Liquidity Management of Islami Bank Bangladesh LTD

Liquidity Management
of
Islami Bank Bangladesh Limited
Submitted by
WWW.ASSIGNMENTPOINT.COM
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Chapter One
Introduction
1.1 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. Customers confidence is
mostly dependent on how efficient a bank to handle any type of liquidity crisis. As a
direct link to customers a bank must 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.
1.2 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.

1.
2.
3.
4.
5.
To find out the components of liquidity statement IBBL.

To know the details about liquidity of IBBL.
To analyze the relation among liquidity, loans and deposits.
To know the condition between specialized bank and Islamic bank.
To know the impact of Bangladesh Bank regarding liquidity management.
1.3 Scope of the Study:

3
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.
1.4 Methodology:
1.4.1 Collection of data:
Primary data are measurements observed and recorded as part of an original study. When
the data required for a particular study can be found neither in the internal records of the
enterprise, nor in published sources, it may become necessary to collect original data.
Primary Data:
For the completion of this report, the primary sources of data are
Discussion with officials of the IBBL

Experts opinion and comments
Observations of the officials
Secondary data:
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.
1.5 LIMITATIONS OF THE STUDY:
There are some limitations in our study. We faced some problems during the study, which
we are mentioning them as below1. Lack of time:
The time period of this study is very short. 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:
4
Few officers sometime were busy in their job. Sometime they didnt want to supervise us
out of their official work.
4. Other limitations:
As we are newcomers, there is a lack of previous experience in this concern. And many
practical matters have been written from our own observation that may vary from person
to person.
Chapter Two
The Organization- An Overview
The Organization
2.1 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.
Corporate Information (As on June 30, 2010)

Date of Incorporation
13th March 1983
Inauguration of 1st Branch

(Local office, Dhaka)
30th March 1983
Formal Inauguration
12th August 1983
Share of Capital
Local Shareholders
41.77%
Foreign Shareholders
58.23%
Authorized Capital
Tk. 10,000.00 million
Paid-up Capital
Deposits
Investments (including Investment in Shares)
Foreign Exchange Business
Number of Branches
212
Number of SME Service Centers
20
Number of Shareholders
52164
Manpower
9588
2.2 Vision:
Our vision is to always strive to achieve superior financial performance, be considered a
leading Islamic Bank by reputation and performance.
Our goal is to establish and maintain the modern banking techniques, to ensure the
soundness and development of the financial system based on Islamic principles and to
become the strong and efficient organization with highly motivated professionals,
working for the benefit of people, based upon accountability, transparency and
integrity in order to ensure stability of financial systems.
We will try to encourage savings in the form of direct investment.
We will also try to encourage investment particularly in projects which are more to
lead to higher employment.
2.3 Mission:
To establish Islamic banking through the introduction of a welfare oriented banking
system and also ensure equity and justice in the field of all economic activities, achieve
balanced growth and equitable development through diversified investment operations
particularly in the priority sectors and less developed areas of the country. To encourage
socio economic uplift and financial services to the low-income community particularly in
the rural areas.
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2.4 Objectives of IBBL
To conduct interest-free banking.
To establish participatory banking instead of banking on debtor-creditor relationship.
To invest on profit and risk sharing basis.
To establish a welfare-oriented banking system.
To contribute towards balanced growth and development of the country through

investment operations particularly in the less developed areas.
To contribute in achieving the ultimate goal of Islamic economic system
2.5 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 banks objectives. The Board exercises
independent oversight on the affairs of management.
9
2.6 Committees:
The Board has two standing committees viz. Executive Committee and Audit Committee.
These Committees operate within clear terms of reference.
2.6.1 The Executive Committee

The executive Committee consists of 6 members and entrusted with the task of policy
making and taking important and strategic decisions as authorized by the Board within
the norms set by the Bangladesh Bank.
2.6.2 The Audit Committee

The Audit Committee formed by the Board of Directors as per instruction of Bangladesh
Bank consists of 3 members and is entrusted with, among others, the task of exercising
their duties & responsibilities with regard to:
Internal Control
Disclosure of Financial Report
Internal Audit
External Audit and
Compliance of existing laws and regulations
2.6.3 The Management Committee

The Management Committee of the bank comprises of 17 top level executives, headed by
the Managing Director (CEO) of the bank. The Committee with financial, administrative
and business discretionary power delegated by the Board is mainly responsible for
implementation of the policies and guidelines approved by the Board. The Management
Committee thoroughly scrutinizes the issues before placing to the Executive
Committee/Board. The Management Committee thoroughly evaluates the performance of
the bank, takes strategic action plan to achieve various targets of the bank set by the
Board of Directors.
2.6.4 Asset-Liability Committee (ALCO)

The asset liability management (ALCO) of IBBL is comprised of 18 members from the
top management which meets once in a month to review the liquidity position of the
bank, maturity grouping of assets and liabilities, Deposits and Investment pricing and
liquidity contingency plan in order to manage the balance sheet risk in a better way. The
ALCO is entrusted with the responsibility of ensuring the banks sufficient liquidity at all
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times to meet its obligations when becomes due without compromising the earning
potential of the bank. In every ALCO meeting, the Committee reviews actions taken in
previous ALCO meeting, economic and market status and outlook, liquidity risk related to
balance sheet, profit rate structure etc. Special ALCO meeting is arranged as and when
any contingent situation arises.
2.7 Shariah Council:

The Shariah Council of the bank plays a very important role in framing and exerting
policy for strict adherence to Shariah 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 Shariah 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 Shariah. 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 Shariah compliance.
2.8 Branches:
Till 2009, out of total 231 branches (including 20 SME/Agricultural Branches), 114 are
Urban Branches and 117 are Rural Branches which are the highest number of rural
branches among the first generation Commercial Banks.
Chart-2.1
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2.9 Products and Services

Local currency Deposit Accounts
1. Al-Wadeeah Current Account.
2. Mudaraba Savings Account.
3. Mudaraba Term Deposit Account.
4. Mudaraba Special Notice Account.
5. Mudaraba Special Savings (Pension) Account.
6. Mudaraba Hajj Savings Account.
7. Mudaraba Savings Bond.
8. Mudaraba Waqf Cash Deposit Account.
9. Mudaraba Monthly Profit Deposit Account.
10. Mudaraba Muhar Savings Deposit Account.
Foreign Currency Deposit Accounts
1. Mudaraba Foreign Currency Deposit .
2. Foreign Currency Deposit (USD, EURO, GPB).

3. FC Deposit ERQ.
Investment Modes
1.
2.
3.
4.
5.
6.
7.
8.
Bai-Muajjal.
Bai-Murabaha.
Hire Purchase under Shirkatul Melk.
Mudarabah.
Musharaka.
Musharaka Documentary Bills (MDB).
Bai-Salam.
Bai-As-Sarf.
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.
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12. Equity and Entrepreneurship Fund of Bangladesh Bank.

Sectors under SME Investments
1. Manufacturing.
2. Trading.
3. Service.
ATM Services
1. Cash Withdrawal.
2. Fund Transfer.
3. Mini Statement of Accounts.
4. Balance Enquiry.
5. Payment of Utility Bills (Electricity, Water, Phone and Gas etc).
Other Banking Value Added Services

1. The Bank issues Payment Orders.
2. The Bank co-operates to remit money from one place to another on the basis of
commission within the country through Demand Draft (DD) and Telegraphic Transfer
(TT).
3. ATM Service has been introduced in selected Branches.
4. Locker Service is available in selected Branches to preserve valuable documents and
materials.
5. The Bank gives counseling on different issues.
6. Online Banking.
7. SMS Banking.
8. SWIFT.
9. REUTER, etc.
Foreign Remittance
There are 16 (sixteen) Foreign Representatives of IBBL in 5 (five) Countries to serve
expatriate customers to encourage and enhance Foreign Remittance.
Treasury Activities
Dealing Room Operation.
Special Services through Islami Bank Foundation
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1. Islami Bank Hospital.

2. Islami Bank Medical College.
3. Islami Bank Community Hospital.
4. Islami Bank Nursing Training Institute.
5. Islami Bank Institute of Health Technology.
6. Islami Bank Homeopathic Clinic.
7. Monorom: Islami Bank Crafts & Fashion.
8. Islami Bank Service Centre.
9. Islami Bank Institute of Technology.
10. Islami Bank International School and College.
11. Islami Bank Model School.
12. Islami Bank Mohila Madrasah.
13. Bangladesh Sangskritic Kendra.
14. Distressed Women Rehabilitation Centre.
Training Services
1. International: Training to Foreigners on Islamic Banking.
2. National: Training to others on Islamic Banking.
3. Islami Banking Diploma.
2.10 IBBLs World Rating:

As per Bankers Almanac (January 2006 edition) published by the Reed
Business information, Windsor Court, England, IBBLs world rank is 1591
among 4500 banks selected by them. World ranking of IBBL amongst top
3000 International Banks:
IBBLs World Rating

Table-2.2
Serial No.
Year
World rating
1.
1995
2314
2.
1996
2303
3.
1997
2262
4.
1998
2119
5.
1999
2100
6.
2000
1999
7.
2001
1902
14
8.
2002
1771
9.
2003
1755
10.
2004
1581
11.
2005
1658
12.
2006
1620
13.
2007
1490
14.
2008
1591
Source: The Bankers Almanac: World Ranking, 2008, Reed Business Information, U.K.
15
Chapter Three
Conceptual Analysis
16
Conceptual Analysis
3.1 What is Liquidity?
Liquidity is the availability of funds, or assurance that funds will be available, to honor all
cash outflow commitments (both on- and off-balance sheet) as they fall due. These
commitments are generally met through cash inflows, supplemented by assets readily
convertible to cash or through the institutions capacity to borrow. The risk of illiquidity
may increase if principal and interest cash flows related to assets, liabilities and offbalance sheet items are mismatched.
3.2 Supply and Demand of liquidity in Islamic Banks

The following sources of liquidity and supply come together to determine each banks net
liquidity position at any moment of time.
Supply and Demand of liquidity in Islamic Banks

Table-3.1
Supplies of liquidity come from
Customers deposit
Demand for Banks liquidity arise from
Customers Deposit withdrawal
Mudaraba Deposits
Uses for CRR & SLR
Al Wadiah deposit
Investment to Customers
Sundry deposit
Bai Murabaha
Bills payable
Bai Mujjal
Contingent Deposits
(security ,NRD,NRT)
Revenues from the sale of Non
deposit services
HPSM
Musharaka
Customers Investment/loan
repayments
Sale of Banks asset
Bai us Sarf
From Money Market ( through

BGIIB)
Capital & reserve
Mudaraba
Quard Hasana
Bai Salam
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Bai istisna
Ijara
Repayment of Non deposit
borrowings
Operating expenses & tax

incurred in producing & selling
services
Payment of Dividends
To Money Market(Through BGIIB)
3.3 Importance of liquidity management

Managing liquidity is a fundamental component in the safe and sound management of all
financial institutions. Sound liquidity management involves prudently managing assets
and liabilities (on- and off-balance sheet), both as to cash flow and concentration, to
ensure that cash inflows have an appropriate relationship to approaching cash outflows.
This needs to be supported by a process of liquidity planning which assesses potential
future liquidity needs, taking into account changes in economic, regulatory or other
operating conditions. Such planning involves identifying known, expected and potential
cash outflows and weighing alternative asset/liability management strategies to ensure
that adequate cash inflows will be available to the institution to meet these needs.
3.4 Objectives:
The objectives of liquidity management are:
Honoring all cash outflow commitments (both on- and off-balance sheet) on an
ongoing, daily basis
Maintaining public confidence on the bank
Avoiding raising funds at market premiums or through the forced sale of assets; and
Satisfying statutory liquidity and statutory reserve requirements
3.5 Sound Practices for Managing Liquidity in Banking

The ability to fund increases in assets and meet obligations as they become due - is
crucial to the ongoing viability of any banking organization. But the importance of
liquidity transcends the individual bank since a liquidity shortfall at a single organization
can have systemic repercussions. The management of liquidity is therefore among the
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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
3.6 Principles for Sound Liquidity Risk Management and Supervision

The principles underscore the importance of establishing a robust liquidity risk
management framework that is well integrated into the bank-wide risk management
process. The primary objective of this guidance is to raise banks resilience to liquidity
stress. Among other things, the principles seek to raise standards in the following areas:
Governance and the articulation of a firm-wide liquidity risk tolerance.
Liquidity risk measurement, including the capture of off-balance sheet exposures,

securitization activities, and other contingent liquidity risks that were not well
managed during the financial market turmoil.
Aligning the risk-taking incentives of individual business units with the liquidity
risk exposures their activities create for the bank.
Stress tests that cover a variety of institution-specific and market-wide scenarios,

with a link to the development of effective contingency funding plans.
Strong management of intraday liquidity risks and collateral positions.

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

in a position to survive protracted periods of liquidity stress.
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.
3.7 ROLE OF THE BOARD OF DIRECTORS

The Board of Directors of each institution is ultimately responsible for the institutions
liquidity. In discharging this responsibility, a Board of Directors usually charges
management with developing liquidity and funding policies for the boards approval and
developing and implementing procedures to measure, manage and control liquidity within
these policies.
At a minimum, a Board of Directors should:
review and approve liquidity and funding policies based on recommendations by the
institutions management
review periodically, but at least once a year, the liquidity management program
ensure that an internal inspection/audit function reviews the liquidity and funding
operations to ensure that the institutions policies and procedures are appropriate and
are being adhered to
ensure the selection and appointment of qualified and competent management to

administer the liquidity management function
3.8 ROLE OF MANAGEMENT

The management of each institution is responsible for managing and controlling the dayto-day liquidity of the institution according to the liquidity management program.
Although specific liquidity management responsibilities will vary from one institution to
another, management should be responsible for:
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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
institutions 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 institutions

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.
3.9 The Liquidity Management Process

Effective liquidity management requires three-steps in which treasury identifies, manages
and optimizes liquidity. These steps are interdependent, each requiring the successful
implementation of the other two to optimally manage liquidity.
Identifying liquidity is the foundation from which the entire liquidity management
process depends. It involves understanding the balances and positions of the institution on
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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.
3.10 Guidelines of Liquidity Contingency Plans

Either within its Liquidity Management Policy (LMP) or separately, a bank is expected to
have a liquidity Contingency Plan (LCP) covering the eventuality of it experiencing a
liquidity crisis. The LCP should be designed to ensure that adequate liquidity is achieved
at such times and should contain a number of key elements:
The identification and definition of what constitutes a liquidity crisis.
Early warning indicators, including the impact of external events not directly related
to the financial condition of the bank.
Actions to be taken.
22
Roles and responsibilities.

Management coordination and escalation of issues.
Channels of communication.
Communication with the Commission.
Scenario planning and testing of the plan.
3.11 Impact of Central Bank Regulation

Bangladesh Bank has the specific guidelines regarding statutory reserve which ensures
the minimum liquidity position of the bank and also safeguards the depositors. Every
Islamic bank has to maintain 5.5% CRR with BB and 10.5% SLR. And every scheduled
conventional bank must have to keep at least 18.5% statutory liquidity reserve. Under this
5.50% must be kept as CRR and rest of the 13% must be kept as LRR. IBBL always
follows BB regulations strictly. We have already observed that IBBL maintains excess
amount SLR and CRR beyond the actual requirement. Here the guideline for conducting
the Islamic banks is given below-
3.11.1 Guidelines for Conducting Islamic Banking: November 2009

regarding Maintenance of CRR/SLR, Liquidity management by
Bangladesh Bank
Section VI
Maintenance of CRR/SLR
All Islamic Banking Companies shall maintain Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR) as per rates prescribed by Bangladesh Bank from time to time.
Every commercial Bank having Islamic bank branches shall maintain SLR/CRR for its
Islamic branches at the same rate as prescribed for the Islamic banks and shall, for the
purpose, maintain a separate Current Account for the Islamic branches with Bangladesh
Bank.
Addressing of liquidity crisis and utilization of surplus fund of the Islamic

Banks:
In case of liquidity surplus and crisis the banks can take recourse to the following:
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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 Shariah.
3.11.2 Asset Liability Management Policy

Asset Liability Management (ALM) is an integral part of Bank Management; and so, it is
essential to have a structured and systematic process for manage the Balance Sheet.
Banks must have a committee comprising of the senior management of the bank to make
important decisions related to the Balance Sheet of the Bank. The committee, typically
24
called the Asset Liability Committee (ALCO), should meet at least once every month to
analysis, review and formulate strategy to manage the balance sheet.
ORGANISATIONAL STRUCTURE OF ALM

The responsibility of Asset liability Management is on the Treasury Department of the
bank. Specifically, the Asset liability Management (ALM) desk of the Treasury
Department manages the balance sheet. The results of balance sheet analysis along with
recommendation is placed in the ALCO meeting by the Treasurer where important
decisions are made to minimize risk and maximize returns. Typically, the organizational
structure looks like the following:
Chart--3.1
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The key roles and responsibilities of the ALM Desk:

1) To assume overall responsibilities of Money Market activities.
2) To manage liquidity and interest rate risk of the bank.
3) To comply with the local central bank regulations in respect of banks 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 dealers authorized limit.
PROCESS
The banks asset liability management is monitored through ALCO. The information flow
in the ALCO can be diagramed as below:
Chart-3.2
Liquidity Test for Contingencies

The major risk a bank runs is liquidity risk. Under any circumstances a bank has to honor
its commitments. As a result, it has to make sure that enough liquidity is available to meet
fund requirements in situations like liquidity crisis in the market, policy changes by
central bank, a name problem of the bank etc. So, a banks balance sheet should have
enough liquid assets for meeting contingencies. Liquid assets can be as follows:
Reserve Assets.
Cash in Tills.
26
Specific Government Securities.

Foreign Currency in open position.
Specific FDRs.
A liquidity contingency plan should be in place to ensure a bank is prepared to combat
any crisis situation. For the Islami Bank Bangladesh Ltd. these assets are maintained
according to Islamic Shariah. The instruments involved with interest are banned here like
T-bill, general bond.
Chapter Four
LIQUIDITY MANAGEMENT OF IBBL
27
LIQUIDITY MANAGEMENT OF IBBL

4.1 Liquidity Management of IBBL
Liquidity management is the function of treasury department. This is the first priority of
this department. Under this, this bank has to deal with sources of fund and how it will be
implemented in the appropriate field. The bank has to appropriately manage maturity of
both asset and liability. It is so important for a bank because if any liquidity crisis occurs
beyond the statutory reserve and other liquidity sources, bank will face disastrous
consequence like bank run which reduces the confidence of the client and this ultimately
reduces the goodwill of the bank. So it is so crucial for the bank. Obviously IBBL always
is in a strong position in maintaining customer confidence though large collection of
deposit and investment. Local Office acts as head office of the bank where FAD
(Financial Administration Division) is considered as a branch though it is situated in the
local office. This FAD operates the Feeding branch which is responsible for
maintenance of cash requirements, distribution and management among the branches
across the country. There are mainly two Feeding Branch in Bangladesh which are
located in Motijheel, Dhaka and 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.

28
4.2 Credit Rating of the Bank

Credit Rating Information and Services Ltd.-CRISL was engaged by the bank for the purpose of
rating the bank since 2002. According to BB guidelines credit rating became mandatory since
January, 2007. CRISL submitted its report on the financial years 2002, 2003, 2004, 2005, 2006,
2007 and also 2008 and assigned A+ (Adequate Safety) for long term rating scale for 2002 and
2003 and upgraded the same to AA- for 2004 & 2005 and further upgraded the rating to AA
(High Safety) in 2006, 2007, 2008. Financial institutions rated in this category are adjudged to
be high credit quality. This level of rating indicates a corporate entity with a sound credit profile
And without significant problems. Risks are modest and may vary slightly from time to time
because of economic conditions.
CRISL assigned ST-2 (High Grade) for short term rating scale for 2002 and 2003
and upgraded to 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.
Chart-4.1
29
4.3 Liquidity Risk of IBBL:

Liquidity risk includes both the risk of being unable to fund its portfolio of assets at
appropriate maturities and rates and the risk of being unable to liquid a position in a
timely manner at reasonable prices.
Causes of Liquidity Risk:

Liquidity Shortage:-Total Demand for Liquidity > total supply of liquidity.
Implications of liquidity deficit.
Offering higher rate of profit to deposits.
Shortage of financial resources to invest against commitments.
Loss of competitiveness.
Liquidity surplus:-Total Supply of liquidity > total demand for Liquidity

Implications of liquidity surplus.
Underutilization of financial resources.
Lower income and higher cost.
loss of competitiveness.
4.4 Why face/sources of liquidity problem

Maturity mismatch Bank takes large amount of short term deposit and then make
invest in long-term (maturity mismatch).The problem related to maturity
mismatch situation is that bank hold an unusually high proportion of liability
subject to immediate payment.
Sensitivity to rate change: When rate of profit by other banks on deposits rise/
Change of Profit rate of deposit.
Loss of Public Confidence.
Unanticipated change in cost of capital.
Abnormal behavior of financial Market.
30
Incorrect judgments and complacency.

Conversion of Non-funded based limit into funded based.
Severe deterioration of assets quality.
4.5 Key Issues in liquidity management in Islamic Banking
Different
Different shariah
shariah interpretation
interpretation
No
No Islamic
Islamic Money
Money Market
Market
Absence
Absence of
of Islamic
Islamic secondary
secondary market
market
Slow
Slow development
development in
in Islamic
Islamic financial
financial instruments
instruments
Small
Small no.
no. of
of participants
participants
4.6 Components of Liquidity Statement:

Some of the major liquid assets what IBBL maintains are cash in hand and balances with
other banks in current accounts, statutory cash reserve with the Bangladesh Bank, money
at call and short notice. Here are the clarifications of the above components.
4.6.1 Asset
Cash in Hand:
The most liquid asset of a bank is cash in hand which is known as first line defense. The
demand of customers is immediately met by the bank with the cash balances with itself.
The banker has to be very cautious, prudent and far-sighted in determining the quantum
of cash to be maintained. In case he keeps cash balances much above his actual needs, he
31
loses interest on that excess portion. If the cash reserves fall short of its requirements, the
bank may find in an embarrassing position. Hence determination of the adequate size of
cash balances is an important task faced by a bank. IBBL is also facing this situation. The
amount of cash in hand is increasing day by day because of increasing amount of deposits
with this bank. Here the amount of cash from the year 2005-09 is given below:
Cash in Hand
In Million
Table-4.1
Year
Amount of
cash
2005
1285.56
2006
1410.15
2007
2008
2009
2907.14
3107.36
2480.
77
Chart-4.2
Cash Reserve Requirement (CRR): 5.50%

Cash Reserve Ratio is calculated and maintained as per section 25 & 33 of the bank
companies Act 1991. 5% of total deposits are kept in Bangladesh Bank which varies with
the deposits. In case of crisis with cash in hand the bank goes to the central bank to meet
the liquidity crisis. With effect from October 01, 2005 CRR is @ 5.00% of total Time &
Demand Liabilities daily on bi-weekly average basis; but CRR position should not be less
32
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:
CRR
Table-4.2
In Million
Year
2005
2006
2007
2008
2009
Required
Amount (5%)
5092.13
6296.85
8086.48
9885.94
11765.32
14922.70
20319.45
21088.84
31126.16
Actual Amount
held with
Bangladesh
Bank
9979.98
Surplus /
(Deficit)
9830.57
14022.59
1893.50
11202.89
19360.83
Maintained
(%)
14.65 %
16.13%
6.17%
10.67%
13.23%
Chart 4.3
33
Statutory Liquidity Requirement (SLR): 10.50%

SLR of the Bank is 10.50% as like as other Islamic Banks as per Bangladesh Bank Letter
No. BCD (P) 744 (23)/ 5 dated January 03, 1987. Here the components of Statutory
Liquidity Ratio (SLR) are cash in hand including Foreign Currency, balance with
Bangladesh Bank & its Agent Bank, investment in Shares of Bangladesh Shipping
Corporation and Bangladesh Government Islamic Investment Bond. The Bank maintains
following SLR requirement throughout the year.
SLR
Table- 4.3
In Million
Year
2005
2006
2007
2008
2009
Required
Reserve
10184.25
12593.70
16172.96
19771.88
23530.65
Actual
Reserve
maintained
20546.39
25725.39
34405.72
32784.45
45646.30
Surplus /
(Deficit)
10362.13
13131.69
18232.76
13012.57
22115.66
Maintained
(%)
20.17%
20.43%
21.27%
16.58%
19.40%
Chart-4.4
34
Balance with Other Banks:

Besides maintaining the statutory cash reserve with the Bangladesh Bank, IBBL also
keeps its cash in other banks to meet up the liquidity crisis. Here cash is kept in different
forms which are given below:
Table-4.4
Balance with Other Banks
In Million
Year
2005
2006
2007
2008
2009
In Current
Account
217.57
442.11
1069.07
1242.91
949.37
In Mudaraba
Savings & MTDR
Account with
Other Islamic
Banks / Financial
Institutions
1032.03
317.21
75.82
4909.21
Sub Total
1249.60
759.32
2353.85
1318.73
5858.58
Outside
Bangladesh
525.72
569.81
1658.47
4304.45
1819.79
Grand Total
1775.32
1329.13
4012.32
5623.18
7678.37
1284.77
In Million
Chart-4.5
35
36
Chart-4.6
Investments in Shares & Securities:

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

Table-4.5
Year
Investments in
Shares &
Securities
In Million
2005
3534.16
2006
2007
2008
2009
3557.76
20365.71
7 532.61
11136.61
Chart-4.7
37
Chart-4.8
Chart-4.9
4.6.2 Liability:
Deposits and Other Accounts:
All the liquid assets are mainly necessary to fulfill the sudden demand of the depositors.
The bank has to be always ready to meet the need of depositors. Here the amount of
deposits is increasing significantly in IBBL and this bank has collected huge amount of
deposits that six other conventional banks have not collected this huge amount of
deposits. Here the amount of deposit from 2005-2009 is given below:
38
Deposits and Other Accounts

Table-4.6
Year
In Million
2005
Deposits and 107779.42

Other
Accounts
2006
2007
2008
2009
132419.40
166325.28
200343.41
244292.14
Chart-4.10
Chart-4.11
39
Provision and Other Liabilities:

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

Table-4.7
Year
Provision
and Other
Liabilities
2005
2006
2007
2008
2009
6885.19
7826.18
10195.73
1 1564.94
10739.19
Chart-4.12
40
Chart-4.13
Chart-4.14
Liquidity Position of IBBL (At a Glance)

41
Table-4.8
Year
2005
2006
2007
2008
2009
SLR Maintained
(%)
20.17%
20.43%
21.27%
16.58%
19.40%
CRR Maintained
(%)
14.65 %
16.13%
6.17%
10.67%
13.23%
*This actual SLR and CRR percentages remind us how strong position of IBBL in
case of liquidity management.
Chart-4.15
4.7Assessing & Managing Liquidity of IBBL

4.7.1. Sources & uses of funds basis:
Net liquidity/Fund Position:
IBBL prepares daily position of funds considering total deposits, total Investments,
investment in shares & approved securities, Balance with Bangladesh Bank, CRR, SLR,
Balance with Sonali Bank as an agent of Bangladesh Bank, Cash in tills, Balance in FC
clearing A/Cs, Deposits with others Banks (Short & term Deposit) etc to work out net
surplus/shortage of fund on daily basis to assess the liquidity /Invest able funds of the
Bank. All this components are described above.
Maturity Profile Mismatch

42
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 banks 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 bucketwise (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 banks 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 noncore 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.
4.7.2 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 banks liquidity position.
1.Cash Position Indicator:
Cash and deposits due from depository institutions is divided by total assets where a
greater proportion of cash implies the bank is in a stronger position to handle immediate
cash needs. Here the cash position indicator always shows increasing trend except 2007
and remains consistent.
Cash Position Indicator

Table-4.9
Year
2005
2006
2007
2008
2009
Cash
Position
16.44%
16.53%
11.02%
16.01%
16.23%
43
Indicator
Chart-4.16
2. Capacity Ratio:
Here net loans and leases are divided by total assets which is really a negative liquidity
indicator because loans and leases are often among the most illiquid assets a bank can
hold. IBBL disburses majority amount in loans which can increase its income.
44
Capacity Ratio
Table-4.10
Year
2005
2006
2007
2008
2009
Capacity
Ratio
71.68%
71.02%
69.96%
73.56%
72.90%
Chart-4.17
3. Core Deposit Ratio:

Here core deposit is divided by total asset where core deposits are defined as small
denomination accounts from local customers that are considered unlikely to be withdrawn
on short notice and so carry lower liquidity requirements. This ratio is in good condition
because at this bank has less possibility of facing liquidity crisis.
Core Deposit Ratio
Table-4.11
Year
Core
Deposit
Ratio
2005
2006
2007
2008
2009
77.04%
78.21%
75.98%
77.56%
78.31%
45
Chart-4.18
4. 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
Table-4.12
Year
2005
2006
2007
2008
2009
Deposit
Compos
ition
Ratio
25.56%
22.79%
25.22%
22.68%
21.44%
Chart: 4:19
46
Chapter Five
Data Analysis & Findings
47
Data Analysis & Findings

5.1 Ratio Analysis:
Liquidity Ratio:
This measures the short term ability of the enterprise to pay its maturing obligations and
to meet unexpected needs for cash. Short term creditors such as bankers are particularly
interested in assessing liquidity. The ratios that can be used to determine the enterprises
short term debt paying ability are the current ratio and liquid assets to deposit liabilities.
5.1.1 Loan to Deposit Ratio:
Such ratio provides a simplified indication of the extent to which a bank is funding
illiquid assets by stable liabilities. In Bangladesh BB sets rules that every bank can
disburse maximum 82% of total deposit in loans and investments. IBBL is not moving in
aggressive way to grant investment what we can realize from SLR and CRR percentage.
Loan to Deposit Ratio

Table-5.1
Year
2005
2006
2007
2008
2009
Loan to Deposit Ratio
81.72%
80.58%
80.49%
84.03%
83.05%
Chart-6.1
48
5.1.2 Liquid Assets to Deposit Liabilities Ratio:

This indicates that how much liquid assets are available to meet up the immediate
necessity of the depositors. This ensures the confidence of the depositors about the bank.
In 2005, this ratio was highest because of lower investment opportunity. But from 20062009 the ratio is satisfactorily constant. This is a good sign for the bank because
management has been able to hold the ratio constant which is a success of the bank. This
ultimately helps to hold the customer confidence.
Liquid Assets to Deposit Liabilities Ratio

Table-5.2
Year
2005
2006
2007
2008
2009
Liquid Assets to
Deposit Liabilities
97.46
62.99
57.38
67.04
62.99
Chart-5.2
49
5.1.3 Loan to Adjusted Deposit Ratio:

The ratio incorporates the extent to which loans are being financed by medium and longterm debt and by shareholders funds less investments in subsidiaries, affiliates and fixed
assets. These additional aspects are included in the denominator of the ratio. Such ratio
takes into account the deficiencies in the loan to deposit ratio by considering the extent to
which the majority portion of the institutions business is funded by medium and longterm debt and free capital.
Loan to Adjusted Deposit Ratio

Table-5.3
Year
2005
2006
2007
2008
2009
Loan to
Adjusted
Deposit Ratio
82.72%
84.51%
84.35%
82.82%
96.16%
Chart-5.3
50
5.1.4 Liquid Assets to Total Assets Ratio:

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

Table-5.4
Year
Liquid Assets
to Total Assets
Ratio
2005
69.67%
2006
2007
2008
2009
69.54%
49.87%
58.17%
55.29%
Chart-5.4
51
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.
52
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 Shariah. The above restrictive environment in the capital market of Bangladesh has
limited substantially the investment opportunities for Islamic banks and hence the
avenues of lawful earning. In the absence of Islamic money and capital market these
banks cannot obtain funds from capital market at times of need.
Absence of inter-bank money market:
In spite of five Islamic banks have been functioning in Bangladesh, inter-bank money
market within Islamic banks has not yet taken place. These banks can take initiative to
form a money market among them. This may help minimising pparticularly the call
money problem they are suffering from beginnings.
Predominance of Murabaha financing:

Predominance of Murabaha financing in the portfolio management of investment funds
by the present day Islamic banks of Bangladesh has been a hot agenda of debate. One
study shows that Islami Bank Bangladesh Limited, Al Arafah Bank and Social Investment
Bank Limited have used 54%, 76% and 65% respectively of their investment funds by
resorting to Murabaha mode (Hoque 1996, p.9). Murabaha though considered as a
Shariah approved mode, the Islamic economists have traditionally prescribed for its
limited application. Due to legacy of traditional banking, lack of appropriate legal
protection and standard accounting practice in business, Islamic banks in Bangladesh find
Murabaha financing as suitable and Mudaraba and Musharaka as difficult to apply.
53
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 Pakistans 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
5.2 SWOT Analysis

SWOT analysis is a strategic planning method used to evaluate the Strengths,
Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It
involves specifying the objective of the business venture or project and identifying the
internal and external factors that are favorable and unfavorable to achieve that objective.
Here the structure of SWOT analysis is given below
54
SWOT Analysis Chart
Attributes of the Environment
External
Attributes of the organization
Internal
Table-5.5
Strengths
Weakness
Internal capabilities that may help a bank Internal limitations than may
to Reach its objective
interfere a companys ability

to active its objective
Opportunities
Threats
External factors that the company may
Current and emerging
exploit to its advantage
external factors that may be

challenged for the
companys performance
Helpful
Harmful
Achieving the Objective
Explanation of SWOT
Following the SWOT analysis procedure I have performed the analysis of IBBL this will
show the present condition of the bank. And also the future possibility of the bank will be
identified.
55
SWOT Analysis of IBBL
Attributes of the organization
Internal
Table-5.6
Strength
Pioneer of Islamic banking sector.
Continuous adoption modern services.
Highest deposit collector among all the

conventional banks and Islamic banks.
External
Weakness
Huge deposits collected but

lower invested amount.
Failure
in
choosing
investment opportunity.
Highest amount spent in corporate

social responsibility (CSR).
Highest no of branches across the

country as a private oriented Islamic
bank.
Weak ATM services.
Less importance in marketing
Highest foreign remittance earner

within the country.
Proper maintenance of Islamic Shariah
Complete follower of Bangladesh Bank

rules.
Close customer oriented service

provider.
Efficient manpower.
Insufficient
no.
of
ATM
booth.
and
advertising
activities.
Opportunities
Threats
56
based
Attributes of the oooEnvironment
Scope
to
increase
investment
in
Implementation
of
strict
diversified area.
Islamic Shariah principles.
Opportunity to introduce most customer
Lack
oriented and mostly Islamic Shariah
regulations regarding Islamic
oriented product.
law in banking.
Possibility of expanding more ATM
Greater
booths and providing smooth ATM
other foreign and local banks.
of
Govt.
rules
competition
&
with
services.
Scope to capture root level customers in

village as a Muslim country.
Adoption of more and smooth Ibanking services.
Helpful
Harmful
5.3 Maintenance of Rules and Restriction by IBBL

5.3.1 CAMELS Rating:
CAMELS rating are the supervisory rating of the banks overall condition. The CAMEL
ratings system is made up of five components: capital adequacy, asset quality, management
competence, earnings, and liquidity with the associated acronym. CAMEL ratings generally
assess overall soundness of the banks, and identify and/or predict different risk factors that
may contribute to turn the bank into a problem or failed bank. To bring and ensure the healthy
conditions of the banks or to check the bank run originated from a failure of a single bank,
authorities review the different aspects of the banks. In Bangladesh, since the early nineties,
the same 5 components of CAMEL have been used for evaluating the five crucial dimensions
of a banks operations that reflect in a comprehensive fashion an institutions financial
condition, compliance with banking regulations and statutes and overall operating soundness.
57
Recently, Bangladesh Bank has upgraded the CAMEL into CAMELS effective from June,
2006. After inserting S or sensitivity to market risk, it is presumed that this off-site
supervision technique of central bank would make it a more effective tool in rating banks.
The CAMELS rating components, usually taken into consideration by the monetary
authorities have the following weights: capital adequacy 20%, asset quality 20%,
management 25%, earnings 15%, liquidity 10% and sensitivity to market risk 10%.
Following is a description of the graduations of rating:
Table- 5.7
In the standard CAMELS framework, liquidity is assessed according to: volatility of deposits;
reliance on interest-sensitive funds; technical competence relative to structure of liabilities;
availability of assets readily convertible into cash; and access to inter-bank markets or other
sources
of cash, including lender-of-last-resort (LOLR) facilities at the central bank. At present,
conventional commercial banks deposits are subject to a statutory liquidity requirement
(SLR) of 18.5 percent inclusive of 5.5 percent cash reserve requirement (CRR). The CRR is
to be kept with the Bangladesh Bank and the remainder as qualifying secured assets under the
SLR, either in cash or in government securities. Till date, SLR for the banks operating under
the Islamic Shariah is 10.5 percent. Liquidity indicators measured as percentage of demand
and time liabilities (excluding inter-bank items) of the banks indicate whether the banks have
excess or shortfall in maintenance of liquidity requirements. The basic indicators of sound
liquidity position are: deposits are readily available to meet the banks liquidity needs; assets
are easily convertible into cash; compliance with SLR; and easy access to money markets etc.
CAMELS rating system has been viewed in light of the principles and practices of Islamic
banking. Though all features of CAMELS are not repugnant or contradictory to the Shariah
stance, there should be some separate provisions to make it conducive and proper to analyze
58
the whole operation of the Islamic banks. Definitely, it should also assess the Shariah
implementation status of the Islamic banks as well. But for BB restriction IBBL has adopted
CAMELS rating procedure and it acquires strong position for many times where no
supervisory response required.
5.3.2 Basel :
The Basel Accord was published in 1988 and is being followed by banks long time. But
in Bangladesh Basel Capital Accord (Basel ) was adopted from 1996. Under this first
Basel accord every bank must maintain minimum capital requirements. IBBL has adopted
Basel from the very first of establishment of this regulation in Bangladesh. IBBL always
maintains significant amount of statutory reserve beyond the Bibs requirements. This
statutory reserve is included under core capital (Tier-1) according to the first Basel
Accord. According to the following chart consistently statutory reserve is increasing as
the amount of deposits is increasing day by day.
SLR
Table-5.8
In Million
Year
2005
2006
2007
2008
2009
Required
Reserve
10184.25
12593.70
16172.96
19771.88
23530.65
Actual
Reserve
maintaine
d
20546.39
25725.39
34405.72
32784.45
45646.30
Maintaine
d (%)
20.17%
20.43%
21.27%
16.58%
19.40%
5.3.3 Basel :
The revised Basel framework (Basel- ) was finalized in June 2004 which is popularly
known as Basel . 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 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
59
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 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 along with Basel at IBBL from early 2009 and supervising full operation
of Basel from 01 January, 2010. In IBBL both the credit risks and market risks are very
insignificant here because as the follower of Basel this bank faces low amount of
default against its huge general investment what can be realized from the following data.
Bad and Loss amount to Total General Investment

Table-5.9
Year
2005
2006
2007
2008
2009
Bad and Loss amount to

Total General Investment
2.39%
2.33%
1.98%
1.65%
1.35
%
Chart-5.4
60
Chart-5.5
5.3.4 Stress Testing:

Bangladesh Bank executed stress testing about financial information for the first time of
48 commercial banks up to 30th June, 2009. This is a form of testing the stability of a
given entity and also to choose scenarios and put them in the valuation model. Four types
of risks are measured here which are credit risk, market risk, exchange rate risk and
finally liquidity risk. Stress testing will be performed once in every 6 months. The main
objectives of performing stress testing are managing risky exposures and helping
diversification of those, monitoring the standard of service and also making sure of
economic stability and fostering growth. If the depositors withdraw money at 2%-6%
from the bank within five consecutive days, then what will be the liquidity condition of
the bank-this is considered through stress testing. The stress test for liquidity risk
evaluates the resilience of the banks towards the fall in liquid liabilities. The ratio liquid
assets to liquid liabilities shall be calculated before and after the application of shocks by
dividing the liquid assets with liquid liabilities. Appropriate shocks will have to be
absorbed to the liquid liabilities if the current liquidity position falls at the rate of 10%,
20% and 30% respectively.
Liquidity Shock:
The ratio of liquid assets to liquid liabilities after a 10%, 20%, 30% fall in the later shall
be calculated as:
61
Table-5.10
Magnitude of
Shock
Year
Liquidity Shock
10%
2009
20%
2008
30%
2009
2008
2009
2008
Liquid Assets
153887.31 134312.24
153887.31
134312.24
153887.31
134312.24
Liquid Liabilities
244292.14 200343.41
244292.14
200343.41
244292.14
200343.41
Liquidity Ratio (%)
62.99%
67.04 %
62.99%
67.04 %
62.99%
67.04 %
Fall in Liquid
Liabilities
24429.21
20034.34
48858.43
40068.68
73287.64
60103.02
Revised Liquid
Assets
129458.1
114277.9
105028.88
94243.56
80599.67
74209.04
Revised Liquid
Liabilities
219862.93 180309.07
139263.26
160274.73
171004.49
140240.37
75.42%
58.80%
47.13%
52.92%
Liquidity Ratio after

shock (%)
58.89%
63.38%
Here it can be proved that due to the fall of liquid liabilities consecutively by 10%, 20%,
30% liquidity ratio also falls. So if the liquid liabilities decrease, the bank is going to face
liquidity shock because investment disbursement in short term is not decreasing. As a
result significant amount of deposit collection must be increased or investment
disbursement must be reduced. Here this stress testing is based on IBBL where only data
of 2008-2009 is taken into consideration. If liquid liabilities fall in this way, it is urgent to
try to absorb the shock. But IBBL is not at all in this position because of higher rate of
maintaining cash in hand.
62
Chapter Six
Summary of Findings, Recommendations
and Conclusion
63
Summary of Findings, Recommendations and Conclusion

6.1 Findings of IBBL Regarding Liquidity Management
Now IBBL is a leading bank in Islamic banking area in Bangladesh and we know that it
was the pioneer of Islamic banking trend in Bangladesh. From the above analysis we have
seen that IBBL is maintaining a good liquidity position. It always maintains SLR and
CRR above the requirement ratio. So it never faces any liquidity crisis. But in spite of
IBBL has some short comings in the liquidity management. Now some problems are
given below:
As we know that IBBL maintains huge amount cash in hand which are kept as
idle bank has failed to utilize proper investment opportunity.
IBBL cannot utilize proper investment opportunity because of proper
forecasting about investment.
As Riba (interest) is prohibited IBBL cannot involve in inter bank transaction.
Also IBBL cannot take part in purchasing Treasury bill for lack of Islamic
Money Market.
IBBL is not attentive enough in marketing and advertisement in this
competitive edge.
The periodic review program is comparatively not strong enough for which
huge liquidity is kept as idle.
64
6.2Recommendations:
Islami Bank Bangladesh Ltd. has been able to establish its own presence with a continued
expansion geared by increasing acceptance by the people. To continue this dynamic
expansion IBBL needs to adopt modern strategy in every banking department of cope
with the competitive banking sector. And at the same time it must be ensured that IBBL is
following the Islamic rules and principles. In Bangladesh there is no Islamic money
market and other laws regarding banking sector. So IBBL needs to think about its
alternative regarding liquidity management. Here some suggestions are given below what
should be achieved to be more efficient in liquidity management.
As IBBL maintains huge amount of cash in hand it cannot utilize proper investment
opportunity. So IBBL should emphasize more on utilization of investment opportunity
to increase it earning
It should give more importance on research & development to launch new product to
cope with increasing competition
Board of Directors of IBBL should ensure the selection and appointment of qualified
and competent management to administer the liquidity management function
Board of Directors should review periodically, but at least once a year, the liquidity
management program
Developing lines of communication to ensure the timely dissemination of the liquidity
and funding policies and procedures to all individuals involved in the liquidity
management and funding risk management process
Monitoring economic and other operating conditions to forecast potential liquidity
needs
IBBL should emphasize on promotion of the image of Islamic bank as PLS banks
65
6.3Conclusion:
Finally it can be said that liquidity management is one of the most essential part of all
banks. Like others IBBL also gives emphasis on this section. Through properly handling
this section a large problem is solved. That is holding customer confidence. On this the
image of the bank is highly correlated. Throughout the report it is seen that liquidity
management position is so strong and satisfactory. As a result IBBL achieves ST-1 rating
from CRISL and it holds its performance from couple of years. Also CAMELS rating
shows that this bank is performing in well manner. Compared to any other banks IBBL is
performing in liquidity management in ideal way. Its risk management department is
acting in a well organized manner which can be realized from the strict maintenance of
Basel . But IBBL should give more importance in adopting competitive strategy like IBanking 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 cant invest in T-bill and bond. So as a
one of the most profitable bank Govt. should consider to establish more accurate Islamic
law and principles for the welfare of the economy which supports the Islamic Shariah..
So 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.
66
67

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Liquidity Management

1.1 Statement of the Topic:

1.2 Objectives of the Study:

Here are some objectives for preparing the report.

To find out the components of liquidity statement IBBL.

1.3 Scope of the Study:

Evaluation of the different financial performance of IBBL.

Discussion with officials of the IBBL

Corporate Information (As on June 30, 2010)

13th March 1983

Inauguration of 1st Branch

30th March 1983

12th August 1983

Tk. 10,000.00 million

Tk. 7,413.00 million

Tk. 265,193.00 million

Investments (including Investment in Shares)

Tk. 255,178.00 million

Foreign Exchange Business

Tk. 277,739.00 million

Number of SME Service Centers

2.4 Objectives of IBBL

To conduct interest-free banking.

To establish participatory banking instead of banking on debtor-creditor relationship.

To invest on profit and risk sharing basis.

To establish a welfare-oriented banking system.

To contribute towards balanced growth and development of the country through

To contribute in achieving the ultimate goal of Islamic economic system

2.5 The Board of Directors:

2.6.1 The Executive Committee

2.6.2 The Audit Committee

2.6.3 The Management Committee

2.6.4 Asset-Liability Committee (ALCO)

2.7 Shariah Council:

2.9 Products and Services

2. Foreign Currency Deposit (USD, EURO, GPB).

Welfare Oriented Special Investment Schemes

12. Equity and Entrepreneurship Fund of Bangladesh Bank.

Other Banking Value Added Services

1. Islami Bank Hospital.

2.10 IBBLs World Rating:

IBBLs World Rating

3.2 Supply and Demand of liquidity in Islamic Banks

Supply and Demand of liquidity in Islamic Banks

Demand for Banks liquidity arise from

Customers Deposit withdrawal

Uses for CRR & SLR

From Money Market ( through

Operating expenses & tax

To Money Market(Through BGIIB)

3.3 Importance of liquidity management

Maintaining public confidence on the bank

Satisfying statutory liquidity and statutory reserve requirements

3.5 Sound Practices for Managing Liquidity in Banking

Developing a structure for managing liquidity

Measuring and monitoring net funding requirements

Managing market access

Foreign currency liquidity management

Internal controls for liquidity risk management

Role of public disclosure in improving liquidity

3.6 Principles for Sound Liquidity Risk Management and Supervision

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