Liquidity Managementof Islami Bank Bangladesh Limited Submitted by WWW.ASSIGNMENTPOINT.COM 1 www.AssignmentPoint.com Chapter One Introduction 2 www.AssignmentPoint.com 1.1 Statement of the Topic: Liquidity means the availability of funds, or assurance that funds will be available, to hand on cash outflow commitments. Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Customer’s confidence is mostly dependent on how efficient a bank to handle any type of liquidity crisis. As a direct link to customers a bank must emphasize on this. IBBL is treated in different way from other conventional banks because of its lucrative contribution in economy. For this, a planned way is necessary to manage the liquidity section. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial markets has posed new challenges for liquidity management. IBBL always tries to stand on a standard queue to provide satisfactory services to the customers. From this report it can be realized about the components of liquidity management and what are the present conditions of the components from year 2005-2009 and also how rules and regulations given by Bangladesh Bank affect the liquidity policy of IBBL is indicated here. 1.2 Objectives of the Study: The first objective of writing the report is fulfilling the partial requirements of the MBA program. In this report, we have attempted to give an overview of Liquidity Position of Islami Bank Bangladesh Limited in general. The primary objective of this report is to determine the origin of liquidity in Bangladesh and in IBBL Limited. And To make a bridge between the theories and practices on banking operations Here are some objectives for preparing the report. 1. 2. 3. 4. 5. To find out the components of liquidity statement IBBL. To know the details about liquidity of IBBL. To analyze the relation among liquidity, loans and deposits. To know the condition between specialized bank and Islamic bank. To know the impact of Bangladesh Bank regarding liquidity management. 1.3 Scope of the Study: 3 www.AssignmentPoint.com 2. Different problems and solutions regarding liquidity management. 1. 1.4. and other secondary data which was collected from the web site and also from the Islami Bank Training and Research Association.com . brochures. the primary sources of data are Discussion with officials of the IBBL Experts’ opinion and comments Observations of the officials Secondary data: The secondary data. Here some points are given below: Evaluation of the different financial performance of IBBL. the officials were busy and were not able to give me much time. nor in published sources.5 LIMITATIONS OF THE STUDY: There are some limitations in our study. working paper. which we are mentioning them as below1. Knowledge of diversified products and services. were the books. We faced some problems during the study.4 Methodology: 1. it may become necessary to collect original data. which was used for this research. So I could not go in depth of the study. Lack of time: The time period of this study is very short. Lack of monitory support: 4 www. Liquidity position of IBBL. Most of the times. 3. Present condition of IBBL in banking sector. Condition of IBBL regarding Bangladesh Bank rules. Insufficient data: Some desired information could not be collected due to confidentiality of business. When the data required for a particular study can be found neither in the internal records of the enterprise. annual report. Primary Data: For the completion of this report.This report provides some important evaluations and present scenario of IBBL.AssignmentPoint.1 Collection of data: Primary data are measurements observed and recorded as part of an original study. 4. there is a lack of previous experience in this concern. Other limitations: As we are newcomers. Sometime they didn’t want to supervise us out of their official work.com .AssignmentPoint.An Overview 5 www.Few officers sometime were busy in their job. Chapter Two The Organization. And many practical matters have been written from our own observation that may vary from person to person. com .AssignmentPoint.6 www. The Organization 2.1 About Bank As a Muslim country people of Bangladesh are deeply committed to Islamic way of life and follow the Holy Qur'an and the Sunnah. This Bank is the first of its kind in Southeast Asia. It is committed to conduct all banking and investment activities on the basis of interest-free profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the Gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh. Corporate Information (As on June 30, 2010) Date of Incorporation 13th March 1983 Inauguration of 1st Branch (Local office, Dhaka) 30th March 1983 Formal Inauguration 12th August 1983 Share of Capital Local Shareholders 41.77% Foreign Shareholders 58.23% Authorized Capital Tk. 10,000.00 million Paid-up Capital Tk. 7,413.00 million Deposits Tk. 265,193.00 million Investments (including Investment in Shares) Tk. 255,178.00 million Foreign Exchange Business Tk. 277,739.00 million Number of Branches 212 Number of SME Service Centers 20 Number of Shareholders 52164 Manpower 9588 7 www.AssignmentPoint.com 2.2 Vision: Our vision is to always strive to achieve superior financial performance, be considered a leading Islamic Bank by reputation and performance. Our goal is to establish and maintain the modern banking techniques, to ensure the soundness and development of the financial system based on Islamic principles and to become the strong and efficient organization with highly motivated professionals, working for the benefit of people, based upon accountability, transparency and integrity in order to ensure stability of financial systems. We will try to encourage savings in the form of direct investment. We will also try to encourage investment particularly in projects which are more to lead to higher employment. 2.3 Mission: To establish Islamic banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the field of all economic activities, achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less developed areas of the country. To encourage socio economic uplift and financial services to the low-income community particularly in the rural areas. 8 www.AssignmentPoint.com 2.4 Objectives of IBBL To conduct interest-free banking. To establish participatory banking instead of banking on debtor-creditor relationship. To invest on profit and risk sharing basis. To establish a welfare-oriented banking system. To contribute towards balanced growth and development of the country through investment operations particularly in the less developed areas. To contribute in achieving the ultimate goal of Islamic economic system 2.5 The Board of Directors: The Board of Directors consists of 14 non executive members including 1 Independent Director. The number of Board of members is within the maximum limit set by the central bank. The Board is composed of experienced members with diverse professional experiences such as business, administration, banking & finance, accounting, general management, diplomacy, government services, engineering and fund management which made the Board very efficient and balanced in deciding and directing on the various issues of the bank. The Board members are independent who express their views and opinions free from any influence. The Directors are also independent from management, business/other relationship of the bank that could materially interfere the activities of the bank. There is also a clear demarcation of duties and responsibilities between the Board and management. While the Board is responsible for formulating the board policy framework within which the bank is operating, the management is accountable for the execution of the policies and attainment of the bank’s objectives. The Board exercises independent oversight on the affairs of management. 9 www.AssignmentPoint.com Executive Committee and Audit Committee. 2. among others.6.6.2 The Audit Committee The Audit Committee formed by the Board of Directors as per instruction of Bangladesh Bank consists of 3 members and is entrusted with.6. administrative and business discretionary power delegated by the Board is mainly responsible for implementation of the policies and guidelines approved by the Board.4 Asset-Liability Committee (ALCO) The asset liability management (ALCO) of IBBL is comprised of 18 members from the top management which meets once in a month to review the liquidity position of the bank. the task of exercising their duties & responsibilities with regard to: Internal Control Disclosure of Financial Report Internal Audit External Audit and Compliance of existing laws and regulations 2. The ALCO is entrusted with the responsibility of ensuring the bank’s sufficient liquidity at all 10 www. The Committee with financial. headed by the Managing Director (CEO) of the bank. maturity grouping of assets and liabilities. These Committees operate within clear terms of reference.2.6 Committees: The Board has two standing committees viz. The Management Committee thoroughly scrutinizes the issues before placing to the Executive Committee/Board.3 The Management Committee The Management Committee of the bank comprises of 17 top level executives. 2. The Management Committee thoroughly evaluates the performance of the bank. takes strategic action plan to achieve various targets of the bank set by the Board of Directors.6. 2.AssignmentPoint.com . Deposits and Investment pricing and liquidity contingency plan in order to manage the balance sheet risk in a better way.1 The Executive Committee The executive Committee consists of 6 members and entrusted with the task of policy making and taking important and strategic decisions as authorized by the Board within the norms set by the Bangladesh Bank. AssignmentPoint. Chart-2. Audit Committee and other relevant committees and Annual Development Conferences too give opinions and oversee the activities of the bank from the view point of Shari’ah. the Committee reviews actions taken in previous ALCO meeting.com . out of total 231 branches (including 20 SME/Agricultural Branches).1 11 www. liquidity risk related to balance sheet. profit rate structure etc. Executive Committee. In every ALCO meeting.7 Shari’ah Council: The Shari’ah Council of the bank plays a very important role in framing and exerting policy for strict adherence to Shari’ah Principles in the bank.times to meet its obligations when becomes due without compromising the earning potential of the bank. The Council also evaluates the performance of the officials in terms of Shari’ah compliance. 2. The council is represented by 14 members consisting of prominent Ulama having adequate knowledge in Fiqhul Moamalat.8 Branches: Till 2009. 2. At present two members of the Council are also the members of Academic Council of IBTRA. Special ALCO meeting is arranged as and when any contingent situation arises. renowned lawyers and eminent economists to advise and guide on the implementation and compliance of Shari’ah principles in all activities of the bank particularly on the modes of investment. economic and market status and outlook. The representative of the Council attends in the meetings of the board of Directors. 114 are Urban Branches and 117 are Rural Branches which are the highest number of rural branches among the first generation Commercial Banks. 3. 5. Mudaraba Special Savings (Pension) Account. Household Durables Scheme. 3. 3. 7. Housing Investment Scheme. Foreign Currency Deposit (USD. 5. Mudaraba Hajj Savings Account. Al-Wadeeah Current Account. Small Business Investment Scheme. Foreign Currency Deposit Accounts 1. 6. Real Estate Investment Scheme. 2. Bai-Muajjal. Mirpur Silk Weavers Investment Scheme. 9. 6. Women Entrepreneurs Investment Scheme. Bai-As-Sarf. 9. Mudaraba Waqf Cash Deposit Account. Car Investment Scheme. 2. Mudaraba Muhar Savings Deposit Account.com . Bai-Salam. 10. 8. Mudaraba Term Deposit Account.2. Agriculture Implements Investment Scheme. Bai-Murabaha. 4. Mudaraba Savings Bond. Mudaraba Foreign Currency Deposit . 4. 3. 3. Welfare Oriented Special Investment Schemes 1. Mudaraba Savings Account. 2. Transport Investment Scheme.AssignmentPoint. Rural Development Scheme. GPB). FC Deposit ERQ. Investment Modes 1. 12 www. 6. Micro Industries Investment Scheme. 8. Mudaraba Monthly Profit Deposit Account. Investment Scheme for Doctors. Mudarabah. 4. 11.9 Products and Services Local currency Deposit Accounts 1. 8. 5. Musharaka Documentary Bills (MDB). EURO. Musharaka. 10. Hire Purchase under Shirkatul Melk. Mudaraba Special Notice Account. 2. 7. 7. com . Special Services through Islami Bank Foundation 13 www. 2. Balance Enquiry. Sectors under SME Investments 1. SWIFT. 6.AssignmentPoint. 4. Phone and Gas etc). etc. SMS Banking.12. 8. 5. The Bank issues Payment Orders. 3. ATM Services 1. 5. Locker Service is available in selected Branches to preserve valuable documents and materials. Fund Transfer. Service. Mini Statement of Accounts. 2. Treasury Activities Dealing Room Operation. 7. Manufacturing. ATM Service has been introduced in selected Branches. 3. Equity and Entrepreneurship Fund of Bangladesh Bank. 4. Payment of Utility Bills (Electricity. Other Banking Value Added Services 1. The Bank gives counseling on different issues. REUTER. The Bank co-operates to remit money from one place to another on the basis of commission within the country through Demand Draft (DD) and Telegraphic Transfer (TT). 9. 2. Foreign Remittance There are 16 (sixteen) Foreign Representatives of IBBL in 5 (five) Countries to serve expatriate customers to encourage and enhance Foreign Remittance. Water. 3. Online Banking. Trading. Cash Withdrawal. Islami Banking Diploma. Year World rating 1. 1999 2100 6. World ranking of IBBL amongst top 3000 International Banks: IBBL’s World Rating Table-2. 1998 2119 5. National: Training to others on Islamic Banking. 4. 3. 2. 2001 1902 14 www. IBBL’s world rank is 1591 among 4500 banks selected by them. Islami Bank Nursing Training Institute. Bangladesh Sangskritic Kendra. Islami Bank Institute of Technology.com . Islami Bank International School and College. 11.2 Serial No. 10. Islami Bank Mohila Madrasah. Distressed Women Rehabilitation Centre. 2. 12. 1997 2262 4. Islami Bank Service Centre. Islami Bank Institute of Health Technology. 13. Islami Bank Model School. International: Training to Foreigners on Islamic Banking. 2. 9. 2000 1999 7. Windsor Court. 7. 14.AssignmentPoint. 6. Islami Bank Community Hospital. Islami Bank Hospital. Training Services 1. 5. 1996 2303 3. 1995 2314 2. Islami Bank Homeopathic Clinic. 3.1. Islami Bank Medical College. Monorom: Islami Bank Crafts & Fashion. 8. England.10 IBBL’s World Rating: As per Banker’s Almanac (January 2006 edition) published by the Reed Business information. U.com . 2002 1771 9. 2005 1658 12.AssignmentPoint. 2007 1490 14. 2003 1755 10. 2006 1620 13. Reed Business Information.K. 2008 1591 Source: The Bankers Almanac: World Ranking. 2008.8. 2004 1581 11. 15 www. AssignmentPoint.com .Chapter Three Conceptual Analysis 16 www. The risk of illiquidity may increase if principal and interest cash flows related to assets.NRD.AssignmentPoint. 3.Conceptual Analysis 3. Supply and Demand of liquidity in Islamic Banks Table-3.1 Supplies of liquidity come from Customers deposit Demand for Banks liquidity arise from Customers Deposit withdrawal Mudaraba Deposits Uses for CRR & SLR Al Wadiah deposit Investment to Customers Sundry deposit Bai Murabaha Bills payable Bai Mujjal Contingent Deposits (security . or assurance that funds will be available. to honor all cash outflow commitments (both on. These commitments are generally met through cash inflows.NRT) Revenues from the sale of Non deposit services HPSM Musharaka Customers Investment/loan repayments Sale of Banks asset Bai us Sarf From Money Market ( through BGIIB) Capital & reserve Mudaraba Quard – Hasana Bai Salam 17 www.1 What is Liquidity? Liquidity is the availability of funds.com . supplemented by assets readily convertible to cash or through the institution’s capacity to borrow.and off-balance sheet) as they fall due.2 Supply and Demand of liquidity in Islamic Banks The following sources of liquidity and supply come together to determine each bank’s net liquidity position at any moment of time. liabilities and offbalance sheet items are mismatched. The management of liquidity is therefore among the 18 www.and off-balance sheet) on an ongoing. Such planning involves identifying known. Sound liquidity management involves prudently managing assets and liabilities (on. both as to cash flow and concentration. taking into account changes in economic. 3. to ensure that cash inflows have an appropriate relationship to approaching cash outflows.AssignmentPoint. Bai istisna Ijara Repayment of Non deposit borrowings Operating expenses & tax incurred in producing & selling services Payment of Dividends To Money Market(Through BGIIB) 3. expected and potential cash outflows and weighing alternative asset/liability management strategies to ensure that adequate cash inflows will be available to the institution to meet these needs.and off-balance sheet).5 Sound Practices for Managing Liquidity in Banking The ability to fund increases in assets and meet obligations as they become due .com .4 Objectives: The objectives of liquidity management are: Honoring all cash outflow commitments (both on. But the importance of liquidity transcends the individual bank since a liquidity shortfall at a single organization can have systemic repercussions.is crucial to the ongoing viability of any banking organization.3 Importance of liquidity management Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. daily basis Maintaining public confidence on the bank Avoiding raising funds at market premiums or through the forced sale of assets. regulatory or other operating conditions. and Satisfying statutory liquidity and statutory reserve requirements 3. This needs to be supported by a process of liquidity planning which assesses potential future liquidity needs. AssignmentPoint. Stress tests that cover a variety of institution-specific and market-wide scenarios.com .most important activities conducted at banks. Strong management of intraday liquidity risks and collateral positions. the principles seek to raise standards in the following areas: Governance and the articulation of a firm-wide liquidity risk tolerance. In light of these developments. there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. Among other things. Over time. Liquidity risk measurement. 19 www. The primary objective of this guidance is to raise banks’ resilience to liquidity stress. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity. securitization activities. but recent turmoil in global financial markets has posed new challenges for liquidity management. with a link to the development of effective contingency funding plans.6 Principles for Sound Liquidity Risk Management and Supervision The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. including the capture of off-balance sheet exposures. there are some necessary practices for managing liquidity in banks which are indicated below: Developing a structure for managing liquidity Measuring and monitoring net funding requirements Managing market access Contingency planning Foreign currency liquidity management Internal controls for liquidity risk management Role of public disclosure in improving liquidity 3. and other contingent liquidity risks that were not well managed during the financial market turmoil. Aligning the risk-taking incentives of individual business units with the liquidity risk exposures their activities create for the bank. but at least once a year. At a minimum. including the need to intervene in a timely manner to address deficiencies and the importance of communication with other supervisors and public authorities. 3. The principles also strengthen expectations about the role of supervisors.com . manage and control liquidity within these policies. the liquidity management program ensure that an internal inspection/audit function reviews the liquidity and funding operations to ensure that the institution’s policies and procedures are appropriate and are being adhered to ensure the selection and appointment of qualified and competent management to administer the liquidity management function 3. Regular public disclosures. high quality liquid assets to be in a position to survive protracted periods of liquidity stress.8 ROLE OF MANAGEMENT The management of each institution is responsible for managing and controlling the dayto-day liquidity of the institution according to the liquidity management program. In discharging this responsibility. a Board of Directors should: review and approve liquidity and funding policies based on recommendations by the institution’s management review periodically. a Board of Directors usually charges management with developing liquidity and funding policies for the board’s approval and developing and implementing procedures to measure. management should be responsible for: 20 www.7 ROLE OF THE BOARD OF DIRECTORS The Board of Directors of each institution is ultimately responsible for the institution’s liquidity. both within and across national borders. Maintenance of a robust cushion of unencumbered. Although specific liquidity management responsibilities will vary from one institution to another. of a bank's liquidity risk profile and management. both quantitative and qualitative.AssignmentPoint. Ensuring that liquidity is managed and controlled within the liquidity management and funding management program. Developing and recommending liquidity and funding policies for approval by the Board of Directors. These steps are interdependent. each requiring the successful implementation of the other two to optimally manage liquidity.9 The Liquidity Management Process Effective liquidity management requires three-steps in which treasury identifies. Ensuring the development and implementation of appropriate reporting systems with respect to the content. manages and optimizes liquidity. It involves understanding the balances and positions of the institution on 21 www. 3. Implementing the liquidity and funding policies. format and frequency of information concerning the institution’s liquidity position.com . Reporting comprehensively on the liquidity management program to the Board of Directors at least once a year.AssignmentPoint. in order to permit the effective analysis and the sound and prudent management and control of existing and potential liquidity needs. Developing lines of communication to ensure the timely dissemination of the liquidity and funding policies and procedures to all individuals involved in the liquidity management and funding risk management process. Identifying liquidity is the foundation from which the entire liquidity management process depends. Establishing and utilizing a method for accurately measuring the institution’s current and projected future liquidity. Monitoring economic and other operating conditions to forecast potential liquidity needs. Ensuring that an internal inspection/audit function reviews and assesses the liquidity management program. AssignmentPoint. This requires the ability to access and gather information across the institution's many lines of business.10 Guidelines of Liquidity Contingency Plans Either within its Liquidity Management Policy (LMP) or separately. currencies. the bank's treasury is able to map the strategic aspects of the institution into the liquidity management process. Early warning indicators. Managing liquidity within a bank's corporate treasury involves using the identified liquidity to support the bank's revenue generating activities. including the impact of external events not directly related to the financial condition of the bank. and tasks that "free up" lower-costing funds for lending or investment purposes to maximize their value to the institution. accounts and often multiple systems. This may include consolidating funds.an enterprise-wide level. optimizing liquidity balances requires a strong and detailed understanding of the financial institution's liquidity positions across all currencies. managing the release of funds to maximize their use. Although treasury groups are staffed with very capable personnel. and does not include the actual movement or usage of funds.com . The LCP should be designed to ensure that adequate liquidity is achieved at such times and should contain a number of key elements: The identification and definition of what constitutes a liquidity crisis. As the strategic aspect of liquidity management. Identifying liquidity is primarily a function of data gathering. With this information. Actions to be taken. 22 www. Limited time and resources availability is the biggest challenge in the liquidity management process to treasury. a bank is expected to have a liquidity Contingency Plan (LCP) covering the eventuality of it experiencing a liquidity crisis. This results in the entire liquidity management process being less efficient and affects the institution's bottom line. a large amount of their time is spent on the task-based function of identifying liquidity instead of on the strategic elements necessary to optimize balances. accounts. business lines and counterparties. Optimizing liquidity is an ongoing process with a focus on maximizing the value of the institution's funds. 3. And every scheduled conventional bank must have to keep at least 18. 3.11 Impact of Central Bank Regulation Bangladesh Bank has the specific guidelines regarding statutory reserve which ensures the minimum liquidity position of the bank and also safeguards the depositors. Liquidity management by Bangladesh Bank Section VI Maintenance of CRR/SLR All Islamic Banking Companies shall maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per rates prescribed by Bangladesh Bank from time to time. Addressing of liquidity crisis and utilization of surplus fund of the Islamic Banks: In case of liquidity surplus and crisis the banks can take recourse to the following: 23 www. Channels of communication.com .11. Under this 5. IBBL always follows BB regulations strictly.50% must be kept as CRR and rest of the 13% must be kept as LRR.1 Guidelines for Conducting Islamic Banking: November 2009 regarding Maintenance of CRR/SLR. We have already observed that IBBL maintains excess amount SLR and CRR beyond the actual requirement.5% statutory liquidity reserve. for the purpose. Communication with the Commission. Scenario planning and testing of the plan. Every commercial Bank having Islamic bank branches shall maintain SLR/CRR for its Islamic branches at the same rate as prescribed for the Islamic banks and shall.5% SLR.AssignmentPoint. Management coordination and escalation of issues. Here the guideline for conducting the Islamic banks is given below- 3.5% CRR with BB and 10. maintain a separate Current Account for the Islamic branches with Bangladesh Bank. Roles and responsibilities. Every Islamic bank has to maintain 5. The Islamic banks/branches may open/ maintain Mudaraba SND accounts with each other and can meet liquidity crisis by receiving deposits in the Mudaraba SND account at MSND rate from those having surplus liquidity. The committee. 4. 3. typically 24 www. may availed funds from Bangladesh Bank at a provisional rate on profit on its respective Mudaraba Short Notice Deposit Accounts which will be adjusted after finalization of Accounts and rate of profit of the concerned Islamic banks/branches.AssignmentPoint. of the Islamic branches of the conventional commercial bank fund may be collected from sources which follow Islamic Shari’ah. The Islamic banks/branches having no surplus investment in 'Bangladesh Govt.1. In the same way. In case Islamic banks/branches have surplus/ enough investment in the Islamic Investment Bond and subsequently faces liquidity crisis then the bank / branch may overcome the crisis by availing of investment facilities from Islamic Bond Fund against lien of their over purchased Islamic Bonds. it is essential to have a structured and systematic process for manage the Balance Sheet.com . and so. Banks must have a committee comprising of the senior management of the bank to make important decisions related to the Balance Sheet of the Bank. Islamic Investment Bond’ at the time of their liquidity crisis. if arises. if any. REPO system may also be introduced for the Islamic Bonds.2 Asset Liability Management Policy Asset Liability Management (ALM) is an integral part of Bank Management. 5. 3.11. 2. To meet the crisis. The excess liquidity of the Islamic banks/ Islamic branches of conventional Scheduled banks may be invested in the ‘Bangladesh Government Islamic Investment Bond’ (Islamic Bond introduced by the Government). To meet the liquidity crisis. But till funds generated from sell of Islamic Investment Bonds remain available for investment such financial support may not be available from Bangladesh Bank. Islamic banks/branches facing liquidity crisis can tide over the crisis by availing of investment from Islamic Bond fund as per the prescribed rules. Typically. review and formulate strategy to manage the balance sheet.called the Asset Liability Committee (ALCO).1 25 www. The results of balance sheet analysis along with recommendation is placed in the ALCO meeting by the Treasurer where important decisions are made to minimize risk and maximize returns.AssignmentPoint.com . Specifically. ORGANISATIONAL STRUCTURE OF ALM The responsibility of Asset liability Management is on the Treasury Department of the bank. the Asset liability Management (ALM) desk of the Treasury Department manages the balance sheet. should meet at least once every month to analysis. the organizational structure looks like the following: Chart--3. e competition. Liquid assets can be as follows: Reserve Assets. it has to make sure that enough liquidity is available to meet fund requirements in situations like liquidity crisis in the market. 4) Understanding of the market dynamics i. Under any circumstances a bank has to honor its commitments. 3) To comply with the local central bank regulations in respect of bank’s statutory obligations as well as thorough understanding of the risk elements involved with the business. potential target markets etc. policy changes by central bank. 2) To manage liquidity and interest rate risk of the bank.AssignmentPoint. 26 www.2 Liquidity Test for Contingencies The major risk a bank runs is liquidity risk. PROCESS The bank’s asset liability management is monitored through ALCO. As a result. Cash in Tills. 5) Provide inputs to the Treasurer regarding market views and update the balance sheet movement.com . a name problem of the bank etc. 6) Deal within the dealer’s authorized limit. a bank’s balance sheet should have enough liquid assets for meeting contingencies.The key roles and responsibilities of the ALM Desk: 1) To assume overall responsibilities of Money Market activities. The information flow in the ALCO can be diagramed as below: Chart-3. So. Foreign Currency in open position. Chapter Four LIQUIDITY MANAGEMENT OF IBBL 27 www. The instruments involved with interest are banned here like T-bill. A liquidity contingency plan should be in place to ensure a bank is prepared to combat any crisis situation.com . Specific FDRs. For the Islami Bank Bangladesh Ltd. these assets are maintained according to Islamic Shari’ah. Specific Government Securities. general bond.AssignmentPoint. Forecasting cash need and providing for these needs in the most cost-effective way. So in this way IBBL maintains the cash requirements of its branches across the country. In IBBL liquidity management means having Ability of bank to meet maturating liability. this bank has to deal with sources of fund and how it will be implemented in the appropriate field. distribution and management among the branches across the country.AssignmentPoint. 28 www. Coping with any short term pressures.com . If there are no branches of BB. Under this. Ability of the bank to attract deposit. This is the first priority of this department. Bangladesh Bank owns 9 branches across the countries which are located in each district and Bogura and these are acted as “Feeding Branch” for the absence of local office. Dhaka and Agra bad.1 Liquidity Management of IBBL Liquidity management is the function of treasury department. The bank has to appropriately manage maturity of both asset and liability. bank will face disastrous consequence like bank run which reduces the confidence of the client and this ultimately reduces the goodwill of the bank. It is so important for a bank because if any liquidity crisis occurs beyond the statutory reserve and other liquidity sources. meets its commitments. Local Office acts as head office of the bank where FAD (Financial Administration Division) is considered as a branch though it is situated in the local office. Ability of matching the maturity of assets & liabilities daily . Obviously IBBL always is in a strong position in maintaining customer confidence though large collection of deposit and investment. This FAD operates the “Feeding branch” which is responsible for maintenance of cash requirements. So it is so crucial for the bank. There are mainly two “Feeding Branch” in Bangladesh which are located in Motijheel. To meet liquidity needs and obligations to ensure the smooth running of business. Reduces the adverse situation developing in the Market.LIQUIDITY MANAGEMENT OF IBBL 4. Chittagong. then Sonali Bank acted as the “Feeding Branch”. Short –term Liquidity including internal fund generation is very strong and access to alternative sources of funds is outstanding. 2007 and 2008. 2007. Financial institutions rated in this category means having highest certainty of timely payment. According to BB guidelines credit rating became mandatory since January. 2004.com .AssignmentPoint. 2006.for 2004 & 2005 and further upgraded the rating to AA (High Safety) in 2006.2 Credit Rating of the Bank Credit Rating Information and Services Ltd. 2003. 2008. 2005. 2005. 2007. CRISL submitted its report on the financial years 2002. 2007 and also 2008 and assigned A+ (Adequate Safety) for long term rating scale for 2002 and 2003 and upgraded the same to AA. Safety is almost like risk free Government short term obligations. 2006. This level of rating indicates a corporate entity with a sound credit profile And without significant problems. Risks are modest and may vary slightly from time to time because of economic conditions. CRISL assigned ST-2 (High Grade) for short term rating scale for 2002 and 2003 and upgraded to ST-1 (Highest Grade) for 2004. Chart-4.4.-CRISL was engaged by the bank for the purpose of rating the bank since 2002. Financial institutions rated in this category are adjudged to be high credit quality.1 29 www. Sensitivity to rate change: When rate of profit by other banks on deposits rise/ Change of Profit rate of deposit. loss of competitiveness. Offering higher rate of profit to deposits. 30 www. Abnormal behavior of financial Market.AssignmentPoint. Liquidity surplus:-Total Supply of liquidity > total demand for Liquidity Implications of liquidity surplus.4 Why face/sources of liquidity problem Maturity mismatch” Bank takes large amount of short term deposit and then make invest in long-term (maturity mismatch). Loss of Public Confidence. Unanticipated change in cost of capital. Underutilization of financial resources. Lower income and higher cost.4.3 Liquidity Risk of IBBL: Liquidity risk includes both the risk of being unable to fund its portfolio of assets at appropriate maturities and rates and the risk of being unable to liquid a position in a timely manner at reasonable prices.com . Causes of Liquidity Risk: Liquidity Shortage:-Total Demand for Liquidity > total supply of liquidity. Shortage of financial resources to invest against commitments. Loss of competitiveness. Implications of liquidity deficit. 4.The problem related to maturity mismatch situation is that bank hold an unusually high proportion of liability subject to immediate payment. 6. 4.5 Key Issues in liquidity management in Islamic Banking Different Different shari’ah shari’ah interpretation interpretation No No Islamic Islamic Money Money Market Market Absence Absence of of Islamic Islamic secondary secondary market market Slow Slow development development in in Islamic Islamic financial financial instruments instruments Small Small no. The demand of customers is immediately met by the bank with the cash balances with itself. money at call and short notice.6 Components of Liquidity Statement: Some of the major liquid assets what IBBL maintains are cash in hand and balances with other banks in current accounts. In case he keeps cash balances much above his actual needs. Conversion of Non-funded based limit into funded based. Severe deterioration of assets quality. statutory cash reserve with the Bangladesh Bank. 4. The banker has to be very cautious. prudent and far-sighted in determining the quantum of cash to be maintained. he 31 www.com . Here are the clarifications of the above components. no.1 Asset Cash in Hand: The most liquid asset of a bank is cash in hand which is known as first line defense. Incorrect judgments and complacency.AssignmentPoint. of of participants participants 4. the bank may find in an embarrassing position.50% Cash Reserve Ratio is calculated and maintained as per section 25 & 33 of the bank companies Act 1991.com . Hence determination of the adequate size of cash balances is an important task faced by a bank.1 Year Amount of cash 2005 1285.15 2007 2008 2009 2907.56 2006 1410. In case of crisis with cash in hand the bank goes to the central bank to meet the liquidity crisis. IBBL is also facing this situation.loses interest on that excess portion. If the cash reserves fall short of its requirements. The amount of cash in hand is increasing day by day because of increasing amount of deposits with this bank.00% of total Time & Demand Liabilities daily on bi-weekly average basis. but CRR position should not be less 32 www. Here the amount of cash from the year 2005-09 is given below: Cash in Hand In Million Table-4. 2005 CRR is @ 5.14 3107. 77 Chart-4.2 Cash Reserve Requirement (CRR): 5.AssignmentPoint. 5% of total deposits are kept in Bangladesh Bank which varies with the deposits.36 2480. With effect from October 01. As we know that CRR is dependent on the deposit collection.83 Maintained (%) 14.94 11765.AssignmentPoint.50 11202.5%.13% 6.than 4. 2009.50% in any day as per BRPD Circular No.17% 10.00% daily on bi-weekly average basis & CRR was not less than 4.48 9885.50% in any day throughout the year.32 14922.01 dated 12 January.84 31126. The amount of CRR is continuously increasing because of increasing amount of deposit.com .89 19360.2 In Million Year 2005 2006 2007 2008 2009 Required Amount (5%) 5092.70 20319.57 14022.23% Chart 4.85 8086.67% 13.98 Surplus / (Deficit) 9830. Now a chart is given from 2005-09 about balance with Bangladesh Bank: CRR Table-4.59 1893. Now the CRR becomes 5.13 6296.3 33 www.65 % 16.45 21088. As per guidelines given by Bangladesh Bank IBBL maintained CRR minimum @ 5.16 Actual Amount held with Bangladesh Bank 9979. 39 25725.4.76 13012. SLR Table.com . investment in Shares of Bangladesh Shipping Corporation and Bangladesh Government Islamic Investment Bond.96 19771.13 13131.70 16172.69 18232.50% SLR of the Bank is 10. 1987. balance with Bangladesh Bank & its Agent Bank.57 22115.88 23530.30 Surplus / (Deficit) 10362.72 32784.39 34405. Here the components of Statutory Liquidity Ratio (SLR) are cash in hand including Foreign Currency.66 Maintained (%) 20.27% 16.50% as like as other Islamic Banks as per Bangladesh Bank Letter No.4 34 www. The Bank maintains following SLR requirement throughout the year.3 In Million Year 2005 2006 2007 2008 2009 Required Reserve 10184.40% Chart-4.17% 20.Statutory Liquidity Requirement (SLR): 10.25 12593.58% 19.43% 21.45 45646.AssignmentPoint.65 Actual Reserve maintained 20546. BCD (P) 744 (23)/ 5 dated January 03. Here cash is kept in different forms which are given below: Table-4.5 35 www.82 4909.11 1069.18 7678.32 1329. IBBL also keeps its cash in other banks to meet up the liquidity crisis.77 In Million Chart-4. Balance with Other Banks: Besides maintaining the statutory cash reserve with the Bangladesh Bank.85 1318.32 5623.81 1658.45 1819.07 1242.79 Grand Total 1775.91 949.21 Sub Total 1249.58 Outside Bangladesh 525.03 317.47 4304.32 2353.13 4012.37 1284.21 75.72 569.AssignmentPoint.com .60 759.73 5858.4 Balance with Other Banks In Million Year 2005 2006 2007 2008 2009 In Current Account 217.57 442.37 In Mudaraba Savings & MTDR Account with Other Islamic Banks / Financial Institutions 1032. 36 www.com .AssignmentPoint. AssignmentPoint.61 Chart-4.71 7 532.16 2006 2007 2008 2009 3557. Here the investments in shares and securities of 2005-2009 are given below: Investments in Shares & Securities Table-4.com .76 20365.6 Investments in Shares & Securities: This is another type of liquid asset that can be used to meet up the liquidity crisis.7 37 www.Chart-4.5 Year Investments in Shares & Securities In Million 2005 3534.61 11136. Here the amount of deposit from 2005-2009 is given below: 38 www.com .9 4.2 Liability: Deposits and Other Accounts: All the liquid assets are mainly necessary to fulfill the sudden demand of the depositors.6.8 Chart-4.AssignmentPoint. Here the amount of deposits is increasing significantly in IBBL and this bank has collected huge amount of deposits that six other conventional banks have not collected this huge amount of deposits.Chart-4. The bank has to be always ready to meet the need of depositors. 41 244292.28 200343.AssignmentPoint.42 Other Accounts 2006 2007 2008 2009 132419.Deposits and Other Accounts Table-4.6 Year In Million 2005 Deposits and 107779.com .10 Chart-4.40 166325.11 39 www.14 Chart-4. Here from 2005 to 2009 the amount of other liabilities is given below: Provision and Other Liabilities Table-4.AssignmentPoint.73 1 1564.19 7826.19 Chart-4.7 Year Provision and Other Liabilities 2005 2006 2007 2008 2009 6885.12 40 www.18 10195.94 10739.Provision and Other Liabilities: In IBBL there are also some other liabilities which must be backed by the liquid asset portion.com . com .AssignmentPoint.13 Chart-4.14 Liquidity Position of IBBL (At a Glance) 41 www.Chart-4. total Investments. Balance in FC clearing A/Cs.23% *This actual SLR and CRR percentages remind us how strong position of IBBL in case of liquidity management.7. SLR. Deposits with others Banks (Short & term Deposit) etc to work out net surplus/shortage of fund on daily basis to assess the liquidity /Invest able funds of the Bank. investment in shares & approved securities.65 % 16.13% 6.7Assessing & Managing Liquidity of IBBL 4. Chart-4. All this components are described above.27% 16.58% 19. Cash in tills.43% 21.67% 13.Table-4.1. Maturity Profile Mismatch 42 www. Balance with Sonali Bank as an agent of Bangladesh Bank.AssignmentPoint.15 4.40% CRR Maintained (%) 14.com . Sources & uses of funds basis: Net liquidity/Fund Position: IBBL prepares daily position of funds considering total deposits. Balance with Bangladesh Bank.8 Year 2005 2006 2007 2008 2009 SLR Maintained (%) 20.17% 10. CRR.17% 20. 3-6 months. However. over 5 year) maturity profile of the assets and liabilities is prepared to understand mismatch in every bucket.core can be in 2-7 days or 3 months bucket. 4-5 years. 7 days-1 month. the core balance can be put into over 1 year bucket whereas non. 1-3 months. We know that all of the shorter tenor assets and liabilities will not come in or go out of the bank’s balance sheet.7. are divided into ‘core and non-core’ balances. This ratio means changes in a bank’s liquidity position. where core is defined as the portion that is expected to be stable and will stay with the bank. Here the cash position indicator always shows increasing trend except 2007 and remains consistent. This often means using certain financial ratios or liquidity indicators. 3-4 years.53% 11.01% 16. customer behavior. next day. overdraft etc.23% 43 www. 1. banks prepare a forecasted balance sheet where the assets and liabilities of the nature of current. i.9 Year 2005 2006 2007 2008 2009 Cash Position 16. A typical strategy of a bank to generate revenue is to run mismatch. The distribution of core and non-core is determined through historical trend. statistical forecasts and managerial judgment. 2-7 days. 6 months-1 year.Cash Position Indicator: Cash and deposits due from depository institutions is divided by total assets where a greater proportion of cash implies the bank is in a stronger position to handle immediate cash needs. borrow/takes deposit short term and lend/investment longer term. 1-2 year.A key issue that IBBL needs to focus on is the maturity of its assets and liabilities in different tenors.44% 16. 2-3 years. a bucketwise (e. mismatch is accompanied by liquidity risk and excessive longer tenor Investment against shorter-term deposits would put a bank’s balance sheet in a very critical and risky position.AssignmentPoint. To address this risk and to make sure a bank does not expose itself in excessive mismatch. and noncore to be less stable.com .e. Cash Position Indicator Table-4. 4.g. As a result.02% 16.2 Liquidity Indicator Approach Many banks estimate their liquidity needs based on experience and industry averages. Indicator Chart-4. Capacity Ratio: Here net loans and leases are divided by total assets which is really a negative liquidity indicator because loans and leases are often among the most illiquid assets a bank can hold.16 2. IBBL disburses majority amount in loans which can increase its income.com .AssignmentPoint. 44 www. 21% 75.56% 72.02% 69.AssignmentPoint.31% 45 www.56% 78.17 3.10 Year 2005 2006 2007 2008 2009 Capacity Ratio 71.98% 77.68% 71. Core Deposit Ratio: Here core deposit is divided by total asset where core deposits are defined as small denomination accounts from local customers that are considered unlikely to be withdrawn on short notice and so carry lower liquidity requirements. Core Deposit Ratio Table-4.11 Year Core Deposit Ratio 2005 2006 2007 2008 2009 77.04% 78.com . This ratio is in good condition because at this bank has less possibility of facing liquidity crisis.96% 73.Capacity Ratio Table-4.90% Chart-4. 22% 22.44% Chart: 4:19 46 www.79% 25.18 4. This ratio measures how stable a funding base each bank possesses. Here we can see that the ratio is in reasonable condition and it is decreasing which suggests greater deposit stability.12 Year 2005 2006 2007 2008 2009 Deposit Compos ition Ratio 25.Chart-4. Deposit Composition Ratio: Demand deposits are divided by time deposits where demand deposits are subject to immediate withdrawal via chque writing while time deposits have fixed maturities with penalties for early withdrawal.68% 21.56% 22. Deposit Composition Ratio Table-4.com . a decline in the ratio suggests greater deposit stability and therefore a lessened need for liquidity.AssignmentPoint. com .Chapter Five Data Analysis & Findings 47 www.AssignmentPoint. Short term creditors such as bankers are particularly interested in assessing liquidity. Loan to Deposit Ratio Table-5.1 Year 2005 2006 2007 2008 2009 Loan to Deposit Ratio 81.AssignmentPoint. In Bangladesh BB sets rules that every bank can disburse maximum 82% of total deposit in loans and investments.Data Analysis & Findings 5. The ratios that can be used to determine the enterprise’s short term debt paying ability are the current ratio and liquid assets to deposit liabilities.1 Loan to Deposit Ratio: Such ratio provides a simplified indication of the extent to which a bank is funding illiquid assets by stable liabilities. IBBL is not moving in aggressive way to grant investment what we can realize from SLR and CRR percentage.1. 5.1 48 www.03% 83.58% 80.com .49% 84.1 Ratio Analysis: Liquidity Ratio: This measures the short term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.72% 80.05% Chart-6. 2 Year 2005 2006 2007 2008 2009 Liquid Assets to Deposit Liabilities 97. This ultimately helps to hold the customer confidence. this ratio was highest because of lower investment opportunity.2 49 www. This ensures the confidence of the depositors about the bank.2 Liquid Assets to Deposit Liabilities Ratio: This indicates that how much liquid assets are available to meet up the immediate necessity of the depositors.38 67. This is a good sign for the bank because management has been able to hold the ratio constant which is a success of the bank.com .5. Liquid Assets to Deposit Liabilities Ratio Table-5. But from 20062009 the ratio is satisfactorily constant.99 Chart-5.46 62.99 57.AssignmentPoint.04 62.1. In 2005. 5.3 Year 2005 2006 2007 2008 2009 Loan to Adjusted Deposit Ratio 82. affiliates and fixed assets.3 50 www.1. Loan to Adjusted Deposit Ratio Table-5.AssignmentPoint.82% 96.72% 84.com .51% 84.3 Loan to Adjusted Deposit Ratio: The ratio incorporates the extent to which loans are being financed by medium and longterm debt and by shareholders funds less investments in subsidiaries. Such ratio takes into account the deficiencies in the loan to deposit ratio by considering the extent to which the majority portion of the institution’s business is funded by medium and longterm debt and free capital.35% 82. These additional aspects are included in the denominator of the ratio.16% Chart-5. AssignmentPoint. How much assets are maintained in liquid form within the total assets that can be understood.4 Year Liquid Assets to Total Assets Ratio 2005 69.1. So from this it can be easily realized that IBBL is slightly emphasizing more on maintaining liquid assets rather maintaining other long term assets.4 51 www. Liquid Assets to Total Assets Ratio Table-5.4 Liquid Assets to Total Assets Ratio: Liquid assets to total deposits must be calculated at month end on liquid asset holdings and total assets.17% 55.com .54% 49.5.29% Chart-5.87% 58.67% 2006 2007 2008 2009 69. The proceeds are spent on welfare activities. Islamic banks.AssignmentPoint. Traditional banks can earn interest on their deposits with Bangladesh Bank but Islamic banks can not since they cannot receive interest as earning. They have to keep 5% in cash with Bangladesh Bank and the rest 13% is invested in Bangladesh Bank approved securities. 5% is required to be kept in cash with Bangladesh Bank and the rest 5% is to be kept either in approved securities or in cash (in case of problem with securities) with Bangladesh Bank. 52 www. Lack of opportunity for profitable use of surplus funds: The bank can invest their excess liquid amount in approved securities and or in other bank in crisis. However. Islamic banks cannot take this opportunity due to the existence of interest element in the transaction process. Compared to interest-based traditional banking. It should be noted that the interest earning are not considered as bank income and added to profit. in this case. Islami Bank Bangladesh Limited has been receiving interest against its deposit with Bangladesh Bank and crediting it to its Sadaqa fund (Islami Bank Foundation).com .Legal reserve requirement: Islamic banks in Bangladesh have to keep 10% of its total deposits as liquidity. Legal reserve requirement for conventional banks is 18%. Of this. are in disadvantageous position. Islamic banks have their problem in this case as they avoid any transaction based on interest. This may help minimising pparticularly the call money problem they are suffering from beginnings. The above restrictive environment in the capital market of Bangladesh has limited substantially the investment opportunities for Islamic banks and hence the avenues of lawful earning. Capital market investment: Conventional banks can invest 30% of their total deposits in shares and securities. 53 www. Due to legacy of traditional banking.com . inter-bank money market within Islamic banks has not yet taken place. Islamic banks in Bangladesh find Murabaha financing as suitable and Mudaraba and Musharaka as difficult to apply. Following examples may be cited for illustration. Al Arafah Bank and Social Investment Bank Limited have used 54%. (c) Islamic banks cannot purchase shares of companies involved in businesses not approved by Shari’ah. and. lack of appropriate legal protection and standard accounting practice in business.Apprehension of liquidity crisis and possibility of liquidity surplus: Islamic banks have always left with a sizeable amount of cash as liquidity surplus. p. the Islamic economists have traditionally prescribed for its limited application. (b) Shares of companies taking loan from commercial banks on interest are not also purchased by Islamic banks. These banks can take initiative to form a money market among them. Murabaha though considered as a Shariah approved mode. Absence of inter-bank money market: In spite of five Islamic banks have been functioning in Bangladesh. Conventional banks can borrow in the form of call money among themselves even at an exorbitant rate of interest. (a) Islamic banks do not purchase shares of companies undertaking interest-based business.AssignmentPoint.9). One study shows that Islami Bank Bangladesh Limited. In the absence of Islamic money and capital market these banks cannot obtain funds from capital market at times of need. 76% and 65% respectively of their investment funds by resorting to Murabaha mode (Hoque 1996. Predominance of Murabaha financing: Predominance of Murabaha financing in the portfolio management of investment funds by the present day Islamic banks of Bangladesh has been a hot agenda of debate. Countries introducing Islamic banking should create an enabling environment for Islamic banks by modifying existing laws and regulations. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective.e. and Threats involved in a project or in a business venture.5% of its profit earned each year and credited to Sadaqa account. 1974 5. The Banking Companies Ordinance.2 SWOT Analysis SWOT analysis is a strategic planning method used to evaluate the Strengths. This depresses profits of Islamic banks. Islamic banks in Iran and Pakistan have their legal supports. amount meant for social welfare activities. This may place Islamic banks relatively in weaker position in terms of profitability compared to conventional banks Moreover. Islamic banks cannot do that. the Federal Bank Co-operation Act. But the compensation so realised is not added to the profit income rather credited to Sadaqa account i. which also depresses banks’ profitability.. The Registration Act and Capital Issues.AssignmentPoint. What it does it realises compensation at the rate of profit. Absence of legal framework: Amendment of old laws and promulgation of new laws conducive to efficient operation of Islamic banks are sin qua non for its healthy growth. 1980. Opportunities. The Banking Tribunal Ordinance and The Banking and Financial Services (Amendment of Law) Ordinance were passed in 1985 by amending seven Acts such as the Partnership Act. Islamic banks are to make a compulsory levy equivalent to 2. Pakistan has provided legal support to float Participation Term Certificate and conduct Mudaraba transaction by replacing “The legal Framework of Pakistan’s Financial and Co-operative System” on June 26. Weaknesses. This is unlikely the case with conventional banks. the Wealth Tax Act.Depression of Profit: Traditional banks can meet up loss arising from delay in repayment by the clients through charging compound interest.com . the Income Tax Ordinance. Here the structure of SWOT analysis is given below 54 www. AssignmentPoint.SWOT Analysis Chart Attributes of the Environment External Attributes of the organization Internal Table-5. 55 www. And also the future possibility of the bank will be identified.5 Strengths Weakness Internal capabilities that may help a bank Internal limitations than may to Reach its objective interfere a company’s ability to active its objective Opportunities Threats External factors that the company may Current and emerging exploit to its advantage external factors that may be challenged for the company’s performance Helpful Harmful Achieving the Objective Achieving the Objective Explanation of SWOT Following the SWOT analysis procedure I have performed the analysis of IBBL this will show the present condition of the bank.com . Less importance in marketing Highest foreign remittance earner within the country. External Weakness Huge deposits collected but lower invested amount. of ATM booth. Failure in choosing investment opportunity. Close customer oriented service provider. Proper maintenance of Islamic Shari’ah Complete follower of Bangladesh Bank rules. Opportunities Threats 56 www. Highest deposit collector among all the conventional banks and Islamic banks. Highest no of branches across the country as a private oriented Islamic bank.com based . Highest amount spent in corporate social responsibility (CSR).6 Strength Pioneer of Islamic banking sector. Weak ATM services.SWOT Analysis of IBBL Attributes of the organization Internal Table-5.AssignmentPoint. Efficient manpower. and advertising activities. Continuous adoption modern services. Insufficient no. Islamic Shari’ah principles. In Bangladesh. authorities review the different aspects of the banks. Helpful Harmful Achieving the Objective Achieving the Objective 5. Adoption of more and smooth Ibanking services. rules competition & with services. The CAMEL ratings system is made up of five components: capital adequacy. since the early nineties. asset quality. 57 www. compliance with banking regulations and statutes and overall operating soundness.com .1 CAMELS Rating: CAMELS rating are the supervisory rating of the bank’s overall condition. management competence. of Govt. earnings. Possibility of expanding more ATM Greater booths and providing smooth ATM other foreign and local banks. CAMEL ratings generally assess overall soundness of the banks. and identify and/or predict different risk factors that may contribute to turn the bank into a problem or failed bank. To bring and ensure the healthy conditions of the banks or to check the ‘bank run’ originated from a failure of a single bank.3. law in banking.3 Maintenance of Rules and Restriction by IBBL 5.Attributes of the oooEnvironment Scope to increase investment in Implementation of strict diversified area.AssignmentPoint. and liquidity with the associated acronym. Opportunity to introduce most customer Lack oriented and mostly Islamic Shari’ah regulations regarding Islamic oriented product. the same 5 components of CAMEL have been used for evaluating the five crucial dimensions of a bank’s operations that reflect in a comprehensive fashion an institution’s financial condition. Scope to capture root level customers in village as a Muslim country. 5 percent inclusive of 5. Liquidity indicators measured as percentage of demand and time liabilities (excluding inter-bank items) of the banks indicate whether the banks have excess or shortfall in maintenance of liquidity requirements. availability of assets readily convertible into cash. The CAMELS rating components. SLR for the banks operating under the Islamic Shari’ah is 10. Though all features of CAMELS are not repugnant or contradictory to the Shari’ah stance. reliance on interest-sensitive funds. earnings 15%. management 25%.Recently. technical competence relative to structure of liabilities. it is presumed that this off-site supervision technique of central bank would make it a more effective tool in rating banks.com . liquidity 10% and sensitivity to market risk 10%. and access to inter-bank markets or other sources of cash. After inserting ‘S’ or ‘sensitivity to market risk’. there should be some separate provisions to make it conducive and proper to analyze 58 www. CAMELS rating system has been viewed in light of the principles and practices of Islamic banking.5. liquidity is assessed according to: volatility of deposits. The basic indicators of sound liquidity position are: deposits are readily available to meet the bank’s liquidity needs. Bangladesh Bank has upgraded the CAMEL into CAMELS effective from June.7 In the standard CAMELS framework. The CRR is to be kept with the Bangladesh Bank and the remainder as qualifying secured assets under the SLR. including lender-of-last-resort (LOLR) facilities at the central bank. either in cash or in government securities. conventional commercial banks’ deposits are subject to a statutory liquidity requirement (SLR) of 18.AssignmentPoint. compliance with SLR.5 percent cash reserve requirement (CRR). asset quality 20%. and easy access to money markets etc. 2006.5 percent. Till date. At present. assets are easily convertible into cash. usually taken into consideration by the monetary authorities have the following weights: capital adequacy 20%. Following is a description of the graduations of rating: Table. 5.39 25725.45 45646.27% 16. Credit risk and market risk both are involved with liquidity risk because potential loss due to probability of violation of commitment by an obligor increases the possibility of liquidity crisis and market risk factors like stock prices.3.AssignmentPoint. IBBL has adopted Basel Ι from the very first of establishment of this regulation in Bangladesh. 2006. foreign exchange rates. But in Bangladesh Basel Capital Accord (Basel Ι) was adopted from 1996.70 16172.8 In Million Year 2005 2006 2007 2008 2009 Required Reserve 10184.30 Maintaine d (%) 20.72 32784.58% 19.3 Basel ΙΙ: The revised Basel framework (Basel.com . Bangladesh has provided a policy & guideline for implementing Basel Accord ΙΙ by the year 2008.17% 20. But for BB restriction IBBL has adopted CAMELS rating procedure and it acquires strong position for many times where no supervisory response required.43% 21.65 Actual Reserve maintaine d 20546. and commodity prices 59 www. SLR Table-5. According to the following chart consistently statutory reserve is increasing as the amount of deposits is increasing day by day. The framework endorsed the adoption of capital allocation for operational risk in addition to market & credit risks and introduced comprehensive risk management practices by banks along with supervision and disclosure requirements.96 19771. IBBL always maintains significant amount of statutory reserve beyond the Bib’s requirements.88 23530.39 34405.2 Basel Ι: The Basel Accord Ι was published in 1988 and is being followed by banks long time. it should also assess the Shari’ah implementation status of the Islamic banks as well.the whole operation of the Islamic banks.25 12593. Subsequently the framework has revised up to June.3.ΙΙ) was finalized in June 2004 which is popularly known as Basel ΙΙ. interest rates. Definitely. Under this first Basel accord every bank must maintain minimum capital requirements.40% 5. This statutory reserve is included under core capital (Tier-1) according to the first Basel Accord. The Unit supervised the parallel run of Basel ΙΙ along with Basel Ι at IBBL from early 2009 and supervising full operation of Basel ΙΙ from 01 January.9 Year 2005 2006 2007 2008 2009 Bad and Loss amount to Total General Investment 2. In IBBL Basel ΙΙ is implemented by a unit which is headed by 15 members for implementation of New Capital Accord.affect the liquidity condition of the bank because when the interest rate of the deposit falls depositors try to withdraw money to invest in better investment opportunity.com . 2010. Then liquidity crisis may occur.4 60 www.35 % Chart-5. Bad and Loss amount to Total General Investment Table-5. In IBBL both the credit risks and market risks are very insignificant here because as the follower of Basel ΙΙ this bank faces low amount of default against its huge general investment what can be realized from the following data.98% 1.33% 1.AssignmentPoint.65% 1.39% 2. Chart-5. exchange rate risk and finally liquidity risk. 20% and 30% respectively. If the depositors withdraw money at 2%-6% from the bank within five consecutive days. Stress testing will be performed once in every 6 months. Four types of risks are measured here which are credit risk. monitoring the standard of service and also making sure of economic stability and fostering growth. then what will be the liquidity condition of the bank-this is considered through stress testing. market risk. Liquidity Shock: The ratio of liquid assets to liquid liabilities after a 10%.3. 20%. The stress test for liquidity risk evaluates the resilience of the banks towards the fall in liquid liabilities.com .4 Stress Testing: Bangladesh Bank executed stress testing about financial information for the first time of 48 commercial banks up to 30th June. Appropriate shocks will have to be absorbed to the liquid liabilities if the current liquidity position falls at the rate of 10%. The main objectives of performing stress testing are managing risky exposures and helping diversification of those.5 5. 2009. This is a form of testing the stability of a given entity and also to choose scenarios and put them in the valuation model.AssignmentPoint. The ratio “liquid assets to liquid liabilities” shall be calculated before and after the application of shocks by dividing the liquid assets with liquid liabilities. 30% fall in the later shall be calculated as: 61 www. 68 73287. 30% liquidity ratio also falls.9 105028. So if the liquid liabilities decrease.42% 58. the bank is going to face liquidity shock because investment disbursement in short term is not decreasing.93 180309.21 20034.10 Magnitude of Shock Year Liquidity Shock 10% 2009 20% 2008 30% 2009 2008 2009 2008 Liquid Assets 153887.14 200343.38% Here it can be proved that due to the fall of liquid liabilities consecutively by 10%.1 114277.41 Liquidity Ratio (%) 62.80% 47.07 139263. it is urgent to try to absorb the shock.Table-5.24 Liquid Liabilities 244292.43 40068.com .89% 63. 20%.92% Liquidity Ratio after shock (%) 58.31 134312.34 48858. 62 www.24 153887.99% 67.26 160274.24 153887.AssignmentPoint.31 134312.73 171004.14 200343.02 Revised Liquid Assets 129458.88 94243. Here this stress testing is based on IBBL where only data of 2008-2009 is taken into consideration.67 74209.41 244292.04 % 62.31 134312.99% 67. But IBBL is not at all in this position because of higher rate of maintaining cash in hand.37 75.99% 67.41 244292.56 80599.04 % 62. As a result significant amount of deposit collection must be increased or investment disbursement must be reduced.49 140240. If liquid liabilities fall in this way.64 60103.04 % Fall in Liquid Liabilities 24429.13% 52.04 Revised Liquid Liabilities 219862.14 200343. AssignmentPoint. Recommendations and Conclusion 63 www.com .Chapter Six Summary of Findings. IBBL is not attentive enough in marketing and advertisement in this competitive edge. From the above analysis we have seen that IBBL is maintaining a good liquidity position.AssignmentPoint. The periodic review program is comparatively not strong enough for which huge liquidity is kept as idle. It always maintains SLR and CRR above the requirement ratio.com . But in spite of IBBL has some short comings in the liquidity management. Also IBBL cannot take part in purchasing Treasury bill for lack of Islamic Money Market. 64 www.1 Findings of IBBL Regarding Liquidity Management Now IBBL is a leading bank in Islamic banking area in Bangladesh and we know that it was the pioneer of Islamic banking trend in Bangladesh. Now some problems are given below: As we know that IBBL maintains huge amount cash in hand which are kept as idle bank has failed to utilize proper investment opportunity.Summary of Findings. So it never faces any liquidity crisis. IBBL cannot utilize proper investment opportunity because of proper forecasting about investment. Recommendations and Conclusion 6. As Riba (interest) is prohibited IBBL cannot involve in inter bank transaction. AssignmentPoint.com . In Bangladesh there is no Islamic money market and other laws regarding banking sector. So IBBL needs to think about its alternative regarding liquidity management. As IBBL maintains huge amount of cash in hand it cannot utilize proper investment opportunity.2Recommendations: Islami Bank Bangladesh Ltd. To continue this dynamic expansion IBBL needs to adopt modern strategy in every banking department of cope with the competitive banking sector. Here some suggestions are given below what should be achieved to be more efficient in liquidity management. So IBBL should emphasize more on utilization of investment opportunity to increase it earning It should give more importance on research & development to launch new product to cope with increasing competition Board of Directors of IBBL should ensure the selection and appointment of qualified and competent management to administer the liquidity management function Board of Directors should review periodically. the liquidity management program Developing lines of communication to ensure the timely dissemination of the liquidity and funding policies and procedures to all individuals involved in the liquidity management and funding risk management process Monitoring economic and other operating conditions to forecast potential liquidity needs IBBL should emphasize on promotion of the image of Islamic bank as PLS banks 65 www. but at least once a year.6. has been able to establish its own presence with a continued expansion geared by increasing acceptance by the people. And at the same time it must be ensured that IBBL is following the Islamic rules and principles. AssignmentPoint. Throughout the report it is seen that liquidity management position is so strong and satisfactory. So IBBL can play a strong role here. That is holding customer confidence. As we know that this bank has the restriction of taking Riba (Interest). It should more careful about its investment opportunity.com . this bank can’t invest in T-bill and bond. Also CAMELS rating shows that this bank is performing in well manner. Its risk management department is acting in a well organized manner which can be realized from the strict maintenance of Basel ΙΙ. As a result IBBL achieves ST-1 rating from CRISL and it holds its performance from couple of years. This can increase its earning in a dynamic way because IBBL is the collector of highest deposit. For liquidity management perspective IBBL maintains huge SLR in excess of requirement. Through properly handling this section a large problem is solved.6. On this the image of the bank is highly correlated. Then lastly it can be said that though there are some limitations of the bank IBBL is trying to encourage socio economic uplift and financial services to the low income community particularly in the rural Ares. But IBBL should give more importance in adopting competitive strategy like IBanking and also in employee efficiency. Compared to any other banks IBBL is performing in liquidity management in ideal way. So following this IBBL as a specialized bank contributes a lot in the economy by fostering its growth from any other banks in our country.. Like others IBBL also gives emphasis on this section. If the employees are satisfied then the banks’ performance will be more spontaneous and smooth and consistent.3Conclusion: Finally it can be said that liquidity management is one of the most essential part of all banks. should consider to establish more accurate Islamic law and principles for the welfare of the economy which supports the Islamic Shari’ah. This bank also should give importance in marketing strategy. 66 www. So as a one of the most profitable bank Govt. AssignmentPoint.com .67 www.
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Report "Liquidity Management of Islami Bank Bangladesh Ltd"