You are on page 1of 22





18th AUGUST 2011

In todays fast paced business environment, banks operating in retail space require a change resilient vertically integrated value chain for delivering the most competitive products and services. This need is redefining the boundaries of a banks value chain creating greater thrust for this value add, right from the lowest end of the delivery channels. BAL-IBD has entered into a Shariah Consultancy agreement with the Centre of Islamic Economics, Karachi, which is a noted and well-known seat of learning for Shariah scholars and a prominent institution dealing in Shariah Advisory services. Besides assisting in advancement of the Divisions product portfolio, the Centre also stamps approval of the Divisions conduct of business following periodic audits. These audits are in addition to those carried out by the State Bank of Pakistan and the internal audits undertaken by the Division itself. Bank Alfalahs Islamic Banking Division (BAL-IBD) started operations in 2003 and at its yearend reflected a modest capital base of Rs 100 million and deposits totalling Rs 113.7m. By following yearend, BAL-IBDs equity had risen more than 4 times to Rs 569m and the balance sheet footing had swelled to Rs 7,799 million. Deposit size had grown from less than Rs 114m to over Rs 7,229 million. The pace of frenetic, triple digit growth was continued over the next twelve months as equity more than doubled to Rs 1,278 million from Rs 569m. Assets also recorded a more than 100% growth, climbing to Rs 15,634 million from Rs 7,799 million. Deposits alone failed to double rising to Rs 12,476m from Rs 6,548 million yet managing a healthy 90% increase. Financial results as of June 30, 2006, reflect growth but at more modest pace. Total balance sheet size fell shy of Rs 18 billion Rs 17,970m vs. Rs 15,634m and deposits climbed to Rs 14,111 million, rising Rs 1,635 million in six months period. Income for the 6-month period was Rs 111.23 million. 1

To practice Islamic banking in its desired spirit that unfolds its true economic potential resulting in prosperity to our customers and commercial rewards to our sponsors and our employees. 2

1 2

18th AUGUST 2011

I have done my internship at bank alfalah, Islamic banking (sadar, Hyderabad branch) from 12th august 2011 to 20th august 2011. I gained a lot of knowledge as dealing with clients in corporate world under the kind supervision of the branch manager and employees. During the internship I visited different cells of the bank and was thoroughly briefed about the procedure and working by cordial senior staff there. This report is based on my experience and knowledge gained in six weeks duration. I would like to present a token of thanks for the staff members of bank alfalah who were very cooperative and helped me at each and every step of completion of this report. I was offered to handle delicate operations even after the consideration of the secrecy of the bank operations. I present my special thanks to Mr. Saeed Anwar (Branch Manager), Ms. Afsheen sheikh and Mr. Akhtar khowaja (CRO, Finance and Accounts), Mr. Zeeshan, Mr.Adnan Ahmed and Mr. Farman Ali Qureshi (Cash Department), Ms. Erum Memon (Human Resource Department) and lastly Mr. Faisal Qureshi (Trade Fianc) along with all the other helpers and staff members.


The state bank of Pakistan is the central bank of Pakistan with its headquarter in Karachi. The State Bank of Pakistan has also been entrusted with the responsibility to carry out monetary and credit policy in accordance with Government targets for growth and inflation with the recommendations of the Monetary and Fiscal Policies Co-ordination Board without trying to effect the macroeconomic policy objectives. The state bank also regulates the volume and the direction of flow of credit to different uses and sectors, the state bank makes use of both direct and indirect instruments of monetary management. The State Bank of Pakistan looks into a lot of different ranges of banking to deal with the changes in economic climate and different purchasing and buying powers.3 Here are some of the banking areas that the state bank looks into;

State Banks Shariah Board Approves Essentials and Model Agreements for Islamic Modes of Financing Procedure for Submitting Claims with SBP In Respect of Unclaimed Deposits Surrendered By Banks/Dfis. Banking Sector Supervision in Pakistan Micro Finance Small Medium Enterprises (SMEs) Minimum Capital Requirements for Banks Remittance Facilities in Pakistan Opening of Foreign Currency Accounts with Banks in Pakistan under new scheme. Handbook of Corporate Governance Guidelines on Risk Management

18th AUGUST 2011

Guidelines on Commercial Paper


Bank Alfalah renders services of NIFT for various purposes. NIFT is a joint venture between a consortium of six major banks and private sector. It is responsible for the establishment and management of automated clearinghouse facilities in Pakistan. NIFT is proactively involved in the modernization of payment systems in Pakistan. These may be reviewed independently by our compliance department.4 1. Cheque Clearing & Settlement Services 2. Web based Clearing Services - ID Request Form 3. Certificate Authority/Public Key Infrastructure. 4. Penetration Testing Services 5. Utility Bill Payment Processing Services 6. Modernization of Utility Bill Payment 7. Enterprise Content Management Services


Islamic banking is precisely banking based on Islamic law termed as shariah. The guiding rules of transactions (fiqah muamalat) come mainly from Quran and Sunnah. However the study reflects other modes of formulation as well. Those include secondary sources as majority based opinions of Islamic scholars (ijma), analogy (qiyas) and personal reasoning (ijtihad). However it is quite understandable that those from the primary sources as quran and sunnah are the most firm and widely believed laws throughout the muslim countries, while others being based on opinion are yet to reach a converging point in islamic world.


1. It works on Islamic set of guidelines consisting of risk sharing, individual rights and duties, property rights, purity of contracts, commitments and fair dealing. 2. Any pre-determined payment over and under the actual amount of principle is prohibited (interest), the only loan allowed is qarz-e-hasna whereby lender doesnt charges any interest. 3. The Islamic financial system employs concept of participation, utilizing funds on a profit and loss sharing basis.

18th AUGUST 2011


WADIAH MUDARABAH Safekeeping Profit sharing Customer guarantees bank as a custodian and keeps their cash and other assets in bank. Mudarabah is a profit sharing activity between an inverstor and an entrepreneur. Investor provides funds for the business and hence earns a profit on its funds according to profit sharing ratio as agreed. (refer to fig:1) Murabahah is same as normal sale the only difference that the seller has to tell the buyer the actual cost as well as the exact amount of profit he is acquiring through sale which follows an agreement. It refers to partnership in order to make profits which are shared by all parties involved on an agreed ratio which is always equal to investment for a sleeping partner. The customer in this case selects a consumer product usually motor vehicle and asks the bank to finance for it. The bank buys it and the ownership is kept with the bank until the buyer pays the cost plus added profit for taking the risk of attaining that product either at one time or in installments. The ownership then passes to buyer. (refer to fig:2) It refers to support of a third party by the bank for any useful purpose.


Cost plus profit sale


Joint venture


Leasing a consumer product







An introduction to Islamic finance by Muhammad taqi usmani

18th AUGUST 2011















18th AUGUST 2011

Bank mainly uses four major accounts ACCOUNT TYPE DEBIT EFFECT CREDIT EFFECT ASSETS Increase Decrease LIABILITY Decrease Increase INCOME Decrease* Increase EXPENSE Increase Decrease* *the debit of income and credit of expense requires special approval from higher authorities. Debit of income is more detrimental than credit of expense because it leads to reduction of profits at closing. At the start of the say the bank transfers money from safe vaults to the teller or cashiers account. As the cash reduces from the vault so it is credited and the teller account is debited. The amount in the teller account is the used for the respective days transactions i.e. deposits and withdrawal. The teller account if of asset nature and the customers account is a liability on the bank. At the end of the day the teller should have nil balance anyhow and should not either exceed or be short. This process is repeated fro every day. However if the money exceeds 10 million then it is transferred to the banks account in state bank of Pakistan which acts as an insurance company for the bank. The bank generally manages a customer account and general ledger accounts. The customer account is a liability on bank. There are two cases: 1. Deposit: in this case the customer is lending money to bank hence the cash or asset of bank is debited while the liability in terms of money increases on bank thus the customer account is credited. 2. Withdrawal: in this case there is a decrease in cash hence cash or asset is credited and as the bank pays some amount to customers so there is a decrease in overall liability thus the respective customer account is debited. *the bank performs one of the above activities i.e. the customer account on front end while the cash related activity is done automatically. However the customer account is identified by an account I.D generated at the time of account opening.

Account I.D is a 14 digit code comprising of 4 parts: 537 BRANC H CODE 036 PRODUCT CODE FOR SAVING ACCOUNT 052819 01



18th AUGUST 2011 *This means if the customer wants to open a saving account on his NIC he will be given this I.D. but if the customer wants to open a second account of saving type then all the details of account I.D remain same except the last code changes to (02).

A check is a negotiable instrument that allows the drawer with an account in respective bank, to draw money on demand, under the limit of its account balance only. It starts with writing the name of payee. However there are two possibilities in this case. a. If the check is open check i.e bearer is open (not cancelled) then money is paid to the bearer of the check no matter what is written in payees space. b. If the check is order check i.e bearer is closed then the amount is only paid to whoever is the payee and not to anyone else. Signature by the bearer or payee is taken on the back of the check and is verified against their respective CNICs. The payers signature on the check is verified against signature specimen card of the bank. *the above condition and explanation is for simple checks only. BANK ALFALLAH LIMITED, ISLAMIC BANKING PAY AMOUNT IN WORDS NAME OF PAYER AMOUNT (FIG) OR BEARER, CHECKNO

CROSSED CHECKS: Cross means two parallel lines anywhere on the face of the check. If a check is cross then it means the money can never be paid on the cash counter in this case and is an account to account transfer phenomena. If the check is open then money can be transferred to the account of bearer. However if the check is closed or there is a stamp of account payee only in between the crossed lines then the money can only be transferred to the payees name and not to anyone else. A crossed check with closed bearer looks like this: EITHER ACCOUNT PAYEE ONLY OR PAY OR. OR BEARER.

SPECIAL CROSSING: Special crossing is crossing done by a financial institution only. For example if stamp of BAL is posted in between the parallel lines, it means the money can only be transferred to BAL. This case is possible when customer pays the lease installments to the financial institution so he draws a check on the name of the bank through endorsement or a cloaed check with the institutes name.

18th AUGUST 2011 SCRUTINIZING: This is a process through which any bank verifies whether the check is acceptable or not. It has following principles: 1. 2. 3. 4. 5. 6. 7. The branch and banks name should be checked. It should be observed whether a check is crossed or a simple one. Words and figures should be matched exactly. Payees account should be verified. Signature should be verified by comparing it with SSC. Any post dated check is not honored. It can only be honored on that respective date. Any check within the duration of six months is acceptable by the bank. A check which exceeds the duration of 6 months is termed STALE and is not honored.

Cash transaction has been explained at the start of the topic. Now we come to transfer transaction that occurs with a crossed check. In transfer transaction the total debit should always be equal to the total credit and this process is merely theoretical so no change occurs physically in the teller account. In an account transfer both the accounts are of liability nature and simultaneously deposit and withdrawal occurs at the same time. For example if a person A transfers money to person B account. Then As account is debited as withdrawal decreases the liability and Bs account is credited as deposit increases the liability on the bank.

18th AUGUST 2011

Clearing is a process by which banks exchange negotiable instruments drawn on each other within a specific time period. The process of clearing is done through NIFT. The controlling staff of NIFT acts as a medium where all the members of bank sit and clear their claims against each other. Clearing if of three types: 1. Local clearing (48 hours). Further divided in inward and outward clearing. 2. Intercity clearing (3-4 days) 3. Same day clearing (4-5 hours)


Say, the payee is of bank alfallah but the payer has an account in some other bank. Such checks are lodged for outward clearing through NIFT. On the other hand inward clearing is a process when payer is of bank alfallah but the payee is of other bank and those banks send the checks for clearing to bank alfallah through NIFT. In short outward for one bank is inward for other. NIFT performs the sorting process and sends clearing checks to respective banks. Each bank then receives a clearing report the next day along with return checks if any. The system entry is automatically performed for cleared checks within 2 days period where as return is marked manually by the BM which is backed by system reverse entry for those checks. 1. Payee of bank Alfalah but payer is of bank A. (OUTWARD CLEARING by bank alfalah) 2. Rider of NIFT carries these checks to bank A at 4p.m. (1DAY) 3. Outward clearing return (3p.m) NIFT performs sorting process and combines all the checks drawn on same bank.

1. Payer is of bank A but payee is of bank Alfalah (INWARD CLEARING by bank A) 2. Bank A receives those checks through NIFT at 9a.m. (1 DAY) 3. Inward clearing return (11a.m) Along with system entry each bank has a state bank treasury account where physical money is withdrawn and deposited in to respective bank accounts. For account entry of inward clearing lodgment: Debit: customer account For account entry of inward clearing return: Debit: M/O account credit: customer account credit: M/O account


18th AUGUST 2011 For account entry of outward clearing lodgment: Debit: M/O account For account entry of outward clearing return: Debit: customer account credit: M/O account credit: customer account

The return may be due to any of the following reasons: 1. Insufficient balance 2. Post dated checks 3. Check not pertaining to the respective bank 4. Stamps not clearly or wrongly affixed. etc The return checks are attached with a reason memo and recorded in a register. The respective customers are called to inform them to collect their respective checks

Clearing process
1. In clearing checks are crossed. Crossing is parallel line on the face of the check with or without anything written between them. 2. Before outward clearing stamp, following days date and payees account credited is fixed on the front and bank side of the check. The inward checks received are checked for the above mentioned things made by other banks. 3. All the checks received for inward clearing should be of same branch and bank which is receiving it. 4. The signature of payee must be checked with SSC when the payee is of that bank. 5. If any institute has received money then stamp of money received should be affixed on the check. 6. Customer account must be credited before launching it for outward clearing.

Intercity checks are those that are of banks out of the city e.g. Karachi, Lahore etc. For these checks no system entry is made until and unless the check is realized within 3 days. For that duration the stamp placed is payees account will be credited, which means liability will be recorded when realization occurs.


Same day checks are those that are restricted for a limited area i.e. 5 km around a bank recognized by NIFT. These checks are also marked as payees account will be credited and liability is recorded after check is cleared within 5 hours duration. This is because the system is set on 2 days which pertains to local clearing only and any check before or after that duration has to be manually entered in to system by the banker.


18th AUGUST 2011

Collection is a process for those checks that are out of the city where clearing is not availed or NIFT is not present in that city. There are two types of collection i.e. OBC (outward billing collection) and IBC (inward billing collection).


Consider a scenario in which a customer of bank alfalah (IBG) draws a check for deposit in his account but the payer is from allied bank in Badin which doesnt avails clearing procedure of NIFT. PROCEDURE: 1. Send check to BAL branch if any or dispatch directly to the concerned bank if not. 2. Lodge liability and make entry on OBC register. 3. IBCA received when check is cleared. Now the customer account is credited. 4. If demand draft is received then it is lodged in outward clearing respectively. EXAMPLE: 1. Either BAL dispatches the clearing checks in outward clearing to allied bank in badin through courier service. BAL marks the check as payees account will be credited along with following days date and clearing stamp. Allied bank when receives the checks it first scrutinizes it. It then issues a demand draft on allied bank in Hyderabad and dispatches this DD on behalf of bank alfallah. This means that bank alfallah will now collect the funds from allied bank in Hyderabad. The whole procedure takes 3 days or 72 hours in total. After receiving the funds the customers account is credited. The physical money is transferred through state bank of Pakistan. In case of absence of state bank this treasury process is done by national bank of Pakistan. 2. Or there can be a second case only if there is a branch Alfalah in Nawabshah. In this case bank Alfallah Hyderabad dispatches the clearing checks to bank Alfalah Nawabshah. BAL Nawabshah then sends the checks in local outward clearing through NIFT to allied bank. After clearing the funds are transferred in state bank account of bank Alfalah Nawabshah and then to bank Alfalah Hyderabads account. This transfer is done through internal IOM covering letter and IBCA which is an internal instrument used for inter branch funds transfer. The account for IBCA is named as HO account new. There are 4 copies of IBCA funds transfer. 1 copy is kept by bank Alfalah Nawabshah and one is sent by them to IBCA for reconciliation department. The other 2 copies are dispatched to bank Alfallah Hyderabad who keeps one copy as a record and the next is send by them for reconciliation. Thus the two copies by sender and receiver are then reconciled. After this whole process the customers account is credited in BAL Hyderabad, payers account is debited by allied bank Nawabshah and entries by bank alfallah Nawabshah are all reversed.


PROCEDURE: 1. 2. 3. 4. 5. 6. Receive checks from different branches. Lodge liability of inward bills for collection. Make entry in IBC register. Lodge IBC checks in outward clearing. When realized, the liability is reversed. If check is returned reverse liability and check is sent to concerned branch.


18th AUGUST 2011 EXAMPLE: In this case the check is sent to BAL Hyderabad by any other branch of BAL in other cities. These checks are then sent for local clearing by BAL Hyderabad to the respective banks. In this case after clearing the checks are dispatched back to BAL branch in other city and all entries by BAL Hyderabad are reversed. The endorsement is confirmed by BAL Hyderabad. As neither the payer nor the payee is belonging to the BAL Hyderabad hence the initial entries are made in general ledgers which are reversed after clearing and money is either sent through IBCA or online in this case.


LODGEMNT FOR IBC: DEBIT: C/L inward local bills for collection CREDIT: B/L inward local bills for collection. LODGEMENT FOR OBC: DEBIT: C/L outward local bills for collection. CREDIT: B/L outward local bills for collection. REVERSAL FOR IBC: DEBIT: B/L inward local bills for collection. CREDIT: C/L inward local bills for collection. REVERSAL FOR OBC: DEBIT: B/L outward local bills for collection. CREDIT: C/L outward local bills for collection.


18th AUGUST 2011

Remittance means transfer of funds from one place to another or one person to another. Four parties are involved: remitter, remittee, issuing bank and paying bank. There are three types of remittance instruments: 1. Pay order 2. Demand draft 3. Call deposit receipt


Pay order is an instrument that a banker issues after receiving funds from customer hence the payee assured of receiving the funds on presenting PO. Pay order is also known as bankers cheque because it is issued by a bank and payable locally only. This means that you cannot issue a pay order to a customer who is outside of your city. The main feature of a pay order is that it is an assured payment. There is no risk of retuning cheque due to insufficiency of fund, technical errors. It helps to avoid the risk of cash handling etc. There are three copies respectively: advice, reconciliation and customers copy respectively. 1. 2. 3. 4. Filling up and signing the requisition slip. Paying amount to the counter Cashier will scrutinize your request He will enter transaction in their system by debiting cash in case you are paying cash and your account in case you are giving a cheque. 5. Next step is printing of PO. 6. Printed PO will be sent to Customer service manager along with requisition slip. The CSM will sign after verification. 7. Two authorities should sign in case of PO. DIFFERENCE BETWEEN PAY ORDER AND DEMAND DRAFT: Both pay orders and demand drafts are used by individuals to make transfer payments from one bank account to another. The main difference between the two is that while a demand draft is a written order directing the payment to be made to a third party outside your city, a pay order is drawn for the third party within your city. They both are, however, different from cheques in that they dont require a signature in order to be cashed. The banking dictionary refers to the person writing the draft as the drawee, the bank making the payment is the drawer, or the payer bank. The beneficiary of a demand draft, the person receiving the payment, is the payee. Charges for demand drafts and pay orders are independent of inter- or intra-city transactions but are calculated as a percentage on the amount of the draft or pay order.


CDR is issued in favor of Government, Semi-Government, Institutions,Corporations, and Semi-Autonomous Bodies etc as a security deposit.


18th AUGUST 2011


Finance and accounts is a wide field and almost every banking function is backed by accounts and recordkeeping. The basic function is to perform profit calculation, tax deduction, bonus counts, and daily activity of accounts, zakat deduction, commission and income, accruals and deferrals updating e.t.c. Zakat was recently deducted from saving accounts on first of ramazan except those who were non-Muslims or had an exemption for any reason. Tax is paid at the end of every week to state bank of Pakistan i.e. 0.2% on transaction above 25000. The receipt and payment collection come under record keeping. Every asset, liability, income and expense is recorded by the bank as soon as the activity is performed. Financing is of two types: 1) Funded facility finance: this involves monetary financing. 2) Non-funded facilitated finance: this involves the goodwill and guarantee of bank. However the first and foremost responsibility of the bank is to securitize its assets, deposits, land, liability and every possession. Hence all finances are backed up by security of bank. They can be classified in to three types: 1) MORTGAGAE: this pertains to financing of immovable assets of which the ownership belongs to bank but the possession belongs to customer. E.g. home financing 2) PLEDGE: this pertains to financing of movable assets of whom the possession and ownership both belongs to bank. E.g. goods at mortgage 3) HYPOTHECATION: this involves financing of movable assets whose ownership belongs to bank only and the possession is with customer. E.g. car financing.


18th AUGUST 2011

BAL provides the facility of car ijarah and home musharaka in the field of consumer financing. Ijarah is the transfer of usufruct of a fixed asset to another person for an agreed period, at an agreed consideration. Under ijarah agreement asset will be given to the customer on a rent for the period agreed at the time of contract.


Alfalah car ijarah is a shariah compliant car leasing scheme and is free from the element of interest. In BAL car ijarah car remains in the ownership and risk of bank and the customer pays the rental for use of vehicle. The scheme provides flexibility of acquiring all new and locally assembled cars costing up to Rs 2 million and imported equivalents up to 7.5 million. The rent can be paid in 3, 4 or 5 years as per wish of customer with security deposit or down payment of 30%. Insurance premium charges (4.6%) and registration charges are also to be paid by customer. However the lease period starts only when the asset is delivered and the ownership is transferred to the bank unlike conventional banking. REQUIREMENTS & PROCEDURE: 1) 2) 3) 4) 5) 6) 7) 8) NTN (national tax number certificate). Photographs, license and NIC. Verification of NIC and signature by bank. 6 months bank statement. Basic fact sheet of customer. Verisys statement. EV certificate which is the proof of existence of customer verified by a third party i.e agent. Credit report from state bank which shows outstanding loans taken from other financial institutions. In case of O.D an undertaken and reason is taken from the customer. 9) Net worth statement which shows the net value for domestic expenditure of the customer. It is classified in to four sections of assets, liabilities, income and expenses respectively. 10) Salary certificate in case of salary individual along with copy of form 29. Form 29 is declaration that proves the shares of directors in a company. 11) In case of partnership NOC from other partners, NIC of partners and partnership deed is required. Partnership deed is an agreement between partners that shows their respective shares in terms of liquid and illiquid assets. In case of termination the remaining rent and insurance charges are recovered from the customer. Consequently the ownership is transferred to the customer along with the legal documents of the vehicle.6


This scheme by BAL is based on diminishing musharakah concept. In this activity you participate with bank alfalah in joint ownership of property where bank alfalah invests a certain amount usually up to 80%. Customer makes a monthly payment to BAL, of which one component is the rent for use of property and the other is purchase of bank alfalah musharakah units. The total monthly payment is reallocated regularly to reflect your growing equity in the investment. When all units are purchased the customer becomes the sole owner with a free title to the property. Tenure for the purchase of units is from 3 to 20 years.


18th AUGUST 2011

Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value. In terms of banking it is done at a short scale for factories and industries, both property and equipment.

In its simplest form, an exporter requires an importer to prepay for goods shipped. The importer naturally wants to reduce risk by asking the exporter to document that the goods have been shipped. The importers bank assists by providing a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan to the exporter on the basis of the export contract. In order to continue trade goods needs to be transported from one place to another. There are three ways to do so: 1) BILL OF LADING: A bill of lading is a document issued by a carrier to a shipper, acknowledging that non specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified7. The BL must contain the following information:
Name of the shipping company; Flag of nationality; Shipper's name; Order and notify party; Description of goods; Gross/net/tare weight; and

2) AIRWAY BILL: Air Waybill (AWB) or air consignment note refers to a receipt issued by an international airline for goods and an evidence of the contract of carriage, but it is not a document of title to the goods. Hence, the AWB is non-negotiable. Waybills are non-negotiable documents unlike bills of lading which are negotiable. The words non-negotiable are printed clearly at the top of the air waybill. This means that the air waybill is a contract for transportation only and does not represent (the value of) merchandise mentioned in the box nature and quantity of goods. The ocean bill of lading, if negotiated may represent (the value of) the goods and must be endorsed by the party ultimately accepting the goods. 3) RAILWAY RECEIPT: It is the receipt of payment followed by goods carried through railway.
There are three common types of non-funded trade financing: 1) letter of credit 2) consignment


18th AUGUST 2011

3) contract All the three types stated above are guarantees by bank in terms of its good will and the bank is liable only in case of letter of credit. Prior to issuance of contract or letter of credit the importer and exporter confirms an agreement. After which the importer requests its bank to provide letter of credit or a contract. The bank sends contract/ LC to exporters bank after the completion of procedure. Exporter ships the goods and its bank sends the document to the importers bank which after acceptance enables importer to carry goods from the port. Consignment does not involve any prior agreement between the parties. The banks function is to collect money from importer and hand documents to him. In any case importer rejects to accept the shipped goods the banks duty is to inform the exporter to carry them back and is no way responsible for payment. L/C is the most reliable financing as it makes the bank liable to pay if the importer rejects the goods however it charges high commission and a margin to avoid price fluctuation whereas contract does not makes the bank liable to pay but involves a prior agreement between the parties.

Letter of credit is given by issuing bank on the request of buyer (applicant/importer) to seller (beneficiary) to effect payment to stated sum within prescribed limits against stipulated documents. If another bank requests the issuing bank to provide L/C to beneficiary then it is termed as advising bank. The payment is made in international currency i.e. ACUD which equals one dollar. L/C is communicated through network of swift. PROCEDURE: 1) Signature of customer is verified on L/C, Performa invoice and review of insurance note to ensure that the shipped goods are insured. 2) Credit report is obtained from state bank of Pakistan if the worth of goods is greater than Rs 500,000. 3) Proposal for approval of LC and credit report is sent to import department for reviewing it. 4) After approval LC number is allocated and entry is made in the register. DR customer liability on L/C CR Bankers liability on L/C DR Customer account CR Commission income CR Postage charges CR Margin on L/C. 5) Documents of L/C are prepared through mail, signed and stamp is affixed. There are total 7 copies. 1st and 2nd to the advising bank. 3rd to reimbursing bank 4th and 5th to customer. 6th in master file 7th in L/C file.

Export bills under L/C:

The bank provides collection service or purchase / discount Export Bills under L/C to allow exporters to use the money before actually receiving payment or before the payment due date from a overseas buyer. After the exporter sends the goods, prepares all required documents require under the L/C and submits them to the bank, the bank will check all 18

18th AUGUST 2011 documents for completeness and accuracy as per requirement stated in the L/C and submits the documents to the bank that issue the L/C. on realization of foreign bills purchased the entries made are:

DR HO account DR customer account for the charges recovered CR foreign bills purchased

Export collection:
If the bank service of collection of export bill, then in such case bank has no financial interest except commission charges. To realized export bills through collection the entries performed are: DR customer liability- foreign documentary bills for collection. CR bankers liability- foreign documentary bills for collection.

Import bills under L/C:

As already discussed L/C is attained through importers request to the bank. However to keep the importers interest in the goods bank obtains a margin on goods from customer along with other securities. Margin is expressed as percentage of credit amount and is collected in pak rupees. This amount is collected before issuance of L/C and is kept in sundry deposit account margin on L/C. to attain L/C invoice, bill of lading, packing list and insurance note are required.

Import collection:
IFBC (inward foreign bills for collection) are received for collection by the remitting bank and are lodged in IFBC register. After the importer accepts the documents customers liability IFBC is debited and bankers liability IFBC is credited. SETTLEMENT: 1) Authority letter is received from importer and signature is verified 2) Cost memo in accordance to current exchange rate is prepared by the bank. 3) Following entries are performed: DR bankers liability IFBC CR customers liability IFBC DR customers account CR commission and other charges. 4) Treasury department is intimidated of the date of maturity of bill in case of D/A letter of credit. There are two tenors sight and D/A. sight involves payment after receiving on documents as per sight. However in deferred payment or acceptance payment is made on the maturity of the bill and documents are handed to the importer prior to payment. ** (Credit can be revocable as well as irrevocable as per agreement. A revocable credit can be cancelled by the issuing bank at any time where as an irrevocable credit cannot be cancelled. Is the papers are affixed as transferable then the credit can be transferred from first beneficiary to the second beneficiary but only once.)


18th AUGUST 2011

Shipping guarantees are required to enable customers to clear goods from the port before arrival of documents of title. A shipping guarantee is given after the presentation of invoice and bill of lading or airway bill. Before issuing guarantee the remittee bank is sent for confirmation of bill amount, invoice value, goods description, country og origin, drawee/consignee name and drawer/shippers name. an undertaken is consequently taken from the customer providing that he will accept the import documents against any discrepancies and payment of bill at maturity under D/A. An account of margin against shipping guarantee is maintained for each customer. Shipping guarantee is redeemed when original bill of loading is surrendered to shiping company and original shipping guarantee is returned to the issuing bank. Entry for shipping guarantee: DR customers account CR income (commission) CR deposit margin on shipping guarantee DR customers liability on letter of guarantee CR bankers liability on letter of guarantee CANCELLATION OF SHIPPING GUARANTEE: 1) 2) 3) 4) 5) Negotiating banks send documents such as lading or airway bill etc Reversal of entry is performed. That is bankers liability is debited and customers liability is credited respectively. For sight bill settlement is made against margin and for D/A negotiating bank is informed of the due date. Shipping guarantee cancellation request is forwarded. An amount of rupee one is kept as bankers liability to affirm that original shipping guarantee has not been returned yet. 6) When original guarantee is received the notional amount is reversed.


18th AUGUST 2011

Business finance comprises of salam and istisna.

Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of advanced price fully paid at spot. The buyer is called rabb-us-salam, the seller muslam ilaih and the cash price is ras-ul-mal. 1) salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. 2) It is necessary for the validity of salam that the buyer pays the price in full to the seller at the time of effecting of sale. 3) The exact date and the place of delivery must be specified in the contract.

Istisna is the second kind of sale where the commodity is transacted before it somes to existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. There are evident differences between salam and istisna: 1) The subject if istisna is always a thing which needs manufacturing, while salam can be effected on anything. 2) It is necessary for salam that the price is paid in full in advance, while it is not necessary in istisna. 3) The contract of salam once effected cannot be cancelled unilaterally, while the contract if istisna can be cancelled before the manufacturer starts working. 4) The time of delivery is an essential part of the sale in salam while it is not necessary in istisna that the time of delivery is fixed.


18th AUGUST 2011

I observed the revolving of employees to gain knowledge of other departments with eagerness and found it impressive. There was also a greater tendency to adopt new methods of handling bank procedures. However I ought to give some recommendation that might help the bank to improve further and move a step ahead in corporate competition. 1) The employees seemed to work till late night after office hours, so more employees could bring relaxation and more integrity. 2) The bank should advertise and communicate its policies to attract more customers and inform them about policies. 3) IT drawbacks were found to be readily occurring and lately resolved. An improvement in backup measures would be appreciated. 4) In terms of my knowledge of internal controls, the security in that sense was not appreciated. The accounts and record keeping were maintained by same person which could bring issues at later stage.