Difference Between Modes of Investment used by Social

1.1 Introduction

Social Invest Bank Ltd was established on November 22,1995 with an

authorized capital of taka.1000 million and Paid up Capital of Taka 260

Million by a group of rignly successful entrepreneurs from various field of

economic activities. It is a Fully licensed scheduled entrepreneurs from

various field of economic activities. It is a fully licensed scheduled

commercial Bank set up in the private sector in line With the Government to

liberalize Banking& Financial services.

The founder Chairman of the Bank was Prof. Dr. M.A Mannan. He is a

world wide renowned Islamic Economist. The first managing director was

Mr. M. azizul Haq. .Highly professional people having wide experience in

domestic and international Banking are managing the Bank.

The present Chairman is Mr. Kamal Uddin Ahmed who is the renowned

Industrialist of the country. The present managing Director is

K.M. Ashaduzzaman has long experience in domestic international Banking.

The Bank has made significant process with in a very short time due to its

very competent Board of Directors, dynamic management and introduction

of various customers friendly deposit and loan producfis. SIBL is operating

three-sector Banking such as Formal, Non-formal and Voluntary Sector.

SIBL is beginning a new era of Islamic banking having social, ethical and

moral dimension in each of its activities ranging from credii to construction,

trading transport, forming to fising, manufacturing to mining and so on.

Some renowned personalities and institutions are sponsors and directors of

this bank.

PREPARED BY-M.M. KARIM, MBA, IIUC 1

1.2. Objectives

The objectives of the study to clarify the modes of investment of SIBL and

compare with investment mode of conventional bank.

The objectives of this report are as follows:

To discuss about investment modes as detailed as possible, used by Social

Investment Bank Limited.

To study the modes of advance & loans used by Conventional Banks.

To compare the investment modes used by Social Investment Bank Limited

and that of by Conventional Banks.

Find out the problems and how to overcome.

1.3. Methodology

A report is logical and systematic plan prepared for directing the research study. It

is also called outline for a framework which specified the method to be used in

data collection and data analysis.

For the purpose of the study, there are two sources of data

a) Primary data

b) Secondary data

c)

The facts and figures used in this study report have been collected both from

primary and secondary sources. A survey was conducted on twelve clients vis a vis

bankers of different branches about the Investment modes used by SIBL and that

of by conventional bank. To collect data a structural questionnaire was used ( a

format of the structural questionnaires is shown at annexure). I have studied the

actual investment operation of Principal Branch & Nawabpur Branch of SIBL and

discussed with the executives & officials of the bank and found the approximate

data which has been presented in the report. As, the secondary source, internet has

been browsed. Relevant books, journals, Annual reports, articles, official

documents etc. have been consulted.


1.4. Scope and Limitations

The scope of this report is limited to the different modes of Investment used by

SIBL and Modes of Advance & Loans used by conventional Bank in Bangladesh.

Such an important study requires in-depth analysis of modes of

Investment/Advance & Loan. To make the study well representative, a number of

branches of different banks were required to be covered. Because of awe full

business in my job, time constraint & space limitation fixed by the course co-

ordinator it was not possible to make the study as in-depth as it was actually

required. Besides, it needs more interaction with different people, but they are so

busy with their schedule work. As a result sometimes they could not give enough

time. Getting the information of the Conventional Banks is very difficult since the

individual company treat it as strict confidential. Since they have a lot of

competitors in the market and Islamic Banks being secured the top position in the

banking sector they are trying to adopt extra ordinary strategy to maintain secrecy

for continuing its progress. However, this study might create a scope of further

study in this important area, which will certainly be more extensive, more

informative, more representative, more insightful and useful.


An Overview of Social Investment Bank Limited

2.1 Introduction

Social Invest Bank Ltd was established on November 22,1995 with an

authorized capital of taka.1000 million and Paid up Capital of Taka 260

Million by a group of rignly successful entrepreneurs from various field of

economic activities. It is a Fully licensed scheduled entrepreneurs from

various field of economic activities. ;t is a fully licensed scheduled

commercial Bank set up in the private sector in line With the Government to

liberalize BGnking& Financial services.

The founder Chairman of the Bank was Prof. Dr. M.A Mannan. He is a

world wide renowned Islamic Economist. The ~irst managing director was

Mr. M. azizul Haq. .Highly professional people having wide experience in

domestic and international Banking are managing the Bank.

-he present Chairman is Mr.Ahmed Akber Sobhan who is also the Chairman

of 3ashundhara Group and ,a renowned Industrialist of the country. The

present managing Director is Mr.Golam Mustafa has long experience in

domestic: relational Banking. The Bank has made significant process with in

a very short - ie due to its very competent Board of Directors, dynamic

management and ; education of various customers friendly deposit and loan

producfis.SiBL is c-Derating three-sector Banking such as Forma!, Non -

formal and Voluntary Sector. SIBL is beginning a new era of Islamic

banking having social, ethical and =ral dimension in each of its activities

ranging from credii to construction, trading transport, forming to fising,

manufacturing to mining and so on. Some renowned personalities and

institutions are sponsors and directors of this bank.


2.3. Investment Position of SIBL:

Total Operating Income of the Bank as on 31st December 2004 stood at Tk.

670.30 million against Tk. 694.89 million of the preceding year. The Bank made

an operating profit of Tk. 414.99 million in 2004 against Tk. 500.54 million of

2003.

A summery of operating result of the Bank as on 31st December 2004 vis-a-vis

the position as on 31.12.2003 is shown below:

(Taka in million)

Particulars 31.12.2004 31.12.2003 Growth Rate

Income on Investment 1787.95 1690.95 5.74%

Profit paid to the Depositors 1372.08 1288.08 6.52%

Net Investment Income 415.87 402.87 3.23%

Commission, Exchange & Other

Income254.42 292.02 -12.88%

Total Operating Income 670.30 694.89 -3.54%

Operating Expences 255.31 194.35 31.37%

Profit Before Provision 414.99 500.54 -17.09%

Provision against Investment &

Others262.12 112.50 133.35

Profit Before Tax 152.47 338.04 -54.90%


Investment policy & the different modes used by SIBL

3.1. Islami Banking:

An Islamic bank is a financial institution which operates with the objective to

implement and materialise the economic and financial principles of Islam in the

arena of banking.

“An Islamic Bank is a financial institution whose status,rules and procedures

expressly state its commitment to the principle of Islamic Shariah and to the

banning of the receipt of interest on any of its operations”-OIC.

The Organisation of (Ali & Shaskar 1995, pp-20-25) Islamic bank is a "company

which carries on Islamic banking business .... Islamic banking business means

banking business whose aims and operations do not involve any element which is

not approved by the religion Islam" (Act No 4.276).

Dr. Ziauddin Ahmed says, "Islamic banking is essentially a nomative concept and

could be defined as conduct of banking in consonance with the ethos of the value

system of Islam" (lbid).

3.2. Investment policy of SIBL:

The special feature of the investment policy of the bank is to invest on the basis of

profit loss sharing system in accordance with the tents and principles of Islamic

Shariah. Earning profit is not the only motive and objective of the Banks

investment policy rather emphasis is given in attaining social good and in creating

employment opportunities for the desiring peoples of Bangladesh.


Accordingly the plan envisages composition of the investment profit-folio with for

agriculture and rural investment, 16% for industrial term investment, 14% for

industrial working capital, 6% for housing and real estate, 6% for transport and

communication, 2% for electricity, gas, water and sanitation services, 2% for

storage’s 40% for import, export and local trade and trade related activities and %

for other productive purposes by the end of the plan period, i.e. the year 2004.

Further, in order to diversify investment profit-folio, the bank engaged itself in

investment operations through special schemes introduced during the years. The

Bank is planning to introduce new investment schemes in addition to welfare

oriented investment schemes such as Rural Development scheme. Its new

investment schemes are Transport investment schemes, car investment scheme,

small business investment schemes, Doctors investment scheme, Household

Durables investment scheme, Housing investment scheme and agricultural

implements investment scheme etc. Besides the bank is financing various

economic groups in different sectors in both urban and rural areas for upliftment of

their economic condition.

Investment operation of a Bank is very important as the greatest share of total

revenue is generated from it, maximum risk is centered in it and the very existence

of a Bank mostly depends on prudent management of its Investment Port-folio.

For efficient deployment of mobilized resources in profitable, safe and liquid

sector a sound, well-defined and appropriate Investment Policy is necessary.

The important feature of the investment policy of the Bank is to invest on the basis

of profit-loss sharing system in accordance with the tenets and principles of Islami

Shariah. Earning of profit is not the only motive and objective of the Bank’s

investment policy rather emphasis is given in attaining social good and in creating

employment opportunities.

A sound well defined, well planned and appropriate investment policy frame work

is a pre-requisite for achieving the goal of the Bank i.e. implementation and

materialization of the economic and financial principles of Islam in the Banking

area and justice in trade, commerce and industry and to build socio-economic


infrastructure, create opportunity for income and sustained economic growth of the

country.


3.3. Objective and Principles of investment operations of SIBL:

The objectives and principles of investment operations of the Banks are:

1. The investment fund strictly in accordance with the principles of

Islamic Shariah.

2. To diversifies its portfolio by size of investment, by sectors (public and

private), by economic purpose, by securities and by geographical area

including industrial, commercial and agricultural.

3. To ensure mutual benefit both for the Bank and the investment client by

professional appraisal of investment proposals, judicious sanction of

investment, close and constant supervision and monitoring therefore.

4. To make investment keeping the socio-economic requirement of the

country in view.

5. To increase the number of potential investors by making participatory

and productive investment.

6. To finance various developments schemes for poverty alleviation,

income and employment generation with a view to accelerating

sustainable socio-economic growth and upliftment of the society.

7. To invest in the form of goods and commodities rather than give out

cash money to the investment clients.

8. To encourage social upliftment enterprises.

9. To shun even highly profitable investment in fields forbidden under

Islamic Shariah and is harmful for the society.

10. The Bank extends investments under the principles of Bai-Marabaha,

Bai-Muazzal Hire purchase under Shairkatul Meilk and Musharaka.

The Bank is making sincere efforts to go for investment under

Mudaraba principle in near future.

3.4. Salient Features of Investment:

Observance of the legal investment limit of the bank.

Observance of the legal investment limit of the client.

Optimum utilization of investable fund.

Profitability of the investments.

Safety and security of the investments.


Investment at minimum possible risk.

Liquidity of investments.

Conform to central bank’s investment restrictions.

Preference to short term investments.

Preference to the investments for small size.

Satisfactory return on investments.

3.5. Investment Modes of SIBL:

Investment is the action of deploying funds with the intention and expectation that

they will earn a positive return for the owner. An Islamic bank makes a direct

investment in short, medium & long-term projects in commercial, industrial,

agricultural, real estates and housing, transport & other services. A profit-loss

sharing bank, particularly the SIBL anges in may types of financing arrangements.

There are three Investment Modes which are:

Partnership Mode (Share Mechanisms)

1. Mudaraba

2. Musharakah

Trading Mode(Bai Mechanism)

1. Bai Murabaha

2. Bai Muajjal

3. Bai Salam

4. Bai Istishna’a

Leasing Mode (Ijara Mechanism)

1. Hire purchase (Ijarah)


2. Hire purchase under Shirkatul Malk


DESCRIPTION OF THREE INVESTMENT MODES

3.5.1. Partnership mode (Share Mechanism):

a) Mudarabah:

It is a form of partnership where one party provides the funds while the other

provides the expertise and management. The first party is called the Sahib-Al-Maal

and the latter is referred to as the Mudarib. Any profit accrued are shared between

the two parties on a pre-agreed basis, while capital loss is exclusively borne by the

partner providing the capital.

b) Musharaka:

An Islamic financial technique that adopts “equity sharing” as a means of

financing projects. Thus, it embraces different types of profit and loss sharing

partnership. The partners (entrepreneurs, bankers) etc.) share both capital and

management of a project so that profits will be distributed among them as per

rations, where loss is shared according to ratios of their equity participation.

3.5.2. TRADING MODES (BAI MECHANISM)

a) Bai Murabaha:

Bai-Mudarabaha may be defined as a contract between a buyer and a seller under

which the seller sells certain specific goods (permissible under Islamic Shariah and

the Law of the land), to the buyer at a cost plus agreed profit payable in cash or on

any fixed future date in lump-sum or by installments. The profit marked-up may be

fixed in lump-sum or in percentage of the cost price of the goods.

b) Bai Muajjal:


Bai-Muajjal may be defined as a contract between a buyer and a seller under which

the seller sells certain specific goods (permissible under Islamic Shariah and the

Law of the Country), to the buyer at a cost plus agreed profit payable in cash or on

any fixed future date in lump-sum or by installments. The seller may also sell the

goods purchased by him as per order and specification of the Buyer.


c) Bai Salam:

Under this mode Bank will executive purchase contract with the client and make

payment against purchase of product, which is under process of production. Bai-

Salam contract will be executed after making any investment showing price,

quality, quantity, time, place and mode of delivery. The profit to be negotiated. It

this mode the payment as the price of the goods is made at the time of Agreement

and the delivery of the goods is deferred.

d) Isteshna’a:

Isteshna'a is a contract between a manufacturer/seller and a buyer under which the

manufacturer/seller sells specific product(s) after having manufactured,

permissible under Islamic Shariah and Law of the Country after haying

manufactured at an agreed price payable in advance or by installments within a

fixed period or on/within a fixed future date on the basis of the order placed by the

buyer.

3.5.3. Leasing Mode (Ijara Mechanism):

a) Hire Purchase /Ijarah:

The term Ijarah has been derived from the Arabic works Ajr and Ujrat which

means consideration, return, wages or rent. This is really the exchange value or

consideration, return, wages, rent of service of an Asset. Ijarah has been defined as

a contract between two parties, the Hiree and Hirer where the Hirer enjoys or reaps

a specific service on benefit gainst a specified consideration or rent from the asset


owned by the Hiree. It is a hire agreement under which a certain asset is hired out

by the Hiree to a Hirer against fixed rent or rentals for a specified period.

b) Hire Purchase Under shirkatul Melk:

Hire purchase under shirkatul Melk is a special type of contract which has been

developed through practice. Actually, It is a synthesis of three contracts : Shirkat,

Izara and sale. Shirkat means partnership. sharikatul Melk means share an

ownership. when two or more persons supply equity, purchase an asset, own the

same jointly, and share the benefit as per agreement and bear the loss in proportion

to their respective equity, the contract is called Shirkatul contract.

Stages of Hire Purchase Under Shirkatul Melk:

Thus Hire Purchase under Shirkatul Melk Agreement has got three stages :

Purchase under joint ownership.

Hire and

Sale and /or transfer of ownership to the other partner Hirer.

3.5.4. There are two other modes of investment which have limited

impact in our country:

a) Quard:

The word "Quard" is an Arabic word" which means loan or credit on advance.

The literal meaning of Quard is giving "Fungible goods" for use without any extra

value returining those goods. It must follow the principle of equal for equal return

with homogenious goods. Fungible goods may be rice, oil, salt, money etc. In

Banking sector, money is used as quard. Quard is Halal by Islam for not to pay any

extra or interest in return.

b) Quard-E-Hasana:


Quard-E-Hasana is also one kind of Quard which is given with the expectation of

return or not.

3.5.5. Special Schemes Under Investment Modes:

a) Small Business Investment Scheme:

Bangladesh a third-wood developing country is rich in natural and human

resources. Inspite of vast possibilities, the majority people of the country livein

hardship-below poverty tapped, explored and exploited. Physical labour is their

only means of earning. A large segment of this populace is active youth force.

Many of them are efficient, intelligent and energetic with initiative & drive and

have courage to tale risks. But they can not uplift their socio-economic condition

due to poverty , lack of financial support and other required facilities. Lack of

capital compelled many small traders to leave their profession. As a result in our

country not only unemployment problem increased but also the young generation

is involved in anti-social activities; thus creating threat to the social life

b) Real Estate Investment Program:

Professionals, Service-holders, Businessmen, Real Estate Developer and other

categories of people who are not entitled for availing investment facilities under

Housing Investment Scheme, shall be eligible under this programme Investment is

to be extended to build new houses and for extension/ completion of the house

already constructed, commercial building, shopping complex, flat apartment etc.

c) Transport Investment Program:

Under this scheme, investment in being allowed to the existing successful

businessmen and potential entrepreneurs in this sector for all types of road and

water transport with simple and easy terms and conditions. The bank is also

extending investment facilities to multinational companies, established, business

houses and well to do officials and professionals for acquisition of private cars,

microbus and jeeps.

d) Rural Development Scheme:


Islami Bank Bangladesh limited (SIBL) envisages an economic system based on

equity and justice. Taking into consideration that majority of the population below

poverty line lives in rual Bangladesh, the Bank has devised a Rural Development

Scheme (RDS) with a view to creating employment opportunity for them and

alleviates their poverty through income generation activities.

The SIBL through its RDS project has been implementing integrated programs

for the landless poor, eage laborers and marginal farmers aimed at meeting their

basic needs and promoting their comprehensive development. Consciousness

among the poor needs to be enhanced so that they can firm ups their position in the

socio-economic structure of the country. In order to consolidate their economic

base, invested money should be used in income generating activities so the poorer

section of the population can become self-reliant. RSD works for the realization of

that objective.


e) Micro Industries Investment Scheme:

Bangladesh as a developing country has been trying for its overall economic

growth. One of the major problems confronting its growth is lack of development

of enterprises and potential entrepreneurs who can create more job opportunities by

establishing new enterprises in the industrial sector. There are a number of

educated unemployed youths and also skilled & semi skilled unemployed persons

in the country. Besides, every year quite a good number of youths are coming out

of the general/technical educational institutions to add to this already crisis ridden

employment market.

Development programmes and efforts will bring no meaningful result unless and

until income generating employment opportunities can be created for the growing

number of unemployed people including the educated unemployed youths.

Establishment and expansion of micro industries can play a vital role in creating

more employment opportunities as well as in the overall socio-economic

development of the county .

Social Investment Bank Limited has been appreciably participating in this

direction by financing industrial sector. With a view to creating wider base for

industries, the Bank has decided to launch "Micro Industries Investment Scheme"

through its Branches. This scheme has been devised to career to the investment

needs of those persons who intend to set-up new micro industrial ventures or to

restructure their old units by way of BMRE involving a total cost of Tk. 5.00 lac.

This is intended mainly to create new jobs for the educated, skilled & semi

unemployed and also to encourage those who remain outside the purview of

investment due to shortage of funds and insufficient collateral. The scheme has

been prepared with easy terms and conditions to encourage the small

entrepreneurs, educated unemployed youths and skilled/ semi skilled persons to

come forward for establishment of micro industries commensurate with the local

demand.


f) Special Schemes:

Cash Waqf provides a unique opportunity for making investment in different

religious, educational and social services. Savings made from earning by the well

off and the rich people of the society can be utilized in our organized manner.

Income earned from these funds will be spent for different purposes like the

purposes of the waqf properties itself.


MODES OF ADVANCE & LOAN USED BY THE

CONVENTIONAL BANKING

The development of commercial banking institutions has been taken place in

different countries according to their economic, political, social and geographical

conditions. Primary function of commercial bank is a) accepting of deposits & b)

lending of money. Deposits are an important source of a bank’s funds. A major

portion of the deposits received by a bank is lent by it. Commercial Banks follows

fixed interest rate in it’s functioning.

Conventional banks engage in the following types of financing arrangements:

4.1. Advances:

Granting advances is the primary function of a bank. A major portion of is funds is

used for this purpose and this is also the major sources of bank’s income.

However, lending money is not without risk and therefore, a banker must take

proper precaution in this process.

Forms of Advance:

a) Cash credits:

A Cash Credit is an arrangement by which a banker allows his customer to

borrow money upto a certain limit. Cash credit is a popular mode of borrowing

by traders, industrialists and agriculturalists. It is a separate account by itself and

does not require having any other account with the bank. It resembles the use of

overdrafts on a checking account. It is an arrangement whereby the borrower may

withdraw funds as needed for day-to-day operations without the delay associated

with making a loan. The borrower may not exceed a predetermined limit and

must deposit cash back into the account as funds become available from daily

operations. Interest is charged on the daily balance in the account.

Cash Credit arrangements are usually made against the security of commodities

hypothecated or pledged with the bank.


Hypothecation- In case of hypothecation, possession of goods is not given to the

bank. The goods remain at the disposal and in the go downs of the borrower. The

bank is given access to goods whenever it so desires. The borrower furnishes

periodical return of stock with him to the bank. Such an advance is granted by the

bank to a person in whose integrity it has full confidence.

Pledge- In case of pledge, the goods are placed in custody of the bank with its

name on the go down where they are stored. The borrower has no right to deal

with them.

Advantages of Cash Credit:

Flexibility- in case of a cash credit system, the customer need not borrow at once

whole of the amount he is likely to require but draw such amounts as and when

required. He can put back any surplus amount, which he may find with him for

the time being. Interest has to be paid by the customer on the amount actually

drawn at any time and not on the full amount of the credit allowed.

Convenience- banks have to maintain only one account for all transactions on the

customer and hence repetitive documentation cab be avoided. Thus, the system is

quite convenient to operate.

b) Overdrafts:

When a current account holder is permitted by the banker to draw more than

what stands to his credit, such an advance is called an overdraft. The banker may

take some collateral security or may grant such advance on the personal security

of the borrower. The customer is permitted to withdraw the amount as and when

he needs it and to repay it by means of deposit in his account as and when it is

feasible for him.

Interest is charged on the exact amount overdrawn by the customer and

for the period of its actual utilization.


Generally, a bank on the basis of a written application and a promissory

note signed by the customer gives on overdraft facility (normally for 30

days).

4.2. Loans:

Under loan system, credit is given for a define purpose and for a predetermined

period. The most obvious form of financing by a conventional bank is the loan

arrangement. Normally, these loans are repayable in installments. Funds are

required for single non-repetitive transaction and are withdrawn only once. If the

borrower needs funds again or wants renewal of an existing loan, a fresh request

is made to the bank. Thus a borrower is required to negotiate every time he is

taking a new loan or renewing and existing loan.

Advantages of loan system:

Financial discipline on the borrower- as the time of repayment of the loan

or its instalments is fixed in advance, this system ensures a greater degree

of self-discipline on the borrower.

Periodic review of loan account- whenever any loan is granted or its

renewal is sanctioned, the banker gets an opportunity of automatically

reviewing the loan account.

Profitability- the system is comparatively simple. Interest accrues to the

bank on the entire amount lent to a customer.


Types of loans:

a) Short Term Loans:

Short term loans are granted to meet the working capital need of the borrowers.

These loans are granted against the security of tangible assets mainly the

movable assets like goods and commodities, shares, debentures etc.

Bridge loans- Bridge loans are essentially short term loans which are granted to

industrial undertakings to meet their urgent and essential needs during the period

when formalities for availing of the term loans sanctioned by financial

institutions are being fulfilled or necessary steps are being taken to raise the

funds from the capital market. These loans are granted by banks or by financial

institutions themselves and are automatically repaid out of amount of the term

loan or the funds raised in the capital market.

b) Term loans:

Medium and long term are usually called Term Loans. These loans are granted

for more than a year and are meant for purchase of capital assets for the

establishment of new units and for expansion or diversification of and existing

unit. Such loans constitute a part of the ‘project finance’ which industrial

enterprises are required to raise from different sources. These loans usually

secured by the tangible assets like land, buildings, plant and machinery etc.

This type of loan is advanced to industries and agriculture for fixed capital

requirements. These loans are also granted to traders for purchase of fixed assets,

to transport operators for purchase of vehicles, and to self-employed persons for

purchase of equipment. These loans are usually extended for a term of 3 to 7

years and in special cases up to 10 years and are generally repayable by

instalments. Since it will take a year or two to derive the full benefits of

expansion or renovation, instalments for repayment may commence after one or

two years of the disbursement of the loan. Interest is charged on annual basis.


c) Consumption loans:

Though normally banks provide loans for productive purposes only but as an

exception loans are also granted on a limited scale to meet the medical needs or

the educational expenses or expenses relating t o marriage and other social

ceremonies etc. of the needy persons, such loans are called consumption loans.

d) Hire-purchase advances:

Under this arrangement, conventional banks grant advances to its clients engaged

in hire-purchase business relating to transports, refrigerators, and televisions, for

example. This type of financing is usually repaid with instalments including

principal and interest. The bank generally requires immovable property as

collateral against this type of financing.

e) Bills purchased/discounted:

Export-Import businesses are performed through opening of L/Cs with Bank. The

client, while opening the L/C, comes to an agreement with the bank that the latter

will repay the bill received on the farmer's behalf on a certain date onward in

exchange for a specific rate of interest determined at the time of agreement. If the

bill happens to reach well ahead of the date mentioned, the bank may purchase

the bill, if requested, with a discount. In this case, the bank makes the return

twice: first, by charging interest and then by discounting the bill.

In conventional banking loans and advances are generally extend as a Project

Loan, Working Capital Loan, Trade Finance (Domestic & International), House

Building Finance (Commercial & Residential), Contractors Financing, Receivable

Financing, Cash Credit, Over Draft, Packing Credit, Trust Receipt, Guarantee,

Letters Of Credit, Personal loan, Loan against TR (LTR), Payment against

Documents (PAD), Loan against Import & merchandise.


Islamic Banking differ with Conventional Banking

5.1. Islamic Banking Vs Conventional Banking:

Islamic Banking is a special nature of financial intermediary, which does not

involve in any way with interest. On the other hand, conventional banking is a

banking system based on interest transactions. Therefore, the nature and modes of

dealing the banking activities under Islamic framework obviously will be un-

identical from the conventional one. The following features of Islamic financial

transactions may be helpful to identify the differences between an Islamic bank

and a conventional bank in different areas:

A . Theoretical aspects :

01. Islamic Banking is an integral part of Islamic Economics and thereby an

Islamic way of life. As Islam prescribes the complete codes of life of a

human being, therefore, the transactions should be tagged and conformed to

the basic teachings of Islam. The traditional banking approach /model is not

derived from such beliefs and understanding.

02. Under Islamic frame work, prohibition of riba (interest/usury) from all

sorts of financial activities is the primary motto of transactions. In 1978, at

its annual conference for Foreign Ministers in Senegal, Organization of

Islamic Conference (OIC) resolved the following concrete definition of

Islami Bank–

“Islami Bank is a financial institution whose statutes, rules and

procedures expressly state its commitment to the principles of Islamic

Shariah and to the banning of the receipt and payment of interest on

any of its operations.”


03. Banning of interest is not the only scope of Islami banking rather

deployment of fund should also be restricted to the sharia permissible

(Halal) businesses.

04. Ethics i.e. what is just/right and what is unjust/wrong is the integral part of

Islamic banking. Adal and Ehsan are the beauties of Islamic Muamelat. In

conventional banking such ideology is not exercised.

05. All sorts of exploitation in any nature is prohibited in Islam. In banking,

exploitation may occur depriving the majority people from their legal share

of earnings generated by a bank. Conventional bank pays pre fixed interest

to its depositors which may not tally with the earnings of the bank. In

Islamic banking the mechanism stipulated under Mudaraba modes ensure

the depositors to earn as per agreed ratio.

06. “Bankers deal with documents not with goods” – the statement may not

necessarily be applicable at all times in Islamic banking. Islami bank buy

and sale goods to the client as per its requirement. The buying-selling is

ensured by adopting the mechanisms of Bai modes that include Murabaha,

Muajjal and Salam. Concept of buying and selling is absolutely absent in

conventional banking.

07. A banking that makes its human resources accountable for their activities in

here and here after. Accountability should be ensured through practices.

Paper banking without shariah can be confirmed in many ways but result

will make the entire income doubtful.

08. Profit is not the only objective of Islamic banking system. Balanced

welfare/development/growth of the entire economy (development of the

people of all sphere of life) is to be taken into account by a banking system

run under Islamic framework as Allah (SWT) asked to mobilize the

resources not only to the haves. On the other hand, conventional banking is

designed to earn more and more profit by any means.


09. Practices of Islamic Banking derived from Quran and Sunnah. Practices

include contract among the parties, writings, evidence etc.

10. Conventional banking is based on the basis of debtor – creditor

relationship. Banking under the Islamic framework is participatory between

the client and the bank. Participation is ensured through the relationship of

buyer and seller of goods and as partner of business in case of shirkat

modes.

11. In traditional banking interest is the price of credit lent by bank. Concept of

credit/loans/ advances is absent in Islamic banking. Islamic bank makes

funding under different investment tools and profit/loss is the result of

investment. Further conventional economists argue that interest is the

reward of savings while Islamic economists disapprove the same arguing

that money must be transformed into capital to be productive and money

may be identified as a potential to capital as money can do nothing

independently.

12. Without taking risk, financial transactions are not allowed in Islam. Under

Islamic frame work , depositors are taking risk as Shahib al Mal. Therefore,

the earnings of depositor is uncertain while conventional banks offer

prefixed interest.

13. Under Islamic banking, access of everybody as depositor/ entrepreneur is

ensured to share the resource mobilization. It contributes to build more

national savings resulting in more investment, more employment, more

income and more savings. As conventional banks impose different barriers

against small savers/micro entrepreneurs therefore national growth is

hampered for unutilized resources.


B. Operational / Functional aspects :

Deposit mobilization :

01. Mudaraba Principle:

A contract between Mudarib (Bank) and Sahib al Mal (Depositor). Sahib al Mal

provides the fund while Mudarib provide the management. Earned profit is

distributed as per agreed ratio. Financial loss is borne by Sahib al Mal and

management /skill /time / efficiency / goodwill loss is borne by Mudarib.

In traditional banking there is no existence of such contract as it collects deposit on

fixed interest basis.

02. Al wadeeah Principle

Use of public fund with their consent. Under traditional banking, it is implied.

Islam doesn’t allow to utilize others resources without their permission.

Investment :

01. Under Trading modes :

Buying and selling should be confirmed in Islamic banking. Three components

should be ensured–existence of goods, having the possession/ownership/title and

transfer of ownership. As per clients order bank will procure the goods and then

sell to the client with adding profit. Quotation, cash memo and other papers (if

any) should be in favor of bank to ensure procurement of goods. Goods once sold

can not be resold i.e. in case of payment failure bank can not charge on the goods

al ready sold. In practice, bank charge compensation to control willful default

which is not realized as income in bank’s books of accounts. Customary trading

modes are Bai Muajjal, Bai Murabaha and Bai Salam.

In conventional banking, due to basic difference in principle, no type of loans and

advances can be compared with trading modes. However, there is an apparent

similarity at operational level of the trading mechanism with the Cash Credit

(hypothecation and pledge) of conventional banks. But the concept of buying and

selling between Bank and client is absolutely absent. Compound interest is charged

and accounted for in case of failure/delay of payment.


02. Under Shirkat modes :

Shirkat modes are Mudaraba and Musharaka. Mudaraba principle is the same as

mentioned in case of deposit mobilization. Musharaka is the equity participation of

both the parties involved. Under Musharaka profit is shared as per agreement and

loss is shared as per equity. Musharaka business can be formed with or without

participation in management.

Conventional banks do not practice these types of mechanism.

03. Under Hire purchase mode :

In conventional banks, HP is practiced. Two contracts (Purchase and sale) are

preformed between bank and client. On payment of the last installment, ownership

is transferred to the client. Interest is accounted for at gestation period. On the

other hand, Islamic banks are operating a special type of mechanism called HPSM

– a mechanism derived through the combination of HP and Musharaka. There are

three contracts (Purchase, sale and rent contract) to be performed under the HPSM

mode. Ownership is gradually transferred to the client after payment of each

installment. Rent is not charged and accounted for in gestation period.

04. Overdrafts, Packing Credits, Demand Loans, Purchase of Demand Drafts:

These are well practiced by conventional banks. In Islamic banking there is no

such provision to practice the same due to the involvement of interest. However

working capital needs can be met through the mechanism mentioned earlier under

Islamic banking.

5.2. Comparison of Financial Modes:

For an effective comparison between the modes used by the two systems of

banking, the following categorizations common to both may be adopted:

1. modes related to project financing,

2. modes related to financing trade and commerce,

and


3. special modes or system specific modes.

In line with the above categorization, medium and long-term loans under

conventional banking, and Mudaraba and Musharaka of PLS-banking come under

category (a). Under category (b), loans, cash credits, Hire Purchase and bills

purchased/discounted of conventional banking and Murabaha, Bai-Salam and Bai-

Muajjal of PLS-Banking may be listed. Loans and cash credits of conventional

banks may be categorized under (c) to satisfy the working capital needs of the

borrower. For Islamic banks, there are no similar modes like its conventional

counterpart to meet working capital needs. Though the "Qard Hasan" is

customarily grouped under this category, it is not widely practiced by PLS-banks

since this mode, by its very nature, does not earn a return. Qard Hasan is

benevolent loans, made on an interest free basis.

Keeping in mind the above categorizations, one may analyze the similarities or

differences between the modes of conventional and those of the PLS-banking. As

far as the first category is concerned, unlike PLS banks, conventional banks

advance money in exchange for a predetermined fixed rate of interest. That is,

under the conventional banking system, every advance made by a bank is a

contract between the bank and the client with the following essential features: (i) a

creditor-borrower relationship is established; (ii) the lending or borrowing is time

bounded qualifying specific date(s) on which a certain percentage of interest on

borrowed capital becomes due for payment along with the principal; and (iii) the

income of the bank is known and prefixed and not in any way related to or variable

with the income of the borrower generated from the borrowed money.

On the other hand, the financing arrangements under the PLS system of Islamic

banks, have the following features: (a) it is a contract between two partners - the

bank and the client-providing a partner-partner relationship; (b) the contract is time

bounded in the sense that the client has to return the capital on/within specific

date(s). However, the return of the bank is not fixed either from the standpoint of

time or that of the rate; and (c) bank shares a prefixed ratio of profit expressed in

percentage terms. This is not a prefixed rate of return calculated on capital

advanced. Thus, income (profit) for a PLSbank, unlike the practice of its

conventional counterpart, fluctuates with the profits of the borrower.


5.3. Investment decision Conventional Banking:

The bank makes a loan at a fixed rate, which includes a mark-up to cover its cost

of capital. The bank is not worried about the rate of return on the project. In other

words, in conventional banking, the rate of return to the bank is fixed regardless of

the success of the project, which is the opposite of what happens in a PLS banking

system.

Under the conventional banking framework, as depicted in Fig-la, the bank charges

a fixed rate of interest to finance only those projects which have rates of return

greater than or equal to the rate of interest. Thus, the conventional banking system

could be termed a Fixed Return System and the investment decision could be

stated as:

I = f(r, r)...................(1) dl dI with--<0; -->0 dr; dr

where, I represents level of investment, r; the rate of interest and r the rate of return

from the project.

dI

Here --- < 0 indicates an inverse relation between interest rate and investment

demand, dr;

dI

Whereas -- > 0 shows a positive relation between investment, I and rate of return,

r. dr

5.4. Investment decision Islami Banking:

Under the profit-loss sharing system of investment financing, the bank receives a

variable rate of return as it shares a percentage of profits earned by the borrower.

Though there is a consensus as to sharing losses in proportion to capital

participation, some of the Muslim economists think that the ratio may vary with

the application of different types of modes of financing (Hasan 1988, p.47). Thus,

the Profit-loss-sharing system of investment financing may be termed a Variable

Return System.


Since the Islamic banking system does not charge interest on any financing

agreements, the client neither receives nor pays fixed rate of return while financing

his investment. Thus, the question arises as to what actually is the allocating device

that ensures optimum allocation of scarce financial resources and establishes

equilibrium in the money market? Furthermore, how does the financing decision of

a bank relate to the investment decision of a firm?

Regarding the formed question, the rate of interest is replaced by the rate of return

in the Islamic banking system. By this replacement there is no strong theoretical

reason to support the often-made a priori assertion that investment levels would

decline (Haque & Mirakhore 1986, p.iii). Though there is no difference of opinion

in regard to the rate of return on equity financing as a tool of efficient allocation of

resources in a Zero Interest Rate Economy (ZIRE), some disagreements still persist

as to the interpretation of the equilibrium condition. According to Arif, capital will

flow into those sectors that offer the highest rate of profits to investors until

equilibrium is reached in the all sectors (Arif 1982, pp. 1-23). Kahf, on the other

hand, says the equilibrium level of investment can be determined at a point where

its cost equals its return (Kahf 1982, pp. 107-23). While Saqr is of the opinion that

equilibrium will be reached at a point where the expected rate of profit is just equal

to the normal rate of profit. Each industry has its own normal rate, and rates differ

according to the size of investment, time maturity, degree of risk and other related

factors (Sakr 1982, pp.63-65). Jarhi's views seem to be more operational and

clear. He says, that there are two robust rules for static efficiency: First is that

marginal rates of return on investment must be equal in all industries. The second

rule requires the use of discounting to take proper care of the time dimension of

costs and benefits. The process of discounting is entirely acceptable in Islam.

This is a rate of return on an alternative real investment (Jahri 1982). Further,

Uzair suggests the average rate of profit prevailing in the economy should be

used as the measure of opportunity cost that guides project evaluation and

resource allocation in the private sector (Uzair 1982, pp.69-70).

The problem still persists as to the definitions of profit and the method of its

calculation. The following discussion concentrates upon resolving these issues.

The term profit in the capitalist world refers to the reward for enterprise whereas

in Islamic context it is a reward that has to be divided between capital and


enterprise. In other words, profit in an Islamic system consists of return of capital

to the investors and the sharing of the remaining profits from the business

operations. But the problem arises with the r being gross rate of return accrued

from project, which includes cost of borrowing and 1 and 11 being the ratios

going to the financier and the entrepreneur leading to confusion in making a

comparison between the first rate and the next two ratios (see Fig-3).

However, the dilemma is not insurmountable. Since we know the rate of return

per unit of investment, we may arrive at total profit. The ratios may then be

applied to the total profit for the purpose of determining shares of profit going to

the financier and the entrepreneur. When we know the ratios and the shares of

profits, their respective rate of return against their investment may easily be

calculated. When we know the financier's rate of return at each level of

investment, we can derive the financier's rate of return curve, i.e., r curve.

Under Islamic banking, the financial contract specifies the following returns to

the financier (bank) and the investor (borrower), respectively:

r = total rate of return

rf= financier's rate of return i.e., (1-

1)r .......... (2) lr = entrepreneur's rate of

return.

Assuming linearity in the movement of T, the financing and investment decisions

under Islamic banking are shown in Fig-lb.

In this figure, the rf curve crosses the horizontal axis at the point marked N' where r = 0, implying the financier's interest to finance all those projects which have rates of return greater than or equal to zero. This may not happen since financing always involves some administrative cost. If so, minimum cost of borrowing under Islamic banking will be somewhere (point M) and the zero rate of return (point N'); say, at point M' as shown above.

We find some additional features of the Fig-3. These are:

i. r; curve is a horizontal line parallel to X-axis.

ii. rf curve is downward sloping and meets with the r curve at its lower level

compared to where r; curve meets, and


iii. The equilibrium under Islamic banking takes place at a higher level of

investment (ON v) than that of the Conventional banking (ON F).

Stability efficiency and Islamic banking:

Islamic banking has a different cash flow and payment commitment arrangement

with the entrepreneurs. Cash flows under Islamic banking are defined as yields

generated from regular operation of projects (which essentially mean profits for

entrepreneurs). Payment commitments, on the other hand, are promises made to

the bank by the entrepreneurs to pay a certain percentage of profits generated by

the project along with repayment of principal. In other words, entrepreneurs

commit to pay a certain percentage of profits, not a fixed percentage of the

loaned amount. Thus, entrepreneurs pay less when profit is lower, and they pay

more when it is higher. Moreover, if profit is zero, they pay nothing to the bank

and if there is loss entrepreneurs are not obliged to pay any profit, rather the bank

shares the loss in proportion to its capital participation. This system of payment,

by its very nature, results in the reduction of the spread between profits or cash

flow and payment commitments. Now let us show how the payment commitment

arrangement under Islamic banking helps reduce cyclical fluctuations. Let us

recall the phasediagram (Fig-4). Suppose we are in the Region I. At this stage,

both the cash commitments (C) and investment (I) is low. Thus, f > 0; g < 0. The

low level of investment can be financed by internal funds. Prospective yields

being high, stimulates further investment.

Region II is characterized by a continuous rise in investment. Here, entrepreneurs

go on expecting still higher prospective returns. This leads them to increase

investment by turning to external financing. In addition they are further

encouraged by the financing arrangement that part of the risk will be borne by the

financier. On the other hand, financiers will be cautious in financing since they are

aware that if there is any loss they will be obligated to share in proportion to their

capital contribution.

In region III, the economy enters into the late stage of the boom. High levels of

investment, at this stage, dampen forecasts of prospective and actual yields.


However, unlike the fixed interest rate case, where cash payments remain the

same, payment commitments under the Islamic banking system are adjusted to the

decline in cash flows. Therefore, there is not as large a need to refinance existing

debts or to take on additional debt in order to meet current payment obligations,

like in the conventional banking system. Moreover, the terms of refinancing may

not be as stringent as the situation that arises when a borrower is unable to meet his

current obligations. Therefore, one can expect that level of investment will not fall

as drastically as it does in the conventional banking system.

In Region IV, the final phase of the cycle, there is a drastic reshuffling of portfolios

to generate additional cash to meet the payment commitments. This results in a

sharp drop in the price of capital assets, which results in chaos in the financing

industry. The main reason for this chaos is the 'spread' between cash flows and

payment commitment. In the Islamic banking system, however, the difference

between cash flows and payment commitments is not as drastic as in the

conventional banking system. Therefore, there are not as many foreclosures,

bankruptcy cases and liquidations of business assets, resulting in a more stable

economy during this stage. The flexibility and the built-in stabilizing capacity of

the Islamic banking system automatically adjusts the spread and keeps the capital

markets and financing under control. Thus, given this natural stabilizing attribute

of the Islamic banking system, it can be stated that it has higher stability efficiency

than its counterpart.

Islamic Banking Vis-a-vis Conventional Banking:

Theoretical discussions on Islamic banking and finance have established that a

system based on profit sharing is not only viable but also has a number of

advantages over the interest-based system. Economists usually evaluate any

scheme on the basis of its allocative efficiency, equity, stability and growth

implications: In this section we evaluate the Islamic banking model described in

the previous section on these criteria.

Equity:


Islam is a religion which emphasizes justice to all parties. A contract based on

interest involves injustice to one of the parties, sometimes to the lender and

sometimes to the borrower. The riba contract is unjust to the borrower because if

somebody takes a loan and uses it in his business, he may earn a profit or he may

end up in a loss. Now, in the case of loss, the person using that money, let me call

him entrepreneur, loses his labor. In addition to this loss, he has to pay interest and

the capital to the lender. The lender, or the financier, in spite of the fact that the

business of the enterprise has ended up in a loss, gets his money as well as his

interest. Therefore, it is unjust. Now, let us see how sometimes interest contract

can be unjust to the lender. Many people do not realize that a riba contract can be

unjust to the lender and not always so to the borrower. In most of the

underdeveloped countries perhaps it is more unjust to the lender. I will explain

how. In most of the under developed countries and even in many developed

countries, most of the borrowers today are big capitalist. They pay may be 10% or

15% rate of interest. We know that if the rate of inflation is higher than that, then

the real rate of interest becomes negative. The lenders are usually small savers like

you and me. Banks collect the savings of all small savers and pass them on to the

industrialists who earn a rate of 50%-100% profit but pay back only 10-15% rate

of interest which in real sense is not even equivalent to the rate of inflation. Based

on that rate of interest and of course minus the administrative expenses of the bank

and their own margin, the banks pass on the difference to the lenders. This is why

the banks give very small rate of return to the small savers. In an inflationary

environment the real rate of interest is even negative. Therefore, had these savings

been invested on the basis of profit sharing, they would have got much better

return.

On the basis of pure economic reasoning, Islamic banking is superior to an interest

based arrangement because it ensures equity between the borrower and the lender.

Both parties share the accrued return which the project generates. Let me also

mention here that in most of the countries, even in a country like United States,

which is the front runner of capitalist model, there are regulations which place

upper limits on the rate of interest. One famous regulation of this kind was

Regulation 'Q' in United States which has now been scrapped but still there are


rules in many countries which place an upper limit on the rate of interest that the

banks can pay. Now, we know that the rate of inflation in many countries is more

than 50%. In the Latin American country, sometimes the rate of inflation has been

1000%. In some Muslim countries also the rate of inflation is quite high. In early

80's, the rate of inflation in Turkey was more than 50% and never in the history the

rate of interest has gone anywhere near this rate.

The rate of interest cannot adjust automatically with the rate of inflation and hence

the lenders are at a disadvantage. In profit sharing system, as the prices increase,

the rate of return of the projects also increases along with the rate of inflation. Thus

the real rate of return does not become negative due to inflation. At the level of an

economy

the-real rate of return is always positive. There may be a few enterprises which end

up in a loss but by and large in a growing economy the rate of return remains

positive. Therefore, both the borrowers and the lenders will share that rate of return

in an equitable manner.

The distribution of credit in an Islamic banking system is also more equitable than

an interest based economy. The reason being that in case of profit sharing the

banks are interested in the results of the project. Of course, they are concerned with

the safety of the capital itself but in an interest based system the safety of the

capital is the sole criteria. Because, rate of interest is fixed, bank's main concern is

that they get their principal as well as the interest -back. In a profit sharing

arrangement, the bank as well as the entrepreneurs will try to maximize their profit.

So their interests are common. They are working for the same objectwe, i.e., for

getting a better return which they will share. Even if a person's credibility may be

low, if the potential of the project is high, the banks may be willing to finance that

project because they will get a better return on their investment. Therefore, small

savers, small entrepreneurs who belong to lower and middle class population get

an opportunity of getting finance from the banks. In an interest based system most

of the funds flows to large industries, multinational corporation and big

industrialists. Small savers and middle class small entrepreneurs do not' get

sufficient finances even for their very good projects. This is not only a theoretical


possibility. It is an empirical fact. The distribution of credit in an interest based

system is skewed in favor of the rich and big industrialist whereas in a profit

sharing system the distribution of bank finances will be more equitably distributed.

Stability of Banking System:

The third criterion usually we talk about in economics is stability. Form the

stability point of view also, the Islamic banking model is more stable than the

conventional banking model. (here, I am talking about the stability of the banking

system and not of the economy.) In an interest based system, there is lack of

symmetry in the cash flow of the banks and the cash flow of the enterprise. The

entrepreneurs or the businessmen have to give a flexed interest to the banks that

has no relationship to the actual return

of the project. Therefore, if the project, i.- not going well in some stage of the

project or in the entire life of the project, there develops an asymmetry between the

cash inflow and cash outflow of the projects.

That creates instability in the entire business sector. From the other end, the

bankers also lack equilibrium in their assets side and the liability side because their

assets are fixed while their liabilities are variable. When there is any external

shock, there is no automatic mechanism which can restore equilibrium between

assets and liabilities of the bank. In case of an Islamic system, the liabilities of the

bank are on the basis of Mudarabah and hence are also variable. If there is any

shock, it effects equally the assets side as well as the liability side of the banks'

balance sheet. For example, if recession occurs, banks' assets will go down. But at

the same time, their liabilities will also go down since they do not have to pay a

fixed rate of return to the depositors. Even the principal is not guaranteed. Thus

their liabilities are related with actual performance of the projects they finance. The

assets and liabilities are mutually linked and this mechanism restores equilibrium

between the assets and liabilities of the Islamic banks. So, there is a very small

likelihood of bank failures.

Growth:


The fourth criterion on which economists usually judge a scheme is that of growth.

From growth point of view also the Islamic banking system is better than the

conventional banking system for the following reasons. Firstly, Islamic banking

model promotes innovation. Innovation is not something on which the big

industrialists have monopoly. Anybody can be enterprising. Anybody can have a

good idea. In Islamic banking, if a small or middle class entrepreneur has a better

project, he has, one - a possibility of getting it financed and, two - he will not be

held back by the fear of tremendous risks. We know that innovations involve risks.

Since risk is shared between the financier and entrepreneur, Islamic banking

system results in a better distribution of risk. Business risk is spread over a larger

number of people. The entrepreneur is risking only his labor and the bank is risking

its capital. Therefore, ingenious entrepreneurs will be forthcoming and innovation

will be promoted. Secondly, conditions of the cost of capital, one of the

determinants of the rate of investment in any economy, are more favorable under

the Islamic system. The cost of capital in an interest based system, which is the rate

of interest, is fixed. In an Islamic economy, the cost of capital varies with

productivity. There is no fixed cost of capital. In the periods when there is a

recessionary trend in the economy, productivity goes down, but at the same time,

the cost of capital for the clients of Islamic banks also goes down. Thus, it does

not have that deterrent effect on investment which a fixed cost of capital has.

Therefore, even in that period, relatively speaking, there will be greater investment

in an Islamic economy or in the profit sharing economy as compared to an interest

based economy. So, for these reason, from the growth point of view also, the

Islamic banking system fares better.


6.1. Findings

At the time of my internship program I have found some Problems which are

faced by the SIBL incase of its mode of investment and its mechanism with the

difference of conventional banking mechanism. Those are discussed bellow –

1. SIBL cannot invest in Shariah prohibited sector, so its investment scope is

narrow in Bangladesh.

2. SIBL lead their investment operation within limited number of investment

mode.

3. Entrepreneurs have no clear concept about Shariah and investment mode.

As a result they do not want to take investment easily.

4. Lack of Islamic Banking rule in our country, the authority of SIBL faces

various problems in their investment operation as a result it cannot run

smoothly.

5. SIBL is shariah based & welfare oriented, so they should engage in poverty

alleviation & rural development seriously, but they could not reach their

idle, as a result, profit is not increasing.

6. Most of the people of Bangladesh have no positive idea about Islamic

Banking operation, some of them hold negative about the philosophy

investment Mechanism of SIBL, so they are not interested to generate the

Banking activities with this Bank.

7. Investment is heart of the Bank and it is the main source of income of

SIBL, but lack of sufficient investment scope a large amount of money are

being idle, as a result, profit is not increasing.

8. There no proper arrangement for women dealing in which many women

clients is in a fix.


9. Lack of sufficient and skilled manpower some time SIBL cannot invest

their asset in proper portfolio.

10. Advertisement is the most important factors to introduce any organization,

goods products or information to the people, but SIBL is not eager to

advertisement that can show their activities in the society.

6.2. Recommendation

Keeping in view the above mentioned facts an attempt has been made in this

report, the following recommendation are given as to how SIBL would be able to

overcome its existing weakness and make SIBL more successful in Bangladesh -

1. SIBL should encourage potential customers, so that they be engaged in

bring forth Halal Products by dint of Halal device, thus they can inspire

their investment scope.

2. SIBL can create new investment mode to increase their investment mode

by huge research & study.

3. By arranging various seminar & symposium, it can possible to understand

the people about Halal, Haram and Shariah and influence them to increase

Halal business.

4. To run Islamic Banking Law in Bangladesh, the authority of SIBL should

create pressure to the government.

5. As welfare oriented Bank, SIBL should increase their operation to remove

poverty alleviation specially rural area in establishing their Branches in

every Upozilla.

6. To remove the negative concept about Islamic Banking, SIBL can

arrange varieties kinds of occasion like ‘Islamic Jalsa’, ‘Oaaz Mahfil’,

and ‘Seminer’ and they can operate mosque-based discussion about

Islamic Banking Function countrywide.

7. By increasing investment scope, SIBL can proper utilize their idle money

through Shariah.

8. In every branch must have women interpreter, who will deal with women

customer and understand them about their activities.


9. SIBL can develop the skillness of the manpower by increasing their

varieties kinds of training facility on such as Computer Course, English &

Arabic Language Course, Business ethics, morality, organization

behaviour, related topics of General Banking, Investment & Foreign

Exchange etc.

10. SIBL have to conscious about their advertisement (even giving a

permanent timing calendar of `Namaz and Roza' with adding a brief

glance of Islamic Banking Operation to every Mosque in our country) so

that it can reach its marketing activities in `Urban', `Sub Urban', `Rural',

even up to hidden village.


6.3. Conclusion

According to Islam, interest is the root cause of economic & financial injustice.

That’s way interest in all forms and intent, whether in simple or compound, is

forbidden by Islam. To remove the impact of interest from the society, the SIBL

are trying heart and soul. They are doing well in banking sector. Here the Islamic

financing system of SIBL has made a evaluation in the conventional banking

system. This bank is committed to run all it's activities as per Islami Shriah of

SIBL through its continued success and steady progress has, by how, earned the

reputation of being one of the leading probate sectors banks of the country. It has

made revaluation especially in the field of bank investment SIBL became

successful in proving that bank investment can be made properly, Profitably

following profit and loss sharing concept with abolishing interest, and which is

also beneficial to human being and society. And these all characteristics of bank

investment are absolutely absent in case of conventional bank.

In spite of the present limitation, SIBL system has tremendous potentiality and

prospect in Bangladesh. SIBL has brought together many depositors and

entrepreneurs under their fold and coverage. These depositors and entrepreneurs so

long avoided interest-based banking on ground of religious injunctions.


6.4. Bibliography

1. M. Kabir Hassan, Text Book on Islamic Banking , Published by Islamic

Economics Research Bureau.

2. Al-Haj Mohammed Haider Ali Miah, A Hand book of Islamic Banking and

Foreign Exchange Operation.

3. Iqbal, Z. & Mirakhor, A. (1987), Islamic Banking. Al-

Tawhid.Vol.4.No.3……..Islamic Thought and Culture. P.106.

4. Ali, M and Sarkar,A.A. (1995). Islamic Banking:Principles and Operational

Methodology. Islamic Economics Research Bureau. Pp.20-25.

5. M. Mahbubuzzaman, unpublished lecture sheet on Corporate Banking

System (A major Course of MBA).

6. Md. Shafiqul Islam, unpublished lecture sheet on Islamic Financial System

(A Course of MBA).

7. Annual Report Social Investment Bank Limited –2001 to 2004.

8. Different types of brochures, Articles, Office Documents of SIBL.

9. www.siblbd.com dated Augast 11, 2006. www.premierbank.com dated

Augast 11,2006. www.ucbl.com dated Augast 11,2006.,

www.islamibankbd.com


http://www.ucbl.com/

http://www.premierbank.com/

http://www.eximbankbd.com/

QUESTIONNAIRE ON DIFFERENCES IN INVESTMENT MECHANISM

OF ISLAMI BANKING AND CONVENTIONAL BANKING

Serial

No.

I am Muhammad Mufazzol Karim, MBA student of International Islamic

University, Dhaka Campus. As a part of evaluating the course, I need to work on a

Internship report, “ A Study on the Investment Modes used by Social Investment

Bank Limited and with Modes of Advance & Loan used by Conventional Banks in

Bangladesh’’ . I will ask you few questions in this regard. Your kind cooperation

by answering question will assist me to prepare a quality project work.

Name: ……………………………………………………………

Designation:

Q1. Do you have any account at SIBL?

A. Yes B. No

[If ‘no’, thank you very much for cooperation, no further question to you]

2. What type of account you have maintained in SIBL?

A. Al Wadiah Current A/C B. Mudaraba Savings A/C

C. Mudaraba Schemes A/C D. Others A/C

4. Do you think there are differences between Islami banking and

conventional banking?

A. Yes B. No

5. If yes, in which causes Islami banking differs from conventional

banking?

A. Deposit policy B. Investment policy


C. Concept of interest D. Services

E. Others

6. If no, why do you think there are no differences between Islami

bank and conventional banking?

-----------------------------------------------------------------------------------------------

7. What is your confidence level on the SIBL due to its Shariah based

Banking?

A. Very high B. High

C. Average D. Less

E. Very less

9. Do you think there are any lapses of Islami Shariah in SIBL?

A. Yes B. No

10. What is your view about the different service charges taken by

SIBL?

A. Very excessive B. Excessive

C. Justified D. Less

E. Very less


QUESTIONNAIRE ON DIFFERENCES BETWEEN INVESTMENT

MECHANISM OF ISLAMI BANKING AND CONVENTIONAL BANKING

Serial

No.

I am Muhammad Mufazzol Karim, an MBA student of International Islamic

University Chittagong, Dhaka Campus. The course, I need to work on a research

project in titled “A Study on the Investment Modes used by Social Investment

Bank Limited and with Modes of Advance & Loan used by Conventional Banks in

Bangladesh’’. I will ask you few questions in this regard. Your kind cooperation

by answering questions will assist me to prepare a quality project work.

Name: ……………………………………………………………

Address...........................................................................

Q1. Do you have any account at conventional bank?

A. Yes B. No

2. What type of account that you have?

B. Current A/C B. Savings A/C

D. FCA A/C D. Others A/C

4. Do you think there are differences between Islami banking and


A. Yes B. No

5. If yes, then which of the following matters in the difference?

A. Deposit policy B. Investment policy

C. Concept of interest D. Services

E. Others


6. If no, why do you think there are no differences between SIBL and


----------------------------------------------------------------------------------------------

8. Do you think the SIBL exactly follows the shariah in its banking

business?

A. Yes B. No

9. What is your view about the different service charges taken by

conventional bank?

A. Very excessive B. Excessive

C. Justified D. Less

E. Very less

10. Why do you not go to the Islami banking?

---------------------------------------------------------------------------------------------


Difference Between Modes of Investment used by Social

Documents

Transcript of Difference Between Modes of Investment used by Social