AIBL Report

Investment Management of AIBL
Chapter-1
Introduction
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Introductory Text
The Jews in Jerusalem introduced the system of banking in the form of money lending
before the birth of Christ. The word 'bank' was probably derived from the word
'bench' as during ancient time Jews used to do money -lending business sitting on
long benches.
First modern banking was introduced in 1668 in Stockholm as 'Svingss Pis Bank'
which opened up a new era of banking activities throughout the European Mainland.
In the South Asian region, early banking system was introduced by the Afgan traders
popularly known as Kabuliwallas. Muslim businessmen from Kabul, Afganistan
came to India and started money lending business in exchange of interest sometime
in 1312 A.D. They were known as 'Kabuliawallas'.
The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central
bank, 4 nationalized commercial banks (NCB), 5 government owned specialized
banks, 30 domestic private banks, 10 foreign banks and 28 non-bank financial
institutions. The financial system also embraces insurance companies, stock
exchanges and co-operative banks.
The structure of the banking system has changed substantially over the last few years.
NCBs’ role has gone down. Their share in total assets went down from 54 percent in
1998 to 40 percent in 2006. On the other hand, PCBs’ share went up from 27 percent
in 1998 to 43 percent in 2006. The change reflects adoption and implementation of
new policies for the banking sector.
One important challenge that the banking sector is facing is the introduction of
information technology in the banking system in an aggressive manner. This is
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required to improve management efficiency, reduce operational cost, improve

customer services, and increase transparency.
The earning and profitability of the banking sector have also improved in recent years
and it is generally measured by return on assets (ROA) and return on equity (ROE).
Hence, the banking sector would play a vital role in the development of the country
and efficient and sound banking management would led the country to reach at the
highest peak of success.
Objectives of the study
1.2 Objectives of the Report:

The objectives act as a bridge between the starting point and the goal of the study. The
main objective of my study i.e. to write a report on “Investment Management of Al
Arafah Islami Bank Ltd. (AIBL)” is to disclose the operational procedures of credit
recovery system & its contribution to the people and the nation. The operational
procedures include credit application, evaluation of credit proposal, preparation of
credit proposal, forwarding to sanctioning authority, giving sanction to the client,
disbursement, nursing of the credit and finally recovery of the credit from the client. It
is also stated that the report is prepared for serving the academic purposes only but
not to disclose its confidential matters to the public.
In brief, the objectives are as below:

i) To get a clear idea of the role of AIBL in improving the contribution of the
people
ii) To identify the main objectives of AIBL Investment Disbursement.
iii) To find out the sector in which AIBL provides Investment.
iv) To find out a time series analysis of Investment Disbursement.
v) To evaluate financial affairs of the Bank
vi) To diagnosis the key financial problem areas of AIBL
vii) To identify policy recommendations for further improvement
viii) To visualize the quantitative and qualitative aspects of AIBL
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Methodology :
The report is mainly based on secondary data that I have collected from various
sources. The major source of information is the Annual Report of the Bank. The other
sources include Internet and the very helpful sites that have provided us with the exact
nature of information that we were looking for.
We have also collected information from newspapers, magazines, periodicals and
other pertinent articles of AIBL. The details of all the books being used in this report
are shown in the bibliography.
Scope
The scope of the study is limited to the analysis of the financial performance,
investment portfolio, growth and competitive advantage of the ‘Al-Arafah Islami
Bank Ltd’. The paper briefly focuses on different quantitative aspects of the financial
statements of funds borrowed & disbursed, trends of growth of equity, assets, profits,
retained earnings, dividend and in other activities.
Different comparative analysis of several years’ data have been made on the different
components of financial statements to critically compare their financial status in
different years.
Limitations of the study :
It is actually very tough to some extent to learn and cover all the components of the
financial management issues and to analyze those within this short period of time.
Generally, access to internal data source of the company is prohibited to some extent.
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Some of the major limitations are given below:
Lack of enough experience in analyzing data

The report would be much more fruitful if allowed some more time.
All the financial statements are not exact but the analysis is done based on the
figures available in the financial statements.
Chapter-2
Familiarization with Organization
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2.1 Historical Background of AIBL:

Al-Arafah Islami Bank Ltd. (AIBL) was incorporated on 18 June,1995 with
authorized capital of Tk.1000 million (100 Crore) and paid up capital of Tk.10.12
Crore paid up by the Sponsors/Directors and Tk.10.12 Crore was offered to the public
for subscribed portion of public issue of shares. The Bank was formally inaugurated
on 27th September, 2005 with Motijheel Branch (Main Branch).The Management of
the Bank is vested in a Board of Directors consisting of 24 members including the
Managing Director of the Bank. Among 24 Directors 2 (two) Directors came from the
public shareholders. Managing Director is the chief executive of the Bank. There is a
Shariah council of 7 (seven) members in Al-Arafah Islami Bank Ltd. to monitor the
over all activities runs by Shariah or not .Since its establishment, AIBL opened 5
branches in 1995, 5 in 1996,10 in 1997, 10 in 1998, 5 in 1999, 2 in 2000, 3 in 2001, 1
in 2005, & 5 in 2006 (hence the no of Branches are 46).Total number of employees of
the Bank was 771 in 1995 and reached to 912 in 2006 and during the short period of
its activities the Bank has made remarkable progress in various activities. Since
commencement of its activities on 18 June ,1995 the Bank has mobilized the deposit
of Tk.6415.79 million and 20645.30 million at the end of the Year 1999 and 30 th June
2007. Foreign exchange business handled by the Bank during the year 1999 to 30 th
June. 07 were Tk.7859.72 million and 74795.94 million respectively and investment
was Tk.3793.71 million and 19840.35 million at the end of the year 1999 and 30 th,
June 2007 respectively. The bank earned a profit of Tk. 31.70 million in the year 1999
compared to Tk.470.02 million (profit after tax and provision) in the year 2006.
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Al-Arafah Islami Bank Ltd. was established not only to earn profit and to develop
economy of the country but also it had an ultimate goal to get reward in the Heaven
by banning interest in business. Since its commencement the Bank has been trying to
achieve this goal. The Islam loving people specially
who are not interested with interest, should help this Bank giving deposit and taking
investment from this Bank.
2.2 Special Features of AIBL:

i) All activities of the bank are conducted according to Islamic Sharia where profit is
the legal alternative to interest.
ii) The Bank’s investment policy follows different modes approved by Islamic Shariah
based on Quran & Sunnah.
iii) The Bank is committed towards establishing a welfare oriented banking system,
economic upliftment of the low-income group of people, create employment
opportunities.
iv) According to the needs and demands of the society and the country as a whole the
Bank invests money to different Halal business. The bank participates in different
activities aiming at creating jobs, implementing development projects taken by the
Government and developing infrastructure.
v) The Bank is committed to establish an economic system through social justice and
equal distribution of wealth. It is committed to bring about changes in the
underdeveloped rural areas for ensuring balanced socio economic development of
the country through Investment program. According to Mudaraba system, the
depositors are the partners of the investment income of the bank. During the period
under review, 70% of the investment income has been distributed among the
Mudaraba distributors.
vi) To render improved services to the clients imbued with Islamic spirit of
brotherhood, peace fraternity and by developing an institutional cohesion.
vii) The Bank is contributing to economic and philanthropic activities side by side. Al
Arafah English Medium Madrasha and AIBL Library are among mention worthy.
(Source-Annual Report-2006)
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2.3 Vision of AIBL:

To establish an interest free transaction in the economy.
2.4 Mission of AIBL:
By establishing an interest free atmosphere in day to day business transactions, the
Promoters, Sponsors & Directors expect the Shafayat from our beloved Prophet
Hadrat Muhammad (S) and the ultimate emancipation in the Afterwards.
2.5 Objectives of AIBL:

► To take part in the economic growth of the country.
►To establish an modern banking system for all kinds of people
► To establish an interest free economy.
►To eradicate the poverty and to do social services by establishing Schools,
Madrashas, University, Hospitals, Public Library etc.
►Finally to achieve ultimate goal i.e. Nazat in Akhirat.
2.6 Line of Business:

►Investment Banking (capital market operation in DSE & CSE)
►International Foreign Trade Finance (Import & Export)
►Foreign Exchange dealing (Currency dealing & Remittance)
►Corporate finance
►SME banking
►Personal banking
►Transport Investments
►House Building Investments (Staff & Commercial)
►Marchant banking (Under Process)
►Broker house (Under Process)
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2.7 Branches of AIBL:

AIBL started its working at 161, Motijheel C/A Dhaka with a Branch named
Motijheel Branch on 27th September,1995 was the first & main Branch of Bank and
has been operating throughout the country. The Head Office of the Bank was situated
at the same holding of Motijheel Branch since its establishment but from 11 January,
2007 it has started its working at its own premises 36, Dilkusha (6 th, 7th, 8th & 9th
floor), Dhaka-1000. The age of the Bank is only 11 & half years and during this short
period of time, the Bank has established total 46 Branches over the country and made
a smooth network inside the country. The number of Branches as Division wise is
mentioned in the following table:
Division No. of Branches

Dhaka Division 22
Chittagong Division 10
Rajshahi Division 4
Khulna Division 4
Sylhet Division 5
Barisal Division 1
Total 46
2.8 Form of Organization:

►Board of Directors
►Shariah council
►Executive Committee
►Audit Committee
►Management Committee
►Asset Liability Committee (ALCO).
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Chapter-3
Familiarization with Investment Management
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3.1 Definition of Investment & Investment Management:

Investment means transaction between two parties in which one ( the creditor or
lender) supplies money, goods, services or securities in return for a promised future
payment by the other ( the debtor or borrower). Such Transaction normally includes
the payment of interest to the lender. Investment may be extended by the public or
private institutions to finance business activities, agricultural operation, consumer
expenditures or government projects. (Encyclopedia Britannia, P-722)
Investment is the power of ability to obtain goods or services in exchange for a
promise to pay for them later. Similarly, it is the power or ability to obtain money by
the borrowing process, in return for a promise to repay the obligation in the future.
Properly defined, Investment represents the actual or prospective debtor’s power or
ability to affect an exchange by his promise of future payment.
In defining the Investment management we can understand that from the very
beginning of the loan giving activities to the end of the recovery of loan is all the
single part of Investment management. Investment management enables the bank to
run safe and sound Investment activities and to make the loan receiver fully confident
to go forward with a particular bank to achieve a Investment facility and that can only
be possible if there is an existence of Investment management which is intensifying
both the bank and the loan receiver.
3.2 The need for Investment Management in Bangladesh:
In Bangladesh the most serious difficulty facing the financial sector is the high level
of interest rates. Here the lending rate is at the level of 14 percent to 16.5 percent and
inflation rate at 5 to 6 percent and the real interest rate is about 10 percent. The high
interest rate for bank loans drive down the return to capital and lends to reduced
investment. High interest rates also contribute to the difficulty the banks face in
receiving loans as these lend to more defaults. As there is the high tendency of the
loan default in Bangladesh, the need of Investment management in our country is
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inevitable. Having various kind of problem in loan giving procedure it is quite needed
to have a sound Investment management system by the commercial banks in
Bangladesh.
3.3 Introduction of Investment & Investment Management:

Introduction of Investment
Modern Investment management is extended through specialized financial institutions
of which commercial banks are the oldest and most important. In present days of
industrial economics, the banks are able to extend and increase the supply of
Investment by the creation of Investment management for their loan customers. The
lender must judge each loan he makes on the basis of the charter of the borrower (his
intention to pay), (his capacity to pay), (based on his potential for earning) and his
collateral pledged in case of default on the loan. The terms of Investment transactions
may be publicly regulated to prevent abuses by customers and lenders as well as to
channel Investment in to particular sectors of the economy.
Most often Investment is regarded as a phone of marketing whose function is to
facilitate the movement of goods through the channels of trade and their promote
production, distribution and consumption of goods and services. Without its use many
businesses could not exist, many purchases would not be made and consumption
would be at a much lower level.
The management of Investment involves the application of management principles as
in any other aspect of business management. It certainly deals with financial
considerations and in recent years Investment has become a massive force in the
marketing of goods and services.
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3.4 Different types of investment (Credit) Modes according to Islamic Shariah :
Bai-Murabaha or simply Murabaha

The terms “Bai-Murabaha” have derived form Arabic words Bai and Ribhun. The
word “Bai” means purchase and sale and the word ‘Ribhun’ means an agreed upon
profit. So Bai-Murabaha means sale for an agreed upon profit. It may be defined
as a contract between a Buyers and a Seller under which the seller sells certain
specific goods permissible under Islamic Shariah and the word Law of the land to
the Buyer at a cost plus and agreed upon profit payable today or on some date in
the future in lump-sum or by installments. The profit may be either a fixed sum or
based on a percentage of the price of the goods.
Musharaka
The word Musharaka is derived from the Arabic word Sharikah meaning
partnership. Islamic jurists point out that the legality and permissibility of
Musharakah is based on the injunctions of the Holy Qura’n, Sunnah and Ijma
(consensus) of the scholars.
Musharaka transaction may be conducted in the following manner:
One, two or more entrepreneurs approach an Islamic Bank to request the financing
required for a project. The bank, along with other partners, provides the necessary
capital for the project. All partners including the Bank have the right to participate
in the project. The profit is distributed according to an agreed ratio. However,
losses are shared in exactly the same proportion in which the different partners
have provided the finance for the project.
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Mudarabah
The term Mudarabah refers to a contract between two parties in which one party
supplies capital to the other party for the purpose of engaging in a business
activity with the understanding that any profits will be shared in a mutually agreed
upon. Losses, on the other hand, are the sole responsibility of the provider of the
capital. The first party provides capital and the other party provides the expertise
with the purpose of earning lawful profit (approved by Islamic law) which will be
shared in a mutually agreed upon proportion.
Bai-Muajjal
The term ‘Bai’ and ‘Muajjal’ are derived from the Arabic words ‘Bai’ and ‘Ajal’
where ‘Bai’ means purchase and sale and ‘Ajal’ means a fixed time or a fixed
period. So Bai-Muajjal is a sale for which payment is made at a future fixed date
or within a fixed period. In short, it is a sale on Credit. It is basically a contract
between a buyer and seller under which the seller sells certain specific goods,
permissible under Shariah and law of the country to the buyer at an agreed fixed
price payable at a certain fixed future date in lump-sum or in fixed installments.
Bai-Salam
The term Bai-Salam is used to define a sale in which the buyer makes advance
payment, but delivery is delayed until some time in the future. Usually the seller is
an individual or business and the buyer is the bank.
Bai-Istisna’a (Pre-shipment Finance)

The Istisna’a sale is contract in which the price is paid in advance at the time of
the contract and the objective of sale is manufactured and delivered later. The
majority of the jurists consider Istisna’a as on of the divisions of Bai-Salam. The
definition can be stated as “ It is contract with a manufacturer to make the
something” and “ It is a contract on a commodity on liability with the provision of
work”.
Qard-E-Hasana (Benevolent Loans)
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It is a contract in which one of the party/ parties (the lender) places into the
ownership of the other party (the borrower) a definite parcel of his property, in
exchange nothing more than the eventual return of something in the same value of
the property loaned. Qard-E-Hasana loans are granted compassionate basis and no
service charges are imposed on the borrower.
Hire Purchase Shirkatul Melk (HPSM):
It is a contract under which the Bank shall invest to purchase articles for the
clients on obtaining initial equity and rent out the same at a determined rate to be
charged on the outstanding balance amount (on reducing balance method) together
with an additional amount to pay off the principal together with accrued rent in a
fixed period.
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Chapter-4
Investing (Lending) Decision
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4. Investment (Lending) Decision:

The principal function of a Bank is to lend or invest. Lending is a dynamic activity .It
helps to create entrepreneur and thus the country would be industrialized. When a
country becomes industrialized it eradicates poverty from the society and over all
from the country. Bank collects deposits from common people invest to the people
who are willi8ng to run business or to set up an industry. In this respect the Bank
takes collateral security to secure the invested amount.
Although all lending involves some degree of risk, it is necessary for any bank to
develop sound and safe lending policies and new lending techniques in order to keep
the risk to a minimum. The principles of sound lending may, therefore, be
summarized on below.
4.1. Safety:
Safety is the first guiding principle of a prudent banker. A bank is in business to make
money. It mainly uses depositor’s fund as a means of its earnings. The money of the
depositor’s being repayable on demand or, after a short notice, determines the
capacity of a bank as to the period for which he can safety lend it out without an
uncalculated risk. Safety should never be sacrificed for profitability. Once the
confidence of the depositor’s is taken, the banker cannot carry on the banking
business. On principle he, therefore, cannot indulge in unsecured or long-term
advances. Investment/Advance should be expected to come back timely otherwise the
securities would be sold to liquidate the investment. The repayment of the investment
depends upon the borrower’s i) capacity to pay ii) willingness to pay.
4.2. Liquidity:
Liquidity is the availability of bank funds on short notice. It is not enough that the
money will come back, it is also necessary that it must come back on demand or in
accordance with agreed terms of repayment. The borrower must be in a position to
repay within a reasonable time after a demand for repayment is made; otherwise, the
liquidity position of the bank is endangered.
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4.3. Profitability:
Commercial Bank has to distribute its resources in a manner that they meet the twin
requirements of liquidity and profitability. A banker has, therefore to see that major
portion of the assets owned by it are not only liquid but also aim at earning a good
profit. The working funds of a bank are collected mainly by the means of deposits
from the public and the interest (in terms of Islamic banks it is designated as profit)
has to be paid on these deposits. They have also to meet their establishment charge
and other expenses. They have to make provision for depreciation of their fixed assets
and also for any possible bad or doubtful debts. The difference between the profit
received on investments and the profit paid on deposits constitutes a major portion of
banker’s income. The bank will not, however, enter into a transaction unless a fair
return is assured. So, there is a little point in a banker granting facilities, which do not
bring directly or indirectly some returns.
4.4. Purpose:
A Banker would not through away money for any purpose for which the borrower want. The
purpose should be productive so that the money not only remains safe but also provides a
definite source of repayment. The banker should study the purpose for which loan is required
and the resources from which the borrower is expected to repay. If the funds borrowed are
employed for unproductive purposes like marriage ceremony, pleasure trip, repayment of old
debts etc. or speculative activities, the repayment in the normal curse will become uncertain.
Banks also discourage advances of holding of stocks.
4.5. Security:
It is the practice of banks not to invest money without any security. A banker would
normally like to recover the investment from the sell of the security. They would
prefer an investment to come back from the normal source. The importance of an
adequate and acceptable security can, however, be hardly over emphasized. Security
serves as a safety value for an unexpected emergency. Security taken by Banks can be
classified into two categories such as: i) Primary Security, ii) Collateral Security.
Primary Security-Primary security may be either personal or impersonal or both.

Personal security is given by a borrower by way of duly executed promissory note,
acceptance/endorsement on a bill of exchange and personal. Impersonal security is
given when a charge is created by way of pledge/hypothecation/mortgage over the
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borrower’s tangible assets, such as, goods and commodity, fixed assets, bills
receivables, book debts.
Collateral security –Collateral Security may direct or indirect. Collateral security
obtained from the borrower himself to secure his own account is known as direct
collateral security. Indirect collateral security means any form of security given by a
third person to secure customer’s account. A guarantee given by third party is an
indirect collateral security.
4.6. Disposal:
The investment should be as much broad based as possible and must be in keeping with the
deposit structure. The investments must not be in particular direction or to one particular
industry because adversity may face problems but diversified investments can minimize the
risk. Again, investments must not be granted in one area alone. There should be spread of
investments against different securities, industries as well as areas. Thus by diversification of
the investments a banker will be able to spread his risks and considerably improve the safety
of investments.
4.7. National Interest:
Banking industry has significant role to play in the economic development of a
country. The banker would lend if the purpose of the investment is for overall national
development plans necessitating flow of credit to priority sector in the larger national
interest. Sometimes, the need of the borrower may be considered so essential for the
benefit of the national economy despite of heavy risk involved if the investment may
be granted. in the changing concept of banking national interest for financing in some
areas, specially in investments to agriculture, small industries, small borrowers, and
export-oriented industries, are assuming great importance.
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Chapter-5
Role of CIB in Bangladesh
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5.1. Role of CIB in Bangladesh:

Due to irregular and insufficient flow of credit information in the banking system the
proportion of classified loan in relation to total credit is very high. This proportion of
classified loan operated a bad culture in the Banking sector. In order to eliminate the bad
culture & to equip the banks with proper credit information for loan application processing,
proposal for relation of CIB was put forward by different committee and organizations and it
was established in 1992.
The main objectives of the CIB are to collect all sorts of information in respect of the
borrowers from the scheduled banks and other non-bank financial institutions & creation of
computer database in order to feedback the same information to the Banks and other non-
banking financial institutions for quick processing of new loan application, rescheduling, etc.
and preparation of various reports for MIS purposes to be used in Bangladesh Bank &
ministry concerned.
5.2 Functions of CIB:
i) To standardize information flow on Investments/loans/credits within the
Bangladesh Banking system.
ii) To increase the speed & accuracy with which the credit information is made
available to banker assessing credit role.
iii) To combine the information gathered on classified loans with the information
on newly sanctioned loans to the borrowers thereby making available on
integrated information package.
iv) To integrate the default loan information in the CIB its timely submission to the
banks for loan application processing.
v) To collect credit information on quarterly basis from banks.
vi) To make policy for keeping utmost security & confidentiality of CIB data &
reports thereon.
vii) To convey the CIB information to Banks as quickly as possible for quick
disposal of loan application.
viii) To prepare various reports on credit information of the borrowers.
ix) To help the commercial banks to generate their own (automatic) database
system for time reduction in submitting the credit to CIB for assimilation.
From the above discussion, we can conclude CIB database is one of the most important
information centers for the financial institutions. This information, if used properly, definitely
will improve the relationship between the Bank & its customers and ultimately be helpful to
eliminate the present bad culture in banking sector.
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Chapter-6
Investment (Credit) Sanctioning
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6.1. Methods of Investment (Credit) Analysis:

Most Bank investments to individuals arise from a direct request from a customer
who approaches a member of the Bank’s staff to fill out a loan application. Requests
for investments for trading business or project, on the other hand, arise from contacts
of Bank’s officer & sales representatives. Sometimes, investment officers call at the
business firm for months till the customers are finally agreed to do business with the
Bank. Being agreed to run business with the respective bank the client opens a
business account (Current/SND/Savings) and then submit the application for
investment with project profile(for project investment) or related papers and
documents for individual/business investment.
6.2. Credit Sanctioning Procedure:
i) Getting Credit information: The Bank collects credit information about the
applicant to determine credit worthiness of the borrower. Bank collects the
information about the borrower from the following sources:
a) Personal investigation.
b) Confidential report from other bank Head office/Branch/ Chamber of the
commerce.
c) CIB Report from Central Bank (Bangladesh Bank).For collecting CIB
Report, the respective Bank Branch sends CIB inquiry form (1 to 5 ) to
Bangladesh bank via their Head Office .For collecting CIB from
Bangladesh Bank Tk.50/- has to send for the firm with Tk.50/- for each
Director/partner/proprietor.
ii) Other Information Collection: The investment Department collects borrower

information as per the list cited below:
a) Name & Address of the borrower (Present& Permanent)
b) Constitution or status of the business,
c) Data of establishment and place of incorporation
d) Particulars of the properties, partners and Directors
e) Background and business experience of the borrowers.
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f) Particulars of personal assets, Name of Subsidiaries, percentage of share

holding and nature of business.
g) A copy of Memorandum & Articles of Association, in case of limited
company.
h) Details of liabilities in name of borrowers, in the name of any directors.
i) Financial Statements/ Audited balance sheet for last three years, But in
case of new enterprise/ company, projected balance sheet is required.
j) Nature and details of business/products.
k) Details of securities offered.
l) Other relevant information.
iii) Project inspection & collateral security valuation:

The project site is physically verified by the Directors/Executives/Bank
officials to justify its location, viability due to availability of raw materials,
communication facility, public sentiment, environmental aspect etc. Another
major task is to valuate the project. Al-Arafah Islami Bank is very much
cautious about valuation of the collateral security. The Bank officials including
bank Engineers valuate the collateral security. Two types of value are
assessed:
● Current Market Value
● Forced Sale Value
The legal officers of the Bank check the documents to ascertain their impurity.
iv) Analyzing the submitted information: Bank then starts examination that
whether the investment applied for, is complying with its lending investment policy.
If comply, then it examines the documents submitted and the credit worthiness. Credit
worthiness analysis i.e. analysis financial conditions of the investment application is
very much important. Now we have to find out total risk by using the ‘CREDIT RISK
GRADING SCORE SHEET’ in the following manner:
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A. Financial Risk -50%

a) Leverage (15% ) :(DebtEquity Ratio=Total Liabilities/Tangible Net
Worth)
b) Liquidity (15%) : (Current Ratio=Current Assets/Current
Liabilities)
c) Profitability (15%): (Operating Profit Margin %=Operating
Profit/Sales×100%)
d) Coverage 5% :Interest Coverage Ratio=Earning Before Interest &
Tax (EBIT) / Interest on debt
B. Business/Industry Risk -18%
a) Size of business
b) Age of business
c) Business outlook
d) Industry Growth
e) Market Competition
f) Entry/Exit barriers
C. Management Risk-12%
a) Experience
b) Second Line/Succession
c) Team Work
D. Security Risk-10%
a) Security Coverage (Primary)
b) Collateral Coverage (Property Location)
c) Support (Guarantee)
E. Relationship Risk-10%
a) Account Conduct
b) Utilization of Limit
c) Compliance of Covenants/Conditions
d) Personal Deposits
[[
v) Proposal Analysis:
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The project proposal is analyzed and decision about the project is taken. The
investment department is responsible for the analysis. After preliminary
appraisal of the investment project the final approval is obtained from the
manager. If the proposal is beyond the capacity of the manager then it is sent
to Head Office. Head Office then makes Memo (Memorandum) for the
placement to Managing Director/Executive Committee/Board of Directors as
per delegation of business power. The delegation of business power is also
assigned to employees as per their designation. And finally the Head Office
decision is sent to Branch Authority as Sanction Advice or regret letter.
[
6.2.1. What makes a good Investment?

The division of the bank responsible for analyzing and making recommendations
on the fate of most loan applications is the Credit Department. This department
must ask and satisfactorily answer three major questions regarding each loan
application.
1. Is the borrower credit worthy?
2. Can the loan agreement be properly structured and documented so that the bank
and the customer has bank probability of being able to service the loan without
excessive strain?
3. Can the bank perfect its claim against the assets or earnings of the customer such
that in the event of default recovery of fucks can be made rapidly with low cost
and low risk?
6.2.2. Is the borrower Credit Worthy?

The question that must be dealt with before any other is whether or not the
customer can service the loan that is pay out the credit when due, with a
comfortable margin for error. This usually involves a detailed study of six aspects
of the loan application charter, capacity and capital, collateral, condition and
control. All must be satisfactory for the loan to be a good one from the lender
point of view.
a) CHARACTER: The loan officer must be convinced that the customer has a well
defined purpose for requesting bank credit and a serious intention to repay. If
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the officer is not sure exactly why the customer is requesting a Investment,
this purpose must be clarified to the lender's satisfaction. And once the
purpose is consistent with the bank's current loan policies even with a god
purpose, however, the Investment officer must determine that the borrower has
a responsible attitude towards using borrowed funds will be truthful in
answering the bank's questions and will make every effort to repay what is
owed. Responsibility truthfulness, serious purpose and serious intention to
repay all make up what a loan officer calls character.
b) CAPACITY: The loan officer must be sure that the customer requesting credit
has the authority to request a loan and the legal standing to sign a binding loan
agreement. This customer characteristic is known as the capacity to borrow
money. The loan officer must be sure mat the representative from a
corporation that asking the company's board of director to negotiate the loan
and sign a credit agreement binding the corporation. Usually this can be
determined by obtaining a copy of the resolution passed by a corporate
customer's Board of Directors who authorizing the company to borrow money,
where a business partnership is involved the officer must ask to see the firm's
partnership agreement to determine which individuals are authorized to
borrow for the firm, A Investment agreement signed by unauthorized persons
could prove to be uncorrectable and therefore, result in substantial bosses for
the bank.
c) CAPITAL: this key feature of any Investment application centers on the
question that does the borrower gave the ability to generate enough available
cash (capital) to repay the loan. In general, borrowing customers' only gave
their sources to draw upon to repay their Investment, (a) Cash flows (b) the
sale or (c) funds raised by issuing debt or equity securities. Any of these
sources may provide sufficient capital to repay a bank loan.
d) COLLATERAL: In assessing the collateral aspect of a loan request, the loan

officer must ask mat does the borrower possess adequate net worth or own a
sufficient amount of quality assets or other items of value to such features as
the age, condition and degree specialization of the borrower's assets.
Technology plays an important role as well if the borrower's assets are
Page 27 of 93
technologically obsolete, they will have limited value as collateral because of

difficulty of recovering those assets into cash if the borrower's income falters.
e) CONDITIONS: The loan officer and credit analyst must also be aware of recent
trends in the borrowers' line of work or industry and how changing economic
conditions might affect the loan. A loan can look very good on paper only to
have its value eroded by declining sales or income in a recession or by the
high interest rates occasioned by inflation. To asses industry and economic
conditions banks must maintain files of information, newspaper cuttings,
magazine articles and research reports of major borrowing customers.
f) CONTROL: the last factor in assessing a borrower's creditworthiness status is

control which centers on such controls whether changes in law and regulations
would adversely effect the borrowers and whether the loan request meets the
banks and the regulatory authority standards for loan quality.
6.2.3 Can the Investment Agreement be properly documented?
The Investment officer is responsible to both the customer and the bank's depositors
and must seek to satisfy the demands of all. This requires, first of all, the drafting of a
loan agreement that meets the borrowers need for finds with a comfortable payment
schedule. The borrower must be able to comfortably handled the bank's success
depends fundamentally on the success of its customers. A properly structured loan
agreement must also protect the bank and those it represents, principally its depositors
and stockholders by imposing certain restrictions on the borrowers' activities when
this may threaten the recovery of bank funds.
6.2.4. Can the Bank make perfect it’s Claim against Collateral?
If the Investment agreement can be properly structured and documented the
Investment officer must also insure that the bank can perfect (I.e. maximize its
capacity to enforce) its claim to the borrowers' assets or other collateral if miss must
be drawn upon to repay the loan. The collateral placed behind a loan and the other
assets that a borrower may own at the second line of defense against loan default,
after the borrower cash flow. When the borrower's cash flow or income falters, the
lender must look to the borrower's assets.
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Therefore, the key issues for any lender include whether or not the bank can get clear
title to any assets that are available to backstop the loan which creditors have priority
of claim if a borrower's must be liquidated to cover a loan and whether the borrower
has assigned the bank exclusive interest in certain assets or has pledged those assets to
someone else, an important technical issue here particularly important in mortgage
lending is mental authorities to mat the bank knows for sure who currently has title to
the properly. If a homeowner is borrowing money and using his or her home as
collateral, the loan officer must verify not only that the customer has title to the home
but also what other lenders may have legitimate claims against that property.
Many bank loan officers argue that the collateral a customer pledges behind a loan in
just one of the safety zones a bank must wrap around the funds it has loaned for
adequate protection. Most bank loan officers prefer to at least for safety zones around
the fluids they have placed at risk with the customer and preferable three zones of
safety. The first and primary safety zone is profitability or cash flow the preferred
source; from which the customer's balance sheet in the form of assets that can be sold
for cash on order to fill any gaps in the customer's cash flow. Finally, the outer safety
zone will consist of guarantees from a firm's owners in which they pledge their
personal assets to back a bank loan to the firm.
6.3. Selection of Business

Through appraisal of different aspect and analyzing of various techniques a business
should be selected. Banks also analysis business through different techniques to
safeguard their investments. Growth of a bank depends on right investment in a
business. Bank follows different techniques before selection of a business.
6.4. Loan Pricing
Loan interest rates are typically set on a prime plus basis to account for the risk
associated with the credit. However, banks are pricing loans in the context of banker-
customer relationship, volume of business etc.
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Interests rates are charged on loans potentially depend on several considerations, such
as followings:
a) The bank's cost of funds.
b) Return on Investment (ROI)
c) The risk ness of the borrower.
d) Compensating balances and fees.
e) Interest rate charged by the competitors.
f) Usury ceiling.
g) Other banking relationship with the borrowers.
Chapter-7
Investment (Credit) Risk Analysis
Page 30 of 93
7.1. Credit Risk Grading

Credit risk grading is an important tool for credit risk management as it helps the
Banks & financial institutions to understand various dimensions of risk involved in
different credit transactions. The aggregation of such grading across the borrowers,
activities and the lines of business can provide better assessment of the quality of
credit portfolio of a bank or a branch. The credit risk grading system is vital to take
decisions both at the pre-sanction stage as well as post-sanction stage.
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At the pre-sanction stage, credit grading helps the sanctioning authority to decide
whether to lend or not to lend, what should be the loan price, what should be the
extent of exposure, what should be the appropriate credit facility, what are the various
facilities, what are the various risk mitigation tools to put a cap on the risk level.
At the post-sanction stage, the bank can decide about the depth of the review or
renewal, frequency of review, periodicity of the grading, and other precautions to be
taken.
Having considered the significance of credit risk grading, it becomes imperative for
the banking system to carefully develop a credit risk grading model which meets the
objective outlined above.
The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh
Bank has been in practice for mandatory use by the Banks & financial institutions for
loan size of BDT 1.00 Crore and above. However, the LRA manual suffers from a lot
of subjectivity, sometimes creating confusion to the lending Bankers in terms of
selection of credit proposals on the basis of risk exposure. Meanwhile, in the end of
2003 Bangladesh Bank provided guidelines for Credit Risk Management of Banks
wherein it recommended, interalia, the introduction of Risk Grade Score Card for risk
assessment of credit proposals.
Since the two credit risk models are presently in vogue, the Governing Board of
Bangladesh Institute of Bank Management (BIBM) under the chairmanship of the
Governor, Bangladesh Bank decided that an integrated Credit Risk Grading Model be
developed incorporating the significant features of the above mentioned models with
a view to render a need based simplified and user friendly model for application by
the Banks and financial institutions in processing credit decisions and evaluating the
magnitude of risk involved therein.
Bangladesh Bank expects all commercial banks to have a well defined credit risk
management system which delivers accurate and timely risk grading. This manual
describes the elements of an effective internal process for grading credit risk. It also
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provides a comprehensive, but generic discussion of the objectives and general

characteristics of effective credit risk grading system. In practice, a bank’s credit risk
grading system should reflect the complexity of its lending activities and the overall
level of risk involved.
7.2. Definition of Credit Risk Grading (CRG)

 The Credit Risk Grading (CRG) is a collective definition based on the pre-
specified scale and reflects the underlying credit-risk for a given exposure.
 A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary
summary indicator of risks associated with a credit exposure.
 Credit Risk Grading is the basic module for developing a Credit Risk
Management system.
7.3. Functions of Credit Risk

Well-managed credit risk grading systems promote bank safety and soundness by
facilitating informed decision-making. Grading systems measure credit risk and
differentiate individual credits and groups of credits by the risk they pose. This allows
bank management and examiners to monitor changes and trends in risk levels. The
process also allows bank management to manage risk to optimize returns.
7.4. Use of Credit Risk Grading:

The Credit Risk Grading matrix allows application of uniform standards to credits to
ensure a common standardized approach to assess the quality of individual obligor,
credit portfolio of a unit, line of business, the branch or the Bank as a whole.
 As evident, the CRG outputs would be relevant for individual credit selection,
wherein either a borrower or a particular exposure/facility is rated. The other
decisions would be related to pricing (credit-spread) and specific features of
the credit facility. These would largely constitute obligor level analysis.
 Risk grading would also be relevant for surveillance and monitoring, internal
MIS and assessing the aggregate risk profile of a Bank. It is also relevant for
portfolio level analysis.
7.5. Numbers & Short names of graders used in the CRG:
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The proposed CRG scale consists of 8 categories with Short names and Numbers
are provided as follows:
GRADING SHORT NAME NUMBER

Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/Watch List MG/WL 4
Special Mention SM 5
Sub standard SS 6
Doubtful DF 7
Bad & Loss BL 8
7.6. Regulatory Definition on Grading of Classified Accounts:

Irrespective of credit score obtained by a particular obligor, grading of the classified
names should be in line with Bangladesh Bank guidelines on classified accounts,
which is extracted from “PRUDENTIAL REGULATIONS FOR BANKS:
SELECTED ISSUES” (updated till August 07, 2005) by Bangladesh Bank are
presently as follows:
7.7. Basis of Loan Classification:
A. Objective Criteria:
Any Continuous Loan if not repaid/renewed within the fixed expiry date for
repayment will be treated as irregular just from the following day of the expiry date.
This loan will be classified as Sub-standard if it is kept irregular for 6 months or
beyond but less than 9 months, as `Doubtful' if for 9 months or beyond but less than
12 months and as `Bad & Loss' if for 12 months or beyond.
Any Demand Loan will be considered as Sub-standard if it remains unpaid for 6
months or beyond but not less then 9 months from the date of claim by the bank or
from the date of forced creation of the loan; likewise the loan will be considered as
‘Doubtful' and ‘Bad & Loss’ if remains unpaid for 9 months or beyond but less then
12 months and for 12 months and beyond respectively.
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In case any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid
within the due date, the amount of unpaid installment(s) will be termed as `defaulted
installment'.
In case of Fixed Term Loans, which are repayable within maximum 5 (five) years
of time:
If the amount of `defaulted installment' is equal to or more than the amount of
installment(s) due within 6 months, the entire loan will be classified as ‘Sub-standard;
If the amount of 'defaulted installment' is equal to or more than the amount of
installment(s) due within 12 months, the entire loan will be classified as ‘Doubtful;
If the amount of 'defaulted installment' is equal to or more than the amount of
installment (s) due within 18 months, the entire loan will be classified as ‘Bad &
Loss.
In case of Fixed Term Loans, which are repayable in more than 5 (five) years of
time:
□ If the amount of ‘defaulted installment' is equal to or more than the amount of

installment(s) due within 12 months, the entire loan will be classified as 'Sub-
standard.'
□ If the amount of ‘defaulted installment' is equal to or more than the amount of
installment(s) due within 18 months, the entire loan will be classified as
'Doubtful'.
□ If the amount of 'defaulted installment 'is equal to or more than the amount of
installment(s) due within 24 months, the entire loan will be classified as 'Bad
& Loss'.
Explanation: If any Fixed Term Loan is repayable at monthly installment, the amount
of installment(s) due within 6 months will be equal to the amount of summation of 6
monthly installments. Similarly, if repayable at quarterly installment, the amount of
installment(s) due within 6 months will be equal to the amount of summation of 2
quarterly installments.
B. Qualitative Judgment:
Page 35 of 93
If any uncertainty or doubt arises in respect of recovery of any Continuous Loan,

Demand Loan or Fixed Term Loan, the same will have to be classified on the basis of
qualitative judgment be it classifiable or not on the basis of objective criteria.
If any situational changes occur in the stipulations in terms of which the loan was
extended or if the capital of the borrower is impaired due to adverse conditions or if
the value of the securities decreases or if the recovery of the loan becomes uncertain
due to any other unfavorable situation, the loan will have to be classified on the basis
of qualitative judgment.
Besides, if any loan is illogically or repeatedly re-scheduled or the norms of re-

scheduling are violated or instances of (propensity to) frequently exceeding the loan-
limit are noticed or legal action is lodged for recovery of the loan or the loan is
extended without the approval of the proper authority, it will have to be classified on
the basis of qualitative judgment.
Despite the probability of any loan's being affected due to the reasons stated above or
for any other reasons, if there exists any hope for change of the existing condition by
resorting to proper steps, the loan, on the basis of qualitative judgment, will be
classified as 'Sub-standard'. But even if after resorting to proper steps, there exists no
certainty of total recovery of the loan, it will be classified as ‘Doubtful' and even after
exerting the all-out effort, there exists no chance of recovery, it will be classified as '
Bad & Loss' on the basis of qualitative judgment.
The concerned bank will classify on the basis of qualitative judgment and can
declassify the loans if qualitative improvement does occur.
But if any loan is classified by the Inspection Team of Bangladesh Bank, the same can
be declassified with the approval of the Board of Directors of the bank. However,
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before placing such case to the Board, the CEO and concerned branch manager shall
have to certify that the conditions for declassification have been fulfilled.
Note:
a) Any change in classification criteria provided by the Bangladesh Bank
shall supersede this grading system for classified accounts.
b) An account may also be classified based on qualitative judgment in line
with Bangladesh Bank guidelines.
c) A particular bank may have classification criteria stricter than Bangladesh
Bank guidelines.
7.8. How to Complete Investment (Credit) Risk Grading:

The following step-wise activities outline the detail process for arriving at credit
risk grading.
[
Step
Credit risk for I: Identify
counterparty allfrom
arises theanPrincipal Risk
aggregation Components
of the following:
 Financial Risk
 Business/Industry Risk
 Management Risk
 Security Risk
 Relationship Risk
Each of the above mentioned key risk areas require to be evaluated and aggregated to
arrive at an overall risk grading measure.
a) Evaluation of Financial Risk:

Risk that counterparties will fail to meet obligation due to financial distress.
This typically entails analysis of financials i.e. analysis of leverage, liquidity,
profitability & interest coverage ratios. To conclude, this capitalizes on the risk
of high leverage, poor liquidity, low profitability & insufficient cash flow.
b) Evaluation of Business/Industry Risk:
Page 37 of 93
Risk that adverse industry situation or unfavorable business condition will

impact borrowers’ capacity to meet obligation. The evaluation of this category
of risk looks at parameters such as business outlook, size of business, industry
growth, market competition & barriers to entry/exit. To conclude, this
capitalizes on the risk of failure due to low market share & poor industry
growth.
c) Evaluation of Management Risk:

Risk that counterparties may default as a result of poor managerial ability
including experience of the management, its succession plan and team work.
d) Evaluation of Security Risk:
Risk that the bank might be exposed due to poor quality or strength of the
security in case of default. This may entail strength of security & collateral,
location of collateral and support.
e) Evaluation of Relationship Risk:

These risk areas cover evaluation of limits utilization, account performance,
conditions/ covenants compliance by the borrower and deposit relationship.
Page 38 of 93
Investment
RISK
Financial Business/ Management Security Relationship

Risk Industry Risk Risk Risk Risk
Size of
Leverage Business Experience Security
Account Conduct
Coverage
Age of
Liquidity Business Succession Collateral Utilization of
Coverage Limit
Business
Outlook Compliance of
Profitability Team Work Support Covenants/
Condition
Industry
Growth
Coverage
Personal Deposits
Market
Competition
Barriers to
Business
Fig. Investment (Credit) Risk Grading diagram
- 39 -
Step II Allocate weight ages to Principal Risk Component
According to the importance of risk profile, the following weight ages are proposed for
corresponding principal risks.
Principal Risk Components: Weight:
 Financial Risk 50%

 Business/Industry Risk 18%
 Management Risk 12%
 Security Risk 10%
 Relationship Risk 10%
Step III Establish the Key Parameters
Principal Risk Components: Key Parameters:
 Financial Risk Leverage, Liquidity, Profitability & Coverage ratio.

 Business/Industry Risk Size of Business, Age of Business, Business Outlook,
Industry Growth, Competition & Barriers to Business
 Management Risk Experience, Succession & Team Work.
 Security Risk Security Coverage, Collateral Coverage and Support.
 Relationship Risk Account Conduct ,Utilization of Limit, Compliance of
covenants / conditions & Personal Deposit.
- 40 -
Step IV Assign weightages to each of the key parameters.
Principal Risk Components: Key Parameters: Weight:
 Financial Risk 50%

 Leverage 15%
 Liquidity 15%
 Profitability 15%
 Coverage 5%
 Business/Industry Risk 18%
 Size of Business 5%
 Age of Business 3%
 Business Outlook 3%
 Industry growth 3%
 Market Competition 2%
 Entry/Exit Barriers 2%
 Management Risk 12%
 Experience 5%
 Succession 4%
 Team Work 3%
 Security Risk 10%
 Security coverage 4%
 Collateral coverage 4%
 Support 2%
 Relationship Risk 10%
 Account conduct 5%
 Utilization of limit 2%
 Compliance of covenants
/condition 2%
 Personal deposit 1%
- 41 -
Step V Input data to arrive at the score on the key

parameters
After the risk identification & weight age assignment process (as mentioned above), the next
steps will be to input actual parameter in the score sheet to arrive at the scores corresponding to
the actual parameters.
This manual also provides a well programmed MS Excel based credit risk scoring sheet to
arrive at a total score on each borrower. The excel program requires inputting data accurately
in particular cells for input and will automatically calculate the risk grade for a particular
borrower based on the total score obtained. The following steps are to be followed while
using the MS Excel program.
a) Open the MS XL file named, CRG_SCORE_SHEET

b) The entire XL sheet named, CRG is protected except the particular cells to input data.
c) Input data accurately in the cells which are BORDERED & are colored YELLOW.
d) Some input cells contain DROP DOWN LIST for some criteria corresponding to the Key
Parameters. Click to the input cell and select the appropriate parameters from the DROP
DOWN LIST as shown below.
e) All the cells provided for input must be filled in order to arrive at accurate risk grade.
f) We have also enclosed the MS Excel file named, CRG_Score_Sheet in CD ROM for use.
- 42 -
Step VI Arrive at the Credit Risk Grading based on total score obtained
The following is the proposed Credit Risk Grade matrix based on the total score obtained by
an obligor.
Number Risk Grading Short Name Score

1 Superior SUP  100% cash covered
 Government
guarantee
 International Bank
guarantees
2 Good GD 85+
3 Acceptable ACCPT 75-84
4 Marginal/Watchlist MG/WL 65-74
5 Special Mention SM 55-64
6 Sub-standard SS 45-54
7 Doubtful DF 35-44
8 Bad & Loss BL <35
7.9 Credit Risk Grading Process:
 Credit Risk Grading should be completed by a Bank for all exposures (irrespective of
amount) other than those covered under Consumer and Small Enterprises Financing
Prudential Guidelines and also under The Short-Term Agricultural and Micro - Credit.
 For Superior Risk Grading (SUP-1) the score sheet is not applicable. This will be guided by
the criterion mentioned for superior grade account i.e. 100% cash covered, covered by
government & bank guarantee.
- 43 -
 Credit risk grading matrix would be useful in analyzing credit proposal, new or renewal for
regular limits or specific transactions, if basic information on a borrowing client to determine
the degree of each factor is
a) readily available,
b) current,
c) dependable, and
d) parameters/risk factors
are assessed judiciously and objectively. The Relationship Manager as per Data Collection
Checklist as shown in Appendix-A should collect required information.
 Relationship manager should ensure to correctly fill up the Limit Utilization Form
as shown in Appendix-B in order to arrive at a realistic earning status for the borrower.
 Risk factors are to be evaluated and weighted very carefully, on the basis of most up-to-date
and reliable data and complete objectivity must be ensured to assign the correct grading. Actual
parameter should be inputted in the Credit Risk Grading Score Sheet as shown in Appendix–
C.
 Credit risk grading exercise should be originated by Relationship Manager and

should be an on-going and continuous process. Relationship Manager shall complete the
Credit Risk Grading Score Sheet and shall arrive at a risk grading in consultation with a
Senior Relationship Manager and document it as per Credit Risk Grading Form as
shown in Appendix-D, which shall then be concurred by the Credit Officer in
consultation with a Senior Credit Officer.
 All credit proposals whether new, renewal or specific facility should consist of
a ) Data Collection Checklist,
b) Limit Utilization Form
c) Credit Risk Grading Score Sheet, and
d) Credit Risk Grading Form.
- 44 -
 The credit officers then would pass the approved Credit Risk Grading Form to
Credit Administration Department and Corporate Banking/Line of Business/Recovery
Unit for updating their MIS/record.
 The appropriate approving authority through the same Credit Risk Grading Form
shall approve any subsequent change/revision i.e. upgrade or downgrade in credit risk
grade.
7.10 Early Warning Signals:
Early Warning Signals (EWS) indicate risks or potential weaknesses of an exposure requiring
monitoring, supervision, or close attention by management.
If these weaknesses are left uncorrected, they may result in deterioration of the repayment
prospects in the Bank’s assets at some future date with a likely prospect of being downgraded
to classified assets.
Early identification, prompt reporting and proactive management of Early Warning Accounts
are prime credit responsibilities of all Relationship Managers and must be undertaken on a
continuous basis.
Despite a prudent credit approval process, loans may still become troubled. Therefore, it is
essential that early identification and prompt reporting of deteriorating credit signs be done to
ensure swift action to protect the Bank’s interest. The symptoms of early warning signals as
mentioned below are by no means exhaustive and hence, if there are other concerns, such as
a breach of loan covenants or adverse market rumors that warrant additional caution, a Credit
Risk Grading Form (Appendix-D) should be presented.
Irrespective of credit score obtained by any obligor as per the proposed risk grade score
sheet, the grading of the account highlighted as Early Warning Signals (EWS) accounts shall
have the following risk symptoms.
a) Marginal/Watchlist (MG/WL - 4): if -

 Any loan is past due/overdue for 60 days and above.
 Frequent drop in security value or shortfall in drawing power exists.
- 45 -
b) Special Mention (SM - 5): if -

 Any loan is past due/overdue for 90 days and above
 Major document deficiency prevails (such deficiencies include but not
limited to; board resolution for borrowing not obtained, sanction letter not
accepted by client, charges/hypothecation over assets favoring bank not filed
with Registrar, Joint Stock Companies, mortgage not in place, guarantees
not obtained, etc.)
 A significant petition or claim is lodged against the borrower.
The Credit Risk Grading Form of accounts having Early Warning Signals should be completed by the
Relationship Manager and sent to the approving authority in Credit Risk Management Department.
The Credit Risk Grade should be updated as soon as possible and no delay should be there in
referring Early Warning Signal accounts or any problem accounts to the Credit Risk Management
Department for their early involvement and assistance in recovery.
7.11 Exceptions to Investment Risk Grading:

 Head of Investment Risk Management may also downgrade/classify an account in the
normal course of inspection of a Branch or during the periodic portfolio review. In such
event, the Credit Risk Grading Form will then be filled up by Credit Risk Management
Department and will be referred to Corporate Banking/Line of Business/Credit
Administration Department/Recovery Unit for updating their MIS/records.
 Recommendation for upgrading of an account has to be well justified by the

recommending officers. Essentially complete removal of the reasons for downgrade
should be the basis of any upgrading.
 In case an account is rated marginal, special mention or unacceptable credit risk as
per the risk grading score sheet, this may be substantiated and credit risk may be accepted
if the exposure is additionally collateralized through cash collateral, good tangible
collaterals and strong guarantees. These are exceptions and should be exceptionally
approved by the appropriate approving authority.
- 46 -
 Whenever required an independent assessment of the credit risk grading of an

individual account may be conducted by the Head of Credit Risk Management or by the
Internal Auditor documenting as to why the credit deteriorated and also pointing out the
lapses.
 If a Bank has its own well established risk grading system equivalent to the proposed
credit risk grading or stricter, then they will have the option to continue with their own
risk grading system.
7.12 Credit Risk Grading Review:
Credit Risk Grading for each borrower should be assigned at the inception of lending and
should be periodically updated. Frequencies of the review of the credit risk grading are
mentioned below;
Number Risk Grading Short Review frequency (at least)

1 Superior SUP Annually
2 Good GD Annually
3 Acceptable ACCPT Annually
4 Marginal/Watchlist MG/WL Half yearly
5 Special Mention SM Quarterly
list
6 Sub-standard SS Quarterly
7 Doubtful DF Quarterly
8 Bad & Loss BL Quarterly
7.13 MIS on Credit Risk Grading:

 Bank should have comprehensive MIS reports on credit risk grading to evaluate
entire credit portfolio of the Bank. Format of such MIS reports on credit risk
grading has been presented in Appendix - E.
 Credit Risk Grading Report (Consolidated)

 Credit Risk Grading Report (Branch Wise)
 Credit Risk Grading Report (Branch & Risk Grade Wise)
 Credit Risk Grading Report (Grade Wise Borrower List)
- 47 -
 MIS reports as mentioned above should be prepared and circulated at least on a

quarterly basis.
7.14 Financial Spared Sheet:

A Financial Spread Sheet (FSS) has been developed which may be used by the Banks while
analyzing the credit risk elements of a credit proposal from financial point of view.
The FSS is well designed and programmed software having two parts. Input and Output
Sheets. The financial numbers of borrowers need to be inputted in the Input Sheets which
will then automatically generate the Output Sheets.
Chapter-8
Investment (Credit) Disbursement Procedure
- 48 -
8.1 Credit Disbursement:

Credit disbursement is involved with a series of procedure and the procedures are cited
below.
8.2 Issuing Sanction Advice to the Client:
After getting Head Office sanction advice, the branch then issue sanction advice to the client.
In client’s sanction advice, branch can include any new clause/terms with the Head office
sanction advice. If the client gives their consent to the terms and conditions cited in the
branch sanction advice within 7 (seven) days from the issuance of sanction advice, then the
branch move forward to complete documentation formalities.
8.3 Creation of Charge on Securities:
‘Taking security simply means acquiring a claim on an asset or assets so that, if repayment is
not made as planned, the assets taken as security can be used to obtain repayment. For this,
security is considered as an insurance against an emergency. A bank acquires rights over
- 49 -
borrower’s assets by creating charge on securities, so that, it can be made available for the
repayment of the loan. The banker does not absolute owner of the property, but has certain
rights over the property until the debt due to him is paid.
8.4 Methods of Creating Charges:
The methods of creating charge depend on the following aspects:
a. Types of properties to be charged
b. Nature of credit (investment) facility
c. Degree of control desired to be ensured.
The creditor may create charges on security by the following methods:
a) Pledge
b) Hypothecation
c) Mortgage
d) Lien
e) Assignment
f) Set-off
8.4.1 Pledge:
Pledge is the “Bailment of goods as security for payment of debt or performance of a
promise” .(Section -172 of the contact Act) and Bailment is the delivery of goods by one
person to another for some purpose, under a contact that the goods shall, when the purpose is
accomplished, be returned or otherwise disposed of, according to the direction of the persons
delivering them.(Section -148 of the contact Act)
Features of pledge:
● Delivery of the movable properties by the pledger ( borrower) to the pledgee as (Lender)
security.
● Ownership remains with pledger (borrower) but possession with the pledgee.
● withdrawal and receiving of goods within drawing power as per terms and conditions of
the credit are allowed.
● Pledged goods should be preserved properly in the bank’s/borrowers/rented godown at the
expense of the borrower.
Documents required for pledge:
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a.Demand promissory Note

b. Agreement for the pledge
c.Letter of continuity
d. Letter of arrangement
e.Insurance policy covering all risks.
f. Invoice of goods pledged ( for imported goods)
g. Latest stock report
h. Letter of disclaimer
i. Another documents as per sanction advice.
8.4.2 Hypothecation:
Hypothecation is a charge against property for an amount of debt where neither ownership
nor possession is passed to the creditor. Though the borrower is an actual physical possession
but the constructive possession remains with the Bank as per the deed of hypothecation. The
borrower holds the possession not in his own right as the owner of the goods but as the agent
of the Bank.
Features of Hypothecation
● Charge against a movable property for an amount of debt.
● as ownership and possession of the goods remains with of the borrower, the lender has no
effective control over the securities.
●Floating charge/Equitable charge creates on the movable properties.
Borrower binds himself under the hypothecation agreement to give possession of the
hypothecated goods to the Bank when called upon to do so. After the possession is handed
over to the lender the charge is converted from hypothecation to pledge.
●In the case of a hypothecation investment to a company the charge has to be compulsorily
filed for registration.
Documents required for hypothecation:

a. Demand Promissory Note
b. Letter of continuity
c. Deed of hypothecation
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d. Letters of guarantee if any

e. Certificate for registration of charge ( Ltd. Comp.)
f. Mortgage of property as collateral security ( if any)
g. Latest stock statement
h. Another documents as per sanction letter.
8.4.3 Mortgage:
A ‘mortgage’ is the transfer of an interest in specific immovable property for the purpose of
securing.
The transferor is called ‘Mortgagor’ & the transferee is called ‘Mortgagee’.
Mortgage formalities are different types:
i) Equitable Mortgage(mortgage by deposit of title deeds);
ii) Simple/Registered Mortgage;
ii) English Mortgage;
iv) Anomalous Mortgage
v) Usufructuary Mortgage
Among those equitable mortgage & registered mortgage are commonly used but now a days
preference is given only on registered mortgage.
Registered Mortgage: Registered Mortgage is completed in the respective Sub-Registry

Office with Registered Power of Attorney.
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Equitable Mortgage: Equitable Mortgage is completed by way of depositing Title Deeds to

the bank and signing Bank’s prescribed form ‘Memorandum of Deposit of title Deed’.
Major documents required for Registered Mortgage:
i) Mortgage deed(certified copy)
ii)Registered receipt in original(S.R.O.)
iii) Chain of documents for title i.e. via deeds( original if available)
iv) C.S.,S.A.& R.S. Parcha.
v)Mutation with DCR
vi) Non encumbrance certificate
vii) Power of Attorney
viii) Legal opinion
ix) Location plan/site plan etc.
Major documents required for equitable mortgage:

i) Chain of original documents for title
ii) Original title deed
iii) C.S.,S.A.& R.S. Parcha
iv) Memorandum of deposit of title deed
v) Mutation with DCR
vi) Non encumbrance certificate
vii) Legal opinion
viii) Location plan/site plan etc
Mode of security Nature of security & its characteristics

d) Lien *Cash, cash collateral & documents of the title to the goods
* It is the right of the banker to hold the debtor’s properly until the
debt is discharged generally retained by the bank in its own
custody or to the hands of third party with lien marked.
* The third party cannot discharge it without the permission of the
bank.
* In case of need bank needs the permission from the court to sell
the property.
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e) Assignment *Borrower transfers the right of property or debt to the bank.

* Life insurance policies, supply bills, book debt of the borrower
can be assigned.
f) Set off * While the right of lien is the right of a creditor in possession of
goods or securities owned by a debtor to retain them until a debt
due from the latter is paid, the right of set-off is the right of a
debtor to the total or partial merging of a claim of a creditor
against him in his counter claim against the latter.
Chapter-9
Recovery of Investments & Legal Action
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9.1 Recovery of Investments:

In these topics we have discussed the causes of overdue and the procedure of recovery
systems.
9.2 Causes of Overdue & Procedure to Recovery:
Irregular/stuck-up/over-due investment in a Bank increases at a faster rate and the same
ultimately jeopardize the interest of the Bank. In this connection we append below the causes
of irregular/Stuck-up and overdue investment for immediate attention of the concerned
officials so that the trend in this regard can be arrested.
9.3 General Causes of Overdue:

i) Selection of the Client
While selecting investment clients Branches do not give due weightage in this regard.
As such clients having bad track record are also inducted for allowing investment.
Selection of client should always be made strictly on the basis of criteria given in short as
under:
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a) The client should be an honest man of active habits with firm commitment. His honesty
and integrity must be undisputed.
b) He must be a good businessman having sufficient experience in the related line of trade.
He should also have good track record of repaying bank investment.
c) He must deploy his own capital in the business and capacity to bear the loss as well as to
run the business. He must have foresight for predicting future market conditions.
d) He should deal in such commodities which have social utilities and Shariah permissibility.
ii) Violation of Discretionary Power
Investments are often allowed violating Discretionary Power of the Branch Manager which
ultimately result in irregularities. Under no circumstances Discretionary Power should be
exceeded. In case any investment is allowed due to emergencies of circumstances beyond
Discretionary Power with prior permission of Head Office over telephone that should be got
confirmed in writing and formal approval should be obtained without delay.
iii) Command Area
The Client must have business establishment within Bank's command area. Some times
branches make investment in remote/distant place beyond the command area of the branch.
As a result branch can not ensure effective supervision and control over the investment.
Therefore, while making investment. Branches should ascertain that the business
establishment of the investment client is within the command area or within reasonable
distance for ensuring easy and effective supervision and control as well as constant follow-up
for timely recovery of investment.
iv) Net-worth of the party
The net worth of the party must be ascertained properly. Nevertheless, the investment in
business, cash flow and liquidity position are also to be ascertained. In fact Bank takes
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decision for making investment among others on the net-worth of the party. If the net-worth
is not ascertained properly Bank interest may be jeopardized subsequently.
v) Market report and confidential report :
Market report and Bank's confidential report are not obtained. The means and standing of the
party as well as performance with the previous/ present Banker is to be obtained checked and
verified.
vi) Cash flow:

Party's own investment in business both in cash and kind should be properly ascertained. In
addition cash inflow and outflow in business should also be examined by referring to
statement of account.
vii) Proper purchase & Sale:
Proper purchase and sale of goods must be done correctly and possession of commodity shall
be obtained. In this connection price, quantity and quality must be properly ascertained.
Purchase memo/cash memo, shall be obtained in the name of the Bank.
viii) Proper documentation:
Disbursements of investment are made before completing documentation formalities and
obtaining proper securities. Proper charge documents in respect of collateral securities
relating to property offered as collateral must be obtained. Original title deeds of mortgaged
property, via deeds, C.S.,S.A.,R.S./B.S. and mutation parcha up to date rent receipt, non
encumbrance certificate with charge fee receipt, Memorandum of deposit of title deeds,
affidavit must be obtained.
Legal opinion on the title deed shall also be obtained. Registered mortgage of property shall
be obtained on execution of deeds drafted by legal advisor.
9.4 Causes of Overdue of Murabaha Investment:
i) Quality and Quantity
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The quality and quantity of Murabaha goods are to be properly verified and checked at the
time of purchase and storing. The Murabaha Goods should also be verified at regular interval
to ensure that the quality is not deteriorating. While receiving the goods in the godown, the
Officers concerned should verify the quality and quantity and ensure receipt of the goods in
good conditions.
ii) Over Pricing

Goods should be purchased at the whole sale market price. Overpricing should always be
avoided to avert possible shortfall. The price trend of the commodities for the last one year
should be kept in view and accordingly percentage of cash security should be fixed-up so that
Bank's interest is not jeopardized due to fluctuation.
iii) Slow Moving Items
Murabaha Investment against slow moving/obsolete/hazardous/less demandable items should
always be avoided.
{{[
iv) Control and Supervision of Godown

Overnight watch and ward arrangement of godown are to be made. Some times Godown
Staffs are utilized for office works of the Branch which should be avoided Godown Staff
must be deployed in godown for proper control and supervision of Murabaha Stock.
v) Inspection
Authorized Officials must inspect the Godown at least once in a month and certificate in this
regard must be kept in Branch record. The duties and responsibilities of Godown Staffs must
be spelt out in clear terms. Branch must also ensure that the Godown Staff are discharging
their duties properly.
vi) Excess Delivery
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Excess delivery and delivery without receiving payment result in unadjusted shortfall which
is a gross irregularity and tantamount to defalcation. Therefore, it must be ensured that excess
delivery or delivery without receiving payment does not occur.
vii) Handling of the Keys of Godown
Some times keys of the Godown are not properly handled and the same is delivered to the
party. This is not only a great lapse but also fraught with great risk. Under no circumstances
Godown Keys should be handed over to the party or any unauthorized person other than the
Bank's Officials.
viii) Storing of Goods

Very often Murabaha Goods are stored haphazardly and piled-up position . As a result the
actual position of goods can not be ascertained. Goods must be stored in countable manner
with due care so that the quality and quantity can be determined at any time.
ix) Bank Signboard
Bank signboard is not displayed in and outside the Murabaha Godown which must be
invariably displayed.
x) Stock Card
Stock Card should be displayed with upto-date information on each consignment for easy
counting and identification.
xi) Delivery Orders
Delivery Orders should be issued properly filed in with necessary posting in Stock and
Delivery Register.
xii) Insurance
Comprehensive Insurance covering value of entire stock + 10% above the cost should be
obtained from enlisted Insurance Company.
xiii) Rotation of Murabaha Stocks
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Some times the stock of goods against Murabaha/MPI remains stored for years together.
Branch Managers should not allow the stocks to continue for a longer period to avoid
damage, pilferage, licking and fall in demand/price.
9.5 Causes of Overdue of Baimuajjal investment:
i) Party must have shop :
Bai-muazzal investment should not be allowed to any one who does not have own shop. The
shop must be visited by the responsible official to ascertain his over all business position.
ii) Assessment of investment need :

Since Bai-muazzal investment amounts to cash loan therefore the need of Baimuazzal
Investment shall be carefully determined, Baim. Investment should not be more than 30% of
own investment of the client.
iii) Supervision:
Bank's officials must pay regular visit to the shop of the investment clients so that the
investment client feel obliged to make regular transaction in current account as well as repay
investment in time.
iv) Stock in business:
Stock in Business is not verified by obtaining Stock Report at regular intervals. Monthly
stock-report should invariably be obtained from the clients.
v) Proper and adequate collateral:
Proper adequate and easily saleable collateral securities are to be obtained. Value of the
collateral security is to be properly assessed and forced sale value thereof should be
ascertained correctly.
vi) Insurance:
Insurance shall have to be obtained covering risk of fire RSD etc. on hypothecated stock
which many branches don't obtain.
vii) Follow-up:
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Follow-up and frequent contact before due date and constant persuasion on or before due
date are to be made by the branches for timely adjustment and to avoid overdue.
9.6 Causes of Overdue of HPSM Investment:

i) Obtention of equity:
Equity as per norms and practice is not being recovered before disbursement of HP(SM)
investment. Proper and adequate equity should invariably be obtained supported by collateral
security for the rest amount.
ii) Model and Make :

Machinery and Vehicle of recent model and make shall have to be procured. Before
procuring machinery and vehicle, its technical feasibility must have to be ascertained. From
the experience it is observed that unless machinery and vehicle, is found technically viable
the investment client cannot repay the investment as per schedule. In case of vehicle it must
be get registered in Bank's name only and insurance cover note, road permit, tax token must
be obtained in Bank's name.
iii) Supervision:
The vehicle/machinery must be inspected at least once in a month so that the same cannot be
shifted elsewhere/another route/place without Bank's knowledge.
iv) Taking of possession :
In the event of party's failure to pay 3(three) consecutive installment the vehicle/machinery
shall have to be taken into Bank's possession, if necessary, with the help of law enforcing
authority.
v) Renewal of insurance:
On expiry of previous insurance fresh insurance cover shall have to be obtained.
9.7 Procedure to be followed for Recovery.
To regularize/recover irregular/stuck-up/overdue investment and in order to overcome the
situation all concerned shall adhere to the following procedures for recovery of aforesaid
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investments. In this regard a brief definition of irregular/stuck-up/overdue investment is also

given.
a) Definition of irregular/stuck-up/over due investment
i)Irregular Investment:
An investment is said to be irregular when regular repayment is not made as per schedule of
repayment, improper documentation leads to non-repayment and when value of security falls
down/security become obsolete or security available does not patch the investment
outstanding.
ii) Stuck-up Investment

An Investment is said to be stuck-up when repayment is stopped as a result of closing of
business, death of Investment Client and for any other unforeseen circumstances rendering
the investment client unable to pay.
iii) Overdue Investment
An Investment is said to be overdue when repayment does not come within the period of
investment or expiry of the limit and in case of bills repayment is not received on due date.
b) Procedure to be followed for recovery of irregular/stuck-up/ overdue investment
i) Contacting the investment client in writing and meeting personally
In order to ensure timely recovery of investment, supervision at all stage shall be ensured.
This will include supervision from the date of disbursement to total repayment. In case
repayment as per schedule does not come the Manager shall personally enquire about the
causes of non repayment. If he is convinced that the difficulty is temporary in nature and is
likely to overcome shortly he should discuss the situation with the investment clients and
obtain reasonable definite repayment schedule under intimation to Head Office.
Apart from the above as and when any investment becomes irregular/stuck-up/ likely to be
overdue, the Branch Manager apart from contacting the borrower in writing shall also consult
discuss with the investment clients about his/their difficulties in regularization/repayment
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thereof. If necessary the Manager will give suggestion in consultation with Head Office for
overcoming the difficult situation. He will personally pursue in such a manner with the
investment client so that investment can be realized without hindering good relationship with
the investment clients. If necessary he will utilize the influence of the local elites to insist the
party to make repayment
ii) Sending Resume of Investment to Head Office

Branch Manager will send the Resume of Investment Vide F-87 mentioning therein the latest
position of investment, security, irregularities occurred and the efforts made in the meantime
for regularization/recovery of the investment as well as suggesting future action.
iii) Issuance of Registered Notice
If persuasion does not bring any fruitful result he will issue a final registered demand notice
impressing upon the client concerned to repay within 15 days time from the date of receipt of
the letter with acknowledgement due.
iv) Legal Notice to be issued
If the investment client does not come forward to repay within a reasonable period,
Legal notice is to be served through panel lawyer of the Bank with copy endorsed to
Head office. The reaction of legal notice is also to be brought to the knowledge of Head
Office with comments of the Branch Manager for further instructions.
v) Suit to be filed
If filing of suit is allowed by Head Office the same should be filed against the debtor/client
concerned and the Guarantor if any under Civil Procedure Code 9 for specific performance to
be deemed as breach of contract. In case the investment is covered by Registered collateral
security before filing suit the security to be disposed off according to article of 12 of Artha
Rin Adalat Ain-2003.After adjusting the sale value with the outstanding balance suit to be
filed against the borrower/Guarantor/ for the rest amount according to the Artha Rin Adalat
Ain-2003.But the sale value is over the investment outstanding balance the excess amount
should be refunded to the borrower.. On the other hand, if the investment is not secured by
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Registered Collateral security, Suit to be filed in Artha Rin Adalat according to the Artha Rin
Adalat Ain-2003 against the borrower/Guarantor.
vi) Disposal of Murabaha Stock

In case where the investment is secured by pledge of stock it should be mentioned in the
Registered Notice that in case the party fails to lift Murabaha goods on making repayment,
the Bank shall dispose off the same by inviting open tender through National/Local daily.
vii) Inviting Tender for Disposal of Stock
In spite of the above if the client does not come forward to lift the goods, tender notice shall
be published in One National/Local daily on obtaining Head Office approval. The goods
shall be delivered to the highest tendered on obtaining Head Office approval and money/title
suit as the case may shall be filed for short fall (if any). For minimizing the cost of
advertisement, Tender/Sale Notice of several clients shall be published through one
Tender/sale Notice.
viii) Criminal Suit for Recovery of Vehicle/Machineries
In case of Hire Purchase Investment, criminal suit under section 406/420 read with section
No.98 or 100 CRPC for breach of contract as well as issuance of search warrant for recovery
of immovable/movable that is transport/machineries shall be filed in case the investment
client fails to repay the installment as per schedule and also do not surrender the assets. After
taking possession of the assets, the same shall be sold by inviting tender and Money Suit
under section 9 of the Civil Procedure Code for specific performance to be deemed as breach
of contract if not backed by Mortgage of property or Title Suit/Mortgage suits for realization
of money by selling the mortgaged property wherein mortgagor also can purchase the
auctioned property under Civil Procedure Code.
c) Difficulties faced while Suit is filed and after filing of Suit
As and when money suit/title suit is filed Bank may face the following difficulties:-
i) Serving of Demand/Legal Notice
The 1st difficulty is that demand/legal notice can not be served for lack of proper and correct
address. Therefore, while opening the Account and initiating investment the residential
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address and permanent address of investment clients and guarantor shall be correctly
recorded and accordingly final/legal notice shall be served.
ii) Availability of Property particulars

Part from the above the full particulars of assets of investment clients must be obtained while
allowing investment so that simultaneously with the filing of Money Suit, attachment of asset
before judgment can be made and subsequently decree can be executed on the available
assets of the judgment debtors.
d) Steps to be taken after filing of Suit
After filing of suit the following steps shall be taken:
i) Branch shall follow-up the progress of the suit effectively with the legal advisor by
constant ouch with him for speedy disposal of cases/ suits.
ii) Quick service of Summons on the dependant shall be ensured. In case normal service of
Summons is not possible, arrangement shall be made for substitute service i.e. by way of
publication of Summons on the daily newspaper.
iii) Steps shall be taken for attaching the assets of investment clients before judgment so that
Bank’s interest remains secured/ safeguarded.
iv) Steps shall be taken for issuance of decree by the court at the earliest. As soon as the
decree is given by the court certified copy shall be obtained and true copy shall be sent to
Head Office. A copy of the decree shall also be sent to the judgment debtor impressing to
payoff as per terms of decree.
v) It shall be ensured that payment by the judgment debtor is made as per terms of decree. In
case of default execution case shall be filed without delay unless otherwise advised by Head
Office & decrial amount shall have to be recovered on auctioning the property of the
judgment debtor.
vi) After filing suit if any compromise prayer is done by the dependent, the terms and
conditions of compromise petitions shall be sent to Head Office prior to filing/ submitting the
same in the court.
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vii) If any prayer for amicable compromise is made by the investment client at any stage, the
same shall be sent to Head Office with comments and observation of the Branch Manager for
consideration of Head Office.
viii) When there is no chance for recovery of any irregular/stuck-up/over due investment
even by taking legal action the investment shall be treated as "Bad" . It may be mentioned
that an investment becomes bad for the following reasons:
a) The financial condition of investment clients turns out poor and his business is collapsed
and there are no realizable assets.
b) Borrower is not traceable and all efforts to find him out fail.
c) Investment becomes timbered for taking legal action.
Considering the above points if the Manager is convinced that the investment should be
written off he shall seek permission form Head Office for submitting write off proposal in
this regard.
e )Time barred by limitation :
i) Responsibility of time barred
If any investment becomes time barred by limitation it will be the personal liability of the
Branch Manager as well as investment-in-charge if any.
In this connection the procedure for computation of time barred by limitation & steps for
regularization is appended below.
ii) Limitation is for three years if debt is not backed by mortgage of property and twelve
years if backed by mortgaged property
If the Bank's investment is not backed by any mortgage of immovable property it becomes
time barred after 3 (three) years from the date of initiation. In case of investment secured by
Mortgage of Property the limitation for filing suit is 12 years form the date of initiation.
iii) Computation of limitation if debt is acknowledged in writing or by signing the
deposit pay-in-slip
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Provided further that before expiry of the above period if the investment client acknowledge
in writing signed by himself or by his duly authorized agent or any payment made by
respective borrower by deposit slip signed by him or his authorized agent, a fresh period of
limitation shall be computed from the time and date when acknowledgement of debt is signed
by him authorized agent or part payment of debt is made by him under his signature or his
authorized agent. The deposit of profit if specifically mentioned in the pay-in-slip will,
however, not save the limitation.
iv) Signing of Blank Charge Forms including Balance Confirmation shall be treated as
acknowledgement debt.
The signing of fresh demand promissory note, letter of continuity or balance confirmation
slip by the borrower or by his authorized agent before the expiry of above prescribed period
of limitation may be treated as an acknowledgement of debt so as to compute the fresh period
of limitation from the date thereof.
v) Mere receipt of Demand Notice or Legal Notice do not constitute acknowledgement
of debt.
In this connection, it may be mentioned that mere receipt of the demand notice or legal notice
by the borrower or by his duly authorized agent by signing the acknowledgement receipt
thereof can not be treated to be an acknowledgement receipt of debt because the
acknowledgement receipt bears the testimony of the receipt of the letter and not the contents
of the letter i.e. do not testify the acknowledgement of debt by the borrower. The mere reply
of bank's notice without specific admission of debt can not also be treated to be an
acknowledgement of debt.
vi) After becoming time barred only obtension of acknowledgement of debt in writing
with promise to repay in writing shall save limitation.
But if after the expiry of the above prescribed period of limitation, i.e. three years in case of
money suit and twelve years in case of mortgage suit, from the date of
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initiation of investments, the borrower or his duly authorized agent makes any such
acknowledgement of debt or any part payment of his debt or profit as mentioned above the
dues shall not be saved from the limitation or the dues shall not get a fresh lease of life unless
the borrower or his duly authorized agent along with his acknowledgement of debt in writing
also promises in writing to repay signed by him or his duly authorized agent to pay the
balance of outstanding dues.
vii) Limitation shall expire as on the last day of the year instead of any date within the
year as per calculation.
Provided further that if the account is current, open and mutual where there has been
reciprocal demands, between the parties, computation period of limitation shall commence
from the date of last credit entry and will extend up to the calendar year, i.e. , if the last date
of credit entry is 02-10-1996 limitation shall expire on 31-12-1997 and not on 01-10-97
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Chapter-10
Investment Rescheduling & Written off
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10.1 Investment Rescheduling:

Bangladesh Bank circulated a No.18 in 1995 for rescheduling the stuck up investments by
depositing 10% cash down payment keeping sufficient collateral security for a minimum
period of time. But this system created a barrier to recover the stuck up investment because
the defaulter clients were started to get this facility frequently. Considering this problem
Bangladesh Bank voided this circular and again circulated a new BRPD circular No.01 dated
13.01.03 .The main guidelines of the circular are given below:
10.1.1 Guidelines for Consideration of Reschedule Application:
While considering investment rescheduling application the banks shall follow the under
mentioned guidelines:
a) When a borrower asks for rescheduling of investments the banks shall examine the causes
as to why the investments have become non-performing. If it is found from such review that
the borrower has diverted the funds elsewhere or the borrower is a habitual investment
defaulter the bank shall not consider the application for investment rescheduling. Instead, the
bank shall take/continue all legal steps for recovery of the investments.
b) At the time of considering investment rescheduling proposal bank must assess the
borrower's overall repayment capacity taking into account the borrower's liability position
with other banks.
c) In order to ensure whether the borrower would be able to repay the rescheduled
installments/existing liability the bank shall review the borrower's cash flow statement,
audited balance sheet, income statement and other financial statements.
d) Bank officers should ensure, if required by spot inspection of the borrower's
company/business place, that the concerned company/business enterprise will be able to
generate surplus to repay the rescheduled liability. Such inspection reports should be
preserved by the banks,
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e) If a bank is satisfied after due diligence mentioned above that the borrower will be able to
repay, the loan may be rescheduled. Otherwise, bank shall take all legal steps to realize the
loan, make necessary provision and take measures to write-off,
f) The rescheduling shall be for a minimum reasonable period of time.
g) At the time of placing the rescheduling proposal before the Board of Directors the Bank
shall apprise the Board in detailed, what would be implications of such loan rescheduling on
the income and other areas of the bank.
10.1.2 Rate of Down Payment:

The investments (loans) which are repayable within a specific time period under a prescribed
repayment schedule are treated as Term Loans. For rescheduling such loans following
policies shall, henceforth, be followed:
a) Application for first rescheduling will be considered only after cash payment of at least
15% of the overdue installments or 10% of the total outstanding amount of loan, whichever,
is less.
b) Rescheduling application for the second time will be considered after cash payment of
minimum 30% of the overdue installments or 20% of the total outstanding amount of loan,
whichever, is less;
c) Application for rescheduling for more than two times will be considered after cash
payment of minimum 50% of the overdue installments or 30% of the total outstanding
amount of loan, whichever is less;
Explanation: If any loan is rescheduled once before issuance of miss policy the conditions
set forth in this circular for second rescheduling shall be applicable for rescheduling of such
loans. Likewise, the terms for 3rd rescheduling as per miss circular shall be applicable for
rescheduling of any loan which has already been rescheduled twice.
The rate of down payment are shown in the following table :
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TERM INVESTMENT Rate of Down payment

FIRST TIME
a)Minimum on overdue installments 15%
Whichever is less
or total outstanding 10%
SECOND TIME
b)Minimum on overdue installments 30%
Whichever is less
MORE THAN TWO TIMES

c)Minimum on overdue installments 50%
Whichever is less
DEMAND & CONTINUOUS Rate of Down payment
INVESTMENT
FIRST TIME
i)Up to Tk.1.00 (one) Crore 15%
ii) Over Tk. 1 .00(one) Crore to Tk. 5.00 (five) 10% But not less than Tk. 1
Crore 5.00 lack
iii)Over Tk. 5.00(five) Crore and above 5% But not less than
Tk.50.00 lack
SECOND TIME
Overdue installments on Reconstruction of 30%
Demand or Continuous Investment/Overdue Whichever is less
installments on rescheduled A/c. being
conversion 20%
or total outstanding
MORE THAN TWO TIMES
Minimum on overdue installments 50% Whichever is less
10.1.3 Other Terms & Conditions of Rescheduling:
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a) Borrower whose loan has been reschedule shall not get any new loan facility direct or
indirect, in addition to the existing credit facility within a period of one year or until the loan
is fully repaid which occurs first.
b) For rescheduling as above no prior approval of Bangladesh Bank will be required;
however, prior approval of Bangladesh Bank shall have to be obtained if the loan is related to
the director/s of a bank company or it is a large loan as defined in section 27 of the Bank
Company Act, 1991.
c) Where the amount equal to minimum twice the amount of principal loan disbursed has
been repaid till the date of issuance of this policy, the instructions contained in this circular
shall not be mandatory for rescheduling of such loan for l(one) year from the date of this
circular.
d) Information on the loan accounts rescheduled (e.g. how many times the loan account has
been rescheduled) shall be reported to the Credit Information Bureau (CIB) of Bangladesh
bank. .
10.2 Investment Written off:
For conducting investment activities sometimes the quality of the investment decreases and
uncertainty arises to recover such type investments. This type of investment is classified as
per usual terms and conditions and sufficient provisions are needed to keep against these
investments. Against keeping proper provision to write off investment is a recognized
system in our country. But due to un willingliness to adopt this system, the balance sheets of
the Banks are becoming broad unnecessarily and artificially. To sustain the claim on the
written off investments ,the probable legal barriers are mitigated in 2001 by adopting the
article# 28ka in Bank Company Law,1991 and to make easy the written off procedure
Bangladesh Bank circulated a new BRPD circularNo.02 on 13.01.03 and the guidelines
according to the new circular are given below:
10.2.1 Guidelines for written off Investments:
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i) Bank can write off any Bad/Loss investment. Any investment against which already 5(five) years
have been passed after being classified as B/L & 100% provision is kept, this type of investment
is written off in priority basis.
ii) if the already kept provision (100%) is not sufficient for written off ,then the investment would be
written off by debiting the income from this year.
iii) the recovery procedure would be continued after written off and suit would be filed.
Responsibility for recover of written off investment would be handed over a separate debit
collection unit in side the Bank.
iv) Any organization, outside of the Bank may be engaged for quick disposal of the suit and recovery
of the written of investment.
v) The account of written off investment should be written in a separate ledger.
vi) The account of written off investment should be furnished cumulatively in the annual
report/balance sheet.
vii) the amount of current year’s written off investment should be written down separately to the
notes to the accounts.
viii) As like other defaulter, the information of written off investment should be reported in Credit
Information Bureau (CIB).
ix) An approval should be taken for doing write off against the investment of present Director, Ex-
Director or other investment which is taken in the name of self interested organization during the
period of directorship.
10.2.2 Written of Investments in AIBL:

To reduce the burden of classified investment from the Balance sheet of Al-Arafah Islami Bank Ltd.
in the half yearly closing that is 30-06-2007 approximately tk. 4700.00 lack was written off against
keeping of 100% provision from about 12 Branches. After written off the investment, the branches
has recovered Tk.400.lac as on 30.06.07
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Chapter-11
Other Investment Terms & Its Importance
11.1 Provisioning on Investments:

a) Provision for investment is made on the basis of year end review by the management
and of instructions contained in Bangladesh Bank BCD circular No.34 dated 16 November
- 75 -
1989,BCD Circular No.20 dated 27 December 1994, BCD Circular No.12 dated 4 September
1995, BRPD Circular No.16 dated6 1998 and BRPD Circular No.9 dated 14 May 2001.
The provision rates are given below:
General provision on unclassified Investment @ 1%
Specific provision on substandard Investment @ 20%
Specific provision on doubtful Investment @50%
Specific provision on bad/loss Investment @100%
b) Investments are written off to the extent that i) there is no realistic prospect of recovery, ii)
Provision is kept 100% against the investment iii) and against which legal cases are pending
for more than five years as per Bangladesh Bank guidelines. (Source-A.R.-2005,P-49)
11.2 Auditing:
‘Audit’ comes from the word ‘Audi ere’ which means ‘he hears’ Audit is defined from
different angles. As per UK definition audit is defined as “Audit is the independent
examination of, and expression of opinion on, the financial statements of an enterprise by an
appointed auditor in pursuance of that appointment and in compliance with any other
statutory obligations.” On the other hand, American Accounting Association (AAA)
Committee defines Auditing as “Audit is a systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to ascertain the
degree of correspondence between those assertions and established criteria and
communicating the results to interested users”.
Auditing is happened in any organization either financial or non financial organization. As a
financial organization, in our Bank external, internal and sometimes special auditing is
performed.
11.2.1 Internal Auditing:

‘Internal Auditing’ means auditing is carried out by the employees of the company.
11.2.2 External Auditing:
External Auditing is the most common type of audit and concerns the audit of financial
statements by professional auditors with a view to express an opinion on the fairness of
- 76 -
management assertion and on the preparation of financial statements in conformity with

GAAP.
In each Annual General Meeting (AGM) 2 (two) reputed Chartered Accountants Firms are
engaged for auditing Al-Arafah Islami Bank Ltd. In 2006 Khan Wahab Shafique Rahman &
Co. and Syful Shamsul Alam & Co. are appointed for auditing the Bank. The Audit firms
audit the balance sheet, related profit and loss account and statement of cash flow of AIBL
prepared for the year then ended. The preparation of these financial statements is the
responsibility of the company’s management but the Auditor’s responsibility is to express
their opinion of the financial statements only.
The Auditors conducted their audit in accordance with Bangladesh Standards on Auditing
(BSA). Those standards require obtaining reasonable assurance about whether the financial
statements are free of material misstatement.
11.2.3 Auditing in 2006 of AIBL:
In 2005 the auditors gave their opinion and stated that the financial statements prepared in
accordance with Bangladesh Accounting Standards (BAS), give a true and fair view of the
state of the company’s affairs as on 31 December,2006 and of the results of its operations and
its cash flows for the year ended and comply with the Bank Company Act 1991, the rules and
regulations issued by the Bangladesh Bank, the companies Act, 1994, the Securities and
Exchange Rules 1987 and other applicable laws and regulations. They also reported as under:
i) We have obtained all information and explanations which to the best of our knowledge and
belief were necessary for the purpose of our audit and made due verification thereof ;
ii) in our opinion, proper books of account as required by law have been kept by the
company as far as it appeared from our examination of those books and proper returns
adequate for the purposes of our audit have been received from branches ;
iii) The bank’s balance sheet and profit and loss account dealt with by the report are in
agreement with the books of account and returns ;
iv) The expenditure incurred was for the purpose of the bank’s operation;
v) The financial position of the company at 31 December, 2006 and the profit for the year
then ended has been properly reflected in the financial statements; the financial statements
- 77 -
have been prepared in accordance with the generally accepted accounting principles
(GAAP);
vi) the financial statements have been drawn up in conformity with the Bank company Act.
1991 and in accordance with the accounting rules and regulations issued by the Bangladesh
Bank ;
vii) adequate provisions have been made for investment and other assets which are in our
opinion, doubtful of recovery ;
viii) the financial statements conform to the prescribed standards set in the accounting
regulations issued by the Bangladesh Bank after consultation with the professional
accounting bodies of Bangladesh ;
ix) The records and statements submitted by the branches have been properly maintained and
consolidated in the financial statements; and
x) The information and explanations required by us have been received and found
satisfactory.
11.3 Credit Rating & Its Implication on Credit Management:

Credit Rating is done by different credit rating companies and also Bangladesh Bank.
Bangladesh Bank Credit rating is named as ‘CAMEL’ Rating where the letter implies as
under
C-Capital of the organization
A-Asset Quality
M-Management Efficiency
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E-Efficiency of the Organization

L-Liquidity Position.
Credit Rating shows performance, liquidity position, and asset quality etc. of an organization
which creates demand of the organization in the financial market. The organization that has
higher rating indicates good performance, their credibility is high and its liquidity position is
much better. So people can deposit their money without any fear.
11.4 Reflection of Reporting on Credit Management:

Reporting plays an important role in Credit Management. Public sentiment & reflection are
focused after publishing the report of the organization. The market value of the shares of any
company become high if any good news are published otherwise the opposite reactions are
happened. But the reflection happens not only on the share value but also on the deposit
position & investment position. The deposit holders always demand a stable position i.e. they
want to keep their money at a more safety place.
- 79 -
Chapter-12
Case Studies
Case Study-1
(A Bad client)
Name & Address of the Client : M/s. Islam Enterprise

90, Moulavibazar, Dhaka.
- 80 -
History of the case:

D.Machinery Corporation is a trading concern which is dealing with diesel Engine,
compressor and other machinery items for long 8 years. They mainly import Air Compressor,
Electronic Motors, Pumps, and Generators & Diesel Engine from abroad. They also purchase
some components from locally which is used to assemble the above items. After assembling
this machinery they sell the items in the local market. They have been doing the business
with own finance. But to cope with the present demand they have decided to take finance
from Al- Arafah Islami Bank Limited., Moulavibazar Branch, Dhaka and thus applied to the
branch on 15.02.02 as per following manner:
Mode & amount of Investment applied.
Mode Amount
1.L/C Tk.500.00 lac
2.MPI Tk.300.00 lac
2. Baimuajjal (CC Hypo) Tk.100.00 lac
After getting application from the client, the bank processed the application and finally sent
to its Head Office for approval. The proposal was placed to the Executive Committee
meeting being proper justified and was approved as usual. Head Office issued sanction letter
to the branch and branch also issued to the client. Within 7 (seven) days the client gave
consent on the sanction advice and prayed for disbursement. Completing & signing the
deeds/documents properly the branch made disbursement to the client. The papers/documents
are included in the documentation are as under:
i) DP(Demand Promissory) Note

ii) DP Note Delivery Letter
iii) DP Note Revival Letter
iv) Baimuajjal/ Murabaha Agreement.
v) Letter of Guarantee
vi) Letter of Arrangement.
vii) Balance Confirmation
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viii) Purchase Schedule

ix) Memorandum of Deposit of Title Deed
x) Registered Deed of Mortgage
xi) Registered Power of Attorney
The client took disbursement Tk.100.00 lac for Baimuajjal & Tk.250.00 lac for MPI
investment. The Baimuajjal disbursement is given for 1 (one) year & MPI disbursement is for
90/120 days. But all the deals for revolving basis i.e. within the limit they can take
disbursement so many times and can adjust the deals before maturity period. If the client
adjusts the deal before maturity period they would be entitled to get ‘rebate’. The client has
been banking for long years with credibility but suddenly they decide to divert the fund to
purchase landed property and without the consent of the bank the reduced the volume of the
business and after few days the bank has informed the incidence of fund diversion and band
reduced their limit and the client run their business smoothly and ultimately thye became
defaulter.
Being defaulter, they prayed for reschedule depositing 15% down payment Tk.19.58 lac of
the total liability of Tk.130.50 lac and the reschedule proposal was accordingly approve by
the proper authority with compliance of all terms and conditions of reschedule. But the client
at last failed to deposit the installments regularly and the bank decided to take legal action.
Firstly, the bank issued demand letter several times and then final demand letter. Secondly,
issued legal notice to the client but the client failed to adjust the account.
Thirdly, Being failure to recover the overdue liability by taking several measures, the branch
finally published auction notice in 2 (two) daily news for selling the mortgage property to
recover the liability as per the stipulation cited in Article-12 of ‘Artha Rin Adalat Ain
-2003’ and should do the following:
i) If the bank branch fails to sell the property then the branch should file Artha Rin case in the
Artha Rin Adalat.
ii) if the Branch is able to sell the property over the liability, the branch at first will adjust the
liability and the excess amount should be returned to the client.
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iii) if the branch sells the property less than the liability, the branch at first adjust the liability
to the extreme level and will file suit for the rest amount.
iv) if no collateral security exists, the branch should directly file Artha Rin suit against the
client.
Filing of Artha Rin Suit:

Being failure to recover the overdue liability by taking the above measures, the branch
immediately filed ‘Artha Rin Suit’ in the Artha Rin Adalat by following the time limit of
Artha Rin Adalat Ain-2003. Before filing Artha Rin Suit a plaint should be prepared with
proper documents & information regarding the investment.
Written off the liability:
After filing Artha Rin suit and keeping 100% provision against the investment the bank
written off the liability to reduce the burden of the classified investment.
Judgment in Artha Rin Adalat:
After receiving the plaint from the bank,the Artha Rin Adalat firstly issued Summon to the
client for attending to the respective court for self defence. To judge the suits there are some
provisions and thus are as follows:
i) If the client be present on the scheduled date in the court for proper hearing & giving
witness the judgment will be declared for taking witness from the both parties.
ii) otherwise the suit will be exparte decreed in favor of the bank and bank will recover the
money by filing execution suit.
Execution of Decree:
If the judgment is declared in favour of the Bank ,then the Bank has to file execution suit in
the decreed court. court then orders to execute the decree by beating a drum in the place of
property & publishing ‘A Nilam Notice’ in 2(two) daily Newspaper giving minimum 15
(fifteen) days time to submit the Bid. On the schedule date the bidders submit their bids in
the respective court and the court accepts the highest bidder’s offer as per consent of the bank
& issue Bainama in favor of the bidder and the bank gets their money from the court.
- 83 -
Findings from the case:
A True Businessman can not fall in any problem. The proprietor of the farm broke the trustee
of business and diverted the fund. As such, bank was bound to reduce the financial facility.
There is a proverb-if you trust a man, you will be trusted by a man. So every businessman
should be free to the banker and never hide any thing. To conduct a businessman banker
should be a great psychologist.
Case Study-2
(A Regular Good client)
Name & Address of the Client : M/s. X Motors Ltd.

X Center, 71, Mohakhali C/A, Dhaka.
History of the case:
- 84 -
X Motors ltd. is a Private limited Company which deals with this business over 15(fifteen)
years in Bangladesh. It imports the chassis from Japan and makes the body here. This
company is doing this business in Bangladesh with remarkable reputation. Their buses run in
almost all the districts in Bangladesh. Initially they have been doing their business with own
finance but day by day the demand are growing upward due to increase of population and
now Bangladesh is a over populated country. Considering the high demand the Board of
Directors of the Company decided to take banking finance and also decided to take the
finance from Al-Arafah Islami Bank Ltd., Motijheel Branch and thus applied as under:
Mode Amount
1.L/C Tk.1000.00 lac
2.MPI Tk.500.00 lac
2.HPSM Tk.2200.00 lac
After getting application from the client, the bank processed the application and finally sent
to its Head Office for approval. The proposal was placed to the Executive Committee
meeting being proper justified and was approved as usual. Head Office issued sanction letter
to the branch and branch also issued to the client. Within 7 (seven) days the client gave
consent on the sanction advice and prayed for disbursement. Completing & signing the
deeds/documents properly the branch made disbursement to the client. The papers/documents
are included in the documentation are as under:
i) DP (Demand Promissory) Note

ii) DP Note Delivery Letter
iii) DP Note Revival Letter
iv) Baimuajjal /Murabaha Agreement.
v) Letter of Guarantee
vi) Letter of Arrangement.
vii) Balance Confirmation
viii) Purchase Schedule
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ix) Memorandum of Deposit of Title Deed

x) Registered Deed of Mortgage
xi) Registered Power of Attorney
The client took disbursement Tk.2000.00 lac for HPSM & Tk.350.00 lac for MPI investment.
The HPSM disbursement is given for 5 (five) years with 6 (six) months gestation period &
MPI disbursement is for 90/120 days. But all the deals for revolving basis i.e. within the limit
they can take disbursement so many times and can adjust the deals before maturity period. If
the client adjusts the deal before maturity period they would be entitled to get ‘rebate’. The
client has been banking for many years with credibility and their demand is increasing day by
day. Considering increasing demand the Board of Directors of the company decided to
enhance their existing demand and thus applied in the following manner:
Mode Amount
1.L/C Tk.1500.00 lac
2.MPI Tk.1000.00 lac
2.HPSM Tk.3000.00 lac
The renewal & enhanced proposal are duly forwarded to Head Office and the Head Office
gave approval the proposal to meet up client’s demand.
Findings from the case:
The client’s behavior was honest to the bank and the Bank trusted the client. Thus, when the
client approached enhancement to the Bank it was obligatory to the Bank to approve their
proposal. We should know that Banking is a business institution. Its main goal is to make
profit by giving excellent & quick service to both the depositors and investment clients.
Client is also the business partner of the Bank. When the partner seems to be good to the
Bank, they will fell fresh to do business with it.
[
Chapter-13
- 86 -
Concluding Part
13.1 Summary of Findings

The 3 (three) months internship program has been going to be finished through writing a
report. During the time of internship I have tried with my best to acquire theoretical and
practical knowledge Banking business and the Management of Credit. Being an employee of
Al- Arafah Islami bank Ltd. it was easy for me to complete this program timely. In my report
I have tried to discuss various investment activities of different sectors and also I have tried
my discussion within 14 (fourteen) chapters. The summary of findings of these chapters are
briefly cited below:
- 87 -
Chapter-1: Introduction is illustrated in chapter one. Here I have tried to find out the scope
of and the limitations of the study by discussing the background of the program. This is just
an introductory discussion.
Chapter-2: In chapter two I have tried to familiarize the organization with educated society.
The mission, vision, objectives, form of different committee, line of business, Shariah
Council & organogram are discussed here and we have gathered knowledge about the
formation of different committee & mission, vision & objectives are written of an
organization.
Chapter-3: In this chapter we are introduced with Credit and Credit Management and also
we have gathered knowledge about different modes of Credit in Al- Arafah Islami Bank Ltd.
Chapter-4: Chapter for helps us taking decision about any kind of Investment and on what
basis we will take decision are discussed here.
Chapter-5: Chapter five plays an important role in financial sector. Credit Information
Bureau (CIB) of Bangladesh Bank helps to us detect any defaulter client of any financial
institution because all financial organizations send their defaulter client list to the CIB.
Chapter-6: Chapter six helps us to know how credit is sanction, how client is selected, how
credit proposal is analyzed.
Chapter-7: Chapter seven discusses investment proposal with an another angle. Here risk is
firstly measured and on the basis of calculated Risk investment proposal is rejected or
accepted. Here we elaborately discussed how this risk is measured.
Chapter-8: We have come to know from chapter eight how charge is created and what are
the methods of creation of charge.
Chapter-9: In chapter Nine We have discussed on recovery of investment & legal action.
Why the investment become overdue, what is the cause of overdue & procedure to be
followed for recovery. How recovery of classified / overdue / stuck up investment is done are
discussed. The procedure of legal action is also illustrated here and we have gathered
knowledge of these.
- 88 -
Chapter-10: We have well experienced about rescheduling & Investment written of process
through this chapter. The rate of down payment is also given here.
Chapter-11: Chapter Eleventh discusses about Provisioning of Investments, Auditing, Credit
rating & reporting and we have come to know the method / procedure of the investment
activities.
Chapter-12: Chapter Twelve shows 2 (two) case studies. These are discussed here from the
practical experience of our two branches. Here the facts are illustrated from the initial stage
to final stage through various intermediate stages and how an investment can be a bad
investment and how an investment can be a good investment are discussed.
Chapter-13: Chapter Thirteen is a concluding part of this report. Here problems &
limitations of AIBL for making investment are discussed and we have given
recommendations for rectifying these problems.
13.2 Problems & Limitations

During collecting of information and data from AIBL & making report for this project the
following problems have been followed:
i) Decision making process is very lengthy and sometimes it creates problems, which is
unexpected to the customers. Most of the cases Head Office controls the decision making
and it is centralized.
ii) The total number of employees in comparison with needed is very short. this is hampering
the daily operation of the Bank.
iii) Lack of proper explanation of records and document records keeping system is not
modern and scientific. Non availability of on line banking.
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iv) AIBL is lacking of modern scientific tools to collect and disseminate the banking related
information in time and proper way.
v) IT Department is not well equipped and lack of expertise.
vi) Training & Research Department is not modernized and regularized.
vii) Number of branches are not enough to serve the people of all the places of the country
because of its high demand.
viii) Investment failed to reach the grass root level of the society.
xiv) Head Office dispatch is not well concerned. They always make delay to reach the
letters/information to the proper places.
13.3 Recommendations.:
i) Decision Making: Decision making power should be decentralized effectively so that
business can promptly be enhanced.
ii)Number of Employees: A handsome number of quality full employees & staffs should be
appointed very soon for maintaining the normal flow of work
iii) Records keeping system: Filing and record keeping system of the bank should me
modernized .At present operation system is partially computerized and on line banking
should be started very soon.
iv) Effective information system: Effectiveness of credit policy largely depends on Bank’s
branch, divisional & national level information system.
v) Development of manpower: Effective implementation of credit policy and recovery tare
depends on higher educated, trained and skilled personnel. Bank should procure and develop
such types of employees for its credit wings.
vi) Modernization of training department: training department should be modernized with
projector and multimedia.
vii) Expansion of branches: People from different corners of Bangladesh need modern and
Islamic banking services and investment facilities for total economic uplift of the country.
AIBL should consider this matter from a realistic point of view and set up new branches at
list one branch in each Thana / Upazilla.
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viii) Investment for all: The bank should give investment in all need full sectors not deprive
of the middle class/lower class.
ix) Effective Head Office dispatch: Head Office dispatch should be more effective and
prompt.
13.4 Strength, Weakness, Opportunities, Threats, (SWOT) Analysis of AIBL:
Every organization is composed of some internal strengths and weaknesses and also has
some external opportunities and threats in its whole life cycle.
13.4.1 Strengths:
- AIBL is financially sound company.
- Countrywide Branch net work
- Presence of well wishers
- SWIFT arrangement
- Motivated and honest human resources
- AIBL utilizes state of the art technology to ensure consistent quality and operation.
-AIBL provides its works force an excellent place to work
-AIBL has research and training division.
-AIBL already achieved a goodwill among the client
13.2.2 Weaknesses
-AIBL lacks aggressive advertising.
-AIBL lacks well trained human resource in some area.
-The procedure of credit facility is to long compare to other banks.
- Lack of Leadership, Persuasion, Guidance and monitoring of the Branch activities
- Lack of proper automation
- Lack of MIS even now not star the One line Banking.
- Insufficient logistic support.
13.4.3 Opportunities:
-Emergence of on line banking will open more scope for AIBL.
-AIBL can introduce more innovative and modern customer service.
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-Many branches can be opened in local remote area as its high demand.
- Increase of expatriates to various countries
-AIBL can recruit experienced, efficient and knowledgeable officers and staffs as it offers
good working environment.
13.4.4 Threats:
-Frequency taka devaluation and foreign exchange rate fluctuation is causing problem.
-The worldwide trend of mergers and acquisition in financial institutions is causing problems.
- Operation of new generation Bank and opening of Islami Bank window.
-lots of new banks are coming in the scenario with new service.
- Local competitors can capture huge market share by offering similar products.
13.5 Conclusion:
Al-Arafah Islami Bank ltd. is a non government commercial Bank in Bangladesh, which
started its business from 1995. It is a rare combination of Shariah & modern banking. Among
non government commercial banks, Al-Arafah Islami Bank Ltd. is a milestone for economic
development. It has been playing an important role to eradicate the unemployment problem
in Bangladesh. Over 800 employees and 6500 shareholders are getting benefit from this
organization. But most of the people in our country have misconception about Islamic
banking specially Al-Arafah Islami Bank Ltd. & other Islamic banks. They can not find any
difference in its operation between conventional commercial Banks and Islamic Banks
because they have no clear idea about the activities as well as investment mechanism of
Islamic banks.
The Bank is committed to run its activities as per Islamic Shariah and thus it has different
investment(credit) modes, different repayment schedules, different disbursement procedure,
- 92 -
different mark up system. and also has a different Credit (Investment) policy. ‘Mark up’
means adding some additional value after purchasing the goods but before to sell the same to
another people. This system is accepted in Islamic Shariah because here money is converted
to goods.’ Money begets money’ is prohibited in Islamic Shariah. People is getting more
benefit from the dealings of Islamic banking because here quarterly interest is not charged
and there is no possibility of interest to be converted into principal. But it needs to mention
here that Islamic Banks like AIBL incurred huge loss in case of default cases. Islamic Banks
can’t charge extra amount on the residual principal of the overdue accounts like other
conventional banks but some compensation is imposed on the accounts to protect huge
accounts to be overdue/classified. It can not take part in call money market. Mudaraba,
Musharaka are another mode of investment in Islamic Banking. But here honesty is the only
pre-requisite. For ensuring more benefit, more facility from Islamic banks like AIBL we have
to be honest and more sincere to repay the taken money from these banks in time.
BIBLIOGRAPHY:
i) Annual Report of AIBL-2006

ii Memorandum and Articles of Association of Al-Arafah Islami Bank Ltd.
iii) L.R. Chowdhury , M.Com.DAIBB, A Text Book on Banker’s Advances, 2nd edition
iv) Memorandum and Articles of Association of Al-Arafah Islami Bank Ltd.
v) A Book of Artha Rin Adalat Ain-2003
vi) v) Credit Risk Grading Manual of Bangladesh Bank.
vii) Kieso & Kimmel ,Accounting Principles, 6th edition
viii) www.al-arafah bank.com
iX) www.bangladesh-bank.org
x) BRPD Circulars of Bangladesh Bank.
xi) Instruction Circulars of AIBL
xii) Various types of publications & Manuals of AIBL.
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AIBL Report

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Investment Management of AIBL

required to improve management efficiency, reduce operational cost, improve

Objectives of the study

1.2 Objectives of the Report:

In brief, the objectives are as below:

Limitations of the study :

Some of the major limitations are given below:

Lack of enough experience in analyzing data

2.1 Historical Background of AIBL:

2.2 Special Features of AIBL:

2.3 Vision of AIBL:

2.5 Objectives of AIBL:

2.6 Line of Business:

2.7 Branches of AIBL:

Division No. of Branches

2.8 Form of Organization:

3.1 Definition of Investment & Investment Management:

3.3 Introduction of Investment & Investment Management:

3.4 Different types of investment (Credit) Modes according to Islamic Shariah :

Bai-Murabaha or simply Murabaha

Bai-Istisna’a (Pre-shipment Finance)

Qard-E-Hasana (Benevolent Loans)

4. Investment (Lending) Decision:

Primary Security-Primary security may be either personal or impersonal or both.

5.1. Role of CIB in Bangladesh:

Investment (Credit) Sanctioning

6.1. Methods of Investment (Credit) Analysis:

ii) Other Information Collection: The investment Department collects borrower

f) Particulars of personal assets, Name of Subsidiaries, percentage of share

iii) Project inspection & collateral security valuation:

A. Financial Risk -50%

6.2.1. What makes a good Investment?

6.2.2. Is the borrower Credit Worthy?

d) COLLATERAL: In assessing the collateral aspect of a loan request, the loan

technologically obsolete, they will have limited value as collateral because of

f) CONTROL: the last factor in assessing a borrower's creditworthiness status is

6.3. Selection of Business

Investment (Credit) Risk Analysis

7.1. Credit Risk Grading

provides a comprehensive, but generic discussion of the objectives and general

7.2. Definition of Credit Risk Grading (CRG)

7.3. Functions of Credit Risk

7.4. Use of Credit Risk Grading:

7.5. Numbers & Short names of graders used in the CRG:

GRADING SHORT NAME NUMBER

7.6. Regulatory Definition on Grading of Classified Accounts:

□ If the amount of ‘defaulted installment' is equal to or more than the amount of

If any uncertainty or doubt arises in respect of recovery of any Continuous Loan,

Besides, if any loan is illogically or repeatedly re-scheduled or the norms of re-

7.8. How to Complete Investment (Credit) Risk Grading:

a) Evaluation of Financial Risk:

b) Evaluation of Business/Industry Risk:

Risk that adverse industry situation or unfavorable business condition will

c) Evaluation of Management Risk:

e) Evaluation of Relationship Risk:

Financial Business/ Management Security Relationship

Fig. Investment (Credit) Risk Grading diagram

Step II Allocate weight ages to Principal Risk Component

Principal Risk Components: Weight:

 Financial Risk 50%

Step III Establish the Key Parameters

Principal Risk Components: Key Parameters:

 Financial Risk Leverage, Liquidity, Profitability & Coverage ratio.

Step IV Assign weightages to each of the key parameters.