credit risk
TRANSCRIPT
Chapter OneIntroduction
&
Organization
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1.1 Introduction:Credit risk management is a vital part of any financial institution. Institution’s existence depends
on good credit risk management. It must be an ongoing process that would enable the firm to
manage the loan portfolio proactively and earn satisfactory return to the shareholders. The
current world is very dynamic and fast changing economy is pressurizing the market players to
move very quickly. Every financial institution in this situation is facing various level of difficulty
to adjust with various changing factors of the economy. Credit risk management which is one of
the most important parts of their management is requiring special interest because it involves a
lot of risk and a good credit risk management involves different aspects.
A business report is defined as an orderly, objective communication of information that serves
some business purpose. Therefore, in order to serve this business purpose a topic of the report
has to be clearly stated. The topic that has been defined for studying in this report is in infinitive
phase. It means that there are further scopes to improve and study on the topics that are discussed
in this report. The topic has been defined as,
1.2 Rationale of the Study:
Due to the increased competition of the increased number of commercial banks and the growing
economy, the expectations of the customers have also increased than ever before.
Realizing the present condition, banks, especially the commercial banks are trying to attract
more and more people to use bank as their trusted saving way. So banks are coming more
reachable to their customers. Presently the most serious difficulty facing the financial sector is
the low level of interest rate and high level of inflation rate, due to political anarchy and
syndicating of products. So it is the duty of the top management of the commercial banks to deal
with the situation.
1.3 Background of the Report:
Banking in Bangladesh has passed through an era of unprecedented all round growth since the
nationalization of commercial banks aftermath our independence. The branch network has
widened and functional dimensions broadened. Loan activities in the banks now-a-days have
assumed new dimensions and this requires up to date knowledge and skill on the part of the bank
managers and those in the field of banking profession about the state of art of lending wisely.
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Extending credit always bears the risk of being defaulted. So policy of credit expansion and
credit management style has inherent importance to the bankers. And the recent wary about the
classified loan hints the importance of studying the credit management of the private commercial
banks. Since the MBL is enjoying the lowest rate of classified loan among the commercial banks
operating in the country.
1.4 Objective of the Study:
The objective of the report is to analyze the credit management of Al-Arafa Islami Bank Ltd.
Other objectives are:
To analyze the services provided by AIBL.
To evaluate the performance and specifically assess the credit risk management policy of
AIBL.
To analyze the comparative performance of AIBL with respect to industry.
To find out some key problems regarding the credit risk management
1.5 Scope of the Report:
This report helps me to understand the clear real-time experience about the total management of
AIBL. It helps me to understand, how the bank manages its total processes. It also helps me to
understand how they deal with the customers as well as the foreign policy of their bank like- the
process of doing LC and export & import etc.
1.6 Benefits:
It gives us knowledge about islami shariah based Banking system.
It helps to know about overall general banking activities of AIBL.
It provides knowledge about deposit product and services.
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1.7 Methodology of the Report:
Certain methodologies were followed when preparing this report to fulfill the objective of the
report, to make maximum utilization of the scopes and to avoid the limitation as much as
possible.
1.8 Data collection Method:
Data refers to know facts or things used as a basis for inference. There are two main sources of
Data:
Primary Data
Secondary Data
1.8.1 Primary Data:
Face-to- face conversion with the executive and officers of bank
Informal conversation with the client
Practical work exposure from the different desks of the various department of the
Branch covered.
Relevant file study as provided by the officer’s concerned.
1.8.2 Secondary Data:
Annual Report of Al- Arafa Islami Bank Ltd
Periodicals Published by Bangladesh Bank
Various books, articles, compilations etc. Regarding general banking functions.
1.9 Limitations of the Report:
Due to some legal obligation and business secrecy the bank was reluctant to provide some
sensitive data. Thus, this study limits only on the available published data and certain degree of
formal and informal interview and limited survey. Although the particular study is extensive in
nature, hard effort was given to make the study worthwhile and meaningful even then there
exists some limitation. Altogether the internship period in the bank was not free from limitations.
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I faced some problems during the study, which I am mentioning below:
The main constraint of the study are insufficiently of current information, relevant to the
study
All required information are not available in any specific branch of the bank and there are
also limited opportunity to visit more than one branch
Due to time limitations many of the aspects could not be discussed in the present report
Lack of experience in internship report writing.
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Chapter Two
Job Responsibility
&
Overview of the Bank
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2.1 Profile of the Organization:
Name of the Bank Al Arafah Islami Bank Limited
Chairman Badiur Rahman
Vice Chairman Al hajj Mir Ahmad Sowdagar
Managing Director M A Samad Sheikh
Company Secretary Md Moffazzal Hossain
Legal Status Private Limited Company
Principal Activity Commercial Banking
Registered Office Peoples Insurance Building 36, Dilkusha C/A, Dhaka-1000
Date of Registration 18 June 1995
1st Branch opening Motijheel branch, Dhaka
Opening Ceremony 27 September 1995.
Authorized Capital 2500.00 million.
Paid up capital 1383.81 million
Local Partnership of Capital 100%
Equity 2705.74 million
Number of Branches 50
Deposit 29690.13 million
Investment 29723.37 million
Number of manpower 1080
Number of shareholder’s 12013.
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Phone 9567885, 9567819, 9569353, 9568007
Fax 880-2-9569351
SWIFT ALARBDDH
E-mail [email protected]
Website www.al-arafahbank.com
Slogan A rare combination of Shariah & modern banking
Logo
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2.2 Historical Background:
With the objective of achieving success here & hereafter by pursuing the way directed by Allah and the path
shown by His Rasul (SM), Al Arafah Islami Bank Ltd was established (registered) as a private limited company
on 18 June 1995. The inaugural ceremony took place on 27 September 1995. The authorized capital of the Bank
is Tk.15000.00 million and the paid up capital is Tk. 8343.24 million as on 31.12.2013. Renowned Islamic
Scholars and pious businessmen of the country are the sponsors of the Bank. 100% of paid up capital is being
owned by indigenous shareholders.
The equity of the bank stood at Tk. 14478.06 million as on 31 December 2013, the manpower was 2387 and the
number of shareholders was 58466. It has achieved a continuous profit and declared a good dividend over the
years. High quality customer service through the integration of modern technology and new products is the tool
of the bank to achieve success. The bank has a diverse array of carefully tailored products and services to satisfy
customer needs.
The Bank is committed to contribute significantly to the national economy. It has made a positive contribution
towards the socio economic development of the country with 119 branches of which 23 is AD throughout the
country.
2.3Mission and Vision:
2.3.1 Mission:
Achieving the satisfaction of Almighty Allah both here & hereafter.
Proliferation of Shariah Based Banking Practices.
Quality financial services adopting the latest technology.
Fast and efficient customer service.
Maintaining high standard of business ethics.
Balanced growth.
Steady & competitive return on shareholders' equity.
Innovative banking at a competitive price.
Attract and retain quality human resources.
Extending competitive compensation packages to the employees.
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Firm commitment to the growth of national economy.
Involving more in Micro and SME financing.
2.3.2 Vision:
To be a pioneer in Islami Banking in Bangladesh and contribute significantly to the
growth of the national economy.
2.4 Commitments:
Ours is a customer focused modern Islamic Banking making sound and steady growth in
both mobilizing deposit and making quality Investment to keep our position as a leading
Islami Bank in Bangladesh.
To deliver financial services with the touch of our heart to retail, small and medium scale
enterprises, as well as corporate clients through our branches across the country.
Our business initiatives are designed to match the changing trade industrial needs of the
clients.
2.5 Objectives of AIBL:
Al-Arafah Islami Bank Limited is Islamic Banking institutions that operates with the objectives
implement and materialize the economic and financial principles of Islamic in the banking arena.
The objectives of AIBL are not only to earn profit, but also to do good and welfare to the people.
The main objectives of AIBL are listed below-
To establish participatory banking instead of banking on debtor creditor relationship
To invest through different modes permitted under Islamic Shariah
To accepts deposits on profit loss sharing basis
To establish as welfare-oriented banking system
To extend co-operation to the poor, the helpless and the low income group for their
economic up liftmen
To play a vital role in human development and employment generation
To contribute towards balances growth and development of the country through
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investment operations particularly in the less developed areas
To contribute in achieving the ultimate goal of Islamic economic system
To conduct interest free banking
2.6 Values& Commitment:
2.6.1 Value:
Place customer interest and satisfaction as first priority and provide customized banking
products and services.
Value addition to the stakeholders through attaining excellence in banking operation.
Contribute significantly for the betterment of society.
Ensure higher degree of motivation and dignified working environment for our human
capital and respect optimal work-life balance.
Committed to protect the environment and go green.
Employees of AIBL share certain common values, which helps to create a JBL culture
Search for professional excellence.
Quick decision‐making.
Flexibility and prompt response
2.6.2 Commitment:
AIBL is a customer focused modern Islamic Bank making sound and steady growth in both
mobilizing deposit and making quality Investment to keep our position as a leading Islamic
Bank.
In Bangladesh, to deliver financial services with the touch of our heart to retail, small and medium
scale enterprises, as well as corporate clients through our branches across the country. Our
business initiatives are designed to match the changing trade & industrial needs of the clients.
2.7 Special Characteristics:
All activities are conducted on interest-free system according to Islamic Shariah
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Principles.
Investment is made through different modes as per Islamic Shariah
Investment Income of the Bank is shared with the Mudaraba depositor according to an
agreed upon ratio ensuring a reasonably fair rate of return on their deposits.
To introduce a welfare-oriented banking system and also to establish equity and
justice in the field of all economic operations
Extend socio-economic and financial services to individuals of all economic backgrounds
with strong commitment in rural uplift.
Plays a vital role in human resources development and employment-generation
particularly among the unemployed youths.
Portfolio of investment and investment policy have been specially tailored to achieve balanced
growth and equitable development through diversified investment operation particularly in the
priority sectors and in the less developed areas of the national economy.
2.8 AIBL’s Products and Services:
Al-Arafah Islami Bank Limited is providing many product and services to satisfy their customers.
For that reason, AIBL has made significant progress in all areas of its operations within a short
period of time, such as deposit mobilization, credit risk management, remittance handling and
foreign exchange and trade. AIBL offers variety of products and services to the customers which
are picked up below:
2.8.1General Banking:
Current Account
Saving A/C
STD (Short Term Deposit) A/C
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Fixed Deposit Account
1 Months Fixed Deposit
3 Months Fixed Deposit
6 Months Fixed Deposit
12 Months Fixed Deposit
Foreign Currency A/C
2.8.2 Foreign Exchange:
Letter of Credit Issue
Letter of Credit Advise
Foreign Documentary Bill Purchase (FDBP)
Foreign Documentary Bill Collection (FDBC)
Bill of Negotiation
Foreign Remittance
2.8.3 Services of the Bank:
ATM Card Service
Online Banking
Lookers Service
2.8.4 Products of AIBL:
Cash management
Wire transfer
Automated clearinghouse (ACH) transaction
Bill presentment and payment
Balance inquiry
Funds transfer
Downloading transaction information
Loan applications
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Investment activity
Other value-added services
2.9 Nature of the jobs:
Cash section
Accounts opening section
Cheque clearing section
Local remittance section (Pay order, DD, &TT)
MTDR section
Accounts section
Establishment section
2.10 Partnership Firm:
Partnership deed must be taken Mandate from the partners is essential indicating who will operate
the account. In case of partnership account, the bank asks for:
A copy of the partnership agreement (Partnership Deed)
A letter signed by all the partners containing the following particulars.
The name and addresses of all partners.
2.11 Branch Location All Over Bangladesh:
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Graphically shown to below:
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Division
Name
Dhaka Chittagong Barisal Rangpur Khulna Sylhet Rajshahi
No. of
Branch51 22 4 7 7 5 4
2.12 Board of Directors:
BadiurRahman Chairman
Sarker Mohammad Shameem Iqbal Vice Chairman
Alhajj Md. Harun-ar-Rashid Khan Director
Alhajj Nazmul Ahsan Khaled Director
Alhajj Abdul MalekMollah Director
Alhajj Hafez Md. Enayet ullah Director
Alhajj Abdul Moktadir Director
Alhajj Ahamedul Haque Director
Alhajj Abdus Samad Director
Alhajj Abu Naser Mohammad Yeahea Director
Alhajj Abdus Salam Director
Alhajj Niaz Ahmed Director
Md. Ashik Hossain Director
Engr. Kh. Mesbahuddin Ahmed Director
Mohammed Emadur Rahman Director
Md. Rafiqul Islam Director
Anwar Hossain Director
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Dr. Momtaz Uddin Ahmed Director
Brigadier General M A Malek (Retd) Director
Ekramul Hoque Managing Director
Md. Rafiqul Islam Deputy Managing
Director
Khondoker Nayeemul Kabir Deputy Managing Director
Md. Mofazzel Hossain Deputy Managing Director
Kazi Towhidul Alam Deputy Managing Director
Md. Golam Rabbani Deputy Managing Director
2.13 Economic Impact:
Economic impact can be defined as any increase or decrease in productive potential of an
economy. By analyzing the economic impact we can understand how a bank adds value to the
society. Economic impacts can be broadly categorized as:
Direct Impact
Indirect Impact
2.13.1 Direct Impact:
Direct impacts are the immediate economic effects resulting from the banks financial transactions.
Bank's direct contribution to the economy resulted in the creation of employment opportunities,
payment of tax to the government and maximization of shareholders wealth.
2.13.2 Indirect Impact:
Indirect impacts are the spill over economic effects that occur through Bank's normal course of
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operations. Banks generate indirect impact by addressing the deficiency of capital in the economy
by mobilizing deposit and channelizing the same to prospective investors.
Through catering financial services, the Bank helped distribute the wealth among all the
stakeholders for example shareholders received dividend, depositors and investors got profit,
employees received compensation and other benefits, the under privileged reaped benefits out of
CSR while the government earned tax revenue.
In 2014, total value added by AIBL was BDT 6,526.49 million as against BDT 5,985.57 million
in 2013. Bank's direct contribution to the economy was BDT 2,161.64 million in the form of
corporate income tax. The Bank distributed BDT 2,072.79 million for its total 2,649 officials in
2014 as against that of BDT 1,658.05 million in 2013.
At the end of 2014, the Bank mobilized total deposits of BDT 166,, 851.17 million and aided the
economy in meeting its growth target by deploying BDT 146,740.36 million as investment to
different sectors of the economy. Apart from these, the Bank performed significant import and
export business.
2.14 Performance at a glance:
2010 2011 2012 2013 20140
20000
40000
60000
80000
100000
120000
140000
160000
180000
shareholder EquityDepositInvestmentProfit before Tax & Provision
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2.15 SWOT Analysis of AIBL:
SWOT analysis facilitates the organization to make their existing line of performance and also
foresee the future to improve their performance in comparison to their competitors. As though this
tool, an organization can also study its current position, it can also be considered as an important
tool for making changes in the strategic management of the organization.
2.15.1 Strengths:
2.15.1.1 Bank reputation:
AIBL has already established a favorable reputation in the banking industry of the country with
its significant business growth. Within a period of 14 years, AIBL has already established a firm
footing in the banking sector having tremendous growth in the profits and deposits. All these have
leaded them to earn a reputation in the banking field.
2.15.1.2 Corporate Culture:
AIBL has an interactive corporate culture. Unlike other local organization, AIBL’s working
environment is very friendly, interactive and informal. There are no hidden barriers or boundaries
while interactive among the superior or the subordinate. The environment is also lively and since
the nature of the banking job itself is monotonous and routine, AIBL’s lively work environment
boosts up the spirit and motivation of the employees.
2.15.1.3 Team Work at Mid-level & Lower level:
At AIBL’s mid-level and lower level management, there are often team works. Many jobs are
performed in-groups of two or three in order to reduce the burden of the workload and enhance
the process of completion of the job. People are eager to help each other and people in general are
devoted to work.
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2.15.1.4 Quality:
Al-Arafah Islami Bank strives to endow its customers with appreciable quality in every service it
provides. Customer satisfaction claims the highest priority, as it should be in any service-oriented
organization.
2.15.1.5 Adaptability:
Al-Arafah Islami Bank draws its strength from the adaptability and dynamism it possesses. It has
quickly adapted to world class standard in terms of banking services. Al-Arafah Islami Bank has
also adopted state of the art technology to connect with the world for better communication to
integrate facilities.
2.15.1.6 Efficient Management:
All the levels of management are solely directed to maintain a culture for the betterment of the
quality of the service and for developing a brand image in the market through the organization’s
wide team approach and horizontal communication system.
2.15.1.7 Human Resource Expertise:
One of the key-contributing factors behind the success of Al-Arafah Islami Bank is its HR who is
highly trained and most competent in their own respective fields. Al-Arafah Islami Bank provides
its employees with training both in-house and outside job.
2.15.1.8 Financial Strength:
Al-Arafah Islami Bank is a financially sound company. As a result customers feel comfortable
and more secure while dealing with the bank. It’s already established its position in the banking
industry of Bangladesh. They achieved a high growth rate accompanied by an impressive profit
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growth rate in 2006. The number of deposits and the loans and advances are also increasing
rapidly from year to year.
2.15.2 Weaknesses:
1.15.2.1 Limited Workforce:
Al-Arafah Islami Bank has very limited human resources compared to its financial activities.
There are not many people to perform most of the tasks. As a result many of the employees are
burdened with extra workloads and works late hours without any overtime facilities. This might
cause high employee turnover that will prove to be too costly to avoid.
2.15.2.2 Liquidity Crisis:
Average asset quality and tight liquidity position is another weakness of Al-Arafah Islami Bank
Limited. Bank’s asset quality is not up to the standard as SCB or CITI N.A. or Prime Bank.
Sometimes the bank faces liquidity crisis especially during the period of vacation which needs to
be checked by the bank otherwise the bank will be in deep trouble in near future.
2.15.2.3 Lack of Qualified System Operators:
Currently AIBL’s Head office and in the Branches, there are system operators who do not have
any background academic knowledge on computer applications. As a result they frequently make
mistakes in the preparation of various computerized statements. At the same time, computer
operators do not have the skill to carry out their activities. Above all its MIS is still on primary
stage which needs to be modified as soon as possible to compete in the market.
2.15.3 Opportunity:
2.15.3.1 Government support:
Government of Bangladesh has provided its full support to the banking sector for a sound
financial status of the country, as it is becoming one of the vital sources of employment in the
country now. Such government concern will facilitate and support the long-term vision for Al-
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Arafah Islami Bank.
2.15.3.2 Evolution of Online Banking:
Emergence of e-banking will open more scope for Al-Arafah Islami Bank to reach the clients not
only in Bangladesh but also in the global area. It will also facilitate wide area network in between
the buyer and the production unit of Al-Arafah Islami Bank Ltd. to smooth operation to meet the
desired need with least deviation.
2.15.3.3 Diversification:
AIBL can pursue a diversification strategy in expanding its current line of business. The
management can consider options of starting client service in its merchant banking division.
2.15.3.4Product line proliferation:
In this competitive environment AIBL can expand its product line to enhance its Sustainable
Competitive Advantage (SCA). As a part of its product line proliferation, AIBL can concentrate
more on SME & Agro based industrial loan because these two sectors have huge potential.
2.15.4 Threat:
2.15.4.1 Multinational Banks:
The emergence of the multinational banks and their rapid expansion poses a potential threat to the
new PCB’s. Due to the booming energy sector, more foreign banks are expected to arrive in
Bangladesh. Moreover, the already existing foreign banks such as Standard Chartered are now
pursuing an aggressive branch expansion strategy. These banks are establishing more branches
countrywide and are expected to get into for operation soon. Since the foreign banks have
tremendous financial strength, it will pose a threat to local banks to a certain extent in terms of
grabbing the lucrative clients.
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2.15.4.2 Upcoming Banks:
The upcoming private local banks can also pose a threat to the existing PCB’S. It is expected that
in the next few years more local private banks may emerge. If that happens the intensity of
competition will rise further and banks will have to develop strategies to complete against an on
slaughter of foreign banks.
2.15.4.3 Mergers and acquisitions:
The worldwide trend of mergers and acquisition in financial institutions is causing concentration
in power in the industry and competitors are increasing in power in their respective areas.
2.15.4.4 Contemporary Banks:
The contemporary banks of AIBL such as Dhaka Bank, Prime Bank, Eastern Bank and Dutch-
Bangla Bank are its major rivals. Prime Bank and others are carrying out aggressive campaign to
attract lucrative corporate clients as well as big time depositors. AIBL should remain watchful
about the steps take by these banks as these will in turn affect AIBL strategies.
2.15.4.5 Political Instability:
Unstable political situations cause great distraction in the otherwise smooth flow of business.
Sudden Hartals and other political programs sometimes present problems for the employees (esp.
female employees) in commuting to and from the office. Political instability also promotes a weak
law and order system leading to an increase in crime rate in the society. This might also be
considered as a potential external threat for a financial institution.
2.16 Small & Medium Enterprises (SME) Investment:
Small & Medium Enterprise (SME) plays a pivotal role in the economic growth and development
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of a country. SME works as the platform for job creation, income generation, and development of
forward and backward industrial linkages. SMEs occupied a unique position in the economy of
Bangladesh. As on 31 December 2014, total SME investment portfolio is Tk. 8627.70 Crore,
which is 50.47% of Total Investment portfolio. Among them Tk. 3682.72 Crore is under Small
Enterprises and Tk. 4944.98 Crore is under Medium Enterprises. We prior service and
manufacturing along with Area Approach Method when SME financing.
2.17 SME Portfolio:
0100020003000400050006000700080009000
10000
2007 2008 2009 2010 2011 2012 2013 2014
2.18 Dividend:
The bank has been paying dividend every year since 1998 just after conversion into a public
limited company. The Board of Directors of the Bank is pleased to recom-mend 14% Cash
Dividend in the year 2014. Table of Historical Dividend Payment Percentage are as follows:
Year % Dividend2005 26% Bonus
2006 35% Bonus
2007 20% Bonus
2008 30% Bonus
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2009 30% Bonus
2010 26% Bonus
2011 21% Bonus
2012 17% Bonus
2013 13.50% Bonus
2014 14% Cash
Devident (%)0
5
10
15
20
25
30
35
40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2.19 Value Added Statement:
Value added is a measure of wealth created by the Bank through various business activities. The
statement of value added shows the total wealth created and how it was distributed among
stakeholders, including the Government, employees and shareholders.
(BDT in million
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Particulars 2014
2013
Income from Banking Service 22,211.79 19,723.41
Cost of Services & Supplies (13,838.44)
(13,149.69)
Value added by Banking Services 8,373.35 6,573.
Provisions for Investment & Off-Balance Sheet Items (1,846.86) (588.15)
Total Value Addition 6,526.49
5,985.57
Value Distributed
To Employees 2,072.79 1,658.05
To Statutory Reserve 793.67 747.57
To Government as Income Tax 2,161.64 2,083.73
Depreciation 210.07 194.13
Retained Earnings 1,288.32 1,302.09
Total 6,526.49 5,985.5
2.20 Distribution of Value Addition:
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32%
12%33%
3%
20%
Distribution of Value AdditionTo Employee To Statutory Reserve To Government as Income TaxDepreciation Retained Earning
2.21 Economic Value Added Statement:
Economic Value Added (EVA) indicates the true economic profit of the company. EVA is an
estimate of the amount by which earnings exceed or fall short of the required minimum return for
shareholders at comparable risk. EVA of the Bank stood at BDT 2,846.07 million as on 31
December 2014 as against that of BDT 1,738.49 million in 2013.
Particulars 2014 2013
Shareholders' Equity 18,159.52 16,091.17
Total Income 22,211.79 19,723.41
Total Expense (15,878.34)
(14,774.85)
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Corporate Tax (2,161.64) (2,083.73)
Capital Charges* (1,325.74)
(1,126.34)
Economic Value Addition 2,846.07
1,738.49
2.22 Distribution of Value Addition:
53%38%
5%3%
* Capital Charges = Paid up capital X percentage of Dividend
Total Income Total Expence Corporate Tax Capital Charges
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2.23 Market Value Added Statement:
Market Value Added (MVA) is the difference between the equity market value of the company
and the book value of equity invested in that company. Market Value Added Statement indicates
how much wealth has been created for the capital providers in a particular period of time. A high
market value addition indicates that the company has created substantial wealth for the equity
holders.
(BDT in million)
Particulars 2014 2013
Market value of total equity 16,085.04 18,086.91
Book value of total equity 18,159.52 16,091.17
Market value addition (2,074.48) 1,995.74
2.24 Market Value Addition:
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2014 201315,000.00
15,500.00
16,000.00
16,500.00
17,000.00
17,500.00
18,000.00
18,500.00Market Value of total equity 18,086.91
Book Value of total equity 16,091.17
Chart Title
Axis Title
2.25 Various deposit product of the Bank in 2014:
Mudaraba Term Deposit
(a) 36 Months
(b) 24 Months
(c) 12 Months
(d) 06 Months
(e) 03 Months
(f) 01 Month
Mudaraba Savings Deposit
Short Notice Deposit (SND)
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Monthly Hajj Deposit
Monthly Installment Term Deposit (ITD)
Monthly Profit Based Term Deposit (PTD)
Monthly Savings Investment (SID)
One Time Hajj Deposit
(a) Al-Arafah Savings Bond (3 Years)
(b) Al-Arafah Savings Bond (5 Years)
(c) Al-Arafah Savings Bond (8 Years)
Marriage Saving Investment Scheme (MSIS)
Pensioners deposit scheme
Special Saving (Pension) Scheme
Cash WAQF
Lakhopati Deposit Scheme
Kotipati Deposit Scheme
Millionaire Deposit Scheme
Double Benefit Scheme
Triple Benefit Deposit Scheme
Probashi Kallyan Deposit Pension Scheme
Mudaraba Savings Deposit-Student,
Farmers, Freedom fighters.
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Chapter Three
Credit Risk Management Techniques
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Al- Arafa Islami Bank Ltd
Credit risk is one of the major risks faced by the bank. This can be described as potential loss
arising from the failure of a counter party to perform as per contractual agreement with the bank.
The failure may result from unwillingness of the counter party or decline in his/her financial
condition. Therefore, bank's credit risk management activities have been designed to address all
these issues. The bank has an investment (Credit) risk management committee at head office. The
committee reviews the investment risk issues on monthly basis. The bank has segregated the
investment approval, investment administration, investment recovery and legal authority. The
bank has segregated duties of the officers/executives involved in credit related activities. A
separate business development (marketing) department has been established at head office, which
is entrusted with the duties of maintaining effective relationship with the customer, marketing of
credit products, exploring new business opportunities etc. In the branches of the bank separate
officials are engaged as relationship manager, documentation officer, verification officer,
disbursement officer and recovery officer. Their jobs have been allocated and responsibilities
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have been defined.
3.1 Risk Management:
Risk is inherent in any walk of life in general and particularly in banking sector. During their
operations,
Banks are invariably faced with different types of risks that may have a potentially negative effect
on their business. Risk Management in Bank operations includes risk identification, measurement
and assessment, and its objective is to minimize negative effects on Bank's financial results by
efficient management. Like other Banks, to minimize potential risks, Al-Arafah Islami Bank has
also taken different steps as per direction of Bangladesh Bank. Besides, eight individual Risk
Management Committee and a Risk Management Coordination Committee in Management level
in addition to Board Risk Management Committee are working with utmost care to minimize the
risk level. Regular meeting of all the committees are held on monthly/quarterly basis. On the
other hand, an analytical paper titled "Risk Management Paper" incorporating all risk areas is
prepared on monthly/ quarterly basis as per requirement of Bangladesh Bank. This paper is
discussed in depth in the Risk Management Coordination Committee and Board Risk
Management Committee and necessary instructions and guidance are given and implemented.
31.03.2013 30.06.2013 31.12.2013 30.06.20140
1
2
3
4
5
6
Risk Management StructureStatus of various RiskRisk Recilence Capacitymeasures taken for mitigating riskFollow up and executionCorporate risk Rating
Rating Our Core risk management by Bangladesh Bank
Note: Risk Level: 1=Very Low, 2=Low, 3=Moderate, 4=High, 5=Critical
3.2 Credit Risk Management:
Credit risk is one of the major risks faced by the bank. This can be described as potential loss
34 | P a g e
arising from the failure of a counter party to perform as per contractual agreement with the bank.
The failure may result from unwillingness of the counter party or decline in his/her financial
condition. Therefore, bank's credit risk management activities have been designed to address all
these issues. The bank has an investment (Credit) risk management committee at head office. The
committee reviews the investment risk issues on monthly basis. The bank has segregated the
investment approval, investment administration, investment recovery and legal authority. The
bank has segregated duties of the officers/executives involved in credit related activities. A
separate business development (marketing) department has been established at head office, which
is entrusted with the duties of maintaining effective relationship with the customer, marketing of
credit products, exploring new business opportunities etc. In the branches of the bank separate
officials are engaged as relationship manager, documentation officer, verification officer,
disbursement officer and recovery officer. Their jobs have been allocated and responsibilities
have been defined.
3.2.1 Investment (Credit) Risk Grading Manual:
The bank has implemented the Investment (Credit) Risk Grading Manual (IRGM) since April 1,
2006 which is made mandatory by Bangladesh Bank vide BRPD Circular No. 18 of December 11,
2005. Investment Officials of the bank have been trained on IRGM. Investment Risk Grading is
incorporated in the investment presentation form for all the cases.
3.2.2.Foreign Exchange Risk Management:
Foreign exchange risk is defined as the potential change in earnings arising due to change in
market prices. As per foreign exchange risk management guideline, bank has established a
separate treasury department at head office. Under the treasury department, foreign exchange
front office, foreign exchange back office and local money market have been physically
demarcated. Duties and responsibilities of them have also been defined. All foreign exchange
transactions are revalued at mark to market rate as determined by Bangladesh Bank at the month
end. All Nostrum accounts are reconciled on monthly basis and outstanding entry beyond 30
35 | P a g e
(thirty) days is reviewed by the management for its settlement. Regulatory reports are submitted
on time to Bangladesh Bank.
3.2.3 Assets Liability Management:
The Asset Liability Committee (ALCO) monitors balance sheet risk and liquidity risks of the
bank. The balance sheet risk is defined as potential change in earnings due to change in rate of
profit, foreign exchange rates which are not of trading nature. ALCO reviews liquidity
requirement of the bank, the maturity of assets and liabilities, deposit and lending pricing strategy
and the liquidity contingency plan. The primary objective of ALCO is to monitor and avert
significant volatility in net profit income, investment value and exchange earnings.
3.2.4 Internal control and compliance:
"Effective internal controls are the foundation of safe and sound banking. A properly designed
and consistently enforced system of operational and financial internal control helps the bank
management to safeguard the bank’s resources, produce reliable financial and managerial report,
and comply with laws and regulations. AIBL has taken all-out efforts to mitigate all sorts of risk
in line with the guidelines issued by Bangladesh Bank. To this effect, the bank has formed an
Internal Control & Compliance (ICC) division headed by Senior vice president. The ICC division
has been segregated to three departments which are audit & inspection department, audit
monitoring department and regulatory compliance department. AIBL internal control contains
self-monitoring mechanisms and to ensure effective control DCFCL, Investment documentation
checklist and quarterly operation report have been developed and implemented. Internal audit and
internal control teams carries out regular audit and surprise/special inspection of the branches to
mitigate operational risk and restrain the possibility of circumvention or overriding the control
procedure. ICC division submits parallel comprehensive internal audit report to the managing
director and to the audit committee. Within 02 (two) months after receiving the audit report, audit
monitoring department completes the compliance report and submits the report to the audit
committee for their review. The committee reviews the system of internal control and the audit
process for compliance with rules, regulation and code of conduct, financial reporting process,
and also suggests actions to remedy the lapses/irregularities. By this time the ICC division has
36 | P a g e
introduced concurrent audit, surprise inspection, auto information system, Quarterly Audited
System, and mandatory leave policy to boost-up the functions of internal control and
compliance."
3.2.5 Prevention of money laundering:
Money laundering risk is defined as the loss of reputation and expenses incurred as penalty for
being negligent in prevention of money laundering. For mitigating the risk the bank has a Central
Compliance Unit (CCU) at head office. The unit reviews the anti-money laundering activities of
the bank on regular basis. The bank has a designated Chief Anti Money Laundering Compliance
Officers (CAMLCO) at head office and Branch Anti Money Laundering Compliance Officers
(BAMLCO) at branches. The compliance officers review the Suspicious Transaction (STR) and
record them properly. Manuals have been established for the prevention of money laundering and
transaction profile has been introduced. Training has been continuously given to all categories of
officers and executives for developing awareness and skill for identifying suspicious activities.
The bank submits the STR, CTR and other periodical reports to Bangladesh Bank on time.
3.2.6 Guideline on information & Communication Technology:
Technology is the process by which humans modify nature to meet their needs and wants. The
term Information Technology (IT) means computers, auxiliary equipment, software, hardware and
similar procedures, services and related resources. Information Technology (IT) developed in a
rapidly changing global environment, and challenges us to courageous initiatives to address a host
of vital skilled human resources. To overcome the challenges the bank has a IT policy. The IT
policy of the bank includes the purchase policy, hardware policy, software development policy,
banking application usage policy, security policy, disaster recovery policy etc. The bank is now
implementing its on line banking project complying the IT policy.
3.2.7 Internal Audit:
"As per Internal Control & Compliance (ICC) Risk Management Guideline of Bangladesh Bank,
a ’Risk Based Audit Plan‘’ is to prepared for each calendar year for smooth conducting of Audit
& Inspection of all the branches and departments & divisions of Head Office of the bank. Besides
the Yearly Auditing, Internal Audit Department Conducts Special Audit, Quarterly Foreign
37 | P a g e
Exchange & Investment Audit, Surprise Audit etc. To prevent incidence of errors and their
recurrences, more emphasize are given on spot rectification of irregularities/lapses while
auditing/inspecting of the branches. For Audit purpose, branches have been segregated into 05
risk categories (Extremely High, Very High, High, Medium & low risk). The regular Audit &
Inspection Teams are also conducting Core Risks System Audit during their regular Audit &
Inspections."
3.2.8Fraud and Forgeries:
During the year 2013, Audit and Inspection department of ICCD, have detected some
incidents/irregularities as fraud-forgery relating to cash misappropriation and investment
disbursement in 03 branches of the Bank, which is little in terms of Bank’s overall financial
transactions. In order to not jeopardize the bank’s interest, all such irregularities were
regularized /mitigated by recovery of the defalcated money through strong monitoring and close
supervision by the ICC Division. Furthermore, administrative actions were also taken against the
delinquent officers/persons involved. Compliances of these issues were duly reported to the Board
Audit Committee and Bangladesh Bank in time as per regulatory guidelines." During the period
1st January to 31st December, 2014 Audit and Inspection department of ICCD, have detected
some incidents/irregularities as fraud-forgeries relating to cash misappropriation and investment
disbursement in03 branches of the Bank, which is little in terms of Bank’s overall financial
transactions. In order to not jeopardize the bank’s interest, all such irregularities were
regularized /mitigated by recovery of the defalcated money through strong monitoring and close
supervision by the ICC Division. Furthermore, administrative actions were also taken against the
delinquent officers/persons involved. Compliances of these issues were duly reported to the Board
Audit Committee and Bangladesh Bank in time as per regulatory guidelines.
3.2.9 Risk Based Capital (Basel II):
To comply with the international best practices and to make the bank's capital more risk sensitive
as well as to build the banking industry more shock absorbent and stable, Bangladesh Bank is
aimed to implement Basel-II reporting from 2010. As per the directive of Bangladesh Bank, all
scheduled banks in Bangladesh are now required to report risk based capital adequacy for banks
under Basel-II along with the existing capital adequacy rules and reporting under Basel-I during
the parallel run i.e. 2009. All scheduled banks are also required to disclose capital adequacy in
38 | P a g e
both quantitative and qualitative terms. The first disclosure as per guidelines shall be made as on
the effective date viz. 31 March 2010.
3.3 Credit Rating:
Credit Rating Agency of Bangladesh (CRAB) Limited has adjudged AA 3 (pronounced Double A
Three) rating in the Long Term and ST-2 rating in the Short Term for Al-Arafah Islami Bank
Limited.
Based on : Audited Financial Statement 2013
Date of Rating : 31st December, 2013
Validity : 30 June, 2015
Outlook : Positive
3.4 Information Technology:
Al-Arafah Islami Bank Ltd's (AIBL) pledge to adhere with the principles of Islamic Norms and
ethics and combine them with today's technology threw a great challenge to the ICT division. It
has been a while now that AIBL is providing True Centralized online payment services to its
customers in all its branches. Our Core Banking System (CBS) which is called "ABABIL
"developed by Millennium Information Solution Ltd. CBS uses 3-tier application architecture
with ORACLE Database (11g Enterprise Edition) along with other Oracle products like Active
Data Guard (ADG) for ensuring data replication to the Disaster Recovery Site (DRS) maintaining
consistency and accuracy adds to the efficiency and quality of service. AIBL with the vision of
becoming the leading Bank in the country both in service and technical aspects have taken bold
steps to full fill the requirements of the mass. Banking sector is going through massive change
with the advent of new technologies , IT Division at Al-Arafah Islami Bank took the challenge of
giving the best possible service to its users and customers alike.
3.5 Capital structure:
39 | P a g e
3.5.1 Qualitative Disclosures:
a) The regulatory capital under Basel-II is composed of(I) Core Capital (Tier-1)
(II) Supplementary Capital (Tier-2)
(III) Additional Supplementary Capital (Tier-3) [only for market risk]
Tier-1capital comprises highest quality capital items which are permanent in nature and allows a
bank to absorb losses on an ongoing basis and includes paid-up capital, statutory reserve, general
reserve and retained earnings.
Tier-2capital lacks some of the characteristics of the core capital but bears loss absorbing
capacity to a certain General provision, revaluation reserves etc are part of Tier 2 capital.
Tier-1capital of the bank as of December 31, 2014 is Tk. 15,620.57 million which is 90.02 % of
total eligible capital Tk. 17,352.63 million and out of Tier 1 capital 60.62 % is paid up capital &
29.73% is statutory reserve.
Tier-2capital of the bank Tk. 1,732.06 million which constitutes 9.98% of total eligible capital and the major contributors are general provision 71.78% & asset revaluation reserves 28.22%..
3.5.2 Quantitative Disclosures : Figures in million taka
b) The total amount of Tier-I capital 13,073.14
Paid-up capital 7,130.98
Non- repayable share premium account -
Statutory Reserve 3,102.08
General Reserve -
Retained earnings 1,238.38
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Non-controlling interest in subsidiaries 1,601.70
Noncumulative irredeemable preference shares - -
Dividend equalization account -
c) The total amount of Tier-2 and Tier-3 1,731.59
d) Other deductions from capital -
e) Total eligible capital 14,804.73
3.6 Capital Adequacy:
3.6.1 Qualitative Disclosures
a)To calculate Minimum Capital Requirement (MCR) under pillar-I of Basel-II framework as per the guideline of
Bangladesh Bank, Al-Arafah Islami Bank Limited is presently following Standardized Approach for assessing and
mitigating Credit Risk, Standardized Rule Based Approach for quantifying Market Risk and Basic Indicator
Approach for Operational measurement
3.6.2 Quantitative Disclosures: Figures in million taka
b) Credit Risk 111,229.00c) Market Risk 5,090.60d) Operational Risk 9,660.70Total Risk Weighted Assets (RWA) 125,980.30e) Total and Tier 1 capital ratio:
o For the consolidated group:
- CAR 11.75%- Tier- 1 Capital Ratio 10.37%o For stand alone
-CAR 10.93%-Tier-1 Capital Ratio 9.49%
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3.7 Credit Risk Disclosure:
a) Definition of past due and impaired assets (for accounting purposes)
A loan payment that has not been made as of its due date is termed as past due. Payment may be made for
repayment/ renewal/rescheduling or as an installment of a claim. The past due claims are discussed below:
Special Mention Accounts (SMA):
A claim which is overdue for 02 (Two) months or more will be classified as Special Mention Account. When a loan
is classified as SMA, it needs constant monitoring and supervision as the repayment probability decreases.
Sub-Standard (SS):
The repayment of the loan has been put in doubt but the recovery is not unlikely.
Doubtful (DF):
There is less possibility of recovery of the overdue amount and probability of loss is high.
Bad /Loss (B/L):
These are the loans which have almost turned unrecoverable.
Approaches followed for specific and general allowances:
i) Specific provision:
a) Substandard : 20%
b) Doubtful : 50%
c) Bad/Loss : 100%
ii) General Provision:
a) 1% to 5% on different categories of unclassified loans.
b) 1% on Off Balance sheet exposure.
c) 5% on the outstanding amount of loans kept in the 'Special Mention Account' after netting off the amount of
Interest Suspense.
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For classification of loan, specific and general allowances the bank follows Master Circular-Loan Classification and
Provisioning vide BRPD circular no-07 dated June 14, 2012; and as advised by Bangladesh Bank from time to time.
In addition to the above mentioned objective criteria, loans can be classified on the basis of subjective judgment
taking into consideration the factors such as uncertainty or doubt of repayment, continuous loss of capital, adverse
situation, decrease of value of securities, legal suit etc. However, Bangladesh Bank can classify any claim on the
basis of their subjective judgment as well as can ask the Bank to build up additional provision on non-performing
loans.
3.8 Credit Risk Management Policy:
The bank has established Credit Risk Management framework as directed by Bangladesh Bank through introduction
or Risk Management (CRM) policy guide along with implementation of the Credit Risk Grading (CRG). This
framework defines CRM structure, role, responsibilities and the processes to identify, quantify, and manage risk
within the framework under the given policy .The CRM policy is reviewed from time to time for adoption of new
techniques/policies for measurement and management of risk in line with the socioeconomic scenario and investment
environment of the country.
Quantitative Disclosures: Figures in million takaa) Funded:General InvestmentI) In BangladeshMurabaha Investment 28,949.88Bai-Muajjal Investment 50,020.08Hire Purchase Investment 19,774.80Pre shipment Investment 1,769.98Quard2, 835.36Sub Total 103,350.10ii) Outside Bangladesh -Total 103,350.10Less Unearned Profit on Investment 7,529.89 95,820.21Bill Purchased & DiscountPayable in Bangladesh 10,375.12Payable outside Bangladesh 455.09Sub Total 10,830.21Total Funded 106,650.42b) Total Non-Funded:c) Geographical distribution of exposures 22,165.73Dhaka 84,298.80Chittagong 17,548.51
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Sylhet 874.69Rajshahi 6,902.15Khulna 3,213.76Barisal 1,342.40Less Unearned Profit on Investment 114,180.31Total 7,529.89d) Country based funded 106,650.42Domestic 106,650.42Oversease) Country based Non-fundedDomestic 22,165.73Oversease) Major Industry wise distribution of exposuresAgriculture, Fishing and Foresty 1,382.00Industry 27,983.42Construction 4,658.54Water works & Sanitary Service 552.48Transport & communication 3,894.49Storage 745.10Trade Finance 73,806.08Miscellaneous 1,158.20 114,180.31Less Unearned Profit on Investment 7,529.89Total 106,650.42g) Distribution of risk exposure by claimsa) Claims on sovereigns and central banks 15,220.30b) Claims on PSE -c) Claims on banks and securities firms 19,689.20d) Claims on corporate 45,667.00e) Claims included in the retail portfolio & small enterprises 27,360.90f) Claims secured by residential property 3,251.00g) Claims secured by commercial real estate 5,812.50h) Consumer Investment 426.00i) Off-balance sheet items 21,792.70h) Credit risk mitigationClaims secured by financial collateral 9,061.70Net exposure after the application of haircuts 2,334.40Claims secured by eligible guarantee 1,310.40I) Residual contractual maturity breakdown of the whole portfolioRepayable on demand -Up to 1 month 38,280.27More than 1 month but less than 3 months 25,313.27More than 3 months but less than 1 year 21,788.97More than 1 year to less than 5 year 12,560.48More than 5 year 8,707.43Total 106,650.42j) Gross Non Performing Assets- (NPAs)1,783.60
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Non-performing assets to outstanding Investment ( loans and advances) 1.63k) Movement of Non-Performing Assets (NPAs)Opening balance 751.10Additions 2,528.57Reductions 1,496.07Closing balance 1,783.60l) Movement of specific provisions for NPAsOpening balance 305.94Fully provision debt written off (114.79)Recoveries of amount previously written off 14.15Specific provision for the year 506.33Closing balance711.63
3.9 Equities: Disclosures for Banking Book Positions:
Qualitative Disclosures:
The bank holds unquoted equities intent of which is not trading and the same are shown as banking book asset in
balance sheet. As these securities are not quoted or traded in the bourses they are shown in the balance sheet at the
cost price and no revaluation reserve has been created against these equities.
Quantitative Disclosures:
Values of investments (for unquoted securities) as disclosed in the Balance Sheet:
Figures in million taka
Name of the Scrip value
Central Depository Bangladesh Ltd. 3.14
Total3.14
As investment in unquoted equities does not have any maturity, we have calculated capital charge on the basis of its
risk weight which is 125% of investment value.
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3.10 Interest Rate Risk in the Banking Book (IRRBB):
Interest rate risk is the exposure of a bank's financial condition due to adverse movements in interest rates.
Changes in interest rates affect a bank's earnings by changing its net interest income and the level of other interest
sensitive income and operating income. Changes in interest rates also affect the underlying value ofthe bank’s assets,
liabilities and off-balance-sheet instruments because the economic value of future cash flows changes when interest
rates change.
1. Interest rate risk in the banking book can be measured on the basis of:
2. Economic value perspective- net interest income measured in a given point in time such as Economic Value of
Capital.
3.11 Methods used to measure Market Risk:
Market risk is the possibility of losing assets in the balance sheet and off- balance sheet positions due to volatility in
the market variables viz. interest rate, foreign exchange rate, reinvestment and price. The bank measures impact on
profitability and impact on asset prices under market risk through Maturity GAP Analysis, Sensitivity Analysis,
VAR, and Mark to Market and has adopted Standardized Measurement approach for measuring Market Risks under
Base.
3.12 Market Risk Management System:
The Bank has its own Market Risk Management System which includes Asset Liability Risk Management (ALM)
and Foreign Exchange Risk Management under core risk management guidelines.
3.12.1 Policies and processes for mitigating market risk:
Risk Management and reporting is based on parameters such as Duration, PV, Exposure and Gap Limits, VaRetc, in
line with the global best practices. Risk Profiles are analyzed and mitigating strategies/ processes are suggested by
the Asset Liability Committee (ALCO). Their effectiveness is monitored on an on-going basis. Forex Open Position
limits (Day limit / Overnight limit), Deal-wise cut-loss limits, Stop-loss limit, Profit / Loss in respect of cross
currency trading are properly monitored and exception reporting is regularly carried out. Holding of equities is
monitored regularly so that the investment remains within the limit as set by Bangladesh Bank. Asset liability
management committee (ALCO) analyzes market and determines strategies to attain business goals.
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3.13 Securities against Investment:
Personal guarantee of spouse parents other family members.
In case of limited companies, guarantees of all directors other than nominated directors shall be obtained.
Registered mortgage of immovable properties with registered Power of Attorney (for 2 lac and above).
Third party personal guarantees (at least one).
Postdated cheques for each installment and one undated cheque for full investment value including full mark-
up profit
Hypothecation on the inventory, receivables, advance payments, plant and machinery.
Bank may relax the security for investment amount up to 2 lac for the growth of SME investment.
Other securities specified by the Bank depending on the types of the investment.
3.14 Lending Process:
Credit Officer, at the outset, identifies market for potential business opportunities (Stage-1). Having identified the
potential borrowers, he then evaluates the credit proposal (stage-2). Once the loan has been approved, monitoring
and review is essential (Stage-3). If the borrower fails to fulfill his obligations, the Credit Officer has to study the
possible remedial action needed for recovery. (Stage-4).
Fig: Lending Process
Stage 4LOAN RECOVERY
(Remedial
Management)
Stage 3LOAN
ADMINISTRATION(Reviews, Re-
approval)
Stage 2CREDIT
EVALUATION
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(Sound Lending
Principals, Credit
Analysis)
Stage 1BUSINESS
DEVELOPMENT(Marketing)
3.15 Green Banking:
Climate change is perhaps one of the most complicated issues, the world is facing now days. The
warming effect of certain man made gas emission such as carbon-di-oxide, methane, nitro oxide
and hydro fluoric carbons are found responsible for distortion in climate change. For
environmental issues, all industries including financial services are being pressurized to
implement green initiatives.
Al-Arafah Islami Bank Ltd. (AIBL) started its business journey from 24th June, 1995. From the
very beginning AIBL has financed in Industries, Factories and many other sectors for the
development of the country. But now, it has changed its Business Strategy to make profit with
environmental sustainability.
The Board of Directors has taken a decision to make a Greener Bangladesh with a tagline of
"Green AIBL, Green Bangladesh". As a part of the motto, AIBL has conducted "Tree Plantation
Programme-2014", under which 25,000 tree plants have been distributed. AIBL is inspiring and
financing in many sectors like before but giving priority to eco-friendly sectors and discouraging
those who are harmful for the environment. Al-Arafah Islami Bank Ltd. has formed Green
Banking Unit in 2011. AIBL has given priority to the green initiatives taken by Green Banking
Department and already made satisfactory progress in this regard. The Green Initiatives taken by
Green Banking
Department in 2014 is given below:
3.15.1 Policy Implementation:
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Implemented Green Banking policy phase-II and a few sector specific environment policies duly
approved by Board of Directors & circulated to all branches, Zonal offices and Wings, Divisions
of Head Office. Further Sector specific environmental policies will be formed in the near future.
The polices are implemented partially.
3.15.2 In-house Initiatives:
Introduces "Green Office Guide" for In-house Environmental Management & circulated to all
branches, zonal offices and all wings & divisions of Head Office. Implementation of Green
Office guide is under process.
3.15.3 Green Financing/Investment (in the year 2014):
i) Bank has financed BDT. 1521.15 cores on 28 clients for projects having ETP. Financing of
ETP project is increasing day by day.
ii) Bank has financed BDT. 94.71 Cores on 64 Brick field projects using HHK & Zigzag
technology as project Investment & working capital.
iii) Bank has financed BDT. 3.18 Cores on 1298 clients for utilization of solar panel under Green
Financing by SME Investment Division.
3.15.4 Environmental Risk Rating (EnvRR):
Maximum branches of AIBL have done the EnvRR on total 964 parties. The disbursed amount is
BDT. 5605.79 Core.
3.15.5 Budgeting:
Allocated considerable amount of Fund for Green Financing, Marketing, Training, capacity
building and Climate Risk fund i.e. amount of BDT. 601.00 Core.
3.15.6 Training/Workshops:
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In 2014, 14 workshops were conducted related to Green Banking & Environmental Risk
Management. A total of 670 executives and officials participated in the workshop at AIBL
Training Institute and reach out programs at Chittagong, Sylhet and Khulna.
3.15.7 Reporting:
Regularly reporting to Bangladesh Bank regarding the progress on implementation of Green
Banking Activities on quarterly basis.
3.15.8 Tree Plantation Programme-2014:
In the year 2014, AIBL has distributed 25000 tree plants among public, Schools, Colleges,
Mosque and Madrashas with a theme.
Chapter Four Analysis
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4.1 Credit Policy of AIBL:
There are some credit policies of the bank which are following below:
Strict observation to the progress of debtor
Investment to national priority sectors
Diversified investment portfolio by size, sector, geographical area, economic purpose,
securities and mode of credit
Preference to short term credit
To ensure safety and security of credit
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Sanctioning loan in high profitable business organization
4.2 Investment Criteria of the Branch:
Number
Grading Abbreviate
Score
1 Superior SUB Fully Cash secured, secured by government guarantee
2 Good GD 85+3 Acceptable ACPT 75-844 Marginal MG 65-745 Special Mention SM 55-646 Substandard SS 45-547 Doubtful DF 35-448 Bad/Loss BL <35
Up to 50 lakhs, the branch manger can sanction a loan but more than that he follows above
investment criteria. The acceptable limit is not below the 75% score. The bank follows different
types of risk –financial risk, business risk, management risk, security risk and relationship risk.
The weight of financial risk is higher than others one. It is determined as 50% of total risk. In
case of financial risk there are four types of ratio are calculated such as debt equity ratio,
liquidity ratio, Profitability ratio, and coverage ratio.
ratio, and coverage ratio.
4.3 Sector wise loan of The Branch:
As the branch launched in this area from July 1, 2013 so we can compare the loan distribution
last year. From where the total loan of this branch can be estimated. Though annual report of the
bank has not been published until but from it has been collected from bank report of the branch.
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05000000
1000000015000000200000002500000030000000
9466876 13299551
500884 3532667 450000
26131389
2014
From the above figure, the loan of every sector is increasing day by day. As the establishment of
the branch is only three years so the loan is increasing day by day. In the figure it can be seen
also the loan of Cash Credit (Hypo) is the highest loan segment of the bank. The employee’s loan
of this branch is only a few amounts in which except 2010 other years were absent.
4.4
Securities Against Loan & Advances:
Securities Details
There are Two Types of Securities against Loans & Advances:
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LOAN AND ADVANCE 2014
GSIS (Grameen Investment Scheme) 9466876
Small and Medium Enterprise Financing (SME) 13299551
Consumer Financing/Staff Loan 500884
Real Estate 3532667
Secured Overdraft 450000
Cash Credit (Hypo) 26131389
Total 53381367
1. Primary
2. Collateral
Primary & Collateral Securities depend on the nature of facilities which is clearly mentioned in
the CRM Sanctioned Approval but some instances are mentioned below for easy understanding
for the branches.
Name of
product
Primary securities Collateral securities
CC (H) Hypothecation of stock value Mortgaged properties
Land & building
SOD (FO) Lien of Deposit (FDR, Scheme), Shares
etc.
Loan General Hypothecated value of stock, Machinery
etc
Mortgaged property land
& building if any
Real Estate Value of Real Estate Property
Term loan ( Indus,
others)
Hypothecated value of stock, Machinery
etc.
Mortgaged property land
& building if any
Home loan
( Repair, Refinance,
Renovation)
Mortgaged land & building value
SME Value of guarantee, security if any
Consumer loan Hypothecation of purchase items
4.5 Some Important Information Related with Credit:
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4.5. 1 Interest earning assets: (Tk. in Million)
4.5.2 Interest bearing liabilities: (Tk. in Million)
4.5.3 Interest sensitive asset: (Tk. in Million)
Item 201 2014
Cccash Agt, Documents, LTR, Overdraft Agt., Margin, PAD Loan,
Export Cash Credit,FDBP, IDBP, Cash Credit, 91 D Bill, 182 D Bill,
364 D Bill
20,5 20,506.53
4.5.4 Interest sensitive liabilities: (Tk. in Million)
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Item 2014
Balance with Foreign Bank, Balance with Other Banks, B.Bank
Fc Clearing Account
ond, Preference Share, Zero Coupon Bond, Loans & Advances
less interest Receivable
47,386.27
Item 2014
Total Deposits less Current Deposits, Sundry Deposits,
DFC, RFCD, NRNC, NRTA Plus Borrow From Banks. 40,954.34
Item 2014
S Savings, STD, FDR, Call Deposits 35,429.17
4.5.5 Net Interest Income: (Tk. in Million)
Item 2014
Interest Income less Interest Expenses 208.85
4.5.6. Net Interest Margin (NIM): (Tk. in Million)
Item 2014
(Total Interest Income plus Investment Income less total Interest
Expenses)/Total Loans & Advances plus Investment.
4.52%
4.5.7. Loan-Deposit Ratio : (Tk. in Million)
Item 2014
Total Loan of the year was TK 5,33,81367 and total deposit of the 25.31%
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Interest Margin in %
4.27%
3.32%
4.52%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
2014-Q1 2014-Q3 2013-Q4
Interest Margin in %
year was TK 21,09,10437
From the above tables and figures: the credit performance of the bank and earnings from this
sector is satisfactory in which the performance tends to positively in most of the changing time.
4.6 Performance at a Glance:
With the objective of achieving success in life here & hereafter following the way directed by the
Holy Qura’n and the path shown by Rasul (SM) Al Arafah Islami Bank Ltd was established
(registered) as a public limited company on 18 June 1995. The inaugural ceremony took place on
27 September 1995. The authorized capital of the Bank is Tk. 10,000.00 million and the paid up
capital is Tk. 7,130.98 million as on 31.12.2014. Renowned Islamic Scholars and pious
businessmen of the country are the sponsors of the Bank. 100% of paid up capital is being owned
by local shareholders. The equity of the bank has stood at Tk. 14,050.69 million as on 31
December 2014, the manpower was 2,110 and the number of shareholders was 52,739. It has
achieved a continuous profit and declared a good dividend over the years. High quality customer
service through the integration of modern technology and new products is the tool of the bank to
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achieve success. The bank has a diverse array of carefully tailored products and services to
satisfy customer needs. The Bank is committed to contribute significantly to the national
economy. It has made a positive contribution towards the socio economic development of the
country with 100 branches of which 21 is AD throughout the country. We are pledge-bound to
convert the Bank into a Islami Bank on global standard which will be dynamic in actions,
progressive in ideas, honest in dealings, correct in judgment,
futuristic in attitude, fair in approach, polite in behavior and devoted to high quality service to
customers. Our aims are for boosting modern management, advanced technology, good
profitability and steady growth transparency. We are also firmly committed to disclosure and
compliance to Shariah and regulatory authorities. Today the bank is an agile organization which
promotes innovation, encourages improvement, values sense of urgency and develops people
who accept challenges and turns them into opportunities.
2010 2011 2012 2013 20140
20000
40000
60000
80000
100000
120000
Shareholders equity
Deposit
Investment
PBT & Provision
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Chapter Five
Findings, Recommendations & Conclusion
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5.1 Findings of the Study:
The loan requirement of borrowing loans of the branch is not more complex.
Most of the loan is sanctioned against the face value of customers.
The loan to deposit ratio is 25.31% in previous year.
The mortgage value of some loans is less than the loans amount.
The processing period is very lengthy due to making of credit proposals, proper
documentations.
Credit monitoring and supervision activities are very poor and not effective.
Credit based product are to not sufficient compared to modern credit policies.
Credit management process of the bank is not technology based.
There is a delay in the liquidation of collateral or other credit recovery processes.
The credit department doesn’t emphasis on the Mortgaged properties as security against
loan.
Work load is not properly distributed the department.
This department Training facilitates is not sufficient for the employees,
The risk management unit of the bank branch centralize domestic risk management does
not estimate properly.
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The branch does not have accurate mathematical risk method they identify this by
assumption/ estimate.
Amortization schedule is not properly maintained by the bank due to the client’s
mobility.
5.2 Recommendations:
According to the findings some recommendations are suggested for improving the credit risk
management process of the branch which are following below:
Proper Documentation for Credit
The rationale should be properly documented and anticipated actions recorded, taking into
account any revised plans submitted by the borrower. The bank should investigate physically for
the confirmation of documents.
Good customer service
The customer service should be good while ensuring the Bank’s interest is protected. The branch
can get more earnings from investing in appropriate sector. If the debtors don’t get quick service
from the bank then they annoy on the bank as a result customers may decrease.
Grow the customer base
The bank should grow customer base through marketing and business development efforts,
including cross selling to existing customer base.
Ensuring credit quality
Ensuring credit quality is maintained and customer reviews should be completed in timely
manner. If the credit operation is occurred quickly then customers feel comfortable to deal the
bank.
Regular Customer and industry Visits
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The bank should maintain an in- depth knowledge of the customer’s business through regular
customer visits and industry research. As from the credit investment is the main income source
of the bank, so they can estimate their loan situation by investigating customers and projects.
Maintaining Amortization Schedule
Bank should maintain the amortization schedule properly to manage time frame. By this process
bankers can estimate and collect the accurate amount of remaining loan from the customers. So it
is the best way to estimate the customers remaining loan.
More Assistance from CRM
The branch should seek assistance from CRM at the earliest if adverse trends in a customer’s
financial position are noted. CRM can determine the positions of credit risk so it will be more
helpful to take decision for sanctioning loan.
Ensuring timely receipt of loan payments
The bank should follow up with customers to ensure the timely receipt of financial statements,
loan payments and all documentary requirements of the Bank. As the receipt of loan payment is
the main document of loan sanctioning and disbursement.
Using sophisticated technology
The bank should use latest sophisticated technology by which everything of the credit activities
can be done easily.
Profitable business organization
The loan should be sanctioned on the basis of profitable business for business loan. Without less
profit the debtor can not repay the loan on due time, as a result the bank can face liquidity crisis.
Increasing Skilled Employees
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Though Mouchak Branch is one of the important business place in Dhaka but the skilled
employees of the branch is not sufficient. Bank should take initiative to recruit more efficient
employees in the branch.
Flexible Loan Requirement for new Entrepreneurs
Most of the new Entrepreneurs can not utilize their business plan for the crisis of financing. The
loan sanction of the bank should be flexible and comfortable for the new entrepreneurs as well as
small and medium enterprises.
Ensuring the exact value of Collateral
The bank should ensure the collateral value that must be enough against the loan security. The
security should be marketable and liquid. When a debtor is to be bankruptcy then the bank may
balance it loss by selling the loan security.
5.3 Conclusion:
The concept of Islami Banking is several decades old. The third attempt to establish an Islamic
Financial Institution took place in Pakistan in the late 1950s with the establishment of a local
Islami Bank in a rural area (Wilson 1995. After 45 years, Islamic Banking system is established
in Bangladesh as a financial institution that is named “Al-Arafah Islami Bank Limited”.
Al-Arafah Islamic Bank Limited is a Bank which operates its activities according to Quaran and
Sunnah. It’s banking activities based on profit \ loss sharing. It does not create any illegal
pressure on client.
On the other hand, every client is not 100% honest. So they are taking investment from AIBL
and after maturity, they are showing loss on that project intentionally. So AIBL is losing some
profits from their investment. For this reason, Al-Arafah Islami Bank Limited has closed it’s bai
- mechanism. Now it is not providing investment under this mechanism.
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Threats of Al-Arafah Islami Bank Limited are - at this time, many financial institutions have
commenced their financial activities according to Islamic shariah. This type of organization will
create more competition in the financial market. So it is a threat for Al-Arafah Islami Bank
Limited.
Although it is facing some problem, it has a bright future and day-by-day it is enhancing its
financial activities over the country. Many organizations are following to AIBL and they are
starting their business based on Islamic shariah in the economy of Bangladesh.
After all, Al-Arafah Islami Bank is increasing its reputation day after day through providing
various sorts of innovative product and service. Moreover, AIBL,s customer services and
management are also being enhanced. Foreign Direct Investment Department will be fully
computerized soon.
5.4 References:Websites:
www.al-arafahbank.comhttp://www.slideshare.netwww.assignmentpoint.comAnnual Reports:
Annual report of Al ArafaIslami Bank 2009 to 2013Annual report of Trust Bank 2009 to 2013Annual report of Pubali Bank 2009 to 2013Annual report of AB Bank 2009 to 2013Published Document & Banking manual:
Credit Division Manual of AIBLSeveral Booklets from Al Arafa Islami BankOther internship reports of Al Arafa Islami BankBank Info Beta, Website: bankinfobd.comBank in Bangladesh, Website: bank.bangladeshinformation.info
Texts:
Chowdhury, L.R.; “A textbook on Banker’s Advances”; 2nd Edition;
paradise printer; 2002.
Macdonald, S. Scott; “Bank Management”; 4th Edition; the Dryden Press;
2000.
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Management Core Risks of Banking:
Credit Risk Management
Industry Best Practices
Published on 2 August 20014, Bangladesh Bank 6.
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