Report On

Foreign Exchange Principles and Foreign Exchange Transaction under Islamic Framework

Submitted to:
Mr. Md. Emdadul Islam
Lecturer Department of Banking University of Dhaka

Submitted by:
MD. Mahtab Hossain
ID no: 12-094 B.B.A 12th Batch Department of Banking

Letter of transmitter
21th August, 2010 Mr. Md. Emdadul Islam Lecturer, Department of Banking University of Dhaka, Bangladesh Subject: Submission of Internship report.

Dear Sir, With due respect and great pleasure I submit my internship report, which is a partial requirement for the Internship program of Islami Bank Training and Research Academy for BBA/MBA students in University of Dhaka. I have done the report on Foreign Exchange Principles and Foreign Exchange Transaction under Islamic Framework. The report is prepared under supervision of Mr. Md. Emdadul Islam, Lecturer of Department of Banking, and University of Dhaka. It was a tremendous opportunity as well as highly enlightening experience for me during my tenure at IBBL, Mouchak Branch. I have taken at most care to present this report and this report has been excellent outlet for combining theoretical and practical aspect in a real business environment. I am pleased and grateful to know for your permission to prepare such a report on Foreign Exchange Principles and Foreign Exchange Transaction under Islamic Framework. Program and advice me for completing study, improvement for my performance and career also. Thanking you very much for your Kind co-operation.

Sincerely yours, Md. Mahtab Hossain ID No: 12-094 BBA 12th Batch Department of Banking University of Dhaka

DECLARATION

This is to notify that this internship report titled Foreign Exchange Principles and Foreign Exchange Transaction under Islamic Framework has been prepared for academic purpose as asked by our BBA program curriculum, supervisor Mr. Md. Emdadul Islam, Lecturer, Department of Banking, University of Dhaka. It is to be evaluated as a part of our examination on this BBA program. This has not been prepared for any other purpose like reproduce, investigation or publication. I do here by declare that the entire banking work unless otherwise, Acknowledged, Submitted as a report in Department of Banking, university of Dhaka is my independent and original work and all the references have been mentioned here.

-----------------------Md. Mahtab Hossain ID No: 12-094 BBA 12th Batch Department of Banking University of Dhaka

Table Of Content Contents

Letter of Transmittal Supervisors Declaration Letter from Bank Acknowledgement Executive summary Chapter 1 : Introduction
1.1 Introduction 1.2 Origin of the Report 1.3 Objective of the Report 1.4 Scope of the Report 1.5 Methodology of the Study 1.6 Limitation of the Study Page No:

Chapter 2
2.0 Literature Review

Chapter 3 : Bangladesh Economy

3.1 Overview of Bangladesh Economy

3.2 Role of Private Commercial Bank in the Economic Development

of Bangladesh

Chapter 4 : Islamic Banking

4.1 Evaluation of Islamic Banking 4.2 Islamization in Banking Industry 4.3 What is Islamic Banking 4.4 What is Riba 4.5 Profit and Riba 4.6 Objective of Islamic Banking 4.7 Distinguish Feature of Islamic Banking

Chapter 5 : Background of Islami Bank Bangladesh LTD.

5.1 History of IBBL 5.2 Overview of IBBL 5.3 Mission & vision of IBBL 5.4 Aim & Objective of IBBL 5.5 Distinguish Feature of IBBL 5.6 Growth & Expansion of IBBL 5.7 Branch Arrangement of IBBL

Chapter 6 : Foreign Exchange operation of IBBL

6.1 Meaning of Foreign Exchange 6.2 Foreign Exchange Business 6.2.1 Trading of Foreign Currencies 6.2.2 Foreign Trade operation 6.3 Financing of Foreign Trade

6.4 Foreign Exchange Operation of IBBL 6.5 Performance of IBBL in Foreign Exchange Business

Chapter 6A : Import
6A.1 Import 6A.2 Import Financing of IBBL 6A.3 Import Performance of IBBL

Chapter 6B : Export
6B.1 Export 6B.2 Export Finance of IBBL 6B.3 Export Performance of IBBL

Chapter 6C : Remittance
6C.1 Remittance 6C.2 Mechanism of Foreign Remittance 6C.3 Instrument of Foreign Remittance 6c.4 Foreign Remittance Performance of IBBL

Chapter 6D : Letter of Credit

6D.1 Letter of Credit 6D.2 types of letter of Credit 6D.3 Documentary of Letter of Credit 6D.4 Important Terms of Letter of Credit 6D.5 Parties of Letter of Credit 6D.6 Modes of Letter of Credit

Chapter 6E : Regression & Trend Analysis 6E.1 Regression Analysis 6E.2 Trend Analysis

Chapter 7 : Findings of the Study

7.1 Problems of Foreign Exchange Operation 7.2 Prospects of Foreign Exchange Operation

Chapter 8 : Recommendation & Conclusion

8.1 Conclusion 8.2 Recommendation

Appendices
References Bibliography List of abbreviations used in the report Acronyms

Chapter 1: Introduction

1.1Introduction

Almighty, Omnipotent, Omniscient and Ubiquitous Allah have strictly forbidden investing or earning on the basis of interest (Riba). Because interest (Riba) is out and out prohibited in accordance with Islamic rules band regulation... So every sort of transaction must be free from Riba. But not only in Bangladesh but also over the world all the banks are working basing on interest. As it is haram in Islam the Muslim scholars thought a plan to establish a banking system that is free from interest and will work on the basis of profit loss shearing. Then depending on this thought, it is decided to establish Islamic banks through the whole world to protect everyone from this curse. So Islamic banks are operating on the basis of Islamic Shariah that is free from interest and Islamic banks also doing their Foreign exchange operation and transaction whit this Shariah Framework.

1.2 Origin of the Report

This report is originated as the course requirement of BBA program, Department of Banking University of Dhaka. As practical orientation is integral part of BBA program requirement, I was sent to the Islami Bank Bangladesh Limited, At first I report to IBTRA (Islami Bank Training and Research Academy) for internship training on Islamic Banking System from July 5 to July 15, then I sent to take the real life exposure of the activities of banking financial institutions at Mouchak Branch from 18.07.2010 to 31.08.2010 After that I submitted a report and presentation in IBTRA and also submitted my internship report at Department of Banking, University of Dhaka.

1.3 Objective of the Report

Objective of the study acts as a bridge between the starting point and the goals of the study. To illustrate the objectives properly, presented into two parts: General objectives of the Report: The general objective of the report is to complete the internship. As per requirement of BBA program, a student need to work in a business organization for two months to acquire practical knowledge about real business operations of a company.

Specific objectives of the Report: y To fulfill the requirement of the BBA program.

To know the basic principles and framework at which Islami Banks operate their foreign exchange transaction and procedure.

To co-ordinate between theory and practice and to make a bridge between theoretical and practical knowledge in fulfillment of the internship program. To identify the formalities maintained by both the bank and client in processing and receiving foreign exchange products. To know about the interest free banking system within the Islamic Shariah and how it could be processed. To determine and focus of Foreign Exchange Principle and Foreign Exchange Operations under Islami Bank Framework.

y To have a clear idea regarding the requirements and the limitations at the time of apply for foreign exchange procedure and other formalities.
y To show the comparison of Foreign Exchange Operations between Islami Banking System that of Conventional Banking System. y To have an overall idea about Islamic Banking system that is based on Al-Quran and Sunnah.

1.4 Scope of the Report

This report will cover an organizational overview of Islami Bank Bangladesh Limited. It will give a wide view of the different stages of foreign exchange operational procedure of Islami Bank Bangladesh Limited under Islami Shariah principles. This study also covers the main principles and framework of Islamic Banking and economics based on Quran and Sunnah. Based upon this principle I try to elaborate that the foreign exchange procedure and practice of Islami Banks and try to show their principles in this area.

1.5 Methodology of the study

The research design is presented below:

Area of Study:
The proposed study has been focused on the Foreign exchange principles and foreign exchange transaction under Islamic Framework of the Islami Bank Bangladesh Limited. In relation with the general & specific objectives, the Foreign Exchange Mouchak Branch of the Islami Bank Bangladesh Limited has been selected to perform my internship program.

Source of information:
Primary Data: Data has been collected primarily through correspondence with the personnel working in different foreign exchange desks and through questionnaire survey. Secondary data: Secondary sources consist of several reading materials such as circulars, journals, brochures, training materials and annual reports. The required data and information to prepare the assignment have been collected from the followings sources: 1. Procedures published by the IBBL, Head office. 2. Files and documents of the branch. 3. Personal interview with branch officials and Executives. 4. Circulars issued by the IBBL and Bangladesh Bank. 5. Practical experience gained by visiting and working different desks during the internship period. The main source of published data is the annual report of the bank. Data have also been collected by going through different circulars issued by the head office and Bangladesh bank, the training instruments of the Bank etc.

Determination of time horizon:

The time horizon has been selected of five years from 2005 to 2009. Over the five year time period, the related data of the IBBL has been evaluated.

Methods of data collection:

The data presented in this report has been collected from the annual reports of the bank from 2004 to 2008, by taking interview of the senior officer, from the training instruments of the bank, from published books and through structured questionnaire.

Data Processing & Analysis:

Data has been computerized & processed by using MS Word, MS Excel and SPSS. For the purpose of analyzing the data we have presented in tabular form, percentage form with necessary chart and graphs.

1.6 Limitations of the Report:

The sources of the report are collected from different desks, various documents of IBBL. Though the entire stuff member remains busy all the time for their desk work they helped a lot to manage and collect the data & information. But it was very difficult to collect information on the client as it is very sensitive and secret issue for the Bank. Every task has some limitations. I faced some usual constraints during the course of my internship. Though I have given utmost effort to prepare this paper but there are some limitations of the study. These are as followsa) Shortage of time period: I had to complete this report writing within a shorter period of time since many days have passed during the training session. So the time constraint of the study hindering the course of vast area and time for preparing a report within the mentioned period is really difficult. b) Busy working environment: The officials had some times been unable to provide information because of their huge routine work. Thats why we do not gather vast knowledge about the critical issues. c) Lack of sufficient well informed officials: Many officials of the branch are not well informed about foreign exchange problems of IBBL. I had to face many difficulties to collect this information.

d) Insufficient Data: The data required for sufficient analysis for writing report couldnt be collected due to excessive workload. I had to rely entirely on the data received from the books of statistics, Manifesto, and the Annual Reports of Islami Bank Bangladesh Limited, and I had no opportunity to verify the satisfaction level of clients and receive their suggestions in implementing the Islamic Shariah as well as other foreign exchange banking activities. e) Secrecy of Management: There some information which are confidential. I was unable to collect these data. Some data could not been collected for confidentiality or secrecy of management.

Chapter 2: Literature Review

2.0 Literature Review

Some researchers were conducted on the field of conventional banking as well as Islamic banking. A brief summary of the researcher relevant to the problem and prospects of the support the some assumption which are as follows: Chachi (1989) expressed in Ph.D thesis entitled Islamic Banking that Islam may lead to a more just and more beneficial way of development, through the western and pro-western economists believe that interest is a must for financial and economic development. The empirical analysis in the study showed that Islamic banking is more appropriate and more relevant to the economic growth and development. Shallah (1989) made a study on Islamic Banking in an interest based economy; A case study of Jordan The dissertation examined the viability of Islamic Banks and financial institutions in an interest based economy which contradicts their ideals. The study was particularly with the experience of Islamic Banking in Jordan and it provided an examination of the structure of the economic and financial system of Jordan. The findings of the research showed that the Jordan Islamic bank has proved viable compared to interest based banks on Jordan. Ahmed (1990) has showed in his Ph.D thesis entitled the contribution of Islamic Banking to economic Development. A case of the Sudan that the Islamic banks investment and in short term and (trade) finance and have done little to promote long-term (equity) finance. The researcher also found that these are different factors affecting this role such as the character and strength of demand for financing productive projects. The attitude of Islamic Banks Management, Govt. policies and the structural rigidities characterizing the Sudanese economy. The finding showed that the religious element is ranked first in importance for customers. The competitive service and wide availability of services ranks after the religious element. Ahsan (1988) stated in his articles Islamic and Modern Banking System some principle and objectives of the Islamic and conventional economic system. He viewed that Islamic banks perform the essential function of financial intermediation between the savers and investors. While the conventional banks assure guaranteed return to the depositor, leaving the risk of investment entirely to the barrowers.

Ahmad1 made an important study entitled "Lending Risk Analysis Implementation: Problem and Prospects". He discussed objectives, problems & prospects of LRA. The objectives of LRA are to assist in bringing changes successfully to the existing lending policies, such as to develop methodology for analyzing lending risk, to improve the LRA for all types of decisions, to ensure the proper security and implement the whole mechanisms. LRA is the output of FSRP, for the sanction of loan Tk. 100 core and application of LRA techniques by the bank has been made compulsory except for BSB, BKB& RAKUB. LRA becomes effective when proper monitoring is done after sanctioning of any projects. Once the cash flow of the borrower is in consistent with the earlier period, no risk is there but in the reverse case, deterioration is found, and early detection is better for early rectification. He realized the major problems related to LRA. There is lack of homogenicly in LRA manual, lack of industry average, competitors data, etc. There are also problems in judging integrity & honesty of management.

Ahmad "Lending Risk Analysis Implementation: Problem and Prospects". Bank Parikrama, BIBM, Vol. XI, No. 12, 1988, pp. 23-29.

Chapter 3: Bangladesh Economy

3.1 Overview of Bangladesh Economy

Bangladesh has only been an independent country since 1971, but geologists estimate that the area has been inhabited for over four thousand years based on archeological finds in the country. With this long history, the people and culture of the country is unique and rich. Everywhere you look in the country, you can see pictures of the people's past. In the early 1600s the British East India Company built a trading post in Gujarat. The Company gained control of the area in 1757. Robert Clive, one of the employees of the British East India Company, eventually became the governor of Bengal. The East India Company ruled the area for the next 100 years. However, the British Crown took over the area in the Sepoy Mutiny, a rebellion that occurred in 1857. The country was ruled by Britain under a viceroy until the 1900s. Bengal was divided along religious lines in 1947. The eastern part of the area became East Bengal and part of Pakistan. The western area became part of India. Britain no longer controlled the country. East Bengal, which later was renamed East Pakistan, never functioned well as a part of Pakistan. The people were not happy with being controlled by the Pakistani upper class. The Bengalispeaking population of the area signed a petition for autonomy in the 1960s, but the Pakistani government ignored it. Tensions mounted, until a huge cyclone destroyed the coast of the area in 1970. When the Pakistani government did not respond well, the people rebelled. After a long, bloody revolution, East Bengali won its independence and chose the name Bangladesh. Sheikh Mujib was the first leader of the country. He was assassinated in 1975 after establishing socialist rule in the country. The three months after his assassination were bloody and confusing, but soon General Ziaur Rahman took power and established a multi-party government. He was also assassinated in 1981. He was followed by Hossain Mohammad Ershad, who ruled for eight years. After his reign, the current parliamentary democratic republic was established.

Current economic conditions in Bangladesh

At Bangladesh's birth, the country embraced socialism as the economic ideology with a dominant role for the public sector. But, since the mid-seventies, it undertook a major restructuring towards establishing a market economy with emphasis on private sector-led economic growth. During the nineties, the country has completed a major stabilization program which has reduced inflation as well as fiscal and current account deficits and established a healthy foreign exchange reserve position with low and sustainable debt-service liabilities. With

modest economic growth, the basic indicators related to health, education and poverty have all shown sustained improvement. The country of Bangladesh is currently rated as the 31st largest economy in the world according to in terms of GNP based on the purchasing power parity method of valuation. As a young country, Bangladesh is doing well in the global economy. However, while the country's economic outlook is strong, many of the workers seeking jobs within the Bangladesh economy are facing significant challenges. The economy has grown 5-6% per year since 1996 despite political instability,poor infrastructure,corruption,insufficient power supplies, and slow implementation of economic reforms. Bangladesh remains a poor, overpopulated, and inefficiently-governed nation. Although more than half of GDP is generated through the service sector, nearly two-thirds of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important product. Bangladesh's growth was resilient during the 2008-09 global financial crisis and recession. Garment exports, totaling $12.3 billion in FY09 and remittances from overseas Bangladeshis totaling $9.7 billion in FY09 accounted for almost 25% of GDP. The country is the largest exporter of jute and jute goods in the world. Readymade garments are among the most exportable items. Tea, frozen shrimp, fish, leather goods and handicrafts are also major exportable commodities. 2007 $216.6 billion 2008 $229.1 billion 2009 $242.2 billion

GDP(purchasing power parity) The Bangladesh economy also focuses strongly on agriculture in order to feed an ever-growing population. A majority of the residents of the country have agricultural jobs. Sustenance farming is not uncommon among the lower economic classes. The primary crops are jute and rice. In fact, the country is one of the top four rice producers in the world. Grain is also being successfully produced in Bangladesh. However, even with this increased focus on agriculture, Bangladesh news sources are often reporting a large amount of the population that faces hunger on a regular basis. Due to a number of factors, Bangladesh's labor-intensive agriculture has achieved steady increases in food grain production despite the often unfavorable weather conditions. These include better flood control and irrigation, a generally more efficient use of fertilizers, and the establishment of better distribution and rural credit networks. Population pressure continues to place a severe burden on productive capacity, creating a food deficit, especially of wheat. Foreign assistance and commercial imports fill the gap, but seasonal hunger ("monga") remains a problem. Underemployment remains a serious problem, and a growing concern for Bangladesh's agricultural sector will be its ability to absorb additional manpower. Due to farmers vulnerability to various risks, Bangladeshi poorest face numerous potential limitations on their ability to enhance agriculture production and their livelihoods. These include an actual and perceived risk to investing in new agricultural technologies and activities, a vulnerability to shocks and stresses and a limited ability to mitigate or cope with these and limited access to market information.

As industry grows within the country, new Bangladesh jobs are constantly being created. Many women are finding employment within the textiles market making clothing. In the Bangladesh economy, textiles are the number one export. Textile mills create knit clothing and ready-made items that are worn across the globe. However, because textile workers are so underpaid in the country, Bangladesh news sources are constantly covering demonstrations by the workers as they strive for better wages and work conditions. In response to these protests, the government of Bangladesh has created a Wage Commission to govern the wages paid by textile mills. One goal of the Wage Commission is to decide on an acceptable minimum wage for the country. 2007 6.2% 2008 5.8% 2009 5.7%

GDP(Real growth rate) Many new jobs mostly for women have been created by the country's dynamic private readymade garment industry, which grew at double-digit rates through most of the 1990s. By the late 1990s, about 1.5 million people, mostly women, were employed in the garments sector as well as Leather products specially Footwear(Shoe manufacturing unit). During 2001-2002, export earnings from ready-made garments reached $3,125 million, representing 52% of Bangladesh's total exports. Bangladesh has overtaken India in apparel exports in 2009, its exports stood at 2.66 billion US dollar, ahead of India's 2.27 billion US dollar. Bangladesh's textile industry, which includes knitwear and ready-made garments along with specialized textile products, is the nation's number one export earner, accounting for 80% of Bangladesh's exports of $15.56 billion in 2009. Bangladesh is 3rd in world textile exports behind Turkey, another low volume exporter, and China which exported $120.1 billion worth of textiles in 2009. The industry employs nearly 3.5 million workers. Current exports have doubled since 2004. Wages in Bangladesh's textile industry were the lowest in the world as of 2010. The country was considered the most formidable rival to China where wages were rapidly rising and currency was appreciating. After massive labor unrest in 2006 the government formed a Minimum Wage Board including business and worker representatives which in 2006 set a minimum wage equivalent to 1,662.50 taka, $24 a month, up from Tk950. In 2010,following widespread labor protests involving 100,000 workers in June, 2010, a controversial proposal was being considered by the Board which would raise the monthly minimum to the equivalent of $50 a month, still far below worker demands of 5,000 taka, $72, for entry level wages, but unacceptably high according to textile manufacturers who are asking for a wage below $30. Other industries which have shown very strong growth include the chemical industry, steel industry, mining industry and the paper and pulp industry.

3.2 The Role of Private Commercial Banks in the Economics Development of Bangladesh
A bank is usually defined as a financial institution which deals in money. Today, however, the functions of a bank have increased so much that it is considered a very vital agent of development in country like ours. Because of their positive involvement in trade, industry, business finance and a host of others allied services; banks today form a very important part of an economy. The nationalized banks, countries margin operational banking units, could not demonstrates and achieve optimistic results in terms of overall economic growth. The gloomy picture of nationalized banks is mainly due toy y y y y y y y y y y Lack of quality of services. Minimum of commitment toward institutions. Management inefficiency. Excessive intervention of collective bargaining agent (CBA). Lack of security. Documentation of loans and advances debarring legal action in case of default. Slow rate of recovery of loan. Lack of supervision and monitoring of loans and advances. Directive loans. Political instability. Transitional inconsistency while formulating policy issues on banking.

Due to inefficient and continuous loosing concern of public sector, the main objective of privatization policy was y y y To reduce deficit of the Govt. to meet continuous loss of public enterprises. To improve operative efficiency of enterprises. To introduce competitiveness in all spheres of economic activities except few areas where Govt. Control of economic activities was unavoidable.

Chapter 4: Islamic Banking

4.1 Evaluation of Islamic Banking

For an expanding economy, a developed and efficient banking system is indispensable. Among others, it helps transfer of financial resources from surplus units to deficit units and, hence, helps accelerate the pace of development by securing uninterrupted supply of financial resources to people engaged in numerous economic activities. The tremendous development that the world economy has experienced in the last few decades was contributed by several factors among which, growing institutional supply of loan able funds must have played the pivotal role. The role of banking is comparable to what an artery system does in the human body. Both commercial banks and other development financial institutions provide short-, medium-, and long-term credits to businesspersons and entrepreneurs who usually take the lead in ventures of economic development. Institutional supply of credit has been made possible by a system of financial inter-mediation organized in a way where conventional banks collect small savings from the public by offering them a fixed rate of interest and advancing the loan able funds out of the deposited money to enterprising clients charging relatively higher rates of interest. The margin between these two rates is the bank's income. In addition, banks also provide many other services to the public for which it receives service charges. Despite the outstanding contribution of the conventional banking system (interest-based), several ancient and modern economists are critical about its efficiency level. Some economists consider the role of interest in the conventional banking mechanism as a major negative factor that contributes to cyclical fluctuations in the economy (Minsky1982). Specifically, the ineffectiveness of interest rate as a stabilization tool during the period of the Great Depression is a case to note. This eventually called for Keynesian prescription of government intervention (Keynes 1964). Similar concern was expressed in a story published in Newsweek regarding Henry Kissinger, the former Secretary of State of USA. To quote, The instability has persisted and the uncertainty has continued. After going through the throes of painfully high levels of inflation, the world economy has experienced a deep recession and unprecedented rate of unemployment, complicated further by high level of real interest rates and unhealthy exchange rate fluctuations (Newsweek 1983). More recent concern over the potential instability of the world monetary and financial system was expressed by Maurice Allais, a Nobel Laureate, who called for an urgent reform of the World Economic Order (Allais 1993, pp.13-16). Others

vehemently oppose the argument for using rate of interest as a stabilizing tool in the economy (Saud 1980, p.88). This called for the emergence of a new system of banking capable of tackling new challenges that the present world economy, particularly the financial sector, has been facing. In response, though not exactly to that exigency but for quite a few other reasons, the second half of the twentieth century witnessed a distinctly separate line of thinking on banking. This was institutionalized at the end of third quarter and subsequently emerged as a new system of banking called Islamic Banking {also called Profit-Loss-Sharing Banking (PLS). The world has now been experiencing operation of as many as 250 Islamic banks and financial institutions in more than 50 countries, Muslim and non-Muslim. There are religious as well as economic reasons, which have contributed to the emergence of PLS-banking as an alternative to its conventional counterpart. It is the prohibition of 'Riba' in the Quran that, according to the proponents of the PLS-system, was the source of inspiration for establishing banks in line with Islamic Shariah (Muslehuddin1987,pp.24-27). The basic intention behind establishing Islamic banks was the desire of Muslims to reorganize their financial activities in a way that do not contradict the principles of Shariah and enable them to conduct their financial transactions without indulging into Riba (Ahmad 1992). These writers consider rate of interest in the conventional banking mechanism synonymous to Riba, the term as used in the Quran [2:275; 30:39]. One of the reasons for this is that the outcome of the productive effort is uncertain, and so interest necessarily involves an element of Gharar, that is, uncertainty (Chapra 1985, p.64). On this religious ground, proponents of the PLS-system urge the Islamic community to avoid all transactions with institutions that are interest-based. The economic reason derived from a verse of the Quran providing inspiration to devise an interest-free financial system has been substantiated in the way that interest, instead of increasing wealth, reduces it [30:34]. The primary reason of why the Quran has taken such a hard approach towards interest is that Islam stands for establishing a just economic system free from all kinds of exploitation (Chapra 1985). Further, Muslim economists consider depression and stagflation very

often found in the capitalist world as an outcome of the financial system based on interest (Rahman 1976). Thus, Islamic banking emerged as a response to both religious and economic exigencies. While religious exigency calls for avoiding any transaction based on interest, economic exigencies, on the other hand, provide a new outlook to the role of banking in promoting investment / productive activities, influencing distribution of income and adding stability to the economy. Islamic banking is thus perceived as an improved system in all dimensions.

4.2 Islamization in Banking Industry

A development of complete Islamization of banking at national levels had been gaining momentum since the second half of the 1970s. The movement took basically two forms. First, an attempt was made to establish Islamic financial institutions side-by-side with traditional banking. In such attempts, two types of institutions were evolved: Islamic banks were established mostly in Muslim countries; and Islamic investment and holding companies started operating in some Muslim but mostly in non-Muslim countries. These institutions claimed to be operating without interest in their transactions and competed with conventional banks to attract deposits. The majority of these institutions were established through private initiatives. Second, an attempt was made to restructure the whole financial system of the economy in accordance with the teachings of Islam.

In Bangladesh
In August 1974, Bangladesh signed the Charter of Islamic Development Bank and committed itself to reorganize its economic and financial system as per Islamic Shariah. In January 1981, Late President Ziaur Rahman while addressing the 3rd Islamic Summit Conference held at Makkah and Taif suggested, ''The Islamic countries should develop a separate banking system of their own in order to facilitate their trade and commerce.'' This statement of Late President Ziaur Rahman indicated favorable attitude of the Government of the People's Republic of Bangladesh towards establishing Islamic banks and financial institutions in the country. Earlier in November

1980, Bangladesh Bank, the country's Central Bank, sent a representative to study the working of several Islamic banks. In November 1982, a delegation of IDB visited Bangladesh and showed keen interest to participate in establishing a joint venture Islamic bank in the private sector. They found a lot of work had already been done and Islamic banking was in a ready form for immediate introduction. Two professional bodies -Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers' Association (BIBA) made significant contributions towards introduction of Islamic banking in the country. They came forward to provide training on Islamic banking to top bankers and economists to fillup the vacuum of leadership for the future Islamic banks in Bangladesh. They also held seminars, symposia and workshops on Islamic economics and banking throughout the country to mobilize public opinion in favors of Islamic banking. Their professional activities were reinforced by a number of Muslim entrepreneurs working under the aegis of the then Muslim Businessmen Society (now reorganized as Industrialist & Businessmen Association). The body concentrated mainly in mobilizing equity capital for the emerging Islamic bank. At last, the long drawn struggle to establish an Islamic bank in Bangladesh became a reality and Islami Bank Bangladesh Limited was established in March 1983 in which 19 Bangladeshi national, 4 Bangladeshi institutions and 11 banks, financial institutions and government bodies of the Middle East and Europe Including IDB and two eminent personalities of the Kingdom of Saudi Arabia joined hands to make the dream a reality. Later, other three Islamic Banks were established in the country. Islami Bank Bangladesh Limited (IBBL) is considered to be the first interest free bank in Southeast Asia. It was incorporated on 13-03-1983 as a Public Company with limited liability under the companies Act 1913. The bank began operations on March30, 1983. IBBL is a joint venture multinational Bank with 63.92% of equity being contributed by the Islamic Development Bank and financial institutions like-Al-Rajhi Company for Currency Exchange and Commerce, Saudi Arabia, Kuwait Finance House, Kuwait, Jordan Islamic Bank, Jordan, Islamic Investment and Exchange Corporation, Qatar, Bahrain Islamic Bank, Bahrain, Islamic Banking System International Holding S. A., Luxembourg, Dubai Islamic Bank, Dubai, Public Institution for Social Security, Kuwait Ministry of Awqaf and Islamic Affairs, Kuwait and

Ministry of Justice, Department of Minors Affairs, Kuwait. In addition, two eminent personalities of Saudi Arabia namely, Fouad Abdul Hameed Al-Khateeb and Ahmed Salah Jamjoom are also the sponsors of IBBL. The total number of branches as of December 2001 stood at 121. The authorized capital of the bank is Tk. 500 million and subscribed capital is Tk. 160 million.

Al-Baraka Bank Limited, often called the second Islamic bank in Bangladesh, commenced banking business as a scheduled bank on May 20, 1987. It is a joint venture enterprise of AlBaraka Investment and Development Company a renowned financial and business house of Saudi Arabia, Islamic Development Bank, a group of eminent Bangladesh industrialists and the Government of Bangladesh. The authorized capital of the bank is Tk 600 million and the paid up capital is Tk. 204.07 million. The Bank currently operates 34 branches throughout the country. Apart from extending conventional commercial banking facilities to its customers, the bank has also given substantial financial support to the development of industrial and real estate projects. Al-Arafa Islami Bank Bangladesh Limited commenced its business as a scheduled bank on September 27, 1995. The authorized capital of the bank is Tk. 1,000 million while its paid up capital is Tk. 101.20 million. The Bank follows the Shariah principles in investment and invests its funds under Mudaraba, Musharaka, Bai-Muajjal, Bai-Salam, etc. Up to 2001, the Bank has been operating its business through 40 branches all over the country. Social Investment Bank Limited is another bank guided by the Islamic principles. It started its journey in November 1995. Its authorized capital is Tk. 1,000 million and paid-up capital is Tk. 118.36 million. Up to September 2001, the Bank has been operating its business through 15 branches.

4.3 What is Islamic Banking

Islamic banking has been defined in a number of ways. The definition of Islamic bank, as approved by the General Secretariat of the OIC, is stated in the following manner. An Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations(Ali & Sarkar 1995, pp.20-25). Shawki Ismail Shehta viewing the concept from the perspective of an Islamic economy and the prospective role to be played by an Islamic bank therein opines: It is, therefore, natural and, indeed, imperative for an Islamic bank to incorporate in its functions and practices commercial investment and social activities, as an institution designed to promote the civilized mission of an Islamic economy (Ibid). Ziauddin Ahmed says, Islamic banking is essentially a normative concept and could be defined as conduct of banking in consonance with the ethos of the value system of Islam (Ibid).

It appears from the above definitions that Islamic banking is a system of financial intermediation that avoids receipt and payment of interest in its transactions and conducts its operations in a way that it helps achieve the objectives of an Islamic economy. Alternatively, this is a banking system whose operation is based on Islamic principles of transactions of which profit and loss sharing (PLS) is a major feature, ensuring justice and equity in the economy. That is why Islamic banks are often known as PLS-banks.

4.4 What is Riba

The word used by the Quran concerning interest is Riba. The literal meanings of Riba are money increase, increase of anything or increment of anything from its original amount (Maududi 1979, p.84). However, all increases are not considered as Riba in Islam. Money may increase in business activities as well. This increase is not at all considered as Riba. Muslim scholars equate interest with Riba. In the Shariah, Riba technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for

the loan or for an extension in its maturity (Chapra 1985, p.64). In other words, Riba is the predetermined return on the use of money. In the past there has been dispute about whether Riba refers to interest or usury, but there is now consensus among Muslim scholars that the term covers all forms of interest and not only excessive interest (Khan1985, p.52). In the era of Ignorance (Jahiliah) moneylenders in Arabia charged a prefixed extra amount on their money lent out. Some of them lent goods or crops and took back prefixed extra amount on and above the principal amount. In those days the extra amount charged on the principal amount of money or goods was also termed as Riba. The term Riba in the Quran has been used in the same sense. The most important characteristic of Riba is that it is the positive and definite result of money when changed. In other words, when money begets money, without being exchanged for goods or services, it is called Riba. Its basic characteristics are: y y y y It must be related to loan; A prefixed amount of money to be paid when due; A time is fixed for the repayment; and All these elements for repayment are taken as conditions for loan.

4.5 Profit and Riba

There are persons who try to equate Riba with profit. In effect, they are fundamentally different from each other as can be seen from the following:

Riba
and define result is Riba borrower to the lender along with principal amount as a condition for the loan.

Profit
uncertain result is profit. the value of production and the cost of production.

1. When money is charged, its imposed positive 1. When money is used in trading (for e.g.) its 2. By definition, Riba is the premium paid by the 2. By definition, profit is the difference between

3. Riba is prefixed, and hence there is no 3. Profit is post-determined, and hence its amount uncertainty on the part of either the givers or the is not known until the activity is done. takers of loans. 4. Riba cannot be negative, it can at best be very 4. Profit can be positive, zero or even negative. low or zero. 5. From Islamic Shariah point of view, it is Haram. 5. From Islamic Shariah point of view, it is Halal.

Prohibition of Riba
On religious perspective:
The religious restriction on interest is quite explicit and unequivocal. All transactions based on Riba are strictly prohibited in the Quran. The prohibition of Riba appears in the Quran in four different revelations. The first of these [30:39] in Makkah, emphasized deprivation of Gods blessing for a man making interest transaction and charity having the essence of manifold rise. The second revelation [4:161] concerning the subject took place in the early Madinah. It severely condemned interest-referring prohibitions taken place in the previous scriptures. The third revelation [3:130-2] enjoined Muslims to keep away from Riba. The fourth revelation [2:275-81] reveling nears the completion of the Prophets mission. The verses giving strong verdict against Riba are as follows:

Condemnation of the system of interest is so strong and without any doubt can be reflected in the following verse which imposes penalties on those who hesitate in observing the verdict: O ye who believe! Observe your duty to Allah and give up what remains (due to you) from Riba, if you are (in truth) believers. And if you do not, then be warned of war (against you) from Allah and His Messenger. And if you repent then you have your principal (without Riba). Wrong not, and you shall not be wronged [2:278-9]. On Socio Economy Perspective: The Islamic law of prohibition of interest was originally not based on economic theory but on divine authority, which considered charging of interest as an act of injustice. Early Muslim scholars considered money as a medium of exchange, a standard of value and a unit of account

but rejected its function as a store of value. Lending upon interest was prohibited because it was an act of ungratefulness and considered to be unjust since money was not created to be sought to be itself but for other objects.

Recent Muslim scholars, however, place the major emphasis of their explanation of the Law on the lack of a theory of interest. They have countered the arguments that interest is a reward for saving, a productivity of capital and an inevitable consequence of the difference between the value of capital goods today and their value a year hence.

4.6 Objectives of Islamic Banking

The primary objective of establishing Islamic banks all over the world is to promote, foster and develop the application of Islamic principles in the business sector. More specifically, the objectives of Islamic banking when viewed in the context of its role in the economy are listed as following: y y To offer contemporary financial services in conformity with Islamic Shariah; To contribute towards economic development and prosperity within the principles of Islamic justice. y y Optimum allocation of scarce financial resources; and To help ensure equitable distribution of income.

4.7 Distinguish feature of Islamic Banking

An Islamic bank has several distinctive features as compared to its conventional counterpart. Chapra (1985, PP.154-57) has outlined six essential differences as below:

Abolition of interest (Riba): Since Riba is prohibited in the Quran and interest in all its forms is akin to Riba, as confirmed by Fuqaha and Muslim economists with rare exceptions, the first distinguishing feature of an Islamic bank must be that it is interest-free. Adherence to public interest: Activity of commercial banks being primarily based on the use of public funds, public interest rather than individual or group interest will be served by Islamic commercial banks. The Islamic banks should use all deposits, which come from the public for serving public interest and realizing the relevant socio-economic goals of Islam. They should play a goal-oriented rather than merely a profit-maximizing role and should adjust themselves to the different needs of the Islamic economy. Multi-purpose bank: Another substantial distinguishing feature is that Islamic banks will be universal or multi-purpose banks and not purely commercial banks. These banks are conceived to be a crossbreed of commercial and investment banks, investment trusts and investment management institutions, and would offer a variety of services to their customers. A substantial part of their financing would be for specific projects or ventures. Their equity-oriented investments would not permit them to borrow short-term funds and lend to long-term investments. This should make them less crisis-prone compared to their capitalist counterparts, since they would have to make a greater effort to match the maturity of their liabilities with the maturity of their assets. Work as catalyst of development: Profit-loss sharing being a distinctive characteristic of an Islamic bank fosters closer relations between banks and entrepreneurs. It helps develop financial expertise in non-financial firms and also enables the bank to assume the role of technical consultant and financial adviser, which acts as catalyst in the process of industrialization and development.

Chapter 5: Background of Islami Bank Bangladesh Ltd.

5.1 History of IBBL

Establishment of Islamic Development Bank (IDB) by the OIC member states in the year 1975 has been proved to be a breakthrough in the expansion of Islamic Shariah based finance and specially banking throughout the world. As a founder member of IDB, the Government of Bangladesh also had the commitment to establish Islamic banks which was reflected in different steps taken by the governments of the country. The OIC members consented to the proposals to introduce Islamic economy and banking in their respective countries held in the foreign ministers conferences in 1978 and 1980 in Dakar and Islamabad respectively. In the year 1981, OIC in its 3rd summit held in Makkah approved the proposition submitted by Bangladesh to introduce separate banking system following Islamic ideology. As per decision, the GOB sent representatives to the Middle Eastern countries to learn the existing banking systems in those countries. In the private sector, the Islamic Economics Research Bureau (IERB) was the first organization that took active initiative in this regard. They arranged a national seminar on Islamic Economics and Banking in the year 1979 and inspired by the discussion and the papers presented in the seminars, some local bankers formed Islami Bank Working Group. The IERB again arranged an international seminar in 1980. After the seminar, Dhaka based Muslim Businessman Society (later renamed as Industrialist and Businessmen Association) under the leadership of renowned industrialist Abdur Razzaque Lasker, took initiative to establish an Islamic bank and applied to the government for permission. At this stage, the GOB provided necessary permission in the year 1983 and at last Islami Bank Bangladesh was registered under Company Act in which 19 Bangladeshi national, 4 Bangladeshi institutions and 11 banks, financial institutions and government bodies of the Middle East and Europe including IDB and two eminent personalities of the Kingdom of Saudi Arabia joined hands to make the dream a reality.

5.2 Overview of IBBL

Islami Bank Bangladesh Limited (IBBL) was incorporated on 13.3.1983 as a Public Company with limited liability under the Companies Act. 1913. The bank started functioning with effect from 30.3.1983. IBBL is the first private sector Islamic bank in South-east Asia. The

establishment of this bank ushered a new era in Bangladesh, the 3rd largest Muslim country of the world. The bank is committed to run all its activities based on Islamic Shariah. IBBL through its steady progress and continued success has, by now, earned the reputation of being one of the leading private sector banks of the country.

Date of Incorporation Inauguration of 1st (Local office, Dhaka) Formal Inauguration Local Shareholders Foreign Shareholders Authorized Capital Paid-up Capital Deposits Investments (including Shares) Foreign Exchange Business Number of Branches Number of Shareholders Manpower investment

13th March 1983 Branch 30th March 1983 12th August 1983 42.63% 57.37% Tk.5,000.00 million Tk.3,801.60 million Tk.200343.41 million in Tk.180053.94 million Tk.402695 million 232 33686 10443

5.3 Mission and Vision of IBBL

To establish Islamic banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the field of all economic activity balanced growth and equity development through diversified investment operations particularly in the priority sectors and less development areas of the country. To encourage socio-economic uplift and financial services to the low income community particularly in the rural areas.

The vision of IBBL is to always strive to achieve superior financial performance, be considered a leading Islamic Bank by reputation and performance. Besides, To establish and maintain the modern banking technology, to ensure the soundness and development of the financial system based on Islamic principles and become the strong and efficient organization with highly motivated professionals, working for the benefit of people, based upon accountability, transparency and integrity in order to ensure stability of financial system. Try to encourage savings in the form of direct investment. Try to economic investment particularly in projects, which are move likely to lead to higher employment.

5.3 Aim & Objectives of IBBL

y y y y y y y y y To conduct interest-free banking. To establish participatory banking instead of banking on debtor-creditor relationship. To invest through different modes permitted under Islamic Shariah. To collect deposits on profit-loss sharing basis. To establish a welfare-oriented banking system. To extend co-operation to the poor, the helpless and the low-income group for their economic development. To play a vital role in human development and employment generation. To contribute towards balanced growth and development of the country through investment operations particularly in the less developed areas. To contribute in achieving the ultimate goal of Islamic economic system.

5.4 Distinguish feature of IBBL

The distinguishing features of the conventional banking and IBBL are shown below: Conventional Banks The functions and operating modes of conventional banks are based on manmade principles. The investor is assured of a predetermined rate of interest. It aims at maximizing profit without any restriction. It does not deal with Zakat. IBBL The functions and operating modes of IBBL is based on the principles of Islamic Shariah. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur). It also aims at maximizing profit but subject to Shariah restrictions. In the modern IBBL system, it has become

Leading money and getting it back with interest is the fundamental function of the conventional banks. Its scope of activities is narrower when compared with IBBL It can charge additional money (compound rate of interest) in case of defaulters. In it very often, banks own interest becomes prominent. It makes no effort to ensure growth with equity. For interest-based commercial banks, borrowing from the money market is relatively easier. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations. The conventional banks give greater emphasis on credit-worthiness of the clients. The status of a conventional bank, in relation to its clients, is that of creditor and debtors. A conventional bank has to guarantee all its deposits.

one of the service-oriented functions of the IBBL to collect and distribute Zakat. Participation in partnership business is the fundamental function of the IBBL. Its scope of activities is wider when compared with a conventional bank. It is, in effect, a multi-purpose institution. The IBBL has no provision to charge any extra money from the defaulters. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity. For the IBBL, it is comparatively difficult to borrow money from the money market. Since it shares profit and loss, the IBBL pay greater attention to developing project appraisal and evaluations. The IBBL, on the other hand, give greater emphasis on the viability of the projects. The status of IBBL in relation to its clients is that of partners, investors and trader. Strictly speaking, IBBL cannot do that.

5.5 Growth & Expansion of IBBL

Since its startup, IBBL is maintaining a steady growth in terms of profitability and geographical coverage. 80s may be termed as Foundation Stage; during the 90s, the bank passed its Early Growth Stage and during the first decade of the 21st century, its making Rapid Growth. The growth fact file from 1983 2008 is given hereunder: 13-03-1983 30-03-1983 12-08-1983 1984 1985 1988 1989 Incorporation of IBBL. Inauguration of 1st Branch (Local Office). Formal inauguration. Establishment of Islami Bank Training and Research Academy (IBTRA). Listed with Dhaka Stock Exchange (DSE) and issue IPO. Introduction of Executive Development Program. 1st Rights Share Issue. Introduced Zonal concept.

1991 1994 1995 1996 1997 1998 1999

2000

2001

2002 2003 2004 2005

2006 2007 2008

Opening of the 50th Branch. Sadaqa Tahabil converted to form Islami Bank Foundation as a separate entity. Introduction of annual award for Dhaka University students. Implementation of BEXIBANK as the banking software. Launched Rural Development Scheme. First IBBL representative abroad (KSA). Listed with Chittagong Stock Exchange (CSE). 2nd Rights Share Issue. Opening of the 100th Branch. Introduction of Diploma in Islamic Banking at IBTRA. Global Finance, a New York based financial magazine named IBBL as the best bank of the country. Implementation of IBBS integrated banking software. Introduction of SWIFT service. 3rd Rights Share Issue. CSE declared IBBL as one of CSE 30 companies. Head Office shifted to new location (own premises). Global Finance named IBBL as the best bank of the country. DSE declared IBBL as one of 20 Blue Chip companies. Introduction of ATM service. All the branches are computerized. IBTRA shifted to its own premises at Mohammadpur. eIBS project started. New Organogram was implemented. 4th Rights Share Issue. LAN has been set up at all the branches. Opening of the 150th Branch. Joining / Agreement with CDBL. Implementation of eIBS web based banking software developed by inhouse developers. Introduction of REUTERS and dealing service. Global Finance named IBBL as the best bank of the country. IT Audit came into practice. Introduction of Online banking. Introduction of Mudaraba Perpetual Bond. ICMAB announced IBBL as the First in Best Corporate in the Banking Sector (Local). Starting brokerage house operation.

5.7 Branch arrangement of IBBL

IBBL has the largest network of branches among PCBs. IBBL has 209 branches up-to-date located at different commercially important places. Out of these branches, 162 branches are in considered as online branches. With the expansion of business, Bank divided their branches in 11 Zones to ensure close supervision, effective monitoring, and quick disposal of business and optimum utilization of manpower. 52 branches are located in 3 Dhaka Zones (Dhaka Central, South & North Zones), 31 branches are in Chittagong Zone, 23 branches are in Khulna Zone, 23 branches are in Bogra Zone, 27 branches are in Comilla Zone, 19 are in Sylhet Zone, 18 branches in Barisal Zone, 19 branches in Rajshahi Zone and 17 branches in Mymenshing Zone.

Chapter 6: Foreign Exchange Operation of IBBL

6.1 Meaning of Foreign Exchange

Foreign Exchange means currency & trade exchange say conversion of one to another. This is a part of economic & Science. This is a big deal divided into different currencies instrument such as Draft, Traveler Cheques, Bill of Exchange business including sell, purchasing of currency notes & TC etc.

6.2 Foreign Exchange Business

Foreign Exchange Business has two aspects: I) II) Trading of Foreign Currencies. Conducting Foreign Trade by using foreign currency as a media of exchange. Foreign Trade includes Import & Export.

6.2.1 Trading of Foreign Currencies

It includes mainly dealing room operation excluding the money market operation. This is purchase or sale of one currency in term of another, either Local Currency to Foreign Currency, or Foreign Currency to Local Currency, or Foreign Currency to Foreign Currency (Cross Currency).All these purchase and sales are permitted by Islamic Shariah and thereby approved by Islamic Banking system subject to observing the guidelines as stated below: y Both parties must take possession of the counter values before dispersing, such possession being either actual or constructive. y The counter values of the same currency must be of equal amount, even if one of them is in paper money and the other is in coin of the same country, like a note of one pound for a coin of one pound. y The contract shall not contain any conditional option or deferment clause regarding the delivery of one or both counter values.

The dealing in currencies shall not aim at establishing a monopoly position nor should it entail any evil consequences to the interest of individuals of societies. Currency transaction shall not be carried out on the forward or futures market. Such trading of foreign currency should not have any speculative motive but to protect the interest of one and to avoid possible loss due to devaluation of the currency conversion of currencies can be done on spot basis.

y y

6.2.2 Foreign Trade Operation

This is cross border trading of goods & services. For conduction trade transaction between two parties of separate territory the following issues are to be resolved. y Seller needs guarantee that he will get payment from the buyer who is almost out of his reach. y Payments are to be made by the buyer in foreign currency by converting currency of his own law. y y Time required for getting payment by the seller who may need immediate payment. For a buyer who needs to buy quantity goods as it can be imported frequently. That means he may need finance for his purchase. In modern banking Foreign Trade is taken into a shape where customers are provided with various products and services, by the bank. They get financial assistance at all stages of their Import & Export trade from bank. Almost all such facilities can be provided under Islamic Banking.

6.3 Financing of Foreign Trade

In modern banking, Foreign Trade is taken into a shape where customers are provided with various products and services by the bank. They get financial assistance at all stages of their Import & Export trade from bank. Almost all such facilities can be provided under Islamic mode. The general principles in financing import and export business are elimination and avoiding of interest in all operation. Foreign trade are-

A) Import B) Export

A) Import finance
Mainly three types of import are done purpose wise: y y y Import of trading item for ultimate user or consumer. Import of raw materials or industrial item for further processing or further production Import of Capital Machinery & Capital Item.

In all types of import usually the importer take bank finance. Under Islamic modes, finance can also be made for the first two types under Bai-Murabaha & Bai-Muajjal mode and for the 3rd type under Hire-Purchase under Shirkatul Melk (HPSM) mode. Import finance can also be made under Bai-Salam or Musharaka or Mudaraba modes. Islami Banks have to perform its all transactions related to import & export by abiding the National and International rules/regulations in addition to its own rules/regulations/guidelines etc.

B) Export Finance
Export means flow of goods and services produced within Bangladesh but purchased by economic agent (individuals, firms & government) of other countries. In other words in case of exports products sold outside the country. So getting payment against such sale usually require different time span depending on the terms of sale contract or relative payment terms of export L/C.In view of above exporter require immediate fund and other financial facilities to execute their export order. It is the bank who extend such facilities as needed by the exporter. And facilitating export by financing exporter at different stages are now important part of banks activities. Exporter requires financial assistance at two stages namely y y Pre-shipment stage & Postshipment stage

6.4 Foreign Exchange Operation of IBBL

According to the Article 2nd Foreign Exchange Act 1947: Foreign Exchange means Foreign Currency i.e. Currencies other then Local Currency. It includes any instrument drawn, accepted, made or issued all deposit, credit and balances payable in any foreign currency. y y Foreign exchange deals with trading of foreign currency. Foreign trade deals with trading of goods and financing in import and export.

Dealing in foreign currency or foreign exchange is done by way of: y Cash over the counter: Cash currencies in the form of notes/coins/Travelers cheques are sold/purchased over the counter on spot basis Bank earns exchange income and commission. y y Corporate dealing arising out of foreign trade import/export/foreign remittance. Independent trading to gain from the market.

6.4.1 Shariah principles

The shariah principle in foreign Exchange i.e. currencies, gold, silver etc. of similar nature is Bai-as-Sarf. Hadith of Prophet Mohammad (PBUH).Preconditions for Bai-as-Sarf ( for cash transactions): y y y y y Must be hand to hand i.e. on spot basis. Must be of equal amount in case of same currency. Contract must not be conditional. Should not be speculative. Should not involve riba, rishwah,garar, mysir and jahl.

6.5 Performance of IBBL in Foreign Exchange Business

2008 has been a very challenging year for IBBL in respect of foreign exchange business. Although it made a good start in the beginning of the year and made good progress up to the 1st half of the year, bank had to curtail the growth due to the compelling situation of bringing down the investments in line with the capital position of the bank. The financial crisis in the USA & Europe also played its role. Export & Remittance business were unaffected throughout the year except in the last 2 months. Summarized performance in F.EX Business is shown as under:
Achievement 2008 Business Target Achievement % of achievement Growth Business plan 2009 Target Amount 23% 41% 67% 244100 131500 211000 % of growth 45% 40% 50%

Import Export Remittance

199,000 93,500 126,500

168,329 93,920 140,420

85% 100% 111%

In 2008 market share stood at 10.25%, 9.56% & 23.07% in import, export & remittance respectively while in 2007 it was 10.83%, 7.82% & 18.59%. The success is due to the relentless efforts of the branch managers and their teams. Bank started 2008 with a slogan To be the market leader which the bank have achieved by the grace of Allah despite the numerous challenges. Bank have taken further challenging target for 2009 specially for Import business which is 45% in spite of the fact that, 2009 would not be an easy year for foreign exchange business as the investment growth has been fixed at 20% and also considering the slowdown of the financial activities in the after math of the melt down in the USA and EU.

Foreign Exchange Business of IBBL: 1983 to 2008

450000

400000

350000

300000

Million Taka

250000

200000

150000

100000

50000

0
Tot al F.ex

1983 11

1984 1369

1985 1737

1986 3596

1987 3974

1988 4490

1989 5840

1990 7846

1991 11985

1992 15756

1993 16857

1994 25357

1995 34681

1996 32970

1997 36645

1998 41493

1999 43609

2000 49860

2001 51868

2002 65131

2003 84643

2004 112624

2005 147642

2006 201822

2007 287919

2008 402669

Comparison of Foreign Exchange Business of IBBL 2007 VS 2008

F. Ex. Business of IBBL: 2007 vs. 2008
160000 140000 120000 100000 80000 60000 40000 20000 0 2007 2007 2008 2008 2007 2008 (Million Tk.)

Import 2007 2008 Growth in amount 96870 137086 40216

Export 51133 66690 15557

Remittance 53819 84147 30328

Growth over 2008 Import: 42% Export: 30% Remittance: 56%

Foreign Trade and Remittance Performance 2007 vs. 2008

Contribution in Country
Portfolio Import Export Remittance 2009 11.33%(Jan-June) 10.12%(Jan-June) 25.10%(Jan-June) 2008 10.25% 9.56% 22.01% 2007 10.78% 8.22% 18.59%

Import in 2009

(Jan-Jun)

IBBL 11.33%

Other Banks 88.67 %

Foreign Remittance in 2009 (Jan-Jun)

IBBL 25.10%

Other Banks 74.90%

Chapter 6A: Import

6A.1 Import
Import means lawfully carrying out of anything from one country to another county for buying. It will be occurred according to the Government law. Based on the needs of commodity and availability of finance, Government declares policy. For import of goods for a particular period, having approval from the National Assembly is defined as Import policy order. Import policy is a guideline of a set of rules envisaged by Government Authority i.e. the Ministry of Trade and Commerce for the registered importer for import of goods inside the country.

6A.2 Import Financing

Mainly three types of import are done purpose wise: y y
y

Import of trading item for ultimate user or consumer. Import of raw materials or industrial item for further processing or further production
Import of Capital Machinery & Capital Item.

In all types of import usually the importer take bank finance. Under Islamic modes, finance can also be made for the first two types under Bai-Murabaha & Bai-Muajjal mode and for the 3rd type under Hire-Purchase under Shirkatul Melk (HPSM) mode. Import finance can also made under Bai-Salam or Musharaka or Mudaraba modes. Islami Banks have to perform its all transactions related to import & export by abiding the National and International rules/regulations in addition to its own rules/regulations/guidelines etc.

6A.3 Import Performance of IBBL

The target growth for 2008 in import business was 45%. With the high growth of import in the first four month of 2008 (167%, 143%, 135%, 173%) from January to April in individual months which continued up to July in aggregate figures too due to high volume of imports of fertilizers, food items, industrial raw materials etc., it was presumed that bank would be able to achieve the target-growth quite comfortably. The figures may be seen from following table:

Comparison of Import: month to month 2007 & 2008

Ja n 0 8 Feb 08 Ma r 08 Apr 0 8

25000 20000 M illio n Tk . 15000

Ma y 0 7 Ma y 0 8

Oc t

Ju n 0 7 Ju n 0 8

Aug 07 Aug 08

Ju l 0 7 Ju l 0 8

Feb 07

Ma r 07

Apr 0 7

Sep Sep

No v

Ja n 0 7

5000 0

Jan 2007 2008 Growth in % 7235

Feb 7537

Mar 7811

Apr 8602

May

Jun

Jul

Aug

Sep

Oct

Oc t

10000

Nov

No v

Dec

10112 9634 4085 42%

10760 12281 11206 17,475 16898 17535 7429 -57% 9410 10217 -186 -2% -1477 -12% -663 -10046 -7488 -7318 -6% -44% -42%

19305 18337 18371 23490 14511 13719 10574 10804 10543 167% 143% 135% 173% 44%

Growth in amount 12070 10800 10560 14888 4399

Contribution of IBBL to Country Import Business

(Figure in Millions)
% of IBBL in national import

Period

National

Growth

IBBL

Growth

2002 2003 2004 2005 2006 2007 2008

492140 495200 606720 722440 890220 1108170 1265130 (approx.)

6.07% 0.62% 22.52% 19.07% 23.22% 24.48% 14.16%

25907 33788 46237 59804 74525 96870 137086

27.02% 30.42% 36.84% 29.34% 24.61% 30.00% 42.00%

5.26% 6.82% 7.62% 8.28% 8.37% 8.74% 10.83%

De c

De c

Top Banks in Import business in 2008

160000 IBBL 140000 Sonali 120000 IBBL 100000 IBBL 80000 Agrani Janata Sonali Sonali Janata Agrani Janata Agran i

60000

40000 20000

2006

2007

200 8 76496 137086 113596 84206

Sonali IBBL Agrani Janata

11452 8 74525 51194 72912

67760 96870 115924 128809

Market share of Import Business among the Bank

IBBL

11.33% 6.83% 6.05% 6.04% 5.87%

Janata

Sonali

Agrani

Prime

Chapter 6B: Export

6B.1 Export
Export Business has broken all previous records in terms of growth in percentage and in amount (41% growth with growth in amount of Taka 14,964 million).The growth is attributable to induction of new export oriented projects who are contributing largely to the basket of export proceeds. The high growth in export business inspires to take challenging targets for exports to optimize export business of the IBBL.

6B.2 Export Finance of IBBL

Export means flow of goods and services produced within Bangladesh but purchased by economic agent (individuals, firms & government) of other countries. In other words in case of exports products sold outside the country. So getting payment against such sale usually require different time span depending on the terms of sale contract or relative payment terms of export L/C. In view of above exporter require immediate fund and other financial facilities to execute their export order. It is the bank who extends such facilities as needed by the exporter. And facilitating export by financing exporter at different stages are now important part of banks activities. Exporter requires financial assistance at two stages namely y y Pre-shipment stage & Postshipment stage

6B.3 Export performance of IBBL

Export business achieved 101% of the target and maintained a steady growth all over the year i.e. more than 41% up to December 2008 as against target growth of 40%.

Comparison of Export: at the end of each month cumulative of 2007 & 2008
Million Tk. 100000 80000 60000 40000 20000 07 0 08 0708 08 07 08 07 08 07 08 07 08 07 08 07 08 07 08 07 08 07 08 07

Jan 2007 2008 Growth in amount Growth in % 4526 7730 3204 71%

up to Feb 10149 14924 4775 47%

up to Mar 1580 23372 7569 48%

up to Apr 20665 31293 10628 51%

up to May 25717 38339 12622 49%

up to Jun 31031 46561 15530 50%

up to Jul 36531 55582 19051 52%

up to Aug 42017 63721 21704 52%

up to Sep 47313 72477 25164 53%

up to Oct 52828 78524 25696 49%

up to Nov 59701 86,494 26793 45%

up to Dec 66690 93,920 27230 41%

Top Banks in Export business in 2008

(Figure in million Tk.) 90000 80000 70000 60000 50000 40000 30000 20000 10000 0

Janata Sonali

Sonali Sonali Janata Agrani IBBL

Agrani Janata IBBL

Agrani IBBL

2006 Sonali Agrani IBBL Janata 64092 41710 36169 72912

2007 70906 51713 51133 70000

2008 75000 78748 66690 71863

Market Share of Export Business among the Banks

Export Business under Islamic Framework:

According to the Article 2nd Foreign Exchange Act 1947: Foreign Exchange means Foreign Currency i.e. Currencies other then Local Currency. It includes any instrument drawn, accepted, made or issued all deposit, credit and balances payable in any foreign currency. y y Foreign exchange deals with trading of foreign currency. Foreign trade deals with trading of goods and financing in export.

Dealing in foreign currency or foreign exchange is done by way of: 1. Cash over the counter: Cash currencies in the form of notes/coins/Travelers cheques are sold/purchased over the counter on spot basis Bank earns exchange income and commission.

2. 3

Corporate dealing arising out of foreign trade /export/foreign remittance. Independent trading to gain from the market.

Export finance means providing financial facilities/supports to the bonafide exporters for procurement, processing, manufacturing, packing, carrying & shipments of the exportable goods. y Conventional Banks allow financial facilities on the basis of interest against their financial products, for instance packing credit. y Islamic Banks allow Investment for export under different shariah approved modes such as Bai-Murabaha, Bai-Muazzal, Bai-Salam, Musharaka, Mudaraba etc. y Banks open BB LC against Master L/C where no fund involves and bank receives only service charges. y Islami Banks are to allow Investment in compliance principles of Shariah.

Chapter 6C: Remittance

6C.1 Remittance
The word Remittance originates from the word remit which means to transmit money/ fund. In banking terminology, the work remittance means transfer of fund one place to another. When money transferred from one country to another is called Foreign Remittance. Foreign remittance may be classified into: y y Inward Foreign Remittance. Outward Foreign Remittance.

Inward Foreign Remittance:

Inward Foreign Remittance means Remittance received from foreign countries from abroad. In other words remittance coming into our country from other countries by the remitter by way of permissible banking channel through freely convertible Foreign Currencies is called Inward Foreign Remittance i.e. payless point of view it is inward foreign remittance. On the other hand remitters point of view it is called outward Foreign Remittance.

Outward Remittance:
Outward remittance of funds be made by means of T.T. D.D. T.T. etc. the remitter has to deposit money along with the application contains name and address of the payee name of the currency etc. All outward remittances must cover the transactions approved by the Bangladesh Bank. Which are usually for exporters travel & educational expenses.

6C.2 Mechanism of Foreign Remittance

y y y y y y y FCAD- Foreign currency A/C Dollar. Foreign currency A/C Dollar. MFCD- Mudaraba foreign currency deposits. PFC- Private foreign currency. FCAD- Exp. - Foreign currency A/C dollar export. NRO- Non residence dollar. NRT- No residence Taka.

y y

PDAP- properly development A/C dollar. PDAP- properly development A/C pound

6C.3 Instruments of Foreign Remittance

Cash for T.C. F.D.D T.T M.T I.M.O Cheque P.O : Dollar, Pound, France Fr. Riyal or any other currency. : Travelers Cheque. : Foreign Demand Draft. : Telegraphic Transfer, Cable transfer or swift transfer. : Mail Transfer. : International Money Order. : By any person & institution.. : Payment Order.

6C.4 Foreign Remittance Performance of IBBL

Remittance increased in 2008 on an average more that 80% upto September compared to corresponding period 2007.Reason for increasing remittance is expansion of network by establishment of remittance arrangement with Global Web-based Remittance Institutions, Banks and Exchange Houses in U.S.A, Malaysia, Singapore, K.S.A, Oman, Bahrain, UAE, Kuwait etc and Development of Service, Development of Automation including on line facility.

Comparison of Remittance: month to month 2007 & 2008

Aug 08 Jul 08 Nov Sep 15000 12000 May 08 Mar 08 Apr 08 Jan 08 Million Tk. Feb 08
Apr 0 7 Mar 0 7

Jun 08

Oct

Aug 0 7

Ju n 0 7

Sep

6000 3000 0

Jan 07

Jan 5120 10437 104%

Feb 0 7

Feb 5571 9717 4146 74%

Mar 5946 6115 103%

Apr 6502 4803 74%

May 6581 10707 4126 63%

Jun 6763 12106 5343 79%

Jul 7260 4777 66%

Aug 6607 5754 87%

Sep 7955 13234 5279 66%

Oct

9000

May 0 7

Ju l 07

Oct 7774 10810 3036 39%

Nov

Nov 8766 4277 49%

Dec

2007 2008 Growth in %

9298 2470 27%

12061 11305

12037 12361

13043 11768

Growth in amount 5317

Market share among Banks in remittance Business

IBBL has been maintaining top position among all banks in remittance business since 2007 ahead of Sonali, Agrani, Janata & other banks.
Share of Remittance 2008: Top 8 Banks
Figure in million USD

IBBL Sonali Agrani Janata National Uttara BRAC Pubali

8.21% USD 760.86 8.20% USD 660.10 5.93% USD 577.34 5.68% USD 507.74 5.44% USD 497.08 4.40% USD 400.22 13.95% USD 1333.92

23.07% USD 1995.70

Dec

Dec

Country Wise Share of National Remittance

Country KSA Kuwait UK UAE Malaysia Bahrain Oman USA Qatar Korea Singapore Italy Others Share

Countrywise Share of IBBLRemittance: 2008

53.13% 11.02% 10.46% 9.94% 4.08%

Bahrain Oman, 2.12% 2.28% USA, 1.79% Qatar, 1.59% Malaysia, 4.08%

Korea 0.59% Italy, 0.07% Singapore, 0.43% Others , 2.46%

2.28%

UAE, 9.94%
2.12% 1.79% 1.59%

Kuwait, 11.02%
0.61% 0.43% 0.07% 2.46%

UK, 10.46%

KSA, 53.13%

Share of top 10 Exchange House in IBBL Remittance

Share of top 10 Exchange Houses in IBBL Remittance: 2008
Milfa Sterling Exc. 1.40% Kuwait Bahrain Int'l Exc. 1.91%

Others 26.13% Al Rajhi Bank. 32.95%

A.N. Express 2.37%

Bangladesh Money Transfer, 2.69%

Bahrain Exchange Co., 3.01% Al Amoudi Exc. 3.36%

IME (M) 4.05%

Bank Al Bilad U. A. E. Exc.Center 16.77% 5.37%

Chapter 6E: Regression and Trend Analysis

6E.1 Regression Analysis

I have calculated multiple regressions to understand the relationship among the key component of the Islami Bank foreign exchange operation like profit, export, import & foreign remittance. After calculation we find out the following in formations:

The least square equation is =a+b1 x1+b2x2 =23.356+0.004x1+0.046x2 This regression equation is Income from Foreign Exchange operation=23.356+0.004(Import) +0.046(Export) Interpretation: In this multiple regression equation, I show the relationship between incomes from Foreign Exchange (dependent ) and Import (independent variable, X1), Export (independent variable X2). If here export, import is zero then a= i.e. =23.356 which is intercept. It shows that if banks export, import is 0 then the profit of the bank is positive, because there are other some factors which effects on Income from Foreign Exchange such as Remittance. If there is no change in two variables then Income from Foreign Exchange will increase by 23.356 million. Now, if the value of b1; or the slope X1 is 0.004. It means if the volume of Import increases by TK.1 million then the profit of the bank increases for TK 0.004 million assuming all other variable held constant. Again the value of b2 or the slope of X2 is 0.046 It means if the Export increases for taka 1 million then the profit of the bank will increase for taka 0.046 million assuming all other things remaining the same.