shahjalal islami bank, bangladesh

7/30/2019 Shahjalal Islami Bank, Bangladesh

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1

PART 1

INTRODUCTION OF REPORT

PART 1

INTRODUCTION OF REPORT


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1.1 Introduction:

Achievement of high economic growth is the basic principles of present economic policy. In

achieving the objectives, the banking sector plays an important role. The banking sectors

channel resources through deposit mobilization and providing credit for different business

venture. The successful running of a bank business depends upon how effectively the credit

management recovered the funds. Shahjalal Islami Bank Limited as new commercial banks

in Bangladesh responsibility bestows upon it to ensure efficient and effective banking

operation in a sound manner.

Shahjalal Islami Bank Limited is always ready to maintain the highest quality services by

upgrading Banking technology prudence in manage and applying high standard of business

ethics through its established commitment and heritage. Objectives of a private institution like

SJIBL are to maximize profit through optimum utilization of resources by providing best

customers service.

1.2 Significance of the report:The prime reason of this study is to become familiar with the practical business world and to

attain practical knowledge about the Banking and Corporate world, which is so much essential

for each and every student to meet the extreme growing challenges in job market. It is also

known to all of us that there is no alternative of practical knowledge and the practical knowledge

is much more durable and useful than the theoretical knowledge. This study will help us to get a

true picture of the practical business world, particularly of banking business and also to attain

practical knowledge on the various spheres of banking business. So this study is of paramount

importance for each and every student regardless of his/her study area or disciplines

1.3 Origin of the Report

As a partial fulfillment of the BBA program University ofASA, We got placement as a report at

the dividend policy of Shahjalal Islami Bank Limited on a 3 weeks. This report is the outcome of

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our experience at the Dividend Policy. One report is an attempt to provide business students an

orientation to a real life business situation in which we can observe and evaluate the use and

applicability of the theoretical concepts, which were taught in the classroom. As a student of

business administration, we preferred to complete our report.

1.4 Topic of the Report:

To write a report it is necessary to select a topic. A well-defined topic reflects what is going on to

be discussed throughout the report. The topic that has been assigned by our course teacher is

Dividend Policy of Shahjalal Islami Bank Ltd..

1.5 Scope of the Report

As we were working at the dividend policy of Shahjalal Islami Bank. We got the opportunity to

learn different types of dividend policy.

I had the opportunity to gather information about-

An overview on Shahjalal Islami Bank Limited.

Financial Performance of Shahjalal Islami Bank Limited.

Dividend Policy of Shahjalal Islami Bank Limited.

Which dividend policy follow the Shahjalal Islami Bank Limited.

1.6 Objective of the Report:

1.6.1 General objective of the Report

The general objective of this report is to complete the report. As per requirement of BBA

program of University Of ASA, student need to work in a dividend policy for three weeks to

acquire practical knowledge about real Business operation.

1.6.2 Specific objective of the Report

To present an overview of Shahjalal Islami Bank Limited.

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A general description of the banking activities of Shahjalal Islami Bank Limited.

To submit a brief description about the Investment Department or Credit Division

and their activities.

To suggest remedial measurement for the improvement of the whole process of the

Investment Department.

1.7 Methodology of the Study:

Although there were so many limitations, it was tried to use both the primary and secondary

sources of collecting information to make the report presentable with as less abstraction as

possible.

1.7.1 Type of Research:

In this report we will describe the which dividend policy follow the Shahjalal Islami bank

limited. So according on the base of objective this research is called exploratory research,

1.7.2 Sources of Information:

A. Primary data

Primary data is always known as survey data. This type of data is collected from the respondent.

For this project personal Interview with the customer has been conducted. When it became

impossible to conduct face to face interview I collected the primary data by using the Telephone

Interview

B. Secondary data

Data that were published before for some other reason can be collected using internal and

external sources.

i) Internal Secondary data: To furnish the report properly some papers has been

collected form the officials of Shahjalal Islami Bank Limited. Information from

annual reports, journals, newspapers and other published documents have been used..

ii) External Secondary Data: For better interpretation some data has been collected

from Bangladesh Bank. Internet Browsing is also one source of external Secondary

data. Others are-

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Brochures of Shahjalal Islami Bank Ltd.

Annual Report (2006-10) of SJIBL

Deferent types of journals on SJIBL

Leaflets of SJIBL

Net browsing

1.8 Limitations of the Report:

Budgeted times for the Study:

The first obstruct is time itself. Due to the time limit, the scope and dimension of the study has

been curtailed. Due to the short time it was not possible our to do random sampling and conduct

with the respondent by going everywhere.

Data Insufficiency:

For better interpretation I had to collect some information from the Head office. But because of

some divisional and confidential problem, I could not get enough information about the dividend

policy.. So for better interpretation we could not get sufficient data.

Lack of Records:

Sufficient books, publications, facts and figures are not available.

Lack of structured data flow:

Lack of structured and current information as the Banks policy does not permit to disclose

various data related to our study and this is the major problem among all the problems, We have

encountered with.

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6

PART 2

ORGANIZATIONAL PROFILE OF

SHAHJALAL ISLAMI BANK LTD.

PART 2

ORGANIZATIONAL PROFILE OF

SHAHJALAL ISLAMI BANK LTD.


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2.1 History & Background:

The Shahjalal Islami Bank Limited was incorporated as a public limited company as on 1st

day of April 2001 under the Companies Act. 1994. The Bank started its commercial operation on

May 10, 2001. The Bank has made a significant progress within a very short period of its

existence and occupied an enviable position among its competitors after achieving remarkable

success in all areas of business operation. The authorized capital of the Bank is Tk. 6000 million

and Paid up capital of the Bank stood at Tk. 3425.12 million as on 31 December 2011. The total

equity (capital and reserves) of the Bank as on December 31, 2010 stood at Tk. 7746 million.

Name of theCompany

Shahjalal Islami Bank Limited

Legal FormA public limited company incorporated in Bangladesh on 1st April 2001under the companies Act 1994 and listed in Dhaka Stock Exchange Limited

and Chittagong Stock Exchange Limited.

Commencementof Business

10th May 2001

Head OfficeUday Sanz, Plot No. SE (A)2/B Gulshan South Avenue,Gulshan 1, Dhaka-1212.

Telephone No. 88-02-8825457,8828142,8824736,8819385,8818737

Fax No. 88-02-8824009

Website www.shahjalalbank.com.bd

SWIFT SJBL BD DH

E-mail [email protected]

Chairman Alhaj Mohammed Solaiman

Managing Md. Abdur Rahman Sarker

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Director

Auditors

M/S. Syful Shamsul Alam & Co.Chartered Accountants

Paramount Heights65/2/1 Box Culvert Road (level-6)Purana Paltan, Dhaka-1000Phone: 88-02-9555915, 9560332

Tax Advisor

M/S K.M Hasan & Co.Chartered Accountants87, New Eskaton RoadDhaka.Phone: 88-02-9351457, 9351564

Legal AdvisorHasan & AssociatesChamber of Commerce Building(6th floor), 65-66 Motijheel C/A, Dhaka

No. of Branches 63

No. of ATMBooth

14

No. of SMECenters

06

Off-Shore banking

Unit 01

No. of Employees 1671

Stock Summary:

AuthorizedCapital

Tk. 6,000 million

Paid up Capital Tk. 3425.12 million

Face Value perShare

Tk. 10

2.2 Our Vision

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To be the unique modern Islami Bank in Bangladesh and to make significant contribution to the

national economy and enhance customers trust & wealth, quality investment, employees value

and rapid growth in shareholders equity.

2.3 Our Mission

To provide quality services to customers.

To set high standards of integrity.

To make quality investment.

To ensure sustainable growth in business.

To ensure maximization of Shareholders wealth.

To extend our customers innovative services acquiring state-of-the-art technologyblended with Islamic principles.

To ensure human resource development to meet the challenges of the time.

2.4 Our Strategies

To strive for customers best satisfaction & earn their confidence.

To manage & operate the Bank in the most effective manner.

To identify customers needs & monitor their perception towards meeting thoserequirements.

To review & update policies, procedures & practices to enhance the ability to extendbetter services to the customers.

To train & develop all employees & provide them adequate resources so that thecustomers needs are reasonably addressed.

To promote organizational efficiency by communicating company plans, polices &procedures openly to the employees in a timely fashion.

To cultivate a congenial working environment.

To diversify portfolio in both the retail & wholesale markets.

2.5 Our Motto

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Committed to Cordial Service.

2.6 Organizational Structure

There are different wings to consist the organizational structure of SJIBL. There are

Board of Directors

Board Committees

Executive Committees

Policy Committees

Management Team

2.6 Structural Management of SJIBL:

Organization Chart of Shahjalal Islami Bank Ltd.

10

Chairman

Managing Director

Executive Vice President/Company Secretary

SponsorsBoard of Directors

Deputy Managing Director

ID, IT, CREDIT, R&P

Deputy Managing Director

GSD, CAD, A&I, GB, D&M

Senior Vice President Senior Vice PresidentSenior Vice President

Vice President

Senior Asst. VicePresident

Asst. Vice President

First Asst Vice President

Executive Officer

Senior Officer

Trainee Senior Officer

Officer

Trainee Officer

Abbreviations:

GSD General Service DivisionCAD Central Account DivisionASI Audit and InspectCB Central BankD&M Developing and

Marketing

ID International DivisionR&P Research & Planning


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2.7 Branch Expansion:

The Bank commenced its business on May 10, 2001 by opening its 1 st branch, i.e. Dhaka Main

Branch at 58, Dilkusha, Dhaka obtaining the licence from Bangladesh Bank, the central bank of

Bangladesh. Its corporate Head Office is situated at 10, Dilkusha Commercial Area, Jiban Bima

Bhavan, Dhaka - 1000. The Bank opened 2 (Two) branches in 2001, 6 (Six) branches in 2002, 2

(Two) branches in 2003, 2 (Two) branches in 2004, 4 (Four) branches in 2005, 5 (Five) branches

in 2006 & 2007,2008. Upto September 31, 2010 SJIBL established 63 branches to all over the

country. to give a cordial service to their customers. Branch Network of Shahjalal Islami Bank

Ltd.:

11

RAJSHAHI 4

BARISHAL 1br 1br11 branch

DHAKA

28 Branch

SYLHET4 Branch

KHULNA3 Branch

CHITTAGONG10 Branch


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Management of SJIBL:

The Board of Directors consists of eminent personalities from commerce and industry of the

country. Mr. Sajjatuz Jumma, the founder Chairman of the Board of Directors, is a

businessman besides being an eminent personality of the country.

The Bank is manned and managed by highly qualified and efficient professionals. The ManagingDirector of the Bank Mr. Md. Abdur Rahman Sarker who has rich experience of managing boththe nationalized and the private sector banks as Managing Director.

2.8 Human Resources Development

SJIBLs policy on human resources management is proactive. SJBL believes that investment in

human resource development is the key to maintaining sound health of the bank. The employees

of the bank attend training program/ seminar, workshop both in home and abroad. The training

center of the bank has been arranging various courses, workshop and seminars on important

aspect of banking. This bank invites experts of banking sector for imparting training to its

employees to meet the above challenges. To keep the employees motivated, incentives,

performance award, promotion and accelerated promotion are given on a regular basis.

2.9 Information Technology

Main objective of the bank is to take care of different economic group of the society and meet

their all type of banking requirements stretching its service to the door step of the people with

the help of information technology gradually. SJBL is providing customer service through online

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Figure: 2-9 Branch Network of SJIBL


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facilities. SJIBLs ultimate aim is to enable its respected and valued clients to shop under the

same roof. In line with that JBL VISA DEBIT CARD, SMS/push pull services have already been

introduced. Besides clients are also being facilitated by the service of REUTERS, SWIFT,

Western Union Money Transfer etc.

2.10 Corporate Governance

The Board of Directors of the bank consists of successful distinguish personalities emerging

from area of trade, commerce and industries. The bank conducts its business and operations

under the policy, directions and guidelines of the Board. The bank has also a Shariah Council

consisting of prominent Faquih, Economists, Lawyers, Bankers to advise and guide the Board

and the Management of Shariah matters relating to the business and operations.

Under the able guidance of the Board of Directors and the Shariah council, the professional

management team carries out the business operation of the bank, ensuring good governance

practicing sound, best corporate and risk management process. The result that was achieved by

the bank so far is due to the constant guidance, cooperation and support of the Board and Shariah

Council and devoted, dedicated and hard work of the management team and all functionaries of

the bank.

2.11 Products

Bank means mobilizing fund from surplus unit and deployment of fund for deficit unit. SJIBL

mobilize its fund from surplus unit through different types of deposit schemes and deployment

this fund for deficit unit through various investment schemes. So the main products of SJIBL are

different kinds of deposits and investment schemes

2.11.1 Deposit Scheme

The mobilized deposits were ploughed back in economic activities through profitable and safe

investment. These types of deposit schemes of SJIBL are:

Mudaraba Monthly Income Scheme

Mudaraba Double/Triple Benefit Scheme

Mudaraba Monthly Deposit Scheme

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Mudaraba Millionaire Scheme

Mudaraba Hajj Scheme

Mudaraba Housing Deposit Scheme

Mudaraba Cash Waqf Scheme

Other than these deposits schemes SJIBL also operate some traditional deposit schemes these

are:

Al-Wadia Current Deposit

Mudaraba Saving Deposit

Mudaraba Short Notice Deposit

Mudaraba Term Deposit

Mudaraba Scheme Deposit

The Deposit-mix of the Bank as on 31.12.2010 was as bellow:-

Sl.No Nature of Deposit Taka in million Percentage of Total Deposit

1 Al-Wadia Current Deposit 2,541.19 4.03%

2 Mudaraba Savings Deposit 3,861.42 6.13%

3 Mudaraba Short Notice Deposit 3,612.78 5.74%4 Mudaraba Term Deposit 38,104.07 60.52%

5 Mudaraba Schemes Deposit 11,193.86 17.78%

6 Other Deposits 3,651.63 5.80%

Total 62,964.95 100.00%

Analysis of Deposit:

S Nature of Deposit

2010 2009 2008 2007 2006

1 Al-Wadia Current Deposit 2,541.19 1,609.95 1,266.56 734.71 519.69

2 Mudaraba Savings Deposit 3,861.42 3,072.78 1,863.52 1,832.75 913.16

3 Mudaraba Short Notice Deposit 3,612.78 1,886.96 765.11 608.75 366.76

4 Mudaraba Term Deposit 38,104.07

27,578.74

21,190.16

11,341.51

10,252.66

5 Mudaraba Schemes Deposits 11,193.8 10,602.7 9,426.65 6,869.13 5,131.30

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6 8

6 Others Deposits 3,651.63 2,708.02 1,972.24 1,231.35 907.08

Total

62,964.95

47,459.23

36,484.24

22,618.19

18,090.65

4%6%

6%

60%

18%6%

Deposit Mix of 2010 Al-wadia Current Account

Mudaraba Savings Deposit

Mudaraba Short Notice Deposit

Mudaraba Term Deposit

Deposit in Scheme

Other Deposits

Exhibit 2.12.1: Deposit Mix of 2010

18,090.6522,618.18

34,279.74

47,459.23

62,964.95

1,000.00

11,000.00

21,000.00

31,000.00

41,000.00

51,000.00

61,000.00

71,000.00

2006 2007 2008 2009 2010

InmillionTaka

Year

Trend of Deposit from 2006 to 2010Total Deposit

2.11.2 Investment Schemes

Total investment of the Bank stood at Tk. 61,440.08 million as on 31.12.2010 as against Tk.

43,958.26 million of 31.12.2009 registering an increase of Tk. 17,481.82 million, i.e. 39.77%

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growth. The Bank is careful in deployment of the fund. Mode wise investment portfolio as on

31.12.2010 are given below:

Sl. No Modes of Investments Taka inmillion

Percentage of Total Investment

1 Murabaha 9,569.65 15.57%

2 Bi-muajjal 27,335.68 44.49%

3 Hire-purchase & Ijara 14,343.70 23.35%

4 Investments against L/C 36.50 0.06%

5 Bill purchased & discounted 7,145.00 11.63%

6 Investment against scheme deposits 1424.86 2.32%

7 Quard 159.18 0.26%

8 Others 1425.51 2.32%

Total 61,440.08 100.00%

The bank entertains good investment clients, having credit worthiness and good track record.The bank has different profitable investment projects these are:

Mudarabaha

Bi-Muajjal

Hire Purchase and Ijara

Investment Against L/C

Bill Purchase/Discounted

Investment Against Scheme Deposit

Quard

The bank has got a few investment schemes to provide financial assistance to comparatively lessadvantage group of people; which are:

Household Durable Scheme

Small Business Investment Scheme Small entrepreneur Investment Program

Medium Entrepreneur Program

Housing Investment Scheme

Rural Investment Program

Car Investment Scheme

Woman Entrepreneur Investment Scheme

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Analysis of Investment trend:

SL Modes of Investment2010 2009 2008 2007 2006

1 Murabaha 9,569.65 8,261.10 7,353.61 5,844.81 4,687.36

2 Bi-muajjal 27,335.68

19,855.00

13,224.94

8,882.60 5,774.57

3 Hire-purchase & Ijara 14,343.70

10,520.72

5,463.44 3,581.92 3,009.46

4 Investment against L/C 36.50 17.32 106.13 19.15 219.72

5 Bill purchased/discounted 7,145.00 3,588.62 3,721.76 1,588.00 1,308.55

6 Investment against schemedeposit

1,424.86 810.61 557.61 17.25 428.78

7 Quard 159.18 132.55 168.33 29.65 59.27

8 Others 1,425.51 771.59 2,322.95 653.23 28.08

Total61,440.0

843,958.2

632,918.7

720,616.61 15,515.79

15.57%

44.49%23.35%

0.06%11.63% 2.32%

0.26%2.32%

Investment Portfolio of 2010 Murabaha

Bi-Muajjal

Hire-Purchase

Investment AgainstL/CInland Bills Purchase

Figure: Investment Portfolio 2010

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15,515.79

20,616.61

32,918.77

43,958.26

61,440.08

-

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

70,000.00

2006 2007 2008 2009 2010

InMillionTaka

Year

Trend of Investment from 2006 to 2010Total Investment

Figure: Trend of Investment from 2006-2010

18,090.65

22,618.18

34,279.74

47,459.23

62,964.95

15,515.79

20,616.61

32,918.77

43,958.26

61,440.08

-

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

70,000.00

2006 2007 2008 2009 2010

InMillionTaka

Year

Deposit & Invesrment Position Deposit

Investment

Figure: Deposit and Investment Position

2.12 Services

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Shahjalal Islami Bank Limited is an industry standard, Islami Shariah and latest technology

based modern bank. The bank is equipped with state-of-the-art technology and committed to

provide technology based modern banking to its valuable customers. Services provided by SJIBL

are:

On Line Banking

SJIBL VISA Card

SMS / Pull Push Service

SWIFT

2.13 Departments of SJIBL:

All branches of Shahjalal Islami Bank Limited are divided into three departments:

General Banking Department.

Foreign Exchange Department.

Investment Department.

2.13.1General Banking Department

General banking department is one of the most important departments of Shahjalal Islami Bank

Limited. Basically bank provides the main services to the customer through this department. In

general this section of the Shahjalal Islami Bank Limited is divided into five sections.

Accounts opening section

Cash section

Remittance section

Bills and clearing section

Accounts section

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2.13.2 Foreign Exchange Department

Banks play a very important role in effecting foreign exchange transaction of a country. Mainly

transactions with overseas countries are in respect of imports; exports and foreign remittancecome under the purview of foreign exchange department. Banks are the vital sectors by which

such transactions are effected /settled. Central Bank records all sorts of foreign exchange

transactions. The other banks dealing with foreign exchange are to report to Bangladesh Bank

regularly (viz. daily, monthly, quarterly, yearly etc.). The foreign exchange department consists

of three sections. They are:

Import section

Export section

Foreign remittance section

2.13.3 Investment Department

Banking business consists of borrowing and lending. Bank act as an intermediary between

surplus and deficit economic units. Thus a banker is a dealer in money and credit. Banks accept

deposit from large number of customers and then lend a major portion of the accumulated money

to those who wish to borrow. In this process banks secure reasonable return to the savers, make

funds available to the borrowers at a cost and earn a profit after covering the cost of funds.

Banks, besides their role of intermediation between savers and borrowers and providing an

effective payment mechanism, have been allowed to diversify into many new areas of better

paying business activities.

2.14 SJIBL Activities:

2.14.1 Membership of Different Organization / Chamber

1. Bangladesh Institute of Bank Management (BIBM)

2. The Institute of Bankers Bangladesh (IBB)

3. Bangladesh Association of Banks (BAB)

4. Bangladesh Foreign Exchange Dealers' Association (BAFEDA)

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5. Central Shariah Board for Islamic Banks of Bangladesh

6. Islamic Banks Consultative Forum (IBCF)

7. International Chamber of Commerce- Bangladesh

8. Society for Worldwide Inter-bank Financial Telecommunication (SWIFT)

2.14.2 Corporate Banking

We provide personalized solutions to all our customers. The Bank distinguishes and identifies

corporate customers' need and designs appropriate solutions accordingly. Shahjalal Islami Bank

Limited offers a complete range of financing and operational services to its corporate client

groups combining trade, treasury, investment and transactional banking activities. We offer

accurate solution whether it is project finance, term Investment, import or export deal, working

capital requirement. We are pledged bound to render efficient services to satisfy customer needs.

Our experience in handling Corporate Banking business covers a wide span of businesses and

industries. We hold leverage on our expertise in the following sectors particularly:

Textile Spinning, Dyeing / Printing

Ready Made Garments

Agro processing industry

Edible Oil, Consumer and Diversified Industries

Industry (Import Substitute / Export oriented)

Food & Allied products

Paper & Paper Products Engineering, Steel Mills

Chemical and chemical products etc.

Telecommunications.

Information Technology

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3. THEORETICAL BACKGROUNDS

3.1 Introduction:

Islami Bank is a financial institution whose status, rules and procedures expressly state its

commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of

interest on any of its operation. For millions of Muslims, banks were institution to be avoided.

Islam is a religion, which keeps Believers from the tellers window. Their Islamic beliefs prevent

them from dealings that involve usury or interest (Riba). Yet Muslim needs banking services as

much as anyone and for many purposes: to finance new business ventures, to buy a house, to

facilitate capital Investment to undertake trading activities and to offer safe place for saving.

Muslims are not averse to legitimate profit as Islam encourages people to use money in Islamic

ally legitimate ventures not just to keep their funds idle.

However in this fast moving world more than 1400 years after the Prophet (S.A.W) can Muslims

find room for the principles of their religion? The answer comes with the fact that a global

network of Islamic banks investment house and other financial institution have started to take

shape based on the principals of Islamic finance laid down in the Quran and the Prophets

traditions some 14 centuries ago. Islamic banking based on the Quranic prohibition of changing

interest has moved from a theoretical concept to embrace more than 100 banks operating in 40

countries with multibillion-dollar deposits worldwide. Islamic banking is widely regarded as the

fastest growing sector in the Middle Eastern financial services market. Exploding onto the

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financial scene barely thirty years ago an estimated $US100 billion worth of funds are now

managed according to Shariah.

The best-known feature of Islamic Banking is the prohibition on interest. The Holy Quran

forbids the charging of Riba on money lent. It is important to understand certain principles of

Islam that underpin Islamic finance. Muslim scholars accepted the word Riba to mean any

fixed or guaranteed interest payment on cash advances or on deposits.

3.2 Evolution of Islamic Banking:

Islamic Banking comes into reality through a long theoretical exercise of several renowned

Islamic scholars and economists. The first attempt to establish an Islamic financial institution

took place in Pakistan in 1950. In the modern world, the pioneering role in establishing the first

Islamic Bank in 1963 named Mit- Ghamar Saving Bankin Egypt at rural area of Nile Delta.

As on today, there are many Islamic financial institutions operating throughout the world

covering both Muslim and non-Muslim countries of various socio-economic environment.

3.3Common Practices of Islamic Banks in Mobilization of Funds:

The common practices of Islamic banks in the sources of funds may be described as follows:

3.3.1Current Accounts:

All Islamic banks operate current account on behalf of their client individuals and business firms.

These accounts are operated for the safe custody of deposits and for the convenience of

customers.

3.3.2SavingAccount:

1. Savings accounts are opened with the condition that deposits provide the bank with an

authorization to invest and

2. Depositors have the right to deposit and withdraw funds.

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3. The profits in savings accounts are calculated on the minimum balance maintained during

the month

4. A minimum balance has to be maintained in order to qualify for a share in profit.

3.3.3 Investment Deposit:

Investment deposits are Islamic banks counterparts of term deposits or time deposits in the

conventional system. They are also called profit and Loss-Sharing (PLS) Accounts or

Participatory Account. However they can be distinguished from traditional fixed term deposits in

the following manner:

3.4 Islamic Financial Vehicles:

Islamic banks around the world have devised many creative financial products based on the risk

sharing and profit sharing principles of Islamic banking. For day to day banking activities a

number of financial instruments have been developed that satisfy the Islamic doctrine and

provide acceptable financial returns for investors.

3.4.1 Al-Mudaraba (Profit sharing):

Important features of Mudaraba are as follows:

1. The division of profits between the two parties must necessarily be on a proportional

basis and cannot be a lump sum or guaranteed return.

2. The investor is not liable for losses beyond the capital he has contributed.

3. The mudarib does not share in the losses except for the loss of his time and efforts.

3.4.2 Murabaha:

This is the sale of a commodity at a price, which includes a stated profit, which includes a stated

profit known to both the vendor and the purchaser. This can be called a cost plus profit contract.

The buyer in deferred payments usually pays the price back.

3.4.3 Musharaka (Profit and loss sharing)

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This is a partnership normally of limited duration formed to carry out a specific project. It is

therefore similar to a western- style joint venture, and is regarded by some as the purest from of

Islamic financial instrument, since it conforms to the underlying partnership principles of sharing

in and benefiting from risk.

3.4.5 Ijarah (Lease financing)

Another popular instrument is leasing which is designed for financing an asset or equipment. It is

a manfaah (benefit) or the right to use the asset or equipment. The lessor leases out an asset or

equipment to the client at an agreed rental fee for a pre-determined period pursuant to the

contract.

3.4.6 Ijara Wa Iktina (Hire Purchase)

Equivalent to the leasing and installment loan, hire- purchase, practices that put millions of

drivers on the road each year.

3.4.7 Muqarada

This technique allows a bank to flat what are effectively Islamic bonds to finance a specific

project. Investors who buy muqaradah bonds take a share of the profits of the project being

financed, but also share the risk of unexpectedly low profits or even losses.

3.4.8 Bai-Salam

A buyer pays in advance for a specified quality of a commodity, deliverable on a specific date at an

agreed price. This financing technique, similar to a futures or forward- purchase contract is particularly

applicable to seasonal purchase but it can also be used to buy other goods in cases where the seller needs

working capital before he can deliver.

3.4.9 Istisna (Purchase order)

This is a sale and purchase agreement whereby the seller undertakes to manufacture or construct

according to the specification given in the agreement. It is similar to bai salam the main

distinction being the nature of the asset and method of payment. Istisna generally covers those

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things which are customarily made to order and advance payment of money is not necessary as

required in bai salam.

3.4.10 Bai-Muajjal

In short, it is a sale on credit. Bai-Muajjal may be defined as a contract between a buyer and

seller under which the seller sells specific goods to the buyerat an agreed fixed price payable at a

certain fixed future date in lump sum or within a fixed period by fixed installments.

3.4.11 Hire Purchase under Shirkatul Melk

Shirkat means partnership. Shirkatul Melk means share in ownership when two or more persons

supply equity to purchase an asset own the same jointly and share the benefit as per agreement

and bear the loss in proportion to their equity, the contract is called Shirkatul Melk contract.

3.4.12. Quard-Al-Hasan

It is a virtuous loan. Through this mode, Bank provides loan to its customer for a certain period,

which bears no profit/loss/compensation.

3.4.13. Direct Investment

Islamic Bank without the help/assistance of any client may directly invest its fund/capital in

share, securities, business and industry. Profit and loss in this business is exclusively, the internal

matter of the Bank.

3.5 Tools for Appraisal Credit

The Cs of Good and Bad Loan

In addition to the formal credit appraisal, the credit officers of SJIBL try to judge the possible

client based on some other criteria. These criteria are called the Cs of good and bad loans. The

Cs are described below.

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CharacterMake sure that the individual or company you are lending to haveOutstanding integrity.

CapacityMake sure that the individual or company you are lending to havethe capability of repaying your loan.

Conditions Understanding the business and economic conditions can and willchange after the loan is made.

CapitalMake sure that the individual or company you are lending to havean appropriate level of investment in the company.

CollateralMake sure that there is a second way out of a credit but do notallow that to drive the credit decision.

ComplacencyDo not rely on past history to continue. Stay alert to what can gowrong in any loan.

CarelessnessRemember that documentation, follow-up and consistentmonitoring is essential to high quality loan portfolios.

Communicatio

nShare credit objectives and credit decision-making both verticallyand laterally within the bank.

Contingencies

Make sure that you understand the risks; particularly the downsidepossibilities and that you structure and price the loan consistentlywith that understanding.

Competition Do not get swept away by what others are doing.

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29

PART 4

SWOT ANALYSIS OF SHAHJALAL

ISLAMI BANK LTD.

PART 4

SWOT ANALYSIS OF SHAHJALAL

ISLAMI BANK LTD.


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8.SWOT ANALYSIS OF SHAHJALAL ISLAMI BANKLTD

A particular SWOT analysis discloses the following issues for an organization that an

organization achieved over the time of its operation by analyzing its both internal and external

environment:

S- STRENGTHS W-WEAKNESS O-OPPORTUNITIES T-THREATS

The SWOT analysis of Shahjalal Islami Bank Ltd. is shown below:

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8.1 STRENGTHS:

Provides of good quality services: Having the reputation of being the provider of good

quality services among its potential customers.

Differentiated Islamic Banking Products: SJIBL has several types of differentiated

Islamic Banking Products (both deposit and investment) with unique features and

facilities, which are so much helpful for enhancing the economic growth.

Wide range of financial products/services: Having wide range of financial

products/services. Particularly the GB department has obtained most of the clients

reliability in providing services by offering various financial schemes.

Good investment portfolio: SJIBL never invest all types of business area for that case

their portfolio is very good.

Low Balance Requirement: Relatively low minimum balance/deposit requirement to

maintain an account with the Bank.

Satisfactory business growth: From the star of the business in 2001 SJIBL run their

business successfully and their business growth is very much satisfactory.

Experienced Top management: Management of SJIBL is very efficient and theyalways take correct decision for give better service to the customer.

Strong correspondent relationship: SJIBL maintains strong relationships with other

commercial banks & a member of SWIFT service.

Strong Capital: SJIBL has strong capital base and maintain all the statutory

requirements to be a good Bank.

Comfortable liquidity position: Shahjalal Islami Bank Limited always maintains a

comfortable liquidity position in the market.

Achieve goodwill from the clients: SJIBL has already achieved a strong goodwill

among the clients.

Strong concentration on Investment: Investment Division is the heart of SJIBL and

main business area of the bank. Bank gives loans to the client by judging their business

and concern how the clients repay the loan

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Strong monitoring Process: Investment terms and conditions are monitored, financial

statements are received on a regular basis, and any covenant exceptions are referred to

the branch manager for timely follow up.

Strictly follow rules and regulations: The terms and conditions strictly followed by

the authority of the bank thats why SJIBL has low risk in loan defaultation.

Co-operative & skilled personnel: SJIBL has skilled personnel who are very much

specialized in interacting with clients, (particularly in Investment department).

8.2 WEAKNESSES:

Complexity in account opening: Various complex requirements demanded by the

Bank to open a new account.

Low geographic coverage: SJIBLs branch expansions growth is not in satisfactory

level. Outside the Dhaka division they have only 8 branches.

Limited delegation of power: For the sanction the loan branch has no power. All

power in handed in the head office.

Lengthy Process for sanction the loan: All power in the head office for that case for

sanctioning loans it takes more time.

No bank guarantee power: No branch has any bank guarantee power.

Conservative mind setting in working: SJIBL working structure is very much

conservative and for that case its growth is slow than other bank.

Lack of strong and attractive promotional activities: It is an Islami perspective bank,

so it spends money for promotional activities in a low rate.

8.3 OPPORTUNITIES:

Perception of Islami bank: Strong appetite for Islamic financial services among the

people of Bangladesh.

Give higher interest rate: Possibility to generate very high rate of return as compared

to fixed rate of interest from other bank

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Demand Endless: Banking industry is an industry with an endless demand in the

future.

Concentration in Other business area: It has an opportunity in SME and Agro based

business.

Credit card Facility: If in future SJIBL provide to the client credit card in dual

currency then it can be differentiated from other commercial bank.

Merge with Same nature bank: Expansion of existing Banking networks through

merge with other Islamic Banks will facilitate the bank to enjoy the competitive

advantage.

Be Prepare in competitive advantage: A large number of private Banks coming into

the market in the recent time. In this competitive environment Shahjalal Islami Bank

must expand its product line to enhance its sustainable competitive advantage.

Wide Banking networks: The bank should establish a wide range of banking network

in the country and outside the country.

8.4 THREATS:

Lack of awareness: Lack of awareness regarding the Islamic Banking system amongthe people of Bangladesh.

Products name difficulty: Name of the products is so much difficult to understand and

very much confusing, such as Mudaraba, Murabaha.

Increase financial institutions merging: The worldwide trend of mergers and

acquisition in financial institutions causing problem.

Money rate devaluation: Frequent taka devaluation and other rate fluctuation is

causing problem for the bank.

Guideline: Lack of adequate guideline by the Central Bank on the basis of Islamic

Shariah.

Competition increase: Increased competition from fellow Islamic Banks and Other

Commercial Private Banks (PCBs).

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Lacking in fund collection procedure: Limitation (as an Islamic Bank) to borrow

from the money market (short term funds), which may produce a threat to the liquidity

of the Bank.

Market pressure: Market pressure for dollar ($) crisis is increasing day by day.

Government rules and regulations: Unfavorable Government rules and regulation

created regarding Banking business that hampers their business procedure.

34

PART 5

DIVIDEND POLICY

PART 5

DIVIDEND POLICY


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Dividend Policy5.1 Dividend:

Dividend refers to that portion of a firms earnings which are paid out to the shareholders.

Net Income alternative

1) 100% net income can be declared as dividend

2) 100% net income can be lets as retained earnings

3) Some part of net income can be declared as dividend and some let as retained earnings

5.2 Pros of Dividends

Dividends certainly do have a place within the financial world. They provide a way for investorsto place a large amount of capital that can then be used as a source of income, since it regularlybrings in money. When you choose dividends, you can look forward to:

Profit while retaining a stake in the company - Normally, a stockholder would have to sell hisor her stock in order to profit from his or her investment in a company. Dividends allowinvestors to profit from their investment in the company without selling their stock. This means

you can look forward to regular returns.

Short-term results and long-term opportunities - An investor can continue to receive dividendpayments from the company as long as the investor continues to hold stock. This can lead tosignificant dividend payments for a long-term investment, even though you're seeing results overa short-term time frame.

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Visible indications of your investment's security - A continued, increased dividend payout is

considered to be a good indicator of a company's continued success. This allows you to quantifyyour gains easily.

5.3 Cons of Dividends

Despite their benefits, dividends aren't for everyone. Before you and your financial advisordecide on this course of action, you'll want to consider the following:

Dividends are not universally available - The Board of Directors is responsible for decidingwhether or not a dividend is to be paid out to its investors. However, even if a company makes asignificant profit, it is under no obligation to pay a dividend.

Tax repercussions - Dividends are often criticized as being subject to double-taxation, as thecompany is taxed on its income and the individual shareholder is also subject to paying taxes onthe dividend payout. In the United States, dividends are subject to a 15 percent dividend tax rate.This is higher than what you can expect to pay on other types of investment windfalls.

5.4 Cash dividend payment procedures:

Board of Directors Meeting:

Dividend decision- whether to declare dividend and what amount to pay cash dividendsto stockholders is decided by the board of directors of a corporation. Usually dividenddecision is derived from the financial position, future growth expectation as well as recenttrend in dividend declaration.

Amount of Dividend:

What amount or percentage of net income will be declared as dividend and payment period is akey decision of the board meeting.

Relevant Date:

If the directors of the firm declare a dividend, they also typically issue a statement indicating thedividend decision, the record date and the payment date.

Ex dividend Date

is the date that the value of the firms common shares will reflect the dividend payment(ie. fall in value)

Ex means without.

At the start of trading on the ex-dividend date, the share price will normally open fortrading at the previous days close, less the value of the dividend per share. This reflects

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the fact that purchasers of the stock on the ex-dividend date and beyond WILL NOTreceive the declared dividend.

5.5Dividend Reinvestment Plans:

Plans that enable stockholders to use dividends received on the firms stock to acquire additionalshares- even fractional shares- at little or no transaction cost.

Two approaches for dividend reinvestment-(1) Shareholders con buy share from secondary market, equal amount that they received as

dividend and they take brokerage house for purchasing the share from stock market andbrokerage house will get some commission.

Actually, when large number of group of shareholders is doing this type of business, then the

firm can treat it as reinvestment of dividend.

2. Shareholders can buy share directly from the firm, without going through a broker. Fromits point of view, the firm can issue new shares to participants more economically,avoiding the under-pricing and flotation costs.

The existence of a DRIP may enhance the market appeal of a firms shares.

5.6The Relevance of Dividend Policy:

The relevance of dividend policy was established through numerous theories and research. But to

a finance manager, capital budgeting and capital structure decisions are far more important than

dividend decision. In other words, good investment and financing decision should not be

sacrificed for a dividend policy.

Before establishing the relevance or importance of dividend policy, some key question have to

be resolved:

Does dividend policy matter?

What effect does dividend policy have on share price?

Is there a model that can be used to evaluate alternative dividend policies in view of share

value?

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5.7 The Residual Theory of Dividends:

Residual dividend policy (Residual Theory of Dividends), is a theory that suggest that thedividend paid by the firm should be the amount left over after all acceptable investment

opportunities have been undertaken.

Using this approach the firm would treat the dividend decision in three steps, as follows:

Step 1:Determine optimal level of capital expenditures

Step 2: Determine the optimal capital structure. Optimal capital structure- the capital structure

where the weighted average cost of capital will be lower. Its basically the estimation of the total

amount of equity financing needed to support the expenditures estimated in step 1.

Step 3: Determine the source of equity financing- retained earnings or new common stock. As

because, cost of retained earnings is less compare to the cost of new common stock, so firm

should use retained earnings to meet the equity

requirement determined in step 2.

If retained earnings are inadequate to meet this need, firm should raise equity by selling new

common stock.

If the available retained earnings are in excess of this need, distribute the surplus amount the

residual- as dividend.

According to this approach, there will be no dividend declaration, if firms equity needs exceeds

the amount of retained earnings. This view of dividend suggest that the required return of

investors, Ks, is not influenced by the firms dividend policy that the dividend policy is

irrelevant.

For example, let's suppose that a company named CBC has recently earned $1,000 and has astrict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).

Now, suppose this company has a project with a capital requirement of $900. In order tomaintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project byusing debt ($300) and two-thirds ($600) by using equity.

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In other words, the company would have to borrow $300 and use $600 of its equity to maintain

the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. On the other hand,

if the project had a capital requirement of $1,500, the debt requirement would be $500 and the

equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project

required an equity portion that was greater than the company's available levels, the company

would issue new stock.

5.8 Dividend Irrelevance Theory:

Dividend irrelevance theory was developed by Merton H. Miller and Franco Modigliani (M andM). They argue that the firms value is determined solely by the earning power and risk of itsassets (investments). M and Ms theory suggest that in the perfect world (certainty, no taxes, no

transactions cost, and no other market imperfections), the value of the firm is unaffected by thedistribution of dividends.

But our world is not perfect (there is uncertainties, taxes, transactions cost and some market isimperfect), studies have shown that, the increase in dividend result in increased share price, anddecrease in dividend result in decreased share price.

In response, M and M argue that these effect are attributable not to the dividend itself but ratherto-

The informational content of dividend, and

Clientele effect.

Informational content: Information provided by the dividend of a firm with respect tofuture earnings. Investors view a change in dividends, up or down as a signal about futureearnings. Anincrease in dividends is viewed as a positive signal, and investors bid up the share price and adecrease in dividends is a negative signal that cause a decreased in share price.

Clientele effect: A firm attracts share holders whose preferences for the payment and stabilityof dividends correspond to the payment pattern and stability of the firm itself.

In summary, dividend irrelevance argue that, all else being equal, an investors required return-and therefore the value of the firm- is unaffected by dividend policy for three reasons:

(1) The firms value is determined solely by the earning power and the risk of its assets.

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(2) If dividend do affect value, they so solely because of their informational content.

(3) A clientele effect exists that causes a firms shareholders to receive the dividends they

expect.

The proponents of dividend irrelevance conclude that because dividends are irrelevant to a firms

value, the firm does not need to have a dividend policy.

5.9 Dividend Relevance theory:

The theory, advanced by M. J. Gordon and J. Lintner, who suggest that there is, in fact, a direct

relationship between the firms dividend policy and its market value.

Fundamental of this theory is their Bird-in-hand argument, in support of dividend relevance

theory, that investors see current dividends as less risky than future dividends or capital gains.

A bird in the hand is worth two in the bush.

Gordon and Lintner argue that current dividend payments reduce investors uncertainty, causing

investors to discount the firms earnings at a lower rate (Ks) and to place a higher value

on the firms stock.

Conversely, if dividends are reduced or are not paid, investor uncertainty will increase, raising

the required return (Ks) and lowering the stocks value.

But, they fails to provide conclusive evidence in support of dividend relevance arguments.

In practice, the action of both financial managers and stockholders tend to support that belief that

dividend policy does affect stock value. That means, dividends are relevant- each firm must

develop a dividend policy that fulfils the goals of its owners and maximizes their wealth as

reflected in the firms share price.

Another model

Walter's Dividend Model

Walter's model supports the principle that dividends are relevant. The investment policy of a firm

cannot be separated from its dividend policy and both are inter-related. The choice of an

appropriate dividend policy affects the value of an enterprise.

Assumptions of this model:

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1. Retained earnings are the only source of finance. This means that the company does not

rely upon external funds like debt or new equity capital.

2. The firm's business risk does not change with additional investments undertaken. It

implies that r(internal rate of return) and k(cost of capital) are constant.

3. There is no change in the key variables, namely, beginning earnings per share(E), and

dividends per share(D). The values of D and E may be changed in the model to determine

results, but any given value of E and D are assumed to remain constant in determining a

given value.

4. The firm has an indefinite life.

Formula: Walter's model

P = DKe g

Where: P = Price of equityshares

D = Initial dividendKe = Cost of equity

capitalg = Growth rate

expected

After accounting for retained earnings, the model would be:

P = DKe rb

Where: r = Expected rate of return on firmsinvestments

b = Retention rate (E - D)/E

Equation showing the value of a share (as present value of all dividends plus the present value ofall capital gains) Walter's model:

P = D + r/ke (E- D)

ke

Where: D = Dividend per share andE = Earnings per share

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Example:

A company has the following facts:Cost of capital (ke) = 0.10

Earnings per share (E) = $10Rate of return on investments ( r) = 8%Dividend payout ratio: Case A: 50% Case B: 25%Show the effect of the dividend policy on the market price of the shares.

Solution:

Case A:D/P ratio = 50%When EPS = $10 and D/P ratio is 50%, D = 10 x 50% = $5

P =5 + [0.08 / 0.10] [10 -

5]

0.10

=> $90

Case B:D/P ratio = 25%When EPS = $10 and D/P ratio is 25%, D = 10 x 25% = $2.5

P =

2.5 + [0.08 / 0.10] [10 -2.5]

0.10

=> $85

Conclusions of Walter's model:1. When r > ke, the value of shares is inversely related to the D/P ratio. As the D/P ratio

increases, the market value of shares decline. Its value is the highest when D/P ratio is 0.So, if the firm retains its earnings entirely, it will maximize the market value of theshares. The optimum payout ratio is zero.

2. When r < ke, the D/P ratio and the value of shares are positively correlated. As the D/Pratio increases, the market price of the shares also increases. The optimum payout ratio is100%.

3. When r = ke, the market value of shares is constant irrespective of the D/P ratio. In this

case, there is no optimum D/P ratio.

Limitations of this model:1. Walter's model assumes that the firm's investments are purely financed by retained

earnings. So this model would be applicable only to all-equity firms.2. The assumption of r as constant is not realistic.3. The assumption of a constant ke ignores the effect of risk on the value of the firm.

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5.10 Factors Affecting Dividend Policy:

There are number of external and internal factors which affect dividend policy.

External factors which affect dividend policy

Contractual constraintsrefer to restrictive provisions in a loan agreement and may includedollar or percentage of earnings limit on dividends and an inability to make dividend paymentsuntil certain levels of earnings is reached.

Legal constraints- this type of constraints depends on the location of the firm. Usually, due tolegal constraints, firms are not able to pay out any dividends if the firm has any overdueliabilities or if it is bankrupt.

Market reactionsa firm needs to consider how markets will react to its dividend decisions.For example, if dividends are not paid or decreasing then markets will see it as a negative signaland the stock price will likely to drop. This will decrease shareholders wealth. If dividends arepaid out consistently or even increasing in amounts, this can be seen as a positive signal by themarket participants and stock price will likely to increase. This will increase shareholderswealth.

Shareholders generally prefer fixed or increasing dividends. This decreases uncertainty andinvestors are likely to use lower rate at which earnings will be discounted. This will lead to anappreciation of share and an increase in shareholders wealth.

Current and expected state of the economy If state of the economy is uncertain or headingdownward than it may be wise for management to pay smaller or no dividends to prepare asafety reserve for the company which can help to deal with future negative economic conditions.

However, if the economy is growing very fast then the firm may have more acceptableinvestments to take advantage of. It can be best not to distribute dividends but rather use thesefunds for investments.

Changes in government policies and state of the industry must also be taken into account.

Internal factors which affect dividend policy

Financing needs of the firm Mature firms usually have better access to external financing.

Therefore, they are more likely to pay out a large portion of earnings in dividends. If a company

is young and rapidly growing than it will likely be unable to pay a large portion of earnings individends as it will require retained earnings to finance acceptable projects and its access to

external financing is likely to be limited.

Preference of the shareholdersa firm should consider the needs and interests of the majorityof its shareholders when making dividend decisions. For example, if shareholders will be able toearn higher returns by investing individually then what firm can earn by reinvesting funds than ahigher dividend payment should be considered.

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If the firm will have to issue more stock to be able to pay out dividends than it may be in the bestinterest of the current stakeholders not to issue dividends to avoid potential dilution ofownership.

Dilution of ownership occurs because after issuing of additional stock, retained earnings

will have to be distributed over a larger amount of the shareholders. This leads to dilution ofearnings for existing shareholders. This also leads to dilution of control.

Firms also need to consider the wealth level of the majority of its shareholders. If the majorityof shareholders are lower income earners than they likely will need dividend income and willprefer payment of dividends. However, if the majority of shareholders are high income earnersthen they will likely to prefer appreciation of share as it will defer tax payment even if the taxapplicable on dividends and capital gains is the same.

Stability of earnings If earnings of the company are not stable from period to period than it iswise to follow conservative payments of dividends.

Earnings requirement this constraint is imposed by the firm. It consists of a firm not beingable to pay out in dividends more than the sum of the current and the most recent past retainedearnings. However, the firm still can pay out dividends even if it incurred losses in the currentfinancial period.

Lack of adequate cash and cash equivalentsoccurs when firm do not have adequate cash

and cash equivalents, such as marketable securities, to make dividend payments. Borrowing with

intention to use funds to pay out dividends is usually not welcomed by lenders because the use of

funds is not aligned with activity that would help firm to pay back debt to the lender. Borrowing

to pay dividends is also usually not a wise business decision.

Growth Prospects:The financial requirements are directly related to how much it expects to grow and what assets it

will need to acquire. A large, mature firm has adequate access to new capital, whereas a

growing firm may not have sufficient funds available. A growing firm like to have to depend on

internal financing, so it is likely to pay out less amount of income as dividend. On the other

hand, a more established firm is in batter position to pay out large amount of income as dividend.

Owner Considerations:

Before establishing the dividend policy, the firm must consider some subject which are related to

its majority of shareholders.

(1) Tax status: If a firm has a large percentage of wealthy stockholders who are in high tax

bracket, it may decide to pay out a lower percentage of its earnings.

(2) Owners investment opportunities: A firm should not retain funds for investment in

projects yielding lower returns than the owners could obtain from external investments of

equal risk.

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(3) Potential dilution of ownership: If a firm pays out a high percentage of earnings, new

capital will have to be raised with common stock. The result of a new stock issue may be

dilution of both control and earnings for the existing owners. The firm can minimize the

possibility of such dilution by paying low dividend.

Market Consideration:

Shareholders often view a dividend payment as a signal of the firms future success. A stable and

continuous dividend is a positive signal, conveying the firms good health. Shareholders are

likely to interpret a passed dividend payment due to loss or to very low earnings as negative

signal. The non payment of dividend creates uncertainty about future, which is likely to result in

lower stock value.

5.11Types of Dividend Policies:

The firms dividend policy must be formulated with two basic objectives in mind: providing for

sufficient financing and maximizing the wealth of the firms owners.

5.11.1Constant-Payout-Ratio Dividend Policy:

The dividend payout ratio indicates the percentage of each dollar earned that is distributed to the

owners in the form of cash. It is calculated by dividing the firms cash dividend per share by its

earnings per share

With a constant-payout-ratio dividend policy, the firm establishes that a certain percentage ofearnings is paid to owners in each dividend period.

Although some firm use a constant-payout-ratio dividend policy, it is not recommended.

5.11.2 Stability

The fluctuation of dividends created by the residual policy significantly contrasts with the

certainty of the dividend stability policy. With the stability policy, companies may choose a

cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or it may choose a

stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In either case,

the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them

with income.

Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings

of $300, $200, $100, $400). If CBC decided on a stable policy of 10% of yearly earnings ($1,000

x 10%), it would pay $25 ($100/4) to shareholders every quarter. Alternatively, if CBC decided

on a cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and

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$40 respectively. In either instance, companies following this policy are always attempting to

share earnings with shareholders rather than searching for projects in which to invest excess

cash.

5.11.3 Regular Dividend Policy:

The regular dividend policy is based on the payment of a fixed dollar dividend in each period.

This policy provides the owners with generally positive information thereby minimize their

uncertainties.

Under this policy dividends are almost never decreased.

5.11.4 Low-Regular-and-Extra Dividend Policy:

Under this dividend policy, a firm is paying a low regular dividend, supplemented by an

additional dividend when earnings are higher than normal in given period. By giving the low

regular dividend the firm gives investors a stable income necessary to build confidence in the

firm, and the extra dividend permits them to share in earnings from an especially good period.

The extra dividend should not be regular event, otherwise, it becomes meaningless.

5.11.5 Expectations Theory

As the time approaches for management to announce the amount of the next dividend,investors form expectations as to how much the dividend will be. The investor then

compares the actual dividend announced with the expected dividend.

If the amount of the dividend is as expected, even if it represents an increase from prior

years, the market price of the stock will remain unchanged. However, if the dividend is

higher or lower than expected, the investors will reassess their perceptions about the firm

and the value of the stock.

5.11.6 Other Forms of Dividends:

Dividend can be paid in the forms other than cash:

Stock Dividend

Stock Repurchases

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5.12 Stock Dividend (Bonus Share):

A stock dividend is paid in stock rather than in cash.

Many investors believe that stock dividends increase the value of their holdings.

In fact, from a market value standpoint, stock dividends function much like stock splits.The investor ends up owning more shares, but the value of their shares is less.

From a book value standpoint, funds are transferred from retained earnings to commonstock and additional paid-in-capital.

If Tramline declares a 10% stock dividend and the current market price of the stock is

$15/share, $150,000 of retained earnings (10%x

100,000 sharesx

$15/share) will becapitalized.

The $150,000 will be distributed between the common stock (par) account and paid-in-capital in excess of par account based on the par value of the common stock. The resultingbalances are as follows.

From a shareholders perspective, stock dividends result in a dilution of shares owned.

For example, assume a stockholder owned 100 shares at $20/share ($2,000 total) before a

stock dividend.

If the firm declares a 10% stock dividend, the shareholder will have 110 shares of stock.However, the total value of her shares will still be $2,000.

Therefore, the value of her share must have fallen to $18.18/share ($2,000/110).

5.12.1Disadvantages of stock dividends include:

The cost of issuing the new shares.

Taxes and listing fees on the new shares.

Other recording costs.

5.12.2 Advantages of stock dividends include:

The company conserves needed cash.

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Signaling effect to the shareholders that the firm is retaining cash because of lucrative investment

opportunities.

5.13 Stock Repurchase:

The repurchase by the firm of outstanding common stock in the market place. Stock repurchase

enhance shareholders value by;

(1) Reducing the number of share outstanding and thereby raising earnings per share,

(2) Sending a positive signal to investors in the market place that management believes that

the stock is under valued, and

(3) Providing a temporary floor for the stock price, which may have been decline.

5.13.1Alternative Reasons for Stock Repurchases

To use the shares for another purpose

To alter the firms capital structure

To increase EPS and ROE resulting in a higher market price

To reduce the chance of a hostile takeover

5.14 Right Share:

Existing shareholders will get priority to purchase share at the time of issuing of new common

stock. This right is known as Pre-emptive Right. Existing shareholders can exercise that right

or not. If shareholders dont want to buy, then right will go to general investors.

5.15 Stock Splits:

A stock split is a recapitalization that affects the number of shares outstanding, par value,earnings per share, and market price.

The rationale for a stock split is that it lowers the price of the stock and makes it moreattractive to individual investors.

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For example, assume a share of stock is currently selling for $135 and splits 3 for 2.

The new share price will be equal to 2/3 x $135, or $90.

Continuing with the example, assume that the investor held 100 shares before the split witha total value of $13,500.

After the split, the shareholder will hold: $13,500/$90 = 150 shares worth $90 each

A reverse stock split reduces the number of shares outstanding and raises stock pricetheopposite of a stock split.

The rationale for a reverse stock split is to add respectability to the stock and convey themeaning that it isnt a junk stock.

Not only do stock splits leave the market value of shareholders unaffected, but they alsohave little affect from an accounting standpoint as this 2-for-1 split demonstrates.

5.16 Arguments against Dividends

First, some financial analysts feel that the consideration of a dividend policyis irrelevant

because investors have the ability to create "homemade" dividends. These analysts claim

that this income is achieved by individuals adjusting their personal portfolios to reflecttheir own preferences. For example, investors looking for a steady stream of income are

more likely to invest in bonds (in which interest payments don't change), rather than a

dividend-paying stock (in which value can fluctuate). Because their interest payments

won't change, those who own bonds don't care about a particular company's dividend

policy.

The second argument claims that little to no dividend payout is more favorable for

investors. Supporters of this policy point out that taxation on a dividend are higher than

on a capital gain. The argument against dividends is based on the belief that a firm that

reinvests funds (rather than paying them out as dividends) will increase the value of thefirm as a whole and consequently increase the market value of the stock. According to the

proponents of the no dividend policy, a company's alternatives to paying out excess cash

as dividends are the following: undertaking more projects, repurchasing the company's

own shares, acquiring new companies and profitable assets, and reinvesting in financial

assets.

In opposition to these two arguments is the idea that a high dividend payout is important

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for investors because dividends provide certainty about the company's financial well-

being; dividends are also attractive for investors looking to secure current income. In

addition, there are many examples of how the decrease and increase of a dividend

distribution can affect the price of a security. Companies that have a long-standing

history of stable dividend payouts would be negatively affected by lowering or omitting

dividend distributions; these companies would be positively affected by increasing

dividend payouts or making additional payouts of the same dividends. Furthermore,

companies without a dividend history are generally viewed favorably when they declare

new dividends

5.17 Shahjalal Islami Bank Limited Dividend policy

The Board of Directors of the Bank has recommended dividend @30% i.e. to issue 03 shares asagainst holding of every 10 shares to its shareholders for the year 2010. Record date for the

issuance of such dividend has already been fixed on 21.04.2011.

Financial Summery: Five Years of SJIBL at a GlanceFigures in million Taka

SL Items 2010 2009 2008 2007 2006

1 Authorized Capital 6,000 4,000 4,000 2,000 2,000

2 Paid up Capital 3,425 2,740 2,246 1,872 936

3 Total Equity (Core & Supplementary) 7,747 5,430 4,069 3,041 1,3634 Core Capital 6,748 4,676 3,605 2,788 1,205

5 Supplementary Capital 999 754 464 253 158

6 Total Deposits 62,965 47,459 34,280 22,618 18,091

7 Total Investment (Loans & Advances) 61,440 43,958 32,919 20,617 15,516

8 Import Business 60,066 39,543 42,551 25,490 18,684

9 Export Business 48,857 29,434 26,347 15,084 11,282

10 Inward Foreign Remittance 6,156 10,473 9,498 4,295 3,535

11 Total Contingent Liabilities and Commitment 27,665 14,475 10,771 6,403 6,020

12 Total Income 9,509 7,117 5,285 3,589 2,563

13 Total Expenditure 5,980 5,076 3,475 2,274 1,718

14 Operating Profit 3,529 2,041 1,810 1,315 84515 Profit/(Loss) before Tax 2,960 1,795 1,566 1,216 788

16 Profit/(Loss) after Tax 2,072 1,071 818 647 463

17 Fixed Assets 1,473 620 339 127 93

18 Total Assets (excluding off-balance sheetitems)

78,800 58,921 44,110 28,347 21,343

19 Volume of Non-performing Investment 1,173 413 143 128 30

20 Amount of Provision against classified 268 118 28 23 21

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Investment

21 Amount of Provision against unclassifiedInvestment

720 480 355 215 157

22 Amount of Provision against Off Balance

Sheets Exposures

278 148 108 38 -

23 Earning Per Share (Taka) 6.05 39.07 29.84 28.81 49.50

24 Book Value per Share (Taka) 10 100 100 100 100

25 Net Asset Value per Share (Taka) 19.70 179.80 160.53 148.95 128.75

26 Investment to Total Deposit Ratio (%) 97.58 92.62 96.03 91.15 85.77

27 Dividend Per Share

Cash Dividend - - - - -

Bonus Dividend 30%* 25% 22% 20% -

28 Return on Equity (%) 30.71 25.10 25.58 23.21 38.44

29 Return on Assets (ROA) (%) 2.63 2.08 2.26 2.60 2.17

30 Operating Income Ratio (%) 37.11 28.68 34.24 36.64 32.96

31 Net Income Ratio (%) 21.79 15.04 15.47 18.03 18.0732 Classified Investment as % of Total Investment 1.91 0.94 0.44 0.62 0.19

33 Capital Adequacy Ratio (%) 9.78 13.98 13.81 16.42 10.39

34 Cost of Deposit (%) 7.91 9.13 9.31 9.00 9.55

35 Cost of Fund (%) 10.15 11.07 10.99 10.40 10.83

36 Return on General Investment (%) 11.90 13.46 14.18 14.68 14.08

37 Number of Branches 63 51 33 26 21

38 Number of Brokerage House 8 5 1 - -

39 Number of SME Center 6 7 5 - -

40 Number of Employees 1,671 1,299 878 555 377

41 Number of Shareholders 54,549 36,675 39,971 40,966 19

42 Number of foreign Correspondents 637 610 590 550 490

Below Graphically Represents The Financial Position

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5.17.1 Equity of the Bank

The Banks Equity is divided into two parts i.e. Tier-I and Tier-II capital. Tier-I includes Paid-upCapital, Statutory Reserve, and Retained Earnings. Tier-II includes General Provision onunclassified investments & Off-Balance Sheet items. The Authorized Capital of the Bank is Tk.6,000 million and paid-up capital of the Bank is Tk. 3,425.12 million as on 31.12.2010. Totalequity was Tk. 7,747 million as on 31.12.2010. Comparative position of Equity for the year 2010& 2009 is given below:-

Tier-I capital (Core Capital) :(Amount in million Taka)

SL. No Particulars 2010 2009

a) Paid-up capital 3,425.12 2,740.10

b) Statutory Reserve 1,774.63 1,182.58

c) Retained Earnings 1,548.60 753.33

Sub total 6,748.35 4,676.01

Tier-II capital (Supplementary):

SL. No Particulars 2010 2009

a) General Provision 998.48 628.48

b) Exchange Equalization - 0.17

c) Assets Revaluation Reserve - 125.31

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Sub total 998.48 753.96

Total Equity 7,746.83 5,429.97

1362.57

3040.88 4069.09

5,429.97

7,746.83

200

1200

2200

3200

4200

5200

6200

7200

8200

2006 2007 2008 2009 2010

InMillionTaka

Year

Equity Movement from 2006 to 2010Total

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18.07%18.03%

15.47% 15.04%

21.79%

10.00%

15.00%

20.00%

25.00%

30.00%

2006 2007 2008 2009 2010

Percentage

Year

Net Income Raion (%)Net Income Ratio

5.18 Dividend of SJIBL at a Glance

2006 2007 2008 2009 2010

Cash % nil nil nil nil nil

Tk.

Stock % nil 20% 22% 25% 30%

Tk. 374330000 494115600 685023900 1027535850

Total % nil 374330000 494115600 685023900 1027535850

Tk.

Net

income

463216712 646992691 817709533 1070568293 2072340363

% ofearnings

Totaldividend/netincome

57.86% 60.43% 63.99% 49.58%

No. ofshare

9358250 18716500 22459800 27400956 342511950

Dividendper share

Totaldividend/ No.of share

Tk.20 Tk.22 Tk.25 Tk.3

Interpretation

At the time of interpretation we considered those things:

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1)Economic position of country as well as recession.

2)Political stability of the country.

3)And we assume internal situation of company.

2006:

Shahjalal Islamic Bank Limited established in 2001. From 2001-2006 they didnt pay any

dividend because they have much more investment opportunities as a result they did not pay the

cash dividend as well as the stock dividend.

2007:

There is a time of caretaker government the economic stability of the country was poor so to face

calculated risk the company can have provide stock dividend.

2008:

That time the world economy suffered by recession and our country is affected by it also. At the

time of recession most of the company try to protect the liquidity because to face initial situation

so we assume that the company not pay cash dividend rather than stock dividend by 22%.

2009:

In 2009 our country escape from recession so company had lot of investment opportunities so we

assume that company provide stock dividend rather than cash dividend.

2010:

The income of the company is more than 2009,but the company also provide stock dividend

from our financial report of 2010.There are lot of investment opportunity in2011that we identify

so the company provide stock dividend.

Finally, we can say that SJIBL follow the constant pay out ratio to the dividend payment because

every year they paid same percentage of stock dividend each per share. From the above chart we

can see 2007-2010 dividend per share(Total dividend/ No. of share) 20%, 22%, 25%, 30% at thattime percentage of income (Total dividend/net income )57.86%, 60.43%, 63.99%, 49.58% also

number of share increasing year by year.SJIBL established in 2001 and from that time they did

not pay any cash dividend because they stand in growth stage for this reason they need huge

money for future investment opportunities.

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Below Graphically Represent

Percentage of Earning:

Figure: Percentage of Earning

Dividend per Share:

Net Income:

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Figure: Net income(In Million)

Number of Share:

Figure: Number of Share

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From our interpretation we have found that the company can have lot of opportunity to provide

cash dividend. After increasing their net income year by year they provide stock dividend, We

know as a investor you prefer cash dividend. SJBL could have been internal problem of the

Shahajalal islami Bank. So at the time of dividend Payment Company follow constant payout

ratio. We recommended that SJBL net income increasing year by year so we assume that

company can pay the cash dividend if they want or the company can change the dividend policy

or method of dividend payment.

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We might add here that we are the stockholder in a few companies of good standing in the

commercial market. We had always been a little doubtful before investing in any stock or shares.

Somehow, going by the sea changes that have been happening in the economic scenario, we have

always opted for cash dividend instead of stock dividend. Cash dividend is one way of ensuringthat you have ready cash on your hand at the end of the year based on the companys earnings.

This money can be utilized for reinvesting, if need be. What if you opt for stock dividend, and

suddenly the company does not perform well and reports sick, all your shares will nothing but

worthless pieces of paper. You will have to again wait with bated breath and hope that the

company is revived with a rehabilitation package in place.

However, a company which does not pay constant dividend does not necessarily mean that thecompany is doing badly. Certain companies, particularly growth companies usually try to pay

little or close to no dividends as they believe that their own growth opportunities are better than

that of other available opportunities to the investors.

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SL

No.Terms Elaborations

1 SJIBL Shahjalal Islami Bank Limited

2 FI Financial Institution

3 BB Bangladesh Bank

4 IBCF Islamic Banks Consultative Forum

5 IBBL Islami Bank Bangladesh Limited

6 BIBM Bangladesh Institute of Bank Management

7 IBB Institute of Bankers Bangladesh

8 BAB Bangladesh Association of Banks

9 BAFEDA Bangladesh Foreign Exchange Dealers' Association

10 SWIFT Society for Worldwide Inter-bank Financial Telecommunication

11 AWCD Al-Wadiah Current Deposit

12 MSD Mudaraba Savings Deposit

13 MSND Mudaraba Short Notice Deposit

14 MDS Monthly Deposit Scheme

15 DBS Double Benefit Scheme

16 MS Millionaire Scheme

17 MTDR Mudaraba Term Deposit Scheme

18 NPI Non Performing Investment19 MBDS Multiple Benefit Deposit Scheme

20 FO Financial Obligation

21 TR Trust Receipt

22 HPSM Hire Purchase under Shirkatul Meel

23 HDIS Household Durable Investment Scheme

24 MIS Monthly Income Scheme

25 L/C Letter of Credit

26 CIB Credit Information Bureau

27 RM Relationship Manager

28 IRM Investment Risk Management

29 RU Recovery Unit

30 IDBP Inland Documentary Bill Purchased

31 HIS Housing Investment Scheme

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Annual reports (2006-2010) of Shahjalal Islami Bank Ltd.

Credit Manual of Shahjalal Islami bank Ltd.

Management guideline of Bangladesh Bank

63

shahjalal islami bank, bangladesh

Documents