- 1. Internship Report On The Investment and Comprehensive
Performance Analysis of commercial Bank. A case Study of Al-Arafah
Islami Bank Ltd. Prepared For: Abdullah Iftikhar Lecturer School of
Business Studies Southeast UniversityPrepared By: Md. Fayshal
Hossan Miazy ID: 2009110000038 Batch: 22nd Major in Finance
Program: BBA Southeast UniversityDate of Submission: 12th May,
2013
2. Internship Report On The Investment and Comprehensive
Performance Analysis of commercial Bank. A Case study of Al-Arafah
Islami Bank LtdPrepared For: Abdullah Iftikhar Lecturer School of
Business Studies Southeast University Prepared By: Md Fayshal
Hossan Miazy ID# 2009110000038 BAtch: - 22 mAjor- FinAnce
ndProgrAm: - BBADate of Submission: 12 May, 2013 Page 2 of 168 3.
Internship Report on The Investment and Comprehensive Performance
Analysis of Commercial Bank. A Case Study of Al- Arafah Islami Bank
Ltd.Page 3 of 168 4. AbbreviationSN 01AIBLAl-Arafah Islami Bank
Ltd02SJIBLShahjalal Islami Bank Ltd03SIBLSocial Islami Bank
Ltd04FSIBL05EBLExim Bank Ltd06A/CAccount07ROAReturn on
Assets08ROEReturn on Equity09RODReturn on Deposit10ROIReturn on
Investment11AVPAssistance Vice- President12SDUSDisbursed to Saving
Deficit Units13SSUSavings Surplus Units14L/CLetter of
Credit15CIBCredit Information Bureau16HDSHousehold Durables
Scheme17ISDInvestment Scheme for Doctors18SEISSmall Enterprise
Investment Scheme19REIPReal Estate Investment
Program20AIISAgricultural Implement Investment SchemeFirst Security
Islami Bank LtdPage 4 of 168 5. DedicationDedicate to my respected
parents, family members & My respected teachers.Page 5 of 168
6. Letter of Transmittal 12 May, 2012 Abdullah Iftikhar Lecturer
School Of Business Studies Southeast University Subject: Submission
of Internship Report. Dear Sir, This is my pleasure to submit my
internship report on The Investment and Comprehensive Performance
Analysis of Commercial Bank, A Case study of Al-Arafah Islami Bank
Ltd It was a great opportunity for me to acquire knowledge and
experience in respect of functions, procedures and operational
mechanism of a commercial bank based on Islami Shariah while
working in Al-Arafah Islami Bank, Khilkhet Branch. This report
contains three (03) parts- first part contains organizational
overview and the investment of Al-Arafah Islami Bank, second part
contains comprehensive performance analysis among five Islami Banks
(Al-Arafah Islami Bank, Shahjalal Islami Bank, Social Islami Bank,
First Security Islami Bank and Exim Bank), and third or final part
contains Research part, which covered with clients view analysis. I
believe that the knowledge and experience I have gathered during my
internship period will immensely help me in my future professional
life. I therefore, request your favor to accept my Internship
Report. Yours Sincerely--------------------------Md Fayshal Hossan
Miazy ID# 2009110000038 BBA. 22nd Batch. Major- Finance Southeast
University Page 6 of 168 7. Declaration of SupervisorThis is
certifying that Md. Fayshal Hossan Miazy ID: 2009110000038, student
of Southeast University, School of Business BBA program has
completed the internship report titled The Investment and
Comprehensive Performance Analysis of Commercial Bank, A Case study
of Al-Arafah Islami Bank Ltd successfully under my supervision. To
the best of my knowledge and as per his declaration the internship
report is an authentic work on the issue and has not been submitted
to anywhere for awarding any degree. I wish his every success in
life.Supervisor---------------------Abdullah Iftikhar Lecturer
School of Business Studies Southeast UniversityPage 7 of 168 8.
Declaration of StudentI hereby declare that the report of
internship namely The Investment and Comprehensive Performance
Analysis of Commercial Bank, A Case study of Al-Arafah Islami Bank
Ltd by me after completing three (03) month of internship in
Al-Arafah Islami Bank at Khilkhet Branch and comprehensive study of
the overall Investment & Performance Analysis of Al-Arafah
Islami Bank . I also declare that this report is my original worked
and prepared for academic purpose which is a part of BBA
program.-----------------------------------Md Fayshal Hossan Miazy
ID# 2009110000038 BBA. 22nd Batch. Major- Finance Southeast
UniversityPage 8 of 168 9. ACKNOWLEDGEMENTAt first I would like to
express my deepest gratitude to Almighty Allah for giving me the
strength and the ability to finish the task and submit the
internship report within the planned time. Then I am very much
grateful to the Al-Arafah Islami Bank Limited (AIBL) Khilkhet
Branch for providing me the opportunity to complete my internship.
First of all I am deeply indebted to our honorable Dean Prof.
Sirajuddaula Shaheen, then my Internship Supervisor Abdullah
Iftekhar Lecturer, School of Business Studies, Southeast University
for his whole hearted supervision to me during Internship period.
Without his support and encouragement this Internship report I cant
submit it due time. My heartiest gratitude goes to Mr. Md. Sharif
Chowdhury, Assistant Vice-President & Manager of Al-Arafah
Islami Bank Limited (AIBL), Khilkhet Branch for giving me
permission for my internship in his organization & valuable
advice and suggestions to complete the report in an appropriate
manner. My special thanks to Mr. Shah Alam, PO & second manager
AIBL, Khilkhet Branch and also grateful to Mr. Kazi Md. Abul Hashem
PO, Mr. Md. Jasim Uddin, Investment In charge, Nazmul Senior Field
officer, Omar Faruq, Md. Shohel & Ibrahim Khalil (Executive
Officer) for providing me assistance, provide necessary
information, and advice which can help me to complete my internship
report. I am also grateful to all the staffs and all the officers
of the Al-Arafah Islami Bank Limited (AIBL), Khilkhet Branch.
Finally I would like thank my all friends, honorable Teachers, my
respected Parents & other family members for giving me help in
every stage.Page 9 of 168 10. Executive Summary Investment is the
main part of the bank. This report contains handy information about
investment of profit base bank. The first chapter of this report is
introduction where contain statement of the profit, objective,
methodology, limitation of the report. In the second chapter
introduces the overview of AIBL introduces background, vision,
mission, board of director, management structure of AIBL shariah
board of the bank AIBL, special feature of AIBL and Al-Arafha
Islamic Bank limited micro finance. In the third chapter focused
all about investment of AIBL. Invest by mainly three mechanisms
which describe in theoretical background. There are two types of
investment. Sector wise investment & Mode-wise investment. They
are Bai-mechanism, Leasing mechanism & Share mechanism. AIBL
commonly Bai-mode. Sometimes they use Leasing-mechanism. It is the
discussion part about various special terms what I use in this
report and various mode of investment. They also invested in
Household Durable Scheme, Real Estate Investment Program etc. The
fourth chapter is the main part where includes product and services
of AIBL. In this chapter give briefly description about all product
and services of AIBL. In this part I am hardly try to all
information about product and services of Al-Arafah Islamic bank
including deposit product of AIBL, financial product, account
operation of AIBL, the functions of AIBL, online general banking
service and other activities of AIBL. AIBL on investment, such as
the problems of Mudaraba is lack of govt. support, uncertain cost
of capital, the problems of Musharaka lack of expertise persons,
lack of legal frame work of Islami Banking in Bangladesh. The
problem of Ijarah is: disposing the asset, when the asset is no
longer be needed, uncertainty about the total life of the asset
etc. AIBL should initiate different investment modes according to
diverse needs of clients by conducting huge research and study
etc.Page 10 of 168 11. Table of Contents
ChapterParticularsIntroductionPage No. 01-081.1Introduction 1.2
Background of the Report021.3 Origin of the report021.4 Objective
of the report03-041.5 Scope of the study 0101041.6 Methodology of
the study051.6.1 Primary data051.6.2 Secondary data051.7
Sampling051.7.1 Population05-061.7.2 The Sample Units061.7.3 The
Sampling Frame061.7.4 The Sampling Design061.7.5 The Sample
Size061.7.6 The Sampling Plan061.7.7 Some Important Facts About The
overall Survey 1.8 Benefit of the reportPage 11 of 1680607 12. 1.9
Limitations of the study07-08Organizational Overview09-312.1
Organizational Overview of Al-Arafah Islami Bank Ltd102.2
Historical Background of Al-Arafah Islami Bank Limited10-112.3 AIBL
Profile 0211-122.4 Vision& Mission of AIBL12-132.4.1
Vision122.4.2 Mission12-132.5 Objectives of AIBL 2.6 Other
objective of Al Arafah Islami Bank includes13 13-142.7
Commitments142.8 AIBL at a Glance14-152.9 CORE VALUES162.10 Special
Features of the Bank16-172.11 Board of Directors of AIBL18-192.12
Management of AIBL20-212.13 Shariah Board of AIBL21-222.14 Members
of AIBL's Fatwa & Shariah222.15 The Board's Role222.16
Important Duties of the Shariah Board232.17 SHARIAH
SUPERVISORS24Page 12 of 168 13. 2.18 SHARIAH AUDITING242.19 SWIFT
CODES of AIBL24-252.20 AIBLS LIBRARY262.21 Corporate Social
Responsibilities of AIBL26-272.22 AIBL Khilkhet Branch272.23
Organogram of Al-Arafah Islami Bank Ltd. Khilkhet Branch, Dhaka
2.24 Operating activities of Khilkhet branch Theoretical Framework
for Investment2829-31 32-623.1 Investment333.2 Introduction of
Investment Division333.3 Investment Assessment343.4 Mode of
Investment353.5 Trading modes (Bai-Mechanism)363.5.1
Bai-Murabaha363.5.2 Bai Muajjal363.5.3 Bai- Salam363.5.4
Bai-Istishna37033.6 Leasing mode (Ijarah mechanism)373.6.1 Ijarah
Muntahia Bittamleak (Hire Purchase) 37 3.6.2 Hire Purchase Under
shirkatul Melk 3.7 Share Mechanism 3.7.1 Mudaraba38 38-39 39-40Page
13 of 168 14. 3.7.2 Musharaka403.8 Others413.8.1 Quard413.8.2 Uzrat
Bill Wakala413.9 PROCESS OF INVESTMENT423.10 Investment
Growth42-453.11 Documentation46-473.12 Investment
Principles48-493.13 Guide Lines by Bangladesh Bank49-503.14
Guideline for Sanctioning Investment by Bangladesh Bank & Head
Office 3.15 Special Scheme under Investment51523.15.1 Household
Durables Scheme (HDS)52-533.15.2 Investment Scheme for Doctors
(ISD)53-543.15.3 Small Enterprise Investment Scheme
(SEIS)54-553.15.4 Real Estate Investment Program (REIP)55-563.15.5
Transport Investment Scheme (TIS)573.15.6 Car Investment Scheme
(CIS)58-593.15.7 Agricultural Implement Investment Scheme
(AIIS)59-603.15.8 Micro Industries Investment Scheme
(MIIS)60-613.16 Process of Investment Performance Analysis Page 14
of 16862 63 15. 4.1 Theoretical Review 4.2 Ratio Analysis64-684.3
Time Series Analysis046469-924.4 Comparative Analysis among Five
Islami Banks Research Part 0593-104105-1325.1 The
Questionnaire1065.2 Clients view Analysis106-132SWOT
Analysis133-1356.1 SWOT Analysis in AIBL 6.2 Strengths1346.3
Weaknesses1346.4 Opportunities1346.5 Threats06134-135135Findings,
Recommendations and Conclusion136-1427.1 Summary of Findings
071377.2 Problems & Limitations1387.3 Recommendations138-1417.4
Conclusion141-142References143Appendix144-157Page 15 of 168 16.
CHAPTER-1 INTRODUCTIONPage 16 of 168 17. 1.1 Introduction The term
Islamic banking refers to a system of banking or banking activity
that is consistent with Islamic law (Shariah) principles and guided
by Islamic economics. In particular, Islamic law prohibits usury,
the collection and payment of interest, also commonly called riba
in Islamic discourse. In addition, Islamic law prohibits investing
in businesses that are considered unlawful, or haraam (such as
businesses that sell alcohol or pork, or businesses that produce
media such as gossip columns or pornography, which are contrary to
Islamic values). Islamic banking has the same purpose as
conventional banking: to make money for the banking institute by
lending out capital. But that is not the sole purpose either. The
basic principle of Islamic banking is based on risk-sharing which
is a component of trade rather than risk-transfer which is seen in
conventional banking. Islamic banking introduces concepts such as
profit sharing (Mudharabah), safekeeping (Wadiah), joint venture
(Musharakah), cost plus (Murabahah), and leasing (Ijar). In an
Islamic mortgage transaction, instead of lending the buyer money to
purchase the item, a bank might buy the item itself from the
seller, and re-sell it to the buyer at a profit, while allowing the
buyer to pay the bank in installments. The goods or land is
registered to the name of the buyer from the start of the
transaction. This arrangement is called Murabahah. An innovative
approach applied by some banks for home loans, called Musharaka
alMutanaqisa, allows for a floating rate in the form of rental. The
bank and borrower form a partnership entity, both providing capital
at an agreed percentage to purchase the property. The partnership
entity then rents out the property to the borrower and charges
rent. The bank and the borrower will then share the proceeds from
this rent based on the current equity share of the partnership.Page
17 of 168 18. 1.2 Background of the Report:A develop banking sector
plays a vital role for financial stability of a country. In the BBA
program, the internship is one of the vital parts, which has to be
done by every student .the internship program provides an
opportunity for the students to minimize the gap between
theoretical and practical knowledge and will help in practical
life. I got this great opportunity to perform my internship program
in the Al-Arafah Islami Bank Ltd. I have completed internship
program based on theoretical and practical knowledge. Through this
report an individual can expect to have a good knowledge about the
service quality between the Supporting Desk Officers and Front Desk
Officers (CRO). I have tried my level best to put more emphasis on
the SME loan and the service quality level between the Front Desk
Officers and the Supporting Desk Officers since it was the topic of
my internship program. This report is to be used only for the
academic purpose. I have collected all the necessary and relevant
data from various primary, secondary and tertiary sources. After
three months long hard labor, it has become possible for me to make
the report comprehensive and factual. The data is truly and
strictly confidential and no one can use its components in full or
partial. I would like to give thanks to everyone who has helped and
encouraged me in the process of preparing this report.1.3 Origin of
the report The BBA internship program is a mandatory requirement
for the students who are graduating from the BBA programme of
Southeast University, Department of Business Administration. In the
internship program, I was attached to a host organization named '
Al-Arafah Islami Bank Ltd ' Khilkhet branch for 12 weeks. During
this period I learned how the host organization works with the help
of the internal supervisor. As a result I have decided to make a
report on "The Investment and Comprehensive Financial Performance
Analysis of Al-Arafah Islami Bank Ltd ".Page 18 of 168 19. 1.4
Objective of the report The objective of this study is to have a
clear concept and some practical experience about Financial
Statement Analysis Systems of an organization. However, we had some
textbook knowledge but had little in real life, practice so ever.
This report is designed to know more about the overall banking
Systems of the United Commercial Bank Limited and analyze the ratio
of this organization and identify the financial condition of this
organization. In addition, the study seeks to achieve the following
objectives:To identify the level of customer satisfaction of AIBL.
To recommend ways of improving the service standard that
accommodates a rapidly growing customer volume. To find out what
are the major factors that hamper satisfaction among General
banking service in AIBL. To examine the activities of the loans and
advanced department. To see if inclusion of some necessary product
or documentation feature that is currently absent, or improvement
of some existing facility can act to increase customer
satisfaction. To submit a report, for the fulfillment of my BBA
practical. The main objective of this report is to find out the The
Investment and Comprehensive Performance Analysis of Al-Arafah
Islami Bank Limited.. To gather comprehensive knowledge on overall
banking functions and the expectations of the customers regarding
the service level of the bank. Identify the factors contributing to
the attractive and operative performance of the local branch of the
bank. Page 19 of 168 20. To make a study of the facts in order to
arrive at certain conclusion about overall banking operation.
Identify the main objectives of AIBL Investment Disbursement. To
find out the sector in which AIBL provides Investment. To evaluate
financial affairs of the Bank To visualize the quantitative and
qualitative aspects of AIBL To identify policy recommendations for
further improvement To evaluate the performance of AIBL with others
four Islami bank.1.5 Scope of the study The report will be limited
to the level of customer satisfaction in the investment and
performance analysis of AIBL. The focus of this report will be only
on the investment and financial performance analysis of AIBL. The
report is developed on the basis of my work in general banking with
AIBL, Khilkhet Branch. In spite of limitation I also got some
facility to complete my internship report. The employees whose held
a responsible post in the entire department helped me lot. They
gave me all essential data and conversation with me. My university
internship supervisor also helped me a lot. He gave me a guidelines
how to prepare my report more attractive and perfect. This bank has
given me the opportunity to observe the banking environment for the
first time indeed. I got an opportunity to gather experience by
working in the different departments of the branch under the
supervision of different departmental heads.Page 20 of 168 21. 1.6
Methodology of the study I have got all the relevant information
from my working experience with AIBL, their Annual report, some
circular, various brochures, AIBL web site and such. Some
information is taken from some of my friends.1.6.1 Primary data:
The primary data of this report is the information, which is
gathered from AIBL while I worked with them. 1.6.2 Secondary data:
The secondary data of this report are collected from AIBL Annual
report, and also some reports from which I got idea about the way
of writing a report. Secondary Sources: Secondary data are
collected in the following ways: Data gathered within the
organization itself. Data gathered from Texts Internet sources.
General reports. Annual reports Official documents Credit manual
and foreign exchange manual of the bank.1.7 SAMPLING: 1.7.1
POPULATION: The population in the research is mainly the branch
customer and employees this population has been selected mainly
because we are conducting the survey on the perception about the
matter amongst the branch customer and employees.Page 21 of 168 22.
1.7.2 THE SAMPLE UNITS: The sampling unit in case of this research
consists of the branch customer and employees 1.7.3 THE SAMPLING
FRAME: The sampling frame usually contains a list of elements from
which the sample is drawn. The survey has been conducted at
different levels of customers coming to the branch such as Priority
customer, Excel Customer, Corporate customer And so on. And also
the different levels of employees in the branch. 1.7.4 THE SAMPLING
DESIGN: The sample design used in this case is random sampling
method. When taking the random sampling into consideration there is
always a chance that error might occur. This happens when there is
a difference in the sampling that is done during the course of the
survey. There are different types of sampling that can be done. In
the case 0f our report we have also used stratified sampling. 1.7.5
THE SAMPLE SIZE: The sample size in my case is 25 customers of the
different level of clients in the Khilkhet branch. 1.7.6 THE
SAMPLING PLAN: We have gathered the data based on the focus group
interview and experience survey through the questionnaire. 1.7.7
SOME IMPORTANT FACTS ABOUT THE OVERALL SURVEY: The Speed of data
collection: moderate to fast The respondents cooperation:
Moderate1.8 Benefit of the report As a student, I have learned
about a bank; I also have learned the report writing, as a great
deal of theory is included in this report. It will be also
benefited for the people who are interested to know about AIBL.Page
22 of 168 23. 1.9 Limitations of the study The present study was
not out of limitations. But as an internee it was a great
opportunity for me to know the banking activities in Bangladesh
especially of AL-ARAFAH-ISLAMI Bank. Some constraints are appended
bellow: The main limitation for conducting this report is time
limitation and resources. Three months is not enough to understand
all the activities of a bank and how they handle their clients.
Lack of experience has also acted a constraint for the exploration
of the topic. Following are the Limitations: Limitation of time was
one of the most important factors to collect data. A longer time
period would have ensured a much better result for the study
findings. Every organization has its own secrecy that is not
revealed to others. While collecting data i.e. interviewing the
credit officials they did not discuss much information for the sake
of confidentiality of the Bank. Due to lack of experience, there is
a chance of having some mistake in the report though best effort
has been applied to avoid any kind of mistake. Lack of depth of
knowledge, lack of experience in collecting information and
analytical ability for writing such report. There were some
misunderstanding between me and the bank officials while searching
the some required information. The main constraint of the study is
inadequate access to information. Due to time limitations many of
the aspects could not be discussed in the report. The employees did
not disclose much information for the sake of the confidentiality
of the organization. Since the bank personals were very busy, they
could provide me very little time. The clients were too busy to
provide me much time for interview. Though I have prepared many
reports before, I had no experience of internship. So inexperience
is one of the main constraints of the study. Lack of social
awareness about the modern and competitive banking system. Lack of
cooperation with others Page 23 of 168 24. CHAPTER-2 ORGANIZATIONAL
OVERVIEWPage 24 of 168 25. 2.1 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, Dilkusha(6-9 Floor)
C/A Dhaka-1000, Bangladesh 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.2.2
Historical Background of Al-Arafah Islami Bank Limited Islam
provides us a complete lifestyle. Main objective of Islamic
lifestyle is to be successful both in our mortal & immortal
life. Therefore in every aspect of our life we should follow the
doctrine of AL-Quran and lifestyle of Hazrat Muhammad (Sm) for our
supreme success. Al Arafah Islami Bank Ltd was established
(registered) as a private limited company, under the Company Act,
1994 on 18 June 1995 for providing modern banking system based on
AlQuran and Sunnah. The inaugural ceremony of Al-Arafa Islami Bank
Ltd (AIBL) took place on 27 September 1995and AIBL started journey
with 5 branches. Now AIBL operates 92 branches in Bangladesh.[1]
Al-Arafah Islami Bank is an interest free Shariah Bank of
Bangladesh rendering all types of commercial banking services under
the regulation of the Bank Company Act, 1991. The Bank conducts its
business on the principles of Musaraka, BaiMurabaha, BaiMuazzal and
Hire Purchase transactions approved by Bangladesh Bank. Naturally,
its modes and operations are substantially different from those of
other conventional commercial banks. There is a Shariah Council in
the Bank who maintains constant vigilance to ensure that the
activities of the Bank are being conducted on the Page 25 of 168
26. precepts of Islam. All activities of the Bank are conducted
according to Islamic Shariah where profit is the legal alternative
to interest.2.3 AIBL Profile With the objective of achieving
success here & hereafter by pursuing the way directed by Allah
and the path shown by His Rasul (SM), Al Arafah Islami Bank Ltd was
established (registered) as a private limited company on 18 June
1995. The inaugural ceremony took place on 27 September 1995. The
authorized capital of the Bank is Tk.5000.00 million and the paid
up capital is Tk. 4677.28 million as on 31.12.2010. Renowned
Islamic Scholars and pious businessmen of the country are the
sponsors of the Bank. 100% of paid up capital is being owned by
indigenous shareholders. The equity of the bank stood at Tk.
9647.45 million as on 31 December 2010, the manpower was 1711 and
the number of shareholders was 49,386. It has achieved a continuous
profit and declared a good dividend over the 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 78 branches of which 21 is AD throughout the country.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 the Bank Branch reaches to
46.Total number of employees of the Bank was 771 in 1995 and
reached to 912 in 2006. Al-Arafah Islami Bank Ltd. has 101 branches
and a total of 2500 employees the authorized capital of the Bank is
Tk.5000.00 million and the paid up capital is Tk. 4677.28 million
as on (31.December.2010). Renowned Islamic Scholars and pious
businessmen of the country are the sponsors of the Bank. 100% of
paid up capital is being owned by indigenous shareholders. Page 26
of 168 27. 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.2.4 Vision& Mission of AIBL
2.4.1 Vision To be a pioneer in Islami Banking in Bangladesh and
contribute significantly to the growth of the national economy.
2.4.2 Mission Achieving the satisfaction of Almighty Allah both
here & hereafter. Proliferation of Shariah Based Banking
Practices. Quality financial services adopting the latest
technology. Fast and efficient customer service. Maintaining high
standard of business ethics. Balanced growth. Steady &
competitive return on shareholders' equity. Innovative banking at a
competitive price. Attract and retain quality human resources.
Extending competitive compensation packages to the employees. Firm
commitment to the growth of national economy. Involving more in
Micro and SME financing.2.5 Objectives of AIBL From time immemorial
Banks principally did the function of moneylenders or Mohajans but
the function and scope of modern banking are now-a-days very wide
and different. They accept deposits and lend money like their
ancestors, nevertheless, their role as catalytic agent of economic
development encompassing wide range of services is very important.
Business commerce and industries in modern times cannot go without
banks. There are people Page 27 of 168 28. interested to abide by
the injunctions of religion in all sphere of life including
economic activities. Human being is value oriented And social
science is not value neutral. Al arafah islami bank believes in
moral and material development simultaneously. Interest or Usury
has not been appreciated and accepted by the tawrat of Prophet
Moses, the Bible of Prophet Jesus and the Quran of Hazarat Muhammad
(SM). Effort are there to do banking without interest Al Arafa
islami bank limited avoids interest in all its transactions and
provides all available modern banking services to its client and
want to contribute in both moral and material development of human
being. No sustainable material well being is possible without
spiritual development of mankind. Only material well being should
not be the objective of development. Socio economic justice and
brotherhood can be implemented better in a Godfearing society.2.6
Other objective of Al Arafah Islami Bank includes: To establish
interest-free and welfare oriented banking system. To establish a
modern banking system for all kinds of people. To help in poverty
alleviation and employment generation. To contribute in sustainable
economic growth. To eradicate the poverty and to do social services
by establishing Schools, Madrashas, University, Hospitals, Public
Library etc. To establish the relationship between bank and
customer as partnership Basis. Finally to achieve ultimate goal 2.7
Commitments Ours is a customer focused modern Islamic Banking sound
and steady growth in both mobilizing deposit and making quality
Investment to keep our position as a leading Islami bank in
Bangladesh. To deliver financial services with the touch of our
heart to retail, small and medium scale enterprises, as well as
corporate clients through our branches across the country. Our
business initiatives are designed to match the changing trade &
industrial needs of Page 28 of 168 29. the clients.2.8 AIBL at a
Glance Islam provides us a complete lifestyle. Main objective of
Islamic lifestyle is to be successful both in our mortal and
immortal life. Therefore in every aspect of our life we should
follow the doctrine of Al-Qur'an and lifestyle of Hazrat Muhammad
(Sm.) for our supreme success. Al-Arafah Islami Bank started its
journey in 1995 with the said principles in mind and to introduce a
modern banking system based on Al-Quran and Sunnah. A group of
established, dedicated and pious personalities of Bangladesh are
the architects and directors of the Bank. Among them a noted
Islamic scholar, economist, writer and exbureaucrat of Bangladesh
government Mr. A.Z.M Shamsul Alam is the founder chairman of the
bank. His progressive leadership and continuous inspiration
provided a boost for the bank in getting a foothold in the
financial market of Bangladesh We present some data on the bank
below: Particulars(In million taka) 2007
20082004200520061000.001000.002500.002500.002500.00Paid up
Capital586.99677.94854.201153.181383.81Reserve
Fund488.00542.22835.981091.95905.33Shareholders
Equity957.261220.161690.182037.502705.7410108.2811643.6616775.3423009.1329690.12Investment8150.1611474.4117423.1922906.3729723.79Import9337.4912631.601882.1427042.7232685.13Export3639.344932.90914.2712714.9120176.64Total
Income1120.851452.682172.482955.614387.26Total
Expenditure771.96904.481202.712199.432859.16Profit before
Tax348.89548.20855.47756.181528.09Profit after
Tax158.76262.90470.02347.31668.24Income
Tax157.00215.10385.45235.53590.66Total
Assets12874.6115336.8921368.1730182.3239158.44Fixed
Assets195.17208.00215.11334.48396.76Earnings per share
(Taka)263.68387.80550.2430.1248.29Authorized CapitalDepositPage 29
of 168 30. Profit Earning Ratio Dividend per share4.89
15.5%26.00%35%20%30%537954024487120131066480377191210331080Number
of Branches4041464650Manpower per Branch20192023Bonus No. of
Shareholders Number of Employees2.9 CORE VALUES For customersTo
become most caring Bank- by providing the most courteous and
efficient service in every area of our business. For employeesBy
promoting the well- being of the members of the staff. For our
shareholdersBy ensuring fair return on their investment through
generating stable profit. For our communityBy assuming our role as
a social responsible corporate entity in a tangible manner through
close adherence to national policies.2.10 Special Features of the
Bank: Al-Arafah Islami Bank is singular in every positive aspect.
The Bank provides a bunch of state-of-art banking services within
the wide bracket of shariah. It is unique with its products, strict
with its principle and uncompromising with its honesty. Here are
some special features of AIBL that make it notable in Islami
banking sector:All activities of the bank are conducted according
to Islamic Shariah where profit is the legal alternative to
interest. The banks investment policy follows different modes
approved by Islamic shariah based on the Quran and Sunnah. Page 30
of 168 31. The bank is committed towards establishing welfare
oriented banking system and creates employment opportunities.
According to the need and demand of the society and the country as
a whole the bank invests money to different Halal business. The
bank participates in different activities aiming at creating jobs,
implementing development projects of the government and creating
infrastructure. The bank is committed to establish an economic
system resulting in social justice and equitable distribution of
wealth. It is committed to bring about changes in the
underdeveloped rural areas for ensuring balanced socio economic
development of the country through micro credit program and
financing of SMES as well. According to Mudaraba system, the
depositors ate the partners of the investment income of the bank.
About 70% of the investment income is distributed among the
Mudaraba depositors. To render improved services to the clients
imbued with Islamic spirit of brotherhood, peace and fraternity and
by developing an institutional cohesion. The bank is contributing
to economic and philanthropic activities. AIBL English Medium
Madrasah and AIBL library patronize by the Bank are two such
examples.Page 31 of 168 32. 2.11 Board of Directors of AIBL:Badiur
Rahman ChairmanSarker Mohammad Shameem Iqbal Vice ChairmanAlhajj
Md. Harun-ar-Rashid Khan DirectorAlhajj Nazmul Ahsan Khaled
DirectorAlhajj Abdul Malek Mollah DirectorAlhajj Hafez Md.
Enayetullah DirectorAlhajj Abdul Moktadir DirectorAlhajj Ahamedul
Haque DirectorAlhajj Abdus Samad DirectorAlhajj Abu Naser Mohammad
Yeahea DirectorAlhajj Abdus Salam DirectorAlhajj Niaz Ahmed
DirectorPage 32 of 168 33. Engr. Kh. Mesbahuddin Ahmed
DirectorMohammed Emadur Rahman DirectorMd. Rafiqul Islam
DirectorAnwar Hossain DirectorDr. Momtaz Uddin Ahmed
DirectorBrigadier General M A Malek (Retd) DirectorEkramul Hoque
Ex-Officio DirectorMd. Ashik Hossain DirectorPage 33 of 168 34.
2.12 Management of AIBL ::: Managing Director :::Ekramul Hoque
Managing Director ::: Deputy Managing Director :::Md. Rafiqul Islam
Khondoker Nayeemul Kabir Md Mofazzel Hossain Deputy Managing
Director Deputy Managing Director Deputy Managing DirectorKazi
Towhidul Alam Deputy Managing DirectorMd. Golam Rabbani Deputy
Managing DirectorPage 34 of 168 35. ::: Executive Vice President
:::Md. Mominul Haque Bhuiyan Executive Vice PresidentMd. Fazlul
Karim Executive Vice PresidentMd. Mahmoodul Haque Executive Vice
PresidentMuhammed Nadim ACA Executive Vice PresidentSyed Masodul
Bari Executive Vice President2.13 Shariah Board of AIBLShariah
Board Scholars of high repute with extensive experience in law,
economics and banking systems and specialising in law and finance
as prescribed by Islamic Shariah make up the AIBL's Fatwa &
Shariah Supervision Board. The Board is appointed by the bank's
Board of Directors. The Shariah Board supervises the development
and creation of innovative Shariah -compliant investment and
financing products and services. The Board is empowered to issue
fatwas on any matter proposed to it by different business units of
the bank. The Shariah auditors ensure that all the transactions are
carried out in strict compliance to Islamic principles of banking.
This framework along with a stringent compliance to rules has made
AIBL the pioneering organization to practice Islamic finance in
true letter and spirit. The name AIBL has come to signify
innovation, financial dynamism, leadership and above all a complete
assurance that all the transactions are free from riba Page 35 of
168 36. (interest).2.14 Members of AIBL's Fatwa & Shariah
Supervision Board are: Mufti Abdur RahmanChairmanMufti Ruhul Amin
MemberMoulana Abdul Basit BarkatpuriMufti Muinul
IslamMemberMemberAlhaz A Z M Shamsul AlamMd. Abdur Rahim
KhanMemberSecretaryBadiur RahmanMember (By Holding of Position)2.15
The Board's Role The Fatwa & Shariah Supervision Board oversees
the application of different aspects of Shariah in the Bank. It
also ensures that all transactions are in strict compliance with
the right of contradicting (fatwa) any violating procedures, if
found. The Board of Directors is obligated to obey the fatwas,
irrespective of whether a unanimous or a majority consensus secured
the decision (clause ---- of the Banks Memorandum & Articles of
Association). Board meetings are held periodically or whenever the
need arises. The rights of the Board are enshrined in Article Seven
o the Bank's Memorandum & Articles of Association (Clauses).
2.16 Important Duties of the Shariah Board: As an expert source on
Islamic Principles (Including Fatwas), the Board through a
representative, usually the General Secretary of the Board,
supervises the Shariah compliance of all the transactions in the
Bank. Page 36 of 168 37. To devote time and effort to devising more
Shariah -compliant transactional procedures, templates and banking
products that enable the Bank to adapt to market trends while
maintaining a high competitive edge in deposit procedures,
investments, and banking services. At the same time, the Board
gives its opinion on proposed new templates, and banking
transactions. Analyzing unprecedented situations that are not
covered by fatwa, in the Bank's transactional procedures or those
reported by different departments, branches and even the customers.
This is to ensure Shariah compliance before the Bank develops any
new products or implements any new procedure. Analyzing contracts
and agreements concerning the Bank's transactions, as submitted by
the Chairman of the Board of Directors or any department/branch
within the bank or requested by the Board itself so that Shariah
compliance can be evaluated and maintained. Ensuring Shariah
compliance in the implementation of all banking transactions and
correcting any breaches. Analyzing administrative decisions, issues
and matters that require the Board's approval. Supervising Shariah
training programmes for the Bank's staff. Preparing an annual
report in the Bank's balance sheet with respect to its Shariah
compliance. The Fatwa & Shariah Supervision Board submits a
complete annual report for the Board of Director, summarizing all
the issues referred to the Board, as well as its opinion on the
Bank's transactional procedures.2.17 SHARIAH SUPERVISORS The Clause
---- of the Bank's Memorandum & Articles of Association
requires the Board of Directors to appoint a Shariah Supervisor,
responsible for monitoring all the Bank's transactional procedures
and assuring Shariah compliance. Also the General Secretary of the
Fatwa & Shariah Supervision Board, the Shariah Supervisor
handles queries about the Bank's administration from staff members,
shareholders, depositors and customers, liaises with the Shariah
auditors and provides them with guidance. He submits reports and
suggestions to the Fatwa & Shariah Supervision BoardPage 37 of
168 38. and to the Chairman of the Board of Directors. The position
also calls for participation in the Bank's training programmes.2.18
SHARIAH AUDITING The supervisory function forms a part of the
Shariah Supervision procedures, its main task being to check
Shariah compliance under the guidance of the Shariah Supervisor.
The auditors continuously review the Bank's transactional
procedures to ensure adherence to the framework created by the
Fatwa & Shariah Supervision Board. The Shariah auditors submit
periodic reports to the Shariah Supervisor so as to monitor and
maintain Shariah compliance.2.19 SWIFT CODES of AIBL 01. Head
Office02. Motijheel Branch03. Moulvi Bazar BranchSWIFT CodeSWIFT
CodeSWIFT CodeALAR BD DHALAR BD DH 066ALAR BD DH 06704. Nawabpur
Road Branch05. Corporate Branch06. VIP Road BranchSWIFT CodeSWIFT
CodeSWIFT CodeALAR BD DH 074ALAR BD DH 075ALAR BD DH 07707. Banani
Branch08. Bogra Branch09. Agrabad BranchSWIFT CodeSWIFT CodeSWIFT
CodeALAR BD DH 079ALAR BD DH 071ALAR BD DH 06910. Khatungong
Branch11. Jubilee Road Branch12. Khulna BranchSWIFT CodeSWIFT
CodeSWIFT CodeALAR BD DH 072ALAR BD DH 076ALAR BD DH 068Page 38 of
168 39. 13. Rajshahi Branch14. Laldighirpar Branch15. Saidpur
BranchSWIFT CodeSWIFT CodeSWIFT CodeALAR BD DH 073ALAR BD DH
070ALAR BD DH 07816. Dilkusha Branch17. New Elephant Road Branch18.
Uttara Model Town BranchSWIFT CodeALAR BD DH 082SWIFT CodeALAR BD
DH 080SWIFT CodeALAR BD DH 08119. Jatrabari Branch20. Dhanmondi
Branch21. North South Road BranchSWIFT CodeSWIFT CodeSWIFT CodeALAR
BD DH 083ALAR BD DH 084ALAR BD DH 08522. Gulshan Branch SWIFT
CodeALAR BD DH 0862.20 AIBLS LIBRARY The AIBL's library houses a
vast collection of more than 4,000 books on Islamic Fiqh, law,
economy, banking and Shariah , The library was primarily
established with the aim of serving the Fatwa & Shariah
Supervision Board's research team and the AIBL staff. The facility
is also accessible to the banks customers, researchers and students
of higher education.2.21 Corporate Social Responsibilities of AIBL
Al-Arafah Islami Bank Foundation : The Bank has a Foundation
launching philanthropic activities. Al-Arafah Islamic International
School & College and Al-Arafah Islami Bank Library are major
two wings for launching Page 39 of 168 40. philanthropic
activities.Al-Arafah Islamic International School & College:
Al-Arafah Islamic International School & College 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 of Islam. The prime aim of this Islamic
International School & College is to contribute towards
building human resource and in the broader sense to ensure human
welfare. With the view Al-Arafah Islami Bank Foundation has
established Al-Arafah Islamic International School & College at
Dhanmondi in 1998. Such institution upto O level of its kind is for
the first time in Bangladesh. Al-Arafah Islami Bank Library :
Library is the carrier & reservoir of knowledge. Al-Arafah
Islami Bank has shown that other than generating profit, it can
also contribute significantly in the field of providing good source
of knowledge by establishing a public library at 32, Topkhana Road,
Chittagong Bhaban (1st floor), Dhaka, thus strengthening social
development. It is situated in a sound, healthy surroundings. It
harbors 23,000 books of reference for the researchers, students,
professionals, bankers, physicians, engineers, politicians, writers
or journalists, even for the kids. It is open to all from the year
2000 and well located & accessible to everybody. It procured
some exceptional collection of books on religion, economics,
banking, computer science, business administration, sociology,
English & Arabic language and juvenile literature in Bangla,
English, Urdu & Arabic, which are very rare.2.22 AIBL Khilkhet
Branch Al-Arafah Islami Bank Limited opened its khilkhet branch
29-11-2010 to cover the huge & prospective customer from the
area of khilkhet. Md. Sharif Chowdhury is the Assistant vice
president (AVP) & he is the manager of khilkhet branch. It has
a large office which can accommodate good number of customer
comfortably. This branch doesnt deal large foreign exchange
transaction. The branch has efficient human resources that can meet
up customers needs. Order wise work is distributed properly. Page
40 of 168 41. 2.23 Organogram of Al-Arafah Islami Bank Ltd.
Khilkhet Branch, DhakaAVP & Manager Md. Sharif ChowdhurySenior
Executive Officer (SEO) Md. Shah AlamGB Incharge Principle Officer
(PO)Investment Incharge Senior Executive Officer (SEO) Md. Joshim
UddinCash Incharge Executive Officer (EO)A Executive Officer (EO)
Md. Omar FaruqInvestment Officer Naimur RahmanExecutive Officer
(EO) ASM Salauddin BaharEO of Foreign Exchange Md. Abdul
KhalekOfficer Md. Abdur RahimSenior Field Supervisor Md. Nazmul
HaqueExecutive Officer (EO) Md. ShohelOfficer Md. Ishfaque
KabirField Assistant Md. Kamal HossainOfficer Md. Saidul
IslamOfficer Md. Ibrahim KhalilPage 41 of 168 42. 2.24 Operating
activities of Khilkhet branch Function of AIBL may be divided into
four categories i. General banking activities ii. Investment
banking activities iii. Foreign exchange activities iv. Others
activities. These functions are discussed briefly as below: General
banking activities General banking activities is the heart of
banking. Here money collection procedure occurs. General banking
activities are discussed briefly as below: a. Cash Receive: Cash
section is include general banking activities. Cash section is very
important for deposit mobilization. b. Cash Payment: General
banking section close various kinds account and cash payment is
made from this section. c. A/c opening: In this section various
kinds of account is opened. Those are Mudaraba A/c, Al-wadia
Current A/c, Mudaraba sort notice deposit A/c Mudaraba terms
deposit A/c, Installment terms deposit A/c, Hajj deposit A/c etc.
d. Cheque Issue: General banking section issue cheque book.
Chequebook is very important for money transaction. e. A/c Closing:
Various type of A/cs are closed in this section f. Clearing
activities: In this section all clearing instrument send to
Bangladesh Bank / Sonali Bank Clearing house and after completing
clearing process clearing amount of are credit to concerned
accounts. g. Deposit Mobilization: Deposit mobilization is the main
function of general banking section. Actually all section are
engaged in deposit mobilization but deposit mobilization procedure
are done this section. Mainly deposit are collection from savings
surplus units (SSU) and loan or credit is disbursed to saving
deficit units (SDUS). h. Bill Collection: AIBL collect bill on
behalf on various institution or enterprise from their customers.
For example electric bill, Telephone bill, Gas bill, Mobile bill
etc.Page 42 of 168 43. i. Investment Activities: Almighty creature
said in his holy Quran that Ahallahul baia and harramahu Riba that
means Allah permitted trading and forbidden interest Islamic bank
is a financial institution whose statutes rules and procedures
expressly state its commitment to the principles of islamic shariah
and to the banning of the receipts and payment of interest in on
any of its operations. So Islami bank always avoids interest and
emphasizes on profit business. Islami bank financing product is
Murabaha, Bai-Muazzal, Ijara, Salam, and Istisna, Out of these
various debt based financing products. The most popular are
Murabaha and Bai-Muazzal. Investment activities AIBL are discussed
as below:Disbursed financed to the business firms and persons: The
most important function of an Islami bank is disbursed finance to
industries and business firm or persons. Disbursed leased finance
to various industries: Islami bank disbursed leased finance to
various industries. Lease finance may be two types operating lease
and financial lease. Issue bank Guarantee: AIBL issue bank
guarantee on behalf or its clients. In this way banks helps a
business firm to run their business smoothly. Foreign exchange
activities: Foreign exchange is another important department for
banking service the functions of foreign exchange section are as
below: L/C issue: A letter of credit is a conditional undertaking
of payment, a letter by the importers bank to the exporter that the
bills if drawn as per terms and conditions are strictly complied
with will be honor on presentation. AIBL issue L/C on behalf of its
clients and its very important for foreign exchange transaction.
Bill negotiation: AIBL issues export L/C and negotiate the export
bill. Foreign remittance: Foreign exchange deportment plays a vital
role for foreign remittance. Foreign exchange department maintain
various Nostro and Vastro A/c Page 43 of 168 44. all over the
world. Its keeps correspondence with foreign banks. Foreign
exchange or foreign transaction done through these nostro and
vostro A/c.Others activities:Banks play important role for
development of a country. Others function of a bank are as below:
Provide information to Bangladesh bank and others institution and
that information is important for policy making. To help the
Bangladesh Bank and govt. for implementation fiscal and monitory
policy. Provide valuable information as well as opinion to its
clients for their business firm. Providing local facilities to safe
keeping peoples valuable assets.Page 44 of 168 45. CHAPTER-3
THEORITICAL FRAMEWORK FOR INVESTMENTPage 45 of 168 46. 3.1
Investment: Investment means 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 but AL-Arafah Islami Bank Limited
always avoids interest and emphasizes on profit-based business.
Investment may be extended by the public or private institutions to
finance business activities, agricultural operation, consumer
expenditures or government projects. "Investment" means any such
modes of financing which Islamic Bank does in accordance with
principles of Shariah or as per the Shariah approved modes like
Mudaraba, Musharaka, Bai-Murabaha, Bai-Muajjal, Istisna, Lease,
Hire-purchase under Shirkatul Melk, etc. 3.2 Introduction of
Investment Division: AL-ARAFAH ISLAMI Bank Ltd is a new generation
bank. It is committed to provide high quality financial
services/products to contribute to the growth of GDP of the country
through stimulating trade & commerce, accelerating the pace of
industrialization, boosting up export, creating employment
opportunity for the educated youth, poverty alleviation, raising
standard of living of limited income group and over all sustainable
socio-economic development of the country. In achieving the
aforesaid objective of the bank, investment operation of the bank
is of paramount importance as the greatest share of total revenue
of the band is generated from it, maximum risk is centered in it
and even the very existence of band depends on prudent management
of its investment portfolio. The failure of a commercial bank is
usually associated with the problem in investment portfolio and is
less often the result of shrinkage in the value of other assets. As
such investment portfolio not only features dominant in the assets
structure, it is critically important to the success of the bank
also. In view of the above this investment policy and control
guidelines of the bank has been prepared which is subject to
amendment, revision, readjustment and refinement from time to time
as may be warranted by the change of circumstances due to passage
of time to suite the requirement of the bank. 3.3 Investment
Assessment: Relationship Manager(s)Investment Officer(s) shall
conduct a thorough assessment of Page 46 of 168 47. 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 terms and conditions in case of
necessity.Page 47 of 168 48. 3.4 Mode of Investment:Page 48 of 168
49. 3.5 Trading modes (Bai-Mechanism)3.5.1 Bai-Murabaha
Bai-Murabaha may be defined as Contractual buying and selling at a
mark-up profit. 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. 3.5.2 Bai Muajjal
Bai-Muajjal 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 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 to 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 lump sum or by fixed installment. 3.5.3 Bai- Salam Bai- Salam
means advance purchase. It is a mode of business under which the
buyer pays the price of the goods in advance on the condition that
the goods would be supplied / delivered at a particular future
time. The seller supplies the goods within the fixed time.Page 49
of 168 50. 3.5.4 Bai-Istishna A contract executed between a buyer
and a seller under which the seller pledges to manufacture and
supply certain goods according to specification of the buyer is
called Istisna. An Istisna agreement is executed when a
manufacturer or a factory owner accepts a proposal placed to him by
a person or an Institution to produce/manufacture certain goods for
the latter at a certain negotiated price. Here, the person giving
the order is called Mustasni, the receiver of the order is called
Sani and the goods manufactured as per order is called Masnu. An
order placed for manufacturing or producing those goods which under
prevailing customs and practice are produced or manufactured will
be treated as Istisna contract.3.6 Leasing mode (Ijarah mechanism)
3.6.1 Ijarah Muntahia Bittamleak (Hire Purchase) Under this mode,
the bank purchases vehicles, machineries and instruments, building,
apartment etc. and allowed clients to use those on payment of fixed
rents in installments with the ultimate objective to sell the asset
to the client at the end of the rental period . The client acquires
the ownership/ title of the assets/ properties subject to full
payment/ adjustment of all the installments. 3.6.2 Hire Purchase
Under shirkatul Melk Definition Hire purchase under shirkatul Melk
is a special type of contract which has been developed through
practice. Actually, it is a synthesis of three contracts: Shirkat,
Ijarah and sale. Shirkat means partnership. Shirkatul Melk means
share an ownership. When two or more persons supply equity,
purchase an asset, own the same jointly, and share the benefit as
per agreement Page 50 of 168 51. and bear the loss in proportion to
their respective equity, the contract is called Shirkatul contract.
Stages of Hire Purchase under Shirkatul Melk Thus Hire Purchase
under Shirkatul Melk Agreement has got three stages: Purchase under
joint ownership. Hire and Sale and /or transfer of ownership to the
other partner Hirer. Hire Purchase under Shirkatul Melk through
gradually transfer (sale) of legal title/ownership of the hired
asset/property Under this type certain .asset / property' is
purchased with equal or unequal equity participation and owned
jointly by the parties -the Bank and the Client. The Bank's share /
portion of the asset is hired out to tile Client partner against
fixed rent/rentals per unit of time for a fixed period with a
promise that the Hire Bank will sell or transfer the ownership of
its portion to the Client Hirer gradually part by part in
proportion to the consideration paid. So that the Hire's portion of
the asset on payment of the total price at the end of the hire
period. Under this system the total price of the hired property /
asset should be determined and divided over the period of hire
contract (per unit of time) so that the Hirer in addition to the
payment of fixed rent /rentals may pay gradually the proportionate
consideration of the total price of the hired property or asset to
acquire proportionate ownership of the same part by, part and
become full owner of the hired asset at the end of the hire period.
It should be noted that there should be a separate sale contract
for payment / acquisition of each share (per unit of time as per
hire deal) / part of asset sold to the Hirer and the amount of rent
should be decreased proportionately with decrease of Hire's
ownership and increase of Hirer's ownership on the property/asset.
If, for any reason, the hire contract is revoked prior to the
payment I transfer of full title to the Hirer, the Hirer will share
that part of the title to the hired property which has been Page 51
of 168 52. transferred to him against payment made by him and the
remaining part will be shared by the Hire Bank. If any loss arises
to the Bank after the sale of Bank's share to the property / asset
that shall be recouped from the Client / Client's security. In our
Bank, we shall be following this type of Sale Contract in Hire
Purchase under Shirkalul Melk. 3.7 Share Mechanism3.7.1 Mudaraba
Definition It is a from of partnership where one party provides the
fund while the other provide the expertise, labor and the letter
referred to at the Mudarib any profits accrued are shared between
the two parties on a pre agreed basis, while capital loss in
exclusively born by the partner providing the capital. Important
Features: Bank supplies capital as Sahib- al Mall and client invest
if in the business with his experience. The client maintains
administration and management. Profit is divided as per agreement.
Bank bears the actual loss alone. Client cannot take another
investment for that specific business without the permission of the
Bank. 3.7.2 Musharaka The term Shirkat and Musharakah have been
derived from Arabic words Shairkah and Sharika. The word shirkah
means a partnership between more than one partner. Thus the ward
Musharaka and Shirkat means a partnership established between two
or more partners for purpose of a commercial venture participate
both in the capital and management where the profit may be shared
between the partners as per agreed upon ratio and the loss. If any
incurred, is to be borne by the partners at per capital /equity
ratio. In case of investment Musharaka meaning a partnership
between the bank and the client for a particular business in which
both the bank and client provide capital at an agreed upon ratio
Page 52 of 168 53. and bear the loss, if any in proportion to their
respective equity. Bank may move itself with the selected client
for conducting any Shariah permissible business under Musharaka
mode.Important Features: The investment client will normally run
manage the business. The bank shall take part in the policy and
decision making as well as overseeing (supervision and monitoring)
the operation s of the business of the client. The bank may appoint
suitable personal(s) to run the manage the business and to maintain
books of accounts of the business property. As the investment
client shall manage the enterprise, the bank may more share of
profit tohim than that of his proportion capital contribution.Loss,
if any, shall be shared on the basis of capital ratio.3.8 Others
3.8.1 Quard It is a mode to provide financial assistance/ loan with
the stipulation to return the principal amount in the future
without any increase thereon. 3.8.2 Uzrat Bill Wakala Murabaha Post
Import (MPI) The importers apply for investment facility against
imported goods after shipment for payment of the invoice values of
the goods to the seller/supplier including custom duty, VAT and
other expenses. In such a case, Islamic banks allow a Bai-Murabaha
investment facility under single deal concept. It is so called as
the Letter of Credit. Bills and the handling of Post-shipment are
settled under one agreement while opening the letter of credit for
importing the goods.Page 53 of 168 54. 3.9 PROCESS OF
INVESTMENTPROCESS OF INVESTMENTApplicant applies for the Investment
in the prescribed form of the bank describing the types and purpose
of loan.1. Collecting credit information about the applicant to
determine credit worthiness of the borrower. Source of 2. Personal
investigation, confidential report of other bank, head office,
branch, and chairman of commerce. 3. CIB (central information
bureau) a. Evaluation of compliance with its lending policy b.
Evaluating the proposed security.Then bank prepare a Investment
proposal which contains terms and conditions of loan for approval
of ManagerTakes the necessary papers and signatures from
borrower.Page 54 of 168 55. 3.10 Investment GrowthInvestment Growth
Year Investment & Advances2012106764.55(Tk. In Millions)
201177062.73Page 55 of 168201053800.792009200837636.0928832.80 56.
Investment Growth The investment of the bank has stood at BDT
77714.95 million as on 31 st December 2011 as against BDT 53582.96
million in the previous year showing a net increase by 45.04%. The
investment portfolio of the bank is well diversified and covers a
broad spectrum of business and industries including readymade
garment, textile, edible oil, ship scrapping, steel and
engineering,chemical,pharmaceuticals,cement,telecommunication,construction,healthcare,
education, transport and investment under consumer scheme. The bank
has geared up effort to improve the recovery rate of disbursed
investment and also taken adequate measures for converting the
classified investment into performing assets. As a result,
classified investment of the bank could be kept at low level for
below the national average. It is 0.95% in this bank as on 31 st
December 2011. The bank gives top-most priority to the creation of
quality assets and does appropriate risk grading while approving
commercial, trade and project investment to different Clients.
Sector wise Investment in 2012 SectorTaka in MillionAgriculture,
Fishing and Forestry793.48Industry24274.6Construction3450.99Water
works and Sanitary Service Transport and Communication
Storage320.28 3435.77 48.04Trade
Finance46500.49Miscellaneous5196.92Total (Including profit
receivable) Less Unearned Profit On Investment Total83626.57
5925.62 106764.55Page 56 of 168 57. Page 57 of 168 58. 3.11
Documentation A. 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 B. 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 C. SupplierBuyer analysis:
Domestic International Potentiality of the buyer or supplier
Strength and weakness of the buyer or supplier D. 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 E. Project Financial Performance: Page 58 of 168 59.
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. F. 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 G. Mitigating Factor: Margin Volatility High debt load (
LeverageGearing ) Overstocking or debtor issues Repaid growth,
acquisition or expansion Management changes or succession issues
Customer or Supplier concentration Lack of transparency or industry
issues. H. Investment Structure: Amount of investment Tenors of
investment Justification of investment Based on the project
repayment ability installment to be determined3.12 Investment
Principles: The Principle of lending is a collection of certain
accepted time tested standards, which ensure the proper use of loan
fund in a profitable way and its timely recovery. Different authors
describe different principles for sound lending. 1. Safety Page 59
of 168 60. 2. Security 3. Liquidity 4. Adequate yield 5.
DiversitySafety: Safely should get the prior importance in the time
of sanctioning the loan. At the time of maturity the borrower may
not will or may unable to pay the loan amount. Therefore, in the
time of sanctioning the loan adequate securities should be taken
from the borrowers to recover the loan. Banker should not sacrifice
safety for profitability. AL-ARAFH-ISLAMI Bank Ltd. exercises the
lending function only when it is safe and that the risk factor is
adequately mitigated and covered. Safety depends upon: The security
offered by the borrower: and The repaying capacity and willingness
of the debtor to repay the loan with interest. Liquidity: Banker
should consider the liquidity of the loan in time of sanctioning
it. Liquidity' is necessary to meet the consumer need. Security:
Banker should be careful in the selection of security to maintain
the safety of the loan. Banker should properly evaluate the proper
value of the security. If the estimated value is less than or equal
to loan amount, the loan should be given against such securities.
The more the cash near item the good the security. In the time of
valuing the security, the Banker should be more
conservative.Adequate Yield: As a commercial origination, Banker
should consider the profitability. So banker should consider the
interest rate when go for lending. Always Banker should fix such an
interest rate for its lending which should be higher than its
savings deposits interest rate. To ensure this profitability Banker
should consider the prospect of the project. Diversity: Banker
should minimize the portfolio risk by putting its fund in the
different fields. If Bank put its entire loan able fund in one
sector it ill increase the risk. Banker should distribute its Page
60 of 168 61. loan able fund in different sectors. So if it faces
any problem in any sector it can be covered by the profit of
another sector3.13 Guide Lines by Bangladesh Bank Guideline of
processing investment (According to Bangladesh Bank & Head
Office): Enter the Application in the Investment Proposal Received
and Disposal Register (B-53) and allot a Serial Number to it.
Examine shariah permissibility of the goods. Reject the proposal
outright, if not permitted by Islamic Shariah. Check-up Credit
Restriction Schedule of Bangladesh Bank and Head Office Current
Investment Policy Guidelines. Visit the Business establishment of
the Client. Talk to the business and important personalities of the
locality to ascertain the Honesty, Integrity and Business dealings
of the Client. Request for confidential report of the client from
local Bank Branches. Confident Report from Credit Information
Bureau (CIB) of Bangladesh Bank through Head Office Investment
Division as per Instruction Circular of Head Office in this Regard.
Obtain Financial Statement/Balance Sheet of the Client for the last
three consecutive years for Investment Proposals of Tk. 50.00 lac
or above as per Head Office Instruction. Inspect Land, Building,
other Assets and Properties proposed to be Mortgaged or
Hypothecated. Forward Documents, Title Deeds and other relevant
Papers to approve Lawyer of the Bank for examination and furnishing
his opinion. Obtain Lawyers Opinion as per clause No. 8.02. Please
study the following carefully and note down the actual findings in
the Appraisal Form against each item : Effective demand, price of
the goods, short or long-term duration, quality and other
specifications of the goods, availability, etc. of the sand or
projected goods.Page 61 of 168 62. Where sale price of the goods is
payable by the client at specified future date in lump sum or
installments as per proposal. For Bai-Murabaha Commercial and Bai
Murabaha Industrial Investment, prepare Appraisal Report on F-167B.
For appraisal Bai-Murabaha agriculture and For BaiMurabaha Import
use special Appraisal Form devised for each of those, if any,
otherwise F-167B providing the available/required supplementary
information. In course of preparation of the appraisal report
please ensure incorporation of all information of all information,
particulars figures and statistics in Appraisal Form correctly with
special attention to the following: Contact primarily with the
producers/sellers/suppliers of the goods in the market, study the
market price and work out the purchase and sale prices of the goods
as per guidelines.3.14 Guideline for Sanctioning Investment by
Bangladesh Bank & Head Office On completion of Appraisal as
provided herein above, of the Proposal is found viable, issue
Sanction Advice (F-188) if it is within the business power of the
Branch mentioning all the terms and condition is duplicate to the
Client and endorse copies to Zonal and Head Offices retaining one
copy in the Clients file duly accepted by the Client. If the
proposal is not within the Discretionary Power of the Branch, the
Branch shall with Appraisal Report on F-167A and F-167B to Zonal
Office/Head Office. If the proposal is within the Business Power of
the Zonal Office, Zonal Office shall accord Approval /Regret the
Proposal. If the proposal is not within the Business of the Zonal
Office shall forward the proposal to Head Office with their views
and recommendations. On receiving the proposal and the Appraisal
Report along with supporting papers Head Office will either approve
or Regret. If the Branch/the Zonal Office /Head Office, the branch
will issue the Sanction advice (F-188) with a copy to Zonal Office
/Head Office duly recorded in /Facility Sanctioned Register (B-119)
with authority to the investment Client for the limit. Page 62 of
168 63. Open file Client-wise, affixing the Fixed Number allotted
to him as per Limit Register (B-117) and Clients name, address,
telephone number be recorded prominently in the inner side of the
investment File for easy tracing in case of need. In case of
investment to the existing Client, obtain required papers, document
with the past performance and outstanding liabilities of the
Client, if any and process of sanction the proposal as per
instruction laid down here-in-above after due evaluation or study.
In case of investment the bank follows this requirement. Sometime
it may be miss uses but almost the bank follows the respective
guideline. . 3.15 Special Scheme under Investment 3.15.1 Household
Durables Scheme (HDS) Objective To increase standard of living and
quality of life of the fixed income group by extending them
investment facilities to purchase household articles. Target Group
Permanent Officials of Govt. / Semi-Govt. / Autonomous Body /
Corporations / Banks & FIs / Defense Forces / Madrasah / School
/ College / University Teachers / Businessmen / House owners of
Metropolitan & other District Head Quarters / Professionals
(Doctors / Engineers / Lawyers etc.) / Existing clients / Wage
Earners / University / Medical Students / Officials of renowned
Private Firms. Nature of Goods / Items Electronics & electrical
goods, Motor cycle / Bi-cycle, Furniture / Fixtures, Ornaments,
Instruments / Equipments for Medical & Engineering students
etc. Mode of InvestmentPage 63 of 168 64. Bai-Muajjal Period of
Investment Maximum 1-years Rate of Return 18.00% or rate to be
determined by the Bank from time to time. Amount of Investment For
All Metropolitan Cities Tk.0.30 million For Districts &
Municipalities Tk.0.20 million Others Tk.0.10 million Age of
Clients Service holders : 2-yrs unexpired service Other than
service holders : Minimum 27-years & Maximum 65 years How to
Apply Application Form shall have to be collected from nearest
Branch of Islami Bank Bangladesh Ltd. 3.15.2 Investment Scheme for
Doctors (ISD) Objective i. To help unemployed qualified doctors to
go for self-employment ii. To provide latest medical equipments to
specialist doctors to extend modern medicare facilities throughout
the country. Target Group Doctors (MBBS), Dentist
(BDS),Homeopath,Unani, Ayurbed Doctors Page 64 of 168 65. Nature of
Goods / Items X-ray/ ECG/Pathological & other
equipments/Apparatus/Modern medical equipments/ other
accessories.Mode of Investment Bai-Muajjal / HPSM (item wise).
Period of Investment Maximum 5-years Rate of Return 18.00% or rate
to be determined by the Bank from time to time. Amount of
Investment For All Metropolitan Cities: Tk.1.50 million For
Districts: Tk.1.00 million For Thana / Municipalities: Tk.0.70
million How to Apply Application Form shall have to be collected
from nearest Branch of Islami Bank Bangladesh Ltd. 3.15.3 Small
Enterprise Investment Scheme (SEIS) Objective i. To help the
educated unemployed youths of rural and urban areas for
self-employment. ii. To provide investment to small businessmen and
entrepreneurs. Target GroupPage 65 of 168 66. Jobless young people
/ small traders / small & cottage industries / service sector
with a valid trade license.Nature of Goods / Items Dairy, beef
fattening, fishery, poultry & duckery,live stock farming,
workshop,tailoring,garments sweetmeat, grocery,stationery,
electrical and electronics, shoes, cloths, laundry, small
restaurant etc. Mode of Investment Bai-Muajjal Period of Investment
Maximum 1-year in Bai-Muajjal & Maximum 2-years in HPSM. Rate
of Return 18.00% or rate to be determined by the Bank from time to
time. Amount of Investment For All Metropolitan Cities : Tk.0.50
million For Districts & Municipalities : Tk.0.30 million Others
: Tk.0.20 million How to Apply Application Form shall have to be
collected from nearest Branch of Islami Bank Bangladesh Ltd. 3.15.4
Real Estate Investment Program (REIP) ObjectivePage 66 of 168 67.
i. To ease the housing problem in the urban areas. ii. To make
arrangement for comfortable accommodation of the fixed income
group. Target Group Land lords, service holders, businessmen,
professionals, expatriates etc. Nature of Goods / Items
Construction of building, purchase of flats / ready made building,
extension / renovation of house, installation of lift, generator,
sub station etc. Mode of Investment Bai-Muajjal Period of
Investment Maximum 15-years Rate of Return 18.00% or rate to be
determined by the Bank from time to time. Amount of Investment
a)For Construction, up to 60% but not to exceed Tk.10.00 million b)
For purchase of Flat / Apartment up to 50% but not to exceed
Tk.7.50 million. c) For purchase of Ready-made House, up to 50% but
not to exceed Tk. 10.00 million. Age of Clients Maximum 65-years.
How to Apply Application Form shall have to be collected from
nearest Branch of Islami Bank Bangladesh Ltd.Page 67 of 168 68.
3.15.5 Transport Investment Scheme (TIS) Objective i. To ease the
existing transportation problem. ii. To ensure speedy economic
growth and development of the country particularly the expansion of
trade, commerce & industry. Target Group Persons, businessmen,
firms having proven experience in transport business,
Official/Commercial use by the business firms &
industries,established clinic & hospitals etc. Nature of Goods
/ Items Bus, Truck, Minibus, Double Decker, Private Car, Micro Bus,
Jeep, Auto Rickshaw, Pick up Van, Human Hauler, Baku, Vessel etc.
Mode of Investment Bai-Muajjal Period of Investment 3 to 5 years
Rate of Return 18.00% or rate to be determined by the Bank from
time to time. How to Apply Application Form shall have to be
collected from nearest Branch of Al Arafha Islami Bank Bangladesh
Ltd.3.15.6 Car Investment Scheme (CIS) Objective Page 68 of 168 69.
To help a section of the officials, business houses and business
executives and established professionals for movement in
discharging their duties and responsibilities punctually and
efficiently. Target Group Permanent officials, teachers,
businessmen, house owners, professionals, existing clients of
IBBL,wage earners etc. Nature of Goods / Items Reconditioned /
Brand new Private Car / Micro / Jeep / Auto Rickshaw etc. Mode of
Investment Hire Purchase under Shirkatul Melk (HPSM) Period of
Investment Maximum 4-years for reconditioned car and 5-years for
brand new cars. Rate of Return 18.00% or rate to be determined by
the Bank from time to time. Amount of Investment Tk.2.00 million
for reconditioned and Tk.3.00 million for brand new car. Age of
Clients Minimum 21 years, Maximum 65 years. How to Apply
Application Form shall have to be collected from nearest Branch of
Al Arafha Islami Bank Bangladesh Ltd. 3.15.7 Agricultural Implement
Investment Scheme (AIIS) ObjectivePage 69 of 168 70. i. To provide
power tillers, power pumps, shallow tube wells, thresher machines
etc. on easy terms to unemployed rural youths for self-employment.
ii. To the farmers to help augment production in agriculture
sector. Target Group Educated / uneducated farmers & persons /
youths. Nature of Goods / Items Power Tiller / Power pump / Deep /
Shallow tube well / Thresher machine / Combined harvester / Tractor
/ Rice transplanter / USG making Machine / Drum Seeder / Agro
processing machinery & equipments etc. Mode of Investment
Bai-Muajjal Period of Investment Maximum 1-year for Bai-Muajjal
& Maximum 2-years for HPSM. Rate of Return 18.00% or rate to be
determined by the Bank from time to time. Amount of Investment
Maximum Tk.0.30 million. How to Apply Application Form shall have
to be collected from nearest Branch of Al Arafha Islami Bank
Bangladesh Ltd. 3.15.8 Micro Industries Investment Scheme (MIIS)
Objective i. To create wider base for industries as well as to
encourage establishment of microindustries in different areas of
the country. ii. To create potential entrepreneurs. iii.
Diversification of Bank investment port-folio. Page 70 of 168 71.
Target Group Engineering diploma / Degree holders / Technical
persons. Nature of Goods / Items Food & agriculture / plastic
& rubber/ forestry & furniture / dairy product processing /
engineering/ leather / chemicals / textiles / recycling / service
electrical accessories / paper product / handicrafts industries /
computer technology industries /manufacturing of garments / sewing
and other machines for tailoring etc. Mode of Investment
Bai-Murabaha Period of Investment Maximum 1-year for Bai-Murabaha
& Maximum 3-years for HPSM (excluding gestation period). Rate
of Return 14.50% or rate to be determined by the Bank from time to
time.Amount of Investment For All Metropolitan cities : Up to
Tk.1.50 million For Districts & Municipalities : Up to Tk.1.00
million Others :Up to Tk.0.50 million How to Apply Application Form
shall have to be collected from nearest Branch of Islami Bank
Bangladesh Ltd.Page 71 of 168 72. 3.16 Process of Investment:
Process of Investment Heads ApplicationCharacteristics Applicant
applies for the Investment in the prescribed form of the bank
describing the types and purpose of loan.Sanction1. Collecting
credit information about die applicant to determine the credit
worthiness of the borrower. Sources of information 2. Personal
Investigation, Confidential Report from other bank. Head
Office/Branch/Chamber of Commerce, 3. CIB (Central Information
Bureau) report from Central Bank. i. Evaluation of compliance with
its lending policy, ii. Evaluating the proposed security. 4. LRA is
must for the loan exceeding one crore - as ordered by Bangladesh
Bank. 5. If everything is in accordance the loan is
sanctionedDocumentationThen bank prepare a Investment proposal
which contains terms and conditions of loan for approval of Ra or
Manager Takes the necessary papers and signatures from
borrowerDisbursementAn Investment Account is opened. Where customer
A/C--------Dr. Respective Loan A/C
--------------------------------------- Cr.Page 72 of 168 73.
CHAPTER-4 PERFORMANCE ANALYSISPage 73 of 168 74. 4.1 Theoretical
Review: 4.2 Ratio Analysis Ratio Analysis is a form of Financial
Statement Analysis that is used to obtain a quick indication of a
firm's financial performance in several key areas. The ratios are
categorized as Short-term Solvency Ratios, Debt Management Ratios,
Asset Management Ratios, Profitability Ratios, and Market Value
Ratios. Ratio Analysis as a tool possesses several important
features. The data, which are provided by financial statements, are
readily available. The computation of ratios facilitates the
comparison of firms which differ in size. Ratios can be used to
compare a firm's financial performance with industry averages. In
addition, ratios can be used in a form of trend analysis to
identify areas where performance has improved or deteriorated over
time. Because Ratio Analysis is based upon accounting information,
its effectiveness is limited by the distortions which arise in
financial statements due to such things as Historical Cost
Accounting and inflation. Therefore, Ratio Analysis should only be
used as a first step in financial analysis, to obtain a quick
indication of a firm's performance and to identify areas which need
to be investigated further.Short-term Solvency or Liquidity Ratios
Short-term Solvency Ratios attempt to measure the ability of a firm
to meet its short-term financial obligations. In other words, these
ratios seek to determine the ability of a firm to avoid financial
distress in the short-run. The two most important Short-term
Solvency Ratios are the Current Ratio and the Quick Ratio.Page 74
of 168 75. Loan-To-Deposit Ratio - LTD' A commonly used statistic
for assessing a bank's liquidity by dividing the banks total loans
by its total deposits. This number, also known as the LTD ratio, is
expressed as a percentage. If the ratio is too high, it means that
banks might not have enough liquidity to cover any unforeseen fund
requirements; if the ratio is too low, banks may not be earning as
much as they could be. Profitability Ratio Profitability ratios
show a company's overall efficiency and performance. We can divide
profitability ratios into two types: margins and returns. Ratios
that show margins represent the firm's ability to translate sales
dollars into profits at various stages of measurement. Ratios that
show returns represent the firm's ability to measure the overall
efficiency of the firm in generating returns for its shareholders.
Return on Assets The Return on Assets ratio is an important
profitability ratio because it measures the efficiency with which
the company is managing its investment in assets and using them to
generate profit. It measures the amount of profit earned relative
to the firm's level of investment in total assets. The return on
assets ratio is related to the asset management category of
financial ratios. The calculation for the return on assets ratio
is: Net Income/Total Assets = _____%. Net Income is taken from the
income statement and total assets is taken from the balance sheet.
The higher the percentage, the better, because that means the
company is doing a good job using its assets to generate sales.
Return on Equity The Return on Equity ratio is perhaps the most
important of all the financial ratios to investors in the company.
It measures the return on the money the investors have put into the
company. This is the ratio potential investors look at when
deciding whether or not to invest in the company. The calculation
is: Net Income/Stockholder's Equity = _____%. Net Page 75 of 168
76. income comes from the income statement and stockholder's equity
comes from the balance sheet. In general, the higher the
percentage, the better, with some exceptions, as it shows that the
company is doing a good job using the investors' money. Return on
Deposit (ROD) The return on debt (ROD) can be expressed as the
quantification of a companys performance or net income as allied to
the amount of debt issued by the company. Putting it other way, the
return on debt refers to the amount of profit generated for every
dollar held by a company in debt. As stated by Investopedia, the
return on debt is an intricate financial modeling skill rather than
being a commonly used financial reporting factor. Moreover,
companies carrying a significant amount of debt relating to capital
and/or assets are more prone to economic downturns during a decline
in earnings and credit measures might be tightened.Leverage Ratio
/Capital Structure Ratio A mix of a company's long-term debt,
specific short-term debt, common equity and preferred equity. The
capital structure is how a firm finances its overall operations and
growth by using different sources of funds. Debt comes in the form
of bond issues or long-term notes payable, while equity is
classified as common stock, preferred stock or retained earnings.
Short-term debt such as working capital requirements is also
considered to be part of the capital structure.Equity-to-Assets
Ratio The equity-to-assets ratio is one of many financial ratios
used to determine the financial health and long-term profitability
of a corporation. It is often used by investors to determine
whether the corporation's shares are a safe investment. Though
important, the equity-to-assets ratio should be used only with
other financial ratios to determine a corporation's overall
financial health. Efficiency RatioPage 76 of 168 77. In banking, a
ratio of expenses to revenue. For example, if a bank spends $10
million and makes $15 million in a given month, its efficiency
ratio is .67. Banks desire a lower efficiency ratio because this
means that the bank is making considerably more than it is spending
and is therefore on sound fiscal footing. One way to conceptualize
the efficiency ratio is to say it is the measure of what a bank
must spend in order to make one dollar. In the above example, the
bank must spend 67 cents. Ratios that are typically used to analyze
how well a company uses its assets and liabilities internally.
Efficiency Ratios can calculate the turnover of receivables, the
repayment of liabilities, the quantity and usage of equity and the
general use of inventory and machinery. Operational Efficiency A
market condition that exists when participants can execute
transactions and receive services at a price that equates fairly to
the actual costs required to provide them. An
Operationally-efficient market allows investors to make
transactions that move the market further toward the overall goal
of prudent capital allocation, without being chiseled down by
excessive frictional costs, which would reduce the risk/reward
profile of the transaction. Asset utilization ratio The asset
utilization ratio measures management's ability to make the best
use of its assets to generate revenue. This is particularly
meaningful in a manufacturing, where fewer capital assets are used
to produce products. The asset utilization ratio is calculated by
dividing total sales by the net book value of the capital assets.
Once calculated, this ratio can then be compared to benchmark
industry standard ratios, or it can be compared to ratios of other
comparable businesses. Total Expenses to Total Assets Total
Expenses to Total Assets is the ratio between total Expense and
total assets. It provides information regarding total costs
involved annually for investment funds. The costs include expenses
like legal fees, management fees, and other operational expenses.
Total Expense Ratio is also called as Expense Ratio. Total expense
ratio = Total expense / Total assets Page 77 of 168 78. The Expense
helps in measuring the funds assets which are sold or used to
manage the expenses relating to the fund. The output is expressed
as a percentage and is calculated on a yearly or annual
basis.Credit Risk Ratio The risk of loss of principal or loss of a
financial reward stemming from a borrower's failure to repay a loan
or otherwise meet a contractual obligation. Credit risk arises
whenever a borrower is expecting to use future cash flows to pay a
current debt. Investors are compensated for assuming credit risk by
way of interest payments from the borrower or issuer of a debt
obligation.Credit risk is cl