Liquidity Management of Islami Bank Bangladesh Ltd

8/10/2019 Liquidity Management of Islami Bank Bangladesh Ltd

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Liquidity Management

of

Islami Bank Bangladesh Limited

Submitted by

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"ha#te$ !ne

Int$odu%tion


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&.& Statement of the To#i%'

Liquidity means the availability of funds, or assurance that funds will be available, to

hand on cash outflow commitments. Managing liquidity is a fundamental component in

the safe and sound management of all financial institutions. Customers confidence is

mostly dependent on how efficient a bank to handle any type of liquidity crisis. As a

direct link to customers a bank must emphasie on this. !""L is treated in different way

from other conventional banks because of its lucrative contribution in economy. #or this,

a planned way is necessary to manage the liquidity section. $ecent technological and

financial innovations have provided banks with new ways of funding their activities and

managing their liquidity, but recent turmoil in global financial markets has posed new

challenges for liquidity management. !""L always tries to stand on a standard queue to

provide satisfactory services to the customers. #rom this report it can be realied about

the components of liquidity management and what are the present conditions of thecomponents from year %&&'(%&&) and also how rules and regulations given by

"angladesh "ank affect the liquidity policy of !""L is indicated here.

&.( !b)e%ti*es of the Study'

*he first ob+ective of writing the report is fulfilling the partial requirements of the

M"A program. !n this report, we have attempted to give an overview of Liquidity

osition of !slami "ank "angladesh Limited in general. *he primary ob+ective of thisreport is to determine the origin of liquidity in "angladesh and in !""L Limited. And

*o make a bridge between the theories and practices on banking operations

-ere are some ob+ectives for preparing the report.

1. *o find out the components of liquidity statement !""L.

2. *o know the details about liquidity of !""L.

3. *o analye the relation among liquidity, loans and deposits.

4. *o know the condition between specialied bank and !slamic bank.

5. *o know the impact of "angladesh "ank regarding liquidity management.

&.+ S%o#e of the Study'


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*his report provides some important evaluations and present scenario of !""L. -ere

some points are given below

/valuation of the different financial performance of !""L.

resent condition of !""L in banking sector.

0nowledge of diversified products and services.

Liquidity position of !""L.

Condition of !""L regarding "angladesh "ank rules.

1ifferent problems and solutions regarding liquidity management.

&., Methodology'

&.,.& "olle%tion of data'

rimary data are measurements observed and recorded as part of an original study. 2hen

the data required for a particular study can be found neither in the internal records of the

enterprise, nor in published sources, it may become necessary to collect original data.

$ima$y -ata

#or the completion of this report, the primary sources of data are(

1iscussion with officials of the !""L

/3perts opinion and comments

4bservations of the officials

Se%onda$y data'

*he secondary data, which was used for this research, were the books, working paper,

annual report, brochures, and other secondary data which was collected from the web site

and also from the !slami "ank *raining and $esearch Association.

&. LIMITATI!NS !/ T0E ST1-2'

*here are some limitations in our study. 2e faced some problems during the study, which

we are mentioning them as below(

&. La%k of time'

*he time period of this study is very short. 5o ! could not go in depth of the study. Most

of the times, the officials were busy and were not able to give me much time.

(. Insuffi%ient data'

5ome desired information could not be collected due to confidentiality of business.

+. La%k of monito$y su##o$t'


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#ew officers sometime were busy in their +ob. 5ometime they didnt want to supervise us

out of their official work.

,. !the$ limitations'

As we are newcomers, there is a lack of previous e3perience in this concern. And many

practical matters have been written from our own observation that may vary from personto person.

"ha#te$ T3o

The !$gani4ation5 An !*e$*ie3


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The !$gani4ation

(.& About Bank

As a Muslim country people of "angladesh are deeply committed to !slamic way of lifeand follow the -oly 6ur7an and the 5unnah. *his "ank is the first of its kind in 5outheast

Asia. !t is committed to conduct all banking and investment activities on the basis of

interest(free profit(loss sharing system. !n doing so, it has unveiled a new horion and

ushered in a new silver lining of hope towards materialiing a long cherished dream of

the people of "angladesh for doing their banking transactions in line with what is

prescribed by !slam. 2ith the active co(operation and participation of !slamic

1evelopment "ank 8!1"9 and some other !slamic banks, financial institutions,

government bodies and eminent personalities of the Middle /ast and the :ulf countries,

!slami "ank "angladesh Limited has by now earned the unique position of a leading

private commercial bank in "angladesh.

Corporate !nformation8As on ;une


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(.( 6ision'

4ur vision is to always strive to achieve superior financial performance, be considered a

leading !slamic "ank by reputation and performance.

4ur goal is to establish and maintain the modern banking techniques, to ensure the

soundness and development of the financial system based on !slamic principles and tobecome the strong and efficient organiation with highly motivated professionals,

working for the benefit of people, based upon accountability, transparency and

integrity in order to ensure stability of financial systems.

2e will try to encourage savings in the form of direct investment.

2e will also try to encourage investment particularly in pro+ects which are more to

lead to higher employment.

(.+ Mission'

*o establish !slamic banking through the introduction of a welfare oriented banking

system and also ensure equity and +ustice in the field of all economic activities, achieve

balanced growth and equitable development through diversified investment operations

particularly in the priority sectors and less developed areas of the country. *o encourage

socio economic uplift and financial services to the low(income community particularly in

the rural areas.


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(., !b)e%ti*es of IBBL

*o conduct interest(free banking.

*o establish participatory banking instead of banking on debtor(creditor relationship.

*o invest on profit and risk sharing basis.

*o establish a welfare(oriented banking system.

*o contribute towards balanced growth and development of the country through

investment operations particularly in the less developed areas.

*o contribute in achieving the ultimate goal of !slamic economic system

(. The Boa$d of -i$e%to$s'

*he "oard of 1irectors consists of =? non e3ecutive members including = !ndependent

1irector. *he number of "oard of members is within the ma3imum limit set by the central

bank. *he "oard is composed of e3perienced members with diverse professional

e3periences such as business, administration, banking D finance, accounting, general

management, diplomacy, government services, engineering and fund management which

made the "oard very efficient and balanced in deciding and directing on the various

issues of the bank. *he "oard members are independent who e3press their views and

opinions free from any influence. *he 1irectors are also independent from management,

businessEother relationship of the bank that could materially interfere the activities of the

bank. *here is also a clear demarcation of duties and responsibilities between the "oard

and management. 2hile the "oard is responsible for formulating the board policy

framework within which the bank is operating, the management is accountable for the

e3ecution of the policies and attainment of the banks ob+ectives. *he "oard e3ercises

independent oversight on the affairs of management.


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(.7 "ommittees'

*he "oard has two standing committees vi. /3ecutive Committee and Audit Committee.

*hese Committees operate within clear terms of reference.

(.7.& The E8e%uti*e "ommittee

*he e3ecutive Committee consists of B members and entrusted with the task of policy

making and taking important and strategic decisions as authoried by the "oard within

the norms set by the "angladesh "ank.

(.7.( The Audit "ommittee

*he Audit Committee formed by the "oard of 1irectors as per instruction of "angladesh

"ank consists of < members and is entrusted with, among others, the task of e3ercising

their duties D responsibilities with regard to

!nternal Control

1isclosure of #inancial $eport

!nternal Audit

/3ternal Audit and

Compliance of e3isting laws and regulations

(.7.+ The Management "ommittee

*he Management Committee of the bank comprises of =@ top level e3ecutives, headed by

the Managing 1irector 8C/49 of the bank. *he Committee with financial, administrative

and business discretionary power delegated by the "oard is mainly responsible for

implementation of the policies and guidelines approved by the "oard. *he Management

Committee thoroughly scrutinies the issues before placing to the /3ecutive

CommitteeE"oard. *he Management Committee thoroughly evaluates the performance of

the bank, takes strategic action plan to achieve various targets of the bank set by the

"oard of 1irectors.

(.7., Asset5Liability "ommittee 9AL"!:

*he asset liability management 8ALC49 of !""L is comprised of => members from the

top management which meets once in a month to review the liquidity position of the

bank, maturity grouping of assets and liabilities, 1eposits and !nvestment pricing and

liquidity contingency plan in order to manage the balance sheet risk in a better way. *he

ALC4 is entrusted with the responsibility of ensuring the banks sufficient liquidity at all


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times to meet its obligations when becomes due without compromising the earning

potential of the bank. !n every ALC4 meeting, the Committee reviews actions taken in

previous ALC4 meeting, economic and market status and outlook, liquidity risk related to

balance sheet, profit rate structure etc. 5pecial ALC4 meeting is arranged as and when

any contingent situation arises.

(.; Sha$i


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(.> $odu%ts and Se$*i%es

Lo%al %u$$en%y -e#osit A%%ounts

=. Al(2adeeah Current Account.

%. Mudaraba 5avings Account.


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=%. /quity and /ntrepreneurship #und of "angladesh "ank.

Se%to$s unde$ SME In*estments

=. Manufacturing.

%. *rading.


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=. !slami "ank -ospital.

%. !slami "ank Medical College.


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>. %&&% =@@=

). %&&< =@''

=&. %&&? ='>=

==. %&&' =B'>

=%. %&&B =B%&

= =')=

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


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"ha#te$ Th$ee

"on%e#tual Analysis


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"on%e#tual Analysis

+.& What is Liquidity

Liquidity is the availability of funds, or assurance that funds will be available, to honor allcash outflow commitments 8both on( and off(balance sheet9 as they fall due. *hese

commitments are generally met through cash inflows, supplemented by assets readily

convertible to cash or through the institutions capacity to borrow. *he risk of illiquidity

may increase if principal and interest cash flows related to assets, liabilities and off(

balance sheet items are mismatched.

+.( Su##ly and -emand of liquidity in Islami% Banks

*he following sources of liquidity and supply come together to determine each banks net

liquidity position at any moment of time.

Su##ly and -emand of liquidity in Islami% Banks

Table5+.&

Su##lies of liquidity %ome f$om -emand fo$ Banks liquidity a$ise f$om

Customers deposit

Customers 1eposit withdrawal

Mudaraba 1eposits Fses for C$$ D 5L$

Al 2adiah deposit !nvestment to Customers

5undry deposit

"ai Murabaha

"ills payable "ai Mu++al

Contingent 1eposits8security ,$1,$*9

-5M

$evenues from the sale of on

deposit services

Musharaka

Customers !nvestmentEloan

repayments

"ai us 5arf

5ale of "anks asset 6uard G -asana

#rom Money Market 8 through

":!!"9

Mudaraba

Capital D reserve "ai 5alam


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"ai istisna

!+ara

$epayment of on deposit

borrowings

4perating e3penses D ta3

incurred in producing D selling

services

ayment of 1ividends

*o Money Market8*hrough ":!!"9

+.+ Im#o$tan%e of liquidity management

Managing liquidity is a fundamental component in the safe and sound management of all

financial institutions. 5ound liquidity management involves prudently managing assets

and liabilities 8on( and off(balance sheet9, both as to cash flow and concentration, to

ensure that cash inflows have an appropriate relationship to approaching cash outflows.

*his needs to be supported by a process of liquidity planning which assesses potential

future liquidity needs, taking into account changes in economic, regulatory or other

operating conditions. 5uch planning involves identifying known, e3pected and potential

cash outflows and weighing alternative assetEliability management strategies to ensure

that adequate cash inflows will be available to the institution to meet these needs.

+., !b)e%ti*es'

*he ob+ectives of liquidity management are

-onoring all cash outflow commitments 8both on( and off(balance sheet9 on an

ongoing, daily basis

Maintaining public confidence on the bank

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

5atisfying statutory liquidity and statutory reserve requirements

+. Sound $a%ti%es fo$ Managing Liquidity in Banking

*he ability to fund increases in assets and meet obligations as they become due ( is

crucial to the ongoing viability of any banking organiation. "ut the importance of

liquidity transcends the individual bank since a liquidity shortfall at a single organiation

can have systemic repercussions. *he management of liquidity is therefore among the


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most important activities conducted at banks. 4ver time, there has been a declining ability

to rely on core deposits and an increased reliance on wholesale funding. $ecent

technological and financial innovations have provided banks with new ways of funding

their activities and managing their liquidity, but recent turmoil in global financial markets

has posed new challenges for liquidity management. !n light of these developments, thereare some necessary practices for managing liquidity in banks which are indicated below

1eveloping a structure for managing liquidity

Measuring and monitoring net funding requirements

Managing market access

Contingency planning

#oreign currency liquidity management

!nternal controls for liquidity risk management

$ole of public disclosure in improving liquidity

+.7 $in%i#les fo$ Sound Liquidity ?isk Management and Su#e$*ision

*he principles underscore the importance of establishing a robust liquidity risk

management framework that is well integrated into the bank(wide risk management

process. *he primary ob+ective of this guidance is to raise banks resilience to liquidity

stress.Among other things, the principles seek to raise standards in the following areas

:overnance and the articulation of a firm(wide liquidity risk tolerance.

Liquidity risk measurement, including the capture of off(balance sheet e3posures,

securitiation activities, and other contingent liquidity risks that were not well

managed during the financial market turmoil.

Aligning the risk(taking incentives of individual business units with the liquidity

risk e3posures their activities create for the bank.

5tress tests that cover a variety of institution(specific and market(wide scenarios,

with a link to the development of effective contingency funding plans.

5trong management of intraday liquidity risks and collateral positions.


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Maintenance of a robust cushion of unencumbered, high quality liquid assets to be

in a position to survive protracted periods of liquidity stress.

$egular public disclosures, both quantitative and qualitative, of a bank7s liquidity

risk profile and management.

*he principles also strengthen e3pectations about the role of supervisors, including the

need to intervene in a timely manner to address deficiencies and the importance of

communication with other supervisors and public authorities, both within and across

national borders.

+.; ?!LE !/ T0E B!A?- !/ -I?E"T!?S

*he "oard of 1irectors of each institution is ultimately responsible for the institutions

liquidity. !n discharging this responsibility, a "oard of 1irectors usually charges

management with developing liquidity and funding policies for the boards approval and

developing and implementing procedures to measure, manage and control liquidity within

these policies.

At a minimum, a "oard of 1irectors should

review and approve liquidity and funding policies based on recommendations by the

institutions management review periodically, but at least once a year, the liquidity management program

ensure that an internal inspectionEaudit function reviews the liquidity and funding

operations to ensure that the institutions 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

+.= ?!LE !/ MANAGEMENT

*he management of each institution is responsible for managing and controlling the day(

to(day liquidity of the institution according to the liquidity management program.

Although specific liquidity management responsibilities will vary from one institution to

another, management should be responsible for


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1eveloping and recommending liquidity and funding policies for approval by the

"oard of 1irectors.

!mplementing the liquidity and funding policies.

/nsuring that liquidity is managed and controlled within the liquidity management

and funding management program.

/nsuring the development and implementation of appropriate reporting systems

with respect to the content, format and frequency of information concerning the

institutions liquidity position, in order to permit the effective analysis and the

sound and prudent management and control of e3isting and potential liquidity

needs.

/stablishing and utiliing a method for accurately measuring the institutions

current and pro+ected future liquidity.

Monitoring economic and other operating conditions to forecast potential liquidity

needs.

/nsuring that an internal inspectionEaudit function reviews and assesses the

liquidity management program.

1eveloping lines of communication to ensure the timely dissemination of the

liquidity and funding policies and procedures to all individuals involved in the

liquidity management and funding risk management process.

$eporting comprehensively on the liquidity management program to the "oard of

1irectors at least once a year.

+.> The Liquidity Management $o%ess

/ffective liquidity management requires three(steps in which treasury identifies, manages

and optimies liquidity. *hese steps are interdependent, each requiring the successful

implementation of the other two to optimally manage liquidity.

Identifying liquidity is the foundation from which the entire liquidity management

process depends. !t involves understanding the balances and positions of the institution on


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an enterprise(wide level. *his requires the ability to access and gather information across

the institution7s many lines of business, currencies, accounts and often multiple systems.

!dentifying liquidity is primarily a function of data gathering, and does not include the

actual movement or usage of funds.

Managing liquidity within a bank7scorporate treasury involves using the identified

liquidity to support the bank7s revenue generating activities. *his may include

consolidating funds, managing the release of funds to ma3imie their use, and tasks that

Ifree upI lower(costing funds for lending or investmentpurposes to ma3imie their value

to the institution.

!#timi4ing liquidity is an ongoing process with a focus on ma3imiing the value of

the institution7s funds. As the strategic aspect of liquidity management, optimiing

liquidity balances requires a strong and detailed understanding of the financial

institution7s liquidity positions across all currencies, accounts, business lines and

counterparties. 2ith this information, the bank7s treasury is able to map the strategic

aspects of the institution into the liquidity management process.

Limited time and $esou$%es a*ailability is the biggest challenge in the liquidity

management process to treasury. Although treasury groups are staffed with very capable

personnel, a large amount of their time is spent on the task(based function of identifying

liquidity instead of on the strategic elements necessary to optimie balances. *his results

in the entire liquidity management process being less efficient and affects the institution7s

bottom line.

+.&@ Guidelines of Liquidity "ontingen%y lans

/ither within its Liquidity Management olicy 8LM9 or separately, a bank is e3pected to

have a liquidity Contingency lan 8L"9 covering the eventuality of it e3periencing a

liquidity crisis. *he LC should be designed to ensure that adequate liquidity is achieved

at such times and should contain a number of key elements

*he identification and definition of what constitutes a liquidity crisis.

/arly warning indicators, including the impact of e3ternal events not directly related

to the financial condition of the bank.

Actions to be taken.


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$oles and responsibilities.

Management coordination and escalation of issues.

Channels of communication.

Communication with the Commission.

5cenario planning and testing of the plan.

+.&& Im#a%t of "ent$al Bank ?egulation

"angladesh "ank has the specific guidelines regarding statutory reserve which ensures

the minimum liquidity position of the bank and also safeguards the depositors. /very

!slamic bank has to maintain '.' C$$ with "" and =&.' 5L$. And every scheduled

conventional bank must have to keep at least =>.' statutory liquidity reserve. Fnder this

'.'& must be kept as C$$ and rest of the =


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=. *he e3cess liquidity of the !slamic banksE !slamic branches of conventional 5cheduled

banks may be invested in the J"angladesh :overnment !slamic !nvestment "ond

8!slamic "ond introduced by the :overnment9. !n the same way, !slamic banksEbranches

facing liquidity crisis can tide over the crisis by availing of investment from !slamic "ond

fund as per the prescribed rules.

%. !n case !slamic banksEbranches have surplusE enough investment in the !slamic

!nvestment "ond and subsequently faces liquidity crisis then the bank E branch may

overcome the crisis by availing of investment facilities from !slamic "ond #und against

lien of their over purchased !slamic "onds. *o meet the crisis, $/4 system may also be

introduced for the !slamic "onds.


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called the Asset Liability Committee 8ALC49, should meet at least once every month to

analysis, review and formulate strategy to manage the balance sheet.

!?GANISATI!NAL ST?1"T1?E !/ ALM

*he responsibility of Asset liability Management is on the Treasur" #e$artment of the

bank. 5pecifically, the Asset liability Management 8ALM9 desk of the *reasury

1epartment manages the balance sheet. *he results of balance sheetanalysis along with

recommendation is placed in the ALC4 meeting by the *reasurer where important

decisions are made to minimie risk and ma3imie returns. *ypically, the organiational

structure looks like the following

"ha$t55+.&


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*he key roles and responsibilities of the ALM 1esk

&:*o assume overall responsibilities of Money Market activities.

(:*o manage liquidity and interest rate risk of the bank.+: *o comply with the local central bank regulations in respect of banks statutory

obligations as well as thorough understanding of the risk elements involved with the

business.

,:Fnderstanding of the market dynamics i.e competition, potential target markets etc.

:rovide inputs to the *reasurer regarding market views and update the balance sheet

movement.

7:1eal within the dealers authoried limit.

?!"ESS

*he banks asset liability management is monitored through ALC4. *he information flow

in the ALC4 can be diagramed as below

"ha$t5+.(

Liquidity Test fo$ "ontingen%ies

*he ma+or risk a bank runs is liquidity risk. Fnder any circumstances a bank has to honor

its commitments. As a result, it has to make sure that enough liquidity is available to meet

fund requirements in situations like liquidity crisis in the market, policy changes by

central bank, a name problem of the bank etc. 5o, a banks balance sheet should have

enough liquid assets for meeting contingencies. Liquid assets can be as follows

$eserve Assets.

Cash in *ills.


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5pecific :overnment 5ecurities.

#oreign Currency in open position.

5pecific #1$s.

A liquidity contingency plan should be in place to ensure a bank is prepared to combat

any crisis situation. #or the !slami "ank "angladesh Ltd. these assets are maintainedaccording to !slamic 5hariah. *he instruments involved with interest are banned here like

*(bill, general bond.

"ha#te$ /ou$

LID1I-IT2 MANAGEMENT !/ IBBL


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LID1I-IT2 MANAGEMENT !/ IBBL

,.& Liquidity Management of IBBL

Liquidity management is the function of treasury department. *his is the first priority of

this department. Fnder this, this bank has to deal with sources of fund and how it will be

implemented in the appropriate field. *he bank has to appropriately manage maturity of

both asset and liability. !t is so important for a bank because if any liquidity crisis occurs

beyond the statutory reserve and other liquidity sources, bank will face disastrous

consequence like bank run which reduces the confidence of the client and this ultimately

reduces the goodwill of the bank. 5o it is so crucial for the bank. 4bviously !""L always

is in a strong position in maintaining customer confidence though large collection of

deposit and investment. Local 4ffice acts as head office of the bank where #A1

8#inancial Administration 1ivision9 is considered as a branch though it is situated in the

local office. *his #A1 operates the K#eeding branch which is responsible for

maintenance of cash requirements, distribution and management among the branches

across the country. *here are mainly two K#eeding "ranch in "angladesh which are

located in Moti+heel, 1haka and Agra bad, Chittagong. "angladesh "ank owns )

branches across the countries which are located in each district and "ogura and these are

acted as K#eeding "ranch for the absence of local office. !f there are no branches of "",

then 5onali "ank acted as the K#eeding "ranch. 5o in this way !""L maintains the cash

requirements of its branches across the country. !n !""L liquidity management means

having

Ability of bank to meet maturating liability.

Ability of the bank to attract deposit, meets its commitments.

Ability of matching the maturity of assets D liabilities daily .

Coping with any short term pressures.

*o meet liquidity needs and obligations to ensure the smooth running of business.

#orecasting cash need and providing for these needs in the most cost(effective way.

$educes the adverse situation developing in the Market.


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,.( "$edit ?ating of the Bank

Credit $ating !nformation and 5ervices Ltd.(C$!5L was engaged by the bank for the purpose of

rating the bank since %&&%. According to "" guidelines credit rating became mandatory since

;anuary, %&&@. C$!5L submitted its report on the financial years %&&%, %&&. #inancial institutions rated in this category are ad+udged to

be high credit quality. *his level of rating indicates a corporate entity with a sound credit profile

And without significant problems. $isks are modest and may vary slightly from time to time

because of economic conditions.

C$!5L assigned 5*(% 8-igh :rade9 for short term rating scale for %&&% and %&&

$equired

Amount 8'9

'&)%.=< B%)B.>' >&>B.?> )>>'.)? ==@B'.) =)

!n Current

Account

%=@.'@ ??%.== =&B).&@ =%?%.)= )?)..?@ ?


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"ha$t5,.7

In*estments in Sha$es H Se%u$ities'

*his is another type of liquid asset that can be used to meet up the liquidity crisis. -ere

the investments in shares and securities of %&&'(%&&) are given below

In*estments in Sha$es H Se%u$ities

Table5,.

Near (@@ (@@7 (@@; (@@= (@@>

In*estments in

Sha$es H

Se%u$ities


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"ha$t5,.=

"ha$t5,.>

,.7.( Liability'

-e#osits and !the$ A%%ounts'

All the liquid assets are mainly necessary to fulfill the sudden demand of the depositors.

*he bank has to be always ready to meet the need of depositors. -ere the amount of

deposits is increasing significantly in !""L and this bank has collected huge amount of

deposits that si3 other conventional banks have not collected this huge amount of

deposits. -ere the amount of deposit from %&&'(%&&) is given below


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-e#osits and !the$ A%%ounts

Table5,.7

Near (@@ (@@7 (@@; (@@= (@@>

1eposits and

4ther

Accounts

=&@@@).?% =


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$o*ision and !the$ Liabilities'

!n !""L there are also some other liabilities which must be backed by the liquid asset

portion. -ere from %&&' to %&&) the amount of other liabilities is given below

$o*ision and !the$ Liabilities

Table5,.;

Near (@@ (@@7 (@@; (@@= (@@>

$o*ision

and !the$

Liabilities

B>>'.=) @>%B.=> =&=)'.@< = ='B?.)? =&@


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"ha$t5,.&+

"ha$t5,.&,

Liquidity osition of IBBL 9At a Glan%e:


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Table5,.=

Near %&&' %&&B %&&@ %&&> %&&)

5L$ Maintained

89

%&.=@ %&.?


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A key issue that !""L needs to focus on is the maturity of its assets and liabilities in

different tenors. A typical strategy of a bank to generate revenue is to run mismatch, i.e.

borrowEtakes deposit short term and lendEinvestment longer term. -owever, mismatch is

accompanied by liquidity risk and e3cessive longer tenor !nvestment against shorter(term

deposits would put a banks balance sheet in a very critical and risky position. *o address

this risk and to make sure a bank does not e3pose itself in e3cessive mismatch, a bucket(

wise 8e.g. ne3t day, %(@ days, @ days(= month, =(< months,

Near %&&' %&&B %&&@ %&&> %&&)

"ash

osition

=B.?? =B.'


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Indi%ato$

"ha$t5,.&7

(. "a#a%ity ?atio'

-ere net loans and leases are divided by total assets which is really a negative liquidity

indicator because loans and leases are often among the most illiquid assets a bank can

hold. !""L disburses ma+ority amount in loans which can increase its income.


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"a#a%ity ?atio

Table5,.&@

Near %&&' %&&B %&&@ %&&> %&&)

"a#a%ity

?atio

@=.B> @=.&% B).)B @.%= @'.)> @@.'B @>.


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"ha$t5,.&=

,. -e#osit "om#osition ?atio'

1emand deposits are divided by time deposits where demand deposits are sub+ect toimmediate withdrawal via chque writing while time deposits have fi3ed maturities with

penalties for early withdrawal. *his ratio measures how stable a funding base each bank

possesses, a decline in the ratio suggests greater deposit stability and therefore a lessened

need for liquidity. -ere we can see that the ratio is in reasonable condition and it is

decreasing which suggests greater deposit stability.

-e#osit "om#osition ?atio

Table5,.&(

Near %&&' %&&B %&&@ %&&> %&&)

1eposit

Compos

ition

$atio

%'.'B %%.@) %'.%% %%.B> %=.??

"ha$t' ,'&>


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"ha#te$ /i*e

-ata Analysis H /indings


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-ata Analysis H /indings

.& ?atio Analysis'

Liquidity ?atio'

*his measures the short term ability of the enterprise to pay its maturing obligations and

to meet une3pected needs for cash. 5hort term creditors such as bankers are particularlyinterested in assessing liquidity. *he ratios that can be used to determine the enterprises

short term debt paying ability are the current ratio and liquid assets to deposit liabilities.

.&.& Loan to -e#osit ?atio'

5uch ratio provides a simplified indication of the e3tent to which a bank is funding

illiquid assets by stable liabilities. !n "angladesh "" sets rules that every bank can

disburse ma3imum >% of total deposit in loans and investments. !""L is not moving in

aggressive way to grant investment what we can realie from 5L$ and C$$ percentage.

Loan to -e#osit ?atio

Table5.&

Near %&&' %&&B %&&@ %&&> %&&)

Loan to 1eposit $atio >=.@% >&.'> >&.?) >?.&


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.&.( Liquid Assets to -e#osit Liabilities ?atio'

*his indicates that how much liquid assets are available to meet up the immediate

necessity of the depositors. *his ensures the confidence of the depositors about the bank.

!n %&&', this ratio was highest because of lower investment opportunity. "ut from %&&B(%&&) the ratio is satisfactorily constant. *his is a good sign for the bank because

management has been able to hold the ratio constant which is a success of the bank. *his

ultimately helps to hold the customer confidence.

Liquid Assets to -e#osit Liabilities ?atio

Table5.(

2ea$ (@@ (@@7 (@@; (@@= (@@>

Liquid Assets to

-e#osit Liabilities

)@.?B B%.)) '@. B@.&? B%.))

"ha$t5.(


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.&.+ Loan to Ad)usted -e#osit ?atio'

*he ratio incorporates the e3tent to which loans are being financed by medium and long(

term debt and by shareholders funds less investments in subsidiaries, affiliates and fi3ed

assets. *hese additional aspects are included in the denominator of the ratio. 5uch ratio

takes into accountthe deficiencies in the loan to deposit ratio by considering the e3tent to

which the ma+ority portion of the institutions business is funded by medium and long(

term debt and free capital.

Loan to Ad)usted -e#osit ?atio

Table5.+

Near %&&' %&&B %&&@ %&&> %&&)

Loan to

Ad)usted

-e#osit ?atio

>%.@% >?.'= >?.


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.&., Liquid Assets to Total Assets ?atio'

Liquid assets to total deposits must be calculated at month end on liquid asset holdings

and total assets. -ow much assets are maintained in liquid form within the total assets

that can be understood. 5o from this it can be easily realied that !""L is slightly

emphasiing more on maintaining liquid assets rather maintaining other long term assets.

Liquid Assets to Total Assets ?atio

Table5.,

Near %&&' %&&B %&&@ %&&> %&&)

Liquid Assets

to Total Assets

?atio

B).B@

B).'? ?).>@ '>.=@ ''.%)

"ha$t5.,


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Legal $ese$*e $equi$ement

!slamic banks in "angladesh have to keep =& of its total deposits as liquidity. 4f this,

' is required to be kept in cash with "angladesh "ank and the rest ' is to be kepteither in approved securities or in cash 8in case of problem with securities9 with

"angladesh "ank. Legal reserve requirement for conventional banks is =>. *hey have

to keep ' in cash with "angladesh "ank and the rest =


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A##$ehension of liquidity %$isis and #ossibility of liquidity su$#lus'

!slamic banks have always left with a sieable amount of cash as liquidity surplus.

Conventional banks can borrow in the form of call money among themselves even at an

e3orbitant rate of interest.

"a#ital ma$ket in*estment'

Conventional banks can invest


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-e#$ession of $ofit'

*raditional banks can meet up loss arising from delay in repayment by the clients through

charging compound interest. !slamic banks cannot do that. 2hat it does it realises

compensation at the rate of profit. "ut the compensation so realised is not added to the

profit income rather credited to 5adaqa account i.e., amount meant for social welfare

activities. *his depresses profits of !slamic banks. *his may place !slamic banks relatively

in weaker position in terms of profitability compared to conventional banks Moreover,

!slamic banks are to make a compulsory levy equivalent to %.' of its profit earned each

year and credited to 5adaqa account, which also depresses banks profitability. *his is

unlikely the case with conventional banks.

Absen%e of legal f$ame3o$k'

$(end(ent o- o#d #a"s and pro(u#gation o- ne" #a"s conducie to ecient

operation o- s#a(ic ban&s are sin ua non -or its ea#ty gro"t. Countries

introducing s#a(ic ban&ing sou#d create an enab#ing eniron(ent -or s#a(ic

ban&s by (odi-ying eisting #a"s and regu#ations. s#a(ic ban&s in ran and

a&istan ae teir #ega# supports. a&istan as proided #ega# support to

oat articipation er( Certi:cate and conduct Mudaraba transaction by

rep#acing ;e #ega# Fra(e"or& o- a&istan's Financia# and Co on *une 26 1980. e %an&ing ribuna# ?rdinance and e %an&ing

and Financia# =erices )$(end(ent o- a"+?rdinance "ere passed in 1985

by a(ending seen $cts suc as te artnersip $ct e %an&ing Co(panies?rdinance te !ea#t a $ct te Federa# %an& Co


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SW!T Analysis "ha$t

Table5.

Inte$na

l

Att$ibutesofthe

o$gani4ation

St$engths Weakness

!nternal capabilities that may help a bank

to $each its ob+ective

!nternal limitations than may

interfere a companys ability

to active its ob+ective

E8te$nal

Att$ibutesoftheEn*i$onment

4pportunities *hreats

/3ternal factors that the company maye3ploit to its advantage

Current and emerginge3ternal factors that may be

challenged for the

companys performance

-elpful

Achieving the 4b+ective

-armful


E8#lanation of SW!T

#ollowing the 524* analysis procedure ! have performed the analysis of !""L this will

show the present condition of the bank. And also the future possibility of the bank will be

identified.


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Table5.7 SW!T Analysis of IBBL

Inte$nal

Att$ibutesoftheo$gani4ation

St$ength Weakness

ioneer of !slamic banking sector.

Continuous adoption modern services.

-ighest deposit collector among all the

conventional banks and !slamic banks.

-ighest amount spent in corporate

social responsibility 8C5$9.

-ighest no of branches across the

country as a private oriented !slamic

bank.

-ighest foreign remittance earner

within the country.

roper maintenance of !slamic 5hariah

Complete follower of "angladesh "ank

rules.

Close customer oriented service

provider.

/fficient manpower.

-uge deposits collected but

lower invested amount.

#ailure in choosing

investment opportunity.

!nsufficient no. of A*M

booth.

2eak A*M services.

Less importance in marketing

and advertising basedactivities.

E8te$nal

4pportunities *hreats


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Att$ibutesoftheo

ooEn*i$onment

5cope to increase investment in

diversified area.

4pportunity to introduce most customer

oriented and mostly !slamic 5hariah

oriented product.

ossibility of e3panding more A*M

booths and providing smooth A*M

services.

5cope to capture root level customers in

village as a Muslim country.

Adoption of more and smooth !(

banking services.

!mplementation of strict

!slamic 5hariah principles.

Lack of :ovt. rules D

regulations regarding !slamic

law in banking.

:reater competition with

other foreign and local banks.

-elpful


-armful


.+ Maintenan%e of ?ules and ?est$i%tion by IBBL

.+.& "AMELS ?ating'

CAM/L5 rating are the supervisory rating of the banks overall condition. *he CAM/L

ratings system is made up of five components capital adequacy, asset quality, management

competence, earnings, and liquidity with the associated acronym. CAM/L ratings generally

assess overall soundness of the banks, and identify andEor predict different risk factors that

may contribute to turn the bank into a problem or failed bank. *o bring and ensure the healthy

conditions of the banks or to check the Jbank run originated from a failure of a single bank,

authorities review the different aspects of the banks. !n "angladesh, since the early nineties,

the same ' components of CAM/L have been used for evaluating the five crucial dimensions

of a banks operations that reflect in a comprehensive fashion an institutions financial

condition, compliance with banking regulations and statutes and overall operating soundness.


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$ecently, "angladesh "ank has upgraded the CAM/L into CAM/L5 effective from ;une,

%&&B. After inserting J5 or Jsensitivity 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.

*he CAM/L5 rating components, usually taken into consideration by the monetary

authorities have the following weights capital adequacy %&, asset quality %&,

management %', earnings =', liquidity =& and sensitivity to market risk =&.

#ollowing is a description of the graduations of rating

Table5 .;

!n the standard CAM/L5 framework, liquidity is assessed according to volatility of depositsH

reliance on interest(sensitive fundsH technical competence relative to structure of liabilitiesH

availability of assets readily convertible into cashH and access to inter(bank markets or other

sources

of cash, including lender(of(last(resort 8L4L$9 facilities at the central bank. At present,

conventional commercial banks deposits are sub+ect to a statutory liquidity requirement

85L$9 of =>.' percent inclusive of '.' percent cash reserve requirement 8C$$9. *he C$$ is

to be kept with the "angladesh "ank and the remainder as qualifying secured assets under the

5L$, either in cash or in government securities. *ill date, 5L$ for the banks operating under

the !slamic 5hariah is =&.' percent. Liquidity indicators measured as percentage of demand

and time liabilities 8e3cluding inter(bank items9 of the banks indicate whether the banks have

e3cess or shortfall in maintenance of liquidity requirements. *he basic indicators of sound

liquidity position are deposits are readily available to meet the banks liquidity needsH assets

are easily convertible into cashH compliance with 5L$H and easy access to money markets etc.

CAM/L5 rating system has been viewed in light of the principles and practices of !slamic

banking. *hough all features of CAM/L5 are not repugnant or contradictory to the 5hariahstance, there should be some separate provisions to make it conducive and proper to analye


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the whole operation of the !slamic banks. 1efinitely, it should also assess the 5hariah

implementation status of the !slamic banks as well. "ut for "" restriction !""L has adopted

CAM/L5 rating procedure and it acquires strong position for many times where no

supervisory response required.

.+.( BaselP'

*he "asel Accord P was published in =)>> and is being followed by banks long time. "ut

in "angladesh "asel Capital Accord 8"asel P9 was adopted from =))B. Fnder this first

"asel accord every bank must maintain minimum capital requirements. !""L has adopted

"asel P from the very first of establishment of this regulation in "angladesh. !""L always

maintains significant amount of statutory reserve beyond the "ibs requirements. *his

statutory reserve is included under core capital 8*ier(=9 according to the first "asel

Accord. According to the following chart consistently statutory reserve is increasing as

the amount of deposits is increasing day by day.

SL?

Table5.=

Near (@@ (@@7 (@@; (@@= (@@>

?equi$ed

?ese$*e

=&=>?.%' =%')> %


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affect the liquidity condition of the bank because when the interest rate of the deposit falls

depositors try to withdraw money to invest in better investment opportunity. *hen

liquidity crisis may occur. !n !""L "asel PP is implemented by a unit which is headed by

=' members for implementation of ew Capital Accord. *he Fnit supervised the parallel

run of "asel PP along with "asel P at !""L from early %&&) and supervising full operation

of "asel PP from &= ;anuary, %&=&. !n !""L both the credit risks and market risks are very

insignificant here because as the follower of "asel PP this bank faces low amount of

default against its huge general investment what can be realied from the following data.

Bad and Loss amount to Total Gene$al In*estment

Table5.>

Near %&&' %&&B %&&@ %&&> %&&)

"ad and Loss amount to

*otal :eneral !nvestment

%.


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"ha$t5.

.+., St$ess Testing'

"angladesh "ank e3ecuted stress testing about financial information for the first time of

?> commercial banks up to


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Table5.&@ Liquidity Sho%k

Magnitude of

Sho%k

&@ (@ +@

2ea$ %&&) %&&> %&&) %&&> %&&) %&&>

Liquid Assets ='>@.


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"ha#te$ Si8

Summa$y of /indingsC ?e%ommendationsand "on%lusion


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Summa$y of /indingsC ?e%ommendations and "on%lusion

7.=/indings of IBBL ?ega$ding Liquidity Management

ow !""L is a leading bank in !slamic banking area in "angladesh and we know that it

was the pioneer of !slamic banking trend in "angladesh. #rom the above analysis we have

seen that !""L is maintaining a good liquidity position. !t always maintains 5L$ and

C$$ above the requirement ratio. 5o it never faces any liquidity crisis. "ut in spite of

!""L has some short comings in the liquidity management. ow some problems are

given below

As we know that !""L maintains huge amount cash in hand which are kept as

idle bank has failed to utilie proper investment opportunity.

!""L cannot utilie proper investment opportunity because of proper

forecasting about investment.

As $iba 8interest9 is prohibited !""L cannot involve in inter bank transaction.

Also !""L cannot take part in purchasing *reasury bill for lack of !slamic

Money Market.

!""L is not attentive enough in marketing and advertisement in this

competitive edge.

*he periodic review program is comparatively not strong enough for which

huge liquidity is kept as idle.


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7.(?e%ommendations'

!slami "ank "angladesh Ltd. has been able to establish its own presence with a continued

e3pansion geared by increasing acceptance by the people. *o continue this dynamic

e3pansion !""L needs to adopt modern strategy in every banking department of cope

with the competitive banking sector. And at the same time it must be ensured that !""L is

following the !slamic rules and principles. !n "angladesh there is no !slamic money

market and other laws regarding banking sector. 5o !""L needs to think about its

alternative regarding liquidity management. -ere some suggestions are given below what

should be achieved to be more efficient in liquidity management.

As !""L maintains huge amount of cash in hand it cannot utilie proper investment

opportunity. 5o !""L should emphasie more on utiliation of investment opportunity

to increase it earning

!t should give more importance on research D development to launch new product to

cope with increasing competition

"oard of 1irectors of !""L should ensure the selection and appointment of qualifiedand competent management to administer the liquidity management function

"oard of 1irectors should review periodically, but at least once a year, the liquidity

management program

1eveloping lines of communication to ensure the timely dissemination of the liquidity

and funding policies and procedures to all individuals involved in the liquidity

management and funding risk management process

Monitoring economic and other operating conditions to forecast potential liquidity

needs

!""L should emphasie on promotion of the image of !slamic bank as L5 banks


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7.+"on%lusion'

#inally it can be said that liquidity management is one of the most essential part of all

banks. Like others !""L also gives emphasis on this section. *hrough properly handling

this section a large problem is solved. *hat is holding customer confidence. 4n this the

image of the bank is highly correlated. *hroughout the report it is seen that liquidity

management position is so strong and satisfactory. As a result !""L achieves 5*(= rating

from C$!5L and it holds its performance from couple of years. Also CAM/L5 rating

shows that this bank is performing in well manner. Compared to any other banks !""L is

performing in liquidity management in ideal way. !ts risk management department is

acting in a well organied manner which can be realied from the strict maintenance of

"asel PP. "ut !""L should give more importance in adopting competitive strategy like !(

"anking and also in employee efficiency. !f the employees are satisfied then the banks

performance will be more spontaneous and smooth and consistent. *his bank also should

give importance in marketing strategy. #or liquidity management perspective !""L

maintains huge 5L$ in e3cess of requirement. !t should more careful about its investment

opportunity. *his can increase its earning in a dynamic way because !""L is the collector

of highest deposit. 5o !""L can play a strong role here. As we know that this bank has

the restriction of taking $iba 8!nterest9, this bank cant invest in *(bill and bond. 5o as a

one of the most profitable bank :ovt. should consider to establish more accurate !slamic

law and principles for the welfare of the economy which supports the !slamic 5hariah..

5o following this !""L as a specialied bank contributes a lot in the economy by

fostering its growth from any other banks in our country. *hen lastly it can be said that

though there are some limitations of the bank !""L is trying to encourage socio economic

uplift and financial services to the low income community particularly in the rural Ares.


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Liquidity Management of Islami Bank Bangladesh Ltd

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