Chapter OneIntroduction of the Report

1.1 Rationale of study:

Internship program of University is a partial requirement for the graduation of BBA students.

Every B.B.A student is appointed to learn some practical knowledge within the pre-stipulated

period by observing the organization day to day activities. In this regard our internship

program started at 30th January at First Security Islami Bank Bangladesh Limited. In the

modern society commercial Banks occupy a position of economic importance. They play a

significant role to meet the needs of the society such as capital formation, large-scale

production, industrialization, growth of trade and economy etc.

Islamic banks are unconditional and specialized financial institutions that perform most of

the standard banking services and investment activities on the basis of profit and loss sharing

system conforming to the principles of Islamic Shari’ah. Out of 50 banking institutions, 7

banks are backed by Islamic mechanism and worldwide accepted Islamic morality and

established code of conduct. This paper, however attempts to appraise performance and

dictate the overall scenario of First Security Islami Bank Bangladesh Limited performing

beneath the umbrella of Islamic shari’ah and approved welfare oriented principles.

1.2 Objectives of report

The first objective of writing the report is fulfilling the partial requirements of the BBA

program. In this report, we have attempted to give an overview of First Security Islami Bank

Bangladesh Limited in general. The primary objective of this report is to observe the general

banking, investment related activities & foreign exchange operations of First Security

Islami Bank Bangladesh Ltd.

The other objectives include:

Following are the main objectives

• To familiar the history of Islami Banking in Bangladesh.

• To learn about the overall general banking operations of FSIBL.

• To show the investment mechanism and product offerings in different modes of FSIBL.

• To learn about the shari’ah aspects followed for foreign exchange operations.

• To learn about the welfare activities of FSIBL.

Page | 1

• To show the differences with conventional banking regarding different aspects.

• To identify strength and weakness of FSIBL.

• To find problems or lacking that FSIBL is facing.

• To recommend actions that may be necessary to redesign the investments of FSIBL

1.3 Methodology

In order to carry out the report, we have collected the required data from both primary and

secondary sources. We focused on taking the interviews of the personnel involved in the

different departments, Manager and Senior Level Employees, Business Clients and Account

Holders. After collecting information the data were used to analyze information, Graphical

tools were used to get clear picture of the situation.

a) Nature of the study: Exploratory

b) Sources of information: Both primary and secondary information sources

were used to complete this report.

Primary sources of data: Direct interview process in bank employees.

Secondary sources of data : Manuals provided by Islami Bank Training & Research

Academy, Published financial statement & Website of First Security Islami bank Bangladesh

Limited.

Analytical Review:

• PEST Analysis

• SWOT Analysis

• Graphical Analysis

Page | 2

1.4 Scope of the Study

Islami Bank is the pioneer of welfare driven economy and promoter of balanced growth in a

country like Bangladesh which has a poverty stricken contemporary economic background.

To address the ongoing condition of IB and their bright prospects is a vital issue to be

explored.

1.5 Limitations

During preparing this report I have faced these following limitations:

Inadequate published information about bank

Financial constraints to collect information

Insufficient information in websites of bank

Confused definition about products and services of Islamic bank

Unsound database about Islamic banks in Bangladesh Bank

Busy working environment

Lack of sufficient well informed officials

Data could not been collected for confidentiality or secrecy of management

1.6 Objectives of Islamic Banking

The primary objective of establishing Islamic banks all over the world is to promote, foster

and develop the application of Islamic principles in the business sector. More specifically, the

objectives of Islamic banking when viewed in the context of its role in the economy are listed

as following:

To offer contemporary financial services in conformity with Islamic Shari’ah;

To contribute towards economic development and prosperity within the

principles of Islamic justice;

Optimum allocation of scarce financial resources; and to help ensure equitable

distribution of income.

These objectives are discussed below:

Offer Financial Services:

Page | 3

Interest-based banking, which is considered a practice of Riba in financial transactions, is

unanimously identified as anti-Islamic. That means all transactions made under conventional

banking are unlawful according to Islamic Shari’ah. Thus, the emergence of Islamic banking

is clearly intended to provide for Shari’ah approved financial transactions.

Islamic Banking for Development:

Islamic banking is claimed to be more development- oriented than its conventional

counterpart. The concept of profit sharing is a built-in development promoter since it

establishes a direct relationship between the bank’s return on investment and the successful

operation of the business by the entrepreneurs.

Optimum Allocation of Resources:

Another important objective of Islamic banking is the optimum allocation of scarce

resources. The foundation of the Islamic banking system is that it promotes the investment of

financial resources into those projects that are considered to be the most profitable and

beneficial to the economy.

Islamic Banking for Equitable Distribution of Resources:

Perhaps the must important objective of Islamic banking is to ensure equitable distribution of

income and resources among the participating parties: the bank, the depositors and the

entrepreneurs.

1.7 Basic Properties of Islamic Banking

Islamic banking is emerging in an era when the world is settling down to a free market

economy and when phenomenal changes are taking place in the global economy. A free-

market economy visualizes three essential features - free trade, open capital market and

minimum governmental intervention. The vagaries of protectionism and regionalism are

transforming the economy to free trade and globalize. The changes could provide ample

scope for the Islamic banking to grow and work in competitive environment. Islamic

banking, being an integral part of an Islamic economic system can be practiced more

effectively in an environment, which conforms to the doctrine of Islam. Thus there are some

essential requirements for a successful Islamic banking, such as:

• Supportive Legal Framework and Swift Judicial System:

Page | 4

An effective legal framework ensuring speedy justice is essential for a good society, it is

more so for the success of Islamic banking, because its investment risk is more than that

of a conventional interest-based bank as its dealings are on profit and loss basis.

• Disciplined Entrepreneurship:

It would minimize cases of malfeasance and mismanagement. Besides, a banker must

extend from being merely a financier to a role-player in business. Although a Murabaha

transaction in Islamic banking does provide an opportunity to a banker to share in

business, the Islamic banks generally limit themselves to being inactive partners for their

credit risk only. The real entrepreneurial role of an Islamic bank needs, therefore, to be

increased.

• Conceptual Change from Credit Risk to Overall Risk Management:

While it is difficult to predict, with any degree of certainty, the operating results of an

enterprise and the magnitudes of profit and loss, all the same, it seems unjust if the party

providing the capital is guaranteed a fixed and predetermined rate of return, and the other

party undertaking the enterprise is made to bear the uncertainty alone. Under the

circumstances, an Islamic banker has not only to focus on credit risk but also to view all

the business risks of the enterprises in which he has invested the bank money.

• Strong Ethical Values:

The Islamic economic system offers a balance between the two extremes of public or

social and private or individual ownership of property. The success of Islamic banking in

a society is related to the extent of acceptability of the doctrine of trusteeship and

transformation of the self-interested and profit-oriented behavior of people into an

altruistic and value-oriented behavior.

• Supreme Shari’ah Council:

The function of Shariah Council in maintaining Islamic banking activities in a country

within the orbit of Islamic injunctions is dependent on its legal status and the extent of

implementation of its opinion.

The opinions of Shari’ah Councils of different countries may not necessarily be uniform.

There is, therefore, a need for a Supreme Shari’ah Council representing Muslim

community all over the world to decide about various issues con fronted by Islamic

banks. A beginning has been made in this direction by establishing the Council of the

Page | 5

Islamic Fiqh Academy at Jeddah, Saudi Arabia under the auspices of the Organization of

Islamic Conference (OIC) but its role has to be augmented.

• Uniform Accounting Standards:

There is need for harmonization of financial reporting of Islamic banks in respect,

particularly, of the following;

The significant accounting policies on which the statements are based should be

fully and clearly declared,

The methods of translating foreign currency transactions would be appropriately

disclosed,

Appropriate and sufficient disclosures regarding the quality of banks assets is of

much concern to the depositors,

Additional disclosure of the nature of the financial contingencies and commitments

of the banks in their financial statements.

• Committed Management:

If the management of a bank is determined to step into the business of Islamic banking, it

can easily evolve a strategy for the same, formulate a plan for a specific time - frame and

implement it accordingly.

• Progressive and Modern outlook:

In order to ensure successful management in Islamic banks, there is need to apply all the

available modern tools of managing corporate business, including management of human

assets, offices, information resources, marketing etc.

• Body to Evaluate Islamic Financial Institutions:

In order to ensure quality and standard in management of Islamic financial institutions

and to build confidence of the general public in Islamic banking, there is need to establish

some professional body responsible to define professional standards and ethics and other

aspects of Islamic financial institutions. It may also certify the level of financial health of

such institutions.

• Treatment in case of Loan default:

In time of loan default these banks don’t take any penalty for default which is one of the

major differences between Islamic & conventional banks.

• Participatory financing:

Page | 6

Islamic banks believe in participatory financing. They do the investment through profit &

loss sharing. Their investment modes depend on mudaraba & murabaha principles which

require participatory financing of both the parties.

• Lending and investing:

In Islam, there is a clear difference between lending and investing lending can be done

only on the basis of zero interest and capital guarantee, and investing only on the basis of

Mudaraba (profit-and-loss-sharing).

1.7 Islamic Banking in Bangladesh

Islamic Banking has experienced a phenomenal growth and expansion in Bangladesh in the

backdrop of strong public demand and support for the system along with its gradually

increasing popularity across the world. As a result, a number of full-fledged Islamic Banks

has been established, while a good number of conventional banks have come forward to offer

services compliant with Islamic Shari’ah through opening of Islamic branches along with

conventional ones. There is also a trend of conversion of conventional banks into Islamic

bank.

It has, therefore, become necessary to ensure that activities of the fast growing Islamic Banks

are carried out properly and uniformly according to the principles of Islamic Shari’ah. With

this end in view, Bangladesh Bank constituted a Focus group comprising representatives of

the central Bank, a number of Islamic Banks and the Central Shari’ah Board for Islamic

Banks of Bangladesh to formulate an integrated guideline for conducting banking business of

the Islamic Bank/Islamic bank branches of conventional banks. Based on the

recommendations of the Focus group this guideline embodying different terminologies used

in Islamic Banking operations, definitions of the terminologies, the principles and modes of

deposits and investments has been prepared. It also dwelt upon the issues of liquidity,

maintenance of books of accounts and preparation of financial statements and other related

issues. This guideline has been prepared mainly on the basis of Banking Companies Act

1991, Companies Act 1994 and Prudential Regulations of Bangladesh Bank. However, this

guideline should be treated as supplementary, not a substitute, to the existing banking laws,

rules and regulations. Incase of any point not covered under this Guideline as also in case of

Page | 7

any contradiction, the instructions issued under the Banking Companies Act and Companies

Act will prevail.

Definitions of Terms used in Islamic Banking Operations

The following terms as used in this guideline, if not repugnant to the subject or affairs, shall

have the following meaning:

• "Shari’ah" means such rules and regulations as have their origin in the holy Qur'an and

Sunnah to govern all aspects of human life.

• "Islamic bank" means such a banking company or an Islamic banking branch (es) of a

banking company licensed by Bangladesh Bank, which follows the Islamic Shariah in

all its principles and modes of operations and avoids receiving and paying of interest at

all levels.

• "Islamic Banking Business" means such banking business, the goals, objectives and

activities of which is to conduct banking business/activities according to the principles

of Islamic Shari’ah and no part of the business either in form and substance has any

elements not approved by Islamic Shari’ah.

• "Branch or Branch Office" means any branch or Branch Office of Islamic Bank

Company or office or Branch of such interest based conventional Banks which run

Islamic banking business.

• "Depositor" means some one who holds with any Islamic Banking Company any

account namely Current account based on Al-Wadiah principles, Savings or long and

short term deposit accounts under Mudaraba principles.

• "Investment" means any such modes of financing which Islamic Bank Company does

bin accordance with principles of Shari’ah or as per the Shari’ah approved modes like

Mudaraba, Musharaka, Bai-Murabaha, Bai-Muajjal, Istisna, Lease, Hire-purchase under

Shirkatul Melk, etc.

• "Client" means such a person or institution who/which has any business relationship

with Islamic Banking Company.

Page | 8

• "Compensation" means such financial penalty as is imposed by a Islamic Banking

Company over and above the amount of installment when a client fails to repay Bank's

investment on due dates as per the agreement executed by him

Bangladesh is one of the largest Muslim countries in the world. The people of this country

are deeply committed to Islamic way of life as enshrined in the Holy Qur’an and the Sunnah.

Naturally it remains a deep cry in their hearts to direct and design their economic lives in

accordance with the precepts of Islam. The establishment and commencement of Islamic

banks in Bangladesh, is the true reflection of this inner urge of its people.

In our banking sector there operates 7 banks which are backed by Islamic Shari’ah and

approved principles according to Quran and Sunnah. First Islamic bank is FSIBL which is

established in 1983. This was in fact the one of a kind bank in the Southeast Asia. Other

players in the market are:

• EXIM Bank

• SJBL

• First Security Islami Bank Ltd

• Al-Arafah Islami Bank Ltd

• Social Islami bank Ltd

• ICB Islamic Bank

Page | 9

Page | 10

CAMELS Rating Status of Islamic Banks Operating in Bangladesh

Strong: Shahjalal Islami Bank

Satisfactory: EXIM Bank , IBBL

Fair: Al-Arafah Islami Bank, First Security Islami Bank

Marginal: Social Islami Bank, ICB Islami Bank