1.

0 Introduction
The word Bank refers to the financial institution deals with money. Commercial banks are the primary contributor to the economy of the country. They are borrowing money from the locals and lending the same to the business as loans and advances. So the people and the government are very much dependent on these banks as the financial intermediary. Moreover, banks are profit -earning concern, as they collect deposits at the lowest possible cost and provide loans and advances at higher cost. The differences between two are the profit for the bank. Involvement of the banking sector in different financial events is increasing day by day. At the same time the banking process is becoming faster, easier and the banking arena is becoming wider. As the demand for better service increases, the banking organizations are coming with innovative ideas. In order to survive in the competitive field of the banking sector, all banking organizations are looking for better services and opportunities providing to their clients. As a result, it has become essential for every person to have some ideas on the bank and banking procedure. Bank is the financial intermediary which collects funds from surplus unit and makes lending or investment to the deficit unit and through this dealing earns interest/profit. And to maximize the profit is the main objective of the bank. The commercial banking system dominates Bangladesh's financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system is composed of four state-owned commercial banks, five specialized development banks, thirty private commercial Banks and nine foreign commercial banks. The Nobel-prize winning Grameen Bank is a specialized micro-finance institution, which revolutionized the concept of micro-credit and contributed greatly towards poverty reduction and the empowerment of women in Bangladesh. Pursuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank with retrospective effect from 16 December 1971. The banking system of Bangladesh is dominated by the 4 Nationalized Commercial Banks. Private Banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products. The banking system of Bangladesh is consists of 30 private commercial banks and 9 foreign commercial banks. Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector while the other two ( Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) are for extending term loans to the industrial sector. There are 7 full-fledged Islamic Bank in Bangladesh and despite it 9 conventional bank has 20 islamic wings which provide Islamic banking services.

1.1Origin of the Report

Reporting means the written presentation of the evidence and findings of a research or practical workings. After completion of the internship program report submission is essential. The report is based on a topic that can satisfy both organization and my academic institution. Internship is the last part of my BBA course. Being a BBA student internship and report of internship submission is essential for me. Without completion of internship and report of internship, I cant be able to complete my BBA course. This report is submitted to my internship supervisor, Mr. Dr. A R khan Professor, Department of Banking, University of Dhaka. After completion of 3 months internship program I need to submit the internship report to my department to finish my BBA program. And that purpose I have completed my 3 months internship program at SOCIAL ISLAMI BANK LIMITED, PRINCIPAL BRANCH, MOTIJHEEL, DHAKA. I have assigned a topic Investment Operation and Investment Risk Management of SOCIAL ISLAMI BANK LIMITED and the authority of SOCIAL ISLAMI BANK gave me the opportunity to work at the principal Branch for three months on the topic.

1.2 Objective of the Study

The main objective of practical orientation is to get a clear-cut idea about the Investment operation and Investment Risk Management of SOCIAL ISLAMI BANK LTD. Along with the main objective other objectives of report are: To apply theoretical knowledge with practical situation To understand the real management situation and to gather practical knowledge To familiar with banking environment, clients, working hours, values, conditions and other things related to bank To analyze the financing system of the bank and to have greater contribution towards countrys economy To identify problems faced by the customers and the bankers To evaluate whether the customer service provided by SOCIAL ISLAMI BANK LTD. is good enough for its congenial existence and growth To find out the growth rate of business of SIBL To describe the concept of Islamic Banking systems and operation methods To familiar with the modes of investments of SIBL To familiar with the concept of Family Empowerment Micro-Credit Programs To familiar with the concept and operation procedure of the Family Empowerment Micro-Enterprise Programs

To describe the concept of SME loan. To describe the concept of SME loan. To illustrate the characteristics of SME Banking. To describe how SME loan is processed by Social Islami Bank Limited.
To find out some problems of SME banking of Social Islami Bank Limited To familiar with the concept of Cash Waqf Certificate Account and its operation procedure for the

development of poor class people To familiar with the concept of Corporate Social Responsibility and its effects to the society 1.3 Scope of the Report There are certain boundaries to cover this report. To achieve the objectives of the report, i.e. through knowledge about the organizational functions and its management, it is not possible to cover each and every activities performed in the organization within a short period of time. The report has covered Non-Formal and Voluntary Banking Services provided by Social Islami Bank Limited. 1.4 Methodology of the Study This report has been prepared on the basis of experience gathered during the period of internship. For preparing this report, I have held group discussions and interviewed officers and clients of the bank. To carry out the study, both primary and secondary data were used Data collection: (i) Primary data: Discussion with the reactive organizations officials Face to face conversation with the officer Work experience in the Head office as an intern Direct observations Practical desk work Different types of brochure provided by Non-formal and Voluntary Banking Department

(ii)

Secondary dataFor the completion of the present study, secondary data has been collected. The main sources of secondary data are: Annual reports of the Bank Various files and documents of Non-Formal & Voluntary banking services division of Social Islami Bank Ltd Articles related to SME management in different journals and magazines

Data from published reports of Bangladesh Bank Different Books, journals, Periodicals, Monthly News letter of Social Islami Bank Ltd, News papers etc. Different website & Social Islami Banks website

1.5 Limitation of the Study

This report has some limitations. These are given below: 1. Time constraint was a major drawback in this study. Three months time is not sufficient to cover such a wide area 2. Another limitation of this report is the banking policy is not to disclose any information earlier, which will publish in future. For this reason I could not collect any data of 2011 3. At the principal branch the officers and executives are too busy to disclose anything to me ant the principal branch is the very busy branch 4. Some personnel of Bank are not proactive, friendly and exposure 5. Most of the employees of the Bank are not familiar with the activities, terms and concepts of the Bank

1.6 My Jobs & Responsibilities as an Intern at Social Islami Bank Limited, Principal Branch, Dhaka
I have been attached as an intern of Social Islami Bank Limited from the month of June 2011 in its Principal Branch, Non-Formal & Voluntary division as well as Investment and Risk Management Department. From the first day of my attachment I have been working in different departments including Investment Administration Department (IAD), Investment Risk Management (IRM) & Training. But during this time period I spent most of the time in Investment and Risk Management Department (IRMD). During this internship period I learned various aspects of Non-Formal and Voluntary Banking and its different department & documentation. Moreover, I also learnt about various aspects of compilation of data, CIB report of Bangladesh Bank in prescribed ABABIL (software) and as per guidelines of Bangladesh Bank & Social Islami Bank Limited.

Chapter 2 Overall Scenario of SMEs & Role of Bangladesh Bank

2.0 SME: Definition for SMEs is often considered to be an obstacle for business studies and market research. Definitions in use today define thresholds in terms of employment, turnover and assets. They also incorporate a reasonable amount of flexibility around year-to-year changes in these measures so that a business qualifying as an SME in one year can have a reasonable expectation of remaining an SME in the next. The thresholds themselves, however, vary substantially between countries. As the SME thresholds dictate to some extent the provision of government support, countries in which manufacturing and labor-intensive industries are prioritized politically tend to opt for more relaxed thresholds. The development of small and medium enterprises (SMEs) in developing countries is generally believed to be a desirable end in view of their perceived contribution to decentralized job creation and generation of output. SMEs constitute the dominant source of industrial employment in Bangladesh (80%), and about 90% of the industrial units fall into this category. The actual performance of SMEs, however, varies depending on the relative economic efficiency, the macro-economic policy environment and the specific promotion policies pursued for their benefit. Table 1: Finally SME has the following characteristics: Small Medium Total Asset* Number of employee Total Asset Number of employee 50 Lakh 10 Crore Less than 50 Trade and service 50,000-5,000,000 Less than 25 50,000-10,050,000 Less than 50 1.5 Crore 20 Crore Industry * Total asset means excluding land and factory. (Amounts are in BDT)

2.1 SMEs in Bangladesh Historically, Bangladesh followed a development strategy in which private investment was controlled through a host of regulations involving investment sanctioning, credit disbursement, import licensing, foreign exchange allocation, etc. While these regulatory barriers thwarted private investment in general, the impact fell unevenly on SMEs. This was because of the relative inability of the SMEs to cope with the regulations compared to their large-scale counterparts. Thus, the policy regime was largely biased against the SMEs although, paradoxically, promoting SME development was a stated objective of successive governments. In a bid to render its industrial sector internationally competitive and to move towards greater efficiency in its production structure, Bangladesh implemented a number of economic reforms during the 1980's, underwritten by the familiar structural adjustment policy. These included deregulation of sanctioning procedure and relaxation of other regulatory barriers, easing of import procedure, reducing trade barriers, following a market oriented exchange rate policy, and implementation of fiscal, monetary and public enterprise reforms. These reforms helped remove a large part of the policy bias against SMEs that prevailed earlier. Recent studies confirm that these reforms had positive impacts reflected in a fairly rapid growth of the sector during the past decade. However, because of their structural weaknesses, the SMEs may need more pro-active policies for their development in addition to the further removal of the policy biases.

2.2 SMEs - number and success No one knows for sure how many SMEs there are in Bangladesh today. It was around 1978 that the BSCIC (Bangladesh Small and Cottage Industries Corporation), under the Ministry of Industries, conducted a survey to find

out the number of cottage and small industries of the country. Inspite of the question about the validity and dependability of the survey, in absence of any other effort by the Bangladesh Bureau of Statistics (BBS) or any other agency, this initiative did provide a useful benchmark but it was never updated. The survey results drew the conclusion that : There are approximately 6 million micro, small and medium enterprises (MSMEs) Including enterprises with up to 100 workers employing a total of 31 million people 40 per cent of the population of the country of age 15 years and above. About three quarters or more of the household income in both urban and rural areas is provided by the MSMEs (Table: 2a).

Table 2: Percentage of household income contributed by SMEs Rural(%) Urban(%) Total(%) 41 45 42 Provides all or almost all 19 14 18 Provides more than half 16 14 16 Provides about half 20 17 19 Provides Less than half 4 9 6 Provides Nothing 100 100 100 Total Source: ICG/MIDAS Survey, 2008. The high level of income contribution was attributed to the fact that the enterprises worked ten hours per day, 28 days per month for eleven months a year. The industrial structure of SMEs consisted of primarily:

Wholesale and retail trade and repairs Production and sale of agricultural goods Services

14.00%

40.00% 15.00%

Manufacturing only 22.00%

Figure 1: Industrial structure of SMEs. Thus the survey brought out very prominently the fact that the large untapped potential for expansion in manufacture and production could be exploited (or contributing more significantly to the national economy. Another vital finding of the survey under discussion was that SMEs contributed BDT 741 ($ 12.5) billion or nearly 25 per cent of the GDP (BDT 2,996 billion) in 2003. Those who tend to look down on micro and small industries may be shocked to note that enterprises employing 2-5 workers are credited for having contributed 51 percent share of the total SME contribution to the economy, followed by 26 percent by those having only one worker and 10 per cent by those having 6-10 workers (Table 4). The sectoral contribution of SMEs to the GDP is also interesting. Manufacturing contributed the highest proportion (38 per cent), followed by Agriculture (24 per cent) and, closely following, Wholesale and Retail Trade and Repairs (23 per cent) .

Contribution (%) to GDP by Size

60 50 40 30 20 10 0 1 2 to 5 6 to 10 11 to 20 21 to 50 51 to 100 26 10 6 5 2

51

Figure 2: Contribution of SMEs to GDP by size (Percentage)

1 20 0 2 4 24 23 4

Agriculture Fishing Manufacturing Construction Wholesale and retail trade Hotels and restaurants Transport, Storage and communications Real state, renting and business activities

1 38

Figure 3: SMEs to GDP by sector (Percentage)

Contribution of

For LDCs like Bangladesh, SMEs are a highly cost-effective route to industrial development. The present size of the population in the 2-14 years age group is approximately 16 million. They will be candidates for new jobs. Together with another 10 million inactive people still looking for employment, the total size of the new entrants to the job market may be said to be around 25 million.

2.3 Bank-wise SME Centers: (Table 3) Serial No. 1 2 Name of the Bank IFIC Bank Ltd. IBBL Total No. of SME centers 5 20

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

National Bank Ltd. City Bank Ltd. NCC Bank Ltd. Prime Bank Ltd. Southeast Bank Ltd. Dhaka Bank Ltd. Social Islami Bank Ltd. DBBL Standard Bank Ltd. Mercantile Bank Ltd. Premier Bank Ltd. Trust Bank Ltd. BRAC Bank Ltd. MTBL Bank Asia Shahjalal Islami Bank Ltd. Jamuna Bank Ltd. Commercial Bank of Ceylon Eastern Bank Ltd. Grand total

10 10 8 5 10 5 10 10 6 3 5 5 60 10 10 7 5 6 23 233

2.4 Role of Bangladesh Bank

Alongside the disbursement of loans, since FY 2004-05 Bangladesh Bank has taken up a scheme of Tk.100 crore for refinancing the schedule bank and financial institutions against the loan given to SMEs. as revolving fund. Presently, this scheme has been widened with an enhanced allocation of Tk.500 crore as revolving fund. Up to June 2008, Tk.409.41 crore, was disbursed to different scheduled banks and financial institution for refinancing. Moreover, ADB has finalised an agreement with Bangladesh Bank to provide additional US$ 30 million to this sector. These resources would strengthen the financing programme of SME. This would result in employment generation in one hand and enhancement of purchasing power of the poor on the other. Under this programme, the financing capabilities of various financial institutions and banks have been enhanced and up to June, 2008 Bangladesh Bank has disbursed Tk. 762.54 crore for refinancing. Out of this, the contribution of IDA and ADB was Tk. 163.46 crore and Tk.189.68 crore respectively while that of Bangladesh bank was Tk.409.41 crore. Detailed refinancing of Bangladesh Bank to various financial institutions and banks is shown at table 4a in the appendix here I just mentioned the contribution of Bangladesh bank.
No. of Beneficiary Enterprises BB financing Criteria 79.21 2706 1097 827 50% 100% 206.75 123.45

5000

0
0% Working Capital Mid Term Long Term Loan Loan

Figure: 6a & 6b: Financing criteria

of BB and number of beneficiary enterprises. Not only Bangladesh bank but also our PCBs are playing a good role to contribute this sector the scenario is as follows:

Total Amount of Loan

40 35 30 25 20 15 10 5 0 33.88

18.09 9.82 5.85 8.91 1.47 9.42 9.63 7.81 0.5 1.69 3.99

Figure 7: Contribution of PCBs to the SME sector.

2.5 SME loan target set for 2011 by Bangladesh Bank

Bangladesh Bank (BB) has set the loans disbursement target for the small and medium enterprise (SME) sector for 2011 at Tk625b. This figure is 64.56% higher than the revised disbursement target of 2010 at Tk380b. Private commercial banks will disburse Tk451.76b while the state-owned commercial banks and financial institutions will be disbursing Tk134.99b. Nine foreign commercial banks got a target to disburse Tk15.93b. The non-banking financial institutions have to reach Tk22.65b in loans to the SME entrepreneurs. The central bank has stressed on cluster and area-approach for loan disbursement to improve employment creation.

Chapter-Two: Literature Review

Chapter-Three: Organizational Profile

3.0 EVOLUATION OF ISLAMIC BANKING For an expanding economy, a developed and efficient banking system is indispensable. Among others, it helps transfer of financial resources from surplus units to deficit units and, hence, helps accelerate the pace of development by securing uninterrupted supply of financial resources to people engaged in numerous economic activities. The tremendous development that the world economy has experienced in the last few decades was contributed by several factors among which, growing institutional supply of loan able funds must have played the pivotal role. The role of banking is comparable to what an artery system does in the human body. Both commercial banks and other development financial institutions provide short-, medium-, and long-term credits to businesspersons and entrepreneurs who usually take the lead in ventures of economic development. Institutional supply of credit has been made possible by a system of financial intermediation organized in a way where conventional banks collect small savings from the public by offering them a fixed rate of interest and advancing the loan able funds out of the deposited money to enterprising clients charging relatively higher rates of interest. The margin between these two rates is the bank's income. In addition, banks also provide many other services to the public for which it receives service charges Despite the outstanding contribution of the conventional banking system (interest-based), several ancient and modern economists are critical about its efficiency level. Some economists consider the role of interest in the conventional banking mechanism as a major negative factor that contributes to cyclical fluctuations in the economy (Minsky 1982). Specifically, the ineffectiveness of interest rate as a stabilization tool during the period of the Great Depression is a case to note. This eventually called for Keynesian Prescription of government intervention (Keynes 1964). Similar concern was expressed in a story published in Newsweek regarding Henry Kissinger, the former Secretary of State of USA. To quote, The instability has persisted and the uncertainty has continued. After going through the throes of painfully high levels of inflation, the world economy has experienced a deep recession and unprecedented rate of unemployment, complicated further by high level of real interest rates and unhealthy exchange rate fluctuations (Newsweek 1983). More recent concern over the potential instability of the world monetary and financial system was expressed by Maurice Allais, a Nobel Laureate, who called for an urgent reform of the World Economic Order (Allais 1993, pp.13-16. This called for the emergence of a new system of banking capable of tackling new challenges that the present world economy, particularly the financial sector, has been facing. Thus, Islamic banking emerged as a response to both religious and economic exigencies. While religious exigency calls for avoiding any transaction based on interest, economic exigencies, on the other hand, provide a new outlook to the role of banking in promoting investment / productive activities, influencing distribution of income and adding stability to the economy. Islamic banking is thus perceived as an improved system in all dimensions.

3.1.1 What is Islamic Banking?

Islamic banking has been defined in a number of ways. The definition of Islamic bank, as approved by the General Secretariat of the OIC, is stated in the following manner An Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations Shawki Ismail Shehta viewing the concept from the perspective of an Islamic economy and the prospective role to be played by an Islamic bank therein opines: It is, therefore, natural and, indeed, imperative for an Islamic bank to incorporate in its functions and practices commercial investment and social activities, as an institution designed to promote the civilized mission of an Islamic economy (Ibid). Ziauddin Ahmed says, Islamic banking is essentially a normative concept and could be defined as conduct of banking in consonance with the ethos of the value system of Islam (Ibid). Islamic banking system whose operation is based on Islamic principles of transactions of which profit and loss sharing (PLS) is a major feature, ensuring justice and equity in the economy. That is why Islamic banks are often known as PLS-banks.

3.1.2 Objectives of Islamic Banking The primary objective of establishing Islamic banks all over the world is to promote, foster and develop the application of Islamic principles in the business sector. More specifically, the objectives of Islamic banking when viewed in the context of its role in the economy are listed as following:

To offer contemporary financial services in conformity with Islamic Shariah; To contribute towards economic development and prosperity within the principles of Islamic justice; Optimum allocation of scarce financial resources; and To help ensure equitable distribution of income.

These objectives are given below:

Offer Financial Services Islamic Banking for Development Optimum Allocation of Resources Islamic Banking for Equitable Distribution of Resources

3.1.3 Distinguishing features of Islamic Banking An Islamic bank has several distinctive features as compared to its conventional counterpart. Chapra (1985, PP.154-57) has outlined six essential differences as below:

 Abolition of interest (Riba): Since Riba is prohibited in the Quran and interest in all its forms is akin to Riba, as confirmed by Fuqaha and Muslim economists with rare exceptions, the first distinguishing feature of an Islamic bank must be that it is interest-free. Adherence to public interest: Activity of commercial banks being primarily based on the use of public funds, public interest rather than individual or group interest will be served by Islamic commercial banks. The Islamic banks should use all deposits, which come from the public for serving public interest and realizing the relevant socio-economic goals of Islam. They should play a goal-oriented rather than merely a profit-maximizing role and should adjust themselves to the different needs of the Islamic economy. Multi-purpose bank: Another substantial distinguishing feature is that Islamic banks will be universal or multi-purpose banks and not purely commercial banks. These banks are conceived to be a crossbreed of commercial and investment banks, investment trusts and investment -management institutions, and would offer a variety of services to their clients. A substantial part of their financing would be for specific projects or ventures. Their equity-oriented investments would not permit them to borrow short-term funds and lend to long-term investments. This should make them less crisisprone compared to their capitalist counterparts, since they would have to make a greater effort to match the maturity of their liabilities with the maturity of their assets.

More careful evaluation of investment demand: Another very important feature of an Islamic bank is its very careful attitude towards evaluation of Applications for equity oriented financing. It is customary that conventional banks evaluate applications, consider collateral and avoid risk as much as possible. Their main concern does not go beyond ensuring the security of their principal and interest receipts. Since the Islamic bank has a built in mechanism of risk sharing, it would need to be more careful in how it evaluates financing requests. It adds a healthy dimension in the whole lending business and eliminates a whole range of undesirable lending practices. Work as catalyst of development: Profit-loss sharing being a distinctive characteristic of an Islamic bank fosters closer relations between banks and entrepreneurs. It helps develop financial expertise in nonfinancial firms and also enables the bank to assume the role of technical consultant and financial adviser, which acts as catalyst in the process of industrialization and development.

3.1.4 Operational Techniques of Islamic Bank

SOURCES OF FUNDS:

The financial resources of the Islamic banks consist of ordinary capital resources comprising paid-up capital and reserves, and funds rose through borrowings from the central bank and other banks (inter-bank borrowing), and issue of Islamic financial instruments. The major part of their operational funds is, however, derived from the different categories of deposits accepted on the Islamic principles of Al-Wadiah (safe custodianship) and Mudaraba (trust financing). For the sake of ease of understanding we call these two sources as Primary and secondary. These are discussed as under.

PRIMARY SOURCES: a. Paid-Up Capital Islamic banks are public limited companies incorporated under the companies Act, which are listed on the Stock Exchange. Individuals and institutions, local and foreign, have subscribed their capital b. Liquid Assets Every Islamic bank is further required to keep at all times minimum amount of liquid assets against its deposit liabilities expressed as certain percentage of the deposits, as may be prescribed from time to time by notice in writing by the central bank. For this purpose, liquid assets mean (i) Cash in bank, (ii) balances with the central bank/other designated banks, (iii) Government Investment Certificates, and (iv) such other assets as may be approved by the central bank. Failure to keep the minimum liquid assets invokes penalty for each day of deficiency. c. Borrowing from Central Bank To tide over temporary liquidity shortages Islamic banks, as member banks, are entitled to borrow from the central bank, as the lender of last resort.

d. Inter-Bank Borrowing The Islamic banks have established interest-free fund arrangements with local and foreign banks on the basis of reciprocity.

SECONDARY SOURCES: Like interest-based conventional banks, the main function of Islamic banks is to mobilize savings and provide financial support to the entrepreneurs bank, on the other hand, neither pays nor receives interest from any of its transactions thereby saving everybody from the curse of interest. Techniques employed by Islamic banks for saving mobilization are as follows. a) Al-Wadiah Account

Islamic banks receive deposits in their Al-Wadiah account. This account is similar to the demand deposit account of interest-based banks. Al-Wadiah Deposits are short-term funds b) General Mudaraba Account. The Mudaraba account of Islamic banks is different from the checking account of an interest-based bank. Mudaraba is a form of business contract where one party supplies money and the other manages the business by investing labor and time. c) Term Mudaraba Account d) Special Mudaraba Account When an Islamic bank receives a Mudaraba deposit for investment in some specific business, sector, or project, the deposit is called a "Special Mudaraba Deposit".

3.1 AN OVERVIEW OF THE BANK

SIBL started its operation on the 22nd November in 1995 as a second generation Islamic bank I close co-operation and assistance of some renowned personalities of the Islamic world. H.E. Dr. Hamid AL Gabid, former secretary general of OIC & Prime Minister of Niger, H.E. Dr. Abdullah Omar Nasseef, Deputy Speaker of Saudi Shura Council & Exsecretary general of Rabeta Al-Islami, H.E. Ahmed M. Salah Jamjoom, former commerce minister of Saudi Government, H.E. Prof. Dr. Ahmad EI-Naggar (Egypt) participated to this noble endeavor as sponsor shareholders. Targeting poverty, SOCIAL ISLAMI BANK LIMITED is indeed a concept of 21 st century participatory three sector banking model in one: in the formal sector, it works as an Islamic participatory Commercial Bank with human face approach to credit and banking on the profit and loss sharing: it is a Non-formal banking with informal finance and credit package that empowers and humanizes real poor family and create local income opportunities and discourages internal migration; it is a Development Bank intended to monetize the voluntary sector and management of Waqf, Mosque properties and introducing cash Waqf system for the first time in the history. In the formal corporate sector, this Bank would, among others, offer the most upto date banking services through opening of various types of deposit and investment accounts, trade financing, providing letters of guarantee, opening letters of credit, collection of bills, leasing of equipment and consumers durable, hire purchase and installment sale for capital goods, investment in lowcost housing and management of real estate, participatory investment in various industrial, agricultural, transport, educational and health projects and so on. To enhance the performance of the bank the management adopted strategic plan that include increase in efficiency, establishment of transparency, efficiency and accountability in all spheres of banking practices and as a logical consequence of reform. Establishing Central Trade Processing Unit (CTPU) and Central Remittance Processing Unit (CRPU) are one of the reform processes that the bank had undertaken during the year 2010 to serve the client more efficiently and effectively. SIBL has increased its authorized paid up capital from 4000 million to 10000 million in the year 2010. The bank also obtained approval for issuance of Right share @ 1:1 at per three times from Securities and Exchange Commission in 2007,2008 and 2011 resulting additional capital of taka 534.56 million added in 2008, 1250.86 million in 2009 and taka 2987.82 million will be added with the paid up capital in 2011. The year 2010 has ended with a capital surplus of Taka 165.16 million. Having the year 2009 as a successful return SIBL witnessed a remarkable growth too in different sectors in the year 2010. The bank has successfully opened 12 new branches and 10 SME service centers throughout the year and such total number of branches have stood at 64.

3.2 Mission of Bank

Satisfactory customer service.

d create local income opportunities. - by way of mobilizing funds and social services. 3.3 Vision of the Bank
Social Islami Bank Ltd started its journey with the concept of 21st Century Islamic participatory three sector banking model: i) Formal Sector- Commercial Banking with latest technology; ii) Non-Formal Sector - Family Empowerment Micro-Credit & Micro-enterprise program and iii) Voluntary Sector - Social Capital mobilization through CASH WAQF and others. Finally, "Reduction of Poverty Level" is our Vision, which is a prime object as stated in Memorendum of Association of the Bank with the commitment "Working Together for a Caring Society".

3.4 POSITION OF THE BANK

Social Islami Bank Limited has taken a renewed drive and zeal aiming at consolidating its business in more focused areas like SME, agro-finance, remittance and search for alternative delivery channel. Under alternative delivery channel, ATM, SMS banking, Internet banking and mobile-based remittance payment systems are gradually introduced to reach the SIBL services to the doorsteps of the customers. The bank under the newly planned IT scheme, VISA card both debit and credit are also in operation. SIBL, a second-generation bank, operating according to Islami banking system has now 64 branches. It has also formed two subsidiary companies namely, SIBL Securities Ltd. and SIBL Investments Ltd. SIBL has set its strategy to convert all its banking activities from traditional branch-based banking system to a centralized processing unit (CPU) based banking, controlled directly from the central point. Meanwhile, bank has centralized its international trade finance through a focused Centralized Trade Processing Unit (CTPU) for up gradation of service distribution system in all the branches irrespective of being an AD or Non-AD branch. As a result, every SIBL branch has been authorized to facilitate LC clearance to its clients. The bank also adopted other reform by establishing Central Remittance Processing Unit (CRPU) in order to serve its clients more efficiently and effectively. At the other extreme, bank introduced SIBL Visa Islamic Credit card having four types of card namely Duel Currency Gold, Duel Currency Classic, Local Currency Gold and Local Currency Classic.

SIBL under its organizational restructuring process introduced a new organgram as approved by the Board of Directors of the bank. With the introduction of it, the bank can now achieve the corporate objectives in regard to better customer focus/performance management/better risk management/efficiency and productive level increase and accountability and reward culture. The bank maintained and achieved strong position in all key access of operations despite challenges. Capital of the bank was TK. 12.60 crore at the very inception, and by the year 2010 it increased to TK. 467.86 crore. Deposits of the

bank stood at TK. 4485.08 crore and total assets stood at TK. 5516.85 crore as on 31 December, 2010 which indicated a growth of 41.98% and 37.99% respectively over the previous year. The bank achieved 37.99% growth in investment with a total investment portfolio of TK. 3668.03 crore in 2010 compared to TK. 2658.06 crore in 2009. The classified investment was only 4.76% of total investment. The bank registered an operating profit of TK. 163.86 crore in the year 2010 with remarkable growth of 53.96% compared to TK. 106.43 crore in 2009. SIBL has projected its business paln for the year 2011 pronouncing slogun the year of image building and consolidation of business. The banks professional focus is given on customers satisfaction and for this; customer care desk has already been installed in its 29 key branches. In phases, one stop service will be introduced for privileged clients/Honble clients/Fast track clients and women clients. 3.5 A Brief History of SIBL 24th September 1989: Model of Social Investment Bank Ltd (SIBL) presented before the president and cabinet at Bhaban by the founder of the bank. Prof M. M. Mannan. 30th December 1989: Formal application for SIBL made to Bangladesh Bank (BB). 6th December 1994: Letter of interest for SIBL received from BB. 5th December 1995: Inauguration by the President of the Peoples Republic of Bangladesh. Social Islami Bank Limited (SIBL) is a banking company registered under the companies Act 1994 with its head office 15 Dilkusha C/A, Dhaka-1000. The Bank started its operation from 22, November 1995. SIBL is a capitalized new generating Bank with an authorized capital and paid up capital of Taka 585 million in 2005 and also. 585 million respectively as of December 2004.Currently the bank has 42 branches and 10 SME Service Centers. More branches are planning to be opened soon. The bank undertakes all types of banking transaction to support the development of trade and commerce in the country. SIBL services are also available for the entrepreneurs to set up new ventured and BMRE of industrial units. To provide clientele services in respect of international trade it has established wide corresponded banking relationship with local and foreign banks covering major trade and financial interest home and abroad. SIBL understands all types of banking transactions to support the development of trade and commerce of the country. SIBLs services are also available for the entrepreneurs to set up new ventures and BMRE of industrial units.

3.6 Service provided by the SIBL in accordance of Islamic Shariah

Social Islami Bank Ltd. has efficient and well-experienced manpower along with ultra modern technology to provide quickest and quality service to the customer. So this bank is operating in three sectors that already mentioned .In these three sectors, various services provided in accordance of Islamic Shariah and these are mentioned below: Formal Banking Sector: Social Islami Bank Ltd. Gives special importance on savings. The objectives and principles of the saving policy of the Bank are to encourage people to save for self and for the country as a whole, develop a sustained saving habit among the people and mobilize deposits through the operation of the following accounts: Deposit Account: Al Wadiah Current Deposit. Mudaraba Savings Deposit. Mudaraba Term Deposit. Special Saving Scheme: Mudaraba Monthly Profit. Hajj Scheme. Mudaraba Millionaire Scheme. Mudaraba Special Savings (Pension) Scheme. Mudaraba Education Savings Scheme. Mudaraba Double Benefit Deposit Scheme. Mudaraba Foreign Currency Term Deposit Scheme. Mudaraba Monthly Deposit Scheme. Mudaraba Lakhopati Deposit Scheme. Mudaraba Mohar Deposit Scheme. Mudaraba Marriage Savings Scheme.

(a) (b)

(c)

Investments: Bai-Muazzal: (1) Commercial, (2) House Hold, (3) Trust Receipt. HPSM-Commercial: (1) Shirkat, (2) Ijarah, and (3) Sale. Mudaraba-Bill of Exchange Mudaraba-Post Import Mudaraba-Commercial Foreign Exchange Trade: (1) Export Finance, (2) Import Finance, (3) Foreign Remittance, (4) SWIFT. Non-Formal Banking Sector: The Banks special program is directed mainly to up-lift the socio-economic conditions of rural and urban poor. In order to achieve this objective, Social Islami Bank Ltd. is involved in the mobilization and utilization of local resources and the surplus labour mainly from within and provides employment opportunities to the unemployed and the land less besides investing in N.G.O activities, educational, health expansion activities, Social Fellowship Program for students etc. Some activities are given below: Family Empowerment Micro Credit Program. Family Empowerment Micro Enterprise Program. Small And Medium Enterprises (SMEs) Program. Development and Rehabilitaion Scheme: Displaced Garments Child Workers Students Stipend Disbursement Program, aiming to eliminate child labor from the garments sector, implemented jointly with the ILO. Small & Medium Enterprise Development Program jointly with JOBS Project, USAID. Other Programs with International Organization (ILO/UNICEF): Micro-Credit Program to the garments child worker (parents)/adult family member jointly with ILO under project finance from the Govt. of Italy and Norway. Financial assistance among the 100 parents/guardian of former garments working children under project UNICEF to continue their education. Family Empowerment Micro-Credit Program for self-employment of HTR (Hard to Reach) graduates to implement micro-credit program in connection with the Letter of Exchange (LOE) signed with UNICEF. Voluntary Banking Sector: It is the right time for globalization of Islamic voluntary sectors activities. In this process Islamic Bank in the 21st Century can play a very vital role in reactivating and institutionalizing the role of Islamic Socio- Economic institutions and various voluntary and obligatory tools of redistribution of income through innovative financial instruments and management of fund. Social Islami Bank Ltd. has a special program of development of various religious and social service oriented institutions. Within this program, Mosque, Maktab, Waqf, Charitable organizations etc will be modernized and activated. All properties under this program will be utilized in productive activities on participation basis. Besides, Hajj (pilgrimage) scheme is included in the program of Social Islami Bank Ltd. Cash Waqf certificate has already been introduced for the first time in history. Various methods of compulsory and voluntary Islamic distribution of finance, such as Zakat, Sadakah, Waqf etc. will be institutionalized.

1. 2. 3. 4. 5.

Social Islami Bank Ltd. is in the process of organizing Voluntary Capital Market Operation for mobilization of necessary fund and in the process of developing the following financial instruments with different sets of rules in accordance with Shariah: 1. Cash Waqf Scheme. 2. Mosque Waqf PropertyDevelopment Scheme. Ancillary Service: 1. Locker Service. 2. Utility Bill Service. E-AGE Banking:

1. Any Branch Banking. 2. ATM (Debit Card). 3. E-AGE Banking >> Online Banking. 3.10 Key Areas of Operations Social Islami Bank Limited is used to perform all Banking activities by the help of following Departments General Banking Department Foreign Exchange Department Investment Department Others Department: Information & Communication Technology Division Financial Administration Division International Division General Services Division Managing Director's Secretariat Business Development & Marketing Division Audit & Inspection Division Chairman's Secretariat Share Division Board Secretariat Human Resources Division Shariah Board Secretariat SIBL Training Institute SME Banking Division Law & Recovery Division Board Audit Cell MIS, Planning & Research Division Internal Control & Compliance Division Investment Risk Management Division Voluntary Banking Division

3.5 Organizational Structure (Organogram)

Chapter-Four: Non-Formal Banking Services

Family Empowerment Micro-Credit and Micro Enterprise Social Financing Line of Islamic Development Bank (IDB) To Local Islamic Banks and Alleviation of Poverty
4.0 Setting of the Problems and Objectives
The family is a basic foundation of human society. The foundation of a family is laid through marriage and the relationship between husband and wife is viewed in Islam as that of a garment and its weaver; it is a civil contract, imparting mutual rights and duties. The management of Micro-Credit and Micro Enterprise Social Financing Schemes can alter this traditional role of the family. Credit Transfer Power: Credit can transfer power to powerless and help alleviation of poverty: It can reinforce power of the powerful and help in concentration and inequitable distribution of income and thus aggravating the poverty. Seen from this prospective, it can empower a family or disintegrate it. So the management of Micro-Credit and Micro Enterprise Financing have profound impact on Micro economic sociology of the family involving the individual in the family, organization and activity within the family and the relationship among family member consisting mainly of husband, wife and children as well as Macroeconomic sociology of the family involving interchange and transactions between the family and society in which it operates. Because family are linked together with other social structure in extended family, neighborhood, villages, communities, kinship groups. The family performs a vital part of the function essential to the individual and group life. Despite the fact the corporation replaces the family in the production of mass consumption goods and services in the industrial society, the family still perform a member of important economic functions. The many farms that were operated as family enterprises, new enterprises in business and industries often began as family enterprise. Often capital came to be drawn from family holdings and business expanded by family financing. Most of the small and medium-scale business and industries in the developing countries have been family enterprises. Apart from this, family is one of the major consumer units in any society. One way to create new markets is by changing the habit of the consumers through efficient marketing method: installment of buying and selling is an important aspects of family economy inter-change. Similarly, rotating family savings schemes can be used in diverse family economy interchange activities. In Bangladesh, there is at least 15 million families living below poverty line. They can hardly enter into market.

4.1 The Frontiers of Family Empowerment Credit Programs Through Islamic Non-formal Banking
Generally speaking, the family empowerment credit programs come under Non-formal Banking. Non-Formal Banking deals with informal finance in non-corporate sector. The popular view of informal sector activities is that they are primarily those of petty traders, street hawkers, and shoeshine boys and confined to employment on the periphery of the main urban areas. On the contrary, informal activities are the way of doing things, characterized by: (1) ease of entry; (2) reliance of indigenous resources; (3) family ownerships of enterprises; (4) small scale of operation; (5) labor intensive and adapted technology; (6) skills acquired outside the formal school system; and (7) unregulated and competitive markets. One important characteristic of the formal sector is its relationships to the government. Economic activities formally and officially recognized. They obtained the direct benefit of access to credit, foreign exchange concessions, work permit and a formidable list of benefits that reduce the cost of capital in relation to that of labor. Partly because of its privileged access to resources, the formal sector is characterized by large enterprise sophisticated technology, high wage rates, high average profits and foreign ownership. The informal sector on the other hand , is often ignored and in some respects helped and in some harassed by the authorities. Enterprises and individuals within it operate have no access to the formal credit institutions. The evidence suggests that the bulk of employment in the informal sector is economically efficient and profit making, though small scale. As indicated earlier these non-corporate sector which covers small scale producers

and enterprise traders, small farmers and low income and middle groups of people account for 30-70% of the labor force in some developing countries. It is to be recognized that the top income groups to the working poor would result in new types of laborintensive investments in both urban and rural areas. This should not only generate demand for the products of the non-formal sector but also encourage innovations in labor-intensive techniques in this sector. This is where Islamic Bank must make a conscious and planned intervention. The difference of wealth and income between urban and rural area draws migrants towards the urban concentrations, not the spread of wealth. It is to be mentioned here that a small farmer or a small entrepreneur having no access to institutionalized source of credit establishes semi-permanent relations with suppliers and buyers, frequently at the expense of his profit and become hesitant to innovate, particularly in agriculture, for , he can not take the chance of failure. These characteristics behavioral response are not inherent in the informal sector, they are adaptive responses to low income. In this context it becomes imperative for the Islamic Banks to work in the non-corporate sector. There are number of approaches which have been tried elsewhere can be adopted or adapted by Islamic Banks. Let me say a few words about Group Lending Schemes and Rotating saving and credit Associations. Group Lending Schemes: Group lending is one of the most popular forms of informal finance. The funds for group leading schemes can come from a commercial bank, a government development Bank or private institutions. The role of the group varies. The idea is that by joining together, small borrowers can reduce the costs of borrowing and improve their access to credit. The two most common means of providing group accountability are (a) Joint and several liability and (b) limited liability.

Rotating savings and credit Associations:

Rotating saving and credit associations (ROSCAs) are a popular form of informal finance. They have various aliases: tanda in Mexico, pasanaku in Bolivia, san in the Dominican republic, syndicate in Belize, gamaiyah in Egypt, isusu in Nigereia, susu in Ghana, tontine in Niger, hagad in Somalia, zitique in Mozambique, arisan in Indonesia, paluwagan in the Philippine, shit in India and Srilanka, pia huey in Thailand, hui in China, kye in Korea and ko in Japan. ROSCAs intermediate in the most basic way. A small number of individuals, typically six to forty, form a group and select a leader who periodically collects a given amount ( a share) from each member. The money collected (the fund) is then given in rotation to each member of the group. In some countries, such as India and Cameroon, ROSCAs have evolved into formal banks. Three types of ROSCAs are found in many countries, In common ROSCAs, the leader receives no special consideration (other than possibly getting the first fund).

4.2 Family Empowerment Social Financing Programs of Social Islami Bank Limited.: An Analytical and comparative Review
To the best knowledge, SIBL is the only Bank in Bangladesh, Perhaps in the world which started with the very phase, Targeting Poverty, which starting its objects in Memorandum and Articles of Association for achieving a goal of participatory economy for a caring society. Clearly, this bank intends to implement Micro Credit and Micro Enterprise program much beyond the scope of market economics as indicated earlier. SIBL is indeed a concept of 21st century participatory three Sector Banking model in one: in the formal corporate sector, it would work as an Islamic participatory Commercial Bank with human face approach to credit and banking on the basis of profit and loss sharing; it is a Non-formal Banking with the poor in noncorporate sector dealing with informal finance and credit package that empowers and humanizes real poor family and create local income opportunities and discourage internal migration; it is a Development Bank intended to monetize the third voluntary sector, committed basically to financing development and management of Waqf and Mosque properties as well as Non Muslim Trust properties. In the process, this Bank intends to empower and humanize the family as a basic unit of the society. Experience indicates that successful family empowerment credit program or group lending schemes, under Non-formal Banking of SIBL works well with groups that are homogeneous and jointly liable for defaults. The practice of denying credit to all group members in case of default is found to be most effective and least costly way of enforcing joint liability. Group lending arrangements without collateral are less subjective to the dangers of portfolio concentration because Bank is diversifying lending by serving a varied clientele in different areas under its family empowerment credit arrangements. Bank also is ensuring joint liability of wife and husband in cse of lending to family or groups of families. It humanizes family and discourages internal immigration. Any attempt to decompose family through various credit and financing schemes in its ultimate analysis bound to generate the forces of disintegration of families, internal migration, child delinquency, social alienation and social conflict. Any credit program which does not manage its socio-economic consequences cannot alleviate poverty. Besides Bank has already introduced Rotating Family Savings and Credit Net and Group installment credit scheme for any group of individual? In the light of this experience, SIBL is also in the process of developing program to assist Agriculture co-operative in providing tailor-made credit package to achieve their objectives in rural settings. In case of Non-formal banking operation, it is the bank which goes to the clients, organize and motivate them into viable income generating household, family or groups. In an effort to achieve the corporate objectives of SIBL, it has under its Non-formal Banking sector, started implementing (a) Environmental friendly business program with small traders of Tokai (mainly street children of distressed parents) with recovery rate of 100%, (b) Real life Tokai Non-formal school of management, (c) empowerment and humanizing family credit program involving modest investment with beneficiaries around 12,000 in various parts of Bangladesh in a modest scale. A serious beginning has been made. More than 40% of investment partners of SIBL are from Non-formal sector indicating its commitment to reach the poor family at the grass root level.

4.3 Family Empowerment Social Credit: A Comparative Review It is apparent from the operations of SIBL that it works on a fundamentally different approach and socioeconomic philosophy compared to other major Banking. Financial and Non-Banking Financial Institutions (NBFIs) i.e. Grameen Bank and Non-government Organization (NGO) operating in Bangladesh for alleviation of rural and urban poverty. While Grameen Bank in Bangladesh intends to empower the women, as opposed to man (as over 95% of its clients are women) and most of the other NGOs intend to empower the poor, as opposed to rich, they are heavily dependent on foreign loans, aids and grants and work on high interest rate basis on implicit assumptions of social class conflict, whilst the SIBL intends to empower the family as a basic social unit and generate its own internal resources through re-empowering, institutionalizing the various Islamic obligatory and voluntary tools of redistribution of income, humanizing formal and non-formal sector as well as monetizing the voluntary sector of the economy. SIBL intends to involve both man women, rich and poor in poverty alleviation programs and to work on participatory basis on the implicit assumptions of social class harmony. Clearly, it implements its programs with economic and social transparency without dependent on foreign aid or grants. In fact, a real value added of this bank lies in its power of new thinking for socio-economic well being of people at the grass-root level, strengthening family values and the moral foundation of the society. By teaching the women to be independent and defiant with their husbands, voluntary organizations are presumed to be undermining the family. Religious groups argued that the NGOs work with women was a form of cultural intersiction imposed through western imaterialistic and secular values. When peoples identity and culture are threatened, they often react by going back to their roots. At this stage social investment and social charity and welfare need to be clearly distinguished. There is confusion between Islamic Social Investment and Islamic Charity. What islamci Bank should do is social investment with built-in provision for social subsidy. While the phrase Social social welfare has been overused or misused in most cases, the concept of Social investment is not properly understood in popular discussion. The social investment in a project refers to a process of investment which should enable is target group or its beneficiaries to develop the sustaining capacity even after withdrawal of the support by the sponsoring agency. The grant in aid element in such investment or credit package needs to be consciously designed so that sustainability and accountability remain transparent. The absence of such criteria are generally found in the most social charity and welfare. The experience suggests that social welfare projects sponsored by most of the NGOs in Bangladesh and elsewhere in Muslim countries tend to create a built-in dependency. Once the support of the NGOs are withdrawn or the flow of aid stops for one reasons or another, this project cease to exist or make its beneficiary worse off in the sense that discontinuation of support push them back beyond their original level of living. Here adjustment process is painful and tends to generate social stress, tension, alienation and protest. Eventually this vulnerable groups turns into a class of alienated people, most likely to commit social crime in both rural and urban setting. At this stage, a comparative review of SIBL approach and approaches of other Non-banking financial institutions and NGOs as outlined in Table-I for social investment will be useful and suggestive. The following table will show that ongoing micro credit and micro enterprise programs of SIBL is indeed fundamentally different and deeply rooted in shariah compared to Non-Banking financial institutions and other NGOs approaches, operating in Bangladesh. Sl. No 1 SIBL Approach Micro-credit for empowering family: ensuring joint liability of wife and husband in case of lending to family or groups of families without collateral No ceiling and floor: Micro credit covers hard core poor also (street children in the urban slump and is tailor make) NBFIs and NGOs Approach Micro credit for decomposing and eventual disintegration of the family. For example: Grameen Banks credit empowers women as opposed to man (i.e. over 98% of its clients are women) Main criterion for membership in many NGOs disbursing loans is a ceiling on land holdings of no more than half an acre and on less real in practice and a floor on the level of income Credit is interest based, not in conformity with shariah

Credit linked to culture as rooted in Islamic values provisioning for perpetual social capital accumulation Credit provisioning on a nominal profit Interest rate is 25% to 35% for the poor. In

8 9 10

or non-profit basis (i.e. flat rate 08% and public health credit @ 5% per annum. At present formal Banking expected profit/return rate varies from 14.5% to 18% In the event of loss there is a provision for sharing the loss and schemes to upscale their operations Providing deposit savings and investment services and schemes to upscale their operations Assisting Micro credit/enterprise with provision for credit access to the formal Banking of SIBL, thereby allowing the poor to cross the frontiers of Nonformal Banking Credit based on depositors fund and no external grants/loan Recovery of loan about 97% confirmed by external audit Financial accountability subject to scrutiny by statutory external auditors and central Bank

many cases defaulters are forced to sell their meager assets or to go to local money lenders who could charge up to 120 % interest

There is no such provision of sharing of loss rather there are reports of ruthless force to defaulters This facility is limited in scope and coverage Working on the household and does not provide credit access to formal Banking

75-100% based on external grant Recovery reported to be 95-97% They are not subject to such control

4.4 Micro-credit line of Social Islami Bank Ltd.: Selected issues and Problems
Currently SIBL is investing a maximum amount of TK. 2500/- equivalent to US$ 500 per family without collateral security under Micro Credit programs as permissible by the central bank of the country. This amount is considered insufficient for the purpose of crossing the border of poverty line. The credit ceiling should be raised to at least us$ 1000/- per family. The maximum amount of TK.2.5 Lac equivalent to US$ 5000 is allowed for investment per micro enterprise borrower under existing Banking Law. This ceiling of investment for Islamic Ban in other countries will of course vary depending on the stage of the development of the country, is per capital income and other related socio economic indicators. While the NGOs lend maximum amount of TK. 5000/- only equivalent to US$ 100 per person. With this meager amount none would overcome the boundary of poverty. Hence all their clients tend to movie in the same circle. In Bangladesh there is at least 15 million poor families which can be covered under micro credit program in phases. In this context, the following five operational issues of SIBL can provide insights for strategic alliances and business net working among IDB and Islamic Banks: a) There is fund constraint for desired expansion of the program in consideration of the fact that central bank of Bangladesh allows commercial bank to invest a very small part of the total deposit in this area b) The cost of fund invested in current micro credit program is relatively high not only due to supervision cost but also utilization of depositors money which affects SIBLs rate of profit to depositors c) SIBL has not yet received any grant or concessional fund for financing its current micro credit projects d) SIBL has flexibility in managing the fund, if received. The bank can make direct investment in micro credit and micro enterprise; it can supervise investment through NGOs or it can undertake such projects on co-financing basis or any other basis mutually agreed 4.5 FAMILY EMPOWERMENT MICRO ENTERPRISE PROGRAM SOCIAL ISLAMI BANK LIMITED is a three sector joint venture shariah based bank integrating Formal, Nonformal and Voluntary sector Banking. Become operational on 22nd November, 1995 besides, Formal banking aiming at achieving the corporate objective of the Bank the family empowerment micro enterprise program is operated through Non-formal sector Banking. Family Empowerment Micro-Enterprise program is introduced to enhance the socio-economic condition of the potential entrepreneur, small and medium Businessmen, successful Micro-Credit graduate into Micro-Enterprise program through income generating activities.

4.5.0 Objectives: To promote and develop Micro and small enterprise to generate employment on a self-sustainable basis To create savings habit and to provide investment resources to the potential entrepreneur to increase their business who have no access to the formal banking To provide necessary investment to new entrepreneurs who want to be self-employment To enroll the successful Micro credit graduate into Micro enterprise program 4.5.1 Target Group: New entrepreneurs or existing small businessmen having no collateral and those who cannot expand their business due to shortage of capital Ongoing small businessmen having ownership/possession of firm/farm/shop or any other holdings Micro-credit graduate, who are interested to expand their business

4.5.2 Modes of Investment: 1. Profit& Loss Sharing Mode: Musharaka 2.Profit Sharing but Loss Bearing Mode: Mudarabah 3. Bai-Modes (Buying & Selling) Bai-Murabaha Bai-Muajjal Bai-Salam Bai-Ishtisna 4. Rent Sharing Modes: Ijarah (Lease) Hire Purchase under Shirkatul Melk (HPSM)

4.5.3 Ceiling of Investment: Collateral security is not required for investment ceiling upto TK. 50,000/-. However guarantee of two solvent persons are required Collateral security to be obtained for investment ceiling above TK. 50,000/= up to TK.2,50,000/=.

4.5.4 Procedure of Investment: Each selected client have to open a mudaraba savings accoung (MSD A/C) or Al-Wadiah Current Deposit Account (AWCD A/C) with SIBL Each client-businessman should obtain trade license from the concerned authority Each Businessman/Entrepreneur having experience of at least one year will be given preference to avail of the investment facilities The equity ratio of all the entrepreneurs is usually 80:20. The entrepreneurs having equity ratio 60:40 will be given preference The clients who have performed their Micro-credit investment satisfactorily, will be given preference to promote their business in Micro Enterprise program provided they are in a position to fulfill the criteria of this program Every selected client/entrepreneur interested to avail these investments may apply in Banks prescribed form The payment of the investment will be made directly to the suppliers of the goods by account payee cheque/payment order against invoices ( in name of the bank) showing the goods supplied

4.5.5 Profit and other Charges: Rate of Profit: 11% per annum (approximate) Risk Fund: 1% per annum on the net investment

4.5.6 Security: Under this program, collateral securities in the form of Mortgage against properties and or 3 rd party personal guarantee are needed. In case of investment upto TK.50,000/- goods (raw materials/finished goods/machineries) will be treated as security In case of Investment exceeding TK. 50,000/- collateral security in the form of equitable Mortgage shall be obtained as Bank rule In all cases clients must sign bank charges documents i.e. promissory note etc. 4.5.7 Purpose of Investment: Client will have the liberty to choose the purpose relating to small and medium Enterprise either from the following projects or any other suitable projects under Family Empowerment Micro Enterprise Program objectives: Agricultural Projects Poultry & live stock projects Fishery projects Processing & manufacturing projects Transport & communication projects Trading projects Different types of small trading projects Shop keeping projects Medicine shop keepers projects Sewing machine projects Readymade garments projects

Recovery of Investment: Generally the repayment of the investment shall be made on monthly installment basis. However, in special cases, repayment shall start depending on the nature of investment subject to recommendation of the branch given specific reasons. Table-: Family Empowerment Micro-Enterprise Statistics

Family Empowerment Micro-Enterprise

Particulars Amount of investment Amount Due Amount Outstanding Amount Recovered Rate of Recovered 2006 25.244 22.91 3.46 21.784 86% Year(amount in crore) 2007 2008 2009 23.43 21.62 15.52 20.88 18.12 7.05 2.78 4.41 7.25 20.65 17.21 8.27 88% 80% 53% 2010 11.13 5.63 0.502 10.628 95%

Graph-4.3: Investment amount in family empowerment micro-enterprise program

Investment in Micro-Enterprise Program (Fig in crore)

2010, 11.13 2006, 25.244

2009, 15.52 2008, 21.62

2007, 23.43

Graph-4.4: Outstanding amount in Family Empowerment Micro-Enterprise Program

Amount in Outstanding (crore in TK)

2010, 0.502

2006, 3.46

2009, 7.25 2007, 2.78

2008, 4.41

Graph-4.5: Rate of Recovery of Family Empowerment Micro Enterprise Program Investment

Rate of Recovered
2006, 86%

2010, 95%

2009, 53%

2007, 88%

2008, 80%

Graph- 4.0: Family Empowerment Micro-Credit Program (amount of investment in crore)

Amount of investment in Micro Credit Program ( amount in crore)

2010, 17.78

2006, 22.8

2009, 18.84 2007, 20.98

2008, 19.89

Graph- 4.1: Family Empowerment Micro-Credit Program (amount of outstanding in crore)

Outstanding amount of Micro credit program

2010, 0.6883

2009, 3.56

2006, 4.66

2008, 5.56

2007, 3.35

Graph-4.2: Family Empowerment Micro-Credit Program (rate of recovered)

Rate of Recovered

2006, 80% 2010, 96%

2007, 84% 2009, 81%

2008, 72%

Chapter-Five: Small and Medium Enterprise (SME)

5.0 New Definition of Small & Medium Enterprise (SMEs):
Definition of the SME & Micro Credit & Cottage Industries: SL Segment Sector value of the fixed Assets (Except Land No. of the & Building) including setup cost Business 1 cottage industries Not more than 5.00 Lac 2 Micro Service & Industries Trading Manufacturing 3 Small Service & Industries Trading Manufacturing 4 Medium Service & Industries Trading Manufacturing < 5.00 Lac 5.00 Lac to 50.00 Lac 5.00 Lac to 100.00 Lac 50.00 Lac to 1000.00 Lac 100.00 Lac to 1500.00 Lac 1000.00 Lac to 3000.00 Lac

Labor or Manpower

Not more than 10 person >10 person <=10-20 10-25 25-99 50-100 100-250

5.1 Prudential Regulations on SME Financing of Bangladesh Bank: Regulation 01:

Sources and capacity of repayment & cash flow backed lending: (01) Banks shall specially identify the sources of repayment and asses the repayment capacity of

the borrower on the basis of assets conversion cycle and expected cash flows. (02) The rationale and parameters used to project the future cash flows shall document and

annexed with the cash flow analysis undertaken by the bank.

Regulation 02:
Personal Guarantee: All facilities to Small Enterprises (SEs) shall be backed by the personal Guarantees of the owners of the SEs. In case of limited companies, guarantees of all directors other than nominee directors shall be obtained.

Regulation 03:
Per Party Exposure Limit: The minimum and maximum exposure of a bank on a single SE shall remain within the range of Tk.2 lac and Tk. 50 lac respectively subject to the following: In case of working capital finance maximum up to 100% of the net required working capital or 75% of the sum total of inventory and receivables whichever is lower. In case of fixed assets purchase- Maximum up to 90% of the purchase price.

Regulation 04:
Aggregate Exposure of a Bank on Small Enterprise Sector:
% of classified SE advances to total portfolio of SE advance Maximum Limit

a. b. c. d.

Below 5% Below 10% Below 15% Up to and above 15%

10 times of the equity 6 times of the equity 4 times of the equity Up to the equity

Regulation 05: Limit on Clean Facilities: In order to facilitate growth of smaller investments, banks are free to determine security requirements for investments up to Tk. 5 lac. Guidelines for security requirements for investments of amounts are more than Tk.5 lac are given in Regulation-6.

Regulation 06: Securities:

For loan amounting Tk.2 lac to Tk. 5 lac As a minimum banks must take charge over assets being financed. For loan amounting Tk.5 lac to Tk. 50 lac (a) Hypothecation on the inventory, receivables, advance payments, plant & machineries. (b) Equitable mortgage over immovable properties with registered power of attorney. (c) Personal Guarantees of spouse /parents/ other family members. (d) One third party personal Guarantee. (e) Post dated cheques for each installment and one undated cheque for full loan value including full interest.

Regulation 07
Loan Documentation: For all facilities, banks must obtain (as applicable) and not limiting to following documents before disbursement of loan can be made: (01) (02) (03) (04) Loan application Form duly signed by the customer. Acceptance of the terms and conditions of sanction Advice. Trade license. In case of Partnership Firm:

Copy of registered Partnership Deed duly certified as true copy or a partnership Deed on nonjudicial stamp of Tk. 150 denomination duly notarized. (05) In case of limited company: (a) Copy of memorandum & Articles of Association of the company including Certificate of incorporation duly certified by Registrar joint stock Companies (RJSC) and attested by the MD accompanied by an up-to-date list of directors. (b) Copy of board resolution of the company for availing credit facilities and authorizing Managing Director/ Chairman/ Director for execution of documents and operation of the accounts. (c) An undertaking not to change the management of the company and the memorandum & articles of the Co. without prior permission of the bank. (d) Copy of last audited financial statement up to last 3 years. (e) Personal Guarantee of all the Directors including the Chairman and Managing Director. (f) Certificate of registration of charges over the fixed and floating assets of the Co. duly issued by RJSC. (g) Certificate of registration of amendment of charges over the fixed and floating assets of the company duly issued by RJSC in case of repeat loan or change in terms and condition of sanction Advice regarding loan amount, securities etc. (06) (07) (08) (09) (10) (11) (12) Demand promissory note. Letter of Hypothecation of stocks and goods. Letter of Hypothecation of book debts & receivables. Letter of Hypothecation of plant & machinery. Charges on Fixed assets. Personal letter of Guarantee. Wherever practical, insurance policy for 110% of the stock value covering all risks with

banks mortgage clause in joint name of the bank and client. Regulation 08: Margin Requirements: Banks shall adhere to the minimum margin requirement as prescribed by Bangladesh Bank (if any). Regulation 09: Credit information Bureau (CIB) clearance: The condition of obtaining CIB report will be governed by rules & regulations as prescribed by Bangladesh Bank from time to time.

Regulation 10: Minimum conditions for taking Exposure: (01) Bank shall, as a matter of rule, obtain a copy of financial statements duly audited by a

practicing Chartered Accountant, relating to the business of every borrower who is a limited Co. or where exposure of banks exceeds Tk. 40 lac, for analysis and record. (02) Banks shall assist the borrower in obtaining/ developing books of accounts as per

forms/formats prescribed by each bank. (03) Each bank shall develop their own Loan Application Form and Borrowers Basic Fact

sheet Regulation 11: Proper Utilization of Loan: The Bank should ensure that the investments have been properly utilized by the SEs and for the same purpose for which they are acquired/obtained. Banks should develop and implement an appropriate system for monitoring the utilization of investments. Regulation 12 Restriction on facilities to related parties: Banks shall not take any exposure on a SE in which any of its director, shareholder, employee or their family members is holding 5% or more of the share capital of SE.

5.2 ANALYSIS OF SME INVESTMENTS IN SIBL: PRESENT SCENARIO

5.2.0 DEFINITION OF SME INVESTMENT:
Definition of Small and Medium Enterprise (SME) by SIBL: 1. Small Enterprises Definition Small Enterprise means such an institution which is not public limited company and fulfills the following criteria: Sl Sector Fixed assets without land and Manpower No. building 1 Service 50,000-50,00,000 -----25 2 Business 50,000-50,00,000 -----25 3 Industry 50,000-1,50,00,000 -----50

2. Medium Enterprises Definition Medium Enterprise means such an institution which is not any public limited company and fulfills the following criteria: Sl Sector Fixed assets without land and Manpower No. building 1 Service 50,00,000-10,00,00,000 -----50 2 Business 50,00,000-10,00,00,000 -----50 3 Industry 150,00,000-20,00,00,000 -----150

5.2.1 Why do you take the SME Investment Opportunity of SIBL? Quick and modern banking services Comparatively low rate of profit Continuous and term investment facilities Revolving method investment facilities without installment 100% shariah based Buy-sell/rent ensuring

5.2.2 SIBL products for Small and Medium Enterprise (SMEs): 1. 2. 3. 4. 5. 6. Bai-Muajjal Commercial, Small Enterprise (SE) HPSM Commercial, Small Enterprise (SE) HPSM Transport, Small Enterprise (SE) Bai-muajjal Commercial, installment, Small Enterprise (SE) Murabaha Commercial, Small Enterprise (SME) Bai-muajjal Commercial (Micro-Enterprise)

The word modes means methods or it refers to systematic and detailed rules, stipulations and steps to be followed for accomplishing a specific thing. Following modes are usually used in Islamic Banking: 1. Profit& Loss Sharing Mode: Musharaka 2. Profit Sharing but Loss Bearing Mode: Mudarabah 3. Bai-Modes (Buying & Selling) Bai-Murabaha Bai-Muajjal Bai-Salam Bai-Ishtisna 4. Rent Sharing Modes: Ijarah (Lease) Hire Purchase under Shirkatul Melk (HPSM)

Hire Purchase:
Its a contract between two parties, one is Hiree (leasor) and another is lessee (Hirer) to acquire a resalable asset and to take the asset by the Hirer against paying the rent and the value of the asset to the Hiree at a time for getting the ownership of the asset.

Hire Purchase under Shirkatul Melk:

It is a special type of Hire Purchase contract where ownership is to be transferred gradually paying part price specially, on paying installment. It has been developed through practices. Actually it is a synthesis of three contracts. Synthesis of three contracts: 1. Shirkat 2. Ijarah (Hire) 3. Sale (Buying purchase & selling both) The term Shirkatmeans partnership or participation. Shirkatul Melk means participation in ownership. The term Ijarah has been derived from the Arabic works (Ajr) and (Ujrat) which means consideration, return, wages of rent. and The term Sale is contract between buyer and seller under which seller transfers the ownership of certain goods of asset to the buyer against agreed upon price paid/to be paid the buyer.

Related terminology of Ijarah (Hire Purchase):

Hiree (leaser)-Muajjir : who rents outs the property/asset Hirer (lessee)-Mustajir: who gets the service and benefit from the property against rent. Asset-Maajur : the asset which provides services and benefits i.e rented out Property.

Main elements of Ijarah (Hire purchase):

1.Wording 2. Contracting parties : Offer and Acceptance. : Hiree (Leasor) and Hirer (Lessee)

3. Subject matter of the contract : Rent and Services/Benefit

HPSM in banking:
Both the Bank and the Client supply equity in equal or unequal proportion for purchase of an asset owning the same jointly, sharing the benefit as per agreement and bearing the loss in proportion to their respective equity. The share in the asset owned by the Bank is hired out to the client and eventually the Banks sells and transfers its ownership to the client against payment of price as per agreement i.e on installment. Here bank is Hiree(leaser) and client is Hirer (lessee).

Some features of HPSM:

1. The Bank and the client purchase the asset jointly with specified equity sharing the ownership under HPSM contract. 2. Through ownership is joint asset may be registered in the name of any one mentioning in the name of Bank. 3. In the HPSM agreement Hiree does not sell of Hirer does not purchase the asset but they promise to sell and purchase the same part by part only. 4. As the portion of the Bank is sold and transferred part-by-part the rent will be reduced proportionally. In practical rent reduced at the time charging but payment made on equal Installment basis. 5. Under HPSM agreement bank will act as partner i.e Hiree and at last as a seller and client will act as partner i.e Hirer and lastly as purchaser. The sale and purchase will effect by separate sale contract. 6. The Hirer cannot change or remove the property without permission of the Hiree. 7. The Hirer contract is binding and no party shall unilaterally rescind except reasons that abrogate binding contract such as damage or destruction. 8. If the hired asset is damaged or destructed accidentally the Hiree offers a substitute with the same specification agreed upon in the hire contract does not terminate. 9.

Shariah issues and rules of HPSM

1. The asset to be hired must be a non-fungible one (non-consumable). 2. The asset and the benefit/service from it must be within the category of Halal or least Mobah as per Islamic Shariah. As example of wine producing machine and in some cases asset in Halal but some services in Haram as example of weapon, service of which may be productive-Halal or destructive-Haram. 3. The Hiree is under obligation to enable the Hirer to the benefit from the asset by putting the possession of the asset at his disposal in useable condition at the commencement of the hire period. 4. The hire contract becomes effective from the day on which the Hiree transfers the possession of the good in order and assemble to the Hirer. 5. Ownership risk will be borne by both the parties proportionally. The Hirer will maintain the asset with due prudence and shall not be held responsible for the accidental damage or destruction of the asset without negligence, otherwise he must be responsible for the same. 6. The Hirer is responsible for keeping the asset in goods condition as trustee. 7. Rent cannot be considered as price or part of price of the asset. 8. In a hire contract, the period of hire and the rent to be paid per unit of time are being clearly stated. 9. It is a condition that the rent falls due from the date of handing-over of the asset to Hirer and not from the date of contract but to be paid from using of the asset. 10. It is permissible to advance, defer or install the rent in accordance with the agreement. 11. The Hiree/owner bears all the basic cost for repairs & maintenance as per contract. 12. The Hirer bears the cost of ordinary routine maintenance. 13. It is also permissible to sell the hired asset by the Hire to the Hirer during the tenure of the hire period or in full at a time.

Gestation Period:
The period from the date of 1st disbursement for acquisition of the asset/property to the date of handing over of the asset/property to the Hirer in good and useable condition to derive the desired service(s)/benefits(s) is called Gestation/Interim period for making construction/ installation of the asset into usable condition.

Treatment of Gestation Period Rent: Share in the higher asset value:

During the gestation period, the asset remains under construction/installation/ making from, so the asset cannot yield the desired services/benefits and as much no rent should be charged for that period. Taking the cost, utility value addition, market demand for the asset, the sale price for the banks share of the asset/ property may be fixed at a higher level to cover cost/benefit of the gestation period or in other words the bank may sale it share in the asset at a higher price with mutual consent of the bank at the purchaser. So, the bank shall not charged any rent during the gestation/interim period of investments under Hire Purchased under Sherkatul Milk but it shall be fixed the sale price of the asset at higher level in such a way to cover its Expected Rate of Return (ERR) for the entire hire period including gestation period. Thus the bank may fix the price of its share/portion of the asset taking the cost price of the same plus the consideration of gestation period in to the account. In practical bank calculates rent for gestation period and spreads over the whole period of investment and to be added up with the monthly installment. MUSHARAKA (Partnership) The word Musharaka is derived from the Arabic word Sharikah meaning partnership. Islamic Jurists point out that the legality and permissibility of Musharakah is based on the injunction of the Holy Quran, Sunnah, and Ijma (consensus) of the scholars. It may be noted that Islamic Banks are inclined to use various forms of Shariakt-al-Inan because of its built-in flexibility. At an Islamic bank, a typical Musharakah transaction may be conducted in the following manner One, two or more entrepreneurs an Islamic bank to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the project. All partners, including the bank, have the right to participate in the project. They can also waive this right. The profits are to be distributed according to an agreed ratio, which need not be the same as the capital proportion. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project. Musharakah may take two forms: I) Permanent and ii) Diminishing Musharaka which are discussed below:

i) Permanent Musharakah
In this case, the bank participates in the equity of a company and receives an annual share of the profits on a pre-rate basis. The period of termination of the contract is not specified. This financing technique is also referred to as continued Musharakah.

ii) Diminishing Musharakah

Digressive of Diminishing Musharakah is a special from of Musharakah, which ultimately culminates in the ownership of the asset or the project by the client. It operates in the following manner. The Bank participates as a financial partner, in full or in part, in a project with a given income forecast. An agreement is signed by the partner and the bank, which stipulates each parts share of the profits. However, the agreement also provides payment of a portion of the net income of the project as repayment of the principal financed by the bank. The partner is entitled to keep the rest. In this way, the banks share of the equity is progressively reduced and the partner eventually become the full owner.

Definition of Permanent Musharakah:

The contributions of the partners under this mode may be equal or unequal percentages of capital for the purpose of establishing a new income-generating project or to participate in an existing one. In this arrangement, each participant owns a permanent share in the capital structure and receives his share of the profits accordingly. This type of a partnership is intended to continue until the company is dissolved. However, one can exit the partnership by selling his share of the capital to another investor. Permanent Musharakah is used by Islamic Bank in many income generating projects. They can provide financing to their customers, in exchange for ownership and profit sharing in the proportion agreed upon by both parties. In addition, the bank may leave the responsibility of management to the customer-partner and retain the right of supervision and follow up.

The three steps to establishing Permanent Musharakah are discussed below:

One-Partnership in Capital:
The bank tenders part of the capital required in its capacity as a partner and authorize the customer/partner to manage the project. The partner tenders part of the capital required for the project and is entrusted with what he holds from the bank funds. Two-Results of the Project: The intent of the project is growth, however, the project may profitable or it may loss money. Three Results of the Projects: In the event a loss is incurred, each partner bears part of the loss proportionate to his share in capital. In the event the venture is profitable, earnings are divided between the two parties (the bank and the partner) in accordance with the agreement. The following is a discussion of those legal rules that apply to the Mushraka relationship:

Rules for Permanent Mushrakah

i) ii) iii) It is a condition that the capital provided by each partner is specific, existent and easily accessible .It is inappropriate to establish a company with borrowed money for the purpose of profit. It is permissible for partners to have unequal ownership in the project. The percent of ownership is set forth in the agreement. It is a condition that the capital of the company is money and valuables. Some of the Jurists permit contributing merchandise as invested capital. However, the merchandise must be evaluated. And the value

iv)

v) vi)

vii)

viii)

agreed upon by all parties. Once the value has been established. It is counted as capital and stipulated in the contract as such. It is impermissible to impose conditions forbidding one of the partners from work. The company is built on honor and each partner implicitly permits and gives power of attorney to the other partner(s) to dispose of and work with for one partner to have full responsibility for the operations of the company. Provided he is granted this authority by the other partners. A partner is trustee of company funds in his possession and he held responsible for their use. it is impermissible to take a mortgage or a guarantee against assets, but is impressible to take for profit or It is a condition that each partner share of the profits be known to avoid uncertainty. Also, it is required that shares in capital but some of the jurists permit variation in profit shares, so long as it is agreed to by all of he partners. This may be the case when one of the partners is more dexterous and more diligent and does not agree to parity, so variation in the sharing of profits becomes necessary. In principle, profit must be divided among partners in rations proportionate to their shares in capital but some of the jurists permit variation in profit shares, so long as it is agreed to by all of the partners. This may be the case when one of the partners is more dexterous and more diligent and does not agree to parity, so variation in the sharing of profits becomes necessary. In principle, a partnership is a permissible and non-binding contract. Thus, if a partner wishes, he could rescind the agreement provided that this occurs with the knowledge of the other partner or partners. Rescinding the agreement without the knowledge of the other partners prejudices the rescinding partners partnership contract is binding up to the liquidation of capital or the accomplishment of the job accepted at the contract.

Application of Permanent Musharakah

Permanent Musharakah is helpful in providing financing for large investments in modern economic activities. Islamic banks can engage in Musharakah partnerships for new or established companies and activities. Islamic banks may become active partners in determining the methods of production cost control, marketing, and other day-to-day operations of a company to ensure the objectives of the company are met. On the other hand, they can also choose to either directly supervise or simply follow up on the overall activities of the firm. As part of the agreement, Islamic banks will share in both profits and losses with its partners or clients in operations of the business.

Definition of Diminishing Musharakah

When the bank enters into a Diminishing Musharakah its intention is not to stay in the partnership until the company is dissolved .In this type of partnership, the bank agrees to accept payment on an installment basis or in one lump sum, an amount necessary to buy the banks partnership interest. In this way, as the bank receives payments over and above its share in partnership profits, its partnership interest reduces until it is completely bought out of the partnership. After the discharge, the bank withdraws it claims from the firm and it becomes the property of the partner. The decreasing partnership arrangement ins an Islamic bank innovation. It differs from the permanent partnership only in continuity. It appears that there are four steps of the diminishing partnership. Those are mentioned below:

Steps of Diminishing Musharakah

i) Participation in Capital: The bank-tenders part of the capital required for the project in its capacity as a participant and agrees with the customer/partner on a specific method of gradually selling its share in capital back to the partner. The partner-tenders part of the capital required for the project and agrees to pay the agreed upon amount in return for the ultimate full ownership of the business. Results of the projects: The intent of the project is capital growth. The project may be profitable or lose money. The distribution of the Wealth accrued from the Project: In the event of loss each partner bears his share in the loss in his exact proportionate share of capital. In the event that the project is successful, profits are distributed between the two partners (the bank and the customer) in accordance with the agreement The bank sells its share in Capital: BIThe bank expresses its readiness, in accordance with the agreement, to sell a specific percentage of its share of capital. The Partner-pays the price of that percentage of capital to the bank and the ownership is transferred to the partner. The process continuous until the bank has been fully compensated for its capital share of the

ii) iii)

iv) v)

business. In this way the bank bas its principal returned plus the profit earned during the partnership and vice versa. vi) In the first Conference of the Islamic Banks in Dubai, he conferences studied the topic of partnership ending with ownership (decreasing partnership) and they decided that this type of business relationship may take one of the following forms:

The First Form: In this form, he bank agrees with the customer on the share of capital and the conditions of partnership. He Conference has decided that the bank should sell its shares to the customer after the completion of the partnership. Furthermore, they determined that the selling of the banks interest to the partner should be done under an independent contract. The Second Form: In this form, the bank to participate in financing all or part of the capital requirements in exchange for sharing in the prospective earnings. In addition, the bank gains the right to retain the remainder of the income for the purpose of applying it towards the capital provided by the bank. The third Form: In this form, the bank and partners ownership is determined by stocks comprising the total value of the asset (real estate). Each partner,(the bank and the customer)gets its proportionate share of the earnings from the real property. On an annual basis, the partner may purchase a prescribed number of the banks shares until such time that the partner becomes the sole-owner of the real property. There are some legal rules for diminishing Musharakah as given below:

Rules for Diminishing Mursharakah

In addition to all the legal rules that apply to permanent partnership which also apply to the decreasing partnership, the following rules also must be observed. i) It is a condition in the decreasing partnership that it shall not be a mere loan financing operation. In other words there must be shared ownership and all the parties must share in the profits or losses during the period of the partnership. ii) It is a condition that the bank must completely own its share in the partnership and all rights of ownership with regard to management of the business. In the event that bank authorizes its partner to manage the business, the bank shall have the right of oversight supervision and follow up. iii) It is impressible to include in the contract of decreasing partnership a condition that adjudges the partner to return to the bank the total of its share in capital in addition to profits accruing from that share, because of resemblance to RIBA (usury) iv) It is permissible for the bank to offer a promise to sell its shares in the company to the partner, if the partner pays the values of the share. The sale must be concluded as a separate deal with no connection to the contract of the company

Application of Diminishing Musharakah

The decreasing Musharakah is suitable for the financing of industrial business that has regular income. It can be considered to be the appropriate mode to finance collective investment. In this arrangement, the bank earns periodic profits throughout the year and it encourages the partner to participate in the join investment. In addition its fosters individual ownership by allowing the partner to gradually buy the banks ownership interest. In term of society as a whole it corrects the course of the economy by developing a mode of positive partnership instead of the negative relationship of indebtedness. In addition, it assists in the equitable distribution of societies wealth.

Economic Analysis of Mursharakah

Financing through a Musharaka partnership investment based. The capital provider has full control in the management of the business. In addition, he shares proportionately in both the profits and losses of the business. Therefore, the rate of return ins uncertain and can be either positive or negative The cost of capital is also uncertain and there exists perfect correlation between the relationship of cost of capital and rate of return on capital.

MUDARABAH Definition
The term Mudarabah refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital. Mudarabah is also known a Qirad and Muqaradah. Mudarabah is a contract of those who have capital with those who have expertise,where the first party provides capital and the other party provides the expertise with the purpose of earning halal(Lawful)profit which will be shared in a mutually agreed upon proportion. This type of business venture serves the interest of the capital owner and the mudharib (agent). The capital owner may not have the ability or the experience to run a profitable business. On the other hand, the agent (the Mudharib) may not have adequate capital to invest in a business or project. Therefore, by entering into a contract of Mudarabah each party compliments one another, allowing a business venture to be financed. The following are the steps of the Mudarabah contract.

Steps of Mudarabah:
i) Establishing a Mudarabah Project: The bank The bank provides the capital as a capital owner. The Mudharibprovides the effort and expertise for the investment of capital in exchange for a share in profit that is agreed upon by both parties. ii) The Result of Mudarabah: The two parties calculate the earnings and divide the profits at the end of Mudarabah.This can be done periodically in accordance with the terms of the agreement, subject to the legal rules that apply. iii) Payment of Mudarabah Capital: The bank recovers the Mudarabah capital it contributed before dividing the profits between the two parties because the profit is considered collateral for the capital. iv) Distribution of wealth resulting from Mudarbah: In the event a loss occurs, the capital owner (the bank) is responsible for the entire loss. In the event of profits, they are divided between the two parties in accordance with the agreement between them, subject to the capital being recovered first.

5.2.3 The growth rate in 2009 and 2010 of the top ten SME loan investing banks are as follows:
TABLE : GROWTH RATE FOR THE TOP TEN SME LOAN INVESTORS Bank Agrani Bank Sonali Bank Janata Bank IFIC Bank BRAC Bank CBL SCB RKUB SIBL BSB 2009 5.84% 38.36% -15.06% 38.85% 81.75% 12.31% 35.86% 12.12% 328.65% -10.51% 2010 0.23% 15.63% 10.31% 26.49% 48.62% 15.85% 60.13% -0.25% 16.83% -63.38%

5.3 SME IN SIBL:

5.3.0 SME DIVISION:
The biggest operational division of SIBL is the SME (Small & Medium Enterprise) Division. SME is directly related to business of the bank. SIBL extends investments to potential small and medium trading, manufacturing and service enterprises. This loan is able to provide quick and quality banking services to targeted business at any places of the country. Potential women entrepreneurs will also get the facilities of SME loan; this initiation is to play a role in the socio-economic development of the country by expansion of business as well as creation of employment. SIBL was titled to be the fastest growing bank in 2009 & 2010. The profitability of the bank came mostly from the SME sector. SME division is enriched with more than 50 staffs and it has almost 64 unit offices all over the country. And the recovery rate of SME is very satisfactory. STRUCTURE OF SME DIVISION: Field Level: In the field level there are three types of designated SIBL staff operates. They are Relationship Manager (RM), Relationship Officer (RO) and Assistant Relationship Officer (ARO).

5.3.1 Objectives of the SME loan: SME is the thirsty sector of Bangladesh for investment and Development. It is also employment generating sector, because most of the people live in village and they are not educated. Bangladesh is also a developing

country for this reason for better economic growth and development of our economic condition. We need to develop our Small and Medium enterprise. SME loan introduce for country for the following reason: Employment generation Equal development of women sectors Agro based industry Social Responsibility Introduce development in the rural sector Provide easy access to loan for rural people. Boost up the Economic Development

5.3.2 CONTRIBUTION OF THE MAJOR BUSINESS DIVISIONS:

As is shown from Figure 2, SIBL is one of the major investors in the SME loan segment of Bangladeshs economy with a market share of 3.78%. Even within the bank, SME loan consists of a major portion of the total loan portfolio. The bank policy requires that at least 50% of the total loan portfolio should be allocated to SME loan. The contribution of SME investments in SIBLs loan portfolio is shown in the following Figure. The contribution of SME loan in the overall loan portfolio was highest in 2008 at 61.14%. However, in 2009, the contribution has decreased to 42.45%. This is mainly due to the managements concentration on SME loan products, the share of which has increased from 17.55% in 2007 to 31.19% in 2010.

Graph-: Major Investors in the SME Investments

100% Corporate 80% Retail 60% Corporate Retail Corporate Corporate

Retail Retail

40% SME 20%

SME

SME SME

0% 2007 2008 2009 2010

Table-: The total loan portfolio of SIBL in the years 2008, 2009 and 2010 is shown in the following table: TABLE : DIVISION-WISE LOAN PORTFOLIO OF SIBL Figures in Million BDT 2007 SME Retail Corporate Total 331 110 184 625 2008 1,890 578 623 3,091 2009 3,435 1,229 1,405 6,069 2010 331 110 184 12,027

5.3.3 Growth in the Business Divisions of SIBL The growth rate in the business divisions of SIBL are as follows: TABLE : GROWTH IN THE BUSINESS DIVISIONS OF SIBL Retail SME Corporate 2008 470.72% 426.41% 237.95% 2009 81.76% 112.72% 125.33% 2010 48.61% 205.10% 125.76%

The year 2008 brought about huge growth in all the divisions of SIBL. As the bank began its operations in late 1996, this was expected. Although the growth rate declined in the subsequent years, the bank still managed to sustain at least a 100% growth rate in the SME and corporate division. But the growth in the Retail division continued to decline drastically through the years 2009 and 2010. This scenario is clearly depicted in the trend analysis of the loan volumes in the different business divisions of SIBL. Graph-: Trends of the Volume of Investment (division wise) in SIBL Figure: Trend of the Volume of Investments (Division-wise) in SIBL 6,000 5,000 4,000 3,000 2,000 1,000 0 2007 SME 2008 Retail 2009 2010 Corporate

Figure shows that SME has maintained a steady slope over the years, whereas the slope for Retail and corporate has begun to become steeper after 2009. This indicates that SME and corporate are experiencing a greater growth than Retail from 2008.

5.3.4 PRODUCT-WISE BREAKDOWN OF SME INVESTMENTS IN SIBL: The first product introduced in SME banking by SIBL in 1996 was SME (installment) loan, which was an any-purpose loan with a range of Tk. 2-8 lacs. This loan still remains the most dominant product with a share of almost 85% of the SME loan portfolio. After the success of it, SME (revolving) was introduced with a range of Tk. 50 thousand-10 lacs. This product also became quite popular and now has a share of 12%. HPSM (Commercial) Loan was introduced in 2004 to capture specific segments of the SME market. These investments have a combined portfolio share of 2.5%. The most recent investments, HPSM (transport), have not made significant progress yet, and have a combined portfolio share of 0.5%.

85

12

0.5

2.5 SME (Revolving) HPSM (Transport)

SME (Instalment) HPSM(COM)

Figure : Product-wise Share of Retail Portfolio

5.3.5 INVESTMENT SECTOR-WISE BREAKDOWN OF SME PRODUCTS OF SIBL: Based on investment sector, SIBL has segmented the SME market into 4 categories: Trade, Manufacturing, Agriculture and Services. The portfolio share in each of the segments is shown in Figure 9 and 10.

87.43%

83%

9% 4.85% 6.15% 1.57% 7% 1%

agriculture

manufacturing

trade

service

Figure 9: Sector-wise Portfolio Share (No. of Loans)

agriculture manufacturing trade service

Figure10 : Sector-wise Portfolio Share (Volume-wise)

Although trading companies have an 87.43% share and service companies 1.57%, number-wise, the volumewise share is 83.48% and 1.07% respectively. On the other hand, manufacturing and agro-based companies have a larger share in volume than in number of investments. This signifies the fact that the average loan size of trading companies is actually smaller than that of manufacturing and agriculture companies. 5.3.6 SECTOR-WISE GROWTH: If we compare the sector-wise trend of SME investments as is shown in Figure 11, we can see that investment in the trading companies has the steepest curve. This indicates the huge increase volume-wise in this sector on a year-to-year basis. Service sector, on the other Hand, has experienced slow increase in volume up to 2010. However, if we take a closer look at Figure 12 which indicates percentage increase on a year-to year basis, we can see that only the service sector has experienced an increasing trend in terms of percentage growth over the period. Investment growth in the manufacturing sector has also begun to increase from 2004. From these figures it can be concluded that although, the trading sector still accounts for the bulk of the portfolio, manufacturing and service sectors have enormous potential for growth.

4500.00 trade 4000.00 3500.00 Volume (million. BDT) 3000.00 2500.00 2000.00 1500.00 1000.00 500.00 0.00 2007 2008 2009 manufacturing agriculture service 2010

Figure : Sectorwise-Trend of Retail Loans of SIBL

600.00% 500.00% 400.00% 300.00% 200.00% 100.00% 0.00% 2007 2008 2009 agriculture mfg trade 2010 service

Figure 6: Percentage Growth in Volume of Personal Loans of SIBL

5.3.7 PERFORMANCE OF SME INVESTMENTS OF SIBL: The performance of a loan is determined by the repayment status of that loan. A loan has two statuses which determine its performance: Regular Loan: When the repayment of a loan is made on time it is considered to be a regular loan. A loan is performing as long as the installments of that loan are paid on time. Irregular Loan: A loan becomes irregular when the installments are not paid on time or when installments are missed. The number of irregular accounts reflects the overall credit quality of a loan portfolio because it is the POI LOAN accounts tend to move towards being defaulted. Therefore the actual recovery efforts by the bank start. 5.3.8 CAUSES OF FAILURE OF LOAN RECOVERY: The fund cost of the SME is very high and the failure to recover the loan is very high. There are lots of causes of failure to recover the loan which are as follows: . Lack of proper monitoring & follow-up: For loan recovery monitoring and follow up is very important. Over finance: For SME financing over finance to the enterprise create burden on the owner of the firm & hindered to repay the loan. Fund Divert: Sometimes firm divert their borrowed fund to another unproductive sector. So it hinders the smooth repayment capacity of the borrower. Sometimes borrower intentionally default the loan. Poor business analysis is also a cause of failure. Sometimes client hide some but necessary information.

CHAPTER-SIX Key Aspects Related to the Marketing of SME Products in SIBL

6.0

DEMAND CREATION:

The SME division of SIBL basically provides micro credit investments to SMALL and MEDIUM ENTERPRISES. Because of its unique nature, the demand for SME investments is different in nature to the demand for corporate or SME investments. A huge portion of the target market has traditionally been neglected by the banking sector and hence, is ignorant about banking activities. Thus, awareness building has been, and still is, a vital activity of the demand management process of SME investments. The process flow of demand creation is as follows:

Market Identification

Customer Needs Identification

Product Development

Relationship Building

Awareness Creation

The RM plays a vital role in all the stages of demand creation apart from market identification and product development. They provide door-to-door services for the clients and at the same time are always in search for potential new clients. Because clients are ignorant about banking products that may satisfy their needs, the RM identify their needs, evaluate their requirements and determine which products are most suitable for them. The major security of the SME products is building relationship between clients and banks. Demand basically comes from two groups: new customers and repeat customers. Because banks are facing new marketing realities like changing demographics, slow growth economy, more sophisticated competitors etc.,

SIBL cannot afford to lose clients. The key to customer retention is superior value and satisfaction. As SIBL recognizes this fact, repeat borrowers of SME products enjoy lots of extra benefits.

6.1 MARKET SEGMENTATION:

The market consists of many types of customers, products and needs and the marketer has to determine which segments offer the best opportunity for achieving company objectives. SIBL segments the market for banking products into three categories based on the nature of the consumer TABLE : MARKET SEGMENTATION OF SIBL Segments Corporate Small & Medium Enterprise Retail Target Market Enterprises with loan requirement of Taka 600 lacs or more Enterprises with loan requirement of Taka50,000/- 50,00,000/Individuals with loan requirements for consumer purposes of Taka 50,000-10 lacs

By segmenting its consumers into these categories, SIBL is trying to serve niche markets where there is ample opportunity for growth. Within SME, the market is further segmented on the basis of the nature of the business as follows:

SME Market

Trading Wholesale

Manufacturing Mills

Agriculture

Service

Pathology Bakery Press Beverage Hospital Poultry Dairy Schools & Colleges

SME

General Stores

Factory

6.2 TARGET CUSTOMERS

To succeed in todays competitive marketplace, organizations must be able to hold on to its customers by delivering greater value. In order to do this, an organization must be able to identify the customers who would be benefited from their products. SIBL has targeted the small and medium enterprises that have small loan requirements as the target consumers of their SME products. However, SIBL does not finance business startups. The business has to be at least two years old to avail the SME loan facilities offered by SIBL. Most of such businesses are sole proprietorships. There are some partnerships as well, but limited companies are rarely seen in this category. The survey that I had conducted brought up the following results as common characteristics of the respondents: The mean age of the respondents was 38.71 years and mode was 33 years. 71.50% of the respondents did not pursue education after completing their HSC. 44.50% of the respondents did not complete HSC. The average working capital requirement of the respondents per month was almost Tk. 28,000.

Thus the target customers can be classified as the entrepreneurs who have little or no formal education, between the age group of 30-40 years and having working capital requirement of around Tk. 30,000.

6.3 MARKET POSITIONING:

Every product must have a unique proposition that will enable it to fulfill the customers needs. In case of investments, there are four factors that might influence the clients decisions regarding the selection of a loan from a bank: Profit Rate Collateral Time Involved in Acquiring the Loan Repayment Scheme and Tenure

Not all factors influence every segment of the market. In the survey conducted, the following findings were revealed when the respondents were asked about their prime reason for obtaining SME investments from SIBL:

6.4 Developing the Marketing Mix for SME investments: PRODUCT:

In order to serve the market more efficiently, SIBL has designed various products that will be able to satisfy the needs of the clients. The summary of all the SME loan product of SIBL is the following----Characteristics of Small and Medium Enterprise (SME) of SIBL at a glance -------------Sl No. 1 Name of the Products Bai-Muajjal Commercial, Small Enterprise (SE) HPSM Commercial, Small Enterprise (SE) Amount of Investment Maximum 50 Lac taka Tenure 1 year (Revolving Method) 2-5 years Competitive and Market Oriented Now the Profit rate is 17% (Mid Rate) Rate of profit Characteristics Investment facilities for meeting the current working capital needs (Revolving Limit) Fixed assets & terms investment opportunities are provided. Equal monthly installment repayable. To buy car, micro-bus, Autorikhsa, delivery van this products is used. Equal monthly installment repayment. Current working capital met up and term investment facilities, equal monthly repayment Current working capital needs fulfillment (revolving limit) To purchase raw material/products this investment is used (equal monthly installment repayment)

Maximum 50 Lac taka

HPSM Transport, Small Enterprise (SE)

Maximum 50 Lac taka

2-5 years

Bai-muajjal Commercial, installment, Small Enterprise (SE) Murabaha Commercial, Small Enterprise (SME) Bai-muajjal Commercial (MicroEnterprise)

Maximum 50 Lac taka

Maximum 4 years

Maximum 50 Lac taka

1 (Revolving Method) Maximum 3 years

Maximum 2.00 Lac taka

SIBL has various SME products to satisfy the needs of the different types of clients in the Consumer market. The different loan sizes are set to attract enterprises of different sizes. Investments are approved on the basis of inventory, total receivables & total payable. Usually, up to 75% of the (inventory+ receivables-payables) is granted as loan.

PRICE: The price of investments is actually the rate of profit for it and the charges, fees or commissions associated with it. In case of SIBL, the pricing for SME products are as follows:

TABLE : PRICING OF DIFFERENT SME LOAN PRODUCTS OF SIBL Investment Modes HPSM (Commercial) HPSM (Transport) SME (Revolving) SME (Installment) Agricultural loan Rate of Profit 17% p.a. 17% p.a. 17% p.a. 17% p.a. 13% p.a. Investment Processing Fee 1% of loan amount plus VAT 1% of the loan amount plus VAT 1% of loan amount plus VAT 1% of loan amount plus VAT 1% of loan amount plus VAT

This differentiated pricing method for different amount of investments is designed to attract clients with various requirements.

PLACE (DISTRIBUTION):
SIBL offers investments to SME clients all over the country. However, investments are processed centrally in the SME Division of the Asset Operations Department. The base unit of the distribution channel of the SME Department is the Unit Office. There are 2-7 investment officers in each unit office based on the market potential of that particular unit. The senior officers are responsible for the grass-root level distribution of SME investments. At present, there are almost 1050 investment officers operating in the country.

The distribution channel of SME investments is as follows: Business development manager

Relationship manager Sales officer Sales officer

Relationship manager Sales officer Sales officer

The country is divided into 7 territories. There are 36 branch and 30 Unit Offices in the country.

PROMOTION:
Due to the nature of clients, direct marketing techniques are very effective for the promotion of SME investments of SIBL. SIBL has two main types of promotional activities:

Door-to-Door Service: The Sales officer (SO) identifies potential clients and reaches them with investment offerings. Most of these clients are illiterate and do not maintain any financial documents. The SOs helps them prepare documents required by the bank for them and provide them with necessary support in activities like account opening, transaction, etc.

Flyers & Brochures: For the more educated clients, SIBL provides flyers and brochures in the unit offices as well as in the branches. These flyers contain specific features of the product they advertise. However, as this type of promotion is handled by the Marketing Department, it would not be within the scope of this report to discuss more elaborately on this promotional tool.

CHAPTER-SEVEN: Green Banking

7.0 Introduction:
We are aware that global warming is an issue that calls for a global response. The rapid change in climate will be too great to allow many eco-systems to suitably adapt, since the change have direct impact on biodiversity, agriculture, forestry, dry land, water resources and human health. Due to unusual weather pattern, rising greenhouse gas, declining air quality etc. society demands that business also take responsibility in safeguarding the planet. Green finance as a part of Green Banking makes great contribution to the transition to resource-efficient and low carbon industries i.e. green industry and green economy in general. Green banking is a component of the global initiative by a group of stakeholders to save environment. The state of environment in Bangladesh is rapidly deteriorating. The key areas of environmental degradation cover air pollution, water pollution and scarcity, encroachment of rivers, improper disposal of industrial medical and house-hold waste, deforestation, loss of open space and loss of biodiversity. In addition, Bangladesh is one of the most climate change vulnerable countries. In line with global development and response to the environmental degradation, financial sector in Bangladesh should play important roles as one of the key stake holders. In response to the above, urgent measures are required by stake holders for sustainable development and thereby save the planet. Banks hold a unique position in an economic system that can affect production, business and other economic activities through their financing activities and thus may contribute to pollute environment. Moreover, energy and water efficiency and waste reduction are of high concern for many big banks. Green banks or environmentally responsible banks do not only improve their own standards but also affect socially responsible behavior of other business. 7.1 Bangladesh Bank's Earlier Initiatives:

BB is well aware of the environmental degradation situation as mentioned above and has already given time to time directions to all scheduled banks. Commercial Banks are now required to ensure necessary measures to protect environmental pollution while financing a new project or providing working capital to the existing enterprises. Banks have been advised to facilitate their clients with utmost care in opening Letter of Credit (L/C) for installation of Effluent Treatment Plant (ETP) in the industrial units. Banks have been advised to finance in Solar Energy, Bio-gas, ETP and Hybrid Hoffman Kiln (HHK) in brick field under refinance programme of BB. A comprehensive guideline on Corporate Social Responsibility (CSR) has been issued where banks have been asked to concentrate hard on linking CSR at their highest corporate level for ingraining environmentally and socially responsible practices and engaging with borrowers in scrutiny of the environmental and social impacts. Banks have been brought under the purview of E-commerce with a view to providing the customers with online-banking facilities covering payments of utility bills, money transfer and transactions in local currency through internet as well. Considering the adverse effects of Climate Change, banks have been advised to be cautious about the adverse impact of natural calamities and encourage the farmers to cultivate salinity resistant crops in the salty areas, water resistant crops in the water locked and flood prone areas, drought resistant crops in the drought prone areas, using surface water instead of underground water for irrigation and also using organic fertilizer, insecticides by natural means instead of using chemical fertilizer and pesticides.

7.2 Green Banking Initiatives taken by SIBL SIBL is a three sector Banking institution such as Non-Formal Banking sector, Formal Banking sector and Corporate Banking sectors. SIBL has already started its Green Banking activities a little. While making investment SIBL emphasis on the environment friendly culture. SIBL is making investment in Solar Energy, Bio-Gas and Hybrid Hoffman Klin (HHK) in brick field under its investment activities. And this bank will accelerate its Green Banking activities in the upcoming days.

CHAPTER-EIGHT: Voluntary Banking Services of SIBL

8.0.0 Background of Cash Waqf Certificate
SIBL is a three sector Banking Model beyond conventional Banking and co-operative aiming at alleviation of poverty and empowering family through social investment on participatory economy. Various activities of the Bank are conducted through Formal, Non-Formal and Voluntary sectors. In the process of organizing Social Capital Market operations in the voluntary sector of the Bank, it has for the first time in the history, introduced Cash Waqf Certificate scheme. It also aims at empowering the family of the rich for the sake of social investment and welfare. A research study entitled, Structural Adjustment and Islamic Voluntary Sector with special Reference to Awaqf in Bangladesh written by the author and published by Islamic Development Bank, Jeddah, in 1995 showed that Cash Waqf is also recognized in Islam. Its use can be traced to the Ottoman era as well as in Egypt. But the use of Cash Waqf as a financial instrument is indeed an innovation in Islamic social finance. Cash waqf provides an unique opportunity for making investment in different religious, educational and social services. Savings made from earning by the well-off and the rich people of the society can be utilized by purchasing cash waqf certificate. Income earned there from will be spent for different purposes like the purposes of the waqf properties itself. Historically speaking, the immovable assets mainly in the form of landed properties are the predominant feature of Awaqf. It follows then that one of the main characteristics of Awaqf is their low degree of liquidity. Liquidity as defined by economists refers to the transferring of funds into cash money within a short period of time and at a reasonable cost. We know that landed property even in the case where it is legally permissible to be sold or replaced by another, such as giving up a landed property it takes a considerable amount of time and expenses to be transferred from landed property into liquid cash. Therefore, we can safely consider low liquidity as a distinctive feature of the Awaqf properties, even when we want to invest in Awaqf properties e.g. constructring a building on a piece of Waqf land with a view to leasing it, this will entail the availability of liquid cash money that would enable us to transfer waqf from one shape to another. In this context, raising fund through sale of cash waqf certificate for development of awaqf properties assumed a special significance in the 21st century. Another significance of the cash waqf certificate lies in the fact that it has broken the age old barrier that the privilege of making waqf belongs to only to the rich. Since cash waqf certificate as introduced by SIBL is expressed in term of a small denomination of TK. 1000 (US$21 only), it has become affordable to a large section of the Muslim population; it can also be expressed in even smaller denomination also. Send in this light, cash waqf certificate scheme can be seen as a movement of social reconstruction and development in which vast majority of the population can participate. Attempts should then be made to popularize the role of waqf in the country including cash waqfs which can be instrumental in transferring savings of the rich to those entrepreneurs and members of the public in financing various religious, educational and social services in Muslim countries. Cash waqf can work as supplement to the financing of various social investment projects undertaken by Islami Banks which can eventually emerge as waqf bank. Even today, fro example, cash waqf in Bangladesh, is extremely important in terms of mobilization of fund for the development of waqf properties. According to 1986 census of waqf estate, there are 150,593 waqf estates in Bangladesh having multipurpose uses. According to 1983 mosque census, there are 131,641 mosques in Bangladesh out of which 123,006 mosques are waqf properties. Out of the total waqf estates 97,046 are registered, 45607 are verbal and the rest 7940 are waqf by tradition. Out of this large Awaqf estates, only 13200 waqf estates are under the administrative control of Waqf administrator out of which 10683 waqf estates are of mixed nature.

8.0.1Cash Waqf Certificate: Empowering Multi-Generational Family Heritage

An individual can easily link himself for at least two hundred years in the family chain in the following say: Consider: yourself, your parents, your grandparents- thats at least one hundred years of your family history. Consider: yourself, your children, your grandchildren-thats next hundred years of your familys future history. In this way, an individual can easily link himself for two hundred years. Within a framework of family heritage and develop a vision for his family contribution to society and people. 200 year. 1900 (past)2000 (Present)2100 (Future)

Beneficiaries of the Continued Charity/Waqf

SIBL offers: 1. 2. 3. 4. Output Employment Income Management of continued charity/waqf Zakah/Sadaqah/ Endowment

Family stability and sustainable opportunities Future beneficiaries of contined charity/waqf Better Generation

8.0.2Implication of Cash Waqf Certificate

As part of extending three sector models banking services towards the achievement of corporate objectives of SIBL, SIBL introduced cash waqf certificate, a new product for the first time in the history of Banking in its Voluntary sector Banking as mentioned earlief. Cash-Waqf can be seen as a social assignment raplacing income tax in many Muslim countries which are reported to be one of the most corrupt departments in most of the Muslim countries like Bangladesh. Its introduction is highly suggestive in the context of fiscal system of Bangladesh which is heavily dependent on indirect tax (85% of the total revenue of the government). A great part of direct tax can be converted to social assignment and cash waqf certificate can partially substitute a substantial part of the income tax for financing strategic social projects in education, health, social welfare activities proposed to be undertaken by the rich. What is needed is a political will. Together, a new beginning can be made for a participatory economy and a caring society. Besides cash waqf can be used as a strategic investment in alleviating poverty and economic deprivation as well as education, health and research to be discussed late on. By taking part in scheme one can contribute not only towards development of a social capital market operation, but also sharing in permanent social investment. As deposit of cash waqf is made once for all, Bank can safely invest it on short term, medium term and long term basis as indicated below: I. Short term investment: Micro Credit and Micro Enterprise investment for poverty alleviation and family empowerment, Tokai rehabilitation etc. II. Medium term investment: Cottage Industry, weaving industry, small garments industry and dairy farm etc. III. Long term investment: Various heavy industries/factories etc. These investment activities shall result in creation of new avenues of employment opportunities. A large number of unemployed shall have the opportunity for earning their livelihood and thus making contribution to social progress. As noted earlier, there are 150,593 Waqf estates in Bangladesh. All of them are in immovable properties. There is an immense scope for development of such properties commercially through raising fund by selling cash-waqf certificate.

There are many rich people who have the desire to create cash waqf at the altar of public good as well as for the benefit of their descendants. But they can not proceed for lack of necessary institutional arrangement for management of cash waqf. SIBL provides the necessary institutional support and an unique opportunity for opening cash waqf deposit account with a view to achieving the following objectives:

8.0.3 Objectives of Cash Waqf:

I. II. To provide Banking services as facilitator to create cash waqf and to assist in the overall management of waqf; To assist in mobilization of social savings by creating cash waqf with a view to commemorate alive or deceased parents, children and to strengthen the integration of the family relationship of the well-off people and the rich; To increase social investment and to transform the social savings into capital; To benefit the general public specially the poor sections of the people out of the resources of the rich; To create awareness among the rich regarding their social responsibilities to the society; To assist in developing social capital market; To assist in overall development efforts of the country and to make a unique integration between social security and social peace.

III. IV. V. VI. VII.

8.0.4 Cash-Waqf services as Social and Private Good and Criteria of Allocative efficiency The Waqf fund supported activities can be divided into social and private good, thereby introducing an interesting area of economic analysis of resource allocation in public finance. Generally, speaking, social good is non-rival in consumption as it is difficult to put price tag on social good as its consumption does not reduce the benefits available to others. This is not true in the case of private good where we can put the price tag and exclude others from consuming it. Its consumption is, therefore, rival, putting it differently, the benefits derived by anyone consuming a social good are externalized in that they become available to all others. This is the situation with social goods. In the case of private goods, the benefit of consumption is internalized with a particular consumer and consumption by him excludes consumption by others. When cash waqf fund supports construction of a bridge it assumes the character of social good and when it does support construction of a hospital or a school, it does provide public provision of private good for which tag can be put. Thus when total resource generated by waqf properties is divided between private and social good or when a mix of social good is chosen, the existence of non-rival consumption changes the condition of efficient resources use from those applicable where consumption is rival. This the institution of waqf is performing an allocation function, however rudimentary way it might be. This allocation function involves not only adjustment of income and wealth, but also adjustment of price of goods and services with which waqf is associated. Thus it should be possible to make in depth case studies to show how does waqf supported goods and services perform allocation, distribution and stabilization function in a modern Muslim state. It should then be possible to discuss further the implications of the spending of Awaqf revenue under the following three effects: a) Good deed effect b) Free rider effect c) Income re-distributioneffect

8.0.5 Guidelines/ Rules Governing the Operations of Cash Waqf Certificate Account The guidelines/rules governing the operation of the cash waqf certificate as introduced by Social Islami Bank Limited are as follows: Cash Waqf shall be accepted as endowment in conformity with the shariah. Bank will manage the waqf on behalf of the Waqfi Waqfs are done in perpetuity and the accunt shall be opened in the title given by the Waqif Waqif will have the liberty to choose the purposes to be served either from the list of 32 purposes mentioned below indentified by SIBL as given below or any other purposes permitted by the shariah The amount deposited in the cash waqf A/Cs will be invested as per Banks own decision in conformity with the shariah and the cash waqf amount will earn profit at the highest rate offered by the bank from time to time The waqf amount will remain intact and only the profit amount will be spent for the purposes specified bey the waqfi. Unspent profit amount will automatically be added to waqf amount and earn profit to be grown over the time. No cheque book will be issued in this account Waqfi may also instruct the Bank to spend the entire amount for the purpose specified by him/her Waqfi has the opportunity to create cash waqf at a time. Otherwise he/she may declare the amount he/she intends to build up and may start with a minimum deposit of TK. 1000/= only. Specific cash waqf A/Cs (where name of beneficiary whether individual or institutions are mentioned) by depositing a minimum sum of TK. 5000/= and above. The subsequent deposits shall also be made in thousand or in multiple of thousand. Waqfi shall also have the right to give standing instruction to the bank for regular realization of cash waqf at a rate specified by him/her from any other a/c maintained with SIBL Cash waqf shall be accepted in specified endowment receipt voucher and a certificate for the entire amount shall be issued as and when the declared amount is buit Account of cash waqf are maintained in a separate ledger and necessary bank charges are deducted therefrom In case of any change of address of the waqfi must inform the Bank immediately Bank reserves the right to regret to open any cash waqf account or to close any account opened earlier without showing any cause The rules of cash waqf account are subject to amendment in conformity with shariah at any time by the Bank

8.0.6 Cash Waqf: Achieving Results on the Ground at the Operational Level of SIBL
The thirty two purposes for utilization of Cash-Waqf fund as indicated below shows the diverse areas of investment by Social Islami Bank Ltd. Although this is not exhaustive, these social investment activities will create a base for perpetual social capital and help developing credit program that reinforces family values and stimulate social and moral foundation of a civil and a caring society.

Thirty Two purposes for utilization of Cash Waqf Fund As specified by Social Islami Bank Limited

A. Family Rehabilitation: 1. Improve the condition of absolutely poor living below the poverty line 2. Rehabilitation of physically handicapped and disadvantaged 3. Rehabilitation of beggars 4. Rehabilitation of destitute women 5. Upliftment of urban slum dwellers

B. Education and Culture: 6. Education of orphans i.e. supplying books free of cost 7. Expansion and development of appropriate education for skill development 8. Informal education facilities of children at home (i.e. mothers educational program, children literature) 9. Physical education and sports facilities 10. Supporting local culture and heritage and art promotion 11. Conducting Dawah activities 12. Supporting education of deserving students in the form of scholarship 13. Supporting vocational education in general 14. Supporting education of specific area 15. Financing specific Madrasha/school/colleges of a particular area 16. Educating deserving descendants 17. Supporting any projects in the area of education, research, religion and social services in the memory o father, mother and any descendants 18. Establishing educational chair C. Health and Sanitation: 19. Village health care and sanitation 20. Supplying pure drinking water ) to households, schools, mosques, slums etc) 21. Establishing hospitals, clinics, health care program specially for the poor 22. Health research grant, research in particular disease D. Social Utility Services: 23. Setting disputes (e.g. village litigation) 24. Providing legal aid to deserving women to establish their lawful rights 25. Assists in arranging dowry-less marriages of poor girls 26. Maintenance of public roads and tree plantation in the village 27. Providing assistance to peace loving no-Muslims and solving their problems 28. Creating social awareness to prohibit gambling and other social vices such as theft and other antisocial activities 29. Construction, installation and development of public utility services 30. Maintenance of a specific mosque with an income generating projects 31. Maintenance of a specific graveyard with an income generating projects 32. Maintenance of a specific Eidgah with an icome generating projects.

Table-8.0.1: Growth Trends of Cash Waqf A/Cs Number & Deposited Amount A COMPARATIVE POSITION OF THE CASH WAQF PROGRAM FROM THE YEAR 2006 TO 2010 Particulars No. of Cash Waqf Account (Opened) Principal Amount (Fig. in Crore) 2006 2623 1.43 2007 3547 1.59 2008 5084 2.03 2009 7082 2.77 2010 8000 4.41

Graph -8.0.1: Number of Cash Waqf Certificate Account from the year 2006 to 2010

No. of Cash Waqf Account (Opened)

9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2006 2007 2008 2009 2010 No. of Cash Waqf Account (Opened)

Graph-8.0.2: Deposited Amount in Cash Waqf A/Cs over the year (2006-2010)

Deposited Amount (Fig. in Crore)

Deposited Amount (Fig. in Crore)

2010

4.41

2009

2.77

2008

2.03

2007

1.59

2006

1.43

Table-8.0.2: Cash Waqf A/Cs at Principal Branch of SIBL: Cash Waqf Statement From June 2010 to June 2011 at principal Br. Sl No. of No. Name of Waqf A/Cs Amount (TK) General Cash Waqf: 1 Family Rehabilition 150 371200 2 Education 320 578550 3 Health & Sanitation 112 145965 4 Social Utility 45 50700 5 Others 38 350756 665 1497171 Specific Waqf: 1 Family Rehabilition 5 532762.67 2 Education 100 6591813.19 3 Health & Sanitation 8 401241.58 4 Social Utility 7 98783.99 5 Others 12 980750 132 8605351.43 Total Acs 797 10,102,522.43 Large amount is deposited at the principal branch of SIBL because this branch is located at the heart of country and the larger contribution is coming from the banks higher level personnel.

VOLUNTARY SECTOR: CORPORATE SOCIAL RESPONSIBILITY

8.1.1 Mainstreaming Corporate Social Responsibility (CSR) in banks and financial institutions in Bangladesh: Globally, the notion of Corporate Social Responsibility (CSR) is fast gaining acceptance as the contribution that businesses can and should make voluntarily towards environmentally sustainable and socially equitable development. Besides the usual financial reporting, non-financial or sustainability reporting is accordingly also fast gaining usage. Stated briefly, CSR is about (i) taking stock of the economic, social, and environmental impacts of a business, (ii) mitigating the negative impacts and bolstering the benign impacts, (iii) taking up action programs and community investments to reduce social exclusion and inequality and to address the key sustainable development challenges (meeting the needs of the present generation without impairing the ability of future generations to meet theirs is a generally accepted meaning of sustainable development) Because of their ethical and public interest dimensions, many of the desired social and environmental practices are compulsorily mandated by laws and regulations (e.g., safe and healthy work environment, equal opportunity and fair treatment in respect of gender and ethnicity in hiring and career advancement, avoidance of forced labor or child labor, and so forth). CSR programs and actions beyond such mandatory compliances into voluntary engagements to promote equitable, sustainable development. Besides the self evident ethical case, a strong business case for CSR (as investment in a strategic asset or distinctive capability, rather than an expense) is also getting clearer with developing practice; seen as benefiting a business by: - building reputation, brand value, customer loyalty, employee motivation and retention; - mitigating risks in own operations and in assessing suppliers and clients; - cutting down wastes (of energy, raw materials etc.), driving up efficiency; - gaining new markets for products and services, in the communities/ social groups benefited by the CSR actions.

8.1.2: Priority Areas of Corporate Social Resposibility (CSR)

It would be of strategic, longer run competitive advantage for banks and financial institutions in Bangladesh to embrace CSR in their management approaches and operations, with initiatives chosen in broad-based, extensive stakeholder engagement. Besides adoption of socially and environmentally responsible practices in own internal operations, banks and financial institutions can make major CSR contribution by speeding up financial inclusion of the large socially disadvantaged rural and urban population segments; drawing them in with appropriate financial service packages and with financing programs innovatively designed to generate new employment, output and income. The following could be some priority areas, among the broad range of possible useful initiatives: - Self-employment credit and small and Medium Enterprise (SME) lending programs, taken up solo or in association with locally active Micro Finance Institutions (MFIs), designed to create productive new on-farm /o.-farm employment, such initiatives are of particular urgency for regions with endemic high seasonal unemployment (e.g., the manga afflicted Northern districts); - Financing programs for installation of biomass processing plants (e.g. biogas plants), solar panels in rural households, for waste recycling plants in locations populated by urban poor, and for Effluent Treatment Plants (ETPs) in manufacturing establishments; - Credit programs for diversified production of crops, oilseeds, spices, vegetables, fruits etc. by rural households, financing the growers directly or through suitable intermediaries in the value chain. Credit support for combinations of farming activities (like co-production of a minor crop with a major one, fish/duck farming with aman rice of deepwater variety in low lying fields), may also be well worthwhile; - Mobile phone based/ local MFI outlet supported programs promptly delivering remittances from migrant workers to recipients in remote rural households; programs for card based/ mobile phone based delivery of financial services to such households; - Financing programs supporting folk crafts, folk musical and performing arts, aimed at promoting domestic tourism and markets in cultural products/events besides income and employment for the population groups involved. With the employment and new income generated by successfully executed programs, the targeted population segments can eventually constitute big new client bases for financial products and services. Banks and financial institutions are also well positioned to foster CSR in their client businesses in various economic sectors, engaging with them in assessing the social and environmental impacts of the enterprises/projects seeking financee. For smaller enterprises, the PKSF has developed a set of guidelines (Revised and Updated Guideline for Management of Microenterprise Environmental Health and Safely (EHS) Risks, PKSF, August 2004) for this purpose. For larger projects (valued at USD10 million or higher), the Equator Principles, a set of guidelines developed under the aegis of the IFC, are being used by a large number of leading international banks.

8.1.3 Initiating CSR programs in banks/financial institutions

Embracing CSR has to begin with decision at the highest corporate level (board of directors), and adoption of action programs and performance targets chosen in consultative processes involving the internal and external stakeholders concerned. A first time CSR program of a bank or financial institution would be likely to include action plans for: i) Ingraining environmentally responsible practices within the organization; ii) Engaging with borrowers in scrutiny of the environmental and social impacts of their proposed undertakings (along the PKSF 2004 or Equator Principles 2006 guidelines, as relevant); iii) Reaching out with financial services to the less well o. population segments of the community (With own initiatives along lines indicated at paragraph 1.2 above); and iv) Community investments by way of donations to initiatives of Civil Society Organizations (CSOs), NGOs and institutions involved in health, education and culture; for social and environmental improvement including nutrition, health and education in the disadvantaged population segments (most banks and financial institutions in Bangladesh already have significant outlays of such charitable expenditures, these can _it in appropriately as elements in the new structured CSR programs). Foreign banks in Bangladesh having structured CSR programs (in line with their home country practices) can come forward to usefully mentor the new, incipient CSR initiatives of local banks. Networking and joint initiatives in CSR programs among banks and financial institutions may be useful in some cases in devising more inclusive, comprehensive programs of necessary critical size.

Reporting of the CSR initiatives can begin in a modest way as supplements to usual annual financial reports, eventually to develop into full blown comprehensive reports in the GRI format. Like the statutory financial reports, the CSR reports are expected to be available in the public domain for perusal by stakeholders.

8.1.4 What is CSR-Clearing the Confusion

In recent years many technical terms have been introduced to the Bangladesh business community these include:Corporate Governance, Corporate Philanthropy, Social Responsibility, Social Compliance and Corporate Culture. This fact sheet aims to summaries these concepts and to compare and contrast them with full-blown corporate social responsibility (CSR).

8.1.5 So what is Corporate Social Responsibility (CSR)?

CSR is the heart of a business. It should be integrated into the companies Human Resource Policy, its ethical business practice and define how it complies with environmental regulations and respects the local community. Most CSR choices involve balancing competing values, interests and costs. CSR also involves decisions about sustainabilityinvolving the triple bottom line of economic, social and environmental performance. CSR is a source of opportunity, innovation and competitive advantage particularly in relation to international sales. Advocates of CSR often offer four arguments as to why it should be given attention:- (1) Moral Obligation- companies have a duty to be good citizens and to do the right things (2) sustainability- emphasizing environmental and community stewardship (3) License to operate because every company needs permission from government, communities and other stakeholders to do business and (4) Reputation to improve the image of a business and to strengthen its brand. We have come to a time in Bangladesh when a new approach is needed in order to integrate social and environmental considerations more effectively into core business operations and strategy. This will be strategic CSR integrating company CSR inside out and outside in where the companys employment practice and factory conditions will receive as much attention as its donations to good causes and its environmental enhancement projects. Typically the more closely tied a social issue is to a business, the greater the opportunity to leverage the firms resource- and to benefit society. CSR is interdependence between society and business and each successful business needs a healthy society. Education, health care and equal opportunity are essential to the development of a productive workforce. Safe products and safe working conditions not only attract customers but lower the internal costs of activities. Efficient use of land, water, energy and other natural resources makes business more productive. Ultimately, a healthy society creates expanding demand for business, as more human needs are met and aspirations grow. At the same time a healthy society needs successful companies. No social program ca rivals the business sector when it comes to creating the jobs, wealth and innovation that improve standards of living and social conditions over time

8.1.6 Corporate Social Responsibility (CSR) Social Islami Bank Ltd.

The Social Islami Bank Limited started its journey with the concept of 21st century Islamic participatory three sector banking model: (i) Formal Sector commercial banking with latest technology, (ii) Non-Formal Sector Family Empowerment Micro-Credit, Family Empowerment Micro-Enterprise & Small and Medium Enterprise (SMEs) program and (iii) Voluntary Sector-Social Capital Mobilization through CASH WAQF and others. Reduction of poverty level is the vision of the bank together with a commitment to working together for a caring society. The welfare activities of the Social Islami Bank Limited (SIBL) as part of corporate social responsibility are maintained from profit made in the Cash Waqf and Social Welfare Fund. Financial support has been extended to different Mosques, Madrashas, Orphangages, Schools & Voluntary Organizations. Benefiaciaries that have received out of profit from the Cash Waqf Fund include center for rehabilitation of the Paralyzed (CRP), Sight Savers International, kidney Foundation, Bangladesh Cancer Foundation Hospital, Jatiya Ando Kalayan Samity, Comilla and Misabbir Cancer Care Centre. SIBL has assisted poor patients suffering from Cataract & Low Vision. In 2006 eight mobile camps were held in different parts of Bangladesh including Faullah, Mirpur, Manikgonj, Bancharampur, Fatichari, Sylhet and Noakhali. These camps provided 185 cleft lip and palate operations and medical care for 2622 patients including medicine/ medicine, spectacles and cataract surgery free of costs. After successful cataract operation, the patients can see the light of the beautiful world and can read the holy Quran or scriptures. SIBL recognizes the importance of skilled Human Resources and promotes a congenial working environment, people related policies generating team spirit and promoting a high level of integrity, loyalty, commitment and devotion among the employees. In order to maintain transparency, SIBL follows clear recruitment policies to show fairness to deserving candidates. The Bank has its own full-fledged training institute and stresses the need for training to employees for their professional improvement. Through its Family Empowerment Micro-Credit program SIBL lends to the segment of the Bangladesh society who are not able to provide collateral security. The Micro-Enterprise Program is tailored to meet the needs of small traders and shop-keepers. Small and Medium Enterprises (SMEs) investment is addressed to unlock the potentials of the missing middle who are not being properly addressed by the Corporate Banking Sector. SIBL has successfully implemented Micro-Credit program with the support from International Labour Organization (ILO) to eliminate child labor form Garment sector in Bangladesh. SIBL and UNICEF have also jointly implemented Micro-credit program to extend investment facilities among the parents-guardians of the former garment child workers. SIBL with support from International Labor Organization (ILO) successfully disbursed stipend worth of TK. 45.00 Million among 5000 students (child labor) during 1996-1998 who had lost their child labor jobs from Garment sector. SIBL Executives & officers have been distributing spectacles among poor patients suffering from cataract & low vision since 2005. SIBL also organized Voluntary Blood Donation Program every year and motivates others to donate blood for the noble cause of humanity. During 2007 SIBL staff donated one days salary to flood affected people of the northern part of the country along with other help in the form of both cash and kinds reaching their door-steps. SIBL also donated one days salary for the devastating SIDR affected people and distributed both cash and kinds in the remotest areas of the southern part of the country. In addition during the winter time staff gives warm clothes for distribution to the poor people. SIBL intends to continue with its welfare activities as part of its Corporate Social Responsibility (CSR).

Table-8.1.1: Sector wise CS expenditure

Corporate Social Responsibility (CSR) Expenditure (Amount in Lac Tk) Year 2008 18.52 12.68 29.35 1.25 58.6 120.4

CSR Sector Education Health & Beneficiary Disaster Management (Family Rehabilitation) Environment (Social Utility) Others Total

2006 38.45 39.365 18.28 2.5 10.13 108.725

2007 40.21 10.23 15.25 1.21 20.31 87.21

2009 22.74 19.61 34.57 2.81 60.01 139.74

2010 90.7 30.85 21.6 3.47 57.76 204.38

Graph-8.1.1: Total Corporate Social Responsibility expenditure

CSR Expenditure in Lac

250.000 200.000 150.000 100.000 50.000 0.000 2006 2007 2008 Total 2009 2010 Total