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

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

Islamic

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

Its 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.

Table of Content
SL

Particulars

1.

Abstract
Introduction

1.2 Objectives
1.3 Methodology
1.3.1 Analysis & Discussion
1.3.2 Statistical hypothesis
2. Literature Review
3. Islamic Banking Industry of Bangladesh
3.1 Deposit Mobilization and Fund Utilization by the Islamic Banks in
Bangladesh, 2013
4. Principles of Islamic banking:
5. Overview of Islami Bank Bangladesh Limited (IBBL) and City Bank Ltd.
5.1 Comparison between Islamic & Conventional Banking system and
challenges
5.2 Comparison between conventional and Islamic banking system (IBBL)
on the basis of Deposit
5.2.1 Demand deposits
5.2.2 Time Deposits
5.3 Comparison between conventional and Islamic banking system (IBBL)
on the basis of Investment
6. Analysis & Discussion
7. Problems faced by the Islamic banks
8. Findings
9. Recommendations
10. Conclusion
References
Appendix

Page
No.
1
1
1
2
2
2
2
4
5
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7
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10
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18
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19
20
21
A

List of Table
Table
No
1
2
3
4
5

Particulars
Islamic Bank Vs Conventional Banks
Deposit Mobilization and Fund Utilization by the Islamic Banks in
Bangladesh, 2013
IBBL Deposits Composition and GR
MUDARABA Hajj Scheme
MUDARABA monthly income scheme

Page
No
4
5
9
12
14

List of Figure
Figure
Particulars
No
Islamic Bank Vs Conventional Banks
1
Deposit Mobilization and Fund Utilization by the Islamic Banks in
2
3
4

Bangladesh, 2013
IBBL Deposits Composition and GR
ROA and ROE trend

Page
No
4
5
7
8

II

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.)

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 interestfree 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
2

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.

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).
Islamic
Banks
14%

Islamic Bank Vs.

Conventional Bank

Schedule
d Banks
(Not
Islamic
Shariah
Based)
86%

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
1.
2.
3.
4.
5.
6.
7.
8.

Name of Bank

Year
of Listing Year of
Incorporation Status Listing
Islami Bank Bangladesh Limited (IBBL)
1983
Listed
1985
ICB Islamic Bank Limited (ICBIBL)
1987
Listed
1990
Al-Arafah Islami Bank Limited (AAIBL)
1995
Listed
1998
Social Islami Bank Limited (SIBL)
1995
Listed
2000
Export Import Bank of Bangladesh Limited 1999
Listed
2004
(EXIM)
First Security Islami Bank Ltd. (FSIB)
1999
Listed
2008
Shahjalal Islami Bank Limited (SJIBL)
2001
Listed
2007
Union Bank Limited (UBL)
2013
----------(Source: Journal of Islamic Banking and Finance
Vol. 2, No. 1; March 2014)
4

Table 2: Average NPAT of Islamic Banks and ROA in the Banking Industry
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Average NPAT of Islamic Banks (in Billion ROA

BDT)
(Industry)
1.45
0.7
2.36
0.6
-1.98
0.8
5.92
0.9
6.84
1.2
8.16
1.4
16.66
1.8
13.74
1.5
17.58
0.6
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
5

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
6

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 countrys 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.

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.
8

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 systemTable (3) is a comparison between traditional and Islamic banking systemCharacteristic Islamic banking system
Traditional banking system
Business
Functions and operating modes are based Functions and operating modes
on Shariah and Islamic banks must ensure are based on secular principles,
that
all
business
activities
are not religious laws or guidelines.
incompliance with shariah requirements.
Framework
Financing is not interest (Riba) oriented Financing is interest oriented,
and should be based on risk-and-reward and a fixed or variable interest
sharing.
rate is charged for the use of
money
Interest
Account holders do not receive Depositors receives interest and
charging
interest(riba) but may share risk and a guarantee of principle
rewards of investment made by the
payment
Islamic bank
Risk sharing in Islamic banks offer equity financing with Risk sharing is not generally
equity
risk sharing for a project or venture. offered but is available through
financing
Losses are shared on the basis of equity venture capital firms and
9

Restriction

Zakat
Penalty on
default

Avoidance of
gharar
Customer
Relationship
Shariah
supervisory
Board
Statutory
requirements

participation, where as profit is shared on investment banks, which may

the basis of pre-agreed ratio.
also participate in management
Islamic banks are allowed to
Traditional banks may finance
participate only in economic
any lawful product or service
activities that are Shariah complain.
One of the functions of the IslamicBanks
is to collect and distribute zakat.
Islamic banks are not allowed to charge
penalties for their enrichment. They may
however allow imposition of default or
latepayment 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.
Transaction with elements of gambling or
speculation are discouraged or forbidden.
The status of client is that of partner and
investor
Each Islamic bank must have a
supervisory board to ensure that all its
business activities are in line with
Shariahs requirement
An Islamic bank must be
compliance
with
the
statutory
requirements of the central bank of the
country in which it operates and also
Shariahs guidelines

Traditional banks do not collects

and pay any religious tax
Traditional banks normally
charge
additional
money
(compound interest) in case of
late payment

Speculative investments are

allowed
The status of a client is one of
creditor and debtor
Traditional banks do not have
such requirements

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:
10

 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
11

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
Amount payable Monthly
Amount payable
installment for for 2012
installment for
for 2013
2012
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 childrens 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. Thats 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.
12

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 thats why conventional bank can do that.

13

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 thats 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.
14

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. Thats 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

15

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
16

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.
17

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.

18

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.
19

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 others 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 consumers 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.

20

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 Peoples 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--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).

21

Appendix:
Statistical output summary (IBBL vs. CITYBL)
Table-1. Statistical result of Profitability
CITYBL

ROA
ROE
Profit Expense Ratio
Profit Growth
EPS

2009-2013
Mean
.0098
.4692
.3773
.1141
46.9240

SD
.00474
.27777
.20142
.46438

IBBL
2009-2013
Mean
.0254
.1482
.5724
.3119
317.1880

SD
.03278
.02487
.08178
.38589

Table-2. Statistical result of Liquidity and Solvency

CITYBL
IBBL
2009-2013
Mean
Cash deposit Ratio
.0741
Advance
deposit .7460
Ratio
Current asset ratio
.9723
Equity Multiplier
46.1532
Govt.
investment

bond .3084

SD
.00781
.04807

2009-2013
Mean
SD
.1565
.03118
.8856
.03909

.00993
5.8226

.0229
46.2322

.18671

.0512

.00278
3.0324
5
.03996

Table-3. Statistical result of Business development

CITYBL
IBBL

Total Assets Growth

Deposits Growth
Advances Growth
Investment Growth

2009-2013
Mean
.2204
.2012
.2112
.3245

SD
.15141
.16211
.23009
.28837

2009-2013
Mean
.2265
.2295
.2568
1.0250

Table-4. Statistical result of Efficiency and Productivity

CITYBL
2009-2013
Mean
SD
Total operating expenses to .0318
.00431
deposits

SD
.03253
.02106
.05058
2.4839
9

Statistic
al Test
T-Value

Hypothesis

-1.009
2.546
-2.449
-.610
-2.614

Rejected
Accepted
Rejected
Rejected
Rejected

Statistic
al Test
T-Value

Hypothesis

-4.885
-5.460

Rejected
Rejected

2.802
-0.022

Accepted
Rejected

6.396

Accepted

Statistic
al Test
T-Value

Hypothesis

-0.069
-0.335
-0.361
-0.543

Rejected
Rejected
Rejected
Rejected

IBBL
2009-2013
Mean
.0191

SD
.00147

Table-5. Statistical result of Efficiency and Productivity

Long term loan ratio

CITYBL

IBBL

2009-2013
Mean
.4995

2009-2013
Mean
SD
.1458
.02865

SD
.17823

Statistic
al Test
T-Value

Hypothesis

2.888

Accepted