Submitted to :

Nazneen Fatema

Lecturer in Finance

IIUC, DC

Submitte By

Group –KRONE

1. Athya sanjida (B121912)

Date of submission: 20th Drcember,2014

Islamic Banking (IB)

Islamic Banking (IB)

• Islamic banking can be defined as: a form of modern banking based on Islamic legal

concepts using risk- sharing as its main method excluding financing based on fixed pre-

determined return.

Objectives of Islamic banks

Objective Goal

Include broad intentions of

the organization

Includes overall strategic

purposes

Includes the business the

organization is in

Supported directly by

objectives

Includes target and critical

results of the organization

Induces performance criteria to

be achieved

Include performance results

Supported directly by goals

Includes specific times –

sensitive milestone of the

organization.

Includes attainment of goals

signifying progress

Include performance goal

Includes basic component for

measuring progress

The purpose of the Islamic financial system:

• The purpose of the Islamic financial system is, as with conventional finance, to

mobilize global resources to promote and sustain global and regional development.

• Islamic Finance taps the vast pool of savings held by Muslims, and puts these savings to

productive use for the benefit of Islamic and other societies.

Mode Of Finance In All Islamic Bank

Features of Musharakah Contract

The capital should be specific, existent and under disposal.

partners shares in capital may be equal or unequal based on agreement.

Nature of capital may be either money, valuables. or merchandise.

Partners have right to participate in the activities of the firm.

No Security provision as a guarantee for Profit.

Ratio of distribution of Profit Prefixed, no be lump sum profit is allowed.

Profit is distributed according to the agreed ratio and loss according to the share in capital

Features of Mudarabah Contract

One party supply capital (Sahib-e-Mal),Other party provide entrepreneurship (Mudarib)

The capital should be specific, existent and under disposal.

Nature of capital may be either money, valuables. or merchandise.

No Security provision as a guarantee for Profit.

Ratio of distribution of Profit Prefixed, no lump sum profit is allowed.

Features of Bui Salam

Commodity Should be Known both buyer and seller

commodity can be monitored by specifications.

Availability of Goods for Delivery is a condition

Salam on Existing Good like ‘land’ is impermissible

Delivery Mechanism and Date of Delivery should be Known

Advance Payment fully or partly It is a condition

Parallel Salam Contract is impermissible

Defining Bui Murabaha

Bai-Murabaha 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 upon 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.

Features of Bui Murabaha

Client can offer an order to purchase particular goods by specification and committing

himself to buy the same cost plus agreed upon profit.

Availability and acquisition of Good by the seller is a condition

The seller bears the risk of goods until those are sold and delivered to Client

The seller should disclose the cost price and the profit mark-up separately to the Client.

Delivery Mechanism and Date of Delivery should be Known to both buyer and seller

price once fixed cannot be further increased.

Defining Bui Muajjal

The word 'Bai' means purchase and sale and the word 'Ajal' means or a fixed period of

time. "Bai-Muajjal" means sale for which payment is made at a future fixed date or

within a fixed period. In short, it is a sale on Credit.

Features of Ijara (Lease Contract):

Unilateral increase of rent by the lesor is not permissible even if stipulated in the contract

Penalty or compensation for late payment is not permissible.

Advance rentals are admissible subject to the condition of adjustment against the actual

rental

Any unilateral or unconditional termination of the lease either by the lesor or the leasee

is not permissible

Assets should revert back to the lesor upon expiry of the lease

Sale and lease back is allowed, but only as two separate transactions

Sub-leaseby the lessee is permissible subject to the consent of the lesor and can be

outlined in the lease agreement

lesor can sell the leased assets to a third party along with his rights and obligations

Violation of Shariah in different Mode of Investment

Bui is not established in its truest sense

Seller do not bui the goods himself

Buyer is appointed to buy goods on behalf of the seller

Risk of the merchandize is not borne by the seller

Most often paper transaction is completed

Rate of profit changes directly and proportionately with the change in the credit period

allowed to the client

Rebate allowed for early payment of the dues

Penalty imposed for the delay in payment

In case of lease rent is not fixed on actual basis.

Period of vacancy is not taken into consideration

Increase of rent unilaterally

Penalty is charged on defaulters

Performance Analysis

Here ROA (Return on Asset), ROE (Return on Equity), and profit margin is used to find

out the profitability. And Investment income, Investment expense, deposit, loans and

advance, non performing investment is used to find the banks performance.

ROA: Return on asset determines the amount of net income produced on a firm’s asset

by relating net income to total Asset.

ROA =Net Income

X 100Total Assets

Table: ROA of Five banks in different year:

Name of the Bank

Year2010 2011 2012 2013 2014 Average

First Security

Islami Bank Ltd.

0.11% 0.33% 0.68% 0.86% 0.64% 0.53%

Social Islami Bank

Ltd.0.61% 0.68% 1.08% 1.17% 1.28% 0.96%

Al-Arafah Islami Bank

Ltd.1.63% 1.80% 1.77% 2.55% 1.71% 1.89%

Islami Bank Bangladesh

Ltd.1.14% 1.16% 1.22% 1.35% 1.63% 1.30%

Shahjalal 2.28% 1.81% 1.82% 2.63% 1.09% 1.93%

Islami Bank Ltd.

ROE:

The amount of net income returned as a percentage of shareholders equity. Return on

equity measures a corporation's profitability by revealing how much profit a company

generates with the money shareholders have invested.

ROE =Net Income

X 100Total Equity

Table: ROE of Five banks in different year:

 Year

2010 2011 2012 2013 2014 Average

First Security Islami Bank Ltd. 2.70% 4.11% 11.41% 13.99% 12.89% 9.02%

Social Islami Bank Ltd. 9.01% 10.82% 12.14% 15.31% 11.51% 11.76%

Al-Arafah Islami Bank Ltd. 22.60% 24.70% 24.10% 24.55% 18.47% 22.88%

Islami Bank Bangladesh Lt.d 17.92% 19.02% 16.93% 19.00% 6.72% 15.92%

Shahjalal Islami Bank Ltd. 23.21% 22.68% 21.73% 30.71% 14.76% 22.62%

Net Profit Margin:

Net Profit Margin measures the net income of a firm as a percent of its revenue.

Net Profit Margin =Net Income

X 100Net Operating Income

Name of

the Bank

Year

2010 2011 2012 2013 2014 Average

First

Security

Islami

Bank Ltd.

7.39% 18.21% 24.62% 26.31% 21.21% 19.55%

Social

Islami

Bank Ltd.

16.62%15.64% 25.12% 24.42% 26.13% 21.59%

Al-Arafah

Islami

Bank Ltd.

28.01%30.76% 32.56% 42.77% 34.58% 33.73%

Islami

Bank

Bangladesh

Ltd.

19.55%23.07% 27.61% 28.51% 61.35% 32.02%

Shahjalal

Islami

Bank Ltd.

39.72%35.20% 36.70% 42.72% 25.23% 35.92%

RURAL DEVELOPMENT SCHEME OF Eight Islami Banks:

• All the Eight Islami Bank in Bangladesh envisages an economic system based on equity

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

line lives in rural 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 IBBL through its RDS project has been implementing integrated programs for the

landless poor, wage laborers and marginal farmers aimed at meeting their basic needs and

promoting their comprehensive development.

• 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. RDS

works for the realization of that objective.

Goals and Objectives

The followings are the important objectives of Rural Development Scheme:

To bring the poorer population within an organizational framework by setting up certain

rules and regulations with a view to free them from the curse of poverty and make them

self-reliant, thereby converting RDS into a self-reliant sustainable program;

To extend bank investment to agricultural and non-agricultural sectors in the rural areas;

To provide self-employment for distressed people;

Socio-economic development of the poor and distressed by group/center formation;

To bring both male and female to provide employment under income generation activities

and help them to attain self-reliance step by step;

To continue to support the self-reliance drive of the poor in their search of capital

formation from savings they make out of their increased income;

To help reduce and eventually stop, through enhancement of their income, the lending on

high and exorbitant rates of interest by the village money-lenders, the advance sale of

crops, land and mortgage of land by the poor at the time when they are most in need.

To follow an approach of comprehensive development side by side with economic

development; and

To provide financing to develop housing in the area.

Selection of Beneficiaries

The RDS of All Islami banks is target group-based. Beneficiaries of the plan are thus

landless, wage laborers and marginal farmers. Selection criteria for members of the target

group are as follows:

(a)       Farmers owning up to 0.50 acres of land including sharecroppers;

(b)       Persons engaged in non-agricultural activities owning up to 0.50 acres land or landless;

(c)       Permanent resident of the project area;

(d)       Borrower or defaulters of any other bank or organization will by no means be the

beneficiaries of the plan;

(e)       Females belonging to the families of the serial 1 and 2 above, interested in income

earning projects, but who unable to do so due to dearth of money, may form a group

and get the financial support;

(f)        Distressed people may undertake income generating schemes in non-agricultural

sectors such as cow/goat/duck/ chicken etc. for their self-employment; and

(g)       Landless to be given priority in selecting target groups whose yearly family income must

be below Tk. 15,000/-.

Durations   and Maximum Limit of investment:

Sl. Sector of Investment Duration Ceiling of

Investment(BDT)

1 Crop Production 1 year 25,000/-

2 Nursery and commercial

production of Flowers & Fruits

1 year 50,000/-

3 Agriculture Implements 1 to 3 years 50,000/-

4 Live stocks 1 to 2 years 50,000/-

5 Poultry & Ducker 1 year 35,000/-

6 Fisheries 1 to 2 years 50,000/-

7 Rural Transport 1 year 20,000/-

8 Rural Housing 1 to 5 years 50,000/-

9 Off-firm activities 1 year 50,000/-

Recommendation

We would like to recommend the following undertakings by All this Eight Islamic banks to

improve their performance:

Promotion, regulation and supervision of the Islamic banks in accordance with the recent

guidelines, laws and regulations seem inadequate since these are basically based on the

conventional wisdom and practices. The spread out mechanism of All the banks should

be faster and progressive as well.

Online banking should be introduced fluently in branches to compete with multinational

banks.

More products of varied interests should be introduced for the diversified client group.

All The bank should take new marketing strategy which will responds and

take effective steps to increase faith on them.

To enhance the image of the bank and to assume social responsibility, Each

of the Islamic bank should engage itself to various social programs like

scholarship to poor but meritorious students, Empowerment of the children in abject

poverty, Campaign against dowry and other social evil etc.