Term Paper on What is investment and debt/trade financing modes followed by Islamic Banks in Bangladesh. Do they conform to shariah rules. If so, how and if not, why not.
Give your own conclusion/concluding remarks / recommendation.

Course code: Fin-5502

Subject: Submission of Term Paper

Dear Sir,

I am very much delighted that I am submitting herewith my term paper titled “what is investment and debt/trade financing modes followed by Islamic Banks in Bangladesh. Do they conform to shariah rules. If so, how and if not, why not ” under the reference of my term paper for partial fulfillment of MBA Program on the Comparative Banking.

As of the requirement, I have closely studied the topic and tried my best to make this paper meaningful. I believe and hope that you will find this report informative and insightful.

Your valued assessment of my assignment would help me in the enhancement of my skill, knowledge and efficiency. Any further clarification, if needed, regarding the paper will be instantly responded.

Regards.

___________________
Saima Sultana

Acknowledgement

In preparing this report, I am beholden to the most venerable teacher Mr.x, Faculty, Department of Business Administration, IIUC for his guidance and supervision for furnishing this term paper.

I am very much pleased on him for his continuous encourage to undertake the term paper, to collect, analyze data and finally editing, presentation of the findings in this particular work.

I also appreciate the kind co-operation of the officers and executives of Islami Bank Bangladesh Ltd., Station Road Branch, Chittagong for providing Manuals, annual report and other secondary source of information.

Finally, I am very much appreciative to Almighty Allah.

CHAPTER- 1

Introduction:

Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia), principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). In the late 20th century, a number of Islamic banks were created, to cater to this particular banking market.

An Islamic bank is a financial institution that operates with the objective to implement and materialize the economic and financial principles of Islam in the banking arena.
The Organization of Islamic conference (OIC) defines an Islamic bank as “a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations.”
According to Islamic Banking Act 1983 of Malaysia, Islamic bank is a “company which carries on Islamic banking business means banking business whose aims and operations do not involve any element which is not approved by the religion Islam.”

Objectives: 1 To Know about the investment modes of islamic banks of Bangladesh.
2 To analyze whether the islamic banks comply shariah in making investment/financing.
3 To draw the recommendation on problem & prospect of investment comlying shariah.

Limitations:

o It is very difficult to analyze this issue without proper knowledge about Islamic banking and economy. o As it is not conventional so it bears some complexity to understand. o Some words are in Arabic terms that make it difficult. o Although we are the people of Muslim country, many of our people are not sufficient knowledge in regards of Interest and profit. o There is no specific law in our central Bank for Islamic Banking .

CHAPTER- 2

INVESTMENT

The special feature of the Investment policy of the bank is to invest on the basis of profit-loss sharing system in accordance with the tenets and principles of Islamic Shariah. Earning of profit is not the only motive and objective of the Bank’s investment policy rather emphasis is given in attaining social goal and objective in creating employment opportunities.

Specially, Islami Bank Bangladesh Limited is firmly committed to implement and materialize the economic and financial principles of Islam in the banking arena and to establish justice in the trade, commerce, and industry and build socio-economic infrastructure, create opportunities for employment and income generation and property alleviation, contribute to the socio-economic enlistment and sustained economic growth of the country by providing different types investment facilities.

Investment Modes

1. BAI MODE: 1.1: BAI MURABAHA

Definition:
Bai-Mudarabaha may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods (permissible under Islamic Shariah and the Law of the land), to the buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump-sum or by installments. The profit marked-up may be fixed in lump-sum or in percentage of the cost price of the goods.
Types of Murabaha:
In respect of dealing parties Bai-Murabaha may be of two types.
1. Ordinary Bai-Murabaha
If there are only two parties, the seller and the buyer, where the seller as an ordinary trader purchases the goods from the market without depending on any order and promise to buy the same from him and sells those to a buyer for cost plus profit, then the sale is called Ordinary Bai-Murabaha.
2. Bai-Murabaha on Order and Promise
If there are three parties, the buyer, the seller and the Bank as an intermediary trader between the buyer and the seller, where the Bank upon receipt order from the buyer with specification and a prior outstanding promise to buy the goods from the Bank, purchases the ordered goods and sells those to the ordering buyer at a cost plus agreed profit, the sale is called “Bai-Murabaha on Order or Promise”, generally known as Murabaha.
This Murabaha upon order and promise is generally used by the Islami Banks, which undertake the purchase of commodities according to the specification requested by the Clients and sale on Bai-Murabaha to the one who ordered for the goods and promised to buy those for its cost price plus a marked-up profit agreed upon previously by the two parties, the Bank and the Clients

Important feature:
1 It is permissible for the Client to offer an order to purchase by the Bank agriculture goods deciding its specification and committing himself to buy the same from the Bank on Murabaha, i.e. cost plus agreed upon profit.
2 It is permissible to make the promise binding upon the Client to purchase from the Bank, that is, he is to either satisfy the promise or to indemnify the damages a caused by breaking the promise without excuse.
3 It is permissible to take cash/collateral security to guarantee the implementation of the promise or to indemnify the damages.
4 It is also permissible to document the debt resulting from Bai-Murabaha by a Guarantor, or a mortgage, or both lie any other debt. mortgage /Guarantee /Cash Security may be obtained prior to the signing of the Agreement or at the time of signing the Agreement.
5 Stock and availability of goods is a basic condition for signing a Bai-Murabaha Agreement. Therefore, the bank must purchase the goods as per specification of the Client to acquire ownership of the same before signing the Bai-Murabaha agreement with the Client.
6 After purchase of goods the Bank must bear the risk of goods until those are actually sold and delivered to the Client buyer, the Bank shall bear the consequences of any damages or defects, unless there is an agreement with the Client releasing the Bank of the defects, that means, if the goods are damaged, Bank is liable, if the goods are defective, (a defect that is not included in the release) the Bank bears the responsibility.
7 The bank must deliver the specified to the Client on specified date and at specified place of delivery as per Contract.
8 The Bank shall sell the goods at a higher price (Cost + Profit) to earn profit. The cost of goods sold and profit mark-up therewith shall separately and clearly be mentioned in the Bai-Murabaha Agreement. The profit mark-up may be mentioned in lump sum or in percentage of the purchase/cost price of the goods. But, under no circumstances, the percentage of the profit shall have any relation with time or expressed in relation with time, such as month, per annum etc.
9 The price once fixed as per agreement and deferred cannot be further increased.
10 It is permissible for the Bank to authorize any third party to buy and receive the goods on Bank’s behalf. The authorized must be in a separate contract.

Categorization:
1. Bai-Murabaha Commercial:
Investment for Purchase and sale goods to Individual /Firm/Company for Commercial purpose shall be termed as Bai-Murabaha Commercial.
2. Bai-Murabaha Industrial:
Investment to industrial undertakings in the Form of Land, Buildings, Machineries, Equipments, Raw Materials, etc. shall be termed as Bai-Murabaha Industrial.
3. Bai-Murabaha Agriculture:
Investment to agriculture sector for supply of seeds, fertilizer etc. shall be termed as Bai-Murabaha Agriculture.
4. Bai-Murabaha Import:
Investment for Import of goods from abroad shall be termed as Bai-Murabaha Import.

1.2: Bai  Muajjal:
Definition:
Bai-Muajjal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods (permissible under Islamic Shariah and the Law of the Country), to the buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump-sum or by installments. The seller may also sell the goods purchased by him as per order and specification of the Buyer.
Important Features:
i. Bank is not bound to declare cost of goods and profit mark-up separately to the client. ii. Sport delivery of the item and payment is deferred. iii. Ownership and possession of the goods is transferred by the Bank to the client before receipt of sale price. iv. Client may offer an order to purchase by the Bank any specified goods and committing himself to buy the same from the Bank on Bai-Muajjal Mode.
v. It is permissible to make the promise binding upon the client to purchase from the Bank. That is he is to either satisfy the promise or to indemnify the damage caused by breaking the promise. vi. Cash/Collateral Security should be obtained to guarantee the implementation of the promise or to indemnify the damages. vii. Mortgagee/Guarantee/Cash Security may be obtained before /at the time of signing the agreement. viii. Stock and availability of goods is a pre-condition for Bai-Muajjal agreement. The responsibility of the bank is to purchase the desired goods at the disposal of the client to acquire ownership of the same before signing the bai-Muajjal Agreement with the client. ix. The Bank after purchase of goods must bear the risk of goods until those are actually delivered place of delivery as per contract.
x. The bank must deliver the specified goods to the client on specified date and at specified place of delivery as per contract. xi. The Bank may sell the goods at one agreed price which will include both the cost price and the profit. xii. The price once fixed as per agreement and deferred can not be further increased.
1.3: Bai Salam:
Under this mode Bank will executive purchase contract with the client and make payment against purchase of product, which is under process of production. Bai-Salam contract will be executed after making any investment showing price, quality, quantity, time, place and mode of delivery. The profit to be negotiated. It this mode the payment as the price of the goods is made at the time of Agreement and the delivery of the goods is deferred.
Important feature:
Bai-Salam is a mode of investment allowed by Islamic Shariah in which commodity(ies)/product(S) can be sod without having the said commodity (ies) /product(s) either in existence or physical /constructive possession of the seller. If the commodity(ies)/product(S) are ready for sale, Bai- Salam is not allowed in Shariah. Then the sale may be done either ill Bai-Murabaha or Bai-Muajjall mode of investment .
• Generally, industrial and agricultural products are purchased/sold in advance under Bai-Salam mode of investment to infuse finance so that product is not hankered due to shortage fund/cash.
• It is permissible to obtain collateral security from the seller client to secure the investment from any hazards viz non-supply/partial supply of commodity(ies)/product(S), supply of low quality commodity(ies) /product(S).
• It is also permissible to obtain Mortgage and /or Personal Guarantee from a third party as security before the signing of the Agreement or at the time to signing the Agreement.
• Bai-Salam on a particular commodity(ies)/product(S) or on a product of a particular field or firm cannot be effected (for Agricultural Product(s)only).
• The seller (manufacturer) client may be made agent of the Bank to sell the goods delivered to the Bank by him provided a separate agency agreement is executed between the Bank and the Client (Agent).
1.4: Isteshna'a:
Isteshna'a is a contract between a manufacturer/seller and a buyer under which the manufacturer/seller sells specific product(s) after having manufactured, permissible under Islamic Shariah and Law of the Country after haying manufactured at an agreed price payable in advance or by installments within a fixed period or on/within a fixed future date on the basis of the order placed by the buyer.
Important feature :
• Istisna’a is an exceptional mode of investment allowed by Islamic Shariah in which product(s) can be sold without having the same in existence. In the product(s) are ready for sale. Istisna'a is not allowed is Shariaf. Then the sale may be done either in Bai-Murabaha or Bai-Maajjal mode of investment. in this mode, deliveries of goods are deferred and payment of price may also be deferred.
• It facilitates the manufacturer sometimes to get the price of the goods in advance, which he may use as capital for producing the goods.
• It gives the buyer opportunity to pay the price in some future dales or by installments.
• It is a binding contract and no party or is allowed to cancel the Istisna'a contract after the piece is paid and received in full or in part or the manufacturer starts the work.
• Istina'a is specially practiced in manufacturing and industrial sectors, However, it can be practiced in agricultural and constructions sectors also.

2. Leasing Mode (Ijara Mechanism)

2.1: Hire Purchase /Ijarah:
The term Ijarah has been derived from the Arabic works Ajr and Ujrat which means consideration, return, wages or rent. This is really the exchange value or consideration, return, wages, rent of service of an Asset. Ijarah has been defined as a contract between two parties, the Hiree and Hirer where the Hirer enjoys or reaps a specific service on benefit gainst a specified consideration or rent from the asset owned by the Hiree. It is a hire agreement under which a certain asset is hired out by the Hiree to a Hirer against fixed rent or rentals for a specified period.
Hire Purchase Under Shirkatul Melk:
Hire purchase under shirkatul Melk is a special type of contract which has been developed through practice. Actually, It is a synthesis of three contracts : Shirkat, Izara and sale. Shirkat means partnership. sharikatul Melk means share an ownership. when two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul contract.
Stages of Hire Purchase Under Shirkatul Melk
Thus Hire Purchase under Shirkatul Melk Agreement has got three stages :
• Purchase under joint ownership.
• Hire and
• Sale and /or transfer of ownership to the other partner Hirer.
Important Feature :
• In case of Hire Purchase under Shirkatul Melk transaction the asset / property involved is jointly purchased by the Hire (Bank) and the Hirer (Client) with specified equity participation under a Shirkatul Melk Contract in which the amount of equity and share in ownership of the asset of each partner (Hire Bank & Hirer Client) are clearly mentioned. Under this agreement, the Hire and the Hirer become co-owner of the asset under transaction in proportion to their respective equity participation.
• In Hire Purchase under Shirkatul Melk Agreement, the exact ownership of both the Hire (Bank) and Hirer (Client) must be recognised- However, if the partners agree and wish that the asset purchased may be registered in the name of anyone of them or in the name of any third party, clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement. However, in IBBL, no third party registration shall be allowed.

• The share / part of purchased asset owned by the Hire (Bank) is put at disposal /possession of the Hirer (Client) keeping the ownership with him (Bank) for a fixed period under a hire agreement in which the amount of rent per unit of tirne and the benefit for which rent to be paid along with all other agreed upon stipulations are also to be clearly stated. Under this agreement, the Hirer (Client) becomes the owner of the benefit of the asset but not of the asset itself, in accordance with the specific provisions of the contract which entitles the Hire (Bank) is entitled for the rentals.
• As the ownership of hired portion of the asset lies with the Hire (Bank) and rent is paid by the Hirer (Client) against the specific benefit, the rent is not considered as price or part of price of the asset.
• In the Hire Purchase under Shirkatul Melk Agreement the Hire (Bank) does not sell or the Hirer (Client) does not purchase the asset but the Hire (Bank) promise to sell asset to the Hirer (Client) part by part only, if the Hirer (Client) pays the cost price / equity / agreed price as fixed for the asset as per stipulations within agreed upon period on which the Hirer also gives undertakings.
• The promise to transfer legal by the Hire undertakings given by the Hirer to purchase ownership of the hired asset upon payment part by part as per stipulations are effected only when it is actually done by a separate sale contract.
• As soon as any part of Hire's (Bank's) ownership of the asset is transferred to the Hirer (Client) that becomes the property of the Hirer and hire contract for that share / part and entitlement for rent thereof lapses.
• In Hire Purchase under Shirkatul Melk Agreement, the Shirkatul Melk contract is effected from the day the equity of both parties deposited and the asset is purchased and continue upto the day on which the full title of Hire (Bank) is transferred to the Hirer (Client).
• The hire contract becomes effective from the day on which the Hire transfer the possession of the hired asset in good order and usable condition to the Hirer, so that the Hirer may make the agreement.
• Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the Hire to the Hirer. It is sold and transferred part by part, it will become effective part by part and with the sale and transfer of ownership of every share / part. The hire contract for that share / part will lapse and the rent will be reduced proportionately. At the end of the hire period when the full title of the asset will be sold out and transferred to the Hirer (Client), the Hirer will become the owner of both the benefit and the asset consequently the hire contract will fully end.
• Hire Purchase under Shirkatul Melk is a binding contract for the parties to it- the Bank and the Client who are committed to fulfill meet their undertakings I obligations in accordance with the relevant agreement.
• Under this agreement the Bank acts as a partner, as a Hire and at last as a seller ;on the other hand the Client acts as a partner, as a Hirer and lastly as a purchaser.
• Ownership risk is borne by both the Hire and Hirer in proportion to their retained ownership equity.
• Under this agreement the role of Hirer is one that of a trustee, the hired asset being a trust property in his hands: he will manage, maintain the asset in favour of the interest of the Hire at his own cost as the exact subject of hirer except in cases of any accident due to any event entirely beyond control of the hirer and natural calamity/disaster (acts of Allah) to be determined by the Bank after proper investigation within the knowledge of the hirer.
• The Hirer is responsible for keeping the hired asset(s) in good condition throughout the whole period of hire and if the asset is damaged 01- destroyed due to mismanagement, corruption, negligence, transgressions, default, etc. of the Hirer, he shall be responsible to compensate the Hire (Bank) for that. Of course, such mismanagement, corruption, negligence, transgressions, default, etc. of the hirer shall be management, corruption, negligence, transgressions, default, etc. of the hirer shall be determined by the Hire (Bank) after proper investigation within the knowledge of the hirer.
• The Hirer cannot, without obtaining prior written permission of the Hire (Bank) make any changes in the exact item of the hire, and / or remove it from its place of installation and transfer it to another location.
• In a Hire Purchase under Shirkatul Melk agreement any stipulation may be made, provided it is not against the nature and requirements of the contract itself, nor does it violate the /this may be the last one devine laws of Islam and is also acceptable to both the parties.
• Hire Purchase under S'nirkalul Melk facilities may be for medium-term or long-term period which may be utilised for the expansion of production and services, as well as housing activities. The duration of Hire Purchase under Shirkatul Melk contract shall not exceed the useful life of the subject / asset of the transaction. The Bank should not normally enter a Hire Purchase under Shirkatul Melk transaction for items with useful life of less than two years.
• Hire Purchase under Shirkatul Melk transaction facilitates the Client (Hirer) to get benefit from the hired asset in exchange of rental and also to become full owner of the asset by purchasing it part by part.

• If, for any reason, the hire contract is revoked prior to the transfer of full title of the asset to the Hirer, then the title of the asset will be shared by both Hire and Hirer the Hirer will share that part of title which has been transferred to him against payment and the Hire will share the remaining part.
• The Hirer to secure the Bank (the Hire) will pledge / hypothecate / mortgage his portion / part / share in the asset (acquired / to be acquired) and or any other asset / property of his own / third party guarantor to the Bank to fulfil his all liabilities /commitments including the accrued rental, if any.

Categorization:
Categorize the proposal as under :
1. Hire Purchase under Shirkatul Melk Commercial
Investment on Hire Purchase under Shirkatul Melk mode to individual /Firm /Company /Society for Commercial purposes shall be termed as Hire Purchase under Shirkatul Melk Commercial.
2. Hire Purchase under Shirkatul Melk Industrial
Hire Purchase under Shirkatul Melk investment to industrial undertakings in the Form of Land, Buildings, Machineries, Equipments, Transport, etc. shall be termed as Hire Purchase under Shirkatul Melk Industrial.
3. Hire Purchase under Shirkatul Melk Agriculture
Hire purchase under Shirkatul Melk Investment to agriculture sector in the form of Agricultural Equipment, Machineries Shallow Tube-Well, Deep Tube-Well, Tractor, Trailers, Transport etc. shall be termed as Hire Purchase under Shirkatul Melk Agriculture.
4. Hire Purchase under Shirkatul Melk Transport
Hire Purchase under Shirkatul Melk investment in the form of Transport -Bus, Truckm Car, Taxi, Launch, Steamer, Cargo Vessel, Air Transport etc, shall be termed as Hire Purchase under Shtrkatu! Melk Transport.
5. Hire Purchase under Shirkatul Melk Real Estate
Hire Purchase under Shirkatul Melk investment in the form of Land, Building, Market, Apartments, for use/rental shall be termed as Hire Purchase under Shirkatul Melk Real Estate.
6. Hire Purchase under Shirkatul Melk Real Estate
Hire Purchase under Shirkatul Melk investment in the form of asset for use/rental under any scheme all be termed as Hire Purchase under Shirkatul Melk cheme.

3. Share Mechanism:
3.1: MUDARABAH:
It is a form of partnership where one party provides the funds while the other provides the expertise and management. The first party is called the Sahib-Al-Maal and the latter is referred to as the Mudarib. Any profit accrued are shared between the two parties on a pre-agreed basis, while capital loss is exclusively borne by the partner providing the capital.

Importer features :
• Bank supplies capital as Sahib-Al-Mall and the client invest if in the business with his experience.
• Administration and management is maintained by the client.
• Profit is divided as per management.
• Bank bears the actual loss alone.
• Client can not take another investment for that specific business without the permission of the Bank (Class, Notes, Hussain, Abul).

3.8.2. MUSHARAKA:
An Islamic financial technique that adopts “equity sharing” as a means of financing projects. Thus, it embraces different types of profit and loss sharing partnership. The partners (entrepreneurs, bankers) etc.) share both capital and management of a project so that profits will be distributed among them as per rations, where loss is shared according to ratios of their equity participation. Important feature:
• The investment client will normally run and manage the business.
• The Bank shall take part in the policy and decision making as well as overseeing (supervision and monitoring) the operations of the business of the client. The Bank may appoint suitable person(s) to run the manage the business and to maintain books of accounts of the business property.
• As the investment client shall manage the enterprise, the Bank may pay more share of profit to him than that of his proportionate capital contribution.
• Loss, if any, sha/r be shared on the basis of capital ratio (Class Notes, Abul Hussain).
Categorization:
Categorize the proposal as under :
• Bai-Musharaka Commercial
• Bai-Musharaka Industrial

Special Investment Schemes:
1. Household Durable Scheme:
This is a very popular investment scheme of the branch. Under this scheme the branch give investment to people of middle and lower middle class specially service holders with limited income find it difficult to purchase articles like refrigerator, television, almirah, wardrobe, sofa-set, pressure cooker, sewing machine etc. which are part of modern and decent living.
2. Small & Medium Enterprise (SME) Investment Scheme:
To inspire and encourage unemployed youths to establish small business enterprises and thereby to create opportunities for self-employment for ensuring social justice and welfare of the people in large scale, the bank introduce this scheme. There are many young & energetic people in Chittagong city mainly in Khatungonj area who can not do business effectively due to shortage of capital. Under the Small Business Investment Scheme, bank provide fund to those people so that they can run their business smoothly.
3. Housing Investment Scheme:
One of the basic human needs is to have a house to live in. A house in an abode of peace and happiness. Housing has now become an acute problem in the country, specially in the towns, cities and metropolis. With their limited income, it has become almost impossible on the part of the lower middle class, middle class and sometimes, even for upper middle class to solve their housing problem. To meet this basic human need, Islami Bank Bangladesh Limited is committed to contribute to this end to provide a peaceful and happy life. This scheme is also popular in Khatungonj Branch.

4. Real Estate Investment Program:
Professionals, Service-holders, Businessmen, Real Estate Developer and other categories of people who are not entitled for availing investment facilities under Housing Investment Scheme, shall be eligible under this program Investment is to be extended to build new houses and for extension/ completion of the house already constructed, commercial building, shopping complex, flat apartment etc.

5. Transport Investment Program:
Under this scheme, investment in being allowed to the existing successful businessmen and potential entrepreneurs in this sector for all types of road and water transport with simple and easy terms and conditions. The bank is also extending investment facilities to multinational companies, established, business houses and well to do officials and professionals for acquisition of private cars, microbus and jeeps.

6. Car Investment Scheme:
Car is considered as an essential mode of transport in the modern society, particularly by a section of the officials, business houses and business executives and established professionals for movement in discharging their duties and responsibilities punctually and efficiently. Many of these categories of people can not purchase a car on payment of entire purchase value at a time out of their own sources. To meet this need Islami Bank has introduced the ‘Car Investment Scheme’ for the mid and high ranking officials of government and semi-government organizations, corporations; executives and directors of big business houses and companies arid also for persons of different professional groups on easy payment terms and conditions.

9. Micro Industries Investment Scheme:
Under this scheme, the branch financed to establish micro industries like Salt industries etc.

There are two other modes of Investment:

1.Quard:
The word "Quard" is an Arabic word which means loan or credit on advance. The literal meaning of Quard is giving "Fungible goods" for use without any extra value retiring those goods. It must follow the principle of equal for equal return with homogeneous goods. Fungible goods may be rice, oil, salt, money etc. In Banking sector, money is used as quard. Quard is Halal by Islam for not to pay any extra or interest in return.

2. Quard-E-Hasana:
Quard-E-Hasana is also one kind of Quard which is given with the expectation of return or not.

CHAPTER- 3

3.1: Major Areas & Nature of Shari’ah Violations in investment

The major Shari’ah violations are appended below: 3.1.1: Investment port-folio:

i. Cash Facility provided to the client. ii. Old investment liability adjusted by creating new investment A/C. iii. Cash memo obtained in the name of the client. iv. Cash Memos are not available.
v. Back dated/Post dated cash Memo obtained. vi. Amount of disbursement not agreed with the amount of Cash memo. vii. Goods are received by the client instead of the Branch from the buyers directly. viii. No records found as proof for receiving the goods by the Branch. ix. The Client not the bank is shown as the applicant of PO/DD.
x. Appointment of Buying Agent in Bank's unapproved item/No Authorization/No post purchase inspection report by the Branch. xi. Letter of Authority not taken in case of MPI/ Dealership. xii. Agreement form is kept blank and undated.

3.1.3: Irregularities Related to Cash Memo:
1. Branches do not preserve cash-memo of the goods purchased.
2. Undated cash memos are taken.
3. Cash-memos are taken before investment.
4. Cash-memos are taken after investment.
5. Cash-memos in the name of customer, in lieu of bank, as a purchaser are taken.
6. Cash- memos do not have signature of the seller.
7. Bank officers sign in the cash-memo as sellers.
8. Amount of disbursement not agreed with the amount of cash memo

3.1.4: Irregularities Related to receiving of Goods Delivery:
1. Investment client receives goods in lieu of the bank officer
2. In some cases, there are no evidences of goods received by the client from the branches.
3. In some cases, there are no evidences of goods received by the branch from the sellers.
4. Investment is made in goods which are not permitted by Shari’ah.

3.1.5: Irregularities Related to Agreement:
1. The signature of the client is being taken in blank Agreement Form(s)
2. Agreement Form(s) are being preserved without date and witness.
3. Agreements do not contain the signature of the branch managers

3.1.6: Irregularities Related to profit Charged/Rent Collected:

1. Profit is charged before buying and selling
2. Profit is charged more than one time on the same buying and selling/deal.
3. Profit is charged at the adjustment stage covering profit for the excess time of investment recovery instead of charging with the cost price at the sale stage.
4. Profit is charged by creating Bai-Muajjal investment if there is any delay/non-receipt/less(Amount) receipt against the sale proceeds of export L/C.
5. Profit is charged on stock lot without buying and selling of the same.
6. In case of pre-shipment Musharaka financing, pre determined profit in lieu of actual profit earned is charged.
7. Rent for “gestation period’’ is charged before the asset becomes ready for income generation.
8. Rent on rent is charged.
9. In case of conversion of investment, the previous debt is considered bank’s equity. At the time of conversion of Bai-Muajjal and Bai- Murabaha Investment (previous investment) to Hire Purchase, rent is charged without establishing ownership of the bank on the asset.

3.1.7: Other Irregularities:
1. Negotiation did not held between the client and the branch to purchase goods.
2. The client makes advance payment for goods and branches make full payment of the goods on behalf of the client. Subsequently, the client gets back the advanced money from the seller.
3. Goods are purchased from the sister organization of the client
4. TT/DD/PO are issued in favour of the client who put signature on the application from TT/D/PO in lieu of the branch officers.
5. At the time of encashment of PO the client attest the signature of the seller in lieu if the branch officer.
6. To adjust the previous dues of the clients, new investment is created showing factious buying and selling.
7. Cash credit is provided to the client directly or indirectly.
8. Letter of authority is not taken from the client for selling the goods under dealership.
It can be observed from the above mentioned lapses and irregularities that most of the lapses are minor in nature in nature and could be avoided if the branch managers were a bit careful and alert.
These violations are responsible for determining the income doubtful. In this regard , a mutual discussion between the management and Shari’ah Council may be held to sort out and remove the wrong compliance of the shari’ah.

3.2: Causes of Shari’ah Violation in different transactions

We think that the following aspects are the main causes of Shari’ah violations:
1. Lack of taqwah (Allah fearing) and commitment among the officials and the Clients in some cases.
2. Lack of the sense of accountability before Allah (Swt).
3. Lack of Shariah knowledge regarding Islamic Banking and Finance.
4. Profit earning tendency by any means.
5. Shortage of purchase officer and purchase cell.
6. Lack of Dawah activities/Motivational works among the clients.
7. Reluctance in introducing the modes of investment where cash requirements of the clients can be met, like Mudarabah. Musharakah, Bai Salam and istisnah etc.
8. Complexity to perform purchase and sale of the goods by the bank.
9. Tendency of the clients to divert the Bank's investment for another purpose.
10. Abuse of Buying Agency.

3.2.1: Causes related to the Officials:
1. Lack of knowledge regarding Shariah principals:
Lack of knowledge regarding mode of Investment/Mode of Financing.
Lack of knowledge regarding buying, selling, possession, ownership etc.
2. Lack of Commitment /Takwa: Cash facilities is being provided by memo discounting. Abuse of Buying Agency.
Creation of new deal for adjustment of overdue account.
Signing in purchase schedule without receiving the goods practically. 3 Achievement of target by any means: Increases doubtful and Haram income. Increase overdue Less income, less dividend, less bonus.
4. Lack of accountability in hereafter. Faring of Allah to present before him in hereafter. Entering into Dozakh.
5. Lack of Shari’ah principles in practical life: Lack of Shari’ah principals in personal life, family life, social life, political life. Lack of fulfilling the demand of Iman.
6. Lack of sincerity in shari’ah compliance: GL Ok everyday. Apprisal of investment proposal is OK
Induction of client/documentation is OK.
Shari’ah compliance that is buying, selling is not OK.

3.2.2: Causes related to the client
1. Involvement in interest for long time. Historical background of Muslim Era.
2. Lack of Knowledge regarding Shari’ah principals: Practicing of conventional system like C.C, Pledge etc. Lack of knowledge regarding mode of investment/financing.
3. Lack of commitment/Takwa: Lack of commitment in personal , family, social and political life. Depositors are sincere for getting halal income.

3.3: Remedial measures to stop Shari’ah violations:

1. To create the sense of taqwah and commitment among the official and the clients.
2. To arrange on the job and off the job training programs for the concerned officials regarding Islamic Banking as a whole and Shari’ah compliance in particular.
3. Compliance of Shari’ah principles should be made the main target, not achieving the investment target.
4. At least one purchase officer is to be engaged in every branch to look after purchase and sale of the goods and to supervise, monitor the investment.
5. Introducing Mudarabah, Musharakah, Bai Salam, Istisnah mode of investment for meeting cash requirement of the client.
6. Diversion of fund for another purpose must be prevented through close supervision by the Bank.
7. Da‘wah and motivational activities are to be strengthened by arranging clients and officials get-together, under the supervision of the members of Shari’ah Council.
8. Buying Agency is to be practiced carefully as per Shari’ah norms.
9. Not to adjust overdue deals by creating a new deal under any circumstances.
10. To introduce inter Branch co-operation for purchasing the goods.

3.3.1: Related to the officials/Role of Officials:
 To acquire Islamic Banking and Shari’ah knowledge.
 Commitment/faith to be strengthen
 Achievement of target with due Shari’ah compliance
 Faring of Allah in here and here after.
 Adherence to the Islamic Shariah in personal, family, social and political life.
 Sincerity, devotion for Shari’ah compliance like GL, documentation etc.
 To involve in buying and selling process directly.
 To insist the good client for doing Mudarabah/Musharaka business with the bank.
 Induction of good Islamic clients with dawa activities.
 Writing in the news paper highlighting Islamic banking and Shari’ah issues
 To remove misconception about Islamic banking through arranging seminer, symposium, workshop etc.
 To develop professionalism.
3.3.2: Related to the client:
1 To help the client for acquiring knowledgfe
2 To help them acquiring knowledge regarding Shari’ah modes, banking and economy, interest/profit, loan/investment , halal/haram etc.
3 To make them islamically so that they become asset, not liability.
4 To introduce Mudarabah/Musharaka, Bai-salam, Istisna modes of investment with due care to meet up cash requirment of the client.
5 To build up relationship with the client and suppliers.

3.3.3: Related to the Management:
1 Providing Logistic support, Manpower
2 Creation of purcahse cell, purchase center
3 To arrange inter branch co-operation.
4 Introduction of cash related modes of investment like Musharaka, Mudaraba and Bai Salam etc.
5 Giving policies for unsolved matter like IBP, FBP/no stock Bai -Murabaha Wes Bills etc.
6 Providing facilities to the officials.
7 To strengthen Shari’ah Council
8 Emphasis on Shari’ah issues like other banking operations.
9 To introduce reward/punishment for Shari’ah compliance. non compliance.
10 Simplification of documentation
11 Shari’ah compliance by the management
12 Shari’ah issues to be reviewed in the various committees of the bank.
13 To develop more Islamic financial institutions like IDB
14 To develop Islamic money market and Islamic instrument alternative to the hedging, arbitress, swapping, forward booking etc.
15 Islamic banking act to be passed.

3.4: Policy prescriptions for effective Shari’ah Compliance

This paper attempts to give some points/prescriptions to the management with a view t o formulate the policy interventions for more effective Shriah Compliance in the Bank; Therefore, in a nutshell the following prescriptions are given/suggested to curb Shari’ah violations and lapses in Banking operations in Islami Bank Bangladesh Limited :

Compliance of Shari’ah Inspection reports
Shariah Compliance of the Inspection reports which is now being done by the Audit and Inspection Division may be accomplished by shariah Council Secretariat for doing the above mentioned activities Shariah Council may need additional potential manpower for effective Shariah Compliance. Therefore it may immediately be assigned to Shariah Council Secretariat to make it justifiable.

Posting of Muraqib in big branches
At least one Muraqib in the rank of Principal Officer is to be posted to the big branches like Local Office, Nawabpur, Ramna, Foreign Exchange and Khutungonj branch to supervise the investment port folio of those branches from 1st to last.

Concurrent Audit
Concurrent Audit which was negated earlier by the council due to Shortage of manpower, now it may be considered/introduced at least in one of the big branches for comprehensive supervision.

Frequency of Shari’ah Inspection
Muraqibs may inspect the branch twice in a year again and again and increase the frequency of inspection. In the present system they go to the branchs and inspect a few cases of the Investment upto a particular date but afterward no inspection is conducted for the remaining period of the year in question. This system may lead the branch to be damcare or careless and reluctant in the compliance of Shariah for the remaining period of the year.

Shariah Audit of 5 big branches
At least 5 big branches should be inspected 100% at the end of the year. This may require additional muraqibs to be posted to Shari’ah Council for doing the same.
This is absolutely my personal views, not the views of Shariah Council and I would humbly request your honorable with apology not to give reference of my own.

Proper utilization of manpower
The Muraqibs may be instructed to see/inspect 100% investment under different modes of investment upto the date of inspection of the branch concerned particularly in commercial modes other than RDS and HDS in these cases (in RDS & HDS) only a representative Sample is sufficient for inspection. In this respect a clear and effective directions and control is to be ensured as to prepare the program of inspection including time to be taken for such inspection and area/volumes to be convened.

Continuous Motivation program for the clients
Continuous get-together of the selective investment clients at Branch level is to be arranged at least twice in a month with the participation of Member Secretary/Asstt. Member Secretary or a Muraqib. This step will help the client to be acquainted with Shariah. The present system of the get-together seminar etc. at the branch/Head office and Zone by the honorable Directors and chief executives will no doubt continue. This is even now inadequate to mobilize the clients.
Reshuffle of Model Branch
Selection of the Branch to get them model may be reshuffled. One or two 'A' Grade branches from other zone may be selected for the same.

Opening of whole sale shop
A big whole sale shop may be established each in Dhaka & Chittagong. Where all commercial and fast moving items will be available to enable the bank to purchase the desired goods from the shop for Baim, Murabaha & HDS clients of different branches as per their requisition.

Visit of the Branches by Member Secretary
To strengthen the visit of the branches by the Member Secretary, Shariah Council, frequency of visit be increased. this will bring a positive result with good impact on the Branch Officials.

Purchase officer in each Branch
One purchase officer from the existing manpower of the branch may be posted in each branch for exclusive purchase of the goods after completion of the formalities, he may be allowed to do other job of the Branch only after purchase of the goods along with other work in connection with the same. An office order may be issued by the branch in this respect.

Paper rectification
The branch may be prevented to refrain from preparing/rectifying the papers of buying & selling of the goods instead of doing the same at actual and real sense by arranging continuous program of motivation to the clients for the branch incumbent to be held at IBTRA, Zones, this is specially to acquaint them with the concept of Halal and Haram and the commitment with the Nation/Ummah as well as to the bad effects of interes

Reward :
Incentive at least one additional increment may be allowed to the managers each year for the best Shariah performance.
Adequate time for Shari’ah inspection:
Shariah Council inspection team may be directed to visit the branches with reasonable and adequate time schedule for mutual discussion/dialogue with be branch incumbent with a view to explain the causes of lapses and rectification of the same on the spot.

Comprehensive training at branch level
Comprehensive training program on Shariah only for the branch official may be introduced at branch level.

Techniques of Shariah Inspection
Muraqibs may be given a clear directives to conduct a comprehensive inspection by checking correspondence file of the concerned client, a good number of related vouchers, sellers' and suppliers' business establishment (if necessary). Otherwise is it correct to comment on income as doubtful or doubt-free?

Workshop for Muraqibs
Workshop may me arranged for the Muraqibs to acquaint them with the art/technique of conduction of the Shariah Inspection of the branches by the Member Secretary and policy maker directors. Training may be imparted to them by sending them in Dubai Islami Bank, Kuwait Finance House, Sudan Islami Bank to see their operations in the desk level under the leadership of honorable Member Secretary, Shariah Council or a Director.

Member of Shariah Council in the Speakers panel
All the Members of Shariah Council may be included in the Speakers' panel of IBTRA.

Muraqib as faculty Member
One Muraqib of the Shari’ah Council in the rank of PO/SPO may be posted to IBTRA as faculty Member.

Circulars be vetted by Shari’ah Council
All circular particularly circulars related to Shari’ah may be vetted by the Council/Department before finalization of the same.

Co-option of Shariah Members in AFAC
One/Two Shariah Members may be co-opted in AFAC every year to enable them give opinion on the Accounts of the Bank.

Inter Branch Co-operation circular
Now any branch does not co-operate with another branch in buying the goods due to lack of a circular on inter branch co-operation. It should immediately be issued.

Purchase cell
Purchase cell (which is now under process) may immediately be introduced without further delay.

Research cell at Shari’ah Council
The research cell of the Shariah Council may be upgraded with suitable manpower and the research officer may be given a particular assignment related to banking and Shari’ah.

Booklet on Modes of investment
A concise book let on different modes of investment being practiced in IBBL along with ayat of the Holy Quran and Hadith pertaining to the restrictions and bad effects of interest may be written/compiled by a special committee formed by E.C. or Board. This will help our human resources and clients to familiar with different modes of investment and bad effect of interest.

Training Session on buying & selling to the Members of Shari’ah Council
More sessions in IBTRA may be given to the Member Secretary and Asstt. Member Secretary on buying & selling.

Central Library
A central Library may be established in the Islami Bank Tower to acquire knowledge about Islam, Islamic Economic and Banking and to comply accordingly.

Providing Manpower to the branches
Each and every branch raises a question (May be pertinent in some cases) that due to acute shortage of manpower they are not able to effect buying & selling of goods as per shariah. This may be examined and assessed properly by an executive committee and according to their recommendations desired number of Manpower may be provided to the branch.

Frequency of Shariah Council Meeting
The Meeting of Shariah Council is required to be held at least once in a month to finalized the issue sent from the management from time to time and a sub-committee meeting to discuss the Shariah Inspection report in order to give guidelines to the Muraqibs.

Transfer of Muraqibs
Inter transfer of Muraqibs and Branch Officials from to time may accelerate the compliance of Shariah and training of the officials. It may bring tremendous result for the Bank. Shariah Council Secretariat has a good number of potential officers/Muraqibs. They would be able to comply Shariah more and more in comparison with other if this transfer system is introduced.

Shari’ah Inspection Book-let for the Managers
Shariah Inspection Book-let for the Managers as prepared earlier by a committee may be finalized and distributed to the Branches, if approved.

Investment under RDS
RDS may be run under Musharaka and Mudaraba instead of Baimuazzal Mode of Investment or buying agency system be immediately introduced in RDS under certain rules and guidelines approved by Shariah. Present system is not compatible with Shariah.

Workshop on Manuals
Workshop on different investment manuals be started and strengthened for the investment officials of the Branches.

Compilation of Fatwa of Shariah Council
Compilation of the Fatwa given so far by the council should immediately be finalized and circulated in all branches. This will equip the employees of this Bank about the Shariah rulings and improve their faith.

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Conclusion

The people of Bangladesh, one of the largest Muslim countries in the world are deeply committed to Islamic way of life. Naturally, it remains a deep cry in their hearts to fashion and design their economic lives in accordance with the precepts of Islam. The establishment of Islami Bank Bangladesh Limited in 1983, is the true reflection of this inner urge of its people. This Bank is the first Islamic Bank in Southeast Asia. It is committed to conduct all banking and investment activities on the basis of interest-free profit-loss sharing system under Islamic principle of shari’ah. 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, Specially, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh.
So the management should provide logistic support, the employees should pay their sincerity, and devotion to confirm buying –selling & the client should help the bank by running their business as per Shari’ah principles. So that the depositors may be free from all kinds of interest. The Government should also make separate rules & regulation for smooth operation of Interest –Free banking without any trouble.

References

Books:
• “Islamic Financial System and selected Islamic Economics Issues-Mahfuzur Rahman & B. M Habibur Rahman
• Principle & Practice of Islamic Banking- Janab Abdur Raquib.
• Dairy -2011 of Islami Bank Bangladesh Ltd.
• Class Handouts

Manual:
• Bai-Murabaha
• Hire Purchase Under Shirkatul Melk
• Bai-Salam
• Musharaka
• Bai-Muajjal
• Mudaraba
• General Banking

Web Site
• http://www.islamibankbd.com