Islamic Banking and Practices - Case Study Example

Bahrain Islamic Bank Case Study The purpose of this paper is to study and analyze Bahrain Islamic Bank (BIB) practices in terms of its vision mission statement and various services and activities that it undertakes as a Islamic financial intermediary. The also, studies and presents the relationship between the theory of Islamic banking and the real practices and explains some of the existing dichotomies. Finally, this case study surveys the impact of the most recent financial crisis on the Bahrain Islamic Bank. Table of Contents Vision & mission statement of Bahrain Islamic Bank 4 Type of deposits offered and their sharia basis 5 Balance sheet position 10 Islamic banking and practices Banking history is dated back to the 19th century, with the financing of the Suez Canal construction by the Egyptian government. Previously, Egypt was offered loan by some European banks for various projects against the long fiber cotton as the collateral. However, this was fury criticized by some of Islamic scholars. The Islamic banks have however remained true to the focus of providing interest free loans but also still concentrating on the system of profit and loss. Islamic banks ensure that depositor’s also share the profit that accrues from the operations. Despite the inception during the 19th century, Islamic banks became popular during early 2000 in most Arab countries. Most of the Islamic banks follow the Shari’s principle when it comes to banking, investment and financing. The banks provide various investment options to customers, which includes Murahaba (Cost plus) Ijarah (leasing), letter of credit, Musharakah (joint venture), and covered card Most of the financial services can be manageable within the range of services offered by banks. The only advantage banks gain from their banking services revolves around global customers who normally extend the market for the available banks. Despite enjoying the wide market, the industry is vulnerable to losses incurred especially when it comes to payment of loans by their potential customers. This is one of the biggest challenges that may not be accommodated by most of the business partners, unless the appropriate route of ethics is put into consideration (Bredeson, 2012). Vision & mission statement of Bahrain Islamic Bank The bank was established in 1979 as one of the first Islamic bank operating within the Kingdom of Bahrain with the authorized capital of BD 100 Million and the paid up capital of BD 93.967 Million. The banks Vision is to be the preferred Islamic Financial Partner going beyond boundaries to grow together. The banks Mission is to ensure that there is delivery to: Customers; building loyalty and exceeding expectations Employees; nurturing and retaining talent Shareholders; ensuring consistent maximization of value Community; social commitment to the community Bahrain Islamic banking Lately, Bahrain has quickly turned into a worldwide pioneer in Islamic money, playing host to the biggest centralization of Islamic monetary foundations in the Middle East. Without further ado, there are seven Islamic insurance agencies (Takaful) and two Re-Takaful organizations working in the Kingdom. In addition, Bahrain is at the cutting edge in the business sector for Islamic securities (sukuk), including fleeting government sukuk and additionally renting securities. The Central Bank has assumed a main part in the presentation of these imaginative items. The development of Islamic saving money specifically has been momentous, with aggregate resources in this fragment hopping from Us$1.9 billion in 2000 to Us$25.4 billion by August 2012, an increment of in excess of 12 times. The piece of the overall industry of Islamic banks correspondingly expanded from 1.8% of aggregate managing account resources in 2000 to 13.3% in August 2012. Type of deposits offered and their sharia basis Islamic banks give an assortment of items, including Murabaha, Ijara, Mudaraba, Musharaka, Al Salam and Istitsnaa, limited and unhindered speculation records, syndications and different structures utilized as a part of traditional fund, which have been fittingly altered to follow Sharia standards. The Central Bank of Bahrain has introduced an extensive prudential and reporting skeleton, perfectly customized for the particular ideas and needs of Islamic saving money and protection. The rulebook for Islamic banks covers zones, for example, permitting necessities, capital sufficiency, hazard administration, business conduct, budgetary wrongdoing, and exposure/reporting prerequisites. In addition, the protection rulebook addresses the particular gimmicks of takaful and re-takaful firms. Both rulebooks were the first far-reaching administrative systems that managed the Islamic money industry. Notwithstanding the various Islamic budgetary foundations dynamic in its money related segment, Bahrain additionally plays host to various associations fundamental to the advancement of Islamic fund, including: i) the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); ii) Liquidity Management Center (LMC); iii) the International Islamic Financial Market (IIFM), iv) and the Islamic International Rating Agency (IIRA) and v) Shariya Review Bureau. Bahrain Islamic bank as of late settled an unique store to fund research, instruction and preparing in Islamic money (the Waqf Fund); and is dynamic in living up to expectations with the business and stakeholders in creating industry norms and the institutionalization of business practices. Mudarabah; This can either be restricted or non-restricted. Restricted allows for the imposition of conditions to entrepreneurs so that the capital provider can secure capital while the unrestricted Mudarabah is where the entrepreneur has the power of acting unconditionally without consulting the capital provider until the completion of a contract. The former applies to customers while the latter applies to accounts and investment deposits in Islamic banks. Wakala- This contract type is adopted by Islamic banks for investing customer deposits forming the portion the capital and is often subtracted from the banks realized profits. It gives customers authorization for trading in specific activities and then receives some rate of return which is then deducted from banks realized profits. Deposits of Bahrain Islamic Bank BisB Savings Account- This is designed to meet the requirements of the customer giving the bank an authorization to invest their deposits. The account allows them to deposit and withdraw anytime they wish and profits are calculated on monthly basis. Vevo youth savings account- This is a savings Mudharabah accounts with ATM. This is where the party provides capital for investment purposes. BisB Current Account- This is a profit free account giving the holders an opportunity to deposit and withdraw money by cheque at any branch or through ATMs. They are available to clubs, companies, businesses and other organizations. Tejoori Al Islami- This account allows customers to win cash prizes as a reward of their investments. It is a normal Mudharaba based investment account. BisB Corporate Accounts- This provides a flexible and simple way of starting banking relationship. There is a free cheque book, easy to access any time and provides all major foreign currencies. Types of financing offered There are a number of financing offered by the bank including; Auto finance- This facilitates the acquisition of sharia’a complaibnce to a car that one desires. Tas’heel- Enables customers to enjoy the benefits of personal finance Property finance- It helps in meeting the financial demand of property financing from BisB. Enable members to purchase land, house and other commercial property. Social housing finance scheme- It focuses on providing descent residence to the citizens. This financing is offered in collaboration with the Ministry of Hosing. Trade Financing- This financing provides customers with solutions to their business needs. Enterprise financing- This provides comprehensive packages that enable the business to grow. Project financing- This I tailored towards the financing of newly initiated projects or its approved addendums. Real estate financing- This provides solutions to businesses intending to invest in commercial real estate. Services Offered by Bahrain Islamic Bank Bahrain Islamic bank is a worldwide player in the inexorably advanced universe of Islamic Banking and Sharia-consistent money related administrations, giving a finish "one-stop arrangement" utilizing an exhaustive suite of Sharia agreeable items or products. We give Islamic managing an account benefits in the MENA district through ABC Islamic Bank in Bahrain, and in Europe through ABC International Banks Islamic Financial Services (IFS) unit and its UK-based Islamic individual home financing item. The bank offer Remittance retail services. It maintains a big network covering larger portion of the world. They offer both outward and inward remittances; the network helps in the execution of outward remittances and also fast receipt buy the respective beneficiaries. There is also the inward remittance through the application of swift system, which is fast, confidential, accurate and advanced. All the payment orders and remittances are gotten from the corresponded and non-correspondent. This will then be credited to the customer’s account after confirmation. Demand Drafts- These are issued to customers in some of the world’s most major currencies exchange rates and charges. It is associated with very competitive rates, lower costs and high levels of security and transfers to various parts of the world. Auto finance- This makes it possible for customers to purchase a second hand asset through a contract that complies to Islamic Sharia’a Property finance- Makes it possible for customers to purchase property. Personal finance- The bank has Tas’heel, which is designed to offer personal finance to customers on the basis of Murabaha. Credit cards- The bank offer credit card, which are accepted both locally and internationally. eCards- This is an electronic charge offered by the bank providing unprecedented flexibility and is friendly to customers. Iqra investment scheme- This is an educational investment scheme making it possible to families to contribute investment on monthly basis Bank insurance- In collaboration with Takaful international- the bank provides a number of customized insurance packages to the customers. Apart from above, the bank also provides trade financing, enterprise finance, property finance, project finance, and real estate finance. Treasury products provided include i. Islamic business keeping money administrations ii. Corporate keeping money exchange underwritings and syndications, where we can get to extra pools of financing for customers by accumulating different financial specialists iii. Islamic task fund iv. Venture and resource financing through Ijara, ijara wa-iktina, istisnaa and other important Sharia agreeable items v. Islamic organized items vi. Organized items, for example, sukuks and securitizations, where customers can get to extra pools of subsidizing vii. Islamic exchange money viii. Exchange money giving Letters of Credit, refinancing and assurances ix. Islamic risk administration administrations Balance sheet position The balance sheet provides the financial position of the bank. Period Ending: 2013 2012 2011 2010 31/12 31/12 31/12 31/12 Total Current Assets - - - - Total Assets 910.29 832.8 839.14 935.67 Cash & Due from Banks 235.43 176.32 190.49 253.84 Other Earning Assets, Total 256.01 265.48 327.28 323.37 Net Loans 361.32 338.37 307.26 340.37 Property/Plant/Equipment, Total - Net 17.07 15.53 - - Property/Plant/Equipment, Total - Gross - - - - Accumulated Depreciation, Total - - - - Goodwill, Net - - - - Intangibles, Net - - - - Long Term Investments 36.24 35.22 7.15 6.78 Other Long Term Assets, Total - - - - Other Assets, Total 4.23 1.89 6.96 11.32 Total Current Liabilities - - - - Total Liabilities 833.42 763.04 737.81 835.61 Accounts Payable - - - - Payable/Accrued - - - - Accrued Expenses - - - - Total Deposits 818.57 748.39 85.1 81.66 Other Bearing Liabilities, Total - - 638.21 741.38 Total Short Term Borrowings - - - - Current Port. of LT Debt/Capital Leases - - - - Other Current liabilities, Total - - - - Total Long Term Debt - - - - Long Term Debt - - - - Capital Lease Obligations - - - - Total Debt - - - - Deferred Income Tax - - - - Minority Interest 1.24 - - - Other Liabilities, Total 13.61 14.65 14.51 12.57 Total Equity 76.87 69.76 101.33 100.06 Redeemable Preferred Stock, Total - - - - Preferred Stock - Non Redeemable, Net - - - - Common Stock, Total 93.97 93.97 93.97 72.86 Additional Paid-In Capital - - 43.94 43.94 Retained Earnings (Accumulated Deficit) -16.53 -23.64 -36.01 -16.43 Treasury Stock - Common -0.56 -0.56 -0.56 -0.31 ESOP Debt Guarantee - - - - Unrealized Gain (Loss) - - - - Other Equity, Total - - - - Total Liabilities & Shareholders Equity 910.29 832.8 839.14 935.67 Total Common Shares Outstanding 936.05 936.05 936.05 736.65 Total Preferred Shares Outstanding - - - - * In Millions of BHD (except for per share items)         Period Ending: 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10 Total Assets 910.29 832.8 839.14 935.67 Total Liabilities 833.42 763.04 737.81 835.61 Total Equity 76.87 69.76 101.33 100.06 Income Statement BISB Income Statement                                       Period Ending: 2013 2012 2011 2010 31/12 31/12 31/12 31/12 Net Interest Income 26.3 16.67 18.29 15.25 Interest Income, Bank 37.42 30.66 33.03 32.97 Total Interest Expense 11.12 13.99 14.74 17.72 Loan Loss Provision 15.01 41.69 21.41 20.32 Net Interest Income After Loan Loss Provision 11.29 -25.02 -3.12 -5.07 Non-Interest Income, Bank 15.87 12.52 5.33 -15.9 Non-Interest Expense, Bank -21.06 -23.69 -19.57 -18.74 Net Income Before Taxes 6.11 -36.2 -17.35 -39.71 Provision for Income Taxes - - - - Net Income After Taxes 6.11 -36.2 -17.35 -39.71 Minority Interest -0.04 - - - Equity In Affiliates - - - - U.S GAAP Adjustment - - - - Net Income Before Extraordinary Items 6.07 -36.2 -17.35 -39.71 Total Extraordinary Items - - - - Net Income 6.07 -36.2 -17.35 -39.71 Total Adjustments to Net Income - - - - Income Available to Common Excluding Extraordinary Items 6.07 -36.2 -17.35 -39.71 Dilution Adjustment - - - - Diluted Net Income 6.07 -36.2 -17.35 -39.71 Diluted Weighted Average Shares 936.05 936.05 837.72 727.38 Diluted EPS Excluding Extraordinary Items 0.01 -0.04 -0.02 -0.05 DPS - Common Stock Primary Issue - - - - Diluted Normalized EPS 0.01 -0.03 -0.02 -0.05 * In Millions of BHD (except for per share items)         Period Ending: 31-Dec-13 31-Dec-12 31-Dec-11 31-Dec-10 Total Revenue 53.29 43.18 38.36 17.07 Net Income 6.07 -36.2 -17.35 -39 From the above table it is evident that the firm’s performance has been on the positive note despite the presented challenges. (Islamic Finance New, 2014) Corporate Social Responsibility Since the inception of the bank, it has been committed to the contribution of social and economic well being of the Bahrain kingdom. Some of the CSR program it has participated in the past includes; Industry sponsorship- It sponsors and participates in the major conferences and events. In 2011 it sponsored the AAOIFI- World Bank Annual Conference of Islamic investment funds . Developing of Bahrain Nationals- It provides career and employment opportunities to Bahrain nationals and encourages and nurtures leaders in both business and political arena. It supports Injaz Bahrain, the Crown Prince International scholarship program, Wagf fund for Islamic Banking Training and Development. Increasing the awareness of Islam- It does this through support for national institutions such as; Rekaaz Bahrain, Ministry of Justice and Islamic affairs, Muslim education society and discovers Islam. Improving well being of community- It does this through donations and other philanthropic activities. Compliance to the Basel standards Minimum capital requirement This move allowed banks to take in additional risks while domestically and cosmetically to minimum capital adequacy demands or requirements. It incorporated new scope of financial regulation to add or include assets of the holding firm of an internationally vibrant bank. This is carried out to avoid risk that a bank will not disclose by transferring its assets to other banks and include financial stance of the entire company in calculation of the whole capital demands for its subsidiary bank. (Wallace,2004). The Bahrain Islamic bank uses the basic indicator approach in order to calculate the reserves required to protect against failures in internal processes of the bank. By this approach, banks hold capital that is equal to 15% of the average gross income gained by a bank or financial body in the last three years. All regulators are given room to adjust 15% in accordance to the level of risk assessment of their respective banks. In addition, bankers were allowed to use the standardized approach whereby banks are divided by business lines to come up with the amount of funds it must possess to guard itself against operational risks Risk Management Bahrain Islamic Bank is a Clearing Company is an inventive item, through which speculators can place stores at short developments with simple access to liquidity and the profit of insurance from Arab Banking Corporation. In addition, we create bespoke organized answers for customers and counterparties in co-appointment with our Sharia guides. The Islamic Desk inside the Treasury is dynamic in giving ware murabaha venture benefits in all significant monetary forms. Further, it has reverse murabaha offices that give liquidity amid the life of a murabaha exchange and finally Islamic speculation and resource administration administrations. References Islamic Finance New, 2014. The best in Islamic finance. [online] Available at: [Accessed 20 November 2014]. Siraj, K. and Pillai, P., 2012. Comparative Study on Performance of Islamic Banks and Conventional Banks in GCC region. Journal of Applied Finance & Banking, 2(3), pp. 123-161. Wallace, R. (2004). The national jobbank 2005. Avon, MA: Adams Media Corp. Bahrain Islamic Bank.com Read More