Responsibilities and Liabilities of Beneficiary/Exporter

Responsibilities and Liabilities of Beneficiary(exporter):

i) The beneficiary has the obligation to make export as per the contract and produce the documents as required by the credit. He 'can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank'.

ii) In a transferable credit, if he requires it to be transferred, he should pay the charges of the transferring bank.

Different parties of Letter of Credit

Responsibilities and Liabilities of Applicant/Importer



The responsibilities and obligations of the Applicant(Importer):

i) Since the credit is based on the sale contract with the exporter i.e. the importer has a duty to the exporter to ensure that the credit is opened as per the terms of the sale contract. However, once a credit is issued, it stands by itself whether or not it is in accordance with the sale contract.

ii) Even if the bank that opens a letter of credit fails the importer remains liable to the exporter for the amount if the exporter has fulfilled his obligation under the contract.

iii) The obligations between the importer and the issuing bank are governed by the application-cum-agreement submitted by the importer to the bank.

iv) The applicant is liable to indemnify the banks against all obligations and responsibilities impossed by foreign laws and usages.

Parties involved in Letter of Credit

Different kinds of Bill of Lading

1. Clean B/L: A bill of lading which acknowledges the receipt of the goods on board the carrying vessel in apparent good order and condition and does not indicate any defective condition of the goods or packages is called a clean bill of lading.

2. Claused B/L: A bill of lading which expressly declares a defective condition of the goods and/or packages is called a claused bill of lading.

Bai-Muajjal

Bai-Muajjal: Bai means 'Sale and purchase' Ajal means a fixed time or a fixed period.
So, Bai-Muajjal means 'sale for which payment is made at a fixed  date or within a fixed period. In short, it is a sale on credit.

Bai-Murabaha

Bai-Murabaha:
Bai means 'Sale and purchase'. Ribhun means 'an agreed upon profit'.  So, Bai-Murahaba means 'Sale on agreed upon profit.'

Bai Salam

Defination: Bai-Salam means advance sale and purchase. Bai means sale and purchase. Salam means advance.

Principles of Islamic Management

Principles of Islamic Management:

1. Honesty
2. Efficiency
3. Patriotism
4. Right man in the right place
5. Descipline

Characterstics of Islamic Management

Some characterstics of Islamic Management:

1. Basic foundation of Islamic Mangament is the Quran and Sunnah.
2. Original model of IM is Prophet Muhammad (SAW) and his companions.
3.  Only economic development is not the final target of IM.
4. Activities aimed at welfare in the life hereafter.
5. Employees should maintain cordial relationship and team spirit.
6. Accountibility is two fold: i) to immediate boss and ii) Almighty Allah
7. Manager considers himself as a vicegerent of Allah.
8. Property is thought to be trusted by Allah to the users and the managers.
9. Decesions are made through consultation( Mashwara).
10. The manager does not have any greed to misuse the power of the post.
11. There must be prevail peach, development and other benefits.
12. IM is applicable to personal, familial and social, economic and political organizations.
13. Here hypocrisy, forgery, activities adverse to religion and morality are not tolerated.
14. Management is thought to be a universal concept.
15. There is freedom of thinking and expression.
16. Competition is a common strategy in good deeds.

Major Sins in Islam

Major Sins: Major sins are difined as what is forbidden by Allah and His Messenger in the Quran and the Sunnah.
Ref: An Nisaa:31, Ash Shura: 37, An Najm:32

List of major sins:
1. Ascribing Associates to Allah, The Most High (Shirk)
2. Killing a human being

What is Unit Banking?

Unit Banking:
Unit Banking means a system of banking under which banking services are provided by a single banking organisation. Such a bank has single office of place of work. It has its own governing body or board of directors. It functions independently and is not controlled by any other individual, firm or body corporate. It also does not control any other bank. Such banks can become member of the clearing house and also of the Banker's Association. Unit banking system originateed and grew in the USA. Different unit banks in the USA are linked with each other and with other financial centres in the country through 'correspondent banks.'
Advantages of Unit banking
Disadvantages of Unit banking

Disadvantages of Unit Banking

Disadvantages of Unit Banking:

1. No Economies of Large Scale
2. Lack of Uniformity in Interest Rates
3. Lack of Control
4. Risks of Bank's Failure
5. Limited Resources
6. Unhealthy Competition
7. Wastage of National Resources
8. No Banking Development in backward Arear
9. Local Pressure

Advantages of Unit Banking

Advantages of Unit Banking:

1. Efficitent Management
2. Better Service
3. Close Customer-banker Relation
4. No Evil Effects Due to Strike or Closure
5. No Monopolistic Practices
6. No Risks of Fraud
7. Closure of Inefficient Banks
8. Local Development
9. Promotes Regional Balance

Functions of Commercial Bank

Functions of Commercial Bank:

A. Primary Functions
B. Secondary Functions
C. Fulfillment of Socio-Economic Objectives

A. Primary Functions

Strategy of Financial Management

1. Financial planning
2. Identification of sources
3. Raising of funds
4. Investment of funds
5. Protection of funds
6. Distribution of profit
7. Management of funds
8. Cost control
9. Management of assets
10. Maintaining good relations
11. Protection of financial documents
12. Forceasting of cash flow

Methods or Techniques for Analysis and Interpretation of Financial Statement

1. Comparative Balance Sheet
2. Comparative Income Statement
3. Trend Percentage Analysis
4. Same of Common Size Statement
5. Fund Flow Statement
  i) Statement of Changes in Working Capital
  ii) Statement of Changes in Non-working Capital
  iii) Statement of Source and Application of Fund
6. Ratio Analysis

Financial Intermediaries(FI) and Types of FI

FI: Firms engaging in the two-stage process of creating secondary financial assets such as savings deposits and exchanging them for money, then exchaning the money for the promary financial assets created by borrowers and others who would use the money.-John Lisdamen

Types of FI:

1. Commercial Banks
2. Credit Unions
3. Savings and Loan Association
4. Small loan companies
5. Mutual Savings Banks
6. Venture Capitalists
7. Investment Banks
8. Insurance Companies
9. Credit Card Companies
10. Thrift and Loan  Institutions.

Influencing factors of commercial bank's loan/credit policy

1. Capital position of the bank
2. Earnings requirements
3. Stability of deposits
4. Economic conditions of the area served by bank
5. Influence of monetary and fiscal policy
6. Experience and efficiency of the bank personnels
7. Competition in banking
8. Credit needs of the area served.

Capital structure of a commercial bank

1. Authorised capital
2. Issued capital
3. Subscribed capital
4. Paid up capital

Necessity of adequate capital for CB.

1. Transaction motive
2. Precautionary motive
3. Speculative motive
4. Provision of safety against bad debt.

Risks in Banking and Financial Services

1. Asset Risk
2. Basis Risk
3. Balance Sheet Risk
4. Core Risks
5. Counter party Risk
6. Country Risk
7. Computer Systems Risk
8. Compliance Risk
9. Call Risk
10. Concentration Risk
11. Credit Spread Risk or Downgrade Risk
12. Credit Risk
13.Detection Risk
14. Default or Credit Risk
15. Economic Risk
16. Exchange Risk
17. Foreign Exchange Risk
18. Fudning Risk
19. Facility Risk
20. Gap or Mismatch Risk
21. Integrity Risk
22. Interest Rate Risk
23. Location Risk
24. Liquidity Risk
25. Market Risk
26. Operational Risks
27. Price Risk
28. Political Risk
29. Reputation Risk
30. Systematic or Intrinsic Risk
31. Sovereign Risk
32. Strategic Risk
33. Time Risk
34. Transaction Risk
35. Transfer Risk.

INCOTERMS

INCOTERMS means International Commercial Terms, Trade terms, Delivery terms. These terms have been prepared and named by the ICC Paris. First published in 1936 and latest in 2000. At present there are 13 INCOTERMS.

Exchange Position

Exchange Position: Exchange position means difference between total sale and total purchase of a particular Foreign Currency in a particular period. The book in which the exchange position is recorded is called position book.

Open positon: If exchange positon is too much bought or over sold then it is called open position. The ADs are required to work out their open exchange positon daily and report to the Central Bank the positions (over bought/over sold) as at the close of the business on Thursday at each week. The ADs will purchage and sell foreign currencies and will ensure that the prescribed open position limit is not exceeded.

Over Bought or Long Position: If total purchase of Foreign Currency is more than total sales then it is called over bought or long position.

Over Sold or Short Position: If total sales are more than total purchases then it is called over sold or short position.

Square up Exchange Position: If total purchase become equal to tatal sales or difference between total purchase & total sales are negligible then it is called square up exchange position.

The Ads should always be careful to maintain its exchange position within the prescribed limit and always take care of exchange rate fluctuation.

Different Foreign Exchange Market Operations

1. Arbitrage
2. Swap
3. Hedging
4. Sepculation

Foreign Exchange Market

1. Spot Market
2. Forward Market
3. Future Market
4. Option Market

Methods of settling debts in Counter Trade

1. Barter
2. Switch trading
3. Counter purchase
4. Buyback
5. Offset

Methods of settling debts in International Trade

a. Advance Payment
b. Open Account
c. Consignment Sale
d. Bill for Collection

Means and Methods for settlement of International Payment

There are some means and methods for settlement of international payment:

i. Foreign accounts of Banks:
a. Nostro Accounts
b. Vostro Accounts
c. Loro Accounts

ii) Credit Instruments:
a. Telegraphic Transfer (TT)
b. Mail Transfer (MT)
c. Banker's Draft
d. Bills of exchange
e. Letter of Credit
f. Stock Draft
g. Personal Cheques/Dividend Warrants etc.
h. SWIFT-The Society for World-wide International Financial Telecommunications

iii) Other means of International payment:
a. Currency notes and coins
b. Bullion/Gold
c. International Money Order

iv) Travel Transaction:
a. Traveler's Cheque
b. Credit Cards
c. Eurocheques
d. Foreign Currency Accounts

Documents used in International Trade

International Trade documents may be classified as under:

1. Commercial documents
2. Official documents
3. Insurance documents
4. Transport documents
5. Financial and financing documents

Different Parties of a Documentary Credit

Normally the following parties are involved to a documentary credit.

1. The Issuing Bank(opening bank)
2. Nominated bank or Intermediary bank
   i) Advising Bank/Notifying Bank
   ii) The Confirming Bank
   iii) Negotiating Bank
   iv) Accepting Bank
   v) Paying Bank
   vi) Reimbursing Bank
   vii) The Transferring Bank
3. The Applicant or Buyer (Importer)
4. The Beneficiary or Seller (Exporter)

Responsibilities and Liabilities of Parties of Letter of Credit

Bill of Exchange

Bill of Exchange: It is a negotiable instrument. It is an unconditional order, signed by the maker, to pay a certain sum of money, to a certain person, at the given date.

Bill of Lading

Bill of Lading: It is a document issued by the shipping company or its agent acknowledging the goods mentioned there in, on board the carrying vessel, in apparent good order and condition unless other wise indicated there in, for shipment to the consignee on terms & conditions as agreed upon as to their carriage. It is a document of title to the goods described in it.

Certified Invoice

Certified Invoice: It is an invoice bearing a signed statement by some one in the importer's country, who have inspected the goods and found them in accordance with those specified in the contract.

Custom Invoice

Custom Invoice: These are specific forms supplied by the consular office of the importer duly filled and signed by the shipper and serve the purpose of making easy entry of the merchandise into the importing country. These invoices are for easy custom clearance.

Consular Invoice

Consular Invoice: This is an invoice issued or certified by the consulate or embassy of the importing country, stationed in the exporting country. This type of invoice is called Legalized Invoice.

Commercial Invoice

Commercial Invoice: When the supplier shipped the goods, he prepares a final invoice, which is called commercial invoice. This has no difinite form but usually commercial invoice includes description of the goods, unit price, name of the buyer and other specification as per credit terms.

Proforma invoice

Proforma Invoice: Proforma invoice is the offer or quatation of the supplier to the buyer. If the buyer accept the offer or quotation, the invoice become the contract between the buyer and the seller. Before opening the L/C, the applicant will submit the proforma invoice to the Issuing Bank as a contract with his supplier.

3 pillars of Basel-II

Pillar-I: Minimum Capital Requirements
i) Capital for Credit Risk
 a) Standardized Approach (upto 2012)
 b) Internal Rating Based Approach( from 2013)
2 Rating Agencies are CRISL and CRAB
(BRPD circular-05 29/04/2009)

Tier 3 Capital ( Additional Supplementary Capital)

Tier 3 Capital (Additional Supplementary Capital) consisting of short term subordinated debt maturity less than or equal of five years but greater than or equal to two years is meant solely for purpose of meeting a proportion of the capital requirements for market risk.

Tier 2 capital (Supplementary Capital)

Tier 2 Capital (Supplementary Capital) contribute to the overall strength of a bank

1. General Provision
2. Asset Revaluation Reserve
3. Preference Shares
4. Subordinated Debt
5. Exchange Equalization Account
6. Revaluation Reserves for Securities

Tier 1 Capital (Core Capital)

Tier 1 Capital (Core Capital) comprises of highest quality capital elements:

1. Paid up capital/capital deposited with BB
2. Non-repayable share premium account
3. Statutory Reserve
4. General Reserve
5. Retained Earnings
6. Minority Interest in subsidiaries
7. Non-Cumulative irredeemable Preference Shares
8. Dividend Equalization Account

Use of Fund

Use of Bank Fund:

1. To fulfill the regulatory and business requirement:

i) Cash (For meeting up day to day operational expenses of the business/withdrawl of deposits/payment of borrowings/payment of dividend/payment of salaries, allowances, wages etc.)
ii) Balance with Bangladesh Bank/Sonali Bank(For Liquidity Purpose)
iii) Fixed Assets acquisition ( Land, Building, Machineries, Furnitures, Car, Computer etc.)

2. To deploy in earning Assets:

i) Investment (By purchasing of shares/debentures/bonds/Govt. securities/Treasury bills etc)
ii) Loans and Advances (both short & long term)
iii) Investing in the Money Market( By investing money at call & short notice to other banks/financial institutions)

Banks sources of Fund

1. Paid up capital
2. Share Premium
3. Debenture/Bond issue
4. Reserve Fund
5. Deposit
6. Bills payable/Remittance
7. Borrowings from Money Market
8. Recovery of Advance/Payment of due installment of loans
9. Undistributed profit/Retained earnings
10. Sale of Assets
11. Govt. /Agencies Loan/Aid/Grant
12. Any other funds raised by the owner/Employees/Profit
REPO agreements/arrangements also acts as source of funding

What is Money Laundering?

Money Laundering means:

As per Money Laundering Prevention Act, 2002
Article 2 (Tha)
Au Properties acquired or earned directly or indirectly through illegal means.
Aa Illegal transfer, conversion, concealment of location or assistance in the above act of the
properties acquired or earned directly or indirectly through legal or illegal means.


Process of money laundering:

Placement
Layering
Integration
Predicate offenses:
Corruption and bribery
Currency duplication
Duplication of paper and documents
Compelling to subscribe
Cheating
Counterfeiting
Illegal arms business
Illegal business of drug
Illegal business of theft goods
Abduction
Killing and injury seriously
Slaying of women and child
Black marketing and handover local and foreign currency
Theft and robbery
Human exploitation and illegal immigration
Dowry
Any other offence declared by the Govt. through public gazette.

Mark-to-Market

Mark-to-Market: 
This is a process through which the treasury back-office values all outstanding positions at the current market rate to determine the current market value of these. This exercise also provides the profitability of the outstanding contracts. The treasury back office gathers the market rates from an independent source. ie. other than dealers of the same organization which is required to avoid any conflict of interest.

Value at Risk(VaR)

Value at Risk(VaR): is a statistical estimate of an upper boundary, within a specified confidence level, of the potential amount a trading position or portfolio could decrease in value during the time needed to close out a position. Specifically, it is a measure of potential loss from an event in a norma, everyday market environment. VaR is denominated in a currency, say taka, where it measures the cance of losing Taka for a movement in interest rates for a given balance sheet scenario. For example, if a bank only has 1 month borrowing to fund 1 year customer lending, an incerase in 1 month rates would result in incremental expense for the bank. VaR is estimated by assuming a 97.5% confidence level for movement in relevant Market Risk Factors.
Let us construct a very simple example to understand the VaR methodology. In the following table a simple hypothetical balance sheet for a bank is shown, where it has BDT 100 1 month borrowing to fund same amount of assets:

Asset 1 month=0 I year=100
Liability : 1 month=100 1 year=0
Mismatch: I month=(100) I year=100

Say the market interest rete for 1 month is 8% and 1 year is 10%. Now, if we need to square the balance sheet gaps, we need to lend in  1 month at 8% and need to borrow in 1 year tenor at 10%. Therefore, the expected Value at Risk to square the position will be:

VaR=100*(8%*30days/360days)-(100*10%*360 days/360 days)=(0.67-10)=9.33

Different organisations use different techniques or formulas for calculating VaR.

Liquid Assets

Liquid Assets can be as follows:

i) Reserve Assets
ii) Cash in Tills
iii) Specific Government Securities.
iv) Foreign Currency in open position.
v)  Specific FDRs.

Objectives of Asset Management

The objectives of Asset Management is to maximize returns on loans and securities and minimize risk by acquiring assets that have a low rate of default risk and by diversifying asset holdings.

Medium Term Funding Ratio(MTF)

Banks earn money from mismatches, i.e. by borrowing short term and lending long term. Bank has to find out the right combination for longer term mismatch. MTF ratio is based on the amount of liability with a contractual maturity of more than one year to assets with a contractual maturity of more than one year, that is MTF should be done on the basis of 1 year and above but less than 2 years term deposit. The desirable ratio of MTF should be 15% to 20%.

Maximum Cumulative Outflow (MCO)

Maximum Cumulative Outflow(MCO) guidelines control the net outflow ( Inflow from asset maturity minus outflow from liability maturity) over the following periods:
i) Overnight
ii) One week
iii) One month
MCO up to 1 month bucket should not exceed 10% of balance sheet amount to avoid funding mismatch (it may vary according to the volume of Assets and Liabilities of a Bank.

Wholesale Borrowing Guidelines(WBG)

Wholesale Borrowing Guidelines limit is based on the match funding basis:

i) Current deposit and part of savings deposit is considered as investment to meet legal requirements of CRR & SLR.
ii) One year and above but less than 2 yrs term deposit may be used for midterm investment.
iii) 3 months 6 months but less than 1 year term deposit and part of savings deposit may be used to finance working capital & other demand loan.
iv) Next day, 2 to 7 days, 7 days to  1 month and 1 to 3 months term deposit may be used for demand loan and short term investment ie. Call money, Reverse REPO, 28 days, 91 days, 182 days Govt. Treasury Bills/Bonds and Govt. securities.
v) 2 yrs and above term deposits can be taken up to the amount of long term loan.

Asset Liability Management (ALM)

Asset Liability Management(ALM):
Asset Liability Management (ALM) is an integral part of Bank Management and so, it is essential to have a structured and systematic process for managing the Banance Sheet or the assets and the liabilities of the Bank.

Financial System of Bangladesh: Money Market and Capital Market

Financial System: The Financial System is a set of institutional arrangement through which surplus unit transfer their fund to deficit units.

Risks Defined

1. Credit Risk: arises from an obligator's failure to perform as agreed.

2. Interest Rate Risk: arises from movement in interest rate in the market. The interest rate exposure is created from the mismatches in the interest rates of assets and liabilities of an organization.

3. Liquidity Risk: arises from an organization's inability to meet its obligations when due. The liquidity exposure is created by the maturity mismatchmes of the assets and liabilities of the organization. This risk is measured through tenor-wise cumulative gaps.

4. Price Risk: arises from changes in the value of trading positions in the interest rate, foreign exchange, equity and commodities markets. This arises due to changes in the various market rates and/or market factors.

5. Compliance Risk: arises from violations of or non-compliance with laws, rules, regulations, prescribed practices or ethical standards.

6. Strategic Risk: arises from adverse business decisions or improper implementation of them.

7. Reputation Risk: arises from negative public opinion.

8. Market Risk: is defined as the potential changes in the current economic value of a position (i.e. its market value) due to changes in the associated underlying market risk factors. Trading positions are subject to mark-to-market accounting ie. positions are revalued based on current market value.

9. Operation Risk: is loss resulting from inadequate or failed internal process, people and systems or from external events. These includes fraud risk, communication risk, documentation risk, cultural risk, external events risk, legal risk, regulatory risk, system risk and so on.

Six risky areas of Bank

Risk management in banks covers six risky areas: These are-

1. Credit risk
2. Foreign Exchange risk
3. Asset-Liability management risk
4. Money Laundering Prevention risk
5. Internal Control & Compliance risk
6. Information and Communication Technology risk

CAMELS Rating

CAMELS affective from June,2006

C=Capital Adequacy
A=Asset Quality
M=Management
E=Earnings
L=Liquidity
S=Sensitibity to Market Risk

CAMELS Numerical Rating:

1 Strong: Best rating
2 Satisfactory:
3 Fair:
4: Marginal:
5: Unsatisfactory: Worst rating