Report on AIBL (GB & FE)

A Rare Combination of Shariah and Modern Banking

Page | 1

PPaarrtt –– OOnnee

PPrreeffaattoorryy PPaarrtt


Page | 2

IInntteerrnnsshhiipp RReeppoorrtt

OOnn

“General Banking & Foreign Trade Activities of Al-

Arafah Islami Bank Limited: A Study on Motijheel

Branch”


Page | 3

DDeeddiiccaattiioonn

TThhiiss RReeppoorrtt iiss ddeeddiiccaatteedd ttoo MMyy HHoonnoorraabbllee SSuuppeerrvviissoorr

Farhana Noor


Page | 4

IInntteerrnnsshhiipp RReeppoorrtt

OOnn

“General Banking & Foreign Trade Activities of Al-Arafah Islami Bank

Limited:

A Study on Motijheel Branch”

Supervised by:

Farhana Noor

Senior Lecturer

Department of Business Administration

Faculty of Business & Economics

Daffodil International University

Prepared By:

Rahat Hasan Rana

Id: 101-11-1439

Batch: 25th

Major in Accounting




Date of Submission: .2013


Page | 5

Acknowledgement

The successful accomplishment of this report is the outcome of the contribution of a number

of people to whom I am grateful and thanked them from the very deep of my heart. At the

beginning, I would like to express my sincere gratefulness to Almighty Allah for enabling me

to prepare this report in complete form.

I would like to express my special gratitude to my honorable supervisor Farhana Noor,

Senior Lecturer, Faculty of Business & Economics, for providing me much needed

suggestions to prepare this report. His inspiration, kind direction helped me in building

courage and confidence to face the practical situations.

I express my sincere gratitude to Jashim Ahmed Chowdhury, Assistant vice president Al-

Arafah Islami Bank limited, Motijheel Corporate Branch, for his kind co-operation and

guidance. The members of Al-Arafah Islami Bank Limited management were very co-

operative and helpful. They helped me by providing various data, guidance and direction.

Thanks to all those persons who helped by providing information and their necessary

materials.


Page | 6

Letter of Transmittal

,2013

To

Farhana Noor

Senior Lecturer




Subject: Submission of Internship Report.

Madam,

It is a great pleasure to submit my internship report on “General Banking, & Foreign

Exchange Activities of Al-Arafah Islami Bank Limited”.

The whole report is based on my academic knowledge of BBA program and practical

experience gained during internship. I tried my best to prepare the report. If any further

clarification required regarding my report, I will gratefully respond to any clarification

required.

Finally, I would like to thank you for kind guidance and help. I hope and pray that you would

be kind enough to accept the report and oblige thereby.

Sincerely Yours

Rahat Hasan Rana

ID: 101-11-1439

BBA 25th Batch

Major in Accounting


Page | 7

Letter of Acceptance

This is to certify Rahat Hasan Rana ID: 101-11-1439 has prepared this internship report

entitled “General Banking & Foreign Exchange Activities of Al-Arafah Islami Bank

Limited (AIBL)” in Motijeel Corporate branch in, under my supervision & guidance, I do

here by approve the style & content of this internship report. This is for the partial fulfillment

of four year graduation degree of BBA in Major-Accounting of Daffodil International

University.

I wish his ever success in life

……………………………………………....

Farhana Noor

Internship Supervisor

Senior Lecturer


Department of BBA



Page | 8

DECLARATION

I solemnly declare that this Internship Report is the outcome of original project work written

in my own Language and it is not the replica of any other student. It has been submitted for

the partial fulfillment of the requirements of the degree of Bachelor of Business

Administration (BBA) under the guidance of honorable supervisor, Farhana Noor, Senior

Lecturer, Faculty of Business & Economics, Daffodil International University, Bangladesh. It

has not been submitted to any other University or Institution for any degree.

………………………….

Rahat Hasan Rana

ID: 101-11-1439





Page | 9

Executive Summary

This report is a combination of three month Internship program with Al-Arafah Islami Bank

Limited (AIBL) is one of the most important institution in this country.

The title of the report is the “General Banking, & Foreign Trade Activities of Al-Arafah

Islami Bank Limited”. This report is concerned with the evaluation and analysis of the

general banking and foreign trade activities of AIBL. The purpose of internship is to meet the

requirement of BBA program and gain practical knowledge by understanding the corporate

culture. The report started with the introductory remarks and subsequently summarizes the

profile of Al-Arafah Islami Bank Limited, theoretical aspects, analysis and findings, major

findings in the general banking of AIBL, and the closing part consists conclusion and

recommendations.

The introduction part of this report emphasizes the background, objective, scope,

methodology, data analysis and limitations of the report. The report is descriptive in nature.

Overview of AIBL includes Objective, business policy, function, and shareholding structure,

board of directors, management committee and continued activities of AIBL.

Hypothetical aspect of this report is general banking of AIBL. Analysis and findings part I

have analyzed the general banking of AIBL on the basis of my experience and observation

(which I have got through my internship program from AIBL).


Page | 10

TABLE OF CONTENT

Part – One

Prefatory Part

Page Number

Title Page

2

Dedication

3

Preface

4

Acknowledgement

5

Letter of Transmittal

6

Letter of Acceptance

7

Declaration

8

Executive Summery

9

Table of Contents

10

List of Tables,Charts,Diagrams

14

Part – Two

Report Body

Page Number

Introduction

Chapter One Introductory Part

1.2 Objectives of the study 16

1.2.1 General objective

17

1.2.2 Specific objectives 17

1.3 Methodology of the Study 18


Page | 11

1.3.1 Sources of Information and data 18

1.3.2 Period covered 18

1.3.3 The process of application of the techniques and

reason

19

1.4 Limitations of the Study 19

Chapter Two Organization Profile of Al-Arafah Islami Bank

2.1 Background 31

2.2 Value Added Statement 33

2.3 At a Glance of Al-Arafah Islami Bank Limited 34

2.4 Functional Area of AIBL 34

Chapter Three

General Banking Activities of AIBL

3.1 Account Opening Section 31

3.1.1 Who can open an account? 33

3.1.2 Necessary documents to open an account 34

3.2 Bills & Clearing Section 34

3.2.1 Cash transaction 36

3.2.1.1 Cash receipt 36

3.2.1.2 Cash payment 36

3.2.2 Clearing Transaction 36

3.2.2.1 Inward clearing 36

3.2.2.2 Outward clearing 36

3.2.3 Transferring Transaction 37

3.3 Remittance Section 37

3.3.1 Demand Draft: 36

3.3.1.1 Issues of Demand Draft 36

3.3.1.2 Payment of Demand Draft 36

3.3.1.3 Dishonor of Demand Draft 36

3.3.1.4 Loss of Draft 37

3.3.2 Telegraphic Transfer 37

3.3.2.1 Mail Transfer Advice 37

3.3.3 Pay Order 38

3.4 CASH SECTION 38

3.4.1 Cheque 39

3.4.1.1 When Banker makes payment of a Cheque 39

3.4.1.2 When banker may refuse payment of a cheque 40

3.4.1.3 Answer generally given in case of dishonored cheque 40

3.4.1.4 Punishment of Bouncing of cheque 40

3.5 Account Division 40

3.5.1 General Account 40

3.5.2 Extract 41

3.5.3 Debit Voucher 41


Page | 12

3.5.4 Account Closing 41

3.5.5 Account Transfer 41

3.5.6 Bank Account Statement & Certificates 41

Chapter Four

Foreign Exchange Activities of AIBL Bank Ltd

4.1 Literature Review 43

4.2 AIBL Bank and Trade Finance 44

4.2.1 AIBL Bank Statement policy 44

4.2.2 Function of Trade Finance Department 44

4.2.3 Parties Involve in Trade Finance 45

4.3 IMPORT Bills 46

4.3.1 Import Procedure and Practice 46

4.3.2 Documentary Credit or L/C 48

4.3.2.1 Various steps in the operation of Documentary Credit 48

4.3.2.2 Different types of documentary credit or L/C : 50

4.3.2.3 Stage to a documentary Credit 52

4.3.2.4 Advantages and Disadvantages of Documentary

Credit

54

4.4 EXPORT Bills 55

4.4.1. Export financing 56

4.4.1.1. Pre – shipment credit 56

4.4.1.2. Post Shipment Credit 57

4.4.2. Operating procedure 58

4.4.3 Methods of payment in export sales 59

4.5 Collection 61

4.5.1 Documentary collection 64

4.5.2 Clean Collection 64

4.5.3 Advantages and Disadvantages of Clean Collection 65

4.6 Banks facilities and Services to Exporter and Importer 65

4.6.1 Export facilities and Services 65

4.6.2 Import facilities and services 66

4.7 Remittance 66

4.7.1 Inward Remittance 67

4.7.2 Outward Remittance 68

4.8 Core Concept of Foreign Exchange 69

4.8.1 Different terms used in foreign exchange 69

4.8.2 Relevancy of Foreign Exchange Revenue for AIBL 70

4.9 Factor Affecting Fluctuation In Exchange Rates 70

4.9.1 Exchange rate in Bangladesh and its function over

time

71

4.10 Ways of avoiding Exchange Risk 72

Chapter Five Findings, Recommendations & Conclusion

5.1 Findings 74

52 Recommendat ions 75


Page | 13

5.3 Conclusion 76

Part – Three

Appended Part

Page Number

A: Bibliography 77

B: Appendices: 77

Appendix - 01 78


Page | 14

List Of Tables,Charts,Diagrams

Page Number

1.1 Period covered 18

2.2 Value Added Statement 23

2.3 At a Glance of Al-Arafah

Islami Bank Limited

24

3.3.2 The charges of T.T 37

3.3.2.1 The charges of M.T.A 37

4.1 Import business of other Banks (2010 - 2012)

47

4.2 Import business of AIBL

Bank

47

4.3 Amount of Guarantee 48

4.4 Steps in D/C 49

4.5 Shows the Back to Back Credit Procedure

51

4.6 AIBL involvement in D/C 53

4.3.2.4 Advantages and

Disadvantages of Documentary Credit

54

4.7 Export amount in other

Banks

55

4.8 Export 55

4.9 Cash in Advance 60

4.10 Open Account 60

4.11 Bills for Collection 62 4.12 Collection 63

4.5.3 Advantages and

Disadvantages of Clean

Collection

65

4.13 Remittance 67


Page | 15

Part : Two

Report Body

Chapter: 1

Introductory Part


Page | 16

Chapter: 1

Introduction

1.1 Rationale of the study

Islam provides us a complete lifestyle. Main objective of Islamic lifestyle is to be successful

both in our mortal and immortal life. Therefore in every aspect of our life we should follow

the doctrine of Al-Qur'an and lifestyle of Hazrat Muhammad (Sm.) for our supreme success.

Al-Arafah Islami Bank started its journey in 1995 with the said principles in mind and to

introduce a modern banking system based on Al-Qur‟an and Sunnah.

General banking is maintenance of Deposit A/C, Saving accounts/ Current accounts/cash

credit deposits/Fixed deposits/short term deposits/margin deposits/Bond deposits/F.C. Bond

deposits. Receipts & payment of cash. Handling transfer transactions and operations of

clearing house. Maintenance of accounts with Bangladesh Bank & other banks. Collection of

Cheques & Bills. Issue and payment of Demand Drafts, Telegraphic Transfers and payment

Orders. Executing customers standing Instructions. Maintenance of safe Deposit Lockers and

Internal Accounts of the banks. Reporting to head office about daily position. Saving all

transaction record in computer. Closing and transfer of different types of accounts. Keeping

good relation with valued customer.

Now a day, foreign trade plays a vital role in banking. It is a system or process in which one

national currency is converted into another and of transferring money from one country to

another. It is mainly consist of export, import and other foreign Remittance. In a developing

country, foreign direct investment (FDI), export, import, foreign remittance etc. plays very

significant role. There is a great opportunity to invest the foreign remittance which also

comes from “wages earners” working abroad, in several prospective investing fields like

energy sector, telecommunication, information technology etc, in our economy.

Therefore, “General Banking and Foreign Exchange” has an important role to play in the

financial sector of Bangladesh. Consequently, the study of “General Banking and Foreign

Exchange” the context of Bangladesh‟s developing economy is of great opportunity


Page | 17

1.2 Objectives of the study

1.2.1 General objective

The general objective is that; practically know about general banking and foreign

Trade actives and it how to apply our real life.

1.2.2 Specific objectives

To analysis the General Banking Transaction procedures maintained by the AIBL

To analysis the Foreign Trade Transaction procedures maintained by the AIBL

To evaluate General Banking and Foreign Trade performance of The AIBL.

To identify problems in General Banking & Foreign Trade operations of The

AIBL.

To recommend some suggestions for the successful operations of General

Banking and Foreign Trade activities of the AIBL.


Page | 18

1.3 Methodology of the Study

The following methodology has been followed to come to a successful conclusion of the

report:-

1.3.1 Sources of Information and data: The sources of information are:

Primary data

Officers.

Conversion with clients.

Secondary data

Different Circulars issued by the head office of Bangladesh Bank.

Banks Annual reports.

Prior research report.

Some printed materials like brushier, hand notes etc.

Data Collection through personal interviews.

1.3.2 Period covered

Department Total Days

General banking 40

Foreign Exchange 50

Total 90

Table 1.1 shows the period covered during the internship


Page | 19

1.3.3 The process of application of the techniques and reason

A critical analysis of the data has been made through the bar diagram and line graph

over the last five years. This has enabled me to visualize the trend of the variables of

interest over time; indicators of bank perforation have also been computed through

ratios of variables and spread-burden analysis. In addition ROE, Profitability etc. have

been critically analyzed.

Trade finance procedure of documentary credit of the AIBL has been critically

evaluated through the analysis of diagram, flow charts. This will provide the

identification of the problems faced by AIBL and ways of removing the problems.

Protection of foreign exchange risk occurring out of transaction exposure for AIBL by

flowchart.

1.4 Limitations of the Study Deposit all out co-ordination from the bank official, I faced some limitations. The main

problem I faced in preparing the paper was that inadequacy and lack of availability of

required data. This report is an overall view of general and foreign trade of AIBL. But there

are some limitations for preparing this report. These barriers, which hinder may work, are

as follows:

Difficulty of accessing latest data of internal operation.

Most limitation of this report is Bank‟s policy is not to disclose some data

and information for obvious reason, which could be very much useful.

Lack of Experience on preparing these type of report

Sometimes data could not be verified.

The scope limited by the availability of data.

I was placed to this bank for only 3 months of time and working like a regular

employee hindered the opportunity to put the better effort for the study.

With All this limitation I try my best to make this report as best as possible. So readers are

requested to consider these limitations while reading and justifying any part of my study.


Page | 20

Chapter: 2

Organizational Profile of Al – Arafah Islami Bank Ltd


Page | 21

Chapter: 2

Organizational Profile of Al – Arafah IslamiBank Ltd

2.1 Background

With the objective of achieving success in life here & hereafter following the way directed by

the Holy Quran and the path shown by Rasul (SM) Al Arafah Islami Bank Ltd was

established (registered) as a public limited company on 18 June 1995. The inaugural

ceremony took place on 27 September 1995. The authorized capital of the Bank is Tk.

10,000.00 million and the paid up capital is Tk. 7,130.98 million as on 31.12.2012.

Renowned Islamic Scholars and pious businessmen of the country are the sponsors of the

Bank. 100% of paid up capital is being owned by local shareholders.

The equity of the bank has stood at Tk. 14,050.69 million as on 31 December 2012, the

manpower was 2,110 and the number of shareholders was 52,739. It has achieved a

continuous profit and declared a good dividend over the years. High quality customer service

through the integration of modern technology and new products is the tool of the bank to

achieve success. The bank has a diverse array of carefully tailored products and services to

satisfy customer needs. The Bank is committed to contribute significantly to the national

economy. It has made a positive contribution towards the socio economic development of the

country with 100 branches of which 21 is AD throughout the country.

We are pledge-bound to convert the Bank into an Islami Bank on global standard which will

be dynamic in actions, progressive in ideas, honest in dealings, correct in judgment, futuristic

in attitude, fair in approach, polite in behavior and devoted to high quality service to

customers. Our aims are for boosting modern management, advanced technology, good

profitability and steady growth transparency. We are also firmly committed to disclosure and

compliance to shariah and regulatory authorities. Today the bank is an agile organization

which promotes innovation, encourages improvement, values sense of urgency and develops

people who accept challenges and turns them into opportunities

Vision

To be a pioneer in Islami Banking in Bangladesh and contribute significantly to the

growth of the national economy.

Mission

Achieving the satisfaction of Almighty Allah both here & hereafter.

Proliferation of Shariah Based Banking Practices.

Quality financial services adopting the latest technology.

Fast and efficient customer service.

Maintaining high standard of business ethics.


Page | 22

Balanced growth.

Steady & competitive return on shareholders' equity.

Innovative banking at a competitive price.

\ Attract and retain quality human resources.

Extending competitive compensation packages to the employees.

Firm commitment to the growth of national economy.

Involving more in Micro and SME financing.

Commitments

Ours is a customer focused modern Islamic Banking making sound and tidy growth

in both mobilizing deposit and making quality Investment to keep our position as a

leading Islami Bank in Bangladesh.

To deliver financial services with the touch of our heart to retail, small and medium

scale enterprises, as well as corporate clients through our branches across the country.

Our business initiatives are designed to match the changing trade & industrial needs

of the clients.

CAPITAL POSITION (up to 2012)

Authorized capital Tk. 10,000.00 million.

Paid-up capital Tk. 7,130.98 million.

Total Reserve up to 31.12.2012 Tk. 118,683.39million

Investment 106,650.42 Million

The Bank is required to transfer 50 percent of its net profit before tax to capital

Fund as per the Banking Companies


Page | 23

2.2 Value Added Statement

Value added is a measure of wealth created by the Bank through various business activities.

The statement of value added shows the total wealth created and how it was distributed

among stakeholders, including the Government, employees and shareholders.

Particulars 2012 2011

Income from Banking Service 16,692.58 11,332.59

Cost of Services & Supplies (10,618.44) (6,037.50)

Value added by Banking Services 6,074.14 5,295.09

Provisions for Investment & Off-Balance

Sheet Items

(811.44) (380.16)

Total Value Addition 5,262.70 4,914.93

Value Distributed

To Employees 1,419.21 918.41

To Statutory Reserve 729.24 658.35

To Government as Income Tax 1,998.69 1,747.87

Depreciation 150.66 86.77

Retained Earning 964.90 1,503.53

Total 5,262.70 4,914.93


Page | 24

2.3 At a Glance of Al-Arafah Islami Bank Limited

Full name Al Arafah Islami Bank Limited

Nick Name AIBL

Type Private Limited Company

Bank Type Private Commercial Banks of Bangladesh

SWIFT Code ALARBDDH

Industry Industry

Headquarters 36, Dilkusha (6-9 floor) C/A Dhaka-1000,

Bangladesh

Established/Founded 1995

ATM Network Available

Foreign Exchange Available

Branches in Bangladesh AIBL has branches all over the country Bangladesh (100 Branches)

Contact Phone: +880-2-7123255-7, 9568007, 9569353

Fax: +880-2-9566160-69 9566074-75

Email: [email protected]

Logo


Page | 25

Organ gram of Al-Arafah Islami Bank Limited

Market Value Addition:

Total number of share outstanding: 713,098,010

Market value per share: BDT 24.29

BOARD OF DIRECTORS

MANAGING DIRECTORS

GM

OPERATION

OFFICER IN

CHARGE

ACCOUNT

OFFICER IN

CHARGE

CREDIT

AGM

INTERNATI

ONAL

DGM

INDUSTRIA

L CREDIT

AGM

ESTABLIS

HMENT

AGM

COMPUTE

R

DGM

ADMINISTR

ATION

GM

DEVELOPMENT


Page | 26

Capital Adequacy Ratio:

Share Holders Equity:


Page | 27

Deposit Mix:

Investment Growth:


Page | 28

Export & Import:

Income & Expenditure:


Page | 29

2.4 Functional Area of AIBL:

Export and Import Function Retail Banking

Industrial financing trade financing

Syndicated Loan

Project financing

Hire purchase

Lease financing

Online service

Automated Accounting

Integrated System

Signature Verification

Any Branch Banking

ATM Services

Other Delivery Channel Services


Page | 30

Chapter: 3

General Banking Activities of AIBL


Page | 31

Bank is nothing but an intermediary between lender (surplus unit) and borrower (deficit unit).

Savings and deposits are the main strength of the banks to provide loan. And the interest

earned from the difference borrowing and lending is the major portion of banks income.

Banks also earns from variety of operation. Branch banking includes four operational

divisions in Al-Arafah Islami Bank Limited.

General banking is the front side banking service department. It provides those customers

who come frequently and those customers who come one time in banking for enjoying

ancillary services. In some general banking activities, these are no relation between banker

and customers with who bank are doing its business frequently. Al-Arafah Islami Bank

Limited‟s general banking is divided into five sectors. These are:

• Account opening Section

• Bills and clearing section

• Remittance section

• Cash section

• Accounts section

Initially all the accounts are opened through deposit money by the customer and these

accounts are called deposit account. Normally a person needs to open an account to take

services from the bank. Without opening an account, one cannot enjoy variety of services

from the bank. Thus, the banking usually begins through the opening of the account with the

bank.

3.1 Account Opening Section

The money deposited with the banker is not held by him in trust but as his debts to the

depositors and the relationship that exists between the banker and the depositor is strictly that

of debtor and creditor. The banker becomes the owner of the money and is free to utilize the

same in any way he chooses an is bound at the place where the deposits are maintained to

make repayment thereof by an equal amount on demand, at notice or at the end of the

specified period with or without interest depending on the nature of the deposits.

The deposits are accepted by the banker through current and savings accounts, which is

withdraw able by cheques. The depositors are repayable on demander otherwise and

withdraw able by cheques, draft, and order of otherwise.

Al –Arafah Islami Bank Limited keeps the deposits on the form of different account. Like

• Al- Wadiah current Deposit

• Mudaraba Saving Deposit

• Short Notice Deposit

• Mudaraba Terms Deposit Receipt

• Mudaraba Investment Terms Deposit

• Mudaraba Fixed Deposit Receipts

• Mudaraba Profit Payable Terms Deposits

• Mudaraba Monthly Hajj Deposit

• Mudaraba Terms Hajj Deposit

• Mudaraba Double Scheme

• Mudaraba Kotipoti Scheme.


Page | 32

Type of Services

Mudaraba Terms Savings Deposit: Deposit in monthly installment @Tk.300/-, Tk.500/-,

Tk.1000/-Tk.1500/- & Tk.2000/- is obtained under the aforesaid scheme for a tenure

of 5,8,10 and 12 years and the same is withdrawal with profit at the end of the tenure.

Monthly Profit based Term Deposit: Under the above scheme, deposit of Tk. 1.00 lac and

multiple thereof are accepted for a term of 5 (five) years and the bank gave profit thereon

Tk. 885 per month per lac and proportionately on the rest amount of deposit under the

category during the year under review. The aforesaid rate shall, however, be adjustable at

the close of calendar year on finalization of accounts.

Monthly Haj Deposit: Hajj deposit at monthly installment from 1 (one) year to 20(twenty)

years are accepted under the above scheme to enable the account holder to perform Hajj

out of the accumulated saving with profit.

Onetime Haj Deposit: Under the above scheme, fixed amount of Hajj deposits are

accepted from the clients for particular term and as per rules profit is accumulated thereon

per year in this regard. As and when the fixed deposit is matured, Hajj expenses are

defrayed by the same. Under the scheme, the guardians may also open Hajj account to

enable their successors to perform Hajj. Highest amount of profit is paid in the above

types of deposit by the bank.

Savings Investment Deposit: Deposit under the scheme is accepted by monthly

installment and after expiry of the term; double amount of such savings is given as

investment in feasible sectors by the bank as per choice of the depositors without any

collateral security. Any one by saving under the scheme can take business venture on

utilization the amount saved under the scheme as well as availing bank investment.

Marriage Savings Deposit: Fixed monthly installment for a particular period is to be

deposited to defray the expenses of marriage and the bank allows double of saving or

Tk.30,000/- which is higher as investment to procure ornaments, furniture, fixture etc.,

repayable in 24 monthly installments without any collateral security.

Savings Bond Deposit: Under this scheme the bank has introduced saving bonds for Tk.

10,000/-, Tk.25,000/- and Tk. 100,000/- for 3,5 and 8 years. After the completion of the

tenure the deposit

Investment: The Total investment of the bank stood at Tk.5079.21 million against

Tk.3728.41 million during the corresponding period of last year. The percentage of

increase is 36.23% as against 13.00% in banking sector.

The bank extends investments to the clients under the following modes of investment

under Islamic Shariah:

Bai-Murabaha or simply Murabaha: The terms ―Bai-Murabaha‖ have derived from

Arabic words Bai and Ribhum. The word ―Bai‖ means purchase and sale and the word

‗Ribhum„ means an agreed upon profit. So Bai-Murabaha means sale for an agreed upon

profit. It may be defined as a contract between a Buyers and a Seller under which the


Page | 33

seller sells certain specific goods permissible under Islamic Shariah and the word Law of

the land to the Buyer at a cost plus and agreed upon profit payable today or on some date

in the future in lump-sum or by installments. The profit may be either a fixed sum or

based on a percentage of the price of the goods.

Musharaka: 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 injunctions of the Holy Qura„n, Sunnah and Ijma (consensus) of the

scholars.

Musharaka transaction may be conducted in the following manner:

One, two or more entrepreneurs approach 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.

The profit is distributed according to an agreed ratio. However, losses are shared in

exactly the same proportion in which the different partners have provided the finance for

the project.

Mudarabah: 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. The first party

provides capital and the other party provides the expertise with the purpose of earning

lawful profit (approved by Islamic law) which will be shared in a mutually agreed upon

proportion.

Bai-Muajjal: The term Bai and Muajjal are derived from the Arabic words Bai and Ajal

where Bai means purchase and sale and Ajal means a fixed time or a fixed period. So Bai-

Muajjal is a sale for which payment is made at a future fixed date or within a fixed

period. In short, it is a sale on Credit. It is basically a contract between a buyer and seller

under which the seller sells certain specific goods, permissible under Shariah and law of

the country to the buyer at an agreed fixed price payable at a certain fixed future date in

lump-sum or in fixed installments.

3.1.1 Who can open an account?

These above accounts may be open by---

• Individual

• Partnership

• Minor (Minor can open the account in the name of the minor's guardian or jointly

with the guardian) • Club, Societies, Trusts etc

• Joint venture

• Proprietorship

• Private Limited Company

• Public Limited Company

• Non-trading concerns • Co-operative society

• Corporation and public body


Page | 34

3.1.2 Necessary documents to open an account

When a customer/ organization/ company/ firm/ society/ club/ etc. want to open bank account

he/ she have to filled a bank prescribed form and have to attached their organization‟s

documents are as follows.

Individual or Proprietorship

• National ID

• Trade License

• Photograph

• Tex certificate (not mandatory)

• Birth Certificate

• Organization‟s seal, etc

Partnership

• Trade License

• Photograph

• Partnership Deed

• Tex certificate

• Organization‟ seal, etc

Private Limited Company

• Trade License

• Photograph of Directors

• Certificate copy of Memorandum and Articles of Association

• Certificate of Incorporation

• List of Directors as per return of joint stock company with signature

• Resolution for opening account with the bank

• Signature and seal. etc

After observation of all the formalities/ documents mentioned above, the applicant is required

to deposit minimum Tk for opening a savings account and Tk for opening a current account.

This is called initial deposit. As soon as this money is deposited, the bank opens an account

in the name of the applicant. It should be noted that the permission of the component

authority for opening of an account is a must. The banker then supplies the following books

to the customer to operate the accounts.

• Deposit book

• A cheque book

3.2 Bills & Clearing Section

Transaction is a financial event, which changes the financial position of a company. There are

three types of transaction that is performed by the Al-Arafah Islami Bank Limited.

• Cash transaction

• Clearing transaction


Page | 35

3.2.1 Cash transaction

Cash department is a sensitive and important place of bank. Cash receiving and cash payment

is the first and important duty. A bank should member that the image of a bank is dependent

on cash officer of the bank. If the cash officer is not smart, outstanding and handsome person,

then it is meant this does not care for its customers.

3.2.1.1 Cash receipt

Receiving cash officer should draw his attention to avoid from these types of notes when he

/she taken money from the customers.

• Mutilated note

• Mismatched note

• Forged note

• Incorrect note

• Burn note

3.2.1.2 Cash payment

The officer should enough care when he/she makes payment of a cheque. Some of the

important checkpoints are given below:

• Amount of the cheque

• Who is the draw of the cheque

• Verifying the signature

• Posted and cash paid sale on the cheque

• Name of the branch

• Is it a fraud cheque?

After payment, the cheque the officer should maintain/noted account number, name of the

draw, and withdrawal amount in a register book.

3.2.2 Clearing Transaction

Clearing transaction is of two types one is clearing another is outward clearing.

3.2.2.1 Inward clearing

When any client of any bank gives cheque to the creditors, the creditor generally gives

deposit to their respective bank account for collection. Then the banks will send those

cheques to Bangladesh bank. The Bangladesh bank then sends this types of cheques to btheir

respective bank main branch this type of transaction is called inward clearing.

3.2.2.2 Outward clearing

When the bank gets different types of cheques of different banks from their client for

collection, they then send cheques to their main branch. The main branch then sends those

cheques to Bangladesh Bank. The Bangladesh Bank sends those to the respective banks.

3.2.3 Transferring Transaction


Page | 36

Transferring Transaction is the type of transaction in which money is not physically moved.

But it is moved from one account to another through debit and credit voucher.

3.3 Remittance Section

Remittance of fund is ancillary services of AIBL like other commercial Banks. It aids to

remit fund from one place to another place on behalf of its customers as well as non-customer

of bank. AIBL has its branches in the major cities of the country and therefore, its service one

of the best mediums for remittance of funds from one place to another.

The main instruments used by AIBL principle branch for remittance of funds.

• Pay order

• Demand Draft

• Telegraphic Transfer

3.3.1 Demand Draft:

A bank draft is an unconditional order issued by one branch of a bank on its branch to pay a

certain sum of money to the named person or order on demand. Hence, a bank draft is always

payable on demand it is also known as demand draft.

Essential feature of Demand Draft:

• It is drawn by one office of a bank upon some other office of the same bank.

• It is payable on demand.

• Its payment is to be made to the person whose name is mentioned or according to his

order.

• In other words, it cannot be made payable to the bearer.

3.3.1.1 Issues of Demand Draft

The person intending to remit the funds though a bank draft has to deposit the money to be

remitted together with the commission, which the banker charges of its services. The amount

of commission depends on the account to be remitted. On receipt of the required amounts

along with due filled in prescribed form, the banker issues a draft and hand over it to the

purchaser.

3.3.1.2 Payment of Demand Draft

If the draft is not crossed, the payee can draw the amount in cash upon presentation of the

same to the draw branch with satisfactory evidence of his identify or can draw the money by

depositing to his account there of any other bank. The draft being payable to certain particular

person or order the banker must satisfy himself as to the title of the person presenting it for

receiving the payment. The banker is discharged from liability only payment in due course.

3.3.1.3 Dishonor of Demand Draft

Normally a bank cannot refuse to make the payment of a draft, as it is his own obligation to

pay unless the presented draft is a forged one or there is double as to the identity of the

person presenting it for payment. He cannot also refuse to make the payment of a draft of the

plea of non-receipt of the relative advice from the issuing office.


Page | 37

3.3.1.4 Loss of Draft

If the issuing branches reported about loss, theft or damages of any draft it must promptly

inform the matter to the drawee branch and request to stop payment order such draft. Being

reported by the issuing branch, the drawee branch will note it to guard it sell against the

fundament encasement of the lost draft. This is essential so that the banker is not held

responsible for making payment otherwise than in due course.

3.3.2 Telegraphic Transfer

Telegraphic transfer, it may branch telephone or telex. Transfer means fund/ money transfer

from one branch to another branch not in same area. Sometimes the remitter of the funds

requires the money to be available to the payee immediately. In that case, the banker is

requested by him to remit the funds telegraphically. The bank passes T.T. by a secret code,

which input by the GB in charge and branch Manager. But at present T.T is being isolated

because of online banking system of AIBL. The online banking system reduces the demand

of Telegraphic Transfer. In Dhaka division the online fee is 100% free but outside the Dhaka

the rate is free up to 1.00 lac taka.

The charges of T.T

Commission 1% but not less than Tk. 10

Telex Tk. 30(fixed)

Sundry Vat Tk.10

3.3.2.1 Mail Transfer Advice

Where the remitter desires the banker to remit the funds to the payee instead of purchasing a

draft himself, the banker does it through a Mail Transfer Advice. The payee must have an

account with the paying office as the amount remitted in such a manner, is meant for credit to

the payee‟s account and not for cash payment.

The charges of M.T.A:

Commission 1% but not less than Tk. 10

Mailing Cost Tk. 30 (fixed)


Page | 38

3.3.3 Pay Order

Unlike an MT or TT the banker‟s payment order is meant for making payment of the

banker‟s own or of the customer‟s dues locally and not for affecting any remittance to an

outstation. In a sense, the payment order is used for making a remittance to the local creditor.

The post are in the form of receipts, which are required to be discharged by the beneficiaries,

where applicable on revenue stamps of appropriate value, against payment in cash or through

an account. The PO is not a negotiable instrument and cannot be endorsed or crossed like a

banker‟s draft.

3.4 CASH SECTION

Cash is the lifeblood of all financial activities. Cash section is a very sensitive point of the

branch. This section deals with all types of negotiable instruments and it includes vault,

used as the store of cash, instruments. The vault is insured up to Tk.20 lac. Insured amount

yet to be enhanced to Tk. 40 lac. Operation of this section begins when the banking hour

starts. Cash officer begins his/her transaction with taking money from the vault, known as

the opening cash balance. Vault is kept in a more secured place. The amount of opening

cash balance is entered into a register. After whole days‟ transaction, the surplus money

remains in the cash counter is put back in the vault and known as the closing balance. If the

cash stock goes beyond this limit, the excess cash is then transferred to AIBL main branch.

The main functions of this section are-

1. Cash Receipt

2. Cash Payment

Cash Receipt

Cash receipt procedure is given below-

1. The depositor first fills up the Deposit-in-Slip.

2. Depositor deposits the money.

3. Officer receives the money, counts and then enters in the Cash Receipt Register, and

finally signs with seal and dates the deposit-in-slip.

4. Slip is then passed to another officer, who enters the receipt details like serial no,

amount, etc. in his register, signs the slip and keeps the banks‟ part of the slip. Other

part is given to the depositor.

At the end of the day, entries are cross checked with the register kept at the cash counter to

see whether the transactions are correct or not

Cash Payment Some important check points for making the payment are as follows-

Endorsement

Endorsement is done by putting signature of the drawer on the back of the negotiable

instrument for the purpose of negotiation. By „blank endorsement‟, an order instrument is

made as „bearer‟.

Crossing


Page | 39

Generally two types of crossing are practiced, namely- General Crossing and Special

Crossing. Basically it gives a direction to the paying bank not to pay the check amount

over the counter. General crossing includes „A/C payee‟ crossing only. Drawing two

parallel and transverse lines do it. On the other hand, special crossing is like general

crossing but in addition bank name is also mentioned. This gives the direction to the same

to pay the check only to the banker, whose name appears in the crossing or to his agent.

Cash payment procedure is given below-

1. Customer first deposits the check (s) to the cash section. Authorized individual checks

whether it is materially altered, proper endorsed, crossed or not. Being satisfied the total

requirements; he passes it to the computer for checking the balance. Operator verifies

the check leaf security no. If matched, then operator signs. Otherwise noticed to the

individual for stop payment;

2. Authorized officer is then verified the signature with the Specimen Signature Card

(SSC);

3. Send the instrument to the computer section once again for posting;

4. Cash officer is then asked the bearer to sign on the back of the instrument. At the same

he just enters the payment details in his register and pays the money to the bearer;

5. At the end of the day, this information must be tallied with computer postings to ensure

the correctness of payment.

3.4.1Cheque

A cheque is a written order to the bank given by an account holder to pay money from his

account. A cheque is usually on the printed form supplied by the bank to their account holder.

Parties to a cheque:

Drawer: A person who orders the bank to pay money from his account.

Drawee: A person which pays the account of the cheque.

Payee: A person who receives his amount of the cheque.

3.4.1.1 When Banker makes payment of a Cheque

1. The cheque should be written in the bank‟s supplied printed cheque form.

2. The cheque should be presented for payment only to the branch of his bank on which it

draw

3. The cheque should be submitted with a date.

4. the amount in words and figure must be same.

5. The account holder signs the scheme.

6. There should be sufficient balance/ funds in the account of his customer to meet the

cheque.


Page | 40

3.4.1.2 When banker may refuse payment of a cheque

• Whether the cheque is post dated.

• Whether the cheque is out of dated.

• Whether the fund is insufficient.

• Whether drawer does not sign the cheque.

• On receipt of customers stop payment instruction.

• On receipt of a notice of a customer‟s death.

• On receipt of a notice of customer‟s insanity.

3.4.1.3 Answer generally given in case of dishonored cheque

• Refer to drawer;

• Not arrange for;

• Exceeds arranged;

• Endorsement irregular;

• Drawer deceased;

• Words and figure differs;

• Drawer‟s signature differs;

• Payment stop by the drawer;

• Cheque is mutilated;

• Cheque is out of date/ post dated requires revaliation;

• Crossed cheque please present through a bank.

3.4.1.4 Punishment of Bouncing of cheque

If the drawer is found guilty of a criminal offence under section 138 he would be punished

with a imprisonment of one year of a fine to the extent of twice the amount of the cheque

dishonor or both.

A clearing house is such a type of house where all members bank settled their interbank

transactions through their Bangladesh account. As the central bank, Bangladesh Bank is the

leader of clearing house in Bangladesh. There are 53 members bank in Bangladesh u

3.5 Account Division

Account department is a department with which cash and every department is related. It

records the profit and loss account and statement of assets and liabilities by applying “Golden

Rules” of book keeping i.e. GAAP. The functions of it are theoretical based. AIBL principle

Branch records its accounts daily, weekly, and monthly every records

3.5.1 General Account

The account that is to be maintained with H/O of AIBL for the purpose of settlement of inter-

branch transactions. Generally A/C is an important one which has to be maintained by each

branch of AIBL. Indeed General A/C is a record of originating and responding transactions

among inter-branches of the same bank. All types of assets and liabilities of one branch with

another one are settled through this account.


Page | 41

3.5.2 Extract

Extract is a statement of all originating and responding transactions among inter- branches

debit and credit advice. At the end of the day, all the debit and credit advices of different

department come to account department. It makes extract in light of all advices.

3.5.3 Debit Voucher

For making cash payment like entertainment, conveyance, and account department writes a

debit voucher. Amount is withdrawn through cash section by presenting debit voucher.

3.5.4 Account Closing

Account closing is also done by account opening section. The customer may close

his/her/their account(s) at any time giving notice to the bank. Similarly, the bank on genuine

ground may close customer(s) account giving reasonable notice for the action or without any

notice if the conduct of the account is not satisfactory to the bank or any reason(s)

whatsoever. In either case, bank will realize a closing charge from the customer‟s account.

The usual closing charge is Tk. 300 + 15% VAT. But, the closing charge of account within

three months of opening is Tk.500 + 15% VAT.

To close an account:

Account holder requires applying in a specific form with full signature.

He/she/they must surrender the unused leaves/cheque book provided by the

bank.

Verification of signature and approval by operation head.

Close the account.

On closure of the account, the bank will pay the credit balance (if any) of the account and any

profit due to the customer(s). The customer(s) shall surrender the unused cheque

books/leaves along with the requisition slip and other materials (if any) supplied by the bank

for operation of the account.

3.5.5 Account Transfer

Account opening section also transfers account to from one branch to another on customer‟s

request. The steps are:

Application for account transfer

The customer(s) shall surrender the unused cheque books/leaves along

with the requisition slip and other materials (if any) supplied by the bank

for operation of the account.

Verification of signature and approval of operation head

Close the account

Inform the respective branch.

Forward the documents.

3.5.6 Bank Account Statement & Certificates

All types of bank statements and certificates such as solvency certificates, income tax

certificates, B.O. certificates etc. are issued by the bank on favor of the customers. As per

customer‟s instruction the bank dispatch the account statement/advice to his/her/their address.

Moreover, on customer‟s request, bank provides statement and certificates related to the

account.


Page | 42

Chapter: 4



Page | 43

Chapter: 4


4.1 Literature Review

Banks play a very important role in effecting Foreign Exchange Transaction of a country.

Mainly transaction with overseas countries is respect of imports; exports and Foreign

Remittance come under the preview of foreign exchange transactions. Banks are the vital

sector by which such transactions are effected or settled. Central Bank records all sorts of

foreign exchange transaction and therefore, transaction effected by the Banks and other

authorized quarters are to be reported regularly (Daily, Fortnightly, Monthly, Quarterly,

Yearly etc) to Bangladesh Bank by the foreign exchange department of every Banks. Foreign

Exchange Department plays a vital role to earn the Banks maximum profit. This department

is classified according to their activities. The foreign exchange department consists of three

sections, these are as follows:

Import Section

Export Section

Foreign Remittance Section

Foreign Exchange Department, Banks facilitates their clients in enhancing International

Trade. The provision of finance to importers (Trust Receipt Facility, Documentary Credit

Facility) and exporters (Negotiation of export Bills, Purchase of Bill for collection)

encourages enterprises to engage in trade and enhance their liquidity position. Bank makes

the payment International Trade through letter of credit to the exporter on behalf importers.

Banks is a media of fund transfer from one party to another. In International Trade, as both

importers and exporters in different countries and do not deal with same currency, they have

to confront the risk of currency fluctuation. This exchange risk can be transferred from the

trader to the bank i. e. ready to provide the former with forward foreign exchange or currency

option so that the importer and the seller can devote their time to their business.


Page | 44

4.2 AIBL Bank and Trade Finance

AIBL Bank plays an important role in international trade. The trade finance department of

AIBL is efficient of their activities and provides the best services to their clients. The major

clients of AIBL are corporate clients. Performing their activities since 1989, AIBL has a very

good relationship with the big corporate clients of Bangladesh. Trade finance department

consist of Bills (Import) and Bills (Export).

4.2.1 AIBL Bank Statement policy

All AIBL employees are responsible for ensuring compliance with the Bank policies and

procedures Operational Manual (OM), Know Your Client (KYC), and other policies. It is

imperative that the trade finance staff is fully conversant with all aspects of the above stated

documents relating to Letter of Credit (L/C), Documentary and clean Collection, Bank

Guarantee, and Bank to Bank Reimbursement and export Bills.

a. International chamber of commerce (ICC) Uniform Rules, customs and practice:

Transactions relating to L/C, Documentary and clean collection, Bank to

Bank reimbursement are processed subject to and in conformity with the

current versions of International Chamber of Commerce Publication

b. Credit policies: Bank has their own credit policies and procedures for all Trade finance

activities. These are Credit Principle, Global credit portfolio limit, Credit

categories, Types of credit activities, Credit approval, Credit administration,

Credit monitoring and review.

c. Know Your Client (KYC): Relationship Managers (RM) are responsible for ensuring that client profile

are kept current and that copy is distributed in accordance with the Banks

Know your client policy.

4.2.2 Function of Trade Finance Department

Trade finance consists of the following areas of activity:

Import Bills

Export Bills

Bills Processing Unit


Page | 45

Basic function:

1. All transactions related to Import Transaction

2. All transactions related to Export Transaction

3. Handling of L/C reimbursements

4. Checking and collection of export bills for correspondent Banks.

4.2.3 Parties Involve in Trade Finance

1. The applicant: The applicant is the party that induces the Banks to issues

the letter of credit. The applicant is normally obligated to reimburse the

Bank for any payment made under letter of credit.

2. The issuing Bank: The issuing Bank is the Bank that issues the letter of

credit. The issuing Bank undertakes an absolute obligation to pay upon

presentation of documents drawn in strict conformity with the terms and

condition of the letter of credit.

3. The Advising Bank: An advising Bank simply advises a letter of credit

without any obligation on its part. However, the advising Bank shall take

reasonable care to check the apparent authenticity of the credit that it

advises. The advising Bank is typically a Bank in the Beneficiaries.

4. The Beneficiary: The beneficiary is the party entitled to drawn payment

under the letter of credit. The beneficiary will have to present the required

documents to avail payment under the letter of credit.

5. The Confirming Bank: The confirming Bank confirms that the issuer has

issued a letter of credit. The confirming Bank becomes directly obligated

on the credit to the extent of its confirmation and by confirming the Bank

receives the rights and obligation of an issuer

6. The Nominating Bank: The Bank where drafts drawn under the credit are

payable. In case of a usance credit where drafts are to be accepted by this

Bank.

7. The Negotiating Bank:The Bank that negotiates document under letter of

credit upon presentation. Typically advising Bank as nominated as

negotiating Bank


Page | 46

4.3 IMPORT Bills

Import Bills deals with L/Cs and the issuance of L/Cs for import purposes. The letter of credit

serves as a vehicle for the importer and exporter to ensure that their goods and money are

coming. It is important to remember that the Bank deals with documents and not goods.

There are various steps towards the issuance of L/Cs; these steps will also AIBL, as well as

various Banks serving as negotiating, confirming, etc. Banks. L/Cs are used for the purchase

and sale of goods.

L/C is used mainly in trade. They usually include the mode of shipment of a specified goods,

and what the port of destination is the expiry of the shipment, the document all need to be

submitted to the issuing Bank, Certificate of Origin, of where the goods is produced,

inspection certificates, as to quantity and quality, are countries may have their own set of

demands they want to ask.

There are two criteria for importing goods:

1. Commercial ( Normally AIBL takes 50% margin of total values of goods )

2. Industrial ( Normally AIBL takes 10% margin of total values of goods)

There are also two types of L/C:

1. Sight L/C: Sight L/C has also to be immediately through advanced payment can be

allowed.

2. Usance L/C: Usance L/C has also to be paid at a fixed maturity date. For example,

payment upon the receipt of goods.

Beneficiaries that want to apply for a L/C need to have proper credit facilities. After

calculating the outstanding, and there is a still room, then L/C is issued. Calculation of

margin and charges are also done. Upon the receipt of goods, proper documentation is

certified, and then payment is done. The reimbursement of funds can be made in through

negotiating. They can be negotiated to the Bank of choice of the relevant currency.

4.3.1 Import Procedure and Practice

1. Regulation

2. Import policy

3. Licensing for Imports

4. Making the purchase contract

5. Opening the Letter of Credit

6. Amendments to Letter of Credit

7. Securing and Lodgment of Documents

8. Verification and Lodgment of Documents by the L/C opening Bank


Page | 47

Chart 4.1: Import business of other Banks (2010 - 2012)

Amount in Million TK

Chart 4.1 shows the import amount in other Banks (2010 - 2012). As

Compared to other Banks AIBL import amount has fallen in 2012.

Chart 4.2: Import business of AIBL Bank


Chart 4.2 shows the import in million taka of AIBL Bank. The import has increased

during the period 2008 to 2012.

0

20000

40000

60000

80000

2008 2009 2010 2011 2012

AIBL

Prime Bank

Dhaka Bank

0

20000

40000

60000

80000

2008 2009 2010 2011 2012

Import (Million Tk.)


Page | 48

Chart 4.3: Amount of Guarantee

Amount of Garments increased as increase the number of Garments which is shown

as chart 4.3. It is increased by 30 percent in 2012 as compare in the year 2011.

4.3.2 Documentary Credit or L/C

Documentary credit is written undertaking given by a Bank (Issuing Bank, Opening

Bank) to a seller (Beneficiary, Exporter) at the request and on the instruction of the

Buyer (Applicant, Importe ) to pay either at sight or at a determinable future date, a

stated sum of money against stipulated documents and fulfillment of all the terms

and condition in the D/C. It is most suitable on the flowing circumstances:

When the importer is not well known, the exporter selling on credit terms

may have importers promise of payments backs by a buyer Banker.

On the other hand, the importer may not wish to pay the exporter until it is

reasonably certain that the merchandise has been shipped in the good

condition. A D/C in this case, can satisfy both the exporter and the importer.

4.3.2.1 Various steps in the operation of Documentary Credit

The importer and exporter have made a contract before a L/C is issued.

Importer applies for a letter of credit from his issuing Bank.

Issuing Bank opens a L/C, which is channeled through its overseas correspondent

Bank, known as advising Bank

Advising Bank informs the exporter of the arrival of the L/C.

Exporter ships the goods to the importer or other designated place as stipulated in the

L/C.

0

500

1000

1500

2000

2500

3000

3500

2008 2009 2010 2011 2012

Garments (Million ok TK)


Page | 49

Diagram 4.4: Steps in D/C

COTRACT ,

IMPORTER

BUYER -

APPLICANT EXPORTER

SELLER -

BENIFICIARY

SHIP

GOODS

TAKE

DELEVERY

GOODS

ISSUING BANK

L/C

ADVISING,

CONFIRMING,NE

GOTIATING

BANK

NEGOTIATI

ON OF

EXPORT

BILLS

APPLY L/C

PREPARE

AND PASS

DOCUMENT

ADVISE

L/C

RELEASE

DOCUMENTS

AGAINST

CASH

SEND

DOCUMENT

MAKE

PAYMENT


Page | 50

Documents are sent to issuing Bank for reimbursement or payment.

Issuing Bank release documents to importers when the letter makes payment to the

former or against the letter trust receipt facility.

Importer takes delivery of goods upon presenting on the transport documents.

4.3.2.2 Different types of documentary credit or L/C :

1. Red clause credit

A red clause credit is a special type of credit with a clause inserted which authorizes

the advising or confirming Bank to make advances to the Beneficiary before

presentation of the documents.

In other words, it is a pre- shipment finance in the form of a loan the advising /

confirming Bank provides to the beneficiary, with payment of principle and interest

Guaranteed by the issuing Bank of the client.

Possible risk in issuing a Red Clause credit:

Exporter may use the advance for other purpose.

Documents presented from the exporter may have discrepancies

unacceptable to the importer.

2. Revolving Credit

A revolving credit is a credit, which provide for the amount of the credit to be

renewed automatically after use without the need to renew the credit every time. A

Revolving credit “With respect to time” can be cumulative or non – cumulative.

It can be renewed with respect to either:

Time

Amount (i.e. total value of the credit)

3. Transferable Letter of Credit

A Transferable letter of credit, which can be transferred in whole or in part by the

original beneficiary to one or more “Second Beneficiaries”. It is normally used when

the first beneficiary does not supply the goods himself, but acts as a middleman

between the supplier and ultimate buyer.

4. Standby Credit

A standby credit is a guarantee type of documentary credit. It might in many form

such as pure loan forms, bid bond and performance guarantee form etc


Page | 51

5. Back To Back Credit

When beneficiary receives a documentary credit which is not transferable, and he

cannot furnish the goods himself, he may arrange with the Banker to issue a second

credit (“which is known as Back to Back L/C”) to a supplier to supply the goods.

The Bank issuing Back to Back Credit will obtain repayment through the master

credit which is deposited to the issuing Bank of the Back to Back Credit

FOREIGN COUNTRY BANGLADESH

Diagram 4.5: Shows the Back to Back Credit Procedure

ULTIMA

TE

BUYER

APPLICA

NT L/C

MASTER

L/C

ISSUING

BANK

ADVISING

BANK

MIDDLEMAN

BENIFICIARY

OF MASTER

L/C

APPLICANT OF

B/B L/C

B/B L/C

ISSUING

BANK

ADVISING

BANK/NEG

OTIATING

BANK

SUPPLIER

BENIFICIARY

OF B.B L/C


Page | 52

6. Standby Credit

A standby credit is a guarantee type of documentary credit. It might in many form

such as pure loan forms, bid bond and performance guarantee form etc.

7. Confirmed Credit

If a letter of credit is confirmed by a Bank (The advising Bank), this mean that, in

addition to the definite undertaking to the issuing to honor beneficiary‟s draft, the

advising Bank also makes it‟s a promise to pay the beneficiary.

4.3.2.3. Stage to a documentary Credit

(A) Issuance of L/C

(B) Execution of Amendment

(C) Advising Letter Of Credit

(D) Confirming Letter OF Credit

(E) Advising Amendment

(F) Negotiation

(G) The process include following:

At negotiating Bank

At issuing Bank


Page | 53

AIBL Bank Banks in beneficiary locate

Diagram 4.6: AIBL involvement in D/C

ISSUING BANK

ADVING BANK

CONFIRMING

BANK

CORRESPONENT BANK

NEGOTIATING

BANK

BENIFICIARY

REIMBURSEMENT BANK


Page | 54

4.3.2.4 Advantages and Disadvantages of Documentary Credit

Advantages Disadvantages

IMPORTER * An importer can be assured the

exporter has complied with certain

steams and conditions as specified

in the D/C before payment.

* He can insist of shipment of

goods within a certain time by

stipulating a latest shipment date.

* He can have export advice from

his Banker as to the D/C terms.

* He can ask for financial

assistance from his Banker such as

T/R.

* Protection offered by DCP500.

* Since Banks deals in document

only: Goods may not be the same

as these specified in the credit.

* Issuing Bank are obligated to

pay even through the conditions

of goods may be poor.

* D/C commission is relatively

costly.

* Line of credit or application is

necessary before an importer can

open an D/C, this may cause

extra inconvenience and is time

consuming.

EXPORTER * The risk of non – payment is

lower provided he complies with

D/C terms and condition.

* It is a safe method through

which to obtain prompt payment

after shipment.

* The exporter can have export

advice from his Banker.

* The exporter also can seek

financial assistance from his

Banker before the buyer makes

payment, such as negotiation of

export Bills advance etc.

* It is comparatively costly.

* Sometimes, the terms and

condition cannot be fulfilled

such as unreasonable shipment

date and expiry date, adding on

D/C the clause of “ Restriction

of a designated vessel to be

informed by D/C amendment “.

* The goods are shipped before

receiving payment; So it is not

100% safe.


Page | 55

4.4 EXPORT Bills

They deal with incoming L/Cs from various Banks. AIBL usually serves as an advising

Bank; but sometimes at request it also serves as confirming and negotiating Bank.


Chart 4.7: Export amount in other Banks

Chart 4.7 shows the export amount in other Banks (2008 to 2012).

This department has to verify L/Cs. As a confirming Bank, AIBL takes responsibility over

the issuing Bank. If the issuing Bank does not pay the beneficiary then AIBL has to as an

advising Bank its job is to verify the L/C, and if it passes their checklist ; Advise it. If all

documents are in accordance with the L/C then payment can be authorized.


Chart 4.8: Export

Chart 4.8 shows the increasing export in million taka over time supported by AIBL Bank

0

10000

20000

30000

40000

50000

60000

2008 2009 2010 2011 2012

AIBL

Prime Bank

Dhaka Bank

0

20000

40000

60000

2008 2009 2010 2011 2012

Export


Page | 56

4.4.1. Export financing

Pre – shipment credit

Post – shipment credit

Financing of exports constitutes an important part of Bank activities. The exporter

needs finance at various stages; some at the Pre – shipment stage and the other of the

post – shipment stage.

4.4.1.1. Pre – shipment credit

Pre – shipment credit, as the name suggest, is given to finance the Activities of an

exporter prior to the actual shipment of good. Pre – shipment credit is essentially as

short term credit and liquidated by negotiation or purchase of export bills covering the

merchandise. Generally, the Bank grants pre – shipment credit against irrevocable,

confirmed, unrestricted letter of credit received by an exporter from an overseas

buyer.

Pre – shipment credit given under the following arrangement:

1. Cash credit against hypothecation:

Under these arrangements a credit is sanctioned against

hypothecation of the raw materials or finished goods intended for export.

2. Cash credit against pledge:

Not infrequently, a cash credit limit is sanctioned against pledge of

exportable goods or raw materials.

3. Cash credit against Trust Receipt:

Under this arrangement credit limit is sanctioned against trust receipt.

4. Packing credit:

This facility is generally extended when the goods become ready for the

shipment for a very short period. Packing credit is given to the exporter

against the security of railway receipt, steamers receipts etc.

5. Back to Back Letter of Credit:

Under this arrangement the Bank finances an export by opening a letter of

credit on behalf of the exporter who has received a letter of credit from the

overseas buyer but is not the actual manufacturers of producer of the

exportable goods.

6. Advance under Red clause Letter of Credit:


Page | 57

Under the red clause Letter of Credit, the Bank provides advance to the

exporter prior to shipment under the authority of the opening Bank.

Procedure for sanction of pre – shipment finance:

The following are some of the points that must be borne in mind for this purpose:

1. Export Letter of Credit should from a reputable Bank abroad whose status has to

be ascertained. The letter of credit should be irrevocable, unrestricted, and valid

and preferably confirmed.

2. Expiry date of letter of credit should be properly recorded in the book.

3. The credit worthiness of the exporter and his exporter performance are to be

invariably ascertained.

4. The period for which the credit is sanctioned should be clearly mentioned.

5. In case of pledge “Bankers effective control should be mentioned“.

6. Charges documents and other necessary documents as stipulated in the sanction

letter should be properly obtained.

7. Guarantee / Policies should be obtained under the export credit scheme

administered by Insurance Company

4.4.1.2. Post Shipment Credit

Post – shipment credit is given to the exporter by Banks after the actual shipment of

goods. The necessity for post shipment credit arises because the exporters who have

shipped the goods have to wait for a long receiving payment for the overseas buyers;

the period of waiting depends on the terms of payment. The exporter needs funds to

carry on his normal export activities.

AIBL also finances the export at post – shipment stage on verification of the credit

worthiness and soundness of both the buyers and the seller by preparing application

for limit (AFL).

1. Negotiating documents under letter of credit: The document generally include

(a) Bill of exchange or Draft

(b) Bill of lading

(c) Insurance Policy

(d) Indent / Pro-forma Invoice

(e) Invoice

(f) Certificate of origin

(g) Inspection certificate

(h) Packing list

(I) Weight list & any other documents specially called for in the letter of credit.


Page | 58

2. Purchase of DP and DA bills

The provision of finance by way of negotiation of documents against payment (DP)

and documents against acceptance (DA) bills is generally made in favor of the

exporter who have been given bill purchase limit.

The Bank should obtain instruction from the drawer of the bill covering the following

aspects:

Documents against payment or acceptance

Instruction to protest

3. Advance against Bills for collection:

The Bank generally accepts bills for collection of proceeds when they are not drawn

under a letter of credit or when the documents, even through drawn against in L/Cs

contains some discrepancies

4.4.2. Operating procedure

1. Telex / Swift Messages:

The procedures are as follows according to the system:

The following Telex and SWIFT Messages to be received from the

Register:

1. Export L/Cs

2. Amendments

3. Other messages:

Note:

a. For unauthenticated messages telex is to be sent to our correspondent for authentication.

b. Some messages are to be sent to local Bank for test authentication.

c. Bills and L/C related messages to be filled in the

respective fill.


Page | 59

2. Advising:


Take reference for Telex, SWIFT and mail L/Cs and amendments from the

L/C register.

Fill up L/C checklist.

Insert L/Cs and amendments in the system.

Making photocopy of all messages.

Mail outside Dhaka‟s L/C and amendments by courier and pack mail.

3. Document Mailing


Type bill schedule.

Endorse bill of exchange and shipping documents.

Endorse in L/Cs.

Photocopy of the documents.

Shorts Bills.

Mail clients information

4.4.3 Methods of payment in export sales

The following methods of payment are ranked in the order of measuring risk to the exporter.

In other words, they are increasingly unfavorable to the exporter but favored by the importer.

A. Cash in advance

B. Documentary credit or L/C (note: this already explained above the bills import)

C. Documentary collection (note: this defined to next section)

D. Open document

A. Cash in advance Cash in advance gives exporter the greatest protection because exporter

either before shipment or upon arrival of the goods receives of payment.

Sometimes exchange controls of the importers country may cause payment delays or

even prevent method it most suitable.


Page | 60

1. Pays exporter before exporter makes

Delivery of goods

2. Delivery of goods upon receipt of

Payment

Diagram 4.9: Cash in Advance

B. Open account

The credit items are arranged between the buyer and the seller, but the seller has little

evidence of the importers obligation to pay a certain amount at the certain date. This

payment method is, therefore, risky for the seller.

Diagram 4.10 shows open account procedure

1. Exporters ships the goods before being paid

2. Importer makes payment upon

Receipt of goods

Diagram 4.10: Open Account

IMPORTER

BUYER

DRAWEE

EXPORTER

SELLER

DRAWER

IMPORTER

BUYER

DRAWEE

EXPORTER

SELLER

DRAWER


Page | 61

Although the payment method bears a higher risk for seller, open accounts sales have greatly

expanded due to the major increase in international trade, and the seller‟s eager to major

export volume.

A comparative statement of the methods of payment is given below with the classification of

risk category and merits and demerits of each method:

Method Risk Chief advantages Chief disadvantages

Cash in advance L No credit extension is required. Can limit sales potential

disturb some potential

customer.

Sight draft M/L Retains control and title;

Ensured payment before goods

are delivered.

If customer does not or cannot

accept goods, goods remains at

port of entry and no payment

is due.

Letter of credit

Irrevocable

Revocable

M

M/H

Bank accepts the responsibility to pay; payment upon

presentation of papers.

If revocable, terms can change

during contract week.

Time draft

M/H

Lowers customer resistance by allowing extended payment.

Same as sight draft, plus goods

are delivered before payment is

due or received.

Consignment sales M/H Facilities delivery; Lowers

customer resistance. Capital tied up until sales;

must establish distributions

credit worthiness; need

political countries; increased

risk from currency controls.

Open account H Simplified procedure; No

customer resistance.

High risk; Seller must finance

production; increased risk

from currency controls.

* L: Low risk ; M: Medium risk ; H: High risk

4.5 Collection

Collection are a method of settling the monitory side of international Trade transactions in

both goods and services. Where goods are Involved, the documents allowing the buyer to

take delivery of these Goods will be routed through Banks in the exporters and importers

Countries.


Page | 62

Chart 4.11 Bills for Collection


Chart 4.11 shows that the total amount of bill for collection over the

year. It is increased very sharply growth rate during the 2001 to 2005.

There are two types of collection.

1. Documentary Collection

2. Clean Collection

The first type is documentary collection, which means collection of:

Financial documents and commercial documents.

Commercial documents only.

The another type is clean collection. It consists of one or more bills of exchange or

promissory notes, for obtaining cash. Clean collection requires no other commercial

documents to be attached.

Please refer to the diagram on 4.12 for an explanation of various steps in the operation of the

collection: -

0

2

4

6

2008 2009 2010 2011 2012

Bill for Collection


Page | 63

Diagram 4.12 shows the collection procedure

1. Goods shipped to buyer

4.Present 5. Makes payment or 7. Pays export

document accepts draft

for payment

2. Forward

Documents

6. Sent payment

3. Forward Documents

Forward Documents

Diagram 4.12: Collection

PRESENTING

BANK

EXPORTE

R SELLER

PRINCIPL

E

IMPORTE

R BUYER

DRAWEE

COLLECTING

BANK

REMITTING

BANK


Page | 64

4.5.1 Documentary collection

These collection entails the use of commercial documentation, they are concerned

with goods and, although not obliged, Bank frequently take steps to protect the goods

in their customers interests.

The payment instruction in a documentary collection is usually a bill of exchange,

which is drawn by exporter (Seller) on the importer (buyer)

The bill of exchange that can be drawn is the following two types:

1. Sight bill: A bill of exchange drawn by the drawer (exporter) at sight for immediate

payment.

2. Term bill: A bill of exchange drawn by the drawer (exporter) and provides

times for the drawer to pay at a fixed or determinable future date, such as 30 days

sight.

4.5.2 Clean Collection

Collection, which do not include goods but consist of documentation only, usually a

bill of exchange, or occasionally a check, is known as clean collections. They are

frequently used for the settlement of trade on open account and for service rendered,

rather than goods supplied. They are very simple for Banks to process since goods are

not directly involved.

The term “Collection applies” to the procedure under which payment to the client for

a check, draft or similar instrument is made only after the proceeds have been

received from the Drawer. Thus Collection requires special handling.


Page | 65

4.5.3 Advantages and Disadvantages of Clean Collection

COLLECTION

Advantages Disadvantages

IMPORTER * For clean collection, buyers

can take possession of the goods

before payment.

* For D/A collection, the buyer

can inspect and sell the goods

before payment.

Terms bill provide the buyer

with a period of credit from the

exporter. Hence its liquidity can

improved.

* If he default on an accepted Bill

of exchange (Notwithstanding the

poor condition of the goods). Legal

action can be taken against him.

* If he refuse to accept or pay a

bill, pretest by the exporter against

non – acceptance or the exporter

can take non – payment, this can

damage the reputation of the

importer.

EXPORTER * It is cheaper than D/A.

* A presenting Bank may have

influence over the foreign buyer

and thus he more able to collect

the payment than an open

account basis.

* Exporters may obtain

immediate payment by

negotiation of the bill or

applying for Bank advance.

* Exporter can retain control

over the goods D/P.

* Loss of control over goods under

D/A.

* No guarantee that buyer will

pay because Presenting Banks are

to collect the Payment only.

* In case of delays or difficulties,

an exporter has to bear all the cost

arising such as demurrage charges

in the importer’s country.

* He has to bear buyer’s credit

risk and country risk.

4.6. Banks facilities and Services to Exporter and Importer

4.6.1. Export facilities and Services

Overdraft (O/D): Overdraft are granted to a customer in order to finance his

daily business requirements and assist his cash flow position.

Bills (Advance): The Bank may agree to offer thus type of finance if thinking

that the Exporter is reliable

Negotiation of export bills: After the beneficiary has effected shipment, he may

present documents to his Banker for negotiation. Sight bills might be negotiated

by the exporter‟s Bank.

Performance Bond: This is a written instrument, issued by a Bank or a surety

company, stating that the exporter will comply with the terms of the contract with

the buyer, otherwise the buyer will receive compensation for any losses suffered

as a result of the exporter‟s failure to perform under the contract.


Page | 66

Guarantee/Indemnity: Guarantee and Indemnity are Banking service available

to both exporters and importers.

Red clause credit: It is a pre-shipment finance granted to the exporter by and at

the risk of the issuing Bank.

Packing loan: The purpose of packing loan is to help the exporter to buy raw-

materials for production or to buy the necessary goods required by the D/C.

Letter of Indemnity: It is a undertaking given by a Bank on behalf of his

customer to another Bank. The Bank giving the promise is primarily liable.

Leasing: This is a financial arrangement in which the Banks and their subsidiary

companies known as lesser of leasing companies hold the title to property or

equipment which the customer known as the leases use it.

4.6.2. Import facilities and services

A. Overdraft (O/D)

B. Documentary Credit Facility (D/C)

C. Loan against imported merchandise: LAM is an advance to the

importer based on the imported goods as the security.

D. Trust receipt facility: This is a document executed by a customer who

agrees to hold the goods in trust for and on behalf of the Bank.

E. Shipping Guarantee: A shipping guarantee is an undertaking given by a

Bank on behalf of his customer to a shipping company to return the

original transport documents.

F. Collection

4.7. Remittance

Designing a global Remittance policy,

The task facing International financial executives is to co-ordinate the used of the various

financial linkages in a manner consistent with value maximization for the firm as a whole.

This tasks require the following four inter-related decisions:

1. How much money (if any) to remit

2. When to do so.

3. Where to transmit these funds

4. Which transfer method(s) to use

A common or shared responsibility with cash development is the custodianship of the volt.

Two groups independently monitor the inflow and outflow of financial instruments to and


Page | 67

from the volt. Bangladesh Bank checks deposits are processed for collection from

Bangladesh Bank.


Chart 4.13 shows Remittance in Million taka of AIBL Bank. It is shown that AIBL Banks

Remittance business has been increased by steady growth rate during the year 2008 – 2011.

Remittance Department

This Department deals with the basic paying and receiving of funds into the Bank, for the

clients. They transfer, or wire money abroad as well as locally through TT or SWIFT, etc..

They work very closely with the cash department. They also sell Government bonds to clients

and organizations.

Remittance Department works as an intermediary for clients and actions taken on their

accounts. Automatic credits and debits are not necessary done, especially in cases of

International transactions. They deal with fund transfers both locally and abroad as well.

A principal mode of remitting fund abroad is through SWIFT. Other traditional mode TT,

Telex, Mailing of Drafts, and transfer of TCs is also used. In both case of incoming and

outgoing remittances the purpose is to be disclosed. Local fund transfer is also done here,

there areas of transfer activities include:

1. Issuance of Pay order

2. Salaries

3. TT to any where the country

4. TT to other parts of the country

4.7.1 Inward Remittance

Function in Inward Remittance

0

5

10

15

20

25

30

2008 2009 2010 2011 2012

Remittance


Page | 68

Step 1: Fund Received

Step 2: Clarification by

I. Own Client

II. Other Client

III. Foreign Mission and International Bodies

Step 3: If the fund is for own client

I. Check faster account

II. Valid IRC Copy

III. Vat Register Certificate

IV. Check the fund account

V. Message transfer date

Step 4: Process the fund

4.7.2 Outward Remittance

Outward Remittance

Bank Condition:

Client must have an account in AIBL

Process:

1. Travel Mucilaginous

2. Document transfer by SWIFT other transaction activities

Types of Transaction (Remittance Department):

1. Govt. Bond Sold

2. Govt. Bond interest paid

3. Other Bank check collection

4. NFCD Open

5. NFCD interest paid

6. NFCD Encasement

7. Credit Advance/Debit Advance

8. Outgoing Payment Instruction

9. Collection item both local/Foreign

10. Incoming Payment Instruction Pay order Installed

11. Salary Disbursed

12. Foreign Currency Draft Issued

13. Correspondence

14. Incoming Collection


Page | 69

15. Bangladesh Bank Check Collection

4.8. Core Concept of Foreign Exchange

a. Foreign Exchange Business

In Foreign Exchange Business, the Commodity is Currency, Buying and

Selling of any currency against local currency is called Foreign Exchange

Business.

According to Bangladesh Bank order 1972, Foreign exchange means foreign

currency and includes any Instrument drawn, accepted made and issued under

clause 13 of section 16 of the Bangladesh Bank order 1972.

b. Foreign Exchange Rate

The rate of exchange is the price of the one currency expressed inters of

another currency. The rate at which exchange dealer would buy or sell foreign

exchange in terms of the domestic currency is known as the rate of exchange.

c. Foreign Exchange Transactions

All transactions related to FOREX are monitored and controlled by the

Treasury Department of the Bank. This Department is responsible for

providing all FOREX rate, interest rates. Basically there are two types of

transactions taking place through out of the Bank – spots and forwards.

Approximately 95% of all FOREX transactions are spot transactions.

4.8.1. Different terms used in foreign exchange

Terminology of foreign exchange market. A foreign exchange rate is the price of one

currency expressed in terms of another currency.

Spot rate: A spot rate is a rate quoted immediately, for delivery of the currency to the

buyer within the working days.

Forward rate: The exchange rate quoted for transaction which called for the delivery

of the currency at future date.

Inter – Bank market: This is a foreign market for commercial Bank‟s only and the

rate is known as Inter – Bank.

A Forward Exchange Contract may be either fixed of option


Page | 70

1. “Fixed” means that performance of the contract may take place on a specified date in

the future.

2. “Option” means that performance of the contract may take place, at the option of the

customer, on any date before maturity.

Premium and Discount Forward rate for a currency is quoted as an adjustment to the spot rate. This department

Is at a either Premium or a Discount.

If the forward rate of a currency is more expensive than the spot rate, it is

quoted in premium

If the forward rate for a currency is more cheaper than the spot rate, it is quoted

in discount.

Buying rate and Selling rate

Buying rate means the Bank is buying the currency. The customer is selling the

currency to the Bank in this transaction.

Selling rate means the Bank is selling the currency. The customer is buying the

currency to the Bank in this transaction.

Exchange rate is quoted in Buying rate and Selling rate, the difference of the rate is Called

Spread.

4.8.2. Relevancy of Foreign Exchange Revenue for AIBL

Revenue generated in Foreign Exchange (FOREX) business has turn out to be an

important element for generating income for AIBL.

4.9. Factor Affecting Fluctuation In Exchange Rates

Medium and Long -Term Factors:

1. Balance of payment

If the country suffer from a balance of payment deficit, its currency will depreciate.

If, on the other hand, a country experiences balance of payment surplus, its currency

will appreciate.

2. Rate of Inflation


Page | 71

If the country suffer from high inflation rate, its currency will depreciate. On the other

hand, if a country experiences a relatively low Inflation rate, its currency will

appreciate.

3. Interest Rate

The currency, which gives a relatively high interest rate, will appreciate while the

currency, which only offer a relatively low interest rate, will depreciate.

Short –Term Factors:

1. Official Intervention

2. Hot Money

“Hot Money” refers to money, which flows in for speculative purpose. When Hot

Money Flows into a country, its currency will appreciate and vice versa. Hot money is

a very substantial forces affecting the movement in exchange rate.

4.9.1 Exchange rate in Bangladesh and its function over time

Bangladesh currency is pegged to composite of nine currency. In Bangladesh capital

account transaction are regulated even through our currency is made convertible in

current account of the Balance of Payment in 1993 and therefore our exchange rate is

technically fixed.

The four factors that are usually taken into consideration while determining exchange

rate in Bangladesh are given below

Real effective exchange rate (REER has a positive relationship with exchange

rate)

Balance of current account (BOCA has a negative relationship with exchange

rate)

Foreign Exchange Revenue (FER has a negative relationship with exchange rate

Unofficial exchange rate (UER has a negative relationship with exchange rate).


Page | 72

4.10. Ways of avoiding Exchange Risk

1. Forward exchange contract:

An immediately firm and binding contract

For the purchase and sale of a specified quantity

At a rate of exchange fixed at a time the contract is made.

For delivery at a future time

Types: Contracts

a) “Fixed” performance at a specified data in the future

b) “Option” : Performance at any data between two

1. specified date

(Note: Option under forward exchange contract should not be mixed up with

currency option).

2. Currency Option

3. Open a foreign currency account

Buy foreign currency and deposit it in a foreign currency account. Any receipts

and payments are to be made from this account so as to avoid any losses in the

movement of exchange rate.


Page | 73

Chapter: 5

Findings, Recommendations & Conclusion


Page | 74

Chapter: 5

Findings, Recommendations & Conclusion

5.1. Findings

In recent years, the foreign exchange business of Al-Arafah Islami Bank Ltd is increasing at a

faster rate. As a state owned scheduled bank, Al-Arafah Islami Bank Ltd is playing an

important role toward the growth and economic development of Bangladesh. Al-Arafah

Islami Bank Ltd is rendering a stable support to the national foreign exchanges business.

Although the foreign exchange business is increasing day by day there are also some

obstacles around it which are as follows:

1. One problem relates to technology, the bank must try to adopt new

technologies. Otherwise the profitability of the bank may hamper.

2. To meet the challenges in the banking industry and to help employees to adapt

to the changes and new working condition, training is essential but no such

training center has yet been established in AIBL. Moreover, training given to

employees is not adequate.

3. Besides, SWIFT is being used in some branches and the head office of the

bank for trade finance related operations like documentary credit,

documentary collections, fund transfer, guarantee, etc. with optimum security,

but not in all branches.

4. The officers are very helpful to the business men. Some of our business men

do not know exactly the procedures of opening L/C. the officers of AIBL help

them properly to execute their business.

5. To make the process easy, bank should give emphasis to use the modern

communication media like e-mail, fax, internet etc.

6. Modern technical equipment like computer, ups, modem etc. is not sufficient

in foreign exchange department, which results in the delay of exchange

process.

7. The data base system of foreign exchange department is not very systematic.

Also documentation and filing process of foreign exchange operation is not

user friendly, which sometimes wastes valuable time.

8. Letter of credit (L/C) opening system for the importer is easy. It consumes

time and money as well.


Page | 75

5.2. Recommendations

I had the practical exposure in Al-Arafah Islami Bank Ltd. for just twelve weeks, with my

little experience in the bank in comparison with vast and complex banking system, it is very

difficult for me to recommend. We have observed some shortcomings regarding operational

and other aspects of their banking. On the basis of my observation we would like to

recommend the followings:

The branch need to set up well designed IT section by using more updated

technology and information.

Adequate on the job training is required for the newly employed personnel.

SWIFT service should be introduced in each and every branch of the bank, which

will help to smooth then the foreign exchange operations of the bank.

Some officers of the bank are not self motivated. They should be self- motivated

by training.

The bank should do more advertisement for attracting new customers.

AIBL needs sufficient computer, ups, modem etc for foreign exchange

department.

The bank should develop an effective database system to analyze the data of

foreign exchange business.

Bank should provide emphasis to make the documentation and filing process of

foreign exchange operation user friendly.

Letter of credit L/C opening system for the exporter should be easier.

I think the Management should employ at least few more employee in foreign trade

department as I have seen from my practical experience that many customers wait for a long

time for any service as they see that only one concerned official is doing their best to meet the

requirements of the customers.


Page | 76

5.3. Conclusion

Al-Arafah Islami Bank Ltd is committed to Boost up export, reduce import, raising of Gross

Domestic Product (GDP) and increase employment.

All the branches of AIBL are authorized dealer of Foreign Exchange Business. The authorized

dealer motivates the importer to import Raw materials, Fabrics, Frozen fish, jute items, and

electronics goods, Accessories, Chemicals, and Vegetable Fat etc.

The import or exports are motivated by the Al-Arafah Islami Bank Ltd to the foreign

exchange business, particularly to open the letter of credit. A letter of credit offer advantages

both to the importer and exporter. The advantages accruing to either of the parties differ

depending upon the nature of credit opened. There are certain Common benefits accruing

from the use of credit as under.

AIBL is playing a vital role in financing import and exports of the country. Without Bank's

co-operation, it is not possible to run any business or production activity in this age. Exports

and import need finance in various stages of their activities. Export and import financing

need letter of credit (L/C), payment against documents (PAD), loan against imported

merchandise (LIM) etc. All these facilities are being provided by BASIC Bank Limited. For

this purpose Bank considers the borrower's business standing, integrity, liability with the

bank and term and conditions of the L/C. There is lot of risks involved in foreign exchange

business. So, the Basic Bank Limited has to clearly serve the customers from a neutral point

and gather the current information about the market.


Page | 77

Part – Three

Appended Part

A: Bibliography

In Text

1. “Foundation of International trade finance”, KWLUK, The Hong Kong Institute of

Bankers.

2. “Multinational Business Finance” Eiteman, Stonehill and Moffelt. 6th edition.

3. “Multinational Financial Management”, Allan C. Shapiro, 4th edition.

4. “Business Finance”, Prof. M Shahjahan Mina, 3rd

edition.

5. Annual report of Al-Arafah Islami Bank Ltd, Prime Bank and Dhaka Bank, 2012.

B: Appendices:

On profile of BASIC Bank

1. Al-Arafah Islami Bank Ltd; Annul Report 2011&2012

2. Al-Arafah Islami Bank Ltd policy Guide lines on Foreign Exchange – 2011

3. Al-Arafah Islami Bank Ltd Several Booklist

4. AIBL prospectus

Online

1. http://www.al-arafahbank.com/

2. http://www.al-arafahbank.com/profile.php

3. http://www.al-arafahbank.com/Annual-Reports.php

http://www.al-arafahbank.com/

http://www.al-arafahbank.com/profile.php

http://www.al-arafahbank.com/Annual-Reports.php


Page | 78

Appendix - 01

Bank Performance at a glance

This section deals with performance analysis of AIBL highlighting the certain aspect of AIBL through

chart and the situation of spread, Burden and productivity indicator over the last five years

Date post:	26-Dec-2015
Category:	Documents
Upload:	rayhan-zahid-hasan
View:	65 times
Download:	0 times