Overall performance analysis of Islami Bank Bangladesh Limited using Aggregate ROE Model.

1. Report on
Overall Performance of Islami Bank Bangladesh Limited
using
Aggregate ROE Model

2. Management of Financial Institutions
Course Code: FIN 4116
Section: D
Submitted to
Muhammad Enamul Haque
Asst. Professor- Finance
School of Business & Economics
United International University
Submitted by
Serial No Name ID
1 Shagufta Rahman 111 151 022
2 Farhin Alam 111 151 348
3 Md. Taiyeb Ahmed Bhuiya 111 151 349
4 Puspa Tabassum 111 151 492
5 Tasnuva Numaira 111 151 497
Date of Submission: 14th
May 2018

3. Page | i
Letter of Transmittal
May 14, 2018
Muhammad Enamul Haque
Asst. Professor
School of Business and Economics
United International University
Subject: Submission of Report on, “Overall Performance of Islami Bank Bangladesh Limited
using Aggregate ROE Model”.
Sir,
With due respect and humble submission, we are the students of BBA department submitting our
Report on “Overall Performance of Islami Bank Bangladesh Limited using Aggregate ROE
Model”. It gives us immense pleasure to inform you that we have completed our Report
under your supervision.
In preparing this report, we tried our level best and worked with most sincerity and make it as
well structured as possible. We hope that this will help us to upgrade our knowledge about the
daily activities of a bank and also about the scenario of their risk management approaches.
Thank You
Sincerely Yours
………………………………………
Tasnuva Numaira
ID: 111 151 497

4. Page | ii
Acknowledgement
At first, we would like to express our gratitude to Muhammad Enamul Haque for giving us to
prepare this report. We have taken help from authentic website of Islami Bank Bangladesh
Limited. We are indebted to our classmates and friends who have guided us from different
corners to complete this report. We tried our level best to include most of the relevant
information what we have collected regarding subject of the report.

5. Page | iii
Executive Summary
Bank is one of the most important financial institutions ruling the economy of a country. In this
report, we have calculated ratio of IBBL from the five dimensions of ratio analysis which are
Liquidity Ratio, Profitability ratio, Activity Ratio, Market Ratio and Solvency Ratio. After
analyzing the ratio, we got a scenario of their activities and performance over five years. Then at
the 2nd
step, we have prepared the aggregate ROE Model. Through this aggregate ROE Model,
we have come to know about the current condition of ROE of the company. On the basis of the
ROE model, we have analyzed the risk management techniques of Islami Bank Bangladesh
Limited.

6. Page | iv
Table of Content
Serial No Contents Page No.
1 Introduction 1
2 Ratio Analysis 2-18
2.1 Liquidity Ratio 3
2.2 Profitability Ratio 6
2.3 Activity Ratio 12
2.4 Market Prospect Ratio 14
2.5 Solvency Ratio 16
3 Aggregate ROE Model 19-31
4 Risk Management 33
4.1 Market Risk Management Framework 34
4.2 Credit Risk Management Framework 34
4.3 Liquidity Risk Management Framework 35
5 Conclusion 36

7. Page | 1
Introduction
Islami Bank Bangladesh Ltd. (IBBL) is the pioneer of Islamic banking in Bangladesh. It became
incorporated on 13 March 1983 as a public limited company under the Companies Act
1913.[5] It has 36.91% local and 63.09% foreign shareholders. Up to Dec 2016, IBBL has 332
branches including 59 AD Branches & 03 Offshore Banking Units as well as has more than
13,500 staffs. In addition to that IBBL maintains its own 497 ATM Booths, 33 IDM (IBBL
Deposit Machine) along with 6,000 shared ATM network across the country. IBBL mobilizes
around 29% of the country remittance. In 2015, it serves USD 3,903.21 million out of USD
15,316.75 million of total country remittance. As such, IBBL is the largest private
banking network in Bangladesh. When IBBL was established, it was the first bank in south-east
Asia to provide banking service based on Shariah. The bank is listed with both Dhaka Stock
Exchange Ltd. and Chittagong Stock Exchange Ltd.
Islami Bank Bangladesh Limited is a shariah compliant bank in Bangladesh which started
operations on 30 March 1983. It was founded by Saudi and Kuwaiti investors. It is a public
limited company registered under the Companies Act of 1913. IBBL is a joint venture of the
government of Bangladesh, 22 businessmen of Bangladesh, Islamic Development Bank, and
investment firms and banks from Muslim Middle Eastern countries.
According to The Economist, "Islami Bank was a pioneer in financing Bangladesh’s rise as the
apparel industry’s main production base outside China."
As of 2017, Islami Bank Bangladesh commands 90% of Islamic-banking assets and deposits in
Bangladesh, is the country's biggest private lender overall, has 12 million depositors and a
balance-sheet of $10 billion.

8. Page | 2
Part-1
Ratio Analysis

9. Page | 3
2.1 Liquidity Ratio
Liquidity ratios measure the adequacy of current and liquid assets and help evaluate the ability of
the business to pay its short-term debts. The ability of a business to pay its short-term debts is
frequently referred to as short-term solvency position or liquidity position of the business.
Liquidity ratio can be classified by 6 types. The interpretation of each is presented below:
I. Current Ratio
Current Ratio refers to the ability of a business to pay its short-term obligations when they
become due. Short term obligations (also known as current liabilities) are the liabilities payable
within a short period of time, usually one year.
Year Current Ratio
2012 0.158668493
2013 0.2537508
2014 0.291332966
2015 0.273747818
2016 0.229164986
A higher current ratio indicates strong solvency position and is therefore considered better. Here,
we can see that year 2014 has the higher value of current ratio, so their paying of short term
obligation is also higher compared to other years.
II. Quick Ratio
Quick Ratio is used to test the ability of a business to pay its short-term debts. It measures the
relationship between liquid assets and current liabilities.
Year Quick Ratio
2012 0.099974737
2013 0.122340371
2014 0.288008453
2015 0.265561242
2016 0.220955619
0
0.1
0.2
0.3
0.4
Current Ratio
Current Ratio
2012 2013 2014 2015 2016
0
0.1
0.2
0.3
0.4
Quick Ratio
Quick Ratio
2012 2013 2014 2015 2016

10. Page | 4
Quick Ratio higher does not mean that the company has a strong liquidity position because a
company may have high quick ratio but slow paying debtors. Year 2014 has the highest quick
ratio and year 2012 has the lowest quick ratio among the five years.
III. Net Working Capital
Working capital is the amount by which the value of a company's current assets exceeds its
current liabilities also called net working capital. Here we can see that, in each year, current
liabilities have exceeded current assets which indicate that they are unable to meet current
obligations.
IV. Absolute Liquid Ratio
The reason of computing absolute liquid ratio is to eliminate creditors from the list of liquid
assets because there may be some doubt about their quick collection. This ratio is useful only
when used in conjunction with current ratio and quick ratio.
Year Absolute Liquid Ratio
2012 0.01509714
2013 0.088055375
2014 0.076828435
2015 0.081840807
2016 0.095805574
Year Net Working Capital
2012 -351,546,742,859
2013 -375,360,550,930
2014 -426,328,307,836
2015 -490,340,347,420
2016 -574,914,873,219
0
0.02
0.04
0.06
0.08
0.1
0.12
Absolute Liquid Ratio
Absolute Liquid Ratio
2012 2013 2014 2015 2016

11. Page | 5
V. Current Cash Debt. Coverage Ratio
Current cash debt coverage ratio is a liquidity ratio that measures the relationship between net
cash provided by operating activities and the average current liabilities of the company. It
indicates the ability of the business to pay its current liabilities from its operations.
From the table, the highest value is 11% in 2012 which indicates that in 2012, it had the highest
ability to pay its current liabilities from its operations.
VI. Cash Ratio
The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
The metric calculates a company's ability to repay its short-term debt.
As the values are less than 1, so here are more current liabilities than cash and cash equivalents.
In this situation, there is insufficient cash on hand to pay off short-term debt.
Year Current Cash Debt Coverage Ratio
2012 0.112195603
2013 0.065994177
2014 0.060356218
2015 0.059984893
2016 0.071303488
Year Cash Ratio
2012 0.067017998
2013 0.113304304
2014 0.116082987
2015 0.000737517
2016 0.108470096
0
0.05
0.1
0.15
Current Cash Debt Coverage Ratio
Current Cash Debt
Coverage Ratio
2012 2013 2014 2015 2016
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
Cash Ratio
Cash Ratio
2012 2013 2014 2015 2016

12. Page | 6
2.2 Profitability Ratio
Profitability ratios measure the efficiency of management in the employment of business
resources to earn profits. These ratios indicate the success or failure of a business enterprise for a
particular period of time.
I. Gross Profit Margin
Gross profit margin reveals how much money is left over, after paying for production, to cover
operations, expansion, debt repayment many other business expenses. A company's gross profit
represents the revenue dollars remaining after deducting all costs relating to the sale of those
goods.
Here we can see that profit margin is high in 2015 and low in 2012. The more the profit margin
is the more strong companies financial health.
II. Gross Profit Ratio
Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between gross
profit and total net sales revenue. The ratio is computed by dividing the gross profit figure by net
sales.
Year Gross Profit Ratio
2012 2.06213507
2013 2.121501817
2014 2.803369048
2015 3.486985198
2016 2.675229074
Year Gross Profit Margin
2012 206.2
2013 212.2
2014 280.3
2015 348.7
2016 267.5
0
100
200
300
400
Gross Profit Margin
Gross Profit Margin
2012 2013 2014 2015 2016
0
1
2
3
4
Gross Profit Ratio
Gross Profit Ratio
2012 2013 2014 2015 2016

13. Page | 7
There is no norm or standard to interpret gross profit ratio (GP ratio). Generally, a higher ratio is
considered better. The ratio can be used to test the business condition by comparing it with past
years’ ratio and with the ratio of other companies in the industry.
III. Operating Income Margin
Operating margin measures how much profit a company makes on a dollar of sales, after paying
for variable costs of production such as wages and raw materials, but before paying interest or
tax.
IV. Return on Asset
The return on assets ratio, often called the return on total assets, is a profitability ratio that
measures the net income produced by total assets during a period by comparing net income to the
average total assets. In other words, the return on assets ratio or ROA measures how efficiently a
company can manage its assets to produce profits during a period.
.
A higher ratio is more favorable to investors because it shows that the company is more
effectively managing its assets to produce greater amounts of net income. Here the high value is
in 2012(.012).
Year
Operating Income
Margin
2012 2.857619281
2013 3.118100037
2014 4.158944631
2015 5.068607173
2016 3.662526574
Year ROA
2012 0.012
2013 0.009
2014 0.006
2015 0.004
2016 0.006
0
2
4
6
Operating Income Margin
Operating Income Margin
2012 2013 2014 2015 2016
0
0.002
0.004
0.006
0.008
0.01
0.012
0.014
ROA
ROA
2012 2013 2014 2015 2016

14. Page | 8
V. Return on Equity
The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to
generate profits from its shareholders investments in the company. In other words, the return on
equity ratio shows how much profit each dollar of common stockholders’ equity generates.
Higher ratios are almost always better than lower ratios, but have to be compared to other
companies’ ratios in the industry. ROE can’t be used to compare companies outside of their
industries very effectively. Here ROE is better in 2012.
VI. Return on Investment Capital
It measures the return that an investment generates for those who have provided capital,
i.e. bondholders and stockholders. ROIC tells us how good a company is at turning capital into
profits.
As an investor, it's important to know that if a company takes your money, you'll get an adequate
return on your investment.
Year ROE
2012 0.142
2013 0.115
2014 0.085
2015 0.067
2016 0.092
Year Return on Invested Capital
2012 0.006
2013 0.005
2014 0.003
2015 0.001
2016 0.002
0
0.05
0.1
0.15
ROE
ROE
2012 2013 2014 2015 2016
0
0.002
0.004
0.006
0.008
Return on Invested Capital
Return on Invested Capital
2012 2013 2014 2015 2016

15. Page | 9
VII. Net Profit Ratio
Net profit ratio (NP ratio) is a popular profitability ratio that shows relationship between net
profit after tax and revenue.
Year Net Profit Ratio
2012 0.651
2013 0.622
2014 0.601
2015 0.569
2016 0.512
Net profit (NP) ratio is a useful tool to measure the overall profitability of the business. A high
ratio indicates the efficient management of the affairs of business.
VIII. Net Profit Margin
Net profit margin is a key financial indicator used to assess the profitability of a company.
Net profit margin measures how much of each dollar earned by the company is translated into
profits. A low profit margin indicates a low margin of safety: higher risk that a decline in sales
will erase profits and result in a net loss.
Year Net Profit Margin
2012 65.06
2013 62.19
2014 60.06
2015 56.9
2016 51.22
0
0.2
0.4
0.6
0.8
Net Profit Ratio
Net Profit Ratio
2012 2013 2014 2015 2016
0
10
20
30
40
50
60
70
Net Profit Margin
Net Profit Margin
2012 2013 2014 2015 2016

16. Page | 10
IX. Price to Revenue Ratio
The price-to-sales ratio is a valuation ratio that compares a company’s stock price to its revenues.
The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or
revenues.
X. Operating ratio
Operating ratio (also known as operating cost ratio or operating expense ratio) is computed by
dividing operating expenses of a particular period by net sales made during that period.
The operating ratio is used to measure the operational efficiency of the management. It shows
whether or not the cost component in the sales figure is within the normal range. A low operating
ratio means a high net profit ratio (i.e., more operating profit) and vice versa.
0
1
2
3
Operating Ratio
Operating Ratio
2012 2013 2014 2015 2016
Year
Price to Revenue
Ratio
2012 5E-06
2013 5E-06
2014 6E-06
2015 7E-06
2016 5E-06
Year Operating Ratio
2012 1.03
2013 1.361
2014 1.832
2015 2.438
2016 2.027

17. Page | 11
XI. Expense Ratio
Expense ratio (expense to sales ratio) is computed to show the relationship between an individual
expense or group of expenses and sales. It is computed by dividing a particular expense or group
of expenses by net sales.
A lower ratio means more profitability and a higher ratio means less profitability.
XII. Cash Return on Capital Investment
Cash return on capital invested (CROCI) is a method of valuation that compares a
company's cash return to its equity.
In 2012, the ratio is the highest which is 29.3%. This means in 2012, IBBL had the highest cash
return to its equity.
0
100
200
300
Expense Ratio
Expense Ratio
2012 2013 2014 2015 2016
0
0.1
0.2
0.3
0.4
Cash Return on Capital Invested
Cash Return on Capital Invested
2012 2013 2014 2015 2016
Year Expense Ratio
2012 103
2013 136.1
2014 183.2
2015 243.8
2016 202.7
Year Cash Return on Capital Invested
2012 0.293
2013 0.114
2014 0.228
2015 0.164
2016 0.146

18. Page | 12
1.3 Activity Ratio
I. Working Capital Turnover
Working capital turnover ratio is computed by dividing the net sales by average working capital.
It shows company’s efficiency in generating sales revenue using total working capital available
in the business during a particular period of time.
A high working capital turnover ratio is better. A low ratio indicates inefficient utilization of
working capital during the period.
II. Total Asset Turnover
The Total Assets Turnover Ratio shows how efficiently the total assets of the firm are employed
to generate sales. This ratio gives an idea to the investor and the creditor about how the firm is
managed, and the assets are utilized to generate revenues.
Year Working Capital Turnover
2012 -0.025
2013 -0.022
2014 -0.015
2015 -0.011
2016 -0.015
Year Total Asset Turnover Ratio
2012 0.0179
2013 0.0148
2014 0.0101
2015 0.0076
2016 0.011
-0.03
-0.02
-0.01
0
Working Capital Turnover
Ratio
2012 2013 2014 2015 2016
0
0.005
0.01
0.015
0.02
Total Asset Turnover Ratio
Total Asset Turnover Ratio
2012 2013 2014 2015 2016

19. Page | 13
The higher the ratio, the better is the utilization of total assets in the firm. This shows that a firm
is able to generate revenues with the minimum amount of total assets without raising an
additional capital.
III. Fixed Asset Turnover
The fixed asset turnover ratio is an efficiency ratio that measures a company’s return on their
investment in property, plant, and equipment by comparing revenue with fixed assets.
In 2012, IBBL has the highest fixed asset turnover ratio which implies that they had a high return
on investment comparing to revenue.
0
0.2
0.4
0.6
0.8
Fixed Asset Turnover Ratio
Fixed Asset Turnover Ratio
2012 2013 2014 2015 2016
Year Fixed Asset Turnover Ratio
2012 0.583
2013 0.5165
2014 0.4146
2015 0.3496
2016 0.561

20. Page | 14
1.4 Market Prospect Ratio
Market Prospect ratios are used to compare publicly traded companies’ stock prices with other
financial measures like earnings and dividend rates. Investors use market prospect ratios to
analyze stock price trends and help figure out a stock’s current and future market value. In other
words, market prospect ratios show investors what they should expect to receive from their
investment.
I. Dividend Payout Ratio
The dividend payout ratio measures the percentage of net income that is distributed to
shareholders in the form of dividends during the year. In other words, this ratio shows the
portion of profits the company decides to keep funding operations and the portion of profits that
is given to its shareholders.
A consistent trend in this ratio is usually more important than a high or low ratio.
II. Dividend Yield
Dividend yield ratio shows what percentage of the market price of a share a company annually
pays to its stockholders in the form of dividends.
Year Dividend Payout Ratio
2012 0.570164
2013 0.618632
2014 0.664042
2015 0.766573
2016 0.718852
Year Dividend Yield
2012 0.0187
2013 0.0231
2014 0.0641
2015 0.0719
2016 0.0337
0
0.2
0.4
0.6
0.8
1
Dividend Payout Ratio
Dividend Payout Ratio
2012 2013 2014 2015 2016
0
0.02
0.04
0.06
0.08
Dividend Yield
Dividend Yield
2012 2013 2014 2015 2016

21. Page | 15
A low dividend yield percentage may be due to a recent decrease in the market price of stock of
the company due to sever financial troubles.
III. Return on Capital Employed Ratio
Return on capital employed ratio is computed by dividing the net income before interest and tax
by capital employed. It measures the success of a business in generating satisfactory profit on
capital invested.
Managers use this ratio for various financial decisions. It is a ratio of overall profitability and a
higher ratio is, therefore, better. Here higher ratio is in year 2012.
0
0.005
0.01
0.015
0.02
0.025
0.03
Return on Capital Employed Ratio
Return on Capital Employed
Ratio
2012 2013 2014 2015 2016
Year Return on Capital Employed Ratio
2012 0.025354
2013 0.009192
2014 0.016182
2015 0.012463
2016 0.013073

22. Page | 16
1.5 Solvency Ratio
I. Current Debt to Net Worth Ratio
Debt to Equity Ratio is a long term solvency ratio that indicates the soundness of long-term
financial policies of a company. It shows the relation between the portion of assets
financed by creditors and the portion of assets financed by stockholders. As the debt to equity
ratio expresses the relationship between external equity (liabilities) and internal equity
(stockholder’s equity), it is also known as “external-internal equity ratio”.
II. Total Liabilities to Net Worth Ratio
A measure of the extent is that the net worth of the enterprise can offset the liabilities. A ratio
greater than 1.0 should be avoided; since it indicates the creditors have a greater stake in the
business than the owners.
Year Total liabilities to net worth ratio
2012 11.1692608
2013 11.55984864
2014 12.98702748
2015 14.34632073
2016 15.33540369
0
5
10
15
20
Current Debt to Net Worth Ratio
Current Debt to Equity Ratio
2012 2013 2014 2015 2016
Year
Current Debt to Net Worth
Ratio
2012 11.08760378
2013 11.48690308
2014 12.91397576
2015 14.27632959
2016 15.26894604
0
5
10
15
20
Total liabilities to net worth ratio
Total Liabilities to Net Worth
Ratio
2012 2013 2014 2015 2016

23. Page | 17
III. Fixed Asset to Net Worth Ratio
Fixed assets to net worth is a ratio measuring the solvency of a company. This ratio indicates the
extent to which the owners' cash is frozen in the form of fixed assets, such as property, plant, and
equipment, and the extent to which funds are available for the company's operations.
Year 2012 indicates the high fixed asset to net worth ratio which is 37% whereas other years’ are
less than it is.
IV. Debt. To Asset
The debt to total assets ratio is an indicator of financial leverage. It tells you the percentage of
total assets that were financed by creditors, liabilities, debt.
A higher debt to asset ratio indicates that the company is highly dependent on debt. The
percentage of every year is almost same and near 100 which is a negative signal for the bank.
0.28
0.3
0.32
0.34
0.36
0.38
Fixed assets to net worth ratio
Fixed Assets to Net Worth Ratio
2012 2013 2014 2015 2016
0.9
0.91
0.92
0.93
0.94
0.95
Debt to Asset Ratio
Debt to Asset Ratio
2012 2013 2014 2015 2016
Year
Fixed assets to Net Worth
Ratio
2012 0.373366585
2013 0.359427617
2014 0.341969109
2015 0.334905286
2016 0.319135464
Year Debt to Asset Ratio
2012 0.91782574
2013 0.920381206
2014 0.928505181
2015 0.934837801
2016 0.93878327

24. Page | 18
V. Proprietary Ratio
The proprietary ratio (also known as net worth ratio or equity ratio) is used to evaluate the soundness of
the capital structure of a company. It is computed by dividing the stockholders’ equity by total assets.
The performance of 2012 is better compared to the other years. It had a high ratio indicating a
well capital structure of the bank.
VI. Capital Equity Ratio
The capital equity ratio determines how much shareholders would receive in the event of a
company-wide liquidation. The ratio, expressed as a percentage, is calculated by dividing
total shareholders' equity by total assets of the firm, and it represents the amount of assets on
which shareholders have a residual claim.
Here, we can see that the capital equity ratio is higher in the recent years that means
shareholder’s profit is maximizing slowly than the previous years.
0
1
2
3
4
5
6
7
8
9
Proprietory Ratio
Proprietory Ratio
2012 2013 2014 2015 2016
Year Proprietary Ratio
2012 8.217425992
2013 7.96187939
2014 7.149481915
2015 6.516219864
2016 6.121673017
Year Capital Equity Ratio
2012 1.671625425
2013 2.91481085
2014 3.762266868
2015 3.908114078
2016 3.499107799 0
1
2
3
4
5
Capital Equity Ratio
Capital Equity Ratio
2012 2013 2014 2015 2016

25. Page | 19
Part-2
Aggregate ROE Model
of
Islami Bank Bangladesh Limited

26. Page | 20
Aggregate ROE Model
Aggregate ROE model is the measurement of overall performance of the organization. It
concerns with how much return the organization get against the investment. It is a measure of the
profitability of a business in relation to the book value of shareholder equity, also known as net
assets or assets minus liabilities. ROE is a measure of how well a company uses investments to
generate earnings growth.
This aggregate ROE model decomposes its components to determine the strengths of an
individual company’s performance with other companies.
Step 01:
ROE = ROA x EM
= (Net Income/Total Assets) x (Total assets/Total equity)
Step 02:
Net Income (NI) = Total Revenue (TR)-Total Expenses (TE)
The effect of dividing both sides of above equation by total assets is to decompose ROA:
NI/TA= (TR/TA)-(TE/TA) which is,
ROA= Assets Utilization- Expense ratio
This implies that maximizing assets utilization and minimizing the expense ratios can maximize
ROA of company.
Step 03:
Total revenues can be further decomposed into:
TR= Interest Income (II) + Non-Interest Income (NII) + Net Profit/ Loss on sale of securities
(PS)
Dividing throughout by total assets, we get-
TR/TA = (II/TA) + (NII/TA) + (PS/TA) in other words,
Assets utilization= Yield on assets + Non-interest income rate + Profit rate on sale of securities

27. Page | 21
Step 04:
Similarly, total expenses can also be further decomposed into
TE= Interest Expenses (IE) + Overhead Expenses (OE) + Provisions (P)
Again dividing throughout by total assets we get,
TE/TA= (IE/TA) + (OE/TA) + (P/TA)
Here, first term represents the cost of funds for the bank, second term represents the overhead
expense rate, and third term signifies, to a large extent, the asset quality for the company.
In this manner, every aspect of bank operations can be examined for analysis and decision
making.
To sum up the whole framework of ROE model,
ROE= (ROA) x (EM)
= (Assets Utilization- Expense ratio) x EM
Stated differently,
ROE= (NI/TA) x (TA/TE)
= (NI/TR) x (TR/TA) x (TA/TE)
= Profit margin x Asset utilization x Equity multiplier

28. Page | 22
Yield on Asset Ratio
Yield on asset ratio is a financial solvency ratio that compares a financial institution’s interest
income to its earning assets. Yield on earning assets (YEA) indicates how well assets are
performing by looking at how much income they bring in. For calculating the yield on asset ratio
of Islami Bank Bangladesh Limited, we have considered all of their revenue income and divide
them by the total asset.
From 2012 to 2016, we can see that the Company had the higher yield on asset ratio in 2012
which is 2.54% but in 2015 it fall to 1.25%. So, if the Company wants to increase its efficiency
level it has to increase all of its interest income for getting higher yields on asset ratio.
Assets utilization= Yield on assets + Non-interest income rate + Profit rate on sale of securities
TR/TA = (II/TA) + (NII/TA) + (PS/TA)
0
0.005
0.01
0.015
0.02
0.025
0.03
Yield on asset ratio
Yield on Assets Ratio
2012 2013 2014 2015 2016

29. Page | 23
Net Interest Income Rate Ratio
Non-interest income is bank and creditor income derived primarily from fees including deposit
and transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges,
inactivity fees, check and deposit slip fees, and so on. Institutions charge fees that provide
noninterest income as a way of generating revenue and ensuring liquidity in the event of
increased default rates. Credit card issuers also charge penalty fees, including late fees and over
the-limit fees.
For calculating the non-interest income rate ratio of Islami Bank Bangladesh Ltd, we have
considered all of their non-interest income such as investment income, commission, exchange
and brokerage and from other operating income. From 2012 to 2016, we can see that the
Company had higher noninterest income rate ratio in 2011 which is 1.16% but it fall down to
0.43%. So, if the Company wants to increase its efficiency level, it has to increase all of its non-
interest income for getting higher non-interest income rate ratio.
0
0.002
0.004
0.006
0.008
0.01
0.012
0.014
Non Interest income ratio
Non Interest Income Rate Ratio
2012 2013 2014 2015 2016

30. Page | 24
Rate of Profit/Loss Ratio
The profit/loss ratio refers to a trading system's ability to generate profits over losses. The
profit/loss ratio is the average profit on winning trades divided by the average loss on losing
trades over a specified time period.
For calculating the rate of profit/loss ratio of Islami Bank Bangladesh Ltd, we have to consider
its total profit/loss on sale of securities and divide it by total asset. From 2012 to 2016, we can
see that the Company had higher rate of profit/loss ratio in 2012 which is 3.27% but from 2013
to 2016, it fall down. So bank must try to hold it for the sake of efficiency.
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
rate of profit or loss ratio
Rate of Profit or Loss Ratio
2012 2013 2014 2015 2016

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Total Expense = Interest Expenses (IE) + Overhead Expenses (OE) + Provisions (P) TE/TA=
(IE/TA) + (OE/TA) + (P/TA)
Overhead Expense Ratio
Overhead expense ratio is a comparison of operating expenses and total income that is not
directly related to the production of a good or service. A firm's operating expenses are
expenditures that result from normal, day-to-day business operations. Operating expenses
include advertising, office rent, professional fees, utilities, insurance, machinery maintenance,
depreciation or plants or machinery, etc.
For calculating the overhead expense ratio we have to consider all overhead expenses such as
salaries and allowances, Rent, taxes, insurance, electricity , legal expenses, postage, stamps,
telecommunication, directors fees, auditors fee, stationery, printings, advertisements, managing
directors salary and allowances, depreciation, leasing expense and repair of bank's assets, other
expenses etc. Then divide by the total assets. From 2012 to 2016, we can see that the bank had
higher overhead expense ratio in 2016 which is 2.22% and but in 2012, it fall down which is
1.87%. It will be difficult for raising the efficiency of the bank.
0
0.005
0.01
0.015
0.02
0.025
overhead expenses ratio
Overhead Expenses Ratio
2012 2013 2014 2015 2016

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Provision Ratio
Provision is an expense set aside as an allowance for uncollected loans and loan payments. This
provision is used to cover a number of factors associated with potential loan losses including bad
loans, customer defaults and renegotiated terms of a loan that incur lower than previously
estimated payments. Loan loss provisions are an adjustment to loan loss reserves and can also be
known as valuation allowances.
For calculating the provision ratio we have to consider all provisions such as provision for loans
and advances, specific provision, general provision, provision for off balance sheet items,
provision for diminution in value of share, provision for other. Then divide the total provision by
the total asset. From 2012 to 2016, we can see that the bank had lower provision ratio in 2011
which I 0.73% but in 2016, it's 0.49%, contiguously decreasing which is 0.49%. If the bank
wants to hold its efficiency level, must decrease its provision ratio.
0
0.001
0.002
0.003
0.004
0.005
0.006
0.007
0.008
provision ratio
Provision Ratio
2012 2013 2014 2015 2016

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ROA= Assets Utilization- Expense ratio
NI/TA= (TR/TA)-(TE/TA)
Asset Utilization Ratio
Asset utilization is a ratio used by business analysts to determine how well a company is using
its available assets to generate a profit. Asset-utilization ratios are used to determine the
profitability of everything from inventory to accounts receivable, sales and total asset turnover.
The higher the utilization ratio of any given asset, the more profit makes a company. With
accounts receivable, it is helpful to know the accounts receivable turnover, or number of times
per year that accounts receivables is collected. From here, an analyst can determine the average
collection period for the company.
For calculating the asset utilization ratio of Islami Bank Bangladesh Ltd, we have to sum up the
yield on asset, non-interest income rate and the rate of profit/loss. Then divide the total
summations value with the total asset. From 2012 to 2016, we can see that the Company had the
higher asset utilization ratio in 2012 which is 3.70% and it’s become decrease from 2013 to
2016. In 2016 its asset utilization ratio decreased in 1.87%. So the bank is in risky in situation
because of the fall in the asset utilization ratio.
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04
asset utilization ratio
Asset Utilization Ratio
2012 2013 2014 2015 2016

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Expense Ratio
The expense ratio is a measure of what it costs an investment company to operate a mutual fund.
An expense ratio is determined through an annual calculation, where a fund's operating expenses
are divided by the average dollar value of its assets under management (AUM). Operating
expenses are taken out of a fund's assets and lower the return to a fund's investors. It is also
known as the management expense ratio (MER).
For calculating the expense ratio of Islami Bank Bangladesh Ltd., we have to sum up the cost of
fund, overhead expense and provision. Then divide the total value by the total asset. From 2012
to 2016, we can see that the Company had the lower expense ratio in 2012 which is 1.84% but it
increased in 2016 which is 2.22%. It indicates that IBBL is not in the good position as their
expense is gradually increasing.
0
0.005
0.01
0.015
0.02
0.025
expense ratio
Expense Ratio
2012 2013 2014 2015 2016

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Return on Equity = (Net Income/Total Assets) x (Total assets/Total equity)
ROE= ROA x EM
ROA Ratio
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
ROA gives a manager, investor, or analyst an idea as to how efficient a company's management
is at using its assets to generate earnings. Return on assets is displayed as a percentage and it’s
calculated as:
ROA = Net Income / Total Assets
ROA ratio is the difference between the asset utilization ratio and expense ratio. We can see that
the ROA ratio in 2012 had the higher ROA ratio which is 1.16%% but it fall from 2013 to 2016.
As we know that higher the ROA ratio higher the efficiency level. So the Company has to avoid
this falling down situation and try to raise its ROA ratio.
0
0.002
0.004
0.006
0.008
0.01
0.012
0.014
roa ratio
ROA Ratio
2012 2013 2014 2015 2016

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Equity Multiplier Ratio
The equity multiplier is a financial leverage ratio that measures the amount of a firm’s assets that
are financed by its shareholders by comparing total assets with total shareholder’s equity. In
other words, the equity multiplier shows the percentage of assets that are financed or owed by
the shareholders. Conversely, this ratio also shows the level of debt financing is used to acquire
assets and maintain operations.
Like all liquidity ratios and financial leverage ratios, the equity multiplier is an indication of
company risk to creditors. Companies that rely too heavily on debt financing will have high debt
service costs and will have to raise more cash flows in order to pay for their operations and
obligations.
For calculating the equity multiplier ratio, we have to divide the total asset by the total equity.
From 2012 to 2016, we can see that IBBL’s equity multiplier is contiguously rising. In 2016 it
had the higher ratio which is 1633.54%.
0
2
4
6
8
10
12
14
16
18
em ratio
EM Ratio
2012 2013 2014 2015 2016

37. Page | 31
ROE Model
2012 2013 2014 2015 2016
Yield on Asset Ratio 2.54% 2.04% 1.62% 1.25% 1.31%
Non-Interest Income Ratio 1.16% 0.92% 0.61% 0.43% 0.56%
Rate of Profit or Loss Ratio 3.27% 2.60% 2.36% 2.01% 1.79%
Overhead Expenses Ratio 1.84% 2.01% 1.86% 1.86% 2.22%
Provision Ratio 0.73% 0.56% 0.74% 0.76% 0.49%
Asset Utilization Ratio 3.70% 2.96% 2.23% 1.68% 1.87%
Expense Ratio 1.84% 2.01% 1.86% 1.86% 2.22%
ROA Ratio 1.16% 0.92% 0.61% 0.43% 0.56%
EM Ratio 1216.93% 1255.98% 1398.70% 1534.63% 1633.54%
ROE 14.16% 11.54% 8.52% 6.66% 9.17%
For the measurement of ROE on Islami Bank Bangladesh Limited, we used year (2012-2016)
ROA and equity multiplier. We can see that in 2011 the company is more efficient because ROA
is 1.16%. But from 2013 to 2014, it fall down to 0.92% and 0.61. In 2015, it fall down to 0.43%
then in 2016, it again increases to 0.56%. So if the Company wants to improve ROA, Company
must maximize asset utilization ratio and minimize the expense ratio in 2015. So ultimately this
will improve the ROE.

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Part-3
Risk Management

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Risk Management
The term risk management is applied in a number of diverse disciplines people in the field of
statistics, economics,psychology,social,sciences,biology,engineering,toxicology,system analysis,
operational research, decision theory to name few have been addressing in the field of risk
management.
What is Risk?
“Risk has been defined as the combination of likelihood of a failure and consequences of the
failure. “Risks can be defined many things but at the root of every definition is the fact that risks
represents uncertain outcomes. These outcomes can be either negative or positive opportunities
(opportunities for excellence) as well as negative threats.
Risk is uncertainty and uncertainty lays opportunity, without uncertainty, there’s little chance to
profit. “Risk is nothing more than the possibility of something unexpected happening.”
Risk statement
For a risk to be understandable the risk statement must include. A description of the current
conditions may lead to the loss.
 A description of the loss
 Risk management is the decision making process involving considerations of political social,
economic and engineering factors with relevant risk assessment relating to a potential hazard so
as to develop analyze and compare regulatory options and to select the optimal regulatory
response for safety.
Banks are in the business of taking risk and devising risk mitigates for survival and growth in
order to ensure safety and adequate return for all shareholders, depositors, borrowers, employees
etc. OBL strongly believes that risk management is crucial and bank management is ultimately
risk management. But at the same time, OBL focuses its risk management as a tool for ensuring
continuous and sustainable growth of business and profit through better trade-off between risk
and return. Their main risk arises from credit extension to the borrowers. Besides, other types of
risks are also there such as operational, market, concentration, and liquidity, legal, reputational,
cross country etc. Considering all these, OBL risk management system is designed to maximize
risk adjusted returns while keeping in view that any viable business opportunity is not missed
out.

40. Page | 34
4.1 Market Risk Management Framework of IBBL
The Treasury Division manages market risk covering liquidity, profit rate and foreign exchange
risks with oversight from Asset-Liability Management Committee (ALCO) comprising senior
executives of the Bank. ALCO is chaired by the Managing Director. ALCO meets at least once
a month.
Policies and processes for mitigating market risk:
There are approved limits for credit deposit ratio, liquid assets to total assets ratio, maturity
mismatch, commitments for both on-balance sheet and off-balance sheet items and borrowing
from money market and foreign exchange position. The limits are monitored and enforced
regularly to protect the market risks. The exchange rate of the Bank is monitored regularly and
the prevailing market condition, exchange rate, foreign exchange position and transactions are
reviewed to mitigate foreign exchange risks.
4.2 Credit Risk Management Framework
Investment (Credit) risk is one of the major risks faced by the Bank. This can be described as
potential loss arising from the failure of counter party to perform as per contractual agreement
with the Bank. The failure may result from unwillingness or inability of the counter party in
discharging his / her financial obligation. Therefore, Bank’s Investment (Credit) risk
management activities have been designed to address all these issues. In 2012, some policies
were taken to manage the credit risk.
Investment (Credit) Risk Management Policy
The Bank has put in place a well-structured Investment/Credit Risk Management Policy known
as Investment Risk Manual approved by the Board. The Policy document defines organization
structure, role and responsibilities and, the processes whereby the Investment (Credit) Risks
carried by the Bank can be identified, quantified and managed within the framework that the
Bank considers consistent with its mandate and risk tolerance.
Authorities are properly delegated ensuring check and balance in investment operation at every
stage i.e. screening, assessing risk, identification, management and mitigation of investment risk
as well as monitoring, supervision and recovery of investments with provision for Early Warning
System and Grading of Investment clients as Blue, Green, Grey, Yellow, Red and Brick Red.
Bank has framed Investment Policy, Investment (Credit) Assessment & Risk Grading, Approval
Authority, Internal Audit Approval Process, Investment (Credit) Administration, Investment
(Credit) Monitoring, and Investment (Credit) Recovery etc. which forms integral part in
monitoring of Investment (Credit) Risk in the Bank. Status of investments is regularly reported
to the Board /Executive Committee of the Bank.

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4.3 Liquidity Management System Framework
In order to develop comprehensive liquidity risk management framework, Contingency Funding
Plan (CFP) has been developed which is a set of policies and procedures that serves as a
blueprint for the bank to meet its funding needs in a timely manner and at a reasonable cost.
For day-to-day liquidity risk management, CFP ensures that the bank is well prepared to respond
to an unexpected problem. In this sense, a CFP is an extension of ongoing liquidity management
and formalizes the objectives of liquidity management by ensuring:
A reasonable amount of liquid assets are maintained; Measurement and projection of funding
requirements during various scenarios; and Management of access to funding sources.
CFP also provides directions for plausible actions in distress and emergency situations. In case of
a sudden liquidity stress, it is important for the bank to handle the same in an efficient and
organized way to meet its obligations to the stakeholders. Since such a situation requires a
spontaneous action, CFP will put the bank in better position by addressing the liquidity problem
more efficiently and effectively. CFP ensures that bank management and key staff are ready to
respond to any distress situation.
Policies and Processes for Mitigating Liquidity Risk
Maturity ladder of cash inflows and outflows is an effective tool to determine bank’s cash
position. A maturity ladder estimates a bank’s cash inflows and outflows and thus net deficit or
surplus (GAP) both on a day-to-day basis and over a series of specified times can be estimated.
A bucket wise (e.g. call, 2 to7 days, 1 month, 1 to 3 months, 3to 12 months, 1to 5 years, over 5
years) maturity profile of assets and liabilities is prepared to understand mismatch in every
bucket. A structural maturity ladder or profile is prepared periodically following guidelines of
the Bangladesh Bank DOS circular no. 02 dated March 29, 2011.

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Conclusion
Islami Bank Bangladesh Limited is the first Islami Shariah based bank in Bangladesh. In past
few years, it was the top performing bank leading the banking industry. But due to some political
issues, credit problems, loans sanctioning without strong securities, it is drastically falling. From
the ratio analysis, aggregate ROE model and risk management, it is clearly stated that its ROE is
falling since 2012 to 2016. It indicates that they should reform their activities and take necessary
steps to stop the rate of default loan. It should take strong securities before disbursing loans to
new loan seekers. If they do not take necessary steps to stop the falling of ROE, it won’t be able
to survive in the economy.

43. Page | v
Reference
https://www.islamibankbd.com/annual_report/Annual%20Report%202016.pdf
https://www.islamibankbd.com/annual_report/Annual%20Report%202015.pdf
https://www.islamibankbd.com/annual_report/Annual%20Report%202014.pdf
https://www.islamibankbd.com/annual_report/Annual%20Report%202013.pdf
https://www.islamibankbd.com/annual_report/Annual%20Report%202012.pdf