Credit Analysis Procedure and Techniques of Al-Arafah Islami BankLimited

Credit Analysis Procedure and Techniques

Al-Arafah Islami BankLimited

An Internship Report

Credit Analysis Procedure and Techniques of

Al-Arafah Islami Bank Limited

Submitted to

Mr. Badruzzaman

Controller of Examination

National University

Gazipur- 1704

Supervised To:

Sayeda Ferdous Lusanta

Assistant Professor

Department of Business Administration

Dhaka City College

Submitted By:

Md. Reyaj Ahmed

National University Roll No. xxxxxxx

National University Reg. No. xxxxxx

Academic session: 2009-2010

Program: Bachelor of Business Administration (BBA)

Dhaka City College

Date of Submission:

March 24, 2016

LETTER OF TRANSMITTAL

March 24, 2016

Mr. Badruzzaman

Controller of Examination

National University

Gazipur- 1704

Subject: Submission of internship report titled as “Credit Analysis Procedure of Al- Arafah Islami Bank Limited”

Dear Sir,

With due respect, I am very glad to submit you my internship report on "Credit Analysis Procedure and Techniques of Al-Arafah Islami Bank Limited.” as it is a fulfillment of partial requirement of achieve BBA degree under the curriculum of National University, Bangladesh.

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

So, I fervent requesting and hope that you would be kind enough to accept my report and oblige thereby.

Sincerely yours

.................................

Md. Reyaj Ahmed

National University Roll No. xxxxxxx

National University Reg. No. xxxxxxx

Academic session: 2009-2010

Program: Bachelor of Business Administration (BBA)

Major in Marketing

Dhaka City College

Dhaka- 1205

CERTIFICATE OF SUPERVISOR

This is to certify that, Md Reyaj Ahmed, student of BBA in Marketing major, National University Roll No. 1061468, Reg. No. 1068047, Academic Session 2009-2010, Dhaka City College, Dhanmondi, Dhaka, Bangladesh, has completed his Internship Program entitled “Credit Analysis Procedure and Techniques of Al-Arafah Islami Bank Limited”. He has completed this internship satisfactorily under my supervision as the partial fulfillment for the award of BBA degree.

He has done his job according to my supervision and guidance. He has tried his best to do this successfully. I think his study will help him in the future to build up his career. I wish him every success in life.

...........................................

Sayeda Ferdous Lusanta

Assistant Professor

Department of business Administration

Dhaka City College

Dhanmondi, Dhaka-1205

DECLARATION

I hereby declare that the Internship Report on "Credit Analysis Procedure and Techniques of Al-Arafah Islami Bank Limited.” includes the results of my own research works, pursued under the supervision of Sayeda Ferdous Lusanta, Assistant Professor, Department of business Administration, Dhaka City College, Dhanmondi-Dhaka, Bangladesh.

I further affirm that the work presented in this report is original and no part or whole of this report has been submitted to, in any form, any other University or Institution for any degree or any other purpose.

.....................................

Md. Reyaj Ahmed

National University Roll No. xxxxxxx

National University Reg. No. xxxxxxx

Academic session: 2009-2010

Program: Bachelor of Business Administration (BBA)

Major in Marketing

Dhaka City College

Dhaka-1205

Acknowledgment

First of all I would like to express my heartfelt gratitude to the almighty Allah, the most Merciful and the Benevolent, for his special kindness to give me the opportunity to complete the internship successfully and making me knowledgeable enough to prepare this report timely.

Secondly I would like to express my hearties gratitude to the authority of National University and also to our honorable principal, Professor Md. Shahjahan Khan for providing me such an opportunity. I want to thanks Ms. Sadia Afrin Ripa, Assistant Professor and Coordinator for her useful suggestions. I also want to express my sincere gratitude and deepest respect to my honorable Supervisor Ms. Sayeda Ferdous Lusanta, Assistant Professor, Department of Business Administration, Dhaka City College for her unfailing enthusiasm, continuous encouragement and this report is a practical example of her excellent guidance and supervising.

I would like to extend my deepest appreciation to all my faculty members of Department of Business Administration, Dhaka City College for their individual contribution and cooperation in advancing this report and hereby completing my BBA program successfully. I would like to express my special thanks to the staffs of the college for their excellent Administrative supports.

I would like to thank A.S.K.M Mahfuzur Rahman, Manager Al-Arafah Islami Bank Limited for accepting me as an intern in his prestigious organization and giving me the opportunity to know the Banking Services more deeply and precisely. His guidance was excellent through whole journey.

Last but not the least, I am thankful to my family and friends for their suggestion, assistance and help for doing this report.

Executive Summery

Internship is must to fulfill academic requirement. This internship report is based on practical experience at the Al-arafah Islami Bank Limited, Kalatiya SME Krishi Branch, Kalatiya, Keraniganj, Dhaka. This study selected five major objectives i.e. to know about the organizational framework of the Al-arafah Islami Bank Ltd., to presepurnt an overview of Al-arafah Islami Bank Ltd., to acquire the knowledge about the credit system of Al-arafah Islami Bank Ltd. during the study period, to find out the SWOT Mix of the Al-arafah Islami Bank Ltd. Al-arafah Islami Bank, to enhance the recommendation to remove the problems of Al-arafah Islami Bank Ltd. during the study period. In the beginning of this study contains some description about the banking sector and perspective of the Al-arafah Islami Bank Limited. I collected both primary & secondary information for fulfill this study. The next part is Historical Background of the Bank. Their corporate mission and vision. How they exercise their corporate and social responsibility. Then a brief description about the board of director and key management profile. The performance of the last few year and growth was well satisfactory.The next part is described about the product & services of the Al-arafah Islami Bank Limited.Al-arafah Islami Bank Limited offers a diversified asset and liability product. Those are broadly described in credit operation in two chapters. For the sanction of loan and some other expenditure, authorization from the Head Office is required. A target of profit is given by the Head Office and the branch is trying it best to achieve it. During my internship program in this branch I have found some lacings. I found that the credit policy is required for better performance of the bank. After that I also found that the some problems of Al-arafah Islami Bank Ltd. under the study period. It is to be mentioned that this is from my point of view. I have also pointed out some recommendations which I believe to be the best form to solving that the problems and Al-arafah Islami Bank Ltd. will be better perform in future and bank will be a great position among the all banks in Bangladesh. Finally I observed that Al-arafah Islami Bank Ltd. will ensure the better services to the people of Bangladesh and they will be more contribution on development of economy of Bangladesh.

Acronyms & Abbreviations

Serial No	Acronyms	Elaboration
	AIBL	Al-Arafah Islami Bank Limited
	AD	Authorized Dealers
	SOCBs	State Owned Commercial Banks
	SDBs	Specialized Banks
	PCBs	Private Commercial Banks
	FCBs	Foreign Commercial Banks
	DFIs	Development Financial Institutions
	L/C	Letter of Credit
	ATM	Automated Teller Machine
	SWIFT	Society For Worldwide Inter Bank Financial Transaction
	UCPDC	Uniform Customs and Practices for Documentary Credit
	CRR	Cash Reserve Requirement
	DD	Demand Draft
	FDR	Fixed Deposit Receipt
	DPS	Deposit Pension Scheme
	STD	Short Term Deposit
	TIN	Tax Identification Number
	ERC	Export Registration Certificate
	LTR	Loan against Trust Receipts
	LIM	Loan against Imported Merchandise
	PAD	Payment Against Documents
	TC	Traveler’s Cheque
	PO	Pay Order

Table of contents of

"Credit Analysis Procedure and Techniques of Al-Arafah Islami Bank Limited.”

Particulars	Page No.
Prefatory Part
Title fly	I
Title Page	Ii
Letter of Transmittal	Iii
Certificate of Supervisor	Iv
Declaration	V
Acknowledgement	Vi
Executive Summery	Vii
Acronyms & Abbreviations	Viii
Table of Contents	ix-x
Chapter 1	1-6
Introduction
1.1 Introduction	2
1.2 Origin of the Report.	3
1.3 Review of the Literature.	3
1.4 Objectives of the Study	3
1.5 Methodology of the Study	4
1.6 Scope of the Study	5
1.7. Limitation of the Study	5
Chapter- 2	7-17
Overview of Al-arafah Islami Bank Ltd.
2.1 Location	8
2.2 Historical background of the company	8
2.3 Strategies of Al-arafah Islami Bank Ltd.	9
2.4 Objectives of Al-arafah Islami Bank Ltd.	10
2.5 Offers of Al-arafah Islami Bank Ltd.	10
2.6 Board of Directors	12
2.7 Management	12
2.8 Products & Services:	12
2.9 Depository Product	13
2.10 Loan Product	13
2.11 Service	13
2.12 Asset Products	14
2.13 Corporate Banking	14
2.14 Personal Banking Division	15
2.15 SWOT Analysis of AIBL	16

Chapter-3	18-44
Theoretical Concept “Credit Analysis Procedure and Techniques”
3.1 Credit Facilities Bank	19
3.2 Loans & Advances	19
3.3 Industrial Credit	19
3.4 Commercial Credit	20
3.5 Micro Credit	20
3.6 Lending Criteria	20
3.7 Credit Operating System	21
3.8 Credit Risk Assessment	25
3.9 Sector Wise Disbursement of Loans	26
3.10 Comparative Recovery Rate of Loans	27
3.11. How Bank recover their Loan	27
3.12. Recovery Patterns of Loan & Advances	27
3.13. Problems in Loan Recovery	28
3.14. Types of Loan	31
3.15. Mission Statement of the Credit Department:	34
3.16. Credit Principles	35
3.17. Processing of Credit Approval	36
3.18. Function of Credit Risk Grading	37
3.19. Computation of Credit Risk Grading	41
Chapter-4	45-50
Findings, Recommendations & Conclusion
4.1 Findings	46
4.2 Problems	48
4.3 Recommendations	49
4.4 Conclusion	50
Appended Part	xi-xv
Bibliography	Xii
Appendices	xiii-xv

Chapter 1

INTRODUCTION

This Chapter Includes:

Ø Introduction

Ø Origin of the Report.

Ø Review of the Literature.

Ø Objectives of the Study

Ø Methodology of the Study

Ø Scope of the Study

Ø Limitation of the Study

1.1 Introduction

In today’s fast moving world, business is more complex and competitive. Banking is an essential industry. It is where we often wind up when were seeking a Opening to purchase a new automobile, tuition for college or trade school, financial advice on how to invest our savings, credit to begin a new business a safe deposit box to safeguard our valuable documents or even more commonly a checking account or Overall Banking System to keep track of when and where we spend our money.

Bangladesh is not exception in this case. Financial strategies for banking business are one of the most vital issues now in Bangladesh because, after liberation the government of the people Republic of Bangladesh formally took over the charge of administration of different banks. The banking institutions are the custodians of private savings and a powerful instrument to provide credit. They oblige resources of the country by accepting deposits and canalize them for industrial and national development by granting advances. Hence in order to implement the above- mentioned state policy.

The Government of Bangladesh decided to nationalize all the banks of the country. At that time all the existing 12 bank were nationalize and were converted into six new banks were completely denationalized (in 1983) and one partly denationalized and other three were kept under government ownership. In addition 8 new private commercial banks were permitted to function in the banking sector. Over the time there are 31 private commercial banks and 14 foreign banks now operating their business in Bangladesh. During the last six years many new banks have emerged to cater the needs of the customers. They are continuously trying to attract people towards them by offering new types of products and services to face completion and fresh challenges thrown by their rival. Efforts are made to satisfy customers. Need by providing superior value than their competitors.

Within these 8 years ago the bank has developed many attractive financial products and services at a pretty Profit rate to help the people for saving their money and for meeting Account Opening demand.

1.2 Origin of the Report:

The BBA (Bachelor’s of Business Administration) internship program is required course for the students who are graduating from the Department of Business Administration, Dhaka City College. Students who have completed all the required courses are eligible to for this course. In this internship program, I was attached do my internship by rotation to all departments of Al-arafahIslami Bank Limited,Kalatia SME Branch,Kalatia, Dhaka. Both the academic and the organizational supervisor assigned me on this project. The report is on “Credit Analysis Procedure And Techniques of Al-ArafahIslami Bank Limited”.

1.3 Review of the Literature:

The profit of a commercial bank depends primarily on the utilization of its fund. And the making of loan and advance is always profitable to a bank. As the bank mobilizes savings from the general people in the form of deposit, the most important task of it is to disburse the said deposit as loan or advance to the mass people for the development of commercial, industrial, who are in need of fund for investment.

A great bulk of problem loans and their ever deepen thrust on Bank credit has brought a gloomy situation in the cost of fund. Loan Default culture has started in Bangladesh mainly after the nationalization of banks. However, it was enhanced by the availability of huge amount of credit in the name of developing private and industrial sector. Industry set-up was shown as sick industry to get additional loan and relieve from interest.

Al-arafahIslami Bank Ltd. was established to provide term loan and other financial assistance to accelerate the pace of development to small industry of Bangladesh, is also prone to such disappointing features of problem loans. The report mainly focuses on the credit operating system, their credit policies and procedures of loan supervision and recovery, especially their classified loans.

1.4 Objectives of the Study:

Primary objective: Primary objective is to learn the real world experience because I have gathered theoretical knowledge for BBA course and try to match real world experience with the theoretical knowledge.

Secondary Objective:

Ø To acquire the knowledge about the credit system of AIBL.

Ø To know about the organizational framework of the AIBL.

Ø To highlight an overview of Al-arafahIslami Bank Ltd. during 2011-2012

Ø To find out the SWOT Mix of the Al-arafahIslami Bank Ltd.

Ø To find out the Productivity, & Trend position of AAIBL during 2009-2013.

Ø To enhance the recommendation to remove the problems of AL-arafahIslami Bank Ltd.

1.5 Methodology of the Study:

1.5.1 Selection of Topic:

Ø This report is the reflection of three months internship program at the Al-arafahIslami Bank Limited at Kalatia SME branch, KalatiaKeraniganj,Dhaka. This study covered by both the primary as well as the secondary form of data was used to prepare the report. . To prepare this internship report I have collected data and information both from primary and secondary sources. I had observed the operations and worked with the officers at the same time. I had interviewed the AAIBL officials for getting more information.

Ø For the analysis part, data have been collected from different statements and the annual report of the bank.

1.5.2 Data Collection:

The data collection method of study consists of both of primary and secondary sources. But majority of the information was collected from secondary sources.

Primary sources:

Ø Face to face conversation with the officer.

Ø Direct observations.

Ø Face to face conversation with the client.

The secondary sources of information are given below:

Ø Annaul report of the Al-arafahIslami Bank Limited during 2014-2015.

Ø Outlets of Bangladesh Institute of Bank Management.

Ø Website of the Al-arafahIslami Bank Limited.

Ø Different publications of the Al-arafahIslami Bank Limited.

Ø Theoretical books relating banking sector.

1.5.3 Computer Assistance:

Ø Microsoft Word

Ø Microsoft Excel

1.6 Scope of the Study

The report commences with the outline of the organization in focus, presenting the mission and vision, individual department job responsibilities, Credit Risk Analysis related issues are discussed in detail along with their results and possibilities. In this report is all the aspect of credit risk analysis has been discussed detailed by those the management can take decisions regarding modifying their plans for granting loans and can strengthen the relationship with the business environment as well as with the stakeholders and clients.

1.7. Limitation of the Study

Three months is not enough to know about commercial banking operation through I have been received maximum assistance from the every individual of the AAIBL Kalatia SME Branch. Definitely, I could not produce an outstanding report for the time limitations.Due to the time limit, the scope and dimension of the study has been curtailed.

The Report is likely to have following limitations:

Ø Since the ideal size of data could not be taken, suggested operating process may not be useful without appropriate modifications.

Ø Due to shortage of time, the accuracy of information may not have been completely perfect.

Ø The Operating Process is a theoretical suggestion. Only a practical application of this may justify its effectiveness that could not be done due to time limitation.

Ø Lack of comprehension of the respondents was the major problem that created many confusions regarding verification of conceptual question.

Ø Confidentiality of data was another important barrier that was faced during the conduct of this study. Every organization has their own secrecy that is not revealed to others. While collecting data on AAIBL, personnel did not disclose enough information for the sake of confidentiality of the organization.

Ø Rush hours and business was another reason that acts as an obstacle while gathering data.

However, omitting this, the report will help us understand the Credit Operation departments of the bank.

Chapter- 2

OVERVIEW OF

AL-ARAFAH ISLAMI BANK LTD.

This Chapter Includes:

Ø Location

Ø Historical background of the company

Ø Strategies of Al-arafahIslami Bank Ltd.

Ø Objectives of Al-arafahIslami Bank Ltd.

Ø Offers of Al-arafahIslami Bank Ltd.

Ø Board of Directors

Ø Management

Ø Products & Services

Ø Depository Product

Ø Loan Product

Ø Service

Ø Asset Products

Ø Corporate Banking

Ø Personal Banking Division

2.1 Location

The Head Office of Al-arafahIslami Bank Limited 36, Dilkusha C/A, Dhaka-1000,Bangladesh .Its branches are situated at all the major cities of the country except 10 which are situated at rural area. The number of bank branches stood at many branch.

2.2 Historical background of the company

Al-arafahIslami Bank Limited (AAIBL) is a Banking Company registered under the Companies with its Head Office 36, Dilkusha C/A, Dhaka 1000, Bangladesh . The Bank started its operation from Date:.

Al-arafahIslami Bank Limited is a highly capitalized new generation Bank with an Authorized Capital and Paid-up Capital of Tk.11000 million and Tk.4588 million respectively. The Paid-up Capital has been raised to 940 million and the total equity of the bank stands at 8425 million as on December 31, 2015. The Bank undertakes all types of banking transactions to support the development of trade and commerce of the country. AAIBL's services are also available for the entrepreneurs to set up new ventures and BMRE of industrial units. Al-arafahIslami Bank Ltd. the only Bengali named new generation private commercial bank was established by a group of winning local entrepreneurs conceiving an idea of creating a model banking institution with different outlook to offer the valued customers, a comprehensive range of financial services and innovative products for sustainable mutual growth and prosperity. The sponsors are reputed personalities in the filed of trade, commerce and industries.

The Bank is being managed and operated by a group of highly educated and professional team with diversified experience in finance and banking. The Management of the bank constantly focuses on understanding and anticipating customers needs. The scenario of banking business is changing day by day, so the bank's responsibility is to device strategy and new products to cope with the changing environment. Al-arafahIslami Bank Ltd. has already achieved tremendous progress within only thirteen years. The bank has already ranked at top of the quality service providers & is known for its reputation.

Al-arafahIslami Bank Ltd. offers different types of Corporate and Personal Banking Services involving all segments of the society within the purview of rules and regulations laid down by the Central Bank and other regulatory authorities. As per the provisions of Bangladesh Bank license, the Bank has offered initially its shares to public by Pre – IPO and subsequently sold shares to the public through IPO in the year 2004. The shares of the Bank are listed with both Dhaka Stock Exchange Ltd. & Chittagong Stock Exchange Ltd.

Our Vision:

To become a leading banking institution by playing a significant role in the development of the country.

Our Mission:

The bank is committed to satisfy diverse need of its customers through an array of products at a competitive price by using appropriate technology and providing timely service so that a sustainable growth, reasonable return and contribution to the development of the country can be ensure with a motivated and professional workforce.

2.3 Strategies of Al-arafahIslami Bank Ltd.

Financing establishment of small units of industries and business and facilitate their growth Small Balance Sheet size composed of quality assets.

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

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

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

Ø To review and update policies, procedures and practices to enhance the ability to extend better service to customers.

Ø To train and develop all employees and provide them adequate resources so that customers' needs can be reasonably addressed.

Ø To promote organizational effectiveness by openly communicating company plans, policies, practices and procedures to employees in a timely fashion

Ø To cultivate a working environment that fosters positive motivation for improved performance

Ø To diversify portfolio both in the retail and wholesale market

Ø To increase direct contact with customers in order to cultivate a closer relationship between the bank and its customers.

2.4 Objectives of Al-ArafahIslami Bank Ltd.

Ø To earn and maintain CAMEL Rating 'Strong'

Ø To establish relationship banking and improve service quality through development of Strategic Marketing Plans.

Ø To remain one of the best banks in Bangladesh in terms of profitability and assets quality.

Ø To introduce fully automated systems through integration of information technology.

Ø To ensure an adequate rate of return on investment.

Ø To keep risk position at an acceptable range (including any off balance sheet risk).

Ø To maintain adequate liquidity to meet maturing obligations and commitments.

Ø To pursue an effective system of management by ensuring compliance to ethical norms, transparency and accountability at all levels.

2.5 Offers of Al-ArafahIslami Bank Ltd.

Ø Term loans especially to develop small scale enterprises and also attach special importance to technical and advisory support in order to enabling them to run their enterprises successfully.

Ø Full-fledged commercial banking services including collection of deposit, short-term trade finance, working capital finance in processing and manufacturing units and financing and facilitating international trade.

Ø Technical support to Small Scale Industries (SSIs) in order to enable them to run their enterprises successfully.

Ø Micro Credit to the urban poor through linkage with NGOs with a view to facilitating their access to the formal financial market for the mobilization of resources is another diversification of our services.

Ø In order to perform the above tasks, Al-arafahIslami Bank Ltd. works closely with its clients, the regulatory authorities, the shareholders (GOB), banks and other financial institutions.

Ø Branch Network

A great deal of investment for developing the physical resources base of the Bank has been made. Al-arafahIslami Bank Ltd. has its presence in all the major industrial and commercial centers of Bangladesh in order to cater to the need of industry and trade. , there are 96 conveniently located branches throughout Bangladesh till now. The bank has already signed an agreement with Placid NK Corporation, USA for obtaining foreign currency remittances. The bank is expected, to sign agreement with Tele Money Transfer, London, UK Money Gram International, and Minneapolis, USA in near future to ensure flow of warld remittance. Some agreement with companies located in Saudi Arabia and going to be finalized shortly.

Ø Human Resources

The Bank's ongoing success speaks to the excellence off its team. Al-arafahIslami Bank Ltd. has a well-diversified pool of human resources, which is composed of people with high academic background. Also, there is a positive demographic characteristic-most employees are comparatively young in age yet rich in experiences, hi an increasingly competitive market for highly skilled staff, Al-arafahIslami Bank Ltd. focusing on providing a stimulating corporate environment and an attractive compensation package.

Ø IT Support

The Board, attaches great importance to acquisition and use of appropriate Information Technology in the Bank. Both Windows and UNIX based Local Area Network (LAN) has been installed in the Head Office and different Branches. The Bank had its own Banking Software developed and since then this software is used for performing normal banking transactions. Besides, SWIFT is being used in the AD Branches the Head Office of the Bank trade finance related operations. Reuters 3000xtra HTA is being used at the Head Office for offering the best exchange rates to the Bank's customers.

2.6 Board of Directors

The responsibility of making policies and operational guidelines is vested with the Board of Directors. The Government holds 100% ownership of the bank and the Government of Bangladesh appoints all the directors' of the Board. The Board consists of 19 members who are repotted business executives and leading industrialists of the country.

2.7 Management

The Managing Director is the Chief Executive of the Bank who is an ex.-officio member of the Board. Four General Managers acting under him and nine Divisional Heads are performing daily operational activities of the Bank. The Managers of the Branches being responsible functionally to the Heads of department of the Head Office and report direct to the Managing Director.

AAIBL is managed by highly professional people. The present Managing Director of the bank is a forward-looking senior banker having decades of experience and multi discipline knowledge to his credit both at home and abroad. He is support by an educated and skills professional team with diversified experience in finance and banking. Al-arafahIslami Bank limited has already achieved tremendous progress within a short period of its operation.

2.8 Products & Services:

Products of Al-arafahIslami Bank Ltd. can be divided into two parts. They are asset product and liability product. Generally liability product means deposits of many kinds that are payable to parties. On the other hand, asset products are the products which clients are liable to pay to bank. Different types of undertaking by the bank to the clients or on behalf of the clients are also a type of liability to bank. On the other hand a different type of promises makes by the clients to bank is considered as bank’s asset.

2.9 Depository Product

Ø Current Account

Ø Savings Account

Ø STD (Short term deposit)

Ø Fixed Deposit

Savings Scheme Products

Ø Monthly Savings Scheme (MSS)

Ø Marriage Deposit Scheme

Ø Lakhpati Deposit Scheme

Ø Millionaire Deposit Scheme

Ø Kotipati Deposit Scheme

Ø Education Savings Scheme

Ø Monthly Benefit Scheme

Ø Double/Triple Growth Deposit

Ø Scheme

2.10 Loan Product

Ø Overdraft

Ø Cash Credit

Ø Term Loan

Ø Loan (General)

Ø Letter of Credit (L/C)

Back-to Back L/C

Local Bill Purchase (LBP)

Foreign Bill Purchase (FBP)

Loan against Imported Merchandise (LIM) etc.

2.11Service

Ø Cash

Ø ATM

Ø Remittance,

Ø Export & Import Business.

2.12 Asset Products

Funded: Funded means those type products in which bank directly fund. This type of product is provided against mortgage, guarantee previous performances. For example: Overdraft, Term Loan, Time Loan, Consumer credit, Car Loan, Professional Loan and Small Business Loan. These will be described on credit part later on.

Non Funded: Non funded means when the bank provides this type of service bank need not provide immediate fund. It is a high income source for the bank. But the bank has to provide high care when provide such type of services to the clients. These types of products are LC, Bank Guarantee. Discussion on LC is later on Foreign Exchange part.

2.13 Corporate Banking

The motto of Al-arafahIslami Bank Ltd. Corporate Banking services is to provide a personalized solutions to our customers. The Bank distinguishes and identifies corporate customers' need and designs tailored solutions accordingly.

Al-arafahIslami Bank Ltd. offers a complete range of advisory, financing and operational services to its corporate client groups combining trade, treasury, investment and transactional banking activities in one package. Whether it is project finance, term loan, import or export deal, a working capital requirement or a forward cover for a foreign currency transaction, our Corporate Banking Managers will offer you the accurate solution. Our corporate Banking specialists will render high class service for speedy approvals and efficient processing to satisfy customer needs.

Corporate Banking business envelops a broad range of businesses and industries. You can leverage on our know-how in the following sectors mainly:

Ø Agro processing industry

Ø Industry (Import Substitute / Export oriented)

Ø Textile Spinning,

Ø Dyeing Printing

- Export Oriented Garments, Sweater.

- Food & Allied

- Paper & Paper Products

- Engineering, Steel Mills

- Chemical and chemical products etc.

Ø Telecommunications.

Ø Information Technology

Ø Real Estate & Construction

Ø Wholesale trade

Ø Transport

Ø Hotels, Restaurants

Ø Non Bank Financial Institutions

Ø Loan Syndication

Ø Project Finance

Ø Investment Banking

Ø Lease Finance

Ø Hire Purchase

Ø International Banking

Ø Export Finance

Ø Import Finance

2.14 Personal Banking Division

Personal Banking Division (PBD) introduces to the customers with a variety of products. Our PBD continuously meets the challenges of developing new products and services to match the specific requirements of customers.

Personal Banking Division (PBD) issues both VISA Debit Cards and VISA Credit Cards. VISA is the renowned Card brand in the earth. Al-arafahIslami Bank Limited is a principal member of VISA Worldwide. Remittance Cell is another successful wing of the Personal Banking Division. Our product range includes:

VISA Debit Cards - You can now avail the convenience of VISA Debit Card. It is the easiest and the most secured way of utilizing your money for 24/7 retail purchases as well as cash withdrawal.

VISA Credit Cards - The AAIBL Credit Card gives you a fast, convenient and reliable way to pay, 24 hours a day, wherever you are in the world.

· VISA Classic

· VISA Gold

International Credit Cards – AAIBL International Credit Cards (VISA) allows you flexibility and convenience when you travel internationally. The VISA International card entitles you to exclusive discounts worldwide.

· VISA Dual (Gold)

AAIBL Remittance Cell – “Remit Fast” is the motto of AAIBL Remittance Cell. It provides the best & faster services to its customers and connects the world through the renowned money exchange agencies. Such as Placid NK Corporation, Money gram Payment System Inc., Raffles Exchange Ltd.UK, Euro Bangla Money Transfer (UK) Ltd., Money link, UK, Home link Remit (UK) Ltd., Rumana Money Services. Customers can avail improved pricing on remittance.

· Bank Transfer

· Instant Cash

· Spot Cash, etc.

2.15 SWOT Analysis of AIBL

Every organization is composed of some internal strengths and weaknesses and also has some external opportunities and threats in its whole life cycle.

2.15.1 Strengths

Ø AIBL provides its customers excellent and consistent quality in every service.

Ø AIBL is a financially sound company.

Ø AIBL utilizes state of the art technology to ensure consistent quality and operation.

Ø AIBL provides its work force an excellent place to work.

Ø AIBL already achieved goodwill among the clients.

Ø AIBL has a research and training division.

Ø AIBL has strong deposit and investment management capabilities.

2.15.2 Weaknesses

Ø AIBL lacks well trained human resource in some area.

Ø AIBL lacks aggressive advertising.

Ø The procedure of credit facility is to long compare to other banks.

Ø Employees are not motivated in some areas.

2.15.3 Opportunities

Ø Emergence of online banking will open more scope for AIBL.

Ø AIBL can introduce more innovative and modern customer service.

Ø Many branches can be opened in local remote area as its high demand.

Ø AIBL can recruit experienced, efficient and knowledgeable officers and staffs as it offers good working environment.

2.15.4 Threats

Ø The worldwide trend of mergers and acquisition in financial institutions is causing problems.

Ø Frequency taka devaluation and foreign exchange rate fluctuation is causing problem.

Ø Lots of new banks are coming in the scenario with new service.

Ø Local competitors can capture huge market share by offering similar products.

Chapter- 3

Theoretical Concept of

“Credit Analysis Procedure and”

This Chapter Includes:

Ø Credit Facilities of Bank

Ø Loans & Advances

Ø Industrial Credit

Ø Commercial Credit

Ø Micro Credit

Ø Lending Criteria

Ø Credit Operating System

Ø Credit Risk Assessment

Ø Sector Wise Disbursement of Loans

Ø Comparative Recovery Rate of Loans

Ø Disbursement of Loan And Net Interest Income from Loan

Ø How Bank recover their Loan

Ø Recovery Patterns of Loan & Advances

Ø Problems in Loan Recovery

Ø Types of Loan

Ø Mission Statement of the Credit Department

Ø Credit Principles

Ø Processing of Credit Approval

Ø Function of Credit Risk Grading

Ø Computation of Credit Risk Grading

3.1Credit Facilities Bank:

The main focus of Bank Credit Line/Program is financing business, trade and industrial activities through an effective delivery system.

Ø Bank offers credit to almost all sectors of commercial activities having productive purpose.

Ø The loan portfolio of the Bank encompasses a wide range of credit programs.

Ø Credit is also offered to major thrust sectors, as earmarked by the govt., at a reduced interest rate to develop frontier industries.

Ø Credit facilities are offered to individuals including housewives, businessmen, small and big business houses, traders, manufactures, corporate bodies, etc.

Ø Loan is provided to the rural people for agricultural production and other off-farm activities.

Ø Loan pricing system is customer friendly.

Ø Prime customers enjoy prime rate in lending and other services.

Ø Quick appreciation, appraisal, decision and disbursement are ensured.

Ø Credit facilities are extended as per guidelines of Bangladesh Bank (Central Bank of Bangladesh) and operational procedures of the Bank.

3.2 Loans & Advances:

Bank emphasis on credit quality and customer's services yielded the desired growth in profit, capital assets and shareholders' value. But to get the loans and advance the investors has to follow some terms and condition which falls under the policy and practice of the bank instruction booklet.

3.3 Industrial Credit:

Bank's services are directed towards the entrepreneurs in the small industries sector. A small industry, as per Industrial policy since approved by the Cabinet, has been defined as an industrial undertaking whose total fixed investment is less than Tk.150 million.

The industrial loan reflected a significant growth of 26.59 % over the previous year. Total outstanding industrial loans including Agri-based industry, RMG, Textile, Ship Building, Ship Breaking & Other Manufacturing Industry stood Taka1459.29 crore at the end of 2012.

3.4 Commercial Credit:

This Bank also supports development of trade, business and other commercial activities in the country. It covers the full range of services to the exporters and importers extending various facilities such as cash credit, export cash credit, packing credit, short term loans, local and foreign bills purchase facilities. At the end of 2012 total outstanding commercial loans stood at Taka 2193.92 crore including Transport, Storage, Trade Service & Commercial Real Estate financing.

3.5 Micro Credit:

Credit Scheme provides for the poor for generation of employment and income on a sustainable basis particularly in urban and suburban areas. The Bank follows three systems of credit delivery. These are:

Ø Lending to the NGOs who on-lend to their members. At present there are such NGOs.

Ø Lending direct to the targets groups or ultimate borrowers under the Bank's own management.

Ø Lending direct to the member-borrowers and NGOs providing non financial services like group formation and monitoring and supervision on exchange for a supervision fee.

3.6 Lending Criteria

Ø Entrepreneur

Entrepreneur/promoter has to be creditworthy and competent enough to run the proposed industry.

Ø Viability of the project

The project should be viable from organizational, technical, commercial, financial and economic points of view.

Ø Technical Viability

Ø The project should be technically sound and environment-friendly.

Ø Technology transfer in case of borrowed know-how ought to be ensured.

Ø Building should be well planned and well constructed.

Ø Commercial viability

Ø Market prospect and potential for the product has to be fully assured at competitive prices.

Ø Marketing channel for the product should be accessible to the entrepreneur.

Ø Financial Viability

Ø There should be reasonable debt equity ratio as determined by the Bank on individual case basis.

Ø Debt service coverage ratio should be at least 2.5 times at the optimum level of production.

Ø IRR should preferably be not less than 20 %.

Ø Economic Viability

Ø The project should ensure benefit to the national economy and create sufficient employment opportunity and be environment friendly.

3.7 Credit Operating System

1. Prospective Borrower

Most bank loans to individuals arise from a direct request from a customer who approaches a member of the bank's staff and asks to fill out a loan application. In the Al-arafahIslami Bank Ltd. Bank, business loan request often arise from the contacts the bank's loan officers and sales representatives make as they solicit new accounts from firms operating in the bank's market area. Sometimes loan officers will call on the same company for months before the customer finally agrees to give the bank a try by filling out a loan application.

2. Client's Interview

When a customer decides to request a loan, an interview with a loan officer usually follows right ways, giving the customer the opportunity to explain his or her credit needs. That interview is particularly important because it provides an opportunity for the bank's loan officer to assess the customer's character and sincerity of purpose. If the customer appears to lack sincerity in acknowledging the need to adhere to the terms of a loan, this must be recorded as a strong factor weighing against approval of the loan request.

3. Client's Request with FIS

The borrower is providing with an instruction paper, which help him or her to prepare the loan proposal properly. Information on loan proposal should be furnished in prescribed First Information Sheet (FIS) in triplicate properly typed in each pages / set should be duly sealed and signed by the applicant(s)/ sponsor(s).

4. Information Sheet

Complete information should be furnished in respect of each item supported by documentary evidences, wherever necessary, to avoid further reference/ delay/ rejection of the application. The bank reserves the right to reject the application forthwith if the application given in the form is incomplete and not fully documented in all respects. Information may be provided in additional sheets of papers, if required. However ensure all the pages and annexure are signed under official seal. Also ensure that all the facts/ evidences have been enclosed properly including the feasibility reports/ detailed study reports on loan proposal.

Ø The client are required to deposit with the application the project examination fee and also apportion of the equity at the following rate either by cheque or pay order or demand draft drown in favor of Al-arafahIslami Bank Ltd. and payable in any scheduled Banks within the country.

Ø Memorandum and Articles of Association together with the certificate of registration/incorporation commencement of business of the company duly certified by an aging director of the company should be submitted.

Ø Certificates from the surveyor for determining the price of land of the project/price of adjacent land sold during last three years should be submitted. Also to be submitted are site/ mouza map.

Ø Machinery layout plan, price quotation of three suppliers together with illustrated brochures and literatures should be submitted for both import and local machinery.

Ø Consent letter from Power Development Board/ Rural Development Board/ Gas Authority/ Pollution Control Board should be submitted whatever required.

Ø Soil Test/ Water Test report (if required).

Ø Nationality certificate along with attested passport size photographs of the directors/partners/ proprietor should be submitted.

Ø Declaration of asset and liability of the proposed directors/ partners/ proprietor. Declaration of payment of income tax should be submitted.

5. Justification of Facility Requested

Compared to other financial institutions' usual two months average processing time for its medium and large loan program, the processing time for small industry loans remains well below the above processing time because of its lesser detailed studied as well as the bank considers that small entrepreneurs look for their sources of credit at their time of need.

Ø The processing/approval time for small industry loan is not more then two months from the date of receiving complete application from.

Ø Application in prescribe form of received in triplicate, duly filled in, and sealed and signed by the sponsoring directors along with their attested photographs duly affixed in the space provided for.

Ø Draft layout plan of the proposed building and the estimated for constriction cost is obtained.

Ø In case of project to be located in any BSCIC industrial estate, BSCIC latter of consent particulars of the land, copy of lease deed is obtained.

Ø For location of industry in other areas, permission / no- objection for setting up the small industry is obtained from the appropriate authorities.

Ø Utility agency's letter of consent of providing necessary utility services to the unit to be obtained.

Ø Detailed credit report of the sponsors/ project is prepared i.e. the Bank should carry out detailed credit investigation of the promoters.

Ø Tentative list of machinery / work with detailed specification should be obtained supported by 3 price quotation.

Ø The individual project appraisal report for small scale and cottage industry may not be very elaborate and exhausted. However it covers the Al-arafahIslami Bank Ltd. area of project viability.

Ø Join report from the Bank and the borrower is prepared for informal sector.

6. Analysis a/Proposals

AL-ARAFAH ISLAMI BANK LTD. was established to provide term loan and other financial assistance including all kinds of banking facilities to accelerate the pace of development to small industry. The financial assistance includes short term working capital loan, medium and long term finance to viable new- small scale industry (SSI) projects and BMRE of SSI projects which fulfill the banks criteria of viability and acceptability. Project appraisal/ analysis in the banking sector is needed for the following reasons:

Ø To justify the soundness of an investment.

Ø To ensure repayment of bank finance.

Ø To achieve organizational goals.

The entrepreneurs of small industry/ project requiring financial assistance from Al-arafahIslami Bank Ltd. need to fulfill the following criteria:

Credit Ratings

As per Bangladesh Banks mandatory requirement vide BRPD circular No. 06 dated Credit Rating of Al-arafahIslami Bank Limited was done by the Credit Rating Agency of Bangladesh Limited (CRAB) on the audited Balance Sheet as on

CRAB has submitted their report as under:

Credit Rating Report (Entity Rating)

	Long Term	Short Term
Current Rating 2013	AA3	ST-2
Previous Rating 2012	A-1	ST-2
Outlook	Stable
Date of Rating	Dec, 2013

Credit rating agency of Bangladesh Limited (CRAB) Upgrades the rating of Al-arafahIslami Bank Limited to AA3 from A-1 and reaffirms short term rating to ST-2. The above rating has been done in consideration of Banks visible improvement in fundamentals such as capital adequacy, liquidity position, profitability, introduction of real time online banking etc. However, the above rating is moderated, to some extent, by limited market share, increase in NPL, high cost of fund, moderate corporate governance, dependency on team deposit etc.

Financial institutions rated in this category are adjudged to offer adequate safety to timely repayment of financial obligation. This level of rating indicates a corporate entity with an adequate credit profile. Risk factors are more variable and greater in period of economic stress than those rated in the higher categories. The short term rating indicates good certain of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small.

3.8 Credit Risk Assessment

A thorough credit risk assessment should be conducted prior to the granting of loans, and at least thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the Relationship Manager (RM), and is recommended by Branch Credit Committee (BCC). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy for the entire credit application submitted for approval. RMs must be familiar with the bank's Lending Guidelines and should conduct due diligence on new borrowers, principles and guarantors. Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details:

• Amount and type of loan(s) proposed.

• Purpose of loans,

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

• Security Arrangements

3.9 Sector Wise Disbursement of Loans in Al-ArafahIslami Bank Ltd.:

Sl. No.	SectoralStructure of Lending	Outstanding as on 31.12.2012	As % of Total Loans & Advances
1	Agriculture And Agro-based Industry	106.68	1.94%
2	RMG	350.77	6.39%
3	Textile	156.10	2.84%
4	Ship Building	0.00	0.00%
5	Ship Breaking	41.61	0.76%
6	Other Manufacturing Industry	41.61	0.76%
7	SME Sector	987.70	18.00%
8	Construction	313.13	5.70%
9	Power, Gas	12.52	0.23%
10	Transport, Storage and Communication	166.55	3.03%
11	Trade Service	1689.62	30.78%
12	Commercial real estate financing	83.27	1.52%
13	Residential real estate financing	85.85	1.56%
14	Consumer Credit	109.58	2.00%
15	Capital Market	87.58	1.60%
16	Credit Card	12.90	0.24%
17	Non-bank financial institutions	21.49	0.39%
18	Bank Acceptance ( i.e. LDBP, FDBP )	767.28	13.98%
19	Others	188.04	3.43%
Total Loans & Advances		5488.70	100.00%

3.10 Comparative Recovery Rate of Loans

In banking environment no reward can be expected without risk. Considering the present non-performing loan position of the country, Al-arafahIslami Bank Ltd. is very much cautious about its investment. Every loan proposal is placed under careful scrutiny before approval. Internal Audit team and Recovery team exercise close monitoring on every loan transaction. All out efforts were made to improve the recovery rate and control of non-performing loans and advances

3.11. How Bank recover their Loan

When Bank sanctions loans and advances to its customers, they clearly state the repayment pattern in the loan agreement. But some credit holders do not pay their credit in due period. The nationalized and private sector commercial banks have to face this sort of problems. To overcome the problem of overdue loan, the bank has taken particular loan recovery programs.

• Recovery Programs taken by Bank:

• Establishing credit supervision and monitoring cell in the bank

• Re-structuring the loan sanctioning and distributing policy of the bank

• Sanctioning loans and advances against sufficient securities as best as possible

• Giving more powers to the branch manager in credit management decision making process

• Offering a package of incentives to the sound borrowers

• Giving more emphasis on short term loans and advances

• Imposing restrictions on loans and advances for sick industries

• Taking legal actions quickly against unsound borrowers as best as possible within the period specified by the law of limitations.

3.12. Recovery Patterns of Loan & Advances:

Generally Bank sanctions loans and advances to every sector of an economy. Before going into details of recovery performance, we have to be familiar with some terms used in recovery performance:

• Disbursement: highest outstanding balance on any date during the reporting period minus outstanding balance at the end of the preceding period.

• Demand for recovery: overdue at the end of the reporting period plus recovery during the reporting period.

• Recovery: highest outstanding balance on any date during the reporting period minus outstanding balance at the end of the recovery period.

• Outstanding: Outstanding figures in the ledger at the end of the reporting period.

• Overdue: Demand for recovery minus recovery

3.13. Problems in Loan Recovery

Though bank is performing better in managing loan and advances, still 12.39% of total loan and advances are classified. There are a lot of reasons for which the loan recovery of the bank is still now defective. In most cases, problems may be raised from sanctioning procedures of loan, investigation of the project, and investigation of the loans etc. that is, the problem in loan recovery proves the outcomes of the default process in loan disbursement. The main reasons of poor loan recovery are categorized in four broad types as follow:

• Problems created by economic environment

The following problems arise from the effect of economic environment:

1. Changing in the management pattern: Changing of management patterns may delay the recovery of mature loan.

2. Changing in industrial patterns: The banks sometimes sanction loan to the losing concern for further improvement of the respective sector, but in most cases, they fail to achieve progress.

3. Operation of open market economy: In our country mainly industries become sick and also close their business on account of emerging of open market economy. The cost of production is high and the quality of goods is not of required of standard. As a result, they become the losing concerns and the amount of bad loan increases.

4. Rapid expansion of business: There are many companies which expand their business rapidly, but the expansion is for short time. In the long run, the amount of classified loan increases.

Problems created by government:

The following problems are arisen by the government:

Ø External pressure: Al-arafahIslami Bank has also faced many problems in the loan recovery process as a part of continuous pressure from various interested groups.

Ø Legal problems: Existing rules and regulations are insufficient to cover the legal aspects of loan recovery. As a result, defaulters can get release easily from all charges against them.

Ø Instability of Govt. policy: Frequent changes in government policies in regard to recovery of loan.

Problems created by the bank:

The following problems are created by the banks:

Ø Lack of analysis of business risk: Before lending, Sometime Al-arafahIslami Bank fails to properly analyze the business risk of the borrowers and the bank cannot forecast whether the business will succeed or fail. If it fails to run well, the loan becomes classified.

Ø Lack of proper valuation of security or mortgage property: In some cases, bank fails to determine the value of security against the loan. As a result, if the loan becomes classified, the bank cannot recover its loan through the sale of mortgage.

Other general causes of poor loan recovery:

Apart from the specific reasons creating problems to recoup loan, there exists some other general causes which have a great impact on creating the problems which are faced by the Bank under study in the loan recovery process. These are:

Ø Early sanction and disbursement of loan to the borrowers without proper inspection of the project by the bank on account of pressure from lobbying group.

Ø Lack evaluation of technical and economic feasibility of the program.

Ø Delay in disbursement of credit.

Ø Sometime credit is not allowed to actual entrepreneurs sometime.

Ø Lack of proper supervision.

Ø Illiteracy of borrowers.

Ø Negative attitude of borrowers to repay the loan.

Ø Deterioration of the value system of the borrowers.

Ø Money borrowers use their loan-money other than specified project, i.e., if the loan is sanctioned for industrial purpose; they use the money in house building or purchase of land for their own purpose.

Ø Sometimes borrowers invest their money outside the country. Many borrowers transfer loan money to abroad where they deposited this money in their own account or spent some other purpose.

Ø Sometimes local borrowers are found to be so much compelled to grant them loan without proper study due to some unexpected reasons. Since these borrowers are capable of getting loan by exercising their influence, they can also escape the repayment liability.

Ø Problems responsible for non-implementation and delayed implementation of project for which the entrepreneurs of the project cannot repay the loan. The causes of failure may be:

Ø Failure to ascertain the economic availability of the projects

Ø Time lag between approval and sanctioning of the projects

Ø Import of machinery and raw materials both are the problems of paucity of foreign exchange and procedures of licensing.

All of these reasons discussed above are general reasons for problems loan recovery of . Besides these, there are some specific reasons for loan recovery problems faced continuously by Bank. They are as:

Ø Loans are given under fictitious names and enterprise

Ø Loans are given in some cases without sufficient securities

Ø Approval of the loans in excess of the branch manager’s power

Ø Improper monitoring and supervision of credit

Ø Politically misuse of loan programs

Ø Lack of timely action against willful defaulter

Ø Loans are sometimes for economically unsound project.

Ø The pressure to achieve targeted loan and advance given by head office to the branches

Problems in loan recovery are the outcome of the default on loans disbursements in the earlier period.

3.14. Types of loan:

Depending on the various nature of financing, all the lending activities have been brought under the following major heads:

Loan (General)

Short term, Medium term & Long term loans allowed to individual/firm/industries for a specific purpose but for a definite period and generally repayable by installments fall under this head. This type of lending is mainly allowed to accommodate financing under the categories (i) Large & Medium Scale Industry and (ii) Small & Cottage Industry. Very often term financing for (i) Agriculture & (ii) Others are also included here.

House Building Loan (General): Loans allowed to individual/enterprises for construction of house (residential or commercial) fall under this type of advance. The amount is repayable by monthly installment within a specified period. Such advances are known as Loan (HBL-GEN).

House Building Loan (Staff): Loans allowed to our Bank employees for purchase/construction of house shall be known as Staff Loan (HBL-STAFF).

Other Loans to Staff: Loans allowed to employees other than for House Building shall be grouped under head - Staff Loan (Gen).

Cash Credit (Hypo.): Advances allowed to individual/firm for trading as well as wholesale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It is allowed under the categories (i) "Commercial Lending" when the customer is other than a industry and (ii) "Working Capital" when the customer is an industry.

Cash Credit (Pledge): Financial accommodations to individual/firms for trading as well as for whole-sale or to industries as working capital against pledge of goods as primary security fall under this head of advance. It is also a continuous credit and like the above allowed under the categories (i) "Commercial Lending" and (ii) Working Capital".

Hire Purchase: Hire-Purchase is a type of installment credit under which the Hire-Purchaser agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of Principal as well as interest for adjustment of the loan within a specified period.

Lease Financing: Lease Financing is one of the most convenient sources of acquiring capital machinery and equipment whereby a client is given the opportunity to have an exclusive right to use an asset usually for an agreed period of time against payment of rent. It is a term financing repayable by installment.

Time Loan: This is one time financial accommodation for short period maximum 12 months to meet some specific purpose. The loan is adjustable within the validity and not renewable and no transaction is allowed.

Consumers Credit Scheme: It is a special credit scheme of the Bank to finance purchase of consumers' durable to the fixed income group to raise their standard of living. The loans are allowed on soft terms against personal guarantee and deposit of specified percentage of equity by the customers. The loan is repayable by monthly installment within a fixed period.

SOD (General): Advances allowed to individual/firms against financial obligation (i.e. lien on FDR/PSP/ BSP/Insurance Policy/Share etc). This may or may not be a continuous Credit.

SOD (Others): Advances allowed against assignment of work order for execution of contractual works falls under this head. This advance is generally allowed for a definite period and specific purpose i.e. it is not a continuous credit. It falls under the category "Others".

SOD (Export): Advance allowed for purchasing foreign currency for payment against L/Cs (Back to Back) where the exports do not materialize before the date of import payment. This is also an advance for temporary period which is known as export finance and falls under the category "Commercial Lending".

PAD: Payment made by the Bank against lodgment of shipping documents of goods imported through L/C falls under this head. It is an interim advance connected with import and is generally liquidated against payments usually made by the party for retirement of the documents for release of imported goods from the customs authority. It falls under the category "Commercial Lending".

LlM: Advances allowed for retirement of shipping documents and release of goods imported through L/C taking effective control over the goods by pledge in go downs under Bank's lock & key fall under this type of advance. This is also a temporary advance connected with import which is known as post-import finance and falls under the category "Commercial Lending".

LTR: Advance allowed for retirement of shipping documents and release of goods imported through LC falls under this head. The goods are handed over to the importer under trust with the arrangement that sale proceeds should be deposited to liquidate the advances within a given period. This is also a temporary advance connected with import and known as post-import finance and falls under the category "Commercial Lending".

IBP: Payment made through purchase of inland bills/cheques to meet urgent requirement of the customer falls under this type of credit facility. This temporary advance is adjustable from the proceeds of bills/cheques purchased for collection. It falls under the category "Commercial Lending".

Export Cash Credit (ECC): Financial accommodation allowed to a customer for exports of goods falls under this head and is categorized as "Export Credit". The advances must be liquidated out of export proceeds within 180 days.

Packing Credit (PC): Advance allowed to a customer against specific L/C/firm contract for processing/packing of goods to be exported falls under this head and is categorized as "Packing Credit". The advances must be adjusted from proceeds of the relevant exports within 180 days. It falls under the category "Export Credit".

F D B P: Payment made to a customer through purchase/negotiation of a Foreign documentary bills falls under this head. This temporary advance is adjustable from the proceeds of the shipping/export documents. It falls under the category "Export Credit".

IDBP: Payment made against documents representing sell of goods to Local export oriented industries which are deemed as exports and which are denominated in Local Currency / Foreign Currency falls under this head. This temporary liability is adjustable from proceeds of the Bill.

F B P: Payment made to a customer through Purchase or Foreign Currency Cheques/Drafts falls under this head. This temporary advance is adjustable from the proceeds of the cheque/draft.

3.15. Mission Statement of the Credit Department:

To deliver credit facilities to customers of Bank with prudence and efficiency and establish FSIBL as the preferred credit service provider in the country in terms of wide range of credit product, competitive price, adherence to credit norms, exercising due diligence, and effective management of risk assets. Credit department of any bank is very much important. “A bank will collapse or not” this important matter depends upon the performance of the bank’s credit department Responsibilities of the credit department are many. They have to maintain a lot of scrutiny factors. They have to use the deposit collected by the bank in a proper way by giving loans to maintain the liquidity. A huge part of the revenue is generated from the interest received from the loans and advances. Again if they give so many loans then liquidity of the bank may decrease and risk will also increase in the market.

But ultimately this is the truth that if banks don’t give loan to their clients their revenue generation will be slow and ultimately the bank will be collapsed. So bank must give loans and advances to the business and the personnel. Now the question arises that how effectively they can do it. They must have to take care that the loan they are giving to the clients. Some questions must arise when gives loan to clients.

Ø Is the client capable enough to repay the loan and interest?

Ø How it will be measured?

Ø On what basis the bank will give the loan to the client?

Ø How will the recover the lone if it is default?

To get the answer of these questions and maintain the credit activities properly there is no alternative of Credit Risk Analysis. Analyzing the risk associated with the loan gives a clear idea about the next step of the credit department that is what decision they will take further. I am focusing this important factor of the credit department that Credit Risk Analysis of Bank that is described broadly in the later part of the report.

3.16. Credit Principles:

In order to maximize the stakeholders’ value by establishing AAIBL as fundamentally sound financial institution, there are ten credit principles, which should always Guide your behavior in our lending decision:

Ø The Bank shall provide suitable credit services and products for the market in which it operates. Product innovation shall be a continuous process.

Ø Loans and advances shall normally be financed from customers deposit and not out of temporary fund or borrowing from money market.

Ø Credit facilities shall be allowed in a manner so that credit expansion goes on ensuring quality i.e. no compromise with the Bank’s standard of excellence. Credit is extended to customers who will complement such standards.

Ø All credit extension must comply with the requirements of Bank’s Memorandum and Articles of Association, Bank companies Act as amended from time to time, Bangladesh Bank’s instructions Circulars, Guidelines and other applicable laws, rules and regulations.

Ø The conduct of the loan portfolio should contribute, within defined risk limitation, to the achievement of profitable growth and superior return on the Bank’s capital.

Ø Credit advancement shall focus on the development and enhancement of customer’s relationship and shall be measured on the basis of the total yield for each relationship with a customer (on the global basis), though individual transactions should also be profitable.

Ø Credit facilities will be extended to those companies/persons, which can make best use of the facility thus helping maximize our profit as well as economic growth of the country. To ensure achievement of this objective lending decision shall be based mainly on the borrower’s ability to repay.

Proper staffing: Proper analysis of Credit proposal is complex and required high level of numerical as well as analytical ability and common sense. To ensure effective understanding of the concept and thus to make the overall credit port-folio of the Bank healthy, proper staffing shall be made through placement of qualified officials having appropriate background, who have got the right aptitude, formal training in Credit Risk Analysis, Bank’s credit procedures as well as required experience.

One	Assess the customer’s character for integrity and willingness to repay
Two	Only lend what the customer will have the capacity and ability to repay
Three	Plan for the possibility of default
Four	Only extend credit where we can sufficiently understand and manage the risk
Five	Ensure independent credit participation in the credit process
Six	Behave ethically in all credit activities
Seven	Be proactive in identifying, managing and communicating credit risk
Eight	Be diligent in ensuring that credit exposures and activities comply with AAIBL
Nine	Optimize risk and reward
Ten	Build and maintain a diversified Credit portfolio

3.17. Processing of Credit Approval:

Credit Risk Grading System (CGRS)

Risk is inherent in all aspects of commercial operation. However for Banks and Financial Institutions Credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower will fail to meet its obligation in accordance with agreed terms. Credit risk, therefore, arises from the Bank’s dealings with or lending to corporate, individual and other Banks or financial institutions.

Credit risk management needs to be a robust process that enables Banks to proactively manage loan portfolio in order to minimize losses and earns an acceptable level of return for Shareholders. Central to this is a comprehensive IT system, which should have ability to capture all key customer data, risk management and transaction information. Al-arafahIslami Bank Ltd. already has real time on-line Banking system which enables to capture all key customer data. Given the fast changing dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and dis-intermediation, it is essential that Banks have robust Credit risk management polices and procedures that are sensitive and responsive to these changes. At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. Since the two credit risk models are presently in vogue, the Governing Board of Bangladesh Institute of Bank Management (BIBM) under the chairmanship of the Governor, Bangladesh Bank decided that an integrated Credit Risk Grading Model be developed incorporating the significant features of the above mentioned models with a view to render a need based simplified and user friendly model for application by the Banks and financial institutions in processing credit decisions and evaluating the magnitude of risk involved therein.

3.18. Function of Credit Risk Grading:

Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.

Use of Credit Risk Grading

Ø The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole.

Ø As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis.

Ø Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.

Number & Short Name of Grading Used in the CRG

The proposed CRG scale consists of 8 categories with Short names and Numbers are provided as follows:

GRADING	SHORT NAME	NUMBER
Superior	SUP	1
Good	GD	2
Acceptable	ACCPT	3
Marginal/Watchlist	MG/WL	4
Special Mention	SM	5
Sub standard	SS	6
Doubtful	DF	7
Bad & Loss	BL	8

Characteristics of different grades

A clear definition of the different categories of Credit Risk Grading is given as follows:

Ø Superior - (SUP) - 1

Ø Credit facilities, which are fully secured i.e. fully cash covered.

Ø Credit facilities fully covered by government guarantee.

Ø Credit facilities fully covered by the guarantee of a top tier international Bank.

Ø Good - (GD) - 2

Ø Strong repayment capacity of the borrower

Ø The borrower has excellent liquidity and low leverage.

Ø The company demonstrates consistently strong earnings and cash flow.

Ø Borrower has well established, strong market share.

Ø Very good management skill & expertise.

Ø All security documentation should be in place.

Ø Credit facilities fully covered by the guarantee of a top tier local Bank.

Ø Aggregate Score of 85 or greater based on the Risk Grade Score Sheet

Ø Acceptable - (ACCPT) – 3

Ø These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record.

Ø Borrowers have adequate liquidity, cash flow and earnings.

Ø Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property).

Ø Acceptable management

Ø Acceptable parent/sister company guarantee

Ø Aggregate Score of 75-84 based on the Risk Grade Score Sheet

Ø Marginal/Watch list - (MG/WL) - 4

Ø This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment.

Ø These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings.

Ø Weaker business credit & early warning signals of emerging business credit detected.

Ø The borrower incurs a loss

Ø Loan repayments routinely fall past due

Ø Account conduct is poor, or other untoward factors are present.

Ø Credit requires attention

Ø Aggregate Score of 65-74 based on the Risk Grade Score Sheet

Ø Special Mention - (SM) - 5

Ø This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower.

Ø Severe management problems exist.

Ø Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage),

Ø An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.

Ø Substandard - (SS) - 6

Ø Financial condition is weak and capacity or inclination to repay is in doubt.

Ø These weaknesses jeopardize the full settlement of loans.

Ø Bangladesh Bank criteria for sub-standard credit shall apply.

Ø An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.

Ø Doubtful - (DF) - 7

Ø Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.

Ø However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.

Ø Bangladesh Bank criteria for doubtful credit shall apply.

An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.

Ø Bad & Loss - (BL) - 8

Ø Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation.

Ø Prospect of recovery is poor and legal options have been pursued.

Ø Proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for.

Ø This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal procedures/suit initiated.

Ø Bangladesh Bank criteria for bad & loss credit shall apply.

Ø An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

3.19. Computation of Credit Risk Grading

So far I have discussed about the theoretical part of the Credit Risk grading. I have known in which grade what are the characteristics of the company as well as clients’ profile. To measure the actual risk associated with the loan that is going to be paid by the bank to the particular client, we have to follow some steps and get a statistical parameter of the risk. There are six steps to compute credit risk grading. Those are given and described below:

Step 1: Identify all the Principal Risk Components

Credit risk for counterparty arises from an aggregation of the following:

Ø Financial Risk

Ø Business/Industry Risk

Ø Management Risk

Ø Security Risk

Ø Relationship Risk

Each of the above mentioned key risk areas require be evaluating and aggregating to arrive at an overall risk grading measure.

Ø Evaluation of Financial Risk: Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow.

Ø Evaluation of Business/Industry Risk: Risk that adverse industry situation or unfavorable business condition will impact borrowers’ capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share & poor industry growth.

Ø Evaluation of Management Risk: Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work.

Ø Evaluation of Security Risk: Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security & collateral, location of collateral and support.

Ø Evaluation of Relationship Risk: These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship.

Step 2: Allocate weights to Principal Risk Components

Principal Risk Components:	Weight:
Financial Risk	50%
Business/Industry Risk	18%
Management Risk	12%
Security Risk	10%
Relationship Risk	10%

According to the importance of risk profile, the following weightings are proposed for corresponding principal risks.

Step 3: Establish the Key Parameters

Principal Risk Components	Key Parameters
a) Financial Risk	Leverage, Liquidity, Profitability & Coverage ratio
b) Business / Industrial Risk	Size of Business, Age of Business, Business Outlook, Industry Growth, Competition & Barriers to Business
c) Management Risk	Experience, Succession & Team Work
d) Security Risk	Security Coverage, Collateral Coverage and Support
e) Relationship Risk	Account Conduct ,Utilization of Limit, Compliance of covenants/conditions & Personal Deposit

Step 4: Assign weights to each of the key parameters

Principal Risk Components	Key Parameters	Weights
1. Financial Risk ……………….	…………………………………… • Leverage…………………. • Liquidity…………………. • Profitability………………. • Coverage………………….	50% 15% 15% 15% 5%
2. Business / Industrial risk……	…………………………………… • Size of the business……… • Age of the business……… • Business Outlook………… • Industry growth………….. • Market competition……… • Entry / Exit Barriers……...	18% 5% 3% 3% 3% 2% 2%
3. Management Risk…………...	…………………………………… • Experience……………….. • Succession………………... • Team Work……………….	12% 5% 4% 3%
4. Security Risk…………………	…………………………………… • Security coverage………… • Collateral coverage………. • Support……………………	10% 4% 4% 2%
5. Relationship Risk……………	…………………………………… • Account conduct………… • Utilization of limit……….. • Compliance of covenants… • Personal deposit…………..	10% 5% 2% 2% 1%

Step 5: Input data to arrive at the score on the key parameters

After the risk identification & weighting assignment process (as mentioned above), the next steps will be to input actual parameter in the score sheet to arrive at the scores corresponding to the actual parameters. This manual also provides a well programmed MS Excel based credit risk scoring sheet to arrive at a total score on each borrower. The excel program requires inputting data accurately in particular cells for input and will automatically calculate the risk grade for a particular borrower based on the total score obtained. The following steps are to be followed while using the MS Excel program.

Ø Open the MS XL file named, CRG_SCORE_SHEET

Ø The entire XL sheet named, CRG is protected except the particular cells to input data.

Ø Input data accurately in the cells which are BORDERED & are colored YELLOW.

Ø Some input cells contain DROP DOWN LIST for some criteria corresponding to the Key Parameters. Click to the input cell and select the appropriate parameters from the DROP DOWN LIST as shown below.

Ø All the cells provided for input must be filled in order to arrive at accurate risk grade.

Ø We have also enclosed theMS Excel file named, CRG_Score_Sheet in CD ROM for use.

Step 6: Arrive at the Credit Risk Grading based on total score obtained

The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor.

Number	Risk Grading	Short Name	Score
1	Superior	SUP	• 100% cash covered • Government guarantee • International Bank guarantees
2	Good	GD	85+
3	Acceptable	ACCPT	75-84
4	Marginal/Watch list	MG/WL	65-74
5	Special Mention	SM	55-64
6	Sub-standard	SS	45-54
7	Doubtful	DF	35-44
8	Bad & Loss	BL	<35

Chapter 4

FINDINGS, RECOMMENDATION & CONCLUTION

This Chapter Includes:

Ø Findings

Ø Problems

Ø Recommendation

Ø Conclusion

4.1 Findings:

AIBL is committed to provide banking services that is purely based on Islamic Sharia transparent and efficient in this competitive environment. Deposit & Investment Management related finding for the year 2014 and 2015 are given below:

SL	Particulars	2014	2015
No.
1.	Total Deposits	141,704,640,624	119,380,245,882
2.	Total Investment	121,298,985,439	101,567,035,153
3.	Investment Deposit Ratio (%)	85.60%	85.08%
4.	Ratio of Classified Investment to	2.97%	2.26%
	Total investment (%)
5.	Amount of Classified Investment	3,598,828,155	2,297,546,431
6.	Provision kept against Classified	1,128,028,705	706,329,000
	Investment
7.	Return on Investment (ROI)	13.01%	12.51%
8.	Income from Investment in Shares	607,225,060	772,218,821

Ø We can see that deposit is the main part of the AIBL fund. So we can say that deposit is the heart of AIBL. Investment of the bank increased with the increase of deposit.

Ø AIBL’s total deposit amount is increased in 2015.

Ø In 2015 total deposit amount is TK. 121,298,985,439. In 2014 it was TK. 101,567,035,153.

Ø The Investment deposit ratio is used to calculate a bank’s ability to cover withdrawals made by its customers. If the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be. AIBL’s Investment Deposit Ratio of 2013 is 85.60% and 2014 is 85.08%. Which is good for the bank.

Any bank investment that is in danger of default is called classified investment. Classified investments have unpaid interest and principal outstanding, and it is unclear whether the bank will be able to recoup the investment proceeds from the borrower. Banks usually categorize such investments as adversely classified asset

on their books. AIBL’s classified investment condition is better in 2014. In 2015 the classified investment ratio is 2.97% which is higher than 2014’s 2.26%.

Ø ROI is performance measure used to evaluate the efficiency of an investment.

Ø AIBL’s ROI has been increased in 2015. It was 12.51% in 2014 but in 2015 it is increased to 13.01%. Higher ROI is good for the bank.

4.2 Problems:

Ø Due to lack of ATM Booth facilities, the bank is not able to attract more new deposits.

Ø AIBL does not provide credit card facilities to its customers.

Ø AIBL does not provide internet banking facility. Therefore technologically

advanced people do open account in the bank.

Ø SMS banking facility is not available which is essential nowadays for depositors.

Ø They have to come to the bank to know their account balance.

Ø Banking software is not up-to-date. There are lot of software bugs, therefore often

bank officials face interruption in their work.

Ø They also use Windows XP as the operating system which is out of date.

Ø Banking service is not fast enough. Often customer need to wait for a long time for service.

Ø Marketing strategy of the bank is very poor. They do not use any modern advertising method to attract customers.

Ø People cannot know about their investment products through online. Their website is not up-to-date and most of the section are incomplete.

Ø Lack of manpower slows down their service.

Ø AIBL does not provide VISA card facility to its customers.

Ø They do not have any dedicated helpline for customers.

Ø Investment processing is lengthy therefore people become demotivated.

Ø Depositor’s forms are not managed properly. Often forms are lost. Sometime accounts are opened without necessary documents.

Ø There are almost no modern banking facilities available other than online banking.

Ø People do not know the actual profit rate for their deposited amount. So they often become confused.

4.3 Recommendations:

Ø AIBL should change the outlook of the branch to attract premium customers.

Ø AIBL should provide an effective training program for the junior level officers.

Ø The service in Kalatia SME Krishi Branch has real good prospect, thus the bank should work actively so that it can attract more clients.

Ø The branch should give more emphasis on proper record keeping.

Ø They should give more attention in increasing their deposits.

Ø As it has been seen that AIBL’s Investment income were more than double by last 4 years, it convey very good sign. They should try to retaining their position.

Ø From the geographical allocation it has been seen that AIBL give less concentration at Khulna and Barisal Region but more concentration at Dhaka and Chittagong, they should give concentration at Khulna and Barisal Region also.

Ø Optimal cost for sanctioning and disbursing investment should be minimized.

Ø The number of branches should be increased.

Ø Bank should offer more facilities to the consumers such as credit card, master card, ATM etc.

Ø Banking is service-oriented marketing. Its business profit depends on its service quality. That is why the authority always should be aware about their service quality. Employees must give individual attention to the consumer. For that, they can recruit more employees.

Ø AIBL should invest in profitable sector. Among the different sector AIBL should invest highly in Industry and Commerce sector for high profit

4.4 Conclusions

Al-ArafahIslami Bank limited is a leading Private Islami bank in Bangladesh with superior customer bases that are loyal, faithful, worthy towards the bank. The service provided by the young energetic officials of the Al-ArafahIslami Bank Limited is very satisfactory. As an islami bank AIBL has to follow the rules of Bangladesh bank despite the fact that these rules sometime restrict the foreign business to some extent. During my internship in this branch I have found the investment department to be very efficient; therefore this department plays a major role in the overall profitability of the branch and to the Bank as a whole.

Al-ArafahIslami Bank Ltd is one of the most potential islami banks in the islami banking sector. It has a large portfolio with huge assets to meet up its liabilities and the management of this bank is equipped with the expert bankers and managers in all level of management.

The Bank’s drive towards market leadership as well as quality in choosing business will continue in the coming years although competition is intensified with the opening of more financial institutions. The Bank is optimistic that the volume of business will increase in future through pragmatic and market friendly policies. The Bank shall continue to explore new fields of investment and take steps to open new Branches for Banking. The bank should endeavor to adopt customer-oriented policies and introduce new techniques that will help to earn profit and increase greater confidence of the existing prospective customers.

It was an honor for me that I have worked as an intern in a reputed organization like Al-ArafahIslami Bank Limited. AIBL is a bank that offers the best islami banking services to its customer and also a fast growing bank. By working in Kalatiya SME Krishi Branch, the knowledge learned would be helpful enough to sustain with the real organizational environment.

Credit Analysis Procedure and Techniques of Al-Arafah Islami BankLimited

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