Introduction
Bank is a government-licensed financial institution whose primary activity is to lend money. Many other financial activities were allowed over time. For example banks are important players in financial markets and offer financial services such as investment funds. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of a cross-share holding entity known as the zaibatsu.
In France, banc assurance is prevalent, as most banks offer insurance services (and now real estate services) to their clients.
Private Banks are banks that are not incorporated. A private bank is owned by either an individual or a general partner(s) with limited partner(s). In any such case, the creditors can look to both the “entirety of the bank’s assets” as well as the entirety of the sole-proprietor’s/general-partners’ assets.
A commercial bank is a type of financial intermediary and a type of bank.
Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits. After the Great Depression, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use the term “commercial bank” to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses.
In some other jurisdictions, the strict separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many banks offer both commercial and retail banking services.
Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment of fees for the renting of money (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.
First Security Islamic Bank Limited (FSIB) was incorporated in Bangladesh on 29 August 1999 as a banking company under Companies Act 1994 to carry on banking business. It obtained permission from Bangladesh Bank on 22 September 1999 to commence its business. The Bank carries banking activities through its Twenty Six (26) branches in the country. The commercial banking activities of the bank encompass a wide range of services including accepting deposits, making loans, discounting bills, conducting money transfer and foreign exchange transactions, and performing other related services such as safe keeping, collections and issuing guarantees, acceptances and letter of credit.
Our course instructor for the internship (BUS499) course, Mr. Nayel Jamilur Rahman realized the importance of learning about the solution of operational problem after conversion from conventional banking system to Islamic banking system and prepares a project on that. He asked me to prepare a report for this course requirement of the course internship early in the semester. The plan had to be prepared individually and the business was to be decided on mutual consent. I decided to prepare the solution plan on FSIB. The topic is ‘solution of operational problem after conversion from conventional banking system to Islamic banking system for First Security Islamic bank Ltd.’
The main objective of this work is to prepare a good report that can be used for solution of FSIB.
This report firstly fulfils the partial course requirement of the internship course. It will serve as either an academic paper or a real solution plan for FSIB. Besides this any individual who is interested in doing finance related business in current market may find the plan very handy and useful.
The data for writing this business plan was from both primary and secondary sources. Utilizing this data this business sector is developed in the way business plans are usually developed. First the current environment is closely monitored and an opportunity is identified. Then some preliminary research was done on how to use the opportunity. Financial projection is done on the basis of the depth interviews with some experts from the field. Marketing part of this business plan is original and exploits some innovative promotional tools along with the traditional financial tools. Organizational structure and legal and management structure is confirmed from depth interview, studying related materials and browsing the internet. An orientation into writing business plans was gotten from different sites on the internet. Consultations with course instructor Mr. Nayel Jamilur Rahman was also a source of useful information.
First Security Islami Bank Limited (FSIB) was incorporated in Bangladesh on 29 August 1999 as a banking company under Companies Act 1994 to carry on banking business. It obtained permission from Bangladesh Bank on 22 September 1999 to commence its business. The Bank carries banking activities through its Twenty Six (26) branches in the country. The commercial banking activities of the bank encompass a wide range of services including accepting deposits, making loans, discounting bills, conducting money transfer and foreign exchange transactions, and performing other related services such as safe keeping, collections and issuing guarantees, acceptances and letter of credit.
FSIB is functioning with professional management team headed by the Managing Director Mr. A. A. M. Zakaria. Among other senior executives currently two DMD, One Principle(Training Center), two SEVP, fourteen SVP, eight VP, five FVP, eleven SAVP, five AVP and three FAVP are discharging their services in progression of the banks business.
Mr. A. A. M. Zakaria, Managing Director of the bank is an eminent banking personality having long 30 years of experience in banking industry. After successful completion of his B.A. (Hons) M.A. in Economics from Dhaka University , Mr. A. A. M. Zakaria has started his banking career in 1977 as Senior Officer of Rupali Bank. Before the current responsibility, Mr. A. A. M. Zakaria was the Deputy Managing Director of Dutch-Bangla Bank Limited. In his multi-greeted banking service, Mr. A. A. M. Zakaria participated in many courses, training program and workshops on banking at home and abroad. Mr. A. A. M. Zakaria joined in FSIB in 7 th August 2005 as Managing Director in a crucial moment when the bank had fallen into Problem Bank with lots of great complex situations. Within a short span of time FSIB under his proper guidance recovered from the “Problem Bank”. Top management of the bank is supported by human resource strength of 421 executives and officers.
For smooth functioning of the Bank, following committees have been formed: 1. Management committee (MANCO) comprises of senior members of the management headed by Managing Director of the bank. All divisional heads are the member of the committee. MANCO meets on regular basis to discuss relevant agenda. 1. Asst Liability Management Committee (ALCO) headed by the Managing Director, is responsible for balance sheet risk management. The committee participate is the monthly ALCO meeting and review the liquidity position, review rate of interest on deposit and lending, and review the ALCO papers on presentation by treasury back office on the position of profit, deposit, advance, cost analysis, maturity bucket of deposit & advance, balance sheet, profit and loss account and many other issues relating to banks business and assets-liability management. Five relevant divisional heads including DMD are the members and FVP & Head of Treasury of the Bank is the member secretary of the committee Human Resources Development
FSIB has a separate Human Resources Division (HRD) to manage the employee policies and practices. As on FYE 2007, Total 421 executives & officers of the bank have been working for smooth banking operations. Bank follows a standardized human resources policy. HRD of the Bank follow a transparent and free & fair system to ensure the standard recruitment, training & development of human resources of the bank. The bank has defined HR policies including recruitment, training & development, promotion, leave, transfer and disciplinary action policy. Usually internal recruitment procedures are considered to fill up the mid and top management positions, while entry-level positions are filled with regularly through competitive recruitment exams. They follow transparent, well-defined and strict rules for appointment of officers and staff in the Bank’s service.
Corporate governance is about how corporation is running its operations to achieve its corporate objectives. Bangladesh Bank (BB) gives emphasis on implementing corporate governance among the financial institutions and to do that, BB emphasises implementation of the guidelines issued by them for improving corporate governance in banking. Good Corporate Governance practices enhance an entity’s corporate image and market credibility, which attract capital and increase its borrowing power. These can be reflected in the quality of financial reporting and disclosures; strength of internal control system and internal audit function induction of professionally competent, independent non-executive Directors on corporate Board; formation of Audit Committee; delegation of authority to executives and staff; protection of corporate governance for strengthening organizational strength. With a view to ensure effective participation and deep interest in the affairs of the company and as per Articles of Association of the Company and as per Bangladesh Bank Circular No. 16 dated March 24, 2003 the bank has set up the following 2 committees:
Executive Committee:
FSIB has constituted 09 members executive committee of the board as per Bangladesh Bank guidelines to ensure corporate goverance in the business of which managing director of the Bank is Ex-officio Member. The executive committee of the board are responsible for developing policy and strategy for smooth operations of business and business development of the bank to ensure maximization of shareholders wealths protecting other stakeholders interest in the company Mr. Alhaj Md. Saiful Alam, Chairman of the board of Directors is the Chairman of the present Executive Committee of the bank. He is very dynamic person and leading the executive committee of the bank in a very manner.
Audit Committee:
FSIB has formulated an audit committee can play an effective role in formulating an efficient and secured banking system. The Audit Committee has been formed comprising three members of the Board of Directors. As per corporate governance guidelines the Chairman of the Audit Committee should have sound knowledge and expertise in finance & accounting or auditing. Mr. Hamidul Haq, who is also a Director of the Bank, is Convener of the committee. He is associated in banking field over long years.
At present, the bank has 26 branches of which 13 branches are in Dhaka, 08 branches are in Chittagong, 03 branches are in Sylhet, 1 branch is in Rangpur, 1 branch is in Khulna All the 26 branches are computerized under distributed server environment. Another three branches are planning to open within December 2008. FSIB has already started their on-line, SMSand ATM banking facilities for their clients.
Board of Directors :
Shariah Council of FSIBL:
Observer Members:
Managing Director: Janab A. A. M. Zakaria
Organizational hierarchy:
To be able to provide banking products and services of high quality to population of the country both home and abroad at a reasonable and affordable price with cutting edge technology and transparency of our books.
The gist of the bank’s vision is “Together toward tomorrow”. FSIB believes in togetherness with its customers in its march on the road to growth and progress with services. To achieve the designed goal, there will be pursuit to excellence at all stages with a climate of continuous improvement, because in FSIB, we believe the line of excellence is never ending, Bank’s strategic plans and networking will strengthen its competitive edge over others in rapidly changing competitive environments. Its personalized quality services to the customers with the trend of constant improvement will be cornerstone to achieve our operational success.
The importance of the mobilization of savings for the economic development of our country can hardly be over emphasized. The bank considers savings and deposits as its lifeblood. More the deposits – the greater the strength of the bank. So the Bank launched various savings schemes with prospect of higher return duly supported by a well orchestrated system of customer savings.
There are three operational divisions in First Security bank Limited. They are:
Refer to Head Office circular no FAD/2008/683 dated December 22, 2008 wherein detail instructions were given to the branches for conversion of previous interest based banking system to Islamic banking system based on shariah principles from 1st January 2009.
Name of the Company – First Security Islami Bank Ltd.
Chairman – Alhaj Md. Saiful Alam
Vice Chairman – Alhaj Md. Abdul Maleque
Managing Director – A.A.M. Zakaria
Company Secretary (Current Charge) – Abdul Hannan Khan
Legal Status – Public Limited Company (PLC)
Date of Incorporation – 29 August1999
Date of Commencement of Business – 29 August 1999
Date of Permission from Bangladesh Bank – 22 September 1999
Date of Opening of First Branch – 25 October 1999
Registered Office – 23, Dilkusha Commercial Area, Dhaka-1000, Bangladesh
Line of Business – Banking
Authorized Capital – Tk.3,600 Million
Paid up Capital – Tk.2,300 Million
Date of consent of IPO – 04 June 2008
Phone: 9560229 (Hunting),9550334,7171029-30
Fax: 880-02-9561637
E-mail: bcs@fsblbd.com
Webside: www.fsblbd.com
Auditors
Syful Shamsul Alam & Co .
Chartered Accountants
15, Dilsusha C/A(6th Level)
Dhaka-1000, Bangladesh
Phone: 7169487, 9569256
Email: syful@intechworld.net
Legal Advisor
The Law Counsel
Barrister & Advocates
City Heart (7th Floor)
Suit No. 8/8, 67, Naya Paltan, Dhaka-1000
Phone: 9349647-8
Fax: 9349866, 9567029
E-mail: l.counsel@bdonline.com
Tax Consultant
K.M. Hasan & Co.
Chartered Accountants
Home Tower Apartment (8 th & 9 th )
87, New Eskaton Road , Dhaka
Phone: 9351457,9351564
Fax: 8358817
Islamic banks appeared on the world scene as active players over two decades ago. But “many of the principles upon which Islamic banking is based have been commonly accepted all over the world, for centuries rather than decades”.
The basic principle of Islamic banking is the prohibition of Riba- (Usury – or interest):
“While a basic tenant of Islamic banking – the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest – has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.
“The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens – ranging from the equitable distribution of wealth through to man’s fundamental right to work – is clearly present in modern Islamic society.
“Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century.” (Islamic Finance: A Euromoney Publication, 1997)
It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.
The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims’ to strive to model their lives in accordance with the ethics and philosophy of Islam.
Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.
Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:
The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.
It is possible, that investment in Islamic financial institutions can provide potential profit in proportion to the risk assumed to satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shariah.
The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management.
Islamic banks are structured to retain a clearly differentiated status between shareholders’ capital and clients’ deposits in order to ensure correct profit-sharing according to Islamic Law.
Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower forms a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rent out the property to the borrower and charges rent. The bank and the borrower will then share the proceed from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank’s share on the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive the proceeds from an auction based on the current equity. This method allows for floating rates according to current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.
There are several other approaches used in business deals. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company’s individual rate of return. Thus the bank’s profit on the loan is equal to a certain percentage of the company’s profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.
And finally, Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged. In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio.[12] However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed.
Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).
Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products.
Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, with minimum investments ranging from US$50,000 to as high as US$1 million. Target markets for Islamic funds vary, some cater for their local markets,
Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic Index Series. The Web site failaka.com monitors the performance of Islamic equity funds and provides a comprehensive list of the Islamic funds worldwide.
The total conversion procedure of Islamic Banking has been completed within 02 days from 30/12/2008 to 31/12/2008.
It has been completed on the basis of the annual closing balance as on 30/12/2008, which is treated as the opening balance of 01/01/2009.
The financial Administration Division(FAD) has been finalized the new Chart of Accounts (totaling Accounts)and accounting Systems of Islamic Banking for smooth operation of the Islamic System.
The information Technology Division of head office has provide complete software of Islamic Banking (PC Bank2000 Islamic) to the Branches on or before the 30th December 2008 so that, the present electronic operational data of the Branches in respect of existing Deposits, Loans and Advances products can be incorporated into the new software for operational purpose with effect from the 1st January, 2009.
General Services Division has been ensured the supply of revised printed forms and stationary and also take necessary steps for changing Sign Board, Logo/Monogram, Seal etc. of Head Office and Branches in time .Existing stock of printed forms and stationary except the newly printed forms, stationary and registers may be used by affixing necessary new seal.
All Branches have preserve the existing Annual closing data of 2008 in the form of hard copy and soft copy through back up on 30.12.2008 after completion of annual closing.
After conversion Branches are printed out the dummy statement of Affairs as on 01/01/09 to ensure that the software is functioning smoothly without error.
Accordingly I.T. Division, Head Office and the software vendor “leads Corporation Ltd.” completed the process of operation but many of the branches are now facing some problems in day-to-day operation.
With a view to combat the operational problems, Head office implementation team conducted workshops/discrete dialog at Dhaka and Chittagong for a few weeks and various problems relating to software and investment were raised and discussed in detail by the participants. Meanwhile maximum software related operational problems have been solved. Regarding general Banking, investment, linked Account operation and foreign exchange transactions branches are further advised to follow the instructions as under:
A. General Banking
It is most important side of the bank. Bank is nothing but a middleman between lenders (surplus unit) and borrowers (deficit unit). To provide loan, a bank needs a huge amount of money from the depositors. General banking is the side where banks offer different alternatives to the clients to deposit and remit their money. To encourage the clients, bank offers different options in front of their clients. Most of these options are very much similar between the banks, but the customer services and facilities may not be the same.
General Banking of FSBL is divided into 4 divisions:
Account Opening
The relationship between the banker and the customer begins with the opening of an account by the customer. Initially all the accounts are opened with a deposit money by the customer and hence these accounts are called deposit account. Usually a person needs to open an account on take services form it. Without an opening an account, one can get only a few services from the bank. So the banking begins actually by opening an account with a bank. Generally, there are five types of accounts in our FSIBL banking system.
Al Wadia current account or Demand Deposit (CD Account) After Conversion of Deposit accounts for converting of all deposit Head of Accounts the following procedures shall be applied:
Mudaraba Savings Deposit Scheme (SB Account)
It’s a Murabaha contract between clients and FSIBL Bank. Here Depositor is the Sahib Al Mal” and Bank is the Mudarib According to Islami rules and regulation Bank accept the deposits and invest that amount as per Islami Shariah. By Investing Mudarabah Treasury fund,from the earnings minimum 65% fixed according to .75 Weightage will be distributed among the Sahib Al Mal and if there is loss then Sahib Al Mal will carry the responsibility as per Deposit amount.
Mudaraba Term Deposit (FDR)
It’s a Murabaha contract between clients and FSIBL Bank. Here Depositor is the Sahib Al Mal” and Bank is the Mudarib According to Islami rules and regulation Bank accept the deposits and invest that amount as per Islami Shariah. By Investing Mudarabah Treasury fund, from the earnings minimum 65% fixed 1,3,6,12,24,36 monthly deposit, respectively .75,.88,.92,.96,.98,1.00 Weightage will be distributed among the Sahib Al Mal and if there is loss then Sahib Al Mal will carry the responsibility as per Deposit amount.
➢ Minimum opening deposit of TK.5000 is required. ➢ Profit rate 10%
Mudaraba Monthly Profit Scheme
It’s a Murabaha contract between clients and FSIBL Bank. Here Depositor is the Sahib Al Mal” and Bank is the Mudarib According to Islamic rules and regulation Bank accept the deposits and invest that amount as per Islami Shariah. By Investing Mudarabah Treasury fund, from the earnings minimum 65% fixed according to .75 Weight age will be distributed among the Sahib Al Mal and if there is loss then Sahib Al Mal will carry the responsibility as per Deposit amount. ➢ Minimum opening deposit of TK.50000 is required. ➢ Deposit time is up to 5year.
Mudaraba Double Deposit scheme
It’s a Murabaha contract between clients and FSIBL Bank. Here Depositor is the Sahib Al Mal” and Bank is the Mudarib According to Islamic rules and regulation Bank accept the deposits and invest that amount as per Islami Shariah. By Investing Mudarabah Treasury fund, from the earnings minimum 65% fixed according to .75 Weight age will be distributed among the Sahib Al Mal and if there is loss then Sahib Al Mal will carry the responsibility as per Deposit amount.
Mudaraba Monthly Deposit scheme
It’s a Murabaha contract between clients and FSIBL Bank. Here Depositor is the Sahib Al Mal” and Bank is the Mudarib According to Islamic rules and regulation Bank accept the deposits and invest that amount as per Islami Shariah. By Investing Mudarabah Treasury fund, from the earnings minimum 65% fixed according to .75 Weights age will be distributed among the Sahib Al Mal and if there is loss then Sahib Al Mal will carry the responsibility as per Deposit amount. ➢ Monthly Deposit amount-100/-,250/-,500/-,1000/-,1500/-,2000/-,2500/-,5000/-. ➢ Deposit time-5,8, 10(year)
Important points:
Clearing
Clearing house is an assembly of the locally operating scheduled banks for exchange of cheques, drafts, pay orders and other demand instruments drawn on each other and received from their respective customers for collection. The house meets at the appointed hour on all working days under the supervision of two central bank officers or its agent as the case may be, and works within the regulations framed therefore on the basis of prevailing banking practices. in Bangladesh, clearing house sites at Bangladesh bank where there is no office of the Bangladesh bank, Sonali bank acts as agent of Bangladesh bank. There are mainly two types of banking systems Bangladesh, such as:
The entire number banks representative daily conducts two meetings at a fixed time. In their first meeting they handover cheque, drafts etc. passed, which has drawn upon them. In case there are certain cheque, which could not be honored are returned to the presenting banks with the reasons of non-payments in the second meeting at the clearing-house.
Clearing operations are completed in three stages:
Bangladesh Bank clearing their house sites twice in a day. In its first meeting Bangladesh Bank clearing-house received instruments and distributes the same among the representatives of different banks drawn on their bank. In second meeting different bank representatives comes with returned instruments and distributing among the representatives.
Software called NIKASH supplied by Bangladesh Bank is used in clearing of the cheques and other instruments. The in-charge of clearing section make clearing slip for each cheque through computer using NIKASH and finally this cheques are send to the Bangladesh Bank Clearing –House sorting bank wise.
Sending money from one place to other places for the customer’s is another important service of banks and this service is an important part of countries payment system. For this service, people specially businessmen transfer funds from one place to another very quickly. There are various types of remitting money, such as:
The pay order is used for making a remittance to the local creditor. Pay Order gives the payee the right to claim payment from the issuing bank. it can be en-cashed from issuing bank only. Unlike cheque, there is no possibility of dishonoring pay order because before issuing pay order bank takes out the money of the pay –order in advance. Pay Order cannot be endorsed or crossed and so it is not negotiable instrument.
Demand Draft is an order of issuing bank on another branch of the same bank to pay specified sum of money to the payee on demand that is the named person or order of the demand. It is generally issued when customer wants to remit money in any place, which is out side of the clearing-house area of issuing branch. Payee can be purchaser himself or another mentioned in the DD. it is a negotiable instrument and it can be crossed or not.
This Method transfers money to one place to another place by telegraphic message. The sender branch will request another branch to pay required money to the required payee on demand. Generally for such kind of transfer payee should have account with the paying bank. Otherwise it is very difficult for the paying bank to recognize the exact payee.
When sending money is urgent then the bank uses telephone for remittance. This service is only provided for valued customers, who is very reliable and with which banks have long standing relationship.
Where the remitter desires the banker to remit the funds to the payee instead of purchasing a draft himself the banker does it through a mail transfer advice. the payee must have an account with the paying office as the amount remitted in such a manner is meant for credit to the payee’s account and not for cash payment. it is the least used technique for transferring fund. Where there is no telex machine or telephone line then this method is used.
After converted into the Islami Banking System the “Loan and Advance” has been Renamed as “Investment”according to Islami Shariah.
The following existing Loans and Advances accounts will be converted into the Islamic Banking Investment accounts given against each existing accounts.
Qard Based Loans & Advances: The existing qard based loans and Advances accents are converted into Qard Accounts under Islamic Banking System
Classified Loans and Advances:
In case of classified loans and advances following instructions are followed by the Branches carefully.
Foreign Exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country. Foreign exchange is the means and methods by which rights to wealth in a country’s currency are converted into rights to wealth in a country’s currency. in bank when we talk of foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another.
Foreign exchange is divided in three parts. They are:
The term exports means carrying out of anything from one country to another. as banker we define export as sending of visible things outside the country for sale. In a word export means goods are outwards and foreign currencies are inward. Export trade plays a vital role in the development process of an economy.
In order to export any goods or services to overseas the exporter must have attested photocopies of the following documents with the up to date ERC. The documents are as follows:
If the bank authority satisfies with all the information provided by the exporter, steps are taken to smooth out the process of export.
The exports and imports Act, 1950 regulate the country’s export trade. There are a number of formalities, which an exporter has to fulfill before and after shipment of goods. These formalities or procedures of export mechanism are enumerated as follows:
The exports from Bangladesh are subject to export trade control exercised by the ministry of commerce through chief controller of imports and exports. No exporter is allowed to export any commodity permissible for export from Bangladesh unless he or she is registered with CCI & E and holds valid export registration certificate (ERC). The ERC number is to be incorporated on EXP forms and other documents connected with exports.
After having the registration, the exporter applies to the bank with trade license and ERC to get EXP. if the bank satisfied an EXP is issued to the exporter.
Securing the order after having the registration, the exporter may proceed to secure the export order. Contracting the buyers directly through correspondence can do this.
The following points are to be mentioned while making a contract:
After making the deal and on having the L/C opened in this favor. The next step for the exporter is to set about the task of procuring the contracted merchandise.
The following the documents normally involved at the stage of shipment:
After those, exporter submits all those documents along with a letter of indemnity to the bank for negotiation; an officer scrutinizes all the documents. If the document is a clean one, FSBL purchases the documents on the basis of banker-customer relationship. This is known as foreign documentary Bill purchase (FDBP). Procedure for FDBP
After purchasing the documents, FSBL takes FDBP charges from customers A/c. a FDBP register is maintained for recording all the particulars.
FDBP signifies that the exporter will receive payment only when the issuing bank gives payment. The exporter submits duplicate EXP form and commercial invoice. an FDBP register is maintained where first entry is given, when the documents are forwarded to the issuing bank for collection and the second one is after realization of the proceeds.
When L/C (export) is transmitted to the bank for advising the bank sends advising letter to the beneficiary depicting that L/C has been issued. The procedure of L/C advising is as follows:
Letter of Credit (L/C)
Letter of Credit (L/C) is an arrangement between an importer and the bank (issuing bank). The bank provides L/C in order to purchase goods from the exporter. The bank acts on the behalf of the clients to deal with exporter and the clients make the payments after receiving the goods accordingly.
Back to Back letter of credit (BTB L/C)
A back to back letter of credit is a new credit. The banks main security is the original credit. Bank to back L/C is opened under a master L/C one or more L/C is opened against one master L/C.
Requirements of opening a Back to Back L/C
There three types of BTB L/C. they are:
Opening process of a L/C is discussed bellow:
At first prepare forwarding. Then arrange the following documents:
This means wait for payment. When the beneficiary sends the goods, they send related documents for payment to the bank. The bank starts the retirement procedure. at first checking these documents with the L/C, L/C time, date number, invoice, terms and conditions, beneficiary’s certificate, certificate of origin, etc. then they entry the register and the number is posted to documents with seal in every page. The register number entry is called ABP.
Then they pay in local payment and foreign payment
Local payment, the bank used P.O and Demand Draft.
The issuing bank prepares voucher. Then entries in the IBTA register, ETDA, then send to the ID. Id informed the Bank, which maintains liaison between the issuing bank and advising bank. Then the bank pays to the beneficiary after checking the authentication code.
Import is foreign goods and services purchased by firms, customers and government in Bangladesh.
An importer must have import registration certificate (IRC) given by Chief Controller of Import & Export to import anything from other country.
The importer enters in to a purchase contract with foreign suppliers. If suppliers have local agent, the importers obtain an indent and pro-forma invoice. If the suppliers have no local agents in Bangladesh, the importers holding valid import registration certificate (IRC).
Documents that are needed for opening an import L/C are listed bellow:
The exports and imports Act, 1950 regulate the country’s import trade. The chief controller of import and export provided the registration to the importer. Then the person secures a letter of credit Authorization from Bangladesh bank. And then a person becomes a qualified importer.
The Import mechanisms are discussed bellow:
The officials have to very much careful while making payment. This task constitutes the following:
Import: During the year performance of import business of the bank was satisfactory in 2007 import business at Tk.14344.40 million as compare to the volume of Tk.7153.00 million of 2006. The growth as 100 point 53%.
Export: During the year performance of export business of the bank was satisfactory in 2007 export business stood at Tk.3648.40 million as compare to the volume of Tk.2960.00 million of 2006. The growth was 23.22%.
Foreign remittance: First Security bank limited has been successful year in 2007 in terms of expansion of its remittance business with its foreign correspondent an exchange houses. This bank has arrangement for drawing with the banks and exchange companies situated at the important countries of the world. In the mean time the bank has been able to draw confidence of f the Bangladeshi expatriates by easy and quick delivery of their hard earned foreign remittance to pays at home. In 2007 foreign remittance stood at Tk.329.90 million as compared to the volume of Tk.48.50 million of 2006.
Although First Security Islami Bank Ltd. Is performing very well, but as per my observation and understanding, I think they need a little modification in their procedures. Such as:
Although the economy of Bangladesh experienced a major shake up during 2007 mainly due to political turmoil, two severe floods and cyclone, FSBL increased its return on average assets (ROAA)as well as return on equity(ROAE).
FSBL has its strength in liquidity position and information technology. On the other hand principal concerns of the Bank are profit margin, large loan exposures, loan monitoring as well as consistency in performance.
Recent conversion in Islami Bank will bring a great change in whole Banking procedure. It may affect on relationship between bank and customer also. So Bank should be concerned about the operational changes and should be solved all the problems and barriers effectively and efficiently with clear technical concept.
Philosopher and scientist are observed: “If you would know the value of money go and try to borrow some”. Consumer debt is one of the fastest growing forms of borrowing money around the globe. Just as consumer borrowing has become a key driving force in the financial marketplace today, so have banks choosing to make these loans. Bankers have engaged in recent decades to become dominant providers of credits to individuals and families, aggressively advertising their services through “money shops”, “money stores”, and other enticing sales vehicles. The key successful consumer lending today center on the ability to process large volume of credit requests quickly so the household borrower receive a fast decision from the lender. Lending process differs in national and multinational companies. This internship report contains the Islamic banking system which is bases on the principles of Islamic law (Sharia). The bank previously so called First Security bank Ltd. converted to Islamic banking system from conventional private commercial bank. The bank is now named First Security Islamic Bank Ltd.
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