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Page 1: ALCOpolicy2006-

UNITED BANK OF AFRICA LIMITED

ASSET AND LIABILITY

MANAGEMENT POLICY

Page 2: ALCOpolicy2006-

UNNITED BANK OF AFRICA LIMITED ASSET AND LIBILITY MANAGEMENT POLICY

Confidential 6/7/2010 2

TABLE OF CONTENTS: 1.0 ASSET AND LIABILITY MANAGEMENT POLICY ......................................... 3

1.1 PURPOSE ......................................................................................................... 3 1.2 OBJECTIVE ...................................................................................................... 3 1.3 RESPONSIBILITIES AND AUTHORITIES ................................................. 3

2.0 ASSET AND LIABILITY MANAGEMNT COMMITTEE (ALCO) ................... 4 2.1 Specific Roles ................................................................................................. 4 2.2 Membership ..................................................................................................... 4 2.3 Frequency of Meeting .................................................................................. 5 2.4 Quorum of the Meeting ................................................................................. 5 2.5 Agenda of the Meeting .................................................................................. 5 2.6 Preparation and Coordination of the Meetings ...................................... 5 2.7 ALCO Reports ................................................................................................. 5

3.0 LIQUIDITY RISK MANAGEMENT .................................................................... 5 4.0 INTEREST RATE RISK MANAGEMENT .......................................................... 6 5.0 FOREIGN EXCHANGE RATE RISK MANAGEMENT. .................................... 6 6.0 CAPITAL ADEQUACY ....................................................................................... 6 7.0 NEW PRODUCTS.................................................................................................. 6 8.0 INVESTMENT POLICY ........................................................................................ 7 9.0 TRADING POLICY ............................................................................................... 7

9.1 Dealing authority ............................................................................................ 7 9.2 Trading and Customer limits ...................................................................... 7 9.3 Mark to market ................................................................................................ 7

10.0 CONTINGENCY FUNDING POLICY ................................................................. 8 10.1 Contingency Funding Plan Team:- ............................................................ 8 10.2 Contingency Plan Activation ...................................................................... 9 10.3 Actions to be taken during the crisis ....................................................... 9 10.4 Deactivation of plan ........................................................................................ 9

11.0 ALCO TARGETS & LIMITS ................................................................................ 9 12.0 IMPLEMENTATION OF THE POLICY ............................................................ 10

12.1 Control and Compliance ............................................................................ 10 12.2 Exceptions to the Policy ............................................................................ 10 12.3 Reporting ........................................................................................................ 11

13.0 POLICY REVIEW AND APPROVAL ................................................................ 11 APPENDIX I: ALCO AGENDA...................................................................................... 12

Page 3: ALCOpolicy2006-

UNNITED BANK OF AFRICA LIMITED ASSET AND LIBILITY MANAGEMENT POLICY

Confidential 6/7/2010 3

1.0 ASSET AND LIABILITY MANAGEMENT POLICY

1.1 PURPOSE

The purpose of the Assets and Liabilities Management Policy is to guide the Bank on proper and continual management of its Assets and Liabilities to ensure robust balance sheet and profitability growth and sustainability through proper risk management.

1.2 OBJECTIVE

This policy intends to achieve the followings:-

• Manage risks i.e. Interest rate risk, Exchange rate risk and Liquidity risk, in line with both Internal and Regulatory requirements. The aim is to achieve sustainable and stable profits within acceptable level of risks.

• Establish appropriate pricing levels and rates to ensure

maximization of both interest rate and exchange rate margins.

• Maintenance of the Optimum Assets and Liabilities mix and composition to ensure maximization of shareholders’ wealth.

• Provide policy direction on the investment, trading and contingency funding strategies.

1.3 RESPONSIBILITIES AND AUTHORITIES

• The ultimate responsibility for proper management of the Bank’s assets and liabilities lies with the Board of Directors.

• The Board of Directors shall delegate that responsibility to Asset

and Liability Management Committee (ALCO).

• ALCO shall be responsible for proposing amendments to Policies for Approval by the Board of Directors.

• Where approval is required between Board meetings, such

approval may be sought from the Board Chairman and one other Director subject to report to the next full Board meeting.

• ALCO shall delegate limits/authorities to line management to

enable the smooth functioning of the Bank’s day to day operations.

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Confidential 6/7/2010 4

• Management will be responsible for implementation and providing

the information input to ALCO. 2.0 ASSET AND LIABILITY MANAGEMNT COMMITTEE (ALCO)

The Asset and Liability Management Committee(ALCO) is a strategic decision making management committee whose principal activities is to manage Bank balance sheet within defined financial risks. The Committee is responsible for balance sheet mix and composition, formulation and directing various strategies to achieve the desired balance sheet goals and targets. 2.1 Specific Roles

• To formulate ALM policy in conjunction with risk management policies and limits.

• To set objectives and review performance against those objectives; • To co-ordinate and assess strategy with respect to both short term and

long-term ALM objectives; • To ensure that ALM policies and decisions are well documented and

advised to all parties concerned in their implementation; • To review compliance with both internal and regulatory requirements.

2.2 Membership The Committee comprises of the following members:-

1. Managing Director(Chairman) 2. Head of Treasury (Secretary)

3. Head of Corporate Banking

4. Head, Institutional Clients & Retail Banking

5. Head, Operations and Service Delivery

6. Financial Controller

7. Others where appropriate and/or by invitation.

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2.3 Frequency of Meeting

The Committee will meet on monthly basis except where there is an urgent matter, in which case, the Chairman/Secretary may decide to call for an ad-hoc meeting. Managing Director, Head of Treasury and Financial Controller will have brief meetings prior to ALCO meeting which will not require taking of notes. It is advised that they hold such briefing on weekly basis if there any material development that can not wait for the main committee. 2.4 Quorum of the Meeting Provided that at least 4 members are present, the quorum will be considered sufficient to make any decision. 2.5 Agenda of the Meeting The contents and format of the reports and agenda shall be determined from time to time but a typical meeting agenda should include but not be limited to the following:-

• Economic and Financial Markets Review. • Liquidity Risk Reports Review including liquidity ratios, liquidity gap

analysis, depositor’s concentrations. • Interest Rate Risk Review including interest rate gap analysis and

Interest rate sensitivity analysis. • Balance Sheet and Income Statement analysis. • Pricing review including base lending rates, deposits rates, cost of

fund • Limits and Statutory compliance status • Any other Business.

2.6 Preparation and Coordination of the Meetings The Secretary shall prepare the agenda, coordinate the information and reports and ensure the notice is given to all members two working days prior to the meeting .The Secretary shall also take minutes and ensure the same are circulated to members for them to follow up on the agreed action plans.

2.7 ALCO Reports All ALCO reports shall be precise and straight to issues of concern in order to keep the meetings focused.

3.0 LIQUIDITY RISK MANAGEMENT

• ALCO is responsible for setting up funding guidelines and limits and ensuring that all exposure are well managed within the set limits

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• ALCO shall review on a regular basis, the cash flow assumptions, stress testing, and other commitments to ensure they are realistic.

• ALCO will monitor material changes in interbank money markets, counterparty, large depositors, funding sources, cashflows and reserves.

• ALCO shall delegate authority to Head of Treasury for day to day management of the liquidity.

4.0 INTEREST RATE RISK MANAGEMENT

• As mismatch between repricing on interest rate sensitive assets and sensitive liabilities generate profits or loss, it is important that ALCO take active role in managing the interest exposures.

• ALCO will be responsible for setting up the interest exposure limits. • ALCO shall review interest rate risk exposure and utilizations against the

set limits and provide guidance on the strategy to follow. • ALCO shall assess the profit and loss and determine the likely future

impact on the movement of the interest rates. 5.0 FOREIGN EXCHANGE RATE RISK MANAGEMENT.

• ALCO shall delegate the day to day management of foreign exchange risk to Head of Treasury.

• ALCO shall set foreign exposure limits and monitor exposure utilization

against the set limits.

• ALCO must be aware of any structural and material exposure on the balance sheet and ensure are well monitored .All hedges and foreign exchange translations must be tabled to ALCO for approvals.

• ALCO shall review on regular basis, the foreign profits /loss and

revaluation account s and provide guidance on the strategy to be followed. 6.0 CAPITAL ADEQUACY

• ALCO shall ensure that the Bank complies fully with both internal and regulatory capital adequacy.

• ALCO shall determine the future capital requirements and ensure the capital is aligned with anticipated business growth and expansion.

7.0 NEW PRODUCTS

• ALCO shall review and approve all new products to the Bank or businesses before being introduced.

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• ALCO should ensure product programmes address booking procedures, accounting, risk mitigations and other regulatory compliance. The respective heads of business must table the products programmes in the ALCO before the products are launched to customers.

8.0 INVESTMENT POLICY

The ALCO shall be responsible for formulating investment policy, providing guidelines and investment strategies to ensure that investments at UBA are conducted within defined risk parameters and tolerance. Guiding Principles

• Investment decisions shall be within approved mismatch (gap) limits, credit limits and regulatory limits.

• Credits limits to banks and other limits shall b e approved by ALCO from time to time which provide guidelines to maximum amounts to be invested and for which tenor.

• ALCO shall approve all investment products. • When investing funds, the consideration shall be based on the best return

available in the market, safety of the investment and other related risks associated with the investment.

• ALCO shall delegate authority to Head of Treasury from time to time for him/her to make day to day investment decision which should be within ALCO prescribed guidelines and limits.

9.0 TRADING POLICY

ALCO will be responsible for formulation of trading policy, providing trading guidelines and strategies which will govern the trading activities of the Bank .The objective of the policy is to ensure that trading activities are conducted within risk tolerance levels acceptable to both Board of Directors and management. The following guidelines will govern the trading activities:-

9.1 Dealing authority ALCO shall delegate authority to Head of Treasury for management of trading activities of the Bank. Treasury shall be responsible for understanding and implementing as directed by ALCO from time to time.

9.2 Trading and Customer limits ALCO shall be responsible for setting up trading limits and counterparty limits.

9.3 Mark to market All trading positions shall be subject to mark to market daily .Treasury Operations who are independent of business shall be responsible for determining the

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independent sources of market rates and ensure the trading positions are revalued daily.

10.0 CONTINGENCY FUNDING POLICY

This policy provides guidelines and procedures for managing liquidity problem outside management’s normal daily funding decisions. This policy is to be used in an emergency situation only.

Depending on the cause, loss of confidence could be rapid or gradual. Events likely to precipitate this loss include:-

1. Natural disaster or national emergency having a long – term impact.

2. General distruct of banking system. 3. Major detrimental economic change in Tanzania. 4. Unfounded rumors concerning Bank’s financial stability. 5. Dramatically reduced earnings, major fraud or major credit

loss at UBA.

The most significant funding risk is considered to be in the final two scenarios, where the event precipitating a funding is UBA specific.

10.1 Contingency Funding Plan Team:- This section lists by title those individuals responsible for activation and implementation of the plan.

Managing Director Head of Treasury Manager, Money Markets Head, Corporate Banking Manager, Treasury Operations Head, Institutional Clients & Retail Banking Head, Operations and Services Delivery Financial Controller. Head of Marketing & Product Development

Responsibilities of the CFP Team

• Designing and managing funding strategies • Attending all customer enquiries • Communicating information within and outside the Bank

including the press

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10.2 Contingency Plan Activation

This plan will be activated when the bank is unable to fund its current commitments, as a result of sudden deposit erosion.

Members of the contingency team will convene to decide if and when the plan is activated. The whole plan or any part could be activated depending on the cause and degree of severity of the loss of confidence. If the funding crisis is considered severe or long-term, the Board and BOT must be notified immediately.

10.3 Actions to be taken during the crisis

• Immediate dialog with banks and other financial institutions with which

UBA has an established standby funding facilities. • Immediate arrange to raise funds from Banks and financial institutions

whom UBA has lines of credit. • Suspension of all lending activities • Use Repurchase agreements with Banks and financial institutions. • Access Bank of Tanzania intraday and Lombard facilities • Sale/discounting of un-pledged securities • Sale of loans. • Communicate to Board of Directors, Bank of Tanzania, External Auditors

and the media. • Convene special Board of the Directors if the liquidity situation is severe. • Preparation of a report detailing the crisis, outlining the course of actions

and support being solicited. This shall also cover the initial response from customers ,employees, counterparty, news media, shareholders and regulators

10.4 Deactivation of plan Contingency Team will determine when crisis has stabilized and loss of confidence has been restored to an acceptable level. Interested parties should be contacted to apprise them of the situation’s improvement.

11.0 ALCO TARGETS & LIMITS

The following are the desired targets which management should strive to achieve and maintain:

• Liquidity ratio of at least 5%, over and above the Bank of Tanzania

Liquidity requirement which presently stand at 20%. This ratio will be calculated in accordance with the Bank of Tanzania

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Measurement method. The Treasury Department is responsible for daily monitoring of the Liquidity position, and ensuring that there are sufficient funds to meet this requirement.

• Deposit concentration. The Bank should avoid excessive reliance

on few sources for deposits; concerted efforts should be made to diversify deposit sources. Top ten depositors should account for at most 40% of total Bank’s deposits.

• Limits on Fixed deposit interest rate of 6% and 1.5% for TZS and

USD Fixed deposits respectively. This is possible though reducing our reliance on Fixed deposits from Pension Funds

• The Bank will maintain, at all times a minimum spread of 10% on

TZS facilities and 5% on USD facilities.

• The ratio of interest earning Assets to Total Assets of at least 80% should always be maintained.

• The Bank shall maintain at all times a net open position, which

does not exceed 20% of its core capital. The Treasury Department is responsible for managing gainfully the open position for the Bank.

12.0 IMPLEMENTATION OF THE POLICY 12.1 Control and Compliance

Head of Treasury will be responsible for day to day implementation of the policy under guidelines of ALCO while Head of Operations and Service Delivery will be responsible for ensuring the compliance with internal and regulatory compliance .The Financial controller shall have responsibility of preparing and providing financial reports and other relevant information for discussion in the ALCO. He /she shall also be responsible for submission regulatory compliance reports as per Bank of Tanzania regulations and directives. 12.2 Exceptions to the Policy

• All exceptions to Asset and liability policy shall be promptly reported to the Chairman of ALCO (MD) for resolutions.

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• ALCO shall be notified of all exceptions at the next meeting with explanations and steps taken so far. ALCO shall provide guidance and may decide on any further action to be taken.

• The Chairman of ALCO shall have mandate to approve

temporary excesses to limits pending ratification by ALCO at the next meeting.

12.3 Reporting • Financial Controller in conjunction with Head of Treasury

shall be responsible for preparation and coordination of various Asset and liability management reports for ALCO and Board resolutions.

• Weekly liquidity reports shall be prepared by the Head of

Treasury and circulated to ALCO members for their review and deliberations.

• Monthly summary report on Asset and liability management to be submitted to ALCO for review and deliberations.

• Quarterly summary report on Asset and liability management, performance and ALCO strategy shall be submitted to the Board of Directors for review and further guidance.

13.0 POLICY REVIEW AND APPROVAL

The Asset and Liability Management Policy shall be reviewed by ALCO and be approved by the Board of Directors annually. Head of Treasury shall be responsible for on going maintenance of the policy.

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APPENDIX I: ALCO AGENDA 1. MATTERS ARISING FROM PREVIOUS MEETING 2. ECONOMIC AND FINANCIAL MARKETS REVIEW

• INFLATION • MARKET LIQUIDITY • FOREIGN EXCHANGE MARKETS • INTEREST RATES TRENDS • OTHER MARKET DEVELOPMENTS I.E MONETARY POLICY

CHANGES AND COMPETITION ETC 3. LIQUIDITY REPORT ANALYSIS

• LIQUIDITY RATIOS ANALYSIS • LIQUIDITY MISMATCH (GAP) ANALYSIS • TREASURY FUNDING GAP MANAGEMENT

4. INTEREST RATE MISMATCH (GAP) AND SENSITIVITY ANALYSIS 5. BALANCE SHEET AND INCOME STATEMENT ANALYSIS

• MONTHLY CHANGES • DEPOSIT STRUCTURE & CONCENTRATION • INVESTMENT PORTIFOLIOS & ASSETS STRUCTURE • CURRENCY RISK EXPOSURES POSITIONS

6. PRICING REVIEW • BASE LENDING RATE • DEPOSITS RATES

7. BUSINESS DEVELOPMENT REVIEW • PIPELINES AND NEW ASSETS • LIABILITY STRATEGY REVIEW

8. LIMITS AND COMPLIANCE REVIEW STATUS 9. ANY OTHER BUSINESS