PRINCIPLES & PRACTICES OF ISLAMIC BANKING (A CASE STUDY ON GENERAL BANKING OF AL-ARAFAH ISLAMI BANK LIMITED)

PREPARED FOR Prof. Milan Kumar Bhattacharjee Professor & Head ULAB School of Business University Of Liberal Arts Bangladesh

PREPARED BY Md. Jakaria Alam ID. 0720 11064 Major in Finance ULAB School of Business University Of Liberal Arts Bangladesh

UNIVERSITY OF LIBERAL ARTS BANGLADESH APRIL 21, 2011

April 21, 2011

Prof. Milan Kumar Bhattacharjee Professor & Head ULAB School of Business University Of Liberal Arts Bangladesh

Sub: Submission of internship report

Dear Sir

It is a great pleasure for me to present you the internship report as required for the completion of BBA program. I have tried my best to gather all the information that are necessary to make a report and put all the theoretical knowledge in practice that I gained throughout the last three and half year. The employees of Al-Arafah Islami Bank Ltd are very supportive with me in providing information regarding principles & practices that they used to follow in their day to day activities. Due to certain constraints and legal formalities, I have not been able to gather all the facts and figures about the organization. Yet it is a comprehensive one, including lot of information. I respectfully request you to accept my report for the further evaluation.

Thanking you

Sincerely yours

Md. Jakaria Alam Id. 0720 11064

Acknowledgement
The special thank goes to my helpful supervisor, Prof. Milan Kumar bhattacharjee for the supervision and support that he gave truly help the progression and smoothness of the internship report throughout the last three months. I would like to thanks to Mr. Hasan Sirazi for his cooperation and guidance regarding the report making. All the tasks during the program would be nothing without the enthusiasm and imagination from both of you. Besides, this internship program makes me realized the value of working together as a team and as a new experience in working environment. My grateful thanks also go to all the faculty members of University Of Liberal Arts Bangladesh for their continuous support in my academic life. A big contribution and hard worked from all of them during the three months is very great indeed. Not forget, great appreciation go to the all the employees of Al-Arafah Islami Bank Limited, Hazaribag Branch who help me from time to time during the project. The whole program really brought us together to appreciate the true value of friendship and respect of each other. And last but not least is the special mention of all the members of my family and friend whose continuous support help me accomplish the report.

I am very grateful to those following who assisted me in the preparation of this report. S k Sohel Pervez (Senior Executive Officer- AIBL)
Md. Ashraf Uddin

(Management Trainee Officer- AIBL) MST. Sharif Un Nesa (Management Trainee Officer-AIBL) Mr. Shamim (Management Trainee Officer-AIBL) Mr. Din Islam (Executive office-AIBL)

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Table of content Title CHAPTER:1 1.1 1.2 1.3 1.4 1.5 CHAPTER:2 INTRODUCTION Origin of the Report Scope of The Study Objectives of The Study Methodology of The Study Limitations of The Study OVERALL BANKING INDUSTRY AND ISLAMIC BANKING CONCEPT IN BANGLADESH Historical Overview of Banking Sector in Bangladesh Development of Banking Sector Role of Central Bank in Bangladesh Regulating System What is Islamic Banking? Islamic Banking Movement in Bangladesh Objectives of Islamic Banking Distinguishing Features of Islamic Banking Al ARAFAH ISLAMI BANK LIMITED: AN OVER VIEW Al-Arafah Islami Bank Limited: In A Brief Nature of Business Special Features of AIBL Vision, Mission Corporate Information of AIBL Organizational Structure Branch Information Corporate Social Responsibility ABABIL Software Performance at a glance
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Page Number 1-4 2 2 3 3-4 4 5-11

2.1 2.2 2.3 2.4 2. 2. 2. 2. CHAPTER:3

5 6 7 8 9 9-10 10 11 12-20

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10

12 12 13 14 15 16 17 17-18 18-19 20

Deposit Section 5.1 5.1.a 5.1.b 5.1.c 5.1.d 5.1.e 5.1.f 5.1.g 5.1.h 5.1.i 5.1.j 5.2 5.2.a 5.2.b 5.2.c 5.2.d 5.2.e 5.3 5.3.a 5.3.b 5.3.c 5.3.d 5.4 5.4.a 5.4.b 5.4.c Al- Wadiah Current Deposit A/C (AWCA) Mudaraba Savings Deposit A/C (MSD) Mudaraba Term Deposit (ITD) Mudaraba Lakhpoti Deposit Scheme (LDS) Mudaraba Millionaire Deposit Scheme (MDS) Mudaraba Kotipoti Deposit Scheme (KDS) Mudaraba Term Deposit Receipt (MTDR) Mudaraba Hajj Savings Account (MHSA) Special Notice Deposit Account (SND) Locker Service Accounts Opening Section Account Opening Eligibility Necessary Documents Regarding Accounts Opening Process of Accounts Opening Account Transfer Accounts Closing Cash Section Cash Receiving Procedure Cash Payment Procedure Cash Packing Allocation of Currency Clearing Section Concept of Clearing Clearing House Types of Clearing Cheque Inward Cheque Outward cheque Precution at the time of cheque receiving, collection of LBC,OBC, & Transfer Clearing Process Bills Collection Transfer Delivery Local Remittances Pay Order (PO) Demand Draft (DD) Telegraphic Transfer (TT)
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26-31 26 27 28 28 28-29 29 29-30 30 30 31 31-35 32 32 33 34 34-35 36-37 36 36 37 37 37-41 37 37 38

5.4.d 5.4.e 5.4.f 5.4.g 5.5 5.5.a 5.5.b 5.5.c

38 39 40-41 41 41-43 42 42-43 43

5.6 5.6.a CHAPTER:6 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 CHAPTER:7 7.1 7.2 7.3 7.3.a 7.3.b 7.3.c 7.4 7.4.a 7.4.b 7.4.c 7.4.d 7.4.e

Foreign Remittance Money Gram Service Investment Department of AIBL Investment Growth Investment Objectives of AIBL Investment Modes of AIBL Most Popular Investment Schemes of AIBL General Procedure of Investment Strategy of Investment Discourage Sectors of Investment Limitations of Investment Section Foreign Exchange Department of AIBL Foreign Trade Rate of Exchange AIBL & Foreign Exchange Operation Import Export Foreign Remittance Documents for Foreign Exchange Business Letter of Credit Letter of Guarantee Back-to-Back L/C Inland Bill Purchase (IBL) Foreign Bill Purchase (FBP) SWOT Analysis

44 44 45-59 45-46 47 48-51 51-55 56 57-58 59 59 60-66 60 61 61-64 61 62 63-64 64 64-65 65 65-66 66 66 83-84 85-86 85 85 86 87

CHAPTER: 9 9.1 9.2 9.3 Bibliography Appendix

Concluding Parts Findings Recommendations Conclusion

Executive summary

This report is prepared for the requirement of the BBA program, School of Business, University Of Liberal Arts Bangladesh. This study is centered with Al-Arafah Islami Bank Ltd. It is prepared from the three months of comprehensive study as an intern of Al-Arafah Islami Bank Limited Hazaribag branch. This report will give a clear idea about general banking operations of Al-Arafah Islami Bank Limited. Basically this report has been developed from the basis of secondary data. The sources of information are annual report of the bank, internet, newspaper, magazine etc. My experience also helps me to create this report. Bangladesh has been slow in economic progress due to lack of infrastructure, poverty, corruption, reduced export earning, and low ratio of foreign direct investment. The global economy plays a crucial role shaping any countrys economy and Bangladesh is no expansion. A bank also plays a significant role in shaping national economy. In our economy, three types of schedule commercial banks are in operation. They are Nationalized Commercial Banks, Local Private Commercial Banks and Foreign Private Commercial Banks. Throughout the fast few years after independence Bangladesh has been experiencing rapid and significant changes in the banking sector. Not only in our country, all over the world the dimension of banking has been changing rapidly mainly due to the technological innovation, globalization and deregulation. This change all over the world has significantly affected the banking industry of our country, the result of which is the change in this sector in our country. Now the condition is such that banks must compete in the market place both with local institution as well as foreign ones. Al-Arafah Islami Bank Ltd is a local private commercial bank of the country. AIBL is the Islamic Shariah based commercial banks in Bangladesh. Naturally, Al-Arafah Islami Bank Ltd. is a bit different from other commercial banks that are it follows Islami Shariah in its operation. AIBL is now sailing its operation throughout the country with its 57 branches. General banking operations includes different types of deposits, SME banking, Micro finance, Locker facility, OBC collection etc. These will be described briefly in this report. In this phase the overall general banking activities are mentioned and briefly described, how the bank are maintained Islamic Shariah in their banking activities.

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Chapter: 1 Introduction

2 1.01 Rationale of the study This internship report on PRINCIPLES & PRACTICES OF ISLAMIC BANKING (A CASE STUDY ON GENERAL BANKING OF AL-ARAFAH ISLAMI BANK LIMITED) is prepared to fulfill the partial requirement of the internship program as full credit subject of the BBA program of The University. As a part of BBA program we need to do an internship program in any corporate field under supervision of our honorable teacher. Only study with text books or consultancies with students and faculties cannot prepare us perfectly to compete in this 21 worlds highly competitive job market. So it required to obtain practical working experience. Furthermore, it provides us a great opportunity to learn about corporate how it look like, how is works, about it environment. As a requirement for that I have done my internship in Al-Arafah Islami Bank, Hazaribag Branch.

1.02 objectives of the study

To complete the partial requirement of the internship program. To apply the knowledge that is gathered throughout last three and half year. To observe the banking environment of Bangladesh To acquire knowledge regarding the banking sector of Bangladesh. To get acquainted with Islamic banking. To find out various types of facilities offered an Islamic bank offers. To gather comprehensive knowledge regarding overall banking function. To gain practical working experience on various functional departments of AIBL.

1.03 Methodology of the study Both primary and secondary data have been collected and used for the purpose of making this report. The primary sources of information are:

Oral conversation with the offices of AIBL. From practical experience during the internship period. Informal conversation with the relevant parties. From observation of different tasks performed by the employees of AIBL during last three months.

3 The secondary sources of information are:

From the annual report of Al-Arafah Islami Bank Limited. Previous reports and journals relevant to the Islamic banking industry. Relevant AIBL paper and published documents. Various books, articles, compilations regarding banking operations. Paper, publications and references that are related to Islamic banking.

1.04 Scope of the study The scope of this report is limited to the operations and descriptions of general banking operations of Al-Arafah Islami Bank. Throughout the report I have tried to describe as detail as possible how every operations of general banking is done in Al-Arafah Isami Bank Limited. The report also contains a brief description of the other operational area of Al-Arafah Isami Bank Limited rather than general banking. 1.05 limitations of the study During the report making I have gone through some problems which may be stated as follows

Limited access to necessary information due to secrecy and security. Inadequate info of financial information in the company website. Unavailability of most recent financial and other information. Limited number of service offered by bank. All personnel of the bank were too busy, so its difficult for them to provide all the necessary data.

Chapter-2 Theoretical aspects

5 2.01 What is banking? The term banking is defined as Accepting, for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise, and withdraw able by checks, drafts order or otherwise. *Section 5 (b), Book-let no. 3] 2.02 Commercial bank A financial institution that provides services such as a accepting deposits and giving business loans. (Investment Dictionary) 2.03 Islamic banking Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively, (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

2.04 Function of commercial banks The business of a commercial bank is primarily to hold deposit and make loans and investments with the object of securing profits for its share holders. The functions of commercial banks are given below:

Receiving deposits from the public Making loan and advances Use of the different instruments like demand draft, pay order, cheque etc. Transfer of fund Other function

[Book let-3, AIBL] 2.05 Branch Banking Economists generally distinguish between branch and unit banking systems. In the branch banking system every bank, as a single legal entity having one board of director and one group of share holders, operates through a network of branches throughout the country.

6 2.06 Money market Money market is the market in which short-term funds are borrowed and lent. The money market does not deal in cash or money. But in trade bills, promissory notes and government paper which are drawn for short period. [Book let -3, AIBL] 2.07 Foreign exchange The term foreign exchange has different meanings. Often foreign exchange is used to donate foreign currency. When banks buys or sell foreign exchange, it deals in claim on foreign currency. [Book let -3, AIBL] 2.08 The instrument of international payment The instruments of international payment are given below:

Telegraphic transfer Mail transfer Bankers draft or bankers cheque Bill of exchange Other means of foreign payment

2.09 Relationship between banker and customer The Relationship between banker and his customer depends upon the nature of service provided by the banker. [Book let -3, AIBL] 2.10 Who is banker? According to Sir John Paget, No person or body, corporate or otherwise, can be a banker who does not 1) Take deposit accounts 2) Take current accounts 3) Issued and pay cheque and 4) Collect cheque, crossed and uncrossed, for his customer. [Book let -3, AIBL] 2.11 Customer A person who has an account in a bank is considered its customer. According to John Paget To constitute a customer there must be some recognizable course of habit of dealing in the nature of regular banking business. *Book let -3, AIBL]

7 2.12 General relationship between banker and customer Relationship as Debtor or Creditor Banker as trustee Banker as agent Banker as advisor

2.13 Negotiable instruments A negotiable instrument means a promissory note, bill of exchange or cheques payable to either to order or bearer. 2.13.1 Essential features of negotiable instruments

The negotiable instruments are easily transferable from person to person. A negotiable instrument confers absolute and good title on the transferee.

2.13.2 Types of negotiable instruments

Negotiable instrument by statute Negotiable instruments by custom or usage

2.14 Promissory note A promissory note is an instrument in writing ( not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument. [Book let -3, AIBL] 2.15 Bill of exchange Bill of exchange is an instrument in writing containing an unconditional order signed by maker, directing a certain person to pay a certain sum of money only to, or order of, a certain person or to the bearer of the instrument. [Book let -3, AIBL] 2.16 Cheque A cheque is a bill of exchange brawn on a specific banker and not expressed to be payable otherwise than on demand. [Book let -3, AIBL]

8 2.17 Endorsement Endorsement means signing on the back of the cheque/other negotiable instrument in order to transfer right to the endorsee. *Book let -3, AIBL]

2.18 Crossing cheque Crossing cheque is an instruction given to the paying banker to pay the amount of the cheque through a banker only and not directly to the person presenting it at the counter. A cheque bearing such an instruction is called a crossed cheque. 2.19 Satisfaction Satisfaction is the difference between the customer benefits and customer costs. Benefits: Functional benefits and emotional benefits. Costs: Money costs, time costs, energy costs and psychic costs. If

Benefits= costs, then customer is satisfied. Benefits< costs, then customer is dissatisfied. Benefits> costs, then customer is delighted.

2.20 Services A service is any set act or performance that one party can offer to another that is essentially intangible and does not result in the ownership of anything. [Book let -3, AIBL] 2.21 Exporting Exporting is the sending of the good from one country to another. [Book let -3, AIBL] 2.22 Importing Importing is the import of the good from other country. [Book let -3, AIBL] 2.23 Remittance Remittance means transfer of fund from one place to another. [Book let -3, AIBL]

9 2.24 Bearer A bearer means a person who by negotiation comes into possession of a negotiable instrument which is payable to bearer.

2.25 Advising bank On receiving the L/C from opening/issuing bank, the advising bank advises the exporter/beneficiary without engagement of their responsibility. [Book let -3, AIBL] 2.26 Negotiating bank Negotiating bank purchases/negotiates the documents from the exporter/ beneficiary and claim reimbursement from the L/C issuing bank. [Book let -3, AIBL]

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Chapter-3 Familiarization with Organization

11 About Al-arafah IslamiBank Limited, The Bank Al-arafah IslamiBank Limited is a Banking Company registered under the Companies Act, 1994 with its head office at Peoples Insurance building, 36, dilkusa commercial area, motijheel, Dhaka-1000. The Bank started its operation from 27 September, 1995. With the objective of achieving success here in this world & hereafter by pursuing the way directed by Allah and the path shown by His Rasul (SM), Al Arafah Islami Bank Ltd was established as a private limited company on 18 June 1995 year with an authorized capital of Tk 500 million. At inception, its paid up capital was Tk 101.20 million divided into 101,200 ordinary shares of Tk 1,000 each. 23 sponsors of the bank subscribed the total issued capital. In 2000, the paid up capital of the bank increased to Tk 253 million, of which Tk 126.50 million were paid by the sponsors and Tk 126.50 million by the general public. The bank is listed in the two stock exchanges of the country and has offered 126,000 shares for subscription and trading by the public. Al-Arafah Bank is an interest-free shariah bank and its mode of operation is substantially different from those of regular commercial banks. The bank however, renders all types of commercial banking services under the regulation of the Bank Companies Act 1991. It conducts its business on the principles of musharaka, bai-murabaha, bai-muajjal and hire purchase transactions. A Shariah Council of the bank keeps constant observation to ensure that the activities of the bank are being conducted according to the principle of Islam. 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 Directors came from the public shareholders. Managing Director is the chief executive of the Bank. There is a Shariah council of 7 members in AlArafah Islami Bank Ltd to monitor the overall activities runs by Shariah. 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 in 2007, 07 in 2008 & 08 in 2009. Total number of employees of the Bank was 771 in 1995 and reached to 1080 in 2008 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 20645.30 million at the end of the Year 1999 and 30th June 2008. Foreign exchange business handled by the Bank during the year 1999 to 30th June 08 were Tk.7859.72 million and 74795.94 million respectively and investment was Tk.3793.71 million and 19840.35 million at the end of the year 1999 and 30th, June 2008 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 2007. It is an interest frees Shariah bank of Bangladesh rendering all types of commercial banking service under the regulation of Bank companies act, 1991. Al-Arafah Islami Bank Ltd. AIBL possesses a powerful combination of skill and knowledgeable person favorable for delivering strong growth in an era of rapidly changing of banking environment like todays. The AIBL is committed to contribute significantly to the national economy. It has made positive contribution towards the Socio Economic Development of the country with 72 branches .It has achieved a continuous profit and declared a good dividend over the

12 years. High quality customer service through the integration of modern technology and new products is the tool of the bank to achieve success. The bank has a diverse array of carefully tailored products and services to satisfy customer needs. The Bank is committed to contribute significantly to the national economy. It has made a positive contribution towards the socio economic development of the country with 72 branches of which 17 is AD throughout the country. Vision

Mission

To be a pioneer in Islamic Banking in Bangladesh Contribute significantly towards the growth of the national economy. To establish an interest free transaction in the economy.

To achieve satisfaction of Almighty Allah both in this world and even in afterlife. To increase the volume of Shariah Based Banking Practices. to satisfying diverse needs of its customers through collection of products at a competitive price by using appropriate technology and providing timely service Fast and efficient customer service. Maintaining high standard of business ethics. To maintain balanced growth. To maintain steady & competitive return on shareholders equity. To introduce innovative banking at a competitive price. To capture and retain quality human resource. To extend competitive compensation packages to the employees. Firm commitment to the growth of national economy. To engage more in Micro and SME financing.

Objectives Al-Arafah Islami Bank Ltd. believes in its uncompromising commitment to fulfill its customer needs and satisfaction and to become their first choice in banking. AIBL is devoted to run all its activities as per Islamic Shariah. AIBL throughout its steady progress and continued success has, by now, earned the reputation of being one of the leading Private Sector Banks of the country. The objectives of AIBL are as under:

All the activities of AIBL are conducted on interest-free system according to Islamic Shariah. Investment is made through different mode permitted under Islamic Shariah. Investment income of bank is shared with the Mudaraba depositors according to a ratio to ensure a reasonably fair rate of return on their depositors.

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Its aims are to introduce a welfare-oriented banking system and also to establish equity and justifies in the field of all economic activities. It extends co-operative to the poor, helpless, and low-income group of the people for their economic enlistment particularly in the rural areas. It plays a vital role in human resource development and employment-generation, particularly for the unemployed youths. Its aims are to achieve balanced growth & development of the country through investment operations, particularly in the less development areas.

Various mode of Business

Investment banking (capital market operation in DSE & CSE) International Foreign Trade Finance (Import & Export) Foreign Exchange dealing (Currency dealing & Remittance) Corporate finance SME banking Personal banking Transport Investments House Building Investments Merchant banking

Layout of Management Structure A layout of Management Structure and Legitimate Hierarchy of Management of AIBL are presented as follows:

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Advisor

Chairman

Board of Director

Managing Director Executive Vice President Senior Vice President Vice President Assistent Vice President