An Internship Report On Modes of Investment A Study on Islami Bank Bangladesh Limited (part-3)
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To give preference to invest in SME, Real
Estate, Retail, Consumer and other special schemes including Rural Development
Scheme for income and employment generation.
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To give preference to short-term investment to
long-term investment in maintaining a balanced portfolio.
§
To expand investment operations beyond the niche
market by including new clients from all sectors.
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To look into the profitability of investments.
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To induct best of the best clients of the
market.
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To encourage investment where the risk weight is
less.
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To ensure safety and security of investments.
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To keep investment pricing competitive.
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To keep non-performing investment at the lowest
possible level.
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To balance maturity of investment with the
maturity of deposit to avert liquidity risk.
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To explore the possibility of investment in the
existing Money and Capital Market and help organization of Islamic Money and
Capital Market.
3.7
Guidelines to Manage Investment (Credit) and Investment (Credit) Risk:
Credit Risk Management Guidelines involve in assessing and
managing credit risks associated with the selection process of a potential
borrower, credit structuring (amount, duration, purpose, repayment, and
support), approval process of credit, credit documentation (security and
disbursement), credit administration, credit monitoring and recovery functions
of a bank or financial institution. At the selection stage, credit risk grading
is essential to keep the credit risk exposure at a tolerable level.
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Figure:
Guidelines for Investment (Credit) and Investment (Credit) Risk Management
Source: Managing Core Risks of
Financial Institutions, Credit Risk Management, Industry Best Practice,
Bangladesh Bank.
This guideline will make us
understand “To manage credit risk-
§
How the credit will be “Assessed” and how the
credit risk will be “Granted”?
§
How the “Credit Approval Authority” will be
worked and what are the processes?
§
How “Internal Audit” can be used as a tool for
managing credit risk?
§
How the “Risk Management Structure” will be look
like?
§
What is the appropriate Credit Administration?
§
How a bank can monitor its credit to Minimize
Credit Risk?
§
What are the effective steps to make an
Effective Recovery Performance?
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3.8 Basel
Guidelines and its Compliance:
IBBL has constituted Stress Testing
Committee and Assessment of Capital under Basel II Accord Committee to look
after the Stress Testing & Basel-II related risk issues. Addressing the
Investment Risk, Market Risk, Operational Risk and other risks associated with
the banking operations, IBBL has been linking its risk profile with the capital
which is the major risk absorbing tool. Currently the capital adequacy of IBBL
is 13.49% wherein the industry average is only 10.46%. IBBL is committed to
continuous improvement of bank’s internal procedure for assessing the specific
risk situation, ongoing adjustment and further development of new methods of
risk management and internal control, covering external factors and risk areas
which are not taken into account or partially taken into account while
calculating Minimum Capital Requirements, quantifying the risks under pillar 2
of Basel-II, stress testing, Internal Capital Adequacy Assessment Process
(ICAAP), setting capital targets that are commensurate with the Bank‟s risk
profile and control environment etc. For adequate supervision of capital
functions and risks, Bank has formed a Supervisory Review Process Team (SRPT)
as stipulated in Bangladesh Bank‟s guidelines.
3.9 Principles of Sound
Investment Criteria:
It should be clearly understood that the
principles are not inflexible laws & are given as guidelines for protecting
credit. In a practical competitive world, risks are defined, accepted and
credit is often granted even though a person does not strictly with some of the
criteria described below. The basic investment criteria can be considered as
eight main headings as follows:
§ Principle
of Safety
§ Principle
of Liquidity
§ Principles
of Purpose
§ Character
& Ability of the Borrower
§ Principles
of Security
§ Principles
of Profitability
§ Source
of Repayment
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28
§ Principles
of National Interest
Principles of Safety:
The first lending
principle is safety. The very existence of a bank depends upon the safety of
its advances. Safety should not be sacrificed for profitability. So utmost care
should be exercised to ensure that the funds go to the right type of borrower, are
utilized in such a way that they remain safe and the repayment comes in the
normal course.
Principle of Liquidity:
Liquidity means
the availability of bank funds on short notice. The liquidity of an advance
means its repayment on demand on due date or after a short notice. Therefore,
the banks must have to maintain sufficient liquidity to repay its depositors
and tradeoff between the liquidity and profitability is must.
Principles of Purpose:
The bank should
not invest money for any purposes for which a borrower may be free from all
risks but if the funds borrower are employed for unproductive. Purpose like a
marriage ceremony, pleasure trip etc. or speculative activities, the repayment
in the normal course will become uncertain.
Character &Ability of the Borrower: The
primary responsibility of the leading banker is “know your customer and his
business”. While considering the character and of a borrower, the following
point must be kept in mind.
§
Do know your customer already?
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Was he respectively introduced?
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If he was previously a customer of another bank,
why has he come to Islami Bank Bangladesh Limited, Try to previous bank
statement?
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Have you made the account opening inquires
required by the bank?
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What is the business its ownership?
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What are the customer’s background and financial
track record?
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Customer’s
honesty & integrity and personal stability?
§
How has the customer managed his financial
circumstances in the past?
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The branch manager
should have the answer of the above queries and should be to judge his ability
to use the investment facilities to his advantage. The advance should be
granted only to those borrowers in whom the branch manager has full confidence.
Principle of Security:
The security
offered by a borrower for an advance is insurance to the banker. It serves as
the safety value for an unforeseen emergency. So another principle of sound
investment is the security of investment. The security accepted by a banker to
cover a bank advance must be adequate, readily marketable, easy to handle and
free from any encumbrance.
Principle of Profitability:
Banking is
essentially a business, which aims at earning of a good profit. The working
funds of a bank are collected mainly by means of deposit from the public and
interest has to be paid on those deposits.
Sources of Repayment:
After the branch
manager has ensured that the investment will be a profitable propositioning for
the bank, he should then turn his attention to the cash flow situation of the
borrower.
Principle of National Interest:
The above
development of banking has reached a stage where a banker is required to
identify his business with national policies. Banking Industry has a
significant role to play in the economic development of a country. So, the
savings of the people which are mobilized by banks must be distributed to those
sectors which require development in the country’s planning program.
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Part Four
Modes of Investment: A
study on Islami Bank Bangladesh Limited, Sylhet Branch, Sylhet
4.1 Investment Process of Islami Bank Bangladesh
Limited:
Generally a bank
takes certain steps to deliver its proposed investment to the client. But the
process takes deep analysis. Because banks invest depositors fund, not banks‟
own fund. If the bank fails to meet depositors demand, then it must collapse.
So, each bank should take strong concentration on investment proposal. However,
Islami Bank Bangladesh Limited makes its investment decision through
successfully passing the following crucial steps:
Figure:
Process of Investment in IBBL
Source:
Investment Department of IBBL, Sylhet Branch
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4.1.1
Selection of the Client:
In this stage
investment taker (client) approaches to any of the branches of Islami Bank
Bangladesh Limited. Then, he talks with the manager or respective officer
(investment). Secondly, the bank considers five C‟s of the client. After
successful completion of the discussion between the client and the bank, bank
selects the client for its proposed investment. It is to be noted that the
client/customer must agree with the bank’s rules & regulations before
availing investment. Generally, bank analyses the following five C,s of the
client:
§ Character;
§ Capacity;
§ Capital;
§ Collateral;
and
§ Condition.
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4.1.2 Application Stage:
At this stage, the
bank will collect necessary information about the prospective client. For this
reason, the bank informs the prospective client to provide and/or fill duly
respective information which is crucial for the initiation of investment
proposal. Generally, here, all the required documents for taking investment
have to prepare by the client himself. Documents that are necessary for getting
investment of IBBL are prescribed below:
Ø
Trade License photocopy (for proprietorship);
Ø
Abridged pro forma income statement;
Ø
Attested copy of partnership deed (for
partnership business);
Ø
Prior three (03) years‟ audited balance sheet
(for joint stock company);
Ø
Prior three (03) years‟ business transaction
statement for the Musharaka/Mudaraba investment;
Ø Abridged pro forma income statement for the Musharaka/Mudaraba
investment;
Ø Attested copy of the Memorandum of Association (MOA) &
Articles of Association (AOA) for the joint stock company;
Ø Attested copy of the Tax Identification Number (TIN) - including
final assessment;
Ø Summary of the sundry debtors and creditors (including both
times& schedule);
Ø Summary of the personal movable & immovable assets; and
others.
4.1.3 Appraisal Stage:
At this stage, the
bank evaluates the client and his/her business. It is the most important stage.
Because on the basis of this stage, the bank usually goes for sanctioning the
proposed investment limit/proposal. If anything goes wrong here, the bank suddenly
stops to make payment of investment.
In order to
appraise the client, Islami Bank Bangladesh Limited provides a standard F-167B
Form (Appraisal Report) to the client for gathering all the information. The
original copy of the appraisal report is enclosed in the appendix chapter.
However, the following contents are presented from that appraisal report:
Ø
Company’s/Client’s Information.
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Ø
Owner’s Information.
Ø
List of Partners/Directors.
Ø
Purpose of Investment/Facilities.
Ø
Details
of Proposed Facilities/Investment
Ø
Break up of Present Outstanding.
Ø
Other Liabilities of the Client/Group.
Ø
Previous Banker’s Information.
Ø
Details of Sister/Allied Concerns.
Ø
Allied Deposit as on.
Ø
Business/Industry Analysis.
Ø
Relationship Analysis.
Ø
Asset-Liability position of the client as per
Audited Balance Sheet.
Ø
Working Capital Assessment.
Ø
Risk Grade.
Ø
Particulars of the storehouse for storing
MPI/Murabaha goods.
Ø
Insurance Coverage.
Ø
Audit Observation.
Ø
Security Analysis.
4.1.4 Sanctioning Stage:
At
this stage, the bank officially approves the investment proposal of the
respective client. In this case client receives the bank’s sanction letter.
Islami Bank Bangladesh Limited’s sanction letter contains the following
elements:
Ø
Investment limit in million.
Ø
Mode & amount of investment.
Ø
Purpose
of investment.
Ø
Period of
investment.
Ø
Rate of
return.
Ø
Securities.
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4.1.4.1 Cash/Goods Security:
In
allowing Murabaha investment and the amount of cash security is generally
realized from the client (amount depends on the nature of goods,
creditworthiness of the client, collateral security obtained etc.) which is
converted to goods security after the purchase of goods purchased out of the
bank’s investment and client’s cash security is pledged to the bank, kept under
bank’s custody before its delivery to the client for payment. Example: If, for
a Murabaha investment cash security is fixed at 25% Bank’s investment stands at
75% of the total goods purchased. For example, if cost of total goods purchased
is Tk.1,00,000 Bank’s investment will be Tk.75000 and client’s cash security
will be Tk.25,000.
|
Bank
|
Client
|
Total Cost of Goods
|
|
Tk.
75,000 (75%)
|
Tk. 25,000 (25%)
|
Tk. 100,000
(100%)
|
4.1.5 Documentation Stage:
At this stage, usually the bank analyses
whether required documents are in order. In the documentation stage, Islami
Bank Bangladesh Limited checks the following documents of the client:
i. Tax Payment Certificate.
ii. Stock Report.
iii. Trade License (renewal).
iv. VAT certificate
v. Liability statement from different
parties.
vi. Receivable from different
clients.
vii. Other assets statement.
viii. AungykarNama.
ix. GhosonaPotra.
x. Three (03) years net income &
business transactions.
xi. Performance report with the bank.
xii. Account Statement Form of the
bank.
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xiii. Valuation Certificate;
a. Particulars of the
Proposal.
b. Particulars of the
Mortgagor.
c. Particulars of the
Properties.
xiv. Outstanding liability position
of the bank.
xv. CIB (Credit Information Bureau)
Report.
4.1.6 Disbursement Stage:
At this stage, the
bank decides to pay out money. Here, the client gets his/her desired fund or
goods. It is to be noted that before disbursement a “site plan” showing the
exact location of each mortgage property needs to be physically verified.
4.1.7 Monitoring & Recovery Stage:
At this final
stage of investment processing of the Islami Bank Bangladesh Limited. The bank
will contact with the client continually, for example- the bank can obtain a
monthly stock report from the client in case of micro investment. Here, the
bank will keep his eye on over the investment taker. If needed, the bank will
physically verify the client’s operations. Also if the bank feels that anything
is going wrong then it tries to recover its investment fund from the client.
4.2 Investment Products of IBBL:
Islamic banks do
not directly deal with money. They run business with money. The funds of
Islamic banks are
mainly invested in the following modes:
i. Mudaraba;
ii. Musharaka;
iii. Bai-Murabaha;
iv. Bai-Muajjal;
v. Salam and
Parallel Salam;
vi. Istisna and
parallel Istisna;
vii.
Ijara;
viii.
IjarahMuntahiaBittamleek (Hire Purchase);
ix. Hire Purchase
MusharakaMutanaqisa;
x. Direct
Investment;
xi. Investment
Auctioning etc.
xii.
Quard
xiii. Quard Hassan
etc.
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Figure:
Investment Mechanisms of IBBL
4.3 Bai- Mechanism:
i. Bai-Murabaha:
Contractual buying and selling at a
mark-up profit is called Murabaha. In this case, the client requests the bank
to purchase certain goods for him. The bank purchases the goods as per
specification and requirement of the client. The client receives the goods on
payment of the price which includes mark-up profit as per contract. Under this
mode of investment the purchase/ cost price and profit are to be disclosed
separately.
Features of
Bai-Murabaha:
§ It
is permissible to take cash/collateral security to guarantee the implementation
of the promise or to indemnify any losses that may result.
§ The
bank sells the goods at a price above the cost to obtain a profit. The sale
price that is
charged by the bank is agreed upon
in the Bai-Murabaha. The profit can be stated in
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terms of a flat dollar
amount or on a percentage of the purchase price. If a percentage is used, the
percentage shall never be expressed in terms of time, in order to avoid
confusion that the price is a form of interest (Riba), which is not allowed.
§ The
price agreed to in the agreement is binding on both parties.
§
It is permissible for the bank to contract with
a third party to buy and receive the goods on its behalf. This agreement must
be a separate contract.
ii. Bai-Muajjal:
"Bai-Muajjal"
means 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 a contract between a buyer and
a 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 a lump sum or within a fixed period by fixed
installments. The seller may also sell the goods purchased by him as per order
and specification of the buyer. In bank's perspective, Bai-Muajjal is treated
as a contract between the bank and the client under which the bank sells the
client certain specified goods, purchased as per order and specification of the
client at an agreed price payable within a fixed future date in a lump sum or
by fixed installments.
Features of Bai-Muajjal:
§
It is permissible and in most cases, the client
will approach the bank with an offer to purchase a specific good through a
Bai-Muajjal agreement.
§
It is permissible to make the promise binding
upon the client to purchase the goods from the bank.
§
It is also permissible to document the debt
resulting from Bai-Muajjal by a Guarantor, or a mortgage or both, like any
other debt.
§
Mortgage/Guarantee/Cash security may be obtained
prior to the signing of the Agreement or at the time of signing the Agreement.
§
The bank may sell the goods at a higher price than
the purchase price to earn profit.
§
All goods purchased on behalf of a Bai-Muajjal
agreement are the responsibility of the bank until they are delivered to the
client.
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Nice information
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