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Home Business Banking Internship Report on Al-Arafah Islami Bank Limited

Internship Report on Al-Arafah Islami Bank Limited

Subject: Banking | Topics: Internship Report

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 27th 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 31st
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 27th
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 (6th, 7th, 8th & 9th 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

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.