A case study of Islamic bank
By M. Aslam Saleemi
Definition of Islamic Bank
An Islamic Bank is a financial institution which operates with the objective of implementation of the economic and financial principles of Islamic Shariah in the arena of banking.

The Organisation of Islamic Conference (OIC) has defined an Islamic bank as "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".

In Malaysia, an act called the Islamic Banking Act was passed in 1983. Islamic bank has been defined in this Act as a "Company which carries on Islamic banking business". Islamic banking means "banking business whose aims and operations don't involve any element which is not approved by the religion Islam."

The Objective of Islamic Banking

Islamic banks operate on Islamic principles of profit and loss sharing, strictly avoiding interest, which is the very root of all exploitation and is responsible for large-scale inflation and unemployment in the country.

An Islamic bank is committed to do away with disparity and establish justice in the economy, trade, commerce and industry; build socio-economic infrastructure and create employment opportunities.

Establishment of Islamic Bank Bangladesh

In March 1983, Bangladeshi businessmen, four institutions of Bangladesh and eleven foreign banks, financial institutions and other bodies of Middle East and Europe including Islamic Development Bank and two eminent personalities of Saudi Arabia joined hands and established Islamic Bank Bangladesh with the following aims and objectives:-

* 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.

* To extend co-operation to the poor, the helpless and the low-income groups for their economic uplift.

* To lay a vital role in human development and employment generation.

* To contribute towards balanced growth and development of the country through investment operations particularly in the under developed areas.

* To contribute in achieving the ultimate goal of establishing Islamic economic system.

Functions of Islamic Bank

The functions of the Islamic Bank Bangladesh Ltd. Are as under:-

a) To maintain all types of deposit accounts.

b) To make investment allowed by Islamic Shariah.

c) To conduct foreign exchange business.

d) To extend other banking services.

e) To conduct social welfare activities through Islami Bank Foundation.

Paid-up Capital and Reserve

The authorized capital of the Bank is 1000 million Taka, and the paid up capital is 640 million Taka. In 1983, the paid up caital was 67.50 million Taka. The reserve fund of the bank has been increasing steadily. On 31st December 1983, it was 0.36 million Taka while on 31st December 2000, it was 2078.88 million Taka.

Equity

According to new Capital Adequacy Policy prescribed by Bangladesh Bank, the Central Bank of the Country, banks are to maintain 8% capital on their Risk-Weighted Assets against which present total equity of the Islamic Bank as on 31st December, 2000 stood at 2671.06 million Taka as compared to 1659.26 million Taka as of 31st December 1999.

Objectives and Principles of Deposit in an Islamic Bank

Islamic Bank gives special importance on savings. The objectives and principles of the Saving Policy of the Islami Bank are as under:-

1. To encourage people to save for self and for the country as a whole.

2. To develop a sustained savings habit among the people.

3. To mobilize deposits through the operation of the following accounts:-

i) Al-Wadeeah Current Account.

ii) Mudarabah Savings Account.

iii) Mudarabah Term Deposit Account: 3 months / 6 months / 12 months / 24 months / 36 months term.

iv) Mudarabah Special Notice Account. (a special account to facilitate performance of Hajj by fixed income groups): 1 year to 25 years term.

v) Mudarabah Special Savings (Pension) Account - 5 years and 10 years term.

vi) Mudarabah Saving Bond Scheme: 5 years and 8 years term.

vii) Mudarabah Foreign Currency Deposit [Savings] Account.

viii) Mudarabah Monthly Profit Deposit Account.

ix) To operate Current Account on Al-Wadeeah principle and all other deposit accounts on Mudarabah principle of Islamic Shariah.

x) The Bank distributes minimum 65% of its investment income, earned through deployment of Mudarabah deposits, among the Mudarabah depositors.

Growth of Deposit

The total deposit of the Bank stood at 32,112.81 million Taka as on 31.12.2000 compared to 25, 190.65 million Taka as on 31.12.1999. The growth rate in this respect is 27.48 percent which is much above the average growth rate of the banking sector of Bangladesh. The Islamic Bank has a sound deposit-base as it mainly comprises of small and medium size deposits.

The total Deposit stands at 35,363.98 million Taka as on 30th June 2001. Evidently the deposit of the Bank has increased remarkably over the last nineteen years. In the first year of establishment to the Bank was 144.15 million Taka as on 31.12.1983. In 1984, the Deposit jumped to Taka 635.94 million as 31.12.1984, the rate of increase being 341%.

In 1995 the Deposit reached 1,563.85 million Taka, the rate of increase being 146%.

Investment

The special feature of the Investment Policy of the Bank is to invest on the basis of profit-loss sharing system strictly in accordance with the tenets and principles of Islamic Shariah. Earning profit is not the only motive and objective of the Bank's policy of Investment, rather emphasis is given to attain social good and to create employment opportunities.

Pursuant to the Investment Policy adopted by the Bank, a "7-year Perspective Investment Plan" has been drawan up and put into implementation. The plan aims at diversification of the investment portfolio by size, sector, geographical area, economic purpose and securities to bring in phases all sectors of economy and all types of economic groups of the society within the fold of Bank's investment operations.

Accordingly, the Plan envisages composition of the investment port-folio with 2.5% for agriculture and rural investment, 18% for industrial term investment, 13% for industrial working capital, 10% for housing and real estate, 4% for transport and communication, 0.5% for electricity, gas water and sanitation services, 2% for storage, 43% for import, export and local trade and trade related activities, 1% for poultry and dairy, 2% for Rural development scheme, 2.5% for other special schems, 0.5% for micro-industry and 1% for other productive purposes by the end of plan period. I.e. the year 2002.

Objectives and Principles of Investment

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

1. To invest fund strictly in accordance with the principles of Islamic Shariah.

2. To diversify its investment port-folio 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 there of.

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

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

6. To finance various development schemes for poverty alleviation and generation of income and employment with a view to accelerating sustainable socio-economic growth and uplift of the society.

7. To invest in the form of goods and commodities rather than giving loan in cash to the clients.

8. To avoid loans in the fields forbidden under Islamic Shariah and in the trade which is harmful for the society even through those loans may be highly profitable.

9. The Islamic Bank extends investments under the principle of "Murabaha", "Bai Muajjal", Hire Purchase under the principle of "Shirkatual-Milk" and "Musharakah'.

Growth Investment

The investment of the Bank has demonstrated steady growth over the past 19 years. The total investment of the Bank stood at Take 27347.32 million in the year 2000. It was Taka 20,585.68 million in the year 1999. Total investment stood at Taka 34,039.63 million as on 30.6.2001. By December 31, 2000 the number of investment clients stood at 1,39,738.

Moodes of Investment

1. Bai-Murabaha. This is 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 cost plus agreed profit payable in cash on any agreed fixed future date in lump-sum or by installments.

2. Bai-Muajjal. Under this mode the Bank may supply implements or equipment or goods on rental basis to the clients. The ownership of good etc. remains with the bank and the clients jointly and the portion of the clients remains mortgaged to the Bank until the closure of the investment account, but the clients will be authorized to possess the goods etc. for a certain period. The clients become owners after the full payment of the installments.

3. Bai-Salam. Under this agreement the Bank executes contract of purchase with the client and makes payment against purchase of product, which is under process of production. This contract will be executed after making any investment showing the price, quality, quantity, time, place and mode of delivery. The profit is to be negotiated. In 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.

4. Musharakah. This is an Islamic technique which adopts 'equity sharing' as a means of financing projects. It embraces different type of profit and loss sharing partnerships in which the partners share both capital and management of a project so that profits will be distributed among the partners as per agreed rations, where the loss is shared according to ratios of their equity participation.

5. Mudarabah. It is a form of partnership where one party provides the capital while the other provides the expertise and management. The first party is called "Sahib-al-Maal" and the latter is referred to as "Mudarib". Any profit accrued is shared on a pre-agreed basis, while the loss is exclusively borne by the partner providing the capital i.e. "Sahib-al-Maal".

The principles and working procedures of Islamic banks are completely new and different fro the conventional banks. Therefore, there is an inevitable need for training of the staff of the bank for orientation of the staff to the new system of Islamic banking. In order to cater this need, Islami Bank Bangladesh has established Training and Research Academy. (IBTRA). The activities of IBTRA cover both training and research on various aspects of Islamic banking. The Academy has developed a rich library with a treasure of valuable books on different subjects including Islamic Economics, banking, comparative philosophies, foreign journals and research articles and papers. Employees of the Islami Bank, learners and researchers have been fully utilizing the library and its facilities.

The Academy has edited and published books and brochures on "Readings in Islamic Banking", "Investment operations" and "Investment and Trade Opportunities in Bangladesh". It also conducts training courses and workshops. The courses include Islamci Banking, Banking law and practice, Investment Operations and Management, Foreign Trade and Foreign Exchanges, Shariah based Audit and Inspeciton.

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