A Comparative study on Islamic Banking in Bangladesh (A Case Study on IBBL and City Bank Ltd)

Faculty of Business Studies Jahangirnagar University

Savar, Dhaka-1342

A Comparative study on Islamic Banking in Bangladesh (A Case Study on IBBL and City Bank Ltd)

Course Title: Bank Fund Management

Course Code: EFIN 519

Submitted to:

Mahfuza Khatun Assistant Professor

Department of Finance and Banking Faculty of Business Studies

Submitted By

Group Name: VIGILANCE Group No: 8

Group Leader: Md. Shahinuzzaman

GROUP MEMBERS Name ID

Md. Shahinuzzaman 20142085 Md. Rihan Uddin 20142045 Md. Mohtasim Billah 20142001 Shariful Kabir Chy 20142009

Department of Finance and Banking

Faculty of Business Studies Jahangirnagar University

Savar, Dhaka-1342

April 24, 2015

April 24, 2015 Mahfuza Khatun Assistant Professor Department of Finance and Banking Faculty of Business Studies Jahangirnagr University Subject: Submission of the Report on “A Comparative study on Islamic Banking in Bangladesh (A Case Study on IBBL and City Bank Ltd)” Dear Madam: It is our enormous pleasure to bring up here the report “A Comparative study on Islamic Banking in Bangladesh (A Case Study on IBBL and City Bank Ltd)”. Thank you very much for appreciation you provide us during the period. We appreciate the opportunity to complete this charge within stipulated time. Any shortcomings or mistakes are absolutely our fault we would always be available and ready to explain that further. Sincerely yours, Md. Shahinuzzaman On behalf of group “Vigilance” Spring 2015 EMBA

ACKNOWLEDGEMENT

It’s our immense pleasure to complete this study in due time by grace of almighty Allah. We are grateful to those people who helped us a lot during the preparation of the report. We wish to express our profound sense of gratitude to our course teacher ‘Mahfuza Khatun, Assistant Professor, Dept. of Finance & Banking, Faculty of business studies’ for her inspiration, guide, valuable suggestion, sympathetic advice, and enthusiastic encouragement made throughout the course of study work. Moreover, we like to avail the opportunity to express our deep gratitude and regards to IBBL and City Bank Ltd for making available information on online.

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Table of Content SL Particulars Page

No. Abstract 1

1. Introduction 1 1.2 Objectives 1 1.3 Methodology 2 1.3.1 Analysis & Discussion 2 1.3.2 Statistical hypothesis 2

2. Literature Review 2 3. Islamic Banking Industry of Bangladesh 4 3.1 Deposit Mobilization and Fund Utilization by the Islamic Banks in

Bangladesh, 2013 5

4. Principles of Islamic banking: 6 5. Overview of Islami Bank Bangladesh Limited (IBBL) and City Bank Ltd. 7 5.1 Comparison between Islamic & Conventional Banking system and

challenges 8

5.2 Comparison between conventional and Islamic banking system (IBBL) on the basis of Deposit

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5.2.1 Demand deposits 10 5.2.2 Time Deposits 13 5.3 Comparison between conventional and Islamic banking system (IBBL)

on the basis of Investment 14

6. Analysis & Discussion 17 7. Problems faced by the Islamic banks 18 8. Findings 19 9. Recommendations 19 10. Conclusion 20

References 21 Appendix A

II

List of Table

Table No

Particulars Page No

1 Islamic Bank Vs Conventional Banks 4 2 Deposit Mobilization and Fund Utilization by the Islamic Banks in

Bangladesh, 2013 5

3 IBBL Deposits Composition and GR 9 4 MUDARABA Hajj Scheme 12 5 MUDARABA monthly income scheme 14

List of Figure

Figure No

Particulars Page No

1 Islamic Bank Vs Conventional Banks 4 2 Deposit Mobilization and Fund Utilization by the Islamic Banks in

Bangladesh, 2013 5

3 IBBL Deposits Composition and GR 7 4 ROA and ROE trend 8

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Abstract

The commercial banking system dominates the financial sector with limited role of non-bank financial institutions and the capital market. The Banking sector alone accounts for a substantial share of assets of the financial system. Commercial banks contribute significantly in the economic development through the development of major contributory economic indicators directly or indirectly. Commercial banks in Bangladesh operate under branding of interest-based conventional banks and interest-free Islamic banks (based on Islamic sariah).The study emphasis on the financial performance analysis of both stream of banks to measure superiority. The study indicates that financial performance (business developments, profitability, liquidity and solvency, commitment to economy and community, efficiency and productivity) of both streams of banks is notable. Study result based on commitment to economy & community, productivity and efficiency signifies that interest-based conventional banks are doing better performance than interest-free Islamic banks. But performance of interest-free Islamic banks in business development, profitability, liquidity and solvency is superior to that of interest-based conventional banks. That is comparatively Islamic banks are superior in financial performance to that of interest-based conventional banks.

Keywords: Interest, Performance, Islamic & Conventional Banking, IBBL, City Bank Ltd. etc.

1. Introduction

Islamic banking and finance is a creation of modern age. Capitalism argues, capital- one of the key factors of production, deserves fixed return whereas the entrepreneurs have to bear all the risks. The conflict of opinions with the Islamic values starts from this very basic point. As the conventional banking systems follow the philosophy of capitalism and interest which is forbidden according to Islamic Shariah, the Muslims made the first move toward the Islamic financial system was observed in the second half of 20th century when the Muslim world got liberation from colonial powers (Hanif, 2011). Conference of Foreign Ministers of Muslim countries (1973) can be marked as a landmark of the growth and popularity of Islamic Financial Institutions (IFIs). Soon after this conference, Bangladesh signed the Charter of Islamic Development Bank n August 1974. Analyzing the demand and feasibility of Islamic banking, Islami Bank Bangladesh Limited, the first Islamic bank of Bangladesh was established in March 1983. Currently eight Shariah based Islamic banks are operating in Bangladesh with their significant contributions to the banking industry and to the financial system of the country as well.

1.2. Objectives

The key objectives of the study are:

To review the distinctive concepts of Islamic banking To evaluate the current practice and performances of the Islamic banks of Bangladesh Comparisons between Islamic Bank (IBBL) and Conventional Bank (City bank Ltd.)

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1.3 Methodology

This is a secondary data based report. Information has been collected from various secondary sources like journal articles, annual reports of different banks, books and different websites. All the existing Islamic banks of Bangladesh are included in this study. The first two objectives of the research are subject to be achieved through the secondary data review and the qualitative discussion. Current Islamic banking practices and the performances of different Islamic banks are measured and analyzed from the financial statements of the banks and information from different relevant websites. Statistical analysis tool SPSS and MS Excel had been used for analysis and graphical presentations.

1.3.1 Analysis & Discussion The financial performance ratios have been calculated from the annual financial statements of these banks. Ratios of the period 2009-2013 have been calculated for evaluation. The statistical method of t-test has been used at 0.05 level of significance to identify significant difference of performance indicators between interest-based conventional banks and interest-free Islamic banks. 1.3.2 Statistical hypothesis In order to assess and draw comparison of the financial performance of interest-based conventional banks “City Bank Ltd” and interest-free Islamic banks “IBBL” the assumed null hypothesis is: “The performance of interest-based conventional banks is superior to that of interest-free Islamic banks”. The hypothesis has been rejected or accepted for each performance ratio separately between conventional and Islamic bank.

2. Review of Literature

A significant level of development had been observed in Islamic banking research since the last decade. The western analysts and economists demonstrated their emphasis on the interest-free business transactions. These western economists discovered the connection between the interest rates and some key macroeconomic instabilities like- unemployment, inflation or negative growth (Bernante and Gertler, 1990; Fisher, 1933; Greenwald and Stiglitz, 1988; Hayek, 1933 & 1939; Minsky, 1977; Smith, 1904; Wicksell, 1935). In different parts of the world, Islamic banking researches had been mostly conducted by Muslims and a small portion by the non-Muslims. The works of Erol and El-Bdour (1989) and Erol et al (1990) revealed three key selection criteria for Islamic banks: fast and efficient services, reputation and confidentiality. According to their findings, religious motivation was not a prime criterion. On the contrary, Metawa and Almossawi (1998) and Naser et al (1999) found loyalty to Islamic belief the primary criterion for selecting Islamic banks in countries like Bahrain and Jordan. Similarly, some other scholars discovered same findings in their studies in Indonesia, Kuwait and Malaysia (Kader 1993 & 1995; Osman et al, 2009; Othman and Owen, 2001 & 2002; Wakhid and Efrita, 2007). A study on a large number of respondents by Dusuki and Abdullah (2006) discovered that Islamic bankers should not only rely on promoting the Islamic factors but also the necessary service quality. The three most important factors found in their study were competence, friendliness and customer service quality. Hanif & Iqbal (2010) categorized Islamic modes of financing objectively in two

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heads; Sharia compliant and Sharia based. Later, Hanif (2011) discussed these terms used for modes of financing briefly. He explained Sharia compliant products as the modes of financing where return of financier is predetermined and fixed but within Sharia constraints. The tools which are relatively harmonizing the operations of Islamic financial system with conventional banking includes Murabaha (cost plus profit sale), Ijara (a rental arrangement), Bai Salam (spot payment for future delivery), Bai Muajjal (sale on deferred payment), Istasna (order to manufacture) and Diminishing Musharaka (house financing) are all Sharia compliant products. Sharia based transactions means the financing modes adopted by IFIs on profit and loss sharing basis including Musharaka (partnership in capital) and Mudaraba (partnership of capital and skill). Under Sharia based modes of financing returns of financier are not fixed in advance rather it depends upon the outcome of the project. However loss is to be shared according to capital contribution. Following the rule of substance over form one can conclude that the major difference

Mahal & Rahman (2013) made a comparative analysis between conventional and Islamic banks of Bangladesh. They discussed the distinctions of product or service and the distinctions in terms of business efficiency between Islamic Banks and Conventional Banks. Their key findings on the product or service differences are about the principles of business, variation in goals, variations in deposit etc. The conventional banks of Bangladesh deal with man-made principles or principles provided by Bangladesh Bank. But Islamic banks follow Shariah based principles under the supervision of BB. Conventional banks currently focusing on the CSR activities but Islamic banks are focusing on the IT development though they also consider the CSR issues. Conventional deposit schemes are like the fixed deposit, savings or short notice deposit and current deposit. The Islamic banks offer through Al-Wadeeah principle and Mudaraba principle. These researchers also discussed the distinctions in terms of business efficiency. Profitability of conventional banks depends on loans and investments both; whereas Islamic banks depends on only investments sectors. Conventional banks have to maintain more SLR (19%) than the Islamic banks (10.5%). Islamic banks do not collect deposits through conventional methods rather on the basis of profit & loss sharing notion. Between conventional and Islamic financing is Sharia based modes of financing.

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3. Islamic Banking Industry of Bangladesh

After the independence, banking industry in Bangladesh started its journey with 6 nationalized commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant expansion with the entrance of private banks. Of the 56 scheduled banks 4currently operating in Bangladesh, 8 are Islamic Shariah based banks (IBs).

Figure 1: Islamic Bank Vs Conventional Banks (Source: Bangladesh Bank, 2014)

The 56 scheduled banks include 39 Private Commercial Banks (PCBs), 4 State Owned Commercial Banks (SOCBs), 4 Specialized Banks (SDBs) and 9 Foreign Commercial Banks (FCBs). These banks operate under full control and supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. As mentioned earlier, Islami Bank Bangladesh Limited is the first Islamic bank in the country and the last inclusion in the list of Islamic banks is the Union Bank Limited, which was incorporated recently (2013). Establishment of Islamic banks in Bangladesh had been portrayed here along with their year of Incorporation, listing status in stock market and year of listing.

Table 1: Islamic Banks’ Year of Incorporation and Listing

SL Name of Bank Year of Incorporation

Listing Status

Year of Listing

1. Islami Bank Bangladesh Limited (IBBL) 1983 Listed 1985 2. ICB Islamic Bank Limited (ICBIBL) 1987 Listed 1990 3. Al-Arafah Islami Bank Limited (AAIBL) 1995 Listed 1998 4. Social Islami Bank Limited (SIBL) 1995 Listed 2000 5. Export Import Bank of Bangladesh Limited

(EXIM) 1999 Listed 2004

6. First Security Islami Bank Ltd. (FSIB) 1999 Listed 2008 7. Shahjalal Islami Bank Limited (SJIBL) 2001 Listed 2007 8. Union Bank Limited (UBL) 2013 ------ ------

(Source: Journal of Islamic Banking and Finance Vol. 2, No. 1; March 2014)

Scheduled Banks

(Not Islamic Shariah Based)

86%

Islamic Banks14%

Islamic Bank Vs. Conventional Bank

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Table 2: Average NPAT of Islamic Banks and ROA in the Banking Industry

Year Average NPAT of Islamic Banks (in Billion BDT)

ROA (Industry)

2004 1.45 0.7 2005 2.36 0.6 2006 -1.98 0.8 2007 5.92 0.9 2008 6.84 1.2 2009 8.16 1.4 2010 16.66 1.8 2011 13.74 1.5 2012 17.58 0.6 2013 19.67 0.7

(Source: Journal of Islamic Banking and Finance Vol. 2, No. 1; March 2014)

3.1 Deposit Mobilization and Fund Utilization by the Islamic Banks in Bangladesh, 2013

Figure 2: Deposit Mobilization and Fund Utilization by the Islamic Banks in Bangladesh, 2013

(Source: Journal of Islamic Banking and Finance Vol. 2, No. 1; March 2014)

The major part of the operational financial resources of Islamic banks is derived from different types of deposits mobilized on the principles of Al-Wadia (safe custodianship) and Al-Mudaraba (trust financing). Utilization of fund under the framework of Islamic banking has opened a multifarious way for making loan (the term “loan” in conventional banking is called "Investment" in the Islamic banking system) conforming to Islamic Shariah. Since Islamic banks can not lend on interest, they have devised different types of interest-free

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financing devices. A short description of the modes of financing used by the Islamic banks in mobilization and utilization of funds is given in the following.

4. Principles of Islamic banking:

The motto of Islamic banking is profit sharing and loss bearing. The main objective of Islamic banking is as same as conventional banking system which is profit making. Bank always try to make money for the banking institute by lending out capital. As interest (riba) is forbidden in Islamic rules on transactions which is known as Fiqh al-Muamalat that is why Islamic banking system always follow the sharing of profit and loss. There are certain names of these terms. Which is Mudharabah, Wadiah, Musharakah, bank in Bangladesh who has converted all of its operations of conventional banking into sharah-based banking since July/2004. We offer banking services for Muslims and non-Muslims alike allowing our customers choice and flexibility in their savings and investments. Our products are approved by our Shariah Board comprising of veteran Muslim scholars of our country who are expert in all matters of Islamic finance. Murabahah, Ijar. Here is some detail information about these terms given below:

Mudharabah:

It is actually the profit sharing rule. Here bank gives loan to its customers to invest in his business. If the customer gains profit the bank will take certain percentage of their profit. But if the customer has loss in his business the bank will also share his loss.

Wadiah:

It is actually safekeeping of depositors’ money. In Wadiah, a bank is acted as a keeper and trustee of funds. A person deposits his funds in the bank and the bank guarantees refund of the entire amount of the deposit when the depositor demands it. The depositor gets certain profit as the bank use his money as its fund.

Musharakah:

Musharakah is known as joint venture. Here the bank as its customer agrees to contribute in a business and share all the net profit and loss together. This concept is basically used for investment projects, letters of credit, and the purchase or real estate or property.

Murabahah:

This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. This all is done by an agreement which is known as Musawamah. Here the bank buy the product or services on behalf of its customers add certain percentage of profit in it than sale the product to its customer. The products remain as mortgage till the final payment of the installment.

Ijar:

Ijar means lease, rent and wage. Here bank sale the benefit of use a product or service to its customers on a fixed price and installment payments. Under this concept, the Bank makes

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available the use of service of asset/equipments such as plant, office automation, motor vehicle for a fixed period and price to its customers.

5. Overview of Islami Bank Bangladesh Limited (IBBL) and City Bank Ltd.

a. Islami Bank Bangladesh Limited (IBBL)

Islami Bank Bangladesh Limited, a bank based on Islamic principles and shariah (Islamic law) started its journey with an authorized capital of TK. 500 million (US$ 7 million)in 1983.This is one of the first interest free banks in South Asia. The opening of an Islamic bank brought a new era in the history of the country‘s financial market. The long cherished desire of many Muslims in the country was realized. Currently this bank has over 10,068 employees, 251 branches with a deposit of taka 29,193 corer /USD $4.2billion(IBBL 2010). There is a Management Committee consisting of the most senior executives of the bank. In addition to these committees, a Shariah Council comprising famous Islamic scholars, economists and bankers, supervise the day to day affairs of IBBL from the viewpoint of the Islamic Shariah (IBBL 2010).

Deposit growth and loan-to-deposit ratio (LDR):

IBBL project 2011-deposit GR of 23%, compared to 2010 GR of 19.5%, and 4-year average of 21.87%. Deposit GR was higher on low stock market liquidity and retail investor confidence as well as high bank deposit rates and declining savings certificate sales.

Figure 3: IBBL Deposits Composition and GR

Sources: Company Annual Report, BRAC EPL Research

Increasing return: ROE and ROA are both increasing

IBBL project ROE and ROA for 2011 to be 24.44% and 1.76%, respectively, up from 20.56% and 1.47% in 2010. Higher profitability ratios are driven by high earnings growth and ROA by enduring loan-deposit spread.

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Figure 4: ROA and ROE trend

Sources: Company Annual Report, BRAC EPL Research

b. City Bank Ltd.

City Bank is one of the oldest private Commercial Banks operating in Bangladesh. It is a top bank among the oldest five Commercial Banks in the country which started their operations in 1983. The Bank started its journey on 27th March 1983 through opening its first branch at B. B. Avenue Branch in the capital, Dhaka city. It was the visionary entrepreneurship of around 13 local businessmen who braved the immense uncertainties and risks with courage and zeal that made the establishment & forward march of the bank possible. Those sponsor directors commenced the journey with only Taka 3.4 crore worth of Capital, which now is a respectable Taka 330.77 crore as capital & reserve.

5.1 Comparison between Islamic & Conventional Banking system and challenges

Now-a-days Islamic banking plays an important role in the whole economic system of the country. Due to its operations based on the interest free banking, it does achieve popularity among the customer. Though Islamic banking system faces various problems but it also provides different types of challenges to the other commercial banks in Bangladesh.

Mobilization of fund: The major part of the operational financial resources of Islamic banks is derived from different types of deposits mobilized on the principles of Al-Wadiah (safe custodianship) and Al-Mudarabah (trust financing). Utilization of fund under the framework of Islamic banking has opened a multifarious way for making loan (the term “loan” in conventional banking is called "Investment" in the Islamic banking system) conforming to Islamic Shariah. Since Islamic banks can not lend on interest, they have devised different types of interest-free financing devices.

Investment & Customer: Among all the banks in Bangladesh Islamic banks has the highest amount of investment and also the highest number of customers. So it is a great challenge for the commercial banks because day by day the amount of investment increases. As a result profit of Islamic banks also increases.

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Liquidity: An important feature about Islamic banks is their relative excessive liquidity. This has been interpreted as implying that most Islamic banks have the tendency to indulge in quick return lending. The extent to which Islamic banks can overcome the application of fund problem would depend on the willingness of the government to create suitable (non-interest bearing) short-term instrument as an outlet for excess funds of Islamic banks. Islamic banks are less exposed to liquidity risk. On the other hand, commercial banks depend more on external liabilities than Islamic banks. Naturally, markets showed that customers were more attracted to use financial instruments offered by Islamic banks.

Hajj Fund: It is a great challenge from Islamic banks to all commercial banks. Because, only Islamic banks offer these types of fund. All Muslim are attracted by these. There are many Muslim people who are not financially strong. So Hajj funds it very much helpful for them.

Welfare activities: In Shariah Muslims are not allowed to receive or pay interest, which is called (Riba). They are encouraged to trade, invest and share profit and loss, instead. "Islamic attitudes towards ethics, wealth distribution, social and economic justice, and the role of the state." Therefore, the purpose of finance in Islam is to achieve welfare for all parties.

Popularity: At present the commercial banks in Bangladesh side by side with conventional banking, they have dual banking system. Conventional banks are also trying to introduce Islamic windows in their attempt to attract Investors who are seeking to invest their money using Shariah compliance products and transactions and other non-Muslim who seek ethical solutions. It is shows that Islamic banking system gain popularity among the people.

Finally, it can be said that performance of interest-free Islamic banks in business development, profitability, liquidity and solvency is superior to that of interest-based conventional banks. That is comparatively Islamic banks are superior in financial performance to that of interest-based conventional banks.

Comparison between traditional and Islamic banking system-

Table (3) is a comparison between traditional and Islamic banking system- Characteristic Islamic banking system Traditional banking system Business Functions and operating modes are based

on Shariah and Islamic banks must ensure that all business activities are incompliance with shariah requirements.

Functions and operating modes are based on secular principles, not religious laws or guidelines.

Framework Financing is not interest (Riba) oriented and should be based on risk-and-reward sharing.

Financing is interest oriented, and a fixed or variable interest rate is charged for the use of money

Interest charging

Account holders do not receive interest(riba) but may share risk and rewards of investment made by the Islamic bank

Depositors receives interest and a guarantee of principle payment

Risk sharing in equity financing

Islamic banks offer equity financing with risk sharing for a project or venture. Losses are shared on the basis of equity

Risk sharing is not generally offered but is available through venture capital firms and

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participation, where as profit is shared on the basis of pre-agreed ratio.

investment banks, which may also participate in management

Restriction Islamic banks are allowed to participate only in economic activities that are Shariah complain.

Traditional banks may finance any lawful product or service

Zakat One of the functions of the IslamicBanks is to collect and distribute zakat.

Traditional banks do not collects and pay any religious tax

Penalty on default

Islamic banks are not allowed to charge penalties for their enrichment. They may however allow imposition of default or late- payment penaltieson the grounds that these penalties discourage late payments or defaults, which impose administrative costs on bank for processing and collecting the amount owed. Penalties may be donated to a charity or used to offset collection cost.

Traditional banks normally charge additional money (compound interest) in case of late payment

Avoidance of gharar

Transaction with elements of gambling or speculation are discouraged or forbidden.

Speculative investments are allowed

Customer Relationship

The status of client is that of partner and investor

The status of a client is one of creditor and debtor

Shariah supervisory Board

Each Islamic bank must have a supervisory board to ensure that all its business activities are in line with Shariah’s requirement

Traditional banks do not have such requirements

Statutory requirements

An Islamic bank must be compliance with the statutory requirements of the central bank of the country in which it operates and also Shariah’s guidelines

An traditional banks must be in compliance with the statutory requirements of the Central bank of the country in which it operates and in some places, the banking laws of state or other localities.

Source: The Research Foundation Of CFA Institute

5.2 Comparison between conventional and Islamic banking system (IBBL) on the basis of Deposit:

Types of deposits:

The deposits that are accepted by IBBL is as like as other banks. Deposits can be classified into 2 types:

• Demand deposits. • Time deposits.

5.2.1 Demand deposits

In terms of demand deposits depositors can deposits and withdraw their money any time as like they want to do. IBBL accepts demand deposit through the opening of:

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Current account. Saving account. Call deposit scheme

Current account: In IBBL, it is known as AL-WADIAH current account. The main feature of this account is depositors can deposit and withdraw any amount of their deposits any time as much time they wanted to do. Bank will not provide any kind of profit to this account. Bank has the rights to use the deposits of this account. This is specially designed for the business people. Normally IBBL opens this account in the name of organization. Bank has the rights close any account if it has zero balance or inactive more than 1 year. Difference: In conventional banking system it is known as current account. Some conventional banks give interest to these accounts. Some conventional bank also opens this account in personal name of their customer. Savings account There are 2 types of savings account in IBBL. They are:

MUDARABA savings deposits MUDARABA short term deposits

MUDARABA savings deposits: The main feature of this account is depositors can deposit any amount of their deposits as much time they wanted to do but in terms withdrawn there is some barriers. No depositor can withdraw more than 5 lacs in a week or more than twice in a day. Bank provides small amount of profit to this account. Bank has the rights to use the deposits of this account. This is specially designed for the mass people. Normally IBBL opens this account not only in the name of individual but also in the name of any organization. Bank has the rights close any account if it has zero balance or inactive more than 2 years. MUDARABA short term deposits: It is special type of savings account. Here depositor opens this account for a short period of time and gain profit. Bank provides profit for the deposits. The profit rate is more than Mudaraba savings deposit. Bank has the rights close any account if it has zero balance or inactive more than 2 years. Difference: In conventional banking system it is known as savings account. Some conventional bank gives interest to this account. Conventional bank opens this account only in name of individuals. Call deposit scheme

Call deposit scheme is special kind of dposit scheme where depositors pay certain amount of deposit every month for a specific period of time. Than after matuirity depositor get benefit

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with his deposited amount of money at a time. Here depositor deposit money several times but they can withdraw their money for once after the maturity date. There two kind of product for deposit scheme in IBBL. They are:

MUDARABA Hajj Scheme MUDARABA monthly savings scheme MUDABARA Education savings scheme

MUDARABA monthly savings scheme: Any adult person having sound mind can open one or more account in the same name at the same branch. The maturity of this account is 5, 8, 10, and12 years. 80% loan can be taken after completion one year of maturity. Deposit must be give within the 1st ten day of the month. Charge is taken by bank for late submission of deposit. MUDARABA Hajj Scheme: It is specially designed for hajj. It is actually same as MUDARABA monthly savings scheme but there is a bit difference. Here IBBL ask his client when they want to do their hajj. Than the assume the cost of hajj for that particular year and than they set the installment. Suppose two clients want to do their hajj in 2012 and 2013 respectively. Than they have to pay the installment like below: Table 4: MUDARABA Hajj Scheme Term Monthly

installment for 2012

Amount payable for 2012

Monthly installment for 2013

Amount payable for 2013

20 years Tk. 863.00 Tk. 840000.00 Tk. 1090 Tk.890000.00 15 years 1205.00 628000.00 1521 666000.00 10 years 1850.00 468000.00 2336 496000.00 8 years 2325.00 417000.00 2935 442000.00 5 years 3725.00 351000.00 4703 372000.00 Education Savings Scheme: The most gratifying experience for parents are proper education of their children. Educational expense is rapidly increasing and therefore appropriate planning needs to be done by all parents. IBBL offers customer ‘Education Savings Scheme’ to assist customer in financial planning well ahead in time for customers children’s higher education. Deposit of Tk. 25,000/- and multiples thereof at a time will be accepted under the scheme. The instrument shall be issued for 7 years, 10 years, 15 years, 20 years term. The deposit is payable at maturity with benefit either in lumpsum or on monthly basis as education allowance for 6 (six) years starting after the completion of respective term. Difference: In conventional banking system it is known as deposits pension scheme account. Conventional bank gives interest to this account. That’s why conventional bank can ensure the actual amount to be paid to their customers. There is no product specially designed for hajj in conventional banking system because interest income is prohibited (HARAAM) in Islam.

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5.2.2 Time Deposits: A deposit which is payable at a fixed date or after a period of notice is a time deposit. IBBL accepts time deposits through fixed deposit receipt (FDR), short time deposit (STD) etc. While accepting these deposits, a contract is executed between the bank and the customer. This contract will be a valid one only when both the parties are competent to enter into contracts. As account initiates the fundamental relationship and since the Banker has to deal with different kinds of persons with different legal status, IBBL officials remain very much careful about the competency of the customer. In term of term deposits their product name is:

MUDARABA term deposit receipt account MUDARABA super savings scheme MUDARABA multiplus savings scheme MUDARABA monthly income scheme

MUDARABA term deposit receipt account: The main feature of this account is depositor can deposit and withdrawn only for one time in this account. The profit rate is much higher in terms of this account which is 12.5 %( as per as Bangladesh Bank order). Any adult person (jointly or individually) having at least tk. 10000 can open this account. One or more account can be opened in the same name at the same branch. Depositor must have the savings account to open this account in IBBL. Depositor can take 80% of their deposits as a loan and pay it in installments or whole at a time. Difference: In conventional banking system it is known as fixed deposits. As like other accounts conventional bank gives interest to this account. To open this account in conventional bank one individual needs at least taka 50000. There is no need for saving account or current account to open this kind of account in conventional banking system. MUDARABA super savings scheme: Any adult person (jointly or individually) having at least tk. 50000 or multiple of its can open this account. One or more account can be opened in the same name at the same branch. Depositor must have the savings account to open this account in IBBL. Tenure of this account is six years. The main feature of this account is bank will double or close to double its depositors money in maturity of this account. Depositor can take 80% of their deposits as a loan and pay it in installments or whole at a time. Difference: It is known as double scheme in conventional banks. Where IBBL do not ensure that they will doubled their depositors money there conventional bank ensure their customer to double their money. As the interest rate is fixed that’s why conventional bank can do that.

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MUDARABA monthly income scheme: IBBL designed this product for those who has a lots of idol money or need monthly fixed income. The main feature of this account, here bank promise to give same amount of profit every month to its customers. Any adult person (jointly or individually) having at least TK.50000 can open this account one or more account can be open in one name. Monthly benefit of different amount of this account is given below: Table 5: MUDARABA monthly income scheme: Amount of deposits (TK) Monthly expected benefit ( provisional) 50000/- 500/- 100000/- 1000/- 200000/- 2000/- 500000/- 5000/- 1000000/- 10000/- Difference: It is known as monthly income scheme in conventional banks. Where in IBBL monthly benefit is not fixed there conventional bank ensure their customer to give certain amount of money every month against their customers deposit. As the interest rate is fixed that’s why conventional bank can do that.

Foreign Exchange Business:

Foreign Exchange Business plays a vital role in providing substantial reveneu in the bank income pool. Like all modern Banks IBBL operates in the area of the foreign Exchange business. IBBL performs the following tasks:

a) Opening letter of credit on the principle of Mudaraba sale, on the principle of Musharaka sale and under wage earner scheme. b) Opening letter of credit (LC) against commission for importing industrial, agricultural and other permissible items under Islamic Shariah and Import policy. c) Handling of export/import document. d) Financing in import under MPI (Mudaraba Post Import) e) Financing to export on profit or loss sharing. f) Handling Inward and outward remittance. Difference: There is no such difference in terms of foreign exchange division between Islamic banking and conventional banking.

5.3 Comparison between conventional and Islamic banking system (IBBL) on the basis of Investment:

Investment section: This section is also known as credit section. It is an essential part of any banks revenue. As IBBL is an Islamic bank they do not change any type of interest in terms of their loan customer. They try to follow the Islamic rule which is known shariah in islam. Now we are going to give a brief idea about their credit system/ loan system.

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IBBL actually divided their loan product into 3 parts. This is known as follow:

o Partnership mode o Buy- sell mode o Izara mode There are certain terms under these modes. This is given in the next graph below: Partnership mode: In this mode IBBL tries to do business in partnership with their clients. There are 2 types of product offered by IBBL in partnership mode. They are:

Mudabara Musharaka

Mudabara: Mudabara loan system means profit sharing and loss bearing. In this mode IBBL give loan to its client for business and take share of the profit gain by their client. For example a company takes loan for its business from IBBL. Bank will give them a certain time to make profit. After making profit bank will take certain percentage of its profit as a feedback of their loan. If the company fails to gain profit bank will give them more time to regain it. If the company fails again then the bank will share the companies’ loss as the agreement of Mudaraba loan system. Since 2006 IBBL stopped the Mudaraba loan system as they have bad experience over it. After becoming Islamic bank from conventional bank they had gave loan in this system to 25 companies. Only 2 of them show small amount of profit. Others show loss to their projects. It is big loss for IBBL. That’s why they stopped it later. Musharaka: This is actually joint venture system. In this loan system bank made an agreement of joint venture with their client, do businesses, and share profit and loss. Suppose a company need a financer of its project. If they go to IBBL and then bank approve the project and invest in it. Here bank and its client becomes partner to a project. Bank and its client will share all its profit and loss as ratio. This is often used in investment projects, letters of credit, and the purchase or real estate or property. Many real estate companies are taking this sort of loan to avoid the interest which is prohibited (haraam) in Islam. o Buy- Sell mode: In this mode bank actually become the middle man to its client. Here bank buys the required product ordered by its client and sells it to its client in higher price. There are 3 products in terms bye- sell mode. They are:

Bai salam. Bai' al 'inah Bai muajjal

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Bai salam. Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. Here client negotiate with bank to made advance payment to its seller of his required product.. IBBL sells it to his client in higher price. Various garments use these terms to operate their business Difference: In conventional banking system is known as letter of credit (LC). Here bank change a fixed interest rate to their client rather than sell it in higher price. Bai' al 'inah: Bai' al inah is a financing facility with the underlying buy and sell transactions between the bank and the customer. The bank buys an asset from the customer on spot basis. The price paid by the bank constitutes the disbursement under the facility. Subsequently the asset is sold to the customer on a deferred-payment basis and the price is payable in installments. Suppose I had a land and I need loan against it. IBBL will buy the land from me and give me the money. I will pay a higher price for my land and buy it back from the bank but this time I will buy my land in installments. In the mean time I can use my land as like as I wanted to use it. Difference: In conventional banking system it is known as property mortgage loan. Here bank will charge fix amount of interest. But in Islamic banking system they will sell it in much higher price than they bought from me. Bai muajjal: Bai means bank earns profit margin and muajjal means credit sale. It is a contract in which to pay the price of the commodity at a future date in a lump sum or in installments. Suppose here a client choose a product from a shop. Then apply for loan in IBBL I bank thinks that everything is ok than they will buy the desired product of that customer from that particular shop and sell that product to that customer in higher price. The client will receive the product and pay the money in installments. Basically IBBL use term of loan in term of car loan, consumer loan etc. IZARA mode: Ijar means lease, rent and wage. Here bank sale the benefit of use a product or service to its customers on a fixed price and installment payments. Under this concept, the Bank makes available the use of service of asset/equipments such as plant, office automation, motor vehicle for a fixed period and price to its customers. There are 2types of product in Izara mode in IBBL. They are:

Ijarah thumma al bai Ijarah-wal-iqtina

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Ijarah thumma al bai: It is known as hire purchase client enterr into contracts with bank to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the bank at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price. Difference: There is no such product in conventional banking system. Ijarah-wal-iqtina: A contract under which IBBL provide equipment, building, or other assets to the client. In return IBBL receives rent from its client. Here ownership of the product belongs to the bank. At the end of the lease period ownership of the product will be transferred to the client. And client will pay the agreed amount in the agreement to the bank. Difference: There is some product like that in conventional banking system. Here they charge the market price at the end of lease period but IBBL only takes the amount which is written in the agreement. 6. Analysis & Discussion

IBBL & City Bank Ltd Profitability

In case of Profitability the null hypothesis has been rejected with respect to the ratios of return on total assets, profit expense ratio, growth of profit and earnings per share but accepted only for return on equity. That is performance of Islami bank Bangladesh ltd. is superior and indicates higher ability and therefore is an indicator of better managerial performance to that of City bank ltd. But ROE of City bank ltd. is superior to that of IBBL. Insert table-1 Appendix.

Liquidity and Solvency

In case of liquidity and solvency ratios the null hypothesis is rejected at 0.05 level of significance because the statistical t-value is not within accepted region for cash deposit ratio, advance deposit ratio, and equity multiplier ratio. That is liquidity & solvency statement is in favor of IBBL to that of City bank ltd. The calculated value reports that IBBL takes less financial stress and has borrowed fewer funds to convert into asset with the share capital but higher govt. bond investment of CITYBL indicates high liquidity and less risk to that of IBBL. Insert table-2 Appendix.

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Business development

Based on the calculated value the null hypothesis is rejected at 0.05 level of significance as the statistical t-value is not within accepted region for all of the ratios that indicates performance of IBBL is superior to that of City bank ltd. and making significant contribution in the economic development of Bangladesh. Insert table-3 Appendix.

Efficiency and Productivity

In case of efficiency & productivity, Islami bank ltd. is more efficient than City bank ltd.because total operating expenses to deposits ratio of IBBL is less than CITYBL it means economies of scale is in favor of Islami bank Bangladesh ltd to that of CITY bank ltd. Insert table-4 Appendix.

Commitment to Economy and Community

Long-term loan ratio is calculated to measure superiority in economic commitment where the null hypothesis is accepted at 0.05 level of significance it means City bank ltd. is superior to that of IBBL. Insert table-5 Appendix.

7. Problems faced by the Islamic banks

When depositors open an account bank provide them a provisional rate of profit but in the time of profit calculation bank does not provide at the same rate.

Islamic bank does not provide fixed return to the depositors so profit may be high or low.

Because of lack of Islamic banking rules in our country, the authority of banks faces problems in investment operation as a result the banks cannot run smoothly.

Islamic bank cannot run in Shariah prohibited sector, so its investment scope is narrow in Bangladesh.

Islamic banks should engage in poverty alleviation & rural development seriously, so they could not reinvest their idle money, as a result, profit is not increasing.

For the existence in the banking world in Bangladesh where Islamic banks have to compete with other conventional banks, sometimes it cannot follow the Shariah board.

Economy of Bangladesh is based on mixed economy system or in other word , it can be said that it is not a Islamic Economy based country. So, as a result, all Islamic principles cannot be implemented in this economy. For this purpose Islamic Banks cannot follow the Islamic investment principles strictly.

Islamic bank differs from traditional banks in the mode of their investment facilities which is based on Islamic investment principles otherwise it has functionally no differences with the traditional banks as all the banks have to follow the same guidelines of the Bangladesh Bank in all respect.

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8. Findings

Islamic Banks use money as a media not goods, but conventional bank use money as a goods

There is no scope of compound interest in the Islamic Banking system, bank charges one time profit and it calculates on the simple basis. But conventional bank charges compound interest.

In the Islamic banking system depositor get profit on the basis of weight age if the bank earn or make profit otherwise depositor must share loss. But in the conventional system depositor get interest on the basis of predetermined rate. Here depositor does not share any loss.

Islamic banks must have to be related with the business or investment or transaction of goods. But traditional banks are not bound to do this.

In Islamic banking system bank invest in profit and loss system (PLS), for this cause bank bear profit as well as loss in predetermined ratio. But traditional banking system does not bear any loss. They charge interest in case of loss.

9. Recommendations

There has been identified progress made by Islamic banking sector since independence.

But for gaining Better progress in the future following steps should be taken by all Islamic banks:

1. The whole financial System need to be re-organized: Conventional bank should re examine and covert their system to (Profit and Loss Sharing (PLS).

2. New banking philosophy for the Islamic Banks: There seems to be a gap between the ideals and actual practice of Islamic banks in Bangladesh. In their reports, booklets, bulletins and posters their banks express their commitment to striving for establishing a just society free from exploitation. Study shows that a little progress has been achieved so far in that direction.

3. Banking Policies and practices should be modernized: Islamic banks, with a view to facing the growing competition either fellow-Islamic banks or the conventional banks which have launched Islamic banking practices, will have to adapt their functioning in line with modern business practices.

4. Policy and Strategy should be formulated: The first action that deserves immediate attention is the promotion of the image of Islamic banks as PLS banks. Strategies have to be carefully devised so that the image of Islamic character and solvency as a bank is simultaneously promoted.

5 Stepping for Distributional Efficiency: The task is more challenging for Islamic banks, as they have to promote their distributional efficiency from all dimensions together with profitability, Islamic banks, step by step, have to be converted into profit-loss-sharing banks by increasing their percentage share of investment financing though PLS modes.

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6. Allocating Efficiency should be promoted: The Islamic banks can improve their efficiency by satisfying social welfare conditions in the following manner. First, they should allocate a reasonable portion of their investible funds in social priority sectors such as agriculture (including poultry and fishery), small and cottage industries and export-led industries like garment, shrimp cultivation. Secondly, when the percentage shares of allocation of investible funds are determined among the sectors of investment financing, profitability of projects should be the criterion for allocating investment funds. The criterion would be best satisfied if more and more projects were financed under PLS modes.

7. Government and Central bank's Responsibilities: Government should think actively for the promotion of Islamic banking in Bangladesh considering its pro-development role. Bangladesh Bank should develop some Islamic Monetary and saving instruments and create separate window for transactions with the Islamic banks and a full-fledged Islamic banking Department for analyzing, supervising, monitoring and guiding purpose, thereby facilitating Islamic banks for their smooth development in Bangladesh.

8. Inter-Islamic Bank Co-operation and Perspective Plan: All Islamic banks should come forward to help each other’s and adopt a perspective plan say for 27 years for Islamization of the banking system of Bangladesh. To actualize this mission, they should set-up immediately an Apex Research Academy and Training Institute designed with modern tools.

10. Conclusion

The study of the prospects, challenges and problems of the Islamic banking sector of Bangladesh shows that this sector is progressing steadily. The formation of Islamic banks and adoption of parallel Islamic banking by several conventional banks over the years can be an indicator of the high acceptability of this sector by the public. The main reason for the demand for Islamic banking can be attributed to the desire of people to engage in financial transactions that adhere to the rules of Shariah. The demand from this segment induces banks to either offer Islamic finance exclusively or as a parallel service with other conventional offers.

The Islamic bankers believe that the Profit Loss Sharing (PLS) method represents financial advantages for the banks and offers benefits for the economy by causing lower interest stimulated instability. The banks are, however, not implementing the principals of Shariah fully. According to the conventional banks, these banks have not abolished interest from the transactions. This has caused the PLS method fail to have the impact it is intended to have on risks, profitability and the society. The foremost factor making Islamic banking attractive to customers is adherence to the rules of Shariah. Convenience of opening accounts or the quality of the services offered does not have much impact on the consumer’s decision of choosing an Islamic banking system, but for the Shariah based activities of the Islamic banks, their reliable commitment to the customer also their well behave encourage the Muslim to be attracted by the Islamic banks.

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At present Islamic banking is worldwide. They follow Islamic rules & laws appropriately. So, day by day its gain its popularity as a secure banking. As a result customer put their steps to the door of Islamic banks.

References

Archer, S. & Abd el Karim, R. (2002), Introduction to Islamic finance. Islamic financial innovation and growth, (3) 3-4.

AUF Ahmad and Kabir Hasan, ‘Regulation and Performance of Islamic Banking in Bangladesh’, Thunderbird International Business Review, Vol. 49, no. 2, pp. 251- 277, 2001

Hassan, M. K., Al-Sharkas, A.,&Samad,A. (2004). An empirical study of relative efficiency of the banking industry in Bahrain. Studies in Economics and Finance, Vol. 22, No. 2, pp. 40-69.

Khan M. M., Bhatti M. I, (2008),"Islamic banking and finance: on its way to globalization",Managerial Finance, Vol. 34 Iss: 10 pp. 708 – 725

Md. Abdul Awal Sarker , Islamic banking in Bangladesh: performance, problems & prospects, international journal of islamic financial services vol. 1 no.3

Ministry of Finance. (2009-2012): Activities of Banks and Financial Institutions, Government of the People’s Republic of Bangladesh, Retrieved from http://www.mof.gov.bd

Mirakhor, “Progress and Challenges of Islamic banking”, Review of Islamic Economics, vol. 4, No.2, 2012.

Samad, Abdus. (1999). Comparative efficiency of the islamic bank malaysia vis-à-vis conventional banks. Journal of Economics and Management, Vol.7, No.1, pp-112-126.

Rana, F.H. (2006), ‘‘Growing business prospect of Islamic banking’’, The Daily Star, 28 August, p. 5, available at: www.thedailystar.net/2006/08/28/d608281503138.htm (accessed 15th April 2015).

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Appendix:

Statistical output summary (IBBL vs. CITYBL)

Table-1. Statistical result of Profitability CITYBL IBBL Statistic

al Test Hypothesis

2009-2013 2009-2013 T-Value Mean Mean ROA .0098 SD .0254 SD -1.009 Rejected ROE .4692 .00474 .1482 .03278 2.546 Accepted Profit Expense Ratio .3773 .27777 .5724 .02487 -2.449 Rejected Profit Growth .1141 .20142 .3119 .08178 -.610 Rejected EPS 46.9240 .46438 317.1880 .38589 -2.614 Rejected

Table-2. Statistical result of Liquidity and Solvency CITYBL IBBL Statistic

al Test Hypothesis

2009-2013 2009-2013 T-Value Mean SD Mean SD Cash deposit Ratio .0741 .00781 .1565 .03118 -4.885 Rejected Advance deposit Ratio

.7460 .04807 .8856 .03909 -5.460 Rejected

Current asset ratio .9723 .00993 .0229 .00278 2.802 Accepted Equity Multiplier 46.1532 5.8226 46.2322 3.0324

5 -0.022 Rejected

Govt. bond investment

.3084 .18671 .0512 .03996 6.396 Accepted

Table-3. Statistical result of Business development CITYBL IBBL Statistic

al Test Hypothesis

2009-2013 2009-2013 T-Value Mean SD Mean SD Total Assets Growth .2204 .15141 .2265 .03253 -0.069 Rejected Deposits Growth .2012 .16211 .2295 .02106 -0.335 Rejected Advances Growth .2112 .23009 .2568 .05058 -0.361 Rejected Investment Growth .3245 .28837 1.0250 2.4839

9 -0.543 Rejected

Table-4. Statistical result of Efficiency and Productivity CITYBL IBBL 2009-2013 2009-2013 Mean SD Mean SD Total operating expenses to deposits

.0318 .00431 .0191 .00147

B

Table-5. Statistical result of Efficiency and Productivity

CITYBL IBBL Statistical Test

Hypothesis

2009-2013 2009-2013 T-Value Mean SD Mean SD Long term loan ratio .4995 .17823 .1458 .02865 2.888 Accepted