CREDIT RATING REPORT On ISLAMI BANK BANGLADESH LIMITED
CREDIT RATING REPORT On ISLAMI BANK BANGLADESH LIMITED
CREDIT RATING REPORT On ISLAMI BANK BANGLADESH LIMITED
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<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
<strong>REPORT</strong>: RR/1544/12<br />
Address:<br />
CRISL<br />
Nakshi Homes<br />
(4 th & 5 th Floor)<br />
6/1A, Segunbagicha,<br />
Dhaka-1000<br />
Tel: 9515807-8<br />
9514767-8<br />
Fax: 88-02-9565783<br />
Email:<br />
crisldhk@crislbd.com<br />
Analysts:<br />
Md. Touhidul Islam<br />
touhidul@crislbd.com<br />
Md. Anowar Hossain<br />
anowar@crislbd.com<br />
Entity Rating<br />
Long Term: AA+<br />
Short Term: ST-1<br />
Outlook: Stable<br />
<strong>ISLAMI</strong> <strong>BANK</strong><br />
<strong>BANGLADESH</strong><br />
<strong>LIMITED</strong><br />
CHAIRMAN<br />
Professor Abu Nasser<br />
Muhammad Abduz Zaher<br />
MANAGING DIRECTOR<br />
Janab Mohammad Abdul<br />
Mannan<br />
TOTAL ASSETS<br />
Tk.389375.60 million<br />
TOTAL EQUITY<br />
Tk.27613.75 million<br />
TOTAL INVESTMENT<br />
Tk.305790.18 million<br />
Page 1 of 1717<br />
This is a credit rating report as per the provisions of the Credit Rating Companies Rules 1996. CRISL long-term rating is valid<br />
for only one year and short term rating for six months from the date of rating. After the above periods, these ratings will not<br />
carry any validity unless the bank goes for rating surveillance.<br />
CRISL followed Bank/FI Rating Methodology published in CRISL website www.crislbd.com<br />
Date of Rating June 21, 2012<br />
Long Term<br />
Short Term<br />
Surveillance Rating AA+ ST-1<br />
Outlook<br />
Stable<br />
1.0 RATIONALE<br />
CRISL has reaffirmed the Long Term rating of Islami Bank Bangladesh Limited (IBBL) to ‘AA+’<br />
(pronounced as Double A plus) and Short Term rating to ‘ST-1’ based on consolidated<br />
financials up to December 31, 2011 and other relevant qualitative and quantitative<br />
information up to the date of rating. During the year under surveillance, the bank maintained<br />
comfortable capital adequacy with good asset quality, good financial performance and<br />
sufficient liquidity and strong market position with wide operational network etc. However, the<br />
above factors have been moderated, to some extent, by considerable increase in gross NPI,<br />
exposure to credit concentration risk, unsatisfactory performance of rescheduled assets,<br />
considerable investment in low yielding government bond etc.<br />
Banks rated in this category are adjudged to be of high quality, offer higher safety and have<br />
high credit quality. This level of rating indicates a banking entity with a sound credit profile<br />
and without significant problems. Risks are modest and may vary slightly from time to time<br />
because of economic conditions. Short term rating indicates highest certainty of timely<br />
repayment. Short-term liquidity including internal fund generation is very strong and access<br />
to alternative sources of funds is outstanding. Safety is almost risk free like Government<br />
short-term obligations.<br />
CRISL also viewed the bank with “Stable Outlook” and believes that bank will be able to<br />
maintain its good fundamentals in future. CRISL does not foresee any volatility in the<br />
operation of the bank within the rating validity period.<br />
2.0 CORPORATE PROFILE<br />
2.1 Genesis<br />
Islami Bank Bangladesh Limited, the first Islamic Shari’ah based private commercial bank in<br />
South-East Asian region, was incorporated on 13 March, 1983 as a public limited company<br />
under Bank Companies Act 1991. The bank was sponsored by few local and foreign corporate<br />
bodies, foreign individuals and a group of local businessmen. The bank went into initial public<br />
offering in 1985 and started operation with a paid up capital of Tk.80.00 million. The bank is<br />
operating with paid up capital of Tk.10,007.71 million against authorized capital of Tk.20,000<br />
million as on December 31, 2011. The bank is running with the mission to establish Islamic<br />
Banking through the introduction of a welfare oriented banking system and also to ensure<br />
equity & justice in economic activities, achieve balanced growth and equitable development<br />
through diversified investment operations particularly in the priority sectors and less<br />
developed areas of the country, and to encourage socio-economic development and financial<br />
services to the low-income community particularly in the rural areas. Since its listing, the<br />
share of the bank has been trading with both the bourses as ‘A’ category issue. The asset size<br />
of the bank (consolidated) stood at Tk.389.38 billion at YE2011 against Tk.330.79 billion at<br />
YE2010 and general investment stood at Tk.305.79 billion at YE2011 against Tk.261.73 billion<br />
at YE2010. The bank is the pioneer in introducing Islamic banking concept in Bangladesh and<br />
created a strong brand image by offering Shari’ah based investments and deposit products.<br />
The bank is also pioneer in the country in issuing the first ever Mudaraba Perpetual Bond in<br />
the secondary market worth of Tk.3.00 billion. Due to its endeavor to quality banking, the<br />
bank was awarded with “Corporate Governance Disclosure Award 2010” (Joint winner) by<br />
South Asian Federation of Accountants (SAFA), “National Best Corporate Award-2010” (1 st<br />
Position among the private commercial banks in Islamic Operation) by Institute of Cost and<br />
Management Accountants of Bangladesh (ICMAB), “Best Published Accounts and Reports<br />
2010” (third position) by the Institute of Chartered Accountants of Bangladesh (ICAB) and
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
“Best Islamic Financial Institution of the Country” by Global Finance, USA etc. Currently the<br />
Board is chaired by Professor Abu Nasser Muhammad Abduz Zaher while Janab Mohammad<br />
Abdul Mannan is leading the management team as Managing Director and CEO. The bank<br />
carries out its activities through 266 branches (including 30 SME/Agriculture branches)<br />
operating with staff strength of 11,465 as on December 31, 2011. This report is being<br />
prepared as a part of CRISL surveillance. The corporate Head Office of the bank is located at<br />
its own premise Islami Bank Tower (18 storied building), 40, Dilkusha Commercial Area,<br />
Dhaka-1000.<br />
Diversified ownership<br />
Wide operational network<br />
2.2 Ownership Pattern<br />
There were no major changes in ownership of IBBL which remains diversified among few<br />
foreign and local corporate bodies, foreign individuals, local sponsors and general public. The<br />
denomination of IBBL shares has been changed from Tk.100 to Tk.10 each with effect from<br />
December 04, 2011. Out of the total 1,000.77 million shares, 42.01% share were held by<br />
sponsors and Directors (out of that 35.94% was foreign sponsors and Directors), 25.27% by<br />
local general public, 22.74% by foreign shareholders (excluding foreign sponsors/directors),<br />
9.98% by institution shareholder while some nominal shares were held by the government.<br />
Again, the total shareholding consists of 58.68% by foreign shareholders and 41.32% by the<br />
local shareholders as on December 31, 2011.<br />
2.3 Operational Network<br />
IBBL is currently operating with the highest operating network among the private commercial<br />
banks (PCBs). The bank has been operating with 266 branches (including 30 SME/Agriculture<br />
branches) with the inclusion of 15 new branches during 2011. In order to facilitate and control<br />
the administrative function of the branches, IBBL has set up 12 zones including one new zone<br />
(Mymensingh) throughout the country. Among 266 branches, 9 branches are in Dhaka Central<br />
Zone, 24 branches (excluding 2 SME/Agriculture branches) in Dhaka South Zone, 22 branches<br />
(excluding 2 SME/Agriculture branches) in Dhaka North Zone, 15 branches (excluding 2<br />
SME/Agriculture branches) in Chittagong North Zone, 16 branches (excluding 2<br />
SME/Agriculture branches) in Chittagong South Zone, 24 branches (excluding 4<br />
SME/Agriculture branches) in Bogra Zone, 23 branches (excluding 3 SME/Agriculture<br />
branches) in Khulna Zone, 29 branches (excluding 4 SME/Agriculture branches) in Comilla<br />
Zone, 20 branches (excluding 3 SME/Agriculture branches) in Sylhet Zone, 17 branches<br />
(excluding 3 SME/Agriculture branches) in Barishal Zone, 18 branches (excluding 3<br />
SME/Agriculture branches) in Rajshahi Zone and 19 branches (excluding 2 SME/Agriculture<br />
branches) in Mymensingh Zone. This large branch network of IBBL is supported by 100 own<br />
ATM and 1035 shared ATM along with 30 SME/Agriculture branches and Internet Banking.<br />
2.4 Business Profile<br />
The bank is continuing its focus in different deposit products and trade financing in shari’ah<br />
based investment portfolio. IBBL provides a full range of financial services to individuals, small<br />
and medium sized enterprise, entrepreneurs and corporate bodies. Under the guidance of<br />
Shari’ah Supervisory Committee, the Bank designed all deposits, investment products and<br />
services and formulated policy guideline and working procedure for banking activities. As a<br />
part of product development, the bank launched different new products which include<br />
Students Mudaraba Savings Accounts, Murabaha foreign currency investment scheme and<br />
Mudaraba NRB bond during the year under surveillance. In addition to the above, IBBL was<br />
also involved with different promotional activities such as sponsorship of Dhaka city<br />
beautification in connection with ICC Cricket World Cup 2011 and National School Football<br />
Championship 2011 etc to promote the bank and its product.<br />
Page 2 of 1717<br />
In addition to regular business activities, the bank has two fully owned subsidiaries namely<br />
“Islami Bank Securities Limited” (IBSL), “Islami Bank Capital Management Limited” (IBCML).<br />
The subsidiaries have been formed during 2010 and the financial statements have been<br />
consolidated as per BB guideline. The subsidiaries have been focusing on providing quality<br />
services to the prospective investors in the capital market. However, IBCML is yet to start its<br />
core business operation. In addition to the above IBBL is also running offshore banking units,<br />
which commenced operation on February 8, 2011.
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
Dominant market player<br />
2.5 Market Position<br />
The bank has been continuing its operation as one of the dominant market players in the<br />
banking industry. The banking industry of Bangladesh reported deposit and investment (loans<br />
& advances) of Tk.4438.70 billion and Tk.3708.82 billion respectively in YE2011 against<br />
Tk.3684.00 billion and Tk.3145.18 billion respectively in YE2010 shared by 47 banks. Against<br />
the same deposit of IBBL rose to Tk.341.86 billion at YE2011 from Tk.291.94 billion at YE2010<br />
registering 17.10% growth. Similarly, total investment increased to Tk.305.79 billion at<br />
YE2011 from Tk.261.73 billion at YE2010 representing 16.84% increase. Market share of IBBL<br />
in terms of deposit was almost same compared to last year which stood at 7.70% in 2011<br />
from 7.92% in 2010 while market share in terms of investment (loans & advances) was also<br />
stable which stood at 8.24% at YE2011 against 8.32% in 2010. Deposit growth of the bank<br />
was 17.10% against industry growth of 20.49% and growth of investment was 16.84%<br />
against industry growth of 17.92% in 2011.<br />
In addition to that, the bank generated substantial income from non-funded business. Among<br />
non-funded business, total foreign exchange business of IBBL has significantly increased and<br />
stood at Tk.716.06 billion in 2011 against Tk.609.33 billion in 2010 indicating 17.52%<br />
increase during the period. Similarly the export business of the bank increased to Tk.178.24<br />
billion in 2011 from Tk.148.42 billion in YE2010 representing 20.09% growth. <strong>On</strong> the other<br />
hand, import business rose to Tk.301.21 billion from Tk.246.28 billion with 22.30% growth in<br />
the above periods. Moreover, inward remittance increased to stand at Tk.236.61 billion in<br />
2011 against Tk.214.63 billion in 2010 representing growth of 10.24% in 2011 holding the<br />
market share of 26.07% in the country’s remittance.<br />
3.0 <strong>BANK</strong>ING SECTOR REVIEW<br />
Banking sector passed through a hard year during 2011 due to global as well as our<br />
macroeconomic slow down. Before the collapse of share market at the end of 2010 almost all<br />
private commercial banks invested beyond approved limit of their capital in the share market.<br />
During 2011 the Bangladesh bank directed all banks to bring down excess exposure in capital<br />
market to applicable limit which many banks could not do by the end of 2011. During 2011<br />
some of the banks faced liquidity constraint and as a remedial measure announced higher<br />
profit rate to attract substantial deposits from customers. During the period Bangladesh Bank<br />
also revised repo rate 4 times to fix the same at Tk 7.25 in the first week of September, 2011<br />
which made the banks’ placement from BB costlier. Although Bangladesh Bank earlier fixed<br />
highest profit rate for lending (except some selected items) but considering various factors<br />
the same cap was withdrawn (except some selected items) in the first quarter of 2011. In<br />
order to strengthen the Audit Committee of the Bank’s Board, the Bangladesh Bank raised the<br />
number of A.C. members from 3 to 5 from June 2011. In the meantime BB took various other<br />
steps for faster and quicker operational activities of the banks such as on line CIB service for<br />
the banks, on line L/C monitoring system, submission of on line weekly statement of position<br />
on every Thursday by banks, e-returns i.e. electronic submission of scheduled bank returns,<br />
on line export monitoring system, Bangladesh automated clearing house (BACH), Electronic<br />
Fund Transfer (EFT), initiation of mobile banking and now almost every commercial bank is<br />
using their own core banking solution for faster and efficient banking operations in line with<br />
international banking system.<br />
During the 2011 credit rating process got impetus as most of the banks concentrated<br />
attention on the credit rating of their clients to improve CAR from asset management point of<br />
view. This effort is still continuing with the banks as large number of clients ratings are still<br />
pending.<br />
Page 3 of 1717<br />
After successful implementation of Pillar I process under Basel II, the Bangladesh bank has<br />
now going to implement Pillar II system i.e supervisory review process (SRP) under a<br />
structured Internal Capital Adequacy Assessment Process (ICAAP). All the banks in the<br />
meantime submitted the ICAAP document to BB under specified format given by BB.<br />
Bangladesh Bank has not yet completed the dialogue with SRP team of the banks to assess<br />
ICAAP to complete Supervisory Review Evaluation Process (SREP). It is expected that after<br />
SREP, the capital requirement for banks would go to higher side.
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
Overall banking sector, experienced steady growth in 2011. During the 2011 the deposit base<br />
stood at TK.4439 billion (Tk.3684 billion in 2010) and investment TK.3709 billion (Tk.3145<br />
billion in 2010) showing 20.49% and 17.92% growth respectively against 2010. During the<br />
2011 investment growth was almost in line with deposit growth resulting to investment to<br />
deposit ratio (L/D) of 83.56%. Overall gross NPI ratio showed improvement to stand at 6.12%<br />
against 7.27% net in YE2010. Finally overall net NPI stood at 0.70% in YE2011 against 1.28%<br />
at YE2010. Overall Capital Adequacy Ratio (CAR) at YE2011 (4 th quarter) stood at 11.35%<br />
(regulatory requirement 10.00% and above) against the same period 9.31% (regulatory<br />
requirement 9% and above). From the latest CAR it is quite obvious that CAR at 2011 was not<br />
adequate to take care of stress tests and other risks under pillar-II of Basel-II operation as<br />
suggested by Bangladesh Bank.<br />
However, considering various regulatory measures, service efficiency achievement,<br />
profitability and operational performance, the 2011 was an average year for the banking<br />
sector for many reasons. Nevertheless, under Basel-II Pillar II system, the banks are heading<br />
towards more risk based capital adequacy system which will make the bank more shock<br />
absorbent.<br />
4.0 CORPORATE GOVERNANCE<br />
17 members Board<br />
7 member Executive<br />
Committee<br />
Page 4 of 1717<br />
4.1 Board of Directors<br />
The Board of IBBL is continuing with 17 members including an Independent Director, two<br />
Depositor Directors and the Managing Director as Ex-Officio. During the last year Janab<br />
Mominul Islam Patwary was appointed as a new Director with the replacement of Dr. Md.<br />
Shafiqur Rahman. Among the Directors, six are representatives of different institutional<br />
sponsors. The Board is currently Chaired by Professor Abu Nasser Muhammad Abduz Zaher,<br />
representative of the Ibn Sina Pharmaceutical Industry Ltd. The Board is involved in setting<br />
key targets for the bank and monitoring the progress, approving long term strategic plan,<br />
appointing key management personnel and adopting sufficient risk management systems to<br />
mitigate core risks of the bank. During 2011 the Board conducted 17 meetings against 16<br />
meetings in the previous year. For smooth operation of the bank, the Board formed two<br />
committees namely Executive Committee and Audit Committee.<br />
4.2 Key Board Committees<br />
The bank is continuing with 07 (seven) member Executive Committee (EC) Chaired by<br />
Engineer Md. Eskander Ali Khan. The Committee reviews different operational affairs including<br />
administration and investment, development/ expansion of business of the Bank, opening of<br />
new branches, purchase of property of the Bank etc. The Audit Committee (AC) is comprised<br />
of four members with one new member Janab Mohamad Adnan Midani. The committee is<br />
headed by Janab Md. Shahidul Islam a renowned businessman. Other two members are Janab<br />
Md. Abdus Salam (FCA, FCS) and Independent Director Professor N R M Borhan Uddin (Ph. D).<br />
AC members play key role in finalization of the financial statements of the bank and other role<br />
under specific Terms of Reference (ToR) that sets out its responsibilities and composition. EC<br />
and AC respectively held 53 and 30 meetings during 2011 against 52 and 32 meetings during<br />
2010.<br />
4.3 Management Committee (M.C.)<br />
There is no major change in Management Committee during the period under surveillance.<br />
The Management Committee of IBBL is headed by Janab Mohammad Abdul Mannan, Managing<br />
Director of the bank. Janab Mannan has been serving in the banking sector for around two<br />
and half decades. In Management Committee, Janab Mannan is aided by six Deputy Managing<br />
Directors along with five Executive Vice Presidents who lead different<br />
wings/divisions/departments. The day-to-day banking functions are handled by these<br />
professionals having modern banking knowledge and experience. The above management<br />
team provides wide succession plan and has the acumen to carry out the objectives of the<br />
bank smoothly. During the 2011 the M.C. held 66 meetings against 58 meetings in the<br />
previous year.
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
Board approved<br />
structured delegation of<br />
power<br />
Staff strength of 11,465<br />
4.4 Delegation of Power<br />
IBBL management is continuing with the same delegation of power in terms of investment,<br />
administrative and financial issues. Delegation varies depending on different mode of<br />
investment which is up to Tk.100.00 million for Managing Director, up to Tk.150.00 million for<br />
M.C. and up to Tk.1500.00 million for EC. Investment approval beyond the above delegated<br />
authority is approved by the Board of the bank. CRISL views that being a bank with large<br />
branch network and operation, the management needs to have more delegation to reduce the<br />
pressure on Executive Committee. However, the Board has delegated substantial<br />
administrative power to the management for smoothing the day-to-day functioning of the<br />
bank.<br />
4.5 Human Resources Management<br />
IBBL is continuing with structured human resources policy with total staff strength of 11,465<br />
(including 216 female officials) at YE2011 against 10,349 at YE2010. Among the total HR<br />
strength, 7129 are Officer and above level and 3869 are support level employees. During the<br />
year under surveillance the Bank recruited 1,372 against 957 employees in the previous year<br />
while promoted 2,696 during the year 2011 against 2670 in 2010. Against the above total 199<br />
employees left the bank in 2011 against 144 in 2010 and HR turnover ratio stood at 1.92% in<br />
2011 against 1.50% in 2010. The bank has Board approved Human Resources Policy Manual<br />
including compensation package, incentive bonus, gratuity, contributory provident fund,<br />
superannuation fund, benevolent fund, house building investment scheme, car scheme etc.<br />
IBBL has qualified and experienced successors in its human resource set up. In order to<br />
improve the efficiency of the human resources of the bank, IBBL has been arranging training<br />
programs to its employees at home and abroad to participate in different training programs.<br />
IBBL has full-fledged training and research academy called Islami Bank Training and Research<br />
Academy (IBTRA) where continuous training programs are arranged for the professionals of<br />
the bank regarding Banking Laws and Practices, Investment Operations and Management,<br />
Foreign Exchange etc. The bank also sent officers and executives to BIBM, BBTA and other<br />
foreign and local training institutes to enhance banking knowledge and competencies of the<br />
professionals to adapt with emerging challenges.<br />
4.6 ICT and its use in MIS<br />
IBBL is continuously improving in the automation of banking activities. All the branches have<br />
been brought under on-line banking using Fiber Optics, DDN and Radio Link where ‘Any<br />
Branch Banking’ facilities are being provided. IBBL is the only bank in Bangladesh, which<br />
developed in-house built integrated Banking system namely eIBS having major modules viz.:<br />
General Banking (GB), Investment and Foreign Exchange. Both GB and Investment module<br />
are running at all 266 branches including 30 SME/Agriculture branches. The foreign exchange<br />
module has been implemented at 43 authorized Dealer (AD) branches. Apart from the core<br />
banking facilities, the bank provides other IT enabled services such as shared and owned<br />
Automated Teller Machine (ATM), SMS banking, EFTN and i-banking. IBBL has established the<br />
country’s largest Data Center in the banking sector running on Sun Solaris 10 & Oracle 10g<br />
Enterprise Edition. Branch data are being uploaded in the Data Centre from all online<br />
branches, which are being used as branch backup data and preparing MIS reports for different<br />
Wings/Divisions/Departments of Head Office. A strong central MIS has already been set up<br />
through using data from the Data Centre. IBBL has completed setting up Disaster Recovery<br />
Site (DRS) as per guideline of Bangladesh Bank as a replication of existing Data Centre which<br />
is on live operation.<br />
12 members Shari’ah<br />
Supervisory Committee<br />
Page 5 of 1717<br />
4.7 Shari’ah Compliance<br />
There is no major change in the Shari’ah Supervisory Committee. The Shari’ah Supervisory<br />
Committee of IBBL is constituted of 12 members and headed by Sheikh Moulana Mohammad<br />
Qutubuddin, Chairman, Baitush Sharaf Anjuman-E-Ittehad Bangladesh. The Committee<br />
reviews different operational issues and gives independent opinion based on Islamic Shariah<br />
as well as provide necessary guidelines on different issues, creates awareness about the<br />
compliance of Shariah, suggests the bank to develop more awareness among the employees<br />
and clients about Islamic Banking and to train the employees on different aspects of Shariah<br />
principles. During 2011, the Committee conducted 7 meetings and sub-committee met in 21<br />
meetings. The Muraqibs of the Shari’ah Supervisory Committee have inspected 251 branches
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
out of 266 branches included 30 SME/Agriculture branches to check the Shari’ah compliance<br />
in the banking activities. Moreover, the Committee checked the financial statements of the<br />
bank and provided separate report regarding financial statements. In compliance with<br />
Shari’ah principle, the brokerage firm of IBBL involves in trading of shares of shari’ah<br />
compliant business.<br />
4.8 Integrity of Accounting & Auditing<br />
IBBL’s external financial reporting seems transparent and informative as required by<br />
BFRS/BAS and by regulators. M/s. A. Qasem & Co. and M/s. ACNABIN, having appropriate<br />
business expertise, are the external auditors of the bank and also provides cash incentive<br />
audit services as per regulatory requirement. As per best corporate governance practice, if fee<br />
for non-audit services is material, then external auditor should not be involved in non-audit<br />
services to keep independence of audit opinion. M/s. K. M. Hassan & Co. and M/s. A. Hossain<br />
& Co. are acting as tax consultant of the Bank. The Audit Committee reviews the major<br />
accounting issues, potential audit risks and quality of internal control systems.<br />
5.0 RISK MANAGEMENT<br />
The bank follows structured risk management procedure in all risk areas as according to BB<br />
guidelines. The bank’s risk management policy defines the relationship between the risk<br />
management philosophy, process and procedure. As per instruction of BB, IBBL has already<br />
formed a Risk Management Unit (RMU) with specific terms of reference (ToR) to look after six<br />
core risk areas in banking operations.<br />
Structured investment<br />
risk management<br />
5.1 Investment Risk Management<br />
IBBL follows structured procedure for investment risk management. In order to manage<br />
investment risk the bank formulated investment policies in compliance with regulatory<br />
requirements covering investment assessment, collateral requirements, risk grading and<br />
reporting, documentation and legal formalities and procedures. Separate investment<br />
guidelines were also formulated for Small & Medium Enterprises and Consumer Investment<br />
Schemes. <strong>On</strong> the basis of designation of officials, authorization limits have been carefully<br />
allocated in Branches, Zonal Offices and Head Office for the approval and renewal of<br />
investment facilities. Board is the supreme authority to approve investment beyond the<br />
discretionary power of Branches, Zonal Officials, Head Office Executives, MC and EC. Having<br />
specific guidelines, concentration limits of exposure to industries and geographies are set<br />
through observing market trend, however, maximum concentration to individual client is<br />
determined on the basis of regulatory guidelines. Investment Wing of Head Office also<br />
provides advice, guidance and specialized skills to business units to promote best practice<br />
throughout the bank in the management of investment risk. Moreover, Internal Control and<br />
Compliance Wing and Shari’ah Muraqibs independently verify the compliance with approved<br />
Investment guidelines, Bangladesh Bank guidelines and operational procedures. The<br />
investment functions of the bank have been segregated in the area of Relationship<br />
Management/Marketing, Investment Administration, Investment Documentation and<br />
Investment Recovery.<br />
While reviewing the risk weight wise distribution of risk of on-balance sheet exposure under<br />
investment (credit) risk, it was revealed that 14.93% of the exposures falls under 0% risk<br />
category, 12.42% under 20%, 37.16% under 50%, 10.50% under 75%, 13.32% under<br />
100%, 10.95% under 125%, 0.57% under 150% category and rest 0.16% fell under Credit<br />
risk mitigation. The above information reveals the fact that the risk concentration is on 50%<br />
risk category. Among the corporate exposure it has been found that 82.60% were rated by<br />
ECAIs under Basel-II guideline which is considered to be good and contributed significantly<br />
towards improvement of CAR. However, these ratings need to be updated through<br />
surveillance by ECAIs to keep the same use worthy.<br />
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5.2 Asset Liability Management (ALM)<br />
With a view to effective management of asset liability, in 2011 IBBL has reorganized the Asset<br />
Liability Committee (ALCO) and amended the Asset Liability Manual in conformity with the<br />
Bangladesh Bank ALM guideline. ALCO is headed by Managing Director and he is aided by 4<br />
Deputy Management Directors and 5 Executive Vice Presidents from respective divisions.<br />
ALCO meeting is held in every month and before meeting key agenda are prepared and<br />
circulated to all the members of the ALCO and minutes are prepared accordingly. ALCO is<br />
responsible for reviewing the liquidity management, deposit and investment trend, deposit<br />
mix, maturity profile, monitoring limit breaches, profit rate profile, maximum level of undrawn<br />
commitments etc. ALCO held 12 regular meetings in 2011.<br />
5.3 Internal Control and Compliance<br />
‘Internal Control and Compliance Wing’ of the bank has been established to minimize the<br />
operational irregularities, lapses, malpractices, corruptions and frauds arising out of the<br />
deviations from the set rules and procedures as a part of establishing culture through<br />
establishment of three separate divisions namely a) Audit & Inspection Division, b)<br />
Compliance Division and c) Monitoring Division. Audit and Inspection Division undertakes<br />
periodic and special audit/inspection of the Branches, Zonal Offices and<br />
Departments/Divisions/Wings of Head Office to review the operational effectiveness of the<br />
Bank. In 2011, the audit team visited all the Zonal Offices, Branches and SME/Agriculture<br />
Branches and provided 382 (three hundred eighty two) reports on Branch/Zonal Office level<br />
and 35 (thirty five) reports on Head Office level. Moreover, heads of 12 Zonal Offices<br />
inspected different Branches and submitted 590 (five hundred ninety) inspection reports.<br />
Heads of Branches also conducted and submitted 506 (five hundred six) Audited Reports<br />
against their Self-Audit. Besides that, the Audit & Inspection Division conducted 32 (thirty<br />
two) investigation against complaints from different branches during the year 2011. The<br />
compliance division ensures that, the Bank complies with all regulatory requirements,<br />
maintain liaison with the regulatory bodies and notify any regulatory changes to all concerned<br />
and provide training & guidance as and when necessary about regularly issues.<br />
Monitoring division assesses the risk of functional areas of business mentioned in the<br />
Departmental Control Function Checklist (DCFCL) by analyzing various reports and<br />
recommend to the Management for the frequencies of Audit teams to be sent accordingly,<br />
monitor the internal control functions through Quarterly Operations Report (QOR) and check<br />
the completion of investment documentation to uphold the cross interests of all the<br />
beneficiaries of the Bank.<br />
5.4 Prevention of Money Laundering<br />
Anti Money Laundering risk is defined as the loss of reputation and expenses incurred as<br />
penalty for being negligent in prevention of money laundering. For mitigating risks the Bank<br />
has formed 5 (five) members Central Compliance Unit (CCU) and 6 (six) members Branch<br />
Compliance Unit (BCU) under the leadership of the Chief Anti Money Laundering Compliance<br />
Officer (CAMLCO), at Anti Money Laundering (AML) Department, Branches Control Division<br />
(BCD), Head Office. Anti Money Laundering Compliance units (BCU) are also functioning at<br />
Branch level, who independently monitor/review the transactions of the accounts to verify<br />
Suspicious Transaction Reports (STRs). It may be mentioned here that AMLD, BCD submitted<br />
total 80 (eighty) numbers of STRs, second highest of the country to the AMLD, Bangladesh<br />
Bank from the inception of AML operations to till date.<br />
Page 7 of 1717<br />
IBBL introduced (a) 13 (thirteen) numbers of Uniform Account Opening Form (AOF); (b) Know<br />
Your Customer (KYC) Profile and (c) Transaction Profile (TP) in the Bank as per instructions of<br />
Bangladesh Bank. IBBL had already issued 72 (seventy two) circulars providing necessary<br />
instructions for Prevention of Money Laundering activities and also for Combating Financing of<br />
Terrorism. Moreover, IBBL introduced a Policy Guideline and arranged training<br />
sessions/workshops to combat terrorist financing in the light of Anti Terrorism Act, 2009<br />
coupled with the Anti Money Laundering Act, 2009 approved by the Board of Directors of the<br />
Bank. A revised/updated IBBL Policy Manual: “Guidelines on Prevention of Money Laundering<br />
Issues” had been approved by the Board in its 181st Meeting held on 04.11.2010 covering the<br />
rules of Money Laundering Prevention Act, 2009 and Anti Terrorism Act, 2009. To establish
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effective Anti Money Laundering drive at branch level, IBBL introduced AML Rating systems<br />
such as excellent/ good/ satisfactory/ marginal/ unsatisfactory through Self Assessment<br />
Report & Independent Testing Procedure as per instruction of Bangladesh Bank. During the<br />
last year, the different branches submitted 254 reports of which 91 reports were good,146<br />
were satisfactory and rest were marginal.<br />
5.5 Market Risk<br />
Major market risks arise from profit rate risk, equity and commodity financing risk and foreign<br />
exchange risk. The position of IBBL bank stands as follows:<br />
5.5.1 Profit Rate Risk<br />
Regulatory pressure to reduce profit rate in the market has been creating substantial profit<br />
rate risk for the banks. The Asset Liability Committee (ALCO) of IBBL monitors and evaluated<br />
the overall profit rate structure. IBBL has been following a competitive profit rate and has<br />
flexibility of setting profit rate according to market conditions and Bangladesh Bank ceilings.<br />
The bank has no profit sensitive trading portfolio. For non trading portfolio (general<br />
investment), the bank has been operating through buying and selling policy i.e. Bai-<br />
Murabaha, Bai-Muajjal, Bai-Salam, Bai-as-Sarf and Rent sharing mode like HPSM. IBBL also<br />
makes Investment under Musharaka mode i.e. profit and loss sharing mode and Mudaraba<br />
mode i.e. profit sharing and loss bearing on short term basis. Investment exposures under<br />
profit loss sharing mode is insignificant, hence facing little risk of investment loss. In case of<br />
rent sharing mode i.e. HPSM, the bank can adjust the rate of rent in line with market<br />
situation. IBBL has been exposed to some risk on buying and selling mode.<br />
5.5.2 Equity Risk and Commodity Financing Risk<br />
The bank does not have investment in the equity market, which carries insignificant equity<br />
risk. IBBL has very small investment in equity portfolio with only one quoted share. The bank<br />
had investment in Bangladesh Shipping Corporation (BSC), the face value of which was Tk.20<br />
million, whereas market value was Tk.110.90 million as on 31 December, 2011. The share of<br />
the same has been kept as SLR purpose and the bank revalued the same based on the closing<br />
market price. In unquoted share category, it has investment in Karmasangsthan Bank, CDBL<br />
and Bangladesh Aroma Tea Ltd. As the bank is involved in commodity financing, it exposed to<br />
commodity financing risk due to its investment in commodity based industries.<br />
5.6 Foreign Exchange Risk<br />
In order to minimize the Foreign Exchange Risk, Islami Bank Bangladesh Limited has adopted<br />
Foreign Exchange Risk Manual named “Foreign Exchange Treasury Manual”, through which<br />
the foreign exchange operations are being dealt with. Currency rate appropriateness is carried<br />
out by the treasury back-office to check as to whether all deals have been concluded at<br />
market rates. Dealing limit of dealers is set on the basis of expertise and efficiency of the<br />
dealers. To minimize the risk arising from the Foreign Exchange Transactions management<br />
approved Counter party Limit, Daylight limit/Intra-day limit, After Hour Dealing Limit, Over<br />
Night Limit, Stop Loss Limit and Management Action Trigger have been set by the<br />
management. Moreover, it has the opportunity to invest the Foreign Currency balance under<br />
Mudaraba Foreign Currency investment Mode and also under restricted Mudaraba principle<br />
through Islamic Development Bank (IDB).<br />
While reviewing the Foreign Currency Position, it has been found that the sum of net short<br />
position found nil and the sum of net long position stood at USD $20.82 million as on<br />
December 31, 2011. The bank’s required capital for the same stood at Tk.170.00 million<br />
which was duly considered while calculation of Capital Adequacy Ratio (CAR).<br />
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6.0 PERFORMANCE<br />
6.1 Analytical Framework<br />
The analytical framework has mainly been based on consolidated financials (considering all<br />
the subsidiaries into account) of the bank. However, separate position has also been<br />
considered wherever required. The bank reported consolidated financial statements as well as<br />
separate financial statement in line with Bangladesh Accounting Standards as well as BB<br />
guideline.<br />
Good financial<br />
performance<br />
6.2 Financial Performance (Overall)<br />
Although the banking industry passed through a tough year in 2011, IBBL registered steady<br />
performance during the period under surveillance. CRISL evaluates the financial performance<br />
in terms of Return on Average Asset (ROAA), Return on Average Equity (ROAE) and Net<br />
interest/profit margin (NIM). Investment income of the bank increased to stand at Tk.32.02<br />
billion registering 29.24% growth. Against the same, the bank paid Tk.18.40 billion as profit<br />
on deposit (increased by 27.15%) resulting to net investment income of Tk.13.62 billion<br />
which was 32.26% higher than that of previous year. Unlike other banks in the industry, IBBL<br />
could manage to maintain the net investment margin due to its stable cost of fund during the<br />
period under surveillance. During the year 2011 the total operating income increased to<br />
Tk.20,123.41 million against Tk. 15,711.95 million in the last year representing 28.08%<br />
growth during the period. The above operating income in YE2011 revealed that 67.68%<br />
income was generated from net investment income (65.52% in YE2010), 26.32% from<br />
commission, exchange & brokerage income (25.44% in YE2010), 1.64% from investment in<br />
share and securities (3.12% in YE2010) and rest 4.36% from other operating income (5.92%<br />
in YE2010). The net profit after tax stood Tk.4,624.59 million during 2011 against Tk.<br />
4,485.48 million in 2010 representing 3.10% growth and the same was not in line with<br />
operating income growth due to significant increase in provision for classified investment and<br />
provision for diminution in value of investment in shares during the period. Moreover, due to<br />
higher growth in asset (17.71%) compared to net income (3.10%), the Return on Average<br />
Assets after tax (ROAA) decreased to 1.28% in 2011 against 1.47% in 2010. Similarly, the<br />
Return on Average Equity after tax (ROAE) slightly decreased to 18.09% in YE2011 against<br />
20.57% of the previous year. The bank made provision of TK.2,673.39 million during 2011<br />
against TK. 1,114.99 million during 2010 registering 1.39 times growth which was mainly due<br />
to increase in provision for classified investment and diminution in value of investment in<br />
shares. Net interest/profit margin (NIM) stood at 4.40% in YE2011 against 4.17% in the<br />
previous year.<br />
6.2.1 Stand Alone Operation<br />
<strong>On</strong> stand alone basis, operating income before provision of the bank increased to<br />
TK.12,731.63 million in YE2011 compared to TK.9,569.70 million in YE2010 registering<br />
33.04% growth over previous year. Net investment income also increased to TK.13,618.31<br />
million during 2011 against TK.10,294.37 million in 2010 indicating 32.29% growth. Profit<br />
payment against deposits of IBBL increased by 27.15% during 2011. Net profit after tax<br />
increased to TK. 4,841.45 million in 2011 against TK. 4,463.47 million in 2010 registering<br />
growth of 8.47% which was not in line with growth in operating income due to increase in<br />
provision during the period.<br />
Two subsidiaries<br />
6.2.2 Operations of Subsidiaries<br />
As said earlier, the bank has formed two subsidiaries. The operation of IBSL started in March<br />
22, 2010. IBSL is involved in portfolio management and brokerage service. The own portfolio<br />
size of IBSL stood at TK.1,920.85 million as on December 31, 2011. Due to adherence to<br />
Shariah principles, IBSL is not involved in non Shariah compliant securities. IBSL reported TK.<br />
238.74 million loss during the same period. The bank also has another subsidiary named<br />
IBCML which was formed on April 01, 2010 which is yet to get license and start its core<br />
business operation. The net profit of IBCML stood at Tk.21.89 million which was generated<br />
only from other operating income (bank deposit).<br />
Page 9 of 1717
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Good operating efficiency<br />
6.3 Operating Efficiency (Overall)<br />
Overall operating efficiency of IBBL has been found to be good. The operating efficiency is<br />
reviewed in terms of operating income, operating expenses, cost-to-income ratio and yield<br />
against per Tk.100 staff cost. Operating income of the bank rose to Tk.20,123.41 million<br />
during the year 2011 from Tk.15,711.95 million in 2010 registering a growth of 28.08%.<br />
Operating expense of the bank increased to Tk.7,291.67 million during 2011 from Tk.6,107.17<br />
million in 2010 showing 19.40% growth. It appears from the above that the growth of<br />
operating income of the bank is higher than the growth of operating expense during 2011.<br />
However, growth of operating income is still higher than the growth of net income due to<br />
increase in provision for classified investment and investment in shares. Consequently,<br />
efficiency ratio stand at 36.23% in 2011 against 38.87% in 2010. Yield per 100 Taka Staff<br />
cost also increased to Tk.275.28 in 2011 against Tk. 223.65 in 2010.<br />
7.0 ASSET MANAGEMENT (overall)<br />
Gross NPI 2.71%<br />
7.1 Non Performing Investment /Asset Quality<br />
IBBL is continuing with large investment portfolio during the period under surveillance. The<br />
overall assets quality of the bank has been found to be good even experiencing downturn over<br />
previous year. Total investments of the bank increased to TK.305,790.18 million at the<br />
YE2011 (Tk.305,840.56 million on stand alone basis) compared to TK.261,725.13 million at<br />
the YE2010 indicating an increase of 16.84%. The total nonperforming investment (NPI) of<br />
the bank stood at TK.8,292.32 million as on December 31, 2011 from TK.4,655.63 million in<br />
2010 registered 78.11% growth over the previous year. The above was mainly due to<br />
significant injection of fresh NPI (TK.8,146.69 million) during 2011 which is a matter of<br />
concern for the bank. However, the above increase was offset by recovery of Tk.1,741.50<br />
million and declassification of Tk.2,399.90 million during the period. The NPI at YE2011<br />
consisted of 38.01% (YE2010; 19.25%) under substandard, 9.68% (YE2010; 11.19%) under<br />
doubtful and remaining 52.30% (YE2010; 69.56%) under bad/loss investment. Due to the<br />
above growth in NPI, gross NPI ratio increased to 2.71% in YE2011 against 1.78% in YE2010.<br />
After considering the specific provision and profit suspense against classified investment, the<br />
net NPI increased to 1.36% at YE2011 (1.36% on stand alone basis) compared to 0.73% at<br />
YE2010. The gross NPI coverage decreased to 98.36% at YE2011 against 141.47% at<br />
YE2010.<br />
7.2 Sectoral and Credit Concentration (Stand alone basis)<br />
The bank is continuing its operation with concentration to trade finance and textile sector. The<br />
sectoral portfolio reveals that 32.52% investment was in trade finance, followed by 20.82% in<br />
textile, 5.24% in iron & steel engineering, 5.04% in housing, 3.50% in RMG, 2.00% in<br />
agricultural sector and rest are segregated to other general investment. While reviewing<br />
sectoral NPI in 2011, it was revealed that classified investment pie is mostly comprised of<br />
trade finance (23.16%) followed by Textile (20.34%), Transport (19.53%), House building<br />
(4.59%), others (30.23%) and rest are insignificantly distributed in different sectors. CRISL<br />
views that the bank is significantly exposed to sectoral concentration risk in textile sector<br />
which might be affected with the volatility of commodity price both in the national and<br />
international market and the sectoral performance.<br />
CRISL reviewed financing facilities extended to Group of companies of IBBL and it was<br />
revealed that the funded exposure of the bank to different Group of companies contribute<br />
significant portion of capital which exposes the bank to credit concentration risk.<br />
Significant large<br />
investment<br />
Page 10 of<br />
7.3 Large Investment (stand alone basis)<br />
The bank’s large investment exposure has slightly decreased during the period under<br />
surveillance. The large Investment exposure of IBBL stood at Tk.62,288.50 million (funded<br />
Tk.34,377.30 million and non-funded Tk.27,911.20 million) against 13 accounts at the<br />
YE2011; whereas the same was Tk.64,850.80 million consisting 18 accounts in 2010. The<br />
large investment of the bank stood at 20.37% of total investment in YE2011 against 24.64 %<br />
of the previous year. All large investment exposures were in unclassified status. The Bank has<br />
also started syndicated financing with other shari’ah based banks to minimize the large
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investment exposure in order to mitigate concentration risk. In the meantime, the bank has<br />
extended investment amounting to Tk.1138.36 million in four projects with other shari’ah<br />
based Banks.<br />
Rescheduled investment<br />
10.56%<br />
Considerable involvement<br />
in off balance sheet<br />
exposure<br />
7.4 Rescheduled Investment (stand alone basis)<br />
IBBL is continuing with large rescheduled assets during the period under surveillance. As on<br />
December 31, 2011, the total rescheduled investment of the bank stood at Tk.32,293.63<br />
million against Tk.24,813.93 million in the previous year and the same was 10.56% of the<br />
total investment at the YE2011 against 9.43% in the previous year. The above was<br />
comparatively high and a cause of concern for the bank. Out of the above rescheduled<br />
amount IBBL recovered Tk.7252.58 million (22.46% of the rescheduled assets) during the<br />
year 2011. CRISL also reviewed top 50 rescheduled agreements as on December 31, 2011<br />
and it was revealed that 28 accounts were rescheduled for the 1st time, 10 accounts for the<br />
second time, 3 accounts for the third time and 2 accounts for the fourth time.<br />
7.5 Off-Balance sheet Exposure (stand alone basis)<br />
IBBL has considerable involvement in off balance sheet exposure and the same has slightly<br />
increased during the year under surveillance. Total contingent liabilities increased to<br />
TK.113,420.93 million in 2011 from TK. 113,098.67 million in 2010. IBBL’s off balance sheet<br />
items comprised of 76.62% irrevocable letter of credit, 15.63% bills for collection and rest<br />
7.75% under letter of guarantees and other contingent liabilities in the same line with<br />
previous year. The total off balance sheet risk weighted assets constituted of 10.56% of total<br />
risk weighted assets of the bank at YE2011 against 6.12% at YE2010.<br />
While reviewing the risk weight-wise classification of the investment equivalent of off balance<br />
sheet exposure, it was revealed that 7.81% falls under 20% risk weight, 34.26% under 50%<br />
risk weight, 19.67% under 75%, 11.31% under 100%, 26.95% under 125% and rest 0.003%<br />
under 150% risk category. The total risk weighted assets of off-balance sheet exposure stood<br />
at Tk.2,696.15 million.<br />
8.0 CAPITAL ADEQUACY (overall)<br />
Good capital adequacy<br />
IBBL has been operating with good capital adequacy. During the surveillance the capital<br />
adequacy position of IBBL has improved due to good assets management. Under risk based<br />
capital adequacy framework of Basel-II, the total RWA of the bank stood at TK.25,5431.30<br />
million as on December 31, 2011 of which 91.21% emanated from credit risk, 0.75% from<br />
market risk and rest 8.04% from operational risk. Against the above, total eligible capital<br />
stood at Tk.33,530.44 million comprising Tier-I (core capital) of Tk.23,214.95 million and<br />
Tier-II (supplementary capital) of Tk.10,315.49 million representing a capital surplus of<br />
Tk.7,987.00 million. The Risk Weighted Capital Adequacy Ratio (RWCAR) stood at 13.13% at<br />
YE2011 (YE2010; 11.06%) against minimum requirement of 10% as on December 2011. Of<br />
the above 9.09% was Tier-I capital to risk weighted assets (regulatory minimum capital<br />
adequacy ratio 5% for Tier-I and 10% for total capital) and 4.04% was Tier-II capital.<br />
Internal capital generation was decreased to 20.25% during 2011 against 23.97% in the<br />
previous year. The risk weighted assets decreased to Tk.255,431.30 million at YE2011 against<br />
Tk.256,804.90 million from previous year which was mainly due to proper asset management<br />
through rating of corporate clients. Unlike most of the banks in the industry, IBBL focused<br />
both on asset management and capital management to maintain required capital in line with<br />
Basel-II capital adequacy framework. However, the Bank needs regular monitoring of the<br />
surveillance of client ratings in order to make them use worthy.<br />
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Stress Testing Analysis<br />
The following table shows the sensitivity of risk factors on CAR (based on actual CAR of<br />
13.13%).<br />
CAR highly sensitive to<br />
increase in NPI<br />
Indicators<br />
Magnitude of Sensitivity<br />
Decrease in the FSV of the collateral -0.14 ~ -0.57<br />
Increase in NPIs -0.36 ~ -6.56<br />
Negative Shift in NPI’s Category 0.00 ~ -0.28<br />
Interest Rate 0.15 ~ 0.46<br />
FEX: Currency Appreciation 0.00 ~ -0.01<br />
Equity Shock 0.00 ~ -0.02<br />
Total Change -0.36 ~ -6.97<br />
CAR After Shock (%) 12.77 ~ 6.15<br />
As IBBL is maintaining adequate capital according to the Basel II capital requirement, any<br />
change in the risk indicators have minor effect on the capital adequacy of the bank. From the<br />
above analysis it has been revealed that CAR of the bank is highly sensitive to increase in NPI.<br />
9.0 LIQUIDITY AND FUNDING (overall)<br />
Sufficient liquidity<br />
9.1 Liquidity Management<br />
IBBL has been operating with sufficient liquidity. IBBL is continuing with a good liquid assets<br />
portfolio in the balance sheet which includes government securities, balance in hand and other<br />
banks etc. The total liquid assets including cash, cash equivalent and Bangladesh Bank<br />
instruments represented approximately 20.89% of total deposit at YE2011 (19.81%;<br />
YE2010). Investment in Bangladesh Government Islamic Investment Bond has increased to<br />
Tk.13,800 million at YE2011 against Tk. 11,000 million at YE2010. As per Bangladesh Bank<br />
Guidelines the bank has been maintaining more than required Cash Reserve Ratio (CRR) and<br />
Statutory Liquidity Ratio (SLR) and the CRR and SLR of IBBL were 9.59% (required 6%) and<br />
15.78% (required 11.50%) in 2011 respectively. Investment to deposit ratio slightly<br />
decreased to 89.45% in YE2011 against 89.65% in YE2010 due to higher growth in deposit<br />
than the investment.<br />
IBBL have favorable gap in all maturity buckets. Liquidity gap ratio up to 3 months period is<br />
1.17 times and maturity bucket up to 12 months period is 1.08 times of liability. Overall gap<br />
analysis results in a net liquidity surplus of Tk.27,800.21 million. Hence it is expected that the<br />
bank will be able to meet its obligations with sufficient cumulative surplus.<br />
Cost of fund 8.86%<br />
9.2 Fund Management<br />
IBBL has been operating with good funding base during the period under surveillance. The<br />
funding mix consists of 87.80% deposits and others, 7.09% shareholders equity, 4.34%<br />
provision, tax and other liabilities and 0.77% Mudaraba Perpetual Bond. Total deposits<br />
consists of Mudaraba Saving Deposit of TK.132.05 billion (38.63% of total deposit), other<br />
Mudaraba Deposit TK.103.11 billion (30.16% of total deposit), Mudaraba Term Deposit of<br />
TK.65.17 billion (19.06% of total deposit), Al-Wadeeah current and other deposit of Tk.38.66<br />
billion (11.31% of total deposit) and Bills payable of TK.2.86 billion (0.84% of total deposit).<br />
Top 50 depositors are holding 1.83% of total deposit at YE2011 against 1.70% in the previous<br />
year. The bank’s weighted average cost of fund was almost stable which stood 8.86% at<br />
YE2011 compared to 8.65% in the previous year. The bank is mainly dependent of customer<br />
deposit which is profit rate sensitive. Any volatility in the cost of fund may affect profitability<br />
of bank.<br />
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10.0 OBSERVATION SUMMARY<br />
Rating Comforts:<br />
• Comfortable capital adequacy<br />
• Good Asset quality<br />
• Good financial performance<br />
• Comfortable liquidity<br />
• Strong market position<br />
• Considerable improvement in non-funded<br />
business<br />
• Experienced top management<br />
• Wide Operational network<br />
• Carrier of Islamic Banking Flagship in<br />
Bangladesh<br />
• Significant rated corporate exposures<br />
Rating Concerns:<br />
• Increase in Gross NPI<br />
• Considerable sectoral concentration<br />
• Rescheduled assets performance yet to arrive<br />
at satisfactory level<br />
• Exposed to credit concentration risk<br />
• Considerable investment in low yielding<br />
government bond<br />
Business Opportunities:<br />
• Product diversification<br />
• Portfolio diversification in low risk category<br />
business segment including SME<br />
• Client rating to enhance investment<br />
Business Challenges:<br />
• Recent liquidity crisis in market<br />
• Regulatory pressure for minimizing<br />
interest/profit rate spread<br />
• Entrance of new bank<br />
• Implementation of risk based capital adequacy<br />
• Unrest in capital market<br />
11.0 PROSPECTS<br />
The financial sector of Bangladesh which is considered as highly regulated and structured was<br />
subject to further refinement under Basel II regime, during 2011, to ensure risk based capital<br />
adequacy for the banks. In fact during first part of the 2011 a good number of banks having<br />
low CAR or marginal CAR took actions to increase capital base by the issuance of bonds to be<br />
included under Tier II capital. This was mainly a balance sheet approach followed by banks to<br />
enhance capital base without going for clients rating as recommended in Basel II system.<br />
Although it was a cumbersome process and needed permission from Bangladesh Bank yet all<br />
banks could not adopt the opportunity for not having CAMELS ratings 2 for both issuer and<br />
issue rating. However the requirement was subsequently relaxed by one notch by Bangladesh<br />
Bank to allow the banks to increase capital base under tier II capital by the issuance of short<br />
term bonds. Subsequently banks found increase of capital through balance sheet is really<br />
costlier on many accounts. Finally the banks decided to gain capital through clients rating (<br />
i.e. asset base approach) which is continuing and as per available statistics most of the banks<br />
started asking their good clients to get themselves rated by recognized ECAIs on the hope<br />
that bank’s capital requirement will be substantially reduced if the clients obtain good rating<br />
with their good fundamentals etc. It has started giving positive results and CRISL believes<br />
that with the passage of time a good percentage of clients would come under rating coverage<br />
for ultimate benefit of banks to have additional capital saved due to good rated clients for<br />
further investment in future without putting pressure for additional capital from bank.<br />
Page 13 of<br />
During 2011 on an average there had been liquidity constrain in the banking sector. Over and<br />
above the Bangladesh Bank enhanced the REPO rate thrice during 2011 which finally stood at<br />
Tk.7.25 at the YE2011 to combat double digit inflation effect. For these reasons money<br />
market was volatile with high cost of fund. In spite of market situation average growth of<br />
Deposit as provided by BB for the banking industry YE2011 stood at 20.49%. Similarly the<br />
investment growth was recorded as 17.92%. As deposit provides good investment capacity to<br />
banks therefore all banks intensified deposit mobilization effort during 2011. This effort got<br />
further impetus as the BB withdrew the profit cap from the market with the moral persuasion<br />
to maintain 4.5% profit spread between deposit and investment. The final result was at<br />
YE2011 almost all banks improved their deposits and investment growth as shown by BB in
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
its scheduled banks statistics. With the improvement of economic meltdown in the western<br />
world including USA, Bangladesh Export started gaining momentum in recent days and the<br />
banks are continuously playing an appreciative role both in export and import business.<br />
Inward remittance from the expatriate Bangladeshis through the banking channel has also<br />
increased due to fast e-bank facilities etc. CRISL believes that under Basel II regime banks<br />
with risk based capital adequacy are more capable and vibrant to operate in line with the<br />
international banking community with equal efficiency.<br />
END OF THE <strong>REPORT</strong><br />
(Information used herein is obtained from sources believed to be accurate and reliable. However, CRISL does not<br />
guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or<br />
omissions or for the results obtained from the use of such information. Rating is an opinion on credit quality only<br />
and is not a recommendation to buy or sell any securities. All rights of this report are reserved by CRISL. Contents<br />
may be used by news media and researchers with due acknowledgement)<br />
[We have examined, prepared, finalized and issued this report without compromising with the matters of any<br />
conflict of interest. We have also complied with all the requirements, policy procedures of the SEC rules as<br />
prescribed by the Securities and Exchange Commission.]<br />
Page 14 of
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
12.0 CORPORATE INFORMATION<br />
DATE OF INCORPORATION: 13 th March 1983<br />
FUNCTIONING DATE: 30 th March 1983<br />
BOARD OF DIRECTORS:<br />
Prof. Abu Nasser Muhammad Abduz Zaher Chairman<br />
Janab Yousif Abdullah Al-Rajhi<br />
Vice- Chairman<br />
Engr. Mustafa Anwar<br />
Vice- Chairman<br />
Engr. Md. Eskander Ali Khan<br />
Director<br />
Jb. Md. Khurshed Hossain<br />
Director<br />
Dr. Abdulhameed Fouad Al-Khateeb Director<br />
Jb. Mohamad Adnan Midani<br />
Director<br />
Jb. Mohammad Abdullah Al Jalahma Director<br />
Jb. Hafizul Islam Mian<br />
Director<br />
Jb. Md. Shahidul Islam<br />
Director<br />
Engr. Muhammad Dawood Khan<br />
Director<br />
Jb. Mohammed Nazrul Islam<br />
Director<br />
Jb. Mominul Islam Patwary<br />
Director<br />
Jb. Md. Abdus Salam, FCA, FCS<br />
Depositor Director<br />
Jb. Humayun Bokhteyar ACPA, FCA Depositor Director<br />
Prof. N R M Borhan Uddin Ph. D<br />
Independent Director<br />
Janab Mohammad Abdul Mannan<br />
Managing Director, Ex-Officio Director<br />
Auditors:<br />
A. Qasem & Co.<br />
Chartered Accountants<br />
&<br />
ACNABIN<br />
Chartered Accountants<br />
Core Management Body: -<br />
Janab Mohammad Abdul Mannan<br />
Janab Mohd. Shamsul Haque<br />
Janab Md. Habibur Rahman<br />
Janab Md. Setaur Rahman<br />
Janab Md. Nurul Islam<br />
Janab Muhammad Abul Bashar<br />
Managing Director & CEO<br />
DMD (Operations Wing)<br />
DMD (Investment Wing)<br />
DMD (<strong>On</strong> deputation in Nigeria)<br />
DMD (International Banking Wing)<br />
DMD (Information & Communication Technology<br />
Division)<br />
DMD (Retail Investment Wing)<br />
DMD (Internal Control & Compliance Wing)<br />
EVP (Risk Management Unit)<br />
EVP (Treasury Division)<br />
EVP (Corporate Investment Division-I)<br />
EVP (Assets Management Division)<br />
EVP (Human Resources Division)<br />
Janab Syed Abdullah Mohammed Saleh<br />
Janab Md. Habibur Rahman Bhuiyan, FCA<br />
Janab A.K.M. Abdul Malek Chowdhury<br />
Janab Md. Mahbub-ul-Alam<br />
Janab Md. Nurul Islam Khalifa<br />
Janab Rafi Ahmed Begh<br />
Janab Abdus Sadeque Bhuiyan<br />
Janab Mohammad Nesar Uddin, FCA, FCMA SVP (Chief Financial Officer)<br />
Janab Abu Reza Md. Yeahia<br />
SVP (Company Secretary)<br />
CAPITAL HISTORY:<br />
Figures in Million Taka<br />
Year<br />
Authorized Capital Issued, Subscribed and Paid-up Rate of Source of<br />
(Million Tk.)<br />
Capital (Million Tk.) Increase Paid-up Capital<br />
2007 5,000.00 3,801.60 10% Bonus Share Issue<br />
2008 10,000.00 4,752.00 25% Bonus Share Issue<br />
2009 10,000.00 6,177.60 30% Bonus Share Issue<br />
2010 10,000.00 7,413.12 20% Bonus Share Issue<br />
2011 20,000.00 10,007.71 35% Bonus Share Issue<br />
Page 15 of
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
13.0 FINANCIALS<br />
A. Balance Sheets<br />
Figure in Million<br />
Particulars 2011* 2010* 2009 2008 2007<br />
Cash in Hand 4,656.00 3,787.39 2,480.77 3,107.36 2,907.14<br />
Cash with BB & Other Banks/FIs 35,975.92 35,266.02 35,004.90 28,222.96 14,169.31<br />
Cash with Other Banks/FIs 16,853.30 7,114.71 7,678.37 5,623.18 4,012.33<br />
Investment in Shares & Securities. 15,853.18 13,471.20 11,136.61 7,532.61 20,365.71<br />
Total Investment, Adv. & Bills 305,790.18 261,725.13 214,615.80 180,053.94 144,920.61<br />
Fixed Assets 7,110.25 6,757.09 6,512.36 4,407.22 3,987.23<br />
Other Asset 3,136.78 2,663.63 874.02 1,931.87 1,000.01<br />
Total Assets 389,375.60 330,785.17 278,302.84 230,879.14 191,362.35<br />
Current A/Cs & Others A/Cs 38,658.70 35,497.19 23,794.37 18,958.13 19,165.15<br />
Bills Payable 2,863.40 2,980.61 2,545.71 2,308.04 1,767.59<br />
Savings Bank Deposits 132,051.08 111,143.63 95,081.55 77,498.41 62,403.50<br />
Term Deposits 65,167.29 51,156.12 45,268.01 36,706.85 31,103.69<br />
Other Mudaraba Deposits 103,114.79 91,159.94 77,602.50 64,871.98 51,885.35<br />
Deposits & Other A/C 341,855.26 291,937.49 244,292.14 200,343.41 166,325.29<br />
Other Liabilities 19,906.59 15,331.40 13,905.15 16,475.23 13,817.42<br />
Total Outside Liabilities 361,761.85 307,268.89 258,197.29 216,818.64 180,142.71<br />
Paid Up Capital 10,007.71 7,413.12 6,177.60 4,752.00 3,801.60<br />
Reserves & Others 17,606.04 16,103.15 13,927.94 9,308.49 7,418.05<br />
Shareholders' Equity 27,613.75 23,516.27 20,105.54 14,060.49 11,841.34<br />
Total Liabilities & Shareholders'<br />
Equity<br />
389,375.60 330,785.17 278,302.84 230,879.14 191,362.35<br />
B. Income Statement<br />
Figure in Million<br />
Particulars 2011* 2010* 2009 2008 2007<br />
Investment Income 32,019.53 24,766.26 21,370.53 19,543.84 14,572.19<br />
Profit Paid on Deposit 18,401.22 14,471.89 13,076.99 12,162.10 9,410.59<br />
Net Investment Income 13,618.31 10,294.37 8,293.54 7,381.74 5,161.60<br />
Income from Investment in Share &<br />
Sec.<br />
331.00 490.42 115.16 408.76 284<br />
Comm., Exchange & Brokerage 5,297.46 3,997.73 3,437.20 3,337.52 2,579.01<br />
Other Non Investment Income 876.63 929.42 480.96 940.22 264.32<br />
Total Operating Income 20,123.41 15,711.95 12,326.86 11,594.23 8,288.94<br />
Salary, Allowance 4,655.98 4,289.28 3,153.35 2,837.99 2,037.23<br />
Other Operating Expenses 2,635.67 1,817.89 1,392.63 1,277.82 1,089.35<br />
Total Operating Expenditure 7,291.66 6,107.17 4,545.97 4,115.81 3,126.58<br />
Profit/Loss before Provisions 12,831.75 9,604.78 7,780.89 7,952.43 5,162.36<br />
Prov. for Unclassified Investment 553.00 743.00 384.26 310.02 436.76<br />
Prov. for Classified Investment 1,641.31 -80.01 939.6 528.51 653.62<br />
Prov. For others Assets/Off Balance<br />
Sheet Items<br />
479.08 452.00 -60.63 766.06 291.16<br />
Net P/L before Taxes 10,158.36 8,489.79 6,517.66 6,347.83 3,780.82<br />
Provisions for Tax 5,533.77 4,004.31 3,114.11 3,673.04 1,731.77<br />
Net P/L after Tax 4,624.59 4,485.48 3,403.55 2,674.80 1,427.36<br />
* Consolidated Financial Statements<br />
Page 16 of
<strong>CREDIT</strong> <strong>RATING</strong> <strong>REPORT</strong><br />
<strong>On</strong><br />
<strong>ISLAMI</strong> <strong>BANK</strong> <strong>BANGLADESH</strong> <strong>LIMITED</strong><br />
<strong>RATING</strong><br />
AAA<br />
Triple A<br />
(Highest Safety)<br />
AA+, AA, AA-<br />
(Double A)<br />
(High Safety)<br />
A+, A, A-<br />
Single A<br />
(Adequate<br />
Safety)<br />
CRISL <strong>RATING</strong> SCALES AND DEFINITIONS<br />
LONG-TERM - <strong>BANK</strong>S<br />
DEFINITION<br />
Banks rated in this category are adjudged to be of best quality, offer highest safety and have highest<br />
credit quality. Risk factors are negligible and risk free, nearest to risk free Government bonds and<br />
securities. Changing economic circumstances are unlikely to have any serious impact on this category<br />
of banks.<br />
Banks rated in this category are adjudged to be of high quality, offer higher safety and have high credit<br />
quality. This level of rating indicates a corporate entity with a sound credit profile and without<br />
significant problems. Risks are modest and may vary slightly from time to time because of economic<br />
conditions.<br />
Banks rated in this category are adjudged to offer adequate safety for timely repayment of financial<br />
obligations. This level of rating indicates a corporate entity with an adequate credit profile. Risk factors<br />
are more variable and greater in periods of economic stress than those rated in the higher categories.<br />
BBB+, BBB,<br />
BBB-<br />
Triple B<br />
(Moderate<br />
Safety)<br />
BB+, BB, BB-<br />
Double B<br />
(Inadequate<br />
Safety)<br />
B+, B, B-<br />
Single B<br />
(Risky)<br />
CCC+,CCC,<br />
CCC-<br />
Triple C<br />
(Vulnerable)<br />
CC+,CC, CC-<br />
Double C<br />
(Highly<br />
Vulnerable)<br />
C+, C, C-<br />
(Near to Default)<br />
D<br />
(Default)<br />
Banks rated in this category are adjudged to offer moderate degree of safety for timely repayment of<br />
financial obligations. This level of rating indicates that a bank is under-performing in some areas. These<br />
entities are however, considered to have the capability to overcome the above-mentioned limitations<br />
with special care and cautious operation. Risk factors are more variable in periods of economic stress<br />
than those rated in the higher categories.<br />
Banks rated in this category are adjudged to lack of key protection factors, which results in an<br />
inadequate safety. This level of rating indicates a bank as below investment grade but deemed likely to<br />
meet obligations when due. Overall quality may move up or down frequently within this category.<br />
Banks rated in this category are adjudged to be with high risk. Timely repayment of financial obligations<br />
is impaired by serious problems which the entity is faced with. Whilst an entity rated in this category<br />
might be currently meeting obligations in time, continuance of this would depend upon favorable<br />
economic conditions or on some degree of external support.<br />
Banks rated in this category are adjudged to be with vulnerable protection factors. This rating indicates<br />
that the degree of certainty regarding timely payment of financial obligations is doubtful unless<br />
circumstances are favourable.<br />
Banks rated in this category are adjudged to be with high vulnerable position. This rating indicates that<br />
the degree of certainty regarding timely payment of financial obligations is quite lower unless overall<br />
circumstances are favourable or there is possibility of high degree external support.<br />
Banks rated in this category are adjudged to be with near to default in timely repayment of financial<br />
obligations. This type rating may be used to cover a situation where a insolvency petition has been filed<br />
or similar action has been taken, but payments on the obligation are being continued with high degree<br />
of external support.<br />
Banks rated in this category are adjudged to be either currently in default or expected to be in default.<br />
This level of rating indicates that the entities are unlikely to meet maturing financial obligations and<br />
calls for immediate external support of a high order.<br />
For long-term ratings, CRISL assigns + (Positive) sign to indicate that the issue is ranked at the upper-end of its<br />
generic rating category and - (Minus) sign to indicate that the issue is ranked at the bottom end of its generic rating<br />
category. Long-term ratings without any sign denote mid-levels of each group.<br />
SHORT-TERM - <strong>BANK</strong>S<br />
Highest Grade<br />
Highest certainty of timely payment. Short-term liquidity including internal fund generation is<br />
ST-1<br />
very strong and access to alternative sources of funds is outstanding, Safety is almost like risk<br />
free Government short-term obligations.<br />
High Grade<br />
ST-2<br />
High certainty of timely payment. Liquidity factors are strong and supported by good<br />
fundamental protection factors. Risk factors are very small.<br />
Good Grade<br />
Good certainty of timely payment. Liquidity factors and company fundamentals are sound.<br />
ST-3<br />
Although ongoing funding needs may enlarge total financing requirements, access to capital<br />
markets is good. Risk factors are small.<br />
Moderate Grade<br />
ST-4<br />
Moderate liquidity and other protection factors qualify issues as to invest grade. Risk factors are<br />
larger and subject to more variation.<br />
Non-Investment Grade<br />
Speculative investment characteristics. Liquidity is not sufficient to insure against disruption in<br />
ST-5<br />
debt service. Operating factors and market access may be subject to a high degree of variation.<br />
ST-6<br />
Default<br />
Issuer failed to meet scheduled principal and/or interest payments.<br />
Page 17 of