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Introduction:

The activities of large organizations are complex. It is not possible for the management, in many
cases, to monitor and controls those activities directly to ensure accuracy and reliability in
accounting records as well as to ensure efficiency. This situation requires an effective tool. This
is where internal control comes into action.
Internal control is best regarded as indicating the whole system of control, financial and
otherwise, established by the management in the conduct of business, including internal check,
internal audit and other forms of control.
One of the most reputed Banks of Bangladesh, Al- Arafah Islami Bank, maintains much
decorated internal control systems. The overall internal control system of Al Arafah Islami
Bank has been discussed in this report.

Objective:
The main objectives of the report are:
1) To collect and present information of the overall internal control system and its practices
in Al- Arafah Islami Bank of Bangladesh;
2) To present the features, principles and objectives of internal control system;
3) To present the information if there are any lacking in the practice of internal control
system of Al- Arafah islami Bank Ltd;
4) To provide recommendations for any weakness.

Methodology:
Both primary and secondary data are used in this report.
To gather primary data, vice president (Head) of the department of audit and inspection division
of Al arafah islami bank ltd was interviewed. Also consultation and discussion with other
officials of the same bank were done.
Secondary data were collected from books and other online sources.

Organizations Profile:

Al-Arafah Islami Bank Ltd is the second largest Islamic bank of Bangladesh. Al-Arafah Islami
Bank Limited is a sharia compliant bank in Bangladesh founded on 27 September 1995. A sharia
council of the bank is responsible for ensuring the bank activities meet sharia requirements. The
headquarters are located in Motijheel, Dhaka.
Al- Arafah bank is a public limited company, specialized in commercial banking under sharia
compliant. The authorized capital of the Bank is Tk.15000.00 million and the paid up capital is
Tk. 9469.58 million as on 31.12.2015. Renowned Islamic Scholars and pious businessmen of the
country are the sponsors of the Bank. 100% of paid up capital is being owned by indigenous
shareholders.
As on 21 September of 2016, the number of employee of the bank was 2978. As on 10 April of
2016, the number of shareholder of the bank was 41,053. As of 2015 report, the banks net
income stood tk.6.49 billion.
All around the country the bank has been operating 137 branches, of which 23 are AD, tailored
to contribute on socio economic development by providing multiple financial services as the
Bank is committed to contribute significantly to the national economy.
The vision of the bank is to be a pioneer in Islami Banking in Bangladesh and contribute
significantly to the growth of the national economy.

Internal Control:
Internal control is a process designed to provide reasonable assurance regarding the achievement
of objectives related to operations, reporting, and compliance. In more detail, it consists of all the
related methods and measurers adopted within an organization to safeguard assets, enhance the
reliability of accounting records, increase efficiency of operations and ensure compliance with
laws and regulations.
To prevent anomalies and to present reliable financial reports to stakeholders so that they can
undertake right decisions based on right information having effective internal control in the
organizations is mandatory.
Internal control systems have five primary components as listed below:

A control environment. It is the responsibility of top management to make it clear that


the organization values integrity and that unethical activity will not be tolerated.
Risk assessment. Companies must identify various factors that create risk for the
business and must determine how to manage these risks.
Control activities. To reduce the occurrence of fraud management must design policies
and procedures to address the specific risks faced by the company.
Information and communication. The internal control system must capture and
communicate all pertinent information to appropriate external parties.
Monitoring. Internal control system must be monitored periodically for their adequacy.

Principles of Internal control activities:


Following are the six crucial principles of internal controls.
Establishment of responsibilities. Control is most effective when only one person is
responsible for a given task;
Segregation of duties. Different individuals should be responsible for related activities.
The responsibility for recording an asset should be separated from the physical custody of
that asset.
Documentation procedures. Documents must provide evidence that transactions and
event have occurred.
Physical control. It is related to the safeguarding of assets and enhances the accuracy and
reliability of the accounting records.
Independent internal verification. This principle involves the review of data prepared
by employees.

Human resource controls. It includes bond employees who handle cash, rotate
employees duties and required employees to take vacations and conduct thorough
background check.

Features of Internal Control system of Al-Arafah Islami Bank Ltd.


As a Bank Al- Arafah is responsible to maintain security to the cash and other resources of
depositors. Also as a public limited company, Al- Arafah bank is liable to a very large number of
shareholders. Thus have a sound and effective internal control system is more than necessary for
the bank.
The bank is maintaining a very comprehensive and effective set of internal control systems to all
of its units. Highly skilled man power and modern technologies are used to keep running proper
internal control procedure.
Unlike what happened to many commercial banks of Bangladesh recently, Al-Arafah Islami bank
limited has not become the victim of any large financial fraud. The credit of this goes to the
Internal Control and Compliance division of that bank.

Common Internal Control Features of the Bank:


The common internal control systems features of the bank, like many other large public limited
corporations of Bangladesh, are:
1. The bank has its own independent internal audit unit under Internal Controls and
Compliance division of the bank.
2. ICC(Internal Controls and Compliance) of Al-Arafah Islami Bank has 4 divisions
a. Audit and inspection analyses operations, recommends controls, reviews compliance
and assures safeguards to ensure reliable and fair environment within the organization
and to ensure the reliability of organizations reports.
b. Compliance division This unit ensures that a financial institution complies with
applicable laws, regulations and rules, and it plays an essential role in helping to preserve
the integrity and reputation of the bank.
c. Monitoring division They monitor the banks control system.
d. Vigilance and special investigation division This division carefully watch for
possible danger or difficulties and carry out investigation if any anomalies take place.
3. Banks ICC (Internal Controls and Compliance) office is different from all of its units.
Separate office for auditing is there which maintains limited and restricted entry. That
office does not deal with customers like any other offices. Only few authorized bank
officials are permitted to enter on that office.

4. External Auditor: ICAB accreditation and Bangladesh banks listed external auditor does
the auditing periodically.
5. Duties and responsibilities are segregated among divisions and officials.
6. The officials of the bank who records transactions are different from the officials who
verify transactions. The recording division is in separate location. Similarly,HR division
is in separate location from ICC division.
7. Technologies like RCC, CCTV, restricted internal server, UVP machine, etc are
implemented to maintain internal control of the bank.
8. Access to account records is highly restricted. Only some authorized officials from ICC
and finance division can access those. Accounting records, which are yet to be presented
in external financial statements, are kept in highly restricted and secured place.
9. Officials of the bank are accountable for the anomalies and mistakes under their
observation and duties.
10. Transactions are maintained in regular basis with maintaining relevant documents for all
transactions.

Strengthening Features of the Internal Control System of Al- Arafah islami Bank LimitedAl- Arafah bank has avoided and prevented many frauds and attempted frauds because of its
formidable control system. Recording mistakes are very low because of it. The officers and
employees of ICC division work and implement their ideas and plans rigorously to ensure that
the bank can secured itself from anomalies and present reliable financial reports to stakeholders
so that they can undertake right decisions based on right information.
Some key strengthening features of the Banks internal control system are The bank follows three lines of defense in their control system:
o 1st: Front desk. They are assigned to deal with customers. They are equipped with
some security measures.
o 2nd: Second line of defense includes Risk management division, IT support
division, Logistic supports division etc.
o 3rd: Internal audit The officials of banks internal audit division analyse
operations, recommend controls, review compliance and assure safeguards to
ensure reliable and fair environment within the organization and to ensure the
reliability of organizations reports.
Multiple trained security personnel are enlisted to all the branches and offices of the bank
24/7 hours to maintain the security of all of the banks units.
The bank use pre number documents for all of its transactions to prevent fraud.
Cash deposit confirmation: Auto and instant SMS to main server.

Fake currency note identifying machines are assigned to count currency notes. As per
Bangladesh banks instruction, expert tellers are assigned to count and identify fake
currency.
To ensure better control of funds transfer among banks, Al- arafah Bank ltd uses
Electronic funds transfer (EFT). It is the electronic transfer of money from one bank
account to another, either within a single financial institution or across multiple
institutions, through computer-based systems and without the direct intervention of bank
staff.
Check honoring: The person who verifies check is different from the person who gives
cash from that check. All verifications, signature, bar code, check number etc. are done
by one person and cash is given by another person.
UVP machine: Bank uses UVP machine to verify checks.
Bar code in checks: Verify printed name on check, i.e. double checks account holders
name. Bank uses separate bar codes in all of its check papers. The checks papers are
manufactured by Singaporean company Secura Bangladesh Ltd, which has a very
credible reputation in manufacturing the papers of check book. Few months ago the bank
prevented an attempted fraud in its Uttara branch because of the bar code system in check
papers.
The bank also carries out surprised audit to ensure better control and to increase
reliability of its records.
Audit reports are sent to Board and Managing director. The managing director sends
those to compliance division.
Officials of cash in charge and tellers are different.
Cash receipts verification: Teller of front desk receives cash and keeps the entry on the
computer. After the end of cash transactions of any day, cash-in-charge confirms cash
receives with documents. At last operation managers verify the cash receipts with given
documents.
Documents are maintained for cash payment. Tellers have limited cash. Extensive records
are kept for cash payment. Regularly after transaction it is verified by cash in charge.
Tellers are liable if any cash are missing or do not match with documents.
Original copies are used as documents for evidence and photocopy is used in case
original copies are missing.
Auto lock for office computers: Passwords are installed in computers from first desks to
the table of top executives. If the authorized personnel leaves his/her computer open, the
computer gets locked by itself. The whole screen goes to sleep mode at that time. Only
particular passwords are used to open that lock. If password is leaked, the holder will
become accountable for this. It is mandatory for all officials to change the passwords
periodically on continuous basis.
Force holiday are provided to employees to verify their desks and positions to prevent
anomalies. At that time, specific employees or officials are not permitted to the office

premises. Normally, Al- Arafah Islami Bank provides 15 days force holiday to all of its
employees annually.
Electronic alarm system known as RCC is maintained in all vaults of the bank.
Authorized officials are allowed to enter in vault. In the cell phones of authorized
officials, identifying software is installed. If anyone enters the banks vault without that
particular software installed cell phone, the alarm will ring. The vault is certified by
authorized engineer.
3 keys are used sequentially to open vault. Manager, second man and cash in charge are
entitled to carry different and separate keys to open vault. Again at the time of closing
vault 3 keys are used sequentially. Without the absence of any key, vault cannot be
opened.
Resources inside the vaults are fully insured.
CCTVs (closed-circuit television camera) are installed in front desk as well as other
important offices of the banks nearly all units. The bank runs a large number of CCT
cameras in its branches front desk to record keeping offices to other operating offices to
ensure that no fraud is taking place. Human resources are employed to monitor
everything 24/7.
Depositors get SMS in their cell phone for any cash transaction in their accounts.
For the payment of salary, information about employees such as their works and their
salaries are gathered by HR division. HR create an excel sheet of this. That excel sheet
goes to the CFO (Chief Financial Officer). CFO then approves it and after the CFOs
approval it goes back to the HR division. Afterwards, HR division approves it. Next, it
goes to ICT. The separate division pays cash after all the approvals. Based on the
documents from that payment and documents from HR, accounts department maintain
the records of it.
The officials of the bank who records transactions are different from the officials who
verify transactions. The recording division is in separate location. Similarly, HR division
is in separate location from ICC division.
At least double checking exists for all documents of the bank to ensure no mistakes or
fraud take place.
The officer who approve loan to a client and the officer who sanction loan money to the
client are different.

Control in Loan Disbursement:


Unlike what happened to many commercial government and non-government banks of
Bangladesh, Al- Arafah bank has been preventing financial fraud in loan making process
successfully. It has been possible because of banks strong control over lending process to the
clients. Features of the control system in banks loan disbursement process are-

Client apples to a branch for loan.


The designated officer explains the Terms and Conditions of the required type of loan.
If agreed with T & Cs, the client submits to branch the required documents with
completed applications.
If loan amount is up to twenty million taka, the branch manager approves the loan
directly.
If loan amount is more than 20 million taka, usually head office approves the loan. In that
case, the branch sends to head office clients documents together with the application
after verification. The investment division reviews the documents and the proposal. In an
Investment Committee Meeting, the top management approves the loan partially or fully
or disapproves it.
Upon approval of the loan, the Investment Division sends the Loan sanction Letter to
branch office for disbursement of the loan to the client.
The client opens an account in the branch. Deposit the sanctioned loan step by step.
Usually, the entire loan is not disbursed at a time unless its a small loan.
The bank run following checks before approving the loan:
o Papers with respect to properties, business, etc
o Loan in other banks and his/her reputation. Whether he/she is a defaulter or not.
his/her loan records
o Political involvement of the applicant
o Whether he has any litigation in the court
o Salary statement
o Bank statement
o Tax statement
o Personal certificates or IDs

Weaknesses in the Control System of Al- Arafah Islami Bank Ltd:


Al-Arafah Islami banks practice of internal control system is very effective and strong. But there
are places which need to be corrected. There are also many scopes of improvements in the
system. Some rules do not followed properly. Some places which need to be improved are1. Few remote areas branches of the bank do not contain some technologies necessary for
effective internal control.
2. All mail receipts must be opened in the presence of at least two officials. A lot of time it
cannot be performed.
3. Control in investment activities of bank, like the control of lending, is not enough.
4. The security of vault is strong, but electronic security system has many scopes for
improvement.
5. HR control, like verification of certificate before employment, is not fully implemented.

6. Internal audit service is yet to be considered as value added service of the bank. It is
necessary for better internal control system.
7. Account opening system: sometimes bank employee fills out the form on behalf of
account opener. This is not right. Not all required docs are checked and/or collected from
account opener.
8. In remote branches same Teller do both cash receipts and cash payment. In many cases
both the Teller and the cash-in-charge is the same individual.
9. No password system is installed to get inside the vault in distant branches.
10. Forced holiday to employees are not properly maintained in many cases.
11. Some bank officials are complacent and approve loans based on experience, i.e. without
checking clients documents.
12. Sometimes bank accepts verbal personal guaranty by any influential company or
personnel or public figure who seek loan.
13. The goodwill of the borrower sometimes is not checked.
14. Sometimes bank doesnt verify the Property Valuation Report issued by an independent
surveyor firm.

Recommendations to Al- Arafah islami Bank Ltd:


Some recommendations to Al- Arafah Bank Ltd to improve their control system and alleviate
flaws in their existing practices-

The bank should implement up to date technologies to all of its branches. Branches of the
remote areas of the country must have same technological control support like branches
of dhaka and other populated cities. As economic activities are rising in Bangladesh,
activities are rising in all other areas of the country. To ensure batter control in all of
banks units, batter technologies must be implemented on all of the branches.
The bank should ensure that all mail receipts be opened in the presence of at least two
officials.
Bank should emphasize in the control of investment activities. To ensure batter control on
investment activities bank can increase the manpower in control and monitoring division.
Although the security of vault is very strong, it needs to be improved. It is recommended
to bank to implement more electronic systems in vault for batter protection.
Control of HR should be improved. More rigorous process must be implemented in the
process of recruitment. It is necessary for the bank to have batter verification in
recruitment.

Bank must recognize internal audit as a value added service of the bank, which will
motivate management to develop internal auditing division. Good internal audit can
enhance the return on equity for stockholders.
It will be highly beneficiary for the bank if the bank increases the power of the officials
of ICC (Internal Controls and Compliance) over all of its branches.
To open account for depositor, front desk officers must collect all the necessary
documents and check those documents meticulously.
Even in remote areas branches of the bank taller for cash receipts and taller for cash
payment must be different individual. Taller and cash in charge also must not be same
person.
Bank should install password system, which will be change continuously, in the entry of
vault for batter security. Three keys system will also be there.
The bank should implement forced holiday to all of its employees properly to check their
desk and position in their absence. The bank must ensure that the subject employee must
not enter the office at that time.
Bank should always accept written guaranty before approving loan to any applicant,
despite of their reputation and position.
Documents should be checked thoroughly before sanctioning any loan to applicant.
Valuation of mortgaged property must be undertaken by using skilled human resources
and technologies.
Decision making power to ICC (Internal Controls and Compliance) should be increased
over various sensitive and important issues of bank.

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