Foreign Exchange Operation of Islami Bank Bangladesh Limited

Introduction

As an Islamic Bank the statutes, rules and regulations of Islami Bank Bangladesh Ltd. expressly state its commitment to the principles of” Islamic Shariah”. All its activities are conducted on interest free system according to Islamic Shariah. So it extends its socio-economic and financial services to the poor helpless and low-income people for their economic upliftment in urban and rural areas.

Islami Bank Bangladesh Ltd. is more concerned with the soundness of the project and the business acumen and managerial competence of the entrepreneur than credit worthiness of the borrower. An Islamic bank is a financial institution that operates with the objective to implement and materialize the economic and financial principles of Islam in the banking arena.

1.1 BACKGROUND OF THE STUDYFor an expanding economy, a developed and efficient banking system is indispensable.

Among others, it helps transfer of financial resources from surplus units to deficit units and,

hence, helps accelerate the pace of development by securing uninterrupted supply of financial

resources to people engaged in numerous economic activities. The tremendous development

that the world economy has experienced in the last few decades was contributed by several

factors among which, growing institutional supply of loan able funds must have played the

pivotal role. The role of banking is comparable to what an artery system does in the human

body. Both commercial banks and other development financial institutions provide short-

term, medium-term, and long-term credits to businessmen and entrepreneurs who usually

take the lead in ventures of economic development. Institutional supply of credit has been

made possible by a system of financial intermediation organized in a way where conventional

banks collect small savings from the public by offering them a fixed rate of interest and

advancing the loan able funds out of the deposited money to enterprising clients charging

relatively higher rates of interest.

The margin between these two rates is the bank's income. In addition, banks also provide

many other services to the public for which it receives service charges. For millions of

Muslims, traditional banks are institutions to be avoided. Islam is a religion, which keeps

believers from the teller's window. Their Islamic beliefs prevent them from dealings that

involve usury or interest (Riba). Yet Muslims need banking services as much as anyone and

for many purposes: to finance new business ventures, to buy a house, to buy a car, to

facilitate capital investment, to undertake trading activities, and to offer a safe place for

savings. For Muslims are not averse to legitimate profit as Islam encourages people to use

money in Islamic legitimate ventures, not just to keep their funds idle.

However, in this fast moving world, more than 1400 years after the Prophet (Sm), can

Muslims find room for the principles of their religion?

The answer comes with the fact that a global network of Islamic banks, investment houses

and other financial institutions has started to take shape based on the principles of Islamic

finance laid down in the Qur'an and the Prophet's traditions 14 centuries ago.

Islamic Banking beyond the traditional banking system will serve the purpose of Islamic

ideology of ‘complete code of life’. One could conclude that Islam has many universal values

in common with the west. As Islam believes the earlier scriptures in its original form were

from the same God (Allah), this is not surprising. However, the specific prohibition of

interest and establishment of the zakat tax, and the status of law on gambling, uncertain

contracts etc. which are prohibitions and not moral exhortations, implies that the objectives of

banking in Islam is different from conventional and even to a certain extent social and

environmental investment. Thus, there is a need for an Islamic investment system in the

Banking arena.

1.2 OBJECTIVES OF THE STUDYMy study serves some specific objectives, among those the main objectives are mentioned below:

To understand the Islamic Banking system of Bangladesh and its policies & regulations;

To understand and analyze foreign exchange mechanism of Islami bank.

To understand and analyze foreign remittance role of IBBL .

To make possible suggestions and recommendations for increasing foreign Exchange

through Islami bank Bangladesh Ltd.

1.3 METHODOLOGY OF THE STUDYThe study is performed based on the information extracted from different sources collected by using a specific methodology. This report is analytical in nature.

Population: All the Branches of IBBL located in everywhere in Bangladesh has been taken into consideration as population.Sample: Islami Bank Bangladesh Ltd, Dhanmondi Branch.Data collection: Sources of data of this report can be divided into two categories:

Primary Sources:

Face to Face conversation with the respective officers, staffs, clients.

Interviewing officers and staffs.

Sharing practical knowledge of officials.

Relevant file study provided by the officers concerned.

In-depth study of selected cases.

Practical desk work.

Secondary Sources:

Annual Report of IBBL-2008

Audit Reports

Website of IBBL

Internet and various study selected reports.

Relevant books, Research papers, Newspapers and Journals.

Library of IBTRA.

1.4 LIMITATIONS OF THE STUDY

High degree of involvement regarding collection of information, review of literature and

analysis of information requires for any kind of research work. This study has suffered

from certain constraints noted below:

Unpublished data have not considered for the study.

The depth of the analysis has been limited to the extent of information collected from

different sources.

Executive President (EP)

Deputy Executive President (DEP)

Executive Vice President ( EVP)

Senior Vice President (SVP)

Vice President (VP)

Senior Principal Officer (SPO)

Assistant Vice President (AVP)

Principal Officer (PO)

Senior Officer (SO)

Officer

Probationary Officer

Assistant Officer Grade - I

Assistant Officer Grade - II

Assistant Officer Grade - III

Last of all, this study has been conducted within a limited time. So, time constraint

has played a key role for the whole study.

Lack of cooperation of the respondents.

Lack of enough knowledge to study on.

CHAPTER TWO

Organizational Overview2.1 ORGANIZATIONAL STRUCTURE OF IBBL

General Banking Foreign Exchange Investment

Cash Import Export RemittancesImport

Foreign Exchange Branch

2.2 O2.2 ORGANIZATIONALRGANIZATIONAL STRUCTURE OF F STRUCTURE OF FOREIGNOREIGN

EXCHANGEEXCHANGE BRANCH OF IBBL BRANCH OF IBBL

2.3 OVERALL 2.3 OVERALL ACTIVITIESACTIVITIES OFOF I ISLAMISLAMI B BANKANK B BANGLADESHANGLADESH

LLTDTD.. MEANING OF ISLAMIC BANKING

Islamic banking has been defined in a number of ways. The definition of Islamic bank, as

approved by the General Secretariat of the OIC, is stated in the following manner. “An

Islamic bank is a financial institution whose status, rules and procedures expressly state its

commitment to the principle of Islamic Shariah and to the banning of the receipt and

payment of interest on any of its operations”(Ali & Sarkar 1995, pp.20-25). Shawki Ismail

Shehta viewing the concept from the perspective of an Islamic economy and the prospective

role to be played by an Islamic bank therein opines: “It is, therefore, natural and, indeed,

imperative for an Islamic bank to incorporate in its functions and practices commercial

investment and social activities, as an institution designed to promote the civilized mission of

an Islamic economy” (Ibid).  Ziauddin Ahmed says, “Islamic banking is essentially a

normative concept and could be defined as conduct of banking in consonance with the ethos

of the value system of Islam” (Ibid). 

It appears from the above definitions that Islamic banking is a system of financial

intermediation that avoids receipt and payment of interest in its transactions and conducts

its operations in a way that it helps achieve the objectives of an Islamic economy.

Alternatively, this is a banking system whose operation is based on Islamic principles of

transactions of which profit and loss sharing (PLS) is a major feature, ensuring justice and

equity in the economy. That is why Islamic banks are often known as PLS-banks.

2.4 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.

The objectives of Islami Bank are: To conduct interest-free banking.

To establish participatory banking instead of banking on debtor-creditor relationship.

To invest on profit and risk sharing basis.

To accept deposits on Mudaraba & Al-Wadeah basis.

To establish a welfare-oriented banking system.

To extend co-operation to the poor, the helpless and the low-income group for their

economic upliftment.

To play a vital role in human development and employment generation.

To contribute towards balanced growth and development of the country through

investment operations particularly in the less developed areas.

To contribute in achieving the ultimate goal of Islamic economic system.

2.5 DISTINGUISHING FEATURES OF ISLAMIC BANKING An Islamic bank has several distinctive features as compared to its conventional counterpart.

Chapra (1985, PP.154-57) has outlined six essential differences as below:

ABOLITION OF INTEREST (RIBA) Since Riba is prohibited in the Quran and interest in all its forms is akin to Riba, as

confirmed by Fuqaha and Muslim economists with rare exceptions, the first distinguishing

feature of an Islamic bank must be that it is interest-free.        

ADHERENCE TO PUBLIC INTERESTActivity of commercial banks being primarily based on the use of public funds, public

interest rather than individual or group interest will be served by Islamic commercial banks. 

The Islamic banks should use all deposits, which come from the public for serving public

interest and realizing the relevant socio-economic goals of Islam. They should play a goal-

oriented rather than merely a profit-maximizing role and should adjust themselves to the

different needs of the Islamic economy.

MULTI-PURPOSE BANK Another substantial distinguishing feature is that Islamic banks will be universal or multi-

purpose banks and not purely commercial banks. These banks are conceived to be a

crossbreed of commercial and investment banks, investment trusts and investment -

management institutions, and would offer a variety of services to their customers.

A substantial part of their financing would be for specific projects or ventures. Their equity-

oriented investments would not permit them to borrow short-term funds and lend to long-

term investments.

This should make them less crisis-prone compared to their capitalist counterparts, since they

would have to make a greater effort to match the maturity of their liabilities with the maturity

of their assets.

MORE CAREFUL EVALUATION OF INVESTMENT DEMAND  Another very important feature of an Islamic bank is its very careful attitude towards

evaluation of applications for equity oriented financing. It is customary that conventional

banks evaluate applications, consider collateral and avoid risk as much as possible. Their

main concern does not go beyond ensuring the security of their principal and interest receipts.

Since the Islamic bank has a built in mechanism of risk sharing, it would need to be more

careful in how it evaluates financing requests. It adds a healthy dimension in the whole

lending business and eliminates a whole range of undesirable lending practices.

 

WORK AS CATALYST OF DEVELOPMENT

Profit-loss sharing being a distinctive characteristic of an Islamic bank fosters closer relations

between banks and entrepreneurs. It helps develop financial expertise in non-financial firms

and also enables the bank to assume the role of technical consultant and financial adviser,

which acts as catalyst in the process of industrialization and development.

2.6 CONVENTIONAL VS. ISLAMIC BANKING :Conventional banking is essentially based on the debtor-creditor relationship between the

depositors and the bank on the one hand, and between the borrowers and the bank on the

other. Interest is considered to be the price of credit, reflecting the opportunity cost of money.

 Islam, on the other hand, considers a loan to be given or taken, free of charge, to meet any

contingency.  Thus in Islamic Banking, the creditor should not take advantage of the

borrower.

Conventional Banks Islamic Banks1. The functions and operating modes of

conventional banks are based on manmade

principles.

1. The functions and operating modes of

Islamic banks are based on the principles of

Islamic Shariah.

2. The investor is assured of a

predetermined rate of interest.

2. In contrast, it promotes risk sharing

between provider of capital (investor) and

the user of funds (entrepreneur).

3. It aims at maximizing profit without any

restriction.

3. It also aims at maximizing profit but

subject to Shariah restrictions.

4. It does not deal with Zakat. 4. In the modern Islamic banking system, it

has become one of the service-oriented

functions of the Islamic banks to collect

and distribute Zakat.

5. Lending money and getting it back with

interest is the fundamental function of the

conventional banks.

5. Participation in partnership business is

the fundamental function of the Islamic

banks.

6. Its scope of activities is narrower when

compared with an Islamic bank.

6. Its scope of activities is wider when

compared with a conventional bank. It is,

in effect, a multi-purpose institution.

7. It can charge additional money

(compound rate of interest) in case of

defaulters.

7. The Islamic banks have no provision to

charge any extra money from the

defaulters.

8. In it very often, bank’s own interest

becomes prominent. It makes no effort to

ensure growth with equity.

8. It gives due importance to the public

interest. Its ultimate aim is to ensure

growth with equity.

9. For interest-based commercial banks,

borrowing from the money market is

relatively easier.

9. For the Islamic banks, it is

comparatively difficult to borrow money

from the money market.

10. Since income from the advances is

fixed, it gives little importance to

developing expertise in project appraisal

and evaluations.

10. Since it shares profit and loss, the

Islamic banks pay greater attention to

developing project appraisal and

evaluations.

11. The conventional banks give greater

emphasis on credit-worthiness of the

clients.

11. The Islamic banks, on the other hand,

give greater emphasis on the viability of

the projects.

12. The status of a conventional bank, in

relation to its clients, is that of creditor and

debtors.

12. The status of Islamic bank in relation to

its clients is that of partners, investors and

trader.

13. A conventional bank has to guarantee

all its deposits.

13. Strictly speaking, and Islamic bank

cannot do that.

2.7 RIBA AND ITS BASIC FEATURES :The word used by the Quran concerning ‘interest’ is Riba. The literal meanings of Riba are

money increase, increase of anything or increment of anything from its original amount

(Maududi 1979, p.84). However, all increases are not considered as Riba in Islam. Money

may increase in business activities as well. This increase is not at all considered as Riba. The

increase, instead of being prohibited (Haram), is approved (Halal) in Islam. Islam prohibits

only those increases that are charged on the loan with a prefixed rate.

 

Muslim scholars equate interest with Riba. In the Shariah, Riba technically refers to the

premium that must be paid by the borrower to the lender along with the principal amount as a

condition for the loan or for an extension in its maturity (Chapra 1985, p.64). In other words,

Riba is the predetermined return on the use of money. In the past there has been dispute about

whether Riba refers to interest or usury, but there is now consensus among Muslim scholars

that the term covers all forms of interest and not only “excessive” interest (Khan 1985, p.52).

Its basic characteristics are:

It must be related to loan;

A prefixed amount of money to be paid when due;

A time is fixed for the repayment; and

All these elements for repayment are taken as conditions for loan.

2.8 RIBA VS PROFIT

There are persons who try to equate Riba with profit. In effect, they are fundamentally

differences are:

Riba Profit

1. When money is “charged”, its imposed

positive and define result is Riba

1. When money is used in trading (for e.g.)

its uncertain result is profit.

2. By definition, Riba is the premium paid by

the borrower to the lender along with

principal amount as a condition for the loan.

2. By definition, profit is the difference

between the value of production and the cost

of production.

3. Riba is prefixed, and hence there is no

uncertainty on the part of either the givers or

the takers of loans.

3. Profit is post-determined, and hence its

amount is not known until the activity is

done.

4. Riba can not be negative, it can at best be

very low or zero.

4. Profit can be positive, zero or even

negative.

5. From Islamic Shariah point of view, it is

Haram.

5. From Islamic Shariah point of view, it is

Halal.

CHAPTER - 3 3Foreign Exchange Mechanism of IBBL3.1 3.1 Foreign Exchange definition INTRODUCTION

Foreign trade can be easily defended as a business activity, which transcends national

boundaries. These may be between parties or governments. Trades among nations are a

common occurrence and normally benefits both the exporter and importer in many countries

international trade accounts for more than 20 % of their national incomes.

Foreign trade can usually be justified on the principle of comparative advantage according to

this economic principle. It is economically profitable for a country to specialize in the

production of that commodity in which the producer country has the greater comparative

advantage and to allow the other country to produce that commodity in which it has the lesser

comparative advantage. It includes the spectrum of goods services, investment, technology

transfer etc. this trade among various countries pauses for close linkage between the parties

dealing with trade. The bank, which provides such transactional trade, demands a few of

goods from seller to buyer and of payment form buyer to seller. And this flow of goods and

payment are done through letter of credit (L/C).

FOREIGN EXCHANGE As more than one currency are involved in foreign trade, it gives rise to exchange of

currencies which is known as foreign exchange. The term “Foreign Exchange `has three

principal meanings. Firstly, it is a term used referring to the currencies of the other countries

in terms of any single one currency. To a Bangladeshi, Dhaka, pound sterling etc. are foreign

currencies and as such foreign exchange. Secondly, the term also commonly refers to some

instruments used in international trade, such as Bill of Exchange Drafts, Traveler cheek and

other means of international remittance. Thirdly, the term foreign exchange is also quite often

referred to the balance in foreign currencies held by a country. In terms of section 2(d) of the

foreign exchange regulations 1947, is adopted in Bangladesh. Foreign exchange means

foreign currency and includes any instrument drawn accepted made or issued under clause

(13) of article 16 of the Bangladesh Bank order 1972, all the deposits, credits and balances

payable in any foreign currency and draft check, letter of credit and bill of exchange

expressed or drawn in Bangladesh currency but payable in any foreign countries.

In exercise of the power conferred by section 3 of the foreign exchange regulation, 1947

Bangladesh Bank issues license to schedule Bank to deal with exchange. These banks are

known as Authorized Dealers. Licenses are also issued by Bangladesh Bank to person or

firms to exchange foreign currency instruments such as T.C. Currency notes and coins. They

are known as Authorized Money changers.

3.2 FUNCTIONS OF FOREIGN EXCHANGE DEPARTMENTExports:

1. Pre shipment advanced.

2. Purchase of foreign bills.

3. Negotiating of foreign bills.

4. Export guarantees.

5. Advising / confirming letters – letters of credit.

6. Advance for deferred payments exports.

7. Advance against bills for collection.

Imports:

1. Opening of letter of credit.

2. Advance bills.

3. Bills for collection.

4. Import loans and guarantees.

Remittances:

1. Issue of DD, MT, TT etc.

2. Payment of DD, MT, TT etc.

3. Issue and enhancement of travelers check.

4. Sale and enhancement of foreign currency notes

3.3 THE MOST COMMONLY USED DOCUMENTS IN FOREIGN

EXCHANGE

Documentary Letter of Credit.

Bill of exchange.

Bill of Lading.

Commercial invoice.

Certificate of Origin of Goods.

Insurance Certificate.

Packing List.

Insurance Policy.

Pro- forma Invoice / Indent.

Master Receipt.

G.S.P Certificate.

DOCUMENTARY CREDIT

In simple terms a documentary credit is a conditional bank undertaking of payment.

Expressed more fully, it is a written undertaking by a bank (issuing bank) given to seller

(beneficiary). At the request, and in accordance with the instructions of the buyer (applicant)

to effect payment (that is, by making a payment, or accepting or negotiating bill of exchange)

up to a stated sum of money, with in a prescribe time limit and against stipulated documents.

The Customary Clauses Contain in a L/c is as followings:

A clause authorizing the beneficiary to draw bills of exchange up to a certain

limit.

List of shipping documents, which are to accompany the bills.

Description of the goods to be shipped. An undertaking by the opening bank

that bills drawn in accordance with the conditions will be dully honored.

Instructions to the negotiating bank for obtaining reimbursement of payments

under the credit.

Parties to letter of Credit

The parties to L/C are:

1. Importer/ buyer

2. Opening Bank / Issuing Bank

3. Exporter /seller / Beneficiary

4. Advising Bank /Notifying Bank

5. Negotiating bank

6. Confirming Bank

7. Paying /reimbursing bank

BILL OF LADING A bill of lading is a document that is usually stipulated in a credit when the goods are

dispatched by sea. It is evidence of a contract of carriage, is a receipt for the goods, and is a

document of tile to the goods. It also constituted a document that is, or may be, needed to

support insurance.

COMMERCIAL INVOICE

A Commercial invoice is the accounting document by which the seller charges the goods to

the buyer a commercial invoice normally includes, the following information:

1. Date 2. Name and address of the buyer and seller 3. Order of contract number, quantity and description of the goods. Unit price and the

total price 4. Weight of the goods, number of the package, shipping marks and numbers. 5. Terms of delivery and payment 6. Shipment details

CERTIFICATE OF ORIGIN

A certificate of origin is a signed statement providing evidence of the origin of the goods.

INSPECTION CERTIFICATE This is usually issued by an independent inspection company located in the exporting country

certifying or describing the quality, specification or other aspects of the goods, as called for

in the contract and the L/C. The inspection company is usually nominated by the buyer who

indicates the types of inspection what he/she wishes to undertake by the inspection company.

INSURANCE CERTIFICATE The insurance certificate document must

1. Be that specified in the credit;

2. Cover the risk specified in the credit;

3. Be consistent with the other documents in its identification of the voyage and

description of the goods.

3.4 IMPORT

Import is foreign goods and services purchased by consumers, Firms and government in

Bangladesh.

An importer must have Import Registration Certificate (IRC) given by Chief controller of

Import and Exports (CCI & L) to import any thing from other country.

To obtain IRC the following certificates are required:-

1. Trade license

2. Income tax certificate

3. Nationally certificate -

4. Banks solvency certificate

5. Asset certificate

6. Registration partnership deed (if any)

7. Memorandum and article of association

8. Certificate of incorporation (if any)

9. Rent receipt of the business premises

IMPORT PROCEDURE

To import through Islami Bank Bangladesh Ltd. Ltd. (RBL) a customer requires:

1. Bank Account

2. Import registration certificate

3. Tax paying identification number

4. Pro forma invoice/indent

5. Membership certificate

6. L/C application form duly attested

7. Insurance cover note with money receipt

8. Others

Importer’s application for L/C limit/margin

To have an import L/C limit, an application to the department of RBL furnishing the

following information.

1. Full particulars of bank account.

2. Natural of business

3. Required amount of limit

4. Payment terms and condition

5. Goods to be imported

6. Offered security

7. Repayment schedule

A credit officer scrutinizes this application and accordingly prepares a proposal CLP and

forwards it to the Head Office Credit Committee (HOCC). The committee, if satisfied,

sanctions the limit and returns band to the branch. Thus, the importer is entitled or the limit.

OPENING OF LETTER OF CREDIT BY BANKS

Opening of letter of credit means, at the request of the applicant (importer), issuance of a L/C

in favor of the beneficiary (exporter) by a bank. The band, which open or issue L/C is called

L/C opening bank or issuing bank.

On receipt of the importer’s L/C application supported by the firm’s contract (indent/pro-

forma invoice) and insurance cover note, the bank scrutinize the same thoroughly and fix up a

margin on the basis of banker-customer relationship

Before opening L/C, the issuing bank must check the followings:

1. L/C application properly stamped, signature verified and margin approved and

properly retained.

2. Indent/pro-forma invoice signed by the importer and indenter/supplier.

3. Ensure that the relevant particulars of L/C application correspond with those

stipulated in indenter/pro-forma invoice.

4. Validity of LCA entitlement of goods, amount etc. conforms to the L/C application.

5. Conversion and rate of exchange correctly applied.

6. Charges like commission, Foreign Currency Charges (F.C.C), postage, telex charges

if any recovered.

7. Insurance cover note in the name of issuing bank covering required risks and voyage

route.

8. Incorporation of instruction for negotiating bank as per banks existing arrangement.

9. Reimbursement instructions for reimbursing bank.

10. If foreign banks confirmation is required, necessary permission should be obtained

and accordingly advising bank is advised as per banks existing arrangement.

11. If add confirmation is required on behalf of the applicant charges will be recovered

form the applicant.

LIABILITY OF ISSUING BANK

As per article 9(a) of university customs and practice for documentary credit (UCPDC)

500, an irrevocable credit constitute a definite undertaking of the issuing bank, provided

that the stipulated documents comply with the terms and conditions of the credit.

ADVISING OF LETTER OF CREDIT:

Advising means forwarding of a documentary letter of credit received from the issuing

bank to the beneficiary.

ADDING CONFIRMATION:

The confirming bank does the confirmation. Confirming bank is a bank, which adds its

confirmation to the credit and it is done at the request of the issuing bank. The confirming

bank, May or May not advising usually, does not do it if there is not a prior arrangement with

the issuing bank. By being involved as a confirming agent, the advising bank undertakes to

negotiate beneficiary’s bill without recourse to him.

Before confirming, it has to observe followings:

a) L/C is issued and there is a request to add confirmation

b) Review the L/C terms

c) Provide reimbursement

d) Drafts to be drawn on L/C opening bank

e) Availability of credit facilities

f) Line allocation from the business and ownership units in the importer’s

country

g) Confirm and advise L/C

SETTLEMENT OF LETTER OF CREDIT

Settlement means fulfillment of issuing bank in regard to affecting payment subject to

satisfying the credit terms. Settlement may be done under three separate arrangements as

stipulated I the credit.

SETTLEMENT BY PAYMENT

Here the seller presents the documents to the nominated bank and the bank scrutinizes the

documents. If satisfied, the nominated bank makes payment to the beneficiary and in case,

this bank is other than the issuing bank, it sends the documents to the issuing bank and claim

reimbursement as par arrangement.

SETTLEMENT BY ACCEPTANCE

Settlement in this arrangement, the seller submits the documents evidencing the shipment to

the accepting bank (nominated by the issuing bank for acceptance) accompanied by draft

down on the bank at the specified tenor.

SETTLEMENT BY NEGOTIATION

This settlement procedure stars with the submission of documents by the seller to the

negotiation restricted by the issuing bank, only nominated bank can negotiate the documents.

A factor scrutinizing that the documents meet the credit requirement, the bank may negotiate

the documents and give value to the beneficiary. The negotiating bank then sends the

documents to the issuing bank. As usual, reimbursement will be obtained in the pre agreed

manner.

PAYMENT PROCEDURE OF THE IMPORT DOCUMENTS

This is the most sensitive task of the import department. The officials have to be very much

careful while making payment.

The task constitutes the following –

a) Date of payment: Usually payment is made within 7 days after the documents have

been received. If the payment is become deferred, the negotiating bank may claim

interest for making delay.

b) Preparing sale memo: A sale memo is made at BC rate to the customer. As the T.T

and OD rate is paid to the ID, the difference between these two rates is exchange

trading. Finally, an inter branch exchange trading advice is sent to ID.

c) Requisition for the foreign currency: For arranging necessary fund for payment, a

requisition is sent to the international department.

d) Transmission of telex: A telex is transmission to the correspondent to the

correspond bank ensuring that payment is being made.

3.5 EXPORT

Practically by the term exports we mean carrying of anything form one country to another.

Being banker, we defined export as sending of visible things outside the country for sale.

Export trade plays a vital role in the development process of an economy.

All though export trade is always encouraged any body cannot export anything to any place.

Exporter trade is required to get him registered before entering export business. Export

Registration Certificate (ERC) given by CCI & E is required for this purpose. The required

documents to obtain ERC are almost same as IRC.

When a bank (authorized dealer) receives a L/C (enable or original) it ascertains the

correctness of the test number and the authorized signature. Then the bank sends the original

copy of the L/C to the beneficiary.

The exporter presents the relative documents to the negotiation bank after the shipment of the

goods. The L/C issuing bank undertakes to honor obligation only if the beneficiary fulfills the

conditions stipulated in the L/C, may namely, the submission of stipulated documents within

the stipulated time.

The following types of discrepancies may be noted while the negotiating bank examines

the documents:-

1. L/C expired

2. Date of shipment

3. Amount drown in excess of the L/C

4. Bill of exchange not properly drawn

5. Descriptions of goods deviate

6. Bill of lading or airway bill’s anomaly

7. Bill of lading classed

8. Insurance cover notes as per terms of L/C

9. Insurance obtained after the bill of lading or airway bill date

10. Enough number of copies not submitted as required by L/C.

11. Negotiation under L/C restrained

12. Packing list and certificate of analysis not as per terms of L/C.

13. Documents not properly endorsed in favor of the bank

14. Full shipment not effective and part shipment prohibited

15. Gross weight and net weight shown in deferent documents differ

16. Documents required by L/C are not submitted

17. Documents inadequately stamped.

Documents with major discrepancies, which could not be negotiated, should be sent on

collection basis with the permission of the exporter.

EXPORT PROCEDURE

The import and export trade in our country are regulated by imports and exports (Control)

Act, 1950. Under the export policy of Bangladesh the exporter has to get the valid export

registration certificate (ERC) from chief controller of import and export (CCI and E). The

ERC is required to renew every year. The ERC number is to be incorporated on EXP forms

and other papers commented with export.

REGISTRATION OF EXPORTERS:

For obtaining ERC Bangladesh exporters are required to apply to the controller, joint

controller/ deputy controller / Assistant controller of imports and export at Dhaka/ Chittagong

/ Khulna / Mymensing / Barisal / Rangpur / Dinajpur in the prescribed form along with the

following documents:

1. Nationality and asserts certificate

2. Memorandum and Articles of Association and certificate of incorporation in case of

limited company

3. Bank certificate

4. Income tax certificate

5. Trade license etc.

SECURING OF ORDER:

After getting the ERC the exporter may proceed to secure the export order. He can do this by

contacting the buyers directly or through agent.

SIGNING THE CONTRACT:

After communicating with buyer, has to get contracted (writing) for exporting exportable

items form Bangladesh detailing commodity, quantity, price, shipment, insurance and marks,

inspection arbitration etc.

RECEIVING LETTER OF CREDIT:

After contract for sale, exporter should ask his buyer for letter of credit clearly stating terms

and conditions of export and payment.

PROCURING THE MATERIALS

Then the exporter should take the preparation for making arrangement for delivery of goods

as per L/C and INCO- terms, prepare and submit shipping documents for payment/

acceptance/negotiation in due time:

EXP form

ERC (valid)

L/C copy

Customers duty certificate

Shipping instruction

Transport documents

Insurance document

Invoice

Bills of exchange (if required)

Certificate of origin

Inspection of certificate

Quality control certificate

Quality control certificate

G.S.P certificate

Photo sanitary certificate

FINAL STEPS

After those exporter submits all these documents along with a letter of indemnity to RBL for

negotiation. An officer scrutinizes all the documents. If the documents is a clear one RBI

will purchase the documents on the basis of banker customer relationship. This is knows as

foreign document bill purchase (FDBP).

EXPORT BILL SECURITY SHEET:

Scrutinizes the export bill on the following points:

A. General:

Late shipment

Late presentation

L/C expired

L/C overdrawn

Partial shipment or trans shipment

B. Bill of exchange:

Amount of bill differs with invoice

Not draw on L/C issuing bank

Not signed

Tenor of B/E not submitted

Full set not submitted

Invoice

Not issue by the beneficiary

Not made out the name of the applicant

Description, price, quality, sales terms of the goods not correspond to the

original.

Not market one fold as original

Shipping marks differs with B/L and packing first

C. Packing list:

Gross weight, net weight and measurement, number of cartoons/ packages

differs with B/L

Not marked one fold as original

Not signed by the beneficiary

Shipping marks differs with B/L

D. Bill of lading / Airway bill:

Full set of bill not submitted

B/L is not drawn or endorsed

Shipment board, fright prepaid, freight collect, etc notations are not

marked on the B/L

B/L not indicated the name and capacity of the party, i.e. carrier or master,

on whose behalf the agent is signing the B/L

Shipped on board notion not showing port of loading and vessel name

Shipping on board notation not showing port of loading and vessel name

Short form B/L

Chapter party B/L

Description of goods in B/L not agree with that of invoice, B/L and P/L

Alternative in B/L not authenticated

Loaded on deck

B/L bearing clauses or notations expressly declaring defective condition of

the goods and packages.

E. Others

Non negotiable documents not forwarded to buying or forwarded beyond

L/C terms

Inadequate number of invoice, packing list and others submitted

Short shipment certificate not submitted.

SETTLEMENT OF LOCAL BILLThe settlement of local bills is done in the following ways:

The customer submits the L/C to Islami Bank Bangladesh Ltd. Along

with the documents to negotiate.

Islami Bank Bangladesh Ltd. Official scrutinizes the documents to ensure

the conformity with the terms and conditions.

The documents are then forwarded to the L/C opening bank.

The L/C issuing bank gives the acceptance and forward an acceptance

letter

Payment is given to the customer on either by collection basis on by

purchasing the document.

Mode of payment of exports bills under L/C:

The most common methods of payment under a L/C are as follows:

1. Sight payment credit: In a sight payment credit, the pays the stipulated sum

immediately against the exporter’s presentation of the documents.

2. Negotiation credit : In negotiation credit, the exporter has to present a bill of

exchange payable to him in addition to other documents, i.e. the bank negotiation

3. Deferred payment credit: In deferred payment, the agrees to pay on a specified

future date or event, after presentation of the export documents. No bill of exchange is

involved. In MBI, payment is given to party at the rate of D.A .But the head office is

paid at T.T clear rate. The difference between the two rates is the exchange trading for

the branch.

4. Acceptance credit: In acceptance credit, the exporter presents hall of exchange

payable to him and drawn at the agreed tenor (that is on a specified future date event)

on the bank that is to accept it. Bank signs its accept on the bill returns to the exporter.

3.6 RemittanceMeaning of RemittanceMeaning of RemittanceThe word “Remittance” originates from the word “remit” which means to transmit money/

fund. In banking terminology, the work “remittance means transfer of fund one place to

another. When money transferred from one country to another is called “Foreign Remittance”

Types of RemittanceTypes of RemittanceForeign remittance may be classified into.

Inward Foreign Remittance.

Outward Foreign Remittance.

BeneficiaryBeneficiary Expatriates working in other countries

Foreign national residing in Bangladesh

Export proceeds coming to us/exporter

Aid or donation

International organization or donarcountries

Direct foreign investment

Officials/personnel working in foreign consulate

Tourist

Interest/ dividend receipt from investment

Sales proceed/ turn down business

ProceduresProceduresRemittance can be received through the following process-

Web based payment system (Xpress money, Money gram, Placid Express, EZ remit,

IME, Merchantrade , remit master, turbo cash,Al-Ansari express)

SWIFT

TT received from IBW

Foreign demand draft

3.7 BACK TO BACK LETTER OF CREDIT A back-to-back letter of credit is a new credit. It is different form the original credit based on

which the bank undertakes the risk under back to back credit, in this case, the bank’s main

security is original credit.

The original credit and the back-to-back credit are separate instruments independent of each

of the same business operation. The supplier ships goods to the importer or supplies goods to

the exporter and presents documents to the banks as is specified in the credit.

In RBI papers / documents required for submission for opening of back to back L/C:

Master L/C

Valid import registration and export registration

L/C application and LCA firm duly signed it

Pro forma invoice or indent

Insurance cover note with money receipt

IMP duly signed

In addition to the above the following papers documents are also required for export

oriented garment industries while requesting for opening of back-to-back letter of

credit-

Textile permission

Valid bonded warehouse license

Quota allocation letter issued by export promotion bureau (EPB) in favor of the

applicant in case of quota items.

In case the factory premises is a rented one, letter of disclaimer duly executed by

owner of the house / premises to be submitted.

Chapter- 44.1. Performance of Foreign Exchange Business of IBBLForeign Exchange BusinessIslami bank Bangladesh limited has obtained a solid foundation in respect of foreign trade

with in a long period of time. It’s total import, export and remittances for the year 2008 was

Tk.65131000000.00. Islami Bank Bangladesh Limited has 208 branches all over the country,

some of them to deal with foreign transaction including many representing branch in the

world.

Islami bank Bangladesh limited has obtained a solid foundation in respect of foreign trade

with in a long period of time. Its contributed 21.26% of total import, 23.45% of export

business and 25.20% remittance of the country in 2008.

4.2The progress of IBBL at a glance 

Table no1.1 The progress of IBBL at a glance  

(Amount in Million Taka)

Particulars 2003 2004 2005 2006 2007 2008

Authorized

Capital500.00 500.00 500.00 1,000.00 1,000.00 1000.00

Paid-up Capital 317.98 317.98 320.00 320.00 640.00 640.00

Reserves Fund 930.17 1,011.84 1,115.61 1,759.65 1,998.04 2451.68

Total Equity 1,429.86 1,517.55 1,659.26 2,671.06 2,993.24 3540.51

Total

Deposits( Inclu

ding bills

payable)

16,873.5

820,021.69 25,190.65 32,112.81 41,640.94 56,246.37

Total

Investments

(Excluding Inv

in Share) Gross

16,392.4

017,366.27 22,198.26 29,563.20 37,648.75 49,185.92

Import

Business

17,370.0

020,238.30 20,396.00 25,327.00 25907.00 33,788.00

Export

Business

14,469.4

014,894.30 14,798.00 16,889.00 16082.00 16,673.00

Remittance 4,806.00 6,360.60 8,415.00 7,644.00 9879.00 14,670.00

Total Foreign

Exchange

Business

36,645.4

041,493.20 43,609.00 49,860.00 51868.00 65,131.00

Total Income 13,68.77 16,29.38 1966.24 3,207.81 4,259.55 4,876.73

Total

Expenditure1,198.02 1,480.99 1,787.93 2,877.57 3,683.43 3,301.97

Dividend 21% 21% 21% 25% 25% 25%

Total Assets) 26,826.6

030,843.90 39,133.40 49,250.36 58,644.46 80,985.50

Total Assets

(Excluding

Contra)

20,013.2

423,025.33 31,314.82 39,362.27 49,551.87 67,705.46

Fixed Assets 143.19 363.47 498.90 1,121.15 1,276.89 1308.73

No. of deposit

account holder922,232 1,116,006 1,355,053 16,51122

Number of

Foreign

Correspondents

610 650 675 775 815 825

Number of

Shareholders6,863 6,989 7,185 7,549 9,917 10,747

Number of

Employees1,903 2,171 2,302 2,685 3,060 10,297

Number of

Branches100 105 110 116 121 208

Book value per 4,497 4,772 5,185 4,174 4,677 5,532

Earning Share

(Taka)322 270 362 353 617 932

Market Value

per Share

(Taka)

(Highest)

4,469 2,695 2,300 3,305 3,205 3656

Capital

Adequacy

Ratio

10.89% 11.39% 8.90% 10.59% 9.24% 8.65%

4.3 IMPORT BUSINESSFrom the very beginning the bank has embanked on foreign exchange business with a view

to facilitating international trade of the country and cope with the race of Globalization. The

bank has established in 1983 and performed well year to year. Letter of credit amount in Tk.

33788.00 million from import business by the IBBL. Items of Import financed by the IBBL

according to the import policy except haram goods.

1.2 The year wise import as follows:Year 2003 2004 2005 2006 2007 2008

Import

Business 17,370.00 20,238.30 20,396.00 25,327.00 25,907.00 33,788.00

2003 2004 2005 2006 2007 20080.00

10,000.00

20,000.00

30,000.00

40,000.00Import Business

Year

Am

ount

in m

illio

n

Fig: 1. 1 Performance of Import Business.

Form the above figure we can see that,

In 2003 The Import was 17370 million and It has been gradually increased in 33788 million

in 2008.

4.4 EXPORT BUSINESS The total export business handled by the business amounted taka 18522.00 million. Export

goods handled by the bank as per rules of export policy without haram goods.

1.3 The year wise export as follows :

Year 2003 2004 2005 2006 2007 2008

Export

Business14,469.40 12,654.00 14,798.00 16,889.0

0

17,525.00 18522.00

2003 2004 2005 2006 2007 20080.00

5,000.0010,000.0015,000.0020,000.00

Export Business

Year

Amou

nt i

n m

illio

n

Fig: 1.2 Performance of Export Business.

Form the above figure we can see that,

In 2003 The export was 14469.40 million but it has been deceased to12654.00 million in

2004 and then It has been gradually increased . Now the export is 18522.00 million in 2008.

4.5 RemittanceIBBL invest the remittance in the profitable sector that produce more profit for the owner of

the account .It has been gradually increased .Now the Remittance is 14670.00 million in

2008.

1.5 The year wise remittance as follows:

Year 2003 2004 2005 2006 2007 2008

Remittance

Business 4806.00 6360.30 8415.00 7644.00 9879.00 14670.46

2003 2004 2005 2006 2007 20080.00

5,000.00

10,000.00

15,000.00

20,000.00Remittance Business

Year

Am

ount

in m

illio

n

Fig: 1.3 Performances of Remittance.

Form the above figure we can see that

In 2003 the Remittance was 4806.00 million but it has been deceased to7644 .00 million in

2006 and then It has been gradually increased .Now the Remittance is 14670.00 million in

2008.

2003

2004

2005

2006

2007

2008

0.00

10,000.00

20,000.00

30,000.00

40,000.00

Export, Import and Foreign remittances

Import BusinessExport BusinessRemittance

Year

Earn

ing

Fig: 1.4 Performance of Import Business, export business and Remittance.

Form the above figure we can see that

From 2004 to 2007 the Performance of Import Business, export business and Remittance

were gradually increased but in 2008 Import Business increase more faster comparison with

export business and Remittance.

4.6 SWOT Analysis of IBBLStrength

Wide Branch Network IN the Country

Islamic Shariah Based Network.

Good Financial Performance A group of honest, hard, industrious employee Well manner and antiquate. Own professional cadre at each management Strong market share Strong support of Muslim country Opening account is very easier than conventional bank. Less risky investment Allah’s help

Weaknesses

Lack of using modern technology Limited customer service Weak management system Lack Of modern banking skill Employee’s dissatisfaction regarding salary. Limited number of Islamic banking

Traditional bureaucratic operational procedure

Opportunities

People’s religious mentality to Islamic shariah Easy transaction system Large number of customer On-line banking. Awareness of Islamic banking.

Threat

Market competition is very hard. World wide economic recession. Increasing SLR by B.B . Export is less than support. Lack of branches in all over the world. Lack of coordination and cooperation among the Islamic banks.

CHAPTER-55.1 FINDINGS REGARDING IMPROVEMENT OF FOREIGN

EXCHANGE THROUGH IBBL:

From the study we have found the following findings regarding improvement of foreign

exchange business of IBBL Dhanmondi Branch:

IBBL has contract with other bank transaction by without interest thus, it

generate low profit for foreign remittance account .

Most of the branches of the IBBL located in the urban area and few of them are

involved with foreign exchange transaction, so most people do not know about the

foreign exchange service of IBBL.

People think that Private bank is less confidential than nationalized bank in

foreign exchange transaction.

Most of the people in our country have a bad impression of IBBL’s operations

regarding indirect generation of interest which meaning no difference between

investment of IBBL foreign remittance account, they are not too much interested

to open foreign remittance account IBBL..

Because of complexities of opening foreign remittance account and procedural

problem many people prefer handy to collect and send remittance.

Because of improper insufficient application of Islamic Banking rules in our

country. The foreign exchange operations of IBBL can't run smoothly,

This Bank can't invest in all economic sectors, which are prohibited by the law of

Islam.

The employ’s salary is less than other private bank so they are not satisfied with

the bank.

Sometimes foreign exchange operations of IBBL are hampered due to increase,

dishonest, indiscreet, hypocritical nature of people.

IBBL has no strong promotional activities to increase foreign exchange operations

by motivate present and potential non-residents Bangladeshi.

5.2 RECOMMENDATION REGARDING IMPROVEMENT OF

FOREIGN EXCHANGE THROUGH IBBLWe have some recommendations for improvement of foreign exchange business of IBBL

which are described below:

IBBL should be located their branches in the important places of the rural area so that

most people will know about the foreign Exchange service of IBBL

Remittance service of IBBL should be easy and flexible.

Increase of salary can motivate the employee of IBBL.

Bank should be creating such situation so that people put confidence on private bank

for huge money transaction.

IBBL should sponsored seminar and symposium to increase awareness about the

foreign Exchange service of IBBL and to remove the negative impression about it.

IBBL should conduct strong promotional activities to increase foreign Exchange

service by motivate present and potential non-residents Bangladeshi.

IBBL management body should be caution about foreign exchange operations of

IBBL that are hampered due to increase, dishonest, hypocritical nature of people.

IBBL should conduct seminar about the bad effect of the Hundi that will hamper

economic development of the country.

IBBL should invest the remittance in the profitable sector that will produce more

profit for the owner of the account so that people will attract for foreign remittance

account of Islami Bank Bangladesh Limited.

Inclusion of more subjects based on the Quran and Sunnah in the training courses of

the Islami bank training and research academy in Order to develop human sources

having

5.3 ConclusionIn conclusion we can say that IBBL was incorporated on 13 March, 1983 as a public

company with a limited liability under the companies act, 1913.IBBL is the first interest free

bank in South Asia. The establishment of this bank conducted new age in Bangladesh, the 3rd

largest Muslim country in the world.

The bank is committed to run all its activities as per Islamic Shariah, earned the reputation of

being one of the leading private sector bank of the country. Now near about 301 Islamic

banking and financial institutions in about 49 countries of Asia, Africa, Europe, America and

countries like Pakistan, UK, USA, Germany, Denmark, India have been established.

In spite of having some limited constrains IBBL still now controlling more than 25% foreign

exchange operation in our country due to their honesty and Islamic Shariah based banking

transaction. Since the branches of Islami bank are increasing day by day not only in

Bangladesh but also all over the world so it is undoubtly estimate that Islami bank will

operate all banking sector in the world.

BIBLIOGRAPHY A text book of Banking

M. Radashawmi

S.V. Vasudevan

1. Website of Islami Bank ( WWW.islamibankbd.com )

2. Islam and Economics Challenges

Dr. Umar Chapra

3. Foreign Exchange Mechanism

Habibur Rahaman

4. Brochure of Different Accounts of IBBL

5. Bangladesh Bank guidelines

6. Ali, M and Sarkar, A. A. (1995). “Islamic Banking: Principles and Operational

Methodology”.

7. Abdallah, A. 1987. “Islamic Banking”, Journal of Islamic Banking and Finance,

January-March, 4(1): 31-56.

8. Abdeen, A.M. and Shook, D.N.. 1984. The Saudi Financial System, J. Wiley and

Sons, Chichester.

9. Annual Report 2008; Islami Bank Bangladesh Ltd.

10. Jakat o Islami Bank Foundation, IBF