Shari`ah Compliance Process in Investment Portfolio

Md. Shamsul Huda1

1. Introduction
As the first Private sector Islamic Bank in South-east Asia Islami Bank
Bangladesh Limited (IBBL) is committed to comply with the principles of
Islamic Shari`ah and to ban the receive and payment of interest in any of its
operation. In other words, this Bank was established for Shari`ah compliance in
financial transaction in order to get satisfaction of Allah Subhanahu Wa Ta’ala.
So, IBBL always tries to ensure equity and justice in all of its activities and
allows the investment facilities to the clients in the priority sectors and less
developed areas of the country. Islami Bank Bangladesh Limited strives hard to
encourage socio-economic uplift and financial services to the low income
community particularly in the rural areas. The main source of income of the
Bank is the income derived from investment. So, it is very important for the
Bank to make the income legitimate from the view point of Islamic Shari`ah.
An over view of Shari`ah compliance in the investment portfolio of IBBL is
furnished below:

2. Shari’ah Compliance Process in Pre-Sanction Stage

2.1 All investment Manuals are approved by Shariah Council
All Manuals on different investment modes like Bai-Murabaha, Bai-Mujjal, Bai-
Istijrar, Bai-Istisna, Musharaka, Mudaraba, Bai-Salam, Hire Purchase Under
Sherkatul Melk (HPSM) and so on are duly approved by the Shariah Council and the
same are circulated for implementation of Shari`ah principles in investment activities
at branch level.

2.2 Induction of Client

The Bank holds preliminary discussion with the clients and explains them the salient
features of Shari`ah regarding the mode of investment at the time of induction of the
client.

2.3 Shari`ah permissibility of the Goods

IBBL examines the Shari`ah permissibility of the goods before making investment.
The Bank rejects the proposal outright if the goods are not permitted by Islamic
Shari`ah.

2.4 Shari`ah Council represents in all the levels of Policy making

In the Head Office Level the representative from the Shari`ah Council formed with a
view to give views on Shari`ah matters attends the meetings of the Board of Directors
as well as other important Committees of the Bank being invited by Chairman to
1
Senior Vice President, Islami Bank Bangladesh Limited

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avoid any decision contrary to Islamic Shari`ah. The Member Secretary or his
representative may give his comments/views on Shari`ah matter instantly in the
meeting or he may refer the issue/issues to the Shari`ah Council for ultimate fatwa if
required. In some cases the Executive Committee approved the proposals placed
before it subject to the clearance of Shari`ah Council.

2.5 Documentation
Before allowing investment facilities to the clients the Bank obtains different Charge
Documents and papers properly executed, i.e. duly filled in, signed, stamped, verified
and witnessed. It is mentionable here that specimen contracts for any kind of financial
transaction are structured as per fatwa and recommendation given by the Shari`ah
Council.

3. Shari`ah Compliance Process in Disbursement Stage

3.1 The Bank purchases the goods
The Bank follows the `Bai’ modes to a great extent in deployment of its fund. The
goods so desired by the Clients are first purchased by the Bank and ownership of the
Bank on the goods is established, i.e. the Bank transforms its money into goods and
goods into money.

3.2 Taking delivery of goods by the Bank

After finalization of Purchase of goods either by the Bank Officials or through any
agent from the local or out station market the Bank requests the seller to deliver the
goods purchased (as per terms of transaction) to the Bank against proper
acknowledgement by the Bank officials.

3.3 Risk is borne by the Bank after purchase

After purchase of goods the risk of the goods is borne by the Bank until the
possession of the merchandise has been passed on to the Client, i.e. “the Bank
continues to be responsible until the goods were actually delivered to the Client in
accordance with the specifications and other terms of the contract.

3.4 Selling and delivery of goods to the client

The Bank after receiving the goods, finally calculates the total Cost price and fix up
the sale price of the goods as per guidelines given by Shari`ah Council from time to
time.

4. Shari`ah Compliance Process in Post Sanction Stage

4.1 Clients motivation to comply with Shari`ah
The bank holds Shari`ah get-together programs for its clients where members of the
Shari`ah Council deliver lectures on Shari`ah issues to make the client aware of
Shari`ah compliance. The Shari`ah Council members also address the clients in
various seminars and pre opening ceremony of the Branch. The Bank arranges special
workshop and orientation program on Shari`ah compliance for the selected investment

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clients exclusively to make them acquainted with the Shari`ah rules and principles
related to investment.

4.2 Internal Shari`ah Audit & inspection of all branches

The Muraqibs of Shari`ah Council inspect all the Branches of the Bank at least once a
year under the supervision of Shari`ah Council to ensure that the Shari`ah principles
are implemented and complied with meticulously by the branches. During the
inspection the Muraqibs of the council examine the agreement and all other
documents/vouchers related to the investment/finance made by the branches and
identify Shari`ah violations/lapses if any. Accordingly they prepare report on Shari`ah
compliance of each branch in details with facts and figures. The reports are sent to the
Management of the Bank for taking necessary action.

4.3 Unexpected haram income is spent in Charity

On the basis of Shari`ah Inspection the incomes of the branches are categorized into
three main category i.e. halal, haram, doubtful. The haram income identified by the
Muraqibs along with interest income (if any) and amount of compensation charged
against default accounts are spent in charity at the end of the year. In addition to that
the management of the Bank takes disciplinary action against the officials who violate
the Shari`ah norms in banking activities.

4.4 Compensation on overdue investment account

Bank charges Compensation on the overdue investment account(s) for the overdue
periods at the calculated rate of profit. But no compensation is charged without the
approval of the Review Committee/competent authority of the Bank and the same is
not taken as income of the Bank rather it is spent in charity as mentioned earlier.

4.5 Rebate for early payment/adjustment of investment account

IBBL allows rebate to the Investment account (at the calculated rate of profit) in lump
sum for earlier adjustment of the concerned account(s) within due date.

4.6 Training course on Shari`ah Lapses and irregularities

Islami Bank Training and Research Academy (IBTRA) organizes training courses on
Shari`ah lapses and irregularities for its employees so that they can identify pit-falls of
Shari`ah violations and keep themselves away from committing any kind of Shari`ah
violation during investment transaction.

4.7 Irregularities and lapses related to Shari`ah

The following irregularities and lapses may occur in investment portfolio
inadvertently by the Branch officials:
1. Providing cash Facility in Bai Murabaha and Bai-Muajjal instead of buying and
selling of goods.
2. Obtaining cash memo in the name of the investment client instead of the Bank.

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3. Adjustment of old investment liability by creating new investment accounts
without complying Shari`ah principles.
4. Showing fake supplier of the goods.
5. Giving investment on the Shari`ah prohibited item.
6. Creating Baim Wes Bills without having any goods.
7. Obtaining Back dated cash memo.
8. Receiving of goods by the client instead of the Branch from the sellers directly.
9. Not taking the goods under possession of Bank/Branch.
10. Charging of rent on the asset before it becomes usable/ rentable.
11. Not receiving the Cashmemo/Bill/Challan/Transport receipt against the goods
purchased.
12. Not taking Letter of Authority in case of MPI and dealership.

5. Conclusion
Islami Bank Bangladesh Limited believes that Shari`ah compliance in all of its
operations is the key to success of the Bank. Due to strict adherence to the Shari`ah
principles in all activities of the Bank including investment operations, peoples of the
country supported and beloved the Bank and thus it has become number one Bank
both in private and nationalized commercial Bank (NCB) of Bangladesh within the
shortest possible time and we hope that it will be able to maintain this dignified
position in the days to come Insha Allah.

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