreign exchange from local country to foreign countries. So AL-ARAFAH ISLAMI Bank, Principal branch is an authorized dealer.

There are three kinds of foreign exchange transaction:-

A) Import.

B) Export.

C) Remittance.

A) IMPORT:

To import, a person should be competent to be and importer. According to Import and Export Control Act, 1950, the Office of Chief Controller of Import and Export provides the registration (IRC) to the importer. In an international business environment, buyers and sellers are generally unknown to each other. So seller of goods always seeks security for the payment of his exported goods. Bank gives export guarantee that it will pay for the goods on behalf of the buyer if the buyer does not pay. This guarantee is called Letter of Credit. Thus the contract between importer and exporter is given a legal shape by the banker by ‘Letter of Credit’.

Letter of Credit:

A letter of credit is a letter issued by a bank (know as the opening or the issuing bank) at the instance of its customer (known as the opener) addressed to a person (beneficiary) undertaking that the bills drawn by the beneficiary will be duly honored by it (opening bank) provided certain conditions mentioned in the letter gave been complied with.

 Parties to the L/C

Steps for import L/C Operation – 8 steps operation

Step 1 – Registration with CCI&E:

• For engaging in international trade, even⁷ trader must be first registered with the Chief Controller of Import and Export.
• By paying specified registration fees to the CCI&E- the trader will get IRC/ERC (Import/Export Registration Certificate), to open L/C with bank, this IRC is must.

Step 2 – Determination terms of credit:

The terms of the letter of credit are depending upon the contract between the importer and exporter. The terms of the credit specify the amount of credit, name and address of the beneficiary and opener, tenor of the bill of exchange-period and mode of shipment and of destination, nature of credit, expiry date name and number of sets of shipping documents etc.

Step 3 – Proposal for Opening of L/C:

To have an import LC limit an importer submits an application to department to AL-ARAFAH-ISLAMI Bank.

The proposal contains the following particulars:

• Full particulars of the bank account.
• Nature of business.
• Required amount of limit.
• Payment terms and conditions.
• Goods to be imported.
• Offered security.
• Repayment schedule.

Step 4 – Application by importer to the banker to open letter of credit:

For opening L/C, the importer is required to fill up a prescribed application form provided by the banker along with the following documents:

Step 5 – Opening of L/C by the bank for the opener:

• Taking filled up application form from the importer.
• Collects credit report of exporter from exporter’s country through his foreign correspondence there.
• Opening bank then issues credit by air mail/TELEX/SWIFT followed by L/C advice as asked by the opener through his foreign correspondent or branch as the case may be, at the place of beneficiary. The advising bank advises the L/C to the beneficiary on his own form where it is addressed to him or merely hand over the original L/C to the beneficiary if it is so addressed.

Step 6 – Shipment of goods and lodgment of documents by exporter:

Then exporter ships the goods to the destination of the importer country.

Sends the documents to the L/C opening bank through his negotiating bank. Generally the following documents are sent to the Opening Banker with L/C:

Step 7 – Lodgment of Documents by the opening Bank from the negotiating bank:

After receiving the documents, the opening banker scrutinizes the documents. If any discrepancy found, it informs the importer. If importer accepts the fault, then opening bankers call importer retiring the document. At this time many thing can happen. These are indicated in the following:

•  Discrepancy found but the importer accepts – no problem occurs in lodgment.
• Discrepancy found and importer not agreed to accept – In this case, importer protest and send back all the documents to the exporter and request his to make in the specified manner. Here banker is not bound to pay because the documents send by exporter is not in accordance with the terms of L/C.
• Documents are OK but importer is willing to retire the documents – In this case bank is obligated to pay the price of exported goods. Since importer did not pay for bill of exchange, this payment by bank is one kind of credit to the importer and this credit in banking is known as PAD.
• Everything is O.K. but importer fails to clear goods from the port and request bank to clear- In this case banks clear the goods and takes delivery of the same by paying customs duty and sales tax etc. So, this expenditure is debited to the importer’s account and in banking it is called LIM.

Step-8  Retirement

The importer receives the intimation and gives necessary instruction to the bank for retirement of the import bills or for the disposal of the shipping document to clear the imported goods from the customs authority. The importer may instruct the bank to retire the documents by debiting his account with the bank or may ask for LTR (Loan against Trust Receipt).

Accounting Procedure in case of L/C Opening:

When the officer thinks fit the application to open a L/C, giving the following entries-creates the following charges:-

Amendment of L/C:

After opening of L/C some time’s alteration to the original terms and conditions become necessary. These amendments involve changes in a Unit price.

1. Extension of validity o the L/C.
2. Documentary requirements etc.

Such amendments can be affected only if all the concerned parties agree i.e. the beneficiary, the importer, the issuing bank and the advising bank.

For any amendment the importer must request the issuing bank in writing duly supported by revised indent/preformed invoice. The issuing bank then advises the required amendment to the advising bank. L/C amendment commission including postage is charged to the clients A/C.

Loan against Trust Receipts (LTR):

Advance against a Trust Receipt obtained from the Customers are allowed to only first class tested parties when the documents covering an import shipment or other goods pledged to the Bank as security are given without payment. However, for such advances prior permission/sanction from Head Office must be obtained.

The customer holds the goods or their sale-proceeds in trust for the Bank, till such time, the loan allowed against the Trust Receipts is fully paid off.

The Trust Receipt is a document that creates the Banker’s Hen on the goods and practically amounts to hypothecation of the proceeds of sale in discharge of the lien.

Loan against Imported Merchandise (LIM):

Advance (Loan) against the security of merchandise imported through the Bank may be allowed either on pledge or hypothecation, of goods, retaining margin prescribed or their Landed Cost, depending on their categories and Credit Restriction imposed by the Bangladesh Bank. Bank shall also obtain a letter of undertaking and indemnity from the parties, before getting the goods cleared through LIM Account.

Payment Procedure of Import Documents:

This is the most sensitive task of the Import Department. The officials have to be very much careful while making payment. This task constitutes the following:

Date of Payment:

Usually payment is made within seven days after the documents have been received. If the payment is become deferred, the negotiating bank may claim interest for making delay.

Preparing Sale Memo:

A sale memo is made at B.C rate to the customer. As the T.T & O.D rate is paid to the ID, the difference between these two rates is exchange trading. Finally, an Inter Branch Exchange Trading Credit Advice is sent to ID.

Requisition for the Foreign Currency:

For arranging necessary fund for payment a requisition is sent to the International Department

Transmission of Message:

Message is transmitted to the correspondent bank ensuring that payment is being made.

B) EXPORT:

Understanding:

The goods and services sold by Bangladesh to foreign households, businessmen and Government are called export. The export trade of the country is regulated by the Imports and Exports (control) Act, 1950. There are a number of formalities, which an exporter has to fulfill before and after shipment of goods. The exports from Bangladesh are subject to export trade control exercised by the Ministry Of Commerce through Chief Controller of Imports and Exports (CC & E).

No exporter is allowed to export any commodity permissible for export from Bangladesh.

Unless he is registered with CC! & E and holds valid Export Registration Certificate (ERC). The ERC is required to be renewed ever}year. The ERC number is to be incorporated on EXP forms and other documents connected with exports. The formalities and procedure are enumerated as follows:

1. Obtaining exports LC: To get export LC form exporter issued by the importer.
2. Submission of export documents: Exporter has to submit all necessary documents to the collecting bank after shipping of goods
3. Checking of export documents: After getting the documents banker used to check the documents as per LC terms
4. Negotiation of export documents: If the bank accepts the document and pays the value draft to the exporter and forward the document to issuing bank that is called a negotiating bank. If the bank does buy the LC then the bank normally acts as collecting bank
5. Realization of proceeds: This is the period when the issuing bank has realized the payment.
6. Reporting to the Bangladesh bank: As per instruction by Bangladesh bank the bank has to report to respective department of Bangladesh bank by mentioning latest payment.

7. Issue to proceeds realization certificate (PRC): Bank has to issue precede realization certificate of export LC to the supplier / exporter for getting cash assistance

Export operation:

Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both knitted and woven), Jute, Jute-made products, frozen shrimps, tea are the main goods that Bangladeshi exporters exports to foreign countries. Garments sector is the largest sector that exports the lion share of the country’s export; Bangladesh exports most of its readymade garments products to U.S.A and European Community (EC) countries, Bangladesh exports about 40% of its readymade garments products to U.S.A. Most of the exporters who export through AL-ARAFAH-ISLAMI BANK are readymade garment exporters. They open export L/Cs here to export their goods, which they open against the import L/Cs opened by their foreign importers.

Export L/C operation is just reverse of the import L/C operation For exporting goods by the local exporter, bank may act as advising banks and collecting bank (negotiable bank) for the exporter.

As An Advising Bank:

It receives documents from the foreign importer and hands it over to the exporter. Sometimes it adds confirmation on the L/C on request from the Opening Bank. By adding confirmation, it assumes the responsibility to make payment to the exporter.

As Negotiating Bank:

It negotiates the bills and other shipping documents in favor of the exporter. That is_? it collects the proceeds of the export-bill from the drawer and credits the exporter’s account for the same. Collection proceed from the export bill is deposited in the bank’s NOSTRO account in the importer’s country. Sometimes the bank purchases the bills at discount and waits till maturity of the bill. When the bill matures, bank presents it to the drawer to in cash it.

In our country, Export and Import operation of bank is very much related with one another because of use of Back to Back and maturity of payment for Back-to-Back L/C is set in such that it can be paid out of export proceeds.

Back-To-Back L/C:

It is simply issued to the clients against an import L/C. Back-to-Back mechanism involves two separate L/C. One is master Export L/C and another is Back-to-Back L/C. On the strength of Master Export L/C bank issues bank to Back L/C. Back-to-Back L/C is commonly known as Buying L/C. On the contrary, Master Export L/C is known as Selling L/C.

Features of Back To Back L/C:

• An Import L/C to procure goods /raw materials for further processing.
• It is opened based on Export L/C,
• It is a kind of Export Finance.
• Export L/C is at Sight but back to Back L/C is at Séance.
• No margin is required to open Back to back L/C
• Application is registered with CCI&E
• Applicant has bonded warehouse license.
• L/C value shall not exceed the admissible percentage of net FOB value of relative Master L/C.
• Séance period will be up to 180 days.
• The import L/C is opened for 75% of the value of Export L/C.
• Here L/C issued against the lien of export L/C.
• Arrangements are such that export L/C matures first then out of this export profit, import L/C is paid out.

Documents Required for Opening a Back-to-back L/C

In AL-ARAFAH-ISLAMI Bank Principal Branch, following papers/ documents are required for opening a back-to-back L/C-

1. Master L/C.
2. Valid Import Registration Certificate (IRC) and Export Registration Certificate (ERC).
3. L/C Application and LCAF duly filled in and signed.
4. Performa Invoice or Indent.
5. Insurance Cover Note with money receipt.
6. IMP Form duly signed.

In addition to the above documents, the followings are also required to export oriented garment industries while requesting for opening a back-to-back L/C –

1. Textile Permission.
2. Valid Bonded Warehouse License.
3. Quota Allocation Letter issued by the Export Promotion Bureau (EPB) in favor of the applicant for quota items.

Check list of export I/C : 

Following defective points are usually found in the Master L/C. So, these points are so much carefully checked by the bank officials. These are:

1. Name of the Advising Bank.
2. Name of Transferring Bank
3. Form of Doc. credit:

• Name of Issuing Bank
• Documentary Credit No. And issuing date
• Date of shipment
• Expiry date and place

4. Applicant/ for order of/ On Account.
5. Beneficiary/ Favoring
6. Amount
7. Availability of Credit
8. Partial shipment/ Transshipment
9. Payment condition /Draft Sight
10. Category.
11. Description of goods:

• Item
• Total Qty
• Unit price

12. B/L Clause
13. Reimbursement clause.
14. UCPDC Clause
15. Net FOB value.

Payment of back to back L/C:

In case back to back as 60-90-120-180 days of maturity period, deferred payment is made. Payment is given after realizing export proceeds from the L/C issuing bank.

L/C under EOF:

• Exporter development Fund is created by Bangladesh Bank to give encourages to the exporter in Bangladesh.
• Generally Back-to-Back L/C is Usance L/C that is here bill of exchange is payable after some maturity date say 90 or 120 days after the date of acceptance/negotiation. But some foreign seller may require sight payment. Here import L/C matures first. In that case Bangladesh Bank gives the fund to the bank to pay the price of imported goods in favor of the local purchaser of raw materials. When export proceeds come, first Bangladesh Bank loan to the importer is adjusted and remaining part goes to the importer of raw materials

 Negotiation of Export Documents:

The most common method of financing exporters is negotiation of documents under L/C. It is a post-shipment credit. Here the bank acts as a negotiating bank. After the shipment of the goods, the exporter submits the relative documents to the branch for negotiation. The documents are to submit within the period mentioned in the L/C. after approval of negotiation of the bill the full particulars of the documents are branch with a forwarding letter. The branch claim reimbursement from the issuing bank or from the reimbursing bank, giving clear instructions to credit the proceeds of the bill to the AL-ARAFAH-ISLAMI Bank head office NOSTRO A/C maintained with the named correspondent bank abroad under telex intimation to the Principal branch and Head Office (International Division).

Negotiation stands for payment of value to the exporter against “the documents stipulated in the LAC. If documents are in order, AL-ARFAH-ISLAMI Bank purchases (negotiates)

the same on the basis of banker- customer relationship. This is known as Foreign Documentary Bill Purchase (FDBP).If the bank is not satisfied with the documents submitted to AL-ARAFAH-ISLAMI Bank gives the exporter reasonable time to remove the discrepancies or sends the documents to

L/C opening bank for collection , this is known as Foreign Documentary Bill for Collection (FDBC) entered into the Foreign, bill Purchased (F.B.P) register. The documents are sent to the L/C opening

Presentation of export documents for negotiation/Purchase:

After shipment exporter submits the following documents to AL-ARAFAH-ISLAMI Bank for negotiation.

• Bill of exchange
• Bill of Lading
• Invoice
• Insurance Policy/Certificate
• Certificate of Origin
• Inspection Certificate
• Consular Invoice
• Packing List
• Quality Control Certificate
• S.P. certificate.

Foreign documentary bills for collection (FPBC):

Settlement of Local Bills:

1. The settlement of local bills is done in the following ways. –
2. The customer submits the L/C to AL-ARAFAH-ISLAMI Bank along with the documents to negotiate
3. AL-ARAFH-ISLAMI Bank official scrutinizes the documents to ensure the conformity \\ith the terms and conditions.
4. The documents are then forwarded to the L/C opening bank.
5. The L/C issuing bank gives the acceptance and forwards an acceptance letter.
6. Payment is given to the customer on either by collection basis or by purchasing the document.

Mode of payment of export bill under L/C

As per UCPDC 500, 1993 revision there are four types of credit. These are as follows;

Sight Payment Credit: In a Sight Payment Credit the bank pays the stipulated sum immediately against the exporter’s presentation of the documents.

A Deferred payment Credit: In deferred payment, the bank agrees to pay on a specified future date or event, after presentation of the export documents. No bill of exchange is involved. Payment is given to the party at the rate of D. A 60-90-120-180 as the case may be. But the Head office is paid at T.T clean rate. The difference between the two rates us the exchange trading for the branch.

Acceptance credit: In acceptance credit, the exporter presents a bill of exchange payable to him and drawn at the agreed tenor (that is, on a specified future date or event) on the bank that is to accept it. The bank signs its acceptance on the bill and returns it to the exporter. The exporter can then represent it for payment on maturity. Alternatively he can discount it in order to obtain immediate payment

Negotiation Credit: In Negotiation credit, the exporter has to present a bill of exchange payable to him in addition to other documents that the bank negotiates.

C) FOREIGN REMITTANCE

This bank is authorized dealer to deal in foreign exchange business. As an authorized dealer, a bank must provide some services to the clients regarding foreign exchange and this department provides these services.

The basic function of this department are outward and inward remittance of foreign exchange from one country to another country. In the process of providing this remittance service, it sells and buys foreign currency. The conversion of one currency into another takes place an agreed rate of exchange, which the banker quotes, one for buying and another for selling. In such transactions the foreign currencies are like am other commodities offered for sales and purchase, the cost (convention value) being paid by the buyer in home currency, the legal tender.

Working of this department

1. Issuance of TC, Cash Dollar /Pound
2. Issuance of FDD, FTT & purchasing, Payment of the same.
3. Passport endorsement.
4. Encashment certificate-
5. F/C Account opening &filing.
6. Opening of Export FC retention Quota A/C& maintain.
7. Maintenance of ledger of Cash Dollar, FC Deposit A/C & TC.
8. Maintain FBC register &follow up FBC.
9. Opening of Student file &Maintain.
10. Preparation of all related statement, Voucher & posting.
11. Preparation of Weekly, Monthly. Yearly Statement for Bangladesh Bank return timely.
12. Attending all related correspondence to other Bank or Institutions.

Al-Arafah Islami Bank Foundation:

A portion of income of the bank is being spent on philanthropic activities. Among other philanthropic activities, running of Al-Arafah English Medium Madrasah and Al-Arafah Islami Bank Library are mention worthy.

Al-Arafah English Medium Madrasah:

Al-Arafah English Medium Madrasah has been established by the Al-Arafah Bank Foundation with a view to building next generation according to the ideals of peace and equality of Islam and to establishing banking and other aspects of life in the way of Islam. The prime aim of this Madrasah is to contribute towards building human resource and in the broader sense to ensure human welfare. With this in view Al-Arafah Islami Bank Foundation has established an English Medium Madrasah at Dhanmondi in 1999. Such institution up to O level of its kind is for the first time in Bangladesh.

Al-Arafah Islami Bank Library:

Library is the carrier and reservoir of knowledge. Al-Arafah Islami Bank has shown that other than generating profit, it can also contribute significantly in the field of providing good source of knowledge by establishing a public library at 32, Topkhana Road, Chittagong Bhaban (1^st floor), Dhaka, thus strengthening social development. It is placed in a sound, healthy surroundings. It harbours 23,000 books of reference for the researchers, students, professionals, bankers, physicians, engineers, politicians, writers or journalists, even for the kids. It is open to all from the year 2000 and well located & accessible to everybody. It procured some exceptional collection of books on Religion, Economics, Banking, Computer Science, Business Administration, Sociology, English & Arabic language and juvenile literature in Bangla, English, Urdu & Arabic which are very rare. Varieties of good books were procured in the library, but those were predominantly to enrich Islamic knowledge and culture. To fulfill that goal Al-Arafah Islami Bank distributed a total of 1084 copies of Arabic-Bangla ‘Torjomatul Quran’ to all the upazillas of the country.

Education is the harmonious development of body, mind & soul. If religion is not attached to it the real attitude towards life and values will fail to develop. It is mandatory to learn Elm-e-Din to govern our life in the right way of Islam. To fulfill this noble intention Al-Arafah Islami Bank Library started Dars-ul-Quran (Teachings of Quran) program. This program will cover translation with detail explanation of Quran starting from Sura Fatiha upto Sura Nas gradually. Dars-ul-Quran program takes place every Monday after Magrib prayer.

Other than this Al-Arafah Islami Bank Library arranges shows of feature films or Documantry films on Islamic life & Culture.

Findings

Problem of Island Banking In Bangladesh

Despite attracting public attention to its success in terms of mobilization of deposit and distribution of profit, Islamic banking in Bangladesh yet to achieve the desired level of success due to a number of potential obstacles and problems as follows:

1. Absence of Islamic money market.
2. Lack of Regulatory and supervisory framework for islami banking.
3. Short have supportive and link Institution
4. Lack of suitably qualified personnel
5. Lack of organizing Relationships with Foreign Banks
6. Lack of cooperation among the shariah councils.
7. Non-existence of a central shariah Supervisory Board.
8. Absence of Institutional Mechanism.
9. Lack of coordination among the Islamic banks.
10. Lack of accounting principle and procedures.
11. Inadequate track record of Islamic banking.
12. Lack of course of research on Islamic banking at the educational institutions.
13. Lack of uniform operational procedure of Islamic banking.
14. Lack of inter-country study on the practical operations of Islamic banking.
15. Lack of aped training institute for the Islamic banks.
16. Reluctance of the management to be strict with shariah guidelines.
17. Lack of co-operation between Islamic banks and Islamic NGOs for extending micro-credit.
18. Using a combination of the different financing technique permissible in shariah.
19. Orientation of Islamic banks mainly towards short term financing of trade transaction.
20. Lack of intention of a number of pious Muslims to deposit their savings in Islamic banks for not maintaining strictly by them the Islamic prohibition of interest.
21. Lack of full-fledged shariah audit.
22. Utilization of interest rate for fixing the profit margin in bai modes.

Recommendation of Overall Banking System of AIBL:

1. The number of exporter and importer who operate through this bank is not enough to achieve the goal. So AIBL should offer more facilities to attract them to be their client.
2. In addition with the present services they should include more services. It is badly needed to provide more services to the customer in order to compete in the market.
3. Banking is a service-oriented marketing. Its business profit depends on its service quality. That’s why the authority should always be aware about their service quality.
4. Foreign exchange department should be fully computerized that the exchange process would be convenient for both the bankers and the clients.
5. The Bank should increase there number of branches and foreign exchange department in other branch. Because they can not compete in the market for their few number foreign exchange department.
6. Bank should offer more facilities to the customers such as credit card, visa card, ATM machine etc to survive in the competition.
7. On-line banking should be introduced for better customer services and to eliminate risk of sending document via post and risk of loss. It also increases quick fund transfer and better satisfaction from customer.
8. Proper Banking software should be used to get best benefit from this department.
9. Staff meetings and departmental meetings at the branch level must be increased to develop service quality as well as problem solving
10. Payment to the workforce should be such that will encourage the employees to work more. Remuneration package must be impressive and inconsistent with work performance.
11. The bank should give an aggressive advertisement campaign to build up a strong image and reputation the potential customer.
12. AIBL should use the latest banking technology to provide better services to the customers. It will also attract the customer’s of international banks.
13. AIBL should pursue advertising campaign in order to build a strong image among the people. They should carry out aggressive marketing campaign to attract clients.
14. AIBL should offer different types of loans to their own staffs immediately after confirming their job. This loan will influence them for better performance. The interest rate on this loan must be less then other banks interest rate.
15. The management should take immediate decision to take the current opportunities.

Conclusion

Al-Arafah Islami Bank ltd. is a Non Government commercial Bank in Bangladesh, which started its business from 1995. It is a rare combination of Shariah & modern banking. Among non government commercial banks, Al-Arafah Islami Bank Ltd. is a milestone for economic development. It has been playing an important role to eradicate the unemployment problem in Bangladesh.

Success in the banking business largely depends on effective lending and Advance foreign exchange facilities. Less the amount of loan losses, the more the income will be from Credit operations. Beside this successful foreign exchange activities can provide more profit to the Bank and also create a positive image of the country in the international trade.

Though there are some drawbacks in the foreign exchange department of al-arafah islami bank, modern banking technology and employee and employer sincerity may lead to increase profit.

So, it can be said that, the Al-Arafah Islami Bank Ltd. should take various necessary steps  regarding the suggestions  stated in the  recommendation part of  this report, then the bank may improve its position in the bank industry for a long run basis.