BANKING COMPANY & ISLAMIC BANKING

BANKING COMPANY & ISLAMIC BANKING Write down the provisions of winding up of a banking company? Ans: The provisions of winding up of a banking company is prescribed in the sec-56 and sec-65 of the Banking Companies Act,1991. According to sec-56, where the Bangladesh Bank under sec-52(1) give any order to any group of persons other than an individual person or company,such group of persons should be treated here as a company subject to winding up. Within 7 days of publication of such declaration on the basis of an application submitted by the Bangladesh Bank; the High Court Division make the order for the winding up of the said company. Chapter six and seven of this act other than sec-64,66 and 76 are as far as applicable on such application of winding up and the proceedings thereafter. Furthermore, insolvency ofa banking company is one of the major reason of wnding up of a banking company.However,anything contained in the Insolvency Act,1997; any declarationof insolvency under sec-52(1) should be treated enough to be adjudged such group of persons or company as insolvent and it can create winding up. Again,sec-65 of this Act discussed about winding up by the High Court Division.Here in this section it says that the HCD may give order for winding up of a banking company if such company unable to pay its debts and if Bangladesh Bank makes up application under this section or sec-64 for winding up. The Bangladesh Bank making such application of winding up on the basis of following reasons:- If the banking company failed to comply with the requirements of sec-13 which contain about the collection of minimum paid up and reserve capital. If by reasons of sec-31 of this Act , the company become disentitled to carry on its banking . Where there is a specific order of prohibition is given by the Bangladesh Bank under the Bangladesh Bank Order ,1972. If the company continuously contraven any provision of this Act,though the Bangladesh Bank in writing notify to stop such contravention. If the banking company totally fails to pay its debt to its claiments. What are the provisions regarding licensing of a banking companies? Obtaining license is one of the most essential things to commence the business of a banking company.Sec-31 of the Banking Companies Act,1991 discussed about the provisions of licensing of banking companies.According to this section ,no banking company shall carry on banking business in Bangladesh without a license issued by the Bangladesh Bank and at the time of issuing such license it may impose any condition it thinks fit.Every existing company before the expiry of six months from the commencement of this Act and the new company before starting its business must apply for a license to the Bangladesh Bank.But this provision should not make a bar to any existing company carrying on its business if its application for license under this section is remaining under consideration or if notice of not granting license has not been given by the Bangladesh Bank.Here it should be kept in mind that the Bangladesh Bank should not grant license before the expiry of two years of the commencement of this Act in caseof companies incorporated in Bangladesh and in case of companies incorporated outside Bangladesh the time limit is six months. Before granting any license the Bangladesh Bank should observe the following conditions:- The company at present or in future will be able to stand in a position to pay all the claims of its depositors. The company do not do anything which seems detrimental to the interest of its depositors. In case of company incorporated outside Bangladesh;in which country it incorporated that country provide same facilities like our law. The Bangladesh Bank may cancel the license on account of the following reasons:- If the company ceases to carry on banking business in Bangladesh If the company at any time fails to comply with any of the conditions imposed upon it by the Bangladesh Bank. The Bangladesh Bank may allow the delay of the company in case of obtaining license if it is satisfied that giving such opportunity does not prejudice the interest of the company’s depositors or the public.Any banking company if aggrieved by the decision of the canceling license may within 30 days from the date on which the decision of the Bangladesh Bank is communicated to it ,appeal to the govt.In such case the decision of the govt. should be final. What is meant by Islamic Banking System? Islamic banking system is such a type of banking system,which is directed according to the rules of the Holy Qura’n and Sunnah where transaction based interest is completely prohibited.Economy in Islam is established upon an idea ,which is the direction of all actions by the divine rules and is implemented with the fear of Allah(ST) by the States through some directions and legislations.Muslims are encouraged in financial transactions as an essential part of their lives as Allah(ST) declares: ‘’And when the prayer is finished,then may you disperse through the lands, and seek of the bounty of Allah;and remember Allah frequently that you may prosper.’’ Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Shariah) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. Generally, Islamic law also prohibits trading in financial risk (which is seen as a form of gambling). In addition, Islamic law prohibits investing in businesses that are considered haram (such as businesses that sell alcohol or pork, or businesses that produce un-Islamic media). In the late 20th century, a number of Islamic banks were created, to cater to this particular banking market. Thus Islamic banking system established economic justice,rationality ,efficiency and progress. Discuss about different types of transaction in Islamic banking system. According to Al-Quran,Allah has approved trade and prohibited usuary(riba).This is the basic verse towards Islamic banking.Islamic banking system is based on profit and loss sharing system due to the prohibition of riba in the Holy Qur’an. Islamic banking has the same purpose as conventional banking except that it claims to operate in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah). Mudarabah(Profit Loss Sharing) "Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The capital investment comes from the first partner, who is called the "rabb-ul-mal", while the management and work is the exclusive responsibility of the other party, who is called the "mudarib". The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profitss generated are shared between the parties according to a pre-agreed ratio. Compared to Musharaka, in a Mudaraba only the lender of the money ("rabb-ul-mal") may incur a loss. Musharakah (joint venture) Musharakah is a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. It is an agreement under which the Islamic bank provides funds, which are mixed with the funds of the business enterprise, and others. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans). Murabahah (Cost Plus) This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of interest determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional interest on late payments); however, the asset remains in the ownership of the bank until the loan is paid in full. Musawamah Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabahah and Musawamah with all other rules as described in Murabahah remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce. Bai-al- salam(Deferred delivery): Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship. Bai-al-Muajjal(credit sale) Literally bai' muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabahah muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. Bai' muajjal is also called a deferred-payment sale. Bai-al-Istisna When a manufacturer,an artisan or a craftsman takes orders with or without advance payment for manufacturing the articles himself or through hired labourers,the arrangement is known as Bai-al-Istisna. Istisna’a can be used for providing the facility of financing the manufacture or construction of houses, plants, projects, and building of bridges, roads, and highways. Ijarah Ijarah means lease, rent or wage. Generally, the Ijarah concept refers to selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price. Wakalah (Agency) Wakala means entrusting a person as a businessman to act on his behalf or as his representative.It has been very common practice to appoint an agent(wakil) to facilitate the trade operations. Wadia(Deposits) Wadia or deposit arises when a person keeps his property with another person for safekeeping allowing him to use it without the intention of receiving any return from it. Amanah(Trust) The term Amana is used to mean a responsibility arising out of contract of safekeeping(wadia).When an employer hands over his property to an employee ,it becomes a trust(amanah).Amanah may be with or without agreement. Discuss about the principles of policies of Islamic Banking in Bangladesh There are almost 50 banks operating in Bangladesh (about 20 are government owned), out of which 6 or 7 (all private) are running on Islami Banking principles. There is a rising trend of low profit private banks to cash on the public sentiments of the Muslim majority country by opening a few additional branches which is said to be run on Islamic principles. But it has been reported that these banks do not adhere to the proper Islami banking model and is really a mask of traditional banking system. Some of them aim to attract certain investment from Saudi Arabia based IDB (Islami development Bank)who has recently declared a policy to lend money (through Islamic model banks) to the small businesses of the OIC countries. Now the debate is not on the Islamic banking principles but the way some of the banks are manipulating the Islamic model and act like the traditional model to increase their client base and thus making own profit. Islami Banking is an alternative model of banking and people should know whether the model is exercised by the shrewd bankers according to Islamic law, for which people prefer the model in the first place. The difference between traditional banking and Islami banking is that it is interest free. Islam prohibits Muslims from taking or giving interest (riba). It has also been argued that riba refers to usury practiced by petty moneylenders and not to interest charged by modern banks and that no riba is involved when interest is imposed on productive loans, however religious people place comfort on an non-interest banking model and that's why Islami banking was evolved in 1971 in Egypt. The Islamic bank on interest does not mean that capital is costless in an Islamic system. Islam recognizes capital as a factor of production. In Islam, the owner of capital can legitimately share the profits made by the entrepreneur. What makes profit sharing permissible in Islam, while interest is not, is that in the case of the former it is only the profit-sharing ratio, not the rate of return itself that is predetermined. Investors in the Islamic order have no right to demand a fixed rate of return. No one is entitled to any addition to the principal sum if he does not share in the risks involved. The owner of capital (rabbul-mal) may 'invest' by allowing an entrepreneur with ideas and expertise to use the capital for productive purposes and he may share the profits, if any, with the entrepreneur borrower (mudarib); losses, if any, however, will be borne wholly by the owner of capital. Another legitimate mode of financing recognized in Islam is one based on equity participation (musharaka); in which the partners use their capital jointly to generate a surplus. Islamic banks normally operate three broad categories of account, mainly current, savings, and investment accounts. The current account gives no return like traditional banking. The savings account is also operated on an al-wadiah (safe-keeping) basis, but the bank may at its absolute discretion pay the depositors a positive return periodically, depending on its own profitability. The investment account is based on the mudaraba principle as discussed earlier. One dissenting view is that the substitution of profit-sharing for interest as a resource allocating mechanism is crude and imperfect and that the institution of interest should therefore be retained as a necessary evil. That is where my concern is. As far as I know that the newly emerged Islami banks or banks with branches running on Islamic models do not adhere to all of the features stated above. They give loan to people stating a fixed amount of profit and In reality nobody can be sure of the profit before running the project. If the borrower suffers loss, then the bank claims back their share of profit along with the capital just like traditional banking. In fact they are just masking the traditional interest based model in the name of Islam. In savings account they are also promising a high rate of return and in some cases they are being pre-fixed. It has also been reported that some banks suppress their actual profit so that the savings account holders will not get a larger share of the profit. These Islami banks sometimes borrow capital from Bangladesh Bank on traditional interest. So more awareness is required from the common people who will put their trust in a bank. There is nothing wrong with the Islami Banking model atleast in theory. However malpractice can deceive people's beliefs. And in a country with low literacy rate that is more likely to happen.