Islamic BankingVs.Conventional Banking

A comparative study on Exim Bank Ltd. & Eastern Bank Ltd.

Islamic Banking Vs. Conventional Banking: A comparative study on Exim Bank Ltd. & Eastern Bank Ltd.

Submitted to: Nusrat KhanAssistant Professor School Of BusinessNorth South UniversitySubmitted by: Nusrat Binta Nasir ID: 1330563060 Department of M.B.ASubmission Date April 17, 2015

Letter of Transmittal August 20, 2013 Nusrat Khan Assistant Professor North South University

Subject: Submission of the report on Islamic Banking Vs. Conventional Banking: A comparative study on Exim Bank Ltd & Eastern Bank Ltd. Dear Sir, This is our pleasure to submit a report on Islamic Banking Vs. Conventional Banking: A comparative study on Exim Bank Ltd & Eastern Bank Ltd Which we were assigned. We have tried our best to prepare this to be as informative and relevant as possible. To prepare this report we have reviewed some books, articles, journals and downloaded some information from internet. We believe that the knowledge and experience we have gathered during this course completion period will immensely help us in our future professional life. We have concentrated our best efforts to achieve the objectives of this course as well as report and hope that our endeavor will serve the purpose. We considered your remarks and instructions very carefully while preparing this report. We tried the best to follow your schedule, format and discipline. Thank you for your kind consideration. Sincerely yours, Nusrat Binta Nasir ID:09304123 North South University

Executive Summary A Bank is an economic institution whose main aim is to earn profit through exchange of money& credit instruments. It is a service oriented as well as profits oriented organization. The Bank divides its operation mainly three parts- General Banking, Foreign Exchange and Investment. The banking sector of Bangladesh is passing through a tremendous reform under the economic deregulation and opening up the economy. Currently this sector is becoming extremely competitive with the arrival of multinational banks as well as emerging and technological infrastructure, effective credit management, higher performance level and utmost customer satisfaction. Bank has a significant role in the economic development of the country. The successful banking business ensures the growth of the economy by the effective uses of the funds. In order to developing the national economy, banks keep in mind going for lending, maintaining safety, liquidity & profitability. The report has been prepared on focusing Investment Activities of Exim Bank Limited to compare with the activities of Eastern Bank Limited (EBL) whereas Exim bank is serving as an Islamic bank and EBL is based on traditional banking. Exim Bank Limited and Easter Bank Limited were introduced in Bangladesh as a banking company under the Company Act 1913(Indian) and 1994 in Bangladesh. Exim Bank commenced on operation on 2nd June 1999 and Eastern Bank commenced on operation on 16th August 1992. Numerically both of the banks are just another commercial Bank, now operating in Bangladesh, but the finders of Exim Bank committed to make different & a little bit special qualitatively. This bank has new vision to fulfill & a new goal to achieve & try to reach new height for realizing its dream. We have done this report on the investment activities but mainly focusing on the differences between Islamic banking and conventional banking in comparing Exim bank with Eastern Bank Ltd. This is basically included Investment and loan activities to show how this department works differently. The 1st chapter contains the origin, objectives, limitations etc. of the study, 2nd chapter is about the overview of EXIM Bank Ltd, 3rd chapter is about the overview of Eastern Bank Ltd, 4th chapter is focused on the difference of investment banking of EXIM Bank and EBL. At the end chapter 5 is all about the findings and conclusion of the report.

CHAPTER -01Introduction1.1 Background of the Report Bank is very old institution that is contributing toward the Development of any economy and is treated as an important Service industry in the modern world. Economic history shows that development has started everywhere with the banking system and its contribution towards financial development of a country is the highest in the initial stage. Modern banks play an important part in promoting economic development of a country. Bank provides necessary funds for executing various programs in the process of economic development. They collect savings from large masses of people scattered throughout the country, which in the absence of banks would have remained ideal and unproductive. These scattered amounts are collected, pooled together and made available to commerce and industry for meeting the financial requirements. Todays modern banks are not only providing traditional banking but also expanding the many financial services. In todays world the life of the people directly or indirectly are within the arena of banking whether conventional or Islamic banking. Although Islamic banking is not a newer concept in Bangladesh as it has started its operation since 1983, very few people are aware about its operation. But things are changing. Islamic Banking is also getting popularity in the country which is the main focal point to this report shown the differences between Islamic and conventional banking. In this regard, Exim bank ltd as an Islamic bank is not same as EBL as a traditional bank.

1.2 Origin of the Report

1.3 Statement of the Problem In general sense we mean bank as a financial institution that deals with money. On the basis of functions bank can be categorized like Central bank, Saving bank, Invest bank, Merchant bank, Commercial bank, etc. but when we use the term bank it generally means commercial bank that collects the deposits from surplus unit of society and then lends the deposits to the deficit units of the society. For the economic development of a country bank plays a vital role, but traditional commercial banking Systems are interest based and Islamic finance and banking interest is prohibited. Islamic finance refers to financial system that complied with the Shariah. In this regard to establish a banking system that run according to Shariah, the concept of Islamic banking arises. Though the regular banking system and the Islamic banking system operate in different mode of investment, there is confusion that both systems have merely any fundamental differences. This confusion arises a question that is there actually any difference between Regular banking system and Islamic banking system. Thats why It is the key area that how Islamic banking and general commercial banking is different in respect to Investment or credit which has been shown on studying Exim bank ltd and EBL.

1.4 Objective of the Study Broad Objective We were instructed from our finance course lecturer Nusrat Khan to submit a report on a comparative study on Exim Bank Ltd & Eastern Bank Ltd focusing conventional and non-conventional banking system.

Specific Objectives The specific objectives of this study are as follows: To have an overall idea about Islamic banking system that claims to be based on the Quran and the Sunnah. To know the principles of Islamic banking system and conventional banking and how it is operated. To find out the differences between the conventional /traditional banking system & Islamic banking system by comparing Exim bank ltd with EBL. Understanding the differences between Islamic banking system and other commercial banking systems. Understanding how an Islamic Bank runs its business without interest. To know how an Islamic Bank earns its profits through investment. To know the key functions of investment. To apply theoretical knowledge into practical area.

1.5 MethodologyIn this report we used secondary data those data that have already been collected for the purposes other than problem at hand. In this report the external data is used to collect the information about the financial growth of Exim Bank Ltd and Eastern Bank Ltd. The external data have been collected from the external source such as published materials, internet etc. Annual Report, Audit Reports of Exim Bank Ltd and Eastern Bank Ltd. Relevant books, Research papers, Newspapers and Journals. Website of both the banks. Bangladesh Bank Report. Bangladesh Economic Review. Unpublished data from the branch.

1.6 Limitation of the Study It is not easy task to collect data and information about our requirement. So the study suffers from various limitations, some of these are mentioned below: In the study areas, the authorities are not willing to express accurate data easily for the reason of their confidentiality. Due to time limitation many of the aspects could not be discussed in the present report. Because of the limitation of information some assumption was made. So there may be some personal mistakes in the report. Almost all the personnel were apparently too busy to assist us with their valuable support. The study was limited only to the EXIM BANK Limited & EBL.

CHAPTER -02Organization Part 1Overview of EXIM Bank Ltd.2.1 Historical Background of EXIM Bank Limited EXIM Bank Limited was established under the rules & regulations of Bangladesh bank & the Bank companies Act 1991, on the 3rd August 1999 with the leadership of Late Mr. Shahjahan Kabir, founder chairman who had a long dream of floating a commercial bank which would contribute to the social-economic development of our country. He had a long experience as a good banker. A group of highly qualified and successful entrepreneurs joined their hands with the founder chairman to materialize his dream. Indeed, all of them proved themselves in their respective business as most successful star with their endeavor, intelligence, hard working and talent entrepreneurship. Among them, Mr. Nazrul Islam Mazumder became the honorable chairman after the demise of the honorable founder chairman.Its very beginning, EXIM Bank Bangladesh limited was known as BEXIM Bank, which EXIM for Bangladesh Export Import Bank Limited. But for some legal constraints the bank renamed as EXIM Bank, which means Export Import Bank Of Bangladesh Limited. The bank starts its functioning from 3rd August 1999 with Mr. Alamgir Kabir, FCA as the advisor and Mr. Mohammad Lakiotullah as the Managing Director. Both of them have long experience in the financial sector of our country. By their pragmatic decision and management directives in the operational activities, this bank has earned a secured and distinctive position in the banking industry in terms of performance, growth, and excellent management. By their pragmatic decision and management directives in the operational activities, this bank has earned a secured and distinctive position in the banking industry in terms of performance, growth, and excellent management. The authorized capital and paid up capital of the bank are BDT 350.00 Crore and BDT 267.75 Crore respectively.Considering the inherent desire of the religious Muslims, EXIM Bank has all of its conventional banking into Shariah based Islamic banking in July 2004 and initially started Islami Banking practice and in two Branches in the same year. The Islami Banking branches perform their activities under the guidance and supervision of a body called SHARIAH COUNCIL2.2 Vision & Mission Vision The gist of EXIM Bank Limiteds vision is Together towards Tomorrow. EXIM Bank Limited believes in togetherness with its customer, in its march on the road to growth and progress with services. To achieve the desired goal, there will be pursuit of excellence at all stages with a climate of continuous improvement, because, EXIM Bank Limited believes the line of excellence is never ending. Banks strategic plans and networking will strengthen its competitive edge over others in rapidly changing competitive environment. Its personalized quality service to the customers with the trend of constant improvement will be cornerstone to achieve our operational success.

Mission The Bank has chalked out the following corporate objectives in order to ensure smooth achievement of its goal: To be the most caring, customer friendly and service oriented bank. To create a technology based most efficient banking environment for its customers. To ensure ethics and transparency in all levels. To ensure sustainable growth and establish full value of the shareholders. Above all, to add effective contribution to the national economy. Eventually the Bank emphasizes on: Providing high quality financial services in export and import trade Providing efficient customer service Maintaining corporate and business ethics Making its products superior and rewarding to the customers Display team spirit and professionalism Enhancement of shareholders wealth2.3Objectives of EXIM Bank Limited To receive, borrow or raise money through deposits, loan or otherwise and to give guarantees and indemnities in respect of all debts and contracts. To establish welfare oriented banking systems. To play a vital role in human development and employment generation to invest money in such manner as may vary from time to time. To carry on business of buying and selling currency, gold and other valuable assets. To extend counseling and advisory services to the borrowers/entrepreneurs etc. in utilizing credit facilities of the bank. To earn a normal profit for meeting the operational expenses, building of reserve and expansion of activities to cover wider geographical area.2.4 Values of EXIM Bank Limited To be one EXIM by holding and guiding the following values: To have a strong customer focus and to build relationship based on integrity, superior service and mutual benefit. To strive for private and sound growth. To work as a team to serve the best interests of the organization. To work for continues business innovation and improvements. To value and respect people and make decisions based on merit. To provide recognition and reward on performance. To value open and honest communication.

2.5 Shariah Auditing This is the civil supervisory aspect that shapes the Banks main feature. Its existence is part of the Shariah Supervision procedures. One of its main tasks is to check the Shariah compliancy in the Banks transactional procedures in accordance to the Fatwas issued in that regard, under the guidance of the Shariah Supervisor. The Shariah auditor is assigned the task of revising the Banks transactional procedures throughout the year to check the extent to which the staff members and the different departments have abided by the regulations. Advices and Fatwas issued by the Fatwa & Shariah Supervision Board, forums, & banking conferences. As well as, assuring that all the contracts that states a right for the Bank or an obligation on the Bank is certified by the Fatwa & Shariah Supervision Board. 2.6 Banking with Principles Export Import Bank of Bangladesh Limited is the 1st bank in Bangladesh who has converted all of its operations of conventional banking into shariah-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. The process by which Noribas investments are designed and executed allows the Bank to offer a combination of Shariah compliance and capital markets expertise that is unique throughout the world. Noriba is committed to the strict adherence to the requirements of the Shariah as a result of sole focus on Shariah-compliant investments and the full supervision of its financial products and transactions by the Noriba Shariah Board. Noriba experts specifically design each of the Banks investment vehicles with the approval of the Noriba Shariah Board. Once the given product or transaction has been arranged, the Noriba Shariah Board carefully screens it for compliance before giving final approval for its implementation. This control mechanism guarantees that all aspects of Noribas final products and banking transactions are in adherence with the guidelines of the Shariah.

2.7 Performance of EXIM Bank

EXIM Bank Ltd. was incorporated as a public Limited company on the 2nd June 1999 under Company Act 1994. The Bank started commercial banking operations effective from 3rd August 1999. During this short span of time the Bank has been successful to position itself as a progressive and dynamic financial institution in the country. The Bank widely acclaimed by the business community, from small business/entrepreneurs to large traders and industrial conglomerates, including the top rated corporate borrowers from forward-looking business outlook and innovative financing solutions.

Capital The bank started with an authorized capital of Tk. 100 million in 1999 and as on 31st December 2004 paid up capital stood at Tk. 627.75 million. The paid up capital stood at Tk. 2677.75million as on 31st December 2008.

Analysis of Capital Structure Capital structure of EXIM Bank has changed from year to year. The components of the capital structure are paid-up capital; proposed issue of dividend, share premium, statutory reserve, proposed cash dividend, retained earnings and other reserve. Authorized and paid up capital of EXIM Bank:Overall Performance of EXIM Bank Limited

Amount in million Taka

SLPARTICULARS2010201120122013

1PAID UP CAPITAL6832.279223.5610514.8611566.35

2TOTAL CAPITAL13957.416109.5618214.3121198.7

3SURPLUS/SHORTAGE OF CAPITAL1561.145258.56

4TOTAL ASSETS113070.98129874.42167056.63195452.52

5TOTAL DEPOSIT94949.4107881.21140369.66165733.25

6INVESTMENT AS A % OF TOTAL DEPOSIT98.26%92.42%84.22%86.79%

7INVESTMENT (GENERAL)93296.6599699.63118219.99143847.38

8TOTAL CONTINGENT LIABILITIES AND COMMITMENTS55098.3654929.9263950.4860119.38

9RETURN ON INVESTMENT AND DEPOSIT84.22%86.79%

10RETURN ON CLASSIFIED INVESTMENT AND TOTAL INVESTMENT4.27%3.67%

11PROFIT AFTER TAX AND PROVISION3476.012009.372157.631913.39

12COST OF FUND7.10%9.15%9.96%10.21%

13PROFIT EARNING ASSEST97901.97109707.5131147.17159705.77

14NON PROFIT BEARRING ASSET15169.0120166.9235909.4635746.74

15RETURN ON INVESTMENT (SHARE & BONDS)1.94%2.63%

16RETURN ON ASSETS (AFTER TAX)3.54%1.65%1.45%1.06%

17INCOME ON INVESTMENT (SHARE & BONDS)183.79312.38

18EPS3.772.182.051.65

19RETURN ON ASSET AFTER TAX3.54%1.65%1.45%1.06%

20P/E RATIO11.3412.7610.147.8

Investments (General) Total Investment (General) of the Bank stood at Tk.143,847.38 million as on 31 December 2013 against Tk.118,219.99 million as on 31 December 2012 registering a growth of 21.68%. As on 31 December 2013 Classified Investment to total Investment ratio was 3.67% which was 4.27% as on 31 December 2012. Bank maintained required provision against Investment (General) for the year 2013. Investment (General) has increased significantly over the years due to the existence of innovative Investment products.

Mode-wise Investment Bank has launched a number of Shariah based Investment products under different mode of Investment which help meeting demand of all types of customer.IN MILLION TAKA

SLPARTICULARS20122013GROWTH

1BAI-MUAZZAL45404.5956154.5723.68%

2BAI-MURABAHA21436.7322458.664.77%

3BAI-SALAM3368.184175.0523.96%

4IZARA BILL BAIA (COMMERCIAL)43007.0353085.4523.43%

5IZARA BILL BAIA (STAFF)1066.051701.4359.60%

6BAI-AS-SARF (FDBP)369.75575.2655.58%

7MUSHARAKA DOCUMENTARY BILL (MDB)1948.422290.7117.57%

8MUDARABA IMPORT BILL (UPAS)766.72079.89171.28%

9MURABAHA IMPORT BILL (MIB)469.481079.52129.94%

10QUARD383.05246.84-35.56%

TOTAL118219.99143847.3821.68%

Operating Profit & Net Profit The bank always strives to achieve meaningful financial performance since its inception. Strong capital base, wide branch network, innovative products, quality services, support from stakeholders are helping the bank to make significant performance. During the year 2013, the bank earned an operating profit of Tk.4,927.89 million despite some downturn in the economy. Net profit after tax stood at Tk.1,913.39 million in 2013 after making provision for investment, provision for other assets and provision for tax.AMOUNT IN MILLION

SLPARTICULARS20122013GROWTH

1INVESTMENT INCOME17307.8320417.517.97%

2PROFIT PAID ON DEPOSITS, BORROWING ETC.-12271.79-15458.8825.97%

3NET INVESTMENT INCOME5036.044958.62-1.54%

4COMMISSION, EXCHANGE & BROKERAGE2023.682020.16-0.17%

5OTHER OPERATING INCOME1025.981177.0514.72%

6TOTAL OPERATING INCOME8085.78155.830.87%

7TOTAL OPERATING EXPENSES2751.353227.9417.32%

8PROFIT BEFORE PROVISIONS5334.354927.89-7.62%

9TOTAL PROVISION1645.91680.572.11%

10PROFIT BEFORE TAXES3688.453247.33-11.96%

11PROVISION FOR TAXATION1530.821333.94-12.86%

12PROFIR AFTER TAX2157.631913.39-11.32%

13EARNINGS PER ORDINARY SHARE1.871.65

CHAPTER -03Organization Part 2

Overview of Eastern Bank Ltd.3.1 Historical Background of Eastern Bank Limited In pursuance of the Bank of Credit and Commerce International (Overseas) Limited in Bangladesh (Reconstruction) Scheme, 1992, framed by the Bangladesh Bank and approved bythe Government of Bangladesh, the Eastern Bank Limited was formed as a public limited company incorporated in Bangladesh with primary objective to carry on all kinds of banking business in and outside the country. Eastern Bank Limited had also taken over the business, assets and liabilities of erstwhile Bank of Credit and Commerce International (Overseas) Limited branches in Bangladesh with effect from 16th August, 1992.3.2 Vision & Mission To become the bank of choice by transforming the way we do business and developing a truly unique financial institution that delivers superior growth and financial performance and be the most recognizable brand in the financial services in Bangladesh.EBL dreams to become the bank of choice of the general public including both the consumer and the corporate clients. It has adopted a new logo that looks very dynamic in its attractive colors that reflect all the changes that are taking place in EBL.

We will deliver service excellence to all our customers, both internal and external.We will constantly challenge our systems, procedures and training to maintain a cohesive and professional team in order to achieve service excellence. We will create an enabling environment and embrace a team-based culture where people will excel. We will ensure to maximize shareholders value.

3.3Objectives of Eastern Bank Limited The EBL Management Team or Management Committee (ManCom) comprises of a group of fifteen people and each of them comes with an international working background and are committed in leveraging their experiences to take EBL to greater heights by ensuring top line revenues with dynamic capabilities.

EBL ManCom is unique in being able to envision the need of the business by bringing in a mixture of advanced technology solutions know-how and revamping the organizational make- up for maximum profitability.

The objective of EBL ManCom is to drive the business to maximize the operational excellence and efficiency through acquisition of talent, developing systems, processes and people and through blending in of these to let customers revel in with fulfillment and permanency.

3.4 Values of Eastern Bank Limited SERVICE EXCELLENCEWe passionately drive customer delight.We use customer satisfaction to accelerate growth.We believe in change to bring in timely solution.

OPENNESSWe share the business plan.We encourage two way communications.We recognize achievements, celebrate results.

TRUSTWe care for each other.We share learning/ knowledge.We empower our people.

COMMITMENTWe know our roadmap.We believe in 'continuous improvement'.We do not wait to be told.

INTEGRITYWe say what we believe in.We respect every relationship.We do not abuse information power.

RESPONSIBLE CORPORATE CITIZENWe are tax-abiding citizen.We promote protection of the environment for our children.We conform to all laws, rules, norms, sentiments and values of the land.

3.5 Strategies of Eastern Bank LimitedMaking business strategy flexible to keep us on track for a sustainable growth.Ensuring responsible corporate governance through conformity with the law and by conducting all our actions honestly, responsibly and ethically. Creating a corporate culture in which performance is rewarded equitably and sustainably. Bringing the attitudes and goals of our staff in line with the needs of our clients and the overall economy. Designing products and services that must meet clients financial needs and objectives, beneficial for the environment and also provide adequate financial return for the bank. Pursue balance sheet growth through selective lending and by offering value proposition. Leveraging balance sheet management through improved productivity, recovery and cost rationalization.

3.6 Performance of Eastern Bank Limited

Over the years, the Bank has shown its resilience facing odds and challenges under volatile operating environment. The year 2014 was no exception. Some of the major challenges that affected the financial industry were low credit appetite, excess liquidity in the market and rising trend of NPL. In face of these challenges, the bank deployed a strategic repositioning or realigning of business concentration, took an approach of cost rationalization, and gave more emphasis on service excellence (0-5 Days service delivery commitment) and product innovations

Operating Income (+7%)

The banks total operating income comprise of two major items: net interest income (NII) and non-interest income (NoII). In 2014, NII accounted for 40% while NoII accounted for 60% of total operating income (33% from investment income, 26% from fees, commission and FX income and 1% from other operating income). Investment income increased signifi cantly by 61% in 2014 to BDT 3,343 million (Investment income share in total operating income increased from 22% in 2013 to 33% in 2014) while our net interest income decreased by 18% in 2014 to BDT4,009 million (NII share in total operating income decreased from 52% in 2013 to 40% in 2014)Net Interest Income (-18%)

Round the year 2014, bank experienced a mismatch between loan and deposit growth, which affected our net interest income. In 2014, bank interest income decreased by 11% while bank interest expense decreased by 8% for following reasons:

Interest Income (-11%)Banks interest income from loans, the principal component of interest income, decreased by 11% or BDT 1,647 million mainly for following reasons: Although loans and advances increased by 15% to BDT 118,291 million at year-end 2014 from BDT 102,910 million at year-end 2013, there was an observed stagnancy in credit growth during first half (H1) of 2014 and a positive turnaround from the third quarter of 2014.

Weighted average return on loans and advances decreased to 12.43 percent in December 2014 as compared to 14.57 percent in the previous year mainly due to lower credit appetite and rise of NPL (interest income is transferred to suspense account on classification).

Interest Expense (-8%)

Banks interest expense on deposits, the principal component of interest expenses, decreased by 8% or BDT 765 million mainly for following reasons:

2014 experienced continued fall in interest rate and the bank cut deposit rates by 0.50% to 2.50% on different buckets to reduce cost of deposit by 183 bps.

Weighted average cost of deposit as on December 2014 was 7.26 percent compared to 8.84 percent in the previous year, mainly due to the banks utmost efforts on booking savings deposit (43% growth in 2014) to get rid of high cost deposit and decreased concentration of fixed deposit (4% growth in 2014). In 2014, due to excess liquidity in money market and lower spread, bank shifted investible resources from money market placement to short term Govt. securities (classified as HFT), which resulted the higher investment income but not placement income (a component of NII) while borrowing expense was booked under the head of interest expense. Beside these lower spreads in 2014 (5.17% in 2014 compared to 5.73% in 2013) also caused the negative growth of net interest income in 2014 by 18% to BDT 4,009 million.

Investment income (+61%)

Bank investment income is usually generated from fixed income securities, secondary market portfolio, and preference share and bond and also dividend income from subsidiaries. Overall investment income increased significantly (61% or BDT 1,272 million) with substantial contribution from fixed income securities as loanable funds were parked in safer govt. treasury securities due to lack of adequate credit demand in the market. Average daily money market turnover stood at BDT 21,760 million in 2014 compared to BDT 23,007 million in 2013 showing negative growth of 5.42% by keeping average daily spread of 4.17%. This negative growth in money market turnover resulted from shifting of huge fund to government securities with the objective to optimize return. Although EBL is not a Primary Dealer (PD), EBL is very active in the secondary Govt. Securities trading in both buy side and sell side and this trading activity generated a substantial amount of revenue for the bank. Total secondary market tradingturnover was BDT 18,300 million, yielding net capital gain of BDT 341.53 million. Investment income from quoted securities (in the form of dividend and capital gain) increased by 4% to BDT 95 million in 2014, compared to 2013. Bank received BDT 65 million as dividend income from the subsidiaries in the year 2014, which was BDT 39 million in 2013.

Loans and Advances (+15%)

In 2014, total loan and advances registered a growth of 15% and stood at BDT 118,291 million at year- end. With a share of around 74% in corporate lending, EBLs credit exposure is well diversified and spread over more than 15 sectors such as textile and RMG, agriculture, pharmaceuticals, telecom, ship-breaking, transportation, electronic goods and service industries, etc. Retail and SME together constitute the rest 26% of the loan portfolio. During the year 2014, our working capital loan like demand loan and other short term loan increased in commensurate with the nature of sources of funds. Classifi ed loans as a percentage of total loan portfolio increased to 4.36 % at the end of 2014 compared to 3.59% at the end of 2013. However, full provision was made against classified loans. Despite adverse business conditions, serious efforts were being made to bring down the amount and percentage of classified loans by exploring all options including legal actions and out of court settlements depending on the merit of the cases.

CHAPTER -04Investment Division of EXIM bank Vs. Loan & Advance of EBL4.1 Investment Division of EXIM Bank Ltd. For any bank, loans and advances constitute the largest portion of asset section in Balance Sheet. Investment division of financial institutions plays a vital role in developing the national economy. Without such support development for a country like Bangladesh were difficult to imagine. The main objective of EXIM Bank Limited is to boost up the economy by proving adequate support to the market through its investment division.

Investment Products Corporate Finance Commercial Finance Industrial Finance Project Finance Lease Finance Syndicate Finance Hire Purchase Finance Real Estate Finance Loan and Investment Policy Of EXIM Bank In a bank all loans are its investment but all investments are not loans. Banks make both loans and investment for different purposes. The dual purposes of loans and investments are liquidity and profitability. More loans mean more risks and more profit while more investments mean more liquidity but less profit. Investments are made in more liquid and less profitable instruments while loans are made at higher profit on less convertible security. Investments are generally made in government instruments with strong liquidity. More investments in highly secured and liquid instruments would ensure safety with less profit while more loans could make a bank vulnerable but very profitable. Thus a balance between liquidity (investment) and profitability (loans) needs to be arrived at judiciously by each and every bank.General Policy Guidelines EXIMBank makes loan to reputed clients. Encourages lending to socially desirable, nationally important and financially visible sector. Satisfactory security and collateral is required including source of repayment both primary and secondary source. EXIMBank may consider term loans with maturity up to five years. EXIMBank extends credit facilities to the area, which the branch located and size and ability of its staff to supervise and monitor the same also considered. Maximum size of the loan portfolio. The Banking Corporation Act 1991 restricts lending to any single obligor or a group of companies up to 155 of the capital funds without having approval from Bangladesh Bank. With the Bangladesh Bank the maximum limit can go up to 100% of the capital of the bank.Types of Loans and Advances There are two types which are given below- 1. Industrial credit: Industrial credits are given for industrial purpose. The sector where some processes are involved is called industry, such as shape of material. Industry can be two types a) Manufacturing industry- cement, steel factory etc. b) Service industry- hotel, transport etc. Industrial credit is given for two purposes: Term loan- fixed assets financing. Working capital- current assets financing. 2. Commercial Credit: Commercial credits are given for trading purpose where no process is involved. EXIM lends support towards development of trade, business and other commercial activities in the country. Forms of Loans and Advances The making of loans and advances has always been prominent and profitable function of a bank. Sanctioning credit to customers and others out of the funds at its disposal is one of the principle services of a modern bank. Advances by EXIM Bank are made in different forms Such as: Overdraft Cash Credit Term Loan Staff Loan Bills Portfolio Packing Credit Bank Guarantee Commercial Loan Commercial Loan PAD(Payment Against Documents) LIM(Loan against Imported Merchandise) LTR(Loan against Trust Receipts)Types of Borrower Single/individual Joint holder Proprietorship firm Partnership firm Private Limited CompanyMode of Investment1. Mudaraba It is a form of partnership of profit where one party provides funds while the other provides expertise and management. The first party is called the Sahib-al-Maal and the latter is referred as the Mudarib. Any profits acquired are shared between two parties on a pre-agreed basis, while capital is due to the breach of trust by the mudarib

2. Bai-MuazzalBai-Muazzal may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods permissible under Islamic Shariah and the law of the country to the buyer of an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installments. The seller may also sells goods purchased by him as per order and specification of the buyer.

3. Bai-MurabahaBai-Murabaha may be defined as a contract between a buyer and a seller under which the seller sells certain specific goods (permissible under Islamic Shariah and the law of the land) to the buyer at a cost plus agreed profit payable in cash or any fixed future date in lump sum or by installments. The profit marked up may be fixed future lump sum or in percentage of the cost price of the goods.

4. MusharakaMusharaka is a contract of partnership between two or more individuals or bodies in which all partners contribute capital, participate in the management, share the profit in proportion to their capital as per pre-agreed ratio and bear the loss, if any in proportion to their capital/equity ratio.

5. Izara Bill BaiaIzara bill baia is a special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts Shirkat, Izara and Sale. When two or more persons supply equity, purchase an asset own the same jointly and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Izara Bill Baia Contract.

6. Wazirat Bill WakalaWazirat Bill Wakala may be defined as a contract between a buyer and a seller under which the seller sells in advance in the certain commodities sells products permissible under Islamic Shariah and the law of the land to the buyer at an agreed price payable an execution of the said, contract and the commodities/products are delivered as per specification, size, quality, quantity at a future time in a particular price. In other word Wazirat Bill Wakala is a sale where by seller undertake to supply some specific commodities or products to the buyer at a future time in exchange of an advance price fully paid on the spot.

7. IBPPayment made through purchase of inland bills/cheques to meet urgent requirement of the customers falls under this type of investment is adjustable from the proceeds of bills/cheques purchased for collection. It falls under the category Commercial Lending.

8. FDBP (Foreign Documentary Bill Purchased)Payment made to customers through purchase/negotiation of foreign documentary bills falls under this head. This temporary investment is adjustable from the proceeds of the shipping/export documents. It falls under the category Investment on Export

9. LDBP (Local Documentary Bill Purchased)Payment made against documents representing sell of goods to local export oriented industries that are deemed as export and which are denominated in Local Currency/Foreign currency falls under this head. This temporary liability is adjustable from proceeds of the bill. Lending Risk Analysis (LRA) the principal function of the Bank is to lend. Lending comprises a very large position of Banks total assets and forms the backbone of the Bank. Sound lending is very important for profitability and success of a bank. For the sake of sound lending it is necessary to develop a sound policy and modern lending techniques have to be adopted to ensure that loans are safe and the money will come back within the time set for repayment.Documents Required For Procuring Loan Proposal The client should supply the following documents: TIN certificate of the client. Bank statement for last two years. Up to date trade license. Present liability position of the company and owners. Name and address of the Sister concern Export and import performance. Personal information in a prescribed form. Balance sheet for the last three years. Memorandum and Articles of the Association signed by the Managing director. Profile of directors and partners.Loan Disbursement Loan is allowed for a single purpose where the entire amount may be required at a time or in a number of installments within a period of short span. After disbursement of the loan amount, there will be only repayment by the borrower. A loan once repaid in full or in part, cannot be drawn again by the borrower. Entire amount of loan debited to the loan account in the name of the customer and is paid to him through his STD/CD Account. Sometimes loan amount is disbursed in cash.

4.2 Investment Division of EBLEBLs capital market operations are conducted by Investment Banking Unit. IBU capitalizes the huge growth potential therein and diversifies the business to maximize the risk adjusted return. This unit makes investment in the capital markets and contributes towards fee-based income and capital gains by taking acceptable level of risk.

EBL Investment Banking Unit, within a very short span of time, has been active in doing the followings: Managing own portfolio Participation in Pre-IPO Placements Participation in Book-Building Process Sponsoring Mutual Funds Trustee Services Acting as Main Banker for IPO Acting as Banker to the Issue Participation in IPO UnderwritingInvestment and Loan policy of Eastern BankEBL revised structure and strategies to meet the challenges of rapidly evolving technology based banking services, growing competition in the financial service industry, changes in customers need. These changes are designed to promote growth, enhance customer services, enrich asset quality, arrange low cost funds and maximize banks earnings.EBL made concrete plans to restructure the entire gamut of Eastern Bank Ltds banking standards and its transaction viz corporate, consumer, treasury, trade services etc. This enables the bank to operate with greater efficiency in all respects thus resulting the better revenue generation compared to past years.In 2002 EBL made significant progress in upgrading our asset portfolio by booking high quality accounts (blue chip local corporate and multinational). The effort was ongoing EBL also introducing new monitoring standards, credit approval guidance and initiated the process to establish a separate credit administration unit to ensure greater control. This brought better management of asset relationships.The loans and advance of the bank stood at tk 11,861 million indicating an increase of 3.65% as against tk 11,288 million of preceding year.The loan facilities that offered by EBL are: Cash credit (hypo) Cash credit scheme Lease financing Hire purchase Staff loan Fast loan Auto car loan Loans for professional Flexi loan Executive loan Loan against trust receipt (LTR) Sight of letter of credit Demand loan Time loan Term loan etc.Types of loan made by banks:Bank loans may be divided into seven broad categories of loans, delineated by their purposes:1. Real Estate loan:REL, which are secured by real property-land, buildings and other structures and which includes short term loans for construction and land development and longer term loans to finance the purpose of farmland, homes, apartments, commercial structure and foreign properties.2. Financial institution loans:FIL includes credit to bank, insurance companies, finance companies and other financial institution..3. Agricultural loans: AL extended to farm and ranch operation to assist in planting and harvesting crops and to support the feeding and care of livestock.4. Commercial and industrial loans:C & IL granted to business to cover such expenses as purchasing inventories, paying taxes and meeting payrolls.5. Loans to individuals:Loans to individuals, including credit to finance the purchase of automobiles, mobile homes, appliances and other retail to repair and modernize homes, cover the cost the medical care and other personal expenses, either extended directly to individuals or indirectly through retail dealers.6. Miscellaneous loans:ML, which includes all those loans not classified here, including securities loan.7. Lease financing receivables,where the bankbuys equipment of vehicles and lease them to its customers.LOAN FACILITY PARAMETERSFacility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) are clearly stated. As a minimum, the following parameter (mentioned in the guideline) is adopted:Bank does not grant facilities where the banks security position is inferior to that of any other financial institution.Assets pledged as security is always properly insured. In fact, EBL ensures 110%insurance on the hypothecated security for a particular facility. The bank also has its own list of insurance companies from which the client can take insurance.Valuations of property taken as security is performed prior to loans being granted. Also recognized 3rd party professional valuation firm is appointed to conduct the valuations.

CREDIT ASSESSMENTA thorough credit and risk assessment is conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment are presented in a Credit Application that originates from the relationship manager/account officer (RM), and is approved by Credit Risk Management (CRM). The RM is the owner of the customer relationship, and is held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs are familiar with the banks Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. The bank has its established Know Your Customer (KYC) and Money Laundering guidelines which are adhered to at all times.Credit Applications summarize the results of the RMs risk assessment and include, as a minimum, the following details:Amount and type of loan(s) proposed.Purpose of loans.Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)Security ArrangementsIn addition, the following risk areas are also addressed: Borrower AnalysisThe majority shareholders, management team and group or affiliate companies is assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions are addressed, and risks mitigated. Industry AnalysisThe key risk factors of the borrowers industry are assessed by the RM. Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces is addressed and the strengths and weaknesses of the borrower relative to its competition should be identified.Supplier/Buyer AnalysisAny customer or supplier concentration is reported in the credit application, as these could have a significant impact on the future viability of the borrower. Historical Financial AnalysisAn analysis of a minimum of 3 years historical financial statements of the borrower is presented in banks specified format. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrowers balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. Adherence to Lending GuidelinesCredit Applications should clearly state whether or not the proposed application is in compliance with the banks Lending Guidelines. Mitigating FactorsMitigating factors for risks identified in the credit assessment is identified and reported in the application.Loan StructureThe RM makes sure that the amounts and tenors of proposed financing are justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrowers repayment ability.SecurityA current valuation of collateral is obtained and the quality and priority of security being proposed is assessed. Loans are not granted based solely on security. Adequacy and the extent of the insurance coverage are also taken into consideration.Name LendingIn this case bank also follows the prudential guidelines which says Credit proposals should not be unduly influenced by an over reliance on the sponsoring principals reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution. Rather, credit proposals and the granting of loans should be based on sound fundamentals, supported by a thorough financial and risk analysis.APPROVAL PROCESSThe approval process segregates the work of Relationship Management/Marketing from the approving authority. The responsibility for preparing the Credit Application rests with the RM within the corporate/SME banking department. Credit Applications are recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives.The recommending or approving executives take responsibility for and are held accountable for their recommendations or approval.

CHAPTER -05Findings & Conclusion 7.1 Findings Since this report focuses on the differences between Islamic banking and conventional banking studying two different banks (EXIM bank ltd as an Islamic Bank and EBL as conventional bank) It finds out numerous differences in various areas. These are;Differences of philosophy & principlesTerminology: Exim bank Ltd vs. EBL Loan and credit department in Exim bank Ltd is termed as investment division whereas is loan and advance in EBL. The following table shows same division used in different terminologies:Modes of Investment in EXIM Bank LimitedModes of Loan & Advance in Eastern Bank Limited

Mudaraba Bai-Muazzal Bai-Murabaha Musharaka Izara Bill Baia Wazirat Bill Wakala FDBP (Foreign Documentary Bill Purchased) LDBP (Local Documentary Bill Purchased)

BAIM (hypo) Vs. Cash credit

Overdraft: Exim Bank Ltd Vs. EBLBAIM (FO) Vs.Loan against DPS/APSIzara/Izara Bill Baia Vs.Term loan

ConclusionReference