2011

[ROLE OF ASSET LIABILITY COMMITTEE IN MITIGATION OF RISK]

CourseInstructorStudentProgramID-

Treasury and Fund Management Sir Maqbool-Ur-Rehman Muhammad Mairaj Asim BBA(H) 8865

Risk Management Framework:

In order to comply with SBP guidelines on risk management, the Bank had prepared the Basic framework & policy guidelines, which were approved by the Board. Recognizing the facts that policies and procedures are imperative to strengthen the internal control systems and to ensure smooth functioning of any department of an institution, the Bank prepared several Guidelines and Manuals, which have been approved by the Board of Directors, including Credit Manual, KYC & Anti Money Laundering Policy & Procedures, Policy for Acquisition & Disposal of Fixed Assets, Policy for Maturity-wise Distribution of Rate Sensitive Deposits & Other Accounts, Consumer Credit Policy, Accounting Policy, Country Risk Management Policy, IT Security Policy, Treasury Manual and Investment Policy . OVERVIEW OF ALCO

At First Women Bank Limited, risk management framework comprises of a Risk Management Committee (RMC) and a Risk management group. RMC. The center of risk management is implementation of policies; strategies and creating awareness that every employee is a risk manager at his / her Job thus invoke the significance of the role in the overall risk structure of the Bank. The following are the duties of Alco committee and shall review it in every quarterly meetings of theirs. DUTIES 1. Local and national economic forecasts 2. Interest rate forecasts and spreads including a consensus interest rate forecast for the Bank developed by Bank management 3. Internal cost of funds (recent pricing) 4. Mismatches in the balance sheet 5. Year-to-date operating results 6. Anticipated funding needs 7. Anticipated loan demands 8. Liquidity position 9. Maturity distribution of certificates of deposit of $100,000 10. (GAP) Rate Sensitivity measures 11. Net Interest Margin/Interest Rate Risk Measures 12. Simulation 13. Capital Positions 14. Ratio of loan loss reserves to outstanding risk loans 15. Tax position 16. Fed funds position 17. Investment portfolio 18. Current loan investment and funding strategies REPORTING REQUIREMENTS The ALCO shall provide the following to the Board of Directors on a quarterly basis:

Average daily balance sheet Interest income and interest expense statements Non-interest income and non-interest expense statements Interest spread statement and GAP Report Relevant ratios (detailed above) Net interest change analysis attributable to dollar volumes, earning, paying and market rates as well as time (simulation) compared to policy limits. Investment portfolio and loan activity report A summary approximating investment portfolio values Duration analysis to approximate investment portfolio values for different rate Projected flow of funds analysis Recommended Asset/Liability Management plan including a quarterly strategy or the Assessment of performance against the prior quarter's strategy

scenarios (annual)

management of interest rate risk and liquidity risk

Board of Directors

Ms. Shafqat Sultana

President/Chairperson First Women Bank Limited

Mr. Qamar Hussain

President National Bank of Pakistan

Ms. Batool Iqbal Qureshi

Secretary, Ministry of Women Development, Govt. of Pakistan

Mr. Atif R.Bokhari

President United Bank Limited

Mr. M. Usman Ali Usmani

President MCB Bank Limited

Mr. Zakir Mehmood

President Habib Bank Limited

Mr. Khalid A. Sherwani

President Allied Bank Limited

Management Team

Charmaine Hidayatullah

Shawana Yamin

Head of Legal, Security & Stationery

Head of Int Division & Company Secretary

Shahid Mughal

Mohammad Khalid
Treasurer

Head of Finance & Planning

Tauqir A. Siddiqui
Reconciliation

Naushaba Shahzad
Head of Risk Management

CIO / Head of Information Technology &

Agha Shujat Ali

Head of Operations

Feroze Ali Hussaini

Head of Credit Division

Shaheen Zamir

Mehwish Khan

Head of Marketing, PR & Spokesperson

Head of Audit & Secretary Audit Committee

Farhan Ahmed

Shahida Mannan
Head of HR

Head of Treasury Operations

The Role of AlCo

A risk-management committee in first women bank comprises of the senior-management levels of the bank. The ALCO's primary goal is to evaluate, monitor and approve practices relating to risk due to imbalances in the capital structure.

The Asset Liability Management Committee (ALCO) in

First Women Bank takes steps to maximize returns while keeping risks within acceptable levels. The Committee undertakes regular measurement and monitoring of the various risks that includes credit risk, market risks, operational risk and others. All the risks are evaluated in the light of the changing market dynamics. The strategies are formulated and adjusted to mitigate any rising risk. The Bank uses a range of monitoring and measurement methods for e.g. interest rate gap analysis and scenario analysis. The Bank incurs no securitization risk because it does not indulge in any securitization process.

RISK MANAGEMENT
Risk Management is a process consisting of defined steps, which support better decision making by contributing to a greater insight into risks and their impacts. The Bank has in place the Basic Framework & Policy Guidelines, which cover organizational set up and functions of Risk Management Department (RMD). Risk management processes help to improve safety, quality and performance of activities. The Bank intends to further augment its RMD in line with the regulatory requirements, etc.

Market Risk
Market risk is the risk of loss arising from movements in market variables, such as interest rates, exchange rates and equity indices, etc. Concentration limits and other controls are applied through various checks and controls. The Asset and Liability Management Committee (ALCO) of the Bank is responsible for reviewing policies relating to risk assets, primarily in lending and treasury related transactions as well as in reviewing / approving the procedures, setting of limits, monitoring and implementation as per Boards approved policies. Procedural guidelines for covering the risks involved in various types of financing and customers transactions are being followed to ensure customers due diligence. A number of developments are underway more particularly for operational and credit risk areas. Information technology infrastructure is being developed so as to strengthen the monitoring capacity as well as to keep pace with the modern banking facilities.

The management ensures all policies and procedures are regularly reviewed with a view to have full compliance with SBP guidelines as far as feasible and practicable with a view to ensure an efficient and effective system.

Credit risk
Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. The Banks Credit Manual contains detailed procedures and guidelines to address credit risk methodology for identifying, assessing, monitoring and mitigating the risk factors. The credit manual is under process of implementation and it will be followed in conjunction with risk based lending approach. The Banks policies and procedures on Country Risk Management have been approved by the Board of Directors.

Concentration of credit and deposit

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Credit risk is monitored, reviewed and analysed by Asset and Liability Management Committee (ALCO), which has established credit lines and credit limits to control exposure to counter parties. Investments are made only in instruments with good credit ratings. Out of the total financial assets of Rs. 12,360.020 million (2009: 9,924.878 million), the financial assets which were subject to credit risk amounted to Rs. 7,877.775 million (2009: Rs. 5,224.265 million). To manage credit risk the Bank applies credit limits to its customers and obtains adequate collateral. Credit Risk is managed by monitoring credit exposures, restricting transactions with specific parties with greater likelihood of default and regularly assessing the creditworthiness of such clients.

Collateral used by the Bank for Credit Risk Mitigation (CRM) in the simple approach are.

 Cash margin Government Securities Government Securities (for repo-style transactions) Guarantees of Government, Banks, PSEs and rated Corporate

Foreign Exchange Risk

Foreign exchange risk management Main objective of foreign exchange risk management is to ensure that foreign exchange exposure of the Bank remains within the defined risk appetite (20% of the paid up capital). Daily reports are generated to evaluate the exposure in different currencies. Details of the Bank's currency risk Exposure is as follows:

Equity position Risk

Equity price risk arises, primarily in trading book, due to changes in process of individual stocks or levels of equity indices. The Bank's existing equity book primarily comprises of available for sale portfolio, which is maintained with a medium term view of capital gains and higher dividend yields. Equity price risk is managed by applying nominal limits on individual scrips. The portfolio is also diversified to minimize the risk.

Yield / Interest Rate Risk

Yield risk is the risk of decline in earnings due to adverse movement of the yield curve. Interest rate risk is the risk that the value of the financial instrument will fluctuate due to changes in the market interest rates. The reconciliation of:

- total assets and total financial assets; and - total liabilities and total financial liabilities is as follows:

Liquidity Risk Liquidity risk is defined as the potential loss arising from the Banks inability to meet its own contractual obligations, when due. The liquidity risk is managed through a framework of liquidity policies, controls and limits. These policies and controls ensure that the Bank maintains diversified sources of funding to meet its contractual obligations.

Operational Risk Operational risk is the risk resulting from inadequate or failed internal processes, people system or from external events. This risk arises from operational risk is the risk of inadequate documentation, legal or regulatory incapacity and uncertainty in enforcement of contracts. Procedural guidelines have been issued down the line. Necessary information / guidelines for Know Your Customer (KYC) compliance have also been issued by the Bank. Every staff is required to get do a self assessment of him self . ADDRESSING TECHNOLOGY RISK

The Bank has commenced the most ambitious and challenging project in its history, of upgrading the entire technology platform. Bank has acquired Oracle Financial Services Software (OFSS) (previously flexcube) as the core banking software with the key objectives to improve business management, upgrade customer service,

Strengthen the internal control environment, and improve quality and timing of financial and non-financial information. In addition the Bank is also implementing Oracle Financial as MIS and Supply Chain Management software, PeopleSoft as human resource management software, Reveleus as risk management software and Siebel as customer relationship management software. These softwares will be fully integrated with OFSS and collectively strengthen the product and service delivery capacity while improving the overall operational and internal control standards