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Development and Performance
Performance evaluation is an important pre-requisite for sustained growth and development of any situation. It is customary in commercial banks to evaluate the pre-determined goals and objectives, with the changes goals and objectives, the criteria of revaluation has undergone changes overtime. Regarding performance evaluation of the Islamic banking in Bangladesh “Banking Efficiency Model” has been taken into consideration.
Islamic Banking is a form of modern banking based on Islamic legal concepts (Shari'a) developed in the first centuries of Islam, using risk-sharing as its main method, and excluding financing based on a fixed, pre-determined return.
Islamic Banking believes in sharing profits and risks in the business instead of becoming creditors. In Islamic Banking the depositor, the Bank and the borrower all share the risks and rewards of financing business ventures. This is unlike the interest-based commercial banking system, where all the pressure is on the borrower; he must pay back his loan, with the agreed interest, regardless of the success or failure of his venture. Islam encourages investment in order that the community may benefit.
The Islamic values are reflected in Islamic economic principles. It is important to understand these principles of Islam, which underpin Islamic Finance.
- Any predetermined payment over and above the actual amount of principal is prohibited.
Islam allows only one kind of loan and that is qard-el-hassan (literally good loan) whereby the lender does not charge any interest or additional amount over the money lent.
- The Bank must share in the profits or losses arising out of the enterprise for which the money was financed.
Unlike the interest-based commercial banking system where all the pressure is on the borrower, Islamic finance is based on the belief that the depositor, the bank and the borrower should all share the risks and the rewards of financing business ventures.
- Making money from money is not Islamically acceptable.
In Islam, money represents purchasing power, which is considered to be the only proper use of money. This purchasing power (money) cannot be used to make more purchasing power (money) without undergoing the intermediate step of it being used for the purchase of goods and services.
- Gharar (Uncertainty, Risk or Speculation) is also prohibited.
Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions and should be free from uncertainty, risk and speculation. Also, parties cannot predetermine a guaranteed profit based on the principle of 'uncertain gains' which does not even allow an undertaking from the customer to repay the borrowed principal plus an amount to take into account inflation.
- Investments should only support practices or products that are not forbidden-or even discouraged- by Islam. Trade in alcohol, for example would not be financed by an Islamic bank; a real-estate finance could not be made for the construction of a casino; and the bank could not lend money to other banks on interest.
IBBL's World rating:
As per Bankers' Almanac (January 2001 edition) published by the Reed Business Information, Windsor Court, England, IBBL's world Rank is 1771 among 3000 banks selected by them. This position was 1902 among 4500 selected banks as on January 1999 edition. IBBL's country Rank is 5 among 39 banks as per ratings made by the above Almanac on the basis of IBBL's Financial Statements of the year 2001.
The gradual process of Islamic station of the banking system in Pakistan started in February 1979 when the President of Pakistan announced that interest was to be removed from the economy within a period of three years (CII 1980). In 1977, the government had appointed the Council of Islamic Ideology (CII) with the responsibility of preparing a blueprint of an interest-free economic system in the light of Islamic teaching. To assist in this task, CII set up a panel of economists and bankers consisting of 15 highly qualified economists, experienced central and commercial bankers and financial experts. Considering the complexity of the task of eliminating interest from the economy, the panel proposed a gradual approach. In the first interim report it recommended immediate removal of interest from those financial institutions whose transactions were relatively less complex and from where interest could be eliminated with the greatest ease. Thus three of the specialized credit institutions - the House Building Finance Corporation, National Investment Trust, and Mutual Funds of Investment Corporation of Pakistan were selected for removing interest from their financing operations immediately (Khan & Mirakhore 1989, p.15).
By the development of Islamic banking system of Bangladesh based on some main product which is created by Islamic bank followed by the Islamic law.
As an Islamic bank, all of the products and services provided by The Bangladesh Islamic Bank are according to Shari'a or Islamic principle. Below are among the concepts that are used for develop their performance in Banking Sector.
'Musharaka' in Arabic literally means sharing. Since Islam has prohibited interest it cannot be used for providing funds of any kind. Musharaka is an ideal lternative for interest-based financing playing a vital role in an economy based upon Islamic principles.
- Ijara (Lease)
"Ijara" is a term of Islamic Fiqh. Literally, it means 'to give something on rent'. In Islamic jurisprudence, the term 'Ijarah' is used for two different situations. "T o employ the services of a person on wages given to him as a consideration for his hired services." The second type of Ijarah is generally used as a form of investment, and also as a mode of financing. The difference between Ijarah and a sale is that in the latter case the majority of the property is transferred to the purchaser.
In modern Islamic banking, the term refers to a buying and selling transaction between the bank (or financial institution) and the customer, whereby the former buys a property (or an asset, e.g. a house) at the prevailing market price and sells it to the customer at a mark-up price where payments are made by instalments over a period of time agreed upon by both parties.
Al Wakalah means agency, or delegating duty onto another party for specific purposes and under certain conditions. Under the concept of Al Wakalah, the bank becomes your agent. You are then required to deposit the full amount of the price of goods to be purchased or imported.
Refers to an investment on your behalf by a more skilled person. It takes the form of a contract between two parties, one who provides the funds and the other who provides the expertise and who agree to the division of any profits made in advance.
In a Mudaraba contract, the expert who manages the investment is known as Mudarib.
The terms "Bai" and "Muajjal" are derived from the Arabic words 'Bai' and 'Ajal'. The word 'Bai1 means purchase and sale and the word 'Ajal' means a fixed time or a fixed period. "Bai-Muajjal" is a sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on Credit.
Bai-Muajjal may be defined as a contract between a buyer and seller under which the seller sells certain specific goods permissible under Islamic Shariah and the Law of the country to the buyer at an agreed fixed price payable at a certain fixed future date in lump sum or within a fixed period by fixed installments. The seller may also sell the goods purchased by him as per order and specification of the buyer.
During 2008 Bangladesh's stable economic environment assisted better earning growth in banking sector. Bangladesh has reported GDP growth of 6.2% in FY2008, compared with 6.4% in FY2007. At end of 2008, average inflation reduced to 8.90%, compared with 9.11% during 2007. Interest rate exhibited an increasing trend, with 90 days Treasury Bill at 7.92% during December 2008 (December 2007:7.63%).
With favour of stable business growth in 2008, the financial performance indicators of IBBL. showed better improvement over the previous year. During 2008, the net profit after tax of the bank improved by 87.39% accounting to TK. 2,674.80 million from TK. 1,427.36 million.
The large Investment exposure of IBBL stood at Tk. 54,722.15 million consisting funded Tk. 46,142.80 million and 50% of non-funded investment at Tk. 8,579.35 million consisting 28 accounts, whereas this was Tk. 37,413.70 million consisting 21 accounts in FY2007. Total outstanding investment including off-balance sheet exposure stood at Tk. 237,191.99 million. Accordingly the large investment of the bank stood at 23.07%, which was below the prescribed limit. All large investment exposures were in unclassified status.
Role and contribution of IBBL to Bangladesh Economy
Islami Bank Bangladesh Limited has many success stories of achievements. These are summarized below:
- IBBL is the pioneer institution for introduction of Islamic Banking in Bangladesh.
- The success of IBBL has imbibed other sponsors at home and abroad to establish Islamic Banking in Bangladesh. Four national, one international Islamic banks have since been established in the country. A private sector traditional bank has also established two full fledged Islamic Banking branches. Several other existing and proposed traditional banks have also expressed their intention to introduce Islamic Banking.
- IBBL has successfully mobilized deposits from a section of people who hither-to-before did not make any deposit with interest based banks.
- The Islamic Banking products which are offered by IBBL through its 118 branches located at important centers all over the country and spontaneous acceptance of those products by the people proves the superiority of Islamic banking.
- IBBL's market share of deposit investment and ancillary business is steadily increasing.
- IBBL, though still a tiny bank, handles more than 10% of country's export and import trade.
- Among the contemporary commercial Banks IBBL's position is first in respect of mobilization of deposit, deployment of fund and earning profit.
- Investment in industrial sector occupies nearly 33% of IBBL's investment portfolio. This is a unique example of industrial finance by a commercial Bank.
- More than 1.15,000 workers are employed in the industrial projects financed by IBBL. IBBL has thus made significant contribution to solving unemployment problem of the country.
- Dhaka- the capital of Bangladesh being a Mega city- has acute transport problem. IBBL has joined hands with an enterprising group to introduce afleet of Premium Bus service, which has attracted the attention of all section of the people and mitigated transportation problem of the city to some extent.
- IBBL has introduced several other welfare oriented Investment schemes, such as Small Transport Investment Scheme, Small Business Investment Scheme, Agriculture Implements Investment Scheme, Poultry Investment Scheme, Household Durable Investment Scheme, Housing Investment Scheme etc.
- IBBL launched a Rural Development Scheme for providing finance to drown-trodden section of the populace- an area where no other Commercial Bank has extended any finance. IBBL's mission is to reach to all 68,000 villages of the country as early as possible.
- IBBL has contributed a remarkable amount of million Taka as income tax to the Government Exchequer on its net profit over the last 18 years, at the initiative and drive of IBBL, several Universities in Bangladesh, have introduced Courses on Islamic Banking and finance.
- IBBL has organized a good number of national and international Seminars on Islamic Banking and Economics. Importantly, IBBL sponsored a Seminar at Dhaka with a view to forming an Islamic Common Market.
- Due to constant persuasion of IBBL the Government has granted license for establishment of an Islamic Insurance Company. By now two- (2) Islamic Insurance Companies have started business.
- IBBL has earned reputation in the country as a corruption free institution.
- IBBL is held in high esteem in the banking circle as a good managed bank.
- Under the leadership of IBBL, Bangladesh Association of Banks (BAB) has been formed. This is a platform to ventilate the standpoints on banking issues of the private sector banks. IBBL has taken initiative to form an Association of Islamic Banks in Bangladesh for furtherance of the causes of Islamic banking.
- IBBL has established a foundation called Islami Bank Foundation for carrying out social welfare activities. The foundation has taken up a number of schemes covering the whole of Bangladesh.