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“Liquidity Management of Islami Bank Bangladesh Limited”

Preface The discussing report is the terminal formalities of the internship program for the Bachelor of Business Administration Program of the Department of Business Administration in Stamford University, Bangladesh which is compact professional progress rather than specialized. This report has prepared as per academic requirement of after the successfully completion of 2 (two) months internship organized at IBBL, Dhanmondi Branch with the view to familiarized the students with the practical implementations of the knowledge provides the theoretical aspects of practical life. It is pleasure and great privilege to submit report titled “Liquidity Management of Islami Bank Bangladesh Limited” worked out at Dhanmondi Branch during July 2010 to September 2010. As the presenter of this report, The tried level best to get together as much information as possible to enrich the report while working at General Banking Department, Foreign Exchange Department and Investment Department of IBBL. The believe that it was a fascinating experience to work in the banking section and it has enriched both my knowledge and experience. However, after all this, as a human being, The believe everyone is not beyond limitation. There might have problems regarding lack and limitation in some aspects and also some minor mistake such as syntax error or typing mistake or lack of information. Please pardon me for that mistake and clarify these of my further information on those matters. ACRONYMS ICMAB = Institute of Cost and Management Accountants of Bangladesh CRISL = Credit Rating Information and Service Limited ICAB = Institute of chartered accountant of Bangladesh ALCO = Asset Liquidity Committee IDB = Islamic development Bank SME = Smoll Medium Entreprise


CSR = Corporate social Responsibilities MDB = MuSharaka Documentary Bills ROA = Return On Assets ROE = Return On Equity RD S = Rural Development Schemes HDS =Househo Durable Schemes EPS = Earnings per Share P/E = Price Earning Ratio CRR = Cash Reserve Ratio SLR = Statutory Liquidity Ratio DD = Demand Draft TT = Telegraphic Transfer PO = Poyment Order HPS = Hire purchase Under Sirkatul Milk LMP = Liquidity Management Policy LCP = Liquidity Contingency Plan ALM = Asset Liquidity Management FAD = Financial Administration Division A+ = Adequate Safety AA = High Safety ST-1 = Hihgest Grade ST-2 = High Grad BB = Bangladesh Bank CRR = Cash Reserve Requirement SLR = Statutory Liquidity Requirement RRR = Reserve Requirement Ratio CAMEL = Capital Adequcy,Asset Quality, Management competence,Earnings And Liquidity. Executive Summary


This report is prepared as a requirement of the internship program of BBA program of STAMFORD University Bangladesh. This report focuses two months working experiences in Islamic Bank Bangladesh Limited, Dhanmondi Branch. This report will give a clear idea about the activities and operational strategies and Liquidity Position of Islamic Bank Bangladesh Limited, Dhanmondi Branch. 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. Both primary and secondary information sources were used to complete this report. For the completion of this report, the primary sources of data are- Discussion with officials of the IBBL, Experts’ opinion and comments, Observations of the officials. The secondary data, which was used for this research , and other secondary data which was collected from the web site and also from the Islami Bank Training and Research Association. As we know that liquidity is the availability of most liquid assets to meet up the demand of the customers, managing liquidity in a tactful manner is now one of the main focuses in banks. Throughout this report the tried to clarify about liquidity and its management as a part of treasury management and also about its process. Here chosen IBBL to give detail clarification about liquidity management of this bank. As an Islamic bank IBBL faces some restrictions in conducting the banking business according to Shariah. So its liquidity management is slightly different from other conventional banks. For this reason chosen IBBL to make transparent about the liquidity management of this bank and discussed about the components of the liquidity statement. Here the assessment of liquidity of IBBL is given to clarify the liquidity condition of IBBL. Then in the analysis part the completed ratio analysis, comparative analysis, SWOT analysis, regression analysis and also trend analysis regarding this liquidity management. In this report the accomplished the comparative analysis with two banks, one is BASIC Bank and another is SIBL to show clear difference about the liquidity management of IBBL with BASIC Bank and SIBL. The also shown the impact of Bangladesh Bank regulation in this section of this bank. There are some monetary policy tools what affects the liquidity of the bank that is given from the perspective of IBBL. As IBBL maintains huge amount of cash in hand it cannot utilize proper investment opportunity. So IBBL should emphasize more on utilization of investment opportunity to increase it earning. Then some problems are identified to manage the liquidity position of the bank and according to this some suggestions are given here to overcome those problems. 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. So throughout the whole report The tried to make you understand about liquidity management of IBBL. Chapter One 1.1 Introduction of Report: Bangladesh is one of the largest Muslim countries in the world. The people of this country are deeply committed to Islamic way of life as enshrined in the Holy Quran and the Sunnah. Naturally, it remains a deep cry in their hearts to fashion and design their economic lives in accordance with the precepts of Islam. The establishment of Islami Bank Bangladesh Limited on March 13, 1983, is the true reflection of this inner urge of its people, which started functioning with effect from March 30, 1983. 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.

1.2 Background of the Report 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. But for posing some new challenges it is time to change itself in a competitive structure which will help to sustain in the competitive edge. So IBBL is trying to be customer oriented in every sphere of wing services. Here how IBBL is handling its liquidity management as a part of treasury management is clarified from different perspective. 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. 1.3 Objectives The first objective of writing the report is fulfilling the partial requirements of the BBA 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.

1.4 Scope of the Report This report provides some important evaluations and present scenario of IBBL. Here some points are given below: • • •

Evaluation of the different financial performance of IBBL Present condition of IBBL in banking sector Knowledge of diversified products and services


• • • •

Liquidity position of IBBL Condition of IBBL regarding Bangladesh Bank rules Scenario of IBBL compared to BASIC bank and SIBL Different problems and solutions regarding liquidity management

1.5 Methodology: 1.5.1 TECHNIQUES OF ANALYSIS To conduct the Analysis part I have chosen the most widely used techniques of analysis. These are Least Squares method for Ratio Analysis and Regression Analysis. Regression Analysis: The analysis is drawn on total amount of liquidity, total amount of loans & total amount of deposits. Amount of liquidity = Y; dependent variable, Total amount of loans= X1; Independent variable, Total amount of deposits= X2, Independent variable. So, the regression equation of Y on X1 and X2 for the regression line will beY = a + b1X1 + b2X2 Where, Y = Total amount of liquidity, a = the intercept (constant), b1 = Slope of line, change liquidity for change in amount of loans, b2 = Slope of line, change in consumer credit for change in deposits X1 = total amount of loans X2 = total deposits 1.5.2 Collection of data: Primary data are measurements observed and recorded as part of an original study. When 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.

Primary Data: For the completion of this report, the primary sources of data are-


• Discussion with officials of the IBBL • Experts’ opinion and comments • Observations of the officials Secondary 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 Islami Bank Training and Research Association. 1.6 LIMITATION OF THE STUDY: There are some limitations in our study. We faced some problems during the study, which we are mentioning them as below1.Lack of time: The time period of this study is very short. We had only 8 weeks in my hand to complete this report, which was not enough. So I 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. 2. Insufficient data: Some desired information could not be collected due to confidentiality of business. 3. Lack of monitory support Few officers sometime were busy in their job. Sometime they didn’t want to supervise us out of their official work. 4. Other limitations: As we are newcomers, there is a lack of previous experience in this concern. And many practical matters have been written from our own observation that may vary from person to person. Chapter Two The Organization Islami Bank Bangladesh Limited (IBBL) 2.1 About Bank As a Muslim country people of Bangladesh are deeply committed to Islamic way of life and follow the Holy Quran 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 Informatio (As on June 30, 2010 ) Table-2.1 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


2.2 Good Performance is Always Rewarded  

The global finance, a reputed USA based quarterly financial magazine, awarded IBBL as the best Islamic Financial Institution for the year 2008. Institute of Cost and Management Accountants of Bangladesh (ICMAB) awarded IBBL as the ICMAB National Best Corporate Award 2007 (First Position, Local Bank) and ICMAB Best Corporate Performance Award-2008 (Second Position, Private Commercial Bank). Credit Rating Information and Services Ltd. (CRISL) rated IBBL AA (High Safety) for long term for the years 2006, 2007, and 2008 and ST-1 (Highest Grade) for short term for the years 2004, 2005, 2006 2007, and 2008. The Institute of Chartered Accountant of Bangladesh (ICAB) awarded IBBL with the Certificate of Appreciation in the best published accounts and reports for the year 2001, and Certificate of Merit for the year 2008. Bankers’ Forum awarded IBBL as the Best Bank for Corporate Social Responsibilities for 2008.

2.3 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. 2.4 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 lowincome community particularly in the rural areas.


2.5 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

2.6 Strategies of IBBL: The strategies on which IBBL is working are as follows: • • • • •

Broad-based economic well-being with full employment and optimum rate of economic growth Socio-economic justice and equitable distribution of income and wealth Stability in the value of money to enable the medium of exchange to be reliable unit of account, a just standard of deferred payments and a stable store of value Generation of adequate savings and their productive mobilization within a framework which is consistent with the above goals Effective rendering of all services normally expected from the banking system

2.7 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. 2.8 Committees: The Board has two standing committees viz. Executive Committee and Audit Committee. These Committees operate within clear terms of reference.


2.8.1 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. 2.8.2 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, among others, 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 2.8.3 The Management Committee The Management Committee of the bank comprises of 17 top level executives, headed by the Managing Director (CEO) of the bank. The Committee with financial, administrative and business discretionary power delegated by the Board is mainly responsible for implementation of the policies and guidelines approved by the Board. The Management Committee thoroughly scrutinizes the issues before placing to the Executive Committee/Board. 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. 2.8.4 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, maturity grouping of assets and liabilities, Deposits and Investment pricing and liquidity contingency plan in order to manage the balance sheet risk in a better way. The ALCO is entrusted with the responsibility of ensuring the bank’s sufficient liquidity at all times to meet its obligations when becomes due without compromising the earning potential of the bank. In every ALCO meeting, the Committee reviews actions taken in previous ALCO meeting, economic and market status and outlook, liquidity risk related to balance sheet, profit rate structure etc. Special ALCO meeting is arranged as and when any contingent situation arises. 2.9 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. The council is represented by 14 members consisting of prominent Ulama having adequate knowledge in Fiqhul Moamalat, 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. The representative of the Council attends in the meetings of the board of Directors, Executive Committee, 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. At present two members of the Council are also the members of Academic Council of IBTRA. The Council also evaluates the performance of the officials in terms of Shari’ah compliance. 2.10 Branches: Till 2009, out of total 231 branches (including 20 SME/Agricultural Branches), 114 are Urban Branches and 117 are Rural Branches which are the highest number of rural branches among the first generation Commercial Banks. Chart-2.1

2.11 Products and Services Local currency Deposit Accounts 1. Al-Wadeeah Current Account 2. Mudaraba Savings Account 3. Mudaraba Term Deposit Account 4. Mudaraba Special Notice Account 5. Mudaraba Special Savings (Pension) Account 6. Mudaraba Hajj Savings Account 7. Mudaraba Savings Bond 8. Mudaraba Waqf Cash Deposit Account 9. Mudaraba Monthly Profit Deposit Account 10. Mudaraba Muhar Savings Deposit Account


Foreign Curreny Deposit Accounts 1. Mudaraba Foreign Currency Deposit 2. Foreign Currency Deposit (USD,EURO,GPB) 3. FC Deposit ERQ Investment Modes 1. Bai-Muajjal 2. Bai-Murabaha 3. Hire Purchase under Shirkatul Melk 4. Maharajah 5. Musharaka 6. Musharaka Documentary Bills (MDB) 7. Bai-Salam 8. Bai-As-Sarf Welfare Oriented Special Investment Schemes 1. Household Durables Scheme 2. Housing Investment Scheme 3. Real Estate Investment Scheme 4. Transport Investment Scheme 5. Car Investment Scheme 6. Investment Scheme for Doctors 7. Small Business Investment Scheme 8. Agriculture Implements Investment Scheme 9. Rural Development Scheme 10. Micro Industries Investment Scheme 11. Women Entrepreneurs Investment Scheme 12. Mirpur Silk Weavers Investment Scheme 13. Equity and Entrepreneurship Fund of Bangladesh Bank


Sectors under SME Investments 1. Manufacturing 2. Trading 3. Service ATM Services 1. Cash Withdrawal 2. Fund Transfer 3. Mini Statement of Accounts 4. Balance Enquiry 5. Payment of Utility Bills (Electricity, Water, Phone and Gas etc.) Other Banking Value Added Services 1. The Bank issues Payment Orders 2. 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). 3. ATM Service has been introduced in selected Branches 4. Locker Service is available in selected Branches to preserve valuable documents and materials 5. The Bank gives counseling on different issues 6. Online Banking 7. SMS Banking 8. SWIFT 9. REUTER, etc. Foreign Remittance There are 16 (sixteen) Foreign Representatives of IBBL in 5 (five) Countries to serve expatriate customers to encourage and enhance Foreign Remittance. Treasury Activities Dealing Room Operation. Special Services through Islami Bank Foundation 1. Islami Bank Hospital


2. Islami Bank Medical College 3. Islami Bank Community Hospital 4. Islami Bank Nursing Training Institute 5. Islami Bank Institute of Health Technology 6. Islami Bank Homeopathic Clinic 7. Monorom: Islami Bank Crafts & Fashion 8. Islami Bank Service Centre 9. Islami Bank Institute of Technology 10. Islami Bank International School and College 11. Islami Bank Model School 12. Islami Bank Mohila Madrasah 13. Bangladesh Sangskritic Kendra 14. Distressed Women Rehabilitation Centre Training Services 1. International: Training to Foreigners on Islamic Banking 2. National: Training to others on Islamic Banking 3. Islami Banking Deploma 2.12 Major CSR practices of IBBL IBBL being one of the most important corporate citizen of the country, has been discharging its responsibilities to the society in general, both directly through its mainstream operations as well as directly through its fully owned subsidiary “Islami Bank Foundation” since inception. • IBBL provides low cost medical treatment for the poor people who are suffering from various eye diseases. In the year 2009 and 2008, a total number of 2,500 and 3,000 patients respectively received eye treatment through low cost eye treatment project. • IBBL provides scholarships to the students of colleges, madrasas, and universities at home and abroad. Moreover, scholarship is being offered to the researchers to obtain M.Phil and Phd degrees. • As part of the service to the distressed humanity, Islami Bank Foundation has established a center for shelter, training and rehabilitation of the unfortunate, shelterless widows. • IBBL observes “Plantation Week” every year during the rainy season to encourage the people planting more by providing saplings free of cost to the beneficiaries of Rural Development Scheme, the micro-investment scheme of the bank. • IBBL awards scholarship among the meritorious wards of the bank officials and the meritorious students of Banking & Finance Department of University of Dhaka, University of Chittagong and


Manarat International University. 2.13 IBBL’s World Rating: As per Banker’s Almanac (January 2006 edition) published by the Reed Business information, Windsor Court, England, IBBL’s world rank is 1591 among 4500 banks selected by them. World ranking of IBBL amongst top 3000 International Banks: IBBL’s World Rating Table-2.2 Serial No.

Year

World rating

1.

1995

2314

2.

1996

2303

3.

1997

2262

4.

1998

2119

5.

1999

2100

6.

2000

1999

7.

2001

1902

8.

2002

1771

9.

2003

1755

10.

2004

1581

11.

2005

1658

12.

2006

1620

13.

2007

1490

14.

2008

1591

Source: The Bankers Almanac: World Ranking, 2008, Reed Business Information, U.K.


2600

Rank

2447 2400

2314

2303

2262 2119

2200

2100 1999

2000

1902 1771

1800

1755 1581

1658

1620

1600

1490

1591

1400 1200

1994

1995

1996

1997

1998

1999

2000

2001

2002

2203

2004

2005

2006

2007

2008

Chapter Three Overall Financial Performance of IBBL To judge and evaluate the performance of the financial institutions, the best way is to evaluate them by their financial and operational activities. There are several ratio analyses which show the operating trends of these banks. Based on this evaluation and examination interpreted the results and find out the actual condition IBBL. Net Profit Before Tax Table-3.1 Year 2005 Net Profit 2162.42 Before Tax

In Million 2006

2007

2008

2009

2908.67

3780.82

6347.83

6517.66

Chart-3.1 IBBL maintains the increasing trend in profit before tax. Its profit before tax position is impressive. It was in increasing trend from 2005 to 2009. The graph showed that the amount increased dramatically than the previous year because of maximum profit generation by the bank. In 2005 it was TK. 2162.42 million and in 2009 it goes 6517.66 million. That means this bank’s operating income is


increasing. Net Profit After Tax Table-3.2 Year

In Million 2005

Net Profit 2162.42 After Tax

2006

2007

2008

2009

2908.67

3780.82

6347.83

6517.66

Chart-3.2 Profit after tax shows the net income of any organization, we will get it after deducting all expenses such as interest and tax expenses. This is also called common shareholders income. In case of profit after tax IBBL shows increasing trend, which is very positive side for the organization. Profit after tax of IBBL is increasing that means bank profitability position is good. Year 2005 profit after tax was Tk 2162.42 million and in 2009 it was Tk 6517.66 million. The total amount of profit is growing every year. The profit was almost doubled in 2008 than that of 2007. Export and Import and Remittance In Million

Table-3.3 Year

2005

2006

2007

2008

2009

Import

74525

96870

137086

168329

161230

Export

36169

51133

66690

93962

106424

Remittance

36948

53819

84143

140404

194716

Chart-3.3


In 2009 remittance collection has reached the peak. Every year the remittance collection is growing at an increasing rate. And in every sector IBBL is now in the first position. Compared to any other banks IBBL contributes a lot in enriching foreign currency reserve Classified Investment to General Investment Table-3.4 Year

2005

Classified 3.25% Investment to General Investment

Chart-3.4

In Million

2006

2007

2008

2009

3.43%

2.93%

2.39%

2.36%


Classified investment to general investment should be lower which shows good sign for the bank. This means the bank adopts better credit policy and its earning trend will increase. In IBBL this ratio is significantly lower which is positive. The trend of the ratio shows decreasing movement. Especially after 2006 the ratio is decreasing. Return on Equity Table-3.5 Year 2005 Return Equity

on 13.51%

2006

2007

2008

2009

13.42%

13.00%

19.02%

16.93%

Chart-3.5

This ratio tells us the earning power on shareholders book value invested and is frequently used in comparing two or more firms in an industry. A high return on equity often reflects the firm’s acceptances of strong investment opportunities and effective expense management. However if the firm has chosen to employ a level of debt that is high by industry standard, a high ROE might simply be the result of assuming excusive financial risk. The ROE performance of IBBL maintained decreasing trend from 2005 to 2007. In 2008 it increased to 19.02% which is pretty higher than the previous year. And again in 2009 the ratio becomes lower which is 16.93%. Return on Assets Table-3.6 Year 2005 Return Assets

on 1.00%

Chart-3.6

2006

2007

2008

2009

1.03%

0.84%

1.27%

1.34%


ROA indicates a firm's ability to efficiently allocate and manage its resources but (unlike return on equity) ignores the firm's liabilities. An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Sometimes this is referred to as "return on investment�. The ROA position of the bank is close to industry avg. and in 2009 it is 1.34% and always shows consistency. Earning Per Share Table-3.7 Year 2005 Earning Share

Per 48.76

2006

2007

2008

2009

36.84

30.04

43.30

55.10

Chart-3.7

The term earnings per share (EPS) represents the portion of a company's earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock. The formula of earning per share is total earnings divided by the number of shares outstanding. Companies often use a weighted


average of shares outstanding over the reporting term. The graphical analysis stated that Earning per share of IBBL declined significantly in year 2006 and 2007. In 2005 it was TK. 48.76 and in 2009 it is 55.10 which is god enough. Price Earning Ratio Table-3.8 Year 2005 Price Earning 9.24% Ratio

2006

2007

2008

2009

10.97%

17.88%

10.78%

10.73%

Chart-3.8

P/E ratio is most valuable for companies within the same industry. Value investors have long considered the price earnings ratio [p/e ratio] one of the single most important numbers available when evaluating a company's stock price. The p/e ratio is how much money you are paying for TK. 1 of the company's earnings. For this bank the results are in increasing trend though it dropped in 2008 because of unstable share market. Price earning ratio should not increase more than 2 Capital Adequacy Ratio Table-3.9 Year Capital Adequacy Ratio

Chart-3.10

2005

2006

2007

2008

2009

9.44%

9.43%

10.61%

10.72%

11.65%


It is a measurement of a bank’s capital adequacy against its requirement. It is expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems in the banking sector around the world. The good news for the depositors is that the capital adequacy ratio of IBBL is in increasing trend. It was slightly dropped in 2006 but that was insignificant. In fact the bank is maintaining its trend of increasing capital and reducing depositors’ risks. Chapter Four EVALUATION OF INVESTMENT PERFORMANCE EVALUATION OF INVESTMENT PERFORMANCE

4.1Investment: Investment of the Bank increased to Tk.180054.00 million as on 31.12.2008 from Tk. 214616.00 million as on 31.12.2009 showing an increase of Tk.34562 million i.e.19.20% growths as against 18.57% growth of investment in banking sectors. This increased investment growth of the Bank in 2009 is due to the thrust given to promote investment for effective utilization of depositors’ fund. The percentage of increase of Investment of IBBL in 2008 was 24.24%. The share of Investment of IBBL in banking sector as on 31.12.2009 was 7.11%. Composition of the investment portfolio: Sectors

Proportion in %

Agriculture and Rural Investment

2%

Industrial Term Investment

18%

Industrial Working Capital

15%


Housing and Real Estate

10%

Electricity, Gas, Water & Sanitation

0.5%

Transaction & Communication Storage

5%

Import, Export & Local & Trade Selected Activities

40%

Household Durable Schemes

1.50%

About Storage

1%

Investment Schemes for Small Business

1.50%

Investment Schemes for Doctors

0.50%

Poultry & Dairy

0.50%

Rural Development Schemes

2%

Micro Industry Schemes

0.50%

Others Special Schemes

1%

Other productive Purpose

1%

Total

100% Table No. 4.1

From the table we find that the IBBL focuses more on import, export investment that play a vital role for the development of national growth. It also provides facilities to industrial sectors more than other sectors. 4.2 Five years investment perspective plan In accordance with the investment Policy, 5 year Perspective Plan from 2008 to 2012 is formulated. Size-wise and sector-wise, allocation of estimated investable funds is made in accordance with the weight age given in the investment: Year

Trade(1 )

Special scheme(2)

Agro base Project industry(3) investment( 4)

Construct ion(5)

Transport( 6)

2008

33%

3%

6%

47%

7%

2%

2009

33%

4%

5%

45%

8%

3%

2010

33%

5%

6%

42%

9%

3%


2011

35%

5%

6%

39%

9%

4%

2012

35%

5%

7%

36%

10%

5%

Table No. 4.2

7%

1

2% 34%

2 3 4

48%

6%

3%

5 6

Chart No. 4.1 4.3 Diversification of Investment This is one of the motto so Islami Bank to invest their deployable fund in a diversified way i.e. diversification by size, sector, purpose and geographical area in order to ensure balanced growth of the society equity and justice. With this view the Management has adopted the slogan for the year 2009 as “Diversification of Investment” Why and where to Diversify •

70% of the total investment is concentrated to 0.36% clients which is not acceptable for a Shariah compliant Bank. Moreover, it is alarming for an Bank from the risk point of view. • 32% of total investment is concentrated in only Textile and RMG sectors. Such concentration in limited is not desirable from the risk point of view • Only 6.02% of the investment is made in the Rural Area which is contrary of equity justice Sidewise investment Position (Considering number of client)


80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Client

1

2

3

4

5

6

7

8

9

10

11

12

13

14

71.76 16.33 7.11%2.36%0.97%0.62%0.31% 0.13%0.06%0.16%0.08%0.04%0.03%0.05%

Amount 1.27%2.99%3.85%2.94%2.47%3.52%3.97% 2.89%1.82%9.61% 10.17 8.97%8.06% 32.38

Chart No. 4.2 Size wise investment Position (Considering number of client) client

80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

amount

1

3

5

7

9

11

13

Chart-4.3 Economic Purpose: (Amount in Million as on 30.12.2009) Sl NO

Name of the Sector

Amount outstanding

% of share

01

Agriculture

6915

3.33

02

Industrial working capital + project

99074

47.67

03

construction and real state

7968

3.83

04

Transport

3508

1.69

05

trade of commodity

59245

28.51


06

special investment

4526

2.18

07

staff and others

16022

7.71

08

share and security

10578

5.09

Total

207836

100

Table No. 4.3 Amount outstanding

2%

24%

49%

2% 1% 14%

3% 4%1%

Agriculture Industrial working capital + project construction and real state transport trade of commodity special investment

Chart No. 4.4

staff and others

Industry wise Investment growth: 2005-2009 (TK in million) Year

Textile

Garments

Others

2005

12896.57

4064.67

18632

2006

17408.74

3959.42

24695

2007

24337.82

5019.05

33285

2008

35414.97

8694.3

34679

2009

52388.73

10341.21

44344

Table No. 4.4


Figure No-4.5 As per Investment policy of the bank top priority has been given towards the industrial development of the country. Bank’s investment in industrial sectors is substantially higher compared with those of other Commercial banks. The Bank’s investment portfolio is gradually being increased towards industrial finance along with commercial investment. Investment by Geographic Area: (Fig in Million as on 30.12.2009) Area/Zone

Amount of investment

% of share

Dhaka base branches

112550

58.83

Chittagong Zone

28845

15.08

Khulna Zone

13425

7.02

Bogra Zone

5943

3.11

Comilla Zone

5755

3.01

Sylhet Zone

2916

1.52

Rajshahi Zone

15148

7.92

Barishal Zone

2106

1.10

Mymenshing Zone

4615

2.41

Total

191303

100


Table No – 4.5 Amount of investment

Dhaka base branches Chittagong Zone Khulna Zone

28%

Bogra Zone Comilla Zone Sylhet Zone

49% 4% 2% 2% 1% 1% 4%1%

8%

Rajshahi Zone Barishal Zone Mymenshing Zone Total

Chart No.4.6 The Bank focuses most on Dhaka zone as well as Chittagong zone as these two areas are the center of industrialization. Later it plans to diversify it investment in other under developing areas too. Investment by Areas (Urban and Rural): (Figure in Million as on 30.12.2009) Sl No

Area

No of Clients

Amount Outstanding

%

1

Rural area

35,365

11785.55

6.02

2

Urban area

9,3612

184132.20

93.98

Total

447264

195917.75

100

Table No – 4.6

6%

1 rural 2 urban

94%

Chart NO. 4.7 As the amount of investment in urban areas is higher than rural areas, the number of client is also higher. Recently the IBBL introduced RDS (Rural Development Scheme) for those who are deprived of modern banking facilities. Investment in special scheme:


Table No 4.7

(Figure in Million as on 31.12.2009)

Name of scheme

2005

2006

2007

2008

2009

% growth

RDS

1106

2242

2885

3060

3752

23%

HDS

782

700

743

639

686

7.35%

For Doctors

64

33

24

16

17

6.25%

Transport

2947

2699

2624

3087

3630

17.58%

Car

28

24

31

42

54

28.5%

Small Business

630

768

876

1104

1160

5.08%

Micro industries

10

6

36

32

50

56.25%

Agriculture

13

12

14

27

77

185%

Housing

610

507

485

429

453

5.6%

Real state

5860

6583

6903

7183

7933

10.44%

of

Chart-4.8 Investment in Special Scheme

In addition to the normal commercial and industrial investment, special schemes are developing on an ongoing basis for the implementation of specific and welfare oriented needs of the different segments of the country. 4.4 Growth of Investment: The investment of the Bank demonstrated steady growth over the years. The total investment to the Bank stood at TK.180054.40 million in 2008. It was TK.214616 million in 2009. Year

2005

2006

2007

2008

2009


investment

93644

113575

144921

180054

214616

Table No 4.8

Graph No 4.9 It shows that the amount of investment is increasing year to year. It is in upward trend. In 2008 the Bank’s total investment was Tk. 180,054 million and in 2009 it was TK. 214,616 million while in 2005 the investment was only TK.93,644 million. Sector wise investment: Table No – 4.9 Sectors % 0f investment

Industrial total 53.53

Commercial

Real estate

Agricultures

Transport

33.26

4.03

6.55

1.64


Chart No: 4.10 Among different sectors of investment industrial sector is more preferable to other sectors. In accordance with the principles of investment policy as well as to foster rapid economic development, Bank makes this type of investment. Mode-wise Investment

Mode

Muraba ha

%of to total 54.60% investment

Table No. 4.10

Chart No 9.11

HPS M

Muajj al

Purchase negotiation

34.42 %

3.41%

5.26%

& Qua rd 1.32 %

Sala m

Mushar aka

0.97%

0.02%


In Bangladesh perspective Bai- Murabaha mode is most popular mode. Bank makes investment against it by taking charge and mortgage documents. HPSM is proanother important mode of investment. After the patment here customer gets the right to be the owner of the property. Welfare scheme as a percentage of total investment

(Tk. in Million)

Year

2005

2006

2007

2008

2009

Welfare scheme

12050.1

13574.2

14620.92

15570.03

17812.57

Total investment

93644.15

113575.07

144920.61

180053.94

214616

Table No 4.11

Graph No.4.12 Trend of investment in industry: Year 2005 Amount of investment

46064

2006

2007

(TK in Million) 2008 2009

62642

78788

99233

114884

Table No 4.12 As a percentage of total investment the amount of scheme is increasing over the years. Professional and class people also take the facility to prompt their future. Chart-4.13


Size Wise Investment of IBBL Chart No – 4.14: Size Wise Investment Trend

Size Wise Investment of IBBL in 2008 Up to 0.50 Million, 11% 0.50-1.00 Million, 8%

Over 1000 Million, 27%

1.00 - 2.50 Million, 12%

500-1000 Million, 11% 2.50-5.00 Million, 11% 5.00-99 Million , 1%

200-499 Million, 13%

100-199 Million, 6%

Chart No 10

4.5 Ratio Analysis To conduct the Analysis part two techniques of analysis are used. These are Ratio Analysis for quantitative comparison of investment performance and Least Squares method for Time Series Analysis and Regression Analysis. By using time series data a straight line trend is drawn for the actual and trend value. And by using regression analysis, the relationship between deposits and scheme deposits and the relationship among scheme deposits, no. of employees and no. of branches are pointed out. Capital adequacy ratio:

Year

2005

2006

2007

2008

2009


CAR

9.44%

9.43%

10.61%

10.72%

11.65%

Table No 4.13

Graph No 4.15 From the graph we found that Capital Adequacy Ratio is increasing as per Government‘s regulation. It decreases the default risk and shows the strength of organization. Total equity of the Bank as on 31 st December 2009 increased to Tk. 23619 million (11.65% of risk weighted Asset) from Tk. 18572 million (10.72% of risk weighted Asset). The percentage of core capital in 2009 was 7.24% against minimum requirement of 5% and from July, 2010 minimum requirement increases to 9%. • Investment deposit ratio Year 2005

2006

2007

2008

2009

Investment deposit ratio

85.77%

87.13%

89.08%

87.85%

Table No 4.14

Graph No:4.16

86.89%


In 2006 Investment Deposit Ratio is less than other years. As the ratio is increasing it shows that return to depositors is increasing year to year. Deposit is the main source for investment. From the diagram we can see that over the year it is fluctuating except year 2009. Out of total collection of deposit Tk. 244292 million about Tk. 214615 million was invested excluding investment in share and securities.

• Year

Classified investment to total investment: 2005

Classified investment to 3.25% total investment Table No 4.14

2006

2007

2008

2009

3.43%

2.93%

2.39%

2.36%

Graph No:4.17 It shows that bank’s credit policy is strict enough to recover the loan. As the amount of classified loan is decreasing, return from investment is increasing. The percentage of classified investment is decreasing over the years while in 2008 it was 2.39%, in 2009 it was 2.36%. In 2009 Tk. 50610 million classified investment against Tk. 214615 million. Provision against classified investment: (Tk. In Million) Year 2005 2006 2007 2008 2009 Provision against classified investment Table No 4.15

1860.88

1463.78

1703.13

1883.45

4990.00


Graph No:4.18 Provision Against classified loan is increasing as bank is very much concern to depositors.If bank falls in any sudden loss tit can recover from the provision. Provition for investment is made as per instruction of Bangladesh Bank. For SS 20%, DF 50% & BL 100%. Prpvision against classified loan decrease the amount of investable fund while invest is in risk • Net Profit margin Year 2005 2006 2007 2008 2009 Net profit margin

13.33%

12.55%

9.8%

13.69%

15.92%

Table No 4.16

Graph No:4.19 In 2007 their loan policy is not effective for investment .After the year the profit margin is increasing that indicates income from investment is gradually increasing. • Income from investment: ( Tk. In Million) Year 2005 2006 2007 2008 2009 Income from Investment Table 4.17

8426

11295

14856

19952

21485


Graph No:4.20 Investment is the main source for income. The amount of income from year to year is increasing as the Bank’s investment policy is favorable to customers. From the diagram we can see, in 2008 Tk. 19952 million and in 2009 Tk. 21485 million. It shows good financial condition of the Bank. • Return on Assets: Year

2005

2006

2007

2008

2009

Return On Total Assets

1%

1.03%

0.84%

1.27%

1.34%

Table 4.18

Graph No:4.21

Return from assets is increasing year to year as investment is increasing. The number of customer of IBBL is increasing day by day it creates the scope for new investment. As a result utilization of assets maximizes.


Chapter Five Conceptual Analysis Conceptual Analysis 5.1 What is Liquidity? Liquidity is the availability of funds, or assurance that funds will be available, to honor all cash outflow commitments (both on- and off-balance sheet) as they fall due. These commitments are generally met through cash inflows, supplemented by assets readily convertible to cash or through the institution’s capacity to borrow. The risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off-balance sheet items are mismatched. 5.2 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. Supply and Demand of liquidity in Islamic Banks Table-5.1 Supplies of liquidity come from

Demand for Banks liquidity arise from

Customers deposit

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 ,NRD,NRT)

HPSM

Revenues from the sale of Non deposit services

Musharaka

Customers repayments

Bai us Sarf

Sale of Banks asset

Quard – Hasana

From Money Market ( through BGIIB)

Mudaraba

Investment/loan


Capital & reserve

Bai Salam

  

Bai istisna Ijara Repayment of Non deposit borrowings

Operating expenses & tax incurred in producing & selling services

Payment of Dividends

To Money Market(Through BGIIB)

5.3 Importance of liquidity management Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Sound liquidity management involves prudently managing assets and liabilities (on- and off-balance sheet), both as to cash flow and concentration, to ensure that cash inflows have an appropriate relationship to approaching cash outflows. This 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. Such planning involves identifying known, 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. 5.4 Objectives: The objectives of liquidity management are: •

Honoring all cash outflow commitments (both on- and off-balance sheet) on an ongoing, daily basis

Maintaining public confidence on the bank

Avoiding raising funds at market premiums or through the forced sale of assets; and

Satisfying statutory liquidity and statutory reserve requirements

5.5 Sound Practices for Managing Liquidity in Banking The ability to fund increases in assets and meet obligations as they become due - is crucial to the ongoing viability of any banking organization. But the importance of liquidity transcends the individual bank since a liquidity shortfall at a single organization can have systemic repercussions. The management of liquidity is therefore among the most important activities conducted at banks. Over time, there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. 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. In light of these developments, 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

5.6 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. The primary objective of this guidance is to raise banks’ resilience to liquidity stress. Among other things, the principles seek to raise standards in the following areas: •

Governance and the articulation of a firm-wide liquidity risk tolerance

Liquidity risk measurement, including the capture of off-balance sheet exposures, securitization activities, 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

Stress tests that cover a variety of institution-specific and market-wide scenarios, with a link to the development of effective contingency funding plans

Strong management of intraday liquidity risks and collateral positions

Maintenance of a robust cushion of unencumbered, high quality liquid assets to be in a position to survive protracted periods of liquidity stress

Regular public disclosures, both quantitative and qualitative, of a bank's liquidity risk profile and management

The principles also strengthen expectations 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.


5.7 ROLE OF THE BOARD OF DIRECTORS The Board of Directors of each institution is ultimately responsible for the institution’s liquidity. In discharging this responsibility, 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, manage and control liquidity within these policies. At a minimum, a Board of Directors should: • • • •

review and approve liquidity and funding policies based on recommendations by the institution’s management review periodically, but at least once a year, 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

5.8 ROLE OF MANAGEMENT The 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: •

Developing and recommending liquidity and funding policies for approval by the Board of Directors

Implementing the liquidity and funding policies

Ensuring that liquidity is managed and controlled within the liquidity management and funding management program

Ensuring 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 existing and potential liquidity needs

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

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


Reporting comprehensively on the liquidity management program to the Board of Directors at least once a year.

5.9 The Liquidity Management Process Effective liquidity management requires three-steps in which treasury identifies, manages and optimizes liquidity. These 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. It involves understanding the balances and positions of the institution on an enterprise-wide level. This requires the ability to access and gather information across the institution's many lines of business, currencies, accounts and often multiple systems. Identifying liquidity is primarily a function of data gathering, and does not include the actual movement or usage of funds. Managing liquidity within a bank's corporate treasury involves using the identified liquidity to support the bank's revenue generating activities. This may include consolidating funds, managing the release of funds to maximize their use, and tasks that "free up" lower-costing funds for lending or investment purposes to maximize their value to the institution. Optimizing liquidity is an ongoing process with a focus on maximizing the value of the institution's funds. As the strategic aspect of liquidity management, optimizing liquidity balances requires a strong and detailed understanding of the financial institution's liquidity positions across all currencies, accounts, business lines and counterparties. With this information, the bank's treasury is able to map the strategic aspects of the institution into the liquidity management process. Limited time and resources availability 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 optimize balances. This results in the entire liquidity management process being less efficient and affects the institution's bottom line. 5.10 Guidelines of Liquidity Contingency Plans Either within its Liquidity Management Policy (LMP) or separately, a bank is expected to have a liquidity contingency plan (LCP) covering the eventuality of it experiencing a liquidity crisis. 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 • Early warning indicators, including the impact of external events not directly related to the financial condition of the bank • Actions to be taken • Roles and responsibilities • Management coordination and escalation of issues • Channels of communication • Communication with the Commission • Scenario planning and testing of the plan 5.11 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. Every Islamic bank has to maintain 5.5% CRR with BB and 10.5% SLR. And every scheduled conventional bank must have to keep at least 18.5% statutory liquidity reserve. Under this 5.50% must be kept as CRR and rest of the 13% must be kept as LRR. IBBL always follows BB regulations strictly. We have already observed that IBBL maintains excess amount SLR and CRR beyond the actual requirement. Here the guideline for conducting the Islamic banks is given below 5.11.1 Guidelines for Conducting Islamic Banking: November 2009 regarding Maintenance of CRR/SLR, 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. 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, for the purpose, maintain a separate Current Account for the Islamic branches with Bangladesh Bank. 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: 1. 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). In the same way, Islamic banks/branches facing liquidity crisis can tide over the crisis by availing of investment from Islamic Bond fund as per the prescribed rules. 2. 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. To meet the crisis, REPO system may also be introduced for the Islamic Bonds. 3. The Islamic banks/branches having no surplus investment in 'Bangladesh Govt. Islamic Investment Bond’ at the time of their liquidity crisis, if arises, 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. But till funds generated from sell of Islamic Investment Bonds remain available for investment such financial support may not be available from Bangladesh Bank. 4. 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. 4. To meet the liquidity crisis, if any, of the Islamic branches of the conventional commercial bank fund may be collected from sources which follow Islamic Shariah. 5.11.2 Asset Liability Management Policy Asset Liability Management (ALM) is an integral part of Bank Management; and so, it is essential to have a structured and systematic process for manage the Balance Sheet. 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. The committee, typically called the Asset Liability Committee (ALCO), should


meet at least once every month to analysis, review and formulate strategy to manage the balance sheet. ORGANISATIONAL STRUCTURE OF ALM The responsibility of Asset liability Management is on the Treasury Department of the bank. Specifically, the Asset liability Management (ALM) desk of the Treasury Department manages the balance sheet. 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. Typically, the organizational structure looks like the following:

Chart--5.1

The key roles and responsibilities of the ALM Desk: 1) To assume overall responsibilities of Money Market activities. 2) To manage liquidity and interest rate risk of the bank. 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. 4) Understanding of the market dynamics i.e competition, potential target markets etc.


5) Provide inputs to the Treasurer regarding market views and update the balance sheet movement. 6) Deal within the dealer’s authorized limit. 

PROCESS

The bank’s asset liability management is monitored through ALCO. The information flow in the ALCO can be diagramed as below:

Chart-3.2

• Liquidity Test for Contingencies The major risk a bank runs is liquidity risk. Under 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. So, a bank’s balance sheet should have enough liquid assets for meeting contingencies. Liquid assets can be as follows:  Reserve Assets.  Cash in Tills.  Specific Government Securities.


 Foreign Currency in open position.  Specific FDRs. A liquidity contingency plan should be in place to ensure a bank is prepared to combat any crisis situation. For the Islami Bank Bangladesh Ltd. these assets are maintained according to Islamic Shariah. The instruments involved with interest are banned here like T-bill, general bond. Chapter Six LIQUIDITY MANAGEMENT OF IBBL LIQUIDITY MANAGEMENT OF IBBL 6.1 Liquidity Management of IBBL Liquidity management is the function of treasury department. This is the first priority of this department. Under this, this bank has to deal with sources of fund and how it will be implemented in the appropriate field. The bank has to appropriately manage maturity of both asset and liability. It 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. So it is so crucial for the bank. Obviously IBBL always is in a strong position in maintaining customer confidence though large collection of deposit and investment. 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. This FAD operates the “Feeding branch” which is responsible for maintenance of cash requirements, distribution and management among the branches across the country. There are mainly two “Feeding Branch” in Bangladesh which are located in Motijheel, Dhaka and Agrabad, Chittagong. Bangladesh Bank owns 9 branches across the country which are located in each district and Bogra and these are acted as “Feeding Branch” for the absence of local office. If there are no branches of BB, then Sonali Bank acted as the “Feeding Branch”. 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

Ability of the bank to attract deposit, meets its commitments

Ability of matching the maturity of assets & liabilities daily

Coping with any short term pressures

To meet liquidity needs and obligations to ensure the smooth running of business

Forecasting cash need and providing for these needs in the most cost-effective way

Reduces the adverse situation developing in the Market.

6.2 Credit Rating of the Bank Credit Rating Information and Services Ltd.-CRISL was engaged by the bank for the purpose of rating the bank since 2002. According to BB guidelines credit rating became mandatory since January, 2007. CRISL submitted its report on the financial years 2002, 2003, 2004, 2005, 2006, 2007 and also 2008 and assigned A+ (Adequate Safety) for long term rating scale for 2002 and 2003 and upgraded


the same to AA- for 2004 & 2005 and further upgraded the rating to AA (High Safety) in 2006, 2007, 2008. Financial institutions rated in this category are adjudged to be high credit quality. 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 ST1 (Highest Grade) for 2004, 2005, 2006, 2007 and 2008. Financial institutions rated in this category means having highest certainty of timely payment. Short –term Liquidity including internal fund generation is very strong and access to alternative sources of funds is outstanding. Safety is almost like risk free Government short term obligations.

Chart-6.1

6.3 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. •

Causes of Liquidity Risk:  Liquidity Shortage:-Total Demand for Liquidity > total supply of liquidity


 

Implications of liquidity deficit Offering higher rate of profit to deposits

Shortage of financial resources to invest against commitments

loss of competitiveness

Liquidity surplus:-Total Supply of liquidity > total demand for Liquidity

Implications of liquidity surplus

underutilization of financial resources

lower income and higher cost

loss of competitiveness

6.4 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).The problem related to maturity mismatch situation is that bank hold an unusually high proportion of liability subject to immediate payment

Sensitivity to rate change: When rate of profit by other banks on deposits rise/ Change of Profit rate of deposit

Loss of Public Confidence

Unanticipated change in cost of capital

Abnormal behavior of financial Market

Incorrect judgments and complacency

Conversion of Non-funded based limit into funded based

Severe deterioration of assets quality

6.5 Key Issues in liquidity management in Islamic Banking

Different Different shariah shariah 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. no. of of participants participants


6.6 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, statutory cash reserve with the Bangladesh Bank, money at call and short notice. Here are the clarifications of the above components.

6.6.1 Asset •

Cash in Hand:

The most liquid asset of a bank is cash in hand which is known as first line defense. The demand of customers is immediately met by the bank with the cash balances with itself. The banker has to be very cautious, prudent and far-sighted in determining the quantum of cash to be maintained. In case he keeps cash balances much above his actual needs, he loses interest on that excess portion. If the cash reserves fall short of its requirements, the bank may find in an embarrassing position. Hence determination of the adequate size of cash balances is an important task faced by a bank. IBBL is also facing this situation. The amount of cash in hand is increasing day by day because of increasing amount of deposits with this bank. Here the amount of cash from the year 2005-09 is given below: Cash in Hand

In Million

Table-6.1 Year Amount cash

2005 of 1285.56

Chart-6.2

2006

2007

2008

2009

1410.15

2907.14

3107.36

2480.77


Cash Reserve Requirement (CRR): 5.50% Cash Reserve Ratio is calculated and maintained as per section 25 & 33 of the bank companies Act 1991. 5% of total deposits are kept in Bangladesh Bank which varies with the deposits. In case of crisis with cash in hand the bank goes to the central bank to meet the liquidity crisis. With effect from October 01, 2005 CRR is @ 5.00% of total Time & Demand Liabilities daily on bi-weekly average basis; but CRR position should not be less than 4.50% in any day as per BRPD Circular No.01 dated 12 January, 2009. As per guidelines given by Bangladesh Bank IBBL maintained CRR minimum @ 5.00% daily on bi-weekly average basis & CRR was not less than 4.50% in any day throughout the year. The amount of CRR is continuously increasing because of increasing amount of deposit. Now the CRR becomes 5.5%. As we know that CRR is dependent on the deposit collection. Now a chart is given from 2005-09 about balance with Bangladesh Bank:

Table-6.2

CRR

In Million

Year

2005

2006

2007

2008

2009

Required Amount (5%)

5092.13

6296.85

8086.48

9885.94

11765.32

21088.84

31126.16

11202.89

19360.83

Actual 14922.70 Amount held with Bangladesh Bank

20319.45

Surplus (Deficit)

14022.59

/ 9830.57

9979.98

1893.50


Maintained (%)

14.65 %

16.13%

6.17%

10.67%

13.23%

Chart6.3

Statutory Liquidity Requirement (SLR): 10.50% SLR of the Bank is 10.50% as like as other Islamic Banks as per Bangladesh Bank Letter No. BCD (P) 744 (23)/ 5 dated January 03, 1987. Here the components of Statutory Liquidity Ratio (SLR) are cash in hand including Foreign Currency, balance with Bangladesh Bank & its Agent Bank, investment in Shares of Bangladesh Shipping Corporation and Bangladesh Government Islamic Investment Bond. The Bank maintains following SLR requirement throughout the year. SLR Table- 6.3

In Million

Year

2005

2006

2007

2008

2009

Required Reserve

10184.25

12593.70

16172.96

19771.88

23530.65

Actual Reserve maintained

20546.39

25725.39

34405.72

32784.45

45646.30


Surplus (Deficit) Maintained (%)

/ 10362.13

20.17%

13131.69

18232.76

13012.57

22115.66

20.43%

21.27%

16.58%

19.40%

Chart-6.4

•

Balance with Other Banks:

Besides maintaining the statutory cash reserve with the Bangladesh Bank, IBBL also keeps its cash in other banks to meet up the liquidity crisis. Here cash is kept in different forms which are given below: Table-6.4 Year

Balance with Other Banks 2005

In Million

2006

2007

2008

2009

In Current 217.57 Account

442.11

1069.07

1242.91

949.37

In Mudaraba 1032.03 Savings & MTDR Account with Other Islamic Banks / Financial Institutions

317.21

75.82

4909.21

Sub Total

759.32

1318.73

5858.58

1249.60

1284.77

2353.85


Outside Bangladesh

525.72

569.81

1658.47

4304.45

1819.79

Grand Total

1775.32

1329.13

4012.32

5623.18

7678.37

Chart-6.5

In Million

Chart-6.6


•

Investments in Shares & Securities:

This is another type of liquid asset that can be used to meet up the liquidity crisis. Here the investments in shares and securities of 2005-2009 are given below:

Investments in Shares & Securities Table-6.5 Year

In Million 2005

Investments 3534.16 in Shares & Securities

Chart-6.7

Chart-6.8

2006

2007

2008

2009

3557.76

20365.71

7 532.61

11136.61


Chart-6.9

6.6.2 •

Liability: Deposits and Other Accounts:

All the liquid assets are mainly necessary to fulfill the sudden demand of the depositors. The bank has to be always ready to meet the need of depositors. 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. Here the amount of deposit from 2005-2009 is given below:


Deposits and Other Accounts Table-6.6 Year

In Million 2005

Deposits and 107779.42 Other Accounts

Chart-6.10

Chart-6.11

2006

2007

2008

2009

132419.40

166325.28

200343.41

244292.14


Provision and Other Liabilities: In IBBL there are also some other liabilities which must be backed by the liquid asset portion. Here from 2005 to 2009 the amount of other liabilities is given below: Provision and Other Liabilities Table-6.7 Year 2005 2006 Provision 6885.19 and Other Liabilities

Chart-6.12

7826.18

2007

2008

2009

10195.73

1 1564.94

10739.19


Chart-6.13

Chart-6.14

Liquidity Position of IBBL (At a Glance) Table-6.8 Year

2005

2006

2007

2008

2009

SLR (%)

Maintained 20.17%

20.43%

21.27%

16.58%

19.40%

CRR (%)

Maintained 14.65 %

16.13%

6.17%

10.67%

13.23%

This actual SLR and CRR percentages remind us how strong position of IBBL in case of liquidity management. Chart-4.15


6.7

Assessing & Managing Liquidity of IBBL 6.7.1. Sources & uses of funds basis: •

Net liquidity/Fund Position:

IBBL prepares daily position of funds considering total deposits, total Investments, investment in shares & approved securities, Balance with Bangladesh Bank, CRR, SLR, Balance with Sonali Bank as an agent of Bangladesh Bank, Cash in tills, Balance in FC clearing A/cs, 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. All this components are described above.

Maturity Profile Mismatch

A key issue that IBBL 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. borrow/takes deposit short term and lend/investment longer term. However, 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. To address this risk and to make sure a bank does not expose itself in excessive mismatch, a bucket-wise (e.g. next day, 2-7 days, 7 days-1 month, 1-3 months, 3-6 months, 6 months-1 year, 1-2 year, 2-3 years, 3-4 years, 4-5 years, over 5 year) maturity profile of the assets and liabilities is prepared to understand mismatch in every bucket. We 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 ‘core and non-core’ balances, where core is defined as the portion that is expected to be stable and will stay with the bank; and non-core to be less stable. The distribution of core and non-core is determined through historical trend, customer behavior, statistical forecasts and managerial judgment; the core balance can be put into over 1 year bucket whereas non- core can be in 2-7 days or 3 months bucket. 6.7.2Liquidity Indicator Approach Many banks estimate their liquidity needs based on experience and industry averages. This often means using certain financial ratios or liquidity indicators. This ratio means changes in a bank’s liquidity position. 1. 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. Here the cash position indicator always shows increasing trend except 2007 and remains consistent Cash Position Indicator Table-6.9 Year

2005

2006

2007

2008

2009

Cash Position Indicator

16.44%

16.53%

11.02%

16.01%

16.23%

Chart-4.16


1. 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. IBBL disburses majority amount in loans which can increase its income. Capacity Ratio Table-6.10 Year 2005 Capacity Ratio

71.68%

2006

2007

2008

2009

71.02%

69.96%

73.56%

72.90%

Chart-6.17

2. 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. This ratio is in good condition because at this bank has less possibility of facing liquidity crisis. Core Deposit Ratio Table-6.11 Year 2005 Core Deposit Ratio

77.04%

2006

2007

2008

2009

78.21%

75.98%

77.56%

78.31%

Chart-6.18

3. Deposit Composition Ratio: Demand deposits are divided by time deposits where demand deposits are subject to immediate withdrawal via cheque writing while time deposits have fixed maturities with penalties for early withdrawal. This 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. Here we can see that the ratio is in reasonable condition and it is decreasing which suggests greater deposit stability. Deposit Composition Ratio Table-6.12 Year 2005 Deposit Composition Ratio

Chart: 6:19

25.56%

2006

2007

2008

2009

22.79%

25.22%

22.68%

21.44%


Chapter Seven Data Analysis & Findings Data Analysis & Findings 7.1 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. Short term creditors such as bankers are particularly interested in assessing liquidity. 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. 7.1.1 Loan to Deposit Ratio: Such ratio provides a simplified indication of the extent to which a bank is funding illiquid assets by stable liabilities. In Bangladesh BB sets rules that every bank can disburse maximum 82% of total deposit in loans and investments. IBBL is not moving in aggressive way to grant investment what we can realize from SLR and CRR percentage. Loan to Deposit Ratio Table-7.1 Year 2005 Loan to 81.72% Deposit Ratio

Chart-7.1

2006

2007

2008

2009

80.58%

80.49%

84.03%

83.05%


7.1.2 Liquid Assets to Deposit Liabilities Ratio: This indicates that how much liquid assets are available to meet up the immediate necessity of the depositors. This ensures the confidence of the depositors about the bank. In 2005, this ratio was highest because of lower investment opportunity. But from 2006-2009 the ratio is satisfactorily constant. 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. This ultimately helps to hold the customer confidence. Liquid Assets to Deposit Liabilities Ratio Table-7.2 Year

2005

2006

2007

2008

2009

Liquid Assets to 97.46 Deposit Liabilities

62.99

57.38

67.04

62.99

Chart-7.2


7.1.3 Loan to Adjusted Deposit Ratio: The ratio incorporates the extent to which loans are being financed by medium and long-term debt and by shareholders funds less investments in subsidiaries, affiliates and fixed assets. These additional aspects are included in the denominator of the ratio. 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 long-term debt and free capital.

Loan to Adjusted Deposit Ratio Table-7.3 Year

2005

Loan to 82.72% Adjusted Deposit Ratio

2006

2007

2008

2009

84.51%

84.35%

82.82%

96.16%

Chart-7.3

7.1.4 Liquid Assets to Total Assets Ratio: Liquid assets to total deposits must be calculated at month end on liquid asset holdings and total assets. How much assets are maintained in liquid form within the total assets that can be understood. So from this it can be easily realized that IBBL is slightly emphasizing more on maintaining liquid assets rather maintaining other long term assets.

Liquid Assets to Total Assets Ratio


Table-7.4 Year Liquid Assets to Total Assets Ratio

2005 69.67%

2006

2007

2008

2009

69.54%

49.87%

58.17%

55.29%

Chart-7.4

Legal reserve requirement: Islamic banks in Bangladesh have to keep 10% of its total deposits as liquidity. Of this, 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. Legal reserve requirement for conventional banks is 18%. They have to keep 5% in cash with Bangladesh Bank and the rest 13% is invested in Bangladesh Bank approved securities. Traditional banks can earn interest on their deposits with Bangladesh Bank but Islamic banks can not since they cannot receive interest as earning. Compared to interest-based traditional banking, Islamic banks, in this case, are in disadvantageous position. However, Islami Bank Bangladesh Limited has been receiving interest against its deposit with Bangladesh Bank and crediting it to its Sadaqa fund (Islami Bank Foundation). It should be noted that the interest earning are not considered as bank income and added to profit. The proceeds are spent on welfare activities. 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. Islamic banks cannot take this opportunity due to the existence of interest element in the transaction process.

Apprehension of liquidity crisis and possibility of liquidity surplus:


Islamic banks have always left with a sizeable amount of cash as liquidity surplus. Conventional banks can borrow in the form of call money among themselves even at an exorbitant rate of interest. Capital market investment: Conventional banks can invest 30% of their total deposits in shares and securities. Islamic banks have their problem in this case as they avoid any transaction based on interest. Following examples may be cited for illustration. (a) Islamic banks do not purchase shares of companies undertaking interestbased business; (b) Shares of companies taking loan from commercial banks on interest are not also purchased by Islamic banks; and, (c) Islamic banks cannot purchase shares of companies involved in businesses not approved by Shariah. 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. In the absence of Islamic money and capital market these banks cannot obtain funds from capital market at times of need. Absence of inter-bank money market: In spite of five Islamic banks have been functioning in Bangladesh, inter-bank money market within Islamic banks has not yet taken place. These banks can take initiative to form a money market among them. This may help minimising pparticularly the call money problem they are suffering from beginnings. 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. One study shows that Islami Bank Bangladesh Limited, Al Arafah Bank and Social Investment Bank Limited have used 54%, 76% and 65% respectively of their investment funds by resorting to Murabaha mode (Hoque 1996, p.9). Murabaha though considered as a Shariah approved mode, the Islamic economists have traditionally prescribed for its limited application. Due to legacy of traditional banking, lack of appropriate legal protection and standard accounting practice in business, Islamic banks in Bangladesh find Murabaha financing as suitable and Mudaraba and Musharaka as difficult to apply. Depression of Profit: Traditional banks can meet up loss arising from delay in repayment by the clients through charging compound interest. Islamic banks cannot do that. What it does it realises compensation at the rate of profit. But the compensation so realised is not added to the profit income rather credited to Sadaqa account i.e., amount meant for social welfare activities. This depresses profits of Islamic banks. This may place Islamic banks relatively in weaker position in terms of profitability compared to conventional banks Moreover, Islamic banks are to make a compulsory levy equivalent to 2.5% of its profit earned each year and credited to Sadaqa account, which also depresses banks’ profitability. This is unlikely the case with conventional banks.

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. Countries introducing Islamic banking should create an enabling environment for Islamic banks by modifying existing laws and regulations. Islamic banks in Iran and Pakistan have their legal supports. 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, 1980. 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, The Banking Companies Ordinance, the Wealth Tax Act, the Federal Bank Co-operation Act, the Income Tax Ordinance, The Registration Act and Capital Issues, 1974 7.2 Regression The regression equation of Y on X for the regression line will beY = a + b1X1 + b2X2 Where Amount of liquidity = Y; dependent variable, Total amount of loans= X1; Independent variable, Total amount of deposits= X2, Independent variable. From the table of Co-efficient, we can find that Y = 1781.620- (.099X1) + (0.167X2) In this equation, b1 = .099 indicates that if the loan increases by 1 percent, the amount of liquidity decreases by TK. 99 million. In this equation, b2 =.167 indicates that if the deposit increases by 1, the amount of liquidity increased by TK. 167 million. The Explanatory power of the independent variable can be assessed with the help of Coefficient of determination, R2. From the table of Model Summary we can find thatR2 = .953 indicates that 95.3% of the liquidity can be explained by the loans & advances and deposits. Standard Error of Estimate: It shows how much error or variability stands between the predicted result and actual observed result. Here the value is 1408.01722 that show the amount of variability of our predicted result and the actual result acquired from the real observation.


Coefficient of correlation R is the coefficient of correlation. It shows the positive correlation between liquidity and amount of deposit. Here the value of R is 0. 976 that indicates the independent variable, deposits are strongly positively related with the dependent variable (liquidity). Adjusted R Square: It is the actual coefficient of determination. If we add an independent variable then the R also became changed and Adjusted R Square shows logically how much value change is possible and that’s why the value of Adjusted R Square is always less than the value of R square. From our accepted date the value of Adjusted R square is .906. It shows actually how much dependent variable (liquidity) is changed for the changing of independent variables (loan & deposit) R square: It is the coefficient of determination. If we change the independent variables by some units then the dependent variables will also become changed and how much change is occurred by these two independent variables, is shown by R square. Here the value of R square is 0.953 meaning that 95.3% changes in the dependent variable are happening for the changes of the independent variables. In addition, the least part (1 – .953) = 4.7% is changed by other factors which are not considered. However, it shows a significant relationship with the independent and dependent variables. 7.3 Trend Analysis: 7.3.1 Asset: Table-7.5

Trend Analysis of Asset Portion

Year

2005

2006

2007

2008

2009

Cash in Hand

31.89%

9.69%

106.16%

6.89%

-20.16%

CRR

-0.75%

10.10%

61.75%

72.93%

23.99%

SLR

-3.21%

1.29%

4.11%

-22.05%

17.01%

Balance with Other -52.39% Banks

-25.13%

201.88%

40.15%

36.55%

Investment in Shares & Securities

0.67%

472.43%

-63.01%

47.85%


Chart-7.5

Interpretation: Here we can see that every component is showing high fluctuation rate. Because I have taken previous year as a base year. So it is showing the rate of change of the components. Asset components like Cash in hand, SLR, CRR etc are not so fluctuating. But investment in shares and securities is showing significant fluctuation in 2007 because of high investment opportunity and also SLR rate and general investment were lower. Table-7.6: Year

Trend analysis of Liabilities Portion 2006

2007

2008

200 9

Deposits and Other 22.70% Accounts

22.86%

25.60%

20.45%

21.9 4%

Provisions and Other -10.28% Liabilities

13.67%

30.28%

13.43%

7.14 %

Chart-7.6

2005


Interpretation: Again previous year is considered to be base year. In 2007 provisions for Off-balance sheet items increases by 31.92% which is showing significant change. Another change is that provision for taxation is kept at huge rate for increasing income trend. But deposit trend is consistently increasing which is a good sign for bank because this will increase the invested amount. 7.4 SWOT Analysis SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. 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. Here the structure of SWOT analysis is given below SWOT Analysis Chart

External

Attributes of the organization

Internal

Table-7.7 Strengths

Weakness

Internal capabilities that may help a bank to

Internal limitations than may

Reach its objective

interfere a company’s ability to active its objective

Opportunities

Threats

External factors that the company may Current and emerging external exploit to its advantage

factors that may be challenged for

the

performance Helpful

Harmful

company’s


Attributes of the Environment

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. And also the future possibility of the bank will be identified.

Internal

Table-5.8

SWOT Analysis of IBBL Strength

Weakness


Attributes of the organization External Attributes of the Environment

Huge

deposits

collected •

Pioneer of Islamic banking sector

Continuous adoption modern services

Highest deposit collector among all the conventional banks and Islamic banks

lower

Highest amount spent responsibility (CSR)

Highest no of branches across the country as a private oriented Islamic bank

corporate

Highest foreign remittance earner within the country

Proper maintenance of Islamic Shariah

Complete follower of Bangladesh Bank rules

Close customer oriented service provider

Efficient manpower

Failure investment opportunity

Insufficient

no.

of ATM booth •

Weak

ATM

services •

Less importance in marketing and advertising based activities

Opportunities

Threats

Scope to increase investment in diversified area

Opportunity to introduce most customer oriented

Implementation of strict Islamic Shariah

and mostly Islamic Shariah oriented product Possibility of expanding more ATM booths and providing smooth ATM services •

in

choosing

social

invested

amount

in

but

Scope to capture root level customers in village as a Muslim country

principles •

Lack

of

Govt.

rules

&

regulations regarding Islamic law in banking


Adoption of more and smooth i-banking services

Greater competition with other foreign and local banks

Helpful

Harmful

Achieving the Objective

Achieving Objective

the

7.5 Maintenance of Rules and Restriction by IBBL 7.5.1 CAMELS Rating: CAMELS rating are the supervisory rating of the bank’s overall condition. The CAMEL ratings system is made up of five components: capital adequacy, asset quality, management competence, earnings, and liquidity with the associated acronym. 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, authorities review the different aspects of the banks. In Bangladesh, since the early nineties, 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, compliance with banking regulations and statutes and overall operating soundness. Recently, Bangladesh Bank has upgraded the CAMEL into CAMELS effective from June, 2006. After inserting ‘S’ or ‘sensitivity to market risk’, it is presumed that this off-site supervision technique of central bank would make it a more effective tool in rating banks. The CAMELS rating components, usually taken into consideration by the monetary authorities have the following weights: capital adequacy 20%, asset quality 20%, management 25%, earnings 15%, liquidity 10% and sensitivity to market risk 10%. Following is a description of the graduations of rating: Table- 5.9


In the standard CAMELS framework, liquidity is assessed according to: volatility of deposits; reliance on interest-sensitive funds; technical competence relative to structure of liabilities; availability of assets readily convertible into cash; and access to inter-bank markets or other sources of cash, including lender-of-last-resort (LOLR) facilities at the central bank. At present, conventional commercial banks’ deposits are subject to a statutory liquidity requirement (SLR) of 18.5 percent inclusive of 5.5 percent cash reserve requirement (CRR). The CRR is to be kept with the Bangladesh Bank and the remainder as qualifying secured assets under the SLR, either in cash or in government securities. Till date, SLR for the banks operating under the Islamic Shariah is 10.5 percent. 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. The basic indicators of sound liquidity position are: deposits are readily available to meet the bank’s liquidity needs; assets are easily convertible into cash; compliance with SLR; and easy access to money markets etc. CAMELS rating system has been viewed in light of the principles and practices of Islamic banking. Though all features of CAMELS are not repugnant or contradictory to the Shariah stance, there should be some separate provisions to make it conducive and proper to analyze the whole operation of the Islamic banks. Definitely, it should also assess the Shariah implementation status of the Islamic banks as well. But for BB restriction IBBL has adopted CAMELS rating procedure and it acquires strong position for many times where no supervisory response required. 7.5.2 Basel : The Basel Accord the published in 1988 and is being followed by banks long time. But in Bangladesh Basel Capital Accord (Basel Ι) was adopted from 1996. Under this first Basel accord every bank must maintain minimum capital requirements. IBBL has adopted Basel from the very first of establishment of this regulation in Bangladesh. IBBL always maintains significant amount of statutory reserve beyond the BB’s requirements. This statutory reserve is included under core capital (Tier-1) according to the first Basel Accord. According to the following chart consistently statutory reserve is increasing as the amount of deposits is increasing day by day. SLR


Table-7.10

In Million

Year

2005

2006

2007

2008

2009

Required Reserve

10184.25

12593.70

16172.96

19771.88

23530.65

Actual Reserve maintained

20546.39

25725.39

32784.45

45646.30

Maintained (%)

20.17%

20.43%

16.58%

19.40%

34405.72

21.27%

7.5.3 Basel ΙΙ: The revised Basel framework (Basel- ΙΙ) was finalized in June 2004 which is popularly known as Basel ΙΙ. Subsequently the framework has revised up to June, 2006. 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. Bangladesh has provided a policy & guideline for implementing Basel Accord ΙΙ by the year 2008. 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 exchange rates, and commodity prices 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. Then liquidity crisis may occur. In IBBL Basel ΙΙ is implemented by a unit which is headed by 15 members for implementation of New Capital 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, 2010. In IBBL both the credit risks and market risks are vey 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. Bad and Loss amount to Total General Investment Table-7.11 Year

2005

2006

2007

2008

2009

Bad and Loss amount to Total General Investment

2.39%

2.33%

1.98%

1.65%

1.35 %

Chart-7.7


Chart-7.8

7.5.4 Stress Testing: Bangladesh Bank executed stress testing about financial information for the first time of 48 commercial banks up to 30th June, 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. Four types of risks are measured here which are credit risk, market risk, exchange rate risk and finally liquidity risk. Stress testing will be performed once in every 6 months. The main objectives of performing stress testing are managing risky exposures and helping diversification of those, monitoring the standard of service and also making sure of economic stability and fostering growth. If the depositors withdraw money at 2%-6% from the bank within five consecutive days, then what will be the liquidity condition of the bank-this is considered through stress testing. The stress test for liquidity risk evaluates the resilience of the banks towards the fall in liquid liabilities. 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. Appropriate shocks will have to be absorbed to the liquid liabilities if the current liquidity position falls at the rate of 10%, 20% and 30% respectively.

Liquidity Shock:


The ratio of liquid assets to liquid liabilities after a 10%, 20%, 30% fall in the later shall be calculated as: Table-7.12 Magnitude Shock

of 10%

Liquidity Shock 20%

30%

Year

2009

2008

2009

2008

2009

2008

Liquid Assets

153887.31

134312.24

153887.31

134312.24

153887.31

134312.24

Liquid Liabilities

244292.14

200343.41

244292.14

200343.41

244292.14

200343.41

Liquidity Ratio 62.99% (%)

67.04 %

62.99%

67.04 %

62.99%

67.04 %

Fall in Liquid 24429.21 Liabilities

20034.34

48858.43

40068.68

73287.64

60103.02

Revised Liquid 129458.1 Assets

114277.9

105028.88

94243.56

80599.67

74209.04

Revised Liquid Liabilities

180309.07

139263.26

160274.73

171004.49

140240.37

63.38%

75.42%

58.80%

47.13%

52.92%

219862.93

Liquidity Ratio 58.89% after shock (%)

Here it can be proved that due to the fall of liquid liabilities consecutively by 10%, 20%, 30% liquidity ratio also falls. So 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. Here this stress testing is based on IBBL where only data of 2008-2009 is taken into consideration. If liquid liabilities fall in this way, it is urgent to try to absorb the shock. But IBBL is not at all in this position because of higher rate of maintaining cash in hand.

Chapter Eight


Monetary Policy Tools that affect the liquidity position of the bank Monetary Policy Tools that affect the liquidity position of the bank 8.1 Open Market Operation Open market operations are the means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. And ultimately this involves with the bank’s liquidity position because this is the indication of the bank’s liquidity holding requirement. Through this BB controls the money supply which is an important tool for controlling the money supply. While BB traditionally conducts the weekly Treasury bill auction as part of the open market operation, a recent development is the introduction of repot (repurchase agreement), reverse repot and inter bank repot operations from July 2002, April 2003 and July 2003 respectively. Both repot and reverse repot transactions are conducted through auctions held on any working day. Through repot operations, BB lends fund to a bank or financial institution by purchasing securities, which the bank or financial institution repurchase upon maturity. The reverse repot facility enables participating institutions to purchase government securities from Bangladesh Bank upon commitment of resale after the agreed upon term. Both repot and reverse repot arrangements are for overnight to seven-day terms. IBBL does not involve with this mechanism to control the money supply which ultimately involves with liquidity requirement policy of the bank. As an Islamic bank IBBL cannot invest in T-Bill because of interest bearing instrument. So IBBL directly holds cash in hand or keeps deposits in BB to meet up emergency. That indicates that govt. takes loosening monetary policy which means availability of liquid money in this bank. 8.2 Money at Call: Again the call money market in Bangladesh is affected by BB's open market operations. Call money rate in Bangladesh can be viewed as a market clearing rate. Fluctuations in the overnight rates come mainly from supply and demand for liquidity in the money market. Periodic change in reserve requirements as well as economic and seasonal factors may cause the demand to rise. The overnight money market rate can also be impacted on the days when Bangladesh Bank (BB) conducts open market operations. Here in IBBL it is seen that amount of money at call is absent. IBBL maintains SLR more than its requirements and for this reason there is no option to involve in money at call. If any branch fails to meet up the demand of the customer in times of special occasion local office acts as the back up of the branch. Interest is avoided here, so this money at call cannot be practiced. Adjusting Discount Rate: Discount rate indicates the rate at which the central bank provides loan to the bank in case of any immediate necessity. Through this BB controls the money supply. To reduce the money supply BB increases the discount rate and at this the banks are discouraged to take loan from the BB as the lender of the last resort. Again to increase the money supply BB reduces the discount rate to make available the loan to the banks. This ensures enough liquidity position of the bank. If the bank fails to meet up the liquidity demand of the customers, then the bank must have to take loan from the BB. As we see that the amount of taking loan from BB is increasing day by day this indicates that BB makes the discount rate lower for ensuring the availability of the liquidity to the depositors. It is so rare that IBBL involves with discount or bank rate factor. Chart-8.1


S2

Interest Rate(R)

S1 R1

R2

LD L1

L2 Loan Demand (L)

Figure: Bank Rate in Action 8.4 Adjusting the Reserve Requirement Ratio: The reserve requirement ratio is the proportion of bank deposits that must be held as reserves. Generally every must have to keep at least 10.50% reserve within the bank itself according to the BB rules. But IBBL always maintains reasonable rate of reserve of deposits to safeguard the bank. Another is CRR which is now 5.5%. This is another reserve requirement. To control the money supply BB recently increases this percentage from 5% to 5.5%. 2% reduction in RRR will freed up some BDT 600 crore in the commercial banks’ loanable fund. Table-8.2

Reserve Requirement Ratio

Year

2005

2006

2007

2008

2009

SLR Maintained (%)

20.17%

20.43%

21.27%

16.58%

19.40 %

CRR Maintained (%)

14.65 %

16.13%

6.17%

10.67%

13.23 %

Chapter Nine Comparative Study of Liquidity Management Between IBBL SIBL and Basic Bank


Comparative Study of Liquidity Management between IBBL SIBL and BASIC Bank 9.1 BASIC Bank Limited Basic Bank Ltd. (Bangladesh Small Industries and Commerce Bank Limited) registered under the Companies Act 1913 on the 2nd of August, 1988, started its operations from the 21 st of January, 1989. It is governed by the Banking Companies Act 1991. The Bank was established as the policy makers of the country felt the urgency for a bank in the private sector for financing small scale Industries (SSIs). At the outset, the Bank started as a joint venture enterprise of the BCC Foundation with 70 percent shares and the Government of Bangladesh (GOB) with the remaining 30 percent shares. The BCC Foundation being nonfunctional following the closure of the BCCI, the Government of Bangladesh took over 100 percent ownership of the bank on 4 th June 1992. Thus the Bank is state-owned. However, the Bank is not nationalized; it operates like a private bank as before. 9.2 Social Islami Bank Limited SIBL started its operation on the 22nd November, 1995 as a Second Generation Islamic Bank in close co-operation and assistance of some renowned personalities of the Islamic world. Targeting poverty, SIBL is indeed a concept of 21 st century participatory basis Islamic banking model which is known as profit and loss sharing. SIBL was listed as a problem bank in October 2005. To overcome the situation bank adopted strategic plan that include increase in efficiency, establishment of transparency, efficiency and accountability in all spheres of banking practices. SIBL has come out from the problem bank list on 5th November, 2007. Now, SIBL has 42 branches and 10 SME Centers. Financial Performance – the IBBL Vs. The SIBL Vs. BASIC Bank The performed my internship in IBBL. Thus to compare its performance we need to consider two types of banks: Islamic and non-Islamic. Here have chosen SIBL as an Islamic Bank and BASIC Bank as a non-Islamic Bank. Thus we can understand the position of the Islamic Bank with respect to both other Islamic and conventional banks. Here the financial performance analysis of the above three banks are given below: Financial Performance – the IBBL Vs. The SIBL Vs. BASIC Bank Table-9.1 Ratios

Years

IBBL

SIBL

BASIC Bank Ltd

2009

83.05%

84.15%

84.81%

2008

84.03%

82.79%

71.07%

2007

80.49%

83.23%

69.69%

2006

80.58%

94.70%

78.89%

2005

81.72%

89.53%

69.74%

Credit or investment-deposit ratio


Average

81.97%

86.88%

74.84%

Ratio of classified loans against total loans and advances or investments 2009

2.36%

3.19%

3.15%

2008

2.39%

4.38%

3.43%

2007

2.93%

4.93%

2.93%

2006

3.43%

4.92%

4.73%

2005

3.25%

7.54%

3.34%

Average

2.87%

4.99%

3.52%

2009

1.00%

1.24%

1.41%

2008

1.03%

1.19%

1.30%

2007

0.84%

1.09%

0.83%

2006

1.27%

0.61%

1.96%

2005

1.34%

0.27%

1.23%

Average

1.09%

0.88%

1.35%

2009

55.10%

18.39%

44.59%

2008

43.30%

17.20%

41.99%

2007

30.04%

17.60%

21.60%

2006

36.84%

9.85%

58.64%

2005

48.76%

24%

35.21%

Average

42.81%

17.41%

40.41%

Return on assets (ROA)

Earnings per share

Source: Annual Report of IBBL, SIBL and BASIC Bank From the above calculation we see that in most of the cases, IBBL is in a better position compared to other two banks. IBBL is doing well what we can understand from EPS, classified loans to total investment and investment to deposit ratio and also ROA is in good form. So comparing with both conventional and Islamic banks IBBL obviously is in better condition. Analysis of the liquidity position of the IBBL


In the following table, we furnish the net liquidity gap from 2003–2006 (both maturity-wise and total figure): Table – Year-wise net liquidity gap of the IBBL Table 9.2 (Amounts are rounded and expressed in million taka) Year

Up to month

2005

2006

2007

2008

2009

Net Liquidity Gap

Net Liquidity Gap

Net Liquidity Gap

Net Liquidity Gap

Net Liquidity Gap

3421

10366

4780

4807

1 -25579

1-3 Months

1563

834

301

5989

5207

3-12 Months

23524

739

1270

871

6181

1-5 Years

-1014

316

717

564

1416

More than 5 9721 Years

4697

-812

1856

2494

Total

8215

10007

11841

14060

20106

Growth (%)

23.83%

18.33%

4.29%

18.74%

43.00%

Source: Annual Report of IBBL Analysis: Here IBBL maintains a consistency in every maturity gap. Specially in 2005, short term liquidity gap was negative and gave importance on medium term investment. Because IBBL disburses loan in small amount at a time but it maintains a chain of loan disbursement. This is because to avoid the investment default and strong credit policy. Its growth rate was not good in 2007 because its short term investment was higher which is not good for the bank. This brings the liquidity problem. After that now it is continuing its journey in smooth way.

Table – Year-wise net liquidity gap of the BASIC Bank (Amounts are rounded and expressed in million taka) Table-9.3 Year 2005 2006 2007

2008

2009


Net Liquidity Gap Up to month

1 -1906

Net Liquidity Gap

Net Liquidity Gap

Net Liquidity Gap

Net Liquidity Gap

-762

-198

-1071

-748

1-3 Months

2385

1927

2272

2649

23060

3-12 Months

275

1572

-110

-1827

-1711

1-5 Years

1565

-546

813

3756

3359

More than 5 -573 Years

49

-180

-524

717

Total

1746

2239

2596

2982

3924

Growth (%)

17.10%

28.23%

15.94

14.86%

31.59%

Source: Annual Report of BASIC Bank Analysis: Here we see that the growth of BASIC Bank is not good in couple of years. Specially in 2007 and 2008 because of weak credit policy and treasury management. This bank is attentive to invest in long term. And in 2009 it achieves some advancement investing the fund in different maturity compared to other years. Here bank is not managing its short term fund in low risk investible fund. Here its growth rate is slow but consistent. Table – Year-wise net liquidity gap of the SIBL (Amounts are rounded and expressed in million taka) Table-9.4 Year 2005 2006 2007 Net Liquidity Gap Up to month

1 1105.32

2008

2009

Net Liquidity Gap

Net Liquidity Gap

Net Liquidity Gap

Net Liquidity Gap

1565.76

1746.32

1902.66

334.12

1-3 Months

-703.54

-1569.09

-573.53

88.50

-496.54

3-12 Months

84.66

-169.27

-180.34

54.40

3008.33

1-5 Years

614.86

1354.47

805.23

206.61

1110.07


More than 5 -332.89 Years

-201.16

-551.16

-384.81

-400.24

Total

768.41

980.69

1246.52

1867.36

3555.75

Growth (%)

21.82%

27.63%

27.11%

49.81%

90.42%

Source: Annual Report SIBL Analysis: Liquidity condition of SIBL is not so well because for long term net liquidity gap is negative which increases the cost of fund. Except short term each kind of term is showing negative liquidity gap which does not indicate good of the liquidity condition of this bank. In 2006 and 2007 there is no growth in liquidity gap. Bank fails to attract profitable investment. But in recent year 2009 it improves medium term liquidity gap. Comparison among Banks IBBL is always maintaining good liquidity gap. Specially short term liquidity management is so strong what we have observed before though SLR and CRR maintenance. And its credit policy is obviously better than others because it disburses small amount of investment but disburses frequently. On the other hand, BASIC Bank emphasizes on medium term only compared to long and short term. Its net liquidity gap does not show consistency. But this bank is not conscious about handling its short term asset. It is improving its condition in better way.Again IBBL is obviously better condition than SIBL. From the liquidity maturity chart we see that in every maturity gap is balanced. But SIBL has not good management to handle liquidity because long term liabilities are kept idle here which reduces the earning of the bank. But both the Islamic banks focuses on acquiring long term liability and investing in short term sector to recover the loan. Chapter Ten Findings, Recommendations and Conclusion Findings, Recommendations and Conclusion 10.1 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. From the above analysis we have seen that IBBL is maintaining a good liquidity position. It always maintains SLR and CRR above the requirement ratio. So it never faces any liquidity crisis. But in spite of IBBL has some short comings in the liquidity management. 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. • IBBL cannot utilize proper investment opportunity because of proper forecasting about


investment. • As riba (interest) is prohibited IBBL cannot involve in inter bank transaction. • Also IBBL cannot take part in purchasing Treasury bill for lack of Islamic Money Market. • IBBL is not attentive enough in marketing and advertisement in this competitive edge. • The periodic review program is comparatively not strong enough for which huge liquidity is kept as idle.


10.2Recommendations: Islami Bank Bangladesh Ltd. has been able to establish its own presence with a continued expansion geared by increasing acceptance by the people. To continue this dynamic expansion IBBL 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 IBBL is following the Islamic rules and principles. 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. Here some suggestions are given below what should be achieved to be more efficient in liquidity management. •

As IBBL maintains huge amount of cash in hand it cannot utilize proper investment opportunity. 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, but at least once a year, 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


10.3Conclusion: Finally it can be said that liquidity management is one of the most essential part of all banks. Like others IBBL also gives emphasis on this section. Through properly handling this section a large problem is solved. That is holding customer confidence. On this the image of the bank is highly correlated. Throughout the report it is seen that liquidity management position is so strong and satisfactory. As a result IBBL achieves ST-1 rating from CRISL and it holds its performance from couple of years. Also CAMELS rating shows that this bank is performing in well manner. Compared to any other banks IBBL is performing in liquidity management in ideal way. Its risk management department is acting in a well organized manner which can be realized from the strict maintenance of Basel ΙΙ. But IBBL should give more importance in adopting competitive strategy like i-Banking and also in employee efficiency. If the employees are satisfied then the banks’ performance will be more spontaneous and smooth and consistent. This bank also should give importance in marketing strategy. For liquidity management perspective IBBL maintains huge SLR in excess of requirement. It should more careful about its investment opportunity. This can increase its earning in a dynamic way because IBBL is the collector of highest deposit. So IBBL can play a strong role here. As we know that this bank has the restriction of taking riba (Interest), this bank can’t invest in T-bill and bond. So as a one of the most profitable bank Govt. should consider to establish more accurate Islamic law and principles for the welfare of the economy which supports the Islamic Shariah. So after proper analysis and judgment BASIC Bank should focus on mainly customer satisfaction as we know customers are the king. 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. 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. Reference: M. Muzahidul Islam, Hasibul Alam Chowdhury (2006), A Comparative Study of Liquidity Management of an Islamic Bank and a Conventional Bank: The Evidence from Bangladesh. Md. Shahiduzzaman, Mahmud Salahuddin Naser, Volatility in the Overnight Money-Market Rate in Bangladesh: Recent Experiences PN 0707. Chinmoy Ghosh. Lecturer accounting and finance, March, 2009, Liquidity Management System The Bank of Japan’s Approach to Liquidity Risk Management in Financial Institutions Liquidity risk management requirements for banks, Reserve Bank of Fiji Banking Supervision Policy Statement No: 9a Bangladesh Bank rules and regulations, Guidelines for Conducting Islamic Banking: November 2009 regarding Maintenance of CRR/SLR, Liquidity management, Section VI Bangladesh Bank rules and regulations, Managing core risks in banking: asset-liability management (ALM) Bangladesh Bank, Department of Offsite Supervision, (April, 2010) GUIDELINES ON STRESS TESTING Abdul Awwal Sarker, CAMELS Rating System in the Context of Islamic Banking: A Proposed ‘S’ for Shariah Framework Islami Bank Bangladesh Limited, Treasury and Fund Management Division, International Banking Wing, Head Office, Dhaka, Fund and Liquidity Management-keeping in view of the existing Liquidity Position and Possibility of Short-Term Investment. The bank of Jamaica, 2005, Standards of sound business practices liquidity management


Bank for International Settlements, June 2008, Principles for sound liquidity risk management and supervision Appendix Loan to Deposit Ratio: (i)

Total Loans, Advances, and Leases and Bills discounted/ Receivable – comprises total loans on demand and other loans. (ii) Total Deposits - the sum of demand deposits, savings deposits, term deposits and negotiable instruments of deposit. Corresponding to Ratio: (Total Loans, Advances, Leases and Bills/ Total Deposits) X 100 = ____% 2. Loan to Adjusted Deposit Ratio: (i) Total Loans, Advances and Leases as defined in 1 above. (ii) Adjusted Denominator as computed in L1 which is Total Deposits + Borrowings + [Reserves – (Investment in Subsidiaries + Investment in Fixed Assets)] + Issues of Medium and Long Term Debt + Debentures Ratio: Total Loans, Advances, Leases and Bills/L1 X 100 = ___% 3. Liquid Assets to Total Deposits Ratio (i) (ii)

Liquid Assets – comprises cash on hand, balances with Bangladesh Bank, and balance due from other banks, money at call, investments, treasury bills and Reserve Bank notes. Total Deposits – as defined in 1 above.

Ratio: Liquid Assets/ Total Deposits X 100 = ____________________% 4. Liquid Assets to Total Assets Ratio (i) Liquid Assets – as defined in 1 above. (ii) Total Assets – Comprises cash on hand, balances due, money at call, loans and advances, lease finance, bills discounted/receivable, investments, customers liability for acceptances outstanding (contra), net local inter branch transactions, credit institution premises, furniture, fixtures and equipment, real and other properties owned and acquired and other assets. Ratio: Liquid Assets/Total Assets X 100 = ____________________%


Regression Variables Entered/Removed Variables Model Entered

Variables Removed

Method

1

.

Enter

Deposit, Investmenta

a. All requested variables entered. Model Summary Model R 1

.976

a

R Square

Adjusted Square

.953

.906

R Std. Error of the Estimate 1408.01722

a. Predictors: (Constant), Deposit, Investment ANOVAb Model 1

Sum of Squares df

Mean Square

F

Sig.

Regression

8.072E7

2

4.036E7

20.358

.047a

Residual

3965024.988

2

1982512.494

Total

8.468E7

4

a. Predictors: (Constant), Deposit, Investment b. Dependent Variable: Liquidity Coefficientsa Standardized Unstandardized Coefficients Coefficients Model 1

B

Std. Error

(Constant)

1781.620

2976.715

Investment

-.099

.336

Deposit

.167

.287

Beta

t

Sig.

-.599

.610

-1.007

-.296

.795

1.981

.583

.619

a. Dependent Variable: Liquidity Bibliography 

Islami Bank Bangladesh Annual Report 2009

Islami Bank Bangladesh Annual Report 2008

Islami Bank Bangladesh Annual Report 2007

Brochures Of Islami Bank Bangladesh

Branch Managers’ Conference Book 2008

Various types of publications of IBBL.


Various lecture sheets of IBTRA

Investment Manuals, Islami Bank Bangladesh Ltd. (IBBL)

Islami Bank Bangladesh Limited Website-

http://www.islamibankbd.com

Liquidity management of islami bank bangladesh limited  

Bangladesh is one of the largest Muslim countries in the world. The people of this country are deeply committed to Islamic way of life as en...

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