A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
CHAPTER-ELEVEN: CONCLUSION
Though the interest rate charged on SME loan is high but it create is helpful for
SME sector. Because previously this sector has enjoyed a little access to
loan/investment facility. Due to their lack of collateral most of the bank did not
provide loan to them. So due to insufficient of capital this sector was not
developed. But for introducing SME banking this sector has been developed to a
noticeable extend.
Social Islami Bank Limited is a SME focused bank. And it is a three sector bank
which started its journey through Micro-credit, Micro-Enterprise and Small and
Medium Enterprise programs. The prospects of the SME market are great, and
the market size is also huge. Research in this field has only begun recently, and
the specifics of the market are still not clearly outlined. At the same time, this
market is a risky market, as it involves dealing with entities which are prone to
default. However, because of its tremendous potential, it is worth taking the risk.
But in the process, SIBL has to take care to minimize the risk involved in
investing in this sector. As the SME sector is relatively new, the performance of
the investments in this segment cannot be evaluated conclusively yet. A cautious
approach to the SME market will enable SIBL to exploit the prospects of this
segment.
A considerable in house preparation by Islamic Banks is needed in developing
distinct Islamic non-corporate financing. In the case of corporate sector, the key
thrust lies in greater participation of the local people both in terms of ownership
and benefiaciaries of Bank’s investment, greater network of mutual obligation
among the Islamic Banks, greater transparency of social, ethical and moral
ingredients of various Islamic modes of financing. In the case of non-corporate
sector, the key thrust lies in conscious planning and developing credit program
that reinforce family values and stimulates civil society. In the Islamic Voluntary
sector, the key thrust lies in developing social capital market for mobilizing and
capitalization of perpetual social savings and investment. The composite thrust
of these sectors’ financing lies in comprehensive participatory Banking with
human face beyond market for the benefit of Muslims and Non-Muslims. And
SIBL is one of the growing banks which is giving emphasis on Family
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Empowerment Micro-credit and Family Empowerment Micro-Enterprise Program
to alleviate the poverty from the society and above all country through making
investment in this sector.
Evidence suggests that there is a considerable mismatch and misuse of Waqf
properties, despite their contributions to social development over time. The cash
waqf certificates scheme is an epoch making event. As this cash waqf is
managed by the Bank, it has its transparency, liquidity and accountability, it si a
perpetual deposit and its profit can be invested in a wide spectrum of social
investment. Besides the 32 areas identified by the Bank, the waquif or subscriber
can select one or more sectors according to his wishes in conformity with
shariah. Money for cash waqf can be deposited at a lump sum or by installment.
Bank shall manage cash waqf on behalf of the waquif. This ensures appropriate
utilization of the fund of the waquif in terms of its goals and objectives. The Holy
Quran has emphasized the virtues of charity in life on earth and life hereafter.
The cash waqf certificate offers an opportunity to get the divine blessing and to
have a rewarding social and moral imperative on the part of the well-to-do come
forward and investment under cash waqf certificate scheme for his own benefit
indeed. And SIBL is the first Bank in Bangladesh which is operating Cash Waqf
Certificate A/Cs satisfactorily and well. SIBL is conducting CSR activates
continuously to come out the change in the society. SIBL intends to continue
with its welfare activities as part of its Corporate Social Responsibility (CSR).
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
References:
1. Bangladesh Economic Review, 2003, 2004 & 2005, Ministry of Finance.
Government of Bangladesh.
2. Mannan, Prof. Dr. M A, Family Empowerment Micro-credit and Micro-
enterprise Social Fianancing line of Islamic Development Bank to local
3. Corporate Social Responsibility, An Awarness Guide for Companies
Operating in Bangladesh
4. “The Role of Private Sector in Bangladesh” (An Occasional Paper), Abdul
Awal Mintoo.
5. “Annual Report” 2006-2010, Social Islami Bank Limited.
6. Journal of Social and Development Sciences, Vol. 1, No. 3, pp. 91-100,
Apr 2011
7. Pihkala, T., Varamäki, E. and Vesalainen, J. (1999). Virtual Organization
and the SMEs: A Review and Model Development. Entrepreneurship and
Regional Development, 11(4): 335–350.
8. Walker, E. and Brown, A. (2004): What Success Factors are Important to
Small Business Owners. International Small Business Journal, 22(6):
577–594.
9. Bangladesh Bank, Review of CSR, Initiatives in Banks (2008 & 2009)
10. Policy Guidelines for Green Banking, BRPD Circular No.02
11. Mahmud,M.M.(1988). Corporate Social Responsibility: A Study with
Reference to Public
12. Khan, Prof. Dr. A R, Business Ethics
13. Khondaker Golam Moazzem, Senior Research Fellow, CPD, Strategies
for Entrepreneurship Development in Bangladesh: Unleashing the
Potentials of SMEs
14. Ahmed, M.U. et al (2001) Impediments to Rapid Industrial Growth in
Bangladesh, Report Prepared for FBCCI, Dhaka.
15. www.cpd-bangladesh.org
16. Website: www.bangladesh-bank.org
17. www.siblbd.com
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Appendices:
Appendix-1
Internship Dairy
Here are the date wise activities----------------------------
Date Activities
June 08,2011 At the first day I met with the Manager of the Principal Branch,
SIBL and showed him the internship letter provided by HR of the
respected Bank (SIBL). Second In charge of the branch made
me introduce with the personnel and staff of the Investment
Department of the Bank. He introduced me with the SAVP
Tofayel Ahmed Sir, Relationship Management Division of the
Bank. He showed me some of important papers used in the
Bank for the purpose of Banking with the clients. He showed me
the investment proposal format of the Bank and gave me a copy
of that. I did some calculation such as profit, classified
investment.
June 09,2011 In the second day I observed how to make a CIB report to the
Bangladesh Bank. And finally I wrote some of the CIB report.
June 12, At the third day I visited to one of the clients of Bank-Fast
2011 corporation to collects some documents needed to make
investment sanction.
June 13, I saw some of the clients investment documents, investment
2011 amount, investment disbursement date, due date, collateral,
limit of the investment, renewal date etc. And I made call to
those clients whose investment date is overdue, dispatch
information regarding renewal of investment and send required
documents to the Bank.
June 14, I saw the required documents which are needed to make
2011 investment to the clients and learned the cost related to the
documentation, survey, observation, identification to the register
office regarding the documents.
June 15, I learned different types of investment modes of the Bank, their
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
2011 characteristics, operation procedure etc.
June 16,2011 I learned investment monitoring and supervision. How the
investment is monitored and supervised. Investment monitoring
is started after the disbursement of investment amount to the
clients. Investment monitoring is the process of making phone
call to the clients regarding the irregular installment, installment
overdue, investment expiration, renewal of the investment,
required documents, practical supervision, and personal
visitation and so on.
June 19, At this date I learned with the documentation division, and
2011 learned what types of documents are needed to make
investment to the clients and how those documents are verified
and stored in a safe place so that in a emergency these can be
found out.
June 20, Collateral is required to have investment facility. Bank checks
2011 collateralized assets or property while making an investment.
SIBL requires present collateral, proposed collateral and above
all total collateral to make an investment. Collaterals are such as
Land, Building, Mudaraba term deposit receipt, immovable
assets etc. while taking collateral bank examine the force sale
value. Force sale value is the immediate market value of the
collateralized property. Force sale value is always less than the
actual value of the collateral.
June 21, SIBL disburse two types of investment facility like Funded and
2011 Non-funded. Funded investment facility is the cash
disbursement and Non-funded investment facility is non cash
investment facility like Bank Guarantee or Letter of credit.
June 23, If the investment installment is due and the investment is
2011 expired then the banks make call to the client to renewal the
investment. Renewal is extending the tenor or renewal with
encashment. In the revolving investment client can withdraw
money and deposit the money means the investment is like
cycle.
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
June 27, While making investment facility to the clients then the required
2011 information about the client is Name of the client, Name of the
key person like manager, director, chairman, Group name if,
address of the client, address of the head office, factory, phone
number of the clients’ office, factory, home, nature of the
business, relationship with the branch (date of account
opening), account number, registration/ date of commencement
of business, Nature of the ownership, Tax index number (TIN),
Import registration certificate (IRC) for importer, export
registration certificate (ERC) for exporter, Bonded warehouse
license, phone fax number of office, total net worth, for the
companies enlisted with DSE and CSE, date of initial public
offering (IPO), Name of the person who brought the client,
Relationship Manager/officer.
June 28, While making investment Bank prudentially pricing the
2011 investment. Pricing like commission, margin, profit and other
charges. Pricing is proposed initially by branch and head office
fixed the profit rate on the basis of information provided by the
clients. At the time of pricing bank see type of facility, existing
rate and finally fixe the rate of profit.
June 30.2011 Called the clients to inform them about their accounts,
installment, overdue and request them to contract with the
manager and the branch.
July 03, 2011 For having investment facility investment officer analyze some
Financial Highlights carefully to be assured about the clients and
their business prospective. The investment officer or mainly
relationship manager does some ratio analysis. Ratio analysis
are- Turnover/sales, Gross Margin, Net Profit, Current Assets,
Fixed Assets, Total Assets, Current Liabilities, Long term
loan/investment, Total Equity, Gross Profit Margin(%), Current
Ratio, Quick Ratio, Inventory Turnover in days, Account
Receivable Turnover in days, Return on Equity (%), Debt
service coverage ratio, Earning Per Share, Price Earnings Ratio
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
etc. And these ratios are very much important to make assure
about the clients and investment return.
July 04, 2011 At this stage I could Know about the sensitivity analysis, peer
group analysis, Business Risk of the clients and SWOT
Analysis. In SWOT analysis some topics are included like
Industry means in which types industry the clients operating
their business, Size of the business and the size can be
ascertained with calculation of wealth, Maturity of the business
means how many years the business is being operated, value of
building and other construction materials.
July 05, 2011 In investment appraisal the machinery valuation taken. In
machinery calculation some criteria comes like the condition of
the machinery, origin of the machinery, value of the machinery,
economic life of the machinery, year of procurement.
In investment appraisal the availability of utilities (Power, gas,
water) is ensured, other infrastructural facilities, production
capacity at 100% capacity, sources of raw materials, user/buyer,
marketing aspects, management aspects, technical aspects,
financial aspects, environmental aspects (whether environment
friendly or not and whether required permission from the
concerned authority has been obtained along with copy of the
same) are considered while making investment decision.
July 07, 2011 While making proposal the performance of foreign trades with
SIBL is considered, Business performance with SIBL last twelve
months considered, personal guarantee, additional personal
guarantee, past earnings from the relationship, liabilities with
other Bank etc are considered.
July 10, 2011 I could know which types of paper generally required for an
investment facility. Required papers are-------------
Copy of investment application form IF-48
Copy of trade license
Photograph of the owner/partners/directors (dully attested
by the branch incumbent)
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Letter of consent along with photographs in case of third
party mortgage
Visit report
Valuation certificate (prepared by branch and surveyor)
Legal opinion
Net Equity Capital (NEC)
Certified copy of Memorandum and articles of
Association of the company
Copy of IRG in full format (Irrespective of amount)
Copy of audited balance sheet for the last three years
Lawyer’s certificate (in case of
renewal/enhancement/recasting)
Compliance report of existing sanction
Current account statement (computer copy)
Investment account statement (computer copy)
Personal net worth statement of the directors
July 11, 2011 To work personally with the relationship manager I learned what
types of tasks are done by RM. The jobs of RM are---
The RM serves as the primary relationship contact with the
Bank’s corporate and commercial customers. To maximize
relationship profitability through cross selling. To minimize
investment loss through risk assessment and timely
identification of deteriorating investment risks of customers.
July 13, 2011 To come at this point of time I could know the jobs of Head of
Investment Risk Management Division. The jobs of Head of
investment risk management division are -----
To ensure sound asset quality and a conservative investment
culture throughout the investment and treasury
trading/underwriting activities of the bank while ensuring the
investment approval process is responsive to customer needs
and investment losses and collection costs are minimized. To
provide and independent, third party assessment/ approval of
investment and business risks of the bank, and serve on the
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Bank’s Assets and Liability Management. Contribute to the
development of investment risk management skills of staff in
investment administration and corporate Banking department.
Provide input/advice to the MD/CEO/Board regarding the
formulation of strategic operating plans.
July 14, 2011 Investment documentation checklist:- CIB report & confidential
opinion from others bank/financial institutions, investment risk
analysis (IRA)/Investment Risk grading (IRG), visit report on the
business/proposed mortgaged properties on investment client
by the Branch officials, original sanction advice/renewal letter
duly accepted by the client, trade license, VAT reg, TIN etc.
Buying agent agreement and cash memo of goods purchased
against investments, IRC, ERC, membership certificate from
chamber of commerce etc. These documents are to be checked
carefully in the documentation division through date of
document, date received, expiry, origin document located in,
taka amount.
July 17, 2011 Investment monitoring division jobs are to remind the clients
about their investment condition, make occasional phone call,
site visit, remind them that their investment is going to be
expired and request to them to make installment regularly.
July 19, 2011 Small and Medium Enterprise (SME) products introduction,
operation procedure, making proposal, sanction procedure.
July 20, 2011 SME documentation, administration, monitoring and recovery
procedure.
July 21, 2011 Introduction with the Family Empowerment Micro-Credit
program
July 25, 2011 Family Empowerment Micro-credit investment amount, clients,
investment condition, recovery condition
July 26, 2011 Cash Waqf Certificate Account opening, operating, deposited
amount, investment sector, recovery rate, number of clients.
Actually the deposited amount from Cash Waqf is invested in
Micro credit, micro enterprise and SME sector and the profit
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
coming from this account is disbursed into different needy sector
and to alleviate poverty
July 28, 2011 Corporate Social Responsibility performed by SIBL and amount
of expenditure
August 01, Providing customer service, introduction with the deposit
2011 mobilization, different deposit products, rate of profit, account
opening procedure, account closing procedure.
August 02, Operating Banking Software (Ababil), providing statement,
2011 balance check, cheque requisition procedure, providing input
into the software
August 03, Operating procedure of pay order, cheque clearing procedure
2011 etc.
Appendix-2
Financial Systems Reformation of Bangladesh since Liberation War
Financial system of any country consists of the two basic parties cognizant as
Surplus Unit and Deficit Unit conducting transaction with a view to providing and
receiving the flow of fund respectively. The financial system of Bangladesh is
also similar to the following structure consisting of two basic structures such as
surplus unit and deficit unit since the elimination of liberation war:
FIGURE1.0: Financial System of Bangladesh
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
1. Indicators of financial Development since Liberation War
Financial intermediaries essentially involve in transferring of funds in exchange
of goods, services, or promises of future returns. Development in the financial
sector raises the overall efficiency of the financial institutions. As “financial
development” lacks any precise definition, following the practice of existing
literature [King and Levine (1993a and 1993b), Levine (1997 and 1999), and
Levine and Zervos (1998)] some indicators of financial development may be
used for effective policy formulation, implementation and evaluation. Accordingly,
three alternative indicators of financial development, such as share of private
sector credit to GDP, total deposits to GDP and the share of broad money (M2)
to GDP for Bangladesh economy have been used.
Domestic credit to the private sector as a share of GDP (denoted by cr_y) is one
of the popular indicators of financial development. It includes all the credit issued
to the private sector by all financial institutions which gives the degree of
financial intermediation and measures the financial resources provided to the
private sector through loans and advances, purchase of non-equity securities,
and trade credits. The second indicator of financial development is total deposits
(demand plus time) as a share of GDP (denoted by dep_y) which is a relatively
broader measure of financial development as it includes all the liquid liabilities of
the financial system excluding currency in circulation. A third indicator, broad
money as a percent of GDP (denoted by m2_y) is basically the liquid liabilities of
the financial system in Bangladesh that includes currency plus demand and
interest-bearing liabilities of financial intermediaries. This is the broadest
measure of financial development and is considered to be a typical measure of
financial “depth”. It also indicates the degree of monetization with respect to the
real economy.
Figure1.1: Trends in financial development since liberation war
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
With a view to investigating the historical overview of indicators of financial
development and their association with investment activities (measured by fixed
capital formation as a share of GDP denoted by i_y) as well as per capita income
(denoted by y_pcap) annual data during 1976-2005 are used. The data as
presented in Figure 1 as well as in Table 1 show that all three indicators of
financial development display steady increasing trend, indicating widening and
deepening of the financial system in Bangladesh over time. It is also observed
that the average credit, deposit and broad money to GDP ratios increased
substantially from 6.6 percent, 14.9 percent and 19.0 percent respectively over
1976-1980 to 28.8 percent 35.01 percent and 40.0 percent respectively over
2001-2005. Investment as a percent of GDP and per capita income (in current
USD) also displays a similar pattern and move broadly together reflecting a close
association among financial development, investment and per capita income
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
during the period. In a broader sense, the scatter-plots of the three indicators of
financial development vis-à-vis investment as well as per capita income also
strongly support the co-movement of financial development and economic
activity.
Table1.1: Trends in the indicator financial development of Bangladesh
2. Current Financial System of Bangladesh:
In Bangladesh, the current financial system comprises of the following units:
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Figure2.1: Current financial system of Bangladesh
The following Figure represents these financial market participants in a
schematic way.
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
The following table reveals that PCBs (including IBs) dominate the banking
system in terms of total deposits by holding 46.47 percent at the end of
December 2005.6 In this connection, it is important to mention that, although
NCBs’ share in total deposits has been dominant since 1970s, it has been
declining continuously in recent years. Even as late as December 2002, NCBs
held 50.32 percent of total deposits. Moreover, if credit (i.e., sum of advances
and bills) of individual bank groups as a share of total credit is considered, it can
be observed that PCBs (including IBs) has the highest share, 54.11 percent, at
the end of December 2005. Again, it is notable that although NCBs’ share of total
credit has declined in recent years, it had the highest share of more than 40
percent at the end of September 2003. This in turn, demonstrates increasing
domination of PCBs (including IBs) in the financial market of Bangladesh.
Table2.1: Position of Deposits and Credits in the Banking System
3. Functions of Financial Market Participants since Liberation War:
3.1 Bangladesh Bank :
After independence, BB (Bangladesh Bank), the central bank of the
country, was established by the Bangladesh Bank Order of 1972
(Presidential Order No. 127 of 1972) with effect from December 16, 1971.
The founding charter identified price, exchange rate and financial system
stability as the main objectives of BB as the monetary authority. Since
then, to achieve these objectives among others, BB conducted monetary
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
policy under a fixed exchange rate regime on the basis of direct
instruments (i.e., bank rate, cash reserve requirement (CRR), and
statutory liquidity ratio (SLR)) as well as quantitative monetary control to
some extent (i.e., the volume of credit, margin on letters of credit (L/C),
and refinancing facility). Besides, BB also determined interest rates,
particularly, lending and deposit rates offered by scheduled banks to both
depositors and borrowers in the economy. Starting the early 1990s, there
have been significant changes in legal, institutional and policy frameworks
under the FSRP. In particular, there have been major changes regarding
interest rate liberalizations (i.e., lending and deposit rates have been
gradually freed from restrictions), development of money market
instruments (i.e. introduction of repo in 2002 and reverse repo in 2003),
OMO by various government treasury bills (TBs) auction (e.g. 28-day, 91-
day, 182-day, 364-day, 2-year, and 5-year), adoption of floating exchange
rate (on May 31, 2003), etc. Consequently, these changes allow BB to
conduct monetary policy relying on market based instruments along with
direct instruments. It is important to mention that although BB is currently
conducting monetary policy under the floating exchange rate, the
amended Bangladesh Bank Order of 2003 allows room for BB to bring
about any necessary adjustment in the foreign exchange market in an
orderly fashion.
3.1.1 Monetary policy Programming:
The framework of monetary programming followed by BB is quite intuitive
and simplistic. The programming exercise involves the estimation of the
required limit (also known as safe limit) of monetary expansion (i.e., broad
money) on the demand side based on the growth estimates of GDP, CPI
and income velocity of money demand.11 In particular, BB programs the
safe limit of monetary expansion, broad money (M2), derived from the
classical quantity equation of money demand, i.e.,, where,,, and are the
growth rates of money demand, anticipated real output, expected inflation
rate and income velocity of money respectively. The following Figure
provides a simple schematic illustration of the monetary policy framework
of BB:
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Figure3.1.1: monetary policy framework of Bangladesh Bank (source: BB
Web site)
3.1.2 Reserve Management Strategy:
Bangladesh Bank (BB) is empowered by section 7A of Bangladesh Bank
Order, 1972 (President’s Order No. 127 of 1972) to hold and manage the
official foreign exchange reserve of Bangladesh. It maintains its foreign
exchange reserve in different currencies to minimize the risk emerging
from widespread fluctuation in exchange rate of major currencies and very
irregular movement in interest rates in the global money market. BB has
established Nostro account arrangements with different Central Banks.
Funds accumulated in these accounts are invested in Treasury bills,
repos and other government papers in the respective currencies. It also
makes investment in the form of short term deposits with different high
rated and reputed commercial banks and purchase of high rated
sovereign/supranational/corporate bonds. Forex Reserve & Treasury
Management Department of BB performs the operational functions
regarding investment which is guided by investment policy set by the BB’s
Investment Committee headed by a Deputy Governor. The underlying
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
principle of the investment policy is to ensure the optimum return on
investment with minimum market risk.
3.1.3 Exchange Rate policy:
Towards liberalization of foreign exchange transactions, a number of
measures were adopted since 1990s. Bangladeshi currency, the taka,
was declared convertible on current account transactions (as on 24 March
1994), in terms of Article VIII of IMF Article of Agreement (1994). As Taka
is not convertible in capital account, resident owned capital is not freely
transferable abroad. Bangladesh adopted Floating Exchange Rate regime
since 31 May 2003. Under the regime, BB does not interfere in the
determination of exchange rate, but operates the monetary policy
prudently for minimizing extreme swings in exchange rate to avoid
adverse repercussion on the domestic economy. In the foreign market
banks are free to buy and sale foreign currency in the spot and also in the
forward markets.
3.1.4 Interest rate Policy:
Under the Financial sector reform program, banks are free to charge/fix
their deposit (Bank /Financial Institutes) and Lending (Bank /Financial
Institutes) rates other than Export Credit. At present, Loans at reduced
rates (7%) are provided for all sorts of export credit since January 2004.
With a view to controlling the price hike and ensuring adequate supply of
essential commodities, the rate of interest on loan for import financing of
rice, wheat, sugar, edible oil (crude and refined), chickpeas, beans, lentils,
onions, spices , dates and powder milk has been temporarily fixed to a
Maximum of 12%. Now, banks can differentiate interest rate up to 3%
considering comparative risk elements involved among borrowers in same
lending category. With progressive deregulation of interest rates, banks
have been advised to announce the mid-rate of the limit (if any) for
different sectors and the banks may change interest 1.5% more or less
than the announced mid-rate on the basis of the comparative credit risk.
Therefore, The trends in real interest rate spread are given below:
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Figure 3.1.4: Trend in interest rate spread
3.1.5 Capital Adequacy management of Banks:
With a view to strengthening the capital base of banks and making them
prepare for the implementation of Basel-II Accord, banks are required to
maintain Capital to Risk-Weighted Assets ratio 10% at the minimum with
core capital not less than 5% effective from December 31, 2007.
However, minimum capital requirement (paid up capital and statutory
reserve) for all banks will be Tk.200 corer as per Bank Company
(Amendment) Ordinance, 2007. Banks having capital shortfall will have to
meet at least 50% of the shortfall by June, 2008 and the rest by June,
2009.
3.1.6 Loan Classification & Provisioning:
In order to strengthen credit discipline and bring classification and
provisioning regulation in line with international standard, Bangladesh
Bank issued a master circular on loan classification and provisioning
through BRPD circular no 5 dated June 5, 2006. The revised policy
covers an independent assessment of each loan on the basis of objective
criteria and qualitative factors which is appended below:
Any Continuous Loan/Demand Loan if not repaid/renewed within the
fixed expiry date for repayment will be treated as past due/overdue from
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
the following day of the expiry date. A Continuous Loan/Demand
loan/Term Loan which will remain overdue for a period of 90 days or
more will be put into the "Special Mention Account (SMA)". Interest
accrued on "Special Mention Account (SMA)" will be credited to
Interest Suspense Account, instead of crediting the same to Income
Account.
A Continuous Loan/Demand loan is classified as 'Sub-standard' if it is
past due/over due for 6 months or beyond but less than 9 months,
classified as `Doubtful' if it is past due/over due for 9 months or beyond
but less than 12 months and classified as `Bad/Loss' if it is past due
for/over 12 months or more. If any installment(s) or part of installment(s)
of a Fixed Term Loan is not repaid within the due date, the amount of
unpaid installment(s) will be termed as `defaulted installment'. In case of
Fixed Term Loans, which are repayable within maximum five years of
time- If the amount of 'defaulted installment' is equal to or more than
the amount of installment(s) due within 6 (six) months, the entire loan will
be classified as "Sub-standard", if the amount is equal to or more than
the amount of installment(s) due within 12 (twelve) months, the entire loan
will be classified as "Doubtful" and if the amount is equal to or more than
the amount of installment(s) due within 18 (eighteen) months, the entire
loan will be classified as "Bad/Loss".
Besides, if any situational changes occur in the stipulations in terms of
which the loan was extended or if the capital of the borrower is impaired
due to adverse conditions or if the value of the securities decreases or if
the recovery of the loan becomes uncertain due to any other unfavorable
situation, the loan will have to be classified on the basis of qualitative
judgment.
As regards the provision, banks are required to maintain General
Provision against all categories of loans along with off-balance sheet
items in the following manner:
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Particulars Short Consumer Financing Small All
Term Other than Housing Loans for Enterprise other
Agri. Housing Finance Professionals Financing Credit
Credit Finance & to set up
and Loans for business
micro Professionals
credit to set up
business
UC Standard 5% 5% 2% 2% 1% 1%
SMA - 5% 5% 5% 5% 5%
SS 5% 20% 20% 20% 20% 20%
DF 5% 50% 50% 50% 50% 50%
Classified
B/L 100% 100% 100% 100% 100% 100%
3.2 Banks & Finance Companies:
Bank Company Act, 1991, empowers BB to issue licenses to carry out
banking business in Bangladesh. Pursuant to section 31 of the Act, before
granting a license, BB needs to be satisfied that the following conditions are
fulfilled: "that the company is or will be in a position to pay its present or
future depositors in full as their claims accrue; that the affairs of the
company are not being or are not likely to be conducted in a manner
detrimental to the interest of its present and future depositors; that, in the
case of a company incorporated outside Bangladesh, the Government or law
of the country in which it is incorporated Bangladesh as the Government or
law of Bangladesh grants to banking companies incorporated outside
Bangladesh and that the company complies with all applicable provisions of
Bank Companies Act, 1991." Licenses may be cancelled if the bank fails to
comply with above provisions or ceases to carry on banking business
Twenty-nine financial institutions are now operating in Bangladesh. Of these
institutions, 1(one) is govt. owned, 15 (fifteen) are local (private) and the
other 13(thirteen) are established under joint venture with foreign
participation. The total amount of loan & lease of these institutions is
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
Tk.99,091.80 million as on 31 December, 2007. Bangladesh Bank has
introduced a policy for loan & lease classification and provisioning for FIs
from December 2000 on half-yearly basis. To enable the financial institutions
to mobilize medium and long-term resources, Government of Bangladesh
(GOB) signed a project loan with IDA, and a project known as ``Financial
Institutions Development Project (FIDP)`` has started its operation from
February 2000. Bangladesh Bank is administering the project. The project
has established ``Credit, Bridge and Standby Facility (CBSF)`` to implement
the financing program with a cost of US$ 57.00 million.
3.3 Capital Markets:
The Capital market, an important ingredient of the financial system, plays
a significant role in the economy of the country.
3.3.1 Regulatory Bodies:
The Securities and Exchange Commission exercises powers under the
Securities and Exchange Commission Act 1993. It regulates institutions
engaged in capital market activities. Bangladesh Bank exercises powers
under the Financial Institutions Act 1993 and regulates institutions
engaged in financing activities including leasing companies and venture
capital companies.
3.3.2 Participants of CAPITAL Market:
a. Stock Exchange
b. Investment Corporation of Bangladesh (ICB)
c. BDBL (Bangladesh Development Bank Ltd)
3.4 Microfinance Institutions:
The member-based Microfinance Institutions (MFIs) constitute a rapidly
growing segment of the Rural Financial Market (RFM) in Bangladesh.
Microcredit programs (MCP) in Bangladesh are implemented by various
formal financial institutions (nationalized commercial banks and specialized
banks), specialized government organizations and Non-Government
Organizations (NGOs). The growth in the MFI sector, in terms of the number
of MFI as well as total membership, was phenomenal during the 1990s and
continues till today. Over the period of June 2003 to June 2006 the growth
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rate was over 70% in terms of horizontal expansion of microcredit borrower.
The total coverage of MCP in Bangladesh is approximately 30.09 million
borrowers without considering overlapping figures. Table-1 shows the
coverage of major institutions in the formal and semi-formal sectors.
Table - 1:Coverage of Microcredit Program
Outstanding
No. of
Organization Loan
Borrowers
(in million Taka)
NGO-MFIs (June 2006) 18,415,878 78,930.57
Grameen Bank (June 2006) 6908704 33235.46
Government Program (December, 2005) 1,997,240 7,710.05
Sub Total 27,621,573 120,493.52
Nationalized Commercial Banks (December, 2311150 32783.45
2005)
Private Banks (December, 2005) 164113 1106.46
Sub Total 2,475,263 33,889.91
Grand Total 30,096,836 154,383.43
Source: Microcredit Regulatory Authority, Grameen Bank
It is estimated that after considering the overlapping problem, which is expected
to be over 40%, the effective coverage would be around 18.05 million borrowers.
Out of 18.05 million borrowers covered by microcredit program, about 62% are
below poverty line and so over 11.19 million poor borrowers are covered by
microcredit program by 2006.
Microcredit programs of NGOs (known as NGO-Microfinance Institutions or
NGO-MFIs) and Grameen Bank play dominant role in this financial market,
NGO-MFIs serve more than 61 percent and Grameen Bank alone serves 24
percent of the total borrowers. Among NGO-MFIs more than 80 percent of the
outstanding loan disbursed by the top 20 NGOs, three of them are very large
and have coverage all over the country. Service charge on credit varies from
10% to 20% at flat method of collection, all partners of Palli Karma-Sahayak
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Foundation (PKSF) charge 12.5%. Average interest offered by NGO-MFIs on
savings to the members is 5%. Near about 90% of the clients of this sector are
female. Loan recovery rate is generally very high compare to the banking sector,
which is over 90%. Average loan size of NGO-MFIs was found around Taka
4,000. The profile of current four micro credit institutions is given below:
Table 3.4: Profile of current four micro credit institutions
4. Reforms in Financial Sector since Liberation War:
Before liberation of Bangladesh, the banking and finance industries in erstwhile
East Pakistan was owned and controlled by erstwhile West Pakistani owners.
Bangladesh inherited a narrow and thin financial sector with six commercial
banks which were nationalized, a few foreign banks and two Govt. owned
specialized financial institutions. The banking system was operating until the end
of 1980s with the directives of monetary authorities aiming at achieving
objectives of supplying cheap money to the State Owned Enterprises (SOEs)
and priority sector like Agriculture, Export and Small and Cottage Industries in
the private sector.
The two important instruments at the amount of monetary authority to execute
monetary policy were selective credit control measures and administered interest
rate. One consequence of Central Bank's regulated deposit and lending rates at
that time without consideration of market clearing rate was that in real terms,
interest rates appeared to be negative in view of high rates of inflation during the
mid 70s and up to the end of 1980s. The policy of arbitrarily fixed low interest
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rate brought about undesirable consequences of distortion in allocation of
resources between different sectors. Consequently, the financial interrelations
ratio (Goldsmith, 1969) measured in terms of ratio of total financial assets to
National Wealth remained abysmally low in Bangladesh ranging between 10%-
20% between 1973-1983 compared to 40Yo - 65oh in Pakistan, India, Sri Lanka,
Thailand, Philippines and Malaysia (IMF Financial Statistics, 1980 - 1984).
4.1 Needs for financial sector reforms:
During the decade up to mid 1980, the banking sector was characterized by a
"financially repressed" regime scenario of low interest rate, distortion in resource
allocation, low rate of savings leading to financial disintermediation and the
financial sector was being used to service the need of the Govt. sector and a few
business houses with concomitant consequence of shallow financial system. The
demand management aspect of macroeconomic variables was not taken care of.
The loanable funds at the disposal of the banks were disbursed mostly in
publicly directed sectors without commercial consideration. The internal control
system of commercial banks was weak, the books of accounts did never reflect
the actual financial health of the banks, and the quality of assets of the banks
was never evaluated on strict accounting principles, the MIS was virtually non-
existent in the banking sector, profitability and liquidity aspect of portfolio
management was unfamiliar concept among the management personnel, the
elements of capital adequacy for banking operation were never given due
weightage.
Cumulative effect of mismanagement in money and capital market led to huge
accumulation of non-performing loans for our financial sector which has risen to
about 40Vo - 42% of the total advances of our banking sector in recent period.
The total scenario of financial sectors was in a state ofdisarray. Hence the need
for overhauling of the financial sector was felt and in order to bring about
structural, institutional and policy changes in the fragile financ.ial sector,
aNational commission ofMoney, Banking and creditwas constifuted in 1984.
The commission submitted reports to the Govt. in 1986 identifying the problem
areas in our financial sector with specific recommendations to bring about the
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structural, institutional, policy and legal reforms. Accordingly, the Financial
Sector Refirm-F*roject (FSRp) was launched in i990 under Financial Sector
Adjustment credit of IDA the 1st phase of which was completed in June, 1996.
The financial sector reform has become a continuous process which is being
carried out in its second phase under the style of commercial banks restructuring
project.
4.2 Chronology of Reform Measures:
Under chronological reforms, there are some institutionalized as well as
some non-institutionalized reforms occurred in the history of financial sector
reforms in Bangladesh. These are divulged below gradually:
4.2.1 Privatization of Banks:
One of the important objectives of the FSRP was opening up of financial
sector for private banks. This policy has been aimed at bringing about
efficiency through competition in the banking sector and gradual
privatization of the 4 NCBs which still hold 60% of the total bank deposits.
At present our banking sector has accommodated l7 private banks
including 4 Islamic Banks and 13 foreign banks in addition to 4
nationalized banks and 5 specialized banks. Under the present policy of
liberalization, scope exists for operation of more indigenous private sector
banks and foreign owned banks keeping a very cautious watch over the
overall performance of the economy in the years to come. With operation
of 39 banks having about 6000 branches all over the country, banking
services have been brought nearer to people. Money market has been
expanded and with gradual computerization and electronic banking
customers’ services have been improved due to the increasing
competition among banks. Although it cannot be ascertained about the
direct impact of institutional reform on the deposit growth of the banking
system but it can be observed from the time series data of deposit growth
as shown in Table 1, that there is clear shifting of deposit from the NCBs
to private sector banks. The rate of growth of deposit in the private sector
banks is higher than that of NCBs although the number of branches and
manpower employed in NCBs are much higher than those of the private
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sector banks. The total number of branches of NCBs and the total
employees are 3617 and 64437 respectively. The total number of
branches of private commercial banks and their total number of
employees are 1,108 and 22,218 respectively
4.2.2 Liberalization of Interest Rate:
A major policy change introduced in a key policy variable was in the area
of interest rate policy. In place of arbitrarily fixed interest rate, Bangladesh
Bank introduced a flexible market oriented interest rate structure from
January 1990. It also abolished sector specific concessional refinance
facility. Interest rate bands were prescribed for different categories of
loans and advances and deposits within which banks were at liberty to
determine their respective rates. Lending rate bands were determined on
the basis of shadow lending rates and deposit rate bands were
determined taking into consideration' the expected rate of inflation and a
positive real return for savers. Interest rate bands were abolished except
for export, agriculture and small & cottage industries. Banks have their
discretion to charge differential rates of interest on the basis of risks
attached to borrowers and also on term loans on the basis of maturity
period. At present, banks are free to fix up their deposit rates on the basis
of market forces. The historical trends of real deposit as well as lending
rate are given below:
Figure 4.2.2 (a): Trends in real deposit & lending rate
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Figure4.2.2 (b): Trends in interest rate spread
4.2.3 Creation of Credit Information Bureau (CIB) and Its Impact:
To restore and strengthen the credit discipline and to provide adequate
reliable credit information among banks to facilitate loan sanctioning, a
Credit Information Bureau (CIB) has been created in Bangladesh Bank in
December, 1992 and its operation started from 1993.
The main objectives of CIB are as follows::
(a) To collect all credit information of the borrowers having outstanding
loan of Tk. 10.00 lacs and above from all the banks and non-banking
financial institutions.
(b) To provide credit information to all banks and financial institutions to
facilitate loan sanctioning, renewal and rescheduling from the computer
database.
(c) To prepare credit reports for using the Government and international
financial institution and to provide relevant data on bank credit for
research and studies.
d) To prepare and provide Credit Risk Rating of the borrowers to banks.
4.2.4 New Loan-Classification Guideline:
Before introducing updated loan classification guidelines in 1989 by
Bangladesh Bank, the commercial banks did not follow any norm to
classify their bad and non-performing loans. Banks did not keep provision
for their poor quality assets. Hence there was huge provision short-fall
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and capital inadequacy of NCBs took a serious shape' for which Govt.
came forward by issuing bonds to salvage the NCB s. As on 3 0 June'97
NCBs had actual capital of 1306 corer with a shortfall of 524.39 corer. T
private sector banks as on 30/06197 had a short fall of 79.37 crore. As far
as classified loan is concerrpd as on3lll2l97 NCBs had29.85% of their
loans classified as againstZ3.0Z% for private banks' and the required
provision was 4058.97 crore as against actual provision 1836.51 corer
with a shortfall of 2222.46 crore. The corresponding figure of private
banks' requirements was 1885.23 crore against which they maintained
980.97 corer leaving shortfall of 909.00 corer.
4.2.5 Capital Adequacy Requirements:
Before introduction to FSRP, our banking sector was unconcerned about
Minimum Capital Requirement. Although it was mandatory under section
13(2) of the Bank Companies Act, 1991 to provide 6Yo of total demand
and time liabilities as capital, very few of our banks could fulfill the
condition' Almost all the banks were undercapitalized and because of
provision shortfall and deteriorating condition of asset quality, further
erosion of capital was faced by the banking sector. Hence in order to
safeguard the interest of depositors and bring about a universally
accepted status of our banking sector, risk weighted capital adequacy
requirement has been introduced from January tgqo -o-it is now
mandatory for the banks to maintain 8% of the assets in risk weighted
manner since 1996.
4.2.6 On-site & Off-site Supervision:
Under FSRP, major change has been made in the on-site and off-site
inspection area of Bangladesh Bank. Evaluation of performances of banks
are being made through'CAMEL RATING". The CAMEL RATING system
is barei'upon an evaluation of 5 crucial dimensions that are to be
evaluated are Capital Adequacy, Asset Quality, Management, Earnings &
Liquidity' Each of these dimensions is to be rated on a scale of I through 5
in ascending order of performance deficiency. Thus, ' 1' represents the
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highest, '5' the lowest level of operating performance. Problem banks are
identified based on the u"ut"rr.r, oithe problems indicated by these ratings.
4.3 Development of Bond Market:
The development of bond market has a long history since the liberation war of
our country. Like emerging-market countries around the world, Bangladesh could
benefit from having a local-currency, fixed-income securities market. At present,
its main fixed-income financial products are bank deposits, bank loans,
government savings certificates, term loans, treasury bills, and government
bonds and corporate debt (syndicated loans, private placement, and
debentures). But in general the corporate debt market is still very small
compared with the equity market The trends of development of bond market are
given below: TABLE: Instruments Available in Bangladesh
4.4 Development of Capital Market:
After Liberation war, the stock market is an important ingredient of the financial
system in Bangladesh. The Securities and Exchange Commission (SEC) of
Bangladesh was formed on June 8, 2003 under the 'Securities and Exchange
Commission Act, 1993'. The principal responsibilities of the SEC include
ensuring proper issuance of securities, safeguarding the interest of investors in
the stock exchange, controlling the stock market and development of the capital
market. The Commission is at work to carry out these responsibilities as well as
performing other activities as defined in the Act. However, relative to the volume
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
of national income and need for investment, the contribution of capital market is
negligible. Currently two stock exchanges are operating in Bangladesh: Dhaka
Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Both the stock
exchanges are autonomous non-profit organizations. These are important
avenue for channeling funds to investors through mobilizing resources from
individuals. In view of the rapidly increasing role of the stock market, volatility in
stock prices can have significant implications on the performance of the financial
sector as well as the entire economy. There exists important link between stock
market uncertainty and public confidence in the financial market.
4.4.1 DSE Performance:
Total market capitalization of all listed securities in DSE increased
substantially (by around 133 percent) in end of December, 2007 to Tk.
753.9 billion which, as a share of GDP, reached a new height in 2007 of
nearly 16.0 percent as against 2.3 percent in 2003. In December 2007, a
total of 350 securities were listed at DSE comprising 266 companies, 14
mutual funds, 8 debentures, 61 treasury bonds, and 1 corporate bond as
opposed to a total of 267 securities comprising of 248 companies, 11
mutual funds, and 8 debentures in December 2003. Thus during the last
four years only 43 new companies got listed in the DSE of which only
three were listed by direct listing route, and the rest were listed through
public offering.
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FIGURE4.4.1: DSE Performance
The trends of trading operations in DSE are given below:
Table 4.4.1: trends of trading operation in DSE
Up to June 2005, market capitalization of securities stood at Tk. 22461.10 corer.
General share price index of the DSE stood at 1310.62 in June 2005, which
were 1318.92 on June 2004 as shown below the share price index in a graphical
representation:
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Source: DSE Web Site
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Appendix-3:
Required Documents for Investment
Following Papers are required
01. Photocopy of National/Voter ID Card.
02. IF-48 (form enclosed).
03. Filled in Letter of Undertaking as per Bangladesh Bank Format for
obtaining CIB report (form enclosed).
04. Valid Trade license, Tin Certificate & VAT Certificate.
05. Audited Balance Sheet and Profit & Loss A/C for the year 2009.
06. Latest Stock report item wise.
07. Declaration of liabilities with other bank.
08. Up to date rent receipt & Non encumbrance Certificate and all other
related documents/papers of the collateral securities.
09. Permission from competent authority (if any).
10. Particulars of sister/allied concern (If any)
11. Photograph of the applicant
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Appendix-4
Investment Mix of Principal Branch, SIBL
Mode of Investment Amount %
Musharaka( Preshipment) 102,024,526.57 0.93%
Murabaha (general) 2,184,179.38 0.02%
MPI 567,309,869.21 5.19%
Baim (Com) 1,693,406,246.17 15.50%
TR 2,157,914,837.49 19.75%
SME 21,182,611.49 0.19%
HPSM(Com) 2,706,199,341.92 24.76%
HPSM(Real Estate) 815,787,659.70 7.46%
HPSM(Transport) 536,339,414.50 4.91%
HPSM(ICS) 8,960,848.44 0.08%
Quard 546,607,142.14 5.00%
Staff loan 153,024,202.34 1.40%
F Ex. Inv 1,617,378,496.82 14.80%
100.00%
Total 10,928,640,794.38
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Appendix-5
Cash Waqf Certificate Model
Appendix-6
Thirty Two purposes for utilization of Cash Waqf Fund
As specified by Social Islami Bank Limited
A. Family Rehabilitation:
1.Improve the condition of absolutely poor living below the poverty line
2.Rehabilitation of physically handicapped and disadvantaged
3.Rehabilitation of beggars
4.Rehabilitation of destitute women
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5.Upliftment of urban slum dwellers
B. Education and Culture:
6.Education of orphans i.e. supplying books free of cost
7.Expansion and development of appropriate education for skill development
8.Informal education facilities of children at home (i.e. mother’s educational
program, children literature)
9.Physical education and sports facilities
10. Supporting local culture and heritage and art promotion
11. Conducting Dawah activities
12. Supporting education of deserving students in the form of scholarship
13. Supporting vocational education in general
14. Supporting education of specific area
15. Financing specific Madrasha/school/colleges of a particular area
16. Educating deserving descendants
17. Supporting any projects in the area of education, research, religion and
social services in the memory o father, mother and any descendants
18. Establishing educational chair
C. Health and Sanitation:
19. Village health care and sanitation
20. Supplying pure drinking water ) to households, schools, mosques, slums
etc)
21. Establishing hospitals, clinics, health care program specially for the poor
22. Health research grant, research in particular disease
D. Social Utility Services:
23. Setting disputes (e.g. village litigation)
24. Providing legal aid to deserving women to establish their lawful rights
25. Assists in arranging dowry-less marriages of poor girls
26. Maintenance of public roads and tree plantation in the village
27. Providing assistance to peace loving no-Muslims and solving their
problems
28. Creating social awareness to prohibit gambling and other social vices
such as theft and other anti-social activities
29. Construction, installation and development of public utility services
30. Maintenance of a specific mosque with an income generating projects
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31. Maintenance of a specific graveyard with an income generating projects
32. Maintenance of a specific Eidgah with an icome generating projects.