Internsip report on MCB bank, Risk Management Report

1. University of Central Punjab
.
Internship Report on MCB, RMG Dept.
Course: B S Hons. Applied Accounting
Internship Report: MCB Bank Ltd
Submitted by: Gohar Nouroze
Uni ID: L1S10BSAA2018
Submission Date: 14 September 2011

2. Preface:
It is the requirement of the Bs Applied Accounting course University of Central Punjab, that
all students of BSAA have to spend Six weeks in any organization to get practical exposure
and to get familiarized with the ways to live in the organizational environment which is
dramatically different from the educational environment. That six weeks period called
“Internship Period “, if spent properly and sincerely, enables the students to be more
confident, more knowledgeable, more responsible and, above all, more committed to its work
in the practical field. I have also been assigned to do internship of six weeks period in Alfalah
bank , Main Branch Gujranwala.
It has enabled me to understand the practical scenario and sharpen our decision making
power and utilizing the resources in an effective manner, so that our resources generate
maximum profit.
In preparing this report, I have put all of my best efforts and tried my level best to give
maximum knowledge. Despite of my all the coherent efforts, I do believe that there will
always be a room for improvement in the efforts of learner like me.
Gohar Nouroze
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3. Acknowledgement
Person is not a perfect in all the contexts of his life, He has a limited mind and mind thinking
approaches. It is the guidance from Almighty Allah that shows the man light in the darkness
and the person find his way in the light. Without this helping light, person is nothing but a
helpless creation.
The teaching of the Holy Prophet Muhammad (PBUH) were also the continuous source of
guidance for me especially his order of getting knowledge and fulfilling once duty honestly
was key motivation force for me.
I also want to show my gratitude to my loving parents and humble teachers who make me
able to be at this position. and as they appreciate me to do this.
And I would like to thanks Mr. Rizwan Chughtai , Mr. Shahid Hassan, Mr. Wasif Tahir, Mr.
Farhaj Qazi, Mr. Shahbaz Bokhari and Mr. Bilal Tahir especially as they helped me
remarkably for this project.
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4. EXECUTIVE SUMMARY
This term report is an essential part of the course Organizational behavior because through
this, students come to know the real difference between theory and practice and they are also
introduced to the outside business world. An important requirement of this study program is
to compile a report about the activities of that organization in which the student has studied
the organization behavior.
I survey organizational behavior in MCB BANK LIMITED. This report provided me great
opportunity to equip myself with knowledge, techniques, application and tools used in an
organization.
The report covers various features of knowledge. It starts with the brief history of Bank,
covers current status, mission statement, vision statement, the bank position today and in the
past decade, hierarchy etc.
The major portion of this report explains the activities of Risk Management and what is risk
and what is Market risk Management and my learning experience elaborates how much these
visits were useful for me.
Concluding the report there are certain recommendations and suggestions for the bank in
order to have improvements.
The source of information for the preparation of report includes the written notes extracts
from banking literature and verbal discussion with bank officials.
I hope this report will help in understanding various aspects and features of MCB BANK
LTD. And will be equally important for business administration students and persons making
future banking.
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5. TABLE OF CONTENTS
DESCRIPTION PAGE #
Organizational Background-----------------------------------------7
Mission & Vision statement----------------------------------------9
Awards & Accolades---------------------------------------------------10
Core Values---------------------------------------------------------------11
Objectives of MCB------------------------------------------------------12
Organization Profile---------------------------------------------------13
Management Level-----------------------------------------------------13
Board of Directors------------------------------------------------------14
Organizational Hierarchy of MCB---------------------------------15
Organizational Setup of MCB---------------------------------------16
Branch Network----------------------------------------------------------17
Pattern of Share Holdings--------------------------------------------18
Organizational Structure of MCB----------------------------------19
Products of MCB Bank ------------------------------------------------20
Policies----------------------------------------------------------------------25
Risk Management Group----------------------------------------------29
Managing credit risk----------------------------------------------------31
Managing Market Risk-------------------------------------------------34
Managing Liquidity Risk----------------------------------------------38
DESCRIPTION PAGE #
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6. Managing Operational Risk----------------------------------------40
Financial Analysis of MCB-----------------------------------------42
Ratio Analysis of MCB-----------------------------------------------46
SWOT Analysis---------------------------------------------------------49
PEST Analysis and Environmental Scan----------------------52
Conclusion---------------------------------------------------------------54
Suggestion---------------------------------------------------------------55
Glossary-------------------------------------------------------------------57
References---------------------------------------------------------------59
Copy Right---------------------------------------------------------------60
ORGANIZATIONAL BACKGROUND
Brief History of MCB BANK LIMITED
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7. Before separation of Indo Pak, the need for more Muslim banks was felt. And Muslims
having strong financial capacity were thinking to invest in this sector as well. This was the
idea which provided the way for setting up MUSLIM COMMERCIAL BANK Ltd known as
MCB. This was the third Muslim bank in the subcontinent.
History
This bank was incorporated under companies’ act 1913 on 9th July, 1947 (just before
partition) at Calcutta. But due to changing scenario of the region, the certificate of
incorporation was issued on 17th August, 1948 with a delay of almost 1 year; the certificate
was issued at Chitagong. The first Head office of the company was established at Dacca and
Mr. G.M. Adamjee was appointed its first chairman. It was incorporated with an authorized
capital of Rs. 15 million.
After some time the registered office of the company was shifted to Karachi on August 23rd,
1956 through a special resolution, now recently the Head office of MCB has been transferred
to Islamabad in July, 1999 and now Head office is termed as Principle Office.
This institute was nationalized with other on January 1st, 1974. At that time it had 506
branches and deposits amounting to Rs. 1,640 million.
PRIVATIZATION
When privatization policy was announced in 1990, MCB was the first to be privatized upon
recommendations of World Bank and IMF. The reason for this choice was the better
profitability condition of the organization and less risky credit portfolio which made'' it a good
choice for investors. On April 8th, 1991, the management control was handed over to
National Group (the highest bidders). Initially only 26% of shares were sold to private sector
at Rs. 56 per share.
AFTER PRIVATIZATION
Ten years after privatization, MCB is now in a consolidation stage designed to lock in the
gains made in recent years and prepare the groundwork for future growth. The bank has
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8. restructured its asset portfolio and rationalized the cost structure in order to remain a low cost
producer.
After privatization, the growth in every department of the bank has been observed. Following
are some key developments:
• Launching of different deposit schemes to increase saving level.
• Increased participation on foreign trade.
• Betterment of branches and staff service level.
• Introduction of Rupee Traveler Cheques & Photo Credit Card for the first time in
Pakistan.
MCB BANK TODAY:
MCB today, represents a bank that has grown with time and experience. A major financial
institution, in scope and size, it symbolizes a fully growing tree evergreen, strong, and firmly
rooted. MCB is one of the leading banks of Pakistan with a deposit base of about Rs. 280
billion and total assets of around Rs.300 billion.
The Bank has a customer base of approximately 4 million, a nationwide distribution network
of over 1,000 branches and over 450 ATMs in the market.
During the last fifteen years, the Bank has concentrated on growth through improving service
quality, investment in technology and people, utilizing its extensive branch network,
developing a large and stable deposit base.
SOCIAL SECTOR:
The bank activity participating in the Prime Minister self-employment Scheme. The
application received from various applicants is being processed on merit and disposed off as
quickly as possible.
MISSION & VISION STATEMENT
Vision Statement
“To be the leading financial provider, partnering with our customers for a more prosperous &
secure future”
8

9. Mission Statement
“We are a team of committed professionals, providing innovative and efficient financial solutions to
create and nurture long-term relationships with our customers. In doing so, we ensure that our
shareholders can invest with confidence in us”
]
AWARDS & ACCOLADES
MCB Bank has won many awards, which is a clear proof of its good performance. It has won
Euro money awards and Asia Money awards.
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10. ► Euro money Awards
● Best Bank Award 2008
• Best Bank in Pakistan Award 2006
• Best Bank in Pakistan Award 2005
• Best Bank in Pakistan Award 2004
• Best Bank in Pakistan Award 2003
• Euro money Award 2003 for the "Best Bank in Pakistan".
• Best Bank in Pakistan Award 2001
• Best Domestic Bank Award 2000
► Asia Money Awards
• The Best Domestic Commercial Bank Award 2005
• The Best Domestic Commercial Bank Award 2004
CORE VALUES
INTEGRITY:
We are the trustees of public funds and serve our community with integrity. We believe in
being the best at always doing the right thing. We deliver on our responsibilities and
commitments to our customers as well as our colleagues.
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11. RESPECT
We respect our customer’s values, beliefs, culture and history. We value the equality of
gender and diversity of experience and education that our employees bring with them. We
create an environment where each individual is enabled to succeed.
EXCELLENCE:
We take personal responsibility for our role as leaders in the pursuit of excellence. We are a
performance driven, result oriented organization where merit is the only criterion for reward.
CUSTOMER CENTRICITY:
Our customers are at the heart of everything we do. We thrive on the challenge of
understanding their needs and aspirations, both realized and unrealized. We make every effort
to exceed customer expectations through superior services and solutions.
INNOVATION:
We encourage and reward people who challenge the status quo and think beyond the
boundaries of the conventional. Our teams work together for the smooth and efficient
implementation of ideas and initiatives.
OBJECTIVES OF MCB
The following are the objectives of MCB Bank Limited.
a) CREATING AND MANAGING VALUES:
The first objective of MCB Bank limited is to create and manage the values, which is one of
the back bones of the objective of any well organized and managed organization.
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12. b) HUMAN CAPITAL:
The second objective of MCB Bank is to take care of the Human capital, which is a necessary
thing for the development and prosperity of any well established organization.
c) BEST PLACE TO WORK:
The third objective of MCB Bank Limited is to make it a place, which is much feasible and
comfortable for employees of the bank. The MCB is always conscious in developing such
place where employees of the bank feel easiness.
d) TECHNOLOGY:
The forth objective of MCB Bank Limited is to bring new and latest technology in the
operations of the bank. AT MCB, technology has a direct relation with your needs; it is a
mean for creating value and convenience for the customer. Over the last few years MCB has
invested heavily into strengthening its technology backbone. Today it is leading the way in
banking technology and setting new standards for the banking industry, penetrating into the
local market, listening to the needs of the people and educating them of simple financial
products and services that create both value and convenience. MCB’s strength lies in
providing a technological base at the grass roots level of the society with a challenge to
educate and assimilate such systems across vast cultural and economic backgrounds.
Organization Profile:
Name of Organization: MCB House.
Chairman: Main Mohammad Mansha
Location: 15-Main Jail Road, Gulberg Lahore.
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13. UAN: (0)42111000111
Website: www.mcb.com.pk
MANAGEMENT LEVEL
The organization chart within a department and in different offices is as follows:
Divisional Heads ………..…………………… Head Office
Regional Head (EVP) ………..…………………… Regional Office
Zonal Head (VP) ………..…………………… Zonal Office
Branch Manager ………..…………………… Branch
(VP, AVP, GRADE 1, 2, 3)
Board of Directors
Mian Mohammad Mansha Chairman
Mr. S. M. Muneer Vice Chairman
Mr. M.U.A. Usmani President / CEO
Mr. Tariq Rafi Member
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14. Mr. Shahzad Saleem Member
Mr. Sarmad Amin Member
Dr. Muhammad Yaqub Member
Mian Raza Mansha Member
Dato' Mohammed Hussein Member
Mr. Aftab Ahmad Khan Member
Mr. Abdul Farid Bin Alias Member
Mian Umer Mansha Member
Mr. Muhammad Ali Zeb Member
ORGANIZATIONAL HIERARCHY OF MCB
PRESIDENT
SENIOR EXECUTIVE
VICE PRESIDENT
EXECUTIVE VICE
PRESIDENT
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15. SENIOR VICE
PRESIDENT
VICE PRESIDENT
ASSISTANT VICE
PRESIDENT
OFFICERS GRADE
I II III
ASSISTANTS
CASHIER
PEONS
HEAD QUARTER LAHORE
PROVINCIAL HEAD
QUARTERS
ORGANIZATIONAL SETUP OF MCB
PUNJAB LAHORE
SINDH KARACHI
BALOCHISTAN PESHAWAR
NWFP & AZAD
QUETTA
KASHMIR
CIRCLE OFFICES
15
BRANCH OFFICES

16. BRANCH NETWORK
The following is the Branch Network of MCB Bank Limited.
Sector wise position of circle is as follows;
Consumer Sector 810 Branches
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17. Main
Lahore
1 Branch
Pattern of Share Holdings
Description Shareholding Percentage
Directors, CEO and children 57,412,411 7.5521
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18. Associated Companies 379,123,038 49.8705
NIT & ICP 131,567 0.0173
Banks, DFI & NBFI 1,582,229 0.2081
Insurance Companies 50,076,792 6.5872
Modarabas & Mutual Funds 6,677,686 0.8784
General Public (Local) 110,658,668 14.5562
General Public (Foreign) 2,770,691 0.3645
Others 29,408,417 3.8684
Foreign Companies 122,373,480 16.0972
Company Total 760,214,979 100.00
ORGANIZATIONAL STRUCTURE OF MCB
As MCB is a banking company listed in stock exchange therefore it follows all the legalities
which are imposed by concerned statutes Mr. Muhammad Mansha is Chairman & Chief
Executive of the company with a team of 10 directors and 1 vice chairman to help in the
business control and strategy making for the company.
Operational Management of the bank is being handled by a team of 10 professionals. This
team is also headed by Mr. Muhammad Mansha. The different operational departments are
Consumer Banking & IT division, financial division & Inter branch division, Banking
operations division, HR & Legal division, financial control & Audit division, Credit
management division, Commercial Banking division, Corporate Banking division, Treasury
management & FX Group and lastly Special Assets Management (SAM) Group.
18

19. For effective handling of branches, it has been categorized into three segments with different
people handling each category. These categories are:
a) Corporate Banking
b) Commercial Banking
c) Consumer Banking
Corporate Banking:
These are branches which have an exposure of over Rs. 100 million. Usually includes
multinational & public sector companies.
Commercial Banking:
The branches which has a credit exposure of less than Rs. 100 million but having a credit
portfolio of more than Rs. 20 million (excluding staff loans)
Usually branches in large markets and commercial areas come under this category.
Consumer Banking:
These are the branches which have exposure up to Rs. 20 million and these include all the
branches which are neither corporate nor commercial branches.
PRODUCTS OF MCB BANK
1. MCB Rupee Traveler Cheques
MCB Rupee Travelers Cheques are as good as cash, in-fact
better. Better because with Rupee Travelers Cheques you have
the power to purchase and a feeling of security that should you lose them, you will get a
refund.
19

20. MCB Rupee Travelers Cheques are accepted at major shops, travel agents, hotels, business
establishments and MCB branches all over Pakistan. You don't have to be an MCB account
holder to buy the Rupee Traveler Cheques. Anybody can purchase them. It's a safe and
convenient way to conduct everyday business. At a time when thefts and robberies are on the
increase, you are better off carrying Travelers Cheques rather than money.
2. Mahnama Khushali Scheme
A 5-year fixed Deposit Scheme, targeted to persons with small savings who would desire a
regular monthly return on their investment.
3. MCB Khushali Bachat Account
Salient Features
• 8% rate of return per annum.
• Returns calculated on daily.
• Average balance and paid half yearly.
• Introduced first time in Pakistan.
• The facility of helping account holders pays utility bills (electricity, telephone and gas)
through their account. No queues. No delays.
4. Capital Growth Certificate Scheme
For long term depositors under which the amount
deposited almost doubles at the end of 5 years. For the
scheme, the minimum amount of deposits is Rs. 10000 while there is no maximum limit. In
case of premature encashment of the certificate, the depositor will profit at the same rates as
that of PL Saving Account.
5. Fund Management Scheme
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21. This scheme is offered to corporate and customers and is aimed at providing better rate of
return up to 15% per annum. One of the objectives of the scheme is to develop secondary
market for Government Securities.
6. Fax Press
This product was first of its kind introduced by using modem
technology of The Fax Machine. It facilitates speedy transfer of funds
within Pakistan. The service guarantees transfer of from one city to
another, within an hour.
7. Utility Bill Collection
With the aim of extending this service to wider range of customers, the
number of MCB branches collecting Utility Bills more than 900.
8. MCB Mobile Banking
At the forefront of technological excellence, MCB proudly introduces MCB MOBILE
BANKING. The convenience of accessing account balance information and mini statements
whenever want or wherever may need them, with comfort and peace of mind.
MCB Mobile Banking service is available to all MCB ATM cardholders, 24 hours - 365 days.
MOBILE BANKING AT A GLANCE
MCB Mobile Banking gives easy and quick access to account(s) at a time find convenient,
including all holidays.
• With MCB Mobile Banking
Check balance
View the last 4 transactions of your MCB account(s).
• Banking at fingertips
Dial in anytime to get information regarding balance and mini statements.
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22. 9. MCB Islamic Banking Services
Islamic banking services through exclusive units/branches offering a range of liability and
asset based Sharia compliant products like Musharika, Murabaha, Ijara and Istasana.
10. MCB Car Cash
Car financing and leasing at competitive rates with flexible options Car cash finances both
semi-commercial and non-commercial vehicles for personal and business use.
11. MCB Locker
Best protection for valuable things. Lockers of different capacities are available in the
branches but only for valued customers.
12. MCB Master Card
THE FUTURE OF MONEY :
Since the beginning of time, people have tried to find more convenient ways to pay, from gold
to paper money and checks. Today, money is moving away from distinct hard currencies and
towards universal payment products that transcend national borders, time zones, and, with the
Internet, even physical space.
Plastic or "virtual" money, credit, debit, and electronic cash products, inevitably will displace
cash and checks as the money of the future.
• Cash Advance Facilities
Available in Pakistan and worldwide with a network of over 1,000 branches and a team of
dedicated professionals, MCB is Pakistan’s largest private sector commercial bank. Our
Consumer Banking provides customers with innovative saving schemes, products and
services. Our ATM network is the largest in Pakistan and our Pak Rupee Travelers
Cheques are market leaders. We were the first to introduce the photo card with the
introduction of the MasterCard.
Our Corporate Banking ensures assistance from a dedicated team of professional financial
advisors for underwriting, project finance or corporate advisory services.
When it comes to banking practices, you can depend on us. We’ve been around for over fifty
years.
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23. 13. MCB Smart Card
MCB now brings you MCB SmartCard -a secure and convenient instrument of payment
with unmatched functionalities. It provides 24-hour direct access to your bank account
The convenience and flexibility of MCB SmartCard will help live a smarter life. It not only
helps you manage your expenses, but also avoids undue interest on your day to day credit card
transactions.Your balance is always within your reach and you spend accordingly.
MCB is the only bank to introduce a debit card that gives the option to choose from domestic
and international card for local and global usage respectively
14. Remit Express
Fastest to Pakistan Anywhere in Pakistan.
Fastest way of getting your money across Pakistan. Remit
Express offers low cost remittance from U.A.E. and Saudi
Arabia. Your relatives, friends or business associates
receive drafts within 72 hours. MCB Remit Express has been specifically designed to meet
the needs of the expatriate Pakistani community residing in the Gulf countries.
15. MCB Pyara Ghar
MCB gives dream home at the lowest and best possible
mark-up rates. You can choose either one of our two
mark-up rate options- fixed or variable.
Early repayment option tailor-made to allow making
partial prepayments at dates that suit.
16. MCB Virtual
MCB Virtual provides the continence of banking on internet. Whether we are at home, in
office or doing travel. Log on at www.mcb.com.pk and enjoy 24 hours access of all your
accounts for the largest array of service.
17. MCB Business Sarmaya
MCB Business Sarmaya is a running finance against your residential
property. It offers running finance up to 20 millions with low
markup.
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24. 18. MCB Car 4 U
MCB car 4 u auto finance is a power move that gets you not only a
car of your own choice but leads you best in life. It is affordable with
competitive markup, flexible conditioning and easy processing and
above all no hidden cost.
! NEWLY LAUNCHED PRODUCT
Now a day MCB is offering a new product called as “SARMAYA MEHFOOZ FUND”.
This fund is valid up-till 17th April, 2010. 9.5% profit ratio has been allocated for this fund.
this is a one year and 1 month investment (13 months). And no tax would be deducted on this
investment. For example if a person deposited 10,000,00 than he will get Rs.95000 profit +
his principle amount after completing 13 months.
Policies:
Internship Policy:
MCB is the bank that serves all type of customers and makes its policies
according to their needs and demands here the MCB has the policy to serve the
students that is six weeks internship.
MCB has no gender bias
For the selection of the employee MCB focus on merit rather than gender.
There is no any kind of discrimination on the basis of male or female, a person having
the skills and knowledge and is perfect of that particular job can be selected as the
employee.
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25. Opening account policy
Prior to establishing a relationship with new customer MCB obtains basic
information i.e. business, source of income, expected level of activity in the account
and reasons for opening the account.
Training of employees
MCB has the program through which all the employees of the bank get proper
training and then work for the achieving the goals.
Revenue Recognition
MCB recognized its revenue on accrual basis. For example if MCB invest in
some different securities and entitled for the profit yet not received, the profit is
recorded as when it earned not when it received.
Investments Policy
MCB also invest its money other than the advances, while investing in the securities
MCB has the following policy to invest in
a) Held for trading
b) Held to maturity
In the light SBP regulations quoted securities are shown at market values and any
changes arising are taken to profit and loss account only upon actual realization.
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26. RISK MANAGEMENT
The bank is primarily subject to interest rate, credit and currency risks. The bank has
designated and implemented a frame work of controls to identify, monitor and manage these
risks are as follow
MCB’s Competitive Strategies
To be competitive the Bank has further reinforced its position in the
Consumer banking area by streamlining and re-launching the consumer financing products
and introducing more convenience based solutions. With the re-launch of auto finance and
house finance products, the Bank pushed the products with full thrust. The Bank has also
launched a running finance facility against mortgage of property.
Technology continued to play an important role in improving and expanding product
offerings. The Bank introduced more IT based products to cater to the changing lifestyles and
needs of the customers.
MCB Virtual-Internet Banking was launched with wide ranging banking solutions for
the customers ranging from individual to corporate customers and it has become the most
preferred Internet banking solution in the country.
MCB also had the privilege of being the first Bank in Pakistan to launch the
comprehensive bill payment facility through its alternate delivery channels which include
Internet Banking, ATMs and MCB Call Centre, currently with six payment partners.
Similarly, the Bank also took initiatives to increase the usage of debit facility. To provide
timely and updated information, MCB has also provided a new look to its website which is
user friendly and considerably easy to browse.
The Islamic Banking initiative has been very successful in attracting new customer,
both individuals and companies. Similarly, those relationships, which were confined only to
current account facility, have grown into stronger business relationships. The branch network
was expanded to Lahore and Multan during the last year and recently been extended to
Hyderabad and Faisalabad. The Bank plans to further expand its Islamic Banking branch
network to other metropolitan areas and also to introduce new sharia compliant banking
solutions to a wider range of customers for satisfying their individual and business needs.
26

27. Some wide-ranging new strategic initiatives were also taken up which will be
important for the Bank in years to come. A private company has been formed in Hong Kong
(fully owned subsidiary of MCB) in partnership with Standard Chartered Bank, handling trade
transactions of select countries in the Asia-Pacific region. It is projected to earn US$ 1 million
in its first year of operations. To increase its international presence, the Bank will be opening
its representative office in Dubai and entering into major strategic alliances with banks in the
UAE/ especially for marketing our consumer banking products to non-resident Pakistanis.
Furthermore, feasibility is also being carried out for entering other international
markets. MCB's operations continued to be streamlined with focus on rationalization of
expenses, re-alignment of back-end processing to increase productivity, enhancement of
customer service standards, process efficiency and controls. The Bank has taken the lead in
introducing the innovative concept of centralizing Trade Services in the country by providing
centralized foreign trade services to branches with a view to improve efficiency, expertise and
reduce delivery cost.
Management of Human Resources has been one of our core focus areas. MCB is
committed towards attracting, retaining and motivating outstanding people. Challenge for
MCB is to provide an environment in which employees can better realize their potential. The
Bank introduced 'reward for performance' where high potential officers were identified and
rewarded accordingly. In view of the competitive environment, the Bank is focusing on
performance and introducing a more robust performance management system.
MCB is also strongly committed to training its staff at all levels. The Bank will also be
implementing the full suite of the latest version of SYMBOLS Version 8. MCB Bank will run
SYMBOLS E-Finance modules to deliver personalized services to its customers over multiple
delivery channels, while SYMBOLS Enterprise Operations Center will serve as its core
banking transaction-processing engine. By implementing SYMBOLS, MCB Bank aims to
raise the level of its customer service and its time to market in new product offerings for its
three core banking businesses in Corporate, Commercial and Consumer Banking – retaining
its market leadership as Pakistan's progressive Bank.
27

28. Summary:
MCB has the policy to serve the students that is six weeks internship. MCB focus on
merit rather than gender. To be competitive the Bank has further reinforced its position in the
Consumer banking area by streamlining and re-launching the consumer financing
products and introducing more convenience based solutions.
RISK MANAGEMENT GROUP
RISK:
Risks are usually defined by the adverse impact on profitability of several distinct sources of
uncertainty. While the types and degree of risks an organization may be exposed to depend
upon a number of factors such as its size, complexity business activities, volume etc. it is
believed that generally the banks face credit, market, liquidity, operational, compliance and
reputational risks. Before reaching these risk categories, given below are some basics about
risk management and some guiding principles to manage risks in banking organization.
RISK MANAGEMENT:
28

29. Risk Management is a discipline at the core of every financial institution and encompasses all
the activities that affect its risk profile. It involves identification, measurement, monitoring
and controlling risks to ensure that
a) The individuals who take or manage risks clearly understand it.
b) The organization’s Risk exposure is within the limits established by Board
of Directors.
c) Risk taking Decisions are in line with the business strategy and objectives
set by BOD.
d) The expected payoffs compensate for the risks taken
e) Risk taking decisions are explicit and clear.
f) Sufficient capital as a buffer is available to take risk
The acceptance and management of financial risk is inherent to the business of banking and
banks’ roles as financial intermediaries. Risk management as commonly perceived does not
mean minimizing risk; rather the goal of risk management is to optimize risk-reward trade
-off. Notwithstanding the fact that banks are in the business of taking risk, it should be
recognized that an institution need not engage in business in a manner that unnecessarily
imposes risk upon it: nor it should absorb risk that can be transferred to other participants.
Rather it should accept those risks that are uniquely part of the
array of bank’s services.
Different hierarchy levels:
In every financial institution, risk management activities broadly take place
simultaneously at following different hierarchy levels.
.
a) Strategic level:
It encompasses risk management functions performed by senior management and BOD. For
instance definition of risks, ascertaining institutions risk appetite, formulating strategy and
policies for managing risks and establish adequate systems and controls to ensure that overall
risk remain within acceptable level and the reward compensate for the risk taken
.
b) Macro Level:
It encompasses risk management within a business area or across business lines. Generally
the risk management activities performed by middle management or units devoted to risk
reviews fall into this category.
c) Micro Level:
It involves ‘On-the-line’ risk management where risks are actually created. This is the risk
management activities performed by individuals who take risk on organization’s behalf such
as front office and loan origination functions. The risk management in those areas is confined
to following operational procedures and guidelines set by management.
Board and senior Management oversight:
29

30. To be effective, the concern and tone for risk management must start at the top. While the
overall responsibility of risk management rests with the BOD, it is the duty of senior
management to transform strategic direction set by board in the shape of policies and
procedures and to institute an effective
hierarchy to execute and implement those policies. To ensure that the policies are consistent
with the risk tolerances of shareholders the same should be approved from board.
Risk Management framework:
A risk management framework encompasses the scope of risks to be managed, the
process/systems and procedures to manage risk and the roles and responsibilities of
individuals involved in risk management. The framework should be comprehensive enough to
capture all risks a bank is exposed to and have flexibility to accommodate any change in
business activities.
Integration of Risk Management:
Risks must not be viewed and assessed in isolation, not only because a single transaction
might have a number of risks but also one type of risk can trigger other risks. Since
interaction of various risks could result in diminution or increase in risk, the risk management
process should recognize and reflect risk interactions in all business activities as appropriate.
While assessing and managing risk the management should have an overall view of risks the
institution is exposed to. This requires having a structure in place to look at risk
interrelationships across the organization.
Business Line Accountability:
In every banking organization there are people who are dedicated to risk management
activities, such as risk review, internal audit etc. It must not be construed that risk
management is something to be performed by a few individuals or a department. Business
lines are equally responsible for the risks they are taking. Because line personnel, more than
anyone e lse, understand the risks of the business, such a lack of accountability can lead to
problems.
Independent review:
One of the most important aspects in risk management philosophy is to make sure that those
who take or accept risk on behalf of the institution are not the ones who measure, monitor and
evaluate the risks. Again the managerial structure and hierarchy of risk review function may
vary across banks depending upon their size and nature of the business, the key is
independence. To be effective the review functions should have sufficient authority, expertise
and corporate stature so that the identification and reporting of their findings could be
accomplished without any hindrance. The findings of their reviews
should be reported to business units, Senior Management and, where appropriate, the Board.
30

31. Managing credit risk
“Credit risk arises from the potential that an obligor is either unwilling to perform on an
obligation or its ability to perform such obligation is impaired resulting in economic loss to
the bank”
Components of credit risk management
A typical Credit risk management framework in a financial institution may be broadly
categorized into following main components:
a) Board and senior Management’s Oversight
b) Organizational structure
c) Systems and procedures for identification, acceptance, measurement, monitoring and
control risks.
1) Board and Senior Management’s Oversight
It is the overall responsibility of bank’s Board to approve bank’s credit risk strategy and
significant policies relating to credit risk and its management which should be based on the
bank’s overall business strategy. To keep it current, the overall strategy has to be reviewed by
the board, preferably annually. The responsibilities of the Board with regard to credit risk
management shall, interalia, include :
a) Delineate bank’s overall risk tolerance in relation to credit risk.
b) Ensure that bank’s overall credit risk exposure is maintained at prudent levels and
consistent with the available capital
c) Ensure that top management as well as individuals responsible for credit risk management
possess sound expertise and knowledge to accomplish the risk management function
d) Ensure that the bank implements sound fundamental principles that facilitate the
identification, measurement, monitoring and control of credit risk.
e) Ensure that appropriate plans and procedures for credit risk management
are in place.
2) Organizational Structure:
Each bank, depending upon its size, should constitute a Credit Risk Management Committee
(CRMC), ideally comprising of head of credit risk management Department, credit
department and treasury. This committee reporting to bank’s risk management committee
should be empowered to oversee credit risk taking activities and overall credi t risk
management function. The CRMC should be mainly responsible for
31

32. a) The implementation of the credit risk policy / strategy approved by the Board.
b) Monitor credit risk on a bank-wide basis and ensure compliance with limits approved
by the Board.
c) Recommend to the Board, for its approval, clear policies on standards for presentation
of credit proposals, financial covenants, rating standards and benchmarks.
d) Decide delegation of credit approving powers, prudential limits on large credit
exposures, standards for loan collateral, portfolio management, loan review
mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans,
provisioning, regulatory/legal compliance, etc.
3) Systems and Procedures:
Credit Origination:
Banks must operate within a sound and well-defined criteria for new credits as well as the
expansion of existing credits. Credits should be extended within the target markets and
lending strategy of the institution. Before allowing a credit facility, the bank must make an
assessment of risk profile of the customer/transaction. This may include:
a) Credit assessment of the borrower’s industry, and macro economic factors.
b) The purpose of credit and source of repayment.
c) The track record / repayment history of borrower.
d) Assess/evaluate the repayment capacity of the borrower.
e) The Proposed terms and conditions and covenants.
f) Adequacy and enforceability of collaterals.
g) Approval from appropriate authority
32

33. Limit setting:
An important element of credit risk management is to establish exposure limits for single
obligors and group of connected obligors.
The measurement of credit risk is of vital importance in credit risk management. A number of
qualitative and quantitative techniques to measure risk inherent in credit
portfolio are evolving.
Internal Risk Rating:
Credit risk rating is summary indicator of a bank’s individual credit exposure. An internal
rating system categorizes all credits into various classes on the basis of underlying credit
quality. A well-structured credit rating framework is an important tool for monitoring and
controlling risk inherent in individual credits as well as in credit portfolios of a bank or a
business line. The importance of internal credit rating framework becomes more eminent due
to the fact that historically major losses to banks stemmed from default in loan portfolios.
Managing Market Risk
“It is the risk that the value of on and off-balance sheet positions of a financial institution
will be adversely affected by movements in market rates or prices such as interest rates,
foreign exchange rates, equity prices, credit spreads and/or commodity prices resulting in
a loss to earnings and capital”
Interest rate risk:
Interest rate risk arises when there is a mismatch between positions, which are subject to
interest rate adjustment within a specified period. The bank’s lending, funding and investment
activities give rise to interest rate risk. The immediate impact of variation in interest rate is on
bank’s net interest income, while a long term impact is on bank’s net worth since the
economic value of bank’s assets, liabilities and off-balance sheet exposures are affected.
Consequently there are two common perspectives for the assessment of interest rate risk.
a) Earning perspective:
In earning perspective, the focus of analysis is the impact of variation in interest rates on
accrual or reported earnings. This is a traditional approach to interest rate risk assessment and
obtained by measuring the changes in the Net Interest Income (NII) or Net Interest Margin
(NIM) i.e. the difference between the total interest income and the
total interest expense.
b) Economic Value perspective:
It reflects the impact of fluctuation in the interest rates on economic value of a financial
institution. Economic value of the bank can be viewed as the present value of future cash
33

34. flows. In this respect economic value is affected both by changes in future cash flows and
discount rate used for determining present value. Economic value perspective considers the
potential longer-term impact of interest rates on an institution.
Equity price risk:
It is risk to earnings or capital that results from adverse changes in the value of equity related
portfolios of a financial institution. Price risk associated with equities could be systematic or
unsystematic. The former refers to sensitivity of portfolio’s value to changes in overall level
of equity prices, while the later is associated with price volatility that is determined by firm
specific characteristics.
Elements of Market Risk management:
Board and senior Management Oversight:
Likewise other risks, the concern for management of Market risk must start from the top
management. Effective board and senior management oversight of the bank’s overall market
risk exposure is cornerstone of risk management process. For its part, the board of directors
has following responsibilities.
a) Delineate banks overall risk tolerance in relation to market risk.
b) Ensure that bank’s overall market risk exposure is maintained at prudent levels and
consistent with the available capital.
c) Ensure that top management as well as individuals responsible for market risk management
possess sound expertise and knowledge to accomplish the risk management function.
d) Ensure that the bank implements sound fundamental principles that facilitate the
identification, measurement, monitoring and control of market risk.
e) Ensure that adequate resources (technical as well as human) are devoted to market risk
management.
Organizational Structure.
The organizational structure used to manage market risk vary depending upon the nature size
and scope of business activities of the institution, however, any structure does not absolve the
directors of their fiduciary responsibilities of ensuring safety and soundness of institution.
While the structure varies depending upon the size, scope and complexity of business, at a
minimum it should take into account following aspe ct.
a) The structure should conform to the overall strategy and risk policy set by the BOD.
b) Those who take risk (front office) must know the organization’s risk profile, products that
they are allowed to trade, and the approved limits.
c) The risk management function should be independent, reporting directly to senior
management or BOD.
34

35. d) The structure should be reinforced by a strong MIS for controlling, monitoring and
reporting market risk, including transactions between an institution and its affiliates.
Asset-Liability Committee:
Popularly known as ALCO, is senior management level committee responsible for
supervision / management of Market Risk (mainly interest rate and Liquidity risks). The
committee generally comprises of senior managers from treasury, Chief Financial Officer,
business heads generating and using the funds of the bank, credit, and individuals from the
departments having direct link with interest rate and liquidity risks. The CEO or some senior
person nominated by CEO should be head of the committee. The size as well as composition
of ALCO could depend on the size of each institution, business mix and organizational
complexity. To be effective ALCO should have members from each area of the bank that
significantly influences liquidity risk. In addition, the head of the Information system
Department (if any) may be an invitee for building up of MIS and related computerization.
Major responsibilities of the committee include:
a) To keep an eye on the structure /composition of bank’s assets and liabilities and decide
about product pricing for deposits and advances.
b) Decide on required maturity profile and mix of incremental assets and liabilities.
c) Articulate interest rate view of the bank and deciding on the future business strategy.
d) Review and articulate funding policy.
e) Decide the transfer pricing policy of the bank.
f) Evaluate market risk involved in launching of new products.
ALCO should ensure that risk management is not confined to collection of data. Rather, it will
ensure that detailed analysis of assets and liabilities is carried out so as to assess the overall
balance sheet structure and risk profile of the bank. The ALCO should cover the entire
balance sheet/business of the bank while carrying out the periodic analysis.
Middle Office:.
The risk management functions relating to treasury operations are mainly performed by
middle office. The concept of middle office has recently been introduced so as to
independently monitor, measure and analyze risks inherent in treasury operations of banks.
Besides the unit also prepares reports for the information of senior management as well as
bank’s ALCO. Basically the middle office performs risk review function of day-to-day
activities. Being a highly specialized function, it should be staffed by people who have
relevant expertise and knowledge. The methodology of analysis and reporting may vary from
bank to bank depending on their degree of sophistication and exposure to market risks. These
same criteria will govern the reporting requirements demanded of the Middle Office, which
may vary from simple gap analysis to computerized VaR modeling. Middle Office staff may
prepare forecasts (simulations) showing the effects of various possible changes in market
conditions related to risk exposures. Banks using VaR or modeling methodologies should
ensure that its ALCO is aware of and understand the nature of the output, how it is derived,
assumptions and variables used in generating the outcome and any shortcomings of the
methodology employed. Segregation of duties should be evident in the middle office, which
must report to ALCO independently of the treasury function. In respect of banks without a
formal Middle Office, it should be ensured that risk control and analysis should rest with a
35

36. department with clear reporting independence from Treasury or risk taking units, until normal
Middle Office framework is established.
Value at Risk:
Value at Risk (VAR) is generally accepted and widely used tool for measuring
market risk inherent in trading portfolios. It follows the concept that reasonable
expectation of loss can be deduced by evaluating market rates, prices observed
volatility and correlation. VAR summarizes the predicted maximum loss (or
worst loss) over a target horizon within a given confidence level. The well-known
proprietary models that use VAR approaches are JP Morgan’s Risk metrics,
Banker’s trust Risk Adjusted Return on Capital, and Chase’s Value at risk.
Generally there are three ways of computing VAR
a) Parametric method or Variance covariance approach
b) Historical Simulation
c) Monte Carlo method
Banks are encouraged to calculate their risk profile using VAR models. At the
minimum banks are expected to adopt relatively simple risk measurement
methodologies such as maturity mismatches, sensitivity analysis etc.
Risk Monitoring:
Risk monitoring processes are established to evaluate the performance of bank’s
risk strategies/policies and procedures in achieving overall goals. Whether the
monitoring function is performed by middle-office or it is a part of banks internal
audit it is important that the monitoring function should be independent of
units taking risk and report directly to the top management/board.
Audit:
Banks need to review and validate each step of market risk measurement process. This review
function can be performed by a number of units in the organization including internal
audit/control department or ALCO support staff. In small banks, external auditors or
consultants can perform the function.
Risk limits:
As stated earlier it is the board that has to determine bank’s overall risk appetite and exposure
limit in relation to its market risk strategy. Based on these tolerances the senior management
should establish appropriate risk limits. Risk limits for business units, should be compatible
with the institution’s strategies, risk management systems and risk tolerance. The limits
should be approved and periodically reviewed by the Board of Directors and/or senior
management, with changes in market Conditions or resources prompting a reassessment of
limits. Institutions need to ensure consistency between the different types of limits.
a) Gap Limits:
The gap limits expressed in terms of interest sensitive ratio for a given time band aims at
managing potential exposure to a bank’s earnings / capital due to changes in interest rates.
Setting such limits is useful way to limit the volume of a bank’s repricing exposures and is an
36

37. adequate and effective method of communicating the risk profile of the bank to senior
management. Such gap limits can be set on a net notional basis (net of asset / liability
amounts for both on and off balance sheet items) or a duration-weighted basis, in each time
band. (Duration is the weighted average term to maturity of a security’s cash flow. For
instance a Rs 100 5 year 8% (semi Annual) coupon bond having yield of 8% will have a
duration of 4.217 years as already explained in the footnotes).
c) Factor Sensitivity Limits:
The factor sensitivity of interest rate position is calculated by discounting the position using
current market interest rate and then using the current market interest rate increase or decrease
by one basis point. The difference in the two values known as factor sensitivity is the potential
for loss given one basis point change in interest rate. Banks may introduce such limits for
each time band as well as total exposure across all time bands. The factor sensitivity limit or
PV01 limit measures the change in portfolio present value given one basis point fluctuation in
underlying interest rate.
Managing Liquidity Risk
“Liquidity risk is the potential for loss to an institution arising from either its inability to meet
its obligations or to fund increases in assets as they fall due without incurring unacceptable
cost or losses.”
Board and Senior Management Oversight:
The prerequisites of an effective liquidity risk management include an informed board,
capable management, staff having relevant expertise and efficient systems and procedures. It
is primarily the duty of board of directors to understand the liquidity risk profile of the bank
and the tools used to manage liquidity risk. The board has to ensure that the bank has
necessary liquidity risk management framework and bank is capable of confronting uneven
liquidity scenarios.
Liquidity Risk Strategy:
The liquidity risk strategy defined by board should enunciate specific policies on particular
aspects of liquidity risk management, such as:
a. Composition of Assets and Liabilities:
The strategy should outline the mix of assets and liabilities to maintain liquidity. Liquidity
risk management and asset/liability management should be integrated to avoid steep costs
associated with having to rapidly reconfigure the asset liability profile from maximum
profitability to increased liquidity.
b. Diversification and Stability of Liabilities:
A funding concentration exists when a single decision or a single factor has the potential to
result in a significant and sudden withdrawal of funds. Since such a situation could lead to an
37

38. increased risk, the Board of Directors and senior management should specify guidance
relating to funding sources and ensure that the
bank have a diversified sources of funding day-to-day liquidity requirements. An institution
would be more resilient to tight market liquidity conditions if its liabilities were derived from
more stable sources. To comprehensively analyze the stability of liabilities/funding sources
the bank need to identify:
o Liabilities that would stay with the institution under any circumstances;
o Liabilities that run-off gradually if problems arise; and
o That run-off immediately at the first sign of problems.
c. Access to Inter-bank Market:
The inter-bank market can be important source of liquidity. However, the strategies should
take into account the fact that in crisis situations access to inter bank market could be difficult
as well as costly.
ALCO/Investment Committee:
The responsibility for managing the overall liquidity of the bank should be delegated to a
specific, identified group within the bank. This might be in the form of an Asset Liability
Committee (ALCO) comprised of senior management, the treasury function or the risk
management department.
Liquidity Risk Management Process:
Besides the organizational structure discussed earlier, an effective liquidity risk management
include systems to identify, measure, monitor and control its liquidity exposures.
Management should be able to accurately identify and quantify the primary sources of a
bank's liquidity risk in a timely manner. To properly identify the sources, management should
understand both existing as well as future risk that the institution can be exposed to.
Management should always be alert for new sources of liquidity risk at both the transaction
and portfolio levels.
Scope of CFP:
The sophistication of a CFP depends upon the size, nature, complexity of business, risk
exposure, and organizational structure.
Liquidity Ratios and Limits:
Banks may use a variety of ratios to quantify liquidity. These ratios can also be used to create
limits for liquidity management. However, such ratios would be meaningless unless used
regularly and interpreted taking into account qualitative factors. Ratios should always be used
in conjunction with more qualitative information about borrowing capacity, such as the
likelihood of increased requests for early withdrawals, decreases in credit lines, decreases in
transaction size, or shortening of term funds available to the bank.
38

39. Managing Operational Risk
“Operational risk is the risk of loss resulting from inadequate or failed internal processes,
people and system or from external events”
Operational risk is associated with human error, system failures and inadequate procedures
and controls. It is the risk of loss arising from the potential that inadequate information
system; technology failures, breaches in internal controls, fraud, unforeseen catastrophes,
or other operational problems may result in unexpected losses or reputation problems.
Operational risk exists in all products and business activities.
Risk Assessment and Quantification:
Banks should identify and assess the operational risk inherent in all material products,
activities, processes and systems and its vulnerability to these risks. Banks should also
ensure that before new products, activities, processes and systems are introduced or
undertaken, the operational risk inherent in them is subject to adequate assessment
procedures. While a number of techniques are evolving, operating risk remains the most
difficult risk category to quantify. It would not be feasible at the moment to expect banks to
develop such measures However the banks could systematically track and record frequency,
severity and other information on individual loss events. Such a data could provide a
meaningful information for assessing the bank’s exposure to operational risk and developing
a policy to mitigate / control that risk.
Risk Monitoring:
An effective monitoring process is essential for adequately managing operational risk.
Regular monitoring activities can offer the advantage of quickly detecting and correcting
deficiencies in the policies, processes and procedures for managing operational risk.
Promptly detecting and addressing these deficiencies can substantially reduce the potential
frequency and/or severity of a loss. There should be regular reporting of pertinent
39

40. information to senior management and the board of directors that supports the proactive
management of operational risk. Senior Management should establish a programme to:
a) Monitor assessment of the exposure to all types of operational risk faced by the
institution;
b) Assess the quality and appropriateness of mitigating actions, including the extent to
which identifiable risks can be transferred outside the institution; and
c) Ensure that adequate controls and systems are in place to identify and address problems
before they become major concerns.
Risk Reporting:
Management should ensure that information is received by the appropriate people, on a
timely basis, in a form and format that will aid in the monitoring and control of the
business.
Establishing Control Mechanism:
Although a framework of formal, written policies and procedures is critical, it needs to be
reinforced through a strong control culture that promotes sound risk management
practices. Banks should have policies, processes and procedures to control or mitigate
material operational risks. Banks should assess the feasibility of alternative risk limitation
and control strategies and should adjust their operational risk profile using appropriate
strategies, in light of their overall risk appetite and profile. To be effective, control activities
should be an integral part of the regular activities of a bank.
40

41. Financial Analysis of MCB
Horizontal Analysis
Muslim Commercial Bank Limited
Balance Sheet
As on 31st December
Items 2010 2009 2010-2009/2009
Cash and balances with treasury banks 45,407,183 38,774,871 17%
Balances with other banks 1,478,569 6,009,993 -75%
Lendings to financial institutions 4,401,781 3,000,000 47%
Investments – net 213,060,882 167,134,465 27%
Advances – net 254,551,589 253,249,407 1%
Operating fixed assets 20,947,540 18,014,896 16%
Other assets – net 27,705,069 23,040,095 20%
Total Assets 567,552,613 509,223,727 11%
Bills payable 10,265,537 8,201,090 25%
Borrowings 25,684,593 44,662,088 -42%
Deposits and other accounts 431,371,937 367,604,711 17%
Sub–ordinated loan
Liabilities against assets subject to finance lease
Deferred tax liabilities – net 4,934,018 3,196,743 54%
Other liabilities 16,092,319 15,819,082 2%
Total Liabilities 488,348,404 439,483,714 11%
Net assets 79,204,209 69,740,013 14%
41

42. Represented by:
Share capital 7,602,150 6,911,045 10%
Reserves 40,162,906 38,385,760 5%
Unappropriated profit 21,414,955 15,779,127 36%
69,180,011 61,075,932 13%
Surplus on revaluation of assets – net of tax 10,024,198 8,664,081 16%
79,204,209 69,740,013 14%
Horizontal Analysis
Muslim Commercial Bank Limited
Profit and Loss Account
As on 31st December
(2010-
2010 2009 2009)/2009
Mark–up / return / interest earned 54,821,296 51,616,007 6%
Mark–up / return / interest expensed 17,987,767 15,837,322 14%
Net mark–up / interest income 36,833,529 35,778,685 3%
Provision for diminution in the value of investments – net 444,476 1,484,218 -70%
Provision against loans and advances – net 3,100,594 5,796,527 -47%
Bad debts written off directly 52,047 41,576 25%
Net mark–up / interest income after provisions 33,236,412 28,456,364 17%
Non–mark–up / interest income
Fee, commission and brokerage income 4,129,540 3,455,948 19%
Dividend income 543,906 459,741 18%
Income from dealing in foreign currencies 632,346 341,402 85%
Gain on sale of securities – net 411,834 773,768 -47%
Other income 547,680 612,026 -11%
Total non–mark–up / interest income 6,265,306 5,642,885 11%
Income after interest income 39,501,718 34,099,249 16%
Non–mark–up / interest expenses
Administrative expenses 12,173,942 10,111,330 20%
Other provision – net 88,261 142,824 -38%
Other charges 986,440 690,150 43%
Total non–mark–up / interest expenses 13,248,643 10,944,304 21%
Profit before taxation 26,253,075 23,154,945 13%
Taxation 9,379,900 7,659,648 22%
Profit after taxation 16,873,175 15,495,297 9%
Unappropriated profit brought forward 15,779,127 9,193,332 72%
Transfer from surplus on revaluation of fixed assets – net of tax 21,792 22,324 -2%
15,800,919 9,215,656 71%
42

43. Profit available for appropriation 32,674,094 24,710,953 32%
Basic and diluted earnings per share – after tax 22.2 22.38 -1%
Vertical Analysis
Muslim Commercial Bank Limited
Balance Sheet
As on 31st December
Assets 2010 vertical 2009 vertical
Cash and balances with treasury banks 45,407,183 57% 38,774,871 56%
Balances with other banks 1,478,569 2% 6,009,993 9%
Lendings to financial institutions 4,401,781 6% 3,000,000 4%
Investments – net 213,060,882 269% 167,134,465 240%
Advances – net 254,551,589 321% 253,249,407 363%
Operating fixed assets 20,947,540 26% 18,014,896 26%
Other assets – net 27,705,069 35% 23,040,095 33%
Total Assets 567,552,613 717% 509,223,727 730%
Bills payable 10,265,537 13% 8,201,090 12%
Borrowings 25,684,593 32% 44,662,088 64%
Deposits and other accounts 431,371,937 545% 367,604,711 527%
Sub–ordinated loan 0% 0%
Liabilities against assets subject to finance lease 0% 0%
Deferred tax liabilities – net 4,934,018 6% 3,196,743 5%
Other liabilities 16,092,319 20% 15,819,082 23%
Total Liabilities 488,348,404 617% 439,483,714 630%
0% 0%
Net assets 79,204,209 100% 69,740,013 100%
Represented by:
Share capital 7,602,150 10% 6,911,045 10%
Reserves 40,162,906 51% 38,385,760 55%
Unappropriated profit 21,414,955 27% 15,779,127 23%
69,180,011 87% 61,075,932 88%
Surplus on revaluation of assets – net of tax 10,024,198 13% 8,664,081 12%
79,204,209 100% 69,740,013 100%
43

44. Muslim Commercial Bank Limited
Profit and Loss Account
As on 31st December
2010 vertical 2009 vertical
Mark–up / return / interest earned 54,821,296 325% 51,616,007 333%
Mark–up / return / interest expensed 17,987,767 107% 15,837,322 102%
Net mark–up / interest income 36,833,529 218% 35,778,685 231%
Provision for diminution in the value of investments – net 444,476 3% 1,484,218 10%
Provision against loans and advances – net 3,100,594 18% 5,796,527 37%
Bad debts written off directly 52,047 0% 41,576 0%
Net mark–up / interest income after provisions 33,236,412 197% 28,456,364 184%
Non–mark–up / interest income 0% 0%
Fee, commission and brokerage income 4,129,540 24% 3,455,948 22%
Dividend income 543,906 3% 459,741 3%
Income from dealing in foreign currencies 632,346 4% 341,402 2%
Gain on sale of securities – net 411,834 2% 773,768 5%
Other income 547,680 3% 612,026 4%
Total non–mark–up / interest income 6,265,306 37% 5,642,885 36%
Income after interest income 39,501,718 234% 34,099,249 220%
Non–mark–up / interest expenses 0% 0%
Administrative expenses 12,173,942 72% 10,111,330 65%
Other provision – net 88,261 1% 142,824 1%
Other charges 986,440 6% 690,150 4%
Total non–mark–up / interest expenses 13,248,643 79% 10,944,304 71%
Profit before taxation 26,253,075 156% 23,154,945 149%
Taxation 9,379,900 56% 7,659,648 49%
Profit after taxation 16,873,175 100% 15,495,297 100%
Unappropriated profit brought forward 15,779,127 94% 9,193,332 59%
Transfer from surplus on revaluation of fixed assets – net of tax 21,792 0% 22,324 0%
15,800,919 94% 9,215,656 59%
Profit available for appropriation 32,674,094 194% 24,710,953 159%
Basic and diluted earnings per share – after tax 22.2 0% 22.38 0%
Vertical Analysis
44

45. Ratio Analysis of MCB
“An index that relates two accounting numbers and is obtained by dividing one
number by other”
Ratio Analysis is an important and age-old technique of financial analysis. It
simplifies the comprehension of financial statements. Ratios tell the whole story of changes in
the financial condition of business. It provides data fro inter firm comparison. They also
reveal strong firms and weak firms, over- valued and undervalued firms.
Ratio analysis also makes possible comparison of the performance of different
divisions of the firm. The ratios are helpful in decision about their efficiency of otherwise in
the past and likely performance in future. Ratios also help in Investment decisions in the
investors and lending decisions in the case of bankers etc.
Following are the main types of ratios that I am going to calculate in this report to
compare and highlight the financial performance of MCB in 2010 with 2009
45

46. 2010 2009
PROFIT TO Profit
16,873,175 15,495,297
DEPOSIT Deposit 431,371,937 367,604,711
RATIO Ratio (%)
3.90% 4.20%
RETURN ON
AVERAGE Profit
After Tax 16,873,175 15,495,297
EQUITY Equity
Capital 69,180,011 61,075,932
(ROE)
Ratio (%) 33.61% 25.37%
FIXED DEPOSIT TO Fixed
TOTAL DEPOSIT RATIO Deposits 80,073,848 62,651,531
Total
Deposits 431,371,937 367,604,711
Ratio (%) 18.56% 17.04%
PROFIT TO ADVANCES Profit 16,873,175 15,495,297
RATIO
Advances 254,551,589 253,249,407
Ratio (%) 6.63% 6.12%
2010 2009
ADMIN EXPENSES TO
DEPOSIT RATIO Admin
Expenses 12,173,942 10,111,330
Deposit 431,371,937 367,604,711
Ratio (%) 2.82% 2.75%
46

47. Details:
• Deposits are increased in 2010 and profit on deposits also increased.
• Equity Capital increased in 2010 and return also increase.
• Profit margin increase in 2010 as compare to 2009.
• Total Deposits are also more than 2009, with increasing ratio.
• Profits are more in 2010 as compare to 2009.
• Advances Increases in 2010.
• Admin expenses are more as compare to 2009.
• Deposits increases in 2010.
Interpretation:
The past two years data shows an increase in all return (i.e. interest earned, interest
income, Profit after taxation) which is a positive sign. But mostly expenses (i.e. Admin
expenses, Provisions, Taxation) are also increase which show negative sign of business. The
Bank should have to review its policies to decrease expenses.
SWOT ANALYSIS
47

48. STRENGTHS:
 One of the main strength of MCB that I think is the faster banking services and more prominent in
banking industry especially in operations and Foreign Exchange. Speedy services and reasonable
services charges are attracting the people to do their business with MCB.
 MCB has fully computerized control on its banking system due to this facility the MCB is in the list of
highly automated bank.
 Internal control and monitoring of the MCB Bank is very effective Quality Control Expert visits twice a
week at bank branches which helps the employees to improve their work.
 Due to fast banking services, prominent banking services and fully computerized computer system
resulted in joining of experienced people, advanced management, advance setup and facilities gave
MCB an edge over its competitors.
 Most private banks have still not online all of their branches in Pakistan but the MCB has all its
branches online. They have wide area network in all over the Pakistan, so that they cover a lot of
portion of cash transactions and make customer satisfied
 The Bank has very strict rules and regulations about the customer's complaints. The customers are
treated as very special persons in the Bank.
 MCB has got the Strongest Bank in Pakistan Award 2010.
 MCB also got the Leadership Achievement Award 2010.
 MCB has been awarded as Euro money Award 2008 for the “Best Bank in Asia.
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49.  Best Bank In Pakistan Award: MCB has been awarded the best bank in Pakistan since 2000, 2001,
2003, 2004, and 2006
WEAKNESS:
 MCB offers different types of products to the customers therefore majority of people
are not well aware about the products of MCB. For examples if a person wants to
open an account with MCB say it is current but he does not know what type of Current
Account he should open does not know this the major weakness for the MCB.
 No entertainment facilities are available in the bank when customer visits Bank and
wait for at longer time. These facilities can be the Newspaper. Magazines, etc.
 Out look of the MCB branches is not attractive to the people.
 In this era of competition most of the banks advertising their different products and
services but no commercial I have seen on any channel regarding their products and
services.
 Equality should be observed throughout banking system. There should no
discrimination among the customers. As I observed at the branch where I worked
wealthy customers were given the more entertaining services while the customers who
have low investment with the bank waited for long for their turn.
 At private local banks there is normally transfer of employees after a normal period of
one and a half years or two years while at MCB branch where I did my internship
most of the employees are working more than three years. Job Rotation help the
employees to learn about different segments of the business which I think is missing at
MCB.
OPPURTUNITIES:
 MCB has got the Strongest Bank in Pakistan Award 2010. MCB also got the
Leadership Achievement Award 2010. MCB has been awarded as Euro money Award
2008 for the “Best Bank in Asia.
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50.  Best Bank in Pakistan Award: MCB has been awarded the best bank in Pakistan since
2000, 2001, 2003, 2004, and 2006.
 These awards create an edge in the mind of people to invest and borrow from this
bank.
 Before privatization people were not satisfied with the services of the bank. After the
privatization people have different alternatives to invest and borrow from. The MCB
due to its over 10 years performance it has the opportunities to attract the customers
THREATS:
 The decreased purchasing power of consumer in the current economic situation of the
country affecting the business activity speed too much and the result is the low
investment from the investors in new projects can create problem for the hank because
it is working a lot in trade.
 The Competition has become severe by the entrants of so many banks. So to exist one
will have to prove himself in its services through excellent management and will have
to satisfy its shareholders. Otherwise it will he out the market
 New Privates Bank coped with emerging new Technology of IT. This ease of entry in
the market is the threat to the MCB bank.
Change in government policies has affected the banking business. Still banks have to wait to
get permission from the State Bank of Pakistan. The freezing of foreign currency accounts is a
vital example of letting people not to trust on banks
PEST ANALYSIS AND ENVIRONMENTAL SCAN
A broad view of market is important when management is interested in introducing
better services for customers. Rapid technological change, global competition and the
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51. diversity of buyers preferences in many markets require the constant attention of the market
vouchers to identify promises business opportunities, see the shifting requirements of the
buyers, evaluate changes in competitors positioning and guide the choice of which buyers to
target and classify them according to respective segments. Identification of external and
macro factors that influence buyers and thus change the size and composition of market
overtime involves initially building customer profiles. These influences include:
• Political and legal environment
• Economic trends
• Socio cultural environment
• Technological factors
POLITICAL AND LEGAL ENVIRONMENT:
Banks are strongly affected by the political and legal considerations. This environment
is composed of regulatory agencies and government law that influence and limit various
organizations and individuals. Mostly these laws create new opportunities for business.
Business legislation has following main purposes
o To protect banking companies from unfair competition.
o To protect consumers from unfair business practices adopted by banking companies
o To protect the interest of the society from unbridled business behavior.
ECONOMIC TRENDS:
A banking market requires better consumer market in volume along with higher
borrowing power. The available borrowing power depends on:
o Consumer income
o Saving rates
o Consumption patrons
o Rates of interest
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52. o Budget deficit
o Exchange rates
o Cost of living
o Inflation
SOCIO-CULTURAL ENVIRONMENT:
A society is shaped by beliefs, norms and values. People in a society consciously and
unconsciously interact with:
• Themselves
• Others
• Organization
• Society
TECHNOLOGICAL FACTORS:
Forces of technological advancement have played the most dramatic role in shaping
the lives of people. The rate of change of technology has greatly affected the rate of growth of
economy. New technology is creating deep rooted affects which could be observed in long
run. The improvement techniques involved in on line banking. In brief PEST analysis affects
the overall banking companies and provides us the information about the external macro
condition.
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53. CONCLUSION
It is evident from this report that MCB is making progress by leaps and bounds. The profits of
MCB have grown considerably during the last few years and this trend is expected to continue
into the future. Therefore we conclude that MCB has a very prosperous present and future,
which assures the shareholders of wealth maximization. Side by side of it I think that if bank
would be able to cover and control on the above mentioned recommendations then it would be
in such a situation that will really lead it towards the road of prosperity, development and
integrity. And with the above mentioned sentences I think there is too fault of the customers
and in order to make the proper working of the bank the customers should
Also cooperate with the bank which will be really a good, ambitious and diligent condition for
the bank. And then bank will be really in such a situation and position to compete its
competitors in the country as well as on international level.
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54. SUGGESTIONS
Bank must let potential customers know that all attractions for banking exist. This is done by
advertising on television and obtaining press coverage, in conjunction with direct mail,
window displays, leaflet in branches and in appropriate other locations (such as hotels, shops,
etc.) and including leaflets in statement of accounts sent to existing customers in the hope that
they will tell potential customers about the services provided by our bank.
Financially unsophisticated people might feel bank accounts, cheque books, credit cards, etc.
are difficult to understand and to keep control thereof.
Some personal sector customers prefer not to come to branch. They increasingly want to deal
with the bank in other ways, such as home banking or use of Automated Teller Machines
(ATMs), which need to be at the branch or some important shopping plazas.
It is widely known that there is a substantial Black Economy in Pakistan, Where people earn
income that is undisclosed to the revenues authorities. Payments for goods and services in the
black economy are necessarily in cash, because transactions by cheques are more likely to be
exposed to the revenue authorities. Some people will therefore avoid bank accounts to
preserve secrecy of earnings.
One way to retain the personal sector customers is to offer a wide range of services such as
tax advice, free life insurance equivalent to amount deposited, shares portfolio management,
fund management facility, etc., complimentary to the core services. Banks must have a
slightly different mix of services. Banks must have a slightly different mix of services and
mean of providing these such that customers can choose the mix that suits them best.
Arguably, there has been a little encouragement from banks to persuade people to open a
bank account. Opening hours are restricted, and there is a commonly held belief that banks
operate for their convenience and not for the convenience of the customers.
A logic leads to promotional campaign through employers who are customers of the banks
and their employees are paid in cash. Such business accounts should be encouraged to open
the accounts of their employees with the banks. It might be worth offering free banking for a
specific period to new accounts or simply publicizing the services available by means of
posters at the employer’s premises.
It might be possible to attract another type of personal customers through business accounts,
namely directors and denier employees, etc. Again an incentive package could be put
together.
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55. The banks may choose to make its existing products distinctive or to introduce new products.
It is often easier to benefit from adverse changes made by other banks than to attract
customers by innovations.
A short term promotional technique is to offer price incentives, for example, low interest rates
on advances or limited issue high profit bearing term deposits. Longer term, a Loss Leader
may be offered. For example, profit bearing current accounts are not very lucrative but any
bank can not afford not to offer these. The reduced profits can be augmented by profits made
on other products.
It is also possible to attract/retain personal customers by investment in new technology like
ATMs and Telephone Banking facilities, which made the services quicker, easier, cheaper and
more flexible.
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56. Glossary
MCB Muslim Commercial Bank
ATM Automatic Teller Machine
FED Federal Excise Duty
WHT with Holding Tax
TDR Term Deposit Receipts
CDR Call Deposit Receipts
PBA Personal Banking Advisor
BBA Basic Banking Account
PLS Profit and Loss A/C
TD Term Deposit
AOF Account opening Foam
AMO Account maintenance officer
KYC Know your customers
SSC Specimen Signature card
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57. GBO General banking officer
ICO Internal control officer
CSO Customer service officer
DD Demand Draft
PO Pay Order
FTA Fund Transfer Application
CPD Central Processing Division
NIFT National Institute of Facilitation Technology
TDR Term Deposit Receipt
RTC Rupee Travel Cheque
IBC Inward Bills for Collection
OBC Outward Bills for Collections
MO Main Office
HO Head Office
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58. REFERENCES
• http://en.wikipedia.org/wiki/Economy_of_Pakistan
• http://www.mcb.com.pk/mcb/about_mcb.asp
• http://www.oppapers.com/essays/Pakistans-Banking-Sector-Industry Analysis/181995
• http://www.sbp.org.pk/reports/annual/arfy09/annex_index.htm
• http://en.wikipedia.org/wiki/Muslim_Commercial_Bank
• http://www.blurtit.com/q501915.html
• MCB Brochures Manuals
• Annual Report
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59. COPY RIGHT
Attention is drawn to the fact that the copy right of this report rests with author. This copy of
report has been supplied on condition that any one who consults it is the understood to
recognize that its copy right with its author and no information derived from it may be
published without the prior written consent author.
This report contains material, which is the property of the MCB Limited, Karachi and is
clearly marked as such. Although they have given me their kind permission for its
reproduction. This material remains protected under their copy right.
This report may be made available for consultation within University / Department of
Commerce library and may be published on or lent to other libraries for the purpose of
consultation.
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