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CONTENTS

Serial No Name Page No

1 Letter of Transmittal i

2 Letter of Acceptance ii

3 Acknowledgement iii

4 Preface iv

5 Executive Summary v

Chapter-01 Introduction
1.1 Introduction 6

1.2 Background of the Study 6

1.3 Rationale of the Study 7

1.4 Objectives of the Study 7

1.5 Scopes of the Study 8

1.6 Hypothesis of the study 8

1.7 Limitation of the study 9

1.8 Chapter Plan 10

1.9 Conclusion 10

Chapter-02 Methodology
2.1 Introduction 12

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2.2 Selection of Sample 12

2.3 Choose of the Period 12

2.4 Sources of Data 12

2.5 Method of Data Collection 12

2.6 Research Design 13

2.7 Statistical Tools Used for the Study 13

2.8 Reliability and Validity of Data 13

2.9 Conclusion 14

Chapter-03 Conceptual Framework

3.1 Introduction 15

3.2 Definition of ALM 16

3.3 ALM objectives and scope 16

3.4 Treasury and ALM 18

3.5 ALM governance 19

3.6 Building an ALM policy 20

3.7 ALM core functions 21

3.7.1 Managing gaps 21

3.7.2 Static/Dynamic gap measurement techniques 21

3.8 Liquidity Risk Management 22

3.8.1 Liquidity gap analysis 23

3.8.2 Measuring liquidity risk 23

3.8.3 Setting limits 24

3.9 The Asset Liability Management Concept 25

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3.10 The Efficient Frontier And Asset Allocation 26

3.11 Fair Value Of Liabilities 28

3.12 Portfolio Manager Evaluation 29

Chapter-04 Data Analysis And Interpretation

4.1 Introduction 32

4.2 Data Presentation 32

4.3 Showing Analysis of Profit And Loss From 2016- 32

2020

4.4 Showing Analysis of Asset and Profit And Loss 34

From 2016 -2020

4.5 Showing Analysis of Asset and Liability From 36

2016 -2020

4.6 Showing Analysis of Inflation rate and Profit And 36

Loss 2016 -2020

4.7 Regression Analysis 2016 -2020 38

Chapter- 05 Conclusion
5.1 Introduction 43

5.2 Findings 43

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5.3 Recommendations 44

5.4 Conclusion 45

References 46

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CHAPTER ONE

INTRODUCTION

1.1 Introduction:

The research program is an opportunity for the students and it bears a great

significance for us. The students of research program get the chance to understand the

real business world closely and familiarize themselves with internal and external

aspects of business. It gives them an opportunity to develop the analytical skill and

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scholastic aptitude. So, I need proper application of my knowledge to get some

benefit from my theoretical knowledge to make it more useful. When I engage myself

in such fields to make proper use of my theoretical knowledge such theoretical

knowledge is obtained from a course of study at only the half way of the subject

matter.

1.2 Background of the Study:

MBA Program conducted by the Rajshahi University, Bangladesh is a very much

theoretical and practical oriented program in the arena of business and non-business

financial sectors. Since, the students of the program were engaged with very much

theoretical course work, I have completed my research Program for my academic

curriculum purposes. The report comprises of the organizational overview, operation

of banking, basically in THE EFFECTS OF ASSET AND LIABILITY

MANAGEMENT OF PROFITABILITY and briefly analyses the performance of the

Bank. Finally, the report has been concluded with some recommendations. It is

expected that the report will highlight the task performed and experience gained

during the research program.

1.3 Rationale of the Study:

In this study an attempt has been made to examine the Asset and Liability

Management of Shahjalal Islami Bank Ltd. The evaluation of Asset and Liability

Management of profitability of Shahjalal Islami Bank ltd. has helped me get an idea

about the current Asset and Liability position of Shahjalal Islami Bank ltd. This study

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will help the investors and other users to form an idea about the information generated

by the AIS of Shahjalal Islami Bank ltd. and accordingly they will be able to make

correct judgment about the Asset and Liability Management of Shahjalal Islami Bank

ltd.

1.4 Objective of the Study:

The main objective of the study was to identify and examine some of the key asset

liability management strategies employed by Shahjalal Islami Bank ltd to either

maintain its profit margin or increased it and to propose a multi-objective decision

model to reach an optimal strategy.

Secondly, to coordinate asset and liability management as a means of achieving

internal consistency and maximizing the spread between revenue and cost and

minimization of risk exposure.

To achieve the broad objective of the study, the following specific objectives were

examined:

1. To evaluate the effect of management strategic decision on profitability of

Shahjalal Islami Bank ltd.

2. To assess the effect of economic policies on profitability of financial institution.

3. To identify the effects of asset and liability management of profitability of

Shahjalal Islami Bank ltd.

1.5 Scope of the study:

Banking system occupies an important place in a national economy. A banking

institution is indispensable in a modern society. It plays a vital role in the economic

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development of a country and forms the core of the money market in the advanced

country. In recent times the banking sector over the world has been undergoing a

lot of changes due to deregulation, technological innovation, globalization etc.

Bangladesh banking sector is lagging far behind in adopting these changes.

This report deals with the organizational structure, services, and other different

aspects of Shahjalal Islami Bank Ltd and the evaluation of effect of Asset and

Liability Management on profitability.

1.6 Hypothesis of the Study

Research hypothesis is an unproven statement, which helps the researcher to

draw the suggestion on his hypothetical assumption whether it is true or false based

on some specific statistical tests.

1.7 Limitations of the Study:

The findings of this research may have some limitations:

I could not gather some of the key data that would have enabled me to analyze into

detail the risk aspect of Shahjalal Islami Bank Ltd loan management process. For

example, inability of the bank to furnish me with the non-performing loan rates for

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the five years period of their financial statement report. The generation of values of

the results could be low as a small sample size was used. The conclusions researched

in this study may therefore not be valid for those of all other financial institutions as

far as assets and liabilities management in economic environment is concerned. The

socio cultural characteristics of the environment, the volume and vigor of financial

market activity and efficiency among other factors could affect the validity of the

results for international comparison may therefore be affected. The gathering of the

empirical data for this present study was conducted over a limited period of time. A

relatively, long period time series may be required so that the long term pattern and

behavior of the variables under study could be examined with the view of establishing

and explaining reasonable relationship. It is therefore recommended that future

research should embrace a larger and wider time period so as to provide valuable

insights.

Despite the limitation outline in the previous paragraphs, these findings could be

treated as part of a larger body of research contribution, towards the understanding of

similar subject matters relating to the management of assets and liabilities by firms,

especially, those in the financial services sector in the context of the environment like

developing economies.

1.8 Chapter Plan:

In order to analyze the effects of asset and liability management of profitability of

Shahjalal Islami Bank Ltd. The following chapters are stated in:

Chapter-01 Introduction

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Chapter-02 Methodology

Chapter-03 Conceptual Framework

Chapter-04 Data Analysis and Interpretation

Chapter-05 Conclusion

1.9 Conclusion:

In fine, I discuss many points of this study such as background, rational, objective,

hypothesis of this study and its limitation.

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CHAPTER TWO

METHODOLOGY

2.1: Introduction:

During my study I followed some methodology to find out fact and features of the

bank and I have used both qualitative and quantitative method which contains

some past and present features of Shahjalal Islami Bank Limited.

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2.2 Selection of Sample:

I have selected Shahjalal Islami Bank Limited as the subject of my study. I selected

this Bank for availability of data and the instruction of my supervisor.

2.3 Choice of the Period

I have chosen of the period 2016 to 2020 for the purpose of my study.

2.4 Sources of Data:

This study is based secondary data only. Secondary data were collected from the

published official statistics, reports documents, laws, Ordinance, books, articles,

periodicals of different domestic and international agencies, annual reports of

concerned bank, different reports and statistics of Bangladesh Bank, Ministry of

Finance, websites etc.

I. Secondary Sources of Data:

a) Annual report of the Bank.

b) Progress report of the Bank.

c) Internet.

2.5 Method of Data Collection:

Relevant data for this report has been collected primarily by direct investigations of

different records, papers, documents etc. operational process and different concerned

personnel. The information and data for this report have been collected from only

secondary sources. The study adopts both qualitative and quantitative data analysis.

I. Secondary Data Collection Method

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a) Some published and unpublished research report

b) Books, Magazines, Statistics documents and papers

c) Business and technical journals and public records

2.6 Research Design

The research design used in this study was mixed method approach by using both

qualitative and quantitative method in gathering data for the study.

The study made use of public and non public financial information (market and non

market) of Shahjalal Islami Bank Limited for the period covering 2016 to 2020. The

analysis has been performed alongside the lines of stakeholder’s value maximization

through the asset and liability management. From the panel of data for the years 2016

and 2020, a simple goal programming model for assets and liability was developed.

2.7 Statistical tools Used for the Study:

Statistical tools that are used are given below:

a) Table

b) Diagram.

2.8 Reliability and Validity of Data:

All the data and information used in this report have reliability and validity because

all documents of the Shahjalal Islami Bank Limited are audited by the chartered

accounted.

2.9 Conclusion:

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The methodological aspects of the study have been described in this chapter. The next

chapter is devoted to different programs, activities of Shahjalal Islami Bank Limited.

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CHAPTER THREE

CONCEPTUAL FRAMEWORK

3.1 Introduction

Initially pioneered by financial institutions during the 1970s as interest rates became

increasingly volatile, asset and liability management (often abbreviated ALM) is the

practice of managing risks that arise due to gaps between the assets and liabilities.

The process is at the crossroads between risk management and strategic planning. It is

not just about offering solutions to mitigate or hedge the risks arising from the

interaction of assets and liabilities but is focused on a long-term perspective.

3.2 Definition of ALM:

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Asset and liability management (ALM) is a financial (analytic) tool for decision

making that sets out to maximize stakeholder value. Its overall objective is to make

judicious investments that increase the value of capital, match liabilities and protect

from disastrous financial events. An integrated asset and liability management model

sets out to find the optimal investment strategy by considering assets and liabilities

simultaneously. Simply stated, the purpose of such an approach is to reduce risk and

increase returns; ALM models have been used successfully for banks, pension funds

and insurance companies, university endowments, hedge funds, mutual funds and

wealthy individuals. Risks that can be addressed are interest rate risk, market risk,

credit risk, liquidity risk and financial risk. In effect, a financial institution that applies

ALM can operate more soundly and profitably. The decision maker under the ALM

approach needs to have a good understanding of the financial markets in which the

institution operates. ALM is interpreted differently among practitioners from different

sectors.

3.3 ALM objectives and scope

The exact roles and perimeter around ALM can vary significantly from one bank (or

other financial institutions) to another depending on the business model adopted and

can encompass a broad area of risks.

The traditional ALM programs focus on interest rate risk and liquidity risk because

they represent the most prominent risks affecting the organization’s balance-sheet (as

they require coordination between assets and liabilities).

But ALM also now seeks to broaden assignments such as foreign exchange risk and

capital management. According to the Balance sheet management benchmark survey

conducted in 2012 by the audit and consulting company PricewaterhouseCoopers

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(PwC), 51% of the 43 leading financial institutions participants look at capital

management in their ALM unit.

The scope of the ALM function to a larger extent covers the following processes:

1. Liquidity risk: the current and prospective risk arising when the bank is unable to

meet its obligations as they come due without adversely affecting the bank’s financial

conditions. From an ALM perspective, the focus is on the funding liquidity risk of the

bank, meaning its ability to meet its current and future cash-flow obligations and

collateral needs, both expected and unexpected. This mission thus includes the bank

liquidity’s benchmark price in the market.

2. Interest rate risk: The risk of losses resulting from movements in interest rates

and their impact on future cash-flows. Generally because a bank may have a

disproportionate amount of fixed or variable rates instruments on either side of the

balance-sheet. One of the primary causes are mismatches in terms of bank deposits

and loans.

3. Currency risk management: The risk of losses resulting from movements in

exchanges rates. To the extent that cash-flow assets and liabilities are denominated in

different currencies.

4. Funding and capital management: As all the mechanism to ensure the

maintenance of adequate capital on a continuous basis. It is a dynamic and ongoing

process considering both short- and longer-term capital needs and is coordinated with

a bank’s overall strategy and planning cycles (usually a prospective time-horizon of 2

years).

5. Profit planning and growth.

In addition, ALM deals with aspects related to credit risk as this function is also to

manage the impact of the entire credit portfolio (including cash, investments, and

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loans) on the balance sheet. The credit risk, specifically in the loan portfolio, is

handled by a separate risk management function and represents one of the main data

contributors to the ALM team.

The ALM function scope covers both a prudential component (management of all

possible risks and rules and regulation) and an optimization role (management of

funding costs, generating results on balance sheet position), within the limits of

compliance (implementation and monitoring with internal rules and regulatory set of

rules). ALM intervenes in these issues of current business activities but is also

consulted to organic development and external acquisition to analyze and validate the

funding terms options, conditions of the projects and any risks (i.e., funding issues in

local currencies).

Today, ALM techniques and processes have been extended and adopted by

corporations other than financial institutions; e.g., insurance.

3.4 Treasury and ALM

For simplification treasury management can be covered and depicted from a corporate

perspective looking at the management of liquidity, funding, and financial risk. On

the other hand, ALM is a discipline relevant to banks and financial institutions whose

balance sheets present different challenges and who must meet regulatory standards.

For banking institutions, treasury and ALM are strictly interrelated with each other

and collaborate in managing both liquidity, interest rate, and currency risk at solo and

group level: Where ALM focuses more on risk analysis and medium- and long-term

financing needs, treasury manages short-term funding (mainly up to one year)

including intra-day liquidity management and cash Clearing, crisis liquidity

monitoring.

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3.5 ALM governance

The responsibility for ALM is often divided between the treasury and Chief Financial

Officer (CFO). In smaller organizations, the ALM process can be addressed by one or

two key persons (Chief Executive Officer, such as the CFO or treasurer). The vast

majority of banks operate a centralized ALM model which enables oversight of the

consolidated balance-sheet with lower-level ALM units focusing on business units or

legal entities.

To assist and supervise the ALM unit an Asset Liability Committee (ALCO), whether

at the board or management level, is established. It has the central purpose of attaining

goals defined by the short- and long-term strategic plans:

To ensure adequate liquidity while managing the bank’s spread between the

interest income and interest expense

To approve a contingency plan

To review and approve the liquidity and funds management policy at least

annually

To link the funding policy with needs and sources via mix of liabilities or sale

of assets (fixed vs. floating rate funds, wholesale vs. retail deposit, money

market vs. capital market funding, domestic vs. foreign currency funding...)

3.6 Building an ALM policy

As in all operational areas, ALM must be guided by a formal policy and must address:

Limits on the maximum size of major asset/ liability categories

Balance sheet mix : in order to follow the old adage 'Don't put all your eggs in

one basket'

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1. Limits on the mix of balance sheet assets (loans by credit

category, financial instruments) considering levels of risk and

return and thus guided by annual planning targets, lending

license constraints and regulatory restrictions on investments.

2. Limits on the mix of balance sheet liabilities such as deposits

and other types of funding (all sources of funding are expressed

as a percentage of total assets with the objective to offer

comparability and correlate by term and pricing to the mix of

assets held) considering the differential costs and volatility of

these types of funds

3. Policy limits have to be realistic :based on historical trend

analysis and comparable to the peers or the market

Correlating maturities and terms

Controlling liquidity position and set limits in terms of ratios and projected net

cash-flows, analyze and test alternative sources of liquidity

Controlling interest rate risk and establishing interest rate risk measurement

techniques

Controlling currency risk

Controlling the use of derivatives as well as defining management analysis

and expert contribution for derivative transactions

Frequency and content for board reporting But also practical decision such as :

1. Who is responsible for monitoring the ALM position of the

bank

2. What tools to use to monitor the ALM framework

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Note that the ALM policy has not the objective to skip out the institution from

elaborating a liquidity policy. In any case, the ALM and liquidity policies need to be

correlated as decision on lending, investment, liabilities, and equity are all

interrelated.

3.7 ALM core functions

3.7.1 Managing gaps

The objective is to measure the direction and extent of asset-liability mismatch

through the funding or maturity gap. This aspect of ALM stresses the importance of

balancing maturities as well as cash-flows or interest rates for a particular set time

horizon.

For the management of interest rate risk it may take the form of matching the

maturities and interest rates of loans and investments with the maturities and interest

rates of deposit, equity and external credit in order to maintain adequate profitability.

In other words, it is the management of the spread between interest rate sensitive

assets and interest rate sensitive liabilities.

3.7.2 Static/Dynamic gap measurement techniques

Gap analysis suffers from only covering future gap direction of current existing

exposures and exercise of options (i.e.: prepayments) at different point in time.

Dynamic gap analysis enlarges the perimeter for a specific asset by including 'what if'

scenarios on making assumptions on new volumes, (changes in the business activity,

future path of interest rate, changes in pricing, shape of yield curve, new prepayments

transactions, what its forecast gap positions will look like if entering into a hedge

transaction.

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3.8 Liquidity Risk Management

The role of the bank in the context of the maturity transformation that occurs in the

banking book (as traditional activity of the bank is to borrow short and lend long) lets

inherently the institution vulnerable to liquidity risk and can even conduct to the so-

call risk of 'run of the bank' as depositors, investors or insurance policy holders can

withdraw their funds/ seek for cash in their financial claims and thus impacting

current and future cash-flow and collateral needs of the bank (risk appeared if the

bank is unable to meet in good conditions these obligations as they come due). This

aspect of liquidity risk is named funding liquidity risk and arises because of liquidity

mismatch of assets and liabilities (unbalance in the maturity term creating liquidity

gap). Even if market liquidity risk is not covered into the conventional techniques of

ALM (market liquidity risk as the risk to not easily offset or eliminate a position at the

prevailing market price because of inadequate market depth or market disruption),

these 2 liquidity risk types are closely interconnected. In fact, reasons for banking

cash inflows are:

when counterparties repay their debts (loan repayments): indirect connect due

to the borrower’s dependence to market liquidity to obtain the funds

when clients put deposit: indirect connect due to the depositor’s dependence to

market liquidity to obtain the funds

when the bank purchases assets hold: direct connect with market liquidity

(security’s market liquidity as the ease at trading it and thus potential sharp in

price)

when the bank sells debts it has primary bought: direct connect

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3.8.1 Liquidity gap analysis

Measuring liquidity position via liquidity gap analysis is still one of the most common

tool used and represents the foundation for scenario analysis and stress-testing. To do

so, ALM team is projecting future funding needs by tracking through maturity and

cash-flow mismatches gap risk exposure (or matching schedule). In that situation, the

risk depends not only on the maturity of asset liabilities but also on the maturity of

each intermediate cash-flow, including prepayments of loans or unforeseen usage of

credit lines.

3.8.2 Measuring liquidity risk

The liquidity measurement process consists of evaluating:

Liquidity consumption (as the bank is consumed by illiquid assets and volatile

liabilities)

Liquidity provision (as the bank is provided by stable funds and by liquid

assets)

2 essential factors are to take into account:

Speed: the speed of market deterioration in 2011 fosters the need to daily

measurement of liquidity figures and quick data availability

Integrity: But daily completeness of data for an internationally operating bank

should not represent the forefront of its procuration as the seek for daily

consolidation is a lengthy process that may put away the vital concern of quick

availability of liquidity figures. So the main focus will be on material entities

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and business as well as off-balance sheet position (commitments given,

movements of collateral posted.

For the purposes of quantitative analysis, since no single indicator can define

adequate liquidity, several financial ratios can assist in assessing the level of liquidity

risk. Due to the large number of areas within the bank’s business giving rise to

liquidity risk, these ratios present the simpler measures covering the major institution

concern. In order to cover short-term to long-term liquidity risk they are divided into

3 categories:

1. Indicators of operating cash-flows

2. Ratios of liquidity

3. Financial strength (leverage)

3.8.3 Setting limits

Setting risk limits still remain a key control tool in managing liquidity as they

provide:

A clear and easily understandable communication tool for risk managers to

top management of the adequacy of the level of liquidity to the bank’s current

exposure but also a good alert system to enhance conditions where the

liquidity demands may disrupt the normal course of business

One of the easiest control framework to implement.

3.9 The Asset Liability Management Concept

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Baum, G.(1996) defined Asset Liability management as the practice of managing a

business so that decisions and actions taken with respects to assets and liabilities are

coordinated in order to ensure effective utilization of company’s resources to increase

its profitability. ALM can be defined as the ongoing process of formulating,

implementing, monitoring and revising strategies related to assets and profitability to

achieve an organization’s financial objectives given the organization’s risk tolerance

and other constraints. According to Dynamic Business Analysts, it is the coordination,

or large scale simulation of an entire company to manage its assets and liability to

enable financial company to operate in a more soundly and profitable environment

and this enables financial institutions to define strategic asset allocation and to

identify financial opportunities and uncertainty in order to improve its financial

resources.

Asset Liability management is relevant to, and critical for, the sound management of

the finances of any organization that invests to meet its future cash flow needs and

capital requirements. Traditionally, asset liability management has focused primarily

on the risks associated with changes in interest rates. Currently however, credit

management considers a much broader range of risks including equity risk, liquidity

risk, legal risk, currency risk and sovereign or country risk.

Asset Liability Management is practiced in diverse settings:

1. Derivate dealers manage their long and short positions

2. Bankers coordinate the reprising horizons of their assets and liabilities.

3. Pension plans adjust their investments to mirror the characteristics of their

liabilities with respect to interest rates, equity returns and expected changes in wages.

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4. Insurers select investment strategies to ensure they can support competitive pricing

and interest strategies.

With each of these involves the application of management techniques to a particular

financial problem, the implementations in these situations may bear little resemblance

to each other. The derivatives dealer must make many decisions during the course of a

trading day, and it is therefore likely to use a technique such as Value At Risk (VAR)

based on itra-day market price volatility that can be used quickly and easily. On the

other hand, insurers typically manage credit risks using simulation models that may

take weeks or months to operate and validate. Daily application of risk limits is

neither feasible nor necessary. Similarly, bankers‟ credit management risks are

primarily those that will show in profits in the near-to medium term future, so their

approach to credit management may emphasis short-term income and expenses, while

a pension plan, taking a longer view, may focus on the present value of required

contribution.

3.10 The Efficient Frontier And Asset Allocation

The work of Markowitz, H. (1952), called “Portfolio Selection”, proposed that the

investor should take into account the impact of a risky security on not only portfolios

expected return but also its variability of return. He suggested that primary function of

portfolio management is to identify an asset allocation strategy that provides the

highest expected (mean) return for a given level of risk that is acceptable to the

investor.

Alternatively, the strategy provides the lowest level of risks (variance) for a specified

level of expected return. Markowitzs paper introduced the concept of the efficient

frontier, which represents the set of optimal combinations of risky assets for each

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level of risk. In the absence of borrowing, rational, risk-averse investors will want to

select a strategy that is on the efficient frontier. The actual strategy selected will

reflect the investors risk tolerance. Under the Markowitz model, given riskless

lending and borrowing rates and all investors working with the same set of inputs, all

investors will prefer a single portfolio of risky assets. This is the optimal portfolio.

Markowitz (1952,1959) and Tobin (1958) developed a model of investor behavior in

a mean-variance framework. In this model, investment portfolios are evaluated in

terms of their mean returns and the total variance of their returns. The model can be

justified by assuming either those investors have quadratic utility functions or that

asset returns are normally distributed. In such a model, investors would choose mean-

variance efficient portfolios, that is, portfolios with the highest mean return for a

given level of variance of returns. The approach is not limited in its usefulness to asset

allocation applications.

Indeed, it can be used to evaluate risk versus reward tradeoffs for any asset-liability

management decision, such as testing alternative crediting strategies or product

designs.

This approach allows the portfolio manager to evaluate risk versus reward tradeoffs of

alternative asset allocation. It can also be used to assemble portfolios of asset classes

or individual securities that take advantage of the benefits of diversification when

asset classes or individual securities that take the advantage of the benefits of

diversification when asset class returns do not exhibit perfect correlation. The

efficient frontier approach can be used in a credit framework if the risk and return

measures are changed to reflect the joint effect of assets and liabilities on financial

results. For example, an insurance company may want to select an asset allocation

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strategy that maximizes the expected ending surplus for a given level of risk or that

minimizes the probability of its not meeting profit objectives.

3.11 Fair Value Of Liabilities

Classical economic theory, Diamond Peter (1993) attempts to explain the interactions

of buyers and sellers of goods, including capital and labour. These interactions, taken

together, are said to form a “market”. The transactions occurring in a market permit

observations of the amounts of one good that is needed, at a particular instant, to

complete an exchange for a given amount of another good. In this way, the market

provides an objective valuation of one good in terms of another. However, if market

trades for a good are infrequent, or if the market for such a good is known to be

inefficient or incomplete, it may be difficult to obtain a market value. In such cases, it

may nevertheless be possible to assign value using information known about the

market values of other goods with similar characteristics.

Such a value is called a fair value. More precisely, a fair value is an estimate of the

price of good provided by a market value model for another good with similar

characteristics if the model is potentially valid with respect to observation of prices

and other market behavior of the first good. Liabilities often require use of the

concept of “fair Value” because they often do not have market value.

3.12 Portfolio Manager Evaluation

According to Cain C. L and Treussard (2007) the primary responsibility of the

portfolio manager is, of course, selection of individual securities. A complete

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evaluation of a portfolio generally ends with an evaluation of how the choice of

individual securities affected the returns achieved. This is calculated under

hypothetical conditions where the influences of cash-flow timing, asset allocation,

risk parameters and other factors have been removed. This evaluation typically

involves attributing actual portfolio returns to a variety of factors by comparison with

an ideal “benchmark” portfolio that represents an optimal strategy. The actual

portfolio returns achieved can then be attributed to controllable and uncontrollable

factors, with only the controllable factors being used to evaluate the performance of

the manager(s). One of the chief uncontrollable factors, from the portfolio managers

view point is the behavior of the benchmark itself. Security prices fluctuate with

interest rates, foreign exchange rates and other macroeconomic values, as well as

peculiar characteristics of the benchmark itself. A portfolio manager can often match

his benchmarks return exactly by following the benchmark definition in his choice of

securities.

Typically, a manager is evaluated on the difference between actual returns and bench

mark returns. The timing and amount of non-investment cash flows are additional

uncontrollable factors. For example, a need for cash to pay surrender benefits may

come at a time when portfolio values are depressed, and after a subsequent recovery,

additional cash may be made available for investment. When comparing the actual

portfolio returns to those of the benchmark over the same period, the benchmark

returns should be adjusted to reflect the invested balances at each point in time.

Investment strategies are often defined in terms of analytic parameters and allowable

ranges. Fixed-income portfolios typically specify a duration target and an allowable

range of durations, while equity portfolios are sometimes constrained to a specific

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style such as growth or value, capitalization size (large, mid or small) or an allowable

range of betas (to measure volatility relative to the market in total).

Additional risk characteristics and ranges may also be specified. These limits are

adopted in order to prevent portfolio managers from assuming investment positions

that are not consistent with the underlying objectives and overall portfolio strategy. In

some cases, constraints are also imposed by regulation, or may be adopted voluntarily

in order to achieve various ratings, even if the purpose is neither to reduce risk nor

increase profits.

In these situations, evaluation for performance measurement purposes involves

determining the extent to which the portfolio manager has deviated from norms (such

as target duration), and attribution analysis will be used to determine the extent to

which actual profit would have been higher or lower had the norm been followed.

Profit or Loss is properly attributable to the manager’s skills. Often portfolio

managers are evaluated on their returns relative to their defined benchmarks, without

regard to the source of the funds they invest, since they may not be aware of the

underlying liabilities or are only responsible for a portion of the asset invested. In

these cases, the other decision makers, who could include the product manager,

investment officer or consultant, must be measured and appropriately benchmarked.

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CHAPTER FOUR

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DATA ANALYSIS AND INTERPRETATION

4.1 Introduction:

The collected data are analyzed and interpreted by the Table and graph in this chapter.

Also discuss the data that are collected form Shahjalal Islami Bank Ltd.

4.2 Data Presentation

4.3 Showing Analysis of Profit And Loss from 2016 -2020

Financial data from 2016 to 2020 were obtained from the annual reports of Shahjalal

Islami Bank Limited. The data included the balance sheets and income statements of

the bank. Face to face and Semi -structured interviews were carried out with the

management staff of Shahjalal Islami Bank Limited to collect data about the company

goals and strategies to maximize profit. The information obtained was used to analyze

the assets and liability of the company and its relationship with the profitability of the

bank, taking into consideration the economic environment of the country.

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Profit and loss from 2014-2018 (Taka in Million)

Year 2016 2017 2018 2019 2020

Profit 11,684 17,295 10,778 7,483 13,059

4.3 Table: Profit and loss from 2016-2020.

A graph showing profit and loss from 2016-2020

20000

18000 17,295

16000

14000 13,059
11,684
12000 10,778
tk in million

10000

8000 7,483

6000

4000
2017 2018 2019 2020
2000

0
1 2 3 4 5

Year Profit

4.3 Graph: Profit and loss from 2016-2020.

The figure above which shows a graph of the profits made by the bank indicates that

the bank made a profit of tk11,684 million in the 2016 financial year. Rise in 2017 to

tk17,295 million. which resulted in a rise of profit margin of tk5611 million

representing 48.02%. The profit then decreased steadily to tk10778 million which

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represents a 7.75% drop compared to the 2016 figure which was used as the base

year.

There was a massive drop of profit tk7483 million to the bank which represents a

percentage changed of - 30.57% of the preceding year. But in the 2020 profit

increased again to tk13059 million which represents a percentage changed of 74.51%

of the preceding year.

4.4 Showing Analysis of Asset and Profit And Loss From 2016 -2020

Profit and loss and asset from 2016-2020 (tk in Million)

Year 2016 2017 2018 2019 2020

Profit 11,684 17,295 10,778 7,483 13,059

Asset 1,077,879 1,339,000 1,219,634 1,295,324 1,354,739

4.4 Table: Profit and loss and asset from 2016-2020

A graph showing profit and loss and asset from 2016-

2020
1,600,000

1,400,000 1,339,000 1,354,739

1,295,324
1,219,634
1,200,000
1,077,879

1,000,000
tk in million

800,000

600,000

400,000

200,000
Department of Accounting & Information Systems University of Rajshahi
11,684 17,295 10,778 7,483 13,059
0
2011 2012 2013 2014 2015
P a g e | 35 Asset and Liability Management

4.4 Graph: Profit and loss and asset from 2016-2020

1600000

1400000 1,339,000 1,354,739

1,295,324
1,219,634
1200000
1,077,879

1000000
tk in million

800000

600000

400000

200000

2016 2017 2018 2019 2020

0
1 2 3 4 5

Year Asset

4.4 Graph: Asset from 2016-2020

The graph shows that there has not always been an increase in the asset of the bank.

The asset of the bank in 2016 was tk 1077879 million the next year increased to tk

1339000 million which represents a percentage increase of (tk261121 million) or

24.22%. But next year asset drop to tk1219634 million which represents a difference

of tk119366 million and this represents a percentage decrease of 8.91% of the

preceding year. But last two year asset increased tk1295324 million to tk1354739

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million. Now we can say that, there is a positive relation with asset and profitability of

Shahjalal Islami Bank Limited.

4.5 Showing Analysis of Asset and Liability From 2016 -2020

Liability and asset from 2016-2020 (tk in Million)

Year 2016 2017 2018 2019 2020

Liability 996,459 1,240,117 1,110,121 1,175,899 1,265,632

Asset 1,077,879 1,339,000 1,219,634 1,295,324 1,354,739

4.5 Table: Liability and asset from 2016-2020

A graph showing asset and liability from 2016-2020

3000000
1,339,000 1,354,739
1,295,324
2500000 1,219,634
1,077,879
2000000
tk in million

1500000 1,240,117 1,265,632

1,110,121 1,175,899
996,459
1000000

500000
2016 2017 2018 2019 2020
0
1 2 3 4 5

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4.5 Graph: Liability and asset from 2016-2020

The graph shows that there has a positive relation with asset and liability. From table

and graph we see when asset increased liability and profit also increased and vice

versa. It is also clear that there has a positive relation among asset liability and

profitability of Shahjalal Islami Bank Limited.

4.6 Showing Analysis of Inflation rate and Profit And Loss 2016 -2020

Profit and loss and inflation rate from

2016-2020 (tk in Million)

Year 2016 2017 2018 2019 2020

Profit 11,684 17,295 10,778 7,483 13,059

Inflation Rate 10.7% 6.23% 7.45% 7.1% 6.43%

4.6 Table: Profit and loss and inflation rate from 2016-2020

A graph showing profit and inflation rate from

2016-2020
20000

18000 17,295

16000

14000 13,059

12000 11,684
10,778
tk in million

10000

8000 7,483

6000

4000
2020
2016 2017 2018 2019
2000
10.70% 6.23% 7.45% 7.10% 6.43%
0
1 2 3 4 5

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4.6 Graph: Profit and loss and asset inflation rate from 2016-2020

The graph above indicates that with an average inflation rate of 10.7% in 2016 the

bank was able to make a profit of tk11684 million whiles in the second year with an

average inflation rate of 6.23% the bank made a profit of tk17295 million. In the third

year with an average inflation rate of 7.45% the bank made a profit of tk10778 million

whiles in the following year with an average inflation rate of 7.1% the bank made a

profit of tk7483 million. In the final year which is 2020 which is a quite lower

inflation rate of 6.43% the bank made a profit of tk13059 million. This shows that

averagely profit increases when inflation decreases.

4.7 Regression Analysis 2016-2020

In order to examine whether there is association between profitability and the volume

of assets, liabilities and rate of inflation, we have conducted regression analysis using

SPSS. The result of regression are given bellow.

1. Asset Vs. Profit

Std. Error of the

Model R R Square Adjusted R Square Estimate

1 .288a .083 -.222 3953.231

a. Predictors: (Constant), Asset

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ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 4252954.384 1 4252954.384 .272 .638a

Residual 4.688E7 3 1.563E7

Total 5.114E7 4

a. Predictors: (Constant), Asset

b. Dependent Variable: Profit

2. Liability Vs. Profit

Std. Error of the

Model R R Square Adjusted R Square Estimate

1 .372a .139 -.148 3831.623

a. Predictors: (Constant), Liability

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 7093055.206 1 7093055.206 .483 .537a

Residual 4.404E7 3 1.468E7

Total 5.114E7 4

a. Predictors: (Constant), Liability

b. Dependent Variable: Profit

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3. Inflation Rate Vs. Profit

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .271a .074 -.235 3.9739505E3

a. Predictors: (Constant), Inflation

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 3760206.485 1 3760206.485 .238 .659a

Residual 4.738E7 3 1.579E7

Total 5.114E7 4

a. Predictors: (Constant), Inflation

b. Dependent Variable: Profit

4. Asset, Liability & Inflation Vs. Profit

Change Statistics

R Adjusted R Std. Error of the R Square F df

Model R Square Square Estimate Change Change 1 df2 Sig. F Change

1 .845a .714 -.143 3822.02228 .714 .834 3 1 .647

a. Predictors: (Constant), inflation, liability, Asset

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 3.653E7 3 1.218E7 .834 .647a

Residual 1.461E7 1 1.461E7

Total 5.114E7 4

a. Predictors: (Constant), inflation, liability, Asset

b. Dependent Variable: profit

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Overall Findings

Regression R R2 F ratio Significance

1. Asset Vs. Profit 0.288a 0.083 0.272 0.638a

2. Liability Vs. Profit 0.372a 0.139 0.483 0.537a

3. Inflation Rate Vs. Profit 0.271a 0.074 0.238 0.659a

4. Asset, Liability & Inflation 0.845a 0.714 0.834 0.647a

Vs. Profit

In our study, we have examined whether, there we association between profit and the

volume of assets, profit and the volume of liabilities and profit and inflation.

Our overall result shows that, there is no significant association between the

dependent and the independent variable since the significance level of F ratios were

greater than 0.05

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CHAPTER FIVE

CONCLUSION

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5.1 Introduction

The principal objective of this study was to identify and examine some of the key

assets/liabilities management strategies employed by Shahjalal Islami Bank Limited

to either maintain its profit margin or increased it and to propose a multi-objective

decision model to manage risk.

Through a survey research and time series therefore, views elicited and the historical

financial statements sampled were analyzed and the results interpreted in the context

of both theoretical and empirical literature as pertains to conventional research

requirement.

5.2 Findings:

Following the analysis of the data and interpretation of the results, the major findings

of the study were as follows:

The value of assets and liabilities of the bank has a direct effect on the

profitability of the bank.

Increase or decrease in asset has direct effect on bank’s profitability.

Inflation rate has the direct effect on profitability.

Changes in the base rate have direct effect on the banking profitability.

Bangladesh Bank policies normally affect the decisions of the bankers.

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5.3 Recommendations:

Based on the findings of the study, the following recommendations are feasible:

Board of directors should review their policies periodically.

Managers should take into account the economic changes in drafting

their strategic policies.

Steps for reinforcing newly developed policies should be encouraged.

Managers should always look at the trend of the economic variables

before strategizing their policies.

Managers should always take into consideration the economic

variables before granting loans to clients.

In case of risk minimization, proper steps should be taken to identify,

measure and analyse specific risk factors.

It is also recommended that in future more studies should be done

about causes of non- performing loans.

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5.4 Conclusion:

In view of the fact that method and the policies for the management of asset-liability

has been formalized by the bank in terms of changes in the economic environment,

there is the need for the board of directors and management to review their policies

periodically so as to take into account not only the new development in the ALM

process, but also the changes in the environmental economic factors such as demand

and supply of goods and services, inflation rate, exchange rate. etc. Steps for

reinforcing the revised levels for adoption of formal level of ALM should be

encouraged.

From the analysis, it can be concluded that:

The value of asset and liability has a direct effect on profitability

Assets and liabilities are always correlated

Inflation rate has a direct effect on profitability

Bangladesh Bank policies normally affect the decisions of Shahjalal Islami

Bank Limited.

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