credit management final project (1)

8/3/2019 Credit Management Final Project (1)

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CHAPTER #1

INTRODUCTION


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1.1 INTRODUCTION

Thefinancial system seeks the efficient allocation of resources and the transfer of money among

savers and borrowers. It comprises a set of complex and closely interconnected financial

institutions, markets, instruments, services, practices, and transactions. A healthy financial

system requires, among other things, efficient and solvent financial intermediaries, efficient and

deep markets, and a legal framework that defines clearly the rights and obligations of all agentsinvolved. It helps inform your organizations planningand action plans. Financial systems also

help you track andmanage the resources required to successfully complete yourwork. These tips

provide basic practices you will need tobuild financial sustainability in your organization.

Demonstrating good stewardship of resources assists CSOs in efforts to be accountable to

stakeholders and funders, and helps build confidence that your organization is a good place for

funders to invest. Other reasons1 why developing financial systems are important include -

Financial systems and capacity help the organization to make sound decisions based on cash

flow and available resources; Monitoring funds, or comparing actual income and expenses

versus budgeted amounts, helps managers ensure that the necessary funds are in place to

complete an activity; Most governments require that registered, charitable organizations create

1Yumi Sera and Susan Beaudry, (2007)-Financial Systems- Social Development Department - The World Bank


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accounts that track income and expenses; Funders require reports that demonstrate that grants

were used for intended purposes; Establishing financial controls and clear accounting procedures

help ensure that funds are used for intended purposes; Transparency, clear planning and realistic

projections.

The financial system in Pakistan has evolved over the years in response to growth of the

economy and government plans for the development of the country. The system comprised the

Central Bank (State Bank of Pakistan (SBP)), Commercial Banks and a mix of Non-Bank

Financial Institutions (NBFIs) including Development Financial Institutions (DFIs), Investment

banks, housing finance companies, leasing companies, modarabas and mutual funds, brokerage

houses and insurance companies. Three Stock Exchanges at Karachi, Lahore and Islamabad arealso a part of Financial System in Pakistan. In addition to managing the monetary policy, SBP

also regulates banks and DFIs. Securities and Exchange Commission of Pakistan (SECP)

supervises investment banks, leasing companies, insurance companies, modarbas and mutual

funds.

Afinancial marketis any marketplace where buyers and sellers participate in the trade of assets

such as equities, bonds, currencies and derivatives at low transaction costs and at prices that

reflect the efficient-market hypothesis. It facilitates: The raising of capital (in the capital

markets); The transfer of risk (in the derivatives markets); In matching those who want capital to

those who have it.

Financial Market in Pakistan consists of two markets.

Money Market: Which provides short term funds

Capital Market: Which makes long terms funds available to businesses and industries


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The Financial market can be reclassified into (i) Primary Market in which new shares or bonds

are issued and (ii) Secondary Market in which securities previously issued are traded such as

Shares, Bonds, Commercial Papers, Options and Mutual Fund.

The banking sectors and non-banking sectors are regulated by the central bank, State Bank of

Pakistan, while rest of the market (lease, stock exchanges, modaarba, mutual funds and

insurance) is regulated by Securities and Exchange Commission of Pakistan.

Financial intermediary is an institution, firm or individual who performs intermediation between

two or more parties in a financial context. Typically the first party is a provider of a service or

product and the second party is consumer or customer. Financial intermediaries are financial

institutions that accept money from savers and lend that money to the investors. The financial

intermediary sector of Pakistan is composed of the money market and capital markets, with

primary and secondary dealers.

Financial intermediaries include: Deposit institutions; Credit unions; financial advisor or broker;

pension funds; Insurance companies


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CHAPTER # 2

THE EVOLVING GLOBAL

FINANCIAL SYSTEM


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2.1 The Evolving Global Financial System2

The prosperity of the world has been immeasurably enhanced by the growth in international

economic relations trading in goods and services, and the migration of labor, capital, and

ideas across the planet. The principle of comparative advantage suggests that the wealth of

nations is enhanced by each country specializing in those economic activities for which it has

low opportunity costs. Yet all this economic activity must be financed, and the stability of the

world financial system is critical to the continued growth in world trade. This is complicated by

the fact that most nations have their own currency, and that the rules and regulations governing

financial transactions vary widely between countries.

During the late 19th and early 20th centuries, there was little coordination of international

finances. The worlds financial capital was London, and most major trading nations were on the

gold standard, meaning financial obligations were settled in currencies redeemable in gold. If a

nation used its currencies excessively to buy imports or invest overseas, it lost gold reserves,

forcing it to restrict money supply and credit, usually causing deflation. This made the countrys

exports more attractive and imports less desirable, thereby correcting the balance of-payment

imbalance problem. Many scholars believe the system worked reasonably well between 1871

and 1914.World War I involved vastly larger international capital flows than ever before, as European

nations such as Britain and Germany went deeply in debt, borrowing heavily from other nations,

especially the United States.

The Versailles Treaty (1919) provided for punitive reparation charges against Germany, which

then engaged in hyperinflationary policies that severely damaged that nation economically. An

attempt to restore the gold standard in the 1920s was short-lived: Britain left the full gold

standard permanently in 1931, as did the United States two years later.

2 Richard Vedder (2009) The Evolving Global Financial System


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The Great Depression of the 1930s resulted partially from sharply declining international trade

caused, in part, by high tariffs. Beginning in 1934, however, nations started to reduce ruinous

trade barriers, led by the Reciprocal Trade Agreements Act in the United States.

However, return to normalcy in international finance was shattered by the outbreak of World

War II in 1939, the most costly war ever fought, which disrupted world trade and led to

international cooperative arrangements to facilitate economic stability and growth.

2.2 New International Institutions

A large number of major developments between 1944 and 1960 profoundly altered the nature of

the international financial system. Concerned about huge deficiencies of hard currencies to pay

for goods, services, and the reconstruction of war-torn economies, Britains John MaynardKeynes and the United States Harry Dexter White successfully proposed a new international

financial order at the Bretton Woods Conference in 1944. The International Monetary Fund

(IMF) and the International Bank for Reconstruction and Development (World Bank) were

created.

The IMF would help nations with balance-of payments problems and with difficulties

maintaining reserves consistent with agreed upon fixed exchange rates defined in terms of gold.

While the fixed-rate system broke down after 1971, the IMF continues with expanded

responsibilities. For example, it has played a key role in averting or reducing national and

regional financial crises, serving as a lender of last resort to nations in fiscal stress.

The World Bank originally provided loans to war-torn countries to finance reconstruction,

although by the 1950s the bank had moved to broader lending to finance new development

projects. Although both the IMF and World Bank are headquartered in Washington, D.C. (given

Americas prominence as a global financial power), these organizations are truly international in

orientation and control.

The most important international organization, the United Nations, began in San Francisco in

1945. While not focusing primarily on economic and financial issues, those issues have been

important to U.N. agencies such as UNCTAD (U.N. Conference on Trade and Development) and

UNESCO (U.N. Economic, Social, and Cultural Organization). The principle of international


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assistance to meet financial strains received a prominent boost with the Economic Recovery

Program (Marshall Plan) of the United States (1948-1952), which provided aid to many

European nations. The Marshall Plan promoted international cooperation among the recipients of

its more than $12 billion in economic assistance in the form of loans. The Cold War after 1945

led to new forms of political and economic regional cooperation as a by-product of the creation

of two military alliances, NATO (North Atlantic Treaty Organization) and the Warsaw Pact of

nations allied with the Soviet Union.

More direct forms of financial cooperation began, leading to the creation of a system of

international financial arrangements. In 1947, the General Agreement on Tariffs and Trade

(GATT) began, which provided a framework for a series of negotiations (such as the Kennedy

Round and the Uruguay Round) that over the next half century led to dramatic reductions inbarriers to international trade, especially in goods and services.

2.3 World Economic and Financial Integration

The financial stress of World War II contributed to the hastening of an abrupt decline in

colonialism, as literally dozens of new nations emerged. Most dramatic, perhaps, was Indias

independence in 1947, but large parts of Asia and Africa also became independent nations in the

next two decades. This greatly accelerated the need for international financial organizations such

as the IMF and World Bank. Each new nation typically had to establish a currency that would

gain widespread international acceptance, needed to borrow considerable sums of money from

foreign nations despite uncertain abilities to repay loans, and often had to learn to live within the

rule of law and the discipline imposed by market conditions. Organizations such as the IMF and

the World Bank became increasingly important in facilitating these factors.

The move toward world economic/ financial integration was advanced by important new

institutions, especially in Europe. A European Payments Union was developed in 1950 to

facilitate ways of dealing with the dollar shortage that made international payments difficult. The

Organization for Economic Cooperation and Development (OECD) began to collect uniform

economic information on major industrial countries, ultimately including nations in Asia and

Latin America as well as Europe and North America. Most important was the Treaty of Rome,

signed in 1957, creating the European Economic Community (Common Market), which has


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grown from a six-nation customs union in 1958 to a 27-nation group that has integrated much of

its economic structure into todays European Union, including a common currency covering over

half the area (the euro) and an EU central bank.

The European effort has been duplicated elsewhere on a much smaller scale, with Asian,

African, and Latin American nations moving to integrate their economies more regionally. The

Asian Development Bank, for example, is an institution of about 40 nations designed to further

the creation and free flow of capital in one important region of the world (making over $10

billion in loans in 2008), while the North American Free Trade Agreement (NAFTA) of 1994

extended the customs union approach to the Americas.

Four further extensions of the world financial system are important. In 1995, the World Trade

Organization (WTO) replaced the GATT, and it was given wide authority to enforceinternational standards relating to trade and cross border financial dealings. The Group of Seven

(G-7) was originally a meeting of the finance ministers of seven leading industrial nations, but it

has expanded numerically, now encompassing 20 nations (the G-20) that meet regularly to agree

on policies governing international economic and financial arrangements. Other,

nongovernmental sponsored conferences, especially in Davos, Switzerland, bring together

corporate and financial leaders, often sowing seeds for later policy reforms. Finally, a number of

multilateral tax treaties have tried to standardize to some extent tax treatment for those engaged

in international activities; recently, small tax haven nations have agreed to modify bank secrecy

provisions to deal with tax evasion.


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CHAPTER # 3

FINANCIAL CRISIS


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3.1 FINANCIAL CRISIS

The term financial crisis is applied broadly to a variety of situations in which some financial

institutions or assets suddenly lose a large part of their value. In the 19th and early 20th

centuries, many financial crises were associated with banking panics, and many recessions

matched with these panics. Other situations that are often called financial crises include stock

market crashes and the bursting of other financial bubbles3, currency crises, and sovereign

defaults. Financial crises directly result in a loss of paper wealth they do not directly result in

changes in the real economy unless a recession or depression follows.

On wards in 20th century the global financial crises has really affected the world, history shows

that it has started during years 2007-2008. Around the world stock markets have fallen, large

financial institutions have collapsed or been bought out, and governments in even the wealthiest

nations have had to come up with rescue packages to bail out their financial systems. On the one

3 An economic bubble is the commonly used term for an economic cycle that is characterized by a rapid expansionfollowed by a contraction, often times in a dramatic fashion. The concept of economic bubble are also posited as atheory which holds that security prices will always rise above their real value and will continue to do so until pricesdrop and the bubble bursts.


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hand many people are concerned that those responsible for the financial problems are the ones

being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods

of almost everyone in an increasingly inter-connected world. The problem could have been

avoided, if ideologues supporting the current economics models werent so vocal, influential and

inconsiderate of others viewpoints and concerns. This crisis has badly affected Europe and

Asian markets which will discussed below.

3.2 Causes of Financial Crisis

3.2.1 Leverage

Leverage, means borrowing to finance investments, is frequently cited as a contributor to

financial crises. When a financial institution only invests its own money, it can, in the very worst

case, lose its own money. But when it borrows in order to invest more, it can potentially earn

more from its investment, but it can also lose more than all it has. Therefore leverage enlarges

the potential returns from investment, but also creates a risk of bankruptcy. Since bankruptcy

means that a firm fails to honor all its promised payments to other firms, it may spread financial

troubles from one firm to another.

3.2.2Asset-liability mismatch

Another factor believed to contribute to financial crises is asset-liability mismatch, a situation in

which the risks associated with an institution's debts and assets are not appropriately aligned.

For example: commercial banks offer deposit accounts which can be withdrawn at any time and

they use the proceeds to make long-term loans to businesses and homeowners. The mismatch

between the banks' short-term liabilities (its deposits) and its long-term assets (its loans) is seen

as one of the reasons bank runs occur when depositors panic and decide to withdraw their funds

more quickly than the bank can get back the proceeds of its loans. Likewise, Bear Stearns failed

in 200708 because it was unable to renew the short-term debt it used to finance long-term

investments in mortgage securities.


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3.2.3Regulatory failures

Governments have attempted to eliminate or mitigate financial crises by regulating the financial

sector. One major goal of regulation is transparency: making institutions' financial situations

publicly known by requiring regular reporting under standardized accounting procedures.

Another goal of regulation is making sure institutions have sufficient assets to meet their

contractual obligations, through reserve requirements, capital requirements, and other limits on

leverage. Hence some financial crises have been blamed on insufficient regulation, and have led

to changes in regulation in order to avoid a repeat.

3.2.4 Fraud

Fraud has played a role in the collapse of some financial institutions, when companies have

attracted depositors with misleading claims about their investment strategies, or have misuse the

resulting income. Many rogue traders that have caused large losses at financial institutions have

been accused of acting fraudulently in order to hide their trades.

Beside these all there are some other variables that cause financial crises such as wrong

implementation of policies, lack of knowledge and political instability.

3.2.5 Severe Crises that Affected the Whole System

A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other

industrialized economies have had a ripple effect around the world. Furthermore, other

weaknesses in the global financial system have surfaced. Some financial products and

instruments have become so complex and twisted, that as things start to unravel, trust in the

whole system started to fail. (As U.S.A is considered a super power)

3.3 Financial Crisis in Pakistan (2007-2008)


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History shows that Pakistan has always been instable politically it was hit financially during the

years 2007-08. It has been reported that the countrys foreign reserves have dwindle to around

$4.5 billion. There the foreign investors have fled the country in droves and the rupee has fallen

sharply. The government of Pakistan started seeking funds from ally countries such as china and

Saudi Arabia but they refused, in the end the last option was IMF, but applying IMF was would

be more dangerous in future. Finally the country was hit financially the stock market specially

Karachi Stock Market went down and as the small investment funds left the stock market, and

market was dysfunctional. It was reported that when the index fell another 286 points or 3

percent on August 27, the exchange authorities imposed a floor of 9,144 to prevent it dropping

further. Since then trading has declined to record lows with a flight from shares that are regarded

as overpriced. The floor is due to be removed on October 27, with analysts predicting sharp fallsas foreign investors dump an estimated 20 percent of their equities. Foreign investment in

equities has already dropped from $4.8 billion to $2 billion since the beginning of the year. In

case of financial crises we should not forget the effort of Pakistan on war on terror supporting

U.S.A, as the government spent $34 billion.

There is no doubt that global Financial Crises has not hit Pakistan in 2007-08, with huge blow as

the government claimed. The country has seen severe loss but indeed survived. Concluding the

financial crisis in Pakistan, it brought destruction in majors sectors such as small businessincluding foreign investors, export and import (trade) stock exchanges and most important sector

which is bank that will be discussed below.

3.4 Banking Crisis in Pakistan

Pakistans banking sector is made up of 53 banks, which include thirty commercial banks, four

specialized banks, six Islamic banks, seven development financial institutions and six micro-

finance banks. According to the 2007-08 Financial Stability Review from the State Bank of

Pakistan (SBP), 'Pakistans banking sector has remained remarkably strong and flexible, despite

facing pressures starting from weakening macroeconomic environment. Since late 2007

according to Fitch Ratings, the international credit rating agency with head offices in New York

and London, 'the Pakistani banking system has, over the last decade, gradually evolved from a

weak state-owned system to a slightly healthier and active private sector driven system.


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However the data from the banking sector for the final quarter of 2008 confirms a slowdown

after a multi-year growth pattern. In October 2008, total deposits fell from Rs3.77 trillion in

September to Rs3.67 trillion. Provisions for losses over the same period went up from Rs173

billion in September to Rs178.9 billion in October. At the same time, the SBP has jacked up

interest rates: the 3-month Treasury bill auction saw a jump from 9.09% in January 2008 to 14%

in January 2009, and bank lending rates are now as high as 20%.

Reasons of banking crises

Credit Management

Removal of Toxic asset 4from banks balance sheet

Following the rules and regulation

Wrong implementation of policies

Government involvement

4 "Toxic asset" is a popular term for certain financial assets whose value has fallen significantly and for which there

is no longer a functioning market, so that such assets cannot be sold at a price satisfactory to the holder


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CHAPTER # 4

BASEL

4.1 Basel


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As in each and every country there are certain rules and regulation that banks have to follow, it

plays an important role in risk management in banks, hence it avoids unnecessary risk. For this

there are certain laws that banks have to follow such as Basel 1 and Basel 2. These laws guide

bank how to perform their duties in all financial term.

4.1.1 Basel 1

Meaning

A set of international banking regulations put forth by the Basel Committee on Bank

Supervision, which set out the minimum capital requirements of financial institutions with the

goal of minimizing credit risk. Banks that operate internationally are required to maintain a

minimum amount (8%) of capital based on a percent of risk-weighted assets.

Background

The Committee was formed in response to the messy liquidation of a Cologne-based bank

(Herstatt) in 1974. On 26 June 1974, a number of banks had released Deutsche Mark (German

Mark)5 to the Bank Herstatt 6in exchange for dollar payments deliverable in New York. On

account of differences in the time zones, there was a lag in the dollar payment to the counter-

party banks, and during this gap, and before the dollar payments could be effected in New York,the Bank Herstatt was liquidated by German regulators. This incident prompted the G-10 nations

to form towards the end of 1974, the Basel Committee on Banking Supervision, under the

auspices of the Bank of International Settlements (BIS) located in Basel, Switzerland.

Main Frame work

5 Was the official currency of West Germany (19481990) and Germany (19902002) untilthe adoption of the euro in 2002? It is commonly called the "Deutschmark" in English butnot in German. Germans often say "D-Mark"

6 Was a privately owned bank in the German city of Cologne. It went bankrupt on 26 June1974 in a famous incident illustrating settlement risk in international finance.


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Basel I, that is, the 1988 Basel Accord, primarily focused on credit risk. Assets of banks were

classified and grouped in five categories according to credit risk, carrying risk weights of zero

(for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent

(this category has, as an example, most corporate debt). Banks with international presence are

required to hold capital equal to 8 % of the risk-weighted assets. However, large banks like

JPMorgan Chase found Basel I's 8% requirement to be unreasonable and implemented credit

default swaps so that in reality they would have to hold capital equivalent to only 1.6% of assets.

Since 1988, this framework has been progressively introduced in member countries of G-10,

currently comprising 13 countries, namely, Belgium, Canada, France, Germany, Italy, Japan,

Luxembourg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States

of America. Most other countries, currently numbering over 100, have also adopted, at least inname, the principles prescribed under Basel I. The efficiency with which they are enforced

varies, even within nations of the Group of Ten.

As Basel one had some short comings for this the community introduced Basel II.

4.1.2 Basel II

Basel II is the second of the Basel Accords, which are recommendations on banking laws and

regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II,which was initially published in June 2004, is to create an international standard that banking

regulators can use when creating regulations about how much capital banks need to put aside to

guard against the types of financial and operational risks banks face. Advocates of Basel II

believe that such an international standard can help protect the international financial system

from the types of problems that might arise should a major bank or a series of banks collapse. In

theory, Basel II attempted to accomplish this by setting up risk and capital management

requirements designed to ensure that a bank holds capital reserves appropriate to the risk the

bank exposes itself to through its lending and investment practices. Generally speaking, these

rules mean that the greater risk to which the bank is exposed, the greater the amount of capital

the bank needs to hold to safeguard its solvency and overall economic stability.

Objectives


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1. Ensuring that capital allocation is more risk sensitive;

2. Separating operational risk from credit risk, and quantifying both;

3. Attempting to align economic and regulatory capital more closely to reduce the scope for

regulatory arbitrage.

4.2 Prudential Regulations for banks in Pakistan

State Bank of Pakistan (SBP) which is the Central Bank of the country has been hand over with

the responsibility for an ongoing effective supervision of the banking sector. The relevant

provisions of law which vest powers in State Bank of Pakistan (SBP) to carry out inspection of

banks are contained in the Banking Companies Ordinance, 1962. Besides, State Bank of PakistanAct, 1956 and the Banks Nationalization Act, 1974, The Financial Institutions (Recovery of

finances) Ordinance, 2001, Companies Ordinance, 1984 and Statutory Regulatory Orders

(SROs) are the relevant legislations, which cover the activities concerning the banking sector.

The State Bank has framed Prudential Regulations for banks and Rules of Business for DFIs that

present a prudent operating framework within which banks and DFIs are expected to conduct

their business in a safe and sound manner taking into account the risks associated with their

activities. These regulations incorporate the spirit and essence of BIS regulations and are

constantly watched for possible improvement so that their enforcement yields the best results to

promote the objectives of supervision.

Before independence on 14 August 1947, during British colonial regime the Reserve Bank of

India was the central bank for both India and Pakistan. On 30 December 1948 the British

Government's commission distributed the Reserve Bank of India's reserves between Pakistan and

India -30 percent (750 M gold) for Pakistan and 70 percent for India. The losses incurred in the

transition to independence were taken from Pakistan's share (a total of 230 million). In May,

1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to establish the State Bank of

Pakistan immediately. These were implemented in June 1948, and the State Bank of Pakistan

commenced operation on July 1, 1948.


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There are different functions that SBPperforms some of the most important functions are

defined below.

Under the Banking Companies Ordinance, 1962 the State Bank of Pakistan is fully authorized to

regulate and supervise banks and development finance institutions. During the year 1997 some

major amendments were made in the banking laws, which gave autonomy to the State Bank in

the area of banking supervision. Under Section 40(A) of the said Ordinance it is the

responsibility of State Bank to systematically monitor the performance of every banking

company to ensure its compliance with the statutory criteria, and banking rules & regulations. In

every case in which the management of a bank is failing to discharge its responsibility in

accordance with the applicable statutory criteria or banking rules & regulations or is failing to

protect the interests of the depositors or for advancing loans and finance without due regard for

the best interests of the bank or for reasons other than merit, the State Bank is empowered to take

necessary remedial steps. The State Bank of Pakistan can exercise the following powers vested

upon it under the Banking Companies Ordinance.

Prohibiting the bank from giving loans, advances & credits.

Prohibiting the bank from accepting deposits.

Cancel license of a bank.

Give directions to the bank as it deem fit. Remove chairman, directors, chief executive or other

managerial persons from the office and appoint a person as chairman, director or chief executive.


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CHAPTER # 5

CASE STUDY OF BANK AL HABIB

LIMITED


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To be a quality financial service provider maintaining the

highest standards in banking practices.

To be strong and stable financial institution offeringinnovative products and services while contributing towards

the national economic and social development.


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History

Bank Al Habib Limited (BAHL) was incorporated in October 1991 and started its operations in

January 1992. It is listed in all the stock exchanges in Pakistan. The directors belong to the well-

known Habib family the pioneer of the banking industry in Pakistan. Their history goes back to

1941 when they established the bank which later became the one of the largest banks of Asia by

the time the government of Pakistan nationalized in 1974 among other private banks. The rich

experience of over seven decades in the banking industry that the sponsor had with them helped

a lot for the tremendous growth in all the sectors that the bank achieved during all these years.

Bankss main focus has been the foreign trade business where in the bank is maintaining market

share of over 7% of the total countrys trade. BAHL observes a prudent and conservative credit

policy thereby keeping the NPL ratio at 1.91% (2009), against average of about 12%. Bank Al

Habib now operates with a network of 263 branches (including an e-branch in Bahrain), making

it the 7th largest network in Pakistan. Pakistan credit rating agency (private) Limited (PACRA)

has rated the bank as AA+ long term and A1+ for short term.

Organizational Structure

As Bank Al Habib is a banking company listed in stock exchange therefore it follows all thelegalities which are imposed by concerned statutes Mr. Ali Raza D.Habib is chairman of the

company with a team of 8 directors and 1 chief executive & MD to help in the business control

and strategy making for the company.


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Name Designation Occupation

Ali Raza D. Habib Chairman Businessman

Abbas D. Habib CEO & MD Banker

Anwar Haji Karim Director Industrialist

Shameem Ahmed Director Banker

Hasnain A. Habib Director Industrialist

Imtiaz Aalam Hanfi Director Banker

Murtaza H. Habib Director Industrialist

Qumail R. Habib Executive Director Banker

Syed Mazhar Abbas Director Banker

Tariq Iqbal Khan Director NIT Nominee

A. Saeed Siddiqui Company Secretary Banker

Operational Management of the bank is being handled by a team of 10 professionals. This

team is also headed by Mr. Ali Raza D. Habib. The different operational departments are

Consumer Banking & IT div; Financial & Inter branch div; Banking operations div; HR & Legal

div; financial control & Audit div; Credit management div; Commercial Banking div; Corporate

Banking div; Treasury management & FX Group and lastly Special Assets Management (SAM)

Group.


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For effective handling of branches, it has been categorized into three segments with different

people handling each category. These categories are:

a) Corporate Banking

b) Commercial Banking

c) Consumer Banking

a) Corporate Banking: These are branches which have an exposure of over Rs. 100 million.

Usually includes multinational & public sector companies.

b) Commercial Banking: The branches which has a credit exposure of less than Rs. 100

million but having a credit portfolio of more than Rs. 20 million (excluding staff loans)

Usually branches in large markets and commercial areas come under this category.

c) Consumer Banking: These are the branches which have exposure up to Rs. 20 million and

these include all the branches which are neither corporate nor commercial branches.

Main Functions & Services

The main functions and services which Bank Al Habib provides to different peoples are as

follows.

- Open Different accounts for different peoples

- Accepting various types of deposits

- Accepting various types of deposits

- Granting loans & advances

Undertaking of agency services and also general utility functions, few of those are as under:

- Collecting cheques and bill of exchange for the customers.

- Collecting interest due, dividend, pensions and other sum due to customers.

- Transfer of money from place to place.

- Acting an executor, trustee or attorney for the customers.


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- Providing safe custody and facilities to keep jewelry, documents or securities.

- Issuing of travelers cheques and letters of credit to give credit facilities to travel.

Accepting bills of exchange on behalf of customers.

Purchasing shares for the customers.

Undertaking foreign exchange business.

Furnishing trade information and tendering advice to customers.

For proper functioning of branches and the overall bank has been divided in different

departments. These departments handle different jobs so that division of work is there forimprovement of functions and also it is easy to control the situation.

The General Division in a branch is as follow:

1) Cash department

2) Deposit department

3) Advances & credit department

4) Foreign exchange department

Technology department (new addition in order to cope with the growing needs of day to day

technology requirements)

Management:


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General Manager

Deputy General Manager

Assistant General Manager

Senior Chief Manager

Chief Manager

Senior Manager

MGR

Assistant Manager

Officer Grade I

Officer Grade II

Officer Grade III

Sub Officer


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Credit Department of Bank Al Habib

This department is the authority concerned with reviewing and auditing the loans and credit

facilities.

Credit Department Hierarchy:

Investment, Financial and Treasury Controller

Asset Banking Head

Corporate and Investment Banking Head

Senior Credit Officer (Unit Head)

Senior Credit Officer (Team Leader)

Junior Credit Officer


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The Department carries out the following tasks:

Credit Policy:

The department defines and plans the Bank's general policies in the field of credit as well as

establishing explicit rules and instructions pertaining to granting credit within the framework of

the policies which aim at realizing sound lending status.

Loans:

The department supervises the loan applications from the time they are submitted to the Bank

and processed in the concerned departments and sections to be approved in accordance with the

guarantees submitted and the credit studies and research of such loans.

The loans and credit facilities activity is closely monitored and followed-up and settled in

coordination and cooperation with the other departments

Main Products of Credit Department

Loans, Credit cards, Savings, Consumer Banking etc.

A credit card is a small plastic card issued to users as a system of payment. It allows its holder

to buy goods and services based on the holder's promise to pay for these goods and services.

The issuer of the card creates a revolving account and grants a line of credit to the consumer (or

the user) from which the user can borrow money for payment to a merchant or as a cash advance

to the user.


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There are basically two types of deposits and their nature vary due to time factor i-e

Demand deposits

Time deposits

The demand deposits have no legal restriction on drawing of the deposited amount and the cash

is readily available on demand without any conditions. Demand deposits are further classified

into two categories i-e

- Current deposits

- Saving deposits

The current deposits are non-interest bearing deposits and earn the most for banks as there is no

cost for the banks but the depositor can claim no interest whatsoever.

Thesaving deposits are the interest bearing deposits and although there are no such restrictions

but it is mostly preferred for saving and salaried class and similar class clients deposit in this

category to earn interest so no regular withdrawal takes place in this type of deposits.

On the contrary the time deposits are deposits for a particular period of time and cannot be

easily withdrawn on demand and if the amount is withdrawn certain penalty is levied on

withdrawal before time.


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They are further categorized into two categories that are

- Notice time deposits

- Fixed term deposits

BAHL Home Loan offers financing options to purchase a new house or

renovate an existing house.

BAHL Personal Loan caters from quality education to a grand wedding to personal well- being,

BAHL Personal Loan helps you fulfill your financing needs.

BAHL Fast Transfer

BAHL Fast Transfer lets you receive your remittance instantly and absolutely free. BAHL one

of Pakistans largest banking network - provides unmatched convenience and a confirmation

SMS to inform you that your money is ready for collection.

BAHL Fast Transfer offers three modes for receiving money in Pakistan. Fast Cash Receive up

to PKR 500,000 for instant collection from any BAHL Branch. Fast Direct Credit Instantly

receives money in any BAHL account. Fast Draft Non BAHL account holders can get their

account credited the same day.


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Automated Teller Machine

Mobile Banking

Internet Banking


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CHAPTER # 6

FINANCIAL ANALYSIS

COMPARATIVE OVERVIEW


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Efficiency Ratios:

Operating Efficiency:

In order to analyze the efficiency of the bank first we intend to calculate the operating efficiency.

The lower the operating efficiency the more efficient the bank. In 2008 the operating efficiency

of the bank stands at 0.37 and witnesses a decrease of 3% in 2009 and reaches 0.36. But then

again in 2010 the operating efficiency increases by 7%. On the whole we can say that the

efficiency of Bank Al Habib is satisfactory because in times of economic downturn in Pakistan

the ratio witnesses only a slight decrease and increase over the period of 3 years.

Cost of Funds:

To further evaluate the efficiency of Bank Al Habib Limited we now move on to the cost of

funds, the lower the cost of funds the lower the variable cost of the bank. In 2008 the cost of

funds stands at 0.05. In 2009 the cost of fund ratio witnesses a jump of 15% and again witnesses

a jump of 4% in 2010. These jumps are pretty marginal and indicate towards a stable cost of

funds.


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Liquidity Ratios:

Non Deposit Borrowing Ratio:

In order to evaluate the liquidity position of the Bank Al Habib we calculate the Non Deposit

borrowing ratio, which indicates that higher the ratio the greater the risk of default or reputation

risk. In the case of Bank Al Habib the ratio stands at 1.06 in 2008. In 2009 the ratio witnesses the

huge increase of 123% and again witnesses a huge decrease of 42% in 2010. In 2009 the

liquidity position of Bank Al Habib was in a disastrous situation but the liquidity improvedconsiderably in 2010.

Cash to Total Asset:

To further evaluate the liquidity position of the Bank Al Habib we now move towards the cash to

total assets. In 2008 the cash to total asset ratio is 1.34 and remains stable and 1.34 in the year

2009 at 1.34 with a 0% increase. While in 2010 the ratio witnesses a decrease of only 3%. This

ratio indicates that higher the ratio higher the liquidity so we can say that the liquidity of the

bank remain stable over the 3 years.

Risk:

Equity Multiplier:

Now we try to determine the level of risk of Bank Al Habib. We can see that the equity

multiplier stands at 1.17 and witnesses a decrease of 2% in 2009 and further goes down by 5% in

2010.


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Profitability:

Return on Equity:

Now we are trying to determine the profitability of Bank Al Habib. In order to determine the

profitability we have calculated ROE which stands at 0.24 and witnesses a slight decrease of 1%

in 2009 and then shows an increase of 5% in 2010. With the help of this ratio we can say that the

profitability of Bank Al Habib is in a satisfactory position.

Return on Assets:

While further evaluating the profitability of the bank we can see that the ROA has increased over

the period of three years. The ratio stands at 0.20 in 2008 and witnesses an increase of only 1%

in 2009 and further increases by 11% in 2010. This ratio reflects a positive image of the banks

profitability position.

Profit Margin:

To further dissect the profitability we calculate the profit margin which stands at 0.14 in 2008

and witnesses a decrease of 13% in 2009 and increases slightly by 2% in 2010. On the whole it

shows that the profitability of the bank is stable as it shows Minimal Change over the period of

three years.


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credit management final project (1)

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