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Gohar Nouroze internship report MCB Bank,RMG Dept.

Gohar Nouroze internship report MCB Bank,RMG Dept.



Internsip report on MCB bank, Risk Management Report

Internsip report on MCB bank, Risk Management Report



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    Gohar Nouroze internship report MCB Bank,RMG Dept. Gohar Nouroze internship report MCB Bank,RMG Dept. Document Transcript

    • University of Central Punjab . Internship Report on MCB, RMG Dept. Course: B S Hons. Applied Accounting Internship Report: MCB Bank Ltd Submitted by: Gohar Nouroze Uni ID: L1S10BSAA2018 Submission Date: 14 September 2011
    • Preface:It is the requirement of the Bs Applied Accounting course University of Central Punjab, thatall students of BSAA have to spend Six weeks in any organization to get practical exposureand to get familiarized with the ways to live in the organizational environment which isdramatically different from the educational environment. That six weeks period called“Internship Period “, if spent properly and sincerely, enables the students to be moreconfident, more knowledgeable, more responsible and, above all, more committed to its workin the practical field. I have also been assigned to do internship of six weeks period in Alfalahbank , Main Branch Gujranwala. It has enabled me to understand the practical scenario and sharpen our decision makingpower and utilizing the resources in an effective manner, so that our resources generatemaximum profit.In preparing this report, I have put all of my best efforts and tried my level best to givemaximum knowledge. Despite of my all the coherent efforts, I do believe that there willalways be a room for improvement in the efforts of learner like me.Gohar Nouroze 2
    • AcknowledgementPerson is not a perfect in all the contexts of his life, He has a limited mind and mind thinkingapproaches. It is the guidance from Almighty Allah that shows the man light in the darknessand the person find his way in the light. Without this helping light, person is nothing but ahelpless creation.The teaching of the Holy Prophet Muhammad (PBUH) were also the continuous source ofguidance for me especially his order of getting knowledge and fulfilling once duty honestlywas key motivation force for me.I also want to show my gratitude to my loving parents and humble teachers who make meable to be at this position. and as they appreciate me to do this.And I would like to thanks Mr. Rizwan Chughtai , Mr. Shahid Hassan, Mr. Wasif Tahir, Mr.Farhaj Qazi, Mr. Shahbaz Bokhari and Mr. Bilal Tahir especially as they helped meremarkably for this project. 3
    • EXECUTIVE SUMMARYThis term report is an essential part of the course Organizational behavior because throughthis, students come to know the real difference between theory and practice and they are alsointroduced to the outside business world. An important requirement of this study program isto compile a report about the activities of that organization in which the student has studiedthe organization behavior.I survey organizational behavior in MCB BANK LIMITED. This report provided me greatopportunity to equip myself with knowledge, techniques, application and tools used in anorganization.The report covers various features of knowledge. It starts with the brief history of Bank,covers current status, mission statement, vision statement, the bank position today and in thepast decade, hierarchy etc.The major portion of this report explains the activities of Risk Management and what is riskand what is Market risk Management and my learning experience elaborates how much thesevisits were useful for me.Concluding the report there are certain recommendations and suggestions for the bank inorder to have improvements.The source of information for the preparation of report includes the written notes extractsfrom banking literature and verbal discussion with bank officials.I hope this report will help in understanding various aspects and features of MCB BANKLTD. And will be equally important for business administration students and persons makingfuture banking. 4
    • TABLE OF CONTENTSDESCRIPTION PAGE #Organizational Background-----------------------------------------7Mission & Vision statement----------------------------------------9Awards & Accolades---------------------------------------------------10Core Values---------------------------------------------------------------11Objectives of MCB------------------------------------------------------12Organization Profile---------------------------------------------------13Management Level-----------------------------------------------------13Board of Directors------------------------------------------------------14Organizational Hierarchy of MCB---------------------------------15Organizational Setup of MCB---------------------------------------16Branch Network----------------------------------------------------------17Pattern of Share Holdings--------------------------------------------18Organizational Structure of MCB----------------------------------19Products of MCB Bank ------------------------------------------------20Policies----------------------------------------------------------------------25Risk Management Group----------------------------------------------29Managing credit risk----------------------------------------------------31Managing Market Risk-------------------------------------------------34Managing Liquidity Risk----------------------------------------------38DESCRIPTION PAGE # 5
    • Managing Operational Risk----------------------------------------40Financial Analysis of MCB-----------------------------------------42Ratio Analysis of MCB-----------------------------------------------46SWOT Analysis---------------------------------------------------------49PEST Analysis and Environmental Scan----------------------52Conclusion---------------------------------------------------------------54Suggestion---------------------------------------------------------------55Glossary-------------------------------------------------------------------57References---------------------------------------------------------------59Copy Right---------------------------------------------------------------60 ORGANIZATIONAL BACKGROUNDBrief History of MCB BANK LIMITED 6
    • Before separation of Indo Pak, the need for more Muslim banks was felt. And Muslimshaving strong financial capacity were thinking to invest in this sector as well. This was theidea which provided the way for setting up MUSLIM COMMERCIAL BANK Ltd known asMCB. This was the third Muslim bank in the subcontinent.HistoryThis bank was incorporated under companies’ act 1913 on 9th July, 1947 (just beforepartition) at Calcutta. But due to changing scenario of the region, the certificate ofincorporation was issued on 17th August, 1948 with a delay of almost 1 year; the certificatewas issued at Chitagong. The first Head office of the company was established at Dacca andMr. G.M. Adamjee was appointed its first chairman. It was incorporated with an authorizedcapital of Rs. 15 million.After some time the registered office of the company was shifted to Karachi on August 23rd,1956 through a special resolution, now recently the Head office of MCB has been transferredto Islamabad in July, 1999 and now Head office is termed as Principle Office.This institute was nationalized with other on January 1st, 1974. At that time it had 506branches and deposits amounting to Rs. 1,640 million.PRIVATIZATIONWhen privatization policy was announced in 1990, MCB was the first to be privatized uponrecommendations of World Bank and IMF. The reason for this choice was the betterprofitability condition of the organization and less risky credit portfolio which made it a goodchoice for investors. On April 8th, 1991, the management control was handed over toNational Group (the highest bidders). Initially only 26% of shares were sold to private sectorat Rs. 56 per share.AFTER PRIVATIZATIONTen years after privatization, MCB is now in a consolidation stage designed to lock in thegains made in recent years and prepare the groundwork for future growth. The bank has 7
    • restructured its asset portfolio and rationalized the cost structure in order to remain a low costproducer.After privatization, the growth in every department of the bank has been observed. Followingare some key developments: • Launching of different deposit schemes to increase saving level. • Increased participation on foreign trade. • Betterment of branches and staff service level. • Introduction of Rupee Traveler Cheques & Photo Credit Card for the first time in Pakistan.MCB BANK TODAY:MCB today, represents a bank that has grown with time and experience. A major financialinstitution, in scope and size, it symbolizes a fully growing tree evergreen, strong, and firmlyrooted. MCB is one of the leading banks of Pakistan with a deposit base of about Rs. 280billion and total assets of around Rs.300 billion.The Bank has a customer base of approximately 4 million, a nationwide distribution networkof over 1,000 branches and over 450 ATMs in the market.During the last fifteen years, the Bank has concentrated on growth through improving servicequality, investment in technology and people, utilizing its extensive branch network,developing a large and stable deposit base.SOCIAL SECTOR:The bank activity participating in the Prime Minister self-employment Scheme. Theapplication received from various applicants is being processed on merit and disposed off asquickly as possible. MISSION & VISION STATEMENTVision Statement“To be the leading financial provider, partnering with our customers for a more prosperous &secure future” 8
    • Mission Statement“We are a team of committed professionals, providing innovative and efficient financial solutions tocreate and nurture long-term relationships with our customers. In doing so, we ensure that ourshareholders can invest with confidence in us” ] AWARDS & ACCOLADES MCB Bank has won many awards, which is a clear proof of its good performance. It has won Euro money awards and Asia Money awards. 9
    • ► Euro money Awards ● Best Bank Award 2008 • Best Bank in Pakistan Award 2006 • Best Bank in Pakistan Award 2005 • Best Bank in Pakistan Award 2004 • Best Bank in Pakistan Award 2003 • Euro money Award 2003 for the "Best Bank in Pakistan". • Best Bank in Pakistan Award 2001 • Best Domestic Bank Award 2000► Asia Money Awards • The Best Domestic Commercial Bank Award 2005 • The Best Domestic Commercial Bank Award 2004 CORE VALUESINTEGRITY:We are the trustees of public funds and serve our community with integrity. We believe inbeing the best at always doing the right thing. We deliver on our responsibilities andcommitments to our customers as well as our colleagues. 10
    • RESPECTWe respect our customer’s values, beliefs, culture and history. We value the equality ofgender and diversity of experience and education that our employees bring with them. Wecreate an environment where each individual is enabled to succeed.EXCELLENCE:We take personal responsibility for our role as leaders in the pursuit of excellence. We are aperformance driven, result oriented organization where merit is the only criterion for reward.CUSTOMER CENTRICITY:Our customers are at the heart of everything we do. We thrive on the challenge ofunderstanding their needs and aspirations, both realized and unrealized. We make every effortto exceed customer expectations through superior services and solutions.INNOVATION:We encourage and reward people who challenge the status quo and think beyond theboundaries of the conventional. Our teams work together for the smooth and efficientimplementation of ideas and initiatives. OBJECTIVES OF MCBThe following are the objectives of MCB Bank Limited. a) CREATING AND MANAGING VALUES:The first objective of MCB Bank limited is to create and manage the values, which is one ofthe back bones of the objective of any well organized and managed organization. 11
    • b) HUMAN CAPITAL:The second objective of MCB Bank is to take care of the Human capital, which is a necessarything for the development and prosperity of any well established organization. c) BEST PLACE TO WORK:The third objective of MCB Bank Limited is to make it a place, which is much feasible andcomfortable for employees of the bank. The MCB is always conscious in developing suchplace where employees of the bank feel easiness. d) TECHNOLOGY:The forth objective of MCB Bank Limited is to bring new and latest technology in theoperations of the bank. AT MCB, technology has a direct relation with your needs; it is amean for creating value and convenience for the customer. Over the last few years MCB hasinvested heavily into strengthening its technology backbone. Today it is leading the way inbanking technology and setting new standards for the banking industry, penetrating into thelocal market, listening to the needs of the people and educating them of simple financialproducts and services that create both value and convenience. MCB’s strength lies inproviding a technological base at the grass roots level of the society with a challenge toeducate and assimilate such systems across vast cultural and economic backgrounds. Organization Profile:Name of Organization: MCB House.Chairman: Main Mohammad ManshaLocation: 15-Main Jail Road, Gulberg Lahore. 12
    • UAN: (0)42111000111Website: www.mcb.com.pk MANAGEMENT LEVELThe organization chart within a department and in different offices is as follows:Divisional Heads ………..…………………… Head OfficeRegional Head (EVP) ………..…………………… Regional OfficeZonal Head (VP) ………..…………………… Zonal OfficeBranch Manager ………..…………………… Branch(VP, AVP, GRADE 1, 2, 3) Board of DirectorsMian Mohammad Mansha ChairmanMr. S. M. Muneer Vice ChairmanMr. M.U.A. Usmani President / CEOMr. Tariq Rafi Member 13
    • Mr. Shahzad Saleem MemberMr. Sarmad Amin MemberDr. Muhammad Yaqub MemberMian Raza Mansha MemberDato Mohammed Hussein MemberMr. Aftab Ahmad Khan MemberMr. Abdul Farid Bin Alias MemberMian Umer Mansha MemberMr. Muhammad Ali Zeb Member ORGANIZATIONAL HIERARCHY OF MCB PRESIDENT SENIOR EXECUTIVE VICE PRESIDENT EXECUTIVE VICE PRESIDENT 14
    • BRANCH NETWORKThe following is the Branch Network of MCB Bank Limited. Sector wise position of circle is as follows; Consumer Sector 810 Branches 16
    • Main Lahore 1 Branch Pattern of Share HoldingsDescription Shareholding PercentageDirectors, CEO and children 57,412,411 7.5521 17
    • Associated Companies 379,123,038 49.8705NIT & ICP 131,567 0.0173Banks, DFI & NBFI 1,582,229 0.2081Insurance Companies 50,076,792 6.5872Modarabas & Mutual Funds 6,677,686 0.8784General Public (Local) 110,658,668 14.5562General Public (Foreign) 2,770,691 0.3645Others 29,408,417 3.8684Foreign Companies 122,373,480 16.0972Company Total 760,214,979 100.00 ORGANIZATIONAL STRUCTURE OF MCBAs MCB is a banking company listed in stock exchange therefore it follows all the legalitieswhich are imposed by concerned statutes Mr. Muhammad Mansha is Chairman & ChiefExecutive of the company with a team of 10 directors and 1 vice chairman to help in thebusiness control and strategy making for the company.Operational Management of the bank is being handled by a team of 10 professionals. Thisteam is also headed by Mr. Muhammad Mansha. The different operational departments areConsumer Banking & IT division, financial division & Inter branch division, Bankingoperations division, HR & Legal division, financial control & Audit division, Creditmanagement division, Commercial Banking division, Corporate Banking division, Treasurymanagement & FX Group and lastly Special Assets Management (SAM) Group. 18
    • For effective handling of branches, it has been categorized into three segments with differentpeople handling each category. These categories are:a) Corporate Bankingb) Commercial Bankingc) Consumer BankingCorporate Banking:These are branches which have an exposure of over Rs. 100 million. Usually includesmultinational & public sector companies.Commercial Banking:The branches which has a credit exposure of less than Rs. 100 million but having a creditportfolio of more than Rs. 20 million (excluding staff loans)Usually branches in large markets and commercial areas come under this category.Consumer Banking:These are the branches which have exposure up to Rs. 20 million and these include all thebranches which are neither corporate nor commercial branches. PRODUCTS OF MCB BANK 1. MCB Rupee Traveler ChequesMCB Rupee Travelers Cheques are as good as cash, in-factbetter. Better because with Rupee Travelers Cheques you havethe power to purchase and a feeling of security that should you lose them, you will get arefund. 19
    • MCB Rupee Travelers Cheques are accepted at major shops, travel agents, hotels, businessestablishments and MCB branches all over Pakistan. You dont have to be an MCB accountholder to buy the Rupee Traveler Cheques. Anybody can purchase them. Its a safe andconvenient way to conduct everyday business. At a time when thefts and robberies are on theincrease, you are better off carrying Travelers Cheques rather than money. 2. Mahnama Khushali SchemeA 5-year fixed Deposit Scheme, targeted to persons with small savings who would desire aregular monthly return on their investment. 3. MCB Khushali Bachat AccountSalient Features • 8% rate of return per annum. • Returns calculated on daily. • Average balance and paid half yearly. • Introduced first time in Pakistan. • The facility of helping account holders pays utility bills (electricity, telephone and gas) through their account. No queues. No delays. 4. Capital Growth Certificate SchemeFor long term depositors under which the amountdeposited almost doubles at the end of 5 years. For thescheme, the minimum amount of deposits is Rs. 10000 while there is no maximum limit. Incase of premature encashment of the certificate, the depositor will profit at the same rates asthat of PL Saving Account. 5. Fund Management Scheme 20
    • This scheme is offered to corporate and customers and is aimed at providing better rate ofreturn up to 15% per annum. One of the objectives of the scheme is to develop secondarymarket for Government Securities. 6. Fax PressThis product was first of its kind introduced by using modemtechnology of The Fax Machine. It facilitates speedy transfer of fundswithin Pakistan. The service guarantees transfer of from one city toanother, within an hour. 7. Utility Bill CollectionWith the aim of extending this service to wider range of customers, thenumber of MCB branches collecting Utility Bills more than 900. 8. MCB Mobile BankingAt the forefront of technological excellence, MCB proudly introduces MCB MOBILEBANKING. The convenience of accessing account balance information and mini statementswhenever want or wherever may need them, with comfort and peace of mind.MCB Mobile Banking service is available to all MCB ATM cardholders, 24 hours - 365 days. MOBILE BANKING AT A GLANCE MCB Mobile Banking gives easy and quick access to account(s) at a time find convenient, including all holidays. • With MCB Mobile Banking Check balance View the last 4 transactions of your MCB account(s). • Banking at fingertipsDial in anytime to get information regarding balance and mini statements. 21
    • 9. MCB Islamic Banking ServicesIslamic banking services through exclusive units/branches offering a range of liability andasset based Sharia compliant products like Musharika, Murabaha, Ijara and Istasana. 10. MCB Car CashCar financing and leasing at competitive rates with flexible options Car cash finances bothsemi-commercial and non-commercial vehicles for personal and business use. 11. MCB LockerBest protection for valuable things. Lockers of different capacities are available in thebranches but only for valued customers. 12. MCB Master CardTHE FUTURE OF MONEY :Since the beginning of time, people have tried to find more convenient ways to pay, from goldto paper money and checks. Today, money is moving away from distinct hard currencies andtowards universal payment products that transcend national borders, time zones, and, with theInternet, even physical space.Plastic or "virtual" money, credit, debit, and electronic cash products, inevitably will displacecash and checks as the money of the future. • Cash Advance Facilities Available in Pakistan and worldwide with a network of over 1,000 branches and a team of dedicated professionals, MCB is Pakistan’s largest private sector commercial bank. Our Consumer Banking provides customers with innovative saving schemes, products and services. Our ATM network is the largest in Pakistan and our Pak Rupee Travelers Cheques are market leaders. We were the first to introduce the photo card with the introduction of the MasterCard.Our Corporate Banking ensures assistance from a dedicated team of professional financialadvisors for underwriting, project finance or corporate advisory services.When it comes to banking practices, you can depend on us. We’ve been around for over fiftyyears. 22
    • 13. MCB Smart Card MCB now brings you MCB SmartCard -a secure and convenient instrument of paymentwith unmatched functionalities. It provides 24-hour direct access to your bank accountThe convenience and flexibility of MCB SmartCard will help live a smarter life. It not onlyhelps you manage your expenses, but also avoids undue interest on your day to day credit cardtransactions.Your balance is always within your reach and you spend accordingly.MCB is the only bank to introduce a debit card that gives the option to choose from domesticand international card for local and global usage respectively 14. Remit ExpressFastest to Pakistan Anywhere in Pakistan.Fastest way of getting your money across Pakistan. RemitExpress offers low cost remittance from U.A.E. and SaudiArabia. Your relatives, friends or business associatesreceive drafts within 72 hours. MCB Remit Express has been specifically designed to meetthe needs of the expatriate Pakistani community residing in the Gulf countries. 15. MCB Pyara GharMCB gives dream home at the lowest and best possiblemark-up rates. You can choose either one of our twomark-up rate options- fixed or variable.Early repayment option tailor-made to allow makingpartial prepayments at dates that suit. 16. MCB VirtualMCB Virtual provides the continence of banking on internet. Whether we are at home, inoffice or doing travel. Log on at www.mcb.com.pk and enjoy 24 hours access of all youraccounts for the largest array of service. 17. MCB Business SarmayaMCB Business Sarmaya is a running finance against your residentialproperty. It offers running finance up to 20 millions with lowmarkup. 23
    • 18. MCB Car 4 UMCB car 4 u auto finance is a power move that gets you not only acar of your own choice but leads you best in life. It is affordable withcompetitive markup, flexible conditioning and easy processing andabove all no hidden cost. ! NEWLY LAUNCHED PRODUCTNow a day MCB is offering a new product called as “SARMAYA MEHFOOZ FUND”.This fund is valid up-till 17th April, 2010. 9.5% profit ratio has been allocated for this fund.this is a one year and 1 month investment (13 months). And no tax would be deducted on thisinvestment. For example if a person deposited 10,000,00 than he will get Rs.95000 profit +his principle amount after completing 13 months. Policies: Internship Policy: MCB is the bank that serves all type of customers and makes its policies according to their needs and demands here the MCB has the policy to serve the students that is six weeks internship. MCB has no gender bias For the selection of the employee MCB focus on merit rather than gender. There is no any kind of discrimination on the basis of male or female, a person having the skills and knowledge and is perfect of that particular job can be selected as the employee. 24
    • Opening account policy Prior to establishing a relationship with new customer MCB obtains basic information i.e. business, source of income, expected level of activity in the account and reasons for opening the account. Training of employees MCB has the program through which all the employees of the bank get proper training and then work for the achieving the goals. Revenue Recognition MCB recognized its revenue on accrual basis. For example if MCB invest in some different securities and entitled for the profit yet not received, the profit is recorded as when it earned not when it received.Investments Policy MCB also invest its money other than the advances, while investing in the securitiesMCB has the following policy to invest in a) Held for trading b) Held to maturity In the light SBP regulations quoted securities are shown at market values and any changes arising are taken to profit and loss account only upon actual realization. 25
    • RISK MANAGEMENT The bank is primarily subject to interest rate, credit and currency risks. The bank hasdesignated and implemented a frame work of controls to identify, monitor and manage theserisks are as followMCB’s Competitive Strategies To be competitive the Bank has further reinforced its position in theConsumer banking area by streamlining and re-launching the consumer financing productsand introducing more convenience based solutions. With the re-launch of auto finance andhouse finance products, the Bank pushed the products with full thrust. The Bank has alsolaunched a running finance facility against mortgage of property. Technology continued to play an important role in improving and expanding productofferings. The Bank introduced more IT based products to cater to the changing lifestyles andneeds of the customers. MCB Virtual-Internet Banking was launched with wide ranging banking solutions forthe customers ranging from individual to corporate customers and it has become the mostpreferred Internet banking solution in the country. MCB also had the privilege of being the first Bank in Pakistan to launch thecomprehensive bill payment facility through its alternate delivery channels which includeInternet Banking, ATMs and MCB Call Centre, currently with six payment partners.Similarly, the Bank also took initiatives to increase the usage of debit facility. To providetimely and updated information, MCB has also provided a new look to its website which isuser friendly and considerably easy to browse. The Islamic Banking initiative has been very successful in attracting new customer,both individuals and companies. Similarly, those relationships, which were confined only tocurrent account facility, have grown into stronger business relationships. The branch networkwas expanded to Lahore and Multan during the last year and recently been extended toHyderabad and Faisalabad. The Bank plans to further expand its Islamic Banking branchnetwork to other metropolitan areas and also to introduce new sharia compliant bankingsolutions to a wider range of customers for satisfying their individual and business needs. 26
    • Some wide-ranging new strategic initiatives were also taken up which will beimportant for the Bank in years to come. A private company has been formed in Hong Kong(fully owned subsidiary of MCB) in partnership with Standard Chartered Bank, handling tradetransactions of select countries in the Asia-Pacific region. It is projected to earn US$ 1 millionin its first year of operations. To increase its international presence, the Bank will be openingits representative office in Dubai and entering into major strategic alliances with banks in theUAE/ especially for marketing our consumer banking products to non-resident Pakistanis. Furthermore, feasibility is also being carried out for entering other internationalmarkets. MCBs operations continued to be streamlined with focus on rationalization ofexpenses, re-alignment of back-end processing to increase productivity, enhancement ofcustomer service standards, process efficiency and controls. The Bank has taken the lead inintroducing the innovative concept of centralizing Trade Services in the country by providingcentralized foreign trade services to branches with a view to improve efficiency, expertise andreduce delivery cost. Management of Human Resources has been one of our core focus areas. MCB iscommitted towards attracting, retaining and motivating outstanding people. Challenge forMCB is to provide an environment in which employees can better realize their potential. TheBank introduced reward for performance where high potential officers were identified andrewarded accordingly. In view of the competitive environment, the Bank is focusing onperformance and introducing a more robust performance management system. MCB is also strongly committed to training its staff at all levels. The Bank will also beimplementing the full suite of the latest version of SYMBOLS Version 8. MCB Bank will runSYMBOLS E-Finance modules to deliver personalized services to its customers over multipledelivery channels, while SYMBOLS Enterprise Operations Center will serve as its corebanking transaction-processing engine. By implementing SYMBOLS, MCB Bank aims toraise the level of its customer service and its time to market in new product offerings for itsthree core banking businesses in Corporate, Commercial and Consumer Banking – retainingits market leadership as Pakistans progressive Bank. 27
    • Summary: MCB has the policy to serve the students that is six weeks internship. MCB focus onmerit rather than gender. To be competitive the Bank has further reinforced its position in the Consumer banking area by streamlining and re-launching the consumer financingproducts and introducing more convenience based solutions. RISK MANAGEMENT GROUPRISK:Risks are usually defined by the adverse impact on profitability of several distinct sources ofuncertainty. While the types and degree of risks an organization may be exposed to dependupon a number of factors such as its size, complexity business activities, volume etc. it isbelieved that generally the banks face credit, market, liquidity, operational, compliance andreputational risks. Before reaching these risk categories, given below are some basics aboutrisk management and some guiding principles to manage risks in banking organization.RISK MANAGEMENT: 28
    • Risk Management is a discipline at the core of every financial institution and encompasses allthe activities that affect its risk profile. It involves identification, measurement, monitoringand controlling risks to ensure thata) The individuals who take or manage risks clearly understand it.b) The organization’s Risk exposure is within the limits established by Boardof Directors.c) Risk taking Decisions are in line with the business strategy and objectivesset by BOD.d) The expected payoffs compensate for the risks takene) Risk taking decisions are explicit and clear.f) Sufficient capital as a buffer is available to take riskThe acceptance and management of financial risk is inherent to the business of banking andbanks’ roles as financial intermediaries. Risk management as commonly perceived does notmean minimizing risk; rather the goal of risk management is to optimize risk-reward trade-off. Notwithstanding the fact that banks are in the business of taking risk, it should berecognized that an institution need not engage in business in a manner that unnecessarilyimposes risk upon it: nor it should absorb risk that can be transferred to other participants.Rather it should accept those risks that are uniquely part of thearray of bank’s services.Different hierarchy levels:In every financial institution, risk management activities broadly take placesimultaneously at following different hierarchy levels.. a) Strategic level: It encompasses risk management functions performed by senior management and BOD. Forinstance definition of risks, ascertaining institutions risk appetite, formulating strategy andpolicies for managing risks and establish adequate systems and controls to ensure that overallrisk remain within acceptable level and the reward compensate for the risk taken. b) Macro Level: It encompasses risk management within a business area or across business lines. Generallythe risk management activities performed by middle management or units devoted to riskreviews fall into this category. c) Micro Level: It involves ‘On-the-line’ risk management where risks are actually created. This is the riskmanagement activities performed by individuals who take risk on organization’s behalf suchas front office and loan origination functions. The risk management in those areas is confinedto following operational procedures and guidelines set by management.Board and senior Management oversight: 29
    • To be effective, the concern and tone for risk management must start at the top. While theoverall responsibility of risk management rests with the BOD, it is the duty of seniormanagement to transform strategic direction set by board in the shape of policies andprocedures and to institute an effectivehierarchy to execute and implement those policies. To ensure that the policies are consistentwith the risk tolerances of shareholders the same should be approved from board.Risk Management framework:A risk management framework encompasses the scope of risks to be managed, theprocess/systems and procedures to manage risk and the roles and responsibilities ofindividuals involved in risk management. The framework should be comprehensive enough tocapture all risks a bank is exposed to and have flexibility to accommodate any change inbusiness activities.Integration of Risk Management:Risks must not be viewed and assessed in isolation, not only because a single transactionmight have a number of risks but also one type of risk can trigger other risks. Sinceinteraction of various risks could result in diminution or increase in risk, the risk managementprocess should recognize and reflect risk interactions in all business activities as appropriate.While assessing and managing risk the management should have an overall view of risks theinstitution is exposed to. This requires having a structure in place to look at riskinterrelationships across the organization.Business Line Accountability:In every banking organization there are people who are dedicated to risk managementactivities, such as risk review, internal audit etc. It must not be construed that riskmanagement is something to be performed by a few individuals or a department. Businesslines are equally responsible for the risks they are taking. Because line personnel, more thananyone e lse, understand the risks of the business, such a lack of accountability can lead toproblems.Independent review:One of the most important aspects in risk management philosophy is to make sure that thosewho take or accept risk on behalf of the institution are not the ones who measure, monitor andevaluate the risks. Again the managerial structure and hierarchy of risk review function mayvary across banks depending upon their size and nature of the business, the key isindependence. To be effective the review functions should have sufficient authority, expertiseand corporate stature so that the identification and reporting of their findings could beaccomplished without any hindrance. The findings of their reviewsshould be reported to business units, Senior Management and, where appropriate, the Board. 30
    • Managing credit risk“Credit risk arises from the potential that an obligor is either unwilling to perform on anobligation or its ability to perform such obligation is impaired resulting in economic loss tothe bank”Components of credit risk managementA typical Credit risk management framework in a financial institution may be broadlycategorized into following main components:a) Board and senior Management’s Oversightb) Organizational structurec) Systems and procedures for identification, acceptance, measurement, monitoring andcontrol risks. 1) Board and Senior Management’s OversightIt is the overall responsibility of bank’s Board to approve bank’s credit risk strategy andsignificant policies relating to credit risk and its management which should be based on thebank’s overall business strategy. To keep it current, the overall strategy has to be reviewed bythe board, preferably annually. The responsibilities of the Board with regard to credit riskmanagement shall, interalia, include :a) Delineate bank’s overall risk tolerance in relation to credit risk.b) Ensure that bank’s overall credit risk exposure is maintained at prudent levels andconsistent with the available capitalc) Ensure that top management as well as individuals responsible for credit risk managementpossess sound expertise and knowledge to accomplish the risk management functiond) Ensure that the bank implements sound fundamental principles that facilitate theidentification, measurement, monitoring and control of credit risk.e) Ensure that appropriate plans and procedures for credit risk managementare in place. 2) Organizational Structure:Each bank, depending upon its size, should constitute a Credit Risk Management Committee(CRMC), ideally comprising of head of credit risk management Department, creditdepartment and treasury. This committee reporting to bank’s risk management committeeshould be empowered to oversee credit risk taking activities and overall credi t riskmanagement function. The CRMC should be mainly responsible for 31
    • a) The implementation of the credit risk policy / strategy approved by the Board. b) Monitor credit risk on a bank-wide basis and ensure compliance with limits approved by the Board. c) Recommend to the Board, for its approval, clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks. d) Decide delegation of credit approving powers, prudential limits on large credit exposures, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc. 3) Systems and Procedures:Credit Origination:Banks must operate within a sound and well-defined criteria for new credits as well as theexpansion of existing credits. Credits should be extended within the target markets andlending strategy of the institution. Before allowing a credit facility, the bank must make anassessment of risk profile of the customer/transaction. This may include: a) Credit assessment of the borrower’s industry, and macro economic factors. b) The purpose of credit and source of repayment. c) The track record / repayment history of borrower. d) Assess/evaluate the repayment capacity of the borrower. e) The Proposed terms and conditions and covenants. f) Adequacy and enforceability of collaterals. g) Approval from appropriate authority 32
    • Limit setting:An important element of credit risk management is to establish exposure limits for singleobligors and group of connected obligors.The measurement of credit risk is of vital importance in credit risk management. A number ofqualitative and quantitative techniques to measure risk inherent in creditportfolio are evolving.Internal Risk Rating:Credit risk rating is summary indicator of a bank’s individual credit exposure. An internalrating system categorizes all credits into various classes on the basis of underlying creditquality. A well-structured credit rating framework is an important tool for monitoring andcontrolling risk inherent in individual credits as well as in credit portfolios of a bank or abusiness line. The importance of internal credit rating framework becomes more eminent dueto the fact that historically major losses to banks stemmed from default in loan portfolios. Managing Market Risk“It is the risk that the value of on and off-balance sheet positions of a financial institutionwill be adversely affected by movements in market rates or prices such as interest rates,foreign exchange rates, equity prices, credit spreads and/or commodity prices resulting ina loss to earnings and capital”Interest rate risk:Interest rate risk arises when there is a mismatch between positions, which are subject tointerest rate adjustment within a specified period. The bank’s lending, funding and investmentactivities give rise to interest rate risk. The immediate impact of variation in interest rate is onbank’s net interest income, while a long term impact is on bank’s net worth since theeconomic value of bank’s assets, liabilities and off-balance sheet exposures are affected.Consequently there are two common perspectives for the assessment of interest rate risk. a) Earning perspective:In earning perspective, the focus of analysis is the impact of variation in interest rates onaccrual or reported earnings. This is a traditional approach to interest rate risk assessment andobtained by measuring the changes in the Net Interest Income (NII) or Net Interest Margin(NIM) i.e. the difference between the total interest income and thetotal interest expense. b) Economic Value perspective:It reflects the impact of fluctuation in the interest rates on economic value of a financialinstitution. Economic value of the bank can be viewed as the present value of future cash 33
    • flows. In this respect economic value is affected both by changes in future cash flows anddiscount rate used for determining present value. Economic value perspective considers thepotential longer-term impact of interest rates on an institution.Equity price risk:It is risk to earnings or capital that results from adverse changes in the value of equity relatedportfolios of a financial institution. Price risk associated with equities could be systematic orunsystematic. The former refers to sensitivity of portfolio’s value to changes in overall levelof equity prices, while the later is associated with price volatility that is determined by firmspecific characteristics.Elements of Market Risk management:Board and senior Management Oversight:Likewise other risks, the concern for management of Market risk must start from the topmanagement. Effective board and senior management oversight of the bank’s overall marketrisk exposure is cornerstone of risk management process. For its part, the board of directorshas following responsibilities.a) Delineate banks overall risk tolerance in relation to market risk.b) Ensure that bank’s overall market risk exposure is maintained at prudent levels andconsistent with the available capital.c) Ensure that top management as well as individuals responsible for market risk managementpossess sound expertise and knowledge to accomplish the risk management function.d) Ensure that the bank implements sound fundamental principles that facilitate theidentification, measurement, monitoring and control of market risk.e) Ensure that adequate resources (technical as well as human) are devoted to market riskmanagement.Organizational Structure.The organizational structure used to manage market risk vary depending upon the nature sizeand scope of business activities of the institution, however, any structure does not absolve thedirectors of their fiduciary responsibilities of ensuring safety and soundness of institution.While the structure varies depending upon the size, scope and complexity of business, at aminimum it should take into account following aspe ct.a) The structure should conform to the overall strategy and risk policy set by the BOD.b) Those who take risk (front office) must know the organization’s risk profile, products thatthey are allowed to trade, and the approved limits.c) The risk management function should be independent, reporting directly to seniormanagement or BOD. 34
    • d) The structure should be reinforced by a strong MIS for controlling, monitoring andreporting market risk, including transactions between an institution and its affiliates.Asset-Liability Committee:Popularly known as ALCO, is senior management level committee responsible forsupervision / management of Market Risk (mainly interest rate and Liquidity risks). Thecommittee generally comprises of senior managers from treasury, Chief Financial Officer,business heads generating and using the funds of the bank, credit, and individuals from thedepartments having direct link with interest rate and liquidity risks. The CEO or some seniorperson nominated by CEO should be head of the committee. The size as well as compositionof ALCO could depend on the size of each institution, business mix and organizationalcomplexity. To be effective ALCO should have members from each area of the bank thatsignificantly influences liquidity risk. In addition, the head of the Information systemDepartment (if any) may be an invitee for building up of MIS and related computerization.Major responsibilities of the committee include:a) To keep an eye on the structure /composition of bank’s assets and liabilities and decideabout product pricing for deposits and advances.b) Decide on required maturity profile and mix of incremental assets and liabilities.c) Articulate interest rate view of the bank and deciding on the future business strategy.d) Review and articulate funding policy.e) Decide the transfer pricing policy of the bank.f) Evaluate market risk involved in launching of new products.ALCO should ensure that risk management is not confined to collection of data. Rather, it willensure that detailed analysis of assets and liabilities is carried out so as to assess the overallbalance sheet structure and risk profile of the bank. The ALCO should cover the entirebalance sheet/business of the bank while carrying out the periodic analysis.Middle Office:.The risk management functions relating to treasury operations are mainly performed bymiddle office. The concept of middle office has recently been introduced so as toindependently monitor, measure and analyze risks inherent in treasury operations of banks.Besides the unit also prepares reports for the information of senior management as well asbank’s ALCO. Basically the middle office performs risk review function of day-to-dayactivities. Being a highly specialized function, it should be staffed by people who haverelevant expertise and knowledge. The methodology of analysis and reporting may vary frombank to bank depending on their degree of sophistication and exposure to market risks. Thesesame criteria will govern the reporting requirements demanded of the Middle Office, whichmay vary from simple gap analysis to computerized VaR modeling. Middle Office staff mayprepare forecasts (simulations) showing the effects of various possible changes in marketconditions related to risk exposures. Banks using VaR or modeling methodologies shouldensure that its ALCO is aware of and understand the nature of the output, how it is derived,assumptions and variables used in generating the outcome and any shortcomings of themethodology employed. Segregation of duties should be evident in the middle office, whichmust report to ALCO independently of the treasury function. In respect of banks without aformal Middle Office, it should be ensured that risk control and analysis should rest with a 35
    • department with clear reporting independence from Treasury or risk taking units, until normalMiddle Office framework is established.Value at Risk:Value at Risk (VAR) is generally accepted and widely used tool for measuringmarket risk inherent in trading portfolios. It follows the concept that reasonableexpectation of loss can be deduced by evaluating market rates, prices observedvolatility and correlation. VAR summarizes the predicted maximum loss (orworst loss) over a target horizon within a given confidence level. The well-knownproprietary models that use VAR approaches are JP Morgan’s Risk metrics,Banker’s trust Risk Adjusted Return on Capital, and Chase’s Value at risk.Generally there are three ways of computing VARa) Parametric method or Variance covariance approachb) Historical Simulationc) Monte Carlo methodBanks are encouraged to calculate their risk profile using VAR models. At theminimum banks are expected to adopt relatively simple risk measurementmethodologies such as maturity mismatches, sensitivity analysis etc.Risk Monitoring:Risk monitoring processes are established to evaluate the performance of bank’srisk strategies/policies and procedures in achieving overall goals. Whether themonitoring function is performed by middle-office or it is a part of banks internalaudit it is important that the monitoring function should be independent ofunits taking risk and report directly to the top management/board.Audit:Banks need to review and validate each step of market risk measurement process. This reviewfunction can be performed by a number of units in the organization including internalaudit/control department or ALCO support staff. In small banks, external auditors orconsultants can perform the function.Risk limits:As stated earlier it is the board that has to determine bank’s overall risk appetite and exposurelimit in relation to its market risk strategy. Based on these tolerances the senior managementshould establish appropriate risk limits. Risk limits for business units, should be compatiblewith the institution’s strategies, risk management systems and risk tolerance. The limitsshould be approved and periodically reviewed by the Board of Directors and/or seniormanagement, with changes in market Conditions or resources prompting a reassessment oflimits. Institutions need to ensure consistency between the different types of limits. a) Gap Limits:The gap limits expressed in terms of interest sensitive ratio for a given time band aims atmanaging potential exposure to a bank’s earnings / capital due to changes in interest rates.Setting such limits is useful way to limit the volume of a bank’s repricing exposures and is an 36
    • adequate and effective method of communicating the risk profile of the bank to seniormanagement. Such gap limits can be set on a net notional basis (net of asset / liabilityamounts for both on and off balance sheet items) or a duration-weighted basis, in each timeband. (Duration is the weighted average term to maturity of a security’s cash flow. Forinstance a Rs 100 5 year 8% (semi Annual) coupon bond having yield of 8% will have aduration of 4.217 years as already explained in the footnotes). c) Factor Sensitivity Limits:The factor sensitivity of interest rate position is calculated by discounting the position usingcurrent market interest rate and then using the current market interest rate increase or decreaseby one basis point. The difference in the two values known as factor sensitivity is the potentialfor loss given one basis point change in interest rate. Banks may introduce such limits foreach time band as well as total exposure across all time bands. The factor sensitivity limit orPV01 limit measures the change in portfolio present value given one basis point fluctuation inunderlying interest rate. Managing Liquidity Risk“Liquidity risk is the potential for loss to an institution arising from either its inability to meetits obligations or to fund increases in assets as they fall due without incurring unacceptablecost or losses.”Board and Senior Management Oversight:The prerequisites of an effective liquidity risk management include an informed board,capable management, staff having relevant expertise and efficient systems and procedures. Itis primarily the duty of board of directors to understand the liquidity risk profile of the bankand the tools used to manage liquidity risk. The board has to ensure that the bank hasnecessary liquidity risk management framework and bank is capable of confronting unevenliquidity scenarios.Liquidity Risk Strategy:The liquidity risk strategy defined by board should enunciate specific policies on particularaspects of liquidity risk management, such as:a. Composition of Assets and Liabilities:The strategy should outline the mix of assets and liabilities to maintain liquidity. Liquidityrisk management and asset/liability management should be integrated to avoid steep costsassociated with having to rapidly reconfigure the asset liability profile from maximumprofitability to increased liquidity.b. Diversification and Stability of Liabilities:A funding concentration exists when a single decision or a single factor has the potential toresult in a significant and sudden withdrawal of funds. Since such a situation could lead to an 37
    • increased risk, the Board of Directors and senior management should specify guidancerelating to funding sources and ensure that thebank have a diversified sources of funding day-to-day liquidity requirements. An institutionwould be more resilient to tight market liquidity conditions if its liabilities were derived frommore stable sources. To comprehensively analyze the stability of liabilities/funding sourcesthe bank need to identify:o Liabilities that would stay with the institution under any circumstances;o Liabilities that run-off gradually if problems arise; ando That run-off immediately at the first sign of problems.c. Access to Inter-bank Market:The inter-bank market can be important source of liquidity. However, the strategies shouldtake into account the fact that in crisis situations access to inter bank market could be difficultas well as costly.ALCO/Investment Committee:The responsibility for managing the overall liquidity of the bank should be delegated to aspecific, identified group within the bank. This might be in the form of an Asset LiabilityCommittee (ALCO) comprised of senior management, the treasury function or the riskmanagement department.Liquidity Risk Management Process:Besides the organizational structure discussed earlier, an effective liquidity risk managementinclude systems to identify, measure, monitor and control its liquidity exposures.Management should be able to accurately identify and quantify the primary sources of abanks liquidity risk in a timely manner. To properly identify the sources, management shouldunderstand both existing as well as future risk that the institution can be exposed to.Management should always be alert for new sources of liquidity risk at both the transactionand portfolio levels.Scope of CFP:The sophistication of a CFP depends upon the size, nature, complexity of business, riskexposure, and organizational structure.Liquidity Ratios and Limits:Banks may use a variety of ratios to quantify liquidity. These ratios can also be used to createlimits for liquidity management. However, such ratios would be meaningless unless usedregularly and interpreted taking into account qualitative factors. Ratios should always be usedin conjunction with more qualitative information about borrowing capacity, such as thelikelihood of increased requests for early withdrawals, decreases in credit lines, decreases intransaction size, or shortening of term funds available to the bank. 38
    • Managing Operational Risk“Operational risk is the risk of loss resulting from inadequate or failed internal processes,people and system or from external events”Operational risk is associated with human error, system failures and inadequate proceduresand controls. It is the risk of loss arising from the potential that inadequate informationsystem; technology failures, breaches in internal controls, fraud, unforeseen catastrophes,or other operational problems may result in unexpected losses or reputation problems.Operational risk exists in all products and business activities.Risk Assessment and Quantification:Banks should identify and assess the operational risk inherent in all material products,activities, processes and systems and its vulnerability to these risks. Banks should alsoensure that before new products, activities, processes and systems are introduced orundertaken, the operational risk inherent in them is subject to adequate assessmentprocedures. While a number of techniques are evolving, operating risk remains the mostdifficult risk category to quantify. It would not be feasible at the moment to expect banks todevelop such measures However the banks could systematically track and record frequency,severity and other information on individual loss events. Such a data could provide ameaningful information for assessing the bank’s exposure to operational risk and developinga policy to mitigate / control that risk.Risk Monitoring:An effective monitoring process is essential for adequately managing operational risk.Regular monitoring activities can offer the advantage of quickly detecting and correctingdeficiencies in the policies, processes and procedures for managing operational risk.Promptly detecting and addressing these deficiencies can substantially reduce the potentialfrequency and/or severity of a loss. There should be regular reporting of pertinent 39
    • information to senior management and the board of directors that supports the proactivemanagement of operational risk. Senior Management should establish a programme to:a) Monitor assessment of the exposure to all types of operational risk faced by theinstitution;b) Assess the quality and appropriateness of mitigating actions, including the extent towhich identifiable risks can be transferred outside the institution; andc) Ensure that adequate controls and systems are in place to identify and address problemsbefore they become major concerns.Risk Reporting:Management should ensure that information is received by the appropriate people, on atimely basis, in a form and format that will aid in the monitoring and control of thebusiness.Establishing Control Mechanism:Although a framework of formal, written policies and procedures is critical, it needs to bereinforced through a strong control culture that promotes sound risk managementpractices. Banks should have policies, processes and procedures to control or mitigatematerial operational risks. Banks should assess the feasibility of alternative risk limitationand control strategies and should adjust their operational risk profile using appropriatestrategies, in light of their overall risk appetite and profile. To be effective, control activitiesshould be an integral part of the regular activities of a bank. 40
    • Financial Analysis of MCB Horizontal Analysis Muslim Commercial Bank Limited Balance Sheet As on 31st December Items 2010 2009 2010-2009/2009Cash and balances with treasury banks 45,407,183 38,774,871 17%Balances with other banks 1,478,569 6,009,993 -75%Lendings to financial institutions 4,401,781 3,000,000 47%Investments – net 213,060,882 167,134,465 27%Advances – net 254,551,589 253,249,407 1%Operating fixed assets 20,947,540 18,014,896 16%Other assets – net 27,705,069 23,040,095 20%Total Assets 567,552,613 509,223,727 11%Bills payable 10,265,537 8,201,090 25%Borrowings 25,684,593 44,662,088 -42%Deposits and other accounts 431,371,937 367,604,711 17%Sub–ordinated loanLiabilities against assets subject to finance leaseDeferred tax liabilities – net 4,934,018 3,196,743 54%Other liabilities 16,092,319 15,819,082 2%Total Liabilities 488,348,404 439,483,714 11%Net assets 79,204,209 69,740,013 14% 41
    • Represented by:Share capital 7,602,150 6,911,045 10%Reserves 40,162,906 38,385,760 5%Unappropriated profit 21,414,955 15,779,127 36% 69,180,011 61,075,932 13%Surplus on revaluation of assets – net of tax 10,024,198 8,664,081 16% 79,204,209 69,740,013 14% Horizontal Analysis Muslim Commercial Bank Limited Profit and Loss Account As on 31st December (2010- 2010 2009 2009)/2009 Mark–up / return / interest earned 54,821,296 51,616,007 6% Mark–up / return / interest expensed 17,987,767 15,837,322 14% Net mark–up / interest income 36,833,529 35,778,685 3% Provision for diminution in the value of investments – net 444,476 1,484,218 -70% Provision against loans and advances – net 3,100,594 5,796,527 -47% Bad debts written off directly 52,047 41,576 25% Net mark–up / interest income after provisions 33,236,412 28,456,364 17% Non–mark–up / interest income Fee, commission and brokerage income 4,129,540 3,455,948 19% Dividend income 543,906 459,741 18% Income from dealing in foreign currencies 632,346 341,402 85% Gain on sale of securities – net 411,834 773,768 -47% Other income 547,680 612,026 -11% Total non–mark–up / interest income 6,265,306 5,642,885 11% Income after interest income 39,501,718 34,099,249 16% Non–mark–up / interest expenses Administrative expenses 12,173,942 10,111,330 20% Other provision – net 88,261 142,824 -38% Other charges 986,440 690,150 43% Total non–mark–up / interest expenses 13,248,643 10,944,304 21% Profit before taxation 26,253,075 23,154,945 13% Taxation 9,379,900 7,659,648 22% Profit after taxation 16,873,175 15,495,297 9% Unappropriated profit brought forward 15,779,127 9,193,332 72% Transfer from surplus on revaluation of fixed assets – net of tax 21,792 22,324 -2% 15,800,919 9,215,656 71% 42
    • Profit available for appropriation 32,674,094 24,710,953 32%Basic and diluted earnings per share – after tax 22.2 22.38 -1%Vertical Analysis Muslim Commercial Bank Limited Balance Sheet As on 31st DecemberAssets 2010 vertical 2009 verticalCash and balances with treasury banks 45,407,183 57% 38,774,871 56%Balances with other banks 1,478,569 2% 6,009,993 9%Lendings to financial institutions 4,401,781 6% 3,000,000 4%Investments – net 213,060,882 269% 167,134,465 240%Advances – net 254,551,589 321% 253,249,407 363%Operating fixed assets 20,947,540 26% 18,014,896 26%Other assets – net 27,705,069 35% 23,040,095 33%Total Assets 567,552,613 717% 509,223,727 730%Bills payable 10,265,537 13% 8,201,090 12%Borrowings 25,684,593 32% 44,662,088 64%Deposits and other accounts 431,371,937 545% 367,604,711 527%Sub–ordinated loan 0% 0%Liabilities against assets subject to finance lease 0% 0%Deferred tax liabilities – net 4,934,018 6% 3,196,743 5%Other liabilities 16,092,319 20% 15,819,082 23%Total Liabilities 488,348,404 617% 439,483,714 630% 0% 0%Net assets 79,204,209 100% 69,740,013 100%Represented by:Share capital 7,602,150 10% 6,911,045 10%Reserves 40,162,906 51% 38,385,760 55%Unappropriated profit 21,414,955 27% 15,779,127 23% 69,180,011 87% 61,075,932 88%Surplus on revaluation of assets – net of tax 10,024,198 13% 8,664,081 12% 79,204,209 100% 69,740,013 100% 43
    • Muslim Commercial Bank Limited Profit and Loss Account As on 31st December 2010 vertical 2009 verticalMark–up / return / interest earned 54,821,296 325% 51,616,007 333%Mark–up / return / interest expensed 17,987,767 107% 15,837,322 102%Net mark–up / interest income 36,833,529 218% 35,778,685 231%Provision for diminution in the value of investments – net 444,476 3% 1,484,218 10%Provision against loans and advances – net 3,100,594 18% 5,796,527 37%Bad debts written off directly 52,047 0% 41,576 0%Net mark–up / interest income after provisions 33,236,412 197% 28,456,364 184%Non–mark–up / interest income 0% 0%Fee, commission and brokerage income 4,129,540 24% 3,455,948 22%Dividend income 543,906 3% 459,741 3%Income from dealing in foreign currencies 632,346 4% 341,402 2%Gain on sale of securities – net 411,834 2% 773,768 5%Other income 547,680 3% 612,026 4%Total non–mark–up / interest income 6,265,306 37% 5,642,885 36%Income after interest income 39,501,718 234% 34,099,249 220%Non–mark–up / interest expenses 0% 0%Administrative expenses 12,173,942 72% 10,111,330 65%Other provision – net 88,261 1% 142,824 1%Other charges 986,440 6% 690,150 4%Total non–mark–up / interest expenses 13,248,643 79% 10,944,304 71%Profit before taxation 26,253,075 156% 23,154,945 149%Taxation 9,379,900 56% 7,659,648 49%Profit after taxation 16,873,175 100% 15,495,297 100%Unappropriated profit brought forward 15,779,127 94% 9,193,332 59%Transfer from surplus on revaluation of fixed assets – net of tax 21,792 0% 22,324 0% 15,800,919 94% 9,215,656 59%Profit available for appropriation 32,674,094 194% 24,710,953 159%Basic and diluted earnings per share – after tax 22.2 0% 22.38 0%Vertical Analysis 44
    • Ratio Analysis of MCB “An index that relates two accounting numbers and is obtained by dividing onenumber by other” Ratio Analysis is an important and age-old technique of financial analysis. Itsimplifies the comprehension of financial statements. Ratios tell the whole story of changes inthe financial condition of business. It provides data fro inter firm comparison. They alsoreveal strong firms and weak firms, over- valued and undervalued firms. Ratio analysis also makes possible comparison of the performance of differentdivisions of the firm. The ratios are helpful in decision about their efficiency of otherwise inthe past and likely performance in future. Ratios also help in Investment decisions in theinvestors and lending decisions in the case of bankers etc. Following are the main types of ratios that I am going to calculate in this report tocompare and highlight the financial performance of MCB in 2010 with 2009 45
    • 2010 2009PROFIT TO Profit 16,873,175 15,495,297DEPOSIT Deposit 431,371,937 367,604,711RATIO Ratio (%) 3.90% 4.20%RETURN ONAVERAGE Profit After Tax 16,873,175 15,495,297EQUITY Equity Capital 69,180,011 61,075,932(ROE) Ratio (%) 33.61% 25.37%FIXED DEPOSIT TO FixedTOTAL DEPOSIT RATIO Deposits 80,073,848 62,651,531 Total Deposits 431,371,937 367,604,711 Ratio (%) 18.56% 17.04%PROFIT TO ADVANCES Profit 16,873,175 15,495,297RATIO Advances 254,551,589 253,249,407 Ratio (%) 6.63% 6.12% 2010 2009ADMIN EXPENSES TODEPOSIT RATIO Admin Expenses 12,173,942 10,111,330 Deposit 431,371,937 367,604,711 Ratio (%) 2.82% 2.75% 46
    • Details: • Deposits are increased in 2010 and profit on deposits also increased. • Equity Capital increased in 2010 and return also increase. • Profit margin increase in 2010 as compare to 2009. • Total Deposits are also more than 2009, with increasing ratio. • Profits are more in 2010 as compare to 2009. • Advances Increases in 2010. • Admin expenses are more as compare to 2009. • Deposits increases in 2010.Interpretation: The past two years data shows an increase in all return (i.e. interest earned, interestincome, Profit after taxation) which is a positive sign. But mostly expenses (i.e. Adminexpenses, Provisions, Taxation) are also increase which show negative sign of business. TheBank should have to review its policies to decrease expenses. SWOT ANALYSIS 47
    • STRENGTHS:  One of the main strength of MCB that I think is the faster banking services and more prominent in banking industry especially in operations and Foreign Exchange. Speedy services and reasonable services charges are attracting the people to do their business with MCB.  MCB has fully computerized control on its banking system due to this facility the MCB is in the list of highly automated bank.  Internal control and monitoring of the MCB Bank is very effective Quality Control Expert visits twice a week at bank branches which helps the employees to improve their work.  Due to fast banking services, prominent banking services and fully computerized computer system resulted in joining of experienced people, advanced management, advance setup and facilities gave MCB an edge over its competitors.  Most private banks have still not online all of their branches in Pakistan but the MCB has all its branches online. They have wide area network in all over the Pakistan, so that they cover a lot of portion of cash transactions and make customer satisfied  The Bank has very strict rules and regulations about the customers complaints. The customers are treated as very special persons in the Bank.  MCB has got the Strongest Bank in Pakistan Award 2010.  MCB also got the Leadership Achievement Award 2010.  MCB has been awarded as Euro money Award 2008 for the “Best Bank in Asia. 48
    •  Best Bank In Pakistan Award: MCB has been awarded the best bank in Pakistan since 2000, 2001, 2003, 2004, and 2006WEAKNESS:  MCB offers different types of products to the customers therefore majority of people are not well aware about the products of MCB. For examples if a person wants to open an account with MCB say it is current but he does not know what type of Current Account he should open does not know this the major weakness for the MCB.  No entertainment facilities are available in the bank when customer visits Bank and wait for at longer time. These facilities can be the Newspaper. Magazines, etc.  Out look of the MCB branches is not attractive to the people.  In this era of competition most of the banks advertising their different products and services but no commercial I have seen on any channel regarding their products and services.  Equality should be observed throughout banking system. There should no discrimination among the customers. As I observed at the branch where I worked wealthy customers were given the more entertaining services while the customers who have low investment with the bank waited for long for their turn.  At private local banks there is normally transfer of employees after a normal period of one and a half years or two years while at MCB branch where I did my internship most of the employees are working more than three years. Job Rotation help the employees to learn about different segments of the business which I think is missing at MCB.OPPURTUNITIES:  MCB has got the Strongest Bank in Pakistan Award 2010. MCB also got the Leadership Achievement Award 2010. MCB has been awarded as Euro money Award 2008 for the “Best Bank in Asia. 49
    •  Best Bank in Pakistan Award: MCB has been awarded the best bank in Pakistan since 2000, 2001, 2003, 2004, and 2006.  These awards create an edge in the mind of people to invest and borrow from this bank.  Before privatization people were not satisfied with the services of the bank. After the privatization people have different alternatives to invest and borrow from. The MCB due to its over 10 years performance it has the opportunities to attract the customersTHREATS:  The decreased purchasing power of consumer in the current economic situation of the country affecting the business activity speed too much and the result is the low investment from the investors in new projects can create problem for the hank because it is working a lot in trade.  The Competition has become severe by the entrants of so many banks. So to exist one will have to prove himself in its services through excellent management and will have to satisfy its shareholders. Otherwise it will he out the market  New Privates Bank coped with emerging new Technology of IT. This ease of entry in the market is the threat to the MCB bank.Change in government policies has affected the banking business. Still banks have to wait toget permission from the State Bank of Pakistan. The freezing of foreign currency accounts is avital example of letting people not to trust on banks PEST ANALYSIS AND ENVIRONMENTAL SCAN A broad view of market is important when management is interested in introducingbetter services for customers. Rapid technological change, global competition and the 50
    • diversity of buyers preferences in many markets require the constant attention of the marketvouchers to identify promises business opportunities, see the shifting requirements of thebuyers, evaluate changes in competitors positioning and guide the choice of which buyers totarget and classify them according to respective segments. Identification of external andmacro factors that influence buyers and thus change the size and composition of marketovertime involves initially building customer profiles. These influences include: • Political and legal environment • Economic trends • Socio cultural environment • Technological factorsPOLITICAL AND LEGAL ENVIRONMENT: Banks are strongly affected by the political and legal considerations. This environmentis composed of regulatory agencies and government law that influence and limit variousorganizations and individuals. Mostly these laws create new opportunities for business.Business legislation has following main purposes o To protect banking companies from unfair competition. o To protect consumers from unfair business practices adopted by banking companies o To protect the interest of the society from unbridled business behavior.ECONOMIC TRENDS: A banking market requires better consumer market in volume along with higherborrowing power. The available borrowing power depends on: o Consumer income o Saving rates o Consumption patrons o Rates of interest 51
    • o Budget deficit o Exchange rates o Cost of living o InflationSOCIO-CULTURAL ENVIRONMENT: A society is shaped by beliefs, norms and values. People in a society consciously andunconsciously interact with: • Themselves • Others • Organization • SocietyTECHNOLOGICAL FACTORS: Forces of technological advancement have played the most dramatic role in shapingthe lives of people. The rate of change of technology has greatly affected the rate of growth ofeconomy. New technology is creating deep rooted affects which could be observed in longrun. The improvement techniques involved in on line banking. In brief PEST analysis affectsthe overall banking companies and provides us the information about the external macrocondition. 52
    • CONCLUSIONIt is evident from this report that MCB is making progress by leaps and bounds. The profits ofMCB have grown considerably during the last few years and this trend is expected to continueinto the future. Therefore we conclude that MCB has a very prosperous present and future,which assures the shareholders of wealth maximization. Side by side of it I think that if bankwould be able to cover and control on the above mentioned recommendations then it would bein such a situation that will really lead it towards the road of prosperity, development andintegrity. And with the above mentioned sentences I think there is too fault of the customersand in order to make the proper working of the bank the customers shouldAlso cooperate with the bank which will be really a good, ambitious and diligent condition forthe bank. And then bank will be really in such a situation and position to compete itscompetitors in the country as well as on international level. 53
    • SUGGESTIONSBank must let potential customers know that all attractions for banking exist. This is done byadvertising on television and obtaining press coverage, in conjunction with direct mail,window displays, leaflet in branches and in appropriate other locations (such as hotels, shops,etc.) and including leaflets in statement of accounts sent to existing customers in the hope thatthey will tell potential customers about the services provided by our bank.Financially unsophisticated people might feel bank accounts, cheque books, credit cards, etc.are difficult to understand and to keep control thereof. Some personal sector customers prefer not to come to branch. They increasingly want to dealwith the bank in other ways, such as home banking or use of Automated Teller Machines(ATMs), which need to be at the branch or some important shopping plazas. It is widely known that there is a substantial Black Economy in Pakistan, Where people earnincome that is undisclosed to the revenues authorities. Payments for goods and services in theblack economy are necessarily in cash, because transactions by cheques are more likely to beexposed to the revenue authorities. Some people will therefore avoid bank accounts topreserve secrecy of earnings.One way to retain the personal sector customers is to offer a wide range of services such astax advice, free life insurance equivalent to amount deposited, shares portfolio management,fund management facility, etc., complimentary to the core services. Banks must have aslightly different mix of services. Banks must have a slightly different mix of services andmean of providing these such that customers can choose the mix that suits them best.Arguably, there has been a little encouragement from banks to persuade people to open abank account. Opening hours are restricted, and there is a commonly held belief that banksoperate for their convenience and not for the convenience of the customers.A logic leads to promotional campaign through employers who are customers of the banksand their employees are paid in cash. Such business accounts should be encouraged to openthe accounts of their employees with the banks. It might be worth offering free banking for aspecific period to new accounts or simply publicizing the services available by means ofposters at the employer’s premises.It might be possible to attract another type of personal customers through business accounts,namely directors and denier employees, etc. Again an incentive package could be puttogether. 54
    • The banks may choose to make its existing products distinctive or to introduce new products.It is often easier to benefit from adverse changes made by other banks than to attractcustomers by innovations.A short term promotional technique is to offer price incentives, for example, low interest rateson advances or limited issue high profit bearing term deposits. Longer term, a Loss Leadermay be offered. For example, profit bearing current accounts are not very lucrative but anybank can not afford not to offer these. The reduced profits can be augmented by profits madeon other products.It is also possible to attract/retain personal customers by investment in new technology likeATMs and Telephone Banking facilities, which made the services quicker, easier, cheaper andmore flexible. 55
    • GlossaryMCB Muslim Commercial BankATM Automatic Teller MachineFED Federal Excise DutyWHT with Holding TaxTDR Term Deposit ReceiptsCDR Call Deposit ReceiptsPBA Personal Banking AdvisorBBA Basic Banking AccountPLS Profit and Loss A/CTD Term DepositAOF Account opening FoamAMO Account maintenance officerKYC Know your customersSSC Specimen Signature card 56
    • GBO General banking officerICO Internal control officerCSO Customer service officerDD Demand DraftPO Pay OrderFTA Fund Transfer ApplicationCPD Central Processing DivisionNIFT National Institute of Facilitation TechnologyTDR Term Deposit ReceiptRTC Rupee Travel ChequeIBC Inward Bills for CollectionOBC Outward Bills for CollectionsMO Main OfficeHO Head Office 57
    • REFERENCES• http://en.wikipedia.org/wiki/Economy_of_Pakistan• http://www.mcb.com.pk/mcb/about_mcb.asp• http://www.oppapers.com/essays/Pakistans-Banking-Sector-Industry Analysis/181995• http://www.sbp.org.pk/reports/annual/arfy09/annex_index.htm• http://en.wikipedia.org/wiki/Muslim_Commercial_Bank• http://www.blurtit.com/q501915.html• MCB Brochures Manuals• Annual Report 58
    • COPY RIGHTAttention is drawn to the fact that the copy right of this report rests with author. This copy ofreport has been supplied on condition that any one who consults it is the understood torecognize that its copy right with its author and no information derived from it may bepublished without the prior written consent author.This report contains material, which is the property of the MCB Limited, Karachi and isclearly marked as such. Although they have given me their kind permission for itsreproduction. This material remains protected under their copy right.This report may be made available for consultation within University / Department ofCommerce library and may be published on or lent to other libraries for the purpose ofconsultation.  59