MANAGING CORE RISK IN BANKING

INVESTMENT RISK MANAGEMENT

AL-ARAFAH ISLAMI BANK LIMITED
HEAD OFFICE, DHAKA SECOND EDITION - 2005

Recommended by Management Committee of the Bank

Drafted by
Muhammad Abu Taher Senior Principal Officer

CUSTOMIZED BY: MUHAMMAD ABU TAHER, SPO

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INTRODUCTION:
Investment (Credit ) Risk Management (IRM) assumes greater priority in view of the changes in the scenario of the banking practices due to liberalization, deregulatory measures and globalization of business and financial transactions. Risk is inherent in all aspects of a commercial operation, however for Banks and financial institutions, investment risk is an essential factor that needs to be managed. Bangladesh Bank took stock of the situation and suggested to introduce 5 basic risk management measures by the banks in their respective organization in order to capitalize the potential strength and sustain the volatilities. Investment Risk Management is one of the major risk management measures for the administration of investment in banks. In compliance with the decision of Bangladesh Bank (Circular No. BRPD-17 date: 07

October 2003), Al-Arafah Islami Bank Limited has prepared risk profile in line with the guidelines and framework provided by Bangladesh Bank to customize in their existing framework to better manage the investment portfolio to suit the new changes. Accordingly, the committee comprising the senior executives draws up detailed investment risk management framework for the bank, which was approved by the Board of Directors of the bank in its 125th meeting held on 16 June 2005. The approved policy guidelines is still in the pre-implementation stage. By this time, an Inspection Team of Bangladesh Bank has conducted Special Inspection on the implementation of Investment Risk Management guidelines in 16 July 2005. The Inspection Report has been sent to the Managing Director of the Bank on 07 September 2005. In the report they identified major gaps of Investment Risk Management guidelines incorporated in the approved policy and that of the guidelines of Bangladesh. In conclusion of the report the Inspection Team recommendations for implementation which are quoted below: • The bank is advised to identify its interest in different business sectors as well as indicate its appetite for growth of investment portfolio in the policy to let the functionaries know its interest in business and appetite for growth of investment. • The bank is advised to incorporate all the type of investment facilities in the policy to let the functionaries know its priority to investment portfolio facilities. • The bank is advised to incorporate limits of large investment for single borrower/group/syndication in the policy to let the functionaries know its policy of extending single /group limits. • The bank is advised to include its preference of “Specific Industry Sector Exposure Cp” in the policy to aware its functionaries to avoid over concentration of its investment n any one-industry sector. • The bank is advised to incorporate the discouraging business sectors in the policy to avoid probable risks. • The bank is advised to incorporate the investment facility parameters in the policy to minimize probable risks. has put some

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• The bank is advised to incorporate the KYC process in the policy to avoid probable risks and it should be implemented in its branch level as soon as possible. • The bank is advised to review its any for establishing an application format by incorporating the basic areas stated in the report that are important to analyze the credit worthiness of the borrowers, justify the borrowing needs while considering the application by the approval authority. Further, Credit Department as well as concerned departments of branches is also advised to use the approved application format without any discrimination. • The bank is advised to take necessary steps to implement the Risk Grading System in its operation. • The bank is advised to develop necessary formats and use the same for reporting of new facilities to Senior Management of Board of Directors on a regular basis. • The bank is advised to incorporate the functions of internal audit department more specifically in the policy guideline to ensure better performance of the functionaries. • The bank is advised to chalk out organ gram for its branches. • The bank is advised to distribute the policy to its different functionaries for proper implementation of the same. • The bank is advised to arrange more training programs regarding Credit Risk Management to the officers working in the Credit departments. • The bank is advised to incorporate the suggestion given in the report about disbursement of approved investment in the polity and necessary steps to be taken for implementation of the policy at the branch level. • The bank is advised to incorporate the suggestion given in the report about custodial duties clearly in the approved policy in line with CRM Guidelines of Bangladesh Bank and necessary steps to be taken for implementation of the policy at the branch level. • The bank is advised to review the policy to incorporate a control mechanism regarding investment monitoring so that concerned officers would be able to monitor credit and make early alert on a regular basis. • The bank is advised to review the policy to place the system for enlistment of surveyors as per the suggestion of the CRM guidelines of Bangladesh Bank and implement the same in its business Bangladesh Bank has advised to take necessary steps to implement recommendations stipulated in the report by 31 December 2005. In compliance with the findings of Bangladesh Inspection Team, Second Edition of the Investment Risk Management (IRM) guideline is prepared incorporating their suggestions. The revised IRM will be applicable for 2006 and will be implemented from January 2006.

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13 2.6 2.18 2. 1.11 2.2.23 2.7 2.24 Industry and Business Segment Focus Types of Investment Facilities Single borrower/Group Limit Investment (Lending) Cap Discourage Business Types Investment Facility Parameters KYC Policy Investment Application Format Risk Grading Approval Authority Reporting of new facilities Segregation of duties Internal Audit Organizational Structure Responsibilities of different functionaries Distribution of the policy to the investment/marketing officers Investment Training Approval Process Disbursement Custodial Duties Monitoring and Early Alert System Enlistment of lawyer and surveyor ID System Ensure the commercial profitability of the bank Page 4 .22 2.10 2.9 2. Investment Guidelines Objectives of the Investment Guidelines 5 5 5 7 7 7 8 9 9 10 11 11 11 13 14 14 14 15 15 15 15 16 18 19 19 21 21 21 2.3 2.Table of Contents 1.4 2.20 2.16 2. INVESTMENT GUIDELINES 2.15 2.19 2.2 2.17 2.14 2.1 2.8 2. Objectives of the Investment Risk Management Guidelines 1.1.5 2.12 2.21 2.

26 2.30 2. poverty alleviation.2.34 2.33 2.27 2.25 2.28 2.35 Encourage the socio-economic development.32 2.31 2. employment generation Investment Diversification Competitive investment pricing Assessment of collateral Asset liability matching Decentralization of investment sanctioning power Strengthen the investment recovery activities Investment Administration Non performing investment provisioning and write off Incentive program Cross Border Risk 22 22 24 24 24 24 24 25 26 26 26 Page 5 .29 2.

Investment (Lending) Caps. small and medium entrepreneur development. The banking activities of the bank are conducted by the rules of Islamic Principle. The Investment Guidelines is updated on the basis of Industrial Policy. 1. micro investment.2) Objectives of the Investment Guidelines Investment diversification. It is a private commercial bank running by principle of Islamic Shariah. Keeping all these views in the mind. the Investment Guidelines is prepared for smooth flow of investment in the coming days.CHAPTER – 1 OBJECTIVES OF THE INVESTMENT RISK MANAGEMENT GUIDELINES 1.1) Investment Guidelines: Al-Arafah Islami Bank Limited is a banking company registered with the Registrar of Joint Stock Company under the Bank Company Act 1994 and licensed by the Bangladesh Bank. Single borrower/Group Limit. corporate investment culture. Export Bank Company Act. the central of the country. The main objective of the policy guideline is to expedite the present flow of investment and overall functions of the bank. Policy and other regulatory rules and regulation. The following policy issues are incorporated in this investment guidelines: • • • • • • • • • • • • Industry and Business Segment Focus Types of Investment Facilities. Implementation of Investment Risk Management system is also the objective of this guidelines. export expansion are the main features of this investment policy guidelines. The important basis of the guidelines is Investment Risk Management (IRM). Import Policy Order. Discouraged Business Types Investment Facility Parameters KYC Policy Investment Application Format Risk Grading Approval Authority Reporting of new facilities Segregation of duties Page 6 . The bank has also to comply the policy and guidelines of Bangladesh Bank.

Encourage the socio-economic development. Enhance investment in the thrust sectors Create new investment sectors Competitive investment pricing. Strengthen the investment recovery activities. Location based diversification II. Sector based diversification III. Investment Administration in the branches ii. and employment generation. poverty alleviation. Investment Administration in Head Office iii. • • • • • • Enhance the small and medium type investment instead of term and large investment Enhance investment in export oriented sectors. Investment Recovery • • • Non performing investment provisioning and write off Inventive program Cross Border Risk Page 7 . Investment Diversification: I. V. Investment Administration i. VI.• • • • • • • • • • • • • • Internal Audit Organizational Structure Responsibilities of different functionaries Distribution of policy to the investment/marketing officers Investment Training Approval Process Disbursement Custodial duties Monitoring and Early Alert System Enlistment of lawyer and surveyor IT System Ensure the commercial profitability of the bank. IV. Assessment of collateral Asset liability matching Decentralization of investment sanctioning power.

Following types of investment are permitted by the bank and allowed in diffident Mode of Investment: # 01 Types of Investment Working Capital Mode of Investment •Bia Muazzal •Murabaha •Quard • HPSM • Bia-Muazzal • Musharaka • Letter of Credit • Back to Back to Credit • Bia-Salam • Istisna (PSF) • Murabaha Post Import • Bill Purchase • 02 Industrial (Term Investment 03 Trade Finance Page 8 . Agriculture. Miscellaneous 2.20 which was Tk.20 million in the year 2004. Trade 9.CHAPTER – 2 INVESTMENT GUIDELINES: 2. Transport and Communication 7. Industry (Other than working capital Financing) 3. Working Capital Financing 4. Construction 5. Storage 8. Water works and sanitary Service 6. 8150.2) Types of Investment Facilities Al-Arafah Islami Bank Limited is extending all types of investment facilities in compliance with Islamic Shariah. Fishing and Forestry 2. Sector wise segregation of investment and growth of each sector is given below: Investment Sector Investment in 2004 Investment in 2005 Growth in 2005 Growth target for 2006 1.1) Industry and Business Segment Focus Total investment volume of the bank in the current year 2005 is running with taka 10831.

• As per Bangladesh Bank’s Guidelines a bank is able to sanction large investment The highest rate fixed for large investment against bank’s total investment 56% 52% 48% 44% 40% as per following limits set against their respective classified investment: Rate of net classified investment Upto 5% More than 5% but upto 10% More than 10 % but upto 15 % More than 15 % but upto 20 % More than 20 % Bank’s net classified investment is at present 7. • not Maximum outstanding funded investment facilities to any single borrower shall exceed 15% of total capital.52000. 05 date 09 April 2005 on the caption “ Master Circular-Single Borrower Exposure”.00 million of total investment of the bank.88%. • Investment allowed to any individual or enterprise or any organization of a group amounting to 10% or more of bank’s total capital of the bank shall be treated as large investment. until further instruction.3) Single borrower/Group Limit Bangladesh Bank issued BRPD Circular No. but under no circumstances the total amount of funded and non funded credit facilities shall exceed 35% of banks total capital. guarantee may be provided to a single borrower.1042. This limit will be reviewed and re-fixed on the basis of growth of capital on quarterly basis. Page 9 . Banks total Tk.70 million (as on 30/06/2005). 364. In compliance of the circular Bank’s policy of large will be as follows: • Outstanding investment facilities to any single person or enterprise or capital as per Bank Company Act 1991 at present is organization of a group shall not at any point of time exceed 35% of the bank’s total capital.94 million.2. So banks investment to single borrower will be Tk. • In case of export sector single borrower investment limit will be 50% of total capital of the bank subject to the condition that funded facilities shall not exceed 15% of the total capital of the bank.g letter of credit..00 million. So maximum funded investment to any single borrower will be Tk.160.. So bank can allow total large investment upto Tk. • Non funded investment facilities e.

So risks involved in investment will spread : • • • • Over a large number of borrowers Over a large number of industries Over a large number of areas.38 59. 2.50 1. Audited collected and Lending Analysis shall be performed. renewing and rescheduling large investment CIB report to be Before sanctioning large investment borrowers Cash Flow Statement. (Taka in crore) Investment Sector Agriculture Large & Medium scale industry Working capital Export finance Commercial Investment Term investment in small & cottage industries Others Total • 2004 0. it is observed that investment in some particular sector under certain mode investment are being classified. renewing. the actual investment facilities shall be determined by deducting the amount of such securities from the outstanding balance of investment.1. • • Before sanctioning.5) Discouraged Business Types From the ten years experience of the bank. rescheduling of large investment shall be approved by the Board of Directors of the bank.13 2.• In case of investment backed by cash and en-cashable like MTDR.26 9.81 Keeping in mind the above experience. Page 10 .0 1. Balance Sheet.17 74. To ensure the objectives mentioned above. Income Statement and Financial Statements to make sure that the borrower has the ability to repay the investment in time. bank will aware in extending investment facilitates in different sector of investment. 2. Sector wise classified investment in 2004 is given below.4) Investment (Lending) Cap An element of risk is always present in every investment. Over different types of securities. Bank will follow the following industry wise Investment (lending) cap as mentioned in para-2. • Sanctioning.37 1.

guidelines mentioned in para 2.6) Investment Facility Parameters Bank’s Investment Facility Parameters are being declared time Instruction Circulars from the • • Investment Division. • (a) (b) (c) (d) (e) (f) Maximum Tenor: Working capital investment limit: 1 (one) year on revolving basis Trading investment: 1 (one) year on revolving basis Individual deal of trade investment: 90 days to 180 days Term investment in Real Estate (Commercial) : 5 years Term investment in Real Estate (Residential): 10 to 20 years HPSM in machineries and equipments: 5 Years Security Requirements: • Page 11 .• No investment will be allowed in the following restricted industries (Industrial Policy-2005. Head to time issuing Office upon approval of competent authority. Anex-3):  Military equipments and weapons  Atomic Energy  Security Printing and Takshal • In addition investment in the following sector will also be discouraged:  Film making industries  Musical Instrument  Highly Leveraged Transactions  Finance of Speculative Investment  Mineral Extraction and Mining  Investment to companies listed in the CIB black list or known defaulters  Organization under UN sanctions  Organization or individual engaged in anti-state activities  Share lending  Taking an equity stake in borrowers  Investment to Holding Companies  Bridge investment relying on equity/debt issuance as source of repayment 2. Further following Parameters are adopted in this policy guidelines: Maximum size of investment (Funded +Non funded) to any borrower will be In determining amount of large investment and single borrower exposure equivalent to 35% of bank’s total capital.3 above will be followed.

7) KYC Policy Before allowing any investment facility KYC requirement as per Anti Money Laundering Policy of the bank shall be ensured. 2.“A” (Revised format is enclosed in annexure-1) • Case to case LC & MPI in format enclosed in annexure-2 Page 12 ..5 times security against current investment. as security should be properly insured. Investment sanctioning delegation: As per delegated power approved by the #. Post dated cheque of equivalent investment amount in all cases to be obtained Assets pledged.5 times in case of rented premises. Properties taken as security shall be physically verified by the branch manager/investment in-charge.Instruction Circular Board of Directors which was circulated vide circular Letter/ADMN/ 42 on May 02.8) Investment Application Format Any investment proposal shall be presented in the banks prescribed format. Cash security against documentary credit (LC) will be on the customer banker relationship. Following investment formats are presently used: • Investment Proposal Presentation: Format. Instructions of the following circular in this respect shall be followed strictly: • # HBC¢hHm/fÐL¡/HHjHm¢p¢pCE/¢ex ¢hx/01/2004 a¡¢lMx 28-08-2004 • h¡wm¡cn hÉ¡wLl j¡x mx fÐx p¡L¤Ñm¡l ew 02 a¡¢lMx 17-072002 • h¡wm¡cn hÉ¡wLl j¡x mx fÐx p¡L¤Ñm¡l ew 03 a¡¢lMx 10-122002 • h¡wm¡cn hÉ¡wLl j¡x mx fÐx p¡L¤Ñm¡l ew 04 a¡¢lMx 23-122002 • h¡wm¡cn hÉ¡wLl j¡x mx fÐx p¡L¤Ñm¡l ew 05 a¡¢lMx 22-052003 • h¡wm¡cn hÉ¡wLl j¡x mx fÐx p¡L¤Ñm¡l ew 06 a¡¢lMx 24-072005 • h¡wm¡cn hÉ¡wLl j¡x mx fÐx p¡L¤Ñm¡l ew 07 a¡¢lMx 14-082005 Instruction Circular 2. 2000. Valuation of properties taken as security should be conducted by the bank official and valuation report to be submitted in the bank’s prescribed format.(a) (b) (c) (d) (e) (f) (g) • At least 1. At least equal security against industrial term investment in own premises and 1.

Loans should be downgraded to 6 if loan payments remain Risk Rating Superior – Low Risk Good – Satisfactory Risk Acceptable – Fair Risk 3 Marginal . • A risk grade matrix is given below for this purpose: Grade 1 2 Definition Facilities are fully secured by cash deposits. If left uncorrected. but should still demonstrate consistent earnings. loan payments routinely fall past due. Adequate financial condition though may not be able to sustain any major or continued setbacks. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. higher than normal leverage.Watch list 4 Special Mention 5 Substandard 6 Page 13 . Grade 5 assets have potential weaknesses that deserve management’s close attention. if loan payments remain past due for 30-60 days. cash flow and have a good track record. An Aggregate Score of 65-74 based on the Risk Grade Scorecard. account conduct is poor. third • • assignment of risk grading. Risk Grade assigned to any borrower shall clearly be mentioned in the concern Risk grading is not a permanent issue. or other untoward factors are present. government bonds or a counter guarantee from a top tier international bank. These weaknesses jeopardize the full settlement of loans. Full repayment of facilities is still expected and interest can still be taken into profits. Borrowers should have adequate liquidity. Facilities should be downgraded to 4 if the borrower incurs a loss. All security documentation should be in place. These borrowers are not as strong as Grade 2 borrowers. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property). Until engagement of any party risk grading agency the designated bank officials will perform the of Anti Money Laundering guidelines.2. the industry or the economic environment. thin cash flow and/or inconsistent earnings. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (consecutive losses. Financial condition is weak and capacity or inclination to repay is in doubt. negative net worth. time. cash flow and earnings. Aggregate Score of 95 or greater based on the Risk Grade Scorecard. these weaknesses may result in a deterioration of the repayment prospects of the borrower. An Aggregate Score of 55-64 based on the Risk Grade Scorecard. All security documentation should be in place.9) Risk Grading • • All the bank’s customer are required to assigned a risk grade as per KYC policy All investment facilities shall be assigned a risk grade. These borrowers have an above average risk due to strained liquidity. the Risk Grade assigned to a borrower and its facilities should be immediately changed. excessive leverage). or if a significant petition or claim is lodged against the borrower. A borrower should not be graded better than 3 if realistic audited financial statements are not received. Grade 4 assets warrant greater attention due to conditions affecting the borrower. The borrower should have excellent liquidity and low leverage. An Aggregate Score of 75-94 based on the Risk Grade Scorecard. The repayment capacity of the borrower is strong. The parameters may be changed at any application format. Where deterioration in risk is noted.

An Aggregate Score of 45-54 based on the Risk Grade Scorecard. and the anticipated loss should have been provided for. Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. if the customer intends to create a lender group for debt restructuring purposes. The prospect of recovery is poor and legal options have been pursued. liquidation procedures or capital injection. and interest can still be taken into profits. the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. They can not approve any investment.4 • Bank is also going introduce an Integrated Risk Grading System by March 2006 as per Risk Grading Manual provided by Bangladesh bank recently.02 May 2000. Page 14 . Not yet considered non-performing as the correction of the deficiencies may result in an improved condition. An Aggregate Score of 35-44 based on the Risk Grade Scorecard Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days. The investment proposals to be placed before the EC of the Board shall be reviewed in the Management Committee. loan rescheduling and provisioning must be followed. • • Any amendment of the delegation will be communicated to the branches and all other concerned. and interest income should be taken into suspense (non-accrual). The adequacy of provisions must be reviewed at least quarterly on all non-performing loans.10 Approval Authority • Authority to sanction/approve investment has been delegated to different level of executives by the Board of Directors in its meeting held on 27 April 2000 which was circulated vide Instruction Circular Letter # ADMN/42 date. the requirements of Bangladesh Bank in CIB reporting. The proceeds expected from the liquidation or realization of security may be awaited.Risk Rating Grade Definition past due for 60-90 days. 2. • Approval of investment shall be in writing and must be maintained in the concern investment file with application format. This classification reflects that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard Doubtful and Bad (Non-performing) 7 Loss (non-performing) 8 • A Risk Grade score card preparation is enclosed in annexure. However. due to specifically identifiable pending factors. such as litigation. The continuance of the loan as a bankable asset is not warranted. the asset is not yet classified as Loss. Loan loss provisions must be raised against the estimated unrealisable amount of all facilities. In all cases. Management Committee can only review and recommend any investment proposal.

limit of investment to be submitted by the branch on monthly basis. Divisions in the Head Office are engaged investment functions of the bank: • • • • • • Management Committee. • • They will ensure compliance of other prudential guidelines. should be referred to Head Office for Approval.12 Segregation of duties Following committee. regardless of amount. The consolidated list of the new borrowers to be placed to the Board of Directors on monthly basis. Any investment proposal that does not comply with Investment Guidelines.13 Internal Audit Audit & Inspection Division of the bank shall ensure the the implementation of this guidelines. They will identify the shortcomings of in the implementation process. renewed. circulars. A format for such type reporting is enclosed in annexure ------------ 2. rules issued the regulatory authorities in respect of investment and credit facilities They will submit their findings to the CEO for onward submission to the Board of Directors. 2. enhanced to be placed to the meeting of the Board of Directors as per format enclosed in annexure.• • The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required. Investment Division International Division-for International Trade Finance Investment Monitoring and Recovery Division Business Development Division For investment risk management their duties and responsibilities are segregated in Chapter-3 2. Their functions in this respect are identified below: • • They will inspect the implementation of the policy guidelines by the other concern at once in a year.11 Reporting of new facilities • A monthly summary statement of new facilities approved.5 • A detail list of new investment facilities approved including name & address of the borrower. Page 15 .

• • AIBTRA will arrange training program and workshop on this policy guidelines of Investment Risk Management. Details are given in Para-3.16 Distribution of the policy to the investment /marketing officers • • Investment Division.18. disbursement.1 Delegation of Approval Limits • Investment sanctioning power has been delegated to the different level of management by the Board of Directors in its meeting held on.17 Investment Training • Al-Arafah Islami Bank Training & Research Academy (AIBTRA) will responsible for arranging sufficient training program for Relationship Manager/Investment Officer and other investment functionaries. circulars issued by Bangladesh Bank to the all investment functionaries. 2. Until Page 16 . For this purpose an Organ gram has been chalked out functions of different investment functionaries have been spelt out.sanction. 2.They will suggest Investment Division for further updating the Investment Risk Management policy.2 of the guideline. Head Office will ensure communication of this guideline to the all investment functionaries. prudential guidelines. 2.27 April. Details are given in Para 3. 2.18 Approval Process 2. AIBTRA will include at least three Investment Management Courses in their annual training calendar 2.15 Responsibilities of different functionaries • Duties and responsibilities of different functionaries concerned with bank's investment have been clearly defined. recovery will be managed under a definite Structure. They will also communicate other regulatory rules & regulation.1 of this guideline.2000..14 Organizational Structure • Total activities of investment .

Transaction/Turnover in the current account of the client is satisfactory. verified.18. The investment proposal has been properly scrutinized. all the investment limit shall be approved. Investment Committee will scrutinize the complete proposal and recommend for approval or decline and forward the same to the branch manager for approval.further amendment of the delegation. Collateral security is properly valued. Investment limit is not recommended on the basis of fake or imaginary transaction. rescheduled as per delegation power. Before recommend any proposal for approval the Investment Committee will ensure the following issues: (a) (b) (c) (d) (e) (f) (g) (h) • • The investment proposal is not fake. Page 17 . Branch manager then approve the investment limit with his responsibility and be Flow chart of investment approval process in the branch level: Branch Incumbent held responsible for approval of the investment. The investment limit is not proposed to so enhanced to regularize previous classified investment account. The investment limit is enhanced which is not inconsistent with business or production of the client. Or investment limit is not artificially enhanced. The client or any the sister concern has not got classified investment with other banks or financial institutions. • The functionaries at different levels shall strictly follow investment sanctioning power delegation policy. • Relationship Manager(s)/Investment Officer(s) will forward the Investment to the Investment Committee of the branch with Application/Proposal • recommendation for approval. Any breach of the policy must be reported to the Managing Director. renewed.2 Investment Approval Process in the Branch level • In the branch level Relationship Manager(s)/Investment Officer(s) will responsible for preparing the Investment Application/Proposal and collecting all necessary information/papers from the client. 2. studied and risk grading has been properly done.

18. • Then the proposal will be placed to the Executive Committee of the Board of Directors for final approval with recommendation on behalf of the CEO/MD. • The proposal the be placed to the individual executive (MD/CEO) for approval if it is within his/her discretionary power. it will be placed to the Management/Investment Committee prior to placing to the EC of the Board of Directors for approval.Relation Manager/ Investment Officer Investment Committee 2.2.3.3 Investment Approval Process in the Branch level • If the investment limit is beyond the discretionary of the branch. • Investment Division and International Division upon receipt of the proposal. • If the investment limit is beyond the discretionary power of the CEO/MD.. Head Office Branch Incumbent If within the discretionaryBranch's Investment Committee will scrutinize not within the discretionary If the proposal & recommend for sanction Relationship Manager will prepare the proposal & recommend to the Investment Committee of the branch Page 18 Bank's Customer approaches to branch for facility .1 of these guidelines). Following flow chart illustrates the whole approval process: Managing Director EC Board of Directors If within the discretionary Investment Committee will scrutinize the proposal and recommed for sanction If not within the discretionary Head of Investment/International Division. then branch incumbent forward proposal the Head of Investment Division. • The Management/Investment Committee will scrutinize the proposal and recommend for approval or decline. Head Office. branch will perform all the steps mentioned in para 1.2 above. The CEO/MD may approve the proposal directly with his responsibility or may refer to the Management Committee/Investment Committee for recommendation /opinion. [ Terms of reference of the committee in this respect has been described in para. make necessary assessment (Investment Assessment Guidelines has been described in chapter-2 of this guidelines) of the investment proposal recommended by the branch. Head Office if the it is general investment proposal.19. • Proposals related to International Trade Finance will be forwarded to the Head of International Division.

No investment proposal irrespective of the amount shall be forwarded to the higher authority for approval/renewal/enhancement/reschedule without collecting CIB report. Security documents are prepared in accordance with approval terms and are Standard investment facility documentation that has been legally enforceable. Financial statement provided by the client shall be analyzed as per set standard but can not be manipulated by the relationship manager/investment officer. limit & outstanding.18. never approve any investment proposal declined by the higher authority. 2. There should be no appeal beyond the Managing Director.18. Page 19 .4 Appeal process • • • • • Any declined investment may be re-presented to the next higher authority for reassessment/approval upon request of the client. reviewed by legal advisor should be used in all cases. 2. Disbursements under investment facilities are only be made when all security documentation is in place.2.5 Covenant The lower authority can.19 Disbursement   Investment Administration Officer/Team will be responsible for disbursement. CIB report should be clean in the name of all the lenders with facility.  • • Exceptions should be referred to legal advisor for advice based on authorization from an Head of Investment/International Division.

1 Investment Monitoring in the branch level • An Investment Monitoring and Recovery Officer (s)/Team independent from the Relationship Manager/Investment and Investment Committee will responsible for Monitoring and recovery.Inland and Foreign. All investment documents shall be held under strict control in locked fireproof storage. They will monitor and follow up the realization of Trade Bills . expenses.• • All formalities regarding large loans & loans to Directors should be guided by Bangladesh Bank circulars & related section of Banking Companies Act. Commercial Audit.21.21 Monitoring and Early Alert System 2. Appropriate insurance coverage shall be maintained (and renewed on a timely basis) on assets pledged as collateral. Internal Audit & Inspection of the Bank. All Investment Approval terms have been met. • • • • • • • They ensure preparation and submission of monthly statements within the 10th Recovery team will ensure reduction of investment loss and investment recovery They will responsible for recovery of over due and classified investment. 2. the Monitoring and Page 20 . Head Office under joint signature with the branch incumbent. They will ensure that excess over limit is not allowed to any borrower. They will comply the Inspection Report of Bangladesh Bank. • • They will monitor the investment terms and conditions stipulated in the sanction They will prepare monthly statement of mode wise investment and ensure advice. If any deterioration is found they will take immediate corrective action. 2. Computerization of the monitoring and recovery function is under process in the day of the following month. sending the statements to the Head of Investment Monitoring & Recovery Division.20 Custodial Duties: • • • Investment Documents shall be held in the branches under joint custody of the Branch Incumbent and Investment Administration Officer. IT Department of the Bank. Until implementation of the project.

So proper action to be taken for recovery before fallen into the vicious circle of classification. it becomes very difficult to regularize . weaknesses of the investment accounts and take corrective measures immediately on a continuous basis. the investment.2 Investment Monitoring in the Head Office • Investment Monitoring and Recovery Division (IMRD) in the Head Office will responsible for Investment Monitoring of all the branches. and conditions stipulated in the sanction advices in the branches.21. formation of special taskforce etc. • • IMRD collect the monthly & other periodical statement from the branches by the 10th day of the following month. identifying the investment accounts which are going to be classified within Page 21 . • The will suggest the CEO to take special crush program for recovery of classified investment –like declaring package award. • IMRD will prepare an early alert statement identifying weakness of investment accounts. Detail function of IMRD is described in para of this manual. They will complete review of the statements by the 15 th day of month and communicate their observation to the branches with proper instruction for recovery of investment. 2. 2.Recovery will Team will perform their duties manually or use of computer as much as possible.21. • IMRD shall keep in their mind that when an investment fall into overdue or classified. supervision. arranging special conference of the functionaries. or close attention by management. It is their duty to reduce the classified investment to the minimum tolerance level of the bank. • • • IMRD will ensure the proper documentation and compliance of investment terms They will ensure that Investment & International Division has properly approved They will prepare action plan for recovery of over due and classified investment. • IMRD also suggest the Legal Department to take proper legal action for recovery of classified investment if required.3 Early Alert System • • An Early Alert Account is one that has risks or potential weaknesses of a Investment Monitoring & Recovery Division/Department will identify the material nature requiring monitoring.

After implementation of the project Investment Risk Management procedure will be computerized. Owners of the bank desire an attractive growth in profit. employment generation Page 22 . Main objective of the bank is to profit maximization.772 127. poverty alleviation. early alert reporting will be done manually.552 2002 116.662 2003 171.next 30 days and report to the Investment/International Division and CEO for their prompt action. Before approval of any investment feasibility. To ensure the targeted goal we have to : • • • • • Increase performing investment portfolio through investment diversification.764 2006 The objective of this policy is to ensure a profit growth of 25% than that of last year.23 IT System • • One banking project is under consideration of management. • Bank has a separate Lawyer Enlistment Policy. Non performing assets to be decreased to the minimum level. 2. Until implementation of the project the Investment Risk Management functions – like Monitoring. viability and profitability to be verified.643 2004 313.058 2005 364.915 154. 2. Investment processing and approving lead time to be minimized. The operating and net profit of the bank for last five years are as below: (In thousand taka) Particulars Operating profit Net profit 2001 155. • IMRD shall closely monitor early alert identified accounts and contact branches and the investment client so that the accounts can be regularly with regularized.22 Enlistment of lawyer and surveyor • It is revealed that assessment collateral security by the third party surveyor does not protect the bank's interest in all cases. Decrease of investment operation and processing cost.24 Ensure the commercial profitability of the bank Al-Arafah Islami Bank Limited is a private commercial bank. Bank's Law Department is dealing with the matter. 2.25 Encourage the socio-economic development. Therefore the bank's official does the job.254 86. 2.691 25.816 43. Experienced officials have been appointed for the purpose.

area generation.26. So we have the scope to enhance investment portfolio in different area of the country. it has wide network having forty one branches.26. 2.3) Enhance the small and medium type investment instead of term and large investment The investment functionaries and marketing officers will keep in mind the indication given To enhance small and medium type investment following two investment scheme have already been introduced: • • • Small Enterprise Investment Sheme Consumer Investment Scheme Branches will follow instruction circular # 131and 132 date 2 August 2005 and instruction circular # 135 & 136 date: 11 October 2005 in this respect. though a third generation bank of the country.2) Sector based diversification The policy of the bank is to follow multi sector investment portfolio. Investment budget will be prepared for 2006 with the first half of January and branches will be instructed for taking necessary efforts. To allow investment facilities to limited sector is always risky and there is possibility to being non performing. Branch wise separate investment budget is prepared every year and communicated to all the branches.26) Investment Diversification 2.1) Location based diversification Al-Arafah Islami Bank Limited.• • Bank will increase micro investment through its rural branches. while marketing investment facilities in different sectors. • • • • Two investment Schemes – Consumer Investment Scheme and Small Enterprise Group based micro investment will be creased for poverty alleviation in the rural Investment to be increased in the labour intensive industries for employment Investment to be increased in the export oriented industries like Garments Investment Scheme have already been introduced.26. 2. Page 23 . Bank’s sector wise investment portfolio target is described in para 2.1 above. 2. Investment in the Masjid and Madrasha based investment Schemes.

28 Assessment of collateral • Banks in our country are still extending security based credit facilities. 2.6) Create new investment sectors • • • Investment facilities will be extended to the new investment sectors. Rate of profit and commission & other charges on various mode of investment is circulated through issuing separate circular upon approval of the competent authority. Branches will find out new potential sectors in their locality and bring the notice to the Head of Investment Division. Instruction Circular/Inv/2204/118 on 20 July 2004 (c) Commission & charges on International Trade through circular # AIBL/HO-ID/ShelCharges/02 on 16 November 2002.4) Enhance investment in export oriented sectors. • • Working capital will be provided to the export oriented industries to procure raw materials Profit rate on the export finance has already been reduced to 7% • Bangladesh Government has identified Thrust Sectors and Some Special Developing Items in Export Policy 2003-2006. (Ref: 8. Existing rates have been circulated through following circular: (b) Profit rate vide circular No. page-337).27 Competitive investment pricing • Bank always a competitive rates for the investment clients. • • Bank will increase investment in traditional export items Term investment will be enhanced in export oriented industries.26. 2.5) Enhance investment in the trust sectors • Bangladesh Government has declared 33 industries as thrust sector in the Industrial Policy 2005 (Parishitha-1. Special Investment Scheme may be taken for the foreign wage remitters and exporters.26. Page 24 .1 & 8. 2. AIBL also consider collateral security while approving investment limit.26. Head Office. 2.3 of the said export policy) • Bank will extend investment to these export sectors. • Incompliance with government policy banks investment will be diversified among the declared thrust sectors.2.

ownership. Page 25 .32) Investment Administration 2. 2.29) Asset liability matching Bank will follow asset liability matching policy as per bank's Asset Liability policy.30) Decentralization of investment sanctioning power • Banks investment sanctioning power has been decentralized and delegated to different level of functionaries. • • Investment disbursement is so easy while recovery is so difficult. Investment Monitoring & Recovery Officer of the branch shall send a certificate to the Head of Investment Monitoring & Recovery Division.• Branches of the bank will assess the collateral security in all respect. 2.31) Strengthen the investment recovery activities. Present maturity based investment and liability position is as below: Particulars Liability Asset Maturity period 3 months 6 months 9 months 12 months 36 months 60 months 84 months 120 months 2.value.32. under joint signature of the branch manager and the officer himself that the documentation has properly been completed. Functions of the department has been defined in chapter-3.1) Investment Administration in the branches • Investment Monitoring & Recovery Team in the branches independent to the relationship • • • manager/investment officer will be responsible for investment administration. For strengthen the recovery activities a separate department has been established in the Head Office named Investment Monitoring & Recovery Department (IMRD). Head Office. possession etc. They will ensure that the investment has been properly approved. They will ensure the proper documentation prior to the disbursement of investment. 2.

2.2. receivership or liquidation as appropriate.2.5 Functions of the Investment Monitoring and Recovery Division will be completely independent than that of Investment and International Division.  2. & BRPD circular # 02 on 13 January 2003 & BRPD # 01 on 29 December 2004 respectively. They will ensure the proper documentation prior to the disbursement of investment.32. investment 2.2) Investment Administration in Head Office • • • • Investment Monitoring & Recovery Division in the Head Office will be responsible for investment administration. against bank's investment.  actual and expected losses.00% 1. Their detail terms of reference/functions in this respect is described in para 3. on 16 October 2005.00% 0.33) Non performing investment provisioning and write off • Bangladesh Bank has declared guidelines for rescheduling and write off of non performing investment vide their BRPD Circular #.. • • • Bangladesh Bank has declared guidelines for provisioning against performing Policy of BRPD circular # 05 on 27 April 2005 also be followed in provisioning Guidelines of all of the circulars to be strictly followed in handling non performing and non performing investment vide BRPD circular # 08. including placing customers into Ensure adequate and timely Investment loss provisions are made based on Regular review of early alert accounts.32.3) Investment Recovery Investment Monitoring & Recovery Department will do the following function for recovery:   Determine Account Action Plan/Recovery Strategy Pursue all options to maximize recovery.01 on 13 January 2003.34) Incentive program • For recovery of non performing investment incentive will be given as Recovery as a % of Principal plus Interest Recommended Incentive as % of net recovery amount Classified as BL 76% to 100% 51% t0 75% 1.00% per following norms Page 26 .50% if written off 2.

The assessment procedure shall include the following issues: (a) (b) (c) (d) (e) (f) etc (g) (h) (i) (j) Margin Repayment capacity and repayment schedule Period of Investment Other terms and conditions in case of necessity Mode of Investment Investment Limit Purpose of Investment Rate of Profit Primary Security Collateral Security – its acceptability. bank will not issue Documentary Credit or Negotiate any bills to CHAPTER – 2 INVESTMENT ASSESSMENT 2.35) Cross Border Risk At this moment bank will not allow any cross border investment. of International Trade.20% to 50% 0.1 Investment Assessment Relationship Manage(s)/Investment Officer(s) shall conduct a thorough assessment of investment requirement before recommending any new proposal. But in case countries under UN sanctions.25% 0. There after all investment at least annually at the time of renewal and enhancement.50% • A detail incentive policy will be prepared by the Investment Recovery & Monitoring Division and place to the Board of Directors for approval and will communicate to the all concern by 31 December 2005 2. its coverage. . its control and genuiness In addition the RMs/Investment Officers shall address the following issues while assessing investment proposal: (a) Customer analysis: Page 27 .

Page 28 . The team will prepare a feasibility study as per Current Industrial Policy. Engineer in the concern field and Financial analyst.• • • • • • • • • (b) Industry analysis • • • • • • • • • • • • • • • • • • Capital structure of the company Authorized capital and paid up capital Reserve and retained earnings Share holdings of the share holders Management Team Group and affiliate companies Ability to comply investment covenant Security Ability and integrity Contribution to GDP of the concern industry Key risk factors of the industry Growth of the industry Domestic market of the industry International market of the industry SWOT of the industry Domestic International Potentiality of the buyer or supplier Strength and Weakness of the buyer and supplier Minimum three years Financial Statement (FSS) analysis Guarantor (s)/Corporate guarantor(s) Financial Statement analysis Quality and sustainability of the borrowers earnings Cash flow statement Strength of the borrower’s balance sheet Leverage Profitability Where term investment facilities are being proposed in favour of any new (c) Supplier/Buyer analysis (d) Historical Financial analysis (e) Projected Financial Performance industrial unit an expertise team comprising RM.

perishable. VIII. Margin Volatility High debt load (leverage/gearing) Overstocking or debtor issues Rapid growth. obsolete. • • • • • • Following risk mitigating factors to be identified in the investment assessment: I. VI. (h) Mitigating Factor • II. marketable & legal items Slow. III. (j) Security • • • Primary security should be acceptable. acquisition or expansion. expired items not to be taken as securtiy A current valuation of collateral security shall be obtained Page 29 . V. banned.(f) Account Conduct • • • • • • • • • Trade Payment Cheque Payment Bank’s investment payment with profit Timely payment Irregular payment Excess over limit drawings Excess over DP drawing Bank’s commission and charges payment It should clearly be stated that the proposal is in compliance with Shariah Principle and with the Bank’s Investment Guidelines. Amount of Investment Tenors of Investment Justification of Investment Based on the projected repayment ability installment to be determined Proposed investment amount and tenor is not excessive The RM/Investment Officer should remember that excessive tenor or (g) Adherence of Investment Guidelines (i) Investment Structure amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability. VII. IV. new business line/product expansion Management changes or succession issues Customer or supplier concentrations Lack of transparency or industry issues.

Investment proposal not to be unduly influenced by over reliance of the reputation of the borrower This type of situation shall be discouraged and treated with great caution. (k) Name Lending CHAPTER – 3 SEGREGATION OF DUTIES OF INVESTMENT FUNCTIONARIES 3. Business Dev. Investment proposal shall be based on sound fundamentals and supported by thorough financial and risk analysis. priority. and forced sale value of the security to be assessed Adequacy and the extent of the insurance coverage also be assessed.1 Organizational Structure for Head Office Investment functionaries EC Board of Directors Management Committee Managing Director Investment Div Internal Div.• • • • • Quality. IMRD Page 30 .

Page 31 .

2 Organizational Structure for Branches Investment functionaries Branch Incumbent Investment Committee Verification Documentation Disbursement Recovery Relationship manager / Investment Officer Customer Page 32 .3.

...3 Investment Division • • • • Investment Risk Management and Investment Approval.3...General Investment. procedures and controls relating to all investment risks arising from other factors Oversight of the bank’s asset quality. The member secretary will prepare a list/statement on Thursday of all the proposal received during the week. Industrial Project Investment.. The minutes of the meeting other than investment proposal will be recorded separately and be communicated to all concern.. Page 33 . Directly manage all Substandard. 3....3... Provide assistance/advice to the Branches (Relationship Manager(s)) regarding new investment proposals. House Building (commercial & residential) etc. Guarantee. • Report to Managing Directors about the potential new investment client they meet/contact on monthly basis with detail particulars & contact number in the format as per Appendix-.. • The Managing Director will form the Management Committee and define the details Terms of Reference (ToR) of the Committee. However the MC may also meet any day in case of emergency. Oversight of the bank’s investment policies. Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made.1 Management Committee (MC) • Management Committee will carefully scrutinize and recommend all deserving investment proposals. The MC will review and the investable fund position of the bank. 3. The MC will suggest new portfolio & sectors where new investment may be made.. • • • • • • The MC will meet every Saturday.2 Business Development Department • • Marketing and Relationship with the existing and new borrowers.3. The opinion/recommendation of the MC will be recorded in the concern file on the spot and be signed by the members present in the meeting.3) Duties & Responsibilities 3..3.. Import & Export Investment .

Periodical review of investment proposals approved. Review and update the Investment Risk Management Guidelines.4 International Division • • • Export & Import Investment Risk Management and Approval. Oversight of the bank’s Import & Export policies. 3. Meet the regulatory requirements in respect of investment issues. renewed. Review and fix up competitive investment pricing and communicate to all concerned. Recommend investment proposal to MD.3. enhanced. govt SRO and rules and regulations of the regulatory authorities. Conduct industry analysis and identify risk involved with each industry. Import Policy Order. renewed. declined. procedures and controls relating to all investment risks arising from other factors Directly manage all Substandard. Page 34 . To ensure that investment executives have adequate experience and/or training in order to carry out job duties effectively. Formulate strategy to minimize investment risk and losses. Export Policy. Loan Provisioning Policy and other Prudential Guidelines in this respect are fully complied. enhanced. To provide advice/assistance regarding all investment matters to line management/RMs. MC Issue sanction advice Prepare and approve Investment Delegation Policy time to time and communicate to all concerned. • • • To provide advice/assistance regarding all Export & Import matters to line management/RMs. Ensure that investment is being made in compliance with the current Industrial Policy. within delegated authority. • Ensue that Bangladesh Bank’s Large Loan Policy. To ensure that International Trade executives/officers have adequate experience and/or training in order to carry out job duties effectively. Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made regarding Export & Import. proposals approved.• • • • • • • • • • • • • To approve (or decline). Periodical review of Export & Import declined. Investment Applications recommended by branches.

and all security documentation is in place. Loan Provisioning Policy and other Prudential Guidelines in this respect are fully complied. Refer & advise the Legal Department to legal action as the last resort of recovery of the non-performing assets. Import Policy Order.4. Export Policy. and is properly assigned to the bank.4) Duties and responsibility at the branch level 3.3. Initiate effective measures for recovery non performing investment. Meet the regulatory requirements in respect of Export & Import issues. govt SRO and rules and regulations of the regulatory authorities.5 Investment Monitoring & Recovery Division • • • • • • • • • Ensure that all security documentation complies with the terms of approval and is enforceable.• • • • • Recommend Export & Import investment proposal to MD.1) Relationship Manager/Investment Officer • Act as the primary bank contact with borrowers. and general monitoring of account conduct/performance. Maintain control over all security documentation. 3. Collect periodical investment statements from the branch and review them carefully and report to the CEO/MD. Monitor borrower’s compliance with covenants and agreed terms and conditions. Page 35 . MC Issue sanction advice Review and fix up competitive charges & commission of International Trade and communicate to all concerned.14 3. • Detail Terms of reference for Investment Monitoring and Recovery Department is enclosed in annexure 4. • Ensue that Bangladesh Bank’s Large Loan Policy. Monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral. Ensure that Export & Import investment is being made in compliance with the current Industrial Policy. Ensure that proper and correct assets have been taken as collateral by the branches. Control loan disbursements only after all terms and conditions of approval have been met.

Issue a certificate that documentation has been properly complete. business or production of the client.  Highlight any deterioration in borrower’s financial standing and amend the Changes in Risk Grades should be borrower’s Risk Grade in a timely manner. investment manual and other circulars in this respect. • Seek assistance/advice at the earliest from CRM regarding the structuring of facilities. imaginary transaction. with other banks or financial institutions.2) Investment Committee • • • • • • • • Scrutinize the complete proposal and recommend for approval or decline Ensure that investment proposal is not fake.4.4.3) Documentation Officer/Unit • • Complete all documentation formalities in compliance with the sanction advice. Ensure that investment limit is not recommended on the basis of fake or Ensure that Transaction/Turnover in the current account of the client is Ensure that investment limit is not proposed to so enhanced to regularize Ensure that that investment limit is enhanced which is not inconsistent with Ensure that the client or any the sister concern has not got classified investment Collateral security is properly valued. taking into account the credit assessment requirements. advised to and approved by CRM. 3.4. previous classified investment account. Page 36 . 3. 3. potential deterioration in accounts or for any credit related issues.4) Verification unit/Officer • Verify the all documentation papers and confirm that documentation has been completed properly. factory/warehouse inspections. etc. Or investment limit is not artificially enhanced. • Responsible for the timely and accurate submission of Credit Applications for new proposals and annual reviews. RMs should proactively monitor the financial performance and account conduct of borrowers. satisfactory.• Maintain thorough knowledge of borrowers business and industry through regular contact.

which are going to be SMA. disbursement. Page 37 . enhance investment under his discretionary. approval. Special attention to be given to the accounts.5) Disbursement unit / officer • Disbursement of Investment will be made after confirmation from the verification officer. Branch Incumbent is investment process. Branch Incumbent • • • • Approve. 3. monitoring & recovery.4. 3. Before approval ensure that the investment has been properly assessed by the RM/Investment Officer and scrutinized by the Investment Committee.6) Recovery unit • • • • Monitor the investment regularly. 7.4.3. renew.4. Issue intimation to the client before maturity. Forward with recommendation investment proposal to responsible for over all Investment/International Division beyond his discretionary. Take all sorts of measures for timely recovery of investment.

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