Intern ship report published by Rahul palit

FIRST SECURITY ISLAMI BANK LIMITED

Internship Report On “Investment Management” A Case study on First Security Islami Bank Limited

Supervised by Prof. Dr.A.N.M. Abdul Muqtader Dean

Faculty of Business Administration Southern University Bangladesh Prepared By

Rahul Palit Major -Finance ID-111-30-14

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Southern University Bangladesh

Internship Report On

“Investment Management” A Case Study on First Security Islami Bank Limited

Internship report is a partial requirement to confer BBA degree.

Date of submission: 15th JULY, 2012

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ACKNOWLEDGEMENT

Thanks to Al-mighty Allah for Blessing in completing the report with in the scheduled time. I am indebted to a number of persons for their kind recommendation, co-operative, submission, direction and their collaboration.

I have the unique opportunity to apply my theoretical & practical knowledge in this assignment. It’s my obligation to disclose the name of all who have contributed in many ways to complete my assignment on the selected topic entitled “Investment Management”

First, I would like to remember the contribution of Internship supervisor & my teacher:. Mr. A.N.M Abdul Muqtader whose guidance & help was very much required prepare the report successfully.

I am grateful to the Management of FSIBL Bahadder Hat Branch for providing me all sorts of facilities requested from time to time. My practical working knowledge in this financial institution helped me a lot. I am lucky and feel proud to get this opportunity for preparing this assignment. I have learned many things from this reputed organization in a short time.

Yours sincerely,Rahul PalitID-111-30-14

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SUPERVISOR’S DECLARATION

CERTIFICATE OF APPROVAL

This is certify that this paper is prepared by Rahul Palit (ID No:111-30-14) Degree of BBA (Finance).This is an original work by him. I am sure it will contribute to enhance existing knowledge. For his excellent paper work recommend accepting this paper and approved this for the Degree of BBA in Finance.

Dr.A N M Abdul Muqtader

Professor and Dean

Faculty of Business Administration

Southern University Bangladesh

Chittagong, Bangladesh.

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Executive Summary

As banks play the key roles in the economy, it is important to know the performance of banks in their operational areas. In addition to this, banks’ performances should be measured because of the several parties related to the banking industry. Depositors evaluate performance to make a decision regarding whether to trade with the bank, bank managers evaluate performance to formulate a strategy, and regulators evaluate to ensure whether the banks’ performances align with the legal and societal structure of the country.The objective of the study is to analyze the “Investment Management” A Case Study on First Security Islami Bank Limited Though primary objective of preparing this paper is to fulfil the requirement of BBA internship program but this study will serve as a reference for any kind of further research both for academic or business purposes.From the study we will get a clear picture of overall performance of FSIBL and also special scenario of customer satisfaction level of monthly savings scheme. Overall customer satisfaction depends on what type of service marketer providing to customer. Customers expect more return on their savings which is comparatively lower than other private commercial bank.

The study has some shortcoming are lack of knowledge to such type of survey, time limitations, respondents’ unwillingness to cooperate and limited sample size.

This report is prepared on the basis of information collected from both secondary and primary sources and every effort has been made ensure that the information compiled in the report is accurate.

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Letter of Transmittal

15th JULY, 2012Prof. Dr.A.N.M. Abdul MuqtaderDeanFaculty of Business AdministrationSouthern University Bangladesh

Subject: Submission of Internship Report.

Dear Sir,

It is my great pleasure to submit the internship report on "“Investment Management On First Security Islami Bank Limited”

I made sincere efforts to study related materials, documents, observe operations performed in First Security Islami Bank Limited. and examine relevant records for preparation of the report. I had to put in a lot of effort & hard work to the preparation of this report with the help of all the bank officials in the Bahadder Hat Branch.

Within the time limit, I have to make this report as comprehensive as possible. But there may be some mistakes due to various limitations. For this reason, I ask for your kind consideration in this regard.

Yours Faithfully,---------------------------Rahul PalitID-111-30-14

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Serialno

Subject Page No

Chapter-ONEINTRODUCTION

1.1 Introduction 12

1.2 Origin of the Report 12

1.3 Objectives of the Study 13

1.4 Scope of the Study 13

1.5 Methodology of the Study 14

1.6 Limitations of the Study 14

Chapter-TWO

First security islami bank in Bangladesh: an overview2.1 Overview of the bank 16

2.2 Mission of the bank 16

2.3 Vision of the bank 16

2.4 Objectives of the bank 17

2.5 Deposit 17

2.6 Loans and Advance 17

2.7 Branch Network 18

2.8 Services 18

Chapter-THREE Authorities involve in investment management of FSIBL3.1 Investment management Committee of

the Board of Directors21

3.2 Corporate Information 22

3.3 Investment management Committee 23

3.4 Approval process 24

3.5 Approval authority 25

3.6 Functions of the investment management Department

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3.7 Overall investment Policy of FSIBL 28

3.8 Impaired Asset Management. 28

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Chapter-FOUR Investment management policies and procedures followed by

FSIBL.

4.1 Strategy statement 31

4.2 Deposit Mobilization and Fund Utilization

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4.3 Comparative Position of the Islamic Banking Sector

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4.4 Mode wise Investment of FSIBL 33

4.5 Remarks and Policy Options 33

4.6 Assets Portfolio 36

4.7 Paid-up –Capital 37

4.8 Showing Deposit Position 38

Chapter-FIVE Source of finance investment management of FSIBL

5.1 Securitization of Assets 41

5.2 Finance & Advisory Services 41

5.3 Syndication of Fund 42

5.4 Import Financing 43

5.5 Export Financing 44

Chapter-SIXDifferent types of products under Corporate and Consumer

loan.6.1 Small Enterprise Financing 46

6.2 Rules for Application 46

6.3 Documentation of Loan 46

6.4 Loan Sanction 47

6.5 Categories of loan 47

6.6 Credit Mix 48

6.7 Cash Credit (Hypo) 49

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6.8 Term Loan 49

6.9 Secured Overdrafts [SOD (FO)] 50

6.10 House Building Loan 50

6.11 Small Enterprise Financing 50

Chapter-SEVEN Sector-wise investment scheme by FSIBL.

7.1 Term Loan 52

7.2 Secured Overdraft 53

7.3 Transport Loans 54

7.4 Cash Credit 55

7.5 House Building Loan 55

7.6 Findings 57

Chapter-EIGHT Recovery position of investment skim of FSIBL.

8.1 Management Committee (M.C.) 608.2 Operational Network 608.3 Recovery Rate 618.4 Sectoral and Credit Concentration 62

8.5 Liquidity Management 63

8.6 Audit & Risk Management Division 64

8.7 Risk Management Unit 64

8.8 Finance & Advisory Services 65

8.9 Loan Recovery Unit 66

Chapter-NINEInfact of investment management on the profitability of

FSIBL. 9.1 Financial Highlights of FSIBL 689.2 Ratio Analysis 719.3 Earnings Performance 73

Chapter-TENProblems of investment management and their probable solution.

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10.1 Documents deficiency and problem resolving

84

10.2 Problems and Challenges of FSIBL 8410.3 ICT and its use in MIS 8510.4 Swot analysis 8610.5 Profit Rate Risk 9110.6 Equity Risk Commodity Financing Risk 9110.7 Foreign Exchange Risk 92

Chapter-ELEVENRecommendation of FSIBL

Conclusion11.1 Recommendation of FSIBL 9411.2 Conclusions 95

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CHAPTER 1 Introduction

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CHAPTER 1:INTRODUCTION

1.1 IntroductionA banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core of the money market in an advanced country. In recent times the banking sector over the world has been undergoing a lot of changes due to deregulation, technological innovation, globalization etc.Bangladesh banking sector is lagging for behind in adopting these changes. Bank plays an important role in the business sectors and in the industrialization of a country. Basically the banks take deposits from the customers against interest and lend it to the borrowers against interest cessation period. Under these circumstances of bank offers different interest rates and other options to the customers to remit and deposit their money. These options are vary common among all the banks, but only the customer services and otherfacilities very from bank to bank.

1.2 Origin of the ReportThis report is prepared as per internship requirement of my Business Administration (BBA) program of Southern University Bangladesh. I worked 3 Months in First Security Islami Bank Limited (FSIBL) Bahadder Hat Branch. In three months I have through various banking activities. This report is a brief overview of those daily activities, I have done during the internship period.

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1.3. Objectives of the StudyThe main objective of the study is to analyze the performance of corporate and consumer loan disbursement of FSIBL. To achieve this main objective the following sub objectives have been undertaken:1. To highlight the authorities involve in investment management of FSIBL2. To examine the investment management policies and procedures followed by FSIBL.3. To examine the source of finance investment management of FSIBL.4. To know the different types of products under Corporate and Consumer loan.5. To analysis sector-wise investment scheme by FSIBL.6.To examine the recovery position of investment skim of FSIBL.7.To evaluate the infact of investment management on the profitability of FSIBL. 8.To find out problems of investment management and their probable solution.

1.4. Scope of the StudyThis report will be dealing with the overview of First Security Ialami Bank Ltd. & mainly deals with “Loan Disbursement” of this Bank. The topic is fixed. But the report has tried to cover overview of FSIBL objectives, functions, management, business policy and otherthings. This report has also mentioned some problems of FSIBL’s Operating systems and its solutions. The empirical part includes only the published information and current practices of the First Security Islamic Bank Limited included.

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1.5. Methodology of the Study: The research design is presented below-Area of the studyThe proposed study has been focused on the Loan Disbursement of the FSIBL. In relation with the primary & secondary objectives, the Bahadderhat branch of the FSIBL has been selected to perform my internship program.Sources of informationPrimary Data: Data has been collected primarily through correspondence with the personnel working in different desks.Secondary data: Secondary sources consist of several reading materials such as circulars, journals, brochures, and annual reports.The required data and information to prepare the assignment have been collected from thefollowings sources:1. Procedures published by the FSIBL, Head office.2. Files and documents of the branch.3. Personal interview with branch officials and Executives.Methods of data collection: The data presented in this report has been collected from the annual reports of the bank from 2006 to 2010, by taking interview of the credit officer, from the training instruments of the bank, from published books and through structured questionnaire.Data Processing & Analysis: Data has been computerized & processed by using MS Word, MS Excel. For the purpose of analyzing the data we have presented in tabular form, percentage form with necessary chart and graphs1.6. Limitations of the study Lack of adequate Information of banking institution for preparing this report, so this report is based on only publicly available information. Although bankers have tried their best to help me, their nature of job is such that gives them little time to discuss. It was very difficult to get the actual information.

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CHAPTER 2 First security Islamic bank in Bangladesh: an overview

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2.1. Overview of the bank

First Security Islami Bank Limited (FSIB) was incorporated in Bangladesh on 29 August 1999 as a banking company under Companies Act 1994 to carry on banking business. It obtained permission from Bangladesh Bank on 22 September 1999 to commence its business. The Bank carries banking activities through its 67 branches in the country. The commercial banking activities of the bank encompass a wide range of services including accepting deposits, making loans, discounting bills, conducting money transfer and foreign exchange transactions, and performing other related services such as safe keeping, collections and issuing guarantees, acceptances and letter of credit. From January 01, 2009 bank has converted into islami shariah based banking system instead of conventional banking system. The bank has constituted a sariah council consisting prominent ulama, bankers, lawyer and Economists to advice and guide on the implementation of islami sariah in business activates.

2.2 Mission of the bank

FSBL mission is to provide banking services to our valued clientele with utmost proficiency & sincerity reinforced by an efficient workforce and the latest state of the art technology.

2.3 Vision of the bank

The vision of FSBL is to always strive to achieve superior financial performance, be considered a leading Islamic Bank by reputation and performance.Try to encourage savings in the form of direct investment.To pay a vital role in human development and employment generation. To establish a welfare-oriented banking system.

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2.4. Objectives of the bankThe objectives of the FSIBL are given below: To provide efficient computerized banking system To enhance Loan with their valued client To accept deposits on profit-loss sharing basis.

2.5. DepositThe deposit of First Security Islami Bank Ltd. Stood at tk. 56344.95 million as on 31.12.2010 as against tk.42423.09 million of 31.12.2009 registering an increasing of tk. 13921.86 million i.e.32.81% growth. Deposit is the “life-blood” of a bank. Bank has given utmost importance mobilization of deposit introducing a few popular andinnovative schemes.

2.6. Loans and AdvanceFirst Security Islami Bank Ltd. has able to increase its investment despite adverse condition in the domestic as well as in the global economy. Total amounts of loans and Advance of the bank stood at tk. 52123.9 million as on December 31,2010as against tk.38725.87 million as on December 31, 2009 showing an increasing of tk.13398.03 million With a growth rate of 34.6% Investments are the core asset of a bank. The bank gives emphasis to acquire quality asset and does appropriate lending risk analysis and follow all the terms and condition all sorts of investments to client.

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2.7 Branch NetworkAt present, the bank has 67 branches of which 26 branches are in Dhaka Division, 26 branches are in Chittagong Division, 06 branches are in Sylhet Division, 03 branches are in Rajshahi Division, 04 branches are in Khulna Division and 02 branch is in Barisal Division. All the 67 branches are computerized under distributed server environment. Another few branches are planning to open within December 2011. FSIBL has already started their on-line, SMS and ATM banking facilities for their clients.

2.8. Services

(i) DepositsIn addition to the normal deposit scheme, the bank has introduced attractive deposit scheme to encourage people and mobilize the deposit. Deposit scheme are: Current account

Short term deposit Sundry Deposit

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Savings Bank account Fixed Deposit Non Resident Foreign Currency Account Resident Foreign Currency Account Monthly savings Scheme Monthly profit based savings scheme Double benefit deposit Scheme

(ii) Online any Branch BankingFSIB have set up Wide Area Network through Radio, Fibre-Optics & other available communication media systems to provide any branch banking to our customers.Customer of one branch is now able to deposit and withdraw money at any of our branches. All Branches are included in our Wide Area Network. No TT/DD or cash carrying will be necessary.

(iii) SMS BankingFirst Security Islami Bank Ltd. has officially launched SMS banking service from December 17,2007.

(iv) Locker ServiceFor safekeeping of customer's valuables like important documents and goods like jewelleries and gold ornaments, FSIB Locker Service is available in most of the Branches in urban areas.

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CHAPTER 3Authorities involve in

investment management of FSIBL.

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CHAPTER 3

3.1.Investment management Committee of the Board of Directors

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3.2.Corporate Information:

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3.3.Investment management Committee

i) Particulars of Investment management Committee The Investment management Committee of the Board was duly constituted by the Board of Directors of the Bank in accordance with the BRPD Circular No. 12 dated 23 December 2002 issued by Bangladesh Bank. The Committee was formed comprising 3 (three) members of the board.

ii) Meeting held with Investment management Committee During the year 2009, the audit committee conducted seven (07) meetings in which, among others, the following issues were reviewed and discussed: comprehensive inspection report of Bangladesh Bank including status of compliance thereof; inspection reports of branches/Head Office conducted by Bank's internal inspection team;

financial statements of the Bank;

half-yearly accounts of 2009 of the Bank; and

status of compliance of different rules and regulations.

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iii) Steps taken for implementation on effective internal control procedure of the Bank The Committee placed its report regularly to the Board of Directors of the Bank mentioning its review results and recommendations on internal control system, compliance of rules and regulations and establishment of good governance within the organization.

3.4.Approval process

Loan Applications in the prescribed format shall be received at Credit Approval unit recommended by sales team along with annexure that covers comprehensive LPF information detailed in the Prudential Guideline advised by Bangladesh Bank. The sales team is responsible for loan sales and should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the loan application submitted for approval. They should be familiar with the bank’s Credit Policy and PPG and should conduct due diligence on new borrowers, purpose of the loans and guarantors. During recommending for a client it is expected that the respective Officer has adhered to Know Your Customer (KYC) and Money Laundering guidelines.

Credit Approval Sheet should have, as a minimum, the following details:

• Amount and type of loan(s) proposed.

• Purpose of loan(s)

• Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)

• Security (if any)

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Client Loan Application

Risk Assessment Unit Recommendation

Credit Approval

Asset Operation disbursement &Custodian of securities

Loan Approval Process

Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications. Loans and advances on becoming inoperative / stuck up should not be renewed and / or re-scheduled without getting prior approval from the Credit Committee. In case of loan take over from any bank/financial institution, then any correspondence should be made with the bank/financial institution directly, such as security takeover.

3.5.Approval authorityLending Authority is delegated to officers related with approval individually by the Managing Director in writing. Records of such authority are retained with Head of Credit. Copies of all Delegation of

Lending Authorities are also retained by Loan Administrations Department. Any breaches from Lending Authority should be reported to the Managing Director, Head of Credit and Head of Risk Management. The executives charged with approving loans shall

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have relevant training and experience to carry out their responsibilities effectively. As a minimum, approving executives

should have 5 years experience working in Branch / Sales team as a relationship manager or account executive. However experience can be compromised to some extent if it is sufficiently compensated by the following:

• Training and experience in financial statement, cash flow and risk analysis.

• A good working knowledge of Accounting. • A good understanding of the local market

3.6.Functions of the investment management Department

Lending money is one of the main functions of a commercial bank. In the lending process, selection of borrower is the most crucial and vital job for a banker. Before a customer enjoys credit facilities it is important that the applicant should qualify for five Cs. The five Cs are:

• Character – Intention to pay back the loan • Capacity – Borrower’s competence in terms of utilizing the fund

profitably and generate income • Capital –Financial strength to cover the risk

• Conditions – General business condition between two parties • Collateral – Implies additional securities

In addition, objectives of the credit department are managing credit exposure of the bank, maintaining credit risk, compliance of Central Bank Ltd, recovering or collecting dues of retail loans or advances. At present credit division performs following activities:

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Credit Approval Process Corporate Credit • Retail Credit • Collection and Monitoring Activity: • Recovery • Risk management

The activities of this department include managing the financial books of the bank, checking all entries of the book are according to standards, preparing daily reports for Bangladesh Bank, revenue appropriation and calculations, setting the internal pricing rates etc. Loan is an asset to any financial institution. That is why it is very much necessary to ensure that a loan does not become bad. The first step in ensuring that is to ask for proper documentation of the loan applicant. A default loan might be very hard to recover due to lack of proper charge documents. This is where the asset operation department of the bank comes into action. Asset operation department of the bank acts as a last frontier to mitigate all loan related risks before disbursement of a loan.

The functions of asset operation department can be broadly categorized under two heads. The first one is the disbursement and monitoring of loans. In this case the department disburses loans after obtaining clean CIB reports of the clients, checking all documents and collecting securities after proper lien and charges creation after terms of approval. This department also periodically review conditions of past due loans, limit, expiry and document deficiency.

The next operation of the department is to act as custodian and compliance of the charge documents and prepare various MIS reports for the central bank and other audit authorities. The documents that are required by asset operation department (AOD) can be classified into three parts. First one is the business verification and related documents of the applicant. Second one is the basic charge documents like demand promissory note, letter of continuity, letter of pledge letter of hypothecation and some other

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documents. The third documents that asset operation department need to disburse loan is the security documents like post dated cheque, undated cheque for unsecured loan, fixed deposit or title deed for secured loan.

3.7.Overall investment Policy of FSIBL

Lending being the most important function of commercial bank, every bank should have own credit policy. Investment policy generally aims at (a) creating healthy loan assets to ensure goods interest earning for the bank (b) ensuring ultimate safety through judicious selection of based on its saleability. The investment policy of FSIBL has been formulated of the plan of “ALL NEW LOANS TO BE GOODS LOANS”, The plan was formed on the basis of the following objectives:

• To maximize the profit of the bank by making sound lending • To deliver credit to viable borrowing at a reasonable cost • To provide satisfactory return on investment • To assist the social and economic development of the country • To deliver general banking services to the public and credit to

viable borrowers at a reasonable cost

3.8.Impaired Asset Management Department

This department of the bank looks after the default loans and tries to recover them. It is said that the less job load this department has, the better it is for the bank itself. The head of IAM directly reports to the Managing Director of the Bank and this division is an administrative division of the bank. This department of the bank has two wings. One wing looks after the impaired assets of SME wing and another wing looks after the impaired assets of retail business. Normally if a loan instalment is six months over due, then the credit department hands

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over the file to IAM for recovery. IAM first issues a letter in soft language. Then if it does not work, IAM issues further three letters to the defaulter. If it does not work either, then IAM files a case against the defaulter. Usually this case filing is done in the 11 month of the default. Loan Admin - The posting is done in the system in the Asset Operations Department. Then Loan Admin sends requisition to Fin Admin. Fin Admin: Fin Admin take care of the other expenses. Recovery: Recovery Dept. prepares an overdue report and informs the TM. Recovery dept. keeps track of the money. Legal notices are given to the defaulters.

MIS: MIS dept. keeps the total record of loan from its sanction to repayment.

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CHAPTER 4Investment management policies and procedures

followed by FSIBL.

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CHAPTER 4

4.1. Strategy statement

To manage and operate the Bank in the most efficient manner to enhance financial performance and to control cost of fund.

To strive for customer satisfaction through quality control and delivery of timely services.

To identify customers' credit and other banking needs and monitor their perception towards our performance in meeting those requirements.

4.2.Deposit Mobilization and Fund Utilization

The major part of the operational financial resources of Islamic banks is derived from different types of deposits mobilized on the principles of Al-Wadia (safe custodianship) and Al-Mudaraba (trust financing). Utilization of fund under the framework of Islamic banking has opened a multifarious way for making loan (the term “loan” in conventional banking is called "Investment" in the Islamic banking system) conforming to Islamic Shariah. Since Islamic banks can not lend on interest, they have devised different types of interest-free financing devices. A short description of the modes of financing used by the Islamic banks in mobilization and utilization of funds

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4.3.Comparative Position of the Islamic Banking SectorGroup of

Banks Deposit Investment Excess

LiquidAssets

Man power

Man power

1 2 3 4 5 6Islamic Banking

Sector188557.4 184547.2 7742.4 8220 308

All Private Banks: 1/

682240.4 587575.2 41863.1 32576 1573

27.6 31.4 18.5 25.2 19.6

All Banks Total: 2/

1463163.6 1220912.2 98126 108451 6336

12.9 15.1 7.9 7.6 4.9

Notes: 1/ Figures in the parentheses indicate share of percentage of the Islamic banking sector to the all private banks. 2/ Figures in the parentheses indicate share of percentage of the Islamic banking sector to all banks.

The distribution of investment by mode as presented in Table 2, shows that Islamic banks' investment is mainly concentrated in the mark-up and rental-based modes of financing, which occupied 74.6% of total investments (Bai-Murabaha, Bai-Muajjal and Ijarah). Investments under the PLS modes accounted for only 1.38% (both in Mudaraba and Musharaka). This demonstrates a complete bias towards mark-up based financing followed by the Islamic banks in Bangladesh.

4.4.Modewise Investment of FSIBL

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An

analysis of the deposits and investments distributed by the size of accounts of the Islamic banks also depicts a bias towards the big projects or clients. The distributive efficiency of the Islamic banks has been impaired due to the concentration of assets in the hands of a few investment clients.

4.5. Remarks and Policy Options

Islamic banking system of Bangladesh, as a new paradigm of banking, has been able to establish its own presence with a continued expansion geared by increasing acceptance by the people. To continue this dynamic expansion, the first action that deserves immediate attention is the promotion of the image of Islamic banks as PLS banks. Strategies have to be carefully devised so that the image of

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Mode of Investment %

Bai Murabaha Bai Muajjal Ijara Bai Istisnaa Bai Salam Musharaka Mudarab0thers

28.0021.8224.7414.510.431.350.039.02

Total 100.00


Islamic character and solvency as a bank is simultaneously promoted. The following policy actions are suggested for immediate application:a) Pilot schemes in some selected areas should be started to test innovative ideas with profit-loss-sharing modes of financing as major component. This type of scheme may be experimented both in urban and rural areas. This endeavor will serve as a ready referencethat Islamic banks are in the process of transforming themselves as PLS banks. Side by side, they will gain experience from real situation as to the problems that might come up while implementing profit-loss-sharing modes on trial and error basis.(b) Islamic banks should clearly demonstrate by their actions that their banking practices are not guided merely by profitability criterion. They must also establish that their practices ensure efficient allocation of resources and provide true market signals throughPLS modes.(c) Islamic banks should continuously monitor and disseminate through various means the impact of their operations on the distribution of income primarily between the bank and the other two parties: the depositors and the entrepreneurs, and then on different income groups of the society. These presuppose the establishment of a fully equipped research academy in each Islamic bank.(d) As the Islamic banks have to promote their distributional efficiency from all dimensions together with profitability, Islamic banks, step by step, have to be converted into profit-loss-sharing banks by increasing their percentage share of investment financing though PLS modes. The Islamic banks, to do that, can be selective in choosing clients for financing under PLS modes. Islamic banks should immediately take measures to revert the trends of resource transfer from both low-income groups to high-income groups and from rural to urban areas. This is extremely important from the viewpoint of their banking philosophy as well as for their tacit commitment for distributional equity. The Islamic banks should also actively consider utilization of rural potentials from both efficiency

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and equity grounds in the context of the present day socio-economic conditions of Bangladesh. (e) The Islamic banks can improve their allocate efficiency by satisfying social welfare conditions in the following manner. First, they should allocate a reasonable portion of their investible funds to social priority sectors such as agriculture (including poultry andfishery), MSME (micro, small and medium enterprises) sector, and export-led industries like garments, shrimp cultivation etc. Secondly, when the percentage shares of allocation of investible funds are determined among the sectors of investment financing, profitability of projects should be the criterion for allocating investment funds. Thecriterion would be best satisfied if more and more projects were financed under PLS modes.(f) It is assumed that in the face of competition with interest-based institutions, a critical initial mass of the hybrid type is necessary not only for the survival but also ensuring efficiency of the PLS in a heterogeneous environment. The recent financial innovations may be tried to suit the need of the integrated global Islamic financial markets.(g) Islamic ethics supports a poverty-alleviation strategy that is based on the principle of promoting economic growth with productive equity. Islamic banks should act as 'Banks for Enriching the Poor' (or as Rural Poor Bank and Urban Poor Bank), because the current collateral-based system for efficiently financing business/projects kicks the poor out of participation in economic activities. Banning interest should have the illuminating effect of allowing greater access by population to finance, and hence lead to a better income distribution, the ultimate objective of the glorious Shariah.

(h) Determination of profit and loss in profit-loss sharing arrangements and treatment of costs and reserves in such accounting is a pertinent issue to be addressed with utmost importance and priority. It may be mentioned that if the Islamic financial system is tobecome truly liquid and efficient, it must develop more standardized and universally (or at least widely) tradable financial instruments. The

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development of a secondary financial market for Islamic financial products is crucial if the industry is to achieve true comparison with the conventional system. It must also work hard to develop moretransparency in financial reporting and accounting. Development in the wholesale and especially inter-bank money markets will be the key to Islamic finance growing outside its current little sphere of influence, and becoming a truly robust and dynamic banking system alongside the traditional system.

4.6.Assets Portfolio

The Bank’s total assets as on December 31, 2010 amounted to Tk. 63619.79 million as compared to Tk. 47978.55 million in 2009.

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4.7. Paid-up –Capital

The paid- up- capital of the First security islami bank ltd. was TK. 2300.00 million at end of the year 2009, and TK.3036.00 million capital at end of the year 2010.

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4.8. Showing Deposit Position:

Source: Annual report of FSIBL

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Analysis: From the survey, I found that out of 100 percent 36 percent of the total sample size said that the overall quality of FSIBL is excellent, 34 percent good and 30 percent moderate.

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CHAPTER 5Source of finance investment

management of FSIBL.

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CHAPTER 5: Source of finance investment management of FSIBL

5.1. Securitization of Assets

A powerful and effective means of generating funds for a certain category of institutions, Securitization of Assets is still in its infancy in The need however for such a service is great and there is a lot of support from multilateral financial institutions, such as the World Bank and the Asian Development Bank, for such activities to be developed further in this country.

FSIB intends to take up this challenge and play a significant role in ensuring that Securitization of Assets becomes a normal part of the range of financial instruments available for organizations who can count on a steady, but piecemeal, flow of revenue and want to translate this stream into cash resources with which to carry out further lending activities to new customers. Some practical issues still need to be settled such as those concerning pricing, or the legal framework, but it is expected that, as FSIB and other institutions pursue more such securitization activities these will be resolved.

5.2.Finance & Advisory Services Given the needs of its large and varied base of corporate clients FSIB will be positioning itself to provide investment banking advisory services. These could cover a whole spectrum of activities such as Guidance on means of raising finance from the local Stock markets, Mergers and Acquisitions, Valuations, Reconstructions of Distressed companies and other expert knowledge based advice. By this means

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FSIB hopes to play the role of strategic counsellor to blue-chip Bangladesh companies and then move from the level of advice to

possible implementation of solutions to complex financing problems that may arise from time to time.

5.3.Syndication of Fund

There has been a surge in the number of syndication deals closed in the last few years. 2004 was an exceptionally good year for syndicated deals for the local commercial banks also for the foreign banks. The total number of syndications in 2004 exceeded 10 totalling over Tk. 10 billion. This rise in the number of syndications can be primarily attributed to the prudential lending guidelines of the Bangladesh Bank. A commercial bank may provide funded facilities up to a maximum of 25% of its equity. Due to this reason, projects with sizeable costs need to approach more than one bank for their debt requirements and therefore the demand for syndications exist. Credit risk diversification has led many international companies to introduce credit derivatives that are actively being traded. Securitization of assets is one such credit risk derivative that allows financial institutions to diversify their portfolios. At FSIBL, the Syndications and Structured Finance unit was setup on October 30, 2004. This unit successfully closed two syndicated deals in the first and second quarters of 2004. The Syndications and Structured Finance team as a business unit soon followed up by closing another deal totalling Tk 2.10 billion for a large local corporate. The year (2004) being the first full year of operation for the team ended on a high note as we were able to close three syndicated deals as the Lead Bank, two deals as the Co-Arranger and several other deals as a participant.

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5.4.Import Financing

Pre-import financing:

1)Letter of credit (non-refunded)

b) Post import financing: 1) Payments against Documents (PAD) 2) Loans against Imported Merchandise (LIM) 3) Loans against Trust Receipt (LTR)

Loans against Imported Merchandise (LIM): Loan against the merchandise imported through bank maybe allowed pledge of goods retaining margin prescribed on their landed cost. The branch shall also obtain letter of undertaking and indemnity from the customer before getting goods cleared through L.I.M. account. Clearing should be taken by approved clearing agent of the bank. Merchandise should be insured with specific risk clauses.

The following matters must consider while allowing L.I.M. against secured of goods. The landed cost of the merchandise is measured before the goods are delivered the client against proportionate payments. The landed cost is determined by taking following items:

• Invoice value if the merchandise including freight • Customs duty • Sales tax • Warfare • Derange agent’s charges • Railway freight • Insurance premium

Loans against Trust Receipt(LTR)

Advances against a Trust receipt obtained from the clients are allowed when the documents covering an import shipment are given

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without prior payment. This type of facility is given only to first class and reliable clients.

The customer holds the goods or their sale proceeds in trust for the bank till the loan allowed against Trust Receipt is fully paid off. The Trust receipt is a document which creates the banker’s lien on goods and practically amounts to hypothecation of the proceeds of sale in discharge of lien. The period of Trust receipt may be 30, 45, 60, 90 days. The loan is adjustable within the period. Sale proceeds of goods held in trust must be deposited in the bank by the borrower irrespective of the period of the trust receipt.

5.5.Export Financing

Export finance can be allowed in two types or stages, namely- Pre-shipment; Packing credit Back to Back L/C. Post- shipment. Through negotiation of documents; Through purchase of foreign bill

PACKING CREDIT: Packing credit is a short-term credit granted by a bank to exporter to help him to purchase, process, pack and ship the goods. Generally, for the movement of goods from hinterland areas to the port of shipment, the bank provided interim facilities by way of packing credit.

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CHAPTER 6Different types of products

under Corporate and Consumer loan.

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CHAPTER 6

6.1. Definition of Loan

Credit is defined as confidence in a borrower’s ability and intention to repay. People use the credit they have with financial institution, business, and individuals to obtain loans. And they use the loans to buy goods and services.The credit a person has typically determines how much they will be permitted to borrow, for what purpose, for how long, and at what interest rates.Credit is general sense means an act of allowing person or person’s immediate use of money with payment deferred until an agreed future date.

6.2.Rules for Application

Interested clients shall apply to any branch of the bank as per following procedures:1. Application In Bank’s prescribed form duly filled in all accounts.2. Two passport size photographs duly attested.3. A certificate of net monthly income from the employer (in case of Service holders).4. Suppliers should be authorized by the Bank.

6.3.Documentation of Loan

The customer will execute the following documents: D.P. Note Letter of Undertaking Letter of Instalments

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Letter of Hypothecation Loan Agreement Under Consumers Finance Schemes Letter of Guarantee Letter of disbursement Letter of Authority

The client will also submit crossed cheques in advance for all the stipulated instalments in favour of the Bank towards repayment of loan including interest and service charge.Personal guarantee of two officials of the same rank or of superior rank of the borrower, officers/Managers of Bank in the grade of principal officer or above. The guarantor must have to be a man of means and shall have to be acceptable to bank. Security in the form of FDR/BSP/PSP or Bank/ Insurance guarantee or corporate if possible may be obtained. The articles procured under the scheme shall remain hypothecated to the bank as security.

6.4. Loan SanctionClients demand specific amount of loan from the Bank after making justification of clients demand, the amount of money sanctioned by Bank as loan is called Loan Sanction.Generally the loan FSIB offers to its clients is divided into two categories; Retail loan and Consumer Credit Scheme.

6.5. Categories of loanAll loans advances will be grouped into 4 categories for the purpose of classification.These areas- Continuous Loan Fixed Term Loan and Demand Loan Short Term Agricultural & Micro Credit

Continuous Loan: The loan Accounts in which transaction may be made within certain limit and have an expiry date for full adjustment

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will be treated as continuous loan. For example: CC (cash credit), OD (Over Draft) etc.In continuous loan bank need some collateral securities to the customer. If customer wants to take a lone against his FDR (any bank account) he has to submit all documents of FDR. He also take loan against his fix assets like land, house.

Demand Loan: The loan that becomes repayable on demand by the bank will be treated as Demand Loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as regular loan) those too will be treated as Demand Loans. Such as: Forced LIM, PAD, FBP, and IBP etc.In demand loan bank need charged documents (shown in 4.3). If customer wants to take loan against his house, at first bank have to see all deeds and documents legal or not, then take the valuation of assets and give loan 80% (force rate) of value.

Fixed Term Loan: Loans which are repayable within a specific time period under a specific repayment schedule will be treated as Fixed Term Loans.

Short Term Agricultural & Micro Credit: Short Term Agricultural & Micro Credit will include the short-term credits as listed under the Annual Credit program issued by the Agricultural Credit department of Bangladesh Bank.Credit in the agricultural sector repayable within less than 12 months will also be included here in.Short-term Micro-Credits will include any Micro-Credits for lessthan Tk. 25,000/- and repayable within less than 12 months, be those termed in any names Such as non-agricultural credit, self-reliant Credit, Weaver’s Credit or Bank’s individual project credit. Actually this loan doesn’t need special documents. It’s only need chairmen/commissioner certificate.

6.6. Credit MixFSIBL offers following types of Credit (loans and advances) as a whole as well as

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Bahadderhat Branch:

Cash Credit (Hypo) Term Loan Secured Overdrafts House Building Loan(HBL) Transport Hire Purchase Scheme Small Enterprise Financing

6.7. Cash Credit (Hypo)Cash Credit or continuing credits are those that form continuous debits and credits up to a limit and have and expiration date. A service charge that is effect an interest charge is normally made as a percentage of the value of purchases. These credits may be of the nature of pledged and /or hypothecated and banks should report these in separate heads incorporated under the main head cash credit. A detailed explanation of hypothecation is given below.

Under this arrangement a credit is sanctioned against hypothecation of the raw materials or finished goods. The letter of hypothecation creates a charge against the goods in favour of the Bank but neither the ownership nor its possession is passed on to it; only a right orinterest in the goods is created in favour of the Bank and the borrower binds himself to give possession of the goods to the bank when called upon to do so. When the possession is handed over, the charge is converted into pledge. This type of facility is generally givento the reputed borrowers of undoubted integrity.

6.8. Term LoanA term loan is a contract under which a borrower agrees to make a series of interest and principal payments on specific dates to the

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lender. Term loan have three major advantages over public offerings- speed, flexibility & low issuance costs.There are two of term loan one is short term another is long term. Short term loan is only five years or less than five years and long term loan up to five years. These two loan recovery system can be same like instalment.

6.9. Secured Overdrafts [SOD (FO)]A loan facility against customer’s financial obligations (MSS/DBDS/FDR/Share) at a Bank permitting him to overdraw up to a certain agreed limit for an agreed period. The customer has to a saving A/c in that branch. The terms of the loan are normally that it isrepayable on demand or at the expiration date of the agreement.All the account documents have to submit in bank. It can be other bank MSSS/FDR/Share/double benefit scheme. Bank needs a guaranty for particular loan that fulfil account documents.

6.10. House Building LoanBanks makes house building loans to fund the acquisition of real property: homes, apartment complexes, shopping center office building, warehouses, and other physical structures as well as land in some cases.House related all paper has to submit to bank then bank investigate all the requirements. After investigation if bank take a decision to give him loan then bank take all the documents as a mortgage. Bank also give apartment loan, this loan have to conceder as a tri part agreements. Builders handover the flat to the bank and after covering all instalment bank handover the flat to the purchaser.

6.11. Small Enterprise FinancingTheses a type of loans is provide to the small, medium enterprise for expanding their business activities in the long run. This is a short term loan. It provides for one year.

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CHAPTER 7Sector-wise investment

scheme by FSIBL.

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CHAPTER 7

Sector-wise investment scheme by FSIBL.

7.1.Term Loan

The following are FSIBL, Bohadderhat Branch provides Term Loan in the last five years:

Source : Bhadderhat Branch Loan Division.

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The above graph shows that, the performance of Term Loan is better from other investment in 2010. There is a highest value is 223.07 million TK, and lower value is 215.05 million TK, in 2009.

7.2.Secured Overdraft

The following are FSIBL, Bahadderhat Branch provides Secured Overdraft in the last five years:

Source: Bahadderhat Branch Loan Division

The above graph shows that, the performance of Secured Overdraft is better from other investment in 2010. There is a highest value is 98.27 million TK, and lower value is 75.37 million TK, in 2009.

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7.3.Transport Loans

The following are FSIBL, Bahadderhat Branch provides Transport Loans in the last five years:

Source: FSIBL , Bahadderhat Branch Loan Division

The above graph shows that, the performance of Transport Loans is better from otherinvestment in 2010. There is a highest value is 87.36 million TK, and lower value is 65.21million TK, in 2009.

The above graph shows that, the performance of Transport Loans is better from other investment in 2010. There is a highest value is 87.36 million TK, and lower value is 65.21 million TK, in 2009.

7.4.Cash Credit

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The following are FSIBL, Bahdderhat Branch provides Cash Credit in the last five years:

Source: FSIBL Annual Report 2010,& Bahadderhat Branch loan Division

The above graph shows that, the performance of Cash Credit is better from other investment in 2006. There is a highest value is 115.36 million TK, and lower value is 46.22 million TK, in 2009.

7.5.House Building Loan

The following are FSIBL, Bhadderhat Branch provides House Building Loan in the last fit.

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Source: Bahadderhat Branch Loan Division.

The above graph shows that, the performance of House Building Loan is better from other investment in 2010. There is a highest value is 123.57 million TK, and lower value is 19.02 million TK in 2006.

Total Loan Disbursement of FSIBL, Bahadderhat Branch

Source: FSIBL, Bahadderhat Branch Loan Division.

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The above graph shows that, the performance of Bahadderhat Branch loans is better from other investment in 2009. There is a highest value is 823.25 million TK, and lower value is 576.40 million TK, in 2007.

7.6. Findings

1. As we observed the chart of total loan disbursement of FISBL it is found that the disbursement of the bank continuously increasing. It signifies that the Bank tries to extend credit facilities to the various sector of the economy.

2. From the study of Term loan by chart it is found that the payment of term load of the branch are not stable at all as it goes upward and downward time to time. In 2006 it goes upward by 4.64% in comparison to 2005 where in 2007 and 2008 it goes downward by 12.15% and .77% in comparison of previous year. But in 2009 it goes 18.83and in 2010its downward.

3. The graph of Secured Overdraft from 2005 to 2009 shows the performance was lowest in 2007 which was 23.22 million and in 2010 the performance was in highest level which was 98.27 million.

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4. As the Transport loan is observed from the chart from 2005 to 2009 it is found that the performance was highest in 2010 which was 87.36 million and the performance was lowest in 2007 which was 47.12 million.

5. From the study of cash credit form the chat from 2005 to 2009 it is found that the performance of FISBL is instable in this case. The performance of cash credit was highest in 2006 which was 115.36 million which is upward by 5.48% in comparison of previous year. But in 2009 the performance of cash credit was lowest which was 46.22 million which was downward by 56.11% in comparison of previous year.

6. The graph of House Building of 2005 to 2010 shows that the performance of FISBL is gradually increasing. It shows that the performance of house building loan is batter from other investment in 2009.

7. The graph of Loan disbursement from 2005 to 2010 shows that the performance is batter from other investment in 2010 which was 823.25 million and lower value is 576.40 million in 2007.

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CHAPTER 8

Recovery position of investment skim of FSIBL.

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CHAPTER 8

8.1.Management Committee (M.C.)

There is no major change in Management Committee during the period under surveillance. The Management Committee of FSIBL is headed by Janab Mohammad Abdul Mannan, Managing Director of the bank. Janab Mannan has been serving in the banking sector for around two and half decades. In Management Committee, Janab Mannan is aided by six Deputy Managing Directors along with five Executive Vice Presidents who lead different wings/divisions/departments. The day-to-day banking functions are handled by these professionals having modern banking knowledge and experience. The above management team provides wide succession plan and has the acumen to carry out the objectives of thebank smoothly. During the 2011 the M.C. held 66 meetings against 58 meetings in the previous year.

8.2.Operational Network

FSIBL is currently operating with the highest operating network among the private commercial banks (PCBs). The bank has been operating with 86 branches (including 30 SME/Agriculture branches) with the inclusion of 15 new branches during 2011. In order to facilitate and control the administrative function of the branches, FSIBL has set up 12 zones including one new zone (Mymensingh) throughout the country. Among 86 branches, 9 branches are in Dhaka Central Zone, 24 branches (excluding 2 SME/Agriculture branches) in Dhaka South Zone, 22 branches (excluding 2 SME/Agriculture branches) in Dhaka North Zone, 15 branches (excluding 2 SME/Agriculture branches) in Chittagong North Zone, 16 branches (excluding 2 SME/Agriculture branches) in Chittagong South Zone, 24 branches (excluding 4 SME/Agriculture branches) in Bogra Zone,

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23 branches (excluding 3 SME/Agriculture branches) in Khulna Zone, 29 branches (excluding 4 SME/Agriculture branches) in Comilla Zone, 20 branches (excluding 3 SME/Agriculture branches) in Sylhet Zone, 17 branches (excluding 3 SME/Agriculture branches) in Barishal Zone, 18 branches (excluding 3 SME/Agriculture branches) in Rajshahi Zone and 19 branches (excluding 2 SME/Agriculturebranches) in Mymensingh Zone. This large branch network of FSIBL is supported by 100 own ATM and 1035 shared ATM along with 30 SME/Agriculture branches and Internet Banking.

8.3.Recovery RateThe recovery perspective in Bangladesh has always been poor and ineffective that sometimes made the Banking sector insolvent. However, the recovery rate of NCBs, PCBs and ICBs are given below:

Table 1: Recovery Rate of NCBs, PCBs and ICBs

Source: Various Issues of FSIBL and Newspaper Articles.

the comparison of NCBs and PCBs show that in order to strengthen the economic conditions of the economy, the NCBs must be improved in terms of its NPL, ROA, ROE, NII and other monitoring, assessment and performance evaluation metrics. The Islamic Banks have been found to be investing generally in the projects with quick returns resulting higher recovery rate of commercial loans provided by the banks. This leads the banks not to take up the projects with long gestation period, i.e., insignificant investment under Mudaraba and Musharaka mode of financing. The short term financing under Murabaha and Bai Muajjal assures the required rate of return, as the mark up of profit is pre assigned according to the bankers and the users of the loans. Moreover, the Islamic Banks cover their loan risk

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by taking the collateral and other forms of securities such as FDR Account with the Bank. Thus, the better performance recovery rate of commercial loans in Islamic Banks is due to its lending portfolio and its different modes of financing. Generally, the Islamic Banks are not performing the true Islamic Banking instruments.

Source: News paper Source and Various Issues of FSIBL.

8.4.Sectoral and Credit Concentration (Stand alone basis)

The bank is continuing its operation with concentration to trade finance and textile sector. The sectoral portfolio reveals that 32.52% investment was in trade finance, followed by 20.82% in textile, 5.24% in iron & steel engineering, 5.04% in housing, 3.50% in RMG, 2.00% in agricultural sector and rest are segregated to other general investment. While reviewing sectoral NPI in 2011, it was revealed that classified investment pie is mostly comprised of trade finance (23.16%) followed by Textile (20.34%), Transport (19.53%), House

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building (4.59%), others (30.23%) and rest are insignificantly distributed in different sectors. CRISL views that the bank is significantly exposed to sectoral concentration risk in textile sector which might be affected with the volatility of commodity price both in the national and international market and the sectoral performance.CRISL reviewed financing facilities extended to Group of companies of FSIBL and it was revealed that the funded exposure of the bank to different Group of companies contribute significant portion of capital which exposes the bank to credit concentration risk.

8.5.Liquidity ManagementFSIBL has been operating with sufficient liquidity. FSIBL is continuing with a good liquid assets portfolio in the balance sheet which includes government securities, balance in hand and other banks etc. The total liquid assets including cash, cash equivalent and Bangladesh Bank instruments represented approximately 20.89% of total deposit at YE2011 (19.81%; YE2010). Investment in Bangladesh Government Islamic Investment Bond has increased to Tk.13,800 million at YE2011 against Tk. 11,000 million at YE2010. As per Bangladesh Bank Guidelines the bank has been maintaining more than required Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) and the CRR and SLR of IBBL were 9.59% (required 6%) and 15.78% (required 11.50%) in 2011 respectively. Investment to deposit ratio slightly decreased to 89.45% in YE2011 against 89.65% in YE2010 due to higher growth in deposit than the investment. FSIBL have favourable gap in all maturity buckets. Liquidity gap ratio up to 3 months period is 1.17 times and maturity bucket up to 12 months period is 1.08 times of liability. Overall gap analysis results in a net liquidity surplus of Tk.27,800.21 million. Hence it is expected that the bank will be able to meet its obligations with sufficient cumulative surplus.

8.6.Audit & Risk Management Division

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The Risk Management Division is responsible for measuring risks that the Bank might face in the course of its operations, developing corporate risk management policies and ensuring that risks remain within the limits in which the Bank prefers to bear such risks in line with its own strategic targets and risk appetite. The primary goal of risk management is to provide capital to businesses in line with their risks (economic capital), maximize risk-adjusted return and increase the added value. The risk management function consists of Market Risk, Credit Risk and Operational Risk Management Units. Bank Risk Committee, Asset-Liability Committee (ALCO), Credit Policy Committee, and Operational Risk Management Committee are the other risk management bodies.

8.7.Risk Management Unit

During the 3rd quarter of the year 2009 the Management of the Bank has set up a Separate Risk Management Unit (RMU) in line with Bangladeshi Bank directives. The RMU functions under direct supervision of the Managing Director, who is assigned by the Deputy Managing Director ( Risk Management). The Risk Management Unit supervises and monitors independently and consistently the management of following Main Risks:

1. Credit Risk 2. Asset- Liability Risk 3. Foreign Exchange Risk 4. Internal Control & Compliance 5. Anti Money Laundering 6. Information and Communication Technology 7. Balance Sheet Risk 8. Operational Risk 9. Market Risk

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10. Liquidity Risk 11. Reputational Risk 12. Insurance Risk 13. Sustainability Risk

The main purpose for establishing the RMU is to prevent the Bank from taking too much risk and build up a Capital Adequacy, which is more risk sensitive. The RMU tends to take necessary measures and find out strategy against financial crisis, unusual market condition, and different investment vulnerabilities.

8.8.Finance & Advisory Services

Given the needs of its large and varied base of corporate clients FSIBL will be positioning itself to provide investment banking

advisory services. These could cover a whole spectrum of activities such as Guidance on means of raising finance from the local Stock markets, Mergers and Acquisitions, Valuations, Reconstructions of Distressed companies and other expert knowledge based advice. By this means FSIBL hopes to play the role of strategic counsellor to blue-chip Bangladesh companies and then move from the level of advice to possible implementation of solutions to complex financing problems that may arise from time to time.

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8.9.Loan Recovery Unit

The RU should directly mange accounts with sustained deterioration. All time bank monitoring the loan client with a very special care. If any client fails to adjust his loan amount, bank has to take some step against client to recover the loan. The RU’s Functionsare: At first, Bank can send 3 times reminder to the client. (1st reminder, 2nd reminder,3rd reminder). Make call to the customer or verbally say the entire problem about loan adjustment and request to clean up all the deals. If client fail to pay the money the guarantor is responsible to pay in terms of complain. After than if client fail to adjust his loan amount then bank sent ……. Notice to the client. At last bank can sue the client in court and bank has to submit entire loan document.

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CHAPTER 9

Infact of investment management on the

profitability of FSIBL.

Chapter 9

9.1.Financial Highlights of FSIBL

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Although there are a number of other competitors, this serves as a basic competitors for FSIBL. For Bahadderhat Branch, it seemed the competitors are the surrounding banks. I have done a questionnaire method and face-to face interview lush secondary information to collect the following data.

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Analysis: From the survey, I found that out of 100 percent 36 percent of the total sample size said that the overall quality of DBL is excellent, 34 percent good and 30 percent moderate.

How satisfied you are by the Loan Department of FSIBL?

Analysis: Here I find that among 50 (100%) clients 20 (40%) are very much satisfied with the loan department of FSIBL where as only 1 (2%) is very dissatisfied with the performances. But average percent is good. Here we can see that 2 clients are dissatisfied and 1 is very dissatisfied. The reason that he was dissatisfied was because he wanted more time to pay his instalments. But FSIBL did not allow this.

How would you rate the quality of The Credit Department service of Bank Limited?

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Analysis: From the survey, I found that out of 100 percent 38 percent of the total sample size said that the overall quality of lending service of FSIBL is excellent, 22 percent 94 satisfactory and 24 percent moderate and only 16 percent is not dissatisfactory. It means the overall opinion of clients is positive about the quality of customer care service of FSIBL.

Analysis: Here in the graph we can see BRAC Bank have maximum ATM booths around 120, next we have DBBL who have total of 65 ATM booths. EBL and SCB have almost equal number of ATM booths. Mercantile Bank, AB Bank and FSIBL have least ATM booth in different division in Bangladesh. Surprisingly MTB and UCBL don’t have any ATM booth, in order to meet up with customer requirements they have co branding with FSIBL for providing ATM service.

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9.2.Ratio Analysis

Capital Adequacy RatioThis ratio expresses capital as a proportion of total risk-weighted assets. Both capital and assets should be fairly stated with the appropriate loan loss provisions and intangible assets having been deducted. This ratio indicates the margin of protection available to both depositors and creditors against unanticipated losses that may be incurred by the bank. For the FSIBL, the ratio is computed as:

Earning Assets to Total Assets Ratio: This consists of earning assets(interest-bearing investments, loans and advances) divided by total assets. It will reveal the extent to which bank's assets are put into productive use. Investment in equipment and buildings may not directly generate income but they are important for the bank's operations. For the FSIBL, the ratio is computed as:

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Cash RatioThis ratio relates the sum of cash in hand and at banks including theCentral Bank to total deposits. For the FSIBL, the ratio is calculated as:

Loans to Deposit RatioThis ratio is a measure of bank liquidity; the higher the ratio, the lower the liquidity. For the FSIBL, the ratio is calculated as:

FIRST SECURITY ISLAMI BANK LIMITEDBALANCE SHEET

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Loans to Assets Ratio

The loans to asset ratio is similar to the loans to deposits ratio. Otherthings equal, a rise in this ratio would indicate lower liquidity and the need to evaluate other liquidity ratios. For the FSIBL, the ratio is computed.

There is no standard way to measure a bank's liquidity. Those withoutaccess to internal data will have to use a number of ratios. Larger banks will have greater flexibility in liquidity planning because they can practise liability management nation-wide. Because of this ability, their liquidity planning horizon is much shorter than it is for smaller banks.

9.3.EARNINGS PERFORMANCE

Return on Assets

Return on assets, often described as the primary ratio, relates the income earned by the bank to the resources employed by it. Normally return' is taken as profit before extraordinary items, since these items fall outside the scope of the bank's normal operations. This does not mean that extraordinary items should be ignored by the analyst, but that their significance should be assessed as a separate exercise from the analysis of the bank's performance.

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For the FSIBL, the ratio would be computed as follows:

The ratio of profit before tax to average total assets essentially is anindication of management ability to generate income and its ability to control expenses. The variations in this ratio could be due to a number of factors including a portfolio shift to higher or lower yielding assets, an increase or decrease in the level of interest rates, or an increase or decrease in fees and other income not related to the employment of assets.

Return on EquityThis ratio relates profit earned after tax by the bank to resourcescontributed by its owners, i.e. ordinary share capital plus reserves.


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BALANCE SHEET AS AT 31 DECEMBER 2008-2009

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BALANCE SHEETAS AT 31 DECEMBER 2008-2009

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PROFIT AND LOSS ACCOUNTAS AT 31 DECEMBER 2008-2009

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CASH FLOW STATEMENT AS AT 31 DECEMBER 2008-2009

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FIRST SECURITY ISLAMI BANK LIMITED BALANCE SHEET

AS AT 31 DECEMBER 2010-2011

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FIRST SECURITY ISLAMI BANK LIMITED BALANCE SHEET

AS AT 31 DECEMBER 2010-2011


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CONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED 31 DECEMBER 2010-2011

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FIRST SECURITY ISLAMI BANK LIMITED CONSOLIDED CASHFLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2010-2011

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CHAPTER 10

Problems of investment management and their

probable solution.

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CHAPTER 10

10.1.Documents deficiency and problem resolving:

If there is any error found then it informed to the respective CRO. If the application form is not filled properly then the file is sent to the CRO to fill the application properly. If any document error is found then the loan administration division asks the CRO to send the required documents and the file stored to the loan administration division.

10.2.Problems and Challenges of FSIBL

Problems Related to Macro Operation of the Islamic Banks1 Liquidity and Capital2 Valuation of bank Assets3 Financial Stability4 The Ownership of Banks5 Increased Cost of Information6 Control over Cost of Funds.7 Mark-up Financing and Corrupted Mark-up8 Excess Resort to the Murabaha Mode of Financing9 Utilization of Interest Rate of fixing the Profit Margin in Bay Modes.10 Financing Social Concerns.11 Lack of Positive Response to the Requirement of government Financing.12 Failure of Islamic Banks to Finance High Return Projects.13 Sacrifice of allocate Efficiency14 Loss of Distributive Efficiency.15 Depression of Profit.16 Lack of Full-fledged Shariah Audit.17 Fraud-Forgery or corruption in Islamic Banks.18 Minimum Budget for Research and Development.19 Working Environment.

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20 Issuance of Letter of Guarantee (L/G)21 Minimum Budget for Research and Development.22 Lack of Shariah Manual or Guidelines.23 Non-exemption of Stamp Duty for Purchasing Property by Banks.24 Lack of Co-operation between Islamic Banks and Islamic NGOs for extending Microcredit.25 Lack of Establishment of Links with other Training Institutes and Shariah Supervisory Bodies.26 Lack of Intention of the Management to be strict with Shariah Guidelines.

The above problems are some of the burning problems confronting the Islamic banks in Bangladesh. However it isfelt that much operational work and in-depth research work has to be undertaken to allow the Islamic banks toflourish with highest quality and strength.

10.3. ICT and its use in MIS

FSIBL is continuously improving in the automation of banking activities. All the branches have been brought under on-line banking using Fiber Optics, DDN and Radio Link where ‘Any Branch Banking’ facilities are being provided. FSIBL is the only bank in Bangladesh, which developed in-house built integrated Banking system namely eIBS having major modules viz.: General Banking (GB), Investment and Foreign Exchange. Both GB and Investment module are running at all 266 branches including 30 SME/Agriculture branches. The foreign exchange module has been implemented at 43 authorized Dealer (AD) branches. Apart from the core banking facilities, the bank provides other IT enabled services such as shared and owned Automated Teller Machine (ATM), SMS banking, EFTN and i-banking.FSIBL has established the country’s largest Data Center in the banking sector running on Sun Solaris 10 & Oracle 10gEnterprise Edition. Branch data are being uploaded in the Data Centre from all online branches, which are being used as branch backup data

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and preparing MIS reports for different Wings/Divisions/Departments of Head Office. A strong central MIS has already been set up through using data from the Data Centre. IBBL has completed setting up Disaster Recovery Site (DRS) as per guideline of Bangladesh Bank as a replication of existing Data Centre which is on live operation.

10.4. SWOT Analysis

Strengths:

• Strong corporate identity According to the customers, FSIBL is the leading provider of financial services identity worldwide. With its strong corporate image and identity, it has better positioned itself in the minds of the customers. This image has helped FSIBL grab the personal banking sector of Bangladesh very rapidly.

• Strong employee bonding and belongings FSIBL employees are one of the major assets of the company. The employees of FSIBL have a strong sense of commitment towards organization and also feel proud and a sense of belonging towards FSIBL. The strong organizational culture of FSIBL is the main reason behind its strength.

• Efficient Performance It has been seen from customers’ opinion that FSIBL provides hassle-free customer services to its client comparing to other financial institutions of Bangladesh. Personalized approach to the needs of customers is its motto.

Young enthusiastic workforce The selection & recruitment of FSIBL emphasizes on having the skilled graduates & postgraduates who have little or no previous work experience. The logic behind is that FSIBL wants to avoid the

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problem of 'garbage in & garbage out'. And this type of young & fresh workforce stimulates the whole working environment of FSIBL.

Empowered Work force

The human resource of FSIBL is extremely well thought & perfectly managed. As from the very first, the top management believed in empowering employees, where they refused to put their finger in every part of the pie. This empowered environment makes FSIBL a better place for the employees. The employees are not suffocated with authority but are able to grow as the organization matures.

Hospitable Working Environment All office walls in FSIBL are only shoulder high partitions & there is no executive dining room. Any of the executives is likely to plop down at a table in its cafeteria & join in a lunch, chat with whoever is there.

Strong Financial Position It has been seen that the net profit has been gradually rising over the years. Furthermore, FSIBL is not just sitting on its previous year’s success, but also taking initiatives to improve.

Weaknesses:

• High charges of L/C

Presently FSIBL charges same rates for all types of import L/C. But for import L/C of exports-oriented industry, FSIBL should reduce the charge of L/C. As a result, exporter will be benefited and the country will earn more foreign exchange. The commission often even rises up to 30%.

Absence of strong marketing activities FSIBL currently don't have any strong marketing activities through mass media e.g. Television. TV ads play vital role in awareness

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building. FSIBL has no such TV ad campaign. Although they do a lot of CSR activities compared to other banks.

• Not enough innovative products

In order to be more competitive in the market, DBL should come up with more new attractive and innovative products. This is one of the weaknesses that DBL is currently passing through but plans to get rid of by 2010.

• Diversification FSIBL can pursue a diversification strategy in expanding its current line of business. The management can consider options of starting merchant banking or diversify it to leasing and insurance. As FSIBL is one of the leading providers of all financial services, in Bangladesh it can also offer these services.

• Lack of Proper Motivation The salary at FSIBL is very decent, but it lacks other sorts of motivation. Incentives such as bonuses are given for acquiring a particular figure, but all in all these are the only motivational factors.

• High Cost for maintaining account The account maintenance cost for FSIBL is comparatively high. Other banks very often highlight this. In the long run, this might turn out to be a negative issue for FSIBL.

Opportunities:

• Distinct operating procedures Repayment capacity as assessed by FSIBL of individual client helps to decide how much one can borrow. As the whole lending process is based on a client's repayment capacity, the recovery rate of FSIBL is close to 100%. This provides FSIBL financial stability & gears up FSIBL to be remaining in the business for the long run.

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• Country wide network The ultimate goal of FSIBL is to expand its operations to whole Bangladesh. Nurturing this type of vision & mission & to act as required, will not only increase FSIBL's profitability but also will secure its existence in the log run.

• Experienced Managers One of the key opportunities for FSIBL is its efficient managers. FSIBL has employed experienced managers to facilitate its operation. These managers have already triggered the business for FSIBL as being new in the market.

• Huge Population Bangladesh is a developing country to satisfy the needs of the huge population, a large amount of investment is required. On the other hand, building EPZ areas and some Govt. policies easing foreign investment in our country made it attractive to the foreigners to invest in our country. So, FSIBL has a large opportunity here.

El Dorado Program It is software which enables customers to deposit and withdraw money from any bank with the cheque or deposit of any other bank. Although a select few has implemented this program, this poses as an opportunity for FSIBL as the number of transactions would drastically increase.

• Bigger Market Although the GDP per head decreased a bit in 2009 from 2008, there is a huge untapped market that requires loans and intends to deposit also.

• BASEL II Implementation of BASEL II would definitely provide benefits. But it requires a lot of monitoring. For this FSIBL has formed BIU

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(BASELL II Implementation Unit). BASEL II is basically a framework set forth by Bangladesh Bank to reduce credit risk, operational risk and market risk. This would definitely aid FSIBL if it is stringently followed.

Threats:

• Upcoming Banks/Branches The upcoming private, local, & multinational banks posse’s serious threats to the existing banking network of FSIBL: it is expected that in the next few years more commercial banks will emerge. If that happens the intensity of competition will rise further and banks will have to develop strategies to compete against and win the battle of banks.

• Similar products are offered by other banks Now-a-days different foreign and private banks are also offering similar type of products with an almost similar profit margin. So, if all competitors fight with the same weapon, the natural result is declining profit.

• Default Loans The problem of non-performing loans or default loans is very minimum or insignificant. However, this problem may rise in the future thus; FSIBL has to remain vigilant about this problem so that proactive strategies are taken to minimize this problem.

• Industrial Downturn Bangladesh is economically and political unstable country. Flood, draught, cyclone, and newly added terrorism have become an identity of our country. Along with inflation, unemployment also creates industry wide recession. These caused downward pressure on the capital demand for investment.

10.5. Profit Rate Risk

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Regulatory pressure to reduce profit rate in the market has been creating substantial profit rate risk for the banks. The Asset Liability Committee (ALCO) of FSIBL monitors and evaluated the overall profit rate structure. FSIBL has been following a competitive profit rate and has flexibility of setting profit rate according to market conditions and Bangladesh Bank ceilings. The bank has no profit sensitive trading portfolio. For non trading portfolio (general investment), the bank has been operating through buying and selling policy i.e. Bai-Murabaha, Bai-Muajjal, Bai-Salam, Bai-as-Sarf and Rent sharing mode like HPSM. IBBL also makes Investment under Musharaka mode i.e. profit and loss sharing mode and Mudaraba mode i.e. profit sharing and loss bearing on short term basis. Investment exposures under profit loss sharing mode is insignificant, hence facing little risk of investment loss. In case of rent sharing mode i.e. HPSM, the bank can adjust the rate of rent in line with market situation. FSIBL has been exposed to some risk on buying and selling mode.

10.6.Equity Risk and Commodity Financing Risk

The bank does not have investment in the equity market, which carries insignificant equity risk. IBBL has very small investment in equity portfolio with only one quoted share. The bank had investment in Bangladesh Shipping Corporation (BSC), the face value of which was Tk.20 million, whereas market value was Tk.110.90 million as on 31 December, 2011. The share of the same has been kept as SLR purpose and the bank revalue the same based on the closing market price. In unquoted share category, it has investment in Karmasangsthan Bank, CDBL and Bangladesh Aroma Tea Ltd. As the bank is involved in commodity financing, it exposed to commodity financing risk due to its investment in commodity based industries.

10.7.Foreign Exchange Risk

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In order to minimize the Foreign Exchange Risk, First Security Islami Bank Bangladesh Limited has adopted Foreign Exchange Risk Manual named “Foreign Exchange Treasury Manual”, through whichthe foreign exchange operations are being dealt with. Currency rate appropriateness is carried out by the treasury back-office to check as to whether all deals have been concluded at market rates. Dealing limit of dealers is set on the basis of expertise and efficiency of thedealers. To minimize the risk arising from the Foreign Exchange Transactions management approved Counter party Limit, Daylight limit/Intra-day limit, After Hour Dealing Limit, Over Night Limit, Stop Loss Limit and Management Action Trigger have been set by themanagement. Moreover, it has the opportunity to invest the Foreign Currency balance under Mudaraba Foreign Currency investment Mode and also under restricted Mudaraba principle through Islamic Development Bank (IDB). While reviewing the Foreign Currency Position, it has been found that the sum of net short position found nil and the sum of net long position stood at USD $20.82 million as on December 31, 2011. The bank’s required capital for the same stood at Tk.170.00 million which was duly considered while calculation of Capital Adequacy Ratio (CAR).

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CHAPTER 11

Recommendation of FSIBL

Conclusion

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11.1.Recommendation of FSIBLThe following are some recommendation of FSIBL:

(i) Improvement of the HRDThe HR department of the bank is one of the weakest areas and many of the human resources development and policies are not being followed or implemented. Though there has been performance appraisal for the employees but still it is lying idle and no action has been taken. The management should immediately apply the performance appraisal system and take appropriate actions on the basis of that appraisal.

(ii) Better recruitmentFSIBL must pursue a strong and an effective recruitment system so that the right people are recruited at the job. It must focus on attracting, getting and retaining qualified personnel for filling up the positions. It is worth spending more on attracting qualified human recourses rather than getting wrong people in the wrong position.

(iii) Stop reference appointmentFSIBL management and particularly the Board of director must change the system of appointing people by giving their reference. It has been deeply observed that most of the appoint references are not up to the standard and have a poor performance. It may not be absolutely possible to eliminate the reference appointment system as it is a local private company, but still the tendency can be reduced to a certain extent if bold steps are undertaken by the management and the board of directors.

(iv) Branch expansionFor expanding geographically the bank should open up new branches strategies important places. The bank can open new branches in Mailbag, Karkalla and new Eskaton of Dhaka city. Some of its rivals already entered in some of this regions and some of are on the way, so the bank should expand in this regions without making any delay. Before entering

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into new market the bank should do extensive market research. The bank should build reflective management team who can make quick decision. Improved customer service and consequently get satisfactory operational result.

Avoid force loan as minimum as it can.

Incorporate more products for the customer.

Proper training and technology should be used to minimize risk at the root level. Auto mated letter machine (ATM) and credit cards should be introduced as soon as possible because of its prevailing demand in the market.

11.2. ConclusionsModern commercial banking is challenging business. The rewards are modest. The penalties for bad looking are enormous. Commercial banks are great monetary institutions, important to general welfare of the company more than many other financial institutions. FSIBL is an emerging bank. The bank has completed twelve years of banking services. At the initial stage of business, every institution has to go through the difficult stage of survival. To achieve the confidence of the customers, the bank must execute some improvement in its marketing and operational areas – FSIBL should try to win customersfaith by providing them efficient and dependable services, credit facilities and updating with user friendly modern technologies. The bank should redesign all sorts of banking procedure to be more users friendly, attractive and impressive. Information and Analysis is not sufficient because it is difficult to measure and express perfectly within this short time of my internship period. But it is a great opportunity for me to get use to with the operational environment of commercial banking of FSIBL.

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I have tried by soul to incorporate the research report with necessary relevant information in my report. This report basically deals with “Investment Management”. But all information is not available about this topic. It is found from the report that credit management of FSIBL,Bahadderhat Branch. There are many terms and conditions about this credit.FSIBL should always try to improve their service level in every term.

Reference

Books: “Bank Management & Financial Services” 6th Edition. McGraw-Hill Singapore.- Peter S. Rose & Sylvia C. Hudgins (2007)

Mishkin, F. S (2009), The Economics of Money, Banking, and

Financial Markets. 9th ed. New York: Pearson, Addison Wesley.

BIBM. 1999. Reading Materials on Islamic Banking. Performance.

Appraisal And Compensation Management: A Modern Approach. pp 8 - 272.

Reports: First Security Islami Bank Limited, Annual Report 2008-2009. First Security Islami Bank Limited, Annual Report 2010-2011.

Internet: http://www.fsiblbd.com

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http://www.fsiblbd.com/