Liquidity Management of Islami Bank Bangladesh Limited
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"ha#te$ !ne Int$odu%tion
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"ha#te$ !ne Int$odu%tion
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&.& Statement of the To#i%' Liquidity means the availability of funds, or assurance that funds will be available, to hand on cash outflow commitments. commitments. Managing liquidity is a fundamenta fundamentall component 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 emphasie emphasie on this. !""L is treated in different way from other conventional banks because of its lucrative contribution in economy. #or this, a planned way is necessary to manage the liquidity section. $ecent 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. !""L always tries to stand on a standard queue to provide satisfactory services to the customers. #rom this report it can be realied about the components of liquidity management and what are the present conditions of the compo componen nents ts from from year year %&&' %&&'(% (%&& &&) ) and and also also how how rule ruless and and regul regulat atio ions ns give given n by "angladesh "ank affect the liquidity policy of !""L is indicated here.
&.( !b)e%ti*es of the Study' *he first ob+ective of writing the report is fulfilling the partial requirements of the M"A program. !n this report, we have attempted to give an overview of Liquidity osition of !slami "ank "angladesh Limited in general. *he primary ob+ective of this report is to determine the origin of liquidity in "angladesh and in !""L Limited. And And *o make a bridge between the theories and and practices on banking operations
-ere are some ob+ectives for preparing the report. 1. 2. 3. 4. 5.
*o find out the components of liquidity statement !""L. *o know know the details about liquidity of !""L. *o analye the relation among a mong liquidity, loans and deposits. *o know know the condition between specialied speciali ed bank and !slamic bank. *o know know the impact of "angladesh "ank regarding liquidity management.
&.+ S%o#e of the Study' 3
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*his report provides some important evaluations and present scenario of !""L. -ere some points are given below •
/valuation of the different financial performance of !""L.
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resent condition of !""L in banking sector.
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0nowledge of diversified products and services.
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Liquidity position of !""L.
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Condition of !""L regarding "angladesh "ank rules.
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1ifferent problems and solutions regarding liquidity management.
&., Methodology' &.,.& "olle%tion of data'
rimary data are measurements observed and recorded as part of an original study. 2hen the data required for a particular study can be found neither in the internal records of the enterprise, nor in published sources, it may become necessary to collect original data. $ima$y -ata
#or the completion of this report, the primary sources of data are( •
1iscussion with officials of the !""L
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/3perts’ opinion and comments
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4bservations of the officials
Se%onda$y data'
*he secondary data, which was used for this research, were the books, working paper, annual report, brochures, and other secondary data which was collected from the web site and also from the !slami "ank *raining and $esearch Association. &. LIMITATI!NS !/ T0E ST1-2'
*here are some limitations in our study. 2e faced some problems during the study, which we are mentioning them as below( &. La%k of time'
*he time period of this study is very short. 5o ! could not go in depth of the study. Most of the times, the officials were busy and were not able to give me much time. (. Insuffi%ient data'
5ome desired information could not be collected due to confidentiality of business. +. La%k of monito$y su##o$t' 4
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#ew officers sometime were busy in their +ob. 5ometime they didn’t want to supervise us out of their official work. ,. !the$ limitations'
As we are newcomers, there is a lack of previous e3perience in this concern. And many practical matters have been written from our own observation that may vary from person to person.
"ha#te$ T3o The !$gani4ation5 An !*e$*ie3
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The !$gani4ation !$gani4ation (.& About Bank As a Muslim country people of "angladesh are deeply committed to !slamic way of life and follow the -oly 6ur7an and the 5unnah. *his "ank is the first of its kind in 5outheast Asia. !t is committed to conduct all banking and investment activities on the basis of interest(free profit(loss sharing system. !n doing so, it has unveiled a new horion and ushered in a new silver lining of hope towards materialiing a long cherished dream of the people people of "angla "anglades desh h for doing doing their their bankin banking g transact transaction ionss in line line with with what what is prescribed by !slam. 2ith the active co(operation and participation of !slamic 1eve 1evelo lopm pmen entt "ank "ank 8!1" 8!1"99 and and some some othe otherr !slam !slamic ic bank banks, s, finan financia ciall inst instit itut utio ions ns,, government bodies and eminent personalities of the Middle /ast and the :ulf countries, !slami "ank "angladesh Limited has by now earned the unique position of a leading private commercial bank in "angladesh.
Corporate !nformation 8As on ;une <&, %&=&9 1ate of !ncorporation
=
<
!nauguration of =st "ranch 8Local office, 1haka9
<&th March =)><
#ormal !nauguration
=%th August =)><
5hare of Capital Local 5hareholders
?=.@@
#oreign 5hareholders
'>.%<
Authoried Capital
*k. =&,&&&.&& million
aid(up Capital
*k. @,?=<.&& million
1eposits
*k. %B',=)<.&& million
!nvestments 8including !nvestment in 5hares9
*k. %'',=@>.&& million
#oreign /3change "usiness
*k. %@@,@<).&& million
umber of "ranches "ranches
%=%
umber of 5M/ 5M/ 5ervice Centers Centers
%&
umber of 5hareholders 5hareholders
'%=B?
Manpower
)'>>
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(.( 6ision' 4ur vision is to always strive to achieve superior financial performance, be considered a leading !slamic "ank by reputation and performance. •
4ur goal is to establish and maintain the modern banking techniques, to ensure the soundness and development of the financial system based on !slamic principles and to become the strong and efficient organiation with highly highly motivated professionals, working for the benefit of people, based upon accountability, transparency and integrity in order to ensure stability of financial systems.
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2e will try to encourage savings in the form of direct investment.
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2e will also try to encourage investment particularly in pro+ects which are more to lead to higher employment. e mployment.
(.+ Mission' *o establish establish !slamic !slamic banking banking through the introductio introduction n of a welfare oriented banking banking system and also ensure equity and +ustice in the field of all economic activities, achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors s ectors and less le ss developed areas a reas of the country. *o *o encourage socio economic uplift and financial services to the low(income community particularly in the rural areas. 8
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(., !b)e%ti*es of IBBL •
*o conduct conduct interest(free interest(fr ee banking.
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*o establish participatory banking instead of banking on debtor(creditor relationship.
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*o invest on profit and risk r isk sharing basis.
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*o establish a welfare(oriented welfa re(oriented banking system.
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*o contribute towards balanced growth and development of the country through investment operations particularly in the less developed areas.
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*o contribute in achieving the ultimate goal of !slamic economic system
(. The Boa$d of -i$e%to$s' *he "oard of 1irectors 1irectors consists of =? non e3ecutive members including including = !ndependen !ndependentt 1irector. *he number of "oard of members is within the ma3imum limit set by the central bank. *he "oard is composed of e3perienced members with diverse professional e3periences such as business, administration, banking D finance, accounting, general management, diplomacy, government services, engineering and fund management which made the "oard very efficient and balanced in deciding and directing on the various issues of the bank. *he "oard members are independent who e3press their views and opinions free from any influence. *he 1irectors are also independent from management, businessEother relationship re lationship of the bank that could materially interfere interf ere the activities of the bank. *here is also a clear demarcation of duties and responsibilities between the "oard and managem management. ent. 2hile the "oard "oard is respons responsibl iblee for formul formulatin ating g the board board policy policy framework within which the bank is operating, the management is accountable for the e3ecution of the policies and attainment of the bank’s ob+ectives. *he "oard e3ercises independent oversight on the affairs of management. 9
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(.7 "ommittees' *he "oard has two standing committees vi. /3ecutive Committee and Audit Committee. *hese Committees operate within clear terms of reference.
(.7.& The E8e%uti*e "ommittee *he e3ecutive Committee consists of B members and entrusted with the task of policy making and taking important and strategic decisions as authoried by the "oard within the norms set by the "angladesh "ank.
(.7.( The Audit "ommittee *he Audit Committee formed by the "oard of 1irectors as per instruction of "angladesh "ank consists of < members and is entrusted with, among others, the task of e3ercising their duties D responsibilities with regard to •
!nternal Control
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1isclosure of #inancial $eport
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!nternal Audit
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/3ternal Audit and
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Compliance of e3isting laws and regulations
(.7.+ The Management "ommittee *he Management Committee of the bank comprises of =@ top level e3ecutives, headed by the Managing 1irector 8C/49 of the bank. *he Committee with financial, administrative and business discretionary power delegated by the "oard is mainly responsible for implementation of the policies and guidelines approved by the "oard. *he Management Committee thoroughly scrutinies the issues before placing to the /3ecutive CommitteeE"oard. *he Management Committee thoroughly evaluates the performance of the bank, takes strategic action plan to achieve various targets of the bank set by the "oard of 1irectors.
(.7., Asset5Liability "ommittee 9AL"!: *he asset liability management 8ALC49 of !""L is comprised of => members from the top management which meets once in a month to review the liquidity position of the bank, maturity grouping of assets and liabilities, 1eposits and !nvestment pricing and liquidity contingency plan in order to manage the balance sheet risk in a better way. *he ALC4 is entrusted with the responsibility of ensuring the bank’s sufficient liquidity at all 10
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times to meet its obligations when becomes due without compromising the earning potential of the bank. !n every ALC4 meeting, the Committee reviews actions taken in previous ALC4 meeting, economic and market status and outlook, liquidity risk related to balance sheet, profit rate structure etc. 5pecial ALC4 meeting is arranged as and when any contingent situation arises.
(.; Sha$i $odu%ts and Se$*i%es Lo%al %u$$en%y -e#osit A%%ounts
=. Al(2adeeah Current Account. %. Mudaraba 5avings Account. <. Mudaraba *erm 1eposit Account. ?. Mudaraba 5pecial otice Account. '. Mudaraba 5pecial 5avings 8ension9 Account. B. Mudaraba -a++ 5avings Account. @. Mudaraba 5avings "ond. >. Mudaraba 2aqf Cash 1eposit Account. ). Mudaraba Monthly rofit 1eposit Account. =&. Mudaraba Muhar 5avings 1eposit Account. /o$eign "u$$en%y -e#osit A%%ounts 1. Mudaraba Foreign Currency Deposit.
%. #oreign Currency 1eposit 8F51, /F$4, :"9. <. #C 1eposit /$6 . In*estment Modes
=. %. <. ?. '. B. @. >.
"ai(Mua++al. "ai(Murabaha. -ire urchase under 5hirkatul Melk. Mudarabah. Musharaka. Musharaka 1ocumentary "ills 8M1"9. "ai(5alam. "ai(As(5arf.
Welfa$e !$iented S#e%ial In*estment S%hemes
=. -ousehold 1urables 5cheme. %. -ousing !nvestment 5cheme. <. $eal /state !nvestment 5cheme. <. *ransport !nvestment 5cheme. ?. Car !nvestment 5cheme. '. !nvestment 5cheme for 1octors. B. 5mall "usiness !nvestment 5cheme. @. Agriculture !mplements !nvestment 5cheme. >. $ural 1evelopment 5cheme. ). Micro !ndustries !nvestment 5cheme. =&. 2omen /ntrepreneurs !nvestment 5cheme. ==. Mirpur 5ilk 2eavers !nvestment 5cheme. 12
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=%. /quity and /ntrepreneurship #und of "angladesh "ank. Se%to$s unde$ SME In*estments
=. Manufacturing. %. *rading. <. 5ervice. ATM Se$*i%es
=. Cas !itdra"a#. %. #und *ransfer. <. Mini 5tatement of Accounts. ?. "alance /nquiry. '. ayment of Ftility "ills 8/lectricity, 2ater, hone and :as etc9.
!the$ Banking 6alue Added Se$*i%es
=. *he "ank issues ayment 4rders. %. *he "ank co(operates to remit money from one place to another on the basis of commission within the country through 1emand 1raft 8119 and *elegraphic *ransfer 8**9. <. A*M 5ervice has been introduced in selected "ranches. ?. Locker 5ervice is available in selected "ranches to preserve valuable documents and materials. '. *he "ank gives counseling on different issues. B. 4nline "anking. @. 5M5 "anking. >. 52!#*. ). $/F*/$, etc.
/o$eign ?emittan%e
*here are =B 8si3teen9 #oreign $epresentatives of !""L in ' 8five9 Countries to serve e3patriate customers to encourage and enhance #oreign $emittance. T$easu$y A%ti*ities
1ealing $oom 4peration. S#e%ial Se$*i%es th$ough Islami Bank /oundation 13
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=. !slami "ank -ospital. %. !slami "ank Medical College. <. !slami "ank Community -ospital. ?. !slami "ank ursing *raining !nstitute. '. !slami "ank !nstitute of -ealth *echnology. B. !slami "ank -omeopathic Clinic. @. Monorom !slami "ank Crafts D #ashion. >. !slami "ank 5ervice Centre. ). !slami "ank !nstitute of *echnology. =&. !slami "ank !nternational 5chool and College. ==. !slami "ank Model 5chool. =%. !slami "ank Mohila Madrasah. =<. "angladesh 5angskritic 0endra. =?. 1istressed 2omen $ehabilitation Centre.
T$aining Se$*i%es
=. !nternational *raining to #oreigners on !slamic "anking. %. ational *raining to others on !slamic "anking. <. !slami "anking 1iploma.
(.&@ IBBL
%==)
'.
=)))
%=&&
B.
%&&&
=)))
@.
%&&=
=)&% 14
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%&&%
=@@=
).
%&&<
=@''
=&.
%&&?
='>=
==.
%&&'
=B'>
=%.
%&&B
=B%&
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Source: The Bankers Almanac: World Ranking, 2008, Reed Business Information, U!
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"ha#te$ Th$ee "on%e#tual Analysis
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"on%e#tual Analysis +.& What is Liquidity
Liquidity is the availability of funds, or assurance that funds will be available, to honor all cash outflow commitments 8both on( and off(balance sheet9 as they fall due. *hese commitments are generally met through cash inflows, supplemented by assets readily convertible to cash or through the institution’s capacity to borrow. *he risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off( balance sheet items are mismatched.
+.( Su##ly and -emand of liquidity in Islami% Banks *he following sources of liquidity and supply come together to determine each bank’s net liquidity position at any moment of time.
Su##ly and -emand of liquidity in Islami% Banks Table5+.& Su##lies of liquidity %ome f$om
Customers deposit
-emand fo$ Banks liquidity a$ise f$om
Customers 1eposit withdrawal
Mudaraba 1eposits
Fses for C$$ D 5L$
Al 2adiah deposit
!nvestment to Customers
5undry deposit
"ai Murabaha
"ills payable
"ai Mu++al
Contingent 1eposits
-5M
Musharaka
8security ,$1,$*9 $evenues from the sale of on deposit services
Customers !nvestmentEloan
"ai us 5arf
repayments 5ale of "anks asset
6uard G -asana
#rom Money Market 8 through
Mudaraba
":!!"9 Capital D reserve
"ai 5alam
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"ai istisna !+ara $epayment of on deposit borrowings
4perating e3penses D ta3
incurred in producing D selling services ayment of 1ividends
*o Money Market8*hrough ":!!"9
+.+ Im#o$tan%e of liquidity management Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. 5ound liquidity management involves prudently managing assets and liabilities 8on( and off(balance sheet9, both as to cash flow and concentration, to ensure that cash inflows have an appropriate relationship to approaching cash outflows. *his needs to be supported by a process of liquidity planning which assesses potential future liquidity needs, taking into account changes in economic, regulatory or other operating conditions. 5uch planning involves identifying known, e3pected and potential cash outflows and weighing alternative assetEliability management strategies to ensure that adequate cash inflows will be available to the institution to meet these needs.
+., !b)e%ti*es' *he ob+ectives of liquidity management are •
-onoring all cash outflow commitments 8both on( and off(balance sheet9 on an ongoing, daily basis
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Maintaining public confidence on the bank
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Avoiding raising funds at market premiums or through the forced sale of assetsH and
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5atisfying statutory liquidity and statutory reserve requirements
+. Sound $a%ti%es fo$ Managing Liquidity in Banking *he ability to fund increases in assets and meet obligations as they become due ( is crucial to the ongoing viability of any banking organiation. "ut the importance of liquidity transcends the individual bank since a liquidity shortfall at a single organiation can have systemic repercussions. *he management of liquidity is therefore among the 18
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most important activities conducted at banks. 4ver time, there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. $ecent 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. !n light of these developments, there are some necessary practices for managing liquidity in banks which are indicated below •
1eveloping a structure for managing liquidity
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Measuring and monitoring net funding requirements
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Managing market access
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Contingency planning
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#oreign currency liquidity management
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!nternal controls for liquidity risk management
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$ole of public disclosure in improving liquidity
+.7 $in%i#les fo$ Sound Liquidity ?isk Management and Su#e$*ision *he principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank(wide risk management process. *he primary ob+ective of this guidance is to raise banks’ resilience to liquidity stress. Among other things, the principles seek to raise standards in the following areas •
:overnance and the articulation of a firm(wide liquidity risk tolerance.
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Liquidity risk measurement, including the capture of off(balance sheet e3posures, securitiation activities, and other contingent liquidity risks that were not well managed during the financial market turmoil.
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Aligning the risk(taking incentives of individual business units with the liquidity risk e3posures their activities create for the bank.
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5tress tests that cover a variety of institution(specific and market(wide scenarios, with a link to the development of effective contingency funding plans.
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5trong management of intraday liquidity risks and collateral positions.
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Maintenance of a robust cushion of unencumbered, high quality liquid assets to be in a position to survive protracted periods of liquidity stress.
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$egular public disclosures, both quantitative and qualitative, of a bank7s liquidity risk profile and management.
*he principles also strengthen e3pectations about the role of supervisors, including the need to intervene in a timely manner to address deficiencies and the importance of communication with other supervisors and public authorities, both within and across national borders.
+.; ?!LE !/ T0E B!A?- !/ -I?E"T!?S *he "oard of 1irectors of each institution is ultimately responsible for the institution’s liquidity. !n discharging this responsibility, a "oard of 1irectors usually charges management with developing liquidity and funding policies for the board’s approval and developing and implementing procedures to measure, manage and control liquidity within these policies. At a minimum, a "oard of 1irectors should •
review and approve liquidity and funding policies based on recommendations by the institution’s management
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review periodically, but at least once a year, the liquidity management program
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ensure that an internal inspectionEaudit function reviews the liquidity and funding operations to ensure that the institution’s policies and procedures are appropriate and are being adhered to
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ensure the selection and appointment of qualified and competent management to administer the liquidity management function
+.= ?!LE !/ MANAGEMENT *he management of each institution is responsible for managing and controlling the day( to(day liquidity of the institution according to the liquidity management program. Although specific liquidity management responsibilities will vary from one institution to another, management should be responsible for
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1eveloping and recommending liquidity and funding policies for approval by the "oard of 1irectors.
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!mplementing the liquidity and funding policies.
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/nsuring that liquidity is managed and controlled within the liquidity management and funding management program.
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/nsuring the development and implementation of appropriate reporting systems with respect to the content, format and frequency of information concerning the institution’s liquidity position, in order to permit the effective analysis and the sound and prudent management and control of e3isting and potential liquidity needs.
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/stablishing and utiliing a method for accurately measuring the institution’s current and pro+ected future liquidity.
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Monitoring economic and other operating conditions to forecast potential liquidity needs.
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/nsuring that an internal inspectionEaudit function reviews and assesses the liquidity management program.
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1eveloping 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.
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$eporting comprehensively on the liquidity management program to the "oard of 1irectors at least once a year.
+.> The Liquidity Management $o%ess /ffective liquidity management requires three(steps in which treasury identifies, manages and optimies liquidity. *hese steps are interdependent, each requiring the successful implementation of the other two to optimally manage liquidity.
Identifying liquidity is the foundation from which the entire liquidity management process depends. !t involves understanding the balances and positions of the institution on 21
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an enterprise(wide level. *his requires the ability to access and gather information across the institution7s many lines of business, currencies, accounts and often multiple systems. !dentifying liquidity is primarily a function of data gathering, and does not include the actual movement or usage of funds.
Managing liquidity within a bank7s corporate treasury involves using the identified liquidity to support the bank7s revenue generating activities. *his may include consolidating funds, managing the release of funds to ma3imie their use, and tasks that Ifree upI lower(costing funds for lending or investment purposes to ma3imie their value to the institution.
!#timi4ing liquidity is an ongoing process with a focus on ma3imiing the value of the institution7s funds. As the strategic aspect of liquidity management, optimiing liquidity balances requires a strong and detailed understanding of the financial institution7s liquidity positions across all currencies, accounts, business lines and counterparties. 2ith this information, the bank7s treasury is able to map the strategic aspects of the institution into the liquidity management process.
Limited time and $esou$%es a*ailability is the biggest challenge in the liquidity management process to treasury. Although treasury groups are staffed with very capable personnel, a large amount of their time is spent on the task(based function of identifying liquidity instead of on the strategic elements necessary to optimie balances. *his results in the entire liquidity management process being less efficient and affects the institution7s bottom line.
+.&@ Guidelines of Liquidity "ontingen%y lans /ither within its Liquidity Management olicy 8 LM9 or separately, a bank is e3pected to have a liquidity Contingency lan 8 L"9 covering the eventuality of it e3periencing a liquidity crisis. *he LC should be designed to ensure that adequate liquidity is achieved at such times and should contain a number of key elements •
*he identification and definition of what constitutes a liquidity crisis.
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/arly warning indicators, including the impact of e3ternal events not directly related to the financial condition of the bank.
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Actions to be taken. 22
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$oles and responsibilities.
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Management coordination and escalation of issues.
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Channels of communication.
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Communication with the Commission.
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5cenario planning and testing of the plan .
+.&& Im#a%t of "ent$al Bank ?egulation "angladesh "ank has the specific guidelines regarding statutory reserve which ensures the minimum liquidity position of the bank and also safeguards the depositors. /very !slamic bank has to maintain '.' C$$ with "" and =&.' 5L$. And every scheduled conventional bank must have to keep at least =>.' statutory liquidity reserve. Fnder this '.'& must be kept as C$$ and rest of the =< must be kept as L$$. !""L always follows "" regulations strictly. 2e have already observed that !""L maintains e3cess amount 5L$ and C$$ beyond the actual requirement. -ere the guideline for conducting the !slamic banks is given below(
+.&&.& Guidelines fo$ "ondu%ting Islami% Banking' No*embe$ (@@> $ega$ding Maintenan%e of "??SL?C Liquidity management
by
Bangladesh Bank Se%tion 6I Maintenan%e of "??SL?
All !slamic "anking Companies shall maintain Cash $eserve $atio 8C$$9 and 5tatutory Liquidity $atio 85L$9 as per rates prescribed by "angladesh "ank from time to time. /very commercial "ank having !slamic bank branches shall maintain 5L$EC$$ for its !slamic branches at the same rate as prescribed for the !slamic banks and shall, for the purpose, maintain a separate Current Account for the !slamic branches with "angladesh "ank.
Add$essing of liquidity %$isis and utili4ation of su$#lus fund of the Islami% Banks'
!n case of liquidity surplus and crisis the banks can take recourse to the following 23
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=. *he e3cess liquidity of the !slamic banksE !slamic branches of conventional 5cheduled banks may be invested in the J"angladesh :overnment !slamic !nvestment "ond’ 8!slamic "ond introduced by the :overnment9. !n the same way, !slamic banksEbranches facing liquidity crisis can tide over the crisis by availing of investment from !slamic "ond fund as per the prescribed rules.
%. !n case !slamic banksEbranches have surplusE enough investment in the !slamic !nvestment "ond and subsequently faces liquidity crisis then the bank E branch may overcome the crisis by availing of investment facilities from !slamic "ond #und against lien of their over purchased !slamic "onds. *o meet the crisis, $/4 system may also be introduced for the !slamic "onds.
<. *he !slamic banksEbranches having no surplus investment in 7"angladesh :ovt. !slamic !nvestment "ond’ at the time of their liquidity crisis, if arises, may availed funds from "angladesh "ank at a provisional rate on profit on its respective Mudaraba 5hort otice 1eposit Accounts which will be ad+usted after finaliation of Accounts and rate of profit of the concerned !slamic banksEbranches. "ut till funds generated from sell of !slamic !nvestment "onds remain available for investment such financial support may not be available from "angladesh "ank.
?. *he !slamic banksEbranches may openE maintain Mudaraba 51 accounts with each other and can meet liquidity crisis by receiving deposits in the Mudaraba 51 account at M51 rate from those having surplus liquidity.
'. *o meet the liquidity crisis, if any, of the !slamic branches of the conventional commercial bank fund may be collected from sources which follow !slamic 5hari’ah.
+.&&.( Asset Liability Management oli%y Asset Liability Management 8ALM9 is an integral part of "ank ManagementH and so, it is essential to have a structured and systematic process for manage the "alance 5heet. "anks must have a committee comprising of the senior management of the bank to make important decisions related to the "alance 5heet of the "ank. *he committee, typically 24
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called the Asset Liability Committee 8ALC49, should meet at least once every month to analysis, review and formulate strategy to manage the balance sheet.
!?GANISATI!NAL ST?1"T1?E !/ ALM *he responsibility of Asset liability Management is on the Treasur" #e$artment of the bank. 5pecifically, the Asset liability Management 8ALM9 desk of the *reasury 1epartment manages the balance sheet. *he results of balance sheet analysis along with recommendation is placed in the ALC4 meeting by the *reasurer where important decisions are made to minimie risk and ma3imie returns. *ypically, the organiational structure looks like the following
"ha$t55+.&
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*he key roles and responsibilities of the ALM 1esk &: *o assume overall responsibilities of Money Market activities. (: *o manage liquidity and interest rate risk of the bank. +: *o 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. ,: Fnderstanding of the market dynamics i.e competition, potential target markets etc. : rovide inputs to the *reasurer regarding market views and update the balance sheet movement. 7: 1eal within the dealer’s authoried limit.
?!"ESS *he bank’s asset liability management is monitored through ALC4. *he information flow in the ALC4 can be diagramed as below "ha$t5+.(
Liquidity Test fo$ "ontingen%ies *he ma+or risk a bank runs is liquidity risk. Fnder any circumstances a bank has to honor its commitments. As a result, it has to make sure that enough liquidity is available to meet fund requirements in situations like liquidity crisis in the market, policy changes by central bank, a name problem of the bank etc. 5o, a bank’s balance sheet should have enough liquid assets for meeting contingencies. Liquid assets can be as follows $eserve Assets.
Cash in *ills. 26
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5pecific :overnment 5ecurities.
#oreign Currency in open position.
5pecific #1$s.
A liquidity contingency plan should be in place to ensure a bank is prepared to combat any crisis situation. #or the !slami "ank "angladesh Ltd. these assets are maintained according to !slamic 5hari’ah. *he instruments involved with inter est are banned here like *(bill, general bond.
"ha#te$ /ou$ LID1I-IT2 MANAGEMENT !/ IBBL
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LID1I-IT2 MANAGEMENT !/ IBBL ,.& Liquidity Management of IBBL
Liquidity management is the function of treasury department. *his is the first priority of this department. Fnder this, this bank has to deal with sources of fund and how it will be implemented in the appropriate field. *he bank has to appropriately manage maturity of both asset and liability. !t is so important for a bank because if any liquidity crisis occurs beyond the statutory reserve and other liquidity sources, bank will face disastrous consequence like bank run which reduces the confidence of the client and this ultimately reduces the goodwill of the bank. 5o it is so crucial for the bank. 4bviously !""L always is in a strong position in maintaining customer confidence though large collection of deposit and investment. Local 4ffice acts as head office of the bank where #A1 8#inancial Administration 1ivision9 is considered as a branch though it is situated in the local office. *his #A1 operates the K#eeding branch which is responsible for maintenance of cash requirements, distribution and management among the branches across the country. *here are mainly two K#eeding "ranch in "angladesh which are located in Moti+heel, 1haka and Agra bad, Chittagong. "angladesh "ank owns ) branches across the countries which are located in each district and "ogura and these are acted as K#eeding "ranch for the absence of local office. !f there are no branches of "", then 5onali "ank acted as the K#eeding "ranch. 5o in this way !""L maintains the cash requirements of its branches across the country. !n !""L liquidity management means having •
Ability of bank to meet maturating liability.
•
Ability of the bank to attract deposit, meets its commitments.
•
Ability of matching the maturity of assets D liabilities daily .
•
Coping with any short term pressures.
•
*o meet liquidity needs and obligations to ensure the smooth running of business.
•
#orecasting cash need and providing for these needs in the most cost(effective way.
•
$educes the adverse situation developing in the Market. 28
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,.( "$edit ?ating of the Bank Credit $ating !nformation and 5ervices Ltd.(C$!5L was engaged by the bank for the purpose of rating the bank since %&&%. According to "" guidelines credit rating became mandatory since ;anuary, %&&@. C$!5L submitted its report on the financial years %&&%, %&&<, %&&?, %&&', %&&B, %&&@ and also %&&> and assigned A 9Adequate Safety: for long term rating scale for %&&% and %&&< and upgraded the same to AA( for %&&? D %&&' and further upgraded the rating to AA 90igh Safety: in %&&B, %&&@, %&&>. #inancial institutions rated in this category are ad+udged to be high credit quality. *his level of rating indicates a corporate entity with a sound credit profile And without significant problems. $isks are modest and may vary slightly from time to time because of economic conditions.
C$!5L assigned 5*(% 8-igh :rade9 for short term rating scale for %&&% and %&&< and upgraded to ST5& 90ighest G$ade: for %&&?, %&&', %&&B, %&&@ and %&&>. #inancial institutions rated in this category means having highest certainty of timely payment. 5hort Gterm Liquidity including internal fund generation is very strong and access to alternative sources of funds is outstanding. 5afety is almost like risk free :overnment short term obligations.
"ha$t5,.&
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,.+ Liquidity ?isk 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. •
Causes of Liquidity $isk Liquidity 5hortage(*otal 1emand for Liquidity total supply of liquidity. !mplications of liquidity deficit. 4ffering higher rate of profit to deposits. 5hortage of financial resources to invest against commitments. Loss of competitiveness.
Liquidity surplus(*otal 5upply of liquidity total demand for Liquidity !mplications of liquidity surplus. Fnderutiliation of financial resources. Lower income and higher cost . loss of competitiveness.
,., Why fa%esou$%es of liquidity #$oblem Maturity mismatch "ank takes large amount of short term deposit and then make
invest in long(term 8maturity mismatch9.*he problem related to maturity mismatch situation is that bank hold an unusually high proportion of liability sub+ect to immediate payment. 5ensitivity to rate change 2hen rate of profit by other banks on deposits riseE
Change of rofit rate of deposit. Loss of ublic Confidence. Fnanticipated change in cost of capital. Abnormal behavior of financial Market.
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!ncorrect +udgments and complacency. Conversion of on(funded based limit into funded based. 5evere deterioration of assets quality.
,. Fey Issues in liquidity management in Islami% Banking
1ifferent 1ifferent shari’ah shari’ah interpretation interpretation o o !slamic !slamic Money Money Market Market Absence Absence of of !slamic !slamic secondary secondary market market 5low 5low development development in in !slamic !slamic financial financial instruments instruments 5mall 5mall no. no. of of participants participants
,.7 "om#onents of Liquidity Statement' 5ome of the ma+or liquid assets what !""L maintains are cash in hand and balances with other banks in current accounts, statutory cash reserve with the "angladesh "ank, money at call and short notice. -ere are the clarifications of the above components.
,.7.& Asset "ash in 0and'
*he most liquid asset of a bank is cash in hand which is known as first line defense. *he demand of customers is immediately met by the bank with the cash balances with itself. *he banker has to be very cautious, prudent and far(sighted in determining the quantum of cash to be maintained. !n case he keeps cash balances much above his actual needs, he 31
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loses interest on that e3cess portion. !f the cash reserves fall short of its requirements, the bank may find in an embarrassing position. -ence determination of the adequate sie of cash balances is an important task faced by a bank. !""L is also facing this situation. *he amount of cash in hand is increasing day by day because of increasing amount of deposits with this bank. -ere the amount of cash from the year %&&'(&) is given below
"ash in 0and n Mi##ion
Table5,.&
Near Amount of %ash
(@@
=%>'.'B
(@@7
=?=&.='
(@@;
(@@=
(@@>
%)&@.=?
<=&@.&. @@
"ha$t5,.(
"ash ?ese$*e ?equi$ement 9"??:' .@ Cash $eserve $atio is calculated and maintained as per section %' D << of the bank companies Act =))=. ' of total deposits are kept in "angladesh "ank which varies with the deposits. !n case of crisis with cash in hand the bank goes to the central bank to meet the liquidity crisis. 2ith effect from 4ctober &=, %&&' C$$ is O '.&& of total *ime D 1emand Liabilities daily on bi(weekly average basisH but C$$ position should not be less 32
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than ?.'& in any day as per "$1 Circular o.&= dated =% ;anuary, %&&). As per guidelines given by "angladesh "ank !""L maintained C$$ minimum O '.&& daily on bi(weekly average basis D C$$ was not less than ?.'& in any day throughout the year. *he amount of C$$ is continuously increasing because of increasing amount of deposit. ow the C$$ becomes '.'. As we know that C$$ is dependent on the deposit collection. ow a chart is given from %&&'(&) about balance with "angladesh "ank
C$$
Table5,.(
n Mi##ion
Near
(@@
(@@7
(@@;
(@@=
(@@>
$equired Amount 8'9
'&)%.=<
B%)B.>'
>&>B.?>
)>>'.)?
==@B'.<%
=?)%%.@&
%&<=).?'
%=&>>.>?
<==%B.=B
Actual Amount held with "angladesh "ank
))@).)>
5urplus E 81eficit9
)><&.'@
=?&%%.')
=>)<.'&
==%&%.>)
=)<
Maintained 89
=?.B'
=B.=<
B.=@
=&.B@
=<.%<
"ha$t ,.+
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Statuto$y Liquidity ?equi$ement 9SL?:' &@.@ 5L$ of the "ank is =&.'& as like as other !slamic "anks as per "angladesh "ank Letter o. "C1 89 @?? 8%<9E ' dated ;anuary &<, =)>@. -ere the components of 5tatutory Liquidity $atio 85L$9 are cash in hand including #oreign Currency, balance with "angladesh "ank D its Agent "ank, investment in 5hares of "angladesh 5hipping Corporation and "angladesh :overnment !slamic !nvestment "ond. *he "ank maintains following 5L$ requirement throughout the year.
SL? Table5 ,.+
n Mi##ion
Near
(@@
(@@7
(@@;
(@@=
(@@>
$equired $eserve
=&=>?.%'
=%')<.@&
=B=@%.)B
=)@@=.>>
%<'<&.B'
Actual $eserve maintained
%&'?B.<)
%'@%'.<)
?.?'
?'B?B.<&
5urplus E 81eficit9
=&%<%.@B
=<&=%.'@
%%=='.BB
Maintained 89
%&.=@
%&.?<
%=.%@
=B.'>
=).?&
"ha$t5,.,
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Balan%e 3ith !the$ Banks'
"esides maintaining the statutory cash reserve with the "angladesh "ank, !""L also keeps its cash in other banks to meet up the liquidity crisis. -ere cash is kept in different forms which are given below Table5,.,
Balan%e 3ith !the$ Banks
n Mi##ion
Near
(@@
(@@7
(@@;
(@@=
(@@>
!n Current Account
%=@.'@
??%.==
=&B).&@
=%?%.)=
)?).<@
!n Mudaraba 5avings D M*1$ Account with 4ther !slamic "anks E #inancial !nstitutions
=&<%.&<
<=@.%=
@'.>%
?)&).%=
Sub Total
=%?).B&
@').<%
%<'<.>'
=<=>.@<
'>'>.'>
4utside "angladesh
'%'.@%
'B).>=
=B'>.?@
?<&?.?'
=>=).@)
G$and Total
=@@'.<%
=<%).=<
?&=%.<%
'B%<.=>
@B@>.<@
=%>?.@@
n Mi##ion
"ha$t5,.
35
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"ha$t5,.7
In*estments in Sha$es H Se%u$ities'
*his is another type of liquid asset that can be used to meet up the liquidity crisis. -ere the investments in shares and securities of %&&'(%&&) are given below
In*estments in Sha$es H Se%u$ities Table5,. Near In*estments in Sha$es H Se%u$ities
n Mi##ion
(@@
<'
<''@.@B
%&
=<%?=).?&
=BB<%'.%>
%&&
$o*ision and !the$ Liabilities
B>>'.=)
@>%B.=>
=&=)'.@<
= ='B?.)?
=&@<).=)
"ha$t5,.&(
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"ha$t5,.&+
"ha$t5,.&,
Liquidity osition of IBBL 9At a Glan%e:
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Table5,.= Near
%&&'
%&&B
%&&@
%&&>
%&&)
5L$ Maintained 89
%&.=@
%&.?<
%=.%@
=B.'>
=).?&
C$$ Maintained 89
=?.B'
=B.=<
B.=@
=&.B@
=<.%<
This a%tual SL? and "?? #e$%entages $emind us ho3 st$ong #osition of IBBL in %ase of liquidity management. "ha$t5,.&
,.;Assessing H Managing Liquidity of IBBL ,.;.&. Sou$%es H uses of funds basis'
Net liquidity/und osition'
!""L prepares daily position of funds considering total deposits, total !nvestments, investment in shares D approved securities, "alance with "angladesh "ank, C$$, 5L$, "alance with 5onali "ank as an agent of "angladesh "ank, Cash in tills, "alance in #C clearing AECs, 1eposits with others "anks 85hort D term 1eposit9 etc to work out net surplusEshortage of fund on daily basis to assess the liquidity E!nvest able funds of the "ank. All this components are described above.
Matu$ity $ofile Mismat%h 42
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A key issue that !""L needs to focus on is the maturity of its assets and liabilities in different tenors. A typical strategy of a bank to generate revenue is to run mismatch, i.e. borrowEtakes deposit short term and lendEinvestment longer term. -owever, mismatch is accompanied by liquidity risk and e3cessive longer tenor !nvestment against shorter(term deposits would put a bank’s balance sheet in a very critical and risky position. *o address this risk and to make sure a bank does not e3pose itself in e3cessive mismatch, a bucket( wise 8e.g. ne3t day, %(@ days, @ days(= month, =(< months, <(B months, B months(= year, =(% year, %(< years, <(? years, ?(' years, over ' year9 maturity profile of the assets and liabilities is prepared to understand mismatch in every bucket. 2e know that all of the shorter tenor assets and liabilities will not come in or go out of the bank’s balance sheet. As a result, banks prepare a forecasted balance sheet where the assets and liabilities of the nature of current, overdraft etc. are divided into Jcore and non(core’ balances, where core is defined as the portion that is e3pected to be stable and will stay with the bankH and non( core to be less stable. *he distribution of core and non(core is determined through historical trend, customer behavior, statistical forecasts and managerial +udgmentH the core balance can be put into over = year bucket whereas non( core can be in %(@ days or < months bucket.
,.;.( Liquidity Indi%ato$ A##$oa%h Many banks estimate their liquidity needs based on e3perience and industry averages. *his often means using certain financial ratios or liquidity indicators. *his ratio means changes in a bank’s liquidity position. &."ash osition Indi%ato$'
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. -ere the cash position indicator always shows increasing trend e3cept %&&@ and remains consistent.
"ash osition Indi%ato$ Table5,.> Near
%&&'
%&&B
%&&@
%&&>
%&&)
"ash osition
=B.??
=B.'<
==.&%
=B.&=
=B.%<
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Indi%ato$
"ha$t5,.&7
(. "a#a%ity ?atio'
-ere 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. !""L disburses ma+ority amount in loans which can increase its income.
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"a#a%ity ?atio Table5,.&@ Near
%&&'
%&&B
%&&@
%&&>
%&&)
"a#a%ity ?atio
@=.B>
@=.&%
B).)B
@<.'B
@%.)&
"ha$t5,.&;
+. "o$e -e#osit ?atio' -ere 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 . *his ratio is in good condition because at this bank has less possibility of facing liquidity crisis. "o$e -e#osit ?atio
Table5,.&& Near
"o$e -e#osit ?atio
%&&'
%&&B
%&&@
%&&>
%&&)
@@.&?
@>.%=
@'.)>
@@.'B
@>.<=
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"ha$t5,.&=
,. -e#osit "om#osition ?atio' 1emand deposits are divided by time deposits where demand deposits are sub+ect to immediate withdrawal via chque writing while time deposits have fi3ed maturities with penalties for early withdrawal. *his ratio measures how stable a funding base each bank possesses, a decline in the ratio suggests greater deposit stability and therefore a lessened need for liquidity. -ere we can see that the ratio is in reasonable condition and it is decreasing which suggests greater deposit stability. -e#osit "om#osition ?atio
Table5,.&( Near
%&&'
%&&B
%&&@
%&&>
%&&)
1eposit Compos ition $atio
%'.'B
%%.@)
%'.%%
%%.B>
%=.??
"ha$t' ,'&>
46
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"ha#te$ /i*e -ata Analysis H /indings
47
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-ata Analysis H /indings .& ?atio Analysis' Liquidity ?atio'
*his measures the short term ability of the enterprise to pay its maturing obligations and to meet une3pected needs for cash. 5hort term creditors such as bankers are particularly interested in assessing liquidity. *he 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. .&.& Loan to -e#osit ?atio'
5uch ratio provides a simplified indication of the e3tent to which a bank is funding illiquid assets by stable liabilities. !n "angladesh "" sets rules that every bank can disburse ma3imum >% of total deposit in loans and investments. !""L is not moving in aggressive way to grant investment what we can realie from 5L$ and C$$ percentage.
Loan to -e#osit ?atio Table5.& Near
%&&'
%&&B
%&&@
%&&>
%&&)
Loan to 1eposit $atio
>=.@%
>&.'>
>&.?)
>?.&<
><.&'
"ha$t57.&
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.&.( Liquid Assets to -e#osit Liabilities ?atio'
*his indicates that how much liquid assets are available to meet up the immediate necessity of the depositors. *his ensures the confidence of the depositors about the bank. !n %&&', this ratio was highest because of lower investment opportunity. "ut from %&&B( %&&) the ratio is satisfactorily constant. *his is a good sign for the bank because management has been able to hold the ratio constant which is a success of the bank. *his ultimately helps to hold the customer confidence.
Liquid Assets to -e#osit Liabilities ?atio Table5.( 2ea$
(@@
(@@7
(@@;
(@@=
(@@>
Liquid Assets to -e#osit Liabilities
)@.?B
B%.))
'@.<>
B@.&?
B%.))
"ha$t5.(
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.&.+ Loan to Ad)usted -e#osit ?atio'
*he ratio incorporates the e3tent to which loans are being financed by medium and long( term debt and by shareholders funds less investments in subsidiaries, affiliates and fi3ed assets. *hese additional aspects are included in the denominator of the ratio. 5uch ratio takes into account the deficiencies in the loan to deposit ratio by considering the e3tent to which the ma+ority portion of the institution’s business is funded by medium and long( term debt and free capital.
Loan to Ad)usted -e#osit ?atio Table5.+ Near
%&&'
%&&B
%&&@
%&&>
%&&)
Loan to Ad)usted -e#osit ?atio
>%.@%
>?.'=
>?.<'
>%.>%
)B.=B
"ha$t5.+
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.&., Liquid Assets to Total Assets ?atio'
Liquid assets to total deposits must be calculated at month end on liquid asset holdings and total assets. -ow much assets are maintained in liquid form within the total assets that can be understood. 5o from this it can be easily realied that !""L is slightly emphasiing more on maintaining liquid assets rather maintaining other long term assets.
Liquid Assets to Total Assets ?atio Table5., Near
%&&'
%&&B
%&&@
%&&>
%&&)
Liquid Assets to Total Assets ?atio
B).B@
B).'?
?).>@
'>.=@
''.%)
"ha$t5.,
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Legal $ese$*e $equi$ement
!slamic banks in "angladesh have to keep =& of its total deposits as liquidity. 4f this, ' is required to be kept in cash with "angladesh "ank and the rest ' is to be kept either in approved securities or in cash 8in case of problem with securities9 with "angladesh "ank. Legal reserve requirement for conventional banks is =>. *hey have to keep ' in cash with "angladesh "ank and the rest =< is invested in "angladesh "ank approved securities. *raditional banks can earn interest on their deposits with "angladesh "ank but !slamic banks can not since they cannot receive interest as earning. Compared to interest(based traditional banking, !slamic banks, in this case, are in disadvantageous position. -owever, !slami "ank "angladesh Limited has been receiving interest against its deposit with "angladesh "ank and crediting it to its 5adaqa fund 8!slami "ank #oundation9. !t should be noted that the interest earning are not considered as bank income and added to profit. *he proceeds are spent on welfare activities.
La%k of o##o$tunity fo$ #$ofitable use of su$#lus funds'
*he bank can invest their e3cess liquid amount in approved securities and or in other bank in crisis. !slamic banks cannot take this opportunity due to the e3istence of interest element in the transaction process.
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A##$ehension of liquidity %$isis and #ossibility of liquidity su$#lus'
!slamic banks have always left with a sieable amount of cash as liquidity surplus. Conventional banks can borrow in the form of call money among themselves even at an e3orbitant rate of interest. "a#ital ma$ket in*estment'
Conventional banks can invest <& of their total deposits in shares and securities. !slamic banks have their problem in this case as they avoid any transaction based on interest. #ollowing e3amples may be cited for illustration. 8a9 !slamic banks do not purchase shares of companies undertaking interest(based businessH 8b9 5hares of companies taking loan from commercial banks on interest are not also purchased by !slamic banksH and, 8c9 !slamic banks cannot purchase shares of companies involved in businesses not approved by 5hari’ah. *he above restrictive environment in the capital market of "angladesh has limited substantially the investment opportunities for !slamic banks and hence the avenues of lawful earning. !n the absence of !slamic money and capital market these banks cannot obtain funds from capital market at times of need. Absen%e of inte$5bank money ma$ket'
!n spite of five !slamic banks have been functioning in "angladesh, inter(bank money market within !slamic banks has not yet taken place. *hese banks can take initiative to form a money market among them. *his may help minimising pparticularly the call money problem they are suffering from beginnings.
$edominan%e of Mu$abaha finan%ing'
redominance of Murabaha financing in the portfolio management of investment funds by the present day !slamic banks of "angladesh has been a hot agenda of debate. 4ne study shows that !slami "ank "angladesh Limited, Al Arafah "ank and 5ocial !nvest ment "ank Limited have used '?, @B and B' respectively of their investment funds by resorting to Murabaha mode 8-oque =))B, p.)9. Murabaha though considered as a 5hariah approved mode, the !slamic economists have traditionally prescribed for its limited application. 1ue to legacy of traditional banking, lack of appropriate legal protection and standard accounting practice in business, !sla mic banks in "angladesh find Murabaha financing as suitable and Mudaraba and Musharaka as difficult to apply.
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-e#$ession of $ofit'
*raditional banks can meet up loss arising from delay in repayment by the clients through charging compound interest. !slamic banks cannot do that. 2hat it does it realises compensation at the rate of profit. "ut the compensation so realised is not added to the profit income rather credited to 5adaqa account i.e., amount meant for social welfare activities. *his depresses profits of !slamic banks. *his may place !slamic banks relatively in weaker position in terms of profitability compared to conventional banks Moreover, !slamic banks are to make a compulsory levy equivalent to %.' of its profit earned each year and credited to 5adaqa account, which also depresses banks’ profitability. *his is unlikely the case with conventional banks.
Absen%e of legal f$ame3o$k' $(end(ent o- o#d #a"s and pro(u#gation o- ne" #a"s conducie to ecient operation o- s#a(ic ban&s are sin ua non -or its ea#ty gro"t. Countries introducing s#a(ic ban&ing sou#d create an enab#ing eniron(ent -or s#a(ic ban&s by (odi-ying eisting #a"s and regu#ations. s#a(ic ban&s in ran and a&istan ae teir #ega# supports. a&istan as proided #ega# support to oat articipation er( Certi:cate and conduct Mudaraba transaction by rep#acing ;e #ega# Fra(e"or& o- a&istan's Financia# and Co on *une 26 1980. e %an&ing ribuna# ?rdinance and e %an&ing and Financia# =erices )$(end(ent o- a"+ ?rdinance "ere passed in 1985 by a(ending seen $cts suc as te artnersip $ct e %an&ing Co(panies ?rdinance te !ea#t a $ct te Federa# %an& Co> and is being followed by banks long time. "ut in "angladesh "asel Capital Accord 8"asel P9 was adopted from =))B. Fnder this first "asel accord every bank must maintain minimum capital requirements. !""L has adopted "asel P from the very first of establishment of this regulation in "angladesh. !""L always maintains significant amount of statutory reserve beyond the "ib’s requirements. *his statutory reserve is included under core capital 8*ier(=9 according to the first "asel Accord. According to the following chart consistently statutory reserve is increasing as the amount of deposits is increasing day by day.
SL? Table5.=
n Mi##ion
Near
(@@
(@@7
(@@;
(@@=
(@@>
?equi$ed ?ese$*e
=&=>?.%'
=%')<.@&
=B=@%.)B
=)@@=.>>
%<'<&.B'
A%tual ?ese$*e maintaine d
%&'?B.<)
%'@%'.<)
?.?'
?'B?B.<&
Maintaine d 9:
%&.=@
%&.?<
%=.%@
=B.'>
=).?&
.+.+ Basel JJ'
*he revised "asel framework 8"asel( PP9 was finalied in ;une %&&? which is popularly known as "asel PP. 5ubsequently the framework has revised up to ;une, %&&B. *he framework endorsed the adoption of capital allocation for operational risk in addition to market D credit risks and introduced comprehensive risk management practices by banks along with supervision and disclosure requirements. "angladesh has provided a policy D guideline for implementing "asel Accord PP by the year %&&>. 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, interest rates, foreign e3change rates, and commodity prices 59
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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. *hen liquidity crisis may occur. !n !""L "asel PP is implemented by a unit which is headed by =' members for implementation of ew Capital Accord. *he Fnit supervised the parallel run of "asel PP along with "asel P at !""L from early %&&) and supervising full operation of "asel PP from &= ;anuary, %&=&. !n !""L both the credit risks and market risks are very insignificant here because as the follower of "asel PP this bank faces low amount of default against its huge general investment what can be realied from the following data.
Bad and Loss amount to Total Gene$al In*estment Table5.> Near
%&&'
%&&B
%&&@
%&&>
%&&)
"ad and Loss amount to *otal :eneral !nvestment
%.<)
%.<<
=.)>
=.B'
=.<'
"ha$t5.,
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"ha$t5.
.+., St$ess Testing'
"angladesh "ank e3ecuted stress testing about financial information for the first time of ?> commercial banks up to <& th ;une, %&&). *his is a form of testing the stability of a given entity and also to choose scenarios and put them in the valuation model. #our types of risks are measured here which are credit risk, market risk, e3change rate risk and finally liquidity risk. 5tress testing will be performed once in every B months. *he main ob+ectives of performing stress testing are managing risky e3posures and helping diversification of those, monitoring the standard of service and also making sure of economic stability and fostering growth. !f the depositors withdraw money at %(B from the bank within five consecutive days, then what will be the liquidity condition of the bank(this is considered through stress testing. *he stress test for liquidity risk evaluates the resilience of the banks towards the fall in liquid liabilities. *he ratio Kliquid assets to liquid liabilities shall be calculated before and after the application of shocks by dividing the liquid assets with liquid liabilities. Appropriate shocks will have to be absorbed to the liquid liabilities if the current liquidity position falls at the rate of =&, %& and <& respectively. Liquidity Sho%k' *he ratio of liquid assets to liquid liabilities after a =&, %&, <& fall in the later shall be calculated as
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Table5.&@
Liquidity Sho%k
Magnitude of Sho%k 2ea$
&@
(@
+@
%&&)
%&&>
%&&)
%&&>
%&&)
%&&>
Liquid Assets
='<>>@.<=
=>@.<=
=>@.<=
=>'>.?<
?&&B>.B>
@<%>@.B?
B&=&<.&%
$evised Liquid Assets
=%)?'>.=
==?%@@.)
=&'&%>.>>
)?%?<.'B
>&')).B@
@?%&).&?
$evised Liquid Liabilities
%=)>B%.)<
=>&<&).&@
=<)%B<.%B
=B&%@?.@<
=@=&&?.?)
=?&%?&.<@
Liquidity $atio after shock 89
'>.>)
B<.<>
@'.?%
'>.>&
?@.=<
'%.)%
-ere it can be proved that due to the fall of liquid liabilities consecutively by =&, %&, <& liquidity ratio also falls. 5o if the liquid liabilities decrease, the bank is going to face liquidity shock because investment disbursement in short term is not decreasing. As a result significant amount of deposit collection must be increased or investment disbursement must be reduced. -ere this stress testing is based on !""L where only data of %&&>(%&&) is taken into consideration. !f liquid liabilities fall in this way, it is urgent to try to absorb the shock. "ut !""L is not at all in this position because of higher rate of maintaining cash in hand.
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"ha#te$ Si8
Summa$y of /indingsC ?e%ommendations and "on%lusion
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Summa$y of /indingsC ?e%ommendations and "on%lusion 7.= /indings of IBBL ?ega$ding Liquidity Management ow !""L is a leading bank in !slamic banking area in "angladesh and we know that it was the pioneer of !slamic banking trend in "angladesh. #rom the above analysis we have seen that !""L is maintaining a good liquidity position. !t always maintains 5L$ and C$$ above the requirement ratio. 5o it never faces any liquidity crisis. "ut in spite of !""L has some short comings in the liquidity management. ow some problems are given below
•
As we know that !""L maintains huge amount cash in hand which are kept as idle bank has failed to utilie proper investment opportunity.
•
!""L cannot utilie proper investment opportunity because of proper forecasting about investment.
•
As $iba 8interest9 is prohibited !""L cannot involve in inter bank transaction.
•
Also !""L cannot take part in purchasing *reasury bill for lack of !slamic Money Market.
•
!""L is not attentive enough in marketing and advertisement in this competitive edge.
•
*he periodic review program is comparatively not strong enough for which huge liquidity is kept as idle.
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7.(?e%ommendations' !slami "ank "angladesh Ltd. has been able to establish its own presence with a continued e3pansion geared by increasing acceptance by the people. *o continue this dynamic e3pansion !""L needs to adopt modern strategy in every banking department of cope with the competitive banking sector. And at the same time it must be ensured that !""L is following the !slamic rules and principles. !n "angladesh there is no !slamic money market and other laws regarding banking sector. 5o !""L needs to think about its alternative regarding liquidity management. -ere some suggestions are given below what should be achieved to be more efficient in liquidity management. As !""L maintains huge amount of cash in hand it cannot utilie proper investment
opportunity. 5o !""L should emphasie more on utiliation of investment opportunity to increase it earning !t should give more importance on research D development to launch new product to
cope with increasing competition
"oard of 1irectors of !""L should ensure the selection and appointment of qualified
and competent management to administer the liquidity management function "oard of 1irectors should review periodically, but at least once a year, the liquidity
management program 1eveloping 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 !""L should emphasie on promotion of the image of !slamic bank as L5 banks
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7.+"on%lusion' #inally it can be said that liquidity management is one of the most essential part of all banks. Like others !""L also gives emphasis on this section. *hrough properly handling this section a large problem is solved. *hat is holding customer confidence. 4n this the image of the bank is highly correlated. *hroughout the report it is seen that liquidity management position is so strong and satisfactory. As a result !""L achieves 5*(= rating from C$!5L and it holds its performance from couple of years. Also CAM/L5 rating shows that this bank is performing in well manner. Compared to any other banks !""L is performing in liquidity management in ideal way. !ts risk management department is acting in a well organied manner which can be realied from the strict maintenance of "asel PP. "ut !""L should give more importance in adopting competitive strategy like !( "anking and also in employee efficiency. !f the employees are satisfied then the banks’ performance will be more spontaneous and smooth and consistent. *his bank also should give importance in marketing strategy. #or liquidity management perspective !""L maintains huge 5L$ in e3cess of requirement. !t should more careful about its investment opportunity. *his can increase its earning in a dynamic way because !""L is the collector of highest deposit. 5o !""L can play a strong role here. As we know that this bank has the restriction of taking $iba 8!nterest9, this bank can’t invest in *(bill and bond. 5o as a one of the most profitable bank :ovt. should consider to establish more accurate !slamic law and principles for the welfare of the economy which supports the !slamic 5hari’ah.. 5o following this !""L as a specialied bank contributes a lot in the economy by fostering its growth from any other banks in our country. *hen lastly it can be said that though there are some limitations of the bank !""L is trying to encourage socio economic uplift and financial services to the low income community particularly in the rural Ares.
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