Thoughts on Economics

Vol. 21, No. 04

The Role of Mudaraba Perpetual Bond (MPB) of IBBL

for Development of Bangladesh Bond Market

Serajul Islam

Nazneen Jahan Chowdhury

Mohammad Rokibul Kabir

Abstract: Islami Bank Bangladesh Limited (IBBL) is a first generation private

commercial bank in Bangladesh under Companies Act, 1913 (Amended in 1994) and

Banking Companies Ordinance, 1962 (Amended in 1991). IBBL is the first of its kind

in South East Asia operates under Islamic Shariah with a vision of establishing

interest free economic and Banking system for ensuring the economic and social

justice. Islami Bank Bangladesh Limited had issued a bond named MPB in

Bangladesh bond market to raise fund to meet the Capital Adequacy Ratio (CAR) of

the bank. Since private sector is the engine of economic growth, Government policy

encourages financing for the private sectors. The IBBL being the largest private

sector bank has been providing both long term and short term funds to the private

sectors. Therefore IBBL is always keeping in mind the maintenance of capital

adequacy requirement set by BB as per requirement of BASEL-II and had to go for

right offers and bonus shares for several times to raise capital. Further increase of

capital from the right shares may reduce the value and return of shareholders

investments. Another purpose of the issuance of Mudaraba Perpetual Bond (MPB) is to enhance the ability of the bank to make further investments by increasing the

CAR. One of the main objectives is to utilize the fund in prospective and profitable

sectors. The paper reveals that through the issuance of the MPB, IBBL has played a

pioneering role in creating a bond market in Bangladesh, as this is the first corporate

bond in the country. Through the issuance of MPB, IBBL has created a new

investment avenue for the investors to help creating an Islamic capital market.

Key Words: Mudaraba, Capital Adequacy Ratio, perpetual, riba, rabb al-mal,

mudarib.

Associate Professor, Department of Business Administration, International Islamic University Chittagong (IIUC).

Assistant Professor, Department of Business Administration, IIUC.

Lecturer, Department of Business Administration, IIUC.

40 The Role of Mudaraba Perpetual Bond

1. Introduction

When a company wishes to borrow money from the public for a longterm

basis, it usually does so by issuing or selling debt securities that is generally

called bonds. A bond is normally a fixed interest-bearing loan instrument,

meaning that the borrower will pay the fixed interest on predetermined time

schedules but the principal will be repaid at the end of maturity. The amount

that will be repaid at the end of the loan period is called the bonds face value

or par value or maturity value. Government Bonds have much larger face

value. The number of years until the face value is paid is called the bonds

time to maturity.

Interest rates change over time. The cash flows from a bond, however, stay the

same. As a result, the value of the bond will fluctuate. When interest rate rises,

the present value of the bonds remaining cash flow declines, and the bond is

worth less. When interest rate falls, the bond worth is more. To determine the

value of a bond at a particular point of time, we need to know the number of

periods remaining until maturity, the face value, and the market interest rate

for bonds with similar features. This interest rate required in the market on a

bond is called the bonds Yield to Maturity (YTM). But for calculating the

value of Islamic bonds requires average rate of return of market rather than

market interest rate because interest is prohibited in Shariah. By using this

information, we can calculate the present value of the cash flows as an

estimate of bonds current market value.

Islami Bank Bangladesh Limited (IBBL) raised fund of Tk.3, 000.00 million

in the year 2007 by issuing Mudaraba Perpetual Bond (MPB). This bond is a

new instrument in the capital market of Bangladesh. It differs from other

category of securities available in the market, as it has no redemption facility

and predetermined interest rate.

2. Objectives of the study

The objectives of the study are as follows:

i) To highlight the Bond Market status of Bangladesh

ii) To highlight the pioneering role of MPB for the development of bond market in Bangladesh

iii) To identify the problems that impede the investments in this bond

iv) To suggest some important measures for the development of bond market in Bangladesh.

Thoughts on Economics 41

3. Methodology of the Study

The researchers have used secondary data only in this study. The sources are

the publications of IBBL regarding MPB, the websites of IBBL, SEC, CSE

and DSE, different types of publications regarding bond & capital market and

books.

4. Literature Review

The development of economy of any country depends mostly on the

establishment of sound, effective and efficient financial system in that country.

A well-developed financial system plays an important role in accelerating

economic growth by mobilizing savings and facilitating investment in an

efficient manner (Mu, 2007). Financial market consists of money market,

capital market, and derivative markets etc and play an important role for the

development of economy.

The debt market being an integral part of financial market plays a

complementary role in developing economy through allocation of funds to

different deficit sectors. The debt market consists of money market, mortgage

market, bond market and derivative market. The debt market of Bangladesh is

very small. An efficient bond market is important for managing public debt

and bank liquidity and for efficient conduct of the monetary policy. Without a

functioning bond market, the monetary transmission processes of policy

measures would be circumvented and the desired impact on the real economy

can not be fulfilled, which compromises the effectiveness of the monetary

policy operations (Jahur, 2009). Bangladeshs bond market represents the

smallest in South Asia, accounting for only 12 percent of the countrys gross

domestic product (GDP) (World Bank Report). For developing our bond

market, Islami Bank Bangladesh Limited has played a pioneering role by

issuing Mudaraba Perpetual Bond (MPB) in the corporate level.

Conventional bondholders get predetermined rate of interest which is strictly

prohibited in Islamic Shariah. Interest or riba (usury) is a kind of social evil. It

is contrary to the welfare of people (Islam, 2005). As regards nature of usury

Allah SWT says,

42 The Role of Mudaraba Perpetual Bond

Those who devour usury will not stand except as stands one whom the

statan by his touch has driven to madness. That is because they say:

trade is like usury. But Allah hath permitted trade and forbidden usury.

Those who after receiving admonition from their Lord, desist, shall be

pardoned for the past. Their case is for Allah (to judge). But those who

repeat (the offence) are companions of the fire. They will abide therein

(forever). (2:275)

When in an Islamic framework of society, interest is prohibited and business is

permitted, the banking or financial institutions are permitted to do business

under the same injunction. A business institution, be it trade, commerce,

industry, transportation, power, or agriculture has to work for profit. If

banking institutions are contributing to productivity, they have to share the

productivity in the form of profit; and profit can not be pre-determined before

the costs are booked against business revenue and the profit and loss account

is prepared (Sharif, 1996). IBBL declares the profit of the MPB after

completing income statement at the end of an accounting period.

4.1 About the Issuer

IBBL was established on March 13, 1983 as a public limited company under

the Banking Companies Act, 1913 (amended in 1994). The bank started its

operation on March 30, 1983 under the ambit of Banking Company

Ordinance, 1962 (amended in 1991) as the first interest free Shariah based

Commercial Bank with a mission to establish Islamic Banking through the

introduction of welfare oriented banking system. The Bank is enlisted with

DSE & CSE. IBBL has been declared as one of the 20 Blue Chip companies in

the country by DSE and as one of the 30 best companies by CSE. The bank

provides a wide range of Islamic banking services. The major portion of

investment portfolio of IBBL is towards corporate business while the rest is

towards SME, Specialized Schemes and retail investments. The bank carries

out its business activities through 254 branches with the total staff strength of

11,033.

Thoughts on Economics