Chapter – 1: Introduction
After the surrender of the Pakistani forces on 16th December 1971, the government of the Peoples Republic of Bangladesh formally took over the charge of the administration of the territories now constitute Bangladesh. In order to rehabilitate the war devastated banking system of Bangladesh, the government promulgated a law called Bangladesh Bank (temporary) Order, 1971(Acting Presidents Order No 2 of 1971). By this order the State Bank of Pakistan was declared as Bangladesh Bank and the offices, branches and assets of the said State Bank was declared to be deemed as offices, branches and assets of Bangladesh Bank. It was also declared by the aforesaid Order that all currency notes and coins issued by the said State Bank and government of Pakistan and were in circulation in Bangladesh shall be deemed to have issued by the Bangladesh Bank. By the steps stated above, the banking system of Bangladesh started with a legal shape.
The number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks, four are Nationalized Commercial Banks (NCBs), 28 local private commercial banks, 12 foreign banks and the rest five are Development Financial Institutions (DFIs). Sonali Bank is the largest among the NCBs while Bank Asia is leading in the private ones. Among the 12 foreign banks, Standard Chartered and HSBC has become the largest in the country. Besides the scheduled banks, Samabai (Cooperative) Bank, Ansar-VDP Bank, Karmasansthan (Employment) Bank and Grameen bank are functioning in the financial sector. Bangladesh Bank (BB) regulates and supervises the activities of all banks.
Islami Bank Bangladesh is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah. Consequently Islamic banks operate on Islamic principles of profit and loss sharing, strictly avoiding interest, which is the root of all exploitation and is responsible for large-scale inflation and unemployment. In this report, I undertake microscopic analysis mainly on Foreign Exchange.
Origin of the report
This report is based on an internship program. IBTRA arranges internship program to gather practical knowledge about banking activities followed by IBBL for University students as Universities conducted with different organization after the completion of theoretical courses of program of Bachelor of Business Administration (BBA). Each intern must carry out a specific project, which is assigned by the IBTRA. Consequently a report based on the projects is to be submitted to the authority of IBTRA. We select Islamic Bank Bangladesh Limited (IBBL) for our internship & since then I have started our realistic orientation program in General Banking, Investment & foreign exchange department. But we have prepared our project paper on Foreign Exchange as it is assigned by IBTRA.
Objectives of the study
The first objective of writing the report is fulfilling the partial requirements of the BBA program. In this report, we have attempted to give on overview of Islami Bank Bangladesh Limited in general. Following are the main objectives
To familiar the history and operations of Islami Banking in Bangladesh.
To show the investment mechanism and product offerings in different modes of IBBL.
To show overall investment proposal, appraisal procedures, documentation system of IBBL and Conventional Banks.
To show the differences with conventional banking regarding investments aspects
To identify strength and weakness of investments of IBBL.
To identify the problems related to investments faced by IBBL.
To recommend actions that may be necessary to redesign the investments of IBBL.
For carrying out this project paper I had to study the actual banking operations of IBBL.
In order to carry out this study, two sources of data and information have been used:
a) Primary data
I discussed with the executives & officials of the IBBL and found the approximate data, which has been presented in the report. I also discussed with the officials of conventional Banks & IBTRA regarding the issue and found necessary information, which has been presented in the report.
b) Secondary data
● Annual Reports of 2000-2006 of Islami Bank Bangladesh Ltd.
● Desk report of the related department
Manuals of Islami Bank Bangladesh Limited (Bai-Murabaha, Bai-Muajjal,
Training sheets which are provided by Islami Bank Training and Research Academy (IBTRA).
Limitations of the study
There are some limitations in our study. We faced some problems during the study which we are mentioning them as below-
i) Lack of time:
The time period of this study is very short. I had only 8 weeks in my hand to complete this report, which was not enough. So I could not go in depth of the study. Most of the times the officials were busy and were not able to give us much time.
ii) Insufficient data:
Some desired information could not be collected due to confidentiality of business.
iii) Lack of monitory support:
Few officers sometime felt disturbed, as they were busy in their job. Sometime they didn’t want to supervise us out of their official work.
iv) Other limitation:
As we are newcomer, there is a lack of previous experience in this concern. And many practical matters have been written from our own observation that may vary from person to person.
Chapter – 2: Islami Bank Bangladesh Ltd.
Derivation of Islami Bank
Bangladesh is one of the largest Muslim countries in the world. The people of this country are deeply committed to Islamic way of life as enshrined in the holy Quran and the Sunnah. Naturally, it remains a deep cru in their hearts to fashion and design their economic lives in accordance with the precepts of Islam. The establishment of Islami Bank Bangladesh Limited on March 13, 1983, is the true reflection of this inner urge of its people, which started functioning with erect from March 30, 1983. This bank is the first of its kind in South-East Asia. It is committed to conduct all banking and investment activities on the basis of interest fee profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the middle east and the gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh.
Banking plays an important role in the economy of any country. In Bangladesh Muslim constituted more than 80% of its population. These people possess strong faith on Allah and they want to lead their lives as per the constructions given in the holy Quran and the way shown by the prophet Hazrat Muhammad (Sm). But no Islamic banking system was developed here up to 1983. The Traditional banking is fully based on interest or “Riba”. But interest is absolutely prohibited by Islam. As a result the people of Bangladesh have been experiencing such a non-Islamic prohibited banking system against their normal values and faith.
Mission of the Bank
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.
Vision of the bank
The vision of IBBL is to always strive to achieve superior financial performance, be considered a leading Islamic Bank by reputation and performance.
- 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.
Aims & Objectives
To conduct interest free banking.
To establish participatory banking instead of banking on debtor creditor relationship.
To invest through different modes permitted under Islamic Shariah
To accept deposits on profit-loss sharing basis.
To establish a welfare-oriented banking system.
To extend co-operation to the poor, the helpless and the low-income group for economic uplift.
To pay 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 area.
To contribute in achieving the ultimate goal of Islamic economic system.
Objectives of Islami Bank
It is a golden desire of every Muslim that his social and political lives should be in accordance with the divine guides prescribed in the holy Quran and the Sunnah. In the same tune of aspiration as above, he desires to follow a unified life in financial and business life. So, the objectives of the Islamic Banking may be derived from the broader objectives of the Islamic economy. Two quotations may help us understand our objectives.
However M. Umer Chapra, in his book “Towards a just Monetary System discussed some of the most fundamental characteristics of Islamic money and banking system. Those are as follows:
1. Broad-based economic well-being with full employment and optimum rate for economic ground;
2. Socio-economic justice and equitable distribution of income and wealth;
3. Stability in the value of money to enable the medium of exchange to be a reliable unit of account, a just standard of deferred payments, and a stable store or value.
4. Mobilization and investment of savings for economic development in an equitable manner such that a just return is ensured to all parties concerned, and
5. Effective rendering of all services normally expected from the banking system.
Historical Background of IBBL
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 Macca 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 1982, Bangladesh Bank, the country’s Central Bank, sent a representative to study the working of several Islamic Banks abroad.
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 Banker’s Association (BIBA) mode significant contributions towards introduction of Islamic Bank in the country.
They came forward to provide training on Islami Banking to top bankers and economists to fill up the vacuum of leadership for the future Islamic banks in Bangladesh. They also help seminars, symposia and workshops on Islamic economics and banking throughout the country to mobilize public opinion in favor of Islamic banking.
Their professional activities were reinforced by a number of Muslim entrepreneurs working under the aegis to 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 becomes a reality. Islamic Bank Bangladesh Limited was established in March 1983. In which 19 Bangladeshi nationals, 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.
Business Philosophy of IBBL
The philosophy of IBBL is to the principles of Islamic Shariah. The organization of Islamic conference (OIC) defines an Islamic Bank as “a financial institution whose status, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banking of the receipt and payment of interest on any of its operations. The sponsor, perception is that IBBL should be quite different from other privately owned and managed commercial bank operating in Bangladesh, IBBL to grow as a leader in the industry rather than a follower. The leadership will be in the area of service, constant effort being made to add new dimensions so that clients can get “Additional” in the matter of services commensurate with the needs and requirement of the country growing society and developing economy.
As on 31st December 2007
Date of Incorporation : 13th March 1983
Inauguration of 1st Branch : 30th March 1983
(Local office, Dhaka)
Formal Inauguration : 12th August 1983
Share of Capital
Local Shareholders : 42.12%
Foreign Shareholders : 57.88%
Authorized Capital : Tk.5, 000.00 million
Paid-up Capital : Tk.2, 764.80 million
Deposit : Tk.110, 721.23 million (As on 28-Feb-2007)
Investment : Tk.106, 342.03 million (As on 28-Feb-2007)
Foreign Exchange Business : Tk.1, 47,642 million (As on 28-Feb-2007)
Number of Branches : 186
Zone : 6
Number of Shareholders : 17,201 (As on 31-Dec-2007)
Manpower : 6,202 (As on 31-Dec-2007)
Capital position from 1999 – 2005
(In million Taka)
Roll of contribution of IBBL to Bangladesh Economy
Islami Bank Bangladesh Limited has many success stories of achievements. These are summarized below:
IBBL is the pioneer institution of Islamic Banking in Bangladesh.
The success of IBBL has imbibed other sponsors at home and abroad to establish Islamic Banking in Bangladesh. Four national, one international Islamic Banks have since been established in the country. A private sector traditional bank has also established two full-fledged Islamic Banking branches. Several other existing and proposed traditional banks have also expressed their intention to introduce Islamic Banking.
IBBL has successfully mobilized deposits from a section of people who hither-to-before did not make any deposit with interest based banks.
The Islamic Banking products which are offered by IBBL through its 176 branches located at important centers all over the country and spontaneous acceptance of those products by the people proves the superiority of Islamic by the people proves the superiority of Islamic banking.
IBBL’s market share of deposit investment and ancillary business is steadily increasing
IBBL, through still a tiny bank, handless more than 10% of country’s export and import trade.
Among the contemporary commercial Banks IBBL’s position is first in respect of mobilization of deposit, deployment of found and earning profit.
Investment in industrial sector occupies nearly 49.19% of IBBL’s investment portfolio. This is a unique example of industrial finance by a commercial Bank.
More than 1.15,000 workers are employed in the industrial projects financed by IBBL. IBBL has thus made significant contribution to solving unemployment problem of the country.
Dhaka-the capital of Bangladesh being a Mega city has acute transport problem. IBBL has joined hands with an enterprising group to introduce a fleet of Premium Bus service, which has attracted the attention of all section of the people and mitigated transportation problem of the city to some extent.
Performance of IBBL for last 5 years
|(Amount in million Taka)|
|Share Money Deposit||1.99||1.99||1.99||1.99||1.99|
(Including bills payable) Gross
|Total Investments (Including Inv in Share) Gross||37,648.75||49,185.92||62,755.90||83,893.63||97,178.31|
|Total Foreign Exchange Business||51868.00||65,131.00||84,643.00||112,665.00||14,7642.00|
|Net Profit before Tax||576.12||994.05||802.01||1842.99||2162.42|
|Payment to Government (Income Tax)||275.52||450.55||373.25||829.35||973.09|
|Dividend||25%||25%||20% (Bonus)||20% (Bonus)||25% (Bonus)|
|Total Assets (including Contra)||58,644.46||77,463.12||98,046.85||125,776.94||150959.66|
|Total Assets (Excluding Contra)||49,551.87||65,080.12||81,704.74||102149.28||122880.35|
|No. of deposit account holder||1,355,053||16,51122||19,94266||22,91269||33,90,000|
|No. of investment account holder||176,138||1,96295||22,3954||26,4863||29,4888|
|Cumulative amount of disbursement from RDS||1323.87||2,029.67||2923.60||4216.77||6216.77|
|Outstanding Investment of RDS||371.1||432.1||570.9||789.97||989.97|
|RDS no. of A / C holder||100,470||107,225||130,465||163,465||183,465|
|RDS no. of village||2,214||2875||3700||4230||5330|
|Number of Foreign Correspondents||815||830||840||850||950|
|Number of Shareholders||9,917||10,747||14,196||15,892||17,201|
|Number of Employees||3,060||3,297||3,752||4,261||6,261|
|Number of Branches||121||128||141||151||176|
|Book value per Share (Taka)||4677||5532||2743||2904||3004|
|Cost of fund %||10.78||10.20||10.89||9.08||10.08|
|Cost income ratio||.86||.81||.88||.78||.88|
|Return on Equity (ROE)%||13.18||16.85||7.43||15.15||16.15|
|Return on Assets (ROA) %||.80||.92||.53||1.10||2.10|
|Price earning ratio||5.12||4.24||23.26||9.32||10.32|
|Earning per Share (Taka)||617||932||195.92||518.00||560.00|
|Price equity Ratio||.69||.72||1.66||1.76||1.96|
|Market Value per Share (Taka) (Highest)||3,205||3956||4548||5110||5220|
|Capital Adequacy Ratio||9.24%||8.64%||9.43%||9.21%||9.34%|
(Note: One Million = Ten Lac)
Overall position of the equity and capital adequacy of IBBL
|Risk weighted assets||32,387.79||40,973.53||55,851.30||72,628.26||88,545.37|
|%of the total investment||92%||89%||95%||86.57%||86.69%|
|Capital adequacy ratio||9.24%||8.64%||9.43%||9.21%||9.34%|
Trend of foreign exchange business of IBBL
Chapter – 3: General Concept About
Foreign Exchange Operation
General Concept About Foreign Exchange Operation
The part describes some conceptual issues regarding foreign exchange market and transaction in our country on the theoretical basis covering the following points-
- Concept of Foreign Exchange
- Foreign Exchange Market
- Trade Transaction
- Bank’s involvement in Foreign Trade Payment
- Letter of credit Operation
Concept of Foreign Exchange
In simple work, foreign exchange means foreign currency. In other word, it means exchange or conversion of one currency with/ into another currency. Basically Foreign Exchange deals with foreign currency as well as currency instrument such as Draft, Traveler cheque, Bill of exchange, MT, TT and PO etc accepted, drawn, made or issued under clause 13, Article 16 of the Bangladesh Bank Order, 1972 and foreign trade- import and Export.
There are mainly two situations in the foreign exchange operation. One is Currency Draft, which is related with buying, and selling of foreign currency and is Trade Transaction which is required for settlement of import and export obligation.
Foreign Exchange Market
The foreign exchange market is a market where conversions take place. In our country inter Bank Foreign Currency/Exchange Market operated through electronic media using Dealing Room of Bank/Financial Institution for buying and selling of foreign currency among banks and other financial institutions at floating rate based on market demand and supply. Only authorized dealers deal directly with each other in foreign exchange markets who are licensed to operate in the foreign market by the Bangladesh Bank. Authorized deals who are generally commercial bank on behalf of their customer handles all the foreign transaction.
Type of Foreign Exchange Market:
There are three types of foreign exchange market existed in our country-
- Spot Market- where exchange of one currency with another takes place on the spot.
- Forward Market- where actual delivery of the currency will happen at a future date as per agreement of present date.
- 0ption Market- Wherein a contract is made specifying the right to buy or sell a standard amount of foreign currency within a specific date at a certain price.
Term Used in Foreign Exchange Market Operation:
Usually three terms used in our foreign exchange market operation. There are-
- Arbitrage- Spot purchase of FC where the price is low and sell where the price is high i.c. By low and sell high. Currency Arbitrage due to price difference in to financial centers.
- SWAP- Purchasing FC on the spot for selling Forward or selling spot for purchasing forward Due to difference in interest rate of the concerned currencies.
- Hedging- to avoid exchange risk, agreement is made to day to buy or sell FC to be delivered at some future date at a rate agreed upon to day.
Mainly trade transaction is of two types. One is local trade transaction, which made with in a country and another is foreign or International trade transaction, which happened between two countries.
International Trade again can be classified into two categories. One is export and another is import that will be discussed in next part in details.
BANK’S INVOLVMENT IN FOREIGN TRADE
Banks play a vital role by minimizing the risk of parties, namely buyer and seller. In fact, without the helps of banks we cannot think about a congenial international trade environment. Now the question comes how bank help international trade. We know that in a local trade there is a change to know about each other. But in international trade, the involved parties stay two distant places.
For a buyer the following risks are involved-
- Rink of non-delivery of goods
- Risk of receiving sub standard goods
- Risk of fraud in goods
For the seller the following risk is involved-
- Risk of non-payment
To reduce the aforesaid risks an independent system is introduced which is letter of credit (L/C) that provides a safeguard to the buyers as well as to the seller in an international trade.
Actually, banks play a key role in L/C operation to getting into parties and bind them.
LETTER OF CREDIT OPERATION
In simple word, a letter of credit is a conditional undertaking of payment given by a bank. In broad sense, A letter of credit is a written assurance of Bank, issued on the instruction of the applicant to the beneficiary, to pay specific amount on agreed currency, provided beneficiary submit the documents in conformity with the terms and conditions of the credit within the prescribe deadlines.
However, Uniform Customs and Practice for Documentary Credit (UCPDC) Revision, Publication No. 500 defines in its Article No.2 that documentary credit mean any arrangement whereby a bank (issuing bank) acting at the request and on the instructions of a customer (the applicant) or on its own behalf.
- Is to make payment to or the order of a third party (the beneficiary) or is to accept and pay bills of exchange (drafts) drawn by the beneficiary or
- Authorized another bank to effect such payment, or to accept and pay such bills of exchange (Drafts)
- Authorized another bank to negotiate, against stipulated documents provided that the terms and conditions are complied with.
Types of L/C
As par rules of UCPDC-500 (Article-6) a documentary credit may be either
- Revocable L/C
- Irrevocable L/C
- Revocable L/C which can be amended or cancelled by the issuing bank at any time without prior notification to the seller.
- Irrevocable L/C which cannot be amended or cancelled without the agreement of both parties.
Besides these there are several special types of L/Cs as used-
- Confirmed L/C which confirmed by another bank in addition to that of issuing bank.
- Transferable L/C which can be transferable by the original beneficiary to one or more subsequent beneficiaries.
- Back-to-Back L/C which is opened against lies on valid exports L/C to import only raw materials.
- Restricted L/C which cannot be negotiated in any bank rather than a specified bank mentioned in the L/C
- Red Clause L/C, which authorized the negotiating bank to provide pre-shipment advance to the beneficiary, typed in red ink.
- Green Clause L/C. which authorized bank to grant advance to the beneficiary for storage facility at the part is the part is addition to pre-shipment advance.
- Revolving L/C, which provides for restoring the credit to the original amount after it has been utilized.
Parties involved in L/C operation
There are numbers of parties involved in a L/C. The involved parties to a L/C are as under:
- Importer/Applicant- Buyer who applies for opening an L/C
- Exported/Beneficiary- Seller in whose favor L/C is issued
- Issuing Bank- It is the bank which opens /issues a L/C on behalf of the importer.
- Confirming Bank- It is the bank which adds its confirmation to the credit at the request of issuing bank.
- Advising Bank/Notifying Bank-It is the bank through which L/C is advised to the beneficiary.
- Negotiating Bank-It is the bank which negotiating bill and purchase bill from exporter.
- Paying/Accepting Bank-It is the bank on which bill is drawn as per condition of L/C and who confirm the maturity period.
- Reimbursing Bank-It is the bank which reimburses the negotiating bank after getting payment instructions from issuing bank.
Chapter – 4: FOREIGN EXCHANGE BUSINESS OF IBBL
Business consists of three categories of business that are import, export and remittance. So in foreign exchange department of IBBL there are three separate sections to handle foreign exchange business. This part focuses on overall operational activities, procedures, accounting system of these three sections in three separate sections.
- Section-A describes import business procedure. How a import L/C opened, what the procedure followed and document maintained by bank, how bank make payment settlement, how shipping document are handed over –all necessary activities including accounting procedure are presented in the section.
- Section-B focus on export business procedure covering overall procedures of export especially for RMG products and export financing offered by IBBL, there accounting procedure of all transaction related export business.
- Section-C describes remittance business of IBBL. In this section type of remittance, fund transferring procedure &channel, payment system for inward remittance and also issuing procedure for our want remittance are clearly defined.
Meaning of Import
Import means lawfully carrying out of anything from one country to county for Buying. It will be occurred according to the Government law.
Important Policy Order
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.
Earlier import policy has been formulated for two years. But present import policy order has been formulated for 5 (five) years, Effect from the 14th June 1999 to 30th June 2003 and valid till announce of new import policy order. If require Government can revise the policy in each every years.
Import related fees
Four categories of importer registration renewal fees are as under
|Categories||Yearly heights import||Registration|
Fees (Taka)RenewalA5.00500/-500/-B15.001500/-1500/-C50.003000/-3000/-DAbove 50.005000/-5000/-
2. Surcharges for different years are as under:
1 year late TK 50/-
2 year late TK 100/-
3 year late TK 200/-
Regulations of Import
Import of goods under this policy shall be regulated as under:
- Control list:
Unless otherwise specified items which have been indicated as banned in this list shall no be permissible for import. An items included in this list with specific conditions for import shall be importable only on fulfillment of the conditions specified.
- Freely Importable Items:
Unless otherwise specified an items the name of which does not appear in the control list shall be freely importable.
3. Notwithstanding anything mentioned else where, all imports into Bangladesh shall be subject to such general or specific conditions as many have been prescribed in this order.
4. In addition to the conditions mentioned in the control list the conditions. Restrictions and procedures for import of various items mentioned in the test portion of this order, shall as usual, apply in case of import of those items.
5. If, while determining the import status of an items mentioned in the control list the description of goods does not conform to the H.S.C Code mentioned against item, or any discrepancy arises between the H.S Code and the description of goods, in that case the description of goods shall prevail, In other words, if the import of a particular item is shown as banned in the control list, or is shown as importable as subject to fulfillment of conditions in the list, the said ban or restriction as the case may be, shall equally apply to the import of that item , even if such ban or restriction is mentioned else where and not against the appropriate H.S Code, if any importer, taking , advantage of such discrepancy, import any banned items or restricted items or restricted item without fulfilling the respective conditions, such import shall be treated to have been made as in contravention of the provisions of this order.
Regulations of Import:
L/C: may be open under deferred payment basis.
Direct Payment in Abroad:
Only for Bangladeshi National who live in abroad for service. Those who are entitled to purchases the importable goods for direct payment to the beneficiary from his own service without opening any L/C, The goods must be sent to the Bangladesh. Nationals who lived in Bangladesh. In that case no approval is required from CCI & E.
Time Limit Opening of L/C:
Letter of Credit shall be opened by all importers within 120 days from the date of registration of LCAF with the Bangladesh Bank unless otherwise notified.
Validity of LCA for Shipment:
Unless otherwise specified, shipment of goods shall take place within 17 month in the case of machinery and spare parts and 11 months in the case of all other items form the date of issuance of LCA from by Bank or registration of LCA form within Bangladesh Bank registration unit as the case may be.
Document required to be submitted along with LCA Form:
Importers in both public sector and private sector shall submit to their nominated banks the following documents along with the L/C authorization Form for opening letter of credit.
a) L/C application form duly signed by the importer.
b) Indent for goods issued by indenture or pro-forma invoice obtained from the foreign supplier, as the case may be and
c) Insurance cover note.
Import L/C (Letter of Credit):
A letter of credit is a conditional Bank undertaking of payment. In other words letters of credit is a letter form the importer Bankers to the exporter that the bills if drawn as per terms & conditions complied with will be honored on presentation.
Definition of L/C:
A letter of Credit is a conditional bank undertaking of payment. In other words letters of credit is a letter form the importer bankers to the exporter that the bills if drawn as per terms and conditions are compiled with will be honored on presentation
As per UCPDC 500 a credit may be either:
The Credit, therefore, should clearly indicate whether it is revocable or irrevocable. In the absence or such indication the credit shall be deemed to be irrevocable.
Classification of L/C:
.Revocable L/C, Irrevocable L/C, Confirmed L/C, Transferable L/C, Divisible L/C, Revolving L/C, Restricted L/C, Red Clause L/C, Green Clause L/C, Back-to-Back L/C
Types of L/C:
1. Revocable Credit:
As per Article no. 8 (a) A revocable credit is a credit which can be amended or canceled by the issuing bank at any time without prior notification to the seller since to offers little security to the seller.
2. Irrevocable Credit:
As per Article no 9 an irrevocable credit constitutes a definite undertaking of the issuing Bank. A credit cannot be amended or cancelled without the agreement of all parties. It gives the seller grater assurance of payment. An irrevocable credit can be either confirms or unconfirmed dependant on the desire of the seller.
Classification of importer:
Importers are those who ate authorized by the import Trade authority i.e. & CCI & E for import of goods essential for consumption or for production purposes.
There are mainly three types of importers.
1. Commercial Importer
2. Industrial Importer
3. Importers under Wage Earner Scheme
1. Commercial Importer:
It means an importer registered under the importers, exporters and indention registration order 1981 who import goods from sale, when issued to commercial importers, given the category held by him with ITC classification and public notice against which they are admitted into import trade.
2. Industrial importers:
When issued to an industrial consumer, gives the items of import as raw materials and packing materials and spare parts, the value of entitlement and ITC classification.
3. Importers under WES:
It means registration importers who import only under the WES. In this scheme, the foreign exchange required for import of goods is met out of the remittance made. By Bangladesh national earning wage abroad. WES importers can be importing all permissible items a declared by the importer also can import under WES.
L/C application & Procedure for Opening L/C :
For opening L/C the client is to submit to the bank an application in the printed format of the designated bank. This is called L/C application form which is also an agreement between the importer and the bank. The form is to be stamped under stamp Act. In force in Bangladesh. The importer must submit the LCA & IMP and indent or contract. Purchase order/pro-forma invoice (duly accepted by the importer) along with L/C application.
The L/C application must be completed/ filled in and signed by the authorize person of the importer giving the following particulars:
- Full name and address of the supplier of beneficiary and importer.
- Brief description of the goods.
- L/C value for US$, etc. (CFR value) which must not exceed the LCA value.
- The unit price, quantity quality of the goods.
- Origin of the goods, port of loading and port of destination must be mentioned.
- Model of shipment (Sea, Air, Truck or Rail etc.)
- List date of shipment and negotiation time (must not be beyond 30 days from the shipment date).
- Insurance cover note number and name or the company.
- Tenor of draft (1.e, sight/ issuance/ deferred etc.
- Mode of advising L/C (i.e. airmail/ full telex short cable etc.)
- Opening of L/C under UCPDC publication No. 500/- ICC revision 1993.
- Whether shipment/ transshipment is allowed.
- Instruction to add confirmation if required.
- LCA Number.
- Any other relevant information and instruction if any must be mentioned in the L/C application form.
A written application from opener is verified a relevant license/ LCA/ permit of the loan/ Barter must remain valid up to that period the extension is sought. Increase of L/C amount may be done provided the LCA covers the increase in amount.
L/C amount can be decreased provided the relevant Indent is amending accordingly and with the consent of beneficiary.
Each of clauses of the L/C can be amended provided the parties involve the L/C consent to it. Procedure or preparation and dispatch:
Amendment is to be typed in the Banks printed format. The copies of the amendment must be dispatched to all concerned as done in dispatching the L/C. Amendment be kept in the L/C file chronologically date wise.
Amendment commission is to be realized form the party as per instruction of Bangladesh Bank F. E. Circulars.
Dr. Party’s A/C.
Cr. Commission A/C.
Cr. Postage & Telegraph A/C.
If the amount of L/C increased the liability voucher is to be passed as under:
Dr. Liability as per contra (WES L/C).
Cr. Asset as per contra (WES L/C).
Dr. Asset as per contra (WES L/C).
Cr. Liability as per contra (WES L/C).
A fresh Liability is to be passed including amount of increase on the date of amendment.
Back to Back L/C
Meaning of Back to Back L/C
Back to Back L/C is a type of import L/C either in inland or in abroad, which open against lien on valid expert L/C.
In our country in export garment this method of finance is widely used and very well known to the manufacturers of garments. Bangladesh exporter received an irrevocable L/C. for supply readymade shirts from an American Bank. For manufacture of the ordered shirts the exporter. Dose not has required raw materials and cloths. To execute the order he is to import materials and cloths from Korea.
Then the Bangladesh exporter does not have the required raw materials and clothes. To excite the order he is to import materials and cloths from Korea.
Then the Bangladeshi exporter will have to open an import L/C favoring Korean suppler for import of cloths and accessories. The L/C is opened by the Bangladeshi bank keeping the American Bank L/C in the ‘back’ (i.e. to fulfill the requirement) of the export L/C is called back to back L/C.
While opening such import L/C the Bangladeshi exporter is to pledge to manufacture the shirt by the Korean in imported cloths under boded ware house system.
Problems of Back to back L/C
1. Shipment time gap: Sometime time is shorted for exporting against import L/C, kit may be caused.
2. Terms and rules violations: IBBL cannot violate the rules & term of Shariah council.
3. Selling violation: Out of agreement IBBL cannot receive excess wanted.
4. Payment of back to back L/C bill: No stock bills are supported against Shariah.
5. Gaps of International rules & regulations.
Prospects of back to back L/C
1. It is Garment oriented readily.
2. Backward lender (must have)
3. To continuous quality improvement.
4. To exchange customer facilities.
5. To be continuous of our authorized.
L/C Opening functions
The following functions are maintained for opening L/C.
1. Opening the L/C.
2. L/C Lodgment.
3. L/C Retirement.
Lodgment of L/C
When the documents received from the foreign correspondent and checked with L/C file by two persons to ascertain the correctness it is found in order at that time make entry in the bill register and pass the necessary voucher (reverse the liability entry). The process is known as lodgment. Document must be lodged within 3 (three) days. In three ways the documents may be transferred to the parties.
Retirement of L/C
When the parties retire the documents by cash payment or by MPI/LIM arrangement is known as retirement.
Kinds of Bill:
- At sight
- Collection (30 cash/ Loan? Barter
Check up the document:
Before lodgment, documents must be checked with L/C file. Check up as under:
2. Bill of Lading
4. Bank forwarding date.
a) The invoiced amount tallied with draft amount.
b) The invoice is shown by the beneficiary ad s signed by him.
c) Description of goods in the invoice and bill of Lading are identical.
2. Bill of Lading:
re also to be referred to the draw for their acceptance.
The reply of importer is to reach to the Bank within 72 hours in case of non-acceptance. The dishonor is to be communicated to the negotiating bank within reasonable time. Unusual delay in communication of dishonor is not acceptable to the negotiating Bank and the issuing Bank forfeits its right to claim refund.
Retirement Procedure for Deferred Payment of issuance Bills/ BB Bills :
When the draft is returned by the draw (importer) after duly accepted by him the following procedure to be maintained.
1. The maturity date is to be worked out and noted in the bill Register and also in due date diary. The due date diary may be maintained by the dealing officer ad the Manager in-charge of foreign Exchange Determent.
2. The Foreign Correspondent should be advised the due date maturity and be authorized to debit the NOSTRO account or to claim reimbursement on due date as per L/C terms.
3. All the documents delivered to the importer except accepted bill of exchange/ draft.
For liability of issuance bill reversed the following vouchers are to the assed be the Bank.
Dr. Liability as per contra, When retired the documents, the as Cr. Assets as per contra. Voucher under:Dr. Party’s A/C.,Cr. H.I., I.D A/C.Cr. R & T A/C.Cr. F.C.C. A/C.Cr. Commission A/C.
Checking & Advising of Export L/C Processing of Opening of BB L/C
IMPORT FLOW CHART
Exporter obtains IRC from CCI & E and arrange others importers documents to import
Proforma invoice received from exporter & accepted & signed by importer
Apply to the bank for opening L/C along with submission of necessary documents
Bank opens L/C and transmits to the exporter through advising bank
Issuing bank received documents from negotiating bank after shipment
Documents scrutinized by issuing bank &go for lodgment and make payment
Document retired by importer and submitted to the custom through C & F
agent to clear goods
Meaning of Export:
Export means lawful carrying out of anything from one country to another country for sale
Definition of Exporter
The importers and exports trade of the country is regulated by the Imports Exports Control Act 1950. No person /firm is allowed to export any thing from Bangladesh unless he is registered with CCI and E under the registration order (Importer and Exporter) 1952. To become an exporter an ERC (export Registration Certificate) must be obtained from the office of CCI & E.
Export under L/C
Exporters are allowed to export the commodity under irrevocable letter of credit. Under this type of export, exporter will ship the goods as pr terms of the credit and will get payment as per arrangement of the credit.
General Rules for Export
There are some rules, which are mandatory for export of any goods form Bangladesh. The rules are as under:
(1) No Person can export any goods from Bangladesh, unless he is duly registered as an exporter with the CCI & E.
(2) All export must be declared on the EXP form, which is consisting of 4 copies.
(3) Export mush is against any of the following:
a) Export L/C.
b) Firm Contract.
c) Advance Payment.
(4) Transport documents related to land route or sea and any other Author8ized Dealer. The Airway Bill and any other documents of title to car4go may be drawn to the order of a Bank in the country of import. However in case of advance payment, transport document may be drawn to the order of Foreign Importer Bank endorsement of transport documents is prohibited. Directions under Sl. No. shall not apply in the following cases:
Stages & Mechanism of Export
1) Exporter will make the goods ready for shipment.
2) Arrangements have to be taken for inspection of the goods by the competent authority as per credit terms.
3) Exporter will declare on EXP form against export L/C/Firm Contract/ Advance payment.
4) Exporter have to arrange approval for export from custom authority on EXP from by submitting Export L/C, Export permission from CCI & E, Quota clearance from EPB, U.D. in case of garments, invoice, packing list along with shipping bill prepared by C&F agent.
5) After completion of custom formalities, shipping company will receive the goods and will issue B.L.
6) Exporter will collect visa/ license and certificate of origin for final documentation.
7) Exporter will submit the full set of documents to the negotiating bank for negotiation.
8) Negotiation bank will dispatch the documents to the issuing bank for clearance of the goods from destination against payment as per credit terms.
Flow chart for Export (Manufacturing)
Export obtain ERC from CCI&E to get permission for export
Purchase contract made between export & import
Master L/C received by exporter from issuing Bank through advising bank
BTB L/C issued against lien on master L/C to provide raw material
Packing credit and export incentive provided to meet working capital
Goods shipped and documents are submitted to the negotiating bank for negotiation
Negotiating forward documents to the issuing bank after endorsement
Issuing Bank makes payment & proceeds realized by negotiating bank
Meaning of 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”
Types of Remittance:
Foreign remittance may be classified into.
Inward Foreign Remittance.
Outward Foreign Remittance.
Mechanism of Remittance
FCAD- Foreign currency A/C Dollar.
FCAP- 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.
PDAP- properly development A/C dollar.
PDAP- properly development A/C pound.
Instruments of Foreign Remittances:
Cash for : Dollar, Pound, France Fr. Riyal or any other currency.
T.C. : Travelers Cheque.
F.D.D : Foreign Demand Draft.
T.T : Telegraphic Transfer, Cable transfer or swift transfer.
M.T : Mail Transfer.
I.M.O : International Money Order.
Cheque : By any person & institution..
P.O : Payment Order.
PROBLEMS & RECOMMENDATION
Islamic Banking is a new phenomenon in our country during last two decades. So majority of our people have no proper knowledge about the activities of Islamic Banking as well as its investment mechanism hamper large scope of investment of IBBL.
Most of the people in our country have a bad impression of IBBL’s operations regarding indirect generation of interest which meaning no difference between investment of IBBL loan / Credit / advance of conventional banks for this reason, they are not too much interested to make investment with IBBL.
Because of improper insufficient application of Islamic Banking rule in our country. The investment operations of IBBL can’t run smoothly.
IBBL, which is committed to avoid interest, can’t invest the permissible part of its statutory liquidity Reserve and short Term liquidity surplus in those securities.
This Bank can’t invest in all economic sectors, which are prohibited by the law of Islam.
IBBL has no strong promotional activities to increase motivate its present and potential investment client.
Chapter – 5: Findings
- Adequate Finance:
Islami Bank Bangladesh Ltd. Have adequate finance. That is why they need not to borrow money from Bangladesh Bank or any other Banks.
- More funds for Investment:
For adequate financial ability they can provide loan to the more investment clients.
- Honest and Reliable Employees:
All of the employees of Islami Bank are honest and reliable. They are always devoted themselves to the works for better customer service. They have no corruption report.
- Lack of Adequate Employees:
Numbers of employees are fewer than the volume of works which creates problem for prompt service.
- Lack of up to date equipment’s:
IBBL has lack of modern technologies and equipment’s like online facilities, fax, cash card and credit card system
- Religious Minded People:
Most of the people of our country are religious minded. So they accept the concept “Interest free banking system” and going to Islami Bank with more interest.
- Special Image:
IBBL has created special image to the people as a more reliable bank. People believe that if they keep their money in Islami Bank it will be more secured than other banks.
- More competitors:
There are a lot of competitors in banking sector of Bangladesh. So it’s a great threat for them. There are not only the conventional banks but also some others Islami Banks in the market as their competitors. Conventional banks are always trying to understand people that interest and dividend are the same through various seminar, symposiums and publicity.
- Rules and regulations:
The rules and regulations of Bangladesh are not favorable for Islami Bank. So they have to face various problems to operate their activities according to Islami Shariah.
- Appropriate Legal Frame work:
Despite of tremendous popular support, spectacular success in terms of mobilization of deposit and distribution of profit. Islamic Banking in Bangladesh yet to achieve the designed level of success due to the absence of appropriate legal framework for carrying out Islamic banking operations in the country. All the Government approved securities in Bangladesh are interest bearing.
Bangladesh is not a full Islamised country, all activities are not operating according to Shariah of Islam. But the IBBL is trying to operate their activities as much as possible. Yet some limitation as and problems are arising these are follows:
Limitations of IBBL:
- Rules & Regulation as Bangladesh is not full Islamized country, so rules and regulation is not favorable to operate full activities, on the other hand interest based banks are available in this country. So these are favorable for them.
- No Islami money market is available. Easily money transaction is no possible for the interest free banking system.
- Call rate money is not responded according to Islami Shariah.
The Islamic Banks in the world have been facing a number of challenges. Side by side, the Islamic Banking in Bangladesh is also facing numerous problems.
Problems of IBBL:
- Islamic Banking is a new phenomenon in our country during last two decades. So majority of our people have no proper knowledge about the activities of Islamic Banking as well as its investment mechanism that hamper large scope of investment of IBBL.
- Most of the people in our country have a bad impression of IBBL’S operations regarding indirect generation of interest which meaning no different between investment of IBBL loan / credit / advance of conventional banks for this reason, they are not too much interested to make investment with IBBL.
- Because of insufficient application of Islamic Banking rule in our country. The investment operations of IBBL can’t run smoothly.
- IBBL, which is committed to avoid interest, can’t invest the permissible part of its statutory liquidity Reserve and short Term liquidity surplus in those securities.
- This Bank can’t invest in all economic sectors, which are prohibited by the law of Islam.
- Sometimes investment operations of IBBL are hampered due to increase, dishonest, indiscreet, hypocritical nature of people.
- IBBL has no strong promotional activities to increase motivate its present and potential investment client.
- There are limited scopes to deal women entrepreneurs and professionals for making investment by women interpreters.
- Lack of Islamic money market, research on Islamic capital market, and the tax structure of the country are not move conductive to the spirit of Islam.
- Absence of efficient personnel and infrastructure fit for Islamic trade financing on International Business.
- IBBL should increase skilled manpower to do its financial activities more effectively so that many of the employees do not have to do extra work.
- The Bank should go aggressive advertising and promotional activities to get a broad geographic coverage.
- The authority of IBBL should introduce more innovative and modern customer service.
- Practice amount of doubtful income declined substantially during the year as compared to the past few years, indicating more carefulness of the Management in complying with Shariah. As a result, idle money will be invested to increase potential profit of this Bank.
- Inclusion of more subjects based on the Quran and Sunnah in the Training courses of the Islami Bank Training & Research Academy in order to develop human resources having morally.
- Arrangement of monthly / quarterly training courses / workshops for the clients selected by the Branches in order to promote Investment clients of the desired level.
- IBBL should initiates different investment models according to changing / diverse needs of clients by conducting huge Research and study.
- IBBL should utilize “Internship Program” as one kind of promotion policy to encourage its present and potential investment clients. To do so this Bank should provides facilities to the internees through proper placement and practical operations as well as job certainty to those who bring introduce themselves the best performers in doing their particulars.
- IBBL should appoint a sufficient number of women employees to deal women entrepreneurs and professionals and understand their needs and thus create demand for investment.
- To fulfill the vision of “mass banking” this bank should grants investment portfolio to new entrepreneurs / new businessmen new companies etc.
- To gain success in the programs like “poverty Alleviation and “Self Reliant” especially in rural areas, this bank should provides investment facilities on the basis of individual.
- The Bank should disburse total invested money not at once to the clients to achieve full benefits of invested money.
- To create syndicate banking system for foreign exchange business.
- Literature on Islamic capital market may be preserved at IBTRA library.
- Islami Bank Bangladesh Limited (IBBL) doesn’t calculate NPV and IRR but they should calculate it.
- Islami Bank Bangladesh Limited IBBL doesn’t consider interest rate but they can calculate NPV and IRR as a discounted rate for doing financial analysis.
Bangladesh is a developing country. Without developing banking sectors, business sector is not in a possible position to progress rapidly. Interest free banking is not a mere concept now, it is in reality. More than 300 Islami banks and financial institutions are operating in different countries throughout the world with a noteworthy success. In our country, from 1983 IBBL has been operating with great confidence. As a large Islamic commercial bank, it took various steps to create employment and socio-economic development for the downtrodden people through Islamic rules and regulations. This economy and Banking is not possible to establish without Tauhid, Reshalat and trust of Akhirat. But our Government is not aware to establish such system. Besides, in case of post import finance, Islamic bank provides noteworthy facilities to the clients than that of the conventional banks. Yet IBBL has emerged facing the many obstacles. This bank is trying to operate their activities according to Islamic Shariah. From this discussion it proves that interest is a curse. We have to take necessary steps to remove all problems that stand as a great obstacle before Islamic banks as early as possible for the development of Islamic banks.