Al Arafah Islami Bank Ltd is the first Bangladesh commercial bank

incorporated on June 18, 1995 under the Companies Act 1994. With the
permission of Bangladesh Bank, it commenced its commercial banking
operation on June 03, 1996. The head office of Al Arafah Islami Bank Ltd. is at
36 Dilkusha commercial area Motijheel Dhaka-1000.
The AIBL, s corporate philosophy is to build its non-funded face and
commission income stream, thus reducing its reliance on interest income alone.
Deposit severe competition, highly volatile money market & foreign exchange
market and intensified political unrest; AIBL was successful in achieving
substantial growth in all business segments.
Al Arafah Islami Bank Ltd is a second generation bank established in 1996
with a vision to stand out as a pioneer banking institution in Bangladesh. The
sponsors of the bank are leading business personalities and eminent
industrialists of the country having stakes in various segments of the national
economy. Among the missions of the company were to provide the customers
with high quality financial services with the help of the latest technology, and to
offer innovative banking services at competitive prices.
Despite such high aims, after being in the market for over a decade, Al Arafah
Islami Bank Ltd. has not yet been able to increase its market share sufficiently.
In general banking I have learnt the various tasks of it specially how to open an
account, how to issue a cheque book, the task of clearing house, task regarding
DD, PO and other services of the bank. Foreign Exchange Department has three
sections namely Import, Export and Foreign Remittance Section. In this
department, I have closely observed the activities like procedures regarding
L/C, documents required while opening a L/C and finally how to report the
export and import activities of bank to Bangladesh Bank.
Organizational Overview of Al-Arafah Islami Bank Ltd:
Al-Arafah Islami Bank Ltd. as the name implies a newly formed commercial
bank in Bangladesh. It has been incorporated in Dhaka, Bangladesh as a public
limited company and its Head Office of the Bank is located at 36, Dilkosha,
C/A, Dhaka- 1000.
In the world of consumerism the business organization of the world strive for
the consumers satisfaction as a number one business strategy whatever may be
the product of the organization, either service or non service. Service is the
product of bank. There is a saying that customer service starts rights right from
the stairs of the bank building. The guard at the door is first person pep resents
of the bank, receives a customer with wishes in smiling face.
Historical Background of Al-Arafah Islami Bank Limited:
Al-Arafah Islami Bank Ltd. (AIBL) was incorporated on 18 June,1995 with
authorized capital of Tk.1000 million (100 Crore) and paid up capital of
Tk.10.12 Crore paid up by the Sponsors/Directors and Tk.10.12 Crore was
offered to the public for subscribed portion of public issue of shares. The Bank
was formally inaugurated on 27
th
September, 2005 with
Dilkushal Branch (Principal Branch).The Management of the Bank is vested in
a Board of Directors consisting of 24 members including the Managing Director
of the Bank. Among 24 Directors 2 (two) Directors came from the public
shareholders. Managing Director is the chief executive of the Bank. There is a
Shariah council of 7 (seven) members in Al-Arafah Islami Bank Ltd. to monitor
the investments whether it invests in Shariah allowed sectors or not .Since its
establishment, AIBL opened 5 branches in 1995, 5 in 1996,10 in 1997, 10 in
1998, 5 in 1999, 2 in 2000, 3 in 2001, 1 in 2005, & 5 in 2006 i.e. at the end of
2006.i,e at the end of 2010 the Bank branch reaches to78.Total number of
employees of the Bank was 771 in 1995 and reached to 1711 in 2010 and during
the short period of its activities the Bank has made remarkable progress in
various activities. Since commencement of its activities on 18 June ,1995 the
Bank has mobilized the deposit of Tk.6415.79 million and 16775.33 million at
the end of the year 1999 and 2006. Foreign exchange business handled by the
Bank during the year 1999 to 2006 were Tk.7859.72 million and 11314.18
million respectively and investment was Tk.3793.71 million and 17423.18
million at the end of the year 1999 and 2006 respectively. The bank earned a
profit of Tk.31.70 million in the year 1999 compared to Tk.470.02 million
(profit after tax and provision) in the year 2006. At present the authorized
capital of this bank is TK5000 millions and paid up capital is taka 4677.28
millions.
Al-Arafah Islami Bank Ltd. was established not only to earn profit and to
develop economy of the country but also it had an ultimate goal to get reward in
the Heaven by banning interest in business. Since its commencement the Bank
has been trying to achieve this goal. The Islam loving people specially who are
not interested with interest, should help this Bank giving deposit and taking
investment from this Bank.
2.03 Mission of Al-Arafah Islami Bank Limited:
By establishing an interest free atmosphere in day to day business transactions,
the Promoters, Sponsors & Directors expect the Shafayat from our beloved
Prophet Hadrat Muhammad (S) and the ultimate emancipation in the
Afterwards.
Vision of Al-Arafah Islami Bank Limited:
To establish an interest free transaction in the economy
2.05 Objectives of AIBL:
To establish an interest free economy.
To establish an modern banking system for all kinds of people
To take part in the economic growth of the country.
To eradicate the poverty and to do social services by establishing Schools,
Madrashas, University, Hospitals, Public Library etc.
Finally to achieve ultimate goal i.e. Nazat in Akhirat.
Auditors:
In terms of Article 149 of the Articles of Association of the Bank M/S Pinaki
and Co. Chartered Accountants were re-appointed as external auditors for
conducting the audit of accounts as 31
st
December, 2000. The Auditor M/S
Pinaki & Co. Chartered Accountants being eligible offered themselves for re-
appointment for the year 2001. But now M/s Rahman Rahman Hoq becomes the
auditor in the year 2005.
Training and Motivation:
Training and Motivation are utmost important to bring about positive change in
the outlook of the manpower and to increase efficiency. Set of trained and
efficient workforce is indispensable for any commercial bank and they are the
fundamental strength of the bank.
Al-Arafah English Medium Madrasah:
Al-Arafah English Medium Madrasah has been established by the Al-Arafah
Bank Foundation with a view to building next generation according to the ideals
of peace and equality of Islam and to establishing banking and other aspects of
life in the way
Branches of AIBL:
AIBL started its working at 161, Motijheel C/A with a Branch named Motijheel
Branch on 27
th
September,1995 was the first & main Branch of AIBL and has
been operating throughout the country. The Head Office of the Bank was
situated at the same holding of Motijheel Branch since its establishment but
from 11 January, 2007 it has started its working at its own premises 36,
Dilkusha (6
th
, 7
th
, 8
th
& 9
th
floor), Dhaka-1000. The age of the Bank is only 15
years and during this short period of time, the Bank has established total 78
Branches over the country and made a smooth network inside the country. The
number of Branches as Division wise is mentioned in the following table:

Division No. of Br.
Dhaka Division 42
Chittagong Division 13
Rajshahi Division 06
Khulna Division 06
Sylhet Division 07
Barisal Division 04
Total 78
Form of Organization:
Board of Directors
Executive Committee
Audit Committee
Management Committee
Shariah council
Environment of Al- Arafa Islami Bank:
Al- Arafa Islami Bank shall bear the mark of the Sunnah of our prophet
Muhammad (S), of our faith and conviction, our values and attitudes towards
life and that the entire environment of Al- Arafa Islami Bank shall be in
conformity with Sunnah, simple in style, noble and rich in thought, but dynamic
and far reaching in impact, exemplary in efficiency and service to the
customers.
Mudaraba Terms Savings Deposit:
Deposit in monthly installment @Tk.300/-, Tk.500/-, Tk.1000/-Tk.1500/-
& Tk.2000/- is obtained under the aforesaid scheme for a tenure of 5,8,10
and 12 years and the same is withdrawal with
profit at the end of the tenure.
Monthly Profit based Term Deposit:
Under the above scheme, deposit of Tk. 1.00 lac and multiple thereof are
accepted for a term of 5 (five) years and the bank gave profit thereon Tk. 885
per month per lac and proportionately on the rest amount of deposit under the
category during the year under review. The aforesaid rate shall, however, be
adjustable at the close of calendar year on finalization of accounts.
3.01.3 Monthly Haj Deposit:
Hajj deposit at monthly installment from 1 (one) year to 20(twenty) years are
accepted under the above scheme to enable the account holder to perform Hajj
out of the accumulated saving with profit.
Onetime Haj Deposit:
Under the above scheme, fixed amount of Hajj deposits are accepted from the
clients for particular term and as per rules profit is accumulated thereon per year
in this regard. As and when the fixed deposit is matured, Hajj expenses are
defrayed by the same. Under the scheme, the guardians may also open Hajj
account to enable their successors to perform Hajj. Highest amount of profit is
paid in the above types of deposit by the bank.
Savings Investment Deposit:
Deposit under the scheme is accepted by monthly installment and after expiry of
the term, double amount of such savings is given as investment in feasible
sectors by the bank as per choice of the depositors without any collateral
security. Any one by saving under the scheme can take business venture on
utilization the amount saved under the scheme as well as availing bank
investment.
Marriage Savings Deposit:
Fixed monthly installment for a particular period is to be deposited to defray the
expenses of marriage and the bank allows double of saving or Tk.30,000/-
which is higher as investment to procure ornaments, furniture, fixture etc.,
repayable in 24 monthly installment without any collateral security.
Savings Bond Deposit:
Under this scheme the bank has introduced saving bonds for Tk. 10,000/-,
Tk.25,000/- and Tk. 100,000/- for 3,5 and 8 years. After the completion of the
tenure the depo
Investment:
The Total investment of the bank stood at Tk.5079.21 million against
Tk.3728.41 million during the corresponding period of last year. The percentage
of increase is 36.23% as against 13.00% in banking sector. The bank extends
investments to the clients under the following modes of investment under
Islamic Shariah:
Bai-Murabaha or simply Murabaha:
The terms Bai-Murabaha have derived form Arabic words Bai and Ribhum.
The word Bai means purchase and sale and the word Ribhum means an
agreed upon profit. So Bai-Murabaha means sale for an agreed upon profit. It
may be defined as a contract between a Buyers and a Seller under which the
seller sells certain specific goods permissible under Islamic Shariah and the
word Law of the land to the Buyer at a cost plus and agreed upon profit payable
today or on some date in the future in lump-sum or by installments. The profit
may be either a fixed sum or based on a percentage of the price of the goods.
Musharaka:
The word Musharaka is derived from the Arabic word Sharikah meaning
partnership. Islamic jurists point out that the legality and permissibility of
Musharakah is based on the injunctions of the Holy Quran, Sunnah and Ijma
(consensus) of the scholars.
Musharaka transaction may be conducted in the following manner:
One, two or more entrepreneurs approach an Islamic Bank to request the
financing required for a project. The bank, along with other partners, provides
the necessary capital for the project. All partners including the Bank have the
right to participate in the project. The profit is distributed according to an agreed
ratio. However, losses are shared in exactly the same proportion in which the
different partners have provided the finance for the project.
Mudarabah:
The term Mudarabah refers to a contract between two parties in which one party
supplies capital to the other party for the purpose of engaging in a business
activity with the understanding that any profits will be shared in a mutually
agreed upon. Losses, on the other hand, are the sole responsibility of the
provider of the capital. The first party provides capital and the other party
provides the expertise with the purpose of earning lawful profit (approved by
Islamic law) which will be shared in a mutually agreed upon proportion.
Bai-Muajjal:
The term Bai and Muajjal are derived from the Arabic words Bai and
Ajal where Bai means purchase and sale and Ajal means a fixed time or a
fixed period. So Bai-Muajjal is a sale for which payment is made at a future
fixed date or within a fixed period. In short, it is a sale on Credit. It is basically a
contract between a buyer and seller under which the seller sells certain specific
goods, permissible under Shariah and law of the country to the buyer at an
agreed fixed price payable at a certain fixed future date in lump-sum or in fixed
installments.
Bai-Salam:
The term Bai-Salam is used to define a sale in which the buyer makes advance
payment, but delivery is delayed until some time in the future. Usually the seller
is an individual or business and the buyer is the bank.
Procedure for Opening of Accounts:
Before opening of a currents or savings account, the following formalities must
be completed by the customer:
Submit application on the prescribed form.
Furnishing photographs- 2 (Two) copies.
Introduction by an account holder.
Putting specimen signatures in the specimen card.
Mandate, if necessary.
After fulfilling above formalities, opens an account for the client and provide
the customer with a pay-in-slip book and a checkbook in case of savings
account and currents account.
Types of Deposit Accounts and Their Formalities:
Current Account
In this kind of account a customer can deposit his money and can write one or
more check to withdraw their money. For doing this notice is not required. He
can deposit it whenever he/ she wants to and also can withdraw it whenever he/
she wants to
In The Name of Individual:
The client has to fill up a light green account opening form. Terms and
conditions are printed on the back of the form. The form contains the
declaration clause, special instructions etc. two copies of passport size
photograph duly attested by the introducer are affixed with the form.
In Joint Name:
In this type, the formality is same as individual account, but in the special
instruction clause, either or survivor or former or survivor clause is marked.
Proprietorship:
In addition the customer has to submit the valid Trade License and Tax Paying
Identification Number (TIN) along with the application.
Partnership:
In case of partnership account, the bank asks for,
A copy of the partnership agreement (Partnership Deed)
A letter signed by all the partners containing the following particulars.
The name and addresses of all partners
The nature of the firms business
The name of the partner authorized to operate the account in the name of the
firm, including the authority to draw, endorse and accepting the bills and
mortgage and sell the properties belonging to the firm.
Limited Company:
On having the desire to open an account from a limited company, an EXIM
Bank Officer asks for the following documents:
Registration Certificate from the Registrar of Joint Stock of Companies
Certificate of Incorporation
Certificate of Commencement of Business
Memorandum of Association
Articles of Association
Copies of Annual Accounts
Copies of the Boards resolution, which contains
a). The name of the persons who have been authorized to operate the bank
account on behalf of the company.
b). The name of the persons who are authorized to execute documents with the
bank on companys behalf.
Societies, Clubs and Associations:
In case of these sorts of accounts Al-Arafah Islami Bank Ltd requires the
following documents:
Registration Certificate Under the Societies Registration Act, 1962
Copies of Memorandum, Articles of Association
Resolution of the Managing Committee.
Power of Attorney to Borro
Non-government Organization (NGO):
The account opening procedure is same but in exception is that the Registration
Certificate from the Social Welfare Department of Government must be
enclosed with the application.
Joint Account in The Name of Minor:
A minor cannot open an account in his own name due to the incapacity to enter
into a contract. He can open an account in Al-Arafah Islami Bank Ltd in Joint
name of another person who will be guardian of him.
Savings Bank Account:
This deposit is basically meant for small-scale savers. There is restriction on
withdrawals in a month. Heavy withdrawals are permitted only against prior
notice. Interest is paid on these types of accounts.
Short-term Deposit (STD):
In Short-term Deposit, the deposit should be kept for at least seven days to get
interest. The interest offered for STD is less than that of savings deposit. In Al-
Arafah Islami Bank Ltd various big companies, Organizations, Government
Departments keep money in STD accounts. Frequent withdrawal is discouraged
and requires prior notice.
Fixed Deposit:
They are also known as time liabilities or term deposits. These are deposits,
which are made with the bank for a fixed period specified in advance. The bank
need not maintain cash reserves against these deposits and therefore, the bank
offers high are of interest on such deposits.
In Al-Arafah Islami Bank Ltd, fixed deposit account is opened in two forms-
Midterm (MTD), which is less then one year & the other is Term Deposit,
which is more than one year.
Opening of Fixed Deposit Account:
The depositor has to fill an application form where in he mentions the amount
of deposit, the period for which deposit is to be made & the name/ names is
which the fixed deposit receipt is to be issued. In case of a deposit in Joint name
Al-Arafah Islami Bank Ltd. also takes the instructions regarding payment of
money maturity of the deposit. The banker also takes the instructions regarding
payment of money on maturity of the deposit. The banker also takers the
instructions regarding payment of money on maturity of the deposit. The banker
also taker specimen signatures of the depositors.
A fixed deposit account is then issued to the depositor acknowledging receipt of
the sum of money mentioned therein. It also contains the rate of interest & the
date on which the deposit will fall due for payment.
Payment of Interest:
It is usually paid on maturity of the fixed deposit. Al-Arafah Islami Bank Ltd
calculates interest at each maturity date and provision is made on that
Miscellaneous creditor expenditure payable accounts is debited for the
accrued interest.
Cash:
The cash section of Al-Arafah Islami Bank Ltd deals with all types of
negotiable instruments, cash and other instruments and treated as a sensitive
section of the bank. It includes the vault that is used as the beyond this limit, the
excess cash is then transferred to Bangladesh Bank. This section performs the
following functions:
Cash Packing:
After the banking hour cash is packed according to the denomination. Notes are
counted and packed in bundles and stamped with initial.
Allocation of Currency:
Before starting the Banking hour all tellers give requisition of money through
Teller cash proof sheet. The head Teller writes the number of the packet
denomination wise in Reserve sheet at the end of the day, all the notes
remained are recorded in the sheet.
Procedure for Opening of Accounts:
Before opening of a currents or savings account, the following formalities must
be completed by the customer:
Submit application on the prescribed form.
Furnishing photographs- 2 (Two) copies.
Introduction by an account holder.
Putting specimen signatures in the specimen card.
Mandate, if necessary.
After fulfilling above formalities, opens an account for the client and provide
the customer with a pay-in-slip book and a checkbook in case of savings
account and currents account.
Societies, Clubs and Associations:
In case of these sorts of accounts Al-Arafah Islami Bank Ltd requires the
following documents:
Registration Certificate Under the Societies Registration Act, 1962
Copies of Memorandum, Articles of Association
Resolution of the Managing Committee.
Power of Attorney to Borro
Non-government Organization (NGO):
The account opening procedure is same but in exception is that the Registration
Certificate from the Social Welfare Department of Government must be
enclosed with the application.
Joint Account in The Name of Minor:
A minor cannot open an account in his own name due to the incapacity to enter
into a contract. He can open an account in Al-Arafah Islami Bank Ltd in Joint
name of another person who will be guardian of him.
Savings Bank Account:
This deposit is basically meant for small-scale savers. There is restriction on
withdrawals in a month. Heavy withdrawals are permitted only against prior
notice. Interest is paid on these types of accounts.
Short-term Deposit (STD):
In Short-term Deposit, the deposit should be kept for at least seven days to get
interest. The interest offered for STD is less than that of savings deposit. In Al-
Arafah Islami Bank Ltd various big companies, Organizations, Government
Departments keep money in STD accounts. Frequent withdrawal is discouraged
and requires prior notice.
Fixed Deposit:
They are also known as time liabilities or term deposits. These are deposits,
which are made with the bank for a fixed period specified in advance. The bank
need not maintain cash reserves against these deposits and therefore, the bank
offers high are of interest on such deposits.
In Al-Arafah Islami Bank Ltd, fixed deposit account is opened in two forms-
Midterm (MTD), which is less then one year & the other is Term Deposit,
which is more than one year.
The banker also taker specimen signatures of the depositors:
A fixed deposit account is then issued to the depositor acknowledging receipt of
the sum of money mentioned therein. It also contains the rate of interest & the
date on which the deposit will fall due for payment.
Payment of Interest:
It is usually paid on maturity of the fixed deposit. Al-Arafah Islami Bank Ltd
calculates interest at each maturity date and provision is made on that
Miscellaneous creditor expenditure payable accounts is debited for the
accrued interest.
Encashment of F.D.R:
In case of premature FDR, Al-Arafah Islami Bank Ltd is not bound to accept
surrender of the deposit before its maturity date. In order to deter such a
tendency the interest on such a fixed deposit is made cut a certain percentage
less a the agreed rate. Normally savings bank deposit interest rate is allowed.
Loss of FDR:
In case of a lost FDR, the customer is asked to record a GD (General Diary) in
the nearest Police Station. After that the customer has to furnish an Indemnity
Bond to Al-Arafah Islami Bank Ltd a duplicate FDR is then issued to the
customer by the bank.
Renewal of F.R.D.:
In Al-Arafah Islami Bank Ltd, the instrument is automatically renewed within
seven days after the date of its maturity if the customer does not come to en-
cash the FDR. The period for renewal is determined as the previous one.
Remittance:
Remittance can be done by telegraph transfer, mail transfer, travelers Cheque
and drafts and Cheque. There are two steps of remittance:
Inland Remittance:
By using ways we can do it. When one bank sends these T.T, M.T, T.C or
Cheque to another bank than it will be called inland remittance. It is done within
the country from one bank to another.
When a bank got this T.T, M.T, T.C and cheque from outside bank, which is not
situated in the home country than it will be called foreign remittance. Using
these methods also has done it.
Types of Remittance:
a) Between banks and non-banks customers.
b) Between banks in the same country.
c) Between banks in the different centers.
d) Between banks and central bank in the same country.
e) Between central bank of different customers.
Administration/ Monitoring:
The administration of the loan process shall ensure, compliance with all laws
and regulations at both local and global levels including bank policy as set out
in this document and the Banks credit manual/circulars.

Loan (General):
Short term and long term loans allowed to individual/ firms/ industries for a
specific purpose but a definite period and generally repayable by installments
fall under this head these types of lending are mainly allowed to accommodate
financing under the categories.
a). Large and Medium Scale Industries.
b). Small and Cottage Industries. Very often term financing for agriculture and
others are also included here.
House Building Loan (General):
Loans allowed to individual/enterprises construction of house (residential or
commercial) fall under this type of advance. The amount is repayable by
monthly installment within a specified period, advances are known as Loan
(HBL-GEN).
Introduction:
HouseBuilding loan is one of the common credit policies of banking sector.
There was only one institution in our country, which is specified in HBFC,
Bangladesh House Building Finance Corporation. Now days, besides this bank
many commercial banks and Leasing Company provides house-building loan to
the customers.
Interest rate:
Currently the interest rate is 16%. But it may changes from time to time
depending on the market interest rate. From the customers point of view this
changes have an adverse impact on the customers. Some times if they have to
bear a higher interest on the principal amount which causes a great burden on
them.
But from the banks point of view this is very good to maintain the markup.
Because when the market interest rate raises 1% than they are getting 1% less
markup. So for this clause of increasing interest rate they can have the same
markup by increasing the
interest rate changing on the clients. So this is very effective for the Bank to
maintain markup.
Disbursement Procedure:
The disbursement procedure or timing of disbursement depends on the client or
the progress of work of the construction. The disbursement can be made two or
three stages or more depending on the above conditions.
Mode of repayment:
The loan shall be adjusted by monthly installment basis. The repayment will
start from 6(six) months of the date of first disbursement (it may change
according to the terms and conditions of the agreement)
House Building Loan (Staff):
Loans allowed to the Bank employees for purchase/construction of house shall
be known as Staff Loan (HBFC-STAFF).
Other Loans to Staff:
Loans allowed to employees other than for HouseBuilding shall be grouped
under head staff Loan (general).
Cash Credit (Hypo)
Advances allowed to individual/ firm for trading as well as wholesale purpose
or to industries to meet up the working capital requirements against
hypothecation of goods as primary security fall under this type of lending. It is a
continuous credit. It is allowed under the categories:0
Commercial lending when the customer is other than an industry and
Working Capital when the customer is an industry.
Consumers Credit Scheme of Al-Arafah Islami Bank Ltd.
Introduction:
Consumer Credit Scheme is a major program of Al-Arafah Islami Bank Ltd. In
CCS the bank ngage an agent who works on behalf of the Bank. This agent
performs all the works prior to the sanction of the CCS. They do the inspection
and make all the documents necessary for CCS. For this purpose they get
commission.
Clients :
The clients are Service Holders and Businessman. Service holders can be
Government and Private. In case of Government officer, the client must be an
officer in rank.
Products:
Electronic goods, cars, jeeps, microbuses, Mobile telephone, T&T telephone
etc.
Profit Rate:
Down payment
Down payment is 20% of the CCS amount. It is considered as equity. The
payment is 50% for vehicles.
Advance allowed for retirement of shipping documents w d release of goods
imported through LIC falls under trust with the arrangement that sale proceeds
should be deposited to liquidate the advances within a given period. This is also
a temporary advance connected with import and known as post-Import finance
and falls under the category Commercial Banking.
IBP (inland bill purchased):
Payment made through purchase of inland bills/cheques to meet urgent
requirement of the customer falls under this type of credit facility. This
temporary advance is adjustable from the proceeds of bill/ Cheques purchased
for Collection. It falls under the category Commercial Lending.
Credit Administration
The principle elements of bank credit administration are as follows:
1. Credit approval.
2. Credit file maintenance.
3. Facility evidence maintenance.
4. Credit monitoring and review.
Credit Approval:
The primary factor determining the quality of the Banks credit portfolio is the
ability of each borrower to honor, on a timely basis, all credit commitments
made to the Bank. The authorizing credit personnel period to credit approval
must accurately determine this.
The credit approval process shall be governed by the Bank Credit Policy
framework, which can be summarized under the following:
Asstt. Vice President
The amount and scope of each Officers lending authority is a function of the
amount and extent of authority required by the officer to carry out his /her
responsibilities to the Bank and its clients ma prudent, effective and efficient
manner.
Definition of Investment:
Investment, transaction between two parties in which one ( the creditor or
lender) supplies money, goods, services or securities in return for a promised
future payment by the other ( the debtor or borrower). Such Transaction
normally includes the payment of interest to the lender. Investment may be
extended by the public or private institutions to finance business activities,
agricultural operation, consumer expenditures or government projects.
Introduction of Investment:
Modern Investment management is extended through specialized financial
institutions of which commercial banks are the oldest and most important. In
present days of industrial economics, the banks are able to extend and increase
the supply of Investment by the creation of Investment management for their
loan customers. The lender must judge each loan he makes on the basis of the
charter of the borrower (his intention to pay), (his capacity to pay), (based on
his potential for earning) and his collateral pledged in case of default on the
loan. The terms of Investment transactions may be publicly regulated to prevent
abuses by customers and lenders as well as to channel Investment in to
particular sectors of the economy.
Role of CIB in Bangladesh:
Due to irregular and insufficient flow of credit information in the banking
system the proportion of classified loan in relation to total credit is very high.
This proportion of classified loan operated a bad culture in the Banking sector.
In order to eliminate the bad culture & to equip the banks with proper credit
information for loan application processing, proposal for relation of CIB was
put forward by different committee and organizations and it was established in
1992.
Functions of CIB:
i) To standardize information flow on loans/credits within the Bangladesh
Banking system.
ii) To increase the speed & accuracy with which the credit information is
made available to banker assessing credit role.
iii) To combine the information gathered on classified loans with the
information on newly sanctioned loans to the borrowers thereby making
available on integrated information package.
iv) To integrate the default loan information in the CIB its timely
submission to the banks for loan application processing.
v) To collect credit information on quarterly basis from banks.
Credit Risk Grading:
Credit risk grading is an important tool for credit risk management as it helps
the Banks & financial institutions to understand various dimensions of risk
involved in different credit transactions. The aggregation of such grading across
the borrowers, activities and the lines of business can provide better assessment
of the quality of credit portfolio of a bank or a branch. The credit risk grading
system is vital to take decisions both at the pre-sanction stage as well as post-
sanction stage.
At the pre-sanction stage, credit grading helps the sanctioning authority to
decide whether to lend or not to lend, what should be the loan price, what
should be the extent of exposure, what should be the appropriate credit facility,
what are the various facilities, what are the various risk mitigation tools to put a
cap on the risk level.
7.02 Use of Credit Risk Grading:
As evident, the CRG outputs would be relevant for individual credit
selection, wherein either a borrower or a particular exposure/facility is
rated.
Risk grading would also be relevant for surveillance and monitoring,
internal MIS and assessing the aggregate risk profile of a Bank. It is also
relevant for portfolio level analysis.
7.03. Numbers & Short names of graders used in the CRG:
The proposed CRG scale consists of 8 categories with Short names and
Numbers are provided as follows:
GRADING SHORT NAME NUMBER
Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/Watch List MG/WL 4
Special Mention SM 5
Sub standard SS 6
Doubtful DF 7
Bad & Loss BL 8
Regulatory Definition on Grading of Classified Accounts:
Irrespective of credit score obtained by a particular obligor, grading of the
classified names should be in line with Bangladesh Bank guidelines on
classified accounts, which is extracted from PRUDENTIAL REGULATIONS
FOR BANKS: SELECTED ISSUES (updated till August 07, 2005) by
Bangladesh Bank are presently as follows:
Basis of Loan Classification:
Objective Criteria:
Any Continuous Loan if not repaid/renewed within the fixed expiry date for
repayment will be treated as irregular just from the following day of the expiry
date. This loan will be classified as Sub-standard if it is kept irregular for 6
months or beyond but less than 9 months, as `Doubtful if for 9 months or
beyond but less than 12 months and as `Bad & Loss if for 12 months or
beyond.
In case any installment(s) or part of installment(s) of a Fixed Term Loan is not
repaid within the due date, the amount of unpaid installment(s) will be termed
as `defaulted installment.
Qualitative Judgment:
If any uncertainty or doubt arises in respect of recovery of any Continuous
Loan, Demand Loan or Fixed Term Loan, the same will have to be classified on
the basis of qualitative judgment be it classifiable or not on the basis of
objective criteria.
Note:
a) Any change in classification criteria provided by the Bangladesh Bank shall
supersede this grading system for classified accounts.
b) An account may also be classified based on qualitative judgment in line
with Bangladesh Bank guidelines.
c) A particular bank may have classification criteria stricter than Bangladesh
Bank guidelines.
a) Evaluation of Security Risk:
Risk that the bank might be exposed due to poor quality or strength of the
security in case of default.
b) Evaluation of Relationship Risk:
These risk areas cover evaluation of limits utilization, account performance,
conditions/ covenants compliance by the borrower and deposit relationship.
Investment Assessment:
Relationship Manager(s) \ Investment Officer(s) shall conduct a thorough
assessment of investment requirement before recommending any new proposal.
There after all investment at least annually at the time of renewal and
enhancement. The assessment procedure shall include the following issues:
1. mode of Investment
2. investment limit
3. Purpose of investment
4. Rate of profit
5. Primary Security
6. Collateral Security- its acceptability, its coverage, its control and genuine
etc
7. Margin
8. Repayment capacity and repayment schedule
9. Period of investment
10. Other terns and conditions in case of necessity
In addition the RM (Relationship Manager ) \ Investment officers shall address
the fallowing issues which assessing investment proposal:
1. Customer analysis :
Capital structure of the company
Authorized capital and paid up capital
Reserve and retained earnings
Share holdings of the share holders
Management team
Group and affiliate companies
Ability to comply investment convent
Security
Ability and integrity
2. Industry analysis:
Contribution to GDP of the concern industry
Key risk factors of the industry
Growth of the industry
Domestic market of the industry
International market of the industry
SWOT of the industry
o Domestic
o International
o Potentiality of the buyer or supplier
o Strength and weakness of the buyer or supplier
3. Supplier \ Buyer analysis :
4. Historical Financial analysis :
Minimum three years Financial Statement (FSS) analysis
Guarantor (s) \ Corporate guarantor (s) Financial Statement analysis
Quality and sustainability of the borrowers
Cash flow statement
Strength of the borrowers balance sheet
Leverage
Profitability
5. Project Financial Performance:
Where term investment facilities are being proposed in favor of any new
industrial unit an expertise team comprising RM. Engineer in the concern field
and financial analyst. The team will prepare a feasibility study as per current
industrial policy.
6. Account Conduct :
Trade payment
Cheques payment
Timely payments
Irregular payment
Banks investment payment with profit
Excess over limit drawings
Excess over DP drawing
Banks commission and charges payment
7. Following risk mitigating factors to be identified in the investment
assessment
Margin
Volatility
High debt load ( Leverage\Gearing )
Overstocking or debtor issues
Repaid growth, acquisition or expansion
Management changes or succession issues
Customer or Supplier concentration
Lack of transparency or industry issues.
Amount of investment
Tenors of investment
Justification of investment
Based on the project repayment ability installment to be determined
Proposed investment an oust and tenor is not excessive
Primary security should be acceptable, marketable & legal items
Slow, perishable, obsolete, banned, expired items not to be taken as security
current valuation of collateral security shall be obtained
Conclusion:
Al-Arafah Islami Bank ltd. is a non government commercial Bank in
Bangladesh, which started its business from 1995.I t is a unique combination of
Shariah & Islamic banking. Among non government commercial banks, Al-
Arafah Islami Bank Ltd. is a milestone for economic development. It has been
playing an important role to eradicate the unemployment problem in
Bangladesh. Over 800 employees and 5500 shareholders are getting benefit
from this organization. But most of the people in our country have
misconception about Islamic banking specially Al-Arafah Islami Bank Ltd. &
other Islamic banks. They can not find any difference in its operation between
conventional commercial Banks and Islamic Banks because they have no clear
idea about the activities as well as investment mechanism of Islamic banks.
The Bank is committed to run its activities as per Islamic Shariah and thus it has
different investment(credit) modes, different repayment schedules, different
disbursement procedure, different mark up system. and also has a different
Credit(Investment) policy. Mark up means adding some additional value after
purchasing the goods but before to
sell the same to another people. This system is accepted in Islamic Shariah
because here money is converted to goods. Money begets money is prohibited
in Islamic Shariah. People is getting more benefit from the dealings of Islamic
banking because here quarterly interest is not charged and there is no possibility
of interest to be converted into principal. But it needs to mention here that
Islamic Banks like AIBL incurred huge loss in case of default cases. Islamic
Banks cant charge extra amount on the residual principal of the overdue
accounts like other conventional banks but some compensation is imposed on
the accounts to protect huge accounts to be overdue/classified. It can not take
part in call money market. Mudaraba, Musharaka are another mode of
investment in Islamic Banking. But here honesty is the only pre-requisite. For
ensuring more benefit, more facility from Islamic banks like AIBL we have to
be honest and more sincere to repay the taken money from these banks in time.
If the Cheque is dishonored due to Insufficiency of funds than Al-Arafah Islami
Bank Ltd dont charges any cost.