Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

RAB 8 Barisal

PART- ONE

Introduction to the report

Origin of the report

 This report is an Internship Report prepared as a requirement for the completion of the BBA Program of the Department of Finance, University of Dhaka. The primary goal of internship is to provide an on the job exposure to the student and an opportunity for translation of theoretical conceptions in real life situation. Students are placed in enterprises, organizations, research institutions as well as development projects. The program covers a period of 3 months of organizational attachment.

 After the completion of BBA program, Md. Mazedul Hoque of BBA 7th Batch was placed in Standard Chartered Bank, Bangladesh for the internship program under the guidance of my department advisor Mr. Md. Humayan Kabir. As a requirement for the completion of the program I needed to submit this report, which would include an overview of the organization I was attached with and elaboration of the project I was supposed to conduct during the internship period.

I was placed in the Islamic Banking Centre of the Bank, under the direct supervision of Mr.Saniyat Rahman, the Manager of Islamic Banking Center of Standard Chartered Bank Bangladesh.

Scope:

The scope of this report is limited to the overall descriptions of Islamic banking services provided by Standard Chartered Bank Bangladesh.

Methodology & Source of Information

In the organization part, much information has been collected from different published articles, journals, brochures, web sites and previous internship reports. All the information incorporated in this report has been collected both from the primary sources and as well as from the secondary sources.

Primary Source of Information

  • Discussion with officials of SCB
  • Face to face and telephone conversations with customers
  • Data from the company’s documents and SCB’s computerized information system

 Secondary Sources of Data

  • Previous reports and journals relevant to the banking industry
  • Other published documents of Bangladesh Bank
  • Relevant SCB paper and published documents

Limitations:

Past and present financial information that are confidential could not be accurately obtained. Alike all other banking institutions, SCB is also very conservative and strict in providing financial information. In such cases, I have relied upon certain assumptions, which are only amateur estimates. As many of the analysis on the obtained data are based on my sole interpretation, there may be some biases, as lack of knowledge and depth of understanding might have hindered my ability to produce an absolutely authentic and meaningful report. Moreover, Islamic Banking is newly introduced banking line to SCB; there was unavailability of past financial data.

Banking Industry in Bangladesh – An Overview

Banking industry in Bangladesh is characterized as a highly competitive and highly regulated sector. With a good number of banks already in operation and a few more in the pipeline, the market is becoming increasingly competitive by the day.

The commercial banks of the country are constantly looking for ways to develop their market and product offers to remain ahead of others. A significant amount of regulation by Bangladesh Bank prevents the scope of introducing newer products into the market and thereby restricts a banks’ ability to outperform others with a diversified product range.

However, recent trends have shown banks shifting away from vanilla products (basic products) towards higher value added products that are highly structured, to meet the needs of the clients.

The Banking Industry in Bangladesh is one characterized by strict regulations and monitoring from the central governing body, the Bangladesh Bank. The chief concern is that currently there are far too many banks for the market to sustain. As a result, the market will only accommodate only those banks that can transpire as the most competitive and profitable ones in the future.

Currently, the major financial institutions under the banking system include:

  • Bangladesh Bank
  • Commercial Banks
  • Islamic Banks
  • Leasing Companies
  • Finance Companies

Of these, there are four nationalized commercial banks (NCB), 5 specialized banks, 11 foreign banks, 26 domestic private banks and 4 Islamic Banks currently operating in Bangladesh. Their proportions are shown in figure 01.

Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

Figure 01 Source: Scheduled Bank Statistics, Bangladesh Bank

All local banks must maintain a 4% Cash Reserve Requirement (CRR), which is non-interest bearing and a 16% Secondary Liquidity Requirement (SLR). With the liberalization of markets, competition among the banking products and financial services seems to be growing more intense each day. In addition, the banking products offered in Bangladesh are fairly homogeneous in nature due to the tight regulations imposed by the central bank.

Competing through differentiation is increasingly difficult and other banks quickly duplicate any innovative banking service.

Foreign banks are playing a very important role in the country’s banking sector. These banks are holding 9% of the countries total deposits (shown in figure 02). These banks are inventing innovative products and ideas in the banking industry. Local banks are learning from these banks and in some cases duplicating their products.

Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

Figure 02 Source: Scheduled Bank Statistics, Bangladesh Bank

Some of the banks, including local and foreign, are playing their role in the socio-economic development of the country.

PART- TWO

 About STANDARD CHARTERED BANK

History of Standard Chartered Bank

The Standard Chartered name came to life with the friendly merger of the two original banks- the Chartered Bank of India, Australia and China, and the Standard Bank of British South Africa. The Chartered Bank was founded by James Wilson following the grant of a royal charter by Queen Victoria in 1853, while the Standard Bank was founded in the Cape Province of South Africa in 1862 by John Paterson; Chartered opened its first branches in Bombay, Calcutta and Shanghai in 1858, followed by Hong Kong and Singapore in 1859. With the opening of the Suez canal in 1869 and the extension of the telegraph to China in 1871, Chartered was well placed to expand and develop its business. Traditional business was in cotton from Bombay, indigo and tea from Calcutta, rice in Burma, sugar from java, tobacco from Sumatra, hemp in Manila and silk from Yokohama.

In South Africa, Standard, having established a considerable number of branches was prominent in financing the development of the diamond fields of Kimberley from 1867 and extended its network to Johannesburg when gold was discovered there in 1885. It is reported that half the output of the second largest gold field in the world passed through the then Standard Bank.

Both banks- at that time still quite separate companies-survived the First World War and the depression, but were directly affected by the wider conflict of the Second World War in terms of loss of business and closure of branches. Following the war, each however, acquired other small banks along the way and spread their networks further. In 1969, the decision was made by Chartered and by standard to undergo a friendly merger. Further expansion also took place in Standard Chartered’s traditional markets in Asia and Africa.

In 1993, Sir Patrick Gillam the then chairman of the group, made it clear that standard chartered would grow and develop its strong franchises in Asia, the Middle East, and Africa using its operations in the United Kingdom and North America to provide customers with a bridge between these markets. Secondly, it would focus on consumer, corporate and institutional banking, and on the provision of treasury services- areas in which the group had particular strength and expertise.

In august 2000, the acquisition of Grindlays bank was completed. This made standard chartered the leading international bank in Bangladesh and other countries of South Asia, strengthened the group’s competitive position in the Middle East.

Now in 2006, Standard Chartered has emerged as one of the leading banks of the world. The activities of the bank are spread world wide.

Standard Chartered Bank in Bangladesh

Standard chartered bank started its operation in Bangladesh 1948. The first branch was opened in the port city of Chittagong and the branch was opened mainly to facilitate the post-war reestablishment and expansion of South and Southeast Asia. Including the Grindlays experience the bank’s presence in this country dates back to 1905. It is the oldest bank in Bangladesh and the only bank that never closed its doors in its 100 years of banking operation in this country. While all foreign banks had suspended their operations after the liberation war of Bangladesh, standard chartered (Grindlays operations) remained open and became the first international bank to extend credit lines to the new country in 1972. Standard chartered (Grindlays operation) is also the first bank to open the first external letter of credit (LC) in Bangladesh in early 1972. Moreover, the bank had assisted the Bangladesh bank with re-construction of the records that were destroyed during the liberation war and with setting up of the exchange rate mechanism.

Today standard chartered bank is the largest international bank in Bangladesh with 25 offices and 35 ATM’s spread over 6 cities- Dhaka, Chittagong, Khulna, Sylhet, Bogra and Narayangonj. The acquisitions of Grindlays bank in 2000 and the commercial banking business of American Express Bank in Bangladesh in 2005 are reflections of the bank’s increasing commitment to Bangladesh. Standard Chartered bank is also continuing its investments for ensuring world-class services along with an array of international products for its clients.

Ethics of Standard Chartered Bank

Standard Chartered reputation is critical to being the world’s leading emerging markets bank. The preservation and enhancement of that reputation depends upon its businesses operating to the highest standards of ethical conduct.

The Bank face a particular challenge to uphold consistent standards of conduct while at the same time respecting the culture and varying business customs of all the countries in which it operates.

The principles that govern the behavior of its business and employees are reflected in a Group Code of Conduct. The Group Code of Conduct is a practical working document which guides employees through the many difficult conduct issues which confront them on a daily basis. Complying with each element of the Code will not always be easy but the employees recognize that they will be judged not just by what is set out in the Code but on how this is reflected in their day to day activities and the behavior.

Standard Chartered Bangladesh

 Strategic Intent:            The world’s best international bank

Leading the way in Asia, Africa and the Middle East

Brand Promise:            The Right Partner

Values:                                    Responsive

Trustworthy

Creative

International

Courageous

Approach                     Participation

Focusing on attractive, growing markets where we can leverage our customer relationships and expertise

Competitive positioning

Combining global capability, deep local knowledge and creativity to outperform our competitors

Management discipline

Balancing the pursuit of growth with firm control of costs and risks

Commitment to

Stakeholders, Customers

Passionate about our customers’ success, delighting them with the quality of our service

Our people

Helping our people to grow, enabling individuals to make a difference and teams to win.

Communities

Trusted and caring, dedicated to making a difference.

Investors

A distinctive investment delivering outstanding performance and superior returns

Regulators

Exemplary governance and ethics wherever we are

Growth of Standard Chartered Bank Bangladesh

Standard Chartered is celebrating its 100 years of operation (including Grindlays operation) in Bangladesh. In the last hundred years the bank has undergone a lot of change s. The ultimate goal of these changes was the overall growth of the bank. In 1993, there was an organizational re-structuring, which led to a substantial expansion of the Bank’s business. It increasingly invested in people; technology and premises as its business grew in relation to the country’s economy. Since then its performance is showing a rising trend in Bangladesh as well as all over the globe. The change in strategy, performance and growth, adapted by Standard Chartered is clearly evident in the following comparison between its performances in 1995 to that in 2004.

Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

All the foreign banks combined hold 9% in deposits as compared to 29% by private commercial banks and 62% by nationalized commercial banks. The comparative performance (holding market share) of Standard Chartered in terms of deposit and advance are presented separately in the following figures:

Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

Figure: 03

Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

Figure: 05

(Source: Scheduled Bank Statistics, Bangladesh Bank)

From the above figure we see that of the 9% held by foreign banks in total deposits, SCB alone commands 60% of the deposits. In terms of advances made, Standard Chartered Bank holds the leading position among the foreign banks with a market share of approximately 46%.

Standard Chartered Bangladesh:  Performance analysis

Financial ratios are the indicators of the performance of an organization. To evaluate the performance of Standard Chartered Bangladesh in 2004 and 2003, some financial ratios are calculated and evaluated below:

Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

Table 01: Financial ratios of SCB

From the table 01 above we get three profitability ratios and a risk ratio. Except ROI (Return On Investment) all other three ratios are showing better performance of SCB than its preceding year. ROA (Return on Asset) which represents the earnings after tax over the bank’s asset and net profit margin are reflecting satisfactory performance of Standard Chartered Bank. ROI has decreased slightly in 2004 but is still showing very satisfactory performance of the bank. From advances/ deposits ratio, we see that risk of the bank has decreased than its previous year.

Activities of Standard Chartered Bank

Activities of Standard Chartered Bank includes the followings:

Corporate Banking Group

Standard Chartered Bank offers it local customer’s wide variety of financial services. All the accounts of corporate clients, which mainly comprise the top local and multinational companies operating in Bangladesh, are assigned to Relationship managers who maintain regular and close contact to cater top their needs.

The objective of this department is to maintain a thorough knowledge of the clients’ business and to develop positive relations with them. This is maintained through interactions to offer timely advice in a n increasingly competitive business environment. The expertise of the Institutional Banking and Treasury groups is also available whenever required. The unique Offshore Banking Unit (OBU) in Savar provides a full range of facilities to overseas investors. The Corporate Banking Group in Bangladesh has displayed a spirit of community involvement by working with NGOs to underwrite soft loans. Standard Chartered offers its corporate customers a wide variety of lending needs that are catered with skilled and responsive attention. They provide project finance and investment consultancy, syndicated loans, bonds and guarantees and local and international treasury products.

Trade finance

The trade finance of standard Chartered bank takes care of the commercial activity related issues, particularly those related to import and export finance services. Some of the services are:

  • Trade finance facilities including counseling, confirming export L/C and issuing of import L/Cs, backed by its international branch and correspondent loan network.
  • Bond and Guarantees
  • Project finance opportunities for import substitution and export oriented projects

Treasury

The foreign exchange and money market operation of the Standard Chartered Bank in the world is extensive. Exotic currencies happen to be one of its special areas of strength. A 24-hr service is provided to customers in Bangladesh through the Bank’s network of dealing centers placed in the principal areas of the world. The Bank’s treasury specializes in offering solutions to those who wish to manage  interest rate and currency exposure s that result from trade, investment and financing activities of other dynamic economies of the region.

Institutional Banking Group

The IBG of Standard Chartered Bank offers a wide variety of products and services to banks and financial institutions. It has global links with leading bank institutions and agency arrangements through its network of offices in 40 countries. The Bank offers a full range of clearing, payment collection and import-export handling services. The bank offers foreign missions, voluntary organizations, consultants, airlines, shipping lines and their personnel, the following services: Current accounts in both Taka and other major foreign currencies and Convertible Taka accounts.

Consumer Banking

Superior retail banking services comprising of a wide range of deposit and loan products are offered by Standard Chartered Bank to its individual customers. The consumer banking division constantly faces

challenges and meets them by developing new products and services to fulfill the specific requirements of local TU. The Bank offers a 24-hour service in Bangladesh through its Money-link ATM Network and Phone-link Phone banking Services.

Custodial services: The Equitor

Headquartered in Singapore, Standard Chartered equitor fulfils the groups’ strategic commitment to the provision of custodial service in Asia. The equitor’s customers are primarily foreign global custodians and broker/dealers requiring cross-border information as well as sub-custodian services. Standard Chartered Bank, Bangladesh is responsible for the planning in Bangladesh, but the overall management of the custody business is based in Equitor’s international business strategy.

Support services

Operations

Operations are the part of the support division that helps to run the businesses of the bank in a smooth and controlled manner.  Since it helps mainly in processing the works of the business units, any mistakes made can be easily detected and on time.  Following are the main functions of the operations department:

Central operations deals with the closing and opening of accounts and other payment and account related processing of the Personal Banking division. Treasury operations help to deal with the processing works of the treasury division. Loan Administration Unit (LAU) deals with the processing of the Corporate Banking division.

Finance, Administration and Risk Management

The support department performs the following activities:

±  Administration, audit and back office operation

±  Taking care of taxation and financial control of the Bank

±  Keeping track of overall credit operation

Information Technology Center

This department is instrumental in the running of all the computerized operations of the bank.  They help in the implementation and generation of computerized reports.  Another duty of the department is to maintain communication with the rest of the world.

Human Resource Department

This department manages recruitment, training and career progression plan.  Standard Chartered Bank highlights the importance of developing its people to create a culture of customer service, innovation, teamwork and professional excellence.

Legal and compliance

In the UK, Standard Chartered Bank is regulated by the Bank of England, while in Bangladesh local banking laws regulate it and rules set by the Ministry of Finance and Bangladesh Bank. The local restriction involves a licensee from Bangladesh Bank to operate banking business in Bangladesh.  Standard Chartered Bank complies by the rules and regulations seriously.  It also encourages its staff to conform to an internal culture of ethical behavior and sensitivities to the culture and religion of the country.  There is a mandatory training on Company Code of Conduct for all staff members.

Some of the key areas that the Legal & Compliance department has to take care of are: any kind of legal issues, to advise the CEO regarding all matters and the management on legal and regulatory issues, correspond regulatory compliance issues to MESA Regional Head of Compliance, and supervise internal control (e.g. internal audit).

 External Affairs

This department deals with advertising, public relations, promotions, partial marketing which involves disseminating new products and services to customers and above all ensuring service quality.

Credit

The credit department approves the loans of Corporate Banking division.  The approval is mainly based on the risk analysis of the corporate clients done by the Corporate Banking division.

SWOT Analysis of Standard Chartered Bank

The SWOT analysis comprises of the organization’s internal strength and weaknesses and external opportunities and threats. SWOT analysis gives an organization an insight of what they can do in future and how they can compete with their existing competitors.

 Strengths:

  • For more than 55 years in Bangladesh, SCB is known to bear the Banking Experience that provides it the strength of being the market leader in the foreign banking sector. Unlike any other multinational bank in Bangladesh, the long-term success of SCB is attributed to this strength of SCB whereas the long-term success of a bank heavily depends on its reputation while dealing with very sensitive commodity like money.
  • The first bank in Bangladesh to issue Money link (ATM) card is SCB. By grabbing the opportunity that exists in the market SCB, as the market leader, showed the most substantial corporate strength among the foreign banks.
  •  SCB has a bulk of qualified, experienced and dedicated human resources.
  •  SCB is the only one among the foreign banks that has been able to utilize its extensive marketing efforts in order to capture a wide customer base at a very short time.
  •  SCB’s dedication is supreme in providing the best phone banking services in town. It is also keen to provide unmatched and instant 24 hour banking service and has recently opened the Call Centre at Lotus Kamal Tower in Nikunjo, Dhaka.
  •  In order to exude innovativeness and creativeness, SCB tries its best to come up with customers’ banking problems and solve them. Another recent step taken by them is starting the Evening Banking service, which will be open from 6 pm to 8 pm in the evening. The customer, who has to keep his transactions stopped for 18 hours until the next banking hour arrives, will be benefited, as this will reduce the lag and hassle associated with it.

Weaknesses:

  •  Banks, who are offering better prospects, now enjoys customers switching to them as SCB offers low deposit rates and has set the minimum balances too high. Furthermore, long waiting cues, moderate customer service, non-functioning ATM machines and outrageously high charges lead to SCB being noted for these weaknesses as well. As a result, a large amount of customers have ceased transactions with the bank. Many customers’ accounts have become overdrawn due to fees that have been charged by the bank’s computer system for as long as three years because they have either simply not cared to close their accounts, or thought that they have been closed automatically.
  •  The banking industry is now experiencing the contractual employment fever that has started up and SCB has also fallen prey to it. Self-interest of the employees are actually hindering their performance because SCB is employing individuals from other agencies and giving them tough targets to reach and thereby not giving them the full benefits of a permanent employee. For example, many accounts are opened by Direct Sales Executives by luring customers with loans, which they ultimately do not receive, and also opening accounts for customers who can hardly maintain the account and do not even pay the minimum opening amount. Even though SCB is getting benefited in the short run, the implications are long run losses.
  •  During the last 10 years the banking industry has become considerably monopolistic and hence SCB is starting to lose its market share to its rivals due to low barriers to entry, and the local banks’ increasing aggressiveness
  •  SCB is also facing problem in its system of collection and disbursement of cash. Many customers do not bear the proper knowledge as to the process of depositing and withdrawing money. The bank does not take many steps to assist them either. The system of withdrawal and deposit may be new and different from the system the customers have come across at local bank. Many of
  •  these customers or people they send to the bank on their behalf, are not educated and hence they face difficulty in the system of deposit or withdrawal. For instance, since the system of deposit is not that vivid, customer often drop the counterfoil of the deposit slip with the main copy into the slip box. Consequently, in many such cases it happened that a smart clerk picked up both the papers and took the money. Then there were no documents left for the bank or the customer to prove that he/she deposited the money.
  • Because the way SCB makes charges to accounts cannot be properly explained, many customers believe and complain about the unethical banking of SCB.
  •  While dealing with its customers- especially in Consumer Banking, SCB emphasizes more on short-term profits than focusing on the maintenance of a long-term healthy relationship with them. This suffering of SCB from myopia- i.e. shortsightedness leads it to pursue strategies in such a myopic manner, and so in the long run, it may undergo severe losses. Another weakness of the bank that can be sighted as well is Poor coordination and communication between the head office and branches. As the head office undertakes many projects, the activities are hampered due to some activities of the branches. Even after the head office’s carefully thought out action plan for a project, they still face problems in executing because the branches are not well aware of such a project and therefore, their actions do not comply with what is required for the ultimate success of the project.

Opportunities:

  •  Standard Chartered Bank was approved of the permission to start Islamic Banking from The Government of Bangladesh. The bank now has a whole new prospect opening up and also the opportunity to introduce a wide array of Islamic Banking products. It also has the prospect of expanding its customer base. The country’s growing population is gradually and increasingly learning to adapt to and use the banking service. As the bulk of our population is middle class, and Muslim, different types of Islamic Banking products will have a very large and easily pregnable market.
  •  SCB has rigorous credit screening policy and it is over conservative. By freeing their credit screening policy a little, they may be able to pursue many opportunist business ventures. SCB also has a good consumer base that maintains several accounts at once. SCB has the opportunity to keep these customers by reducing its current fees and charges and positioning attractively in middle class segment.
  • More Branches around Dhaka specially and all over Bangladesh will enable SCB to capture more market share, and hold a stronger competition against local banks.
  •  By offering more attractive interest rates, and lowering the minimum balances eligible for interest, the bank can attract a lot of the old customers who have strewn away to other banks as well as new customers.

Threats:

  • Increased competition by other foreign banks is a threat to SCB. At present HSBC and CITI Corp are posing significant threats to SCB regarding retail and business banking respectively. Furthermore, the new comers in private sector such as Prime Bank, Dutch Bangla Bank, EXIM Bank, BRAC Bank, Southeast Bank, Mercantile Bank, Social Investment Bank, Islami Bank and Bank Asia are also coming up with very competitive products. With customers shifting to these banks, SCB’s profits, as well as market share is falling, and it faces the threat of being wiped out by competition.
  • In today’s economy, substantial amount of savings is remaining idle. Currently foreign direct investment in the country is very low. These economic situations of the country indicate political threats.

 PART- THREE

 Islamic Banking in Standard Chartered Bangladesh -ins & outs

Introduction

The Islamic financial services industry, comprising Islamic banking, Islamic insurance (takaful) and the Islamic capital market, is an area that has grown to become an increasingly substantial segment within the global financial market and has gained considerable interest as a viable and efficient alternative model of financial intermediation. Growing awareness of demand for investing in accordance with Shariah principles on a global scale have been the catalyst towards making the Islamic services industry s flourishing industry. This is also a reflection of the increasing wealth and capacity of investors, both Muslim and non-Muslim, to seek and invest in new investment products that serve their needs.

Islamic banks today represent the majority of Islamic financial institutions, which are spread worldwide. The emergence of Islamic banking was a result of a revival of interest to develop an Islamic economic system as well as the increasing demand from Muslims worldwide for products and modes of investment that are in compliance with Shariah principles. The pioneering establishment of Islamic banks had been the catalyst for growth and provided the foundation for the development of the Islamic financial services industry as a whole.

Islamic Banking: Characteristics

Islamic banks are characterized by the following features:

  • Transactions those are free from the payment and receipt of a fixed or predetermined rate of interest.
  • Transactions those are based on profit and loss sharing (PLS) arrangements where the rate of return is not fixed prior to the undertaking of the transactions.
  • Business activities and investments those are undertaken on the basis of permissible activities.
  • Transactions those are free from elements of unreasonable uncertainty.
  • Payments of Zakat (alms or taxes) by the Bank.
  • Transactions that operate through shariah-compliant modes of financing.
  • Establishment of shariah supervisory boards. These boards are responsible for reviewing, scrutinizing and endorsing the activities and operations of Islamic banks to ensure that their activities are in line with Shariah principles.

Overview of the evolution of Islamic banking

Islamic finance has a long history and, in fact some of the concepts and instruments commonly used today such as mudharabah and musharaka can be traced back to pre Islamic days. After the establishment of Islam in the Middle East, Islamic principles were applied to trade financing practices then and were further formalized and institutionalized. Most of the early formal structures were developed in relation to state-based financing to aid and support business activities.

The increasing European influence during the period of colonialism resulted in the adoption of European-style financial institutions and products by most of the Islamic countries. However, by the 1960s, Islamic countries began to re-examine their financial services industry and establish financial system compatible with shariah principles. This eventually laid the ground for modern Islamic banking.

The creation of modern Islamic financial institutions began with the establishment of Islamic banks. Its rapid growth was, to a large extent, aided by a period of prosperity for the Arab world, which benefited from rising oil prices. The huge amounts of wealth in the region provided a source of substantial liquidity for the nascent Islamic banks. As a result of its early head-start, Islamic banking is today the most developed component in the Islamic financial system and Islamic banks represents the bulk of Islamic financial institution worldwide.

Early experimentation with Islamic banking took the form of a savings bank that operated on a profit sharing basis in the Egyptian town of Mit Ghamr in 1963. This bank functioned more as a saving institution rather than as a commercial bank. The first recognized interest-free commercial bank was Nasser Social Bank. It was established in Cairo in 1971 with the objective of developing a social security system in Egypt.

The next milestone was the founding of the Islamic Development Bank (IDB) in 1975 under the auspices of the Organization of the Islamic Conference (OIC). The main functions of the IDB was to provide assistance- in the form of equity capital and loans for Shariah-compliant projects-for the economic development and social progress of member countries as well as to promote Islamic banking worldwide.

The establishment of IDB was a catalyst for the establishment of Islamic banks in other Muslim countries. The Dubai Islamic bank was incorporated immediately after the establishment of IDB in 1975. Various approaches were used towards establishing an Islamic banking system by different countries. Some countries such as Iran and Sudan converted their entire financial systems to become an interest-free system. By contrast, in majority of countries, the Islamic banking system developed in parallel with the conventional banking system. Malaysia, Egypt and Saudi Arabia have dedicated Islamic banks, as well as conventional banks that offer banking services based on shariah principles. The Islamic units of conventional banks are commonly known as “Islamic windows”. These Islamic units are required to maintain separate current/ clearing accounts for their Islamic banking operations and, in some jurisdiction; they are required to appoint Shariah advisers to advice on the day-to-day operation of Islamic windows.

The strong growth of Islamic financing continues to be driven by increasing demand; not only by those who invest in such instruments in order to meet their religious obligations, but also by others, including non-Muslims, who find some of the risk-return features attractive, or investors who subscribe to ethical investment philosophies. Islamic finance is becoming a prominent segment of the global financial market with the most active global financial centers for Islamic financial activities located in London and New York. Many of the global financial players such as Citigroup, HSBC and Standard Chartered, among others, have recognized the potential market demand for these products and have built their capacity and capabilities to originate, distribute and make markets in Islamic financial products.

Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

Figure 06: Geographical spread of countries that offer Islamic Banking Products

Islamic Banking industry all over the world

(At a glance)

Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

Table: 02

Source:  Report of the Islamic Capital Market Task Force Of the

International Organization of Securities Commissions,

July 2004

Islamic Banking

In Standard Chartered Bank Bangladesh

In recent days Islamic banking has emerged a prominent and potential segment of the global financial banking industry. As a moderate Muslim country, Bangladesh has become a potential market for Islamic banking. For this reason, most of the conventional banks of the country are launching Islamic banking services in their product line. Standard Chartered, the leading multinational bank of the world, has also utilized this opportunity. With the objective to grow market share and to cater the Islamic minded customers’ shariah based Islamic banking was launched at Standard Chartered Bangladesh in December 2004.

Islamic Banking Products of Standard Chartered Bangladesh

Currently SCB is offering three Islamic banking products comprising two financing facilities and one deposit product.

Financing facilities are

(a)                Islamic personal finance

(b)               Islamic auto finance

The single deposit product is

(a)                Islamic current account

Islamic personal finance (IPF)

Islamic personal finance is a clean financing facility offered to individuals for some given purposes and is to be repaid by equated monthly installments. The formal launch of Islamic Personal Finance took place in December 2004. In the first year of operation of Islamic Banking Centre, IPF became its core area of business.

Areas of financing

  • Purchase of miscellaneous household appliances
  • Purchase of personal computers
  • Purchase of refrigerator
  • Purchase of audio-video equipment
  • Purchase of furniture
  • Hospitalization or other emergency medical needs
  • House renovation
  • Purchase of office equipment / accessories
  • Office renovation
  • Marriages in family
  • Advance rent payment
  • Overseas trips
  • Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study
  • urabaha financing facilityStandard chartered provides Islamic Personal Finance under Murabaha financing facility.Murabaha facility: MeaningIt is one of the most widely used instruments for short-term financing based on the traditional notion of purchase finance. In this sale, the buyer (client) knows the price at which the seller obtains the object to be financed, agrees to pay a premium over the initial price. It is an agreement that refers to the sale and purchase transaction for the financing of an asset or project, whereby the cost and profit margin (mark-up) are made known and agreed to by all parties involved.
  • As practiced in the market for Murabahah arrangements, the financier undertakes to buy the asset required by the client for resale to the client at a higher price as agreed upon by both parties and this can be settled in cash or in installments as specified in the agreement.To Standard Chartered –Murabaha facility means the financing facility provided herein through the purchase of the asset by the bank from the seller at the cost price and the subsequent sale of the asset by the bank to the customer for the sale price, with payment on the payment dates.
  1. Purchase of the asset by the bank shall only be subject to the condition that customer has duly filled up the application form with accurate information and there being no material adverse event or situation occurring prior to the disbursement of the cost price to the seller and subject to the creation of the security and completion of all security formalities prescribed by the bank as stipulated in clauses below, including the completion/ execution of the following documents:
    • A letter of hypothecation of asset in favor of the bank evidencing or creating first priority charge over the asset.
    • Power of attorney in favor of the bank.
    • Irrevocable standing instructions and/ or post dated cheques.
    • Such other documents as the bank may require from time to time.
  2. In the event that any of the above are not received by the bank within 45 days of the date of payment of the cost price, the request for a Murabaha facility shall be deemed to have lapsed, unless otherwise stated by the bank in writing, and the customer shall be liable for all expense borne by the bank in relation to the same and the agree to indemnify the bank against all loss cost and damages.

Customer’s representation and warranties

The customer hereby represents and warrants as follows:

  • Promptly pay all monthly installments of the sale price on the payment dates until the entire sale price has been paid including any charges and other expenses payable under the agreement.
  • That information provided to the bank by the customer in the application and other documents are accurate and the customer has fully understood the terms and conditions mentioned in the application form and agree that the said terms and conditions are part of this Murabahah agreement.
  • That there are no material legal or administrative proceedings pending or threatened against the customer; and
  • Immediately advise the bank of any change in the customer’s address.
  • The sums owing from the customer to the bank shall be such as may be certified by a duly authorized officer of the bank and the customer agrees to accept the same as conclusive.
  • The customer will pay all taxes, duties, penalties, expenses or charges in respect of the Sale Price, insurance payments or in respect of the Murabahaha facility granted under this agreement or arising from the sale of the asset. In case the bank pays such an amount the customer will pay the same to the bank within 3 days of demand or in case of failure to do so the bank is authorized to debit any account of the customer with the bank at its discretion( without being obliged to do so ).
  • The customer will not create any charge,
  • Lien or encumbrance whatsoever over the asset except in favor of the bank without express written consent of the bank

Delivery of asset Upon signing this agreement the customer shall irrevocably undertake to provide the bank with the following documents:

Murabaha agreement
The asset financing agreement containing the terms and conditions of asset financing on Murabahah basis made by and between Standard Chartered Bank and the customer. This agreement will serve as the basis for settlement of future disputes between the Bank and the customer.
The terms and conditions of Murabaha agreement
Conditions precedent:
Subject to the terms and conditions contained into the agreement, the bank shall purchase the asset from the seller on the basis of immediate delivery and upon immediate payment terms. Subsequently, the Bank shall sell the asset to the customer at the sale price and otherwise in accordance with the terms of the agreement and in the event that any asset warranty has been issued in respect of the asset the bank shall transfer such asset warranty to the customer.

    • The registration certificate of the asset indicating (1) the customer as owner of the asset and (2) the interest of the bank in the asset pursuant to the letter of hypothecation.
    • Acknowledge of asset receipt signed by the customer; and
    • If required by the bank, a comprehensive original insurance policy in relation to the asset, specified herein below showing the bank’s interest as first loss payee and beneficiary of all proceeds of the policy.

    The customer further undertakes after the purchase of the asset from the bank the following:

    • To keep the asset in sound and usable condition and repair and in full working order and to advise the bank within seven days of any accident resulting in the total loss of the asset;
    • To keep the ownership of the asset in the customer’s name and not to transfer ( or attempt to transfer) the ownership of the asset or any of the customer’s right in respect of the asset without the written approval of the bank; and
    • Not to take the asset outside the geographical limits of Bangladesh without the written consent of the bank.

    Upon fulfillment of the conditions, the customer shall take delivery of the asset and shall be entitled to utilize the asset in any manner the customer wishes, provided that such utilization is lawful and proper and not contrary to the terms of the agreement. In the event that the customer does not fulfill the conditions, the bank will not be obliged to fulfill its obligations under the agreement.The asset will be the sole responsibility of the customer as from the moment the customer takes delivery of the same from the bank.

    The customer may not sell the asset or transfer the ownership of the same before payment to the bank in full of the sale price and all charges and costs payable by the customer under the agreement.


     Additional security

    • Give irrevocable standing instructions authorizing the bank to deduct from the account(s) of the customer the Sale price and in case of the death of the customer to deduct the entire sale price and any other amount payable to the bank in terms of this agreement ( irrevocable standing instruction), and or:
    • At the request of the bank, the customer shall issue post dated cheques in favor of the Bank for the amounts corresponding to the sale price drawn in favor of the bank (post dated cheques). The bank may encash the post dated cheques at any time on or after the date specified on the relevant post dated Cheques with respect to the payment of the installments of sale price or any other amount due under this agreement.
    • The customer hereby irrevocably authorizes the bank to debit any of the customer’s accounts withheld with the bank or any other financial institution within the Standard Chartered Group all amounts owing under this agreement, provided that the customer shall remain liable to the bank until all of the customer’s obligation under the agreement have been fully discharged.

    Prepayment

    • In the case of a prepayment the bank may (at its absolute discretion) choose to give a rebate on the Murabahaha price in accordance with the bank’s financing policies in force at the relevant date.
    • The customer is allowed to make prepayment of the full sale price to the bank only after six months of the Murabahaha facility.

    Bank not liable for asset’s condition

    • The customer accepts that the asset is sold by the bank to the customer on “as is” basis and accordingly hereby waives any and all rights the customer might otherwise have under any applicable law to claim against the bank in respect of any apparent or latent defects in the asset [or on any other grounds whatsoever] in relation to the asset or its purchase in accordance with the terms of the agreement.
    • The customer acknowledges that the Bank is not the manufacturer of supplier of the asset and that the Asset has been selected by the Customer independently and without any reliance on the judgment of the Bank. The Bank shall not be deemed to give any warranty or representation whatsoever (including, without limitation, conditions, warranties or representations as to the description, suitability, merchantability, fitness for purpose, value, condition, design or operation of any kind or nature of the asset) whether arising by implication, by law or statute or otherwise and without prejudice to the generality of the foregoing any such warranty or representation is hereby expressly excluded.
    • The Bank shall, to the extent possible upon the sale of the Asset to the Customer be deemed to assign to the customer all rights in relation thereto or otherwise arising out to the purchase of the asset by the bank, which have vested in the bank. The bank shall have no liability to the customer whatsoever in the event that any warranties or contractual rights relating to the asset are not fully and effectually transferred from the bank to the purchaser.
    • The bank will not be liable under law or otherwise in respect of the asset purchased on behalf of the customer or sold under and in terms of this agreement, with regard to condition, existence, quality, defects in title, subsisting encumbrances, delivery or non-delivery, value or otherwise fitness for use of the asset and the bank will be relying on the representation of the customer / seller as to the same.
    • It is hereby specifically agreed that the bank shall have no obligation of any kind with respect to warehousing, servicing, of maintains the asset. The bank disclaims any liability for the condition, fitness, or quality of the asset and makes no warranty express of implied, with respect to such asset or the title thereto the customer hereby agrees to hold the bank harmless against all losses, expenses, damages, claims, suits, or other liabilities of any kind whatsoever arising from of in connection with the Asset or this agreement or sale of asset to the customer or obtaining repossession of the Asset or the documents relation to the asset including but not limited to any stamp withholding or other tax to be paid in connection herewith or with respect to the state price of the asset.

    Default:

    The bank may declare all amounts outstanding hereunder, or outstanding in connection herewith, as immediately due and payable by the customer if any of the following events occurs:

    • The customer fails to perform or observe any of the terms of this agreement; or
    • The customer fails to make payment of the outstanding on demand of the bank; or
    • The representation and warranties made by the customer becomes untrue; or
    • The customer fails to make payments of any sums due to the bank under the agreement on payment date after the bank has sent a notice to the customer stating that the customer is in default; or
    • The customer becomes a defaulter either as a borrower or surety under any other agreement either with the bank or any subsidiary, affiliate, associate or other company, bank or financial institution belonging to the Standard Chartered Group on any account whatsoever or with any other financial institution or bank in Bangladesh.
    • The customer provides incomplete or materially inaccurate or misleading information in connection with the agreement.
    • If the police or any authority of the Government seize the asset for any reason whatsoever; or
    • If the customer transfers or attempts to transfer the asset to any person without written consent of the bank; or
    • Any proceeding for bankruptcy, liquidation and/ or attachment is instituted against the customer; or
    • Any person and/or government authority attaches or attempts or threatens to attach the asset in implementation of a court order issued against the customer or in an attempt to recover debts from the customer; or
    • If the customer is imprisoned, dies and/or becomes unable, in the opinion of the bank, to perform the customer’s obligations under this agreement.

    Remedies

    In the event of the occurrence of an event of default;

    • The customer shall deliver the asset in sound condition and in full working order to the Bank at the address specified in the agreement  or to such other place, as the bank shall notify to the customer, provided, however, that if no such delivery takes place, the bank shall in any event be entitled to take possession of the asset wherever  located;
    • The customer shall pay to the bank in full all sums outstanding under the agreement; and
    • The Bank shall have the absolute right to repossess and sell the asset and set off the sale proceeds against all sums due from customer under the agreement.

    Waiver

    The obligations of the customer here under shall not be affected by any act, omission or circumstance which might operate to release the customer from the customer’s obligations hereunder or affect such obligations in any way, and in particular the customer obligations shall not be affected by:

    • Any time or indulgence granted or composition made with any other person; or
    • The variation, extension, compromise or renewal of, or release from any term or condition of the agreement; or
    • The refusal or failure to perfect or enforce any term of the agreement or any rights or remedies against the customer or any other person.

    Assignment

    • The customer may not assign or transfer all or part of its obligations under the agreement without the bank’s prior consent.
    • The bank may at any time assign or transfer all or any of its rights, benefits and obligations under the agreement. The bank agrees that any assignment of its rights, benefits and obligations will be conducted in accordance with guidelines established by the bank and approval by Shariah Supervisory Committee of the Bank.

    Indemnity

    Without prejudice to any other rights and remedies which the Bank may posses, the customer will be liable for and will indemnify the bank against any and all of the following events that may occur after the customer’s purchase of the asset from the bank:

    • Any loss or damage to the asset.
    • All loss, damage or expense incurred or sustained by the Bank in the repossession of the asset, including but not limited to administrative fees and/ or storage costs and any other legal costs incurred by the bank in the enforcement of the terms of the agreement.
    • All costs and expenses incurred or sustained by the bank in the repossession of the asset, including but not limited to administrative fees (in relation to returned cheques or otherwise) and/ or storage costs and any other legal costs incurred by the bank in the enforcement of the terms of the agreement.
    • In any legal action or proceedings between the bank and the customer arising out of or in connection with this agreement, no party shall claim or plead any entitlement to interest on any judgment debt except and compensation for delayed payments that may be payable under the law relating to the recovery of finances by the Bank.

    Islamic Auto Finance (IAF)

    The Standard chartered Islamic auto finance offers a flexible and affordable auto finance facility with easy repayment options and freedom to choose repayment period-from 1 to 5 years depending on vehicle type. Customers can have a maximum finance amount of 75% of the car value with a maximum finance of BDT 4000000. There is no requirement to provide personal guarantee or cash security to qualify for Islamic auto finance.

    Criteria for applying Islamic Auto Finance:

     

  •  A Bangladeshi citizen.
    • Between 23 to 60 years of age.
    • A salaried or self-employed person earning a minimum of BDT 25000 per month.
    • Maintaining a savings or current account with standard chartered Bank for at least six months or with another bank in Bangladesh for at least a year.
    • A resident of Dhaka, Chittagong or Sylhet.
    • Islamic Banking in Standard Chartered Bank Bangladesh – a comprehensive study

    Musharaka Financing Facility

    At standard chartered Islamic Auto Finance is provided under diminishing Musharaka financing mode.

    Diminishing Musharaka: Meaning

    Diminishing Musharaka is a newly developed financial contract under which both the financial institution and the client share the ownership of the financed asset. The periodic payment of the client contains two parts; a rental payment for the part of the property owned by the Islamic financial institution and a buy-out part of that ownership. Over time, the portion of the asset owned by the client increases, until he owns the entire asset and the contract is eventually terminated.

    Diminishing Musharaka Agreement

    This agreement sets out the term and conditions upon and subject to which the bank has agreed to participate in the property on the basis of a diminishing musharaka financing arrangement with the customer.

    Terms and conditions of the agreement

    Registrations and Title of the property

    • The property shall be registered jointly in the name of the customer and the Bank under the laws pertaining to registration of such properties. The customer however acknowledges that title, beneficial ownership and right of property in and to the property shall at all times remain vested in the bank and the customer in proportion to their respective shares in the participation amount. The customer covenants and agrees not to do or perform any act prejudicial thereto, and without limiting the generality of the foregoing, not to do any act to encumber, convert, pledge, sell, assign, rehire, underlet, sub-lease, lend, abandon, give-up possession, damage or destroy the property.
    • Payment of all taxes incidental to transfer and registration of title, if applicable, shall be the sole responsibility of the customer.

    The payment of any costs, expenses, taxes or other moneys with regard to the property by the customer shall not affect the respective shares of the parties in the property.

    Use of the property

    • At the request of the customer, the Bank hereby agrees to allow the customer to exclusively use the property for his/her own and his /her family’s transportation subject to the conditions of the agreement.
    • The rental values of the property shall be distributed between the parties on a pro rata basis in accordance with their respective share in the participation amount which represents the respective party’s undivided share in the beneficial ownership of the property.

    Payments and accounts

    • The customer shall make monthly payments of such amounts and on such dates as may be advised by the bank from time to time.
    • All payments to be made by the customer under this agreement shall be made in full, without any set-off or counter claim whatsoever, on the due date and when the due date is not a business day, the next business day.
    • If, at any time, the customer is required to make any deduction or withholding in respect of taxes from any payment due to the bank under this agreement, such deduction or withholding will be the sole responsibility of the customer in respect of such payment. The customer shall ensure that the bank receives on due date, a net sum equal to the sum which it would have received had no such deduction or withholding been required to be made and the customer shall indemnify the bank against any losses or costs incurred by the bank by reason of any failure of the customer to make any such deduction or withholding. The customer shall promptly deliver to the bank original or copies of any receipts, certificates or other proof evidencing the amounts (if any) paid or payable in respect of any deduction or withholding.

    Security

    As security for the performance of the customer’s obligation hereunder, the customer shall:

    • Create a lien on all his / her title and interest in the property in favor of the bank.
    • Execute such further deeds and documents as may from time to time be requested by the bank for the purpose of more fully securing and or perfecting the security created or to be created in favor of the bank;
    • Create such other securities to secure the customer’s obligations under the Principal Documents as the bank may require the customer to finish from time to time.

    Fees and expenses

    • The customer shall pay to the bank within 15 days of a demand being made, all expenses (including legal and other ancillary expenses) incurred by the bank: (a) in connection with the negotiation, preparation and execution of the principal documents and of amendment or extension of or the granting of any waiver or consent under the principal documents; and (b) in contemplation of, or otherwise in connection with, the enforcement of, or preservation of any rights under the principal documents.

    Covenants for the use of the property

    The customer hereby agrees and undertakes that:

    • The customer shall at all times use and occupy the property carefully and prudently.
    • The property shall be used for the normal and usual purpose for a vehicle of the customer and his / her family, and , except with prior permission of the bank, for no other purpose whatsoever;
    • The customer shall comply with all relevant laws, rules, regulations, orders and direction, whether of the federal or any provincial government or of any municipal or local authority or of any court, tribunal or other competent authority or officer;
    • The customer shall not sell, transfer, assign or otherwise dispose of, or sub-lease, let for hire, give on license, or part with the possession of, or in any way mortgage, hypothecate, pledge, charge or otherwise encumber, the property.

    Maintenance of the property

    The customer agrees, at its own cost and expense, to be responsible for the performance of all maintenance and repair required by the property.

    • The customer and the Bank agree to assume responsibility for any maintenance (in the proportion of their respective shares in the participation amount held by the parties at that may be required to the property.
    • The customer also agrees to be responsible for and forthwith to pay all fees, taxes, fines or  penalties of any nature and by and to whosoever payable and relating to the ownership (to the extent of customer’s share in the beneficial ownership of the property), use and occupation of the property.

    Insurance, accidents, injuries and indemnification

    • The customer, on behalf of the bank, shall procure insurance coverage from reputable Islamic insurance companies offering protection under the Islamic concept of takaful. The property shall be comprehensively insured (with a reputable Islamic insurance company to the satisfaction of the Bank) against all insurable risk, which shall include, but not be limited to fire, theft, accidents, vandalism, riots and acts of terrorism. The insurance shall cover both the Bank’s interest in the property, the customer may its own cost procure insurance in the aforesaid manner to protect his / her own interest in the property.
    • The customer shall indemnify and save harmless the bank from and against any and all claims, losses, costs, damages, suits, expenses, including but not limited to attorney’s fees, which the bank may sustain or incur as a result of any accident or injury, whether fatal or otherwise suffered by, or any damage or loss occurring to any person or property and however resulting form or traceable or relatable to the occupation, or use of the property by the customer, and his/her employees or agents or to any failure on the part of the customer to observe and perform any of the obligations under this agreement.
    • The customer further indemnifies the bank against any loss or actual expenses which the bank shall certify as rightly incurred by as a consequence of: (a) any default in payment by the customer of any sum under this agreement, (b) the occurrence of any event of default, and (c) arising out of any misrepresentation or negligence of the customer.
    • All proceeds of insurance related to the property shall be deposited directly to the bank by the relevant insurance company. It shall at all times be the responsibility of the customer to ensure that any and all insurance proceeds are deposited directly to the bank. In case any insurance proceeds are paid to the customer, the customer shall hold the same in trust for the bank and shall deposit such insurance proceeds to the bank within seven calendar days of receiving the same from the insurance company.

     

    • In the event the proceeds of the insurance procured on behalf of the bank consist of payment arising out of the total loss of the property, such proceeds shall be utilized firstly towards payment of such installments and secondly the remaining amounts shall be applied by the bank in its direction towards any amounts payable by the customer to the bank.

    Default and termination

    (1)There shall be an event of default, if in the sole opinion of the bank:

    • Any representation or warranty made, or deemed to be made, or repeated by the customer in or pursuant to the principal documents, or in any document delivered pursuant to this agreement is found to be incorrect;
    • Any indebtedness of the customer;
    • The customer makes an assignment or arrangement for the benefit of its creditors;
    • The customer: (a) voluntarily or involuntarily becomes the subject of proceedings under the bankruptcy or insolvency law, or procedure for the relief of financially distressed debtors; (b) has been unable or has admitted in writing its inability to pay his/her debts as they mature to the bank or to any other party or the financial institution; or (c) had a receiver or administrator appointed for all or any part of its assets or business;
    • If the property is used in an unlawful or abusive manner;
    • If the insurance obtained by the customer in respect of the property is cancelled in whole or in part;
    • Any cost, charges and expenses under the principal documents shall remain unpaid for a period of seven days after notice of demand in regarding the same has been received by the customer from the bank.
    • If the property is attached or seized by any person by order of the court or any administrative order;
    • Customer’s failure to meet any of its obligations under this agreement; and
    • Any other event or circumstances arising out of customer’s negligence or default which may result in the customer’s failure to meet its obligations under this agreement.

    (2) Upon the occurrence of an event of default, the bank shall be entitled (but not obliged) to take over the property by giving a notice in writing to the customer (take over notice).

    (3) Upon receipt of a takeover notice, the customer shall hand over vacant and peaceful possession of the property to the bank; the customer shall continue to remain liable to pay the rent to the bank.

    Representations and warranties

    The customer hereby represents and confirms that:

    • The customer has not defaulted in respect of any payment obligation (whether relating to loan, finance or otherwise) or any other type of obligation owed to any bank or financial institution; and
    • The customer has not defaulted in payment of any taxes or other dues owed to the government or any local authority.

    Credit procedure of IPF and IAF

    The credit procedures embody the core processes and principles for processing, assessing, approving and managing the credit risks associated with the products. The credit procedure of IPF and IAF is described below:

    Account initiation

    Target market process

    Target market:

    Target market of Islamic Personal Finance has been divided into four distinct segments. Segment 3 and 4 are divided into six and two sub segments respectively. These are:

    Segment 01:

    Employees of listed multinationals and corporate bodies which have corporate and salary a/c relationship with SCB.

    Segment 02:

    Employees of Supra National i.e. UNICEF, ILO, FAO, WB etc.

    Segment 03:

    • Category 01: Employees of corporate bodies which have salary a/c with SCB by practice.
    • Category 02: employees of corporate bodies which have salary a/c with other bank.
    • Category 03: employees of corporate bodies which disburses salary in cash.
    • Category 04: Businessmen.
    • Category 05: self employed professionals like architects, Engineers, Chartered Accountants and Land Lords.
    • Category 06: Self employed doctors whose major income comes from private practice.

    Segment 04(Working women-Salaried Executives):

    • Category 01: Employees of corporate bodies which have salary a/c with SCB (if any customer meets segment 1 / 2 criteria she will be treated as Segment 1 / 2 customer; else the application will be treated as segment 04.)
    • Category 02: employees of corporate bodies whose salary transferred to other bank or who receives salary in cash.

    Marketing plan

    Marketing plan includes methodology for sourcing the customers and the promotional activities to be taken to promote the products.

    Methodology for sourcing the customer:

    Segment 01

    Corporate bodies are identified from a list of large local and multinational corporates. Direct Selling Executives (DSEs) set up appointments in these companies and visit the appropriate department from where a list of employees is obtained. Potential customers are tracked down from the obtained list of employees and they are contacted either through phone calls or when the DSE visits the organization.

    Segment 02

    Those customers are generally contacted only when any employee from such company informs that he/she is interested in loan. Since this is a low priced segment, the customers are not voluntarily marketed by DSE/ PFC/ STM/STM.

    Segment 03 and 04

    Customers in these segment are contacted the DSEs themselves. DSEs reach the customer by making cold calls, through references from existing customer or by random selection.

    Promotion

    Newspaper ads are given at different points in time. Considering cost and marketing requirements. Several outdoor and indoor visuals like bill board, posters, banners, brochures are installed for market awareness.

    Distribution Channel

    IPF and IAF are mainly sourced through following distribution channels:

    1. Direct sales
    2. Branch cross sell / walk in.
    3. Priority Banking

    Receipt and Custody of Application

    At distribution channel

    1. Direct Sales: DSEs receive applications from customer and submit to sales officer/ Assitt Manager/ Manager for security. After scrutinizing, they verify the signature, recommends the application, input the customer information in loan locator and forward the same to credit along with the loan locator ID. They also maintain a register of applications sent to credit unit. The register contains the name of the applicant, employer/ business concern, DSE name, application sent date and a control number.
    1. Branch cross sell / Walk In: PFC/STM receives the applications from customer and scrutinizes the application. After scrutinizing, PFC / STM recommend the application, input the customer information in loan locator and forward the same to CCU with a courier control sheet along with the loan locator ID.
    1. Priority Banking: Same as Branch. The only exception is applications are handled by PSO/ARM/CRM instead of PFCs/STMs.

    Authority:

    • DSEs are authorized to receive applications from customers.
    • PFCs/ Sales Officers/ Assitt Sales Manager/ Sales Managers/ Priority Service Officers/ Customer Relationship Managers are authorized to scrutinize and forward IPF as well as IAF after recommending / supporting at their end.

    At credit

    Applications are received by a credit support staff (CSS) through loan locator with date and time stamped in application from who maintain an spreadsheet that contains name of the applicant, loan amount, a/c no ( if SCB customer), profession, employer/ name of business concern, received from, received date and application status. After performing necessary input in spreadsheet CSS perform bank statement calculation i.e. average balance and credit turnover for businessmen & self-employed professionals and later applications are distributed among credit analysis. Who then assess the applications to arrive at an approval/ decline decision? After scrutiny if Credit Appraiser satisfy himself with application meeting PPG criteria, a Credit Checklist & Basel II Data Checklist (as per Appendix III) are prepared and hand over the application to CSS for performing verification wherever necessary. CSS later prepare a list of applications along with their detailed information containing name of the applicant, residence address and phone no, residential status, mobile phone no, guarantee details including guarantee amount and hand over to Verification Agency (VA). After performing verification, AV provide a report for each application. If verification report is positive Credit Analyst (CA), Senior Credit Analyst (SCA), Credit Manager (CM) or Country Credit Manager (CCM) approve the loan as per their authority level. All approved application must go through de-duplication and negative checks.

    After approval and keeping necessary update in spreadsheet, CSS sends the approved documents to “Asset Operations along with the approval list. Approval decisions are notified to the soured through fax or E-mail.

    At asset operations

    Documentation, QC & MIS:

    • Upon receipt of approved documents from credit, support staff of loan operations acknowledge through loan locator, put acknowledgement on the control sheet.
    • Officer documentation, QC & MIS verify credit approver’s signature, checks all documents, credit condition(s) and other condition(s) if any.
    • If the documents are in order and credit/ other conditions are met, officer issues limit loading instruction (LLI) and Security Compliance Certificate (SSC) for loan disbursement.

    Loan Admin:

    • After receiving the LLI and SCC, Loan admin verifies the signatures and then hand over the LLI and SSC to processor.
    • Approver verify LLI and approve the loan and past due account in the system
    • Processor then

    -amend risk grading classification in the master level

    -amend individual relationship

    -set the prescribe profit rate

    -set standing instruction in between finance (loan) and customer   -account.

    -set the limit with the expiry date in finance (loan) account.

    -prepare vouchers by debiting the finance account and crediting to customer account. And also debiting customer account to realize the processing fees (1% of the limit or BDT 1000

    which ever is higher + 15% VAT) and stamp charges and crediting to the respective P & L and Stamp account and posts in the system.

    Security Management

    Acceptable types of security

    IPF is an unsecured product and, hence, no security is taken from customers. However, for customer falling into segment 3 except for category 6 and segment 1 & 2, a third party guarantee is taken as a secondary recourse to the borrower.

    For IAF there is no requirement to provide personal guarantee or cash security as well.

    Procedures of early settlement of IPF and IAF

    1. at distribution channel:
    • PFC/STM/PSO/ARM/CRM receives application from the customer, inform him/her the amount required to settle the loan (outstanding + accrued interest + early settlement fee)
    • They verify the signature of the customer and send the application to asset operations.
    1. at asset OPS:
    • Retrieve the files along with PDC & UDC. If sufficient fund is available, prepare the closing instruction and send to loan admin.
    • At loan admin processor take necessary steps to settle the facilities.

    Collection and remedial Management

    The collection process for Islamic Personal Finance and Islamic Auto Finance starts when the customer fails to meet one or more contractual payment. It therefore becomes the duty of the collection department to minimize the outstanding delinquent receivable and credit losses.

    Objective of collections is to build a cost effective collections process which is risk aware, pro-active and information based. Its purpose is to assist business growth and maximize profitability while maintaining balance between risks and reward over the life-cycle the products.

    Collection unit’s responsibility will commence from the time an account becomes delinquent until it is regularized by means of payment or closed with full payment amount collected.

    When any customer fails to pay his/ her contractual monthly payments of islamic personal finance or monthly rent payments of Islamic auto finance, collection people identify the delinquent accounts and take their steps to recover the amount outstanding by making phone calls, sending legal notices etc.

    Islamic Current Account

    People’s greatest assets are their principles. Keeping it in mind, Standard Chartered has introduced Islamic Current Account in Bangladesh in December 2005. Now customers can enjoy convenient, fast moving transactions with the assurance of knowing that their account is Islamic shariah-compliant.

    Islamic Current Account: Key features

    • Funds deposited in an Islamic current account are used only in a Shariah-compliant manner, as per the established guidelines of standard Chartered’s shariah supervisory committee.
    • There are no interest related charges on Islamic current account.
    • Minimum account opening balance is BDT 50000.
    • The standard chartered Islamic current account is all about flexibility and convenience. Depositors can make withdrawals and deposits without any restrictions.
    • The account can be operated from any of 25 branches of SCB located in the different parts of Bangladesh.
    • Depositors in Islamic current account enjoy all the modern banking facilities like other conventional account holders in SCB.
    • There are no ledger fees and monthly minimum balance fees in Islamic current account.

 PART FOUR

Islamic Banking Division of

Standard Chartered Bank:

Performance analysis

Islamic Banking Division of SCB: SWOT Analysis

 SWOT analysis of Islamic banking centre is done below to get an insight of the internal strength and weaknesses and external opportunities and threats of Islamic banking centre of SCB.

 Strengths:

q  The main strength of Islamic Banking Center of Standard Chartered is the renown of Standard Chartered Bank in the banking industry. Potential customers are well known about SCB and its services. That is why market is almost ready for the Islamic Banking unit of the bank and market processing cost is very nominal.

q  Islamic Banking unit of SCB can easily attract those customers who want to get a combined service of Islamic banking and modern banking.

q  Islamic Banking unit of SCB is using the same infrastructures that are used for conventional banking. For example, Islamic personal finance or Islamic auto finances are sold at all the branches of the Bank all over Bangladesh. So Islamic banking unit can easily operate their business without establishing separate branches. Thus the unit is minimizing its cost.

q  The unit is utilizing the efficient and dedicated Direct Selling Executives of Standard Chartered for selling its products. This minimizes operating cost of the unit as well as ensures prompt sale of its products.

q  Standard chartered has a twelve years experience in Islamic banking globally. Islamic Banking unit of SCB is directly supervised from Dubai and a strong Shariah Supervisory Committee.

Weaknesses:

q  Islamic banking unit of standard chartered is offering only one deposit product and two finance products. That is why there is little opportunity for borrowers and investors to do banking with Islamic banking window of SCB.

q  Advertisement and campaign are vital factors for promotion of any products. Though SCB does huge promotional campaign for its different products, but it does very little for its Islamic banking products.

q  Being a conventional bank, Standard Chartered has introduced Islamic banking as a new line of business. It is always a tough job for a conventional bank to attract customers for Islamic banking. Some people may not like to do so with a conventional bank.

q  Islamic banking unit of SCB has its main office at Gulshan and no other particular branch at Bangladesh. It operates its banking works through the conventional branches of SCB. But the conventional branches give little emphasis on islamic banking.

q  Islamic banking centre of SCB has little workforce to conduct its banking activities. The centre is been conducted by only three personnel.

Opportunities:

q  Islamic banking centre of SCB has started its journey before one year. The bank now has a big opportunity to introduce a wide array of Islamic Banking products. It also has the prospect of expanding its customer base. The country’s growing population is gradually and increasingly learning to adapt to and use the banking service. As the bulk of our population is middle class, and Muslim, different types of Islamic Banking products will have a very large and easily pregnable market.

q  With its present infrastructures and market renown, Standard Chartered can promote its islamic banking products with ease and within a very short period of time.

Threats:

q  Standard Chartered is facing severe competition from its rival banks in the industry. Various local and foreign banks have started Islamic banking in line with conventional banking. Recently

q  HSBC has started islamic banking service called Amanah. These are threatening islamic banking unit of SCB.

q  Presence of usual Islamic banks like Islamic Bank Bangladesh Ltd, Al Arafah Islamic Bank etc threatens the Islamic banking windows of conventional banks like SCB.

  4.2 Feasibility analysis

Is it feasible for SCB to run Islamic banking?

Islamic banking is a very potential and fast growing banking sector in Bangladesh. Standard Chartered launched Islamic banking globally before 12 yeas to grasp a new market segment. In Bangladesh, it started its journey in December 2004. Was it a feasible decision? The answer can be found by analyzing the last year’s performance of Islamic Banking Division of SCB as well as its potential future performance.

In 2005, Islamic banking division of SCB has earned an amount of BDT 108214279 by investing in Islamic personal finance and Islamic Auto Finance. In terms of profitability the figure is a very handsome one. The division has an immense opportunity to accelerate its profitability for the following reasons:

Islamic banking division of SCB can easily attract the customers by providing modern banking facilities along with Islamic banking products.

  • Islamic banking division of SCB can use the already established infrastructures of SCB and thus minimize its operating expenses.
  • Standard Chartered can use its global experience in Islamic banking in Bangladesh and can make it a profitable venture.
  • By adding new products in Islamic banking product line, SCB can grip a greater portion of Islamic banking market in Bangladesh.

Introducing effective promotional campaign SCB can attract people to its Islamic banking products.

  • If SCB could use the competitive advantages that it has over its local competitors, it can grasp a greater market share.
  • Standard chartered has only 25 branches all over the country which are not good enough to serve the huge people in the country. By increasing the number of branches and establishing separate islamic banking branches, greater no of people can be brought under islamic banking services.

From the above discussion, it is evident that Islamic banking division of Standard Chartered Bangladesh could be a very important segment of its business in Bangladesh.

In 2005, it has shown a good performance and is expected to generate superior performance in future. So, it was right decision of Standard Chartered Bangladesh to start Islamic banking and is very feasible to drive the banking services.

PART- FIVE

 Findings and Conclusion

Findings and Conclusion

The Islamic financial services industry is an area that has grown to become an increasingly substantial segment within the global financial market and has gained considerable interest as a viable and efficient alternative model of financial intermediation. Islamic banks today represent the majority of Islamic financial institutions, which are spread worldwide. Islamic banking is a fast flourishing segment of modern banking industry worldwide. As the second largest Muslim country, Bangladesh is a highly potential market to flourish Islamic banking industry.

Keeping this in mind, Standard Chartered Bank Bangladesh has introduced shariah based Islamic banking services in December, 2004 with the objective to grow market share and to cater the Islamic minded customers.

Islamic banking is a very potential and fast growing banking sector in Bangladesh. Standard Chartered launched Islamic banking globally before 12 yeas to grasp a new market segment. In Bangladesh, it started its journey in December 2004. Islamic banking division of SCB can use the already established infrastructures of SCB and thus minimize its operating expenses. Standard Chartered can use its global experience in Islamic banking in Bangladesh and can make it a profitable venture. By adding new products in Islamic banking product line, SCB can grip a greater portion of Islamic banking market in Bangladesh. Introducing effective promotional campaign SCB can attract people to its Islamic banking products. If SCB could use the competitive advantages that it has over its local competitors, it can grasp a greater market share. Standard chartered has only 25 branches all over the country which are not good enough to serve the huge people in the country. By increasing the number of branches and establishing separate Islamic banking branches, greater no of people can be brought under Islamic banking services. From the above discussion, it is evident that Islamic banking division of Standard Chartered Bangladesh could be a very important segment of its business in Bangladesh.

Utilizing Standard Chartered’s 12 years of global experience in Islamic banking and the ready infrastructure in Bangladesh, it can be expected that Islamic Banking Division of SCB will grip a greater portion of Islamic banking market in Bangladesh in near future.

 

 

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