Liquidity Management of Islami Bank Bangladesh limited
Statement of the Topic:
Liquidity means the availability of funds, or assurance that funds will be available, to hand on cash outflow commitments. Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Customer’s confidence is mostly dependent on how efficient a bank to handle any type of liquidity crisis. As a direct link to customers a bank must emphasize on this. IBBL is treated in different way from other conventional banks because of its lucrative contribution in economy. For this, a planned way is necessary to manage the liquidity section. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial markets has posed new challenges for liquidity management. IBBL always tries to stand on a standard queue to provide satisfactory services to the customers. From this report it can be realized about the components of liquidity management and what are the present conditions of the components from year 2005-2009 and also how rules and regulations given by Bangladesh Bank affect the liquidity policy of IBBL is indicated here.
Objectives of the Study:
The first objective of writing the report is fulfilling the partial requirements of the MBA program. In this report, we have attempted to give an overview of Liquidity Position of Islami Bank Bangladesh Limited in general. The primary objective of this report is to determine the origin of liquidity in Bangladesh and in IBBL Limited. And
To make a bridge between the theories and practices on banking operations Here are some objectives for preparing the report.
- To find out the components of liquidity statement IBBL.
- To know the details about liquidity of IBBL.
- To analyze the relation among liquidity, loans and deposits.
- To know the condition between specialized bank and Islamic bank.
- To know the impact of Bangladesh Bank regarding liquidity management.
Scope of the Study:
This report provides some important evaluations and present scenario of IBBL. Here some points are given below:
- Evaluation of the different financial performance of IBBL.
- Present condition of IBBL in banking sector.
- Knowledge of diversified products and services.
- Liquidity position of IBBL.
- Condition of IBBL regarding Bangladesh Bank rules.
- Different problems and solutions regarding liquidity management.
Collection of data:
Primary data are measurements observed and recorded as part of an original study. When the data required for a particular study can be found neither in the internal records of the enterprise, nor in published sources, it may become necessary to collect original data.
For the completion of this report, the primary sources of data are-
- Discussion with officials of the IBBL
- Experts’ opinion and comments
- Observations of the officials
The secondary data, which was used for this research, were the books, working paper, annual report, brochures, and other secondary data which was collected from the web site and also from the Islami Bank Training and Research Association.
Limitations of the study:
There are some limitations in our study. We faced some problems during the study, which we are mentioning them as below-
1. Lack of time:
The time period of this study is very short. So I could not go in depth of the study. Most of the times, the officials were busy and were not able to give me much time.
2. Insufficient data:
Some desired information could not be collected due to confidentiality of business.
3. Lack of monitory support:
Few officers sometime were busy in their job. Sometime they didn’t want to supervise us out of their official work.
4. Other limitations:
As we are newcomers, there is a lack of previous experience in this concern. And many practical matters have been written from our own observation that may vary from person to person.
The Organization- An Overview
The Organization About Bank
As a Muslim country people of Bangladesh are deeply committed to Islamic way of life and follow the Holy Qur’an and the Sunnah. This Bank is the first of its kind in Southeast Asia. It is committed to conduct all banking and investment activities on the basis of interest-free profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the Gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh.
Our vision is to always strive to achieve superior financial performance, be considered a leading Islamic Bank by reputation and performance.
- Our goal is to establish and maintain the modern banking techniques, to ensure the soundness and development of the financial system based on Islamic principles and to become the strong and efficient organization with highly motivated professionals, working for the benefit of people, based upon accountability, transparency and integrity in order to ensure stability of financial systems.
- We will try to encourage savings in the form of direct investment.
- We will also try to encourage investment particularly in projects which are more to lead to higher employment.
To establish Islamic banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the field of all economic activities, achieve balanced growth and equitable development through diversified investment operations particularly in the priority sectors and less developed areas of the country. To encourage socio economic uplift and financial services to the low-income community particularly in the rural areas
Objectives of IBBL
The Board of Directors:
The Board of Directors consists of 14 non executive members including 1 Independent Director. The number of Board of members is within the maximum limit set by the central bank. The Board is composed of experienced members with diverse professional experiences such as business, administration, banking & finance, accounting, general management, diplomacy, government services, engineering and fund management which made the Board very efficient and balanced in deciding and directing on the various issues of the bank. The Board members are independent who express their views and opinions free from any influence. The Directors are also independent from management, business/other relationship of the bank that could materially interfere the activities of the bank. There is also a clear demarcation of duties and responsibilities between the Board and management. While the Board is responsible for formulating the board policy framework within which the bank is operating, the management is accountable for the execution of the policies and attainment of the bank’s objectives. The Board exercises independent oversight on the affairs of management.
The Board has two standing committees viz. Executive Committee and Audit Committee. These Committees operate within clear terms of reference.
The Executive Committee
The executive Committee consists of 6 members and entrusted with the task of policy making and taking important and strategic decisions as authorized by the Board within the norms set by the Bangladesh Bank.
The Audit Committee
The Audit Committee formed by the Board of Directors as per instruction of Bangladesh Bank consists of 3 members and is entrusted with, among others, the task of exercising their duties & responsibilities with regard to:
- Internal Control
- Disclosure of Financial Report
- Internal Audit
- External Audit and
- Compliance of existing laws and regulations
The Management Committee
The Management Committee of the bank comprises of 17 top level executives, headed by the Managing Director (CEO) of the bank. The Committee with financial, administrative and business discretionary power delegated by the Board is mainly responsible for implementation of the policies and guidelines approved by the Board. The Management Committee thoroughly scrutinizes the issues before placing to the Executive Committee/Board. The Management Committee thoroughly evaluates the performance of the bank, takes strategic action plan to achieve various targets of the bank set by the Board of Directors.
Asset-Liability Committee (ALCO)
The asset liability management (ALCO) of IBBL is comprised of 18 members from the top management which meets once in a month to review the liquidity position of the bank, maturity grouping of assets and liabilities, Deposits and Investment pricing and liquidity contingency plan in order to manage the balance sheet risk in a better way. The ALCO is entrusted with the responsibility of ensuring the bank’s sufficient liquidity at all times to meet its obligations when becomes due without compromising the earning potential of the bank. In every ALCO meeting, the Committee reviews actions taken in previous ALCO meeting, economic and market status and outlook, liquidity risk related to balance sheet, profit rate structure etc. Special ALCO meeting is arranged as and when any contingent situation arises.
The Shari’ah Council of the bank plays a very important role in framing and exerting policy for strict adherence to Shari’ah Principles in the bank. The council is represented by 14 members consisting of prominent Ulama having adequate knowledge in Fiqhul Moamalat, renowned lawyers and eminent economists to advise and guide on the implementation and compliance of Shari’ah principles in all activities of the bank particularly on the modes of investment. The representative of the Council attends in the meetings of the board of Directors, Executive Committee, Audit Committee and other relevant committees and Annual Development Conferences too give opinions and oversee the activities of the bank from the view point of Shari’ah. At present two members of the Council are also the members of Academic Council of IBTRA. The Council also evaluates the performance of the officials in terms of Shari’ah compliance.
Till 2009, out of total 231 branches (including 20 SME/Agricultural Branches), 114 are Urban Branches and 117 are Rural Branches which are the highest number of rural branches among the first generation Commercial Banks.
Products and Services
Local currency Deposit Accounts
- Al-Wadeeah Current Account.
- Mudaraba Savings Account.
- Mudaraba Term Deposit Account.
- Mudaraba Special Notice Account.
- Mudaraba Special Savings (Pension) Account.
- Mudaraba Hajj Savings Account.
- Mudaraba Savings Bond.
- Mudaraba Waqf Cash Deposit Account.
- Mudaraba Monthly Profit Deposit Account.
- Mudaraba Muhar Savings Deposit Account.
Foreign Currency Deposit Accounts
1. Mudaraba Foreign Currency Deposit.
2. Foreign Currency Deposit (USD, EURO, GPB).
3. FC Deposit ERQ.
- Hire Purchase under Shirkatul Melk.
- Musharaka Documentary Bills (MDB).
Welfare Oriented Special Investment Schemes
1. Household Durables Scheme.
2. Housing Investment Scheme.
3. Real Estate Investment Scheme.
3. Transport Investment Scheme.
4. Car Investment Scheme.
5. Investment Scheme for Doctors.
6. Small Business Investment Scheme.
7. Agriculture Implements Investment Scheme.
8. Rural Development Scheme.
9. Micro Industries Investment Scheme.
10. Women Entrepreneurs Investment Scheme.
11. Mirpur Silk Weavers Investment Scheme.
12. Equity and Entrepreneurship Fund of Bangladesh Bank.
Sectors under SME Investments
1. Cash Withdrawal.
2. Fund Transfer.
3. Mini Statement of Accounts.
4. Balance Enquiry.
5. Payment of Utility Bills (Electricity, Water, Phone and Gas etc).
Other Banking Value Added Services
1. The Bank issues Payment Orders.
2. The Bank co-operates to remit money from one place to another on the basis of commission within the country through Demand Draft (DD) and Telegraphic Transfer (TT).
3. ATM Service has been introduced in selected Branches.
4. Locker Service is available in selected Branches to preserve valuable documents and materials.
5. The Bank gives counseling on different issues.
6. Online Banking.
7. SMS Banking.
9. REUTER, etc.
There are 16 (sixteen) Foreign Representatives of IBBL in 5 (five) Countries to serve expatriate customers to encourage and enhance Foreign Remittance.
Dealing Room Operation.
Special Services through Islami Bank Foundation
- Islami Bank Hospital.
- Islami Bank Medical College.
- Islami Bank Community Hospital.
- Islami Bank Nursing Training Institute.
- Islami Bank Institute of Health Technology.
- Islami Bank Homeopathic Clinic.
- Monorom: Islami Bank Crafts & Fashion.
- Islami Bank Service Centre.
- Islami Bank Institute of Technology.
- Islami Bank International School and College.
- Islami Bank Model School.
- Islami Bank Mohila Madrasah.
- Bangladesh Sangskritic Kendra.
- Distressed Women Rehabilitation Centre.
1. International: Training to Foreigners on Islamic Banking.
2. National: Training to others on Islamic Banking.
3. Islami Banking Diploma.
IBBL’s World Rating:
As per Banker’s Almanac (January 2006 edition) published by the Reed Business information, Windsor Court, England, IBBL’s world rank is 1591 among 4500 banks selected by them. World ranking of IBBL amongst top 3000 International Banks:
IBBL’s World Rating
Conceptual Analysis What is Liquidity?
Liquidity is the availability of funds, or assurance that funds will be available, to honor all cash outflow commitments (both on- and off-balance sheet) as they fall due. These commitments are generally met through cash inflows, supplemented by assets readily convertible to cash or through the institution’s capacity to borrow. The risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off-balance sheet items are mismatched.
Supply and Demand of liquidity in Islamic Banks
The following sources of liquidity and supply come together to determine each bank’s net liquidity position at any moment of time.
Supply and Demand of liquidity in Islamic Banks
Supplies of liquidity come from
Demand for Banks liquidity arise from
incurred in producing & selling
Importance of liquidity management
Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Sound liquidity management involves prudently managing assets and liabilities (on- and off-balance sheet), both as to cash flow and concentration, to ensure that cash inflows have an appropriate relationship to approaching cash outflows. This needs to be supported by a process of liquidity planning which assesses potential future liquidity needs, taking into account changes in economic, regulatory or other operating conditions. Such planning involves identifying known, expected and potential cash outflows and weighing alternative asset/liability management strategies to ensure that adequate cash inflows will be available to the institution to meet these needs.
The objectives of liquidity management are:
- Honoring all cash outflow commitments (both on- and off-balance sheet) on an ongoing, daily basis
- Maintaining public confidence on the bank
- Avoiding raising funds at market premiums or through the forced sale of assets; and
- Satisfying statutory liquidity and statutory reserve requirements
Sound Practices for Managing Liquidity in Banking
The ability to fund increases in assets and meet obligations as they become due – is crucial to the ongoing viability of any banking organization. But the importance of liquidity transcends the individual bank since a liquidity shortfall at a single organization can have systemic repercussions. The management of liquidity is therefore among the most important activities conducted at banks. Over time, there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial markets has posed new challenges for liquidity management. In light of these developments, there are some necessary practices for managing liquidity in banks which are indicated below:
- Developing a structure for managing liquidity
- Measuring and monitoring net funding requirements
- Managing market access
- Contingency planning
- Foreign currency liquidity management
- Internal controls for liquidity risk management
- Role of public disclosure in improving liquidity
Principles for Sound Liquidity Risk Management and Supervision
The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. The primary objective of this guidance is to raise banks’ resilience to liquidity stress. Among other things, the principles seek to raise standards in the following areas:
- Governance and the articulation of a firm-wide liquidity risk tolerance.
- Liquidity risk measurement, including the capture of off-balance sheet exposures, securitization activities, and other contingent liquidity risks that were not well managed during the financial market turmoil.
- Aligning the risk-taking incentives of individual business units with the liquidity risk exposures their activities create for the bank.
- Stress tests that cover a variety of institution-specific and market-wide scenarios, with a link to the development of effective contingency funding plans.
- Strong management of intraday liquidity risks and collateral positions.
- Maintenance of a robust cushion of unencumbered, high quality liquid assets to be in a position to survive protracted periods of liquidity stress.
- Regular public disclosures, both quantitative and qualitative, of a bank’s liquidity risk profile and management.
The principles also strengthen expectations about the role of supervisors, including the need to intervene in a timely manner to address deficiencies and the importance of communication with other supervisors and public authorities, both within and across national borders.
ROLE OF THE BOARD OF DIRECTORS
The Board of Directors of each institution is ultimately responsible for the institution’s liquidity. In discharging this responsibility, a Board of Directors usually charges management with developing liquidity and funding policies for the board’s approval and developing and implementing procedures to measure, manage and control liquidity within these policies.
At a minimum, a Board of Directors should:
- review and approve liquidity and funding policies based on recommendations by the institution’s management
- review periodically, but at least once a year, the liquidity management program
- ensure that an internal inspection/audit function reviews the liquidity and funding operations to ensure that the institution’s policies and procedures are appropriate and are being adhered to
- ensure the selection and appointment of qualified and competent management to administer the liquidity management function
ROLE OF MANAGEMENT
The management of each institution is responsible for managing and controlling the day-to-day liquidity of the institution according to the liquidity management program. Although specific liquidity management responsibilities will vary from one institution to another, management should be responsible for:
- Developing and recommending liquidity and funding policies for approval by the Board of Directors.
- Implementing the liquidity and funding policies.
- Ensuring that liquidity is managed and controlled within the liquidity management and funding management program.
- Ensuring the development and implementation of appropriate reporting systems with respect to the content, format and frequency of information concerning the institution’s liquidity position, in order to permit the effective analysis and the sound and prudent management and control of existing and potential liquidity needs.
- Establishing and utilizing a method for accurately measuring the institution’s current and projected future liquidity.
- Monitoring economic and other operating conditions to forecast potential liquidity needs.
- Ensuring that an internal inspection/audit function reviews and assesses the liquidity management program.
- Developing lines of communication to ensure the timely dissemination of the liquidity and funding policies and procedures to all individuals involved in the liquidity management and funding risk management process.
- Reporting comprehensively on the liquidity management program to the Board of Directors at least once a year.
The Liquidity Management Process
Effective liquidity management requires three-steps in which treasury identifies, manages and optimizes liquidity. These steps are interdependent, each requiring the successful implementation of the other two to optimally manage liquidity.
Identifying liquidity is the foundation from which the entire liquidity management process depends. It involves understanding the balances and positions of the institution on an enterprise-wide level. This requires the ability to access and gather information across the institution’s many lines of business, currencies, accounts and often multiple systems. Identifying liquidity is primarily a function of data gathering, and does not include the actual movement or usage of funds.
Managing liquidity within a bank’s corporate treasury involves using the identified liquidity to support the bank’s revenue generating activities. This may include consolidating funds, managing the release of funds to maximize their use, and tasks that “free up” lower-costing funds for lending or investment purposes to maximize their value to the institution.
Optimizing liquidity is an ongoing process with a focus on maximizing the value of the institution’s funds. As the strategic aspect of liquidity management, optimizing liquidity balances requires a strong and detailed understanding of the financial institution’s liquidity positions across all currencies, accounts, business lines and counterparties. With this information, the bank’s treasury is able to map the strategic aspects of the institution into the liquidity management process.
Limited time and resources availability is the biggest challenge in the liquidity management process to treasury. Although treasury groups are staffed with very capable personnel, a large amount of their time is spent on the task-based function of identifying liquidity instead of on the strategic elements necessary to optimize balances. This results in the entire liquidity management process being less efficient and affects the institution’s bottom line.
Guidelines of Liquidity Contingency Plans
Either within its Liquidity Management Policy (LMP) or separately, a bank is expected to have a liquidity Contingency Plan (LCP) covering the eventuality of it experiencing a liquidity crisis. The LCP should be designed to ensure that adequate liquidity is achieved at such times and should contain a number of key elements:
- The identification and definition of what constitutes a liquidity crisis.
- Early warning indicators, including the impact of external events not directly related to the financial condition of the bank.
- Actions to be taken.
- Roles and responsibilities.
- Management coordination and escalation of issues.
- Channels of communication.
- Communication with the Commission.
- Scenario planning and testing of the plan.
Impact of Central Bank Regulation
Bangladesh Bank has the specific guidelines regarding statutory reserve which ensures the minimum liquidity position of the bank and also safeguards the depositors. Every Islamic bank has to maintain 5.5% CRR with BB and 10.5% SLR. And every scheduled conventional bank must have to keep at least 18.5% statutory liquidity reserve. Under this 5.50% must be kept as CRR and rest of the 13% must be kept as LRR. IBBL always follows BB regulations strictly. We have already observed that IBBL maintains excess amount SLR and CRR beyond the actual requirement. Here the guideline for conducting the Islamic banks is given below-
Guidelines for Conducting Islamic Banking: November 2009 regarding Maintenance of CRR/SLR, Liquidity management by Bangladesh Bank
Maintenance of CRR/SLR
All Islamic Banking Companies shall maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per rates prescribed by Bangladesh Bank from time to time. Every commercial Bank having Islamic bank branches shall maintain SLR/CRR for its Islamic branches at the same rate as prescribed for the Islamic banks and shall, for the purpose, maintain a separate Current Account for the Islamic branches with Bangladesh Bank.
Addressing of liquidity crisis and utilization of surplus fund of the Islamic Banks:
In case of liquidity surplus and crisis the banks can take recourse to the following:
1. The excess liquidity of the Islamic banks/ Islamic branches of conventional Scheduled banks may be invested in the ‘Bangladesh Government Islamic Investment Bond’ (Islamic Bond introduced by the Government). In the same way, Islamic banks/branches facing liquidity crisis can tide over the crisis by availing of investment from Islamic Bond fund as per the prescribed rules.
2. In case Islamic banks/branches have surplus/ enough investment in the Islamic Investment Bond and subsequently faces liquidity crisis then the bank / branch may overcome the crisis by availing of investment facilities from Islamic Bond Fund against lien of their over purchased Islamic Bonds. To meet the crisis, REPO system may also be introduced for the Islamic Bonds.
3. The Islamic banks/branches having no surplus investment in ‘Bangladesh Govt. Islamic Investment Bond’ at the time of their liquidity crisis, if arises, may availed funds from Bangladesh Bank at a provisional rate on profit on its respective Mudaraba Short Notice Deposit Accounts which will be adjusted after finalization of Accounts and rate of profit of the concerned Islamic banks/branches. But till funds generated from sell of Islamic Investment Bonds remain available for investment such financial support may not be available from Bangladesh Bank.
4. The Islamic banks/branches may open/ maintain Mudaraba SND accounts with each other and can meet liquidity crisis by receiving deposits in the Mudaraba SND account at MSND rate from those having surplus liquidity.
5. To meet the liquidity crisis, if any, of the Islamic branches of the conventional commercial bank fund may be collected from sources which follow Islamic Shari’ah.
Asset Liability Management Policy
Asset Liability Management (ALM) is an integral part of Bank Management; and so, it is essential to have a structured and systematic process for manage the Balance Sheet. Banks must have a committee comprising of the senior management of the bank to make important decisions related to the Balance Sheet of the Bank. The committee, typically called the Asset Liability Committee (ALCO), should meet at least once every month to analysis, review and formulate strategy to manage the balance sheet.
ORGANISATIONAL STRUCTURE OF ALM
The responsibility of Asset liability Management is on the Treasury Department of the bank. Specifically, the Asset liability Management (ALM) desk of the Treasury Department manages the balance sheet. The results of balance sheet analysis along with recommendation is placed in the ALCO meeting by the Treasurer where important decisions are made to minimize risk and maximize returns. Typically, the organizational structure looks like the following:
1) To assume overall responsibilities of Money Market activities.
2) To manage liquidity and interest rate risk of the bank.
3) To comply with the local central bank regulations in respect of bank’s statutory obligations as well as thorough understanding of the risk elements involved with the business.
4) Understanding of the market dynamics i.e competition, potential target markets etc.
5) Provide inputs to the Treasurer regarding market views and update the balance sheet movement.
6) Deal within the dealer’s authorized limit.
The bank’s asset liability management is monitored through ALCO. The information flow in the ALCO can be diagramed as below:
Liquidity Test for Contingencies
The major risk a bank runs is liquidity risk. Under any circumstances a bank has to honor its commitments. As a result, it has to make sure that enough liquidity is available to meet fund requirements in situations like liquidity crisis in the market, policy changes by central bank, a name problem of the bank etc. So, a bank’s balance sheet should have enough liquid assets for meeting contingencies. Liquid assets can be as follows:
- Reserve Assets.
- Cash in Tills.
- Specific Government Securities.
- Foreign Currency in open position.
- Specific FDRs.
A liquidity contingency plan should be in place to ensure a bank is prepared to combat any crisis situation. For the Islami Bank Bangladesh Ltd. these assets are maintained according to Islamic Shari’ah. The instruments involved with interest are banned here like T-bill, general bond.
LIQUIDITY MANAGEMENT OF IBBL
Liquidity Management of IBBL
Liquidity management is the function of treasury department. This is the first priority of this department. Under this, this bank has to deal with sources of fund and how it will be implemented in the appropriate field. The bank has to appropriately manage maturity of both asset and liability. It is so important for a bank because if any liquidity crisis occurs beyond the statutory reserve and other liquidity sources, bank will face disastrous consequence like bank run which reduces the confidence of the client and this ultimately reduces the goodwill of the bank. So it is so crucial for the bank. Obviously IBBL always is in a strong position in maintaining customer confidence though large collection of deposit and investment. Local Office acts as head office of the bank where FAD (Financial Administration Division) is considered as a branch though it is situated in the local office. This FAD operates the “Feeding branch” which is responsible for maintenance of cash requirements, distribution and management among the branches across the country. There are mainly two “Feeding Branch” in Bangladesh which are located in Motijheel, Dhaka and Agra bad, Chittagong. Bangladesh Bank owns 9 branches across the countries which are located in each district and Bogura and these are acted as “Feeding Branch” for the absence of local office. If there are no branches of BB, then Sonali Bank acted as the “Feeding Branch”. So in this way IBBL maintains the cash requirements of its branches across the country. In IBBL liquidity management means having
- Ability of bank to meet maturating liability.
- Ability of the bank to attract deposit, meets its commitments.
- Ability of matching the maturity of assets & liabilities daily .
- Coping with any short term pressures.
- To meet liquidity needs and obligations to ensure the smooth running of business.
- Forecasting cash need and providing for these needs in the most cost-effective way.
- Reduces the adverse situation developing in the Market.
|4.2 Credit Rating of the BankCredit Rating Information and Services Ltd.-CRISL was engaged by the bank for the purpose of rating the bank since 2002. According to BB guidelines credit rating became mandatory since January, 2007. CRISL submitted its report on the financial years 2002, 2003, 2004, 2005, 2006, 2007 and also 2008 and assigned A+ (Adequate Safety) for long term rating scale for 2002 and 2003 and upgraded the same to AA- for 2004 & 2005 and further upgraded the rating to AA (High Safety) in 2006, 2007, 2008. Financial institutions rated in this category are adjudged to be high credit quality. This level of rating indicates a corporate entity with a sound credit profile|
And without significant problems. Risks are modest and may vary slightly from time to time because of economic conditions.
CRISL assigned ST-2 (High Grade) for short term rating scale for 2002 and 2003 and upgraded to ST-1 (Highest Grade) for 2004, 2005, 2006, 2007 and 2008. Financial institutions rated in this category means having highest certainty of timely payment. Short –term Liquidity including internal fund generation is very strong and access to alternative sources of funds is outstanding. Safety is almost like risk free Government short term obligations.
Liquidity Risk of IBBL:
Liquidity risk includes both the risk of being unable to fund its portfolio of assets at appropriate maturities and rates and the risk of being unable to liquid a position in a timely manner at reasonable prices.
- Causes of Liquidity Risk:Implications of liquidity deficit. Offering higher rate of profit to deposits. Shortage of financial resources to invest against commitments.
- Liquidity Shortage:-Total Demand for Liquidity > total supply of liquidity.
- Loss of competitiveness.
- Liquidity surplus:-Total Supply of liquidity > total demand for Liquidity
- Implications of liquidity surplus.
- Underutilization of financial resources.
- Lower income and higher cost.
- loss of competitiveness.
Why face/sources of liquidity problem
- Maturity mismatch” Bank takes large amount of short term deposit and then make invest in long-term (maturity mismatch).The problem related to maturity mismatch situation is that bank hold an unusually high proportion of liability subject to immediate payment.
- Sensitivity to rate change: When rate of profit by other banks on deposits rise/ Change of Profit rate of deposit.
- Loss of Public Confidence.
- Unanticipated change in cost of capital.
- Abnormal behavior of financial Market.
- Incorrect judgments and complacency.
- Conversion of Non-funded based limit into funded based.
- Severe deterioration of assets quality.
Key Issues in liquidity management in Islamic Banking
Components of Liquidity Statement:
Some of the major liquid assets what IBBL maintains are cash in hand and balances with other banks in current accounts, statutory cash reserve with the Bangladesh Bank, money at call and short notice. Here are the clarifications of the above components.
Cash in Hand:
The most liquid asset of a bank is cash in hand which is known as first line defense. The demand of customers is immediately met by the bank with the cash balances with itself. The banker has to be very cautious, prudent and far-sighted in determining the quantum of cash to be maintained. In case he keeps cash balances much above his actual needs, he loses interest on that excess portion. If the cash reserves fall short of its requirements, the bank may find in an embarrassing position. Hence determination of the adequate size of cash balances is an important task faced by a bank. IBBL is also facing this situation. The amount of cash in hand is increasing day by day because of increasing amount of deposits with this bank. Here the amount of cash from the year 2005-09 is given below:
Cash Reserve Requirement (CRR):
Cash Reserve Ratio is calculated and maintained as per section 25 & 33 of the bank companies Act 1991. 5% of total deposits are kept in Bangladesh Bank which varies with the deposits. In case of crisis with cash in hand the bank goes to the central bank to meet the liquidity crisis. With effect from October 01, 2005 CRR is @ 5.00% of total Time & Demand Liabilities daily on bi-weekly average basis; but CRR position should not be less than 4.50% in any day as per BRPD Circular No.01 dated 12 January, 2009. As per guidelines given by Bangladesh Bank IBBL maintained CRR minimum @ 5.00% daily on bi-weekly average basis & CRR was not less than 4.50% in any day throughout the year. The amount of CRR is continuously increasing because of increasing amount of deposit. Now the CRR becomes 5.5%. As we know that CRR is dependent on the deposit collection. Now a chart is given from 2005-09 about balance with Bangladesh Bank:
Statutory Liquidity Requirement (SLR): 10.50%
SLR of the Bank is 10.50% as like as other Islamic Banks as per Bangladesh Bank Letter No. BCD (P) 744 (23)/ 5 dated January 03, 1987. Here the components of Statutory Liquidity Ratio (SLR) are cash in hand including Foreign Currency, balance with Bangladesh Bank & its Agent Bank, investment in Shares of Bangladesh Shipping Corporation and Bangladesh Government Islamic Investment Bond. The Bank maintains following SLR requirement throughout the year.
Actual Reserve maintained
Surplus / (Deficit)
Balance with Other Banks:
Besides maintaining the statutory cash reserve with the Bangladesh Bank, IBBL also keeps its cash in other banks to meet up the liquidity crisis. Here cash is kept in different forms which are given below:
In Current Account
|In Mudaraba Savings & MTDR Account withOther Islamic Banks / Financial Institutions|
Investments in Shares & Securities:
This is another type of liquid asset that can be used to meet up the liquidity crisis. Here the investments in shares and securities of 2005-2009 are given below:
Investments in Shares & Securities
Investments in Shares & Securities
Deposits and Other Accounts:
All the liquid assets are mainly necessary to fulfill the sudden demand of the depositors. The bank has to be always ready to meet the need of depositors. Here the amount of deposits is increasing significantly in IBBL and this bank has collected huge amount of deposits that six other conventional banks have not collected this huge amount of deposits. Here the amount of deposit from 2005-2009 is given below:
|Deposits and Other Accounts||107779.42|
Provision and Other Liabilities:
In IBBL there are also some other liabilities which must be backed by the liquid asset portion. Here from 2005 to 2009 the amount of other liabilities is given below:
Provision and Other Liabilities
|Provision and Other Liabilities|
Liquidity Position of IBBL (At a Glance)
SLR Maintained (%)
CRR Maintained (%)
This actual SLR and CRR percentages remind us how strong position of IBBL in case of liquidity management.
Assessing & Managing Liquidity of IBBL
Sources & uses of funds basis:
Net liquidity/Fund Position:
IBBL prepares daily position of funds considering total deposits, total Investments, investment in shares & approved securities, Balance with Bangladesh Bank, CRR, SLR, Balance with Sonali Bank as an agent of Bangladesh Bank, Cash in tills, Balance in FC clearing A/Cs, Deposits with others Banks (Short & term Deposit) etc to work out net surplus/shortage of fund on daily basis to assess the liquidity /Invest able funds of the Bank. All this components are described above.
Maturity Profile Mismatch
A key issue that IBBL needs to focus on is the maturity of its assets and liabilities in different tenors. A typical strategy of a bank to generate revenue is to run mismatch, i.e. borrow/takes deposit short term and lend/investment longer term. However, mismatch is accompanied by liquidity risk and excessive longer tenor Investment against shorter-term deposits would put a bank’s balance sheet in a very critical and risky position. To address this risk and to make sure a bank does not expose itself in excessive mismatch, a bucket-wise (e.g. next day, 2-7 days, 7 days-1 month, 1-3 months, 3-6 months, 6 months-1 year, 1-2 year, 2-3 years, 3-4 years, 4-5 years, over 5 year) maturity profile of the assets and liabilities is prepared to understand mismatch in every bucket. We know that all of the shorter tenor assets and liabilities will not come in or go out of the bank’s balance sheet. As a result, banks prepare a forecasted balance sheet where the assets and liabilities of the nature of current, overdraft etc. are divided into ‘core and non-core’ balances, where core is defined as the portion that is expected to be stable and will stay with the bank; and non-core to be less stable. The distribution of core and non-core is determined through historical trend, customer behavior, statistical forecasts and managerial judgment; the core balance can be put into over 1 year bucket whereas non- core can be in 2-7 days or 3 months bucket.
Liquidity Indicator Approach
Many banks estimate their liquidity needs based on experience and industry averages. This often means using certain financial ratios or liquidity indicators. This ratio means changes in a bank’s liquidity position.
Cash Position Indicator:
Cash and deposits due from depository institutions is divided by total assets where a greater proportion of cash implies the bank is in a stronger position to handle immediate cash needs. Here the cash position indicator always shows increasing trend except 2007 and remains consistent.
Cash Position Indicator
Cash Position Indicator
Here net loans and leases are divided by total assets which is really a negative liquidity indicator because loans and leases are often among the most illiquid assets a bank can hold. IBBL disburses majority amount in loans which can increase its income.
Core Deposit Ratio:
Here core deposit is divided by total asset where core deposits are defined as small denomination accounts from local customers that are considered unlikely to be withdrawn on short notice and so carry lower liquidity requirements. This ratio is in good condition because at this bank has less possibility of facing liquidity crisis.
Core Deposit Ratio
|Core Deposit Ratio|
Deposit Composition Ratio:
Demand deposits are divided by time deposits where demand deposits are subject to immediate withdrawal via chque writing while time deposits have fixed maturities with penalties for early withdrawal. This ratio measures how stable a funding base each bank possesses, a decline in the ratio suggests greater deposit stability and therefore a lessened need for liquidity. Here we can see that the ratio is in reasonable condition and it is decreasing which suggests greater deposit stability.
Deposit Composition Ratio
Deposit Composition Ratio
Legal reserve requirement:
Islamic banks in Bangladesh have to keep 10% of its total deposits as liquidity. Of this, 5% is required to be kept in cash with Bangladesh Bank and the rest 5% is to be kept either in approved securities or in cash (in case of problem with securities) with Bangladesh Bank. Legal reserve requirement for conventional banks is 18%. They have to keep 5% in cash with Bangladesh Bank and the rest 13% is invested in Bangladesh Bank approved securities. Traditional banks can earn interest on their deposits with Bangladesh Bank but Islamic banks can not since they cannot receive interest as earning. Compared to interest-based traditional banking, Islamic banks, in this case, are in disadvantageous position. However, Islami Bank Bangladesh Limited has been receiving interest against its deposit with Bangladesh Bank and crediting it to its Sadaqa fund (Islami Bank Foundation). It should be noted that the interest earning are not considered as bank income and added to profit. The proceeds are spent on welfare activities.
Lack of opportunity for profitable use of surplus funds:
The bank can invest their excess liquid amount in approved securities and or in other bank in crisis. Islamic banks cannot take this opportunity due to the existence of interest element in the transaction process
Apprehension of liquidity crisis and possibility of liquidity surplus:
Islamic banks have always left with a sizeable amount of cash as liquidity surplus. Conventional banks can borrow in the form of call money among themselves even at an exorbitant rate of interest.
Capital market investment:
Conventional banks can invest 30% of their total deposits in shares and securities. Islamic banks have their problem in this case as they avoid any transaction based on interest. Following examples may be cited for illustration. (a) Islamic banks do not purchase shares of companies undertaking interest-based business; (b) Shares of companies taking loan from commercial banks on interest are not also purchased by Islamic banks; and, (c) Islamic banks cannot purchase shares of companies involved in businesses not approved by Shari’ah. The above restrictive environment in the capital market of Bangladesh has limited substantially the investment opportunities for Islamic banks and hence the avenues of lawful earning. In the absence of Islamic money and capital market these banks cannot obtain funds from capital market at times of need.
Absence of inter-bank money market:
In spite of five Islamic banks have been functioning in Bangladesh, inter-bank money market within Islamic banks has not yet taken place. These banks can take initiative to form a money market among them. This may help minimising pparticularly the call money problem they are suffering from beginnings.
Predominance of Murabaha financing:
Predominance of Murabaha financing in the portfolio management of investment funds by the present day Islamic banks of Bangladesh has been a hot agenda of debate. One study shows that Islami Bank Bangladesh Limited, Al Arafah Bank and Social Investment Bank Limited have used 54%, 76% and 65% respectively of their investment funds by resorting to Murabaha mode (Hoque 1996, p.9). Murabaha though considered as a Shariah approved mode, the Islamic economists have traditionally prescribed for its limited application. Due to legacy of traditional banking, lack of appropriate legal protection and standard accounting practice in business, Islamic banks in Bangladesh find Murabaha financing as suitable and Mudaraba and Musharaka as difficult to apply.
Depression of Profit:
Traditional banks can meet up loss arising from delay in repayment by the clients through charging compound interest. Islamic banks cannot do that. What it does it realises compensation at the rate of profit. But the compensation so realised is not added to the profit income rather credited to Sadaqa account i.e., amount meant for social welfare activities. This depresses profits of Islamic banks. This may place Islamic banks relatively in weaker position in terms of profitability compared to conventional banks Moreover, Islamic banks are to make a compulsory levy equivalent to 2.5% of its profit earned each year and credited to Sadaqa account, which also depresses banks’ profitability. This is unlikely the case with conventional banks.
Absence of legal framework:
Amendment of old laws and promulgation of new laws conducive to efficient operation of Islamic banks are sin qua non for its healthy growth. Countries introducing Islamic banking should create an enabling environment for Islamic banks by modifying existing laws and regulations. Islamic banks in Iran and Pakistan have their legal supports. Pakistan has provided legal support to float Participation Term Certificate and conduct Mudaraba transaction by replacing “The legal Framework of Pakistan’s Financial and Co-operative System” on June 26, 1980. The Banking Tribunal Ordinance and The Banking and Financial Services (Amendment of Law) Ordinance were passed in 1985 by amending seven Acts such as the Partnership Act, The Banking Companies Ordinance, the Wealth Tax Act, the Federal Bank Co-operation Act, the Income Tax Ordinance, The Registration Act and Capital Issues, 1974
The revised Basel framework (Basel- ΙΙ) was finalized in June 2004 which is popularly known as Basel ΙΙ. Subsequently the framework has revised up to June, 2006. The framework endorsed the adoption of capital allocation for operational risk in addition to market & credit risks and introduced comprehensive risk management practices by banks along with supervision and disclosure requirements. Bangladesh has provided a policy & guideline for implementing Basel Accord ΙΙ by the year 2008. Credit risk and market risk both are involved with liquidity risk because potential loss due to probability of violation of commitment by an obligor increases the possibility of liquidity crisis and market risk factors like stock prices, interest rates, foreign exchange rates, and commodity prices affect the liquidity condition of the bank because when the interest rate of the deposit falls depositors try to withdraw money to invest in better investment opportunity. Then liquidity crisis may occur. In IBBL Basel ΙΙ is implemented by a unit which is headed by 15 members for implementation of New Capital Accord. The Unit supervised the parallel run of Basel ΙΙ along with Basel Ι at IBBL from early 2009 and supervising full operation of Basel ΙΙ from 01 January, 2010. In IBBL both the credit risks and market risks are very insignificant here because as the follower of Basel ΙΙ this bank faces low amount of default against its huge general investment what can be realized from the following data.
Islami Bank Bangladesh Ltd. has been able to establish its own presence with a continued expansion geared by increasing acceptance by the people. To continue this dynamic expansion IBBL needs to adopt modern strategy in every banking department of cope with the competitive banking sector. And at the same time it must be ensured that IBBL is following the Islamic rules and principles. In Bangladesh there is no Islamic money market and other laws regarding banking sector. So IBBL needs to think about its alternative regarding liquidity management. Here some suggestions are given below what should be achieved to be more efficient in liquidity management.
As IBBL maintains huge amount of cash in hand it cannot utilize proper investment opportunity. So IBBL should emphasize more on utilization of investment opportunity to increase it earning
It should give more importance on research & development to launch new product to cope with increasing competition
Board of Directors of IBBL should ensure the selection and appointment of qualified and competent management to administer the liquidity management function
Board of Directors should review periodically, but at least once a year, the liquidity management program
Developing lines of communication to ensure the timely dissemination of the liquidity and funding policies and procedures to all individuals involved in the liquidity management and funding risk management process
Finally it can be said that liquidity management is one of the most essential part of all banks. Like others IBBL also gives emphasis on this section. Through properly handling this section a large problem is solved. That is holding customer confidence. On this the image of the bank is highly correlated. Throughout the report it is seen that liquidity management position is so strong and satisfactory. As a result IBBL achieves ST-1 rating from CRISL and it holds its performance from couple of years. Also CAMELS rating shows that this bank is performing in well manner. Compared to any other banks IBBL is performing in liquidity management in ideal way. Its risk management department is acting in a well organized manner which can be realized from the strict maintenance of Basel ΙΙ. But IBBL should give more importance in adopting competitive strategy like I-Banking and also in employee efficiency. If the employees are satisfied then the banks’ performance will be more spontaneous and smooth and consistent. This bank also should give importance in marketing strategy. For liquidity management perspective IBBL maintains huge SLR in excess of requirement. It should more careful about its investment opportunity. This can increase its earning in a dynamic way because IBBL is the collector of highest deposit. So IBBL can play a strong role here. As we know that this bank has the restriction of taking Riba (Interest), this bank can’t invest in T-bill and bond. So as a one of the most profitable bank Govt. should consider to establish more accurate Islamic law and principles for the welfare of the economy which supports the Islamic Shari’ah.. So following this IBBL as a specialized bank contributes a lot in the economy by fostering its growth from any other banks in our country. Then lastly it can be said that though there are some limitations of the bank IBBL is trying to encourage socio economic uplift and financial services to the low income community particularly in the rural Ares.