Interest Rate Risk Management of Dhaka Bank Limited

1.1 Introduction

Commercial banks play a major role in the economic development of a nation through the
fluctuation of interest rate. Interest rate is the vital role player in a financial growth. So it is
more crucial for an economy to follow this interest rate fluctuation in a rapid movement and
adjust this fluctuation with the proper way of monetary policy. Central Bank always gives their
attention in this interest rate and tries to adjust this interest rate through the controlling
recession and inflation. Conventional banks of Bangladesh perform this role directly and
indirectly in economic sectors with adequate supervision and monitoring of Central Bank
which ultimately led to the economic solvency or net worth of financial institution as well as
economic growth of a country.

Interest rate is considered as a vital part of the macroeconomic variable of our country. Interest
rate risk is defined as the change in a bank’s portfolio value due to fluctuations of interest rate.
It is considered as the vulnerability of an institution's financial condition to adverse changes in
interest rates. It is related to the potential effects of interest rate changes on the institution's
profitability, net interest income and its net value.

Dhaka Bank Limited is one of the leading private commercial banks in our country. This study
describes how DBL identifies the sources of interest rate risk to which they are exposed and
evaluate their effects on profitability and net value as a result of interest rate changes. DBL
proved itself as a most growing and sustainable bank even in the recent financial crisis. Their
total performance in recent years proves itself as an efficient one.

In banking, the amount of interests on deposits will decrease and the market value of the
liability portfolio will increase, if interest rates decline. On the other hand, it is considered that
the amount of interests on loans and financial instruments will decrease and the market value of
the assets portfolio will increase if interest rates decrease. Such relative changes in the amount
of interest and the value of portfolios could shrink the bank’s interest margin and economic
equity. Interest rate fluctuations affect bank’s income, bank’s market value, and amount of
financial intermediation. Interest rate risk relies on deposits, loans, and off-balance sheets
financial operations. Interest rate risk in banking is occurred by a mismatching of assets and
liabilities maturities and interest rate repricng on assets and liabilities. Interest rate risk in

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 Interest Rate Risk Management of Dhaka Bank Limited

banking is changed by the amount, structure, maturity, rate sensitivity, and quality, of a bank’s
assets and liabilities.

I will conduct my study under the close supervision of my Academic Supervisor who will
consistently monitor my progress and recommend any steps taken with a view to solving the
errors occurred during my study.

1.2 Origin of the Report

This report has been prepared as a requirement of “Thesis” for completing the degree of MBA.
The thesis program is designed to provide the MBA students some opportunities of getting
broad knowledge and aims at bringing together the two sources of learning: theoretical and
practical. My supervisor, Professor, Dr. Hasina Sheykh, Department of Banking and Insurance,
has authorized and provided support to prepare the report “Interest Rate Risk Management
of DBL.”

1.3 Objectives of the Report

1.3.1 Broad Objective

The broad objective of the report is to find out the interest rate risk of Dhaka Bank and risk
management techniques adopted by DBL.

1.3.2 Specific Objectives

1. To know about the Net interest income and Net interest Margin of this bank

2. To know about their interest sensitive gap compare to other bank and the way how the bank
progress in case of interest rate risk

3. To know about the position of DBL in cumulative interest rate GAP

4. To know about the interest sensitivity ratio and relative IS Gap of DBL

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5. To analyze which factors the bank consider to minimize the risk

6. To examine the last 6 years data to overlook its risk position and compare these with other
bank to find out comparative position

7. To find out the relation among various factors which affect the risk

8. To find out the sensitivity and mismatched maturity of the bank assets and liabilities.

1.4 Rationale of the Study

It is known that a rationale for research is a set of reasons offered by a researcher for
conducting more research into a particular subject either library research, descriptive research,
or experimental research. Interest rate risk is considered as the vital sources of risk for the
financial institution like bank. Profitability of a bank mainly depends on the management of
interest rate risk because, it creates other risks for the bank. Efficient management of interest
rate risk may ensure the success of any bank. Through this study, I have come to know the
trend of interest income of this bank and their interest rate risk management technique.

1.5 Scope of the Study

In this report mainly I have emphasized the sequential activities how the bank judges their total
interest rate risk through the several analyses and analytical techniques used by DBL for
Interest Rate Risk Management. The basic vital lies in the proper estimation of interest rate
fluctuation, duration, GAP etc. Later the report includes an assessment of the different factors
of interest rate risk and monitoring techniques and findings problems and making some
recommendations.

1.6 Limitations of the Report

There is hardly any activity which has no limitation. This study also has some limitations. In
preparing this report I face some problems. Time is the first limitation of this study. As the
thesis period is for 3 months, it is really a short period to analysis a huge organization like
DBL. So, data collection process is also hampered for this.

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1.7 Structure of the Study

This study follows a sequence of works. They are given in below:

Section 2

2.1 Literature review

2.2 Organizational overview

Section 3

3.0 Methodology

Section 4

4.1 Theoretical framework

4.2 Data analysis

4.3 Major findings

Section 5

5.1 Recommendation

5.2 Conclusion

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2. Literature Review and Organizational Overview

2.0 Introduction

Interest rate risk is the major type of market risk. This is one kind of systematic risk. Interest
rate risk management is focused by financial institutions like bank because their success highly
depends on interest income. Different strategy and technique are followed by banks to manage
interest rate risk management.

Two things are focused in this section of this study. First part is about literature review based
on previous study regarding interest rate risk. Second part of this study is about the
organizational overview of the Dhaka Bank Ltd.

2.1 Literature Review

The literature on interest rate risk management has taken the significance of several authors
particularly the attention in understanding its management. Many people have already
discussed how a bank should manage their interest rate risk. Basically different approach they
focus on to manage the interest rate risk.

2.1.1 Interest Rate Risk

Different writers provide different definition of interest rate risk management. Few of them are
given below:

The chance that the net worth of bank will be changed due to change in market interest change
because it will affect their both non-interest income and interest income ( P.allen, 2000)

Interest rate risk means that adverse changes in its earnings and/or its capital base as a result of
changes in the absolute level of interest rates, in the spread between rates, in the shape of the
yield curve or in any other interest rate relationship will be faced by a bank (B. William, 2002)

Interest rate risk is one kind of risk for the banker because of fluctuation of interest rate which
can affect their net worth and profitability (Wright and Houpt, 1996)

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2.1.2 Assessment of Interest Rate Risk

There are two methods for assessing interest rate risk (B. William, 2002). The first approach
focuses on the impact of changes in market interest rates on liabilities and off balance sheet
positions and the value of bank assets. The second approach focuses on the change in market
rates for the future cash flows. The movements of interest rates have had important effects on
banks’ net interest income and the average yield on liabilities. If mismatches of repricing assets
and liabilities are avoided by banks, they could have significant interest rate exposures. So they
need to remain conscious about excessive exposure to changes in market interest rate.

2.1.3 Sources of Interest Rate Risk

According to P.allen,2000, Interest rate risk is a key component of the intermediary process and
it can be derived from different sources. He suggested four primary sources of interest rate risk.
One of them is yield curve risk which derives from unanticipated shifts in slope and shape of
the yield curve. Another sources of interest rate risk is re-pricing risk which derives from
mismatches in the re-pricing of assets and liabilities which are of different maturities and are
priced off different interest rates. Third risk is basis risk which arises from the imperfect
correlation in the adjustment of interest rates among two or more rates. Fourth risk is option
risk which derives from the changing of market interest rates causing a change in the amounts
or timings of cash flows received from an instrument with an imbedded option component.

According to Wright and Houp (1996) the sources of interest rate risk are based on basis risk
and option risk which are related with the sensitivity of an institution’s economic value and
assessing the effect of interest rate changes that would increase or decrease the net worth of
institutions.

2.1.4 Factors That Impact A Bank’s Interest Rate Risk

Commercial bank should consider systematic factor for the exposure to interest rate risk
(According to M.Christoph, 2010). Systematic factor of the exposure to interest rate risk may
change in accordance with possible earnings from term transformation. Changes in earnings
from term transformation over time have a large impact on the interest margin for savings and
cooperative banks but the interest margin is not much determined by the bank’s exposure to

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interest rate risk. So banks consider the interest rate risk into account when they distribute the
budgets to the different types of risk and the risk from term transformation yields
approximately the same return as credit risk measured in terms of risk units.

There are some of the factors that may affect the level of interest rate risk among commercial
banks. Length of long terms, credit risk, overall economic climate and foreign exchange rate
can affect interest rate (Wright and Houpt, 1996)

2.1.5 Nature of Interest Rate Risk

Interest rate risk is higher at thrift institutions than at community banks. He considered that
lengthening assets and increased use of volatile liabilities are the primary drivers of recent
increased interest rate. Security portfolios are not used by banks to reduce this risk (P.allen,
2000)

Wright and Houpt, 1996 stated that interest rate risk is not considered a major risk to most
commercial banks. For that reason, interest rate risk must be carefully monitored and managed
specially by institutions with concentration in riskier or less predictable positions. Measuring
Interest rate risk is a challenging task normally and is made even more difficult for banks.

2.1.6 Impact of Interest Rate Risk

S.Vighneswara, 2009 stated that there are significant effects of interest rate risk on the market
value of equity of the bank under different interest rate. Difference between the amount of rate-
sensitive assets and rate-sensitive liabilities are measured by gap analysis, both on and off-
balance sheet that reprice in a particular time period. The effect of rate fluctuation on the
market value of the assets and liabilities and net interest margins are measured by duration
analysis with the help of duration. He said that maturity gap analysis ignore the time value of
money while duration gap analysis take the timing of cash flow.

Wright and houpt, 1996 said that the impact of interest rate varies on bank assets, liabilities and
off-balance sheet positions are very significant. There are a significant relationship between the
market interest rate and banks’ net interest margin. The sensitivity of an institution’s economic

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value and assessing the effect of changes of interest rate that would increase or decrease the
bank’s net worth.

Peng, Lai and Shu, 2003 said that an increase in interest rates affects profits of banks. If interest
sensitive assets are lower than interest sensitive liabilities then net interest margin will be
reduced in response to increases in interest rate because the interest cost of borrowed funds
rises faster than income from loans and advances. So the bank’s net interest margin will be
reduced, with negative effects on bank’s profits. Increasing market interest rate may affect asset
quality by raising borrowing costs and the risk of default, thereby increasing the net allocation
for provisions.

2.1.7 Interest Rate Spread

Mustafa K. Mujeri, Sayera Younus , 2009 said that the lower the interest rate spread, the higher
the non-interest income as a ratio of total assets of a bank, which increase the probability of low
profit generation. They added that IRR is affected by market share of deposits of a bank,
statutory reserve requirements, and NSD certificate interest rates. Interest rate spread is
influenced by operating costs and classified loans for state owned commercial banks and
specialized banks, while inflation, operating costs, market share of deposits, statutory reserve
requirements, and taxes are important for the private commercial banks. Non-interest income,
inflation, market share, and taxes are important for the foreign commercial banks.

2.1.8 Interest Rate Risk Management

Interest rate risk management is the vital area of risk management for any bank. Many experts
provide many suggestions about interest rate risk management. Some of the suggestions are
given below:

2.1.8.1 Gap Analysis

By using duration gap analysis, maturity gap analysis and simulation models all bank manage
their interest rate risk. Banks can also control interest rate risk by using derivative securities
sDh as swaps futures and options. Interest rate risks arising from both current and future
business are evaluated by simulation models and provide a way to evaluate the effects of

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strategies to increase earnings or reduce interest rate risk. Banks can also measure interest rate
risk that calculate the value at risk interest rate risk management evaluates the adequacy of the
bank’s capital and also identifies the component rating for sensitivity to market risk. Cash flow
forecasting is improved and earnings volatility is reduced by IRR. (S.vighneswara, 2009)

2.1.8.2 Net Interest Income

Burke and Warfield, 2014 stated that earnings and valuation of net interest income is related to
Interest rate risk management. The effective interest rate risk management is tough to achieve.
There are some measures which may be used by the investors to evaluate interest rate risk
management to make investment decision. For monitoring banks’ interest rate risk profile,
earnings sustainability and management quality there are different types of disclosures that are
most useful to investors. Changes in interest rates on rate sensitive liabilities tend to be lower
than changes in interest rates on rate sensitive assets, regardless of increasing or decreasing
market interest rate environments.

2.1.8.3 Asset and Liability Portfolio

Reeta, 2016 said that both banks public sector or private sector have been facing interest rate
risk but except few commercial banks on average all the banks have done their assets liability
management very well and they have positive value of gap and there is no significant variation
in the level of interest rate risk in both sector banks. Banks will be able to mitigate interest rate
exposure up to a large extent by doing this assets-liability management and when their
RSA>RSL they can always get benefit of interest rate changes in terms of increased net interest
income which tends to increase liquidity and profitability of the banks. Assets and liabilities are
most important factors for banking industry which get affected because of interest rate changes
and for that reason, doing proper match of assets and liabilities are advisable to mitigate the
effect of interest rate changes. It is very common for the bank that interest rate rises will affect
both the assets as well as the liabilities. It must be considered that what will be the overall
impact of this interest rate rise that depends on the total amount of assets and liabilities which
banks have.

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2.1.8.4 Compliance and Guidelines

According to Basel committee on banking supervision, 2001 there are fifteen principles to
manage interest rate risk in the banking book and also reflect banks’ non trading activities.
These principles and general approaches may be used to measure interest rate risk exposure
from both an economic value and an earnings perspective. The development of a business
strategy, the assumption of assets and liabilities in banking and trading activities and a system
of internal controls should be included in Interest rate risk management process. Sound risk
management practices are essential to the prudent operation of banks and it also motivates the
financial stability in the economic system.

2.1.9 Interest Rate Risk Management in Bangladesh

Shahidul, 2016 said that empirical studies on the determinants of banking profitability is based
on capital holdings, bank size or the equity to total assets ratio, credit risk, liquidity position
and other operational efficiency indicators as the microeconomic determinants and the
concentration indices, inflation, ownership structure, economic growth, regulatory policy rate,
market interest rates as the industry and macroeconomic determinants.

Basel guidelines are followed by most of the banks for their interest rate risk management. The
banks that have higher the non-interest income as a ratio of total assets of a bank, have the
lower interest spread which increase the possibility of low profit generation. Inflation, market
share, non-interest income, and taxes matter for the foreign commercial banks. It may carry out
several systemic actions and determines the bank level to improve earnings and profitability of
the banks which are sustainable methods of redDing the IRS. (Mustafa K. Mujeri, Sayera
Younus, 2009)

2.1.10 Approach of Interest Rate Risk Management

Basel Committee on Banking Supervision, 2001 suggests that there are various approaches
which vary in their ability to capture the different forms of interest rate exposure inherent in
many positions and instruments and they are very essential for interest rate management.

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Interest rate risk management through a systemic approach in banking needs an empirical
investigation on the exposure of banks to interest rate risk. Maturity and duration models are
used in measuring interest rate risk in banking. To measure the impact of interest rate risk in
banking they can develop two different approaches. The maturity models depend on the current
earnings approach. The duration models are depended on the economic value. Banks can
control the interest rate risk both externally and internally. They manage their assets and
liabilities to reduce the mismatch on repricing or the mismatch on duration. To hedge the
exposure to interest rate risk banks use financial derivatives. (Scannellai and Bennardo, 2013)

To assess interest rate risk management to overcome the shortcomings of traditional maturity
gap and provide more information about interest rate risk by which a bank is able to manage
net interest income by changing interest rates on assets and liabilities differentially in response
to changes in market interest rates bank should use new approach. (Burke and Warfield, 2014)

2.2 An Overview of DBL

Introduction

Dhaka Bank Limited (DBL) is one of the leading private sector commercial banks in
Bangladesh offering full range of Personal, Corporate, International Trade, Foreign Exchange,
investment, Lease Finance and Capital Market Services. DBL had been widely acclaimed by
the business community from small business to large traders and industrial conglomerates,
including the top rated corporate borrower for forward looking business outlook and innovative
financing solutions. Full range of banking and investment services are offered by the bank for
personal and corporate customers, backed by the latest technology and a team of highly
motivated officers and staff. The Bank has introduced Online Banking services (I-Banking),
joined a countrywide shared ATM network and has launched a cobranded credit card. A
process is also underway to provide e-business facility to the bank's clientele through Online,
mobile and Home banking solutions. Thus as a commercial bank DBL is maintaining its
operational activities successfully.

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History

The Dhaka Bank was established as a public limited company on April 06, 1995 under the
Companies Act 1994. The Bank started its commercial operation on July 05, 1995 with an
authorized capital of Tk. 1,000 million and paid up capital of Tk. 100 million, to offer
commercial banking service to the customers' door around the country, Dhaka Bank Limited
established 90 branches up-to this year. This organization has achieved customers' confidence
immediately after its establishment in domestic and international markets. The Company
Philosophy - "Excellence in Banking" has been preciously the essence of the legend of bank's
success. The Bank within a period of 23 years of its operation achieved a remarkable success
and met up capital adequacy requirement of Bangladesh bank.

Mission and Vision of DBL

Mission

“To be the premier and leading financial institution in Bangladesh providing high quality
products and services backed by latest technology and a team of highly motivated personnel to
deliver Excellence in Banking.”

Vision

“At Dhaka Bank, it draws its inspiration from the distant stars. DBL’s team is committed to
assure a standard that makes every banking transaction a pleasurable experience. It offers razor
sharp sparkle through accuracy, reliability, timely delivery, cutting edge technology, and
tailored solution for business needs, global reach in trade and commerce and high yield on
customer investments.” “People, products and processes are added to meet the demand of DBL
discerning customers. DBL’s goal is to achieve a distinction like the luminaries in the sky. Its
prime objective is to deliver a quality that ensures a true reflection of its vision – Excellence in
Banking.”

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Values of DBL

 Customer Focus.
 Integrity and Honesty
 Quality
 Teamwork.
 Respect for the Individual
 Responsible Citizenship
 Transparency and Accountability
 Environmentally Conscious
 High Morale

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3. Methodology of the Study

3.0 Introduction

Methodology is considered as the systematic, theoretical analysis of the methods applied to a

field of study which comprises the theoretical analysis of the body of methods and principles
associated with a branch of knowledge. Normally, it encompasses concepts such as paradigm,
theoretical model, phases and quantitative or qualitative techniques. In order to prepare the
report, I decide to collect various types of primary and secondary data. Then the data were
structured as required.

3.1 Research Design

The research design is the overall strategy that one chooses to integrate the different
components of the study in a logical way which ensuring that he will effectively find out the
research problem and it constitutes the blueprint for the collection, measurement, and analysis
of data. A research design refers a detailed outline of how an investigation will take place. A
research design will normally explain how data is to be collected, what instruments will be
employed, how the instruments will be used and the intended means for analyzing collected
data.

3.1.1 Research Type

This research is a descriptive in type. Both quantitative and qualitative data is used here.
Basically descriptive research is used to describe characteristics of a population or phenomenon
being analyzed but it does not answer questions about how/when/why the characteristics
occurred. On the other hand, descriptive research cannot be applied as the basis of a causal
relationship, where one variable is affected by another. Normally, a descriptive study is one in
which information is gathered without changing the environment.

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3.1.2 Sample Size

I have selected six years data from 2012 to 2017 of DBL. For comparison I also collect other
two bank’s six years data from 2012 to 2017. These banks are AB bank and Agrani bank. I
have collect their annual report for these years.

3.1.3 Sampling Technique

I have used Cumulative Gap analysis, Interest-Sensitive Gap Analysis, Interest Sensitivity
Ratio Analysis and Relative IS Gap Analysis as sampling techniques.

3.2 Data Collection

In order to make this research effective and efficient, I have collect different types of data and
information. Data collection is very important in preparing a report. In order to make the report
more and meaningful and accurate I have used secondary types of sources.

3.2.1 Secondary Sources of data

For preparing this study, I have collected the annual Reports of DBL from 2012 to 2017. I also
collect data from their website. To find out some specific data like recent interest rate, market
position I have collected this bank related data from Bangladesh bank’s website. For
comparison I also collect data from the Annual Reports of Agrani Bank Limited from 2012 to
2017 and the Annual Reports of AB Bank Limited from 2012 to 2017. For preparing the
theoretical background of this study I have followed Interest Rate Risk Management Guidelines
of Bangladesh Bank. For preparing literature review I have read Interest Rate Risk
Management related various book and Articles. To make my work useful I have collected
different information from the Website of DBL and the Website of Bangladesh Bank

3.3 Data Analysis Method

To analyze my data I have used many data analysis technique and to present them I have used
many tools. They describe in below:

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3.3.1 Data Analysis Technique

To find out the position of this bank I have calculated the net interest margin by using the data
of bank’s net interest income and net earning assets. On my study I basically focused on the
Gap analysis technique for interest rate risk management. I have formulated the cumulative gap
and risk weighted assets. I have used trend analysis of net interest income of different year and
various elements of interest sensitive assets and liabilities. Then I have calculated interest
sensitive gap from interest sensitive assets and interest sensitive liabilities. I also calculate the
relative IS Gap for better understanding. I have calculate the IS ratio to find out the bank
interest rate risk management efficiency. To measure their efficiency I have focused on four
things NIM, IS Gap, Relative IS Gap and IS Gap Ratio. I compare these four things with other
two banks to calculate their comparative position.

3.3 Data Analysis Tools

To analyze and present the numerical data and values associated with Interest Risk
Management, different tools and techniques are used. For example, to Calculate the Net Interest
Margin, IS Gap, Relative IS Gap and Ratio of interest sensitive asset to liabilities I used
Microsoft Excel. To present these numerical data I have used some Tables, Bar Charts and Line
Graphs by using Microsoft Excel.

3.4 Conclusion

In order to prepare the report, I decide to collect various types of secondary data. Then the data
were structured as required. In order to complete the study effectively and efficiently I have
done both quantitative and qualitative analysis.

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4. Data Analysis and Major Findings

4.0 Introduction

According to interest rate changes in the financial marketplace, the sources of revenue and their
expenses must change. If interest rates rise, the cost of funds increases more rapidly than the
yield on assets that decreases net income. So fluctuation of interest rate may have a negative
impact on the economic and financial statement through assets, liabilities, and off-balance
sheets positions related to interest rates.

If the interest rate risk is not managed properly it can decrease both the shareholder value and
profitability. This section contains the following part:

 Theoretical Framework
 Data Analysis
 Major Findings

4.1 Theoretical Framework of the study

Banks of Bangladesh basically follow the guideline set by the Bangladesh bank. Bangladesh
bank provides update of proper rules and regulation time to time for the management of interest
rate risk.

4.1.1 Interest Rate Risk

Interest rate risk (IRR) is the changes in a bank’s net worth value due to interest rate changes. It
is considered as the potential loss or threat from unexpected changes in interest rates which can
significantly affect a bank’s market value of equity and profitability.

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Interest rate risk is the vital risk for the financial institution like bank depended on interest
income. Interest rate risk in banking sector is originated by a mismatching of assets and
liabilities maturities.

4.1.2 Types of Interest Rate Risk

There are four types of Interest Rate Risk. These types of interest rate risk are frequently faced
by the banks. They also called as sources of interest rate risk. Brief descriptions of different
types of interest rate risk are given here:

Interest
Rate Risk

Repricing Yield curve Option

Basic Risk
Risk Risk Risk

Repricing Risk

First one is Repricing risk that refers to fluctuations in interest rate levels that have different
impacts on bank assets and liabilities. For example, when a bank provides a long-term fixed
rate loan with a short-term deposit can face a decline in both the future income arising from the
position and its underlying value if interest rates increase. These declines arise because the cash
flows on the loan are fixed over its lifetime, where the interest paid on the funding is variable,
and it increases after the short-term deposit matures.

Yield Curve Risk

Yield curve risk is another type of interest rate risk which can arise when unanticipated shifts of
the yield curve have changed in a bank's portfolio values or income. This is the relation
between interest rate and time to maturity of the debt for a given borrower. The shape of the
yield curve can be changed by the change of supply and demand. The type of risk occurred due
to change in yield curve from time to time depending on interest rate and various other factors.
For example, short-term interest rates might change more quickly than long-term interest rates
and affecting the profitability of funding long-term loans with short-term deposits.

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Basis Risk

Very vital type of interest risk is the basis risk which occurs when interest rates on different
assets and liabilities change in different magnitudes. It is one kind of imperfect correlation
between index rates across different interest rate markets for similar maturities. For example, a
bank which is providing loans whose payments are based on U.S. Treasury rates with deposits
based on Libor rates is exposed to the risk of unexpected changes in the spread between these
index rates.

Option Risk

Another important type of interest rate risk is Option risk that refers to the risks arising from
interest rate options in a bank assets, liabilities, and off-balance-sheet positions. SDh options
can be explicitly purchased from established markets for interest rate derivatives or included as
a term within a loan contract. It is the special condition added to a security, and in a bond that
gives the holder or the issuer the right to perform a specified action at some point in the future.
Options risk is also another type structure risk.

4.1.3 Reasons for interest rate changes

There are effect of interest rate changes on the value of long-term financial assets and
liabilities. For example, the price of a bond will change as interest rates increase so investors in
debt instruments will initially get benefit from interest rates decrease and similarly borrowers
of long-term funds may initially suffer from financial loss as rates fall because their liabilities
will increase. These financial gains and losses will only be realized by the investors if the
investment or liability is realized prior to maturity or the economic gain or loss creates an
opportunity gain or a loss when the interest rates changed.

Market interest rate is changed change very frequently. Some reasons are responsible for these
changes such as:

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Alternative Investments

The lender of money has a choice for using his money in different investments. If the lender
chooses one of them, he forgoes the returns from all the others that is opportunity costs.
Different types of investments effectively compete for the lender’s funds.

Risks of Investment

There is always a probability that the borrower may go bankrupt, abscond, die, or otherwise
defaulter of his loan. This states that a lender generally expect a risk premium to ensure that,
across his investments, the lender is compensated for those in case of failure.

Short-Term Gain

Lower interest rates can give the country’s economy a short-run increase. Under normal
conditions, most experts think that a cut in interest rates will give a short term gain in economic
activity that will soon be offset by inflation.

Economic Condition

According to the condition of the economy Interest rates can fluctuate. It is found that if the
economy is strong then the interest rates will be high, if the economy is weak the interest rates
will be low. In times of economic recession, the company may find that it is difficult to borrow
money because of the higher interest rate. The uncertainty of cash inflows but increasing cash
outflows for higher interest payments may increase the company’s exposure to interest rate
risk.

Competitive Pressure

Basically pressure of competitiveness influences the industry’s management of interest rate risk
especially competition may be reducing the banking industry’s ability to manage interest rate
risk through discretionary pricing of rates on loans and advances. For example we can say that,
growing number of bank in the industry has caused the demand on loans or deposits of a bank
decreases and the bank may offer higher interest. In return of increase the company’s interest
rate risk as the company increases capital through borrowings.

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Inflationary Expectations

Most experts show inflation such that a given amount of money buys fewer goods in the future
than it will now. The borrower of money needs to compensate the lender for this.

Liquidity Preference

People prefer to have their resources available in a form of cash that can immediately be
exchanged, rather than a form that takes time to realize that means that people prefer cash.

Taxes

Gains from interest income from some sources may be subject to taxes, the lender may expect
a higher rate to make up for this loss due to tax paid.

Banks

Basically the Banks are forced to change the interest rate to either slow down or speed up
economy growth. This trend includes either raising interest rates to slow the economy down, or
lowering interest rates to raise economic growth.

4.1.4 Sources of Interest Rate Risk

Different sources of interest rate risk are identified by financial institutions to which they are
exposed and evaluate their effects on profitability and net value as a result of interest rate
movements. Excessive amount of interest rate risk can create a significant threat to a bank's
earnings and capital base. Changes in interest rates can affect a bank's earnings by affecting its
net interest income and the level of other interest sensitive income and operating expenses.
Interest rates changes also affect the underlying value of the bank's assets, liabilities and off-
balance sheet instruments because the present value of future cash flows change when interest

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 Interest Rate Risk Management of Dhaka Bank Limited

rates change. Interest rate risk may arise from different sources. For example, Interest costs
change according to interest rate change during the loan period.

Different derivatives for example interest rate swaps the value of these instruments will change
as interest rates change, representing either an opportunity gain or a loss or real gain or loss
where the transaction is determined prior to maturity. Interest Rate Risk can also incur from
early payment discount. For example, discount rates offered for early payment by debtors may
be higher than the cost of funds.

The relationship between rates associated with various portfolios may be affected by interest
rate movements held by an institution and change the slope and shape of the yield curve and
rescheduling of interest rates on short-term investments such as bank deposits, commercial
paper, bills and so on can be the sources of interest rate risk. The interest rate sensitivity of
earnings and net value of asset portfolio can be affected by the nature and complexity of the
structure of assets and liabilities and the main components of the economic environment,
including inflation rates, and possible declines in return generated by certain financial products.

4.1.5 Impact of Interest Rate Risk

Interest rate risk has the potential effect on a bank’s earnings and net asset values of changes in
interest rates. When an institution’s principal and interest cash flows including final maturities,
both on- and off-balance sheet, have mismatched repricing dates then interest rate risk can
arise. The amount at risk is considered as a function of the magnitude and direction of interest
rate fluctuation and the size and maturity structure of the mismatch position.

An adverse movement in interest rate risk may potentially increase the borrowing costs for
borrowers, decrease returns for investors and decrease profitability of financial services
providers such as banks and other financial institution. Due to the effect of changes in the
discount rate (interest rate) it may decrease in the net present value (NPV) of organizations on
the value of financial instruments, hedges and the return on projects. There are some impacts of
the Interest rate risk that may face by the institutions or corporations are:

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 Interest Rate Risk Management of Dhaka Bank Limited

Products’ Price

From the perspective of producers, they may change their prices to cover their costs. The
financial performance of their businesses may be affected by an increase in price. However,
some companies which are highly competitive and the price policy in the industry is already
controlled by government such as petroleum industry and household industry, they cannot able
to do so, because high interest rates may increase both input costs and interest payment on
finance, which will direct customer to postpone their purchase.

Repricing Mismatch

Economic Value perspective gives us a vital method to analyzing the changes of impact of
interest on the expected cash flows on assets and the impact of changes of interest rate toward
the net value of assets of company. Basically it emphasized on identify risk arising from long-
term interest rate gaps. The bankers predict the future cash flow of their financial instrument
such as saving or demand deposits. Measuring the interest rate risk of these instruments will be
rare due to the uncertainty of cash flow and unpredictable maturities.

Cost of Borrowing

The cost of borrowing will increase or decrease because of interest rate risk increases or
decreases. The creditor faces a problem that is a higher interest rate risk may increase the
interest payment made by the creditors which are determined at a variable rate. So if the
interest rate risk increases frequently, a bank with a high debt financing may suffer financial
distress due to the company need to pay a higher interest to the fund provider.

Interest Income

The interest income of the bank will decrease if the interest sensitive asset is lower than those
on liabilities due to the lower interest rate and vice versa. In earning perspective it is considered
how the changes of interest rate will affect a bank’s reported income and its net worth.

Aggregate Demand

It is considered an increase in interest rate risk can negatively affect the banking company’s
business. The company like bank which always need frequent borrowing may be affected by

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 Interest Rate Risk Management of Dhaka Bank Limited

the increase of interest rate risk, as the fund providers have to renegotiate the term and
condition of loan because the lenders are reluctant to purchase the high interest rate bonds due
to the disposable income decrease and increase of the fixed cost. Therefore, it will reduce the
aggregate demand of economy and make the price and output decrease.

4.1.6 Measurement of Interest Rate Risk

A clear understanding of the amount at risk and the impact of changes in interest rates on this
risk position must be required in management of interest rate risk. To determine the interest rate
risk, adequate information must be available to permit appropriate action to be taken within
acceptable, often very short, time periods. The longer it takes a bank to remove or reverse an
unwanted exposure, the greater the probability of loss.

Each institution like bank requires to use risk measurement techniques that accurately and
frequently evaluate the impact of potential interest rate changes on the institution. In choosing
appropriate interest rate scenarios to measure the effect of rate changes, the bank must consider
the potential volatility of rates and the time period within which the bank could practically react
to close the position.

Chart 2: Different Techniques of Interest Rate Risk Measurement

Gap Analysis

Duration Analysis

Simulation Models

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 Interest Rate Risk Management of Dhaka Bank Limited

Each institution has to use at least one technique, and if possible they can use a combination of
these techniques in managing its interest rate risk exposure. Each technique gives a different
perspective on interest rate risk, has distinct strengths and weaknesses, and is more effective
when used with another. Major Interest rate risk measurement techniques are discussed below:

Gap Analysis

Gap analysis is very common which measure the difference between the amount of rate
sensitive assets and rate-sensitive liabilities, both on and off-balance sheet that reprice in a
particular time period.

A negative or liability-sensitive gap occurs when interest-sensitive liabilities exceed interest

earning assets for a specific or cumulative maturity period, that is, more liabilities reprice than
assets. In this situation, the bank should decrease the interest rate to increase the net interest
rate margin in the short term, as deposits are turned over at lower rates before the
corresponding assets. On the other hand, an increase in interest rates will reduce the earnings
by reducing the net interest margin.

A positive or asset-sensitive gap occurs when interest-earning assets exceed interest- sensitive
liabilities for a specific or cumulative maturity period, that is, more assets reprice than
liabilities. To handle this situation, a decline in interest rates should reduce the net interest
margin in the short term, as assets are turned over at lower rates before the corresponding
liabilities. An increase in interest rates should increase the net interest spread.

Limitations of Gap Analysis

There are some limitations of gap analysis. Gap analysis does not consider the basis risk or
investment risk. Gap analysis is generally based on parallel shifts in the yield curve and it does
not incorporate future growth or changes in the mix of business, and does not account for the
time value of money. Simply gap analysis assumes that the timing and amount of assets and
liabilities maturing within a specific gap period are fixed and determined and it ignore the
effects of principal and interest cash flows arising from honoring customer credit commitments,
deposit redemptions, and prepayments, either on mortgages or term loans, as well as the timing
of maturities within the gap period. It depends on the interest rate environment, the mix of

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 Interest Rate Risk Management of Dhaka Bank Limited

assets and liabilities both on and off-balance sheet and the exercise of credit and deposit
options by customer and these deficiencies may represent a significant interest rate risk to an
institution.

In my study basically I focused on gap analysis for interest rate risk management. There are
another two methods are used in interest rate risk management. They are duration analysis and
simulation model. Duration analysis measures the relative sensitivity of the value of these
instruments to changing interest rates and reflects how changes in interest rates will affect the
company’s present value of equity. On the other hand, the simulation models evaluate interest
rate risk arising from both current and future business and provide a way to evaluate the effects
of strategies to increase earnings or decrease interest rate risk.

4.2 Interest Rate Risk Management of DBL

Dhaka Bank and their officials have spent considerable time and effort in recent years
developing systems for monitoring and managing interest rate risk. This special feature
examines that specific component of interest rate risk arising from the possible effects of
changes in market interest rates on bank net interest margins. These effects can be very large if
interest rate risk is not managed carefully. The analyses primarily focus on variations in net
interest margins. The variation in net interest income is the key determinant of earnings
volatility for the banks. To understand the degree to which these shocks affect the bank’s net
interest income would help us identify the channels through which they could affect overall
bank profitability and the responses bankers make to manage reported profitability. In order to
protect profits against adverse interest rate changes, management seeks to hold fixed the
financial firms Net Interest Margin.

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 Interest Rate Risk Management of Dhaka Bank Limited

4.2.1 Cumulative Gap & Capital to risk weighted assets ratio of DBL

Dhaka bank has calculated the rate sensitive asset and rate sensitive liability with maturity up to
12 month and applied the sensitivity analysis to measure the level of interest rate shock on its
capital adequacy.

Table 1: Calculation of Cumulative Gap of DBL (2017)

Particulars Up To 3 Month 3-6 Month 6-12 month

Rate sensitive asset 122,195.70 22524.20 35520.60
(RSA)

Rate sensitive 101932.60 34452.00 41209.60

liabilities(RSL)

Gap (RSA-RSL) 20263.1 (11927.80) (5689.00)

Cumulative gap 20263.10 8335.30 2646.30
Sources of Data: Annual Reports of DBL-2017. (BDT in million)

According to Basel accord every bank has to maintain risk weighted asset against their equity.
Risk-weighted asset is a bank's assets or off-balance sheet exposures, weighted according to
their risk. This kind of asset calculation is taken in calculating the capital requirement or
Capital Adequacy Ratio (CAR) for a financial institution.

Table 2: Calculation of Capital to risk weighted assets ratio of DBL (2017)

Interest Shock on Capital Amount (BDT in million)

Total Regulatory Capital 33521.89

Total Risk Weighted Asset 294391.54
Capital To Risk Weighted Assets Ratio 11.39%

Sources of Data: Annual Reports of DBL-2017

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 Interest Rate Risk Management of Dhaka Bank Limited

4.2.2 Management of Net Interest Margin of DB

The immediate result of interest rate change is effect on net interest income .it is the short term
effect of interest rate change. Long term result of interest rate change is impact on net worth.
Now some net interest margin management technique are discussed below:

4.2.2.1 Factors Affecting Net Interest Income

The Net Interest Income of DBL affected by multiple factors like Changes in level of interest
rates, up or down, changes in the spread between asset yield and liability cost, Changes in the
volume of Interest bearing asset or Interest bearing liabilities that DBL holds as it expands or
reduces the overall scale of its activities and Changes in the mix of assets and liabilities.

4.2.2.2 Calculation of Net Interest Margin

The net Interest margin can be presented as a performance metric that examines the prospect of
a firm’s investment decisions as contrasted to its debt situations. A negative Net Interest
Margin shows that the firm was unable to make an optimal decision, as interest expenses were
higher than the amount of returns produced by investments. From interest income, interest
expense and total earning asset we can evaluate the net interest margin.

The Net Interest Margin is can be calculated by the following way:

Net Interest Margin = (Interest Income – Interest Expenses) / Total Earning Assets

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 Interest Rate Risk Management of Dhaka Bank Limited

Table 3: Calculation of Net Interest Margin of DBL (2012 to 2017)

Year Net Interest Total Asset Fixed Asset Total Earning

Income Asset NIM

2012 6613.71 207448.38 5222.78 202225.6 0.03270

2013 7079.50 226333.13 7957.31 218375.82 0.03241
2014 7930.59 266100.74 8510.00 257590.74 0.03079
2015 7723.38 293847.23 8586.73 285260.50 0.02708
2016 8638.11 329720.78 8380.18 321340.60 0.02688

2017 9572.66 356750.87 8600.18 354650.98 0.02967

Sources of Data: Annual Reports of DBL- 2013, 2015, 2017

The results presented here suggest that Dhaka Banks have managed their exposures to volatility
in the yield curve in ways that have limited effects on their net interest margins. I have used
five years data 2012 to 2017 to calculate Net Interest Margin. Table 3 reveals that the Net
Interest Income at 8638.11 million and NIM at 2.688% for the year 2016 which is lower than
2015. In 2015 the net interest margin is 2.708%. In 2014 Net Interest Income is 7930.59 and
net interest margin was 3.079%. In 2013 net interest income was 7079.5 million and NIM was
3.24%. If assumed that interest rate 2% is decreased, it decreased the NII to 6938.38 million,
NIM to 3.17%. However, if assumed that interest rate 2% is increased, it increased the NII to
7221.08 million, NIM to 3.30%. From 2012 to 2017 we can see the negative trend of net
interest margin of DBL.

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 Interest Rate Risk Management of Dhaka Bank Limited

Figure 1: Trend in Net Interest Margin of DBL (2012-2017)

0.035

0.03

0.025

0.02
NIM
0.015 Column1

0.01

0.005

0
2012 2013 2014 2015 2016 2017

Source: Calculation of Net Interest Margin (Table-3)

Table 3 shows that Net Interest Income is gradually decreasing from 2012 to 2017. These
increases in net interest income have occurred due to various factors, primarily decreasing in
demand for loans. Net interest income is the sum of interest and certain fees produced by
earning assets minus interest paid on deposits and other funding sources. It is considered as the
principal source of the Company’s earnings.

4.2.2.3 Trend Analysis

Interest income is affected by market interest rate, interest sensitive asset and liabilities. When
market interest changes it affects the net interest income. Interest sensitive asset also affects the
net interest income. Interest sensitive liabilities can also be affected by the interest rate
movements. They are highly correlated with interest rate. In this part we can see the trends of
Market Interest rate, Total Interest Sensitive Asset and Total Interest Sensitive Liabilities that
affect Net Interest Income.

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 Interest Rate Risk Management of Dhaka Bank Limited

Figure 2: Trend in Market Interest Rate from 2012-2017

14
12.82

12 11.16 11.14

10
8.06 7.78
8

6
4.39
4

0
2012 2013 2014 2015 2016 2017

Interest Rate Column1 Column2

Sources of Data: www.bb.org

Interest Rate is considered as cost of borrowing. In this report I have used monthly average call
money rate from 2012 to 2017. In 2012 interest rate is 4.39%; in 2013 interest rate is 8.06%
and in 2014 interest rate is 11.16%. From this chart we can also see that, from 2012 to 2017,
Interest Rate was increasing trend but in 2017 interest rate was decreasing. So, in figure 1, we
also see that Net Interest Margin is also increasing. So Interest Rate is an important factor that
affects Interest Income. We can also conclude that net interest income of Dhaka Bank Ltd was
good enough in last five years in terms of Interest rate.

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 Interest Rate Risk Management of Dhaka Bank Limited

Figure 3: Trend in Total Interest Sensitive Asset from 2012-2017

Trend in Total Interest Sensitive Asset

160000
140000
120000
100000
Axis Title

80000
60000
40000
20000
0
2012 2013 2014 2015 2016 2017
Balance with other bank 3607.17 1824.53 1972.03 4713.33 6993.51 7312
Money at call 5100 1120 6950 7160 1570 2360
Investment 9346 15048.23 19383.42 26090.32 35587.25 40675.22
Loan and Advance 61692.8 93560.7 115506.33 136071.65 14664.86 15678.9

Sources of Data: Annual reports of DBL (FY 2012-FY 2017)

Total Interest Sensitive Asset of Dhaka Bank Ltd is increasing trend. Dhaka Bank’s main
Interest Sensitive Assets are Balance with other banks, Money at call, Investment and Loans
and Advances. From the graphical presentation it has shown the six year total interest sensitive
Asset of DBL from 2012 to 2017. In 2012 the growth rate of Total Interest Sensitive Asset was
21.01% where in 2013 the growth rate was 10.79% and 2017 was 12.5% . Though it is
increasing trend growth rate is lower than previous year in 2013. In this chart we can also see
that Loans and Advance of DBL was higher than others interest sensitive Asset and it has also
more influenced on Bank’s Net Interest Income. So Net Interest Income also gradually
increasing from 2012 to 2017 of Dhaka Bank.

4.2.4 Interest Sensitive Gap Management of DBL

The interest-sensitive gap is calculated by taking the interest-sensitive assets minus the interest
sensitive liabilities for a particular time period. A financial firm is considered asset sensitive
when it has more interest-rate sensitive assets maturing or subject to repricing during a specific
time period than rate-sensitive liabilities.

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 Interest Rate Risk Management of Dhaka Bank Limited

IS Gap of DBL from 2012 to 2017 are given below:

Table 4: Calculation of IS Gap of DBL (2012 to 2017)

year ISA ISL IS Gap Status

2012 79745.78 78280.8 146498 Asset sensitive
2013 111553.46 226041.56 -114488.1 Liability sensitive
2014 143811.77 264410.1 -120598.32 Liability sensitive
2015 174035.3 171730.56 2304.74 Asset sensitive
2016 192815.62 188513.98 4301.64 Asset sensitive
2017 224540.66 197623.09 26917.57 Asset sensitive

Sources of Data: Annual reports of DBL (FY 2012-FY 2017)

From this table we can see that in 2017 there are a positive IS Gap which mean that their
interest sensitive asset is more than their interest sensitive liabilities. Dhaka bank will earn if
interest rate rises. In 2015 and 2012 they had positive IS Gap. But in 2013 and in 2014 they had
negative IS Gap which indicate that their interest sensitive asset was less than their interest
sensitive liabilities.

4.2.8 Comparative Discussion

Now, I have taken another two banks to find out the comparative position of DBL. These
banks are AB Bank limited and Agrani Bank limited. I will make comparison among these
three bank on their net interest margin, IS Gap, relative IS Gap and IS gap ratio. Then I find out
the comparative position DBL with other two banks

4.2.8.1 Position of Net Interest Margin

On the basis of net interest margin the Comparative position of DBL is given below:

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 Interest Rate Risk Management of Dhaka Bank Limited

Table 5: Comparative Position of Net Interest Margin

NIM of Agrani Bank NIM of DBL Bank NIM of AB Bank

2012 3.65% 3.72% 2.05%
2013 1.27% 3.24% 2.30%
2014 0.34% 3.07% 2.21%
2015 0.17% 2.07% 2.86%
2016 0.25% 2.68% 1.72%
2017 0.35% 3.32% 1.89%

Source: DBL, Agrani & AB Bank´s annual report

In the above table, we see that the Net Interest Margin of Dhaka Bank is higher than both AB
Bank and Agrani Bank Limited.

Figure 4: Comparative Net Interest Margin

Comparative Net Interest Margin

4.00%
3.50%
3.00%
2.50%
Axis Title

2.00%
1.50%
1.00%
0.50%
0.00%
2012 2013 2014 2015 2016 2017
NIM of Agrani Bank 3.65% 1.27% 0.34% 0.17% 0.25% 0.35%
NIM of DBL Bank 3.72% 3.24% 3.07% 2.07% 2.68% 3.32%
NIM of AB Bank 2.05% 2.30% 2.21% 2.86% 1.72% 1.89%

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 Interest Rate Risk Management of Dhaka Bank Limited

The Graph shows that the net interest margin of AB bank is higher than Agrani Bank and DBL
in all the 6 years. The net interest margins of all banks are similar to each other except 2014.
Net interest margin of Agrani Bank Ltd in the year 2013, 2014, 2015 and 2017 are very low
compare to AB Bank Ltd and DBL. So it can be said that the position of AB Bank is better than
Agrani Bank and DBL in terms of Net Interest Margin.

4.2.8.2 Position of IS Gap

Comparative position of DBL on the basis of IS Gap is given below:

Figure 5: Comparative IS Gap

Comparative IS Gap
20000

-20000

-40000
Axis Title

-60000

-80000

-100000

-120000

-140000
2012 2012 2012 2012 2012 2012
Agrani Bank -35863.28 -58476.42 -41029.51 -47532.91 -47660.97 -48670.76
AB Bank -9540 -7822 -785 547 4173 4534
DBL 1465.38 -114488 -120598 2304.74 4301.64 5607.76

Source: DBL, Agrani & AB Bank´s annual report

It is found that Dhaka bank is situated in good position compare to Agrani Bank and AB Bank
because maximum interest sensitive gap are in asset sensitive condition. If interest rate

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 Interest Rate Risk Management of Dhaka Bank Limited

increases then Agrani bank will face a great problem. On the other hand AB Bank is situated in
liability sensitive position but the gap is not so that huge compare to Agrani Bank. AB Bank
also has a asset sensitive gap in 2014 and 2015. DBL has positive gap in 2017, 2016, 2015 &
2012. So, if interest rate increases in these years, their interest income will rise .

4.2.8.3 Position of Relative IS Gap

Comparative position of DBL is shown below:

Table 6: Relative IS gap Comparison

2012 2013 2014 2015 2016 2017

Relative IS Gap of Agrani -0.1 -0.15 -0.09 -0.01 -0.08 -0.06
Bank
Relative IS Gap of DBL 0.07 -0.14 -0.15 0.007 0.013 0.015
Relative IS Gap of AB -0.06 -0.04 -0.004 0.002 0.01 0.02
Bank
Source: DBL, Agrani& AB Bank´s annual report

Here, the relative IS gap of DBL in 2017 is higher than 2016 which indicates the increasing
change recently.

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 Interest Rate Risk Management of Dhaka Bank Limited

Figure 6: Comparative Relative IS gap

Chart Title
0.1
0.05
Axis Title

0
-0.05
-0.1
-0.15
-0.2
2012 2013 2014 2015 2016 2017
Relative IS Gap of
-0.1 -0.15 -0.09 -0.01 -0.08 -0.06
Agrani Bank
Relative IS Gap of DBL 0.07 -0.14 -0.15 0.007 0.013 0.015
Relative IS Gap of AB
-0.06 -0.04 -0.004 0.002 0.01 0.02
Bank

Source: DBL, Agrani& AB Bank´s annual report

DBL ‘s condition is better than Agrani Bank and AB bank in 2012, 2014, 2015 and 2017 the
gap of Dhaka bank is also positive which indicates asset sensitive gap that shows that if interest
rate increases they will gain profit on the other hand if interest rate falls the will face loss. As
negative gap of Agrani bank is higher than AB Bank and DBL, Agrani Bank face huge loss on
the other hand if interest rate falls down they will do huge gain, if interest rate will increase.

4.3 Major Findings of this study

According to data analysis of this study Major’s findings of the study are as follows:

1. Net interest income, Net interest Margin is in satisfactory levels of this bank.

2. DBL has negative interest sensitive gap positions because its interest sensitive liability is
greater than its interest sensitive asset. In case of negative IS gap loses net interest income
when interest rate rises. So Bank would benefit of falling interest rate in case of negative gap.

3. Its cumulative gap is also negative and so falling interest rates would be beneficial to the
bank overall.

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 Interest Rate Risk Management of Dhaka Bank Limited

4. The interest sensitivity ratio of DBL is less than 1 which indicates DBL is liability sensitive
institution.

5. Bank also uses interest rate derivatives to direct asset and liability positions. The bank can be
reduced Interest Rate Risk by diversifying or hedging techniques through an interest rate swap.

6. In DBL, interest rate risk is measured through the use of interest sensitive gap analysis.

7. Bank has calculated rate sensitive asset and liabilities within maturity bucket and applied the
sensitivity analysis to measure the level of Interest Rate shock on its capital adequacy.

8. Interest Rate Risk in the Banking Book of DBL, Capital adequacy ratio decreases in case of
negative cumulative gap and increases in case of positive cumulative gap.

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 Interest Rate Risk Management of Dhaka Bank Limited

5.1 Recommendation

DBL proved itself as a most growing and sustainable bank even in the recent financial crisis.
Their total performance in recent years makes itself as an efficient one. Based on assessment of
different aspects, the following recommendations have been made:

1. The Dhaka Bank Management must determine the volume of interest sensitive asset and
interest sensitive liabilities it wants the financial firm to hold.

2. Management must develop a correct interest rate forecast or find ways to reallocate earning
asset and liabilities to increase the spread between interest revenue and interest expense.

3. Banks management should require to logically focus on improving the quality of their banks
profitability by providing better return to depositors and charge less interest rate to borrowers
for the development of economy.

4. Banks can use IR derivatives such as Future contract, Forward Contract, Interest Rate Swap
and Options to reduce their IRR of the banks to the certain extent

5. The effective risk management framework inclusive of Basel supervisory guidelines and
BCBS principles can help the banks in a major base of controlling the loss exposed through
IRR

6. The banks can decrease their risk without involvement of funds by developing their focus on
non-interest income.

7. Bank can take conscious measure about capital adequacy ratio and abrupt changes in the
interest rate.

8. Management can choose the time period during which the net interest margin is to be
managed to achieve the desired value. Bank should ensures that the interest rate risk is not
included within the maturity risk.

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 Interest Rate Risk Management of Dhaka Bank Limited

5.2 Conclusion

DBL is one of the leading private commercial banks in our country. During the time of my
Thesis program I have gathered lots of practical knowledge and experiences. The officials of
Dhaka Bank use various risk measurement techniques that accurately and frequently measure
the impact of potential interest rate changes on the institution. They use at least one or a
combination of these techniques in managing its interest rate risk exposure.

They use Gap analysis technique that measures the difference between the amount of rate-
sensitive assets and rate-sensitive liabilities, both on and off-balance sheet that reprice in a
particular time period. The analysis found that DBL is liability sensitive institution. So it has
negative gap occurs when interest-bearing liabilities exceed interest-earning assets for a
specific or cumulative maturity period, that is, more liabilities reprice than assets. In this
situation, a decrease in interest rates should increase the net interest rate margin in the short
term, as deposits are turned over at lower rates before the corresponding assets. On the other
hand, an increase in interest rates lowers earnings by reducing the net interest margin.

DBL uses different measures for deriving value of capital requirement for interest rate risk. For
example they follow Cumulative Gap Analysis, Gap Analysis, Relative IS Gap, IS Ratio
Analysis. DBL proved itself as a most growing and sustainable bank even in the recent
financial crisis. Their total performance in recent years makes itself as an efficient one.

I have compared the interest rate risk management of DBL with other two banks. They are
Agrani bank and AB bank. Performance of DBL is better than other two banks. So it can be
said that, DBL manage its Interest Rate Risk more efficiently than others.

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 Interest Rate Risk Management of Dhaka Bank Limited

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