Executive Summary
This paper mainly introduces the core operation system of commercial banking This also deals with the structure of the commercial Bank and how they maneuvers their sourcing and usage of funds. . Commercial bank represents a key financial intermediately because they serve all types of surplus and deficit units. In case of institutional and informational structure, the currency of markets is driven primarily by the management of credit risk and price variation in spot currency markets by dispersed information To facilitate our study we choose three renowned commercial banks currently operating in our country. We studied their balance sheets and tried to find out how they gather funds and in what way they use their collected funds. Moreover, we also attempted to see how manage their capital, risk and asset- liability. The overall process is firstly started with regulation system of the commercial banking and latter it has discussed about the different types of transactions like deposit accounts, borrowing funds, bank capital, loans ,investments and other assets and liabilities. We used graphs and pie charts. All analysis have been made with the help of the annual reports of those three concerned banks that is Bank Asia, HSBC and Al-Arafah Islami Bank. Three Banks were taken from three different sides that is local, foreign and Islami Shariah Based which flared our study. The attempt was to examine the basic operations of those three banks and the similarities and variations of these commercial banks. The report mainly addresses the commercial bank’s funds, their sources of funds, uses of funds and different depository systems that helps us to understand the major operation systems of commercial banking.
Introduction
Commercial Banks have been proven as the part and parcel of the modern economy these days. Our term paper is mainly related to the different kind of operations of a commercial banking system and the formal structure of their organization. The total systematic environment of their operations is mainly for benefiting customers and it also creates a potential impact on the growth of the economics which helps to accelerate the flow of financial activities. Commercial bank and its regulation are needed to protect customers who supply funds to the banking system. By preventing bank runs that might occur if customers became concerned about the safety of their deposits, a safer banking environment. The banking system that has been discussed is to enhance the safety of the banking system by overseeing individual banks. We clearly know that the operation system of the commercial bank and fluctuations of economic cycle are related simultaneously. One of the most important point is, the going concern policy as they can operate in any critical situations. In the recent times, the banks are especially cautious because they are already experiencing an increase in problem (potential defaults) loans as a result of weak economy. Therefore, the bank has more money available than they can use for lending. Many banks increased their investments in securities because the demands of the loanable funds have weakened. Bank operations change in response to changing regulations and economic conditions and to managerial policies designed to hedge various form of risk. For example; in the recent years banks expanded across state lines, diversified their asset portfolios, boosted their capital ratios and expanded their operations into services as insurance, brokerage, underwriting of securities and sales of mutual funds. Large changes in bank operations typically require restructuring which normally must be assessed and approved by the bank’s executives and board of directors.
Decisions to restructure are complex because of their effects on customers, shareholders and employees. A strategic plan to satisfy customers and shareholders will not necessarily satisfy the majority of employees. Here, we are mainly concern about the overall performance of commercial banking systems. Today’s economic world is related with the banking system and dynamic flow of financial transactions in the currency markets and these are focused on this paper.
Banking Operations of Bank Asia
A Brief Story
Bank Asia Limited is a scheduled commercial bank in the private sector established under the Bank Company Act 1991 and incorporated in Bangladesh as a public limited company under the Companies Act 1994 to carry out banking business in Bangladesh. Bank Asia Limited acquired the business of Bank of Nova Scotia, Dhaka in the year 2001 and at the beginning of the year 2002 the Bank also acquired the Bangladesh Operation of Muslim Commercial Bank Limited (MCBL), a bank incorporated in Pakistan, having two branches at Dhaka and Chittagong with one booth at Dhaka. The Bank carries its banking activities through nineteen branches in the country. Bank Asia customers have access to 20 ATMs as a member of ETN. Under the ATM network the Stellar Online Banking Software enables direct linking of a client’s account, without the requirement of a separate account. The Bank is also in the process of setting up its own ATM network with a view to providing retail banking services.
Review of Bank Asia Operations
Capital Adequacy Management
Commercial banks have to make decisions about the amount of capital they need to hold for three reasons. First, bank capital helps bank failure, a situation in which the bank cannot satisfy its obligations to pay its depositors and other creditors and so goes out of business. Second the amount of capital affects returns for the owners of the bank.. And third, a minimum amount of bank capital(bank capital requirements)is required by regulatory authorities.
Bank Asia achieved the tk.1.0 billion capital requirement ahead of the deadline set by Bangladesh Bank. In terms of section 13(2) of Banking Companies Act 1991 and Bangladesh Bank BRPD circular nos.01,14 and 10, dated 08 January 1996, 16 November 1996 and 25 November 2002 respectively, required capital of the Bank at the close of business on 31 December 2005 is Taka 1,565,027,480 as against available core capital of Taka 1,473,982,069 and supplementary capital of Taka 183,112,813,that is a total of Taka 1,657,094,882 thereby showing surplus capital/equity of Taka 92,067,402 at that date.
The authorized and paid up capital of the bank are tk.1200 million and tk.930 million respectively. The total shareholder’s equity as of dec 31,2005 stood at tk.1473million.The bank maintained a capital adequacy ratio of 9.53% at the end of 2005 against the regulatory requirement of 9.0%. The ratio is higher than the required but less than the previous year’s CAR .
Capital Requirement Required Holding
Core Capital 4.5% 8.48%
Supplementary Capital 4.5% 1.05%
Total 9.00% 9.53%
We can show the capital adequacy ratios of bank Asia through a bar graph.
Asset and liability Management
Asset management involves a commercial bank in acquisition of assets that have a low rate of default and diversification of asset holdings to increase profit. On the other hand, liability management means acquisition of funds at low cost to increase profits. Prudent management of funds has been the underlying principle of Bank Asia’s operations. This bank is almost balanced in managing asset and liability portfolios. The bank has increased it’s deposits to tk.18,500 million in 2005 from tk.13,471 million in the previous year. The Loans and advances during the period increased to tk.17,870 million in 2005 from tk.11,861 in the previous year.
Figures are in millions.
Liquidity Management
A commercial bank makes decision to maintain sufficient liquid assets to meet the banks/ obligation to depositors. The Bank has an Asset Liability Committee (ALCO) which is responsible for managing short-term and long-term liquidity and ensuring that the Bank has adequate liquidity at all times at optimal funding cost. ALCO reviews liquidity requirement of the Bank, the maturity of assets and liabilities, deposit and lending pricing strategy and the liquidity contingency plan. The Asset Liability Committee also monitors Balance Sheet risk. The Balance Sheet risk is defined as potential changes in earnings due to change in rate of interest, exchange rates, which are not of trading nature.
Treasury Operations
Bank Asia has been participating in the local money market as well as foreign currency market in a prudent way. The Bank’s investment treasury bills and other securities is tk.2257 million. An amount of tk.1104 million was placed at call and short notice as of end 2005 against previous year’s 990 million.
Internal Control
The internal control system of the bank is designed to ensure that all the units operate within rules set by the regulatory authorities and Banks’ own policies and regulations. Measures are taken to ensure that ethical standards are maintained, accounting rules and procedures are observed, and efficiency in business process and safeguarding of assets are ensured. the Stelar Banking Software sets the periphery within which department heads and branch managers can operate. In line with our objective towards prevention of money laundering all the relevant departments are instructed to be vigilant, to prevent such activities, and regular workshops are held in this regard.
Risk management
Bank Asia believes that risk is an integral part of it’s business and the main role of their risk management principle is to find the optimal balance between risk and return. Bangladesh Bank has undertaken a project to install a Core Risk Management System in every bank. They are in the process of installing the same in respect to Asset liability Management, Credit Risk management ,Foreign exchange risk management, internal control and compliance and Anti money laundering. The Bank also controls asset allocation through limiting exposure to industry sector and setting client limit. maturity grouping of asset and liability is also monitored to ensure that the bank’s portfolio remain within acceptable risk. The business intelligence reports generated by Stelar Software allows better and more effective monitoring of loan portfolio than before.
Credit Risk
Credit risk is one of the major risks faced by the Bank. This can be described as potential loss arising from the failure of a counter party to perform with agreed terms with the Bank. To assess and to mitigate the credit risk, the management has implemented CRM manual, which is considered an important tool for retaining the assets quality performing. Therefore, Bank’s credit risk management functions have been designed to address all these issues including risk arises from global changes. The Bank has segregated duties of the officers/ executives engaged in the credit related activities. A separate department has been formed at Corporate Office which is entrusted with the tasks of maintaining effective relationship with the customers, marketing of credit products, exploring new business opportunities, etc. Moreover, credit approval, administration, monitoring and recovery functions have been segregated. For this purpose, three separate units have been formed within the Credit Department. These are (i) Credit Risk Management Unit, (ii) Credit Administration Unit and (iii) Credit Monitoring and Recovery Unit.
Foreign Exchange Risk
Foreign exchange risk is defined as the potential change in earnings arising due to unfavorable change in exchange rates. The foreign exchange risk of the Bank is minimal as all the transactions are carried out on behalf of the customers against L/C commitments and other remittance requirements. No speculative dealing on Bank’s account was conducted during the year. Treasury front office conducts deal for commercial purpose and back office of treasury keeps record and pass entries in books of account. The main risks in treasury and foreign exchange are exchange rates risk, fund management and liquidity risk. As per Bangladesh Bank’s guidelines, the Treasury Department was operationally and physically divided into front office and back office to mitigate the risk. Separate telephone and fax lines were installed at the dealing room to meet Bangladesh Bank’s guidelines.
Money Laundering Risk
Money laundering risk is defined as the loss of reputation and expenses incurred as penalty for being negligent in prevention of money laundering. For mitigating the risks, the Bank has nominated a Chief Compliance Officer at Corporate Office and Branch Compliance Officers at branches, who independently review the transactions in the accounts to verify suspicious transactions. Know Your Customer (KYC) policy and Transaction Profile (TP) format has been introduced. The regulatory requirements are being complied with and the guidelines in respect of KYC are followed for opening of new accounts. Training has been providing continuously to all the category of officers and executives for developing awareness and skill for identifying suspicious activities.
In addition, the President & Managing Director has provided a Message on Anti Money Laundering (AML) policy. The management has circulated a Customer Acceptance Policy to the members of the staff for guidance.
Internal Control and Compliance Risk
Operational loss may arise from errors and omissions, fraud and forgeries due to lack of proper internal control and compliance culture. Management through the Internal Control and Compliance Department ensures controls in all operational areas of the Bank. Internal Control and Compliance Department undertakes periodical and special audit and inspection of the branches and departments at Corporate Office for identifying and reviewing the operational lapses and compliance of statutory requirements as well as Bank’s own guidelines. The Audit Committee of the Board also reviews the Audit and Inspection reports of the Internal Control and Compliance Department. The Bank has introduced Risk Based Internal Audit (RBIA) and audit rating over its branches from 2006 and prepared a comprehensive audit manual which have been approved by the Board of Directors.
Sources of Fund of Bank Asia
The operation of any commercial bank mainly depends on how they are sourcing their funds and how they use their gathered funds. To understands how they execute their operations ,balance sheet can be reviewed. It’s reported liabilities and equity indicate its sources of funds. The major sources of Bank Asia funds are summarized as follows:
Deposits and other Accounts
Bank Asia maintains three types of deposits. There are tk.1,983,287,400 amount of current and other deposits. No interest is offered on this kind of deposits. The current deposits consists of 10.72% of the total deposits.
Savings deposits in also known as the passbook savings deposits, which does not permit check writing. The bank has a substantial amount that is tk.1,176,495,618 on their savings deposits. It carries only 6.36% of the total deposit amount.
Finally, the largest portion of bank’s deposits go to in Term deposits. Term deposits are deposits that can not be withdrawn until a specified maturity date. Bank Asia has managed a large amount of term deposits of tk.15,044,201,780.They maintain a very large scale of term deposits consisting 81.31% of total deposits.
Maturity Analysis of Bank Deposits
Maturity of bank deposits Amount Percentage
1.Repayable on demand 2,563,354,396
13.86%
2.Repayable within 1 month
192,191,742
1.038%
3.Over 1 month but within 6 months
5,13,71,04,952 27.76%
4.Over 6 months but within 1 year
3,364,813,252
18.18%
5.Over 1 year but within 5 years
7,242,606,313
39.15%
6.Over 10 years
– –
We can show this maturity wise division through a graphical representation:
Borrowed Funds
Bank Asia has borrowed funds only from other commercial banks in Bangladesh. It has currently a total of tk.1,350,000,000 borrowed from other banks which is lesser than previous year’s 1,490,000,000 Bank Asia no fund borrowed from Bangladesh Bank, the central bank of Bangladesh. All the amount borrowed are unsecured and the funds are repayable on demand .
Long term Sources Of Funds
Bank Capital/Shareholder’s Equity
Bank Capital generally represents funds attained through the issuance of stock or through retaining earnings. With either form bank has no obligation to pay out funds in the future. This distinguishes bank capital from all other sources of funds, which represents a future obligation by the bank to pay out funds. Bank capital as defined here represents the equity or net worth of the bank capital.
A bank’s capital must be sufficient to absorb operating losses in the event that expenses and loses exceed revenues, regardless of the reason for losses bank regulators are concerned that banks may maintain a lower level of capital than they should and have therefore imposed capital requirements on them.
The required level of capital for each bank is dependent on its risk assets with low risk are assigned relatively low weights and assets with high risk are assigned high weights. The capital level is set as a percentage of the risk weighted assets. Bank Asia has an capital adequacy ratio of 9.53% , which exceeds the required 9.00% on risk weighted assets imposed by Bangladesh Bank. So, We can infer that it has adequate capital. It has a paid up capital of 930 million which includes 5,637,248 ordinary shares of Taka 100 each issued for cash and 3,662,752 ordinary shares of Taka 100 each issued as bonus shares.
Bank Asia has a retained earnings of tk.6,155,429 and a statuary reserve of tk.351,826,300.The Shareholder’s equity part also consists of Share premium, Proposed cash dividend etc.
Summary of Sources of Fund
All the Commercial Bank’s cannot completely control the amount of deposits they receive, they may experience a shortage of funds. For this reason, the nondepository sources of funds are useful. to support the acquisition of fixed assets, long-term funds are obtained by issuing long bonds, issuing stock, or retaining a sufficient amount of earning.
We here place a pie chart to show the division of sources of funds of Bank Asia and their percentages on total liability and capital.
Here we can see the deposits make up 79% of the sources of funds. on this 79%,term deposits takes 81% and savings and current deposits are 6% and 11% respectively. The distribution of bank sources of funds is influenced by bank size. Smaller banks rely more heavily on savings deposits than larger banks. As we have seen , bank Asia has a large capital amount and operating very elaborately, so naturally it is mainly dependent on term deposits like other large banks. Bank Asia’s borrowed funds are all short termed that is repayable on demand and all of them are made from other commercial banks operating in Bangladesh. As larger Banks rely on short term borrowings , Bank Asia went for that type of borrowing instead of long term .
Uses of Funds by Bank Asia
Having identified the main sources of funds, bank uses of funds can be discussed.
Cash
Banks must hold some cash as reserves to meet the reserve requirements enforced by the Bangladesh Bank. Bank Asia also holds cash to maintain some liquidity and accommodate any withdrawal requests by depositors. Because banks do not earn income from cash, they hold only as much cash as is necessary to maintain a sufficient degree of liquidity. Bank Asia holds cash in vault an amount of tk.105,054,105 and it holds cash in Bangladesh bank is 654,507,615. This holdings with Bangladesh Bank is mandatory.
Cash reserve ratio (CRR) and statutory liquidity ratio (SLR)
Cash reserve ratio and statutory reserve ratio have been calculated and maintained in accordance with section 33 of Banking Companies Act 1991 and subsequent Bangladesh Bank BCD circular no. 13 dated 24 May 1992, BRPD circular no. 12 dated 20 September 1999 and BRPD circular no. 22 dated 06 November 2003 and circular nos. 11 and 12 dated 25 August 2005.
The statutory cash reserve ratio required on the Bank’s time and demand liabilities at the rate of 5% has been calculated and maintained with Bangladesh Bank in current account and 18% statutory liquidity ratio, including CRR, on the same liabilities is also maintained in the form of treasury bills, bonds and debentures including balance with Bangladesh Bank. Both the reserves are maintained by the Bank in excess of the statutory requirements, as shown below :
Statutory reserve ratio (SLR)
Cash reserve ratio (CRR)
Required reserve
3,153,001,000
700,667,000
Actual reserve maintained
3,517,705,000
852,543,000
Surplus(RR-ARM)
364,704,000
151,876,000
Loans and Advances
The main use of bank funds is for loans. the loan amount and maturity can be tailored to the borrower’s needs. Bank Asia has two types of loans and advances. One is Loans, cash credits, overdrafts, etc which is tk15,252,372,045 . and other one is bills purchased and discounted of tk.2,617,472,497 and a total loans of tk..17,869,844,542 .
Maturity Wise Grouping
If we divide the whole amounts of loans and advances in terms of maturity ,we can see 50% of the loans are given to the borrowers who will repay the loans by over 3 months but within 1 year. And the lowest portion that is 10% of the total loans and advances goes to loans payable by over 5 years. So that means Bank Asia relies on short to mid term loans rather than long term or even too short term loans like repayable on demand. We can see the classification through a table.
Maturity Grouping Amount
Repayable on demand 1,806,853,873
Over 1 month but not more than 3 months 1,786,199,531
Over 3 months but not more than 1 year 8,986,975,499
Over 1 year but not more than 5 years 4,316,995,959
Over 5 years
972,819,680
Total 17,869,844,542
Graph: Maturity wise grouping
Significant concentration of loans and advances
Bank Asia Has concentrated most of their Loans and Advances to the industries. The Bank closed a number of syndicated financing as the lead arranger and also participated in a number of deals in the textiles, ship breaking, sugar refining, health , telecom etc sectors. The Sectoral distribution of Bank Asia’ lending in 2005 is shown below:
Investments
In the FY 2005, Bank Asia has a total of tk.2,256,278,942 invested in government’s financial instruments and with others. It has Two year and five years treasury bills in government investment, totaling tk.2,125,333,708. Bank Asia also has invested in government prize bonds and in debentures of Bangladesh House Building Finance Corporation. Among the other investments, it has shares , debentures and bonds. It has 10% debentures with Beximco Denims Ltd and Beximco Textiles Ltd totaling tk.37,943,234. Bank Asia also has invested in zero coupon bonds of Industrial and Infrastructure Development Finance company ltd.
Bank Asia has invested 95% of their funds to Government securities and other 5% to the others bonds, shares and debentures.
Other Uses of Funds
Other than these major uses of funds, Bank Asia has other areas of using their funds. Bank Asia has balance with other banks and financial institutions in and outside Bangladesh. It also has money at call and short notice of tk.1,104,617,231 and Fixed assets including assets taken on lease of tk.442,167,364. Bank Asia also has other assets including Advance rent and Deposit Stationery, stamps, printing materials, etc Interest accrued on investment, commission and brokerage receivable on shares and debentures and other income receivables Security deposits – Preliminary, formation, renovation, development and prepaid expenses.
Summary of Uses of Fund
The Distribution of bank uses of funds is illustrated in the pie chart below.
Loans of all types make up about 76% of bank assets, while investments in securities account for about 10% of bank assets. The distribution of assets for an individual bank varies with the type of bank. As a large operating commercial bank, Bank Asia has a higher level of business loans given to industries , infrastructure compared to household loans and advances. The bank has 2% fixed assets including furniture ,fixtures and equipments for conducting their business operations. They also have some other assets some of them are income generating and some of them are nor not. Bank’s uses of funds mainly depends on how they sources their funds and how efficiently they can use funds as loans or investments.
Off-Balance Sheet Activities
Banks commonly engage in off-balance sheet activities, which generate fee income with-out requiring an investment of funds. However, these activities do create a contingent obligation for the bank..
Standby Letters of Credit
A standby letter of credit backs a customer’s obligation to a third party. If the customer does not meet it’s obligation Bank Asia has to on behalf of their customers. The third party may require that the customer obtain an SLC to complete a business transaction. In return of the guarantee Bank Asia charges a fee to the customer. Bank Asia currently holds an amount of tk.2,011,380,036 as letters of credit.
Letter of Guarantee
Letter from a bank to a brokerage firm which states that a customer does indeed own the underlying stock and the bank will guarantee delivery if the call is assigned. Thus the call can be considered covered. Not all brokerage firms accept letters of guarantee. Bank Asia at present serves this kind of services amounting tk.1,513,007,722.
There are some other off balance sheet items including bills for collections and other contingent liabilities. We can put a pie chart here:
Banking Operations of
Al-Arafah Islami Bank Limited
Preamble
Al-Arafah Islami Bank Limited was established in 1995 under the companies Act, 1994 as a banking Company with Limited Liability by shares. It is an interest free Shariah bank of Bangladesh rendering all types of commercial banking services under the regulation of Bank Companies Act, 1991. The Bank conducts its business on the principles of Musaraka, Bai-Murabaha, Bai-muazzal and Hire Purchase transactions approved by Bangladesh Bank. Naturally, its modes and operations are substantially different from those of other conventional commercial banks. There is a Shariah Council in the bank who maintains constant vigilance to ensure that the activities of the bank are being conducted on the precepts of Islam. The Shariah Council consists of prominent Ulema, reputed Bankers, renowned Lawyers and eminent Economist.
Review of Al-Arafah Islami Bank Operations
Asset and liability Management
The Asset Liability Committee (ALCO) of the Bank monitors Balance sheet risk and liquidity risks of the Bank. The Balance Sheet risk is defined as potential change in earnings due to change in rate of profit, foreign exchange rates which are not of trading nature. The Bank has an Asset Liability Committee (ALCO) that reviews Liquidity requirement of the bank, the maturity of assets and liabilities, deposit and lending pricing strategy and the liquidity contingency plan, The primary objective of the ALCO is to monitor and avert significant volatility in net profit income, investment value and exchange earnings.
sensible supervision of funds has been the fundamental principle of Al-Arafah Bank’s operations. This bank is almost balanced in managing asset and liability portfolios. One important feature of Islami Banking we can see here that, it does not use their gathered fund in paying out loans and advances. This is the basic difference of typical commercial banking and Islami banking system, as Islami Bank’s are completely interest free.
Internal Control
Operational loss may arise from error and fraud due to lack of internal control and compliance. Management through Internal Control and Compliance Division controls operational of the Bank. Internal Control and Compliance Division undertakes periodical and special audit of the branches and departments at Head Office for review of the operation and compliance of statutory requirement. The Audit committee of the Board subsequently reviews the reports of the Internal Control and Compliance Division.
Risk management
The risk of Al-Arafah Islami Bank limited is defined as the possibility of losses, financial or otherwise. The risk management of the Bank covers 5 (five) Core risk Areas of banking i.e Credit risk management, foreign exchange risk management, Assets Liability Management, prevention of money laundering and establishment of Internal Control and Compliance. The prime objective of the risk management is that the Bank takes well calculative business risks while safeguarding the Bank’s capital, its financial resources and profitability from various risks. In this context, the Bank took steps to implement the guidelines of Bangladesh Bank as under :
Credit Risk
Credit risk is one of the major risks faced by the Bank. This can be described as potential loss arising from the failure of a counter party to perform as per contractual agreement with the Bank. The failure may result from unwillingness of the counter party of decline in his/her financial condition. Therefore, Bank’s credit risk management activities have been designed to address all these issues. The Bank has segregated duties of the officers/executives involved in credit related activities. A separate a business development cell has been formed at Head Office, which is entrusted with the duties of maintaining effective relationship with the customer, marketing of credit products, exploring new business opportunities etc. Moreover, credit approval; administration, monitoring and recovery functions have been segregated.
Foreign Exchange Risk
Foreign exchange risk is defined as the potential change in earnings arising due to change in market prices. International Division independently conducts the transactions and passing of their entries in books of accounts. All foreign exchange transactions are revalued at Mark-to Market rate as determined by Bangladesh Bank at the month-end. All Nostro accounts are reconciled on monthly basis and outstanding entry beyond 30 days is reviewed by the Management for its settlement.
Prevention of Money Laundering
Money laundering risk is defined as the loss of reputation and expenses incurred as penalty for being negligent in prevention of money laundering. For justifying the risks the Bank has a designated compliance Officer at Head Office and compliance officers at branches, who independently review the transactions of the accounts to verify suspicious transactions. Manuals for prevention of money laundering have been established and transaction profile has been introduced. Training has been continuously given to all the category of officers and executives for developing awareness and skill for identifying suspicious activities suspicious transactions are reported to Bangladesh Bank.
Sources of Fund of Al-Arafah Bank
The operation of any commercial bank mainly depends on how they are sourcing their funds and how they use their gathered funds. To understands how they execute their operations ,balance sheet can be reviewed. It’s reported liabilities and equity indicate its sources of funds. The major sources of Bank Asia funds are summarized as follows:
Deposits and other Accounts
All the deposits of A-Arafah islami Bank are based on Mudaraba system of Islamic Banking. The term Mudaraba refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital. Mudaraba is also known a Qirad and Muqaradah. Mudaraba is a contract of those who have capital with those who have expertise, where the first party provides capital and the other party provides the expertise with the purpose of earning Halal (lawful) profit which will be shared in a mutually agreed upon proportion. This type of business venture serves the interest of the capital owner and the Mudarib (agent).
The capital owner may not have the ability or the experience to run a profitable business. On the other hand, the agent (the Mudarib) may not have adequate capital to invest in a business or project. Therefore, by entering into a contract of Mudaraba each party compliments one another, allowing a business venture to be financed.
Significant amounts of deposits of Al-Arafah Islami Bank goes to mudaraba term deposits and mudaraba savings deposits. 35% goes to mudaraba term deposits of this bank which are long term deposits. And then another 26% goes to mudaraba savings deposits. We can add a remark here that although Islami banks rely most on their term deposits, but not to the that extent like other conventional commercial banks. It has only 35% of term deposits which is most of all the deposits but other commercial banks tend to have above 80% of term deposits of their total deposits. We can see the weightings of different deposits through a graph:
Borrowed Funds
Al-Arafah Bank does not have any borrowed fund from Bangladesh Bank or any other commercial Bank, Financial Institutions .
Bank Capital/Shareholder’s Equity
Bank Capital generally represents funds attained through the issuance of stock or through retaining earnings. With either form bank has no obligation to pay out funds in the future. This distinguishes bank capital from all other sources of funds, which represents a future obligation by the bank to pay out funds. Bank capital as defined here represents the equity or net worth of the bank capital.
Al-Arafah Bank has a paid up capital of tk..677,939,000 and a capital surplus of tk.340,131,346.So, we can conclude that , the bank has adequate capital.
Bank Asia has a retained earnings of tk.176,341,664 and a statuary reserve of tk.299,223,928.The Shareholder’s equity part also consists Asset Revaluation Reserve, Exchange Equalization.
Summary of Sources of Fund
Al-Arafah Bank mainly has three sources of funds.76% of their funds come from different types of mudaraba deposits. They do nor borrow any kind of funds from central or other financial institutions or banks. 8% of their total sourcing comes from Bank’s capital.
We here place a pie chart to show the division of sources of funds of Bank Asia and their percentages on total liability and capital.
The distribution of bank sources of funds is influenced by bank size. Smaller banks rely more heavily on savings deposits than larger banks. As Al-Arafah bank is operating elaborately, We can see of these 76% of deposits,35% goes to long term deposits. Another feature of their sourcing is that there is borrowed fund as Al-Arafah bank operates on the basis of Islami Banking System.
Uses of Funds
The major aspect of Al-Arafah Islami Bank is that it uses it’s gathered funds in a different way than other commercial banks. Most of the conventional commercial banks have borrowed funds in their sourcing and the prevalent portion of their use goes to loans and advances. As Islami banks follow Islami Shariah so they do not provide loans and advances which generate interest. Rather they make huge investments in different sectors. That is the Basic difference in usage of funds of Islamic and other banks. Having identified the main sources of funds, Al-Arafah Islami Bank uses of funds can be discussed.
Cash
Al-Arafah Islami Bank holds cash to maintain some liquidity and accommodate any withdrawal requests by depositors. Because banks do not earn income from cash, they hold only as much cash as is necessary to maintain a sufficient degree of liquidity. Bank Asia holds cash in vault an amount of tk.215,076,298 and it holds cash in Bangladesh bank is 1,041,878,189 . This holdings with Bangladesh Bank is mandatory. Al-Arafah Islami bank has a total amount of cash amounting tk.1,256,954,487 including foreign currency.
Investments
Al-Arafah Islami Bank uses their sourced fund substantially in investing which include bills purchased and discounted too. The amount totaling 11,474,412,031 consists of general investment of 9,858,411,266 and Bills purchased and discounted amounting 1,616,000,765.As per Islami Shariah loans and advances which generates interest is forbidden so the substantial part of collected funds are invested in different sectors and bills. Because investments necessarily makes profit ,not interest. So, we did not find any kind of loans and advances in the balance sheet of Al-Arafah Islami Bank. Now, Let us have a look on the maturity grouping of these investments.
Maturity Grouping Amount
Repayable on demand 245,065,085
Over 1 month but not more than 3 months 1,054,846,915
Over 3 months but not more than 1 year 8,485,216,030
Over 1 year but not more than 5 years 562,256,000
Over 5 years
1,127,028,001
Total 11,474,412,031
Graph: Maturity wise grouping of Investments
Balance with other banks and Financial Institutions
They have balance with other banks and financial institutions too and the amount within Bangladesh is 1,685,451,726 and outside Bangladesh is 148,358,265 totaling amount tk.1,833,809,991.This balance of Al-Arafah Islami Bank can also be divided maturity wise . The balance which has maturity less than 1 month amounts 1,733,809,991 and the remainder part of the balance has a maturity of 1 to 3 month .
Fixed Assets
Banks must maintain some amount of fixed assets, such as office buildings and land, so that they can conduct their business operations. However, this is not a concern to the bank managers who decide how day-to-day incoming funds will be used. They direct these funds into the other types of assets already identified. l-Arafah Bank has Fixed assets including Premises, Furniture and Fixture amounting 207,998,760 . They include Computer, Motor Car, Machine equipment & appliance, Books & Library, Land & Building etc.
Summary of Uses of Fund
The Distribution of bank uses of funds is illustrated in the pie chart below
Graph: Summary of uses of funds
Here, we can see as an Islami Shariah Based Bank it has the major part of their collected funds at investments. whereas the other local commercial banks have a tendency to put them into loans and advances. So, Al-Arafah Uses 75% of their collected funds in investments which is relatively larger than the investment amount of non-Islamic banks. It can be mentioned that we did not find any Money at Call & Short Notice, Investment in Shares ,loan and advances in their balance sheet. The bank has 1% fixed assets including furniture ,fixtures and equipments for conducting their business operations. They also have some other assets some of them are income generating and some of them are nor not. Bank’s uses of funds mainly depends on how they sources their funds and how efficiently they can use funds as loans or investments.
Banking Operations of HSBC
A Brief Story
The Hong Kong Shanghai Banking Corporation (HSBC) Bangladesh branches commenced its banking operations in Bangladesh on 3 December 1996 after obtaining license from Bangladesh Bank on 17th April 1996. The Hong Kong Shanghai Banking Corporation (HSBC) Limited incorporated in Hong Kong and its ultimate holding company HSBC Holding plc in England.
Sources of Fund of HSBC
Deposits and other Accounts
HSBC maintains three types of deposits. There is tk.5, 329,201,849 amounts of current and other deposits. No interest is offered on this kind of deposits. The current deposit consists of 21.87% of the total deposits.
Savings deposits in also known as the passbook savings deposits, which does not permit check writing. The bank has a substantial amount that is tk.6, 248,431,895 and on their savings deposits. It carries 25.65% of the total deposit amount.
Finally, the largest portion of bank’s deposits goes to in Term deposits. Term deposits are deposits that can not be withdrawn until a specified maturity date. HSBC has managed a large amount of term deposits of tk.12, 621,054,334.They maintain a large portion of term deposits consisting 51.80% of total deposits.
Maturity Analysis of Bank Deposits
Maturity of bank deposits Amount Percentage
We can show this maturity wise division through a graphical representation:
Borrowed Funds
HSBC has borrowed funds only from other commercial banks in Bangladesh. It has currently a total of tk.572, 383,093 borrowed from other banks which are lesser than previous year’s 1,051,144,529.HSBC no fund borrowed from Bangladesh Bank, the central bank of Bangladesh. The entire amount borrowed is unsecured and the funds are repayable on demand.
Long term Sources Of Funds
Bank Capital/Shareholder’s Equity
Bank Capital generally represents funds attained through the issuance of stock or through retaining earnings. The required level of capital for each bank is dependent on its risk assets with low risk are assigned relatively low weights and assets with high risk are assigned high weights. The capital level is set as a percentage of the risk weighted assets. HSBC has a capital adequacy ratio of 20%, which exceeds the required 9.00% on risk weighted assets imposed by Bangladesh Bank. HSBC has a statuary reserve of tk.2, 480,748,085.
Summary of Sources of Fund
All the Commercial Bank’s cannot completely control the amount of deposits they receive, they may experience a shortage of funds. For this reason, the nondepository sources of funds are useful. to support the acquisition of fixed assets, long-term funds are obtained by issuing long bonds, issuing stock, or retaining a sufficient amount of earning.
We here place a pie chart to show the division of sources of funds of HSBC and their percentages on total liability and capital.
Figure: Summary of sources of fund
Here we can see the deposits make up 78% of the sources of funds. on this 78%,term deposits takes 51% and savings and current deposits are 26% and 22% respectively. The distribution of bank sources of funds is influenced by bank size. Smaller banks rely more heavily on savings deposits than larger banks. As we have seen, HSBC has a large capital amount and operating very elaborately, so naturally it is mainly dependent on term deposits like other large banks.
Uses of Funds by HSBC
Cash
HSBC holds cash in vault an amount of tk.559051547 including local and foreign currency and it holds cash in Bangladesh bank amounting tk..4073965360 This holdings with Bangladesh Bank is mandatory. HSBC bank has a total amount of cash consists of cash in hand and balance with Bangladesh Bank tk. 4,63,30,16,907.
Cash reserve ratio (CRR) and statutory liquidity ratio (SLR)
The statutory cash reserve ratio required on the Bank’s time and demand liabilities at the rate of 5% has been calculated and maintained with Bangladesh Bank in current account and 18% statutory liquidity ratio, including CRR, on the same liabilities is also maintained in the form of treasury bills, bonds and debentures including balance with Bangladesh Bank. Both the reserves are maintained by the Bank in excess of the statutory requirements, as shown below :
Investments
HSBC bank has its investments in both government and other sectors. It has investment in government treasury bills tk. 2,40,10,64,900 and another 60,00,000 to other sectors. If we overview the maturity analysis of HSBC’s investments we will find that they have emphasized in short term that means the investments which has a maturity less than 1 month. 85% of their investments are of this nature. And other 15% has a maturity of 3 to 12 month. So, we can say that HSBC has specially emphasized on very short term investments. And most of their investments are in government sectors. They have a very non-mentionable part invested in other assets.
Loans and Advances
Loans and advances are basic uses of funds gathered by any commercial banks. HSBC provides loan and advances of many different maturities and to many different sectors as well. It has Loans, cash credits and overdrafts of tk.19990474088 and bills purchased and discounted of tk. 1446013439.
Maturity Wise Grouping
If we divide the whole amounts of loans and advances in terms of maturity ,we can see 39% of the loans are given to the borrowers who will repay the loans by over 1 year but within 5 years. And the lowest portion that is 28% of the total loans and advances goes to loans payable 1 to 3 months. So that means HSBC relies on short term loans rather than long term or even too short term loans like repayable on demand. Here, it is notable that they do not provide any kind of loans and advances which has a maturity of over 5 years. We can see the classification through a pie:
Graph: Maturity wise grouping
Sector wise Classification
HSBC has resulted most of their Loans and Advances to the retail loans. It gave the second priority to the agricultural sector. The Bank closed a number of syndicated financing as the lead arranger and also participated in a number of deals in the textiles, agriculture, steel and metal, etc sectors. The Sectoral distribution of HSBC lending in 2005 is shown below:
Summary of Uses of Fund
The Distribution of bank uses of funds is illustrated in the pie chart below.
Loans of all types make up about 73% of bank assets, while investments in securities account for about 8% of bank assets. The distribution of assets for an individual bank varies with the type of bank.. They also have some other assets some of them are income generating and some of them are nor not. Bank’s uses of funds mainly depends on how they sources their funds and how efficiently they can use funds as loans or investments. HSBC has also 3% of their total assets used in keeping balance with other banks and financial institutions. But like other commercial banks, it also emphasizes using their funds in loans and advances mainly.
Findings
We studied functions and operations of three commercial banks .We picked up three banks from three different elevations for benefiting our study. We selected Bank Asia from local banking area, Al- Arafah Islami Bank from Islami Shariah based banking side and lastly Hong Kong Shanghai Banking Corporation(HSBC) from foreign banks. After
Analyzing their data of the financial year 2005 and reviewing their operations and general principles of bank management we can draw some inferences. They are:
While groping the sources of fund, we found every bank sourcing their funds principally by depositing funds of different types and maturities. All three banks concerned got more than 70% of their funding through deposits both checkable and nontransaction.
Concerned three banks collected funds through term deposits mainly. All three banks have lion’s share of deposits as term deposits in type-wise grouping of deposits. Because larger banks rely on term deposits.
Bank Asia and HSBC has borrowed funds in their sources of funds ,but being an Islami Shariah based bank Al-Arafah does not have any borrowed fund. This bank
collected all supports through deposits and bank capitals.
In Usage of funds HSBC and Bank Asia emphasized on loans and advances. Bank Asia utilized 76% of it’s funds in providing loans and advances and HSBC have 73% of resources used in the same purpose.
We did not find any loans and advances in the balance sheet of Al-Arafah Islami bank rather they have a substantial amount of investments which takes almost 75% of the total usage of funds.
HSBC and Bank Asia pays interests on their term, current and savings deposits whereas Al-Arafah Islami bank pays Mudarabah(profit) on their Mudarabah and Al-Wadia deposits.
HSBC concentrated on retail loans whereas Bank Asia provided loans and advances mostly to the industries.
All three banks went for supplying loans and advances having average maturity. HSBC concentrated on 1 to 5 years maturity period and Bank Asia emphasized on 3 months to 1 year period. Having no loans and advances, Al-Arafah Islami Bank invested 74% of their funds in the treasury bills or other sectors having maturity of 3-12 months.
HSBC and Bank Asia has adequate capital. Bank Asia has a capital adequacy ratio of 9.53 and HSBC has a ratio of 20.(Required ratio is 9)
Three concerned banks are effective in asset liability management. Bank Asia has a credit-deposit ratio of 96.59%,HSBC has 88.00% .On the other hand, Al-Arafah bank has 98.55% of investment-deposit ratio.
Conclusion
Numerous studies have assessed the commercial banking. With the passage of time many changes have made in rules and regulations of commercial banking. By this time bank has become more efficient and effective on their operational line. So many complex strategies and project designs helps to competes in the prima facie economic situation. The banking system which is widely involves in the risk assessment and conglomerate policy. Risk involve in the operation of banking is the main path of experiencing the management of financial projects. So here, all of the discussion focuses that the regulatory structure and the risk assessment events that have had the greatest impact on commercial banking operations. our basic analytical subject is the commercial bank and institutions. Commercial bank represents a key financial intermediately because they serve all types of surplus and deficit units. In case of institutional and informational structure, the currency of markets is driven primarily by the management of credit risk and price variation in spot currency markets by dispersed information. On the other hand, the role of financial markets represent that they offers deposit accounts with the size and maturity characteristics desired by the surplus units. Their main function is to repackage the funds received from the deposits to provide loans of the size and maturity desired to the deficit units. They have ability to asses the creditworthiness of deficit units that apply for the loans, so that they can limit their exposure to credit risk on the loans they provide.
