1

MANAGEMENT, ISLAMIC BANKING AND FINANCIAL RATIOS

(BANK ALFALAH LIMITED)

Master of Commerce
(M.Com-Finance) Session: 2006-2008

Submitted By:
Irfan Shahzad Submitted To: Dr. Naseer Akhtar Muhammad Irshad Rana Tanveer Ahmed Dean Principal Lecturer Roll No. 1

College of Commerce

MINHAJ UNIVERSITY LAHORE

19 February 2009

Irfan Shahzad

DEDICATION

BISMILLAH HIR RAHMAN NIRRAHIM

Now hath come unto you an messenger from amongst yourselves: it grieves him that ye should perish: ardently anxious is he over you: to the most Believers is he

Kind and Merciful.

But if they turn away, Say : "Allah sufficeth me: There is not god but He: On Him is my trust - He the Lord of the Throne (of Glory)Supreme!
(Surah taubah versus 128129)

Maula Ya Salli Wa Sallim Daiman Abadan Ala Habibika Khairil Khaliqi kul Lihimi

Irfan Shahzad

Professor Doctor MUHAMMAD TAHIR UL QADRI

Irfan Shahzad

Irfan Shahzad

Presented by Irfan Shahzad

Irfan Shahzad

Acknowledgement
ALWAYS THANKS TO ALMIGHTY ALLAH
For giving me such a beautiful chance to check my abilities and enabled me to complete this project. Secondly, thanks to my Dear Mother who really deserves all my love and thanks, who has helped me a lot at every phase of my life, encouraged me in the days of depression, scarified for my best future and prayed for me for all time of success. Third thanks to my teachers who worked really hard to teach me and helped, encouraged and supported me a lot in all the problems with full devotions and care.

Irfan Shahzad

OBJECTIVES OF THE PROJECT

By the grace of Almighty ALLAH,
I feel proud to present this project on Bank Alfalah limited. This project is part of my M.com studies and has been assigned to me by Honorable Principal, Sir Irshad Ahmad. The project writing is an art and science in which writer shows his abilities, experience, knowledge and analytical skill, learn in his time of studies. This project has been assign to me with the topic of Bank Alfalah, management system, Islamic banking and financial analysis. This project is very important for me to improve my skills. I tried my best to make it totally different form the other projects. The basic purpose of this project is to understand the financial system of a Bank and to know about analysis of a financial statement by applying my analytical and professional skills. This project helped me a lot to professionally understand and analyse financial affairs of the Bank Alfalah, I divide this project into seven parts. These are as following, 1st part of project consists of introduction to the Bank Alfalah. 2nd part is on Bank management system. 3rd part describes in Islamic Banking and instruments of Islamic Bank. 4th part is based on literature review 5th part consist of Financial ratios, their types and objectives 6th Analysis of financial statement of bank Alfalah has been done. 7th part is of SWOT analysis and recommendations

Irfan Shahzad

TABLE OF CONTENTS

Particulars
EXEXCUTIVE SUMMARY

Chapter 1
INDUSTRY OVERVIEW
Overview of Financial Sector in Pakistan History of Bank Alfalah Limited Mission Vision Chairpersons Message Board of Directors Goals & Objectives Credit Rating Branches Network Products and Services of Bank Alfalah General Banking Financial Services Consumer Finance Treasury and Investment Islamic Banking

Page 1 2 2
3 4
5 5 6 7 8 8 9

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11 19 24 31 34

Chapter 2
THEORATICAL ASPECTS MANAGEMENT
Planning Organizing Leadership Controlling Organizational Structure Departments of Bank

40
40 40
40

42 42 44 49 50

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Chapter 3
ISLAMIC BANKING
Murabaha Salam Istisna Ijarah Mudarabah Musharakah

58
58
59 60 61 61 66 67

Chapter 4
FINANCIAL STATEMENT ANALYSIS
Financial Statements Balance Sheet Income Statement Cash Flow Statement Uses and Limitations of Ratio analysis

71
71
72 72 77 81 88

CAMEL APPROACH
Capital Adequacy Asset Quality Management Earnings (Profitability) Liquidity & Funding

89
90 94 96 97 99

Chapter 5
FINANCIAL ANALYSIS
Goals of Financial Analysis Balance Sheet Ratio Analysis Income Statement Analysis Vertical Analysis Horizontal Analysis Working capital management

104
104
104 106 107 110 110 111

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Chapter 6 Practical Implementation

ANALYSIS OF FINANCIAL STATEMENT OF BANK ALFALAH
Income statement Balance sheet

113
113
114 115

Financial Analysis
Summary Of Ratio Analysis Vertical Analysis Horizental Analysis Balance Sheet of Islamic Banking Cash Management Risk Management Future Prospects

117
137 138 141 145 147 152 157

Chapter 7
SWOT ANALYSIS & RECOMENDATION
Internal & External Factors SWOT analysis Conclusion Recommendations

158
158
158 160 162 163 164 170

REFERENCE GLASORRY

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EXECUTIVE SUMMARY
Banking is one of the most important and sensitive businesses all over the world. Bank plays a significant role in the economy of a country. Pakistan has a well developed banking structure, which ranks among the top ten in the world in terms of profit. There are a number of different banks established in Pakistan, including local incorporated commercial banks, foreign incorporated commercial banks, development financial institutions, investment banks, discount & guarantee houses, house financing companies, venture capital companies, micro finance banks and Islamic banks. This study project is undertaken to analyse the financial statement and then to measure the performance of the bank Alfalah and related sectors. For this purpose various aspects, techniques and financial tools are used in this project. Bank Alfalah was established in 1997, it is a first fully private bank and having fifth position in Pakistani banking sector. It has more than 270 branches across the country. The Bank has highest deposits and huge paid up capital. The Bank also offers latest products and services to their customers. Bank Alfalah management is very competent and developed, using latest techniques (Planning, leading, organizing, and controlling). In Bank Alfalah is using its own intranet, through which every branch is inter connected and functioning well. Islamic Banking Department was established in 2003. but is not working well and having only five branches in six years period. Islamic Banking Department offers different types of Islamic banking products on the bases of Murabaha, Ijarah, Istisna, Mudarabah and Musharaka. IBD (Islamic Banking Department) shows a balance sheet of Rs. 26577 million in 2007. Financial analysis refers to an assessment of the viability, stability and profitability of a business. For analysis of financial statement distinct ratio methods has been used. Financial ratio analysis shows a growth in financial statement and analysis also shows that bank have strong position and having better future. Bank Alfalah is one of the rapidly growing bank of Pakistan on the basis of financial analysis. It is concluded that banks performance has generally improved in all segment. Profits have risen largely due to increase in advances, investments and lending to financial institutions. Earning of bank has increased upto 66% in 2007 showing significant improvement. And the bank also shown growth in all departments. Some of the recommendations include workshops for employees, job rotation, teams work to find innovative products and scholarship programs for employees. It is suggested that by improving above matters bank can obtain more achievements in the market.

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CHAPTER 1

BANKING INDUSTRY OVERVIEW

Banks are custodian of the assets of the general masses. Banking sector plays a significant role in a modern world of money and economy. Banking sector influences and facilitates many different but integrated economic activities Bank works on resources mobilization, poverty elimination .Bank also works on production and distribution of public finance. Pakistan has a well-developed and well organized banking system, which consists of a wide variety of institutions ranging from central bank to commercial banks and to specialized agencies to cater for special requirements of specific sectors. Pakistan started without any worth-while banking network in 1947 But witnessed phenomenal growth in the first two decades. 1970, it had acquired a flourishing banking sector. In 1990 the Banking system was dominated by five commercial Banks. 1990 amendments to the Banking Companies Ordinance launched. New process of financial sector reforms by allowing privatization of the state-owned Banks. During the first round of reforms. Two of the state-owned Banks, Muslim Commercial Bank and Allied Bank, Were privatized between 1991 and 1993. The reforms process was subsequently delayed for several years and resumed significantly only in the early 2000s. With the privatization of the third large Bank, United Bank, in 2002 The domination of the state-owned Banks was ended. September - 2003, the asset share of local private Banks and public sector Banks was 47 Percent and 41 Percent respectively. Another large state-owned Bank, Habib Bank, completed its privatization process In February 2004. As a result of this privatization, the share of Banking system Assets held by public sector commercial Banks decreased to less than 25 Percent. The largest Bank in the country, National Bank of Pakistan, with a market share of approximately 20 Percent, remains state-owned and its privatization Prospects are uncertain at this stage although the government divested approximately 25 Percent of its capital in 2001-2003.

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Overview of the Financial Sector in Pakistan

The history of Banking system in Pakistan dates back to Independence of Pakistan August 1947 when various Banks transferred their Head Quarters and funds to areas to fall in india. This trend emerged due to dominant role of Hindus in prepartitioned Indian Banking system. According to various books there were 3496 branches of indian scheduled banks in the undivided sub-continent as on 1st March 1947 out of which only 487 Branches were located in areas presently constituting Pakistan. However the number of scheduled Banks drastically declined to 195 from 487 immediately after partition. At the time of partition there were only two Banks having the honor to be first commercial Bank of Pakistan (namely) Habib Bank Ltd, which was set up in 1941 with its Head Office in india and the Australasia Bank Ltd, which was established in 1944 with its Head Office in Pakistan. By following the partition, an expert committee was set up and this committee recommended that the Reserve Bank of india being the Central Bank of the undivided India should continue to function as Central Bank of Pakistan and the india currency notes would continue to be legal tender in Pakistan till 30th September 1948. Subsequently it was decided to have separate Central Banks. State Bank of Pakistan was setup and started functioning from 1st July 1948. Thus the history of Banking system in Pakistan started with the establishment of the State Bank of Pakistan which was inaugurated by Quaid-i-Azam Mohammad Ali Jinnah On 1st July, 1948. Consequently three Banks were established which include Muslim Commercial Bank Ltd. Formed in September 1948, Bank of Bahawalpure in October 1948 and National Bank of Pakistan in 1949. Habib Bank transferred its Head Office from Bombay to Karachi due to partition in August 1947 and it was assisted by the State Bank to finance domestic trade of the country.

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History of Bank Alfalah Limited

Bank Alfalah Limited was incorporated on June 21st, 1997 as a public limited company under the Companies Ordinance 1984. its banking operations commenced from November 1st, 1997.1 The bank is engaged in commercial banking and related services as defined in the Banking companies ordinance, 1962. The Bank is currently operating through 267 branches in 83 cities, with the registered office at B.A. Building, I.I. Chundrigar, Karachi. Since its inception, as the new identity of H.C.E.B after the privatization in 1979 the management of the bank has implemented strategies and policies to carve a distinct position for the bank in the market place Charged with the strength of the Abu Dhabi based consortium, and under the leadership of Highness Sheikh Nahayan Mabarak Al-Nahayan, Minister of Education, Government of Abu Dhabi, and a prominent member of Royal Family the bank is energized with the vision, envisaging the development of consumer sector in Pakistan This facilitates the banks commitment to a culture of innovation and seeks out synergies with clients and service providers to ensure uninterrupted services to its customers. Bank Alfalah Limited perceives the requirements of the customers and matches them with quality products and service solutions. During the past five years, the bank has emerged as one of the foremost financial institution in the region endeavoring to meet the needs of tomorrow today. The bank perceived the requirements of customers and matches them with quality products and service solutions. During the past five years, bank has emerged as one of the foremost financial institution in the region endeavoring to meet the needs of tomorrow as well as today. To continually upgrade the quality of service to the customers, training of team members in all the integral aspects of banking, customer service and IT was specially focused. The portfolio concentrates on all aspects of conventional banking as well as the financial needs of corporate sector. Dynamic and high value product includes Car Financing, Home Financing, Rupee Travelers Cheques, Credits Cards, Debit Cards, On line Banking, ATM and consumer Durables. In addition to this, Islamic Banking Division is a recent initiative, which operates as separate branch. It offers Shariah Compliant products through a network of eight (8) branches. The bank is committed to combine all its energies and resources to bring high value, security and satisfaction to its customers, employees and shareholder. The Bank has invested in revolutionary technology to have an extensive range of products and services. This facilitates commitment to a culture of innovation and seeks out synergies with client and service providers to ensure uninterrupted services to it customers.
1

History of Pakistan

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Mission & Vision:

Vision: To be the premier organizations operating locally & internationally that provides the complete range of financial services to all segments under one roof. THE PHILOSOPHY Excellence in service Quality performance Product innovations

CORE SLOGANS AT BANK ALFALAH LIMITED. Every door leads to our customers. The legacy of leadership stands as our guiding light. The strength of the chain relies on the strength of each link. A keen ear is key to understanding. Achievement is nothing without a target. A stitch in time saves nine. Time is our most valuable asset. Performance is nothing without the ability to measure it. Every drop counts. Whatever we are is harvest of hard work. Lets look ahead towards a brighter future. Together.

Mission: To develop and deliver the most innovative products, manage customer experience, deliver quality service that contributes to brand strength, establishes a comprehensive advantage and enhances profitability, in this way providing value to the stakeholders of the bank.

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Chairpersons Message:

Our core philosophy of customer dealings, product customer services and our responsible corporate citizen

honesty, transparency in innovation, excellence in commitment to being a pervades this website.

Since the inception of Bank Al-Falah, by the grace of have moved rapidly in expanding our branch network with making profitable advances and increasing the services. We have made a break-through in providing affordable cost to our customers.

the Almighty Allah, we and deposit base, along range of products and premier services at an

Keeping in view our valued clients and the need for constant and effective communication of information, we have designed this website to be as userfriendly as possible.

As we pursue the path of excellence, customer satisfaction remains our priority. It is only when we know our customers better, can we deliver a higher quality of services, thereby adding synergy to our existing management expertise, financial strength and profitability.

This is yet another channel of communication for the delivery of quality products and services that enhance value to our stakeholders.2

www.bankalfalah.com

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Board of Directors

H.E. Sheikh Hamdan Bin Mubarak Al Nahayan Chairman Mr. Mohammad Saleem Akhtar Chief Executive Officer Mr. Abdulla Khalil Al Mr. Ikram Ul-Majeed Sehgal Mutawa Mr. Abdulla Nasser Hawalileel Al-Mansoori

Mr.Khalid Mana Saeed Al Mr. Nadeem Iqbal Sheikh Otaiba

Management Mr. Nadeemul Haq Executive Incharge Systems & Operations Mr. Sirajuddin Aziz Executive Incharge International &Treasury Division

Mr.Mohammad Saleem Akhtar Chief Executive Officer

Mr. Parvez A. Shahid Executive Incharge Strategic Planning & Global Marketing

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Goals & Objectives Of Bank Alfalah

Goals and objectives are factors through which the companys devotion and commitment to the job can be seen. If the goals are realistic and achievable, than surely that organization is doing its job. Bank Alfalah also has certain goals and objectives which it is trying to achieve, through its various strategies and operations. The goals and objectives are mentioned below: 1. To create a sound base, and through efficient systems achieve modern banking through out Pakistan. 2. By the end of every accounting year there is an increase in deposits. Expand the business to provide as much as more services to people. 3. To create unit banking network in all the branches of Bank Alfalah, the end of the year. This means that all the operations of the bank, i.e. deposits to advances, imports exports, L/C Opening, foreign currency and many more aspects under one roof, so that the customer can be facilitate in one visit. 4. Islamic Banking is one of the goals of Bank Alfalah though it has been initiated in the last fiscal year and it is very acceptable for general public. However, there is lot of work to do for successful implementation of the Islamic Banking Plan. In this regard the Bank is opening specific Islamic Banking Branch under the supervision of its Islamic Banking Division.

Credit Rating:
In 2008, the Bank Al-Falah Limited, long term rating increased to AA in the long term and A1+ in the short term. These ratings have been assigned by PACRA, Pakistan's leading rating agency. These ratings denote better risk absorption capacity stemming from enhanced equity as well as well maintained credit portfolio.3

www.pacra.com

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Branches Network Bank has 267 branches in different cities of Pakistan and working on expending branch network. The detail of some main branches of Bank Alfalah Network in over Pakistan is as under:
Sr. No. 1. Main Branch B.A. Building, I.I Chundrigar Road, Karachi Clifton Branch, Karachi Korangi Industrial Area Branch, Karachi Muhammad Ali Jinnah Branch, Karachi Sharah-e-Faisal Branch, Karachi Defence Branch, Karachi Gulshan-e-Iqbal, Karach Cloth Market Brach, Karachi Jodiah Bazar Branch, Karachi North Karachi Branch, Karachi KESC Branch, Karachi Paper Market Branch, Karachi North Napier Road, Branch, Karachi S.I.T.E Branch, Karachi PECHS Branch, Karachi Timber Market Branch, Karachi Bahadurabad Branch, Karachi LAHORE LDA Plaza Branch, Lahore Defence Branch, Lahore Township Branch, Lahore Gulberg Branch, Lahore Circular Road Branch, Lahore Badami Bagh Branch, Lahore Allama Iqbal Brach, Lahore Shah Alam Branch, Lahore Shadman Branch, Lahore Mall Road, Brnach, Lahore RAWALPINDI Main Branch, The Mall, Rwp. Branch KARACHI Phone Number 111-777-786 021-2414030-9 021-583778-2 021-5065701-2 021-7750627-30 021-4313536-8 021-5374330-5 021-4984937 021-2401621-26 021-7532482-84 021-698760 021-2417515-9 021-2211353-8 021-7540067-68 021-2582114-16 021-4535861-2 021-7750635-9 021-4128578-81 042-6306201-10 042-5729772-6 042-5114722-23 042-5877800-8 042-7638256-8 042-7708291-5 042-5432961-3 042-7673401-6 042-7538116-8 042-7350033-35 051-5582288 051-566084-6 051-4424080-5 051-2275286 0451-724138-9

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.

29. 30. 31.

Satellite Town, Branch, Rwp ISLAMABAD Blue Area Branch, Islamabad Branches in Other Cities Liaqat Road Branch, Sargodha

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Sr. No. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51.

Branch Sarwar Road Branch, Sahiwal College Road Branch, D.I Khan Saidu Sharif Road Branch, Mangora Saddar Branch, Hyderabad Islamia Road Branch, Peshawar Cantt Branch, Peshawar Hospital Road, Nawabshah Liaquat Bazar, DG Khan Circular Road, Gujrat Bank Road Branch, Mardan The Mall Branch, Wah Cantt. Circular Road Branch, Bahulpur Cantt. Branch Jhelum Abdali Road Branch, Multan Paris Road, Branch, Sialkot Liaquat Road Branch, Faisalabad G.T Road Branch, Gujranwala Frefre Road Branch, Sukkur Shahi Road Branch, Rahim Yar Khan M.A Jinnah Road Branch, Quetta

Phone Number 0931-73631-2 0961-711730-3 0936-726745-6 0221-786020-2 091-287051-5 091-287051-5 0214-62127-9 0641-468201-4 0433-530219 0931-73631-2 0596-539426-8 0621-889922-5 0541-610022 061-546792-6 0342-591741-43-44 041-617436-39 0431-255556-16 071-28173-75 0731-84771-73-79 081-827567

ISLAMIC BANKING BRANCH NETWORK 1. Islamic Banking Main Branch 66, Main Boulevard, Gulberg, Lahore Islamic Banking Y-Block Branch 93-Y, Phase-3-C, DHA, Lahore Cantt Islamic Banking Katchery Branch Kutchyery Bazar, Faisalabad Islamic Banking Jinnah Avenue Branch REDCO Plaza, 8-E, Blue Area, Islamabad Islamic Banking McLeod Road, Branch Plot No. 13, McLeod Road, Lahore Islamic Banking Faisal Arcade, Branch G.T Road, Gujranwala Islamic Banking Murree Road Branch Near Ministry of Defence 042-5715241-5

2.

042-5746191-95

3.

041-603021-25

4.

051-2879589

6.

042-7211640

7.

0431-557301-5

8.

Products And Services

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General Banking

Current Account PLS Savings Account Royal Profit Basic Banking Account Alfalah Kifayat Alfalah Mahana Amdan Alfalah Education4

Detail of each type of accounts is as follows; Current Account: PKR non-remunerative account No limit on minimum balance Minimum initial deposit PKR 1,000 only Free ATM card Two free withdrawals and two free deposits per month Subsequent deposit and withdraws will be charged at PKR 50 per transaction ATM card with free of charge unlimited ATM withdrawals from ATM's PLS Savings Account: Profit & Loss Sharing Saving Bank Account. Minimum account opening requirement of Rs. 5,000 only. No restriction on number of withdrawals and number of Profit on saving accounts is credited to the customer account half-yearly basis. Free debit card can be used to withdraw cash and make at thousands of Outlets across Pakistan Which provides access 24 hours a day.

deposits. on purchases to funds

www.bankalfalah.com

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 Royal Profit: Minimum Deposit requirement of Rs. 50,000 only. Higher returns on higher balances. No restriction on number of withdrawals and on number of deposits. Free debit card can be used to withdraw cash and make purchases at thousands of outlets across Pakistan which provides access to funds 24 hours a day. Profit is credited to the customer account on monthly basis.

Basic Banking Account: Initial deposit for account opening is Rs. 1,000 with no minimum balance requirement. Non interest bearing checking account. Maximum 2 deposits & 2 withdrawals through cheque are allowed. Free debit card can be used to withdraw cash and make purchases at thousands of outlets across Pakistan which provides access to funds 24 hours a day. No restriction on ATM withdrawal.

Alfalah Kifayat Account

Features 24-hour ATM convenience - You can access your savings account via ATMs 24 hours a day, seven days a week. Earn more - Our savings account gives you added incentive to save because it pays profit on the minimum balance of the month, which is credited to your account on a half yearly basis . Standing Instructions - You may also set up standing instructions through your savings account. Personalized cheque book - You are provided with a personalized cheque book for enhanced security of your account. Excellent Customer Service - Our customer service officers will be available to assist you in all your banking needs.

Alfalah Mahana Amdan

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Alfalah Mahana Amdan is a 3 year TDR with expected rate of profit of 10% p.a. This term deposit will provide an opportunity to individual/joint customers to enjoy higher returns that will automatically be credited to his/her current/PLS/RP/BBA account on 1st working day of each month. This facility is not available for business and corporate customers. Some salient features Minimum placement limit is Rs. 100,000/- and maximum placement limit is Rs.15,000,000/ Expected Rate of profit is 10% Per annum (as per PLS governing rules) Profit will be automatically credited on the 1st working day of each month into customers Current/PLS/RP/BBA account Free Personal Accident Insurance coverage up to the deposit amount or Rs. 1,500,000/- whichever is lower. Customer can avail financing facility up to 90% of the deposit(as per banks policy) Any Pakistani resident over the age of 18 can open this account Alfalah Mahana Amdan term deposit can be maintained only at any one BAL branch with a maximum cap of Rs. 15 Million. An undertaking shall be obtained from the customer certifying that he/she is not availing Alfalah Mahana Amdan Term Deposit Receipt facility from any other BAL branch.(included in AOF) Alfalah Mahana Amdan TDR will be issued for three years tenure with auto renewal facility of principal amount i.e. the facility will be renewed automatically on maturity (i.e. 3 years) Alfalah Mahana Amdan TDR will be subject to Zakat, Withholding Tax as well as any other applicable taxes.

Alfalah Eduction

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Alfalah Education is a Term Deposit product with No Additional Cost (NAC) education insurance cover for account holders with school going children. Alfalah Education Account , beside offering competitive return on TERM DEPOSIT , offers tuition fee reimbursement of children for 15 years of schooling or up to their 20th birthday, in the unfortunate event of the death (either through accident, illness or natural causes) of the main breadwinner (account holder) parent. Alfalah Education offers a competitive return on term deposit and secondly, it creates a contingency provision for our school going youths education in the hapless event of the death of any major breadwinner. The product seems rewarding in the current scenario of increasing number of children of school going age and the general public interest in quality education of their off springs. Features Deposits can be placed in multiple of 100,000 units with maximum 3 units allowed per depositor, i.e. a maximum deposit per customer of Rs. 300,000 across all BAL branches. All 3 units can be purchased for 1 child or each for up to 3 children. No evidence of insurability (medical examination/health decoration) is required. Maximum entry point age is 55 years (renewable up to 64th birthday) Benefit payment increases with age/class of the child. The product will be offered as a 1 year term deposit at upto 7 % profit to be paid at maturity Premium cost for each deposit unit of Rs. 100,000 would be Rs. 85 per month and borne by the bank. Regular Zakat and WHT would apply on the deposit. Monthly payments set forth will be paid directly to the mother/guardian, regardless of the actual school fee. In case of joint account holders, only main breadwinner account holder would be covered under the policy.

Benefit Schedule Benefit Payable: for 15 years or up to the child age 20 Monthly Premium: Rs. 85 Deposit: Rs. 100,000

Lockers

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Bank Alfalah provides safe deposit locker facility to its customers for safe keeping of their valuables like documents, securities and jewellery etc. Important features of lockers facility are as follows:

Various sizes to choose from small, medium & large. Annual locker rent ranges from Rs.1,000/- to Rs.3,500/-. Locker rent is waived for customers maintaining a minimum deposit of Rs.2 million in current account or above US $25,000/- in a current account or US $50,000/- in a savings account. Locker Rates

The annual license fees of the following sizes of lockers will be as follows: Locker Size Small Medium Large Special Rs.1000/- (Refundable) The license fees lockers will be payable in advance every year and no part of the same shall be refundable in any circumstances. Remittance Charges Rs.1000/Rs.1500/Rs.3000/Rs.3500/Key Deposit:

Through our international correspondent banking relationships we provide direct and indirect foreign currency remittance facility around the world.

Consumer Finance

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In our endeavor to provide you versatile banking options to fulfill your financial needs, Bank Alfalah Limited presents the Alfalah HilalCard, a Debit Card which gives you unlimited access to your current / savings account with a simple swipe at millions of retail shops and ATMs worldwide. The Alfalah HilalCard comes with a host of conveniences and benefits combined with the wide reach of Visa Network, enabling it to be accepted at more than 1 million ATMs and 29 million retail outlets around the world, making it the most acceptable Debit Card available in Pakistan. What's more, it is easy to operate and can be used on any electronic self-printing POS machine where VISA is accepted, locally and internationally. No more hassle of remembering your PIN for retail transactions and no need to go to the ATM for cash withdrawal! One swipe and your transaction is complete. Features The Alfalah HilalCard can be used electronically at any retail outlet or ATM that accepts VISA cards and displays these logos:

Personal Identification Number (PIN): Debit cards that are currently available in Pakistan require the card member to enter the PIN number in order to complete a transaction. The Alfalah HilalCard is a "OneSwipe Card" and does not require you to remember any PIN in order to execute retail transactions. The PIN which will be delivered to you for Visa Electron will be required for ATM based transactions only. Special POS Machines: In order to use other debit cards currently in the market you would need to find outlets that carry special POS machines where these cards can be used. Alfalah HilalCard is accepted at all outlets displaying the VISA/Electron logo worldwide and having selfprinting POS terminals.

To be used Not to be used for Alfalah HilalCard for Alfalah HilalCard Global Acceptability: The Alfalah HilalCard is globally accepted welcomed at all locations displaying the VISA/ ELECTRON/PLUS logos with self-printing POS terminals. Your card is accepted at nearly 29 million physical locations in more than 150 countries round the globe with above 22,000 major establishments in Pakistan.

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With your Alfalah HilalCard, you can pay for shopping, meals, travel, entertainment, holiday, petrol and much more. Also it gives you access to ready cash through your PIN (Personal Identification Number) at more than 1 million ATMs to withdraw any amount up to your available bank account balance. This premier card service is a convenient point-of-sale alternative for ATM cardholders who do not qualify for Visa credit purchasing power. Through Alfalah HilalCard, you can access your Bank Alfalah's account from anywhere in the world. Foreign Transactions: Transactions made outside Pakistan will be converted from the transaction currency to US Dollars, based on international exchange rate prevailing on that date. In order to assist card members, all transactions will be converted to Pak Rupees for payment. This conversation will be based on the market exchange rate quoted by authorized money changers and in accordance with the Bank's Procedures applicable from time to time. Zero Loss Liability: If ever you lose your card, Bank Alfalah ensures that you never have to worry about it! You are covered for all fraudulent charges made on your card as soon as it has been reported lost to us. Just make sure that you report the loss immediately upon discovery. You are completely secure against loss, theft after the card loss has been reported to us. No Minimum Income Requirement: Unlike other Cards, the Alfalah HilalCard is easy to obtain. There is no preset income requirement to enjoy the benefits of this fast, convenient and safe. All you need to do is open and maintain an account with any of the branches of Bank Alfalah Limited. Simplicity: Charge goods and services to your Alfalah HilalCard at all point-of-sale terminals with self-printing ability displaying VISA / Electron sign in Pakistan and abroad. Flexibility: With Alfalah HilalCard you may withdraw cash from over 1 million ATMs (Automatic Teller Machines) worldwide. You no longer need to worry about whether you'll make it to the bank before closing time, because ATMs never close - they are open 24 hours a day, 7 days a week, and 365 days a year. Promptness: Using Alfalah HilalCard at ATMs and / or shops requires less time than queuing in the Bank and writing out checks.

Controlled Spending: All Alfalah HilalCard transactions are subject to authorization, which means whenever you do a transaction the status of your account is checked. Thus you

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eliminate the risk of spending the money you don't have - you yourself control your account. Overview of Expenses: Each single charge and each withdrawal of cash at ATM made using your Alfalah HilalCard shall be clearly itemized on your bank statement enabling you to easily check the status of your account. Immediate Payment: With Alfalah HilalCard you pay your bills immediately unlike when you use a Credit Card and get the bill later. The amount is directly debited from your designated Current/Savings account. Utility Bill Payments on Bank Alfalah ATMs We now entertain the following Utility Bills Payments on Bank Alfalah ATMs country-wide with NO additional charges during the initial phase: Gas Bill Payment: SSGC and SNGPL Electricity Bill Payment: KESC and LESCO Mobile Bill Payment: WARID (With top-up) and UFONE (With top-up) Cash Deposit (CDMs) Alfalah HilalCard holders can deposit cash in real-time to any of their linked Accounts using Bank Alfalah CDMs (Cash Deposit Machines) which automatically recognize the following notes: Rs. 5000/ Rs.1000/- (Old and New Currency Format) Rs. 500- (Old and New Currency Format) Rs. 100/- (Old and New Currency Format) Rs. 50/- (Old Currency Format, The template for New note is in progress) No fees will be charged on Cash Deposit. Difference between Hilal debt card and credit card Put in simple terms, a HilalCard is a Buy Now, Pay Now option while a Credit Card is a Buy Now, Pay Later option. Alfalah HilalCard allows the following facilities: No monthly repayment. No interest charged. Backed by a customer maintained Current/Savings account. Your limit is your balance.

Financial Services

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Structured Finance Department comprises a team of hand picked professionals, dedicated to syndicated loans and structured products. The teams expertise is well known in the marketplace with its capability to assist public & private sector entities, major financial institutions, multinational corporations, domestic & international institutional investors in innovative financing including underwriting & private placements. The scope of SFUs activities also encompasses advisory assignments, such as privatization, Mergers & Acquisitions (M&As), domestic listings, IPOs and restructuring. During the past few years, SFU has been successful in sourcing and participating in a number of prestigious transactions involving large amounts. Some of the value added services offered by SFU include the following: Loan syndication Public floatation of Term Finance Certificates (TFCs) and equity Private placement of Term Finance Certificates (TFCs) and equity underwriting Guarantee syndications Financial restructuring Mergers & Acquisitions (M&As) Fostering joint ventures Privatization Sale side and buyers side advisory Structuring new financial instruments In future, SFU is envisaged to supplement the enhanced profile and profitability of Bank Alfalah Limited through its value added services, through both asset building and income generating aspects

Trade Finance

Small and Medium Enterprise (SME) means an entity, ideally not a public limited company, which does not employ more than 250 persons (if it is manufacturing / service concern) and 50 persons (if it is trading concern) and also fulfills the following criteria of either a and c or b and c as relevant: (a) A trading / service concern with total assets at cost excluding land and building up to Rs 50 million. (b) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million. (c) Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements. An Individual, if he or she meets the above criteria, can also be categorized as an SME.

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Realizing its corporate social responsibility and carrying forward the image of "The Caring Bank", Bank Alfalah started a separate department at the Head Office level in early 2004. The SME Department was established with a mandate to foster SME finance at BAL, explore opportunities for developing structured product programs for SMEs, introduce the concept of Dedicated SME officers and finding market based solutions to fill the financing gap to this important and under-served business segment. Bank Alfalah believes in innovation, simplification of procedures, and reduction in turnaround time and customer friendly service. To accomplish this resolve, the SME Department is supported by 86 dedicated officers in 57 branches of the bank who are nurturing valuable relationships in the SME sector. Alfalah Karobar Finance Bank Alfalahs first SME product Alfalah Karobar Finance is a running finance facility based on projected cash flows. Under AKF, we offer working capital finance (Rs.0.5 million to Rs. 10 million) to SMEs at highly competitive rates. We have a team of professional credit officers who provide expert financial advice along with customized packages to a diverse range of business clientele. The product is available to SMEs through our 86 branches in 38 cities. Milkiat Finance Bank Alfalah took another step towards addressing the needs of the industry by introducing Alfalah Milkiat Finance. AMF is aimed at strengthening the Small and Medium Enterprises viz a viz their business premises. Alfalah Milkiat Finance offers comprehensive and flexible financing packages from Rs. 0.5M up to Rs. 20 million for the purchase, renovation and expansion of business premises. Alfalah Karobar Finance

AKF is a Running Finance facility between Rs 0.50M to Rs 10.0M. Tailor-made product for SMEs for their working capital financing based on the cash flow methodology. (Our Edge = Better pricing, quicker TAT and low processing charges.) At Bank Alfalah, 86 branches are designated to deal with AKF business in the entire country. The purpose of the AKF is financing procurement of raw material, finished goods and receivables of SME businesses. SME Customers with following acceptable criteria are entertained in this product: 1. Resident Pakistanis 2. Individuals/ sole proprietors aged up to 60 years. 3. In the same business for the last three years 4. Could offer mortgage urban residential/commercial/ industrial properties (third party collateral also allowed.

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5. Overall debt burden not to exceed 40% of the projected cash flows over the period of financing. 6. Maximum AKF entitlement to be worked out by considering the lowest of: 60% of assessed market value of the mortgaged property, or 35% of sales turnover or condition # 5 above. Validity of the AKF shall be initially for a period of one year. Quarterly mark-up shall be serviceable within 15 days of its becoming due. Turn-around-time for the approval of AKF would be 20 working days from the date of receipt of complete LAF along with its attachment. Processing charges of Rs 2,000/- are recovered upfront with Loan Application Form. Clean-up requirement: At least 25% of the AKF approved limit shall be required to be cleaned-up for two days in six months.

Alfalah Milkiat Finance

Alfalah Milkiat Finance (AMF) is a unique long term financing facility offered to SMEs to purchase, renovate or expand their business premises. It is being offered keeping in mind requirements of the small business owner who needs to take his/her business to the next level. AMF is grouped into four sub categories to help you identify which arrangement suits your needs best. . AMF-1: Acquisition of rented commercial/ industrial property by present tenant. AMF-2: Construction on owned and in possession commercial/ industrial premises/ plot. AMF-3: Purchase of constructed commercial/ industrial property. AMF-4: Renovation of owned and in possession commercial / industrial property. You are eligible to apply if: You have been in business for at least 3 years. Amount of finance you need is between Rs 0.5 Million to Rs 20 Million under AMF 1, 2 & 3 or a maximum of Rs 3.5 Million for AMF 4.

Salient Features AMF 1,2 & 3 shall be repayable in 2-12 years whereas AMF-4 shall be repaid in 2-4 years. Mark up shall be (SBP discount rate + 4%) Monthly installments will be hassle free through post dated cheques. AMF shall be disbursed approximately within one month after completion of documentary requirements by you. The property being financed shall be mortgaged in favor of the bank. Leasing Finance

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In modern days leasing has now become an economic and financial reality of primary importance. It is the originality of the leasing techniques and its economical advantages, which has enabled it to enter the world of industrial investment in Pakistan and on the international scene. Lease finance provides a significant source of funds for companies to acquire or use assets. Leasing provides additional earning opportunities to acquire assets and to get the inflows simultaneously out of the operations of the same assets. The ownership of the asset is vested with the Bank (lessor) and in return for rental payments; the client (lessee) has full use of the asset. Being a medium to long term mode of financing, it allows the lessee to use the funds for other profitable purposes which otherwise would have been tied up in case of immediate payment for purchase of the asset. How do we Lease The lease finance facilities are available for a variety of assets (imported/local) conforming but not limited to the following categories: 1. Vehicles (Private & Commercial) 2. Plant, Machinery and equipment 3. CNG Equipment 4. Generators(Industrial & Commercial) Who can Apply 1. Sole Proprietors 2. Partnership Firms (Registered / Un-registered) 3. Private Limited Companies 4. Public Limited Companies (Listed / Unlisted) 5. Govt./ Semi Govt. Organizations/ Autonomous Bodies The Leasing Mechanism BAL works closely with its existing and prospective business partners to deliver most comprehensive and tailored leasing solutions to meet all asset needs. BAL offers the most competitive and flexible terms & conditions for lease concerning choice of assets, repayment, pricing, and tenor which range between 3 to 5 years commensuration with the specific requirement of the lessee, useful life of the assets and clients ability to repay the lease rentals. Agriculture Finance

Bank Alfalah Limited acknowledging the vital role of a agriculture in the economic development of Pakistan has designed Rural Finance Program named as "BANK ALFALAH ZARIE SAHULAT". The product is designed to cater for multiple financing requirements of our farming sector. We are caring our customers through chain of complete, distinguished and specialized products for agriculture sector. BAL Branches are designed to help the farmers with

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expert advice, technical know-how and Credit for their multifarious activities through timely, affordable and attainable modes to suit farmer requirements. Bank Alfalah Zarie Sahulat it is available for Short, Medium and Long terms. Bank Alfalah Limited Strategy is to focus on following Objectives: Provide reliable infrastructure for Agri customers. Help farmers utilize funds efficiently and effectively. Provide farmers an integrated package of credit, supervision and technical know-how. Bank Alfalah Limited is committed to make dreams come true by making Pakistan's Rural Economy healthier and stronger Products Bank Alfalah's Zarie Sahulat offers finance facilities covering entire spectrum of Farm and Non-Farm activities both for production and development purpose. We offer following wide range of Agri Finance Products to encourage farmers to increase farm production. Alfalah Paidawari Zarie Sahulat Alfalah Musalsal Zarie Sahulat Alfalah Tractor and Transport Zarie Sahulat Alfalah Machinery & Equipment Zarie Sahulat Alfalah Aabpaash Zarie Sahulat Alfalah Poultry Zarie Sahulat Alfalah Dairy & Livestock Zarie Sahulat Alfalah Fisheries Zarie Sahulat Alfalah Silos/ Storage Zarie Sahulat Alfalah Agri Industrial Zarie Sahulat Alfalah Bills /Guarantee Zarie Sahulat (for growers corporate clients only). Alfalah Lease Zarie Sahulat Eligibility We facilitate all categories of farms individuals / corporate entities engaged in Agri production, processing, packing, transportation, marketing, storage and export of Agri farm commodities as per list of eligible items prescribed by State Bank of Pakistan. The eligibility criteria observed while extending Agri finance to farmers under various products of Bank Alfalah Zarie Sahulat is: The applicant is an individual /entity engaged in Agri activities identified in the foregoing paragraph. The applicant is not a defaulter of the banking system. The applicant must be able to produce proper securities pass book acceptable to the Bank. The applicant (individual / entity) shall be Pakistani / registered in Pakistan. The minimum and maximum age shall be 18 years and 65 years respectively.

Consumer Finance

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Alfalah cards
1. Platinum card

Your partner wherever you go Alfalah Merchant Acquiring Features Convenience & reliability- Protection - Step-By-Step (SBS) Monthly Installment Plan- Balance Transfer Facility (BTF) - Credit Cover- Cash Advance Facility- Women Exclusive Card- Supplementary Cards- Buy your dreams online- Reward yourself -Basics of your Card 2. Gold and Classic Card

A perfect card combination for all segments of salaried & professional individuals. 3. Classic Blue Card

This Card is for you, if you are: 1) Have just started your Career... 2) Not qualified for any other credit cards income criteria... As a Classic Blue Cardholder you have a privilege of having access to all features of Alfalah VISA Credit Cards including two free supplementary cards 4. Woman Exclusive Card

A Credit Card Exclusively for Women, Now for the first time in Pakistan, Bank Alfalah has introduced a credit card exclusively for women. This card has its unique features which have been tailor-made for women in Pakistan. Liability

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The liability of this card depends on what basis this card has been applied for: If the female is applying on her own income basis, she herself will be liable to pay for the amount spent through the card(s). If the female is a house wife and does not have any direct income source, she can apply for the card through the person responsible for the household (i.e. husband or father) who will sign an undertaking to be responsible for the amount spent through all the card(s) issued under this scheme. 5. Student Card

For the first time in Pakistan, Bank Alfalah introduces a credit card for Students. This card is for you if you are enrolled in a professional university (as per Bank Alfalahs approved list) with 15 years of schooling experience. Now you can pay your fee, buy books or just chill out with Alfalah VISA. Not only this but you will also earn reward points and can redeem them for a TV, Mobile Phone, CD player & DVDs etc. Requirements 1. The applicant must be a graduate with 14 years of schooling and must be currently enrolled in a professional college/University. o Karachi Institute of Business Administration (IBA) Shaheed Zulfiqar Ali Butto Institute of Science and Technology (SZABIST) College of Business Management (CBM) Agha Khan University (AKU) o Lahore Fatima Jinnah Medical College Lahore University of Management and Science (LUMS) King Edward Medical College Punjab University- IBA o Islamabad Quaid-i-Azam University Bahria University Islamic International University (IIU) 2. Copy of Result Card of 1st year of professional education or equivalent semesters/terms. 3. Copy of Last Fee Deposit Slip in the current institution. College/University roll number, section & department.

6.

Supplementary Card

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All Bank Alfalah Basic Card members can apply for supplementary cards in separate categories including Sons Card, Daughters card (children who are above 13 years of age) and House Staffs card. This feature has been introduced for the first time in Pakistan, yet another beginning made by Bank Alfalah Credit Cards. In addition, supplementary cards can be issued to anyone you like thus giving you complete freedom of choice (Only 1 supplementary card will be issued to Awami Card holder). Separate Card Design for Each Category Each supplementary card category contains its own specific design of card. These card designs which have been specifically designed keeping in view the trends and tastes of the modern day young generation who has the desire to look exclusive in it. You can get supplementary cards in unique designs for your son, daughter and house staff, but any other person can also enjoy this privilege using your own card design. Separate Spending Limit for Each Category Not only are the card designs unique, the basic Card member can also assign a separate percentage or amount of the total credit limit of the credit card account to each of the supplementary cards. So, whether it is your son who needs his monthly pocket money, or your daughter needs to make school fees payments, or your chef, chauffeur or maid is usually the one who buys all the groceries it is you who will decide how much credit each of them gets for it. Control over Household Expenses Alfalah VISA credit card helps in controlling your household expenses that is why it is the best suited card available in the market. By using this card, you can: Control your son and/or daughter's spending habits. Control your household expenses by giving a supplementary card to your House Staff responsible for day to day shopping. Forget about the need to keep a record all the time of each expense made from your household budget, your Monthly statement will show the detail of each transaction card-wise. Give cards to children with fixed spending limit and feel free of the tension of giving them allowances and monitoring their spending habits. Unique Supplementary cards There are three design categories of Supplementary cards, namely, the Son's card, the Daughter's card and the House Staff card. This enables you to get away from the dayto-day hassle of buying groceries, petrol, children's books, etc, as each member can then do his or her own purchases.

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Controlling Limits for each supplementary category When you present a supplementary card, you are in total control of assigning each supplementary card a fixed limit at your discretion. Monitoring Now you don't have to maintain that little diary recording your day to day expenses. With the Women's Exclusive Card, your statement will contain all the detail that you need to know.who spent what, where and how much! 7. Mini Card

Forget your wallet and chill out with Alfalah VISA Mini! Visa Mini is a practical and convenient part of your everyday life - whether you go for shopping, dine out, buy grocery, want to go for holidays or feel like buying something of interest while you are out just for a jog! You can take it with you anywhere you like with no hassle as it has a perforated hole in the bottom left corner making it attachable to your key chain, mobile phone or other day-to-day carry along device. 43% smaller than the regular sized credit card with the same features and benefits. Accepted at over 29 million merchants worldwide and around 22,000 establishments in Pakistan (used on electronic POS terminals only). Has the same security features as the regular sized Alfalah VISA credit card. Features of Alfalah Cards No Joining Fee -No Annual/Renewal Fee -Balance Transfer Facility Global Acceptability-Cash Advance Facility -Revolving Credit -Free Supplementary Cards -Card Expiry Period -24-Hours Phone Banking Service -Zero Loss Liability -All Billing in Pak Rupees -Comprehensive Travel Protection -Statement of Account -Fortunes -Acceptance at 1Link ATMs -Instant SBS Monthly Installment Plan -Utility bill Payments -Call and Pay Facility -Prepaid Mobiles Top ups -Alfalah Credit on Phone -Credit Card bill Payment through HilalCard -Special Offer on Warid post paid connection -Step By Step Plan -Non Alfalah Card members No Joining Fee Step By Step Plan | Non Alfalah Card members Join Alfalah VISA without paying any joining fee. Start enjoying your free card from the moment you get hold of it. No Annual / Renewal Fee Alfalah VISA is the only credit card in Pakistan with no annual or renewal fee, so benefit from your card without worrying about any renewal fee.

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Balance Transfer Facility Bank Alfalah offers balance transfer facility to all its Card members - the easy and convenient way to settle unsettled credit card payments on all existing credit cards in Pakistan. As an Alfalah VISA Card member you can avail balance transfer facility at a low rate of only 1.50% (18% APR) per month (for initial six months), which is the lowest in Pakistan. The balance transfer facility can only be availed if the total outstanding balance does not exceed beyond the credit limit assigned by Bank Alfalah for Alfalah VISA card. Avail balance transfer facility by filling out our Balance Transfer Facility Form. Print the form, fill out all the fields, sign it and send it to us through courier. Global Acceptability Your Bank Alfalah VISA card is your partner everywhere and is globally accepted and welcomed at locations displaying the VISA logo. It is accepted over 29 million locations in more than 150 countries around the globe and at over 22,000 establishments in Pakistan. Cash Advance Facility 50% of Credit Limit Now you can avail Cash Advance Facility up to 50% of your available credit limit. Enjoy the benefits of this exclusive offer on your Bank Alfalah Credit Cards. You can get cash from Alfalah ATMs or cash counters of Bank Alfalah branches and other VISA member banks in Pakistan. Revolving Credit With Alfalah VISA you have the option of paying only 5% of your outstanding balance by the payment due date. Service charges will be levied on the balance unpaid spending and carried forward. These charges are calculated on a daily basis from the transaction date for all cash and retail transactions. The following month you have the option of either the full amount payment or if you wish, pay only the minimum amount due and revolve again. Free Supplementary Cards Gift your family members with exclusive Alfalah VISA supplementary cards and let them also enjoy the privileges of Alfalah VISA. Only Alfalah VISA gives you the unique feature of having up to six free supplementary cards for anyone you care for. All supplementary Card members share your credit limit. All charges incurred on the supplementary cards will be reported on your monthly statement. Zero Loss Liability If you ever lose your card, Bank Alfalah ensures that you never have to worry about it. You are covered for all fraudulent charges made on your card as soon as it has been reported lost to us. Just make sure that you report the lost card immediately upon discovery. You are completely secure against loss/theft after the card loss has been reported to us.

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All Billing in Pak Rupees Whether you make transactions in Dollars or any other currency, for your convenience, all your billing will be in PAK Rupees. Comprehensive Travel Protection Alfalah VISA offers a comprehensive cover up to Rs. 3.5 Million on Alfalah VISA Gold Card in case of an accident, while traveling on any common carrier. It is applicable only if the tickets are charged through Alfalah VISA card. The details are given as follows: Coverage: Personal accidents travel insurance for card holders during travel only, if ticket is bought using the card, as per benefits listed below. Death:100% Special Exclusion: This policy will not cover any claim due to death or permanent injury unless the same is caused due to any accident of the carrying vessel/vehicle.

Master Cards

Features Convenience & reliability- Protection - Cash Advance Facility- Step-By-Step (SBS) - Balance Transfer Facility (BTF) - Credit Cover - Buy your dreams online Reward yourself - Basics of your Card - Monthly Card Statement Your Partner Wherever You Go Your Bank Alfalah Titanium MasterCard is your partner everywhere and is globally accepted and welcomed at locations displaying the MasterCard logo. It is accepted at nearly 25 million locations around the globe and at over 22,000 Bank Alfalahs merchant establishments in Pakistan. Alfalah Titanium MasterCard lets you pay for shopping, travel, entertainment, meals and much more. You have access to cash at more than 1 million ATMs worldwide and 2200 1Link ATMs in Pakistan. With your Alfalah Titanium MasterCard and PIN (Personal Identification Number) you can withdraw any amount upto 50% of your assigned credit limit. You can generate PIN through IVR (Interactive Voice Response). Please ensure that your PIN is kept safe and confidential. You also have the option of withdrawing cash by requesting an Over-the-Counter Cash Advance at 300,000 financial institutions worldwide or at any Bank Alfalah Branch/ATM or participating VISA member banks in Pakistan.

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Alfalah Car Finance

Benefits and Features Quickest processing. No hidden charges. Minimum down payment. Complete repayment at any point of time. Balance transfer facility {BTF} for existing as well as new clients from other Banks. Tenure period ranging from 1 to 5 years. Financing of all brand new locally assembled vehicles and used cars. Financing limit ranging between Rs. 200,000/- to Rs. 2000, 000/- for brand new cars. Corporate & Individual Car Leasing BALs recently introduced car leasing facility for individuals and corporate sector has set new dimensions for the product. Now you are provided with the option of either to get the vehicle leased or financed. Insurance Renowned and reliable Insurance companies are offering the competitive rates of insurance. Pay year insurance premium in advance {at the time of down payment} and the remaining in the subsequent equal monthly installment. How Much Extra Money Being Paid? {Mark-Up} Bank Alfalah's mark-up rates are as follows:

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Repayments Easily affordable installments on monthly basis in the form of post-dated cheques will set you free of depositing your rental cheques every month. Security Hypothecation of vehicle in the name of Bank Alfalah Limited. You Can Act As a Co-Borrower Acting as a co-borrower will enable your family members {spouse, children- 18 year and above} to avail the financing facility and get the car registered in their names as well.

TREASURY AND INVESTMENT

Money Market Short term money market inter-bank trading. Active Treasury Bills trading in secondary market. Forward forward inter-bank money market trading. Money market linked lending to and borrowing from corporate clients Foreign Exchange Market Active trading in ready and forward USD/PKR. Active quotations of foreign exchange rates in fifteen major currencies. Information in respect of prevailing rates of most of the currencies of the world for corporate clients and individuals. Forward Forward foreign exchange rates of USD/PKR. Active swap trading in USD/PKR and other major currencies such as EUR, GBP, JPY and CHF. Investment Active Investment in treasury bills (TBs). Active Trading in Pakistan Investment Bonds (PIBs). Active investment in Certificate of Investment (COIs) Active investment in Terms Finance Certificates (TFCs) Government Securities Efficient service for individuals and corporate clients for buying and selling govt securities on their appropriate requests

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Custodianship Investment Securities Portfolio Accounts of Customers for holding on their behalf Treasury Bills, Pakistan Investment Bonds.

Financial Advisory Services Briefing on current information available in market in respect of prevailing rates of USD/PKR. Briefing on current information available in market in respect of foreign exchange rates of major foreign currencies. Future expectations and sentiments on major foreign currencies including Pak Rupees.

Nostro Account

A nostro account is a bank account established in a foreign country for the purpose of holding that countries currency. Suppose a US bank purchases GBP. That currency has to be delivered somewhere, but US banks are only set up to maintain accounts in USD. The bank establishes a nostro account at a British bank and instructs its counterparty to deliver the GBP to that account. Bank Alfalah has nostro account in each country. Home Remittance

Remittances are transfers of money by foreign workers to their home countries. The World Bank officially estimates that migrants from developing countries sent from abroad, Home Remittances more than US$ 223 billion to their families during the Year 2005, a figure more than twice the level of international aid. Remittances are playing an increasingly larger role in the economies of many countries. Around 130,000 people leave our country annually, opening up many avenues to enrich the stream of home remittances. Therefore under the present circumstances where enhanced volumes of funds are flowing in from abroad, Bank Alfalah is proactively seeking to be an important conduit to facilitate the growth of sizeable business. Our Home remittances unit is strategically proactive in diminishing the informal channels of transfer of funds. Our strength of correspondent banking relationship plays a pivotal role in augmenting the quality of our remittance services. We continue to offer unprecedented and most efficient services to our clients.

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Features Bank Alfalah limited, in collaboration with MoneyGram, offers remittance service to Pakistan. MoneyGram is person to person money transfer service that allows consumers to receive money in just a few minutes. Secure and reliable: An extensive network of quality agents, linked by computer, will transfer your money safely and ensure that it is handled with care and without delay. Thousands of people already use the MoneyGram service all over the world. It is trusted for its reliability and security. Convenient and fast: MoneyGram is available in over 154 countries and in more than 40,000 locations worldwide. With MoneyGram your money is transferred immediately and usually arrives at the receiving end within 10 minutes while other services can take days or weeks. There are no complicated procedures and you do not need a bank account or a credit card. Whats more, the receiver is handed the cash immediately. Free message service (for senders): There is also an added personal touch-you can receive a 10 word message from the sender with every transaction at no extra cost. Worldwide Services MoneyGram is available in over 154 countries and in more than 40,000 locations worldwide. With MoneyGram your money is transferred immediately and usually arrives at the receiving end within 10 minutes other services can take days or weeks. There are no complicated procedures and you do not need a bank account or a credit card. Whats more, the receiver is handed the cash immediately.

Islamic Banking

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Introduction The thrust for Islamic Banking is founded on the desire to submit to the Divine Instructions on all transactions, particularly those involving exchange of money for money. However, it would be quite unfair to limit Islamic Banking to elimination of Riba only. Riba is but one of the major undesirable elements of an economic transaction, the others being Gharar (uncertainty) and Qimar (speculation). While elimination of these objectionable aspects in a transaction is indeed a critical aim of Islamic banking system, it is by no means its ultimate objective. At the heart of Islamic Banking is a system of commercial transactions that not only provides Halal modes of commercial transactions by avoiding that which is obnoxious and objectionable, but also fosters ethical, fair and just practices. A key element of Islamic economics is distribution of equitable rewards to the different factors of production. Islamic economic system seeks system of Redistributive justice where concentration of wealth in a few hands is countered and flow of money into economy is fluent. Islamic Banking is, therefore, seen as a lynchpin to achieving the economic and social goals of the Islamic economic system. Riba. It has been argued in vain for long in some circles that the prohibition in Islam is that of excessive interest only. Or that it is the interest on consumptive loans that has been forbidden and as such loans extended for commercial purposes are entitled to an excess over the principal amount lent. Such tendentious arguing fails to give due understanding to verses 278 and 279 of Surah Al-Baqarah (quoted below).

O ye who believe! Be afraid of Allah and give up what remains (due to you) from Riba (usury) (from now onwards) if you are (really) believers! 2:278 And if you do not do it, take notice of war from Allah and His Messenger! But if you repent, you shall have your capital sums 2:279
However, this does not mean that Islam prohibits any gain on principal sums. In Islam, profit is the recognised reward for capital. When capital employed in permissible business yields profit that excess over capital becomes the rightful and just claim of the owner of the capital. As a corollary, the risk of loss also rests exclusively with the capital and no other factor of production is expected to incur it. Another important element of Islamic finance is that profit or reward can only be claimed in the instance where either risk of loss has been assumed or effort has been expended. Profit is therefore received by the provider of capital and wages/remuneration by labour/manager.

A depositor in an Islamic bank can therefore make earnings on his or her deposit in several ways. Through return on his capital when that capital is employed in a

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business venture; through sharing of profit when his capital is part of the capital that is employed in a partnership, and finally through rental earnings on an asset that has been partially financed by his capital.

Islamic financing: Asset-based financing

A key feature of Islamic banking is that unlike conventional banks which deal primarily in money and financial securities, Islamic financing is related to an asset that is a feature of the transaction, and quite often the principal feature itself. From this springs an important distinguishing feature of Islam wherein Islamic financing is always based on illiquid assets that have intrinsic value. Profit to Islamic financing is generated through bonafide sale of these assets. Conventional banking, on the other hand, is free of such limitations. It lends money and makes its earnings through this act of lending. Its earnings are unconcerned with the economic fate of its lending.

A Perspective:
The history of Islamic banking from its recorded inception is less than 40 years old. From a humble beginning in a small village in Egypt in the late 60s, it has spread to the four corners of the world. By normal standards in a time span that is less than half a century it could have hardly been expected to establish foothold in Muslim world, let alone make its presence felt in Muslim-minority countries. Yet such has been its phenomenal rate of growth that not only is it taking firm roots in its homestead, but is also attracting genuine interest among the standard bearers of conventional banking and in swathes of land where Muslims are a small minority only. Still there is much ground left to cover. In Pakistan, Islamic Banking is less than 3% of the Banking sector. Even in the Gulf States, where it has a larger footprint, in no single country is the volume of Islamic banking more than a third of the entire sector. Many blame Islamic Bankings small share against conventional banking to a smaller portfolio of products. A standard complaint against Islamic banks is that they do not have the same variety of financial instruments as found in conventional banking. Though valid to an extent, this popular jeremiad needs to be seen in the perspective of Islamic Bankings brief history against more than two centuries of conventional banking adopted in full force across the globe, its competition against an entrenched system of banking and the constraints within which it must operate.

MISSION STATEMENT: To practice Islamic banking in its desired spirit that unfolds its true economic potential resulting in prosperity to our customers and commercial rewards to our sponsors and our employees.

COMPANY INFORMATION:

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Great journeys begin with but a single step and mighty oaks are born out of humble seedlings. Bank Alfalah Islamic Banking Division (BAL-IBD) presently a division of Bank Alfalah Limited is gearing up to become a separate, full-fledged Islamic Banking entity. BAL-IBD offers to its customers a broad range of Islamic products under personal, consumer and corporate banking modes. The array of Islamic instruments at the disposal of BAL-IBD is equipped to provide efficient and satisfying solutions to our customers needs. Our Islamic products are Shariahcompliant carrying the seal of approval of the Centre of Islamic Economics, an institution vested with powers to attest authenticity and legitimacy of Islamic banking products in Pakistan. BAL-IBD has entered into a Shariah Consultancy agreement with the Centre of Islamic Economics, Karachi, which is a noted and well-known seat of learning for Shariah scholars and a prominent institution dealing in Shariah Advisory services. Besides assisting in advancement of the Divisions product portfolio, the Centre also stamps approval of the Divisions conduct of business following periodic audits. These audits are in addition to those carried out by the State Bank of Pakistan and the internal audits undertaken by the Division itself. PERFORMANCE: Bank Alfalahs Islamic Banking Division (BAL-IBD) started operations in 2003 and at its yearend reflected a modest capital base of Rs 100 million and deposits totaling Rs 113.7m. By following yearend, BAL-IBDs equity had risen more than 4 times to Rs 569m and the balance sheet footing had swelled to Rs 7,799 million. Deposit size had grown from less than Rs 114m to over Rs 7,229 million. The pace of frenetic, triple digit growth was continued over the next twelve months as equity more than doubled to Rs 1,278 million from Rs 569m. Assets also recorded a more than 100% growth, climbing to Rs 15,634 million from Rs 7,799 million. Deposits alone failed to double rising to Rs 12,476m from Rs 6,548 million yet managing a healthy 90% increase. Financial results as on December 31, 2007 as compared to December 2006 are total balance size of Bal-IBD was Rs. 26577 in 2007 million as compared to Rs. 23496 mullion in 2006 reflecting 13% growth. Investment of BAL_IBD was Rs. 3057 million in 2007 as compared to Rs. 0.833 million in 2006 showing 267% growth. Financing under the Islamic modes of financing was compared to Rs. 15055 million in2007 as compared to Rs. 12.823 million in 2006 showing 17% growth from the previous year. Deposits of BAL_IBD were Rs. 21014 million in 2007 as compared to Rs. 18957 million in 2006 showing 11% growth from previous year. Equity of BAL_IBD was Rs. 1471 million in 2007 as compared to Rs. 1390 million in 2006 showing 5.82% growth from previous year.

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Personal Accounts: Bank Alfalah Islamic Banking Division (BAL-IBD) offers Current, Savings and Term Deposit facilities to its customers seeking personal banking relationships with the following features: Facility Minimum Profit Zakat deductions balance Current deposit PKR 10,000/= Nil Not applicable Musharakah PKR 5,000/= Savings deposit Musharakah Term deposit PKR 50,000/= Tiered structure, 6 Applicable monthly pay-out Tiered structure, 6 Applicable monthly pay-out

All profits subject to 10% withholding tax On-line cash deposit facility at all branches of Bank Alfalah On-line transfer facility between all branches of BAL-IBD Remittances: Foreign and local remittances are both available. Foreign remittances are available in the following currencies: US dollars, Pound Sterling and Euro. Locker services: Locker services are offered at select branches. Lockers are available in three sizes small, medium and large. Annual charges for the lockers are as follows: Small Rs 1,000/- Medium Rs 2,000/- Large Rs 3,000/Lockers are available to account holders and carry an insurance value of Rs.250, 000/-

Murabaha Finance Types of Murabaha: o Local purchases: For purchase of locally available goods o Imported goods/commodities/assets

Mode of repayment: o Immediately in cash o On a mutually agreed future date o Spot Murabaha (Import) o Deferred Sale Murabaha

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Trade Finance Imports o Letter of Credits o Import Murabaha Finance o Full range of services related to imports e.g. Contract registration, Import bills for collection, Shipping Guarantees and Advance payments against imports. Exports o Export Murabaha Finance o SBP Islamic Export Finance Scheme o Other export related services e.g. Collection of export bills, Negotiation under Sight LCs, Advising/Confirmation/Transfer of Letter of Credits opened by other banks Bank Guarantees A host of Guarantee types are offered by BAL-IBD including performance, financial and payment guarantees. BAL-IBD also issues guarantees securing financing facilities to be availed from Islamic Banks and/or Conventional Banks under Islamic modes of financing.

Alfalah Musharaka Homes: With Alfalah Musharaka homes, you can participate with Bank Alfalah-Islamic Banking Division (BAL-IBD) in joint ownership of property where BAL-IBD invests a certain amount, usually up to 80% of the property value. Through monthly payments a composite of rent for use of property and purchase of BAL-IBDs Musharaka shares/units in the property to BAL-IBD you will be able to increase your stake in the property every month. The rental component will be readjusted every month to reflect your growing share of ownership in the property. Following purchase of all Musharaka units initially owned by BAL-IBD you shall become the sole owner of the house with a free Title to the property. Alfalah Car Ijarah A Shariah compliant car-leasing scheme with added features such as: No upfront registration charges No upfront insurance premium No rentals before delivery of car The facility applies to all locally-assembled new cars up to Rs 4 million. Used cars not older than three years can also be considered.

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Alfalah Hilal Card The International VISA Debit Card Carry your bank account in your wallet with Alfalah HilalCard Bank Alfalah Islamic Banking Division (IBD) offers Alfalah HilalCard to its customers for a conscious free spending in a modernized form of currency that provides you with a wide range of accessibility using VISAs worldwide network. Alfalah HilalCard can be utilized for all your financial needs around the world, round the clock, wherever VISA cards are accepted locally and Internationally, giving you a more secure and convenient mode of payment. The Alfalah HilalCard The Alfalah HilalCard is an International VISA Debit card which gives you an unlimited access to your current/savings (Musharaka) account with a simple swipe, at more than 1 million ATMs and 27 million outlets around the world. The reasons that make Alfalah HilalCard different from others: Hilal card is a buy now, pay now option. 4 No monthly repayment 4 No interest charges 4 Backed by a customer maintained current/savings (Musharaka) account 4 Your limit is your balance

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CHAPTER 2

THEORETICAL ASPECTS Management

5

Management Is A Process Of Planning, Leading, Organizing And Controlling The Financial, Informational, Technical And Physical Resources Of An Organization.
The process of management system of bank is an explained as following.

Planning6
Definition Planning is; Defining organizations goals and objectives Establishing an overall strategies for achieving those goals Developing a comprehensive set of plans to integrate and coordinate organizational work Types of Planning: Bank use both formal and informal types of planning. Informal: In informal planning, their planning is not written down, short term focus and specific to an organizational unit. Formal: In formal planning, their planning is written down, specific, long term focus and involves shared goals for the organization. Goals / Objectives: Financial strength and Profitability by making profitable advances Customer satisfaction by providing higher quality of services at an affordable cost Growth by expanding branch network and deposit base o Short-term Objectives: Profitability o Long-term Objectives: Profitability To optimize the use of resources

5 6

Amir Shahzad Operation Manager In Bank Philip kotlor principle of management

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Process of Planning:

Mission Strategies Plans Programs Policies Rules Budget

a)

Mission: Mission of Bank is to develop and deliver the most innovative products, manage customer experience, deliver quality service that contributes to brand strength, establishes a comprehensive advantage and enhances profitability, in this way providing value to the stakeholders of the bank. Strategies: Strategies of Bank are giving loans and accepting deposits. Plans: Plans of Bank are short-term & long-term Advances & Deposits. Programs: Programs of Bank are up to one year or more than one year advances, Fixed account, current account etc, debit card, credit card etc. Policies: Policies of Bank are profitability, by making profitable advances and customer satisfaction by providing best services at an affordable cost. Rules: Their rules are defined by upper level of management according to situation. g) Budget: Bank always met its budget with the very strong economic sources.

b) c) d)

e)

f)

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ORGANIZING
Organization is a deliberate arrangement of people to accomplish some specific purpose. Every banks, university is an organization, colleges, govt, departments are all organizations because they have three common characteristics. First, Each organization has a distinct purpose. This purpose is typically expressed in terms of a goal or set of goals that the organization hopes to accomplish. Second, Each organization is composed of people. One person working alone is not an organization and it takes people to perform the work thats necessary for the organization to achieve its goals. Third All organization develops some deliberate structure so that their members can do their work. Purposes of organizing Divide work to be done into specific jobs and departments in Bank. Assign tasks and responsibilities associated with individual jobs in Bank. Coordinates diverse organizational tasks in Bank. Establishes relationships among individuals, groups and departments in Bank. Allocates and deploys organizational resources in Bank.

Leadership
The process of influencing a group of people towards the achievement of preselected goals is called leadership. & The person who makes this process or who can Influence others / group of people and who has managerial authority is called a leader. The leader is needed by the every field & Organization, as well as the Bank Has its own leaders in the form of Highly qualified & skilled Managers, Which are working hardly to put the bank at the peak level As well as achieving the organizations pre-selected goals. Bank has formal way of leadership style. Traits of Leader The leaders of Bank have the following Traits & Skills in themselves. Decision making Risk taking & Risk bearing Stress taking & Stress bearing Communication Power Honesty Strong Vision Market forecasting skill Consistency Step forward

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Discipline

Type of Leader
Democratic leader The leaders, Bank have, are the types of Democratic. Because the major portion of bank is De-centralized, thats why the each leader has the complete power of decision making, but they are working Collaboratively in whole organization With each other. All leaders of bank are involved in decision making, Delegating their authorities to their higher qualified employees, encouraged the participation of their employees in work and gives them opportunities of coaching in well manners.

Managerial Grid:
A two-dimensional grid of two leadership behaviors, concern for people and concern for production / output, which resulted in five different leadership styles is called managerial grid.
Country Club Management

Team / Ideal Management

Leader member relation: The relationship between the Impoverished Task leaders of Bank and their Management Management followers is very strong and close relationship. Because the Concern for Output every leader has the full trust on his followers and he is confident that they all will do every work in better way and give the best performance as well for the achievement of the organizations objectives. Task structure: Every leader is giving the formal / formalized job or task to his employees, For getting the best results. Thats why the task structure is also strong in the Bank. Position power: All kinds of powers, either Reward power, Creative power totally in the hand of Leader(s) / Executive(s) / Manager(s) of the all departments of the whole organization of Bank. Mostly Leaders / Executives / Managers, like General-Manager, Managing-Director have more than one or two powers which they are using for better control over the employees As well as situations in whole organization.

Concern for People

Middle of Road Management

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Team leader: In Banks, mostly every Executive is working together with employees under him, and they all are working collaboratively with each other in all the departments of whole organization, for achieving their and As well as organizational objectives or pre-selected goals. They all are working in the form of A-Team. Thats why those leaders are also known as Team leader. Types of leader Transformational - Transactional leader: Some of the leaders of Bank are giving the guideline and directions of established goals to their followers by clarifying the role and task requirements for best possible result. Those leaders are not provides the individualized considerations to their followers for achieving the objectives. Thats why those leaders of the bank are Transactional Leaders But not Transformational leaders. Visionary - Charismatic leader: Some of the leaders of Bank are self-confident and their attractive personality have the ability to create and articulate a realistic and also have attractive vision of the future, from through they can improves their control over the present situation, and their actions are influences and invites their followers to behave and do the task. In certain way. Thats why those leaders are known as Visionary & Charismatic leaders.

CONTROL
Controlling is the process of monitoring activities to ensure that they are being accomplished as planned and of correcting any significant deviation. Importance of Control: Control is very much important because it is the final stage in the management functions. It is the only way managers know whether organizational goals are being met And, it not, the reasons why. The value of control function lies in its relation to planning, empowering employees, and protecting the workplace. In bank the importance of control can not be neglected because its a service Base organization and deals with finance. Every employee in this organization has Direct or indirect interaction with financial activities. And finance playing the key role in the progress of the bank. Thats why there is significance importance of a good control over all the activities in the bank for progressing on the right path.

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Types of Control: Following are three types of controls:Feed forward Control: In feed forward control problem is identified and resolved before accruing. Concurrent Control: In Concurrent Control problem is identified and resolved while that is accruing. Feed Back Control: In Feed Back Control problem is identified and resolved after accruing. In bank all above types of controls are applied. Because controlling is a continuous process and some times problem is identified and solved before. Accruing, some times managers come to know about the problem while that is accruing and some times after accruing they come to know about the problem and they resolve that problem. Divisions in bank for Controlling: Following are two divisions in Al-Falah bank for controlling purposes: Credit Monitoring Division Audit & Inspection Division Credit Monitoring Division: Credit Monitoring Division Monitor all the activities related to following Areas: Credit Cards Hilal Card(Debit Cards) Auto Loans Home Loans RTC Money Gram Agree Finance Audit & Inspection Division: This devising in bank conduct the internal audit at and inspections of all the activities in the bank to insure the accuracy of work and the performance of the bank. Control at Supervisor and Managerial Level: At lower level in the bank supervisors and managers ensure the proper handling of the activities and they assign the targets to their subordinates to achieve in a given time and at those bases, they asses the performance of the employees. Process of Control: A three-step process including measuring actual performance, comparing actual performance against a standard, and taking managerial action to correct deviations or inadequate standards.

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Diagram of control process is as following:-

Step 1:Measuring Actual Performance

Step 3:Taking Managerial Action

Step 2:- Comparing Actual Performance with Standards

Measuring Actual Performance: To determine what actual performance is managers must acquire the information about the actual performance of the workers who are working in the organization and over all performance of the organization. In bank managers get prepared statistical and financial reports about the employees and progress of the bank to see that where organization is going. In statistical reports there is all mentioned about the progress of employees that which employee have achieve how much targets at the end of the month which were given by their bosses. There are two ways of measuring performances in the bank. Qualitative Quantitative In measurement of performance employees of the organization are being measure qualitatively 40% and quantitatively 60%. In qualitative the behavior of the employees in the organization is measured. e.g.:- absentees, respect of seniors, respect of rules and regulations, loyalty with the organization, etc. In the quantitative measures there included the statistical achievements of the employees.

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Comparing Actual Performance with Standards: The comparing performance determines the degree of variation between actual performance and the standard performance. Standards; In bank following standards are set to compare actual performance:General Standards: Compliance with law Reasonable assurance and safeguards Integrity, competence, and positive attitude Specific Standards: Internal control systems and all transactions and significant events must be clearly documented, and the documentation readily available for examination. Transactions and other significant events are to be promptly recorded and properly classified. Transactions and other significant events are to be authorized and executed only by authorized persons. Key duties and responsibilities in authorizing, processing, recording, and reviewing transactions should be separate among individuals Qualified and continued supervision is to be provided to ensure that internal control objectives are achieved. Managers are to: Evaluate promptly findings and recommendations reported by reviewers. Determine proper actions in response to findings and recommendations, and complete, within established time frames, all actions that correct or otherwise resolve the matters brought to management's attention. Taking Corrective Actions: Corrective action in the organization corrects problems at once to get performance back on track. Management of bank reviews the results from the comparison of the actual performance with the standards and then takes the corrective actions to solve that particular problem to ensure the achievement of targets in the organization. Revise the standard: Some times it happens in the bank that variance was a result of an unrealistic standards, So management take corrective action by revising the standards, So that variance could be eliminated and expected results could be meet. Budget Control:

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Budget is a numerical plan for allocating resources to specific activities in an organization. Budgeting is a very good tool to allocate resources on the planned activities. And control on that budget control is very much important for achieving efficient results. bank has good control over the budget and always meet the budget at the end of the year.

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ORGANIZATIONAL STRUCTURE President (CEO) Senior Executive Vice President

Executive Vice President

Senior Vice President Vice President

Assistant Vice President OFFICERS GRADE I,II,III

Clerical Staff & Non Clerical Staff Bank Management chart: Management performs different functions in Bank. C.E.O (Chief executive officer) controls the whole management affairs in Bank. Executive Incharge (E.I) establishes the environment of strategic planning and aware of to hold the global market. Executive Incharge (E.I) manages the HRM and assigns work to individual for betterment. Executive Incharge (E.I) divides the credit in different ways and allocation to safer place. Executive Incharge (E.I) controls the administration activities and carries on the establishment process for the betterment of Bank. Executive Incharge (E.I) investigates the business development reports that our business gets profit or loss. Executive Incharge (E.I) analysis the audit and inspection division for efficient work. Executive Incharge (E.I) His work is to divide the cards in best manner, just like debit cards, credit cards, ATMs cards and Hilal cards in Bank. Executive Incharge (E.I) He did his work for international and treasury division in Bank. Executive Incharge (E.I) divided the I.T (information technology). Executive Incharge (E.I) He monitoring the credit division. Executive Incharge (E.I) investigates the legal affairs.

 Executive Incharge (E.I) analysis the system and operations in Bank.

Departments In Bank
Finance Department:
Finance is responsible in terms of money in all departments or monetary policies. It is concern with more inflow of the cash that outflow of the cash in terms of Bank. Structured Finance: Established in 1998 in order to provide innovative investment banking services to our valued clients. A team of hand picked professionals, dedicated to syndicated loans and structured products. The teams expertise is well known in the marketplace with its capability to assist public & private sector entities, major financial institutions, multinational corporations, domestic & international institutional investors in innovative financing including underwriting & private placements. The scope of SFUs activities also encompasses advisory assignments, such as privatization, Mergers & Acquisitions (Mans), domestic listings, IPOs and restructuring. During the past few years, SFU has been successful in sourcing and participating in a number of prestigious transactions involving large amounts. Some of the value added services offered by SFU include the following: Loan syndication Public floatation of Term Finance Certificates (TFCs) and equity Private placement of Term Finance Certificates (TFCs) and equity underwriting Guarantee syndications Financial restructuring Mergers & Acquisitions (M&As) Fostering joint ventures Privatization Sale side and buyers side advisory Structuring new financial instruments In the future, SFU is envisaged to supplement the enhanced profile and profitability of Bank through its value added services, through both asset building and income generating aspects.

Marketing Department:
Marketing department performs different functions in terms of Bank. Sales: In Bank sales get only in the light of the customer. Need Identification:

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First of all, you identify your customer and how is your dealing with that person. Positioning: In Bank, what is your position to deal that person? Targeting: What is your long term goal and short term goal according to Bank? Promotion: It is concerned with all types of advertisement. It is the purposes to get more customers in terms of promotion according to Bank.

IT Department:
ATMs. Bank Al-Falah through its commitment to provide superior and improved services to its valued customers, has unveiled a nationwide network of ATMs. For your convenience, you now have access to instantaneous cash availability, 24 hours a day, 7 days a week. Our ATM network is geared up to exploit the latest technology, and is equipped to meet the highest standards of security and efficiency. With your new Hilal-Card you can now: Withdraw Cash Use our convenient, user-friendly fast cash option Make a Balance Inquiry. Get an instant printout of your account balances Get a printout of your last transactions (Mini-statement) on the spot. Change your PIN (Personal Identification Number). Bank Al-Falah is pleased to introduce 55 state of the art ATMs, deployed at the most convenient and accessible locations. Bank Al-Falah is a founder member of the 1Link Switch, thus making a country wide network of ATMs available. Online Banking. Bank now offers the facility of on-line banking to its customers through its country wide network of branches. Customers can use the ATMs or the banking counters of any branch for day-to-day banking needs, irrespective of branch where they maintain their accounts. For Corporate customers centralized Cash Management facility is also offered through on-line banking. Phone Banking: "Al-Falah Phone Banking is available to all customers on a countrywide basis. Customers can dial 111-225-111 (without any city code/prefix) from their respective cities i.e. 21 cities where Bank is present, and get prompt services from the Centralized Phone Banking Services.

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Customers enjoy 24x7 Round the Clock Phone Banking Services. Bank is the first bank in Pakistan to offer Centralized UAN connectivity from 21 cities to its Call Centre with Hunting & ACD facilities.

Human Resource Management (HRM):

HRM means to put the right man, for the right job, at the right time and at the right place, so HRM deals with the fair job description as a whole in Bank. Road-Map of HRM: The road-map through which HRM helps the managers to organize the activities of man-power in Bank. How HRM is important: A banking organization HRM practices have been found to have a significant impact on organizational performance. HRM process: Activities necessary for staffing the organization and sustaining high employee performance in Bank. HRM training and development: Bank HR management believes in developing the potential of the Banks employees to the fullest extent. Training & Development Centre of the Bank is housed in custom-built, state of the art facility on the 4th floor of the Head Office building at Karachi. The centre is responsible for providing multi-level high quality training programs to all staff members in the following areas: Consumer banking operations Credit marketing & credit proposals Credit administration/documentation Trade finance operations Marketing & selling skills Customer service skills Performance appraisal skills Time management & personal effectiveness It is obligatory for each staff member of the bank to attend at least one training program. Wherever the Training Department is unable to provide focused training for certain groups of staff, reputable external training providers are invited to fill the gap. Human Resource Policies of Bank Alfalah Initiation of Staff Hiring: All branches/units of Bank should systematically forecast their future staffing requirements for time of induction of high quality staff. These requirements are intimated to HRD through Area Managers. Staff hiring may be done in Batches, in small groups or individually.

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Hiring of Batches: Batches are hired of fresh officers, given training, and then placed at branches. These batches are 1: Management Trainee Officers 2: Operational Officers 3: Cash Officers 4: Business Development Officers Hiring In Small Groups: It may be done according to planned expansions of existing branches. Individual hiring: Individual hiring is done from time to time when a branch or unit has need to induct additional staff. Minimum entry requirements: Graduation from recognized university home or abroad Recruitment of close relatives: It can be done but the candidate must meet the eligibility criteria. Selection Authority: It can't be disclosed Selection Test: People getting more than 50% marks in tests go of the next step. Psychometric Test Every candidate must have to pass psychometric test. Selection Interview: It is done by branch manger, area manager, and head product dept. as required. Panel Interview: Candidates of higher range are interviewed by panels of senior officials. Medical Examination of New Joiners: If the bank deems fit, the candidate will undergo a medical examination before joining the bank. Issue of Offer /Appointment Letter:

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Offer letter will be issued by HRD of Bank to be signed by signatory.

Probationary Period: For entrants this period is determined but it cant be disclosed. Placement of Candidates: As far as possible, attempt is to be made to select candidates belonging to the area where they need to be posted. However to the requirements of the bank services are transferable.

INDUCTION TRAINING AND DEVELOPMENT

In Service Training: Training need: objective is to keep the e employees abreast of latest professional knowledge and skills. Annual training plan: Minimum training for all: Two days of calendar year. Induction Training: Full day induction session for new joiners. Batch Training: As per requirements, a comprehensive training for new batches, they may be asked to undergo on the job training by way of rotation. External Training: Whenever deemed necessary external training consultants may be invited to conduct training programmed. SALARY, ALLOWANCES AND BENEFITS FOR PAKISTAN BASED STAFF Staff monthly salary is disbursed before the end of each month. Salary and allowances of each employee is a confidential matter. Advance against Salary; Employee in need of funds for an emergency may be allowed advance against salary for the current month to be adjusted in full on disbursement of salary it is only in case of emergency. Accommodation: As the discretion of bank's management, furnished or unfurnished accommodation up to reasonable value may be provided to senior officers. Other staff members when transferred out of city given additional allowances.

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Furniture Facility: It is given to confirmed range of officers which can't be disclosed, but they should have minimum two years of experience. Fuel Allowance: At the discretion of the management, officers posted in business units like BDO, car finance, home finance etc. are given fuel up to certain liters. Mobile Phone Facility: Officers having their functional requirements are given mobile phone facility up to certain limit subject to their own mobile phone. Title Allowance: Branch managers, product heads, asset executive in charge, area managers are given title allowances till such time they hold these positions. Bank Car Facility: This facility is given to some executives who can't be disclosed. Profit Bonus/Special Cash Prize: Profit bonus will be paid to employees based on respective bonus circular and special cash may be paid on outstanding performance. Provident Fund: All permanent e employees are eligible for membership of this fund. Contribution is 8.33% of monthly salary. Cash Awards on Passing Institute of Bankers Diploma Exams; There (3) stages of IBP diploma exams and for each stage there rewards based on completing in 21st attempt, 2nd attempt and 3rd attempt. Staff Insurance: The bank has arranged insurance for its full time staff. These are subject to amendment from time to time. Hospitalization Insurance Coverage for Employees and Their Dependent Parents, Spouse and Children: In case working wife not covered by her employer then she will be eligible for applying in this scheme.

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Group Mortgage Insurance Coverage: Lives of bank employees are covered up to the out standing balance of house finance liability in the name of the concerned employee with the bank would be taken over by the insurance company and no liability will be borne by the family of the deceased. Group Mortgage Insurance Coverage for Conveyance Finance Lives of clerical and non clerical staff covered up to the conveyance finance liability and would be taken over by the insurance company and no liability will be borne by the family of the deceased. Life Insurance Coverage: All employees of the bank who are on bank's pay roll whether in regular or contractual up to the age of 65 years will be covered under group life insurance. The category and amount can't be disclosed. Follow Up Treatments: Regular employees, their spouse, children suffering from serious illness will be entitled to imbursements of cost of medicine but if 1: Treatment prolongs for six months or more. 2: If treatment expense is up to 10% of basic monthly salary. End Service Benefits: 1: Provident fund 2: Gratuity Payment 3: Encashment of Un-availed Privileged Leave Income Tax Liability: The employees are personally responsible for their preparation and submission of personal income tax any other personal taxation returns and reports. Other Regulatory Requirements: The HRD will ensure deduction of employees Old Age Benefit contributions. Social Security Contributions, education as per the rules and provisions of relevant statutes. HRM Trade Department: Inspired by a challenging spirit and an unyielding desire to create a sound and reliable networking of correspondent relationships, the bank has placed great emphasis towards it growth. Accomplishing something for the first time requires a special focus. It demands foreseeing possibilities. In our endeavor, to do so, we successfully surmounted problems and difficulties arising out of issues relating to weak economic conditions of the economy and a continuous deteriorating status of country risk. The incertitude and skepticism of the international banking community towards financial institutions from emerging markets remained intact. Our persistence during the past four years allowed us to make significant inroads into the arena of

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correspondent banking. Large international banks, after critically evaluating us, agreed to enter into relationship. During 2002 we added 81 banks to our network of correspondents, bringing the total number over 170. Of these relationships, there are now several banks that rank amongst, the top financial institutions in the world. Our geographical coverage now extends to over 100 countries, which is adequately compatible with our trade flows. Our correspondents, during the year extended us unqualified support, which enabled us to undertake a healthy quantum of foreign trade business. There are many challenges ahead for the bank, in the coming year, our bank will not only continue to review its efforts on existing correspondents to make the relationship more beneficial, but will also add more correspondents to establish a comprehensive international networking to facilitate our customers transaction as well as the Banks proprietary needs. We have provided against the list of correspondents their world and country ranking. These ranking have been taken from The Bankers Almanac July 2001 issue. We would like to emphasize that correspondent arrangements do not necessarily imply the existence of account relationship. We are in the process of rationalizing our current nostro account relationships. We shall continue to open new accounts in various currencies based on our trade flows and business requirements.

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CHAPTER 3

ISLAMIC BANKING
Establishment of Alfalah Islamic Banking
Islamic banking is a compliment to the farsightedness of the banks sponsors & managements. In year 2002 there were only two Islamic banks operating in Pakistan. Alfalah Islamic banking was conceptualized by management in the year 2002 and the Islamic banking division was formally launched in June 2003. After spending six months on the drawing board operations were launched with the opening of five Islamic banking branches in December 2003.bank initiative in Islamic banking was the largest ever taken by any conventional bank in Pakistan. One can vividly perceive the transition in the global banking sector, from core/retail banking, to the complex and detailed role of financing, which clearly depicts sophistication and organization of international banking community. With the passage of time, the banks have undoubtedly become multifunctional bodies, performing various roles and providing their clients with numerous desired products. Speaking of the international banking community, Islamic banking is undoubtedly a part of it. To keep up with this modernized community and to compete with their fellow-competitors, Islamic banking has introduced and refined some alternative Islamic financing products, to the ones available in the Conventional markets, in order to cater for the Muslim community around the globe. Having said that, it is open to anyone, whether a Muslim or a non-Muslim, to take advantage of these products, as long as they comply with the requirements and precepts of Islamic Shariah. At this instance, it helps to add that the prohibition of interest in Islam does not imply that the capital is not to be rewarded, nor that risk is not being priced. The Islamic system has both fixed and variable return modes to price the capital and add risk premia in relation to the degree of risk involved. Islamic banks provide financing using two methods. The first is based on profit-sharing and the second one deal with modes, which rely on fixed return (mark up) and often conclude in creating indebtedness of the party seeking finance.

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Difference between Conventional and Islamic Banking Conventional Banking Conventional bank prices money. Islamic Banking banking prices goods

Islamic services

and

Depositors get a fix rate regardless of the Profit is shred with the depositor, higher banks profitability, thus insulating them the banks profit, higher the depositors from the banks true performance. income. Deals in money or paper. Borrows fund form the depositors paying interest on the liability side of its balance sheet. Deals in assets Partnership (Mudarabah) or profit and loss sharing arrangement between the bank and the depositors.

Between the depositors and the bank Profit and loss sharing (Musharaka) or there is an iron wall. trade based financing arrangement between the bank and its investment client. The interest or the return predetermined or fixed in advance. Transactions are financial asset based. is Islamic bank entitles the depositors to be informed what the bank does with the money Transactions are real asset based.

Islamic Modes of Financing

Debt creating modes A. Murabaha B. Salam C. Istesna D. Ijara Partnership based modes E. Musharaka F. Mudarabah

Murabaha
In this particular kind of sale, the seller clearly mentions the Cost of the sold commodity, and then sells it to the buyer by keeping a profit margin. Thus, Murabaha should not be seen as a loan given on interest, it is rather a sale of a commodity for cash/deferred price.

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As regards Bai Murabaha, the bank purchases a commodity, on a clients behalf, and then resells it to the latter, on the basis of plus-profit. Under this kind of agreement, the bank discloses its cost and profit margins to the client. Thus, unlike Conventional banks (which advance money to a borrower), the bank will buy the goods from a third party and sell it onwards to a customer for a pre-agreed price, thus abstaining from interest. The growing use and vitality of Murabaha agreement is proven by the fact that in Islamic banks world over, 66% of all investment transactions are through Murabaha. It is argued by critics of Islamic banking that Murabaha agreements are in reality interest-based contracts, under the garb of a notional sale and buy back transaction, profit being synonymous to interest in this case. Islamic scholars have reverted to this argument by stressing that a true Murabaha financing structure is quite different from an overdraft provided by Conventional banks and the former offers various benefits to the bank and its customers, namely that depositors have a share in the banks profits. Furthermore, the basic difference is the Aqd (contract), which specifies the Islamic conditions, as against the interest element in Conventional banking transactions. Basic Rules for a Murabaha transaction: 1. The subject of sale must be in existence at the time of the sale. 2. The seller must have the ownership of the commodity in question. 3. The subject of sale must be in physical or constructive possession of the seller while he is selling it. 4. The sale must be instant and absolute; no provisions for contingencies should be made part of the contract. 5. The goods/commodity to be sold must reflect a value and must be specified to the buyer, leaving no room for ambiguities or confusion as between the parties. 6. The sale must be unconditional and the price of the commodity should be certain.

Salam
This mode of financing can be used by modern banks and financial institutions, especially in order to finance the agricultural sector. In Salam, the seller undertakes to supply specific goods to the buyer at a future date, in exchange of an advanced price fully paid at the spot. The payment is made in cash, and the supply of purchased goods is deferred. Purpose of Salam Contracts: The purpose is to meet the need of farmers, who operate on a small scale, and thus need the finance for farming purposes, so that they can carry out their day-to-day activities. Moreover, it is designed to assist the traders, in their export/import transactions. Salam proves beneficial to the seller, as he receives the price in advance, and at the same time, advantageous to the buyer, as the price under the Salam arrangement is normally lower than the price in spot sales.

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Istisna
Istisna is a sale transaction whereby a commodity is transacted before it comes into existence. It is an order for a manufacturer to manufacture a certain kind of commodity, to be used by the purchaser. The manufacturer uses his own material to manufacture the required goods. The price must be fixed with consent of all the parties involved. All other vital specifications of the commodity must also be fully settled. Subject to the acknowledgment or receipt of prior notice, either party can cancel the contract before the manufacturing party has begun the work. The time of delivery need not be fixed, however a time limit may be imposed as between the parties

Ijarah
In an Islamic leasing (Ijarah), the owner of the asset, while retaining the corpus of the asset, transfers its usufruct to another person for an agreed period, at an agreed consideration. All the liabilities arising from the ownership must be endured by the lessor. The period of lease must be determined in clear terms and the asset must be clearly identified as between the parties Subject leased should be: Valuable Identified Quantified Ijarah Products Alfalah car Ijara, analogous to the English term 'leasing, is based on the Ijarah wa Iqtina concept which means the sale of the asset to the lessee after the Ijarah has matured. Under this scheme, Alfalah car Ijarah will be the owner of the asset, and the customer (lessee) will be given the asset to use for a certain period of time in return for monthly rental payments. Alfalah car Ijara will give a separate unilateral undertaking that it will offer to sell the asset to the customer (lessee) at the maturity of the Ijarah agreement at a price that may be equal to the security deposit amount, hence the term Wa Iqtina. Parties in Ijarah Lessee - Banks Customer Lesser - Bank Types of Ijarah Car Ijarah Equipment Ijarah

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Car Ijarah Department

Alfalah car Ijarah concept Under the Alfalah Ijara scheme, you can get a car of your choice against monthly rentals payable to Alfalah Islamic Banking. At the end of the Ijara Agreement, customer will be given a choice whether to return the car to bank and receive back the security deposit paid by customer at the beginning or to purchase it at a price as low as the security deposit. Difference between Ijarah and Conventional Lease The rental rate decided at the time of the agreement cannot fluctuate expenses under Ijarah are as follows 1. Lessor- expenses relating to the corpus of the asset i.e. insurance, accidental repairs etc. will be borne by the lessor, a. Lessee- actual operating/overhead Expenses 2. Ijarah rental can only be charged after possession of asset to the lessee. 3. All risk and rewards are borne by the lessor 4. The lessee is liable to compensate the lessor for every harm to the leasee asset caused by any misuse or negligence. 5. The leased asset shall remain in the risk of the lessor throughout the lease period. 6. The rental must be determined at the time of contract for the whole period of lease. 7. The lease period shall commence from the date on which the leased asset has been delivered to the lessee Eligibility: Applicant is a Pakistani national. The income of the customer should be three times of the rental. He is not less than 22 years & shall not be 60 (for salaried persons) & 65 (for businessmen), before maturity of the Ijarah facility. He is a Businessman / self-employed with a minimum experience of 2 years in the same business / profession. Procedure: The very first thing the client has to fill an application requesting the bank for financing of a car. Along with the application the client is suppose to attach some documents which are Copy of N.I.C Copy of Utility Bill(s)

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Bank Statement for last six months (from the date of application) Signature Verification Form Proof of Proprietorship/Partnership

Step One: The application form along with the personal data also contains the home address, the address of the place of business (if the client is a business man), and two references. Moreover in the application form the client has to mention how much down payment he is going to make. Considering the fact that after he pays his down payment the amount to be financed by the bank does not go belowRs.200, 000 Step Two: Verification Process by the Verification Officers This step embodies immense significance as the results of this very step reveal whether the client is genuine and trustworthy and whether all the details provided by him are true or not. Verifications officers first visit the house of the client and certify that the client has provided the bank with the correct residential address. Then they inquire about the conduct, character, behavior, occupation, and other activities of the client from at least two of his/her neighbors. After being satisfied the verification officers visit the place of business (if the client is a business man). There they first make sure that the said business actually exists and the factory/organization/company actually is situated at the said place. Then the verification officers either visit or call any one or both of the references given by the client in the application form. When all aspects of the verification process are complete then what the verification officers do is that they prepare four reports namely Business office verification report Residence verification report Reference verification report Telephone verification report These reports are than filed in the proposal file and these constitute an integral part of the proposal. Step Three: Preparation of the Proposal File Once the customers credibility is verified then the file is prepared for acceptance/approval by the branch Credit Committee and subsequently by the Head Office id required. This preparation calls for attachment of certain documents apart from those that were provided by the client along with the application. These documents are Borrowers Basic Fact Sheet The Proposal Sheet A Check List Credit Information Bureau Report Verification Reports

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Step Four: Execution of Legal Documents After the approval stage the client is called to the branch and the process of legal documentation is under taken. For this purpose the operations personnel gets the signatures of the client on all the legal documents including the offer letter which is of prime importance. The list of legal documents the client has to sign is as follows; The account opening form as a result of which the client (if he wants a current or PLS account with Bank) could give the post-dated cheques for payment of installments The letter in which the client acknowledges the Finance Limit that has been provided to him by the bank The agreement for financing the motor vehicle on Ijarah Basis The schedule to Ijarah agreement Letter of hypothecation of motor vehicle Irrecoverable power of attorney Letter of authorization to take possession of motor vehicle Bill of exchange without recourse to the drawer Delivery acceptance form Transfer letter Promissory note Letter of hypothecation of movables Step Five: Receipt of Down Payment and Post Dated Cheques When all the legal documents are properly signed then the customer is asked that his share of financing (the down payment) is required. The customer deposits this amount and also gives the bank post dated cheques, duly signed. These cheques are of the amount of installment due to the customer on monthly basis. Step Six: Getting the Car Insured Now come the step to insure the car for which the financing is done. The bank has to get the car insured, as it is a part of the car financing agreement that the car has to be fully insured Step Seven: Establishment of Delivery Order and Demand Draft (In The Name Of the Manufacturer) When bank has got physical possession of the insurance policy the car dealer is suppose to send the bank a quotation of the car being sold, on his official letter head. On the basis of that quotation bank makes the delivery order, which contains the instructions for the dealer that now he, should hand over that car to the customer. The bank will not pay to the dealer the bank would make a Demand Draft in the name of the manufacturer and hand it over to the dealer and the dealer would give it to the manufacturer. Step Eight: Getting the Vehicle Registered When the manufacturer gets the payment against the demand draft then he sends the Invoice to the bank. This invoice contains all the details of the vehicle namely; price, customer name, bank name, color of the vehicle, mode of payment etc. If the car is

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completely ready for the delivery this invoice will also contain the engine number and the chassis number, but if the car is not ready for delivery i.e. it is in the booking process than the invoice will not contain these two items. The bank gets the vehicle registered with the help of its private agents on the basis of this invoice. Step Nine: Receipt of Monthly Installment Now when the car is with the customer bank presents the pre-signed post dated cheques on monthly basis, and if a Cheque bounces the recovery staff has to get the money from the customer. If three cheques of a particular client bounce on a trot and the client also does not bother to make payment through cash or via issuance of Cheque of another account then Bank Alfalah, as per the signed legal documents has the right to repossess the car, which it does. Other Documentation Unilateral undertaking by the Bank to offer to sell the asset at maturity. Unilateral undertaking by the lessee to purchase the asset at the Pre-Agreed Purchase Price on termination of Ijara before Maturity. Determination of Rental The rental must be determined at the time of contract for the whole period of lease. The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of Shariah. The lessor cannot increase the rent unilaterally, and any agreement to this effect is void. The lease period shall commence from the date on which the leased asset has been delivered to the lessee. Rental will be charged when the Leased asset is handed over to the lessee.

A Mode of Financing
1. The commencement of lease Unlike the contract of sale, the agreement of Ijarah can be effected for a future date. 2. Rent should be charged after the delivery Of the leased asset to the lessee and not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full price, the lessee should not be liable for the rent of the period of delay. 3. Different relations of the parties There are two separate relations between the institution and the client: one of an agent and the other of a lessee.

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4. Expenses consequent to ownership to the lessor As the lessor is the owner of the asset, he is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor for example expenses of freight and customs duty etc. 5. Lessee as Ameen The lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to any normally occurring wear and tear. 6. Variable Rentals in Long Term Leases In this case the lessor has two options: A lease contract can have a condition that the rent shall be increased according to a specified proportion (e.g. 5%) after a specified period (like one year). He can contract lease for a shorter period after which the parties can renew the lease at new terms and by mutual consent 7. Penalty for late payment of Rent The lessor cannot charge an additional amount in case the lessee delays payment of the rent. Penalty of late payment is given to charity by lessee. 8. Termination of Lease If the lessee contravenes any term of the agreement, the lessor has a right to terminate the lease contract unilaterally. If not then it can be terminated through mutual consent only. However, in such a case he cannot charge rentals of remaining period. Further more, the destruction of the asset also terminates the lease. In the event of lessees death the lease will also be terminated 9. Insurance of the assets If the leased property is insured under the Islamic mode of Takaful, it should be at the expense of the lessor and not at the expense of the lessee 10. The residual value of the leased asset Through a mutual agreement of Lease, after the expiry of the lease period, the corpus of the leased asset cannot be transferred to the lessee, otherwise it becomes hire purchase.

Ijarah WA Iqtina
It is permissible in Islamic Shariah that instead of there being a sale, that the lessor signs a separate agreement, making a promise to gift the leased asset to the lessee at the end of the lease period, on condition that the lessee makes all the payments due for his/her rent. The latter arrangement is known as Ijarah WA Iqtina. It has been affirmed by a large number of contemporary Islamic scholars and is widely practiced

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by the Islamic banks and financial institutions. Although, the validity of this arrangement is subject to two conditions. They are: The agreement of Ijarah itself should not be subjected to signing of sale or gift. The promise should be made in a separate document. The promise must be unilateral and binding on the promisor only.

Mudarabah
This is also a kind of partnership, whereby one partner provides finance to the other for investing in a commercial enterprise. The investment is provided by the first partner called the Rab-ul-Maal, while the entire responsibility for the management and work falls upon the other partner, who is called the Mudarib. The profits generated, are shared in a predetermined ratio. There are two kinds of Mudarabah Restricted Unrestricted. Restricted Mudarabah Rab-ul-Maal may specify a particular business for the Mudarib, in which case he shall invest the money in that specified business only. This is known as Al-Mudarabah-alMuqayyadah Unrestricted Mudarabah But if he leaves it open for the Mudarib to undertake whatever business he wishes, the Mudarib should be authorised to invest the money in any business he wishes. This type of Mudarabah is called Al-Mudarabah-al-Mutlaqh Roles of Mudarib: He is an Ameen (trustee), who is responsible to look after the investment, with an exception of natural calamities. He is a Wakeel (agent), as he makes the purchases from the funds provided. He is also a Shareek (partner), thus sharing the profits with Rab-ul-Maal. He can also possibly be a Zamin (liable), and thus will have to compensate for any loss suffered during the course of Mudarabah, due to any erroneous act on his part.

Musharakah
The literal meaning of the Arabic word Musharakah is sharing, or Shirkah, which means being a partner. There are several kinds of partnership, and they all come under the heading of Shirkah. Musharakah is perceived as an ideal alternative for the interest based financing with far reaching effects on both production and distribution. Musharakah is a mutual contract between the parties, and thus all the Mandatory ingredients of a valid contract must be present. Furthermore, the capital in Musharakah agreement should be quantified, specified, but not necessarily merged or in liquid form. If all the partners agree to work for the joint venture, each one of them shall be treated as the agent of the other, in all matters concerning the business.

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Any act carried out by a single partner, in the normal course of business, shall be deemed as authorised by all other partners. All scholars are unanimous on the principle of loss sharing in Shariah, which is based on the saying of SYEDNA ALI IBN TALIB (ALLEY E SALAM), which is as follows:

Loss Is Distributed Exactly According To The Ratio Of Investment And The Profit Is Divided According To The Agreement Of The Partners.
Alfalah Home Musharakah In Alfalah Musharaka homes applicant enter into a joint ownership agreement with the bank for purchase/construction, renovation and /or replacement of your outstanding housing loans to own a Musharaka property, where the bank provides a certain amount of financing up to 80% of value of property and sign Musharaka agreement. Applicant also signs monthly payment agreement, to pay rentals for the use. The purchase of the Musharaka unit by applicant shall result in transfer of title of Musharaka property and one becomes the sole owner of the property. Diminishing Musharaka Concept Another form of Musharakah, which has developed in the recent years, is known as Diminishing Musharakah. It involves the participation of a financier and his client, either in the joint ownership of a property/equipment, or in a joint commercial enterprise. The financiers share is further divided into several units, and it is intended that the client will purchase the financiers units of the share, one at a time, periodically, increasing his own share, until all the units of the financier are purchased by him, so as to make him the sole owner of the property or the commercial enterprise, whichever be the case. Bank purchases property through Joint Ownership Agreement and then transferring the Title of ownership to the customer through Purchase of Musharaka Units. This Unique treatment makes it differ from Conventional Banks home loan. Differences Islamic Bank and Conventional Bank (Musharakah) Conventional Bank Islamic Bank As regards interest-based financing, a fixed rate of return on a loan, advanced by the financier is predetermined, irrespective of the profit earned or loss suffered by the debtor. The financier cannot suffer loss in an interest-based financing Charges interest on money (Loan) Financing / Markup Agreement Conventional home loan Musharakah agreement does not envisage a fixed rate of return; it is in fact based on the actual profit earned by the joint venture. The financier under a Musharaka agreement can, possibly suffer a loss, if the joint venture fails. Rental for use of banks share (Portion) Shariah Compliant Agreements Diminishing Musharaka

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No Ownership Eligibility

Joint ownership in property

Applicant is a Pakistani national. Applicants Age is between 25-65 years. If applicant is in continuous employment for 2 years or more. Criteria to apply Rs. 240,000/- Gross Annual Income (Installment not to exceed 35 % of the Net Take Home Income)

Products Alfalah Buyer (Purchase of House) Alfalah Builder (Construction of House) Alfalah Renovation (Extension / Renovation of existing property) Alfalah Replacement

Alfalah Home Buying Banks finances Up to Rs. 80 % of Property Value or 40 Times of Gross Monthly Income (Which Ever is lower). Tenure from 3 to 20 years. Alfalah Home Construction Bank finances Up to 70 % of Property Value or 40 Times of Gross Annual Income (Which ever is lower) . Tenure = 3 to20 years. Land is already Owned Bank finances Up to construction Cost or 40 times of Gross Monthly Income (Whichever is lower). Land is not Owned 50 % of the Allowable Limit for Purchase of Plot and remaining 50 % for Construction, but total exposure does not exceeds 70 % of the Market Value of Proposed Property. Alfalah Home Renovation Bank finances Up to Rs. 2.50 Million or 30 % of the Market value of Property (Whichever is lower). Tenure 3 to 7 years. Alfalah Home Replacement Bank finances Up to Amount Outstanding or 40 Times of Gross Annual Income (Which ever is Lower). Tenure 3 to 20 years.

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Rate of Rent Profit margin is to be linked with 01 Year KIBOR rate, which will be reviewed from time to time. Present Applicable Rate is K + 3 %. Documents Required 2 Latest Passport Size Photographs 2 Copies of the National Identity Card Copies of last 3 Bills paid of Electricity, Gas and Telephone Copies of Credit Card Bill for last 03 Months Last Six Months Bank Statement Last Two Month Salary Slips Letter of verification of Employment on Company letter head (Current Designation/ Length of Service / Gross Salary and Certificate from HR for Regular monthly perks) Income Tax Returns / Statement last three years. Other Conditions The bank will assess value of the property through their own approved valuators of the bank. The facility will be provided only for urban properties (Approved areas of the bank) Loans for construction will be considered only after plans has been approved by the competent authority The-processing fee is non-refundable. If however the case is declined due to any issue related to title of documents at the lawyers level or due to issue in property valuation the fee will not be refundable. Security in Musharakah: As regards a Musharakah agreement between the bank and the client, the bank should in its own right and discretion, obtain adequate security to ensure that the capital invested/financed and the profit that may be earned are safe. As part of the usual practice, the securities obtained by the bank, are kept comprehensively insured at the partys cost and expenses, till the Islamic mode of insurance (Takaful) becomes operational. It is understood that the purpose of the latter security is a precautionary measure to cover for damage(s) or loss of the principal amount due to the clients negligence.

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Chapter 4

FINANCIAL STATEMENT ANALYSIS

In this section we will discus what is financial analysis and how information presented in the financial statements7 is used to facilitate decision making by the managers, investors, regulators, competitors, Banks, and other interested groups. The analysis is performed chiefly by summarizing the financial statement information into ratios. This outline will assist us in getting a general understanding of the financial statements and identifying some of the key ratios. 1. 2. 3. 4. 5. Introduction about financial statements Annual Reports and Financial Statements What you Need to Know about Financial Statements? Financial Ratio Analysis Uses and Limitations of Ratio Analysis

1. Introduction
Financial statement analysis involves analyzing the firms financial statements to extract information that can facilitate decision-making. For example, an analysis of the financial statement can reveal whether the firm will be able to meet its long-term debt commitment, whether the firm is financially distressed, whether the company is using its physical assets efficiently, whether the firm has an optimal financing mix, whether the firm is generating adequate return for its shareholders, whether the firm can sustain its competitive advantage etc; While the information used is historical,
7

Eugene F. Brigham FINANCIAL MANAGEMENT 3 edition

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the intent is clearly to arrive at recommendations and forecasts for the future rather than provide a picture of the past. The performance of a firm can be assessed by computing key ratios and analyzing: (a) How is the firm performing relative to the industry? (b) How is the firm performing relative to the leading firms in their industry? (c) How does the current year performance compare to the previous year(s)? (d) What are the variables driving the key ratios? (e) What are the linkages among the ratios? (f) What do the ratios reveal about the future prospects of the firm for various stakeholders such as shareholders, bondholders, employees, customers etc.? Merely presenting a series of graphs and figures will be a futile exercise. We need to put the information in a proper context by clearly identifying the purpose of our analysis and identifying the key data driving our analysis. Financial analysis is performed by both internal management and external groups. Firms would perform such an analysis in order to evaluate their overall current performance, identify problem/opportunity areas, develop budgets and implement strategies for the future. External groups (such as investors, regulators, lenders, suppliers, customers) also perform financial analysis in deciding whether to invest in a particular firm, whether to extend credit etc. There are several rating agencies (such as Moodys, Standard & Poors) that routinely perform financial analysis of firms in order to arrive at a composite rating. 2. Annual Reports and Financial Statements The annual reports of companies typically contain: (a) CEO/Presidents letter to shareholders (b) Financial statements (c) Other information (a) CEO/Presidents letter summarizing the operations of last year, explanations for good/bad performance, and a discussion on the goals for the immediate and long-term future. It will be a good idea to review the letter to shareholders of some prominent companies. Warren Buffet of Berkshire Hathaway is famous for writing the most insightful letters. (b) Financial Statements The financial statements (typically published every quarter and annually) are prepared according to GAAP and audited by independent auditors. However, as the recent corporate scandals have revealed, there are definitely too many gaps/loopholes in how the GAAP is implemented! Nonetheless, financial statements are an invaluable source of information. I. Balance Sheet (It is also known as the Statement of Financial Position): This provides the value of firms assets (what the firm owns), liabilities (what the firm owes to outsiders) and equity (what the inside shareholders or owners own) on a particular date. The value of assets will equal the value of liabilities plus owners equity or (A = L +E). Items

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in the balance sheet are listed based on conservative principle i.e. if estimating or in doubt of the actual value, the value of assets is not be overstated and the value of liabilities is not be understated. Why we should Analyze a Balance Sheet The analysis of a balance sheet can identify potential liquidity problems. These may signify the company's inability to meet financial obligations. An investor could also spot the degree to which a company is leveraged, or indebted. An overly leveraged company may have difficulties raising future capital. Even more severe, they may be headed towards bankruptcy. These are just a few of the danger signs that can be detected with careful analysis of a balance sheet. Beyond liquidity and leverage, the following section will discuss other analysis such as working capital and bankruptcy. As an investor, everyone will want to know if a company you are considering is in danger of not being able to make its payments. After all, some of the company's obligations will be to you if someone choose to invest in it. We will start with Liquidity Ratios, an important topic for all investors. Liquidity Ratios The following liquidity ratios are all designed to measure a company's ability to cover its short-term obligations. Companies will generally pay their interest payments and other short-term debts with current assets. Therefore, it is essential that a firm have an adequate surplus of current assets in order to meet their current liabilities. If a company has only illiquid assets, it may not be able to make payments on their debts. To measure a firm's ability to meet such short-term obligations, various ratios have been developed. we will study the following balance sheet ratios:

Current Ratio Acid Test (or Quick Ratio) Working Capital Leverage These tools will be valuable in making investment decisions. Current Ratio

The Current Ratio measures a firm's ability to pay their current obligations. The greater extent to which current assets exceed current liabilities, the easier a company can meet its short-term obligations.

After calculating the Current Ratio for a company, you should compare it with other companies in the same industry. A ratio lower than that of the industry average suggests that the company may have liquidity problems. However, a significantly higher ratio may suggest that the company is not efficiently using its funds. A satisfactory Current Ratio for a company will be within close range of the industry average. A generally acceptable current ratio is 2 to 1.

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Acid Test or Quick Ratio Acid Test Ratio or Quick Ratio is very similar to the Current Ratio except for the fact that it excludes inventory. For this reason, it's also a more conservative ratio.

Inventory is excluded in this ratio because, in many industries, inventory cannot be quickly converted to cash. If this is the case, inventory should not be included as an asset that can be used to pay off short-term obligations. Like the Current Ratio, to have an Acid Test Ratio within close range to the industry average is desirable.

Working Capital Working Capital is simply the amount that current assets exceed current liabilities. Here it is in the form of the equation:

This formula is very similar to the current ratio. The only difference is that it gives you a amount rather than a ratio. It too is calculated to determine a firm's ability to pay its short-term obligations. Working Capital can be viewed as somewhat of a security blanket. The greater the amount of Working Capital, the more security and investor can have that they will be able to meet their financial obligations. You have just learned about liquidity and the ratios used to measure this. Many times a company does not have enough liquidity. This is often the cause of being over leveraged. Leverage Leverage is a ratio that measures a company's capital structure. In other words, it measures how a company finances their assets. Do they rely strictly on equity? Or, do they use a combination of equity and debt? The answers to these questions are of great importance to investors.

A firm that finances its assets with a high percentage of debt is risking bankruptcy should it be unable to make its debt payments. This may happen if the economy of the business does not perform as well as expected. A firm with a lower percentage of debt has a bigger safety cushion should times turn bad. A related side effect of being highly leveraged is the unwillingness of lenders to provide more debt financing. In this case, a firm that finds itself in a jam may have to issue stock on unfavorable terms. All in all, being highly leveraged is generally

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viewed as being disadvantageous due to the increased risk of bankruptcy, higher borrowing costs, and decreased financial flexibility. On the other hand, using debt financing has advantages. Stockholder's potential return on their investment is greater when a firm borrows more. Borrowing also has some tax advantages. The optimal capital structure for a company you invest in depends on which type of investor you are. A bondholder would prefer a company with very little debt financing because of the lower risk inherent in this type of capital structure. A stockholder would probably choose for a higher percentage of debt than the bondholder in a firm's capital structure. Yet, a company that is highly leveraged is also very risky for a stockholder. When a firm becomes over leveraged, bankruptcy can result. Read on to learn more about this dreaded occurrence. Bankruptcy Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer meet its financial obligations. Bankruptcy is a result feared by both stock and bond investors. Generally, the firm's assets are liquidated (sold) in order to pay off creditors to the extent that is possible. When bankruptcy occurs, stockholders of a corporation can only lose the amount they have invested in the bankrupt company. This is called Limited Liability. The stockholders' liability to creditors is limited to the amount invested. Therefore, if a firm's liabilities exceed the liquidation value of their assets, creditors also stand to lose money on their investments. When bankruptcy occurs, a federal court official steps in and handles the payments of assets to creditors. The remaining funds are always distributed to creditors in a certain pecking order: I. II. III. IV. V. VI. VII. Unpaid taxes to the government and bankruptcy court fees Unpaid wages Secured bondholders General creditors and unsecured bonds Subordinated debentures Preferred Stockholders Common Stockholders

Obviously, to hold secured bonds rather than unsecured bonds is more advantageous in the event of a bankruptcy. This is where you must examine your risk/reward requirements. As you move down this hierarchy, your risk of losing your investment increases. However, you are "rewarded" for taking more risk with potentially higher investment returns. How do you predict bankruptcy? Well, no one can do it perfectly. However, one popular method called a Z-score (developed by Edward Altman) has a good track

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record. A few of the most important points about learning to analyze a company's balance sheet. Trying It All Together Analyzing a balance sheet is fundamental knowledge for anyone who wishes to carefully select solid and profitable investments. The balance sheet is the basic report of a firm's possessions, debts and capital. The composition of these three items will vary dramatically from firm to firm. As an investor, you need to know how to examine and compare balance sheets of different companies in order to select the investment that meets your needs. After reading this section, we should have an understanding of liquidity, leverage and bankruptcy and know how to apply basic ratios to measure each. These ratios should be compared to other firms in the same industry in order for them to have relevance. Be careful, however, that the firms are not fundamentally different even if they are in the same industry. What do we see in the balance sheet? Assets: Current assets (ex. cash, marketable securities, accounts receivable, inventory, prepaid expenses) that are more liquid than the long-term/fixed assets (ex. equipment, land), assets that are intangible and yet valuable (ex. goodwill, patents, deferred charges). Liabilities could include current liabilities (ex. bank advances, income tax payable, accounts payable, accrued expenses), deferred income taxes (difference between the tax reported on the income statement and tax reported on the tax return), Minority interest in subsidiary companies (representing outside ownership in subsidiary companies), long-term debt (ex. Bonds, capital leases). Shareholders Equity includes Share capital (par or stated value of shares received at the time of original issue), Paid-in-capital (when shares are sold for more than the par or stated value), retained earnings/deficit (undistributed earnings), foreign currency translation adjustment (fluctuation in the value of assets of foreign subsidiaries due to changes in exchange rates). Equity is also expressed as residual interest (E=A-L). If E is negative, the firm is technically bankrupt. Net worth or Book Value refers to what is available to common shareholders and is given by: Net Worth = Total Assets Total Liabilities Preferred Stock Net worth divided by number of common shares outstanding will give us the book value per share. The market value is equal to the price per share times the number of shares outstanding (also referred to as the market capitalization of a company). We can estimate the intrinsic value of stock by using discounted cash flow models. All assets (except Land) lose their value over time and this is accounted for through depreciation (for fixed assets), depletion (for natural resources) and amortization (for intangible assets/deferred charges).

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Limitations of Balance Sheet: The balance sheet records the values of assets and liabilities in terms of their original cost. This is especially misleading for fixed assets (that could have significantly changed in value). Also, it is difficult to value intangible assets. Current assets are less troublesome; partly because of their short-term nature (inventories and marketable securities are listed at lower of their cost or market values). Liabilities are also not biased (since they are generally contractual, and market values will be equal to their book values; For example, if the company has taken a loan, the dollar amount of loan obligation does not change with time). Also, an analyst should pay close attention to off-balance sheet items.

II. Income Statement It is also known as the statement of earnings or profit & loss statement or the statement of operations: Income Statement Analysis Introduction The income statement is a basic record for reporting a company's earnings. Since earnings are a fundamental component in a firm's worth, it is essential for investors to know how to analyze different elements of this important document. There are some basic methods for analyzing the income statement. Analyzing income statements is an important tool to help investors appraise their investment options. By analyzing an income statement properly, investors can begin to evaluate the effectiveness of the management of operations in the companies in which they are interested in investing. Proper income statement analysis can help identify good investment opportunities. It can also reduce the risk involved with choosing a poor investment choice. In this section, the following ratios, tools and concepts to helps to analyze income statements:

Interest Coverage Profitability Ratios Where Did All Those Expenses Come From? Depreciation Expense Basic Points about Calculating Depreciation Straight-Line Depreciation Accelerated Depreciation Selecting a Depreciation Method

Interest Coverage (a.k.a. Times Interest Earned)

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Interest Coverage is the measurement of how many times interest payments could be made with a firm's earnings before interest expenses and taxes are paid. From a bondholder's perspective, interest coverage is a test to see whether a firm could have problems making their interest payments. From an equity holder's perspective, this ratio helps to give some indication of the short-term financial health of the company. The following formula is used to determine the coverage of interest:

A higher ratio is typically better for bondholders and equity investors. For bondholders a high ratio indicates a low probability that the firm will go bankrupt in the near term. A company with a high interest coverage ratio can meet their interest obligations several times over. Stock investors typically like companies with high interest coverage ratios too. A high ratio indicates a company that is probably relatively solvent. Thus, all other things equal, an investor should be very careful with firms that have a low Interest Coverage Ratio with respect to other companies in their industry. Since the fundamental purpose of the income statement is to report profits or losses, understanding the various profitability ratios that follow is extremely helpful to your analysis of a firm. Profitability Ratios Profitability is often measured in percentage terms in order to facilitate making comparisons of a company's financial performance against past year's performance and against the performance of other companies. When profitability is expressed as a percentage (or ratio), the new figures are called profit margins. The most common profit margins are all expressed as percentages of Net Sales. Let's look at a few of the most commonly used profit margins that you can easily learn to use to help you measure and compare firms: o Gross Margin: Gross margin is the resulting percentage when Gross Profit is divided by Net Sales. Remember that Gross Profit is equal to Net Sales - Cost of Goods Sold. Therefore, Gross Margin represents the percentage of revenue remaining after Cost of Goods Sold is deducted.

Since this ratio only takes into account sales and variable costs (costs of goods sold), this ratio is a good indicator of a firm's efficiency in producing and distributing its products. A firm with a ratio superior to the industry average demonstrates superior

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efficiency in its production processes. The higher the ratio, the higher the efficiency of the production process. Investors tend to favor companies that are more efficient. o Operating Margin: As the name implies, operating margin is the resulting ratio when Operating Income is divided by Net Sales.

This ratio measures the quality of a firm's operations. A firm with a high operating margin in relation to the industry average has operations that are more efficient. Typically, to achieve this result, the company must have lower fixed costs, a better gross margin, or a combination of the two. At any rate, companies that are more efficient than their competitors in their core operations have a distinct advantage. Efficiency is good. Advantages are even better. Most investors will tend to prefer a more efficient company. Let's move on to the last profitability measure we will cover in this section. o Net Margin As the name implies, Net Margin is a measure of profitability for the sum of a firm's operations. It is equal to Net Profit divided by Net Sales:

As with the other ratios you will want to compare Net margin with other companies in the industry. You can also track year-to-year changes in net margin to see if a company's competitive position is improving, or getting worse. The higher the net margin relative to the industry (or relative to past years), the better. Often a high net margin indicates that the company you are looking at is an efficient producer in a dominant position within its industry. However, as with all the previous profit margin measurements, you need to always check past years of performance. You want to make sure that good results are not a "fluke." Strong profit margins that are sustainable indicate that a company has been able to consistently outperform their competitors. The savvy investor uses profitability margins to help analyze income statements of prospective investments. Companies with high interest coverage ratios, gross margins, operating margins and net margins will always be very attractive to investors. Where Did All Those Expenses Come From? You have just finished learning about interest coverage and profitability ratios. Both of these measures are simple and easy to understand. Interest coverage measures a company's ability to make its loan payments. Profitability ratios measure the bottom line of the income statement - earnings. However, to calculate either ratio, you must be able to classify a company's expenses. The interest coverage ratio concerns itself with a specific type of expense (interest

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expense). Meanwhile, profitability ratios such as net profit margin consider the net effect of all the expenses a company incurs. Most of the expenses a company incurs (raw materials, labor, rent, etc.) are straightforward items. In general, companies want to minimize these sorts of expenditures to ensure improved performance and profitability. For example, the less a company has to pay for the raw materials of the products it produces, the more competitive that company can become. Yet, there is one type of expense companies cannot eliminate. In fact, incurring this expense actually helps save the company money. What is this mysterious expense?

Depreciation Expense Depreciation is the process by which a company gradually records the loss in value of a fixed asset. The purpose of recording depreciation as an expense over a period is to spread the initial purchase price of the fixed asset over its useful life. Each time a company prepares its financial statements, it records a depreciation expense to allocate the loss in value of the machines, equipment or cars it has purchased. However, unlike other expenses, depreciation expense is a "non-cash" charge. This simply means that no money is actually paid at the time in which the expense is incurred. Like all other expenses, depreciation expense reduces the taxable income of the company. Yet, a business reporting a depreciation expense incurs no additional cash expenditure. Simply put, depreciation allows businesses to reduce their taxable income without making the additional cash expenditure typical of most other expenses. While depreciation is an attractive way to reduce taxable income, specific regulations govern how it is to be calculated and allocated. Let's take a moment to review a few important points about how companies calculate depreciation. There are several forms of income statement. An example of a generic form is as follows: Sales Revenue - Cost of Good Sold = Gross Profit - Selling and Administrative expenses - Depreciation = Earnings before Interest and Taxes (EBIT) - Interest expenses (on bank loans and bonds) + Interest income = Earnings before Taxes (EBT) - Taxes (current and deferred) = Earnings after Taxes (EAT) + Income from subsidiaries (equity income) +/- Gains/Losses from discontinued operations +/- Gain/loss on extraordinary items

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= Net Earnings - Preferred Stock Dividends = Earnings available for common shareholders Limitations of Income Statement: In finance, the focus is on valuation that requires knowledge of expected cash flows rather than historical earnings. Note net income does not equal the actual cash flow. This is because the income statement reports revenue/expenses when they are earned/accrued and not when actual cash is received. Further, several items are subjectively determined (ex. depreciation). Also, depreciation is based on historical cost of the asset. Thus, during periods of inflation, depreciation expense will be understated as it is based on historical cost while the revenues reflect the current market price.... such non-synchronization leads to inflated earnings. Furthermore, a traditional income statement only records transactions and not opportunities. III. Statement of Retained Earnings It is known as the Statement of changes in shareholders equity, statement of shareholders investment or statement of changes in shareholders equity. It shows the balance in retained earnings after making adjustments for current profits and current dividend. It also shows information on treasury stock, any new shares issued, and the impact of exercised options, preferred stock details and additional paid-in-capital. IV. Cash Flow Statement It shows how the company obtained cash and for what purpose they were used. Thus cash balance at the end = Cash in the beginning + Net Cash flow from operating (income statement cash items) + Net Cash flow from financing (ex. proceeds from sale of bonds, repayment of loan, payment of dividends) + Net Cash flow from investing activities (ex. Sale/purchase of asset). (c) Other information in the annual report 1. Notes to financial statements8 2. The Auditors report 3. What You Need to Know About Financial Statements As the Enron fiasco has brought to light, there is plenty wrong with the way financial results are reported. Congressional committees will determine how much of Enrons troubles were due to criminal activity, and how much due to poor judgment and loopholes. But "managing results" is an old game on Wall Street. The pros know how to read between the lines to identify shaky financials. They read the footnotes to the financial statements carefully for clues that will tell them how aggressively the company is pushing to use legal, but misleading GAAP, rules to their limit.
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So here is a list of things to look for in financial statements that will tell you as much or more about the company than the actual reported results. First, Wall Street is not your friend. Making money in a stock market that is trading flat is a zero sum game. For you to profit, someone else must lose. Be skeptical and very careful where you get your investment advice. Question the motives of so-called experts. As of yet, there are no rules ensuring that they disclose their conflicts of interest. Performa Earnings Announcements Many companies now issue Performa Earnings Statements that exclude certain expense items as being "extraordinary". It is now a normal part of business for many firms, particularly tech firms. The trouble is that there are no standards for reporting Performa Statements, leaving the door open to manipulating earnings and misleading investors. Outgoing SEC Chief Economist Lynn Turner says pro forma earnings are effectively "EBS" earnings--"Everything but the Bad Stuff." A study that compares the un-audited Performa Earnings Statements to the NASDAQ 100 companies with the audited statements they filed with the SEC shows a huge $101 billion difference for the first three quarters of 2001. Frequent Restructuring Charges and Write-Downs As businesses adjust their internal structure, they incur costs for shutting down one activity and starting another. In a small company, charges for these activities would occur infrequently, but in a large company, they will be routine. If charges and write downs for restructurings occur regularly, the company may be classifying normal business expenses as extraordinary to create the illusion that the core business is more profitable than it really is. Reserve Reversals Companies generally establish reserves to cover the costs of restructuring. Reserves allow management to "store profits" for later use if the reserves are unusually large. At a later time, they can reverse the reserve for the amount that was not spent and it flows directly to the bottom line. Pension Funds Pension funds are great sources of earnings manipulation. Boost earnings by under funding them or by overestimating the investment return of the fund so that current payments will be lower and profits higher. If the fund does particularly well, pull the excess back into the income statement to boost profits. Footnotes to Financial Statements Statements can mislead and evade but they must come clean in the footnotes or face criminal charges. Thats why the pros look here first. You will learn about risk exposure, debt that changes character under certain conditions, the use of aggressive accounting practices and all sorts of other details that management would like to avoid telling you.

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Sales/Non-Sales Look at the revenue and receivable numbers over several years. Is the ratio of receivables to sales increasing? If yes, then the company is shipping goods faster than customers are paying for them. Are deferred revenues dropping? If so, the company is living off last years sales. In the current slowdown, customers look to change sales terms to use the suppliers money as much as possible by acknowledging the sale as late as possible. Cash Flow is King The pros know that it is too easy to manipulate earnings numbers. So they focus on cash flow as being a more reliable indicator of performance because the cash is either there or it isnt. One expert thinks a comparison of cash flow vs. non-cash revenue could have been an early tip of to Enron investors. Goodwill Companies account for the premium over book value that they pay for an acquired company as goodwill. Under the older accounting rules, companies could write down the payment for goodwill with a charge against earnings spread out over decades. First Call estimates that, because of the goodwill accounting change, analyst forecasts for 2002 are about three percentage points too high. As companies restate prior year earnings to account for the change, earnings will shrink. Employee Stock Options 78% of companies with sales over $10 billion compensate management with stock options. Yet accounting rules do not require the issuing of the option to be accounted for with an expense. In the wake of Enron, this controversial and questionable rule may be changed. If so, one expert estimates that many large tech companies may see an annual reduction in earnings of 1/3.

Financial Ratio Analysis 9

A popular way to analyze the financial statements is by computing ratios. A ratio is a relationship between two numbers, e.g. ratio of A: B = 30:10==> A is 3 times B. A ratio by itself may have no meaning. Hence, a given ratio is compared to (a) ratios from previous years - internal trends, or (b) ratios of other firms in the same industry external trends. Ratios are more of a diagnostic tool that helps us to identify problem areas and opportunities within a company. In this section, we will discuss how to measure and interpret some key ratios. Obviously, since ratio is simply a comparison of two variables, the possibilities for number of ratios are endless! There is no one way of classifying various ratios so you may find different groupings depending on what text or article you read. Also, there are no specific rules on what is an ideal or acceptable number for a ratio, although there are some rules of thumb. The key ratios that are determined by the financial analysts provide insights on (a) Liquidity (b) Degree of financial leverage or debt (c) Profitability
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(d) Efficiency (e) Value. A. Analyzing Liquidity Liquid assets are those assets that can be converted into cash quickly. The short-term liquidity ratios show the firms ability to meet short-term obligations. Thus a higher ratio (#1 and #2) would indicate a greater liquidity and lower risk for short-term lenders. The Rule of Thumb (for acceptable values): Current Ratio (2:1), Quick Ratio (1:1) While high liquidity means that the company will not default on its short-term obligations, note that by retaining assets as cash, valuable investment opportunities might be lost. Obviously, Cash by itself does not generate any return ... only if it is invested will we get future return. In quick ratio, we subtract the inventories from total current assets since they are the least liquid (among the current assets). 1. Current Ratio = Total Current Assets/Total Current Liabilities 2. Quick or Acid-test Ratio = Total Current Assets - Inventories /Total Current Liabilities B. Analyzing Debt These ratios show the extent to which a firm is relying on debt to finance its investments/operations and how well it can manage the debt obligation (i.e. repayment of principal and periodic interest). Obviously, if the company is unable to repay its debt or make timely payments of interest, it will be forced into bankruptcy. On the positive side, use of debt is beneficial as it provides valuable tax benefits to the firm. Note total debt should include both short-term debt (bank advances + current portion of long-term debt) and long-term debt (such as bonds, leases, and notes payable). Some texts may include only long-term debt. Again, what we use will depend on what our question is. 1. Leverage Ratios Asset-Equity Ratio or Leverage Ratio= Assets/Shareholders Equity This shows firms reliance on external debt for financing (or the degree of leverage). Any number above 100% shows that the company relies on external debt for financing some of its assets. If the number equals 100%, it implies that the assets are fully financed by the shareholders. Some analysts tend to use the Debt ratio (given by total Debt/total assets) or Debt/Equity ratio (given by total long-term debt/equity). These ratios also show companys reliance on external sources for financing its assets. Ratio shows what proportion of the total long-term capital comes from debt. Total Debt ratio = Total Debt/Total assets Debt-Equity Ratio = Total Debt/Equity Long-term Debt to capital = Debt/Debt + Equity

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For a lender, more important than the degree of leverage is the firms ability to service the debt and this is captured in the following two ratios. 1) Interest Coverage Ratio Interest Coverage Ratio= EBIT/ Annual Interest Expense This shows the firms ability to cover fixed interest charges (on both short-term and long-term debt). The margin of safety that is acceptable will vary within and across industries, and will also depend on the earnings history of a firm. 2) Cash Flow Coverage Cash Flow Coverage = Net Cash flow/Interest Expense Net Cash flow is equal to Net Income +/- non-cash items (-equity income + minority interest in earnings of subsidiary + deferred income taxes + depreciation + depletion + amortization expenses). Since depreciation is the biggest dollar term, oftentimes analysts would approximate Net cash flow as being equivalent to EBIT + depreciation. Cash flow is a critical variable in assessing a company. If a company is showing strong profits but has poor cash flow, you should investigate further before passing a favorable opinion on the company. Financial analysts prefer using ratio #3 to ratio #2, although ratio #2 is more widely reported. C. Analyzing Sales and Profitability Profitability is a relative term. It is hard to say what % of profits represents a profitable firm as the profits will depend on the product life cycle (for example profits will be lower in the initial years), competitive conditions in the market, borrowing costs, expense management etc. Profits can also be analyzed using the framework of CVP (cost-volume-prices). Analysts will be interested in the (historical and forecasted) trend of sales/expenses/profits are the profits generally on the rise, are the sales stable or rising, how do the profits compare to the industry average, is the market share of the company rising/stable/falling? Are the expenses rising, stable or falling? The set of ratios here include some of the traditional earnings based performance measures such as ROS, ROA, ROI, and ROE. For a better understanding of growth rates, it will be useful to know the real growth rate as opposed to nominal growth rate. For example, it is quite possible that the sales growth rate figures are impressive due to inflation (rather than an increase in the number of items sold). This is particularly useful if we are dealing with high inflation period or conducting an extending time series analysis. 1 2. 3. Sales Growth Rate = {(Current year sales last year sales)/last year sales}*100 Expense analysis= various expenses /Sales Gross Margin/Sales = Gross Profit/Total Sales

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4. 5. 6. 7. 8. 9. 10. 11. 12.

Operating Profit/Sales = Operating Profit/Net Sales EBIT/Sales = EBIT/Net Sales Return on Sales (ROS) or net profit ratio = Net Income/Net Sales Return on Investment (ROI) = Net Income/Total Assets Return on Assets (ROA) = Net Income/Total Assets Return on Equity (ROE) = EAT/Shareholders Equity Payout ratio = Cash Dividends/ Net Income Retention ratio = Retained Earnings/Net Income Sustainable growth rate (SGR) = ROE * Retention Ratio

It is useful to disaggregate the ROE figure into three elements as follows to get a better insight ROE = {Net Income/Sales} * {Sales/Assets} * (Assets/Equity) The above formulation clearly shows that if management wishes to improve their ROE, they need to improve profitability, efficiently use the assets, and optimize the use of debt in their capital structure. Thus two companies with similar profitability may have different ROEs depending on their degree of financial leverage. If we combine this with ratio #10, we can see that a firms growth rate will depend on all of these factors plus their divided policy. Thus it covers the three main financial decisions in any corporation: investment decision, operating decision and financing decision. SGR shows how much the company will grow in the future if some of the key ratios remain the same as in previous years. It is useful to disaggregate the sustainable growth rate as follows. SGR = f (Profitability, Asset Efficiency, Leverage, Dividend policy) = Return on Sales * Asset turnover ratio * Leverage * Retention ratio = (Net income/sales) * (sales/assets) * (assets/equity) * (RE/net income) D. Analyzing Efficiency These ratios reflect how well the firms assets are being managed. The inventory ratios show how fast the inventory is being produced and sold. Ratio #1 shows how quickly the inventory is being turned over (or sold) to generate sales ... higher ratio implies the firm is more efficient in managing inventories by minimizing the investment in inventories. Thus a ratio of 12 would mean that the inventory turns over 12 times or the average inventory is sold in a month. Ratio #2 is referred to as the shelf-life i.e. how many days the inventory was held in the shelf. Ratio #3 shows how much sales the firm is generating for every dollar of investment in assets naturally, higher the better. However, note that this ratio is biased (as assets are listed at historical costs while sales are based on current prices). Ratios #4 and #5 show the firms efficiency in collecting from credit sales. While a low ratio is good it could also mean that the firm is being very strict in its credit policy, which may drive away some customers. Ratios #6 and 7 focus on efficiency in making payments. Combining inventories, accounts receivable and accounts payable we get ratio #8, which shows the financing period to fund working capital needs. Longer the period, greater the short-term liquidity risk.

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1. 2. 3. 4. 5. 6. 7. 8.

Inventory Turnover = Cost of Goods Sold/Average Inventory Days in Inventory = (Average Inventory/Cost of Sales)*365 Assets turnover = Net Sales/Total Assets Receivables Turnover = Credit Sales/Accounts Receivables Average Collection period = (Accounts Receivable/Net Sales)*365 Accounts Payable turnover = Purchases/Accounts Payable Days AP outstanding = (Accounts Payable/Cost of Sales)*365 Financing Period = Average Collection period + days in inventory days AP outstanding

E. Analyzing Value Earnings per share (EPS) is widely reported although it is now less closely followed (after academic theory insights into the drawback of EPS and importance of cash flow based measures). SEC requires that the company report both basic and diluted EPS. Basic EPS uses the actual number of shares currently outstanding in the market while diluted EPS uses currently outstanding shares + all potential shares (due to convertibility of debt or preferred stock as well as exercise of stock options, rights and warrants). Dividend yield, while widely reported, may not contain much useful information by itself (especially when comparing across firms) since dividend policies vary across firms. Furthermore, price appreciation (as opposed to dividends) is the more important source of yield for shareholders. Ratio #7 is useful for valuing companies such as internet services or cable services that rely primarily on members to generate income. Thus an assessment of members (total members, current and future expected growth rate, and average spending by member) can provide useful guideline in valuing such companies (especially when planning acquisitions). 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Earnings per Common share (EPS) = (Net Earnings - Preferred Dividend) No. of shares outstanding Earnings Yield = 1/EPS Cash flow per Share (CPS) = Net Cash Flows/No. of shares outstanding Dividend Yield = Annual Dividend / Current Market price Price-earning Ratio (PE) = Market Price per share / EPS Price-Sales Ratio (PS) = Market price per share/Sales per share Membership Value = No of members * value per member Free CF per share = (Net Cash flow from Operations Capital Expenditure)/No of shares Total Shareholder Return (TSR) = (Ending Price + Dividend Beginning Price)/Beginning Price EVA = EAT Cost of Financing (that is, Net Capital Assets Employed * WACC)

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F. Uses and Limitations of Ratio analysis Uses 1. To evaluate performance (compared to previous years & peers); 2. To set benchmarks or standards for performance; 3. To highlight areas that need to be improved or highlight areas that offer the most promising future potential; 4. To enable external parties (such as investors/lenders) in assessing the creditworthiness/profitability of the firm. Limitations 1. There is considerable subjectivity involved as there is no theory as to what should be the right number for the various ratios. Further, it is hard to reach a definite conclusion when some of the ratios are favorable and some are unfavorable. 2. Ratios may not be strictly comparable for different firms due to a variety of factors such as different accounting practices, different fiscal year. Furthermore, if a firm is engaged in diverse product lines it is difficult to identify the industry category to which the firm belongs. Also, just because a specific ratio is better than the average does not necessarily mean that the company is doing well (it is quite possible rest of the industry is doing very poorly) 3. Ratios are based on financial statements that reflect the past and not the future. Unless the ratios are stable, one cannot make reasonable projections about the future trend. 4. Financial statements provide an assessment of the costs and not value. For example, the market value of items may be very different from the cost figure given in the balance sheet. 5. Financial statements do not include all items. For example, it is hard to put a value on human capital (such as management expertise). 6. Accounting standards and practices vary across countries and thus hamper meaningful global comparisons. 7. Management decision making is a dynamic process in a constantly changing environment while ratio analysis is a static analysis based on historical data. 8. The linkage among various ratios is not readily obvious10.
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eugene f. brigham financial management theory and practice 2007

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CAMEL APPROACH11
(CAPITAL ASSETS MANAGEMENT EARNINGS AND LIQUIDITY)
Overview Camel assesses different aspects of commercial banks operations to determine the soundness of its condition. This describes the methodology used by examiners to assess these factors and the criteria for assigning ratings to a bank. It provides method of identifying risks in internal processes, the evaluation of these risks, Monitoring procedures and internal controls. The CAMEL approach was developed by bank regulators in the United States as a means of measurement of the financial condition of a financial institution. The word CAMEL stands for: Capital Adequacy Asset Quality Management Earnings (Profitability) Liquidity & Funding CAMEL analysis requires: financial statements (the last three years and interim statements for the most recent 12-month period) cash flow projections portfolio aging schedules funding sources information about the board of directors operations/staffing macroeconomic information

In reviewing ratios the credit analyst needs to keep 2 concepts in mind:

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1) Level or whether the ratio for a given fiscal period is either equal to or exceeds (which can be either positive or negative depending on the ratio) the established parameters of what is considered a generally acceptable position for that specific ratio. 2) Trend or whether the fiscal to fiscal comparison period indicates that the level of the ratio is improving or deteriorating. In addition, individual ratios must not be reviewed in isolation to other ratios and what is the present strategy of the management of the financial institution.

Capital Adequacy
The purpose of capital, Factors for evaluating capital adequacy, The measurement of capital, Prompt Corrective Action

Capital Adequacy is a measurement of a bank to determine if solvency can be maintained due to risks that have been incurred as a course of business. Capital allows a financial institution to grow, establish and maintain both public and regulatory confidence, and provide a cushion (reserves) to be able to absorb potential loan losses above and beyond identified problems. A bank must be able to generate capital internally, through earnings retention, as a test of capital strength. An increase in capital as a result of restatements due to accounting standard changes is not an actual increase in capital. The Capital Growth Rate, which is calculated by subtracting prior-period equity capital from current-period equity capital, then dividing the difference by prior-period equity capital, indicates that either earnings are extremely good, minimal dividends are being extracted or additional capital funds have been received through the sale of new stock or a capital infusion, or it can mean that earnings are low or that dividends are excessive. The capital growth rate generated from earnings must be sufficient to maintain pace with the asset growth rate. The 1988 Basel Committee Capital Accord established a benchmark for measuring bank capital (and for correctly calculating / risk weighting assets): BIS Tier 1 (core capital): total own funds must be at least 4% of total risk weighted positions. The only intangibles that the FDIC allows to be included in Tier 1 regulatory capital are purchased mortgage servicing rights and purchased credit card relationships. BIS Tier 2 (supplemental): total own funds (plus value adjustments; reserves arising from the revaluation of tangible fixed assets and financial fixed assets; hybrid capital instruments) must be at least 8% of total risk weighted positions. Under FDIC guidelines (1997) a "well capitalized institution" will have a 5% or better Tier 1 leverage ratio (the ratio of Tier 1 capital to average total assets), a 6% or better Tier 1 risk-based ratio (the ratio of Tier 1 capital to total risk-adjusted assets, with assets categorized by

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risk level), and a 10% or better total risk-based ratio (the ratio of total capital to total risk-adjusted assets). The regulatory treatment of Tier 2 capital is such that securities issued in a subordinate position for regulatory capital purposes have their capital value amortized over the last five years of the security. This recently was solved in 1997 through a "10 non-call five/seven step-up." A call provision is put in from one day after year five or year seven and the bank is allowed to call it with five full years as 100% capital treatment. A coupon step-up is put in at the end of year five or seven to allow for the bond to roll over for a further five year period.

Risk Weighting Assets

The Basel I guidelines on risk weighting asset classes has been revised by the Basel II framework. Capital Adequacy ratio which is calculated by dividing the bank's core capital by the bank's total risk-weighted assets, then multiply by 100. Core Capital Adequacy ratio which is calculated by dividing the bank's risk-based capital by the bank's total risk-weighted assets, and then multiply by 100. The BIS Risk-weighted Assets guidelines were adopted by the Board of Governors of the state bank. These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain offbalance sheet exposures such as unused loan commitments, letters of credit, and derivative and foreign exchange contracts. The risk-based capital guidelines are supplemented by a leverage ratio requirement. To be "well capitalized" under Federal bank regulatory agency definitions, a bank holding company must have a Tier 1 ratio of at least 6%, a combined Tier 1 and Tier 2 ratio of at least 10%, and a leverage ratio of at least 3%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. Risk-weighted 0% 1. Cash 2. Securities issued by and other direct claims on the Government or its agencies 3. Securities issued by and other direct claims on the central government 4. Notes and obligations issued by either the Federal Savings and Loan Insurance Corporation or the Federal Deposit Insurance Corporation and backed by the full faith and credit of the Government 5. Deposit reserves at, claims on, and balances due from Federal Reserve Banks 6. The book value of paid-in Federal Reserve Bank stock 7. That portion of assets that is fully covered against capital loss and/or yield maintenance agreements by the Federal Savings and Loan Insurance Corporation or any successor agency 8. That portion of assets directly and unconditionally guaranteed by the Government or its agencies, or the central government

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Risk-weighted 20% 1. Cash items in the process of collection 2. That portion of assets collateralized by the current market value of securities issued or guaranteed by the government or its agencies, 3. That portion of assets conditionally guaranteed by the Government or its agencies 4. Securities (not including equity securities) issued by and other claims on the Government or its agencies which are not backed by the full faith and credit of the Government 5. Securities (not including equity securities) issued by or other direct claims on, Government-sponsored agencies 6. That portion of assets guaranteed by Government-sponsored agencies 7. That portion of assets collateralized by the current market value of securities issued or guaranteed by Government-sponsored agencies 8. Claims representing general obligations of any public-sector entity in an country, and that portion of any claims guaranteed by any such public-sector entity 9. Bonds issued by the Financing Corporation or the Resolution Funding Corporation 10. Balances due from and all claims on domestic depository institutions. This includes demand deposits and other transaction accounts, savings deposits and time certificates of deposit federal funds sold, loans to other depository institutions, including overdrafts and term federal funds, holdings of the savings association's own discounted acceptances for which the account party is a depository institution, holdings of bankers acceptances of other institutions and securities issued by depository institutions, except those that qualify as capital 11. Deposit reserves at, claims on and balances due from the Federal Home Loan Banks 12. Claims on, or guaranteed by, official multilateral lending institutions or regional development institutions in which the Government is a shareholder or contributing member 14. All claims on depository institutions incorporated in a country, and all assets backed by the full faith and credit of depository institutions incorporated in a country. 15. Claims on, or guaranteed by depository institutions other than the central bank, incorporated in a country, with a remaining maturity of one year or less Risk-weighted 50% 1. Revenue bonds issued by any public-sector entity in a country for which the underlying obligor is a public- sector entity, but which are repayable solely from the revenues generated from the project financed through the issuance of the obligations 2. Qualifying mortgage loans and qualifying multifamily mortgage loans 3. Privately-issued mortgage-backed securities representing an interest in qualifying mortgage loans or qualifying multifamily mortgage loans. If the security is backed by qualifying multifamily mortgage loans, the savings

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association must receive timely payments of principal and interest in accordance with the terms of the security. Payments will generally be considered timely if they are not 30 days past due

Risk-weighted 100% 1. Consumer loans 2. Commercial loans 3. Home equity loans 4. Non-qualifying mortgage loans 5. Non-qualifying multifamily mortgage loans 6. Residential construction loans 7. Land loans, except that portion of such loans that are in excess of 80% loanto-value ratio 8. Nonresidential construction loans, except that portion of such loans that are in excess of 80% loan-to-value ratio 9. Obligations issued by any state or any politica1 subdivision thereof for the benefit of a private party or enterprise where that party or enterprise, rather than the issuing state or political subdivision, is responsible for the timely payment of principal and interest on the obligations, e.g., industrial development bonds 10. Debt securities not otherwise described in this section 11. Investments in fixed assets and premises 12. All repossessed assets or assets that are more than 90 days past due 13. Indirect ownership interests in pools of assets. Assets representing an indirect holding of a pool of assets, e.g., mutual funds, are assigned to riskweight categories under this section based upon the risk weight that would be assigned to the assets in the portfolio of the pool. Off-balance sheet items are included in determining risk-weighted assets after reduction by specific reserves. Risk-weighted 0% 1. Letters of credit, guarantees or guarantee-type instruments secured by deposits with the issuing bank Risk-weighted 20% 1. Unused, non-callable credit lines with original maturity up to one year 2. Revocable letters of credit Is the bank increasing its capital from the growth of retained earnings? Does it have the ability to raise capital? Banks, securities firms and finance companies should show increasing capital due to the growth of principal risk-taking/trading and the growth of derivatives business which results in these firms taking more off-balance

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sheet risk. Banks and Investment Banks must also allocate capital to new/growing international operations.

Key Ratios for Examining Capital Adequacy

Equity Capital Equity Capital / Average Assets This is a primary measurement for judging capital strength. Equity capital is defined as the total of common stock, surplus, perpetual preferred stock, undivided profits and capital reserves before adjustments. Intangibles and net unrealized holding gains (losses) on available-for-sale securities are excluded from Capital. Leverage is the relationship between the risk-weighted assets of a bank and its equity. Securities firms look at Net Assets divided by Equity as Leverage. Loan Loss Reserves / Net charge-offs plus 90-day delinquent. Are reserves adequate enough so that the bank can absorb potential losses? If a bank has a higher than anticipated loan delinquency rate then loan loss reserves will be insufficient. Reserves should be equal to or greater than charge-offs and delinquencies. Loan Loss Reserve / Tier 1 Capital: should be greater than 40% Tier 1 Capital / Total Assets

Asset Quality
Concept of asset quality Impact of asset quality on banks financial statements. Concepts of past-due and non-accrual loans Analyzing asset quality ratios Asset classification and types of asset classification Rating of asset quality Adequacy of allowance for loans and leases losses (ALLL)

The Assets of a bank are: Cash (unrestricted) Fed funds sold Trading portfolio (securities, although banks also tend to include derivative contracts in this category) Securities (available for sale is liquid; held to term as less liquid) Loans (various counterparties and maturities; lease contracts may also be included in this category)

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 Fixed assets Asset Quality evaluates risk (and there must be some risk to earn a return), controllability, adequacy of loan loss reserves, and acceptable earnings; and the affect of off-balance sheet earnings and loss. The quality of a bank's assets hinges on their collectivity during and at maturity. Thus, one must examine the portfolio quality, the portfolio classification system (aging schedule and the methodology to classifying a receivable) and the fixed assets (the productivity of the long-term assets, for instance the branch network). It is also necessary to determine the liquidity and the maturity structure of various Assets. Investing in assets is how a bank primarily earns a return. How well are these assets going to perform? Earning Assets: Interest bearing financial instruments which are principally commercial, real estate, and consumer loans; investment securities and trading account securities; money market investments; lease finance receivables; time deposits placed in foreign banks. Risk-based / Risk Weighted Assets: Some investments and loans are riskier than others and regulators realize that there should be a flexible scale of allocating bank reserve capital to these various types of assets. For instance, a bank that has U.S Treasury securities in its portfolio of securities does not have to assign any capital reserve for this particular asset. Risk assets: Loans to affiliates, other loans, interest receivables and other assets. Loans are usually the largest asset category for a bank: Change in loan volume, why has it grown or contracted what percentage has it grown/contract? an mix: what part of the portfolio is growing (consumer vs. commercial) Is the bank overly exposed in one sector (i.e. commercial real estate, industry sector, country) and what is the environment for the performance and value of the assets? What percentage of loans (either separate portfolios of consumer loans and commercial loans and/or combined) is delinquent 30 day? What percentage of total loans are delinquent 90 days? What percentage of total loans are non-performing (over 90-day, non-accrual and restructured). What is the percentage of charge-offs to total loans (consumer and commercial receivables)? What is the percentage change of charge-offs from the previous fiscal period? If there is a problem with the repayment of a loan, the interest will sometimes be capitalized. Interest begins accruing on a loan as soon as it is disbursed. The interest can be repaid as scheduled or it can be capitalized, which means that the interest will continue to accrue and will be added to the loan principal amount thereby increasing the loan principal amount, which is then the new balance that is used to compute interest for the next period. The net effect of capitalization is that it increases the total amount paid over the lifetime of the loan.

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The Asset Growth Rate, which is computed by subtracting prior-period total assets from current-period total assets, then dividing the difference by prior-period total assets, indicates the state of economic condition and/or the philosophy (which wants to rapidly increase or slowly increase the asset side of the balance sheet).

Key Ratios for Examining Asset Quality Loan Loss Reserves (Total Loans) This is a primary measurement for judging capital strength. Traditionally the amount is a minimum 1.0% but it is not sure if it is adequate unless it is compared to Provisions/Total loans: percentage of provisions from fiscal income statement as a percentage of the portfolio. Intangibles and net unrealized holding gains (losses) on available-for-sale securities are excluded from Capital. Loan Loss Reserves (Non-Performing or Non-current Loans and Leases) Non-performing or Non-current loans consist of loans that are 90 days or more overdue and still accruing and non-accrual loans. Also sometimes known as the coverage ratio, should be in excess of 1.5x Overdue Loans Total Loans 30-89 Days Past Due / Total Loans Indicates that either credit underwriting standards are inappropriate or collection procedures are inadequate. 90-Day Overdue Loans Total Loans 90-Days Past Due / Total Loans Indicates that the loan portfolio may be experiencing some deterioration through either poor underwriting and/or collections. Non-current Assets plus other Owned real estate / Total Assets. Ratio of non-performing loans to core capital. Loans / Earning Assets

Management Structure
Management organization and function Assessment of management Evaluation factors and ratings Is the bank newly privatized from government ownership? What is the ownership structure of the bank? (Government support? Independently capitalized or a branch? Can rely on parent support implicit/explicit?)

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Is as small branch network a constraint on business? Loan portfolio management, credit administration, policy development, employee training, loan workout Is it possible to determine Governance, Audit oversight and Strategic planning?

Earnings (Profitability)
Different components of earnings Importance of earnings to a banks financial condition Different earning ratios on a UBPR Earnings determine the ability of a bank to retain capital, absorb loan losses, support the future growth of assets, and provide a return to investors. The largest source of income for a bank is net interest revenue (interest income from lending activity less interest paid on deposits and debt). The second most important source is from investing activity. A substantial source of income also comes from foreign exchange and precious metal trading, and commissions/transaction fees and trust operations. New banks are usually not profitable for the first two to three years as they develop their core business operations, hire employees, open branches and may also have to pay a higher interest rate to attract deposits. What the analyst should look at in this case is the "burn rate" (on a monthly and quarterly basis), which is an indication of how much of the initial equity investment (stockholder's equity) is being used up to cover operating expenses. What needs to be demonstrated is that income is increasing faster than expenses and the monthly and quarterly losses are decreasing, hence equity is not decreasing as rapidly. Key Ratios for Examining Profitability Net Interest Margin Net Interest Income (annualized) / Average Interest Earning Assets This is net interest income expressed as a percentage of average earning assets. May come under pressure from offering preferential rates to customer base, a low level of growth in savings and the higher percentage of more expensive wholesale funds available. The lower the net interest margin, approximately 3.0% or lower, generally it is reflective of a bank with a large volume of nonearning or low-yielding assets. Return on Average Assets (ROAA) Net operating income (annualized) after taxes (including realized gain or loss on investment securities) / Total Average Assets (assets at the previous fiscal year plus assets at this current fiscal year divided by 2) for a given fiscal year

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Actual net income should be examined for the inclusion of extraordinary earnings. This measures how the assets are utilized by indicating the profitability of the assets base or asset mix. Ranges from approximately 0.60% to under 2.0% for Banks.

Return on Average Equity (ROAE) Net operating income after taxes (including realized gain or loss on investment securities) / Total (average) equity (common stock) for a given fiscal year. This ratio is affected by the level of capitalization of the financial institution. Measures the ability to augment capital internally (increase net worth) and pay a dividend. Measures the return on the stockholder's investment (not considered an effective measure of earnings performance from the bank's standpoint). In the long run, a return of around 15% to 17% is regarded as necessary to provide a proper dividend to shareholders and maintain necessary capital strengths. Adjusted ROE or ROAE: Net income / Total equity plus loan loss reserves in excess of 10% of equity. Return on Earning Assets (ROEA): Revenue from loans, securities, cash equivalents and earning assets (including noninterest) before interest expense / Assets Measures the results of operations prior to funding costs and as if the operations were totally funded by equity. Operating Profit Margin: Operating profits (before the loan loss provision and excluding gains or losses from asset sales and amortization expense of intangibles) / Net operating revenues (interest income less interest expense plus non interest income) This ratio measures the percent of net operating revenues consumed by operating expenses, providing the remaining operating profit (the higher the margin the more efficient the bank). Inverse of the efficiency ratio. Non-interest Income Non-Interest Income (annualized) / Total Average Assets Non-interest income is income derived from fee-based banking services such as service charges on deposit accounts, consulting and advisory fees, rental of safe deposit boxes and other fee income, fiduciary, brokerage and insurance activities. Realized gains on the sale of securities is excluded. Average Collection of Interest (Days) Accrued Interest Receivable / Interest Income x 365 This is a measurement of the number of days interest on earning assets remains uncollected and indicates that volume of overdue loans is increasing

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or repayment terms are being extended to accommodate a borrower's inability to properly service debt.

Overhead Ratio Total Non-Interest Expenses (annualized) / Total Average Assets Non-interest expenses, which are the normal operating expense associated with the daily operation of a bank such as salaries and employee benefits plus occupancy / fixed asset costs plus depreciation and amortization. These costs tend to rise faster than income in a time of inflation. Provisions for loan and lease losses, realized losses on securities and income taxes should not be included in non-interest expense. Efficiency Ratio Total Non-interest expenses / Total Net Interest Income (before provisions) plus Total Non-Interest Income Efficiency improves as the ratio decreases, which is obtained by increasing net interest income, increasing non-interest revenues and/or reducing operating expenses. Non-interest expenses (expenses other than interest expense and loan loss provisions, such as salaries and employee benefits plus occupancy plus depreciation and amortization) tend to rise faster than income in a time of inflation. This is a measure of productivity of the bank, and is targeted at the middle to low 50% range. This may seem like break-even but it is not; what this is saying is that for every dollar the bank is earning it gets to keep 50 cents and it has to spend 50 cents to earn that dollar. The ratio can be as low as the mid to low 40% range, which means that for every dollar the bank earns it gets to keep 60 cents and spends 40 cents, a very efficient bank. Ratios in excess of 75% mean the bank is very expensive to operate.

Liquidity & Funding

Liquidity risk Liquidity management Factors for evaluating liquidity Ratings

Funding and Liquidity are related, however they are separate situations. Funding is what a bank relies upon to grow its business and the asset side of the balance sheet above and beyond what could be accomplished with just equity. Funding is provided

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by deposits, short-term debt and longer-term debt. Funding means access to capital. Liquidity is what a bank requires if Funding is interrupted and the bank must still be able to meet certain obligations. What is the liability structure / composition of the institutions liabilities, including their tenor, interest rate, payment terms, sensitivity to changes in the macroeconomic environment, types of guarantees required on credit facilities, sources of credit available to the institution and the extent of resource diversification. A bank's least expensive means of funding loan growth is through deposit accounts. When this is not available, banks must rely on more expensive funding sources such as borrowing funds at wholesale rates or liquidating investment securities portfolios. The Deposit Growth Rate, which is computed by subtracting prior-period total deposits from current-period total deposits, then dividing the difference by priorperiod total deposits, indicates how a bank is funding the asset side of its balance sheet. Funding sources also include: Net earnings Issuance of common and preferred securities Trust preferred securities Commercial paper Senior debt Subordinated debt Securitizing various financial assets including credit card receivables. Monetizing investment securities Liquidity refers to reserves of cash, securities, a bank's ability to convert an asset into cash, and unused bank lines of credit. The faster the conversion the more liquid the asset. Illiquidity is a risk in that a bank might not be able to convert the asset to cash when most needed. Moreover, having to wait for the sale of an asset can pose an additional risk if the price of the asset decreases while waiting to liquidate. Thus, if loans or assets are illiquid then liquidity is also limited, especially if the loans exceed stable deposits and available lines of credit. Liquidity must be sufficient to meet all maturing unsecured debt obligations due within a one-year time horizon without incremental access to the unsecured markets. Probably the most critical issue to examine for a bank is the ability to meet obligations. If earnings are poor and liquidity is high, the bank's lending may be too conservative, with a high proportion of proceeds from deposits are invested in low yielding liquid assets. If earnings are low and liquidity is low, then the bank may have an aggressive lending policy coupled with heavy borrowing. It examines "internal" sources of funds: maturing loans and marketable securities; and "external" sources of funds: is the bank dependent on large deposits from a single source or does it have a large and stable retail funding base? (Single sources should not exceed 10% of shortterm liabilities). The overall goal of management in the asset/liability/capital structure of the institution is to maximize the return earned from the assets, with the lowest risk profile and default ratio, and also minimize the cost of funds as much as possible to

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widen the spread between earnings and expenses (manage the net interest margin); and to utilize leverage over invested capital. Liquidity Management: "cash-out" or the risk of being illiquid when cash is needed. Sources and uses of funds approach: liquidity required for deposit withdrawals and loan demand. Structure of deposits approach: focuses on the stability of deposit liabilities.

Awareness of gap management: gap analysis is a measurement of interest rate sensitivity of assets and liabilities. If a company has a negative duration gap that means that its assets are paying off faster than its liabilities. The response can either be defensive or aggressive with regard to managing the spread between the yields of the institution's assets and their income from service sales and the cost of carrying on their operations, especially the return paid to savers to attract deposits and equity investments. Management's goal for assets: Primary reserves Sufficient cash on hand to cover customer deposits and withdrawals or clearing and collecting check payments; and maintain contemporaneous reserve requirements. Cash in the vault is not earning interest. Cash/total assets ratio rises in relation to the size of the institution. Secondary reserves Marketable securities portfolio: short-term and liquid for cash needs and pledging collateral. Treasury: relatively short-term maturities, increasing to 20% of total assets due to favorable tax and capital reserve treatment. Securities of states and municipalities: declined due to less favorable tax and capital treatment. Loans At a rate in excess of the cost of funds, to borrower with a good credit profile. Rates on corporate loans have been declining due to disintermediation/competition. Real estate loans have the highest margin but are less liquid and riskier. Total loans tend to approximate 60% of the total assets.

Liquidity Management related to assets: match maturity of assets with liquidity needs.

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The historical decline in liquid assets on hand is related to better management. Anticipation of deposit and loan changes. If the bank invests for yield, it will not be able to cover demands. Could be covered by liquidation of assets and borrowings. Commercial loan theory: confine loans to short-term, self-liquidating commercial loans. Money market approach: hold money market instruments such as Treasury bills, CP or banker's acceptances.

Management's goal for liabilities: Management goal for liabilities is also manage sources of funds (not just uses of funds/asset management) to meet liquidity requirements; and increase income potential. Funding requirements Customer deposits: the least expensive source of funding for the institution. The institution is seeking "core deposits," or passive accounts that stay with the institution out of loyalty or convenience (checking accounts, savings certificates and regular savings accounts). Non-deposit borrowed funds: cost more than customer deposit funds Federal funds for short-term liquidity. CDs if funding is needed for a longer period Liquidity Management related to Liabilities: Interest rates may be higher when the institution seeks to acquire funds. Requires that the financial condition of the bank be strong. Management's goal for Capital: provide the buffer to absorb losses, must maintain adequate equity capital to satisfy regulatory requirements, and have a financial condition that allows it to borrow funds. Must meet BIS risk assets to capital guidelines: 4% Tier one, 8% including Tier two capital; risk weighted asset categories. If condition has weakened, then funds will cost more. It is poor liquidity, as opposed to poor asset quality or inadequate capital, that leads to most bank failures. Key Ratios for Examining Liquidity Loans as a percentage of deposits = Loans (net) / Total deposits Maximum 80% to 90%, measures funding by borrowing as opposed to equity. However, can not also be too low as loans are considered the highest and best use of bank funds. Between 70% to 80% indicates that the bank still has capacity to write new loans.

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A high loan-to-deposit ratio indicates that a bank has fewer funds invested in readily marketable assets, which provide a greater margin of liquidity to the bank.

Liquid assets / Total deposits: measures deposits matched to investments and whether they could be converted quickly to cover redemptions. Loan loss or Non-performing loans / Total loans: is the trend increasing or decreasing?

Illiquid loans / Stable deposits (deposits less brokered CDs and CDs over the FDIC insured amount) and borrowings plus excess liquidity. Book Value If the financial institution had to be shut down immediately, the book value of the financial institution is equal to the Total Assets minus Liabilities, Preferred Stock, and Intangible Assets. However, this is a straight arithmetic exercise. The reality is that a distressed bank has impaired or hard to sell assets and it is not likely that another bank or investor is going to purchase them at par. Thus, the assets must be examined to determine whether there are any secured lenders who have a claim on assets, what type of securities is the financial institution holding in its portfolio and what is the present performance of the loan portfolio. The fixed assets are not going to be readily marketable and the fixtures and furniture will either disappear with employees or be of salvage value only. Liabilities usually tend to be definite in value while assets tend to have fluctuating or questionable value. Issues affecting banks: Further disintermediation of bank assets: trend toward the securitization of assets by corporate customers (banks will decrease as primary suppliers of credit to high quality borrowers. This means that a higher proportion of bank's remaining credit exposure will be to less marketable credits where there is less demand and less hedging instruments available) and the increasing use of mutual funds and private pension funds by consumer customers. The continuing increase in non-bank competitors offering similar services. Continued deregulation and globalization of services. Increased technological innovation and technology costs in order to compete effectively. How to differentiate and appropriately price services such as origination, structuring and administration. Consistent risk pricing and Basle Committee capital requirements for credit risk.

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Chapter 5

FINANCIAL ANALYSIS
Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project. Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may:

Continue or discontinue its main operation or part of its business; Make or purchase certain materials in the manufacture of its product; Acquire or rent/lease certain machineries and equipments in the production of its goods; Issue stocks or negotiate for a bank loan to increase its working capital. Make decisions regarding investing or lending capital other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.

Goals of Financial Analysis

Financial analysts often assess the firm's: 1. Profitability its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;

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2. Solvency Its ability to pay its obligation to creditors and other third parties in the long-term. 3. Liquidity Its ability to maintain positive cash flow, while satisfying immediate obligations; Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time. 4. Stability The firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. Financial analysts often compare financial ratios (of solvency, profitability, growth...): Past Performance: Across historical time periods for the same firm (the last 5 years for example), Future Performance: Using historical figures and certain mathematical and statistical techniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects. Comparative Performance: Comparison between similar firms. These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example Return on equity = Net profit / equity Return on assets = Gross profit / balance sheet total P/E-ratio = Stock price / earnings per share Comparing financial ratios are merely one way of conducting financial analysis. Financial ratios face several theoretical challenges: They say little about the firm's prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms. One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm's performance. Seasonal factors may prevent year-end values from being representative. A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.

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Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values. They fail to account for exogenous factors like investor behavior that are not based upon economic fundamentals of the firm or the general economy

1. Balance Sheet Ratio Analysis

Improtant balance sheet ratio liquidity and solvency and leverage. This include following important ratios: Liquidity ratio These ratios indicate the ease of turning assets into cash. Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.
Current ratio The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business.

The cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows:

The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded.

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 Quick Ratio Quick Ratio to use its near cash or quick assets to immediately extinguish or retire its current liabilities. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:

The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test. Generally, the acid test ratio should be 1:1 or better, however this varies widely by industry. Working Capital Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

A general obervation about these threee liquidity ratios is that the higher they are the better, especially if you are relying to any signficiant extent on credito money to finance assets.
Leverage ratio The meaning of the leverage ratio differs by context. Often: the ratio of debts to total assets. Can also be the ratio of debts (or long-term debts in particular, excluding for example accounts payable) to equity.

Normally used to describe a firm's but could describe the accounts of some other organization, or an individual, or a collection of organizations.

Income Statement Analysis

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The income statement is a basic record for reporting a company's earnings. Since earnings are a fundamental component in a firm's worth, it is essential for investors to know how to analyze different elements of this important document. Gross Margin Gross margin, Gross profit margin or Gross Profit Rate can be defined as the amount of contribution to the business enterprise, after paying for direct-fixed and direct-variable unit costs, required to cover overheads (fixed commitments) and provide a buffer for unknown items. It expresses the relationship between gross profit and sales revenue. It can be expressed in absolute terms:: Gross Profit = Revenue Cost of Goods Sold or as the ratio of gross profit to sales revenue, usually in the form of a percentage: Cost of goods sold includes variable and fixed costs directly linked to the product, such as material and labor. It does not include indirect fixed costs like office expenses, rent, administrative costs, etc. Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income. For a retailer it will be their markup over wholesale. Profit Margin Profit margin, Net Margin, Net profit margin or Net Profit Ratio all refer to a measure of profitability. It is calculated using a formula and written as a percentage or a number. The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss. Inventory turnover ratio Inventory turnover ratio is one of the Accounting Liquidity ratios, a financial ratio. This ratio measures the number of times, on average, the inventory is sold during the period. Its purpose is to measure the liquidity of the inventory. A popular variant of the Inventory turnover ratio is to convert it into an average days to sell the inventory in terms of days. Remember that the Inventory turnover ratio is figured as "turnover times" and the average days to sell the inventory is in "days".

Inventory turnover ratio = Cost of goods sold / Average inventory Average days to sell the inventory = 365 / Inventory Turnover Ratio

Account Receivables Turnover Ratio An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity

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ratio, measuring how efficiently a firm uses its assets. Formula:

Some companies' reports will only show sales - this can affect the ratio depending on the size of cash sales

Return on Assets The Return on Assets (ROA) percentage shows how profitable a company's assets are in generating revenue.

This number tells you "what the company can do with what it's got", i.e. how many dollars of earnings they derive from each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Return on assets gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets. Rate of Return In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (realized or unrealized) on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage rather than a fraction. The rate of return can take on any value greater than or equal to -100% -- a positive value corresponds to capital growth, a negative value corresponds to capital decay, and a value of 0% corresponds to no change.

Other improtant ratios

Capital Adequacy Ratio - CAR A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures.

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Also known as "Capital to Risk Weighted Assets Ratio (CRAR)." Net Interest Income All firms can divide the balance sheet into assets and liabilities. For banks the assets are commercial and personal loans, mortgages, construction loans and securities. The liabilities are deposits from customers. The net interest income (NII) is then the difference between the revenues on the assets and the cost of servicing the liabilities. Notice that both cash flows are not interest payments. In other words, the NII is the difference between the interest payments to the bank on loans and the interest payments by the bank to the customers on the deposits. NII = {Interest payments on assets} - {Interest payments on liabilities} Net Interest Margin Net Interest Margin (NIM) is a measurement of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders(for example, deposits).

Vertical Analysis
Technique for identifying relationship between items in the same financial statement by expressing all amounts as the percentage of the total amount taken as 100. In a balance sheet, for example, cash and other assets are shown as a percentage of the total assets and, in an income statement, each expense is shown as a percentage of the sales revenue. Financial statements using this technique are called common size financial statements. A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of analyzing a balance sheet in this manner are that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes in one business. For example, suppose XYZ Corp. has three assets: cash and cash equivalents (worth $3 million), inventory (worth $8 million) and property (worth $9 million). If vertical analysis is used, the asset column will look like: Cash and cash equivalents: 15% Inventory: 40% Property: 45% This method of analysis contrasts with horizontal analysis, which uses one year's

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worth of entries as a baseline while every other year represents differences in terms of changes to that baseline.

Horizontal Analysis
International accounting standards call for the presentation of comparative financial statements that gives the current years and past years financial information. A common starting point for studying such statements is horizontal analysis, which begins with the calculation of monetary amount changes and percentage changes from the previous to the current year. The percentage change must be calculated to show how the size of the change relates to the size of the amount involved. Horizontal analysis is an easier way of comparing the performance of two different financial statements either within the same company or accounts of the other entities within the same industry. Horizontal analysis involves line by line comparison of the financial figures from two different sets of accounts.

Working Capital Management

Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

Decision criteria
By definition, working capital management entails short term decisions - generally, relating to the next one year period - which is "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability. One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the interrelatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows

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Irfan Shahzad

this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link shortterm policy with long-term decision making. See Economic value added (EVA). Management of working capital Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ). Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances. Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring.

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Chapter 6 ANALYSIS OF FINANCIAL STATEMENT

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Description Assets Cash and balances with treasury banks Balance with other banks Lending to financial institutions Investments Advances Other assets Operating fixed assets Operating fixed assets Deferred tax asset Total assets Liabilities Bills payables Borrowing from financial institution Deposits and other accounts Sub-ordinate loans Liabilities against assets subject financial lease Other liabilities Deferred tax liabilities Total liabilities

Bank Alfalah ltd Balance Sheet As at December 31 2004

2005

2006

2007

19708518 3183957 35503196 88931400 3226959 3226959 4280504 154834534

4798070 9798070 27050493 57416255 11864010 3851529 3851529 6620067 248313793

859360 7859360 12456653 56502210 149999325 5633051 5633051 10502990 275685541

9436378 9436378 3452059 88491564 171198992 6012097 6013097 1922324 328895152

2233671 12723830 129714891 1899480 to 2725344 275834 149593050

3733124 5844389 222345067 3223355 521966 484066 240849667

3091135 8394130 239509391 3222106 7305496 1921338 263443596

4138243 21230697 273173841 3220858 9531860 1379809 312675308

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Irfan Shahzad

Net assets Represented by Share capital Reserves

5261484

7464126

12241945

16219844

2500000 1008772

3000000 1851218 1886845 6738063 726063 7464126 296016 49

5000000 2749533 2823072 10572605 1669340 12241945 606132 53

6500000 2414833 4851840 13766673 2453171 16219844 650000 52

Un appropriated profit 860300 Total 4369072 Surplus on revaluation of assets 892412 -net of deferred tax Equity 5261484 Weighted average number of ordinary 280428 shares Average share price 46

Bank Alfalah ltd Profit and Loss Account For the year ended December 31 Description 2004 2005 (Rs. 000) (Rs. 000) Markup/return/interest earned 5602203 12246811 Markup/return/interest/expensed 2434459 7204992 Net markup/interest income Prevision against non-performing loans -net prevision for Bad debts written off directly Total Provision Net markup/interest provision income 3185744 -370208 (2165) (351) (372724) 5041819 -402298 (512) (402810) 4639009

2006 (Rs. 000) 21191470 15232886 59585884 -697690 (1557) (699227) 5259357

2007 (Rs. 000) 25786871 16620963 9162908 -2370867 (5844) (2376711) 6786197

after 2813020

Non markup/interest income Fee, commission and brokerage income Dividend income Income from dealing in foreign currencies Gain on sale of securities Unrealized gain/loss on revaluation of investments Classified as held for trading Other income Total non markup/interest income

675868 52539 218820 -

1158747 52014 290091 239551 23163

1804998 37393 386997 180751 (27599)

2429599 64772 474510 2053192 (14929)

572822 15200449

504967 2268533

842099 3224639

1031372 6038466

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Irfan Shahzad

Total Income Total non markup/interest expenses Administrative expenses Provisions against off balance sheet obligations Other charges Total non ,markup/interest expenses Total Expenses Extraordinary/unusual items Profit before taxation Taxation For the period: current Deferred For prior year: current Deferred Net taxation Profit after taxation Un appropriated profit brought Forward as previously reports Effect of change in accounting policy with respect to dividend Declared after the balance sheet date Un appropriated profit brought forward ad restated Transfer from general reserve Transfer from surplus on revaluation of fixed assets- current year net of tax Profits available for appropriation Appropriations Transfer to statutory reserve Bonus shares Dividend Un appropriated forward profit

4333049

6907542

8483996

12824663

2677635 1700 2679335 1653734 1653734 586159 (3663) (30000) 9247 561745 1091989 463042 500000

4313023 10125 21104 4344252 2563290 2563290 592635 267524 (7000) 8037 861196 1702094 860300 -

5874745 43306 5918051 2565945 2565945 476226 427902 (100874_ 803254 1762691 1886845 -

8272587 6959 9565 8289111 4535552 4535552 1726810 (321487) 1405323 3130229 2823182 -

963042

860300

1886845

2823072

23667

24870

26074

24585

2078698

2587264 (340419) 500000 360000 (1200419) 1386845

3675610 -

5977886 -

(218398) (500000) 500000 (1218398) carried 860300

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Irfan Shahzad

Analysis of financial statement (Financial Ratios)

A written report which quantitatively describes the financial health of a company. This includes an income statement and a balance sheet, and often also includes a cash flow statement. Financial statements are usually compiled on a quarterly and annual basis. In the following part financial analysis of bank has been done. Operating Results Pakistan is amongst ten top banking sectors in the world. Bank Alfalah has had its share In the phenomenal profits growth of banking sector. Bank Alfalah profit has been increased, and profit has been raised largely due to increases in advances, investment, and lending to financial institutions. There has been a shift from advances to higher investment in 2007. in 2007 Pakistan has great achievement in investment and investor has made largest investment since independence. And all industry in Pakistan has shown the trend of advancement. Profit before Tax Bank Alfalah profit before tax in year 2007 is Rs. 4535522 million, which is more than 76% as compared to the profit of previous year which is Rs. 2565945 million. Bank Alfalah pays a huge tax to government. It pays total tax in year 2007 of Rs. 1405293 million. Profit of Bank Alfalah Bank has pure profit of Rs. 3130229 millions as compare as to previous year of Rs. 1762694 millions. Profit is increased upto 77%. This increase in profit is attributing to overall increase in business volumes. The bank continues to strength the presence in the marked place in year 2007. Bank has a nationwide network of 288 branches that include 49 Islamic branches, and five overseas branches two in Afghanistan and three in Bangladesh. Profit of bank as compare to previous year is shown in following chart,

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Irfan Shahzad

Profit before Taxation

5000000 4500000 4000000
Profit before Tax

3500000 3000000 2500000 32565945 2000000 1500000 1000000 500000 0 1653734 2563290

4535552

2004

2005 Year

2006

2007

Advances & Deposits At a Glance 300000000 250000000 200000000 Rupee 150000000 100000000 50000000 0 2004 2005 Year 2006 2007

Advances Deposits

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Irfan Shahzad

Financial Ratio Analysis Bank Alfalah

Ratio Analysis to Financial Statements to analyze the success, failure, and progress of a business. Ratio Analysis enables the business owner/manager and shareholders to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this compare your ratios with the average of businesses similar to yours and compare your own ratios for several successive years. A number a ratios are designed depending upon the purpose of the analysis. To analysis the performance of financial statements of bank various types of ratios are calculated with different kinds of measures which are as following.

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Irfan Shahzad

1. Earning Ratios
Following ratios are used in earning ratios. a) Earning per share The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Formula

Calculated 2007 2006 2005 2004 3130229 / 650000 1762691 / 606132 1702094 / 296016 1091989 / 280428
Earning per Share

= 4.82 = 2.91 = 5.75 =3.89

6 5 4
Rupee 4.82 EPS

3
3.89

5.75

2.91

2 1 0

2004

2005 Year

2006

2007

Interpretation Trend in EPS is major factor affecting the market value of company. We see 63% increase in EPS for the year 2007.It shows tremendous increase in earning power of company. It implies an effective and efficient utilization of resources. As a result shareholders can expect better dividend and increase in market value of company. The bank provide basic and doubled earning per share (EPS) for its share holders. The bank performance has improved in all segments in 2007. Earning per share (EPS) ratio of the bank is Rs. 4.82, per share in 2007 s compare to Rs. 2.91 per share in 2006. The ratio shows significant improvement.

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b) Return on Deposits (ROD) This ratio measures the return on deposit (ROD) the amount which has been deposited with the bank. Formula

Calculation 2007 2006 2005 2004

3130229 / 273179841 = 1.15% 1762691 / 239509391 = 0.74% 1702094 / 222345067 = 0.77% 1091989 / 129714891 = 0.84%

Return on Deposits
1.20% 1.00% 1.15% 0.80% Re turn 0.60% 0.40% 0.20% 0.00% 2004 2005 year 2006 2007

Interpretation A positive growth of deposits has succeeded in improving the ROD of the bank which has declined in 2006. Long term deposits by both customers and financial institutions have seen a growth, leading to an increased interest expense. Since 2004 there has been a growth of 131% in the bank's deposits which is an indicative of the growth that this bank has seen. Profits have also risen due to increase in advances, investments and lending to financial institutions (Earning Assets). The lending to financial institutions alone grew by 264% in 2006. Deposits increase from Rs. 239m to Rs. 273 m an increase of 9% in 2007.the trend of ROD has a reverse this year as it has improved from 0.75 in 2006 to 1.16% in2007 mainly because of improved control on cost resulting in improved profile. Due to

0.74%

0.77%

0.84%

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Irfan Shahzad

bank eagerness for raising longer term deposits to match their assets maturity profiles. It is expected that the share of fixed deposit in total deposits of the banking system would continue to further increase in days ahead. c) Return on Assets (ROA) An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment". The formula for return on assets is:

Calculation 2004 2005 2006 2007

1091989/154834534 1702094 /248313793 1762691/275685541 3130229/328895152

Return on Assets

= 0.71% =0.69% =0.64% =0.95%

1.00% 0.90% 0.80% 0.70% Return 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 2004 2005 year 2006 2007 0.71% 0.69% 0.64% 0.95%

Interpretation Although the ROA of the bank was better than the industry average, it increased from 0.71 in 2004 to 0.95 in 2007. The total assets of the bank have grown by 11% from Rs 248.31billion to Rs 328.89 billion in 2007. The bank's earning assets have shown a significant increase but the high costs of funding these EA (earning assets) have resulted in low profits. In 2007 EA grew by 19.3% from 275.69 billion to 328.89 billion in 2007. The bank earning assets showing a significant increase but the costs of funding these EA have resulted in low profits.

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Irfan Shahzad

d) Return on Equity (ROE) The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as:

Calculation 2004 2005 2006 2007

1091989/5261484 1702094/7464126 1762691/12241945 3130229/16219844

=20.75% =22.80% =14.40% =19.30%

Interpretation ROE has had a fluctuating trend for the bank. It rose in the 2005 on the back of high profits for the year but declined in the 2006 and in 2007 is at 19.30%, it is raisin from 275.69 billion to 328.89 billion. it is showing improvement. As the general trend in the banking sector, this bank is also retaining profits and has had fresh capital inflow. One reason for this enhanced capital base is aimed at meeting the minimum capital requirement of the SBP.
Return on Equity (ROE)
25.00% 20.00%

22.80%

20.75%

Return on Equity

15.00% 10.00% 5.00% 0.00%

19.30%

14.40%

2004

2005 Year

2006

2007

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Irfan Shahzad

2. Yield
In finance, yield is a percentage that measures the cash returns to the owners of a security. Normally it does not include the price variations, at the difference of the total return. Yield applies to various stated rates of return on stocks (common and preferred, and convertible), fixed income (bonds, notes, bills, strips, zero coupon), and some other investment type insurance products (e.g. annuities). Net interest income of the bank registered a growth of 53.8% to Rs 9.1 billion in FY07 compared to Rs 5.9 billion in FY06 mainly on the back of interest earned on the deposits to customers. (Total deposits of the bank grew by Rs 33.6 billion during FY07). Yield is an indicative of the profitability of the banks assets. The bank's net interest income (NII) has increased by 53.8% in 2007. The increase in NII is mainly because of the high spreads that Bank Alfalah is taking advantage of like others in the sector. An important observation in the income of the bank is that its earning assets have been generating increasing returns, over the years. But overall profitability has not seen great increments because of increasing costs of funding these earning assets. An important observation in the income of the bank is that its earning assets have been generating increasing returns over the years. But overall profitability had not seen great increments because of the increasing costs of funding these earning assets. In the year 2006 bank's markup/interest costs rose by 111% as compared to a 73% increase in its earnings. This was also indicated by a declining interest margin, which is a ratio of markup/return/interest expensed to the markup/return/interest income. The result is that though the yields are high, overall profits are low and so ROA, ROE and ROD have shown a declining trend in 2006. However the situation improved in FY07. Banks markup interest costs rose by 9,11% as compares to a 21.67% increase in its earning. This is indicated by a declining interest margin ratio, which is a ratio of markup/return/interest expands to the markup/return/interest income and consequently ROA, ROE, and ROD have shown a growing trend in 2007. 3. Asset Qualit Ratios Non-performing loans forming loans (NPLS) A non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 3 months, but this can depend on the contract terms. A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full NPLs are loans and advances whosse markup/interest or princpile os overdue by 90 days or more from the date are classified as non performing.

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The non-performing loans (NPLs) have shown variable character during the period of analysis, first increasing from Rs 2.845 billion in FY03 to Rs 2.935 billion in FY04, then decreasing by almost two thirds of that to Rs 1.06 billion in FY05. Thus there was a drastic cut down in NPLs in this year, which was also reflected in the industry figures, where NPLs decreased from Rs 211 billion in FY03 to Rs 177 billion in FY05. This was the result of extensive measures by the industry in general and this bank in particular to improve the regulation and monitoring of loans and control defaults through more rigorous screening. The following year, however, once again showed a rapid rise of more than a hundred percent in NPLs to Rs 2.31 billion. This rise in NPLs can be more accurately attributed to the rapid rise in interest rates during this period than to any lapse in the bank's screening procedures, as the State Bank had taken definite measures to tighten its monetary policy. At the same time there was a high level of indebtedness in both private sector and the consumer markets. There was a slowdown in rapid decline in the industry NPLs, which stood at Rs 175 billion at the end of FY06. Disaggregated industry analysis revealed that there were plenty of fresh NPLs incurred during this period. However, extensive write-offs and recoveries managed to reduce the overall level of NPLs. The bank is now making greater efforts aimed at the recovery of NPLs, and a tightening of the loan policies is expected. Provisioning against NPLs grew phenomenally during FY07 and amounted to Rs 2.3 billion over Rs 697.6m in FY06. The bank made incremental provisioning of Rs 1.0 billion during the year due to the withdrawal of FSV benefit, which was the major reason behind the upsurge in the provisions. The comprison between figures on2007 and 2006 reveal that there has been a continuing increase in NPLs into the current year, such that NPLs are now a higher percentage of assets, while the provision coverage for NPLs has declined significantly. The bank is now making greater efforts aimed at the recovery of NPLs, and a tighening of the loan policies is expected.
Non Performing Loans (NPL)
4500000 4000000 3500000 3000000

4030000

NPL

2500000 2000000 1500000 1000000 500000 0

2004

2935000

2310000

2005

1770000
Year

2006

2007

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Irfan Shahzad

NPL to Advances
3.50% 3.00% 3.30% 2.50% NPL to 2.00% advances 1.50% 1.00% 0.50% 0.00% 2004

2.35%

1.54%

2005 Year

Provision for NPL

1.49%

2006

2007

3500000 3000000 2500000 Provision 2000000 2236456 1500000 1552981 1360057 2004 1000000 500000 0 2005 year 2006 2007 3151396

4. Debt Management
A unique strategy developed to help a debtor manage their debt. This strategy is usually developed and implemented by an outside company or organization on behalf of the debtor, usually because the debtor is unable to sufficiently manage their debt on their own, due to lack of knowledge or because they are overwhelmed by the amount of debt. It involves a designated third party assisting a debtor with repayment of his or her debt. Many companies specializing in credit counseling offer debt management plans

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Irfan Shahzad

to help people with heavy debt and damaged credit get their financial situation under control. A simpler definition of debt management could be the routine practice of spending less than one earns. However, for all intents and purposes, debt management is a structured repayment plan set up by a designated third party, either as a result of a court order or as a result of personal initiation. The debt management figures show that the assets of the bank have become less leveraged during the current period. This was due to the fact that the debt has increased but equity has increased by a greater percentage in recent years. Equity increased by 11% in FY04, 42% in FY05, 64.01% in FY06 and 32% in FY07. However, liabilities rose by an astounding 57% in FY04 and a further stunning 60% in FY05, and then a relatively modest 11% in FY06 and 19% in FY07. The steep increases in debt in FY04 and FY05 were due to a spectacular rise in deposits in both years. Deposits rose from a modest Rs 76.7 billion in 2003 by almost 70% to reach Rs 130 billion in 2004, after which they again rose by more than 70% to touch Rs 222 billion in 2005. Deposits continued to show strong growth, rising by more than 14% in 2007 to cross Rs 270 billion. The major upward trend in deposits throughout the industry has been the result of the heavy economic activity during recent years fuelling the demand of consumers and the private sector for credit. The industry has also shown a trend towards increasing deposits in banks, a major cause of which is, of course, the booming economic activity, apart from higher foreign inflows in the form of worker remittances and FDI, as well as expanding branch networks, product innovation and better efforts at marketing. In fact, deposit growth in the top five banks, including Alfalah, was actually slower than that in the next five banks. However, Local Private Banks have shown the highest deposit growth of any in the banking sector. Deposits showed consistent growth in both local and the foreign currencies. Both customer and the institutional deposits showed steep growth in 2004 and 2005, while in 2006, growth in customer deposits slowed while institutional deposits showed a decline. Deposit growth had also slowed in the industry as a whole in 2006, declining from 18.3% in FY05 to 13.1% in FY06. Another marked trend within the deposit structure of the bank was the greater growth shown by fixed deposits as compared to and at the cost of saving deposits. Fixed deposits increased by an absolutely stunning 100% and 300% in FY04 and FY05 respectively, and by a further 11% in FY06, thus attaining a level of almost Rs 89 billion at the end of that year, as compared to a mere Rs 11 billion at the end of FY03. On the other hand, while savings deposits grew by almost 55% in FY04, their growth slowed to around 25% in FY05, and actually turned into a 3% decline in FY06, so that their level changed from Rs 44 billion at the end of FY03 to Rs 79 billion at the end of FY06. This is a good sign for the bank since its long term deposits havdebt to Asset Ratioe risen.

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Irfan Shahzad

a) Debt to Asset Ratio The Debt to Assets, or Debt to Total assets financial ratio measures a company's solvency. It is derived by taking the company's total liabilities and dividing by the company's total assets, which can both be found on the balance sheet. It measure the percentage of funds provided by sources other than equity. Formula

Calculation 2004 2005 2006 2007 149593050 / 154834534 240849667 / 248313793 263443596 / 275685541 312675308 / 328895152 =0.96 =0.97 =0.96 =0.95

Interpretation Bank debt to asset ratio has been declined as compared to 2006 and 2005 which is high relatively 0.96% and 0.97%. it is low decline and not much effect to bank operations. The comprison of debt to asset ratio shown that in last three financial years, bank creditors have supplied more than 95% of the total financing.
Debt to Assets 0.97% 0.97% Debt to Assets 0.97% 0.96% 0.96% 0.96% 0.95% 0.95% 0.94% 2004 2005 Year 2006 2007

b) Debt to Equity Ratio The Debt to Equity Ratio measures how much money a company should safely be able to borrow over long periods of time. A measure of a company's financial

0.96%

0.95%

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Irfan Shahzad

leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. Formula

Calculation 2007 2006 2005 2004

149573050 / 5261484 240849667 / 7464126 263443596 / 12241945 312675308 / 16219844

=28.43 =32.27 =24.92 =19.28

Interpretation Bank financial report shows a decline in debt to equity ratio. debt to equity ratio is lowest in last five years. This means banks share holders have supplied very least amount of the total financing in year 2007. This ratio is very low, and this is lowest value in bank alfalh working.
Debt to Equity
35 30 32.27 25 Debt to 20 Equity Ratio 15 10 5 0 2004 2005 Year 2006 2007 24.98

24.92

21.83

5. liquidity Ratios
A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in

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Irfan Shahzad

calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency. A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. a) Earning Assets to Total Assets An asset is a thing which provides income. Earning assets are interest bearing financial instrumental, which are principally commercial, real estate; consume loans, investment securities, money market investments, lease finance receivables, and time deposits placed in foreign banks. This ratio shows the proportion of the earning assets of the bank in total assets. Formula

Calculation 2007 2006 2005 2004

124434596 / 154834564 203330758 / 248313793 218958188 / 275685541 244455479 / 328895152

=0.80% =0.82% =0.79% =0.80%

Interpretation The ratio of earning assets to total assets for the bank is 0.80% as on dec31,2007as compared to dec31,2006 showing remark able uniformity, suggesting careful management of and investmentin interest generating assets. With in earning assets, these assets are showing mixing trend like they increased in 2005 by 63040%, decreased in2006 by 7.69% ans again increase in 2007 by 20.18%. this variation also caused a fluction in the precentage of earning assets held as advances, which increase by 33.66%,26.19s% and 14.13% in 2005,2006 and 2007 respectly. The trend in investments has been mainly a inclinind one, which increased by 61.72%, 45.38% and 14.13% in 2005, 2006 and 2007 respectly.

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Irfan Shahzad

Trend Analysis
Earning Assets to Total Assets Ratio

0.82% 0.82% 0.81% 0.81% Earning Assets 0.80% to Total Assets 0.80% 0.79% 0.79% 0.78% 0.78% 2004 2005 0.80% 0.82% 0.80%

Year

2006

0.79%

2007

Earning Asset to Deposits

97.00% 96.00% 95.00% 94.00% Earning 93.00% 92.00% 91.00% 90.00% 89.00% 88.00% 2004 96.33% 95.93% 2005 Year 91.45% 2006 91.42% 2007

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Irfan Shahzad

b) Advances to Deposit Ratio Advance on deposit is the ratio of advances to deposits. Formula

Calculation 2007 2006 2005 2004 88931400 / 129714891 118864010 / 222345067 149999325 / 239509391 149336509 / 273173841 =0.69% =0.53% =0.63% =0.63%

Interpretation ADR has shown mix trend over the period from 2004 to 2007. the ADR of the bank as on dec31, 2007 is 0.63% as compared to 0.63% as on dec31,2006. the said ratio is unchanged over the period because advances and deposits of the bank are growing with the same growth rate,that is 14%. This ratio of the b ank as whole had actually increased over the period, as a result of an aggressive loans policy overtaking thestrong growth in deposits. The banlk however, managed to maintain and actually improve its liquididty position. As had been mention above, deposits showed a steep up trend, increasing by almost 70% 2005 and 7% in 2006 and by futher 14% in 2007. on the other hand , though advances showed more moderate growth rates of 31%, 26% and 14% in 2005,2006 and 2007 respectly, showing a moderate and cautioue expansion in loans by a the bank. Advance have shown a strong upward trens over both the short and long term categories. Trend Analysis
Advance to Deposit Ratio
0.70% 0.60% 0.69% 0.50% Advances to 0.40% Deposit 0.30% 0.20% 0.10% 0.00% 0.63% 0.63%

0.53%

2004

2005
year

2006

2007

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Irfan Shahzad

Solvency Ratio
Solvency is the ability of a business to have enough assets to cover its liabilities. Solvency is often confused with liquidity, but it is not the same thing. Solvency is often measured as a ratio, the "current ratio," which is the total current assets divided by the total current liabilities. In order to be solvent and cover liabilities, a business should have a current ratio of 2/1, meaning that it has twice as many current assets as current liabilities. This ratio recognizes the fact that selling assets to obtain cash may result in losses, so more assets are needed. The solvency situation for the industry as a whole showed a marked improvement in recent years caused by increasing profitability and fresh inflows of capital. The figures for the bank show that there was a decline in the solvency position in 2005 as a result of high growth in deposits. This situation, however, has improvement in 2006 because of increases in equity which once again finances from almost 4% of assets. However earning assets in the comprising to deposits declines from around 0.96 in 2004 to 0.91 2005 and 2006. This is caused by the fact that while deposits have shown great growth over the period of time. The bank has maintained a consistent approach with respect to its earning assets and has not expanded them to the same extent. The increase in MCR by the SBP has also led to banks increasing their capital share. The figures for FY07 show a continuing improvement in the solvency position of the bank as a result of further increases in capital. This follows an industry-wide trend of better solvency. Banks have dominated the capital markets of Pakistan because of their superlative performance. They comprise one third of the total capitalisation of the KSE.
Equity to Assets
5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

Equity ratio

4.93%

4.44%

2004

3.40%

2005 Year

3.01%

2006

2007

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Equity to Deposit
6.00% 5.00% 4.00% 5.11% 4.06% 5.94%

Equity to 3.00% Deposits

2.00% 1.00% 0.00%

3.36%

2004

2005 Yaer

2006

2007

Earnings of bank
Earnings of bank Alfalah have been rising on the back of higher profitability over the years. As mentioned earlier banks have been retaining their profits. But the overall boom in the economy and the banking sector has made the investors confident about long term gains. Thus price has been increasing for Alfalah. The price of bank Alfalah's share has fluctuated between Rs 34 and Rs 87 over the past three and a half years. P/E has been on the rise that indicates that investors are looking forward to invest in the stocks of the bank in expectation of better returns in future. Though a multiple of 13.7x makes the share look overvalued, its strong fundamentals and in particular the success of its subsidiary Warid telecom has kept the investors interested in it.

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Price to Earning Ratio

20.00% 18.00% 16.00% 14.00% 18.50% 12.00% PE 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2004 2005 year 2006 2007 11.90%

11.50%

Market value Added (MVA)

Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors. If MVA is positive, the firm has added value. If it is negative, the firm has destroyed value. The amount of value added needs to be greater than the firm's investors could have achieved investing in the market portfolio, adjusted for the leverage (beta coefficient) of the firm relative to the market. MVA is the present value of a series of EVA values. MVA is economically equivalent to the traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if the cost of capital is used for discounting. The formula for MVA is:

8.50%

Description Average stock price No. of Shares Market Value Equity Capital MVA

2004 46 280428 12872424 4870482 7610940

2005 49 296016 14428737 7464126 6964611

2006 53 606132 32260433 12241945 20018488

2007 60 650000 33625114 13596568 17405270

Bank is continuously maximizing the wealth of its stockholders every year by adding valule to investment suppied by its shareholders by its stockholders and achieving its goal very efficiently ans efectly.

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Trend in Market Price of Stock

60 50 60 40 53 49 Average 30 Market Price 20 10 0 2004 2005 Year 2006 2007 46
40000000 35000000 30000000 Average Stock Price No. of Shares Market Value Equity Capital Market Value Added 25000000 20000000 15000000 10000000 5000000 0 20004 2005 years 2006 2007

Analysis of Bank Shares

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Description Earning Ratios Earning per share (EPS) ROA ROE ROD Assets Quality Ratios Non Performing Loans(NPL) NPL to Advances Provision Provisions to NPL Market Value Ratios Average Share Price Price to Earning Book Value Per Share Market Value to Book Value Market Value of Stock Market Value Added Debt Management Debt to Equity Debt to Assets Deposit Times Capital Liquidity Earning Assets to Assets Advance to Deposit Solvency Equity to Assets Equity to Deposit Earning Assets to Deposit Other Ratios Net Profit Margin Net Interest Margin

Summary Of Ratio Analysis As on December 31st 2004 2005 3.89 0.71% 20.75% 0.84% 5.75 0.69% 22.80% 0.77%

2006 2.91 0.64% 14.40% 0.74%

2007 4.82 0.95% 19.30% 1.15%

2935000 3.30% 1360057 0.46%

1770000 1.49% 1552981 0.88%

2310000 1.54% 2236456 0.97%

4030000 2.35% 3151396 0.78%

46 11.79 18.76 2.45 12872424 7610940

49 8.48 25.22 1.93 14428737 6764611

53 18.3 20.2 2.64 32260433 20018488

60 12.46 24.95 2.4 33625114 17405270

28.43 0.96% 24.65

32.27 0.97% 29.79

24.92 0.96% 19.56

19.28 0.95% 16.84

0.80% 0.69%

0.82% 0.53%

0.79% 0.63%

0.80% 0.63%

3.40% 4.06% 0.96%

3.01% 3.36% 0.91%

4.44% 5.11% 0.91%

4.93% 5.94% 0.96%

38.82% 43.32%

36.69% 58.83%

33.52% 71.88%

46.13% 64.46%

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Vertical Analysis
A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of analyzing a balance sheet in this manner is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes in one business. financial statement item that is used as a base value. All other accounts on the financial statement are compared to it. In the balance sheet, for example, total assets equal 100%. Each asset is stated as a percentage of total assets. Similarly, total liabilities and stockholders' equity are assigned 100% with a given liability or equity account stated as a percentage of the total liabilities and stockholders' equity. Vertical balance sheet reports all the items as a percentage of total assets and vertical profit and loss account reports all the items as a percentage of total revenues.

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Description

Bank Alfalah Ltd Vertical Balance Sheet As at December 31 2004 120.73% 2.06% 0.00% 22.93% 57.44% 2.08% 2.76% 0.00% 100%

2005 9.99% 3.91% 10.89% 23.12% 47.87% 1.55% 2.67% 0.00% 100%

2006 10.11% 4.62% 4.52% 20.50% 54.41% 2.04% 3.81% 0.00% 100%

2007 8.95% 5.59% 1.05% 26.91% 52.05% 1.83% 3.62% 0.00% 100%

Assets Cash and balances with treasury banks Balances with other banks Landings to Financial Institutions Investments Advances Other Assets Operating Fixed Assets Deferred Tax Asset Total Assets Liabilities Bills Payable Borrowings from Financial Institutions Deposits and other accounts Sub ordinate loans Liabilities Against Assets subject to Financial Lease Other Liabilities Deferred Tax Liabilities Total Liabilities Net Assets Represented By Share Capital Reserves Unappropriated Profit Surplus on Revaluation of Assets - Net of Deferred Tax Equity Total Liabilities and Equity

1.44% 8.22% 83.78% 1.23% 0.00%

1.50% 2.35% 89.54% 1.30% 0.00%

1.12% 3.04% 86.88% 1.17% 0.00%

1.26% 6.46% 83.06% 0.98% 0.00%

1.76% 0.18% 96.96% 3.40%

2.10% 0.19% 96.99% 3.01%

2.65% 0.70% 95.56% 4.44%

2.90% 0.42% 95.07% 4.93%

1.61% 0.65% 0.56% 2.82% 0.58% 0.00% 3.40% 100%

1.21% 0.75% 0.76% 2.71% 0.29% 0.00% 3.01% 100%

1.81% 1.00% 1.02% 3.84% 0.61% 0.00% 4.44% 100%

1.98% 0.73% 1.48% 4.19% 0.75% 0.00% 4.93% 100%

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Bank Alfalah Ltd Vertical Profit and Loss Account For the Year Ended December 31 Description 2004 2005 Markup/Interest/Interest Earned 100% 100% Markup/Interest/Interest Expense 43.32% 58.83% Net Markup/Interest Income Provision Against non Performing Loans and Advances - Net Provisions for Diminution in Value on Investment Bad Debt written off directly 56.68% -6.59% - 0.04% - 0.01% - 6.63% 50.05% 41.17% -3.28% 0.00% 0.00% - 3.29% 37.88%

2006 100% 71.88% 28.12% -3.29% 0.00% - 0.01% - 3.30% 24.82%

2007 100% 64.46% 35.54% -9.20% 0.00% - 0.02% - 9.20% 26.32%

Net Markup/ Interest Income after Provisions Non Markup/ Interest Income Fee, Commission and Brokerage Income Dividend Income Income from dealing in Foreign Currencies Gain on Sale of Securities Unrealized Gain/Loss on Revaluation of Investments Classified as Held for Trading Other Income Total non Markup/interest Income Non Mark up/Interest Expense Administrative expenses Provisions against off Balance Sheet Obligation Other charges Total non Markup/Interest Expenses Profit before Taxation Taxation For the Period ; Current Deferred For Prior Year ; Current Deferred Net Taxation Profit after Taxation

12.03% 2.16 3.89

9.46% 0.72 2.37 3.32 0.19

8.52% 0.25 1.83 1.19 - 0.13

9.42% 0.39 1.84 12.35 -0.06

0.00

10.19% 62.44 136.01 47.64 0.00 0.00 110.06 51.91 24.42 10.43 (3663) (30000) 0.16 23.07 19.43%

4.12 31.49 137.00 35.22 0.14 0.04 60.30 50.84 20.93 4.84 267524 (7000) 0.07 11.95 13.90%

3.97 21.17 142.38 27.72 0.00 0.04 38.85 43.06 12.11 2.25 427902 (100874) 0.00 5.27 8.32%

4.0 36.33 139.96 32.08 0.04 0.05 49.87 49.50 17.59 6.70 - 1.93 0.00% 0.00 8.46 12.40%

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Horizental Analysis
Procedure in fundamental analysis in which an analyst compares ratios or line items in a company's financial statements over a certain period of time. The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration. Horizontal analysis looks at amounts on the financial statements over the past years. For example, the amount of cash reported on the balance sheet at December 31st of 2007, 2006, and 2005, and will be expresses as a percentage on December 31st 2005 amount. Instead of rupee amounts you might see 134,125,110,130 and100. This shows that the amount of cash at the end of 2007 is134% of the amount it was at the end of 2005. The same analysis will be done for each item on the balance sheet and for each item on the income statement. This allows us to see how each item has changed in relationship to the changes in other items. Horizontal analysis is also referred to as trend analysis.

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Description Assets

Bank Alfalah ltd Horizontal Balance Sheet As at December 31 2005

2006

2007

Cash and Balances with Treasury Banks Balances with Other Banks Lending to financial Institutions Investments Advances Other Assets Operating Fixed Assets Deferred Tax Assets Total Assets Liabilities Bills Payable Borrowings from Financial Institutions Deposit and Other Accounts Sub ordinate Loans Liabilities against Assets subject to Financial Lease Other Liabilities Deferred Tax Liabilities Total Liabilities Net Assets Represented by Share Capital Reserves Unappropriated Profit Surplus on Revaluation of Assets - Net of Deferred Tax Equity Total Liabilities and Equity

25.82% 205.07% _ 61.72% 33.66% 17.35% 54.66% 0.00% 60.37%

12.34% 31.08% -53.95% - 1.59% 26.19% 46.25% 58.65% 0.00% 11.02%

5.65% 44.37% -72.29% 56.62% 14.13% 6.75% 13.51% 0.00% 19.30%

67.13% - 54.07% 71.41% 69.70% 0.00% 91.52% 75.49% 61.02% 41.86%

-17.20% 43.63% 7.72% - 0.04% 0.00% 39.96% 296.92% 9.38% 64.01%

33.87% 152.92% 14.06% - 0.04% 0.00% 30.48% - 28.18% 18.69% 32.49%

20.00% 83.51% 119.32% 54.22% - 18.64% 0.00% 41.86% 60.37

66.67% 48.53% 49.62% 56.91% 129.92% 0.00% 64.01% 11.02%

30.00% - 12.17% 71.86% 30.21% 46.95% 0.00% 32.49% 19.30%

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Bank Alfalah Ltd Horizental Profit and Loss Account For the Year Ended December 31 Description 2005 2006 Mark up/Return/Interest Earned Mark up/Return/Interest Expensed Nat Mark up/interest Income Provision against non Performing Loans and Advances -Net Prevision for Diminution in Value Of Investments Bad Debts written off Directly Net Mark up/ Interest Income After previsions Non Mark up/ interest Income Fee, commission and Brokerage income Dividend Income Income from Dealing in Foreign Currency Gain on Sale of Securities Unrealized Gain/Loss on Revaluation of Investments 117.91% 195.96% 58.26% 8.67% 45.87% 8.07% 64.91% 73.04% 111.42% 18.18% 73.43% 200.20% 73.59% 13.37%

2007 21.67% 9.11% 53.78% 239.82% 280.22% 239.91% 29.03%

71.45% - 1.00% 32.57% 0.00% 0.00%

55.77% - 28.11% 33.41% - 24.55% - 219.15%

34.60% 73.09% 22.61% 1035.92% - 45.91 %

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Classified as held for Trading Other Income Total no mark up /Interest Income

- 11.85% 49.24% 59.41%

66.76% 42.15% 22.82%

24.48% 87.26% 51.16%

Non Mark up/Interest Expenses Administrative Expenses Provisions against off Balance Sheet Obligations Other Charges Total non Markup/Interest Expenses Extraordinary/Unusual Items Profit before Taxation Taxation For the period :current Deferred For Prior Year: current Deferred Net Taxation Profit after Taxation 61.08% 0.00% 1141.41% 62.14% 0.00% 55.00% 1.10% - 7403.41% -76.67% - 13.10% 53.31% 55.87% 36.21% - 100.00% 105.20% 36.23% 0.00% .10% - 19.64% 59.95% 1341.06% - 10.00% - 6.73% 3.56% 40.82% 90.00% - 77.91% 40.06% 0.00% 76.76% 262.60% -175.13 -100.00% 0.00% 74.95% 77.58%

Islamic Banking Deportment Balance Sheet of Islamic Banking

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For the Year ended at Dec31 Description 2006 Assets Cash and balance with Treasury Banks Balance with and due from Financial Institutions Investments Financing and Receivables Murabaha Ijarah Musharaka Diminishing Musharaka Salam Istesina Other Islamic Modes Total Assets Liabilities Bills Payable Due to financial Institutions Deposits and Other Accounts Current Accounts Saving Accounts Term Deposits Deposit from Financial InstitutionsRemunerative Deposit from Financial Institutions- Non Remunerative Others Due to Head Office ( Deferred Tax Liabilities) Other Liabilities Total Liabilities Net Assets 3110942 4631442

2007 2804104 3326484

2979948 6869769 293656 2371423 100000 _ 210834 1995042 23496259

3332490 7814376 361951 2652234 331933 148474 417803 2330408 26577412

165580 _ 5057425 3701738 6808727 3275330 _ 116796 215936 2280394 21621926 1874333

299333 99573 6022120 4462553 6845355 3481453 _ 204587 253498 2972927 24641396 1936016

Represented By Islamic Banking Fund

1200000

1200000

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Reserves Exchange Equalization Reserve Unappropriated Profit Surplus/(Deficit) on Revaluation of Assets Remuneration to Shariah Advisor/Board Charity Fund Opening Balance Assertions during the Year Payments/ utilization During the Year Closing Balance

_ _ 190586 1874333 483747 1874333 1019

_ 178 271201 1471379 464637 1936016 375

2908 13703 _ 16611

16611 11508 _ 28119

Cash Management

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Cash flow has been called the "lifeblood" of any business, and it's easy to see why. While sales and profits are important, you need cash to keep your business afloat - to pay salaries and overhead, buy equipment, and invest in and grow your company. Understanding the basic concepts of cash management will take you a long way toward making sure your cash keeps flowing. While the term cash management sometimes sounds intimidating to business owners, it shouldn't. The concept of cash management is really very simple: managing the inflows and outflows of cash from your business in order to reduce costs and increase profits. Hence many Banks offers a complete line of cash management services designed to help you do just this. These services can be divided into four main components: collections and receivables, disbursements and payables, information reporting, and investment services. The local currency account is maintained with the state bank of Pakistan as per the requirements of sections 36 of the state bank Pakistan act 1956. The section requires banking companies to maintain a local currency cash reserve in the current account opened with the SBP at a sum not less than such percentage of its time and demand liabilities in Pakistan as may be prescribed by SBP. Cash reserve of 5% required to be maintains with state bank of Pakistan on deposits held under new foreign currency accounts scheme wide BSD Circular no. 18 .special cash reserve of 15% is requires to be maintained with state bank of Pakistan of deposits held under the new foreign currency accounts scheme wide BSD circular no. 18.Profits rates on these deposits are fixed by SBP on monthly basis. It carries profit ranging between 3.63% to 4.39% pr annum. This includes an amount of USD 5.009 million equivalents to AFS 240.430 million placed with the Afghan Bank of Afghanistan to comply with the capital requirements of the countrys regulatory authority. This represents an amount of 15.88 million placed with Central Bank of Bangladesh to meet the minimum capital requirement for Bangladesh operations at varying interest rates ranging from 4.22% per annum.

Cash and balance with treasury banks As on december 31

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Description In Hand Local currency(including in transit Rs. 94.960 million) Forign currency(including in transit Rs. 104904 million) With State Bank of Pakistan in Local Currency Current Account Foreign Currency Current Account Foreign Currency Deposit Account With other Centeral Banks in Foreign Currency Current Account Foreign Currency Deposit Account With national Bank of Pakistan in Local Currency Current Account National prize bonds Total Cash and balance with treasury banks

2006 3384226 1469879

2007 4797473 1839649

16077606 939560 2318183 1515185 986329 1151358 14034 27859360

16566799 1036674 929357 1413622 1509628 1323806 21370 29436378

Capital adequacy
Regulators try to ensure that banks and other financial institutions have sufficient capital to keep them out of difficulty. This not only protects depositors, but also the wider economy, because the failure of a big bank has extensive knock-on effects. Capital adequacy ratio which is calculated by dividing the banks core capital by banks total risk weighted assets, than multiply by 100.

Capital management
The banks objectives when manageing capital, which is broader concept than equity on the face of the balance sheet are, To comply with the capital requiremenats set by he requlators of the banking markets where the bank operates. To safeguard the bank s abilty to continue as a going concern so that it can continue to provide returns for sharehopldrs and benefits for other stackholders To maintain a storng capital base to support the development of its bussiness.

Mininum capital requirement by bank accourding to Psakitan laws.

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In order to further strengthen the solvency of individual bank/DFI, it has been decided to raise the Minimum Capital Requirements (MCR) as well as Capital Adequacy Ratio (CAR) calculated as per Basel II, as under: i) The minimum Paid up Capital requirements for all locally incorporated banks has been raised to Rs. 23 billion (net of losses). ii) Branches of foreign banks operating in Pakistan (FBs) are also required to increase their assigned capital to Rs. 23 billion (net of losses). iii) DFIs will raise their paid up capital (free of losses) to Rs. 5 billion by December 2008 and Rs. 6 billion by December 2009 as presently required. The individual banking operations or companies outside Pakistan are directly regulated and supervised by their local banking supervisor. The requirements of these may differ from country t country. The banking regulatory is divided into two tiers. Tier 1 capital: Share capital, reserve excluding foreign exchange translation reserves and un appropriated profits. Tier 2 capital: Qualifying subordinated debts, eligible general reserves against future credit losses, revaluation reserves on fixed assets and exchange translation reserve. Bank is continually to maintain the required capital either through its risk management strategies or by increasing the capital requirements in line with the business and capital needs. Capital Adequacy Ratio The capital to risk weighted asset ratio, calculated in accordance with the state Bank of Pakistan guidelines on capital adequacy is as following.

Capital Adequacy Ratio Analysis

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As on December 31 Regulatory Capital Base Description 2006 Tier 1 Capital Shareholders Capital Balance in Share Premium Associate Reserves Unappropriated Profits Minority Integers Less adjustments Deficit on Account of Revaluation of Investment classified as AFS Total Tier 1 Capital Tier 11 Capital Subordinated Debt (upto 50% of total Tier capital) General Provisions (subject to 1.25% of total risk weighted assets) Revaluation Reserve (upto 50%) Foreign Exchange Transaction Reserves Total Tier 11 Capital Eligible Tier 111 Capital Total Regulatory Capital 5000000 2701729 1979360 52383 9733472 54715 9678757 2702939 1060888 1050324 47804 4861995 _ 14540712

2007 1615473 6500000 2327775 4404631 26046 14873925 59811 14873925 2322446 1099409 1256491 87058 4765404 _ 19579518

Risk-Weighted exposures

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Description Book Value Credit Risk Balance Sheet items; Cash and other liquid assets Investments Loans and Advances Fixed Assets Other Assets Off Balance Sheet Items Loan Repayment Guarantees and Acceptance Performance Bonds, Bids bonds, warranties and similar Instruments etc Stand by Letters of Credit and Other Stand by Facilities Outstanding Foreign Exchange contracts Purchase and Sale Credit risk-weighted Exposures Market Risk General Market Risk Specific Market Risk Capital Charge for Foreign Exchange Risk Total Capital Change for Market Risk (B) Market Risk weighted Exposures (B*12.5) Total Risk Weighted Exposures (C) Capital Adequacy Ratio (A/C)

2006 Risk Adjusted Value Book Value

2007 Risk Adjusted Value

53051620 55290583 137387437 10548440 5840129 262118209 6586181 3138478 25139511 9114410 43978580

7330283 5507969 108928420 10548440 5249830 137564942 6586181 1242115 9112710 100136 17041142 154606084

51276561 89047947 159543072 11955258 6838479 318661317 12606646 3833017 30958445 24279700 71661147

5166102 10886316 128109846 11955258 6738869 162856391 8831288 1833017 12369451 271380 23305136 186161527

67040 67040 9833 105001 1798913 156404997 9.3

42435 42435 20131 143913 1312513 187474040 10.44

Investments exclude investment in equity of subsidiary companies amounting to Rs. 76.000 million (2006: Rs. 132.000 million) and held-for-trading portfolio amounting to Rs. 529.402 million (2006: Rs. 833.377 million). The held-for-trading portfolio is

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subject to market risk and is included in the computation of capital charge for market risk. Advances secured against government securities/own deposits and cash margins amounting to Rs. 12587.518 million (2000; 13616.168 million) have been deducted from gross advances. Advances are gross of general reserve for consumer financing amounting to Rs. 1,099.409 million (2006: Rs. 1,060.888 million). This reserve has been added to supplementary capital. Cash margins / government securities amounting to Rs. 2,608.655 million (2006: Rs. 1,927.011 million) and expired instruments amounting to Rs. 492.436 million (2006: Rs. 99.458 million) have been deducted from loan repayment guarantees. Cash margins / government securities amounting to Rs. 12,684.627 million (2006: Rs. 10,845.067 million) and expired instruments amounting to Rs. 4,397.859 million (2006: Rs. 2,782.718 million) have been deducted from performance bonds etc. Cash margins / government securities amounting to Rs. 5,361.447 million (2006: Rs. 1,183.529 million) and expired instruments amounting to Rs. 2,992.124 million (2006: Rs. 1,057.508 million) have been deducted from stand by letters of credit.

RISK MANAGEMENT
The Bank has in place an approved integrated risk management framework for managing credit risk, market risk, liquidity risk and operational risk as evidenced by its Board approved. Risk Management and Internal Control manual. Following is the governance structure and important policies on Risk Management of the Bank: The Board of Directors through its sub-committee called Board Risk Management Committee (BRMC) oversees the overall risk of the Bank. RMD is the organizational arm performing the functions of identifying, measuring, monitoring and controlling the various risks and assists the Apex level committee and the various sub-committees in conversion of policies into action. As part of its mandate the Central Management Committee (CMC) is entrusted with overseeing the operational risk of the bank. The Bank has established a Treasury Middle Office to effectively monitor day-to-day trading activities of the dealing room. The middle-office directly reports to Head of RMD. An independent risk review function exists at the bank through by internal audit division that reports directly to the Board Audit Committee. The Bank has completed the Basel-II GAP analysis process and is now preparing for the proper implementation of Basel-II in collaboration with external consultants and in light of SBP circulars and guidelines.

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As a policy the reporting line of the risk management function has been kept completely independent of the business divisions. The Bank has acquired Temenos T24 banking system as its core banking solution and its Risk Management system called T-Risk will be used for managing Credit, Market and Operational risks.

Credit Risk
Bank Alfalah Limited has conducted a comprehensive Basel-II GAP analysis in order to categorize all the risk areas and have also laid down the road-map to move towards the implementation of Basel-II, as per the State Bank of Pakistan directives. In our experience, a key to effective credit risk management is a well thought out business strategy and in order to achieve this the Bank continually strive hard to gauge such factors existent and simultaneously deriving the mitigating factors to effectively manage the risk inherent to the best possible degree. The Credit Risk Management comprises of the Credit Risk Manager who along with his staff looks after all the aspects of credit risk and conducts portfolio analysis for managing credit risk. The Credit Risk Manager reports directly to the Head of Risk Management Division. The bank has built-up and maintained a sound loan portfolio in terms of welldefined Credit Policy approved by the Board of Directors. Its credit evaluation system comprises of well-designed credit appraisal, sanctioning and review procedures for the purpose of emphasizing prudence in lending activities and ensuring the high quality of asset portfolio. As part of discreet prudential practices the Risk Management Division conducts pre-fact validation of major cases from a risk point of view. The Credit Division (now known as Credit & Collection Group) comprises of multiple credit approvers with authorities assigned in accordance with their qualifications and experience. This would be based on risk basis once rating structure is in place. A comprehensive Risk Grading Index (RGI) model is used by the bank which categorizes different aspects of risk from credit point of view and assigns a grading to the counterparty. Moreover, a sophisticated Internal Credit Rating System is being developed by the Bank, which would be able to quantify the counterparty risk in accordance with the best practices. The system would take into consideration the qualitative and quantitative factors of the counter-party and generate a rating providing a snapshot of anticipated customer behavior. The system will be tested, validated and checked for compliance with the State Bank of Pakistans guidelines for Internal Credit Rating.

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Credit Administration Department (CAD) is working towards ensuring all the policies and procedures are implemented and followed accordingly. Special attention is paid by the management in respect of non-performing loans. Special Asset Management (SAM) Department (now under Credit & Collections Group) is functional and handles this responsibility. A "Watch list" procedure is also functioning which identifies loans showing early warning signals of becoming non - performing. The Risk Management Division also monitors the NPL portfolio of the bank and reports the significant matter to BRMC. Proactive credit-risk management practices in the form of studies, research work, Risk Grading Index (RGI), Integrated Bank-wide Risk Management and Internal Control Framework, adherence to Basel II accord, portfolio monitoring are only some of the prudent measures the bank is engaged in for mitigating risk exposures. The current focus is on augmenting the banks abilities to quantify risk in a consistent, reliable and valid fashion which will ensure advanced level of sophistication in the Credit Risk measurement and management in the years ahead.

Market Risk
Market risk is the risk of losses due to on and off-balance sheet positions arising out of changes in market prices. Market risk mainly arises from trading activities undertaken by the banks treasury. It also includes investments and structural positions in the banking book of the bank. To manage and control market risk a well defined limits structure is in place. These limits are reviewed, adjusted and approved periodically. The bank uses the Standardized Approach to calculate capital charge for market risk as per the current regulatory framework under Basel I and the same approach is being adopted for the revised regulatory framework under Basel II. Going forward the bank is preparing to use more sophisticated systems and models and currently is evaluating various tools to enhance its capability to successfully meet the requirements of the internal models approach of Basel II.

Foreign Exchange Risk

Foreign exchange risk arises from the fluctuation in the value of financial instruments consequent to the changes in foreign exchange rates. The Bank manages this risk by setting and monitoring dealer, currency and counterparty limits for on and off-balance sheet financial instruments. Off-Balance sheet financial instruments are contracts which are the resultant outcome of the import and export transactions. Moreover, counterparties enter into swaps, forward transactions in inter- bank market on behalf of customers to cover-up their positions against stipulated risks. The buy and sell transactions are matched in view of their maturities with respect to tenor.

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The currency risk is regulated and monitored against the regulatory / statutory limits enforced by the State Bank of Pakistan. The foreign exchange exposure limits in respective currencies are managed against the prescribed limits.

Equity Position Risk

Equity position risk in the trading books arises due to changes in prices of individual stocks or levels of equity indices. The Banks equity trading book comprises of Equity Portfolio Units Held for Trading (HFT) & Available for Sale (AFS) portfolios. The objective of Equity Portfolio Units HFT portfolio is to take advantages of shortterm capital gains, while the AFS portfolio is maintained with a medium term view of capital gains and dividend income. Separate product program manuals have been developed to discuss in detail the objectives / policies, risks / litigants, limits / controls for equity trading portfolios of the Equity Portfolio Unit.

Interest Rate Risk

The interest rate risk arises from the fluctuation in the value of financial instruments consequent to the changes in the market interest rates. The Bank is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off-balance sheet instruments that mature or re-priced in a given period. In order to ensure that this risk is managed within acceptable limits, the Banks Asset and Liability Management Committee (ALCO) monitors the re-pricing of the assets and liabilities on a regular basis. The Banks interest rate risk is limited since the majority of customers deposits are retrospectively re-priced on a biannual basis on the profit and loss sharing principles.

Liquidity Risk
Liquidity risk is the potential for loss to the bank arising from either its inability to meet its obligations or to fund increases in assets as they fall due without incurring an unacceptable cost. The banks Asset and Liability Committee (ALCO) manages the liquidity position on a regular basis and is primarily responsible for the formulation of the overall strategy and oversight of the asset liability function. ALCO monitors the maintenance of balance sheet liquidity ratios, depositors concentration both in terms of the overall funding mix and avoidance of undue reliance on large individual deposits. Moreover, as core retail deposits form a considerable part of the banks overall funding mix therefore significant importance is being given to the stability and growth of these deposits. The BOD has approved a comprehensive liquidity management policy which stipulates the early warning indicators of liquidity risk and maintenance of various ratios.

Operational Risk

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Basel II defines Operational risk as, the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. In compliance with the Risk Management Guidelines, issued by SBP, an Operational Risk Function has been established within RMD, which directly reports to Head of RMD. The Operational risk management policy of the Bank is incorporated in the Boardapproved Risk Management & Internal Control Manual, which covers the strategies, processes, structure and functions of Operational risk management and provide guidelines to identify, assess, monitor, control & report operational risk in a consistent & transparent manner across the bank. At Bank, risk awareness culture is being encouraged by communicating the principles of proper risk management to all Bank employees. Operational Risk Function and business units are involved and regularly collaborate in determining and reviewing the strategy, in order to use it as an action plan in improving the operational risk & control system at the organizational and business unit levels. All the policies and procedures of the Bank are reviewed from the risk perspective, and the recommendations of RMD are taken into consideration before their approval at the appropriate level. An Operational Loss Database, Risk & Control Self Assessment (RCSA) exercise and Key Risk Indicators (KRIs) are being developed and will soon be implemented.

Dividend Policy
Dividend yield of bank in 2007 is low as compare to previous year. The shares are being traded at a high value but the dividend policy of the bank is such that it prefers bounces rather than cash dividends. There is retention of profits by the bank as prefers to re-invest profits rather than giving them out as dividend. The bank plans to use the additional capital to meet SBP future capital adequacy requirements. The further plan have kept the investors interested and has results in keeping the MV of its share above Rs. 50 since February 2007. Dividend cover is given by DPS/EPS. It has an increasing inclines towards bonus issues resulting in increased number of outstanding shares, with the profits not rising considerably EPS has been on the decline.

Bonus Shares
The directors recommend the issue of fully paid bonus shares in the ratio of three shares for every ten shares (10:3) held i.e. 30% subject to approval of the shareholders. For this purpose an amount of Rs. 1000 million is proposed to be utilized from un appropriated profit.

Future Prospects

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The future seems bright for the banking sector in Pakistan. The recession in the economy has particularly not favored the services sector, and of course banking is a vital part of the economic growth of any country. Thus, the current declining momentum is likely to sustain in the near future at the least. The loan portfolio of banks would, however, depend on the growth and the capital demand in the corporate and consumer sectors, and future interest rates will of course exert an influence on overall demand as well as NPLs. If the current slowdown in loan growth continues, banks are likely to further increase their investment portfolios. The Government has also shown heavy borrowing needs from banks, and this is also likely to draw funds away from loans. SBP stressed upon further tightening the monetary policy in its recent MPS (2008) By raising the discount rate by 50bps to 10.5%. Increase in CRR by 100 bps strives To reduce liquidity in the market. BAFL shall not be highly affected by this measure, as it has increased its share of term deposits. Rather it shall benefit from the zero rating of CRR on the greater than one (>1) year deposits by having more to lend as is evident from its high earning asset ratio. After current tightening, average deposit rates are also expected to Decrease which might impact BAFL's low margins. Future expansion through high cost funding sources might be difficult in near future. Recently, the SBP has raised the upper limit of retail exposure, In case of consumer loans and small business loans. Moreover, the exposure limit should not be more than 2% of total (gross) retail portfolio of the bank. Penetration in Small and Medium Enterprises (SMEs) segment and expansion in the Middle East markets are some of the opportunities that BAFL can tap. The challenge facing the banking industry, according to SBP's industry overview Is to increase the monitoring and regulation of loans to reduce NPLs While at the same time keeping loans high to sustain the high ROEs prevalent at the moment, especially when growth in capital is expected. This could be accomplished by tapping new, less risk areas, Broadening the base of credible borrowers, adoption of strict monitoring and improving corporate governance standards.

Chapter 7

SWOT ANALYSIS AND RECOMENDATIOS

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Factors Effecting Bank Performance

There are two types of factors that affect the performance of a bank these factors are explained as following. 1. Internal factors 2. External Factors Internal Factors: HRM: HRM is playing both positive and negative role in the performance of organization. Positively, HRM is performing its functions and managing the human resource properly. On the negative side, sometimes HRM adopts the policy of favoritism due to political pressure in managing human resource. Structure / Infrastructure: Bank has sound structure and infrastructure. Organizational Policies: Policies of Bank are favorable for customers Nature of Organization: Financial Institution External Factors: Technological Factors: Technologically, Bank is weak and this element is threatening to Bank. Online Banking (advances, deposits, transactions etc.) is not working properly. Political Factors: Politically, people are influencing on the performance of Bank. Particularly, agricultural people get benefits due to relation to politicians. Such people are getting advances and jobs on favoritism. Physical Factors: Physical structure of Bank is very sound. Demographic Factors: Population of Pakistan is high which is supportive for bank.

Economic Factors:

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Population of Pakistan is rich which is beneficial for the bank. Legal & Ethical Factors: Bank has legal entity and is taking care of ethics which is giving it advantage in attaining customer attention. Social & Cultural Factors: Social and cultural factors are affecting the bank. Majority of the population is un-educated and unaware of the benefits of banking sector. They have low saving and want to keep money with them.

SWOT Analysis:

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The SWOT analysis is an extremely useful tool for understanding and decisionmaking for all sorts of situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. This SWOT analysis of Bank takes into consideration the external as well as the internal environment internal structure of the bank.

Strengths (+)

Growth Strategy (+ , +) Stability Strategy (- , +)

Stability Strategy (+ , -)
Retrenchment Strategy (- , -)

Weaknesses (-)

Opportunities (+) Strengths: The predominant strengths of Bank are

Threats (-)

Humble Management Strength And Commitment Of Sponsors Efficiency Phenomenal Growth Vastly Experienced Management Highly Professional Human Resource Department Crucial Location Of Branches Bank is financially strong and has a huge deposit reserve Its cost of funds is less as compared to many of its competitors Personnel of Alfalah are well trained & highly skilled. Majority of employees has many years of experience in banking sector & are an asset for bank Bank Alfalah has a wide network of branches at the ideal locations, catering the financial needs of its clients Foreign Trade is the focus of bank. It has become an ideal bank for the importers and exporters

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Weaknesses: The chief weaknesses are Small Size Less Efficient Computer And I. T. System Disproportionate Presence Of Old Staff In The Upper Management Hierarchy Skill Set Of Employees Is Not Up to The Mark As There Is No Job Rotation Foreign Banks Still Are A Little More Prestigious Bank Alfalah Limited Does Not Possess Foreign Network No Advertising In Electronic Media It is a step behind in using new technology as compared to other banks Most of the employees are overloaded with work. There is uneven distribution of work and promotions are not very timely It is slow in the introduction of new services

Opportunities: The opportunities on which bank can capitalize upon are Extension of local branch network Establishing foreign branch network Capitalizing on information technology Unexplored market of multinational corporations Growth in textile sector Adopt E-banking

Threats: The predominant threats Bank is facing at the moment are discussed in the following lines. Private sector banks Heavy reliability on only one market segment i.e. Textile. Network expansion by foreign banks If Pakistani banks (especially state owned banks), backed by huge network improve the service they give and their employee skill set Terrorist image of the country Inconsistency in government policies

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Conclusion of SWOT Analysis: Since Bank has decent strengths and opportunities in the market, its market share is increasing and it is expanding its branch network rapidly, so the situation tells us that Bank Al-Falah is adopting and implementing on Growth Strategy. Boston Consulting Group (BCG Matrix): ? Question Mark (H, L) Dog (L, L) Low

High Business Growth Rate

Star (H, H)

Low

Cash Cow (L, H) High

Relative Position (Market Share) Star: The businesses, whose growth rate as well as market shares are very higher, and those are leader of market, are categories as star. Example: Bank Al-Falah Cash Cow: The businesses have big market share but their growth rate is low, and they earn a large amount of cash due to their reputation, are categories as cash cow. Example: National Bank ? (Question Mark): The businesses, which are growing highly but their market share is low than stars businesses, are categories as question mark. Example: United Bank Ltd (UBL) Bank Al-habib Dogs: The businesses, which have very low growth rate as well as market share, are categories as dogs. Example: RBS, Faysal Bank

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RECOMMENDATIONS The following recommendations include short term as well as long-term issues. Bank should continue to expand its business, by increasing its deposit portfolio through aggressive market penetration strategies. Bank needs to use more marketing channels to make the public aware of its products and services. In the presence of intense competition Bank has to realize the importance of marketing. Management should distribute work equally among different employees. Some of the employees are overburdened while some sections are overstaffed. There are a disproportionate number of seasoned bankers in the top management who have the responsibility of making strategic decisions. This think tank should also include a reasonable proportion of young bankers whose mindsets teem with new creative ideas, which might prove to be invaluable for Bank. The top management should immediately start thinking in terms of rotating the employees in various departments, as this transforms work force into human capital. If a particular individual keeps on employing his / her efforts in one sphere of banking it would not only create a sense of monotony and boredom, but also not help improving the skill set of Bank employees. Bank should embark upon an even more aggressive management strategy of expansion of branch network not only in the local market (Pakistan), but also in foreign markets because that is a huge untapped opportunity for Bank. One of the most pressing needs of the time is to advertise Bank in the electronic media. Bank has not, till date, employed advertisement in electronic media as a full fledge marketing tool. I think it is high time that BAL does this.

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REFERENCE
Financial management(Theory and Practice) Strategic management Encyclopedia Encyclopedia www.bankalfalah.com www.scribd.com www.bussinessrecorder.c om www.google.com Ahmad Ali Raza Khurram Shahzad Raja Adil Sharif Amir Hussain Doc.259875 and doc 229758 31st august 2008 Google scholar articles Islamic Scholar Professor in Minhaj University Manager of Faysal Bank Operational Manager Eugene F. Brigham,&0 Michael C. Ehrhardt Peter Drucker http://en.wikipedia.org/wiki/F inancial_ratio/Groppelli, Angelico A.; http;//en.wikipedia.org/wiki/camel Ratio analysis & there roles (3rd chapter) How to analyse a financial statement (1st & 2nd chapter) What is financial ratios and (different articles) Camel ratio analysis Bank information about management And system Islamic banking and sample of project Financial analysis of bank Alfalah Miscellaneous articles Guide in whole project Review this project Information about bank working Provide data about financial performance of bank Alfalah

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GLOSSARY
Acid test Ratio
Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.

Analytical
This is auditor-speak for finding the percentage difference from the current year's revenue balance to the prior year's balance. Ignore the awkward phrase. It's a great exercise because it can help you spot large swings from one year to the next. Big percentage changes relative to past performance should be red flags.

Balance Sheet
Also called the statement of financial condition, it is a summary of a company's assets, liabilities, and owners' equity.

Bank Regulation
The formulation and issuance by authorized agencies of specific rules or regulations, under governing law, for the conduct and structure of banking.

Bankruptcy
Inability to pay debts. In bankruptcy of a publicly owned entity, the ownership of the firm's assets is transferred from the stockholders to the bondholders.

Capital Adequacy Ratio

It is also called Capital to Risk (Weighted) Assets Ratio (CRAR), is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and are complying with their statutory Capital requirements.This has been agreed internationally at 8%.

Credit Risk
The possibility that a bond issuer will default, by failing to repay the principal and interest on time

Cash Reserve Ratio (CRR)

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with SBP.

Debit Equity Ratio

It compares a company's total liabilities to its total shareholders' equity

Derivative
A financial contract whose value is based on, or "derived" from, a traditional security (such as a stock or bond), an asset (such as a commodity), or a market index.

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Economic Value Added (Eva)

Economic Value Added, a measure of the superiority of the return a company is able to realize on invested capital above the baseline return expected by the investment community.

ECONOMIC VALUE OF EQUITY

EVE is the present value of the expected cash flow of assets minus the value of the expected cash flows on liabilities, plus or minus the present value of expected cash flows on off balance sheet instruments, discounted to reflect market rates.

Foreign Exchange Risk

It is a risk which is associated with exposure to fluctuation in spot exchange rates.

Gross Income
Gross income is commonly defined as the amount of a company's or a person's income before all deductions or any taxpayers income, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. For a business, this amount is pre-tax net sales less cost of sales.

Halal; Anything permitted by the Shariah. Haram; Anything prohibited by the Shariah. Ijarah-wa-Iqtina
A mode of financing, by way of Hire-purchase, adopted by Islamic banks. It is a contract under which the Islamic bank finances equipment, building or other facilities for the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rental as well as the purchase price is fixed in such a manner that the bank gets back its principal sum along with some profit, which is usually determined in advance.

Inter Bank Rated

The rate of interest charged on short-term loans made between banks. Banks borrow and lend money in the interbank market in order to manage liquidity and meet the requirements placed on them. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length. Interest Rate Risk The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap).

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Liquid Assets
Liquid assets are accounts or securities that can be easily converted to cash at little or no loss of value.

Liquidity Risk
The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.

M2
Total stock of money in the economy, consisting primarily of currency in circulation and deposits in savings and checking accounts.

Market Risk
Market risk is the risk that the value of an investment will decrease due to moves in market factors

Money Market
Money markets are for borrowing and lending money for three years or less. The securities in a money market can be .government bonds, Treasury bills and commercial paper from banks and companies.

Mudarabah;
A form of partnership where one party provides the funds while the other provides expertise and management. The latter is referred to as the Mudarib. Any profits accrued are shared between the two parties on a pre-agreed basis, while loss is borne by the provider(s) of the capital.

Murabaha;
Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and the profit. This has been adopted by Islamic banks as a mode of financing. As a financing technique, it can involve a request by the client to the bank to purchase a certain item for him.

Musharakah
Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. It is an agreement under which the Islamic bank provides funds which are mixed with the funds of the business enterprise and others. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by every partner strictly in proportion to respective capital contributions.

Net Interest Income

NII. A financial measure for banks, calculated by the amount of money the bank receives from interest on assets (commercial loans, personal mortgages, etc) minus

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the amount of money the bank pays out for interest on liabilities (personal bank accounts, etc). Although usually calculated for banks

Net Interest Margin

(NIM) is a measurement of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders(for example, deposits).

Net Investment Income Per Share

Income received by an investment company from dividends and interest on investments less administrative expenses, divided by the number of outstanding shares.

Net Performing Loans

Generally, one on which payments are less than 90 days past due.

Non Performing Asset

An asset that is not effectively producing income, such as an overdue loan. Over-The-Counter (OTC) Trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges. Open Market Operations Open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities, or other financial instruments. Monetary targets, such as interest rates or exchange rates, are used to guide this implementation. Operating Leverage Fixed operating costs, which are characterized as leverage because they accentuate variations in profits. Operating Profit (Or Loss) Revenue from a firm's regular activities less costs and expenses and before income deductions.

Paid up Capital
The total amount of shareholder capital that has been paid in full by shareholders.

Profit Margin
Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage. Also known as net profit margin.

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Profitability Ratios
Ratios that focus on how well a firm is performing. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment.

Ratio Analysis
A way of expressing relationships between a firm's accounting numbers and their trends over time that analysts use to establish values and evaluate risks.

Receivable Turnover
This ratio can help you get a feel for just how quickly a company collects the money it's owed from its customers. Just divide total annual sales by average of the most recent two years' accounts receivable. Thirty days is a pretty good benchmark (most companies require payment in 30 days), but check with the company's competitors.

Return on Assets (ROA)

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.

Return on Equity (ROE)

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Required Rate of Return (RRR)

The minimum expected yield by investors requires in order selecting a particular investment.

Riba
An excess or increase. Technically, it means an increase over principal in a loan transaction or in exchange for a commodity accrued to the owner (lender) without giving an equivalent counter-value or recompense in return to the other party; every increase which is without an equal counter-value.

Risk Weighted Assets

In terms of the minimum amount of capital that is required within banks and other institutions, based on a percentage of the assets, weighted by risk.

Secondary Market
A market where investors purchase securities or assets from other investors, rather than from issuing companies them.

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Shariah
The term Shariah refers to divine guidance as given by the Holy Qurran and the Sunnah of the Prophet MUHAMMAD (PBUH) and embodies all aspects of the Islamic faith, including beliefs and practice.

Tier 1 Capital
Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital,[1] which consists primarily of equity capital and cash reserves, but may also include irredeemable non-cumulative preferred stock and retained earnings.

Tier 11 Capital
A term used to describe the capital adequacy of a bank. Tier II capital is secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and more.

Tier 111 Capital

Tertiary capital held by banks to meet part of their market risks, that includes a greater variety of debt than tier 1 and tier 2 capitals. Tier 3 capital debts may include a greater number of subordinated issues, undisclosed reserves and general loss reserves compared to tier 2 capital.

Yield Curve Risk

The risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument. The risk is associated with either a flattening or steepening of the yield curve, which is a result of changing yields among comparable bonds with different maturities.

Yield Risk
The risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument. The risk is associated with either a flattening or steepening of the yield curve, which is a result of changing yields among comparable bonds with different maturities.

Yield Spread
In finance, the yield spread is the difference between the quoted rates of return on two different investments, usually of different credit quality. It is a compound of yield and spread.

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