thesis alm(draft) old

7/28/2019 Thesis ALM(Draft) Old

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Study on

ASSET AND LIABILITY MANAGEMENT

(ALM)

Prepared by:

S. Tayyab Raza Z.

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ACKNOWLEDGEMENT

I am deeply grateful to Almighty Allah for enabling us to accomplish this onerous task.

Sincere thanks and Special regards to Sir Nawaz without his help and guidance this

robust task could not be completed.

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Table of Contents

Title Page... iAcknowledgement.. ii

Table of Contents. iii

ABSTRACT. ivIntroduction 01

Focus of Study. 02

Literature Survey. 02Problem Statement 09

Theoretical Framework. 09

Hypothesis 11

Methodology 12Population and Sample size.. 12

Data Collection Method 12

Sample Characteristics 13

Variable and Measures. 13Data Analysis Method.. 13

Survey Findings. . 14Measure of Central Tendencies 14

Pearson Correlation.. 15

Qualitative Analysis.. 15Hypothesis Testing 16

Hypothesis One 16

Hypothesis Two 18

Hypothesis Three. 19Hypothesis Four.. 20

Hypothesis Five 22

Hypothesis Six. 23Hypothesis Seven. 24

Discussion Conclusion 25

Conclusion. 25Recommendation. . 27

ANNEXURE-I (Samplecharacteristics).. 29

ANNEXURE-II (Questionnaire) . 31

End notes 34

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ABSTRACT

The focus of the study was to ascertain the overall awareness of Asset and Liability

Management (ALM) in commercial banks. Based on the literature survey, the predictorvariables were identified. These dimensions were:

the importance given to ALM by the management

the techniques employed and their importance

inter-bank market support to asset-liability mismatches

the prime objective of ALM in the opinion of respondents

the extent to which funding and interest risks can be managed through ALM

the supervisory and regulatory role played by State Bank of Pakistan.

Data for testing the hypotheses was collected through a close-ended questionnaire based

on rating scale. The questionnaire administrated for the study was based on 25 items

including 4 items related to personal data. The subject population comprised of 46 local,

foreign commercial banks and DFIs. Of the total population, a sample of 23 elements was

drawn based on judgment sampling.

SURVEY FINDINGS:

All the financial institutions have an Asset Liability Committee (ALCO).

About 74% of ALCOs are headed by their chief executives.

Most of the institutions ALCO has about 5 to 10 members (83%).

About 57% of the incumbents obtained occasional training while 39% received no

training about ALM. No doubt that the members of ALCO are professional but

there should be workshop/seminars on the latest research in the field to

disseminate the knowledge among the senior officials to get the anticipated

results.

The ALCO status is executive in about 78% of the institutions.

Both gap and duration techniques are used in about 78% of the institutions.

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In the opinion of 35% of the respondent institutions there are no specific

guidelines regarding ALM issued by the State Bank of Pakistan except that of

Prudential Regulations.

Seven hypotheses were developed and tested. The summarized results are presented

below:

a) Hypothesis No. 1.0

The hypothesis relating to respondents opinions of no-significant difference on

different ALM techniques was rejected.

b) Hypothesis No. 2.0

The hypothesis relating to respondents opinions of no-significant difference on

the prime objectives of ALM was rejected.

c) Hypothesis N0 3.0

The hypothesis relating to respondents opinions regarding the effectiveness of

State Bank of Pakistans role (guidance, supervisory and regulatory) in ALM

was rejected.

d) Hypothesis No. 4.0

The hypothesis relating to respondents opinions on the effectiveness of inter-bank market support to Assets-Liabilities mismatches was rejected.

e) Hypothesis No. 5.0

The hypothesis relating to respondents opinions that funding risk can be

managed through ALM was accepted.

f) Hypothesis No. 6.0

The hypothesis relating to respondents opinions that interest risk can be managed

through ALM was accepted.

g) Hypothesis No. 7.0

The hypothesis relating to respondents opinions on the degree of importancegiven by the management to ALM was accepted.

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1.0.0 INTRODUCTION

Asset-Liability Management (ALM) is done to cover the risk of interest rate and

liquidity of financial institutions. Therefore, it is an essential part of strategic

management of financial institutions. ALM addresses two types of interest rate

risks. The first is interest rate movements, which affects interest income. The

second risk results from prepayment options of individual borrowers. In this type

of risk the borrowers have option to renegotiate the rates of loans if rates

declines.1

ALM policies deal with two target variables i.e. interest income and Net Present

Value of assets minus liabilities. Exposure is calculated on the basis ofoutstanding balances of all assets and liabilities except equity at book value. The

banks portfolios could be sensitive to the change in the prevailing interest rate. If

the portfolio contains more loans in which the customers have options to

renegotiate its rates, it would be considered as sensitive portfolio. Insensitive

portfolios on the hand would be least affected with the change in prevailing

interest rate.2

Borrowers can exercise prepayment options to renegotiate fixed rates when rates

move down. Depositors also have options to switch over their demand deposits to

higher interest-earning liabilities when rates increase.3

The mismatch or gap is a pivot of ALM. The difference between assets and

liabilities resulting in a deficit or an excess of funds is called liquidity gap. An

interest rate gap is mismatch between the interest accrued on assets and paid on

liabilities.4

Whenever assets are greater than resources, deficits appear, which require funds

from inter-bank market. When resources are greater than assets, the bank has

excess funds for lending or investing. Both deficits and excesses are liquidity

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gaps. A higher portion of liquid assets (surplus) is an indication that the bank is in

stronger position to meet its short term obligations.5

1.1.0 FOCUS OF THE STUDY

The focus of the study was to ascertain the overall awareness of Asset and

Liability Management (ALM) in commercial banks.

1.2.0 LITERATURE SURVEY

Asset-Liability Management is the ongoing process of formulating,

implementing, monitoring and revising strategies related to asset and liabilities in

an attempt to achieve financial objectives for a given set of risk tolerances and

constraints. 6

1.2.1 OBJECTIVE OF ALM:

The basic objective is to ensure that the banks profitability is not fully exposed to

interest and foreign exchange rate risks and management of liquidity. It is worth

mentioning that a huge part of a typical banks profit derives from net interest

income. Hence it is vital to measure, control and manage the interest and foreign

exchange rate exposure. The exposure arises due to different maturity patterns of

the assets and liabilities, which are re-priced from time to time. These changes in

interest rates affect the cost of liabilities and yield on assets, which accordingly

affect the profitability. Many financial institutions have suffered losses due to

mismanaging the interest and foreign exchange rate risk.7

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1.2.2 ASSET AND LIABILITY MANAGEMENT IN COMMERCIAL BANKS:

Asset and Liability Management in Commercial Banks is managing availability of

requisite funds to support assets of the bank or management of liquidity in the

bank. It requires arranging funds to support assets of the bank, which match the

assets in terms of currencies, amounts, tenors and rates. This aim can be achieved

in close coordination with branches where funds are generated and consumed.

ALM is the function of banks Treasury and Finance Planning Units. Following

are the result oriented functions:

Clarity of vision and practicable planning by the Financial Planning unit.

Effective flow of information between branches and the Treasury.

Market knowledge and professional capability of incumbents in treasury.8

1.2.3 RISK INHERENT IN LIABILITY MANAGEMENT:

Banks used to fund their loan portfolios with mismatched customer deposits.

Deposits with varying maturities were bundled together to fund a loan often

having a tenor longer than the longest maturity of a deposit in the bundle. In past

interest rates were stable and fewer investment options were available to savers.

Thus the banks used to extend loans despite maturity mismatches.

Now the scenario has changed due to growing competition from NBFIs,

Government savings schemes and increased volatility of interest rate. Now the

banks depend on inter-bank markets to manage liquidity and asset-liability

mismatches. 9

a) FUNDING RISK:

When a bank is not able to generate the required funds to meets its due

obligation, it is known as funding risk.10

b) INTEREST RATE RISK:

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Extending loans based on mismatched maturities of loans and deposits results

in interest rate risk. In this context there are two possibilities, short-term loans

funded by long term deposits and vice versa. In case short-term loans are

funded by long term deposits and the management is unable to extend these

loans on their maturity on the existing or high rate due to fall in the interest

rate then the management will face loss in spread currently being earned. In

second scenario long-term loans are funded by short-term deposits and the

management is unable to retain these deposits on their maturity on the existing

or low rate due to increase in the interest rate then the management will also

face loss in spread currently being earned. 11

To offset these risks the banks must develop products based on future interest

rate trend, market liquidity and future money supply position due to

intervention of monetary authority.

1.2.4 DEPOSIT-LOAN MISMATCH:

Deposit-loan mismatch falls into two categories. In type one deposits and loans

are equal in quantum but unequal in terms of maturity periods. These mismatches

are common in banks if this continues for a long period then change in interest

rates would adversely affect the exposed portions.

In second type of mismatches, the loan portfolios are based on bundling together

the un-matched deposits. Subsequently the un-funded portions (gap) of such loans

are funded by rollover of existing deposits or by fresh deposits or by inter-bank

borrowings. Thus in case of non-availability of required deposits/funds on time

will cause funding risk. And generating deposits at higher rates will results in

interest rate risk.12

1.2.5 INTEREST RATE RISK MANAGEMENT:

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Banks are usually exposed to interest rate risk in normal course of business

because deposit tenors do not always match the life of loans granted out of these

deposits. A prudent management of the duration mismatches can secure the banks

against drop in interest income and can make additional profit by taking

advantage of the market interest rates. To achieve this goal the term structure of

interest rates needs to be studied, understood and extrapolated to predict future

rate trend and to identify profit opportunities therein so that strategically planned

contracts can be executed.13

1.2.6 GAP ANALYSIS OF INTEREST RATE RISK:

In Gap analysis assets and liabilities (which are sensitive to interest rate changes)

are grouped together according to their maturity dates. In this process two

different types of Gap are expected.14

a) NEGATIVE GAP:

A negative gap will emerge if a bank has a larger amount of interest-sensitive

liabilities than it has interest-sensitive assets and both maturing at the same

time. The difference between these two amounts refers to net exposure. 15

b) POSITIVE GAP:

A positive gap occurs if the amount of interest-sensitive assets exceeds the

amount of interest-sensitive liabilities and both maturing at the same time.16

1.2.7 MANAGING PERIOD AND RATE MISMATCHES:

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Managing period mismatches or duration gapsis an important technique because

the manipulation of this technique is the key to make profit by taking advantage

of the market rates for various time periods. Term structure of rates should be

studied carefully to get benefit from these period mismatches without

compromising the portfolio safety. Asset Liability Management is a tool that

enables bank management to take business decisions in a more informed

framework with an eye on the risks that the bank is exposed to. ALM is thus a

comprehensive and dynamic framework for measuring, monitoring and managing

the liquidity, interest and exchange rate risks.17

1.2.8 BALANCE SHEETS ITEMS ON THE BASIS OF COST AND EARNINGS:

The best combination of items on banks balance sheet on the basis of cost and

earnings will be one in which:

Non-earning assets i.e. Cash etc. are kept to the minimum

No cost liabilities i.e. Current Deposits, Accrued Expenses & Bills Payable

etc. are maximized in order to fund earning assets

Cost bearing liabilities i.e. Saving Deposits, Short-term Deposits, Term

Deposits & Borrowings from other banks are kept to the minimum

Fixed assets are kept to the minimum so that a large part of the capital funds

are available to fund earning assets

However, pursuing such a policy to the extreme is inadvisable from the funding

risk point of view.18

1.2.9 BALANCE SHEETS ITEMS ON THE BASIS OF VOLATILITY:

The best combination of items on banks balance sheet on the basis ofvolatilitywill be one in which:

Volatile liabilities i.e. Current Deposits, Accrued Expenses & Bills Payable

are kept to the minimum

Stable liabilities i.e. Saving Deposits, Short-term Deposits, Term Deposits &

Borrowings from other banks are maximized in order to fund earning assets

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Fixed assets are kept to the minimum so that better part of the capital funds

are available to fund earning assets

But pursuing such a policy to the extreme is also inadvisable from the profitability

point of view. The actual need is a trade off between the volatility and cost of

liability types.19

1.2.10 CONSEQUENCES OF ACCEPTING HOT DEPOSITS:

Occasions may arise when hotdeposits received in banks. They are called so

because these deposits can be withdrawn at any time. These deposits cannot be

advanced to customers for obvious reasons. They can safely be invested only in

money market. This is a difficult liability to handle due to limitation on their

profitable investment. These deposits can result in losses to the bank if they are

accepted on high rates to please some customers. This situation often comes

across when inter-bank market is flushed with funds so it is difficult for Treasury

to invest them at a high enough rate. Further, reserves will be required to maintain

for these deposits, which may be arranged by borrowing at a premium in the form

of securities. In case reserves are maintained through purchased securities then

funds will be stuck with them after the deposit is withdrawn. If there is sufficientsecurities and neednt to buy or borrow securities for related reserve requirements,

then hot deposits may be accepted. But this will partially offset the cost to the

bank and will cause a loss if these deposits have not been invested at a premium

over their cost. However, it can be prove a source of additional risk free revenue

when the overall liquidity position is tightened. 20

1.2.11 STATUTORY RESERVE REQUIREMENTS:

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The most important responsibility among other primary responsibilities of a

Central Bank is ensuring that Depository institutions under its supervision are

sufficiently liquid at all times to meet deposit withdrawals. Banks lend to each

other in the inter-bank market, which create a large chain of payment obligations.

Hence default on these payment obligations by one bank will result in defaults by

other banks, which can be termed as failure of the whole system. To avoid such a

situation a sizeable portion of bank deposits are held by Central Bank as a reserve

to be released as and when a bank faces substantial deposit withdrawals. 21

1.2.12 LIQUIDITY MANAGEMENT STRATEGY:

Liquidity management can be effected by adopting the following strategies:

1. Deposit base should be well diversified both by maturityand depositor profile

2. Liquidity can be raised through discounting, sale, or repurchase deals in

readily marketable securities portfolio

3. Flexibility in raising funds can be ensured in different market conditions

through an optimum mix of investment in both short and long term securities

4. Forex Swaps, Call borrowings and Re-purchases can help to maintain

liquidity5. Preference should be given in lending to those customers who have lines from

other banks which enable them to repay you by drawing on those lines as and

when needed

6. Encourage timely payments by insertion of suchclauses in loan agreements to

minimize loan repayment defaults22

1.2.13 HEDGE EFFICIENCY:

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Hedging is the process through which financial risk can be managed or reduced.

The risk of interest rate movements can be hedged through various instruments

viz. Forward Rate Agreements, Financial Futures, Options and Interest Rate

Swaps. Hedge Efficiency is the degree to which the exposure is covered.23

1.2.14 HEDGING AND EXPOSURE GUIDELINES:

1. Asset-liability mismatch periods and amounts should be restricted to the

prevailing market volatility

2. Allow period mismatches subject to a very calculated view of future market

liquidity

3. Review regularly asset-liability mismatches by taking immediate corrective

steps if the market turns against

4. Exposures may be restricted to un-drawn lines of credit from other banks to

handle unwinding mismatched positions in case of emergency.24

1.3.0 PROBLEM STATEMENT

How much importance is given to ALM by the commercial banks? What

techniques are employed? What is the prime objective of ALM in their opinion?

To what extent funding and interest risks can be managed through ALM. The

supervisory and regulatory role played by State Bank of Pakistan.

1.4.0 THEORETICAL FRAMEWORK

In order to study the commercial banks behavior towards Asset and Liability

Management (ALM) a bracket of variables was worked out, where the dependent

variable overall awareness was the variable of prime interest. The other

variables

importance given to ALM

techniques employed

inter-bank market support

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prime objective of ALM

funding risk management

interest risk management

supervisory and regulatory role played by State Bank of Pakistan

have been used to measure the dependent variable. The above mentioned

variables were predictors variables (independent variables).

Based on the literature survey and information obtained from focus group,

measures and variables were identified. The relationship of the measures and

variables are depicted below:

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1.5.0 HYPOTHESES

Based on the theoretical framework seven different hypotheses were developedand tested which are presented below:

H1O: There is no significant difference of the respondents opinions on the

importance of different ALM techniques.


prime objectives of ALM.

ImportanceGiven by

Management to ALM

InterestRisk

Management

Fund RiskManagemen

t

Inter-bankMarket

Support

SBPRole

PrimeObjective of

ALM

ALMTechniques

AssetLiability

Management

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H3O: The effectiveness of State Bank of Pakistans role in ALM is at least 4 onthe rating scale of 5 to 1.

H4O: The degree of support of inter-bank market to Asset-Liability mismatches

is at least 4 on the rating scale of 5 to 1.

H5O: The degree to which funding risk can be managed through ALM is at least4 on the rating scale of 5 to 1.

H6O: The degree to which interest risk can be managed through ALM is at least

4 on the rating scale of 5 to 1.

H7O: The importance given by the management to ALM is at least 4 on the

rating scale of 5 to 1.

2.0.0 METHODOLOGY

The methodology adopted for the subject study is briefly discussed below:

2.1.0 POPULATION AND SAMPLE SIZE:

The population for the subject study is the treasury department of commercial

banks in Karachi. There are forty-six local and foreign commercial banks and

DFIs incorporated in Pakistan. The sample size of the study was 23. The sample

was drawn from DFIs, foreign banks and local commercial banks.

2.2.0 DATA COLLECTION METHOD:

The close-ended questionnaires were handed over to the personnel of treasury

department of four DFIs, five foreign and fourteen local commercial banks in

Karachi. The closed-ended questionnaire containing 25 questions out of which

four were related to personal data and the rest were related to subject study. The

questionnaire comprised of nominal and rating scale. Judgement sample technique

was used for collecting the data.

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2.3.0 SAMPLE CHARACTERISTICS:

The characteristics of the subject respondents are presented in Annexure-I.

2.4.0 VARIABLE AND MEASURES

The questionnaire administered for the study was based on 25 items. Four

questions were related to personal information viz. position held, Age, institution

and Gender. The nominal scale was used for measuring the personal information.

The overall awareness level was measured through six dimensions based on the

rating scale. These dimensions were

importance given to ALM

techniques employed

inter-bank market support

prime objective of ALM

funding risk management

interest risk management

supervisory and regulatory role played by State Bank of Pakistan

The above variables were predictor variables (independent variables). The

variable of the primary interest was overall awareness.

2.5.0 DATA ANALYSIS METHOD

The data were mostly measured through the measure of central tendencies

including mean, mode and median etc. The hypotheses developed were tested

through t-test, simple ANOVA and correlation analysis.

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3.0.0 SURVEY FINDINGS:

The survey findings were analyzed linearly, cross section ally in order to have a

better comprehension and understanding of the relationship between dependent

and independent variable, which are discussed below:

3.1.0 MEASURE OF CENTRAL TENDENCIES:

The data pertaining to the prime objective of ALM was based on rating scale,

therefore, the results were analyzed based on mean, mode and standard deviation

etc. The results are summarized below:

TABLE 1

Measure of Central Tendencies

ManagingLiquidity

Risk

CapitalAdequacy

AchievingTargetIncome

Mean 4.87 4.26 3.87

Standard Error 0.07 0.18 0.19

Median 5.00 4.00 4.00

Mode 5.00 5.00 3.00Standard Deviation 0.34 0.86 0.92

Sample Variance 0.12 0.75 0.85

Kurtosis 3.86 0.51 (1.84)

Skewness (2.35) (1.02) 0.28

Range 1.00 3.00 2.00

Minimum 4.00 2.00 3.00

Maximum 5.00 5.00 5.00

Sum 112.00 98.00 89.00

Count 23.00 23.00 23.00

According to the respondents opinion managing liquidity risk with an average of

4.87 is the prime objective of ALM followed by capital adequacy (4.26) and

achieving target net income (3.87). The standard deviation of respondents

opinions on managing liquidity risk was the least i.e. 0.34 as compared to SD on

other variables i.e. 0.86 and 0.92. This indicates that there is less polarization on

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the respondents opinions on managing liquidity risk as the prime objective of

ALM.

3.2.0 PEARSON CORRELATION:

Pearson correlation matrix was drawn in order to determine the correlation

between the dimensions used to measure the prime objective of ALM. The

summarized results are presented below:

TABLE-2

Pearson Correlation Matrix

Managing

Liquidity RiskCapital

AdequacyAchieving

Target Income

ManagingLiquidity Risk

1.00

CapitalAdequacy

0.27 1.00

AchievingTarget Income

0.37 0.45 1.00

The respondents preferring liquidity risk management as the prime objective of

ALM has a comparatively strong correlation with achieving target net income,

and the least with capital adequacy. The respondents that have rated capital

adequacy, as high, the same appears to have a higher correlation with achieving

target net income. The respondents that have rated achieving target net income

high, have higher correlation with capital adequacy.

3.3.0 QUALITATIVE ANALYSIS:

According to the data obtained through questionnaires each financial

institution has a formal set up of Asset Liability Management which is called

Asset Liability Committee (ALCO). It is a critical strategic decision making

body in banks

About 74% of ALCOs are headed by the CEO of the banks.

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83% ALCOs comprise of five to ten members. A moderate number of

members will be helpful for mutual consensus.

In most of the banks there is no supporting staff attached to ALCO except that

of treasury department or PAs to CEOs.

The ALCOs conducts its meeting every month.

About 57% of the incumbents obtained occasional training while 39%

received no training about ALM. No doubt that the members of ALCO are

professional but there should be workshop/seminars on the latest research in

the field to disseminate the knowledge among the senior officials to get the

anticipated results.

The ALCO status is executive in about 78% of the institutions.

Both gap and duration techniques are used in about 78% of the institutions.




3.4.0 HYPOTHESIS TESTING:

Seven different hypotheses were developed and tested through t-test and simple

ANOVA. The result and interpretation of the seven developed hypotheses are

described below:

3.4.1 HYPOTHESIS ONE

The respondents opinions on the importance of techniques employed to ALM

were measured. The opinions were sought on the techniques such as gap,

duration, and combination of both. The hypothesis developed in this context is

presented below:



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H1A: There is significant difference of the respondents opinions on the


Statistical representation:

H1O: 1=2=3.

H1A: 123

Where H1o represents the term null hypothesis, H1A represents the term alternate

hypothesis and 1, 2 & 3 are means of gap, duration and combination of both

respectively.

The above hypothesis was tested through simple ANOVA and the summarized

result is represented below:

TABLE-3

` Simple Anova: ALM techniquesSummary

Groups Count Sum Average Variance

Gap 23.00 105.00 4.57 0.44

Duration 23.00 87.00 3.78 1.63

Both 23.00 90.00 3.91 1.63

ANOVA

Source ofVariation

SS df MS F P-value

F crit

BetweenGroups

8.09 2.00 4.04 3.28 0.04 3.14

WithinGroups

81.39 66.00 1.23

Total

89.48 68.00

At 95% confidence level and (2, 66) degree of freedom, the F-critical value is

3.14 and the F-calculated value is 3.28 which falls in the critical region. Hence the

hypothesis relating to respondents opinions of no-significant difference on

different ALM techniques was rejected.

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According to the respondents opinion gap with an average of 4.57 is the

important technique employed to ALM followed by combination of both (4.91)

and duration (3.78).

3.4.2 HYPOTHESIS TWO

The respondents opinions on the prime objective of ALM were measured. The

opinions were sought on the objectives such as managing liquidity risk, capital

adequacy and achieving net income target. The hypothesis developed in this

context is presented below:

H2O: There is no significant difference of the respondents opinions on theprime objective of ALM.

H2A: There is significant difference of the respondents opinions on the primeobjective of ALM.

.


H2O: 1=2=3.

H2A: 123


hypothesis and 1, 2 & 3 are means of Managing Liquidity, Capital Adequacy

and Achieving Target Net Income respectively.

The hypothesis was tested through simple ANOVA and the summarized result is

represented below:

TABLE-4

` Simple Anova: Prime objective of ALM.

SummaryGroups Count Sum Average Variance

ManagingLiquidity

23.00 112.00 4.87 0.12

CapitalAdequacy

23.00 98.00 4.26 0.75

AchieveTarget Income

23.00 89.00 3.87 0.85

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Anova

Source ofVariation

SS Df MS FP-

valueF crit

BetweenGroups 11.68 2.00 5.84 10.24 0.00 3.14

WithinGroups

37.65 66.00 0.57

Total 49.33 68.00

At 95% confidence level and (2, 66) degree of freedom, the F-critical value is

3.14 and the F- calculated value is 10.24 which falls in critical region. Hence the

hypothesis relating to respondents opinions of no-significant difference on the

prime objectives of ALM was rejected.



achieving target net income (3.87).

3.4.3. HYPOTHESIS THREE

The respondents opinions regarding the effectiveness of State Bank of Pakistans

role (guidance, supervisory and regulatory) in ALM were measured. The

hypothesis developed in this context is presented below:

H3O: The effectiveness of State Bank of Pakistans role in ALM is at least 4 onthe rating scale of 5 to 1.

H3A: The effectiveness of State Bank of Pakistans role in ALM is less than 4

on the rating scale of 5 to 1..


H3O: 4

H3A: < 4

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hypothesis and is the mean of effectiveness of State Bank of Pakistans role in

ALM.

The hypothesis was tested through t-test and the summarized result is represented

below:

TABLE-5

`

Role of SBP

Mean 3.04

Confidence level 0.95

Degree of Freedom 22

Critical value -1.72

S.D 1.19

t-value to be tested 4.00

t -calculated value (3.87)

At 95% confidence level and 22 degree of freedom, the critical value of t is

-1.72 and the calculated value of t is -3.87, which falls in the critical region.

Hence the hypothesis, relating to respondents opinions on the effectiveness of

State Bank of Pakistans role (guidance, supervisory and regulatory) in ALM ishigh as 4 on the rating scale 5-1, was rejected.




3.4.4. HYPOTHESIS FOUR

The respondents opinions on the effectiveness of support of inter-bank market to

Assets-Liabilities mismatches were measured. The hypothesis developed in this

context is presented below:

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H4O: The degree of support of inter-bank market to Assets-Liabilities

mismatches is at least 4 on the rating scale of 5 to 1.

.H4A: The degree of support of inter-bank market to Assets-Liabilities

mismatches is less than 4 on the rating scale of 5 to 1.

. Statistical representation:

H4O: 4

H4A: < 4

Where H4o represents the term null hypothesis, H4Arepresents the term alternate

hypothesis and is the mean of degree of support of inter-bank market to Assets-

Liabilities mismatches


below:

TABLE-6

`

Support of inter-bank market to Assets-Liabilities mismatches

Mean 3.52

Confidence level 0.95Degree of Freedom 22


S.D 1.33


t-calculated value -1.75


-1.72 and the calculated value of t is 1.75, which falls in the critical region.

Hence the hypothesis, relating to respondents opinions on the effectiveness of

support of inter-bank market to Assets-Liabilities mismatches is high as 4 on the

rating scale of 5-1, was rejected.

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3.4.5. HYPOTHESIS FIVE

The respondents opinions that funding risk can be managed through ALM were

measured. The hypothesis developed in this context is presented below:

H5O: The degree to which funding risk can be managed through ALM is at least

4 on the rating scale of 5 to 1..

H5A: The degree to which funding risk can be managed through ALM is less

than 4 on the rating scale of 5 to 1..


H5O: 4H5A: < 4


hypothesis and is the mean of degree to which the funding risk can be managed

through ALM


below:

TABLE-7

` Funding Risk Management through ALM

Mean 4.35




S.D 0.83t-value to be tested 4.00

t- calculated value 2.01


-1.72 and the calculated value of t is 2.01, which falls in the non-critical region.

Hence the hypothesis, relating to respondents opinions on the degree to which

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funding risk can be managed through ALM is at least 4 on the rating scale 5-1,

was accepted.

3.4.6. HYPOTHESIS SIX

The respondents opinions that interest risk can be managed through ALM were

measured. The hypothesis developed in this context is presented below:

H6O: The degree to which interest risk can be managed through ALM is at least

4 on the rating scale of 5 to 1.

.H6A: The degree to which interest risk can be managed through ALM is less

than 4 on the rating scale of 5 to 1.

.


H6O: 4

H6A: < 4


hypothesis and is the mean of degree to which the interest risk can be managed

through ALM


below:

TABLE-8

` Interest Risk Management through ALM

Mean 4.43

Confidence level 0.95Degree of Freedom 22


S.D 0.79


t-calculated value 2.65

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Hence the hypothesis, relating to respondents opinions on the degree to which

interest risk can be managed through ALM is at least 4 on the rating scale 5-1,

was accepted.

3.4.7. HYPOTHESIS SEVEN

The respondents opinions on the degree of importance given by the management

to ALM were measured. The hypothesis developed in this context is presented

below:

H7O: The importance given by the management to ALM is at least 4 on therating scale of 5 to 1.

.

H7A: The importance given by the management to ALM is less than 4 on therating scale of 5 to 1.


H7O: 4

H7A: < 4


hypothesis and is the mean of degree of importance given by the management

to ALM.


below:

TABLE-9

` Importance given by the Management to ALM.Mean 4.78




S.D 0.52


t-calculated value 7.24

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Hence the hypothesis, relating to respondents opinions on the degree of

importance given by the management to ALM is at least 4 on the rating scale 5-1,

was accepted.

According to the data obtained through questionnaires each financial institution

has a formal set up of Asset Liability Management which is called Asset Liability

Committee (ALCO). It is a critical strategic decision making body in banks. The

CEO of the banks heads about 74% of ALCOs, which proves that management

gives importance to ALM.

4.0.0 Discussion Conclusion

The major findings and recommendation are discussed below:

4.1.0 Conclusion:

According to the data obtained through questionnaires each financial institution

has a formal set up of Asset Liability Management which is called Asset Liability

Committee (ALCO). It is a critical strategic decision making body in banks.

About 74% of ALCOs are headed by the CEO of the banks. The ALCO status is

executive in about 78% of the institutions. 83% ALCOs comprise of five to ten

members. A moderate number of members will be helpful for mutual consensus.

In most of the banks there is no supporting staff attached to ALCO except that of

treasury department or PAs to CEOs. The ALCO conducts its meeting every

month.

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According to the respondents opinion gap with an average of 4.57 is the

important technique employed to ALM followed by combination of both (4.91)

and duration (3.78). Both gap and duration techniques are used in about 78% of

the institutions.






achieving target net income (3.87).

Seven different hypotheses were developed out of which four were rejected and

three were substantiated, the summarized results are presented below:

1.0: The hypothesis relating to respondents opinions of no-significant

difference on different ALM techniques was rejected. At 95% confidence

level and (2, 66) degree of freedom, the F-critical value is 3.14 and the F-

calculated value is 3.28 which falls in the critical region.

2.0: The hypothesis relating to respondents opinions of no-significant

difference on the prime objectives of ALM was rejected. At 95%

confidence level and (2, 66) degree of freedom, the F-critical value is 3.14

and the F- calculated value is 10.24 which falls in critical region.

3.0: The hypothesis, relating to respondents opinions on the effectiveness of

State Bank of Pakistans role (guidance, supervisory and regulatory) in

ALM is high as 4 on the rating scale 5-1, was rejected. At 95% confidence

level and 22 degree of freedom, the critical value of t is -1.72 and the

calculated value of t is -3.87, which falls in the critical region.

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4.0: The hypothesis, relating to respondents opinions on the effectiveness of

support of inter-bank market to Assets-Liabilities mismatches is high as 4

on the rating scale of 5-1, was rejected. At 95% confidence level and 22

degree of freedom, the critical value of t is -1.72 and the calculated value

of t is1.75, which falls in the critical region.

5.0: The hypothesis, relating to respondents opinions on the degree to which

funding risk can be managed through ALM is at least 4 on the rating scale

5-1, was accepted. At 95% confidence level and 22 degree of freedom, the

critical value of t is -1.72 and the calculated value of t is 2.01, which

falls in the non-critical region.

6.0: The hypothesis, relating to respondents opinions on the degree to which

interest risk can be managed through ALM is at least 4 on the rating scale

5-1, was accepted. At 95% confidence level and 22 degree of freedom, the

critical value of t is -1.72 and the calculated value of t is 2.65, which

falls in the non-critical region.

7.0: The hypothesis, relating to respondents opinions on the degree of

importance given by the management to ALM is at least 4 on the rating

scale 5-1, was accepted. At 95% confidence level and 22 degree of

freedom, the critical value of t is -1.72 and the calculated value of t is

7.24, which falls in the non-critical region.

4.2.0 Recommendation:

About 57% of the incumbents obtained occasional training while 39% received no

training about ALM. No doubt that the members of ALCO are professional but

there should be workshop/seminars on the latest research in the field to

disseminate the knowledge among the senior officials to get the anticipated

results. Banks should make efforts to educate their branch managers and other

relevant staff on the need for ALM and the implications of business decisions on

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the risk profile of the bank. A clear communication of the benefits of risk

management would be the first step towards inculcating an organization-wide risk

culture.

The CEO of the banks heads about 74% of ALCOs. Since the Asset Liability

Committee (ALCO) is a critical strategic decision making body it has to be

headed by the CEO of the bank. The ALCO status is executive in about 78% of

the institutions. Keeping in view the strategic position of ALCO the decisions

emanating from it must be complied with. 83% ALCOs comprise of five to ten

members. A moderate number of members will be helpful for mutual consensus.

In most of the banks there is no supporting staff attached to ALCO except that oftreasury department or PAs to CEOs. There should be a separate supporting unit

to assist the committee exclusively and to ensures timely two-way flow of

information from various departments to the ALM desk, as well as reverse

dissemination of information on the business decisions taken by the ALCO to the

relevant line functions. The ALCO conducts its meeting every month. The

committee should meet at fortnightly basis to have a fair grip of the affairs of

asset liability management.



Prudential Regulations. The State Bank of Pakistan has to ensure that in its drive

for profitability and market share, the banking sector does not expose itself to

high levels of risk. Credit risk traditionally has been and still is the biggest risk

faced by this sector and has to be addressed through various regulations and

guidelines from time to time. The recent bank collapse of Mehran Bank Ltd. and

the losses suffered by Bankers Equity Ltd. demonstrate the importance of assets

and liabilities management. The State Bank should make qualitative judgements

whether ALCOs have satisfied their responsibilities in a prudent manner. A

mechanism needs to be built in so as to enable constant monitoring by the State

Bank of the risk parameters and adherence to regulations. The frequency of

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monitoring the risks would be determined keeping in view the availability of data,

volatility of interest and exchange rates and the pace of change of the risk profile

of the banks balance sheet. It is also the State Banks responsibility to ensure that

the bank puts in place software and management systems and expertise to

regularly monitor and report these risks.

The increasing volatility in interest rates as well as foreign exchange rates

together with competition for business on the asset and liabilities sides is a

challenge for the management of banks and financial institutions to up hold

spreads profitability and long term viability. These challenges need to be

addressed not on transitional basis but on permanent footing.

ANNEXURE-I

(POSITION HELD)

Position Frequency Percentage

Top 10 43.48

Middle 12 52.17

Lower 1 4.35

23 100

(Age Group)

Age Group Frequency Percentage

Below 25 0 0.00

25 - 35 9 39.13

36 - 45 9 39.13

46 - 55 2 8.70

55 Plus 3 13.04

23 100.00

100

101 (RANK OF HEAD)

Rank Of Head Frequency Percentage

CEO 17 73.91

SEVP 5 21.74

EVP 1 4.3523 100.00

100 (COMMITTEE MEMBER )

Committee Member Frequency Percentage

Below 5 2 8.70

Between 5-10 19 82.61

Between 10-15 2 8.70

23 100.00

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100 (TRAINING RECEIVED)

Training Received Frequency Percentage

Never 9 39.13

Occasional 13 56.52

Frequently 1 4.35

23 100.00

(STATUS OF ALM)

Status of ALM Frequency Percentage

Advisory 5 21.74

Executive 18 78.26

23 100.00

100 (IMPORTANCE GIVEN BY MANAGEMENT)

Technique Employed Frequency Percentage

Gap 5 21.74

Duration 0 0.00Both 18 78.26

23 100.00

100 (SPREAD )

Spread % Frequency Percentage

1.0 - 2.0 4 17.39

2.1 - 3.0 9 39.13

3.1 - 4.0 10 43.48

23 100.00

100 (SBP GUIDELINE )

SBP GUIDELINE Frequency PercentageYes 15 65.22

No 8 34.78

23 100.00

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ANNEXTURE-II

Assets / Liabilities Management (ALM)Questionnaire

1. Name of Institute ____________________________________________

2. Position Held

1 Top Management 2 Middle Management 3 Lower Management

3. Age Group

1 Below 25 2 Between 25-35 3 Between 36-45

4 Between 46-55 5 55 Plus

4. Gender

1 Male 2 Female

5. Is there any formal setup of assets/liabilities management at your bank?

1 Yes 2 No

6. What is the rank of the head of ALM setup?

1 CEO 2 SEVP 3 EVP

7. How many members comprise ALM Committee?


8. How many Supporting personnel are deputed to ALM setup?


9. How frequently the ALM committee conducts its meetings?

1 Monthly 2 Quarterly 3 Half yearly

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-2-

10. Did you receive training programs regarding ALM?

1 Never 2 Occasional 3 Frequently

11. What is the status of ALM setup in your bank?

1 Advisory 2 Executive

12. Rate the importance given to ALM by the management on rating scale of 5 1, as 5being most and 1 being least.

5 4 3 2 1

13. Which technique is employed to ALM analysis?

14. Rate the importance of technique employed to ALM on rating scale 5 1.

Gap 5 4 3 2 1

Duration 5 4 3 2 1

Both 5 4 3 2 1

15. Rate the support of inter-bank market to asset-liabilities mismatch in your

institution on rating scale 5-1.

5 4 3 2 1

16. Rate the prime objective of ALM on rating scale of 5-1.

Managing liquidity risk 5 4 3 2 1

Capital adequacy 5 4 3 2 1

Achieving target net income 5 4 3 2 1

-3-

1 Gap 2 Duration 3 Both

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17. To what extent funding risk can be managed through ALM, use rating Scale 5 1.

5 4 3 2 1

18. To what extent interest rate risk can be managed through ALM, use rating Scale 51.

5 4 3 2 1

19. What is the percentage gap between market rate of assets and liabilities on your

balance sheet? ___________%

20. Your banks ALM policy is:

1 Proactive 2 Reactive

21. Does your bank adhere to the policies and procedures of ALM?

1 Yes 2 No

22. Has SBP provided any guidelines regarding ALM?

1 Yes 2 No

23. Rate the extent to which SBPs guidelines regarding ALM (if any) satisfy yourrequirements on rating scale 5 1.

5 4 3 2 1

24. Rate the supervisory role played by SBP in assets and liabilities management on

rating scale 51

5 4 3 2 1

25. Rate the regulatory role played by SBP in assets and liabilities management on

rating scale 51.

5 4 3 2 1

ENDNOTES

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1. Joel Bessis, Risk Management Banking, 2nd Edition, John Wiley & Sons, England.

2. Survey on Asset Liability Management Practices of Canadian Insurance Companies,

March 2001, Canadian Institute of Actuaries, Ottawa.

3. A.V. Rajwade, International Banking and Asset Liability Management, The Journalof The Indian Institute of Bankers, India.

4. Dr. Maximillian J. B. Hall, Liability Management in Commercial Banks.

5. Strategic Financial Management by British Professional Publication for ACCA.


7. Strategic Financial Management by British Professional Publication for ACCA.


thesis alm(draft) old

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