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Capital Adequacy of Social Islami Bank Limited


Abdur Rahman Shible ID: 0720529

An Internship Report Presented in Partial Fulfilment of the Requirement for the Degree Bachelor of Business Administration (BBA)


Social Islami Bank Limited

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Capital Adequacy of Social Islami Bank Limited
By Abdur Rahman Shible ID: 0720529

Has Been Approved September 2012

______________________ Mr. Abdullah Al Aabed Lecturer School of Business Independent University, Bangladesh.

September 6, 2012

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Date: 6th September, 2012 Mr. Abdullah Al Aabed Lecturer School Of Business Independent University, Bangladesh Subject: Submission of Internship Report Dear Sir, I am hereby submitting my Internship Report, which is a part of the BBA Program curriculum. It is a great achievement to work under your active supervision. This advance working report is based on Capital adequacy of Social Islami bank Limited. I have got the opportunity to work in Social Islami Bank Limited for twelve weeks, under the supervision of Mr. Fazle Rabbi Talukder (Assistant Officer). This project gave me both academic and practical exposures. First of all I learned about the organizational culture of a prominent bank of the country. Secondly, the project gave me the opportunity to develop a network with the corporate environment. I shall be highly obliged if you are kind enough to receive this report and provide your valuable judgment. It would be my immense pleasure if you find this report useful and informative to have an apparent perspective on the issue. Sincerely Yours

__________________ Abdur Rahman Shible IUB, Business School ID: 0720529

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First of all, I wish to express my gratitude to the almighty ALLAH for giving me the strength to perform my responsibilities as an intern and complete the report within the stipulated time.

I am deeply indebted to my Faculty Supervisor Mr. Abdullah Al Aabed for whole-hearted supervision during my organizational attachment period. I am also grateful to Mr. Fazle Rabbi Talukder, Assistant Officer and my organizational supervisor and my colleague who helped me by providing informative instructions. I was closely attached with them during my internship tenure. Without them this project would have been very difficult. I must mention the wonderful working environment and group commitment of this organization that has enabled me to deal with a lot of things.

And finally I express my sincere gratitude to all those participated to prepare the report. Most of them were busy employees of Social Islami Bank Limited.

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Part-1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 Part-2 2.1 2.2 Part-3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 The Organization Introduction Historical Background of SIBL Origin of The Report Objectives and Goals of SIBL Vision of SIBL Mission of SIBL Function of SIBL Products & Services Different Department of SIBL Journey with New Logo Corporate Structure Description of The Job Internship at SIBL Description of My Job At SIBL Advance Working Definition of Capital Adequacy Capital Adequacy Under Basel ii The Three Pillars Capital Base for Minimum Capital Requirement Maintenance of Regulatory Capital Calculation of Capital Adequacy Ratio Comparative Analysis of Capital Maintained throughout The Year 2011 Literature Review Impact of Adaption of Basel ii in SIBL Risk Management Capital Management Recommendation References Appendix Page No. 1-7 2 2 3 3 4 4 5 5 6 6 7 8-10 9 9 11-28 12 12 13 15 17 19 20 21 22 24 26 27 28

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Executive summary

Social Islami Bank Limited (SIBL) is a private owned bank. SIBL is a second generation Islami bank operating since 22 November, 1995 based on Shariah Principles. Now SIBL has 76 branches all over the country with two subsidiary companies-SIBL securities ltd. And SIBL investment ltd. The bank opened 12 branches in 2011 to bring more people under the coverage of banking service. This report will cover Capital Adequacy of Social Islami Bank Limited (SIBL). Capital Adequacy is a very vital thing for each and every bank. SIBL maintained and achieved strong position in all key areas of operations despite challenge in 2011. Capital of the bank was tk.12.60 crore at the very inception, and by the year 2011 it has increased to tk. 953.45 crore. Total deposit of the bank stood at tk. 6685.25 crore and total assets stood at tk. 8440.62 crore as on 31 December, 2011 which indicate a growth of 49.05% respectively over that of the previous year. The bank achieved 46.97% growth in investment with a total investment portfolio of tk. 5390.86 crore in 2011 compared to 3668.03 crore in 2010. Successful issuance of @ 1:1 Right Share in the year 2011 has resulted in an effort towards raising the paid up capital to Taka 2987.81 million and thus capital of the bank stood at Taka 9534.52 million at the year end 2011. The year 2011 has ended with a capital surplus of tk. 2456.22 million as per requirement of the Basel ii. Having the year 2010 as a successful return SIBL witnessed a remarkable growth too in different sectors in the year 2011. SIBL have successfully opened 12 branches in the year 2011.

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Part-1 The Organization

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1.1 Introduction:
Social Islami Bank Limited was incorporated in Bangladesh in the year 1995 as a banking company under the companies Act, 1994. Since its establishment, it has come forward as a private commercial bank and very encourage has come forward as the stimulator of economic activities in the country. The bank has been entrusted with the responsibility of undertaking various steps related to the development of the country’s commercial, industrial and agricultural sectors. The banking sector of a country is called the economic barometer of the country. As a pioneer commercial bank in the private sector in Bangladesh, Social Islami Bank provides considerable financial helps to the business sector that imports industrial goods and/or exports excess production outside the country for profit. Thus for imports the Social Islami Bank provides LIM (Loan against Import Merchandise) and LTR (Loan against Trust Receipt) facility and for exports provides both pre shipment and post shipment finances. Thus with these bank helps the prospects in the business sector has increased more than ever before.

1.2 Historical Background of SIBL:
Social Islami Bank Limited (SIBL) is a banking company registered under the companies Act 1994 with its head office in 15 Dilkusha C/A, Dhaka-1000. The bank operates as a scheduled bank under a banking license issued by the Bangladesh Bank, Central Bank of the country. The Bank started its operation from 22, November 1995. SIBL is a capitalized new generating Bank with an authorized capital and paid up capital of Taka 585 million in 2007 and also 585 million respectively as of December 2006. Currently the bank has 24 branches of which 12 in Dhaka, 4 in Chittagong, 1 in Sylhet, 2 inNarayanganj, 1 in Bogra, 1 in Khulna, 1 in Rajsahi, 1 in Sirajgonj. The bank under takes all types of banking transaction to support the development of trade and commerce in the country. SIBL services are also available for the entrepreneurs to set up new venture and BMRE of industrial units. To provide clientele services in respect of international trade it has established wide corresponded banking relationship with local and foreign bank stride and financial interest home and abroad. Since the very inception, Social Islami Bank Ltd. is working with the philosophy of serving the nationals as an ideal and unique financial house. Every organization has some objectives of its own. The prime objective of Social Islami Bank Ltd. is to earn profit throw undertaking

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the responsibility of providing financial help for the development of the country’s commercial and industrial sector. Now the year 2012 is envisaged as a golden year of SIBL. Adopting new strategic Business Policy, SIBL will leave no stone unturned to boost business in all areas of operation to achieve its corporate goals.

1.3 Origin of the report:
Internship Program of Independent University, Bangladesh (IUB) is a graduation requirement for the BBA students. It is a 12 weeks long internship program to introduce the students with the real life business administration. I took the internship with Social Islami Bank Limited which stands a prominent name in Banking industry. I am proud to work as an internee with SIBL and this experience will surely help me in my future career. This advance working report has been prepared as a part of the Internship Program. Being an intern the main challenge was to translate the theoretical concepts into real life experience.

The internship program and the study have following purposes:  To get and organize detail knowledge on the job responsibility.  To experience the real business world.  To compare the real scenario with the lessons learned at IUB  To fulfil the requirement of BBA Program.

1.4 Objectives and Goals of SIBL:
1.4.1 Sectoral Objectives The key sectoral objectives are  To humanize corporate finance in the formal sector through participatory market mechanism with collateral.  To socialize non-corporate finance in the non-formal sector through non-market and participatory custom-tailored micro-level credit package without collateral.  To monetize voluntary sector through participatory financing mainly on joint ownership basis.

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 To integrate these three sectors operational activities of the Bank to various willconceived and well-planned “Social Assignment and Investment Schemes” or “Social Fund” for making them economically and ethically transparent and revealed. 1.4.2 Overall Operational goals The key thrusts of the operational goals are as follows:  Empowering the family of the poor by creating income opportunities as well as strengthening the family of the rich for a better future generation.  Achieving sustainable participatory economy, Social Security, and peace for a society.

1.5 Vision of SIBL:
In SIBL journey towards continuous excellence it is striving to become the Country’s leading Islamic Bank offering one-step service of an wide range of value added products and services meeting the needs of its customers; conducting its business ethically in accordance with the laws of Shariah while optimizing best utilization of the most modern state-of-the-art technological solutions through creation of a pro-active organizational culture based on sound team spirit, fairness, mutual understanding and pragmatic leadership always remain open to new ideas and adaptable to the best practices in the market ensuring recognition and quality banking experience to its customers and deliver best value to all its stakeholders as well.

1.6 Mission of SIBL:
 Transformation into a service-oriented technology-driven profit earning Bank.  Ensure fast, accurate and best-in-class customer service.  Balanced & sustainable growth strategy.  Optimum return on shareholder’s equity.  Introducing innovative Islamic Banking Products.  Attract and retain high quality human resources.  Empowering real poor families and create local income opportunities.  Providing support for social benefit organizations- by way of mobilizing Funds and social services.

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1.7 Functions of SIBL:
 Mobilization of idle resources of the country by accepting Deposits from the general public.  Granting Loans and Advances to the individual firms and companies for activating and developing trade, commerce and industries and other productive activities in the country.  To give facilities to the client and shareholders in a systematic way.  Give encouragement to the people for savings.  To increase investment.  To make easy transfer of foreign currency.  To identify consumer’s demand and fulfil their demand by supplying money.  To improve economy by borrowing financial facility.  To assist capital market.

1.8 Products & Services:
 Mudaraba Term Deposit  Mudaraba Savings Deposit  Al-Wadia Current Account  Mudaraba Notice Deposit  Mudaraba Scheme Deposit  Mudaraba Hajj Savings Deposit  Mudaraba Monthly Savings Scheme  Mudaraba Special Deposit Pension Scheme (5 Years)  Mudaraba Monthly Profit Deposit Scheme  Mudaraba Education Deposit Scheme  Mudaraba Home Saving Scheme  Mudaraba Millinery Deposit Scheme  ATM Service  Locker Service  Online Banking

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1.9 Different departments of SIBL:
In recent times management has brought a change in the organizational structure in view of need of time. There are few departments. The departments are:  Human Resources Division  Personal banking Division  Treasury Division  Computer and Information Technology Division  Credit Division  Operation Division  Card Division  Finance & Accounts Division  Audit & Risk Management Division  Risk Management Unit

1.10 Journey with New Logo:
SIBL has changed its brand logo through a colourful function at Cox’s Bazar sea beach. Bank has passed a successful year 2011 through generating highest business growth interms of profit amidst unfavourable market conditions and also set superior service delivery for its customers through implementation of real time on line state of-the-art banking technology. In its journey towards continuous excellence the bank has decided to change its logo, the new logo depicts bird’s wing, 9(nine) feathers, to represent its comfortable and safe flying in the economic sky by passing the territorial Boundary. The wings are colored in red in a green background. Red symbolizes the vigour and enthusiasm of youth and the green symbolizes love for the dear motherland, Bangladesh is a country of greenery. Moreover 9(nine) feathers represent- Honesty, Transparency, Efficiency, Accountability, Reliability, Innovation, Flexibility, Security, and technology flying towards continuous excellence. In SIBL journey towards Continuous Excellence it takes pride in their new Logo.

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1.11 Corporate Structure

Vice Chairman Director Managing Director Deputy Managing Director Sr. Executive Vice President

Executive Vice President

Sr. Vice President

Vice President

Sr. Asset. Vice President

Principal Officer Executive Officer

Management Trainee Officer Officer

Junior Officer

Assistant Officer

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Part-2 Job Description

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2.1 Internship at SIBL:
Internship is offered for 12 weeks and since 3rd of June, 2012, I have been working in Social Islami Bank Limited and deal with lots of issues. My association with this bank is being a part of the General Banking Section (GB). Particularly being a student of Accounting and Human Resource Management (HRM) it is necessary for me to get practical knowledge of General Banking (GB). So, I have tried my level best to learn a lot about General Banking (GB). The nature of work was quite basic as an internee; nevertheless I got to see what practical life is. Below, the duties I have performed are given.  Account open  Cheque requisition  Cheque delivery  Cheque issue  Client account statement  Scanning of different documents  Client data entry or edit

2.2 Description of my job at SIBL:
2.2.1 Account Open: People need bank account for different purpose. Generally there are four(4) types of account. 1. Mudaraba Savings deposit (Savings Account) 2. Al Wadia Current Account (Current Account) 3. Mudaraba Term Deposit (Fixed Deposit) 4. Mudaraba Special Deposit Pension Scheme (DPS- Deposit Pension Scheme) Some people need personal account, some people need business account. Each and every account has different purpose. 2.2.2 Cheque Requisition: Savings and current account holders need cheque book. Because those account holders deposit and withdraw their money frequently. Without cheque book they cannot withdraw their money. So realistically those account holders need cheque book for their transaction, for business and personal purpose. When they open their account there is a separate form for

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cheque book requisition. Account holders need to fill out those form for their account activation. Through banking software (Ababil) I give entry cheque requisition. 2.2.3 Cheque Delivery: After giving cheque requisition customers need to wait for their cheque book. After cheque requisition normally it takes couple of working days to delivery cheque book to respective customers. After that customers need to collect their cheque book from our branch. 2.2.4 Cheque Issue: When customers come to our premises for collecting their cheque book, they need to sign it in a register book. After that I issued their cheque book and give it to them. After issuing cheque book they can use their cheque book at any time when they wish. But it has to be in between transaction hour, which is 9am to 4pm. 2.2.5 Client Account Statement: Some customers ask for their bank account statement. According to their demand I gave bank account statement to our customers. We didn’t apply any charge for bank account statement. 2.2.6 Scanning of Different Documents: When I open an account, I need to collect different documents from customers. Ex- National ID Card, Passport, driving Licence, Commissioner Certificate etc. So I need to scan those documents for banking purpose. After scanning those documents I print it and return the original copy to the customers. 2.2.7 Client Data entry or Edit: In the account opening form customers write the details according to what is asking for. After filling the form I need to cheque it. After that I need to entry those data in computer through banking software. In the banking software there are minimum two (2) pages that I need to fill out. In this software I can also edit the data if required.

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Advance working report on Capital Adequacy of SIBL

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3.1 Definition of Capital Adequacy:
A measure of the financial strength of a bank or securities firm, usually expressed as a ratio of its capital to its assets. For banks, there is now a worldwide capital adequacy standard, drawn up by the Basel Committee of the Bank for International Settlements. The Basel Capital Accord, introduced from 1988, requires banks to have capital equal to a minimum of 8 per cent of their assets. In 2004, a revised framework, known as Basel II, was issued. Among its proposals are those capitals requirements should be more risk sensitive and that greater use should be made of risk assessments produced by banks' internal systems. The revisions, which have sparked controversy, are being considered by national banking supervisors and implementation is due at the end of 2007.

3.2 Capital Adequacy under Basel II:
To cope with the international best practices and to make the Bank’s capital more risk sensitive as well as more shock resilient, Guidelines on Risk Based Capital Adequacy (RBCA) for Banks’ (Revised regulatory capital framework in line with Basel II) have been introduced from January 01, 2009. Throughout the year 2009, Basel II reporting was parallel to Basel I which was the statutory requirement up to that year. However, beginning year 2010, Basel II became mandatory. Bangladesh Bank further reviewed the RBCA Guidelines on several occasions prior to Basel II became fully in force. Instructions regarding Minimum Capital Requirement (MCR), Adequate Capital, and Disclosure requirements as stated in these guidelines have to be followed by all scheduled banks for the purpose of statutory compliance. SIBL has adopted standardized approach for computing capital charge for credit risk & market risk and basic indicator approach for operational risk. Assessment for capital adequacy is carried out in conjunction with the guidelines and regulations by Bangladesh Bank from time to time. SIBL has been generating most of its incremental capital from retained profit (stock dividend, right share issue and statutory reserve transfer etc.) to support incremental growth of Risk Weighted Assets (RWA). Therefore, the Bank’s Capital Adequacy Ratio (CAR) remained consistently within the comfort zone under Basel II during 2011. (This was 13.17% against required MCR of 10% in December, 2011)

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Assessing regulatory capital in relation to overall risk exposures of a bank is an integrated and comprehensive process. SIBL, through its SRP team, is taking active measures to identify, quantify, manage and monitor all risks to which the Bank is exposed to. Assessment of Regulatory Capital will be in alignment with the findings of these exercises. Basel II guidelines are structured on the following aspects: a) Minimum capital requirements to be maintained by a Bank against credit, market, and operational risks. b) Process for assessing the overall capital adequacy aligned with risk profile of a Bank as well as capital growth plan. c) Framework of public disclosure on the position of a Bank’s risk profiles, capital adequacy, and risk management system.

3.3 The Three Pillars:
Basel II capital accord is known for its three mutually reinforcing pillars, which are minimum capital requirement, supervisory review process and market discipline. In figure-1, the approaches for calculation of capital for pillar I are stated. In this section, these three pillars and the approaches for calculation of capital will be discussed. Pillar I of Basel II is somehow present in the previous capital accord Basel I, but Pillar 2 and Pillar 3 are new. In the pillar 1 it has identified three risks whereas in the previous accord there were two risks. Operational Risk was introduced for the first time in Basel II.

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Basel II

Pillar I Minimum Capital Requirement

Pillar II Supervisory Review Process Supervisory Review Process

Pillar III Marker Discipline

Credit Risk

Minimum Capital Market Risk Requirement

Operational Risk

Standardized Approach

Internal Rating Based Approach

Standardized Approach

Internal Model Approac h

Basic Indicator Approac h

Standardized Approach

Advance Measurement Approach



Figure-1: The Basel II Framework

3.3.1 Pillar 1-Minimum Capital Requirements: In Pillar I, three kinds of risk such as credit risk, market risk and operational risk are considered to determine the minimum capital requirement. The definition of eligible regulatory capital remains the same as outlined in the 1988 Accord i.e., the ratio of capital to risk-weighted asset remains unchanged at 8%. This pillar is a quantitative one. 3.3.2 Pillar 2-Supervisory Review Process: Pillar II ensures that not only do banks have adequate capital to cover their risks, but also that they employ better risk management practices so as to minimize the risks. Supervisors will be expected to evaluate the board and management of banks, to look into strategic decisions and to evaluate portfolio diversification as well as the ability to react to future risks in a rapidly changing environment. In particular, issues of transparency, corporate governance and efficient markets can be considered as additional challenges in pillar II enforcement. 3.3.3 Pillar 3-Market Forces: Banking operations are becoming complex and difficult for supervisors to monitor and control. In this context, Basel Committee has recognized the importance of market discipline and has suggested implementing it by asking banks to make adequate disclosures. The

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potential audiences of these disclosures are supervisors, bank's customers, rating agencies, depositors and investors. With frequent and material disclosures, outsiders can learn about the bank's risks.

3.4 Capital Base for Minimum Capital Requirement:
For the purpose of calculating regulatory capital requirement, capital has been categorized into the following three tiers: 3.4.1 Tier 1 capital Tier 1 capital called ‘Core Capital’ comprises of highest quality of capital elements that consists of: i) Paid up Capital ii) Non-repayable share premium account iii) Statutory Reserve iv) General Reserve v) Retained Earnings vi) Minority Interest In Subsidiaries vii) Non-cumulative irredeemable preference shares viii) Dividend equalization account

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 Tier-1 (Core Capital ) Fully Paid-up Capital/Capital Deposited with BB Statutory Reserve Non-repayable Share premium account General Reserve Retained Earnings Minority interest in Subsidiaries Non-Cumulative irredeemable Preferences shares Dividend Equalization Account Other (if any item approved by Bangladesh Bank) Sub-Total Tk. In Crore 639.39 116.85 71.13 827.37

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Deductions from Tier-1 (Core Capital) 1.11 Book value of Goodwill and value of any contingent assets which are show n as assets. 1.12 Shortfall in provisions required against classified assets. 1.13 Shortfall in provisions required against investment in shares. 1.14 Remaining deficit on account of revaluation of investments in securities afte r netting off from any other surplus on the securities. 1.15 Reciprocal crossholdings of bank capital/subordinated debt. 1.16 Any investment exceeding the approved limit under section 26(2) of Bank Company Act, 1991. 1.17 Investment in subsidiaries which are not consolidated-50% 1.18 Other if any 1.19 Sub Total 1.20 Total Eligible Tier-1 Capital (1.10-1.19) 827.37

3.4.2 Tier 2 capital Tier 2 capital called “Supplementary Capital” represents other elements which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank and consists of: i) General provision ii) Revaluation reserves iii) Revaluation reserve for fixed assets iv) Revaluation Reserve for Securities v) Revaluation reserve for equity instrument vi) All other preference shares vii) Subordinated debt

2.1 2.2 2.3 2.4 2.5 2.6 Tier-2 (Supplementary Capital) General Provision (Unclassified loans +SMA+ off Balance Sheet exposure) Assets Revaluation Reserves up to 50% Revaluation Reserves for securities up to 50% Revaluation Reserves for equity instruments up to 10% All other preference shares Subordinated debt 69.16 56.32 -

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2.7 2.8 2.9 2.10 2.11

Other (if any item approved by Bangladesh Bank) Sub-Total (2.1 to 2.7) Deductions if any Investment in subsidiaries which are not consolidated-50% Total Eligible Tier-2 Capital

126.08 126.08

3.4.3 Tier 3 capital Tier 3 capital called „Additional Supplementary Capital‟, consists of short-term subordinated debt (original maturity less than or equal to five years but greater than or equal to two years) would be solely for the purpose of meeting a proportion of the capital requirements for market risk.

3.1 Tier-3 (eligible for market risk only) Short-term subordinated debt
Bank has no Tier 3 capital.


3.5 Maintenance of Regulatory Capital: Table-4
31.12.2011 (amount in crore Tk) Quantitative Disclosure : A) Amount of Tier -1 Capital Fully Paid-up Capital/Capital Deposited with BB Statutory Reserve Retained Earning B) Amount deducted from Tier-1 Capital Goodwill Shortfall Others C) Total amount of Tier2 capital (net of deductions from Tier 2 capital) d) Total eligible capital 827.37 639.39 116.85 71.13 126.08 953.45

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3.5.1 Conditions for maintaining regulatory capital The calculation of Tier 1 capital, Tier 2 capital, and Tier 3 capital is subject to the following conditions: a) The amount of Tier 2 capital will be limited to 100% of the amount of Tier 1 capital. b) 50% of revaluation reserves for fixed assets and securities eligible for Tier 2 capital. c) 10% of revaluation reserves for equity instruments eligible for Tier 2 capital. d) Subordinated debt shall be limited to a maximum of 30% of the amount of Tier 1 capital. e) Limitation of Tier 3: A minimum of about 28.5% of market risk needs to be supported by Tier 1 capital. Supporting of Market Risk from Tier 3 capital shall be limited up to maximum of 250% of a bank’s Tier 1 capital that is available after meeting credit risk capital requirement. 3.5.2 Eligible regulatory capital In order to obtain the eligible regulatory capital for the purpose of calculating Capital Adequacy Ratio (CAR), banks are required to make following deductions from their Tier-1 capital: a) Intangible asset e.g., book value of goodwill and value of any contingent assets, etc. which are shown as assets b) Shortfall in provisions required against classified assets c) Shortfall in provisions required against investment in shares d) Remaining deficit on account of revaluation of investments in securities after netting off from any other surplus on the securities. e) Reciprocal/crossholdings of bank’s capital/subordinated debt artificially intended to inflate the capital position of banks f) Holding of equity shares in any form exceeding the approved limit under section 26(2) of Bank Company Act, 1991. The additional/unauthorized amount of holdings will be deducted at 50% from Tier 1 capital and 50% from Tier 2 capital. g) Investments in subsidiaries which are not consolidated. The normal practice is to consolidate subsidiaries for the purpose of assessing the capital adequacy of banking groups. Where this is not done, deduction is essential to prevent the multiple uses of the same capital resources in different parts of the group. The deduction for such investments will be 50% from Tier 1 capital and 50% from Tier 2 capital. The assets representing the investments in

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subsidiary companies whose capital had been deducted from that of the parent would not be included in total assets for the purposes of computing the CAR

3.6 Calculation of Capital Adequacy Ratio
In order to calculate CAR, banks are required to calculate their Risk Weighted Assets (RWA) on the basis of credit, market, and operational risks. Total RWA will be determined by multiplying the amount of capital charge for market risk and operational risk by the reciprocal of the minimum CAR and adding the resulting figures to the sum of risk weighted assets for credit risk. The CAR is then calculated by taking eligible regulatory capital as numerator and total RWA as denominator. 3.6.1 Formula for calculating Capital Adequacy Ratio: Capital Adequacy Ratio =
������������������������ 1 ������������������������������������������ +������������������������ 2 ������������������������������������������ ������������������ℎ ������������������������ ℎ������������������ ������������������������������������ 827.37+126.08 7238 .94

Capital Adequacy Ratio for the year 2011= Similarly,

= 13.17%

Capital Adequacy Ratio for the year 2010 = 9.33%

Years 2011 2010 Required CAR 10% 9% CAR Maintained 13.17% 9.33%

Table -6
Risk Weighted Assets (RWA) A. Credit Risk   B. C. On Balance Sheet Off Balance Sheet 5186.70 1396.07 414.95 241.22 7238.94 6582.78 TK In Crores

Market Risk Operational Risk

Total RWA

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Required CAR & CAR Maintained
14% 12% 10% 8% 6% 4% 2% 0% 2011 2010

Figure -2: Form the graph it can be said that the Bank has constantly maintained its capital well during the year 2010 and 2011. During these two years the bank has maintained its capital more than it required. This shows that bank has perfectly followed the rules under Basel II.

3.7 Comparative Analysis of Capital maintained throughout the year 2011 Table-6 (From pg-56, annual report 2011)
(Amount in Crore)

Particulars Capital Requirement Capital Maintained Core Capital Supplementary Capital Core Capital to RWA Supplementary Capital to RWA Risk Weighted Assets 1. Credit Risk a) On Balance Sheet b) Off Balance Sheet 2. Operation Risk 3. Market Risk Capital Adequacy Ratio Minimum Capital Requirement

31-03-2011 494.748 496.23 406.88 89.35 7.40% 1.63% 5497.20 5027.19 4015.52 1011.67 309.55 160.46 9.03% 9%

30-06-2011 587.7783 887.54 760.07 127.47 11.64% 1.95% 6530.87 6000.64 4539.36 1461.28 301.19 229.04 13.59% 10%

30-09-2011 720.833 925.04 790.14 134.9 10.96% 1.87% 7208.33 6719.04 5124.81 1594.23 271.1 218.19 12.83% 10%

31-12-2011 723.89 953.45 827.37 126.08 11.43% 1.74% 7238.94 6582.77 5186.70 1396.08 414.95 241.23 13.17% 10%

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Table-6: It may also be mentioned here that as per Basel II requirement, capital adequacy has been maintained properly to support the investment policy, risk management policy and overall growth of SIBL. From the table it is very clear that SIBL has been maintaining its capital adequacy ratio adequately enough to cope up with the requirement. Total capital has increased from Tk496.237 crore to Tk 953.45 crore (From quarter 31.12.2011 to 31.12.2011) registering an increase of 92.14%. The bank is very much proactive to cope up with the scenario and its Basel committee is well equipped to face the new challenges of capital requirements of bank at any time.

3.8 Literature Review:
Capital Adequacy: The significance of start-up and operating capital to any business cannot be over emphasized and according to the submission of many financial theorists, the term capital is capable of being a source of confusion because of the variety of meanings which can be assigned to it, Ebhodage (1991), Greuningand Poratanovic (2003), and Satchindananda (2006). To the economist, capital refers to “real” capital which is the stock of goods accumulated through production while in business and finances, it is seen as “financial capital” which in itself could sometimes mean both tangible and intangible capital; Klise(1972). On the other hand, Arogundade (1999) defines capital as the owner’s stake in business and therefore a commitment to its success. Opinion however, differs among experts in banking and finance as to what constitutes capital adequacy; for instance Nwankwo (1991) submits that the question of how much capital a bank needs to ensure the stakeholders confidence and sustain healthy operations is determined by the supervisory and regulatory authorities. Umoh (1991) noted that adequate capitalization is an important variable in business and it is more so in the business of using other people’s monies such as banking. It is further stated that insured banks must have enough capital to provide a cushion for absorbing possible losses or provide, funds for its internal needs and for expansion, as well as ensure security for depositors and the depositor insurance system. Regulators and bankers have also not reached agreement as to what level of capitalization is adequate; for instance while regulators concern themselves primarily with the safety of banks, the viability of invested funds, and stability of financial markets, sbankers generally prefer to operate with less capital, as the smaller its Social Islami Bank Limited
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equity base the greater the financial leverage. Rose (1999) buttressed Koch’s stand by stating that even a bank with a low return on assets can achieve a relatively high return on equity through heavy use of debt (leverage) and minimal use of owner’s capital. Kidwell et al (2000), on the issue of capital adequacy observed banks and regulators differ because they have different objectives. The primary goal of bank management is long term profit maximization achievable through high leverage while bank regulators are more interested in the risk of bank failures in general. Hence, bank regulators desire higher capital standards that promote bank safety.

3.9 Impact of Adoption of Basel II in Social Islami Bank Limited
As Basel II implementation started in Bangladesh from 2010, the impacts of adoption are not visible clearly yet. But, there will be some certain impacts. In the following those certain and some potential impacts are discussed. 3.9.1 Improved Risk Management and Capital Adequacy One aspect that the staunchest critics of Basel II agree to is the fact that it will tighten the risk management process, improve capital adequacy and strengthen the banking system. 3.9.2 Impact on Customers For SIBL, Basel II is an internal management exercise that does not directly affect customers. However, there has been a good deal of talk about Basel II leading to greater risk-based pricing in loan markets, as it increases the difference in capital required between risky and safer lending categories. This could lead to riskier types of debt, such as consumer finance, costing more relative to safer categories such as loan to large corporate house. From 2010, management of the Bank decided to give preference to the client rated by ECAI. It also will extend its credit towards the good rated borrower. This scenario will bar the poor rated client to avail any loan. 3.9.3 Shorter Term to maturity of lending Both the Basel I and II accords have a preference for short-term lending. This is because of the ease in exiting the investment in case the situation turns adverse. Also the interest rates on short term will also tend to be lower further incentivising such borrowings. For this

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reason, SIBL is trying to attract shorter term borrowing to get the benefits. This shall impact both the bank and ultimate borrowers because of the change in the interest rate term structure and the need for Asset and Liability Management (ALM). 3.9.4 Impact on capital flows Short Term lending will further increase the volatility of capital flows within Bangladesh, from one bank to another. If any negative event occurs at any point of the flow, people will get panicked. There would be a tendency to press the panic button at the smallest change in the situation, further deteriorating it, leading to crisis. 3.9.5 Higher Interest Costs Implementation of Basel II will force banks like Social Islami Bank to charge more interest to risky customer as it has to keep some capital for that loan. On the other hand, there are few good customers in Bangladesh, so every bank will want them as their customer. So, competition will increase and interest rate will fall for the well rated borrower. 3.9.6 Competitive Advantage of Corporate Borrowers Corporate Banking is the main operating business model of Social Islami Bank Limited. But, in Basel II advantage has been given to corporate borrowers with good rating. As the good clients number is limited, and competition is huge. SIBL may lose some of its customers. 3.9.7 Impact on Companies The Shortened term funding of banks will find its way to the balance sheets of companies because of the need for matching maturities. This would impact output levels in corporate and skew the capital structure in favor of short term borrowings and working capital finance. The Liquidity position and the companies’ ability to globalize would be hampered by this difficulty in raising long-term capital. 3.9.8 The Vicious Circle of Curtailment of Credit to Developing Countries This is countrywide impact which will hit all the financial organization in Bangladesh. Developing countries like Bangladesh usually has lower sovereign rating. The lower ratings will reduce the availability of funds in the developing countries. This has the potential to deteriorate the situation in these countries leading to further recession. The reduced market

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access and high costs of funding will further impact the ratings of these countries leading to a vicious circle with each aspect feeding the other in a downward spiral. In brief, these are some of the impacts that are felt and will be felt in future as SIBL and other banks adopt Basel II.

3.10 Risk Management:
The management of Social Islami Bank acknowledges that risk is an integral part of business and attaches due importance to various risks involved in the banking business. The Board of Directors of the bank has endorsed the views of the management and instructed to implement in line with the directives of Bangladesh Bank. The bank has also taken initiatives to structure the banking activities in line with Bangladesh Bank’s risk management guidelines. The risk management of the bank covers a wide spectrum of risk issues and the six core risk areas of banking i.e. investment risk, foreign exchange risk, internal control & compliance risk, money laundering risk, ICT risk and asset liability management risk have already been taken care of by SIBL. The bank is much concerned about the business risk and its proper management so that the risk and return could be optimizes and management would pay special attention to reduce the risk to an acceptable level apart from prudent control over the Bank’s assets. These issues are periodically reviewed and examined by the Audit & Inspection Department and Board Audit Cell as well as by the Senior Executive of the Bank. According to Basel II stet, risk management is also a part of maintaining adequate capital. Since market risk and operational risk are a part of risks involved in banking operation as well as Basel II accord, risk management plays a key role in maintaining mandatory capital adequacy. The bank management has taken it very seriously and established separate team to manage the risks.

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History of Paid-Up Capital (From pg-131, annual report 2011)
Years Declaration No. of Share FV per Share (Taka) 1995 1996 1997 6.43%Bonus issue for the year 1996 1998 1999 2000 Right Share Issued Placement Initial Public Offer 2001 20% bonus Issue (Declared in the year 2004) 2002 25% Bonus Issue (Declared in the year 2004) 2003 50% Bonus Issue(Declared in the year 2004) 2004 Bonus Issue( For the year 2001,2002,2003) 2005 2006 2007 2008 1:1 Right Share 17% Bonus Issue for the year 2007 2009 10% Bonus Issue for the year 2008 1:1 Right Share 2010 11% Bonus Issue for the year 2009 2011 14% Bonus Issue for the year 2010 1:1 Right Share 298,781,575 10 639,392,570 2,987,815,750 6,393,925,700 41,829,420 10 340,610,995 418,294,200 3,406,109,950 12,508,587 2,960,899 100 100 26,917,259 29,878,158 1,250,858,700 296,089,850 2,691,725,900 2,987,85,750 1,309,879 100 14,408,672 130,987,900 1,440,867,200 5,345,550 1,903,243 100 100 585,000 585,000 11,195,550 13,098,793 534,555,000 190,324,300 585,000,000 585,000,000 1,119,555,000 1,309,879,300 325,000 1,000 585,000 325,000,000 585,000,000 260,000 260,000,000 260,000 260,000,000 74,000 50,000 10,000 1,000 1,000 1,000 126,000 200,000 250,000 260,000 260,000 74,000 50,000,000 10,000,000 126,000,000 200,000,000 250,000,000 260,000,000 260,000,000 Initial Capital 118,380 7,620 1,000 1,000 118,380 118,380 126,000 Cumulative no. Of Shares Value of issued Capital for the year (Taka) 118,380,000 7,620000 118,380,000 118,380,000 126,000,000 Cumulative of Capital (Taka)

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3.11 Capital Management:
The bank started its journey in the year 1995 with a paid up capital of Taka 118.36 million and thereafter within 16 years it has built a total capital of Taka 9,534.52 million using the external and internal sources. The table given below is the last 5 years history of SIBL’s capital journey efforts: Year Paid up Capital Total Capital Growth (over the previous year) 2007 2008 2009 2010 2011 1,119.55 1,309.88 2,691.72 2,987.81 6,393.93 1,870.94 2,168.22 3,914.62 4,678.56 9,534.52 65.86% 15.89% 80.54% 19.52% 103.79% Internal & external (right issue) generation Internal generation Internal & external (right issue) generation Internal generation Internal & external (right issue) generation Source of Capital

(From pg-30, annual report 2011)

Capital Structure of SIBL as on Dec 2011
6% 7% 8% Paid up Capital Statutory Reserve Retained Earnings 12% 67% 1% Provision on Unclassified Investment 50% of Revaluation Surplus

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3.12 Recommendation:
As SIBL has taken all the steps to implement Basel II and maintained it in a proper way, it is little difficult to recommend. But still I have come up with the following recommendation:  SIBL should look for comprehensive IT solution for Basel II. Bangladesh will go to implement the foundation IRB approach in 2012 and this approach requires extensive Management Information System.  The Bank should recalculate its lending rate on a periodic basis to cope with changing lending scenario caused by Basel II.  The Bank should introduce Risk Based Pricing. For this, Credit officer must be skilled enough to understand the procedure.  As there are few good customers in the market, extra attention should be given to them as intense competition is taking place.  The Bank should concentrate more on short term lending as it charges less capital according to Basel II.  To be fully compliant with Basel II requirements, the bank should develop historical databases on probability of default (PD) and loss given default (LGD). Such databases will enable the bank to compute expected loss (EL) from any new credit approval.  For credit risk mitigation purpose, the collateral accepted by Basel II only, should be taken as security.  An investigative review should be carried out on significant cases. The review should enable the bank to understand better how problem credits and losses develop and identify weaknesses in the banking institution’s existing credit-granting process and monitoring process.

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Reference: Annual Report of Social Islami Bank Ltd 2011

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List of banks in bangladesh
Bangladesh Bank

Al Baraka Bank Bangladesh Ltd

American Express Bank Ltd

ANZ Bank

Arab Bangladesh Bank Ltd

Agrani Bank

Bangladesh House Building Finance Corporation

Bangladesh Shilpa Bank Bangladesh Krishi Bank

Bangladesh Shilpa Rin Sangstha

Bank Of Nova Scotia

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Bank Of Small Industries & Commerce Bangladesh Limited

Citi Bank

City Bank Limited

Dhaka Bank Limited Dutch-Bangla Bank Limited Eastern Bank Ltd

Grameen Bank

Habib Bank Lid

Commercial Bank

Hongkong And Shanghai Banking Corporation Ltd Industrial Promotion And Development Company Of Bangladesh Ltd International Finance Investment And Commerce Bank Ltd

Brac Bank

Social Islami Bank Limited

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Islami Bank Bangladesh Ltd

Janata Bank

National Bank Ltd

National Bank Of Pakistan

Prime Bank Ltd

Pubali Bank Ltd

Purbani Bank Ltd

Rajshahi Krishi Unnayan Bank

Sonali Bank

Standard Chartered Bank

State Bank Of India

United Commercial Bank Ltd

Uttara Bank Ltd

Social Islami Bank Limited

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Woori Bank Bank Alfalah Limited

Mutual Trust Bank Limited

Exim Bank

ICB Islamic Bank Limited

First Security Islami Bank Ltd.

Al-Arafah Islami Bank Limited

Shahjalal Islamic Bank Limited

NCC Bank Limited

Mercantile Bank Limited

Social Islami Bank Limited

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Jamuna Bank Limited

Rupali Bank Limited

Bank Asia Limited

One Bank Standard Bank

Social Islami Bank Limited

Page 40

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...APPROVAL LETTER TO WHOM IT MAY CONCERN ACKNOWLEDGMENT DECLARATION I hereby declare that the work reported in this project work on “Nepal Investment Bank Limited.” submitted to Thames International College, Tribhuvan University is my original work done in the form of partial requirement for the degree of Bachelor of Information Management (BIM). It has not been previously submitted to any other University or any other examination(s) nor has been duplicated from any other reports. ………………………………………. Laju Shrestha Exam Roll No:2763/10 TU Registration No: 7-2-450-106-2010 Contents APPROVAL LETTER i TO WHOM IT MAY CONCERN ii ACKNOWLEDGMENT iii DECLARATION iv LIST OF TABLES vii LIST OF FIGURES viii ABBREVIATION ix CHAPTER: 1 1 INTRODUCTION 1 1.1Background 1 1.2Objective of the Internship 2 1.3Methodology 3 1.3.1Organization Selection 3 1.3.2 Sources of Data 3 1.3.3 Placement 4 1.3.4Duration of field work 4 1.3.5 Activities performed in various department 5 CHAPTER: 2 6 INTRODUCTION TO THE BANKING INDUSTRY 6 2.1 Introduction to Banking 6 2.2 Nature and Importance of Banks 6 2.3 History of Banking 7 2.4 History of Banking in Nepal 8 2.5 Types of Banks 9 2.6 Commercial Bank 9 2.6.1 Functions of Commercial Bank 10 CHAPTER: 3 11 INTRODUCTION TO THE ORGANIZATION 11 3.1 Introduction of NIBL 11 3.2 Vision 11 3.3 Mission 11 3.4 Background 12 3.5 Capital Structure of NIBL 12 3.6 Organization......

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