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An Internship report Submitted in Partial Fulfillment For The Degree of Masters of Science In Accounting & Finance
AMNA HAMID Session (2008-2010) Department Of Accounting & FinanceKinnaird College for Women, Lahore
EXECUTIVE SUMMARY
THE PURPOSE OF STUDY WAS TO KNOW ABOUT SUMMIT BANK LIMITED AND TO ANALYZE THE FINANCIAL STATEMENT. In this report the Summit Banks history, mission, vision and services as well as management is mentioned. After this the analysis of financial statements is conducted which shows where the Banks is standing. Banking sector of Pakistan has been transformed within a short period of 5 years from a sluggish and Government dominated sector to a much more agile, competitive and profitable industry.Speed and sequencing of banking sector transformation and its role in promoting economic growth is now a leading story of a sector succes.Within Pakistan SBP offers a story of what effective leadership of regulator and change management and corporate governance can achieve and offer.Outside pakistan it is serving to offer rich lessons in what difference governance of regulator can make and how bank restructuring and privatization can change the lanscape of of the industry. Summit Bank Limited started operations in August 2006 and became a profitable entity within one year.AHBL had started off with a high capital base and is positioned to take advantage of the business synergies and complementaries afforded to it by its sponsoring group.The bank has a quality management team, a first class technology platform, and commitment to global practices.Its business strategy is based on the block-building principle wherein profitable niches are tapped progessively. I did my 12 weeks internship in Summit Bank Limited Multan Road Branch.During internship I was rolled over in departments.
Summit Bank made heavy investments towards enhancing its capabilities in the area of automation and technology. It is well positioned to meet client needs, with improved competitive advantage. During my twelve weeks internship in Summit Bank Multan Road Lahore is spend one or two weeks each in following departments: Account opening department Clearing department Trade finance department
Working these departments was a great learning exposure for me. When I conduct financial and trend analysis of Summit Bank I found that its financial position is improving year by year. Comparative study with other banks shows that it is somewhat better then other banks. I concluded that Summit Bank is performing very well.
ACKNOWLEDGEMENT
My creator, my best friend and mentor, who bestowed on me the meaning of life. ALLAH who granted me a wealth of knowledge, love and respect to share with my fellow beings. He gave me courage to pursue my passion against all odds. My Parents whose raising gave me character and a compassionate heart. I pay my thanks to Dr. Nikhat Khan Head of Accounting & Finance Department of Kinnaird College for Women enabled me to complete this assignment. I also pay my gratitude to my teachers and Ms Manal Talat Coordinator, Accounting & Finance whos cooperation on every step of this demanding task is highly appreciatable. Without their cooperation it was not possible to complete this task. My heartily thanks to Staff of Summit Bank limited, Multan Road Branch for their cooperation.
Table of Contents
Description Page No.
Introduction of report------------------------------------------------02 History of the organization------------------------------------------07 Management of the organization------------------------------------21 Field of activities------------------------------------------------------26 Work done by me-----------------------------------------------------78 Financial analysis-----------------------------------------------------85 Dilemmas faced by organization------------------------------------103 Recommendation------------------------------------------------------104 Conclusion-------------------------------------------------------------105 Reference---------------------------------------------------------------106 Annexure---------------------------------------------------------------107
WHAT IS A BANK?
A bank is a financial institution that offers the widest range of financial services. These financial institutions play a vital role throughout the worlds economic system. Caircross defines bank as: A financial intermediary and a dealer to create credits A bank or banker is a dealer in credit or more properly a dealer in money. It is an intermediate party between the borrower and the lender. It borrows from one party and lends to another. The system of common settlement of receipts and payments have been derived from the school of thought of the ancient Romans temple banking, to develop trade and trading relations with each other nations. Banks are of different types. The term Commercial Banking is a throwback of commercial loan theory. The theory holds that the bank assets (except for cash) should consist exclusively of commercial loans that are shortterm loan to businesses to financing the production and transportation of goods. Among the services provided by the commercial banks, two services are very important; Accepting deposit Lending loans Other functions include safekeeping of valuables, financial advising, cash management, offering trust service, selling insurance policies, retirement plans and offering security brokerage services, etc.
Role as a Guarantor
Standing behind their customs to pay off customer debts when those customers are unable to pay (such as by issuing letters of credit to support international trade and to back customer issues of commercial paper), which makes it both easier and cheaper for a banks customers to obtain credit elsewhere in the financial marketplace.
HISTORY OF SUMMIT BANK LIMITED: Arif Habib Group is among the largest most, most innovative and fastest growing business group in Pakistan.In addition to financial services(Asset Management, Brokerage Services, Corporate Finance and Project Advisory, Private Equity and commercial Bank), the group has also interest in fertilizer, cement and real estate. This has made possible by a strong brand franchise built on decades of firstrate services to clients. Managing assets in excess of PRs.37 billion (US$ 617 million), the group holds interests in the securities brokerage, investment and financial advisory, investment management, commercial banking, commodities, private equity, cement and fertilizer industries. The Group takes pride in its orientation towards client service. It believes that its key success factors include continuous investment in staff, systems and capacity building, and its insistence on universal best practices at all times. ARIF HABIB SECURITIES LTD: The holding company o the group. Holds controlling interest in the enterprises listed below. ARIF HABIB LIMITED: The securities brokerage company. Member of all three srock ewchanges and the national Commodities exchange.Manages a number of mutual funds investment plans. The commercial bank with the mission to be The bank for everyone The proposed private equity venture with the objective to develop a vast new
Industry in Pakistan
The upcoming commodities firm at the (DMCC) Arif Habib Limited is one of the fastest growing commercial Banks of the country supported by the strong sponsorship of Arif Habib Group. AHBL started off with a high capital base and is positioned to take advantage of the business synergies and complementaries afforded to it by its sponsorship group. The bank has a quality management team, a first-class technology platform, and commitment to global practices. Its business strategy is based on the blockbuilding principle wherein profitable niches are tapped progressively. Progressively. The Bank has an Authorized Share Capital of 6.0 Billion and Paid-up Share Capital of 5.0 Billion. The management intends to double it in a short period by injection of fresh capital which will strengthen the bank further. The bank has a network of 35 Branches/Sub Branches.the branch network covers Sindh, Punjab, NWFP and Azad Jammu and Kashmir. The bank plans to open further offices to better cover all four provinces within a short time span. All branches are Real Time Online providing customers the facility to deposit at or without incurring any additional charges making banking with us a faster, relable and a convinient experience. OBJECTIVE: To be a Universal Bank in terms for providing products and services in all key segments of Banking.
BUSINESS APPROACH AND CORE VALUES: It is their business objective to be a Universal Bank in terms of providing products and services in all key segments of banking i.e. Corporate , Wealth Management, Commercial Mid Market/ SMEs and Consumer Banking. Branch expansion plan is carried out to have a network of 100 Branches by 2011.The projected Branch network is based on centralized processing centre (factory and boutique concept) with secure and real time IT capability. Hence the delivery Channel configuration is dependent upon the potential in each location in terms of size, Product Delivery Template and Head count for each Branch. In terms of Statuary capital Requirement, they are determined to meet and in fact exceed the Minimum Capital Requirement-MCR benchmark via injection f capital and retention of retained earnings. Mandatory allocation of 20% of after tax profit as Free Reserves until such time our free reserves are equal to MCR will further strengthen their equity base. Business and branch Network: Summit bank is currently operating with 40 branches throughout Pakistan (breakup is given in coming part).The banks strategy is to establish a network of 100 branches during the next three to five years. Several new sites have already been identified at strategic locations. All branches are online, equipped with state of the art technology capable of providing Real Time Banking services to the clients. A professional team has been developed to meet the expectations of demanding customers. This is line with the banks strategy to build infrastructure of international standard to attract and retain a sizeable client base. The growth in the economy provided them numerous opportunities and they remained selective pursuing business through which strike a balance between growths and prudent like risk taking and diversification. Summit banks performance in 2007 was a result of the pragmatic and will planned efforts of the
management to attain present strategic goals aimed at providing quality services to their customers and at the same time enhance the shareholders value. Despite the high growth level, they continued to ensure the high customer satisfaction and service quality levels are maintained and they are appreciative of the trust and confidence that their customers place in them. Management firmly believe that the success of the Bank lies in expanding there way of financial services and seamlessly delivering innovative solutions to meet customers requirements across all the platforms.Accordingly, they work closely with their customers in order to understand their business needs and to address them with high quality tailored financial products so that they are viewed as a strategic partner in the business growth. Management is pleased and encouraged to receive a very favourable response to their endeavours from their respective customers. In all, management believes that the economic outlook for the coming year is bright with the right mix of products and services and their commited workforce; they can deliver yet another superior performance next year.Bank will continue to build infrastructure, leverage the cutting edge technology in plan introduce products and services , manage risk efficiently and effectively and generate alternative revenue streams.Management has ambitious plans for the coming year and they are all ready to make it happen to the benefit of their stakeholders Banks focus and energy for the coming year evolve around customer base and look to expand network of branches throughout the country.Summit Bank has a network of 35 branches/Sub branches in major districts of Pakistan.The branch network covers Sindh,Punjb,NWFP, and Azad Jammu and Kashmir and details are as under:
CORPORATE BANKING
Current Accounts (Pak Rupees) Foreign Currency Accounts
CONSUMER BANKING
Current Account (Pak Rupees) PLS Account Saving Accounts Term Certificates Saving Deposit Lockers
CONSUMER FINANCE
Current Account (Pak Rupees) Personal Loans Personal accidental insurance ATM withdrawl insuranse Home finance Foreign Currency Account
Summit Bank is committed to the personal welfare and professional development of all its team members. It realizes that proper training of human resource is essential, not only for a more productive and satisfied work force but also for a homogeneous corporate culture. The bank continues to follow its strategy of hiring batches of young and energetic management trainees who are sent to a Training and Development Center for training in all areas of banking. The Training and Development Center is a state of the art facility with an impressive faculty. At the same time short courses are continually conducted for other team members to only enhance their skill levels but also increase their performance potential. Lately, Surroor investments Ltd(SIL) have taken over Summit Bank and the board of directors of the bank has been changed.SIL has 60 percent shares of Summit bank limited. In addition, SIL has also signed share purchase agreements with the principal sponsors of My Bank Ltd. And Atlas Bank Ltd, respectively, and made down payment in each case. Acquisition of My Bank has been completed on August,18 2010 and after merging with Atlas Bank it will have a branches over 160 and total assets of about Rs.100 billion. The name of the new bank is Summit Bank Limited.
CREDIT RATING
The Summit Banks Medium to long term rating increased to A and A-2 in the short term. These ratings have been assigned by PACRA, Pakistans Leading rating agency. These rating denote better risk absorption capacity Stemming from enhanced equity as well as well-maintained credit portfolio.
RATING DEFINITIONS:
A1+: Obligations supported by the highest capacity for timely repayment.
AA- VERY HIGH CREDIT QUALITY: AA ratings denote a very low expectation of credit risk, the capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. Organizational Structure Head Office: Karachi DECISION MAKING The branch follows centralized patterns as all approvals are given by centralized authority except for a few cases. Top management had set the procedures and regulations and now the employee have to follow those regulations.
CULTURE
The bank has a bureaucratic culture. All the tasks performed are routine based and hardly any change is done in procedures. The bank has stories and myths told through bi-annual news letter. Interior of every branch is same carrying a very corporate look.
VISION
We are committed to be recognized as preferred supplier of financial services to the markets we serve.
MISSION
Our mission is to differentiate ourselves as an institution built on Trust, Integrity, Good Governance, and Commitment to deliver value to all stakeholders i.e. customers, creditors, employees, investors, and community at large. Reach out and provide financial services to under-served and unserved customer segment.
CHAIRMANS MESSAGE Our Core philosophy of honesty, transparency in customer dealings Product innovation, excellence in customer service and our commitment to be a responsible corporate citizen. H.E.Sheikh Hamdan Bin Mubarak Al Nahayan
MANAGEMENT OF ORGANIZATION:
HUSAIN LAWAI PRESIDENT AND CEO SYED MOHAMMAD ANWAR LUTFULLAH HEAD OF OPERATIONS & INFORMATION TECHNOLOGY MOHAMMAD ZAHIR ESMAIL HEAD OF RETAIL/BRANCH BANKING, CONSUMER, SME, COMMERCIAL BANKING, CORPORATE AND INVESTMENT BANKING DIVISIONS ASIF QASIM HEAD OF TREASURY DIVISION SYED ASIF ALI HEAD OF RISK MANAGEMENT DIVISION & HEAD OF CREDIT AND CREDIT ADMINISTRATION & CAD PERVEZ MOBIN HEAD OF HUMAN RESOURCE MANAGEMENT, ADMINISTRATION & BRANCH EXPANSION GULRAYS KHAN HEAD OF CO-ORDINATION AND CONTROL DIVISION MUHAMMAD AMIN BHOORI CFO & COMPANY SECRETARY AZIZ MORRIS HEAD OF INTERNAL AUDIT DIVISION
Valid city markets have their unusual importance regarding import business. They are known as business and commercial hub of Lahore. Major commoditieis and Industrial raw materials are being imported in these markets. Major industrials are routing prefer to route their business through the banks situated in these areas. These markets are highly profitable and important for banking sector.
BRANCH MANAGER OMER KHAN MANAGER OPERATIONS AHMER HAMEED RELATIONSHIP MANAGER CREDITS AHMAD AWAIS CUSTOMER RELATION OFFICER ZAMURAD BUTT SARA AHMAD KHAWAR IQBAL RAZA BUSINESS DEVELOPMENT OFFICER FARHAT QAYUM PIRACHA CASH OFFICER MUHAMMAD USMAN ZUBAIR NAWAZ
IT Officer
Currency in which the account is to be maintained/ operated. The currencies include Pakistani Rupee U.S. dollar Pound sterling Euro JPY
The client should inform weather the zakat to be deducted or not . The client is supposed to provide the information whether the account would be maintained singly (only one person operates the account) or jointly (two or more than two persons maintain the account).
Name of the person who intends to operate the account is to be provided. Provision of either Fathers or the Husbands name is also a pre-requisite.
Occupation of the prospective account holder is also to be written. Name and complete address of the employer is to be written. Nationality is to be provided. Country of residence is to be specified. Telephone number is must. The national identity card, of course is an integral part of the account opening application. Passport number, if the prospective client has got one. Another requirement is the date and place of issue of the national identity card. The prospective client also has to provide the name, address and relationship of any one of his/her close relatives in order to facilitate the communication problem. The clients often have a misconception that there next of kin might, if some peculiar circumstances arise, get the profit out of his account but this is not the case. The name and address of a close relative is only recorded in order to undertake necessary communication when needed.
In case of a business concern there are two more things that are to be provided by the business.
TYPES OF ORGANIZATION
The various types of organization which are present in Pakistan at present are: date of Incorporation, and place of incorporation, national tax number, telephone number and fax number. The choice of either the deduction or non-deduction of Zakat also needs to be highlighted. Zakat is deducted out of a Profit and Loss sharing account and not out of any account maintained in any other currency. Moreover exemption from Zakat would only be granted if proper proof of exemption under a law presently enforced in Pakistan is provided. Details of other account/s maintained with other branches of Summit Bank or other banks are also to be given. The name, signatures, and account number of the introducer is a very essential prerequisite in order to facilitate the opening of an account. The introducer is a person who already has an account in the same branch. It can also be a person from the staff of Limited company Public Private Partnership Association/Club/Society Sole-Proprietorship
The business concerns also have to give their full name, brief description of the business,
the branch as well. Then the client also has to put forth the instructions regarding as to whether the account would be maintained on the basis of either or survivor, jointly or any one of us. After this three signatures of the client are needed and if it is an account of a business concern then the rubber stamp of the company/organization is also needed below the three signatures. In case of a joint account all the persons unanimously might give the right to operate the account to one person. In case of account opened by a business concern there are some documents that are needed to be attached with the account opening form. The details of these documents are given below.
Limited Company:
Copy of certificate of incorporation Memorandum of Association List of Directors Copy of board resolution Certificate of Commencement of Business Copies of NIC of Directors Latest copy of Form-29
Partnership:
Partnership deed certified copy NIC photocopies of all partners. Partnership mandate for account signed by all the partners A letter duly signed by all the partners containing the operating instructions of the account also has to be taken
Club/Society/Association:
Copy of rules/ by-laws Copy of registration (if applicable) List of Executive member management committee/management board etc
There are two things that always accompany an account opening form; Signature Specimen Card. Cheques Book Requisition
cheques is received for a payment from the client, the signature on the cheques are verified by comparing them with the S.S. Card.
Recording in Computer:
After opening of account, all information regarding the account is entered into the computer. Currently, a program named hplus is being used for this purpose. Record of all the transactions regarding the account of a customer is kept updated in the computer.
right along side the original account opening form. The form has to be pasted with the original account opening form even if the account was opened a decade ago. In the computer as well all the entries and records related to that particular account are permanently deleted by using the close account option.
Issuance Requisition
This requisition is used by the staff to order for any thing (e.g. stationary) they need. They write the type and quantity of the stationary they need, get it signed by the Manager Operations, give it to the person in-charge of issuance of stationary who on receipt of this requisition (duly signed) issues the stationary.
The depositor uses depositor slip/vouchers for depositing the amount. Client fills these vouchers, fulfilling all requirements.
Encashment of Cheques
Cheques encashment is made in four steps Receiving of cheques Verification of signatures Computer terminal process Payment of cash
CLEARING DEPARTMENT
One of the basic economic functions of banks is to receive deposits and to honor cheques drawn upon them. So, cheques are a most commonly used instrument for making payments by account holders. Now the question arises that how these cheques & other negotiable instruments drawn on one bank are deposited in other banks and money is transferred from one bank to another. Clearing House has provided this facility. Clearing house facilitates different banks to get their cheques drawn upon other banks to be cleared. Cheques lodged in clearing constitute two types of clearing Outward Clearing Inward Clearing
Outward Clearing
When cheques and other negotiable instruments drawn upon other banks like MCB, ABN-AMRO of the same city (as Lahore) are presented in Summit Bank Limited to deposit them in the respective payees accounts, these instruments are lodged in outward clearing of summit Bank limited. When the cheques are presented in Summit Bank to be deposited in their respective payees accounts, different stamps are put on cheques before their lodgment in outward clearing.
hands. If, crossed cheques is lost or stolen, there is no risk of wrong payment. So it is an effective means of minimizing the risk of loss or forgery.
Clearing Stamp
After the cheques have been crossed specially, clearing stamp is put on the cheques and other instruments, with the following days date, as these cheques would have to be presented in their concerned drawee banks on the subsequent day.
Endorsement Stamp
It means anything written or printed upon the back of an instrument. So, at the end, the cheques are endorsed in full (endorsed specially) by putting the stamp with words describing Payees account Credited in Summit Bank Limited , Multan Road Branch, Lahore. After putting these three stamps on cheques & other negotiable instruments, they are sent to NIFT (National Institutional Facilitation Authority) with Add List. NIFT after segregating the cheques of different banks delivers them to their concerned banks, which constitute the inward clearing for those (drawee) banks.
Inward Clearing
Cheques and other negotiable instruments (PO, DD etc.) drawn on Summit Bank Limited, Lahore, sent by other banks, constitutes the inward clearing of Summit Bank. After having all the stamps and dates of cheques confirmed, the concerned drawers accounts are debited (in Summit Bank Limited) and main branchs account is credited by the total amount.
Collection
When cheques and other negotiable instruments drawn upon other banks outside the city (Lahore) are presented in Summit Bank Limited, Multan Road Branch, Lahore to deposit in payees accounts, then instead of clearing, these instruments are lodged in collection and constitute outward bills for collection. Cheques of cities, where Summit
Bank Limited branch exists (e.g. Islamabad, Faisalabad etc.) are sent to that branch where these cheques are lodged in is outward clearing. Otherwise, they are directly sent to the drawee bank. Postage & other charges are deducted on account of payee according to Schedule of Charges.
Accounts
It is probably the only department in the entire bank where there is almost no direct customer dealing. Two types of accounts are there which are as follows:
Inter-Branch Accounts
Like other banks, Summit Bank Limited has a network of branches all over the country. These branches in different cities are interlinked with each other through their correspondent accounts in other branches. So, all payments from one branch to another branch (in the same city or another) are made by debiting and crediting these inter-branch accounts.
Inter-Bank Accounts
Like inter-branch accounts of a bank, different banks have correspondent accounts with each other. Main branches of banks in a city maintain these inter-bank accounts. So, money is transferred from one branch of a bank to another banks branch through these inter-bank and inter-branch accounts. The accounts department deals with various routine activities for the bank. The main activities performed by it are Budgeting Reporting Maintenance & depreciation of fixed assets Miscellaneous functions
Budgeting
Accounts department of bank, for a year makes budget of branch. Fiscal year of bank starts from January 01 and ends on December 31. The accounts department starts preparing budget from October for the next year.
Procedure
The budget is based on forecasting through past performance First of all, the bank reviews what are its sources of funds and where it can utilize these funds? The main sources of the bank are deposits, borrowing from other banks, borrowing from SBP, banks paid-up capital, its reserve fund, profit generated by the bank. The budget is submitted to the head office for recommendation and modification. Monthly budget meeting is held by branch managers to analyze the monthly performance. Budget and actual performances are employed and variance is computed for analysis. The management will then drive the reasons for the variance and take remedial measures to achieve the targets.
Reporting
The accounts department, in the form of reports, clubs the details of various departments together. Each and every minute detail is provided in weekly, monthly and annual reports. The reports are submitted to head office, SBP and to the government. The accounts department prepares many reports, of which the most common are Statement Of Affairs Income & Expenditure Foreign Currency Report Outstand Receipt Report
Miscellaneous Functions
The accounts department also performs some other miscellaneous functions like Reconciliation Statements Closing Entries Foreign Exchange Forward Transaction Reconciliation statements The bank prepares reconciliation statement with head office and SBP
Head Office
Reconciliation with head office is done in reconciliation department. The branches send their reports to the head office. They check the posting of all the entries if outstanding, which has not been posted by branch or head office. The reconciliation is carried out in the head office and accounts department handles quarries.
Closing Entries
Accounts department also passes the closing entries on monthly, 6 monthly and yearly bases to calculate the profit and analyze the overall performance for a certain period.
Statements
The predominant functions performed by the accounts department can be categorized into two broad categories. Daily Activity Checking Report Generation
Report Generation
The exact number of reports generated by the accounts department on a daily, weekly, monthly, bi-yearly and yearly basis is somewhere in the bracket of 500. It is neither necessary nor possible to get acquainted by all of these reports in a short period of time.
Some of the common reports are Daily Advance And Deposit Position Daily Exchange Position Daily Fund Management Closing Reports Monthly Assets & Liabilities Monthly Budget Review Report Monthly Monitory Statement Monthly Performance Review Report Schedule Of Maturity Distribution
From these statements, five reports carry extreme importance. The five reports are Daily position of advances and deposits Statement of affairs Daily exchange position report Fixed assets statement Month review of performance. The Local Remittances Department
Besides cheques (the primary notes of exchange in a bank), banks also handle Promissory Note, Bills of Exchange, Bank Drafts, Pay Orders, Traveler Cheques, Pay Slips, Call Deposit Receipts; as negotiable instruments.
Making of a PO:
When a person requires a Pay Order (made by Summit Bank Limited, Lahore), he is asked to complete the prescribed application form in which the amount of pay order is to be stated. Certain amount of commission and advance tax is charged on issuance of pay order. After having the total amount deposited in the bank (in cash or through cheques, in case of account holder), pay order is issued in favor of the payee. Like cheques, when pay orders issued by Bank, are presented in other banks to get them deposited in the payees accounts, they constitute the outward clearing for those banks and inward clearing for Summit Bank Limited, Multan Road Branch Lahore.
Making of a DD:
Suppose a customer requests his Summit Bank Limited, Multan Road Branch Lahore to provide him a DD made on his account for a particular city like Islamabad. Then, after having the total amount to be deposited with application form, demand draft is issued in favor of the specified person in Islamabad (supposed) and is drawn on Summit Bank Limited, Islamabad Branch. So, when this demand draft is presented by payee in any bank, it constitutes the inward clearing of Summit Bank Limited, Islamabad Branch.
Cancellation of PO & DD
After issuance of Pay Order, Demand Draft by Summit Bank Limited, Multan Road Branch, Lahore, if any one of these has to be cancelled by the customer, it is returned in
the bank. Then, after deducting the cancellation charges of Rs.100, the remaining (net) amount is paid to the customer through Cash Payment Voucher.
TRADE FINANCE
Trade deals with entry / departure of goods into / from one country to another country. International trade basically is a consequence of an agreement between buyer and a seller separated by geographical boundaries. To ensure secured transfer of goods to the right buyer and a right seller, the services of the Financial Institutions are of great importance. In this relation the banks have proved to be not only dealers but also the leaders.
Trade finance
The term Trade Finance encompasses all banking transactions that are embarked upon in relation to exports and imports. Now-a-days banks have become a compulsory assistant to almost all the International Trade transactions. When trade is taking place between the representatives of two countries (exporter and importer), the exporter involves his bank (the Advising Bank) in the transaction, as he wants to feel secure regarding timely payment of his remuneration in the required currency. On the other hand the importer involves his bank (the Issuing Bank), in order to get a sense of security regarding timely supply of the required product, in the required manner. The Trade Finance Department has two predominant dimensions namely Exports and Imports. Thus there are two processes that take place in international trade i.e. the buying process (the importer purchases the products from the exporter) and the selling process (the exporter sells the goods to the importer).
goods and services. However, the objective remains the same for each purchase, to get the best price with the best delivery and with the best quality.
The exporter and the importer might decide to carry on trade without the
IMPORTS DEPARTMENT
In the common words, import means bringing commodities into a country from outside by sea or air. Stated differently, whenever there is a need of any commodity in a country and if that commodity is not available the need for import arises.
Requirements to be fulfilled
When a person wants to import, he must have to register his name and his companys name. The registration was previously granted by chief controller imports and exports but now the Export Promotion Bureau of Pakistan performs this task. For Import Registration, the following basic documents are required: Questionnaire duly filled in National Identity Card (attested copy) Membership Certificate of Chamber of Commerce
National Tax Number / Certificate Bank Certificate Affidavit in case of Female Proprietor / Partner / Director Sales Tax Registration
The fulfillment of these requirements will give the registration to the importer and after that he can open an L/C with any bank and can import anything.
confirming bank and seller. This L/C gives more security to exporter as compared to revocable L/C. In Pakistan, all banks including Bank Alfalah Limited-IBD are permitted to open irrevocable L/Cs only.
Sight L/C
If the beneficiary of a credit is to obtain the payment immediately on presentation of stipulated documents, it is sight credit. In this form of credit, the exporter draws a sight or demand draft payable at the counters of the advising bank or the bank specified in the letter of credit. The draft is paid on presentation if all the other terms of the credit have been complied with. In this form of letter of credit the beneficiary or exporter gets the credit from advising bank immediately after completing all the requirements. Banks usually deal in this type of letter of credit more because there is lesser risk for both the exporter and the bank. Bank gets payment from importer before giving him the possession of documents. In other words, we can say in this type of L/C when importer sights the document he makes the payment to the issuing bank.
Usance L/C
When a credit is to be paid upon the maturity of a bill of exchange drawn under the terms of the credit, it is called an Acceptance Credit or Usance Credit or Terms credit. In this type of letter of credit the payment will be made on maturity of a bill of exchange. This maturity or tenor of this type of letter of credit varies e.g. 30, 60, 90, 120 days. Exporter does not get payment on the receipt of documents rather he gets the acceptance on bill exchange by importer that payment will be made on maturity.
CIF & C I
When goods are shipped on CIF and C I (Commission and Interest) basis, it means the price quoted includes cost, freight, insurance, commission and interest.
F O B (Freight on Board)
When freight of goods shipped, is not realized in advance by shipping company, it is
then to be paid by the importer on delivery of goods at the port of destination. Documents required for opening letter of credit (L / c)
For getting an L/C issued, the importer has to submit the following documents
Performa Invoice:
The foremost document required by the bank for establishment of an L/C is the Performa Invoice (signed by both the importer & exporter). The exporter issues it. It comprises all the terms and a condition that has to be mentioned on L/C. Performa Invoice constitutes the basis of the whole transaction.
Indent:
When the importer and exporter dont have direct relations and are connected to each
other through an intermediary, called Indenter, then he (indenter) issues an indent form containing all terms and conditions (like Performa Invoice).
Annexure B:
This is a form in triplicate and must be filled by the importer. The HS (Harmonized Code) or ITC (International Trade Control) code of the imported goods must be mentioned. Every commodity has a different universally applicable code. The banker must check before opening the L/C that the HS code given by the importer is correct.
Form I:
This form is also a part of the SBPs efforts to check all transactions in which foreign exchange is involved. The form I also contains all the information about the transaction along with the importers import registration number.
Insurance:
It is necessary for the importer to get the consignment insured and provide proof of having done so.
Promissory Note
It is an unconditional written promise signed by the maker, to pay on demand or at a fixed or determinable future time, a certain sum of money to the specified person or to the bearer of the instrument. Therefore, to make the payment (by importer) secure, bank obtains a promissory note signed by the importer, along with the above stated documents.
L/C Margin:
It is a certain percentage of the value of L/C that is retained by the bank as security.
Type of Credit:
The heading of a credit indicates the type of credit and its purpose. For this purpose, every bank has prescribed its own letter of credit forms.
Value of Credit:
The fixed amount to which the bank is liable is specially mentioned in the letter of credit.
Specifications of Documents:
The documents required are specially mentioned in the credit.
Description of Goods:
A brief description of goods that are required by the importer is given.
Collection of Charges:
The buyer and seller should have been decided as to which party would bear the expenses because of interest/ markup and other bank charges. The credit specifies the party that would bear the charges.
Validity Period:
This is a very important clause and because every credit indicates an expiry date or the validity period. This period is so fixed to provide sufficient time to complete the transaction.
Reimbursement Clause:
This clause indicates the method for obtaining the reimbursement by the foreign
Shipping Marks:
If the importer wants that the goods should be identifiable with some special packing marks, it should be so specified in the credit. This clause is not found in all the credits.
Advising Bank:
The bank that advises the L/C i.e., the bank that physically delivers the L/C to the exporter on the behalf of the issuing bank. It is a correspondent bank of the issuing bank situated in the beneficiarys country or it can also be a branch of issuing bank.
Negotiating Bank:
The negotiating bank receives the documents and delivers to exporter. When the exporter completes all the documents, after making shipment, the negotiating bank sends them to the issuing bank.
Reimbursement Bank:
According to ICC Rules, Reimbursement against foreign currency has to be made through the country originating that currency. Therefore, for dollar transactions, reimbursement has to be made (received) through the banks situated in USA. When issuing bank dont have any branch in USA (for dollar payments), Summit Bankk has Nostro Account, that bank is known as Reimbursement Bank or Drawee Bank. It is a correspondent bank of issuing bank and makes payment by debiting the nostro account.
worldwide, for advising its L/Cs. For example, if an L/C has to be advised in Australia, it can be advised through ABN AMRO or Standard Chartered Bank, Australia.
Bill of exchange
A Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money on demand or at a future determinable period, to a certain person or to the bearer of the instrument. It is drawn by the exporter through negotiating bank (drawer) and is an order for the importer or issuing bank (Drawee; Summit Bank) to pay a specified amount. In case of sight bill (for sight L/C), it has to be paid immediately.
Commercial Invoice
Commercial Invoice prepared by the exporter signifies the name and address of importer, invoice price, invoice number and all the specifications of goods being imported.
Packing List
It is prepared by the exporter to show that the consignment is in accordance with the order of importer.
Shipment Advice
Shipment Advice is issued for the insurance company to provide every information and specifications regarding shipment.
Certificate of Origin
This document is a certification for the origin of goods. It certifies that the goods being imported (or exported) have the origin of a specific country.
Phytosanitary Certificate
The exporter in case of commodities, like medicinal herbs, sends this certificate. It certifies that the use of goods is not harmful.
Covering Schedule
Along with the above stated documents, the negotiating bank sends its Covering Schedule on which the instructions regarding the whole transaction are prescribed. It also mentions the number of each document sent by the exporter.
Scrutiny of documents
After receiving all the documents, next and the most important step is to scrutinize the
documents. For this purpose, a list called Check List of Import Documents is prepared. All the documents must be in accordance with the requirements of L/C. In case of any deviation the documents can be rejected and payment can be stopped. Negotiating bank must be intimated about any discrepancy found, with in 7 days.
Retirement of Documents
The whole transaction of foreign trade in which an L/C is involved, completes with the retirement of documents. The documents that are first lodged in PAD are retired when the importer pays the total amount (payable). This amount includes the PAD plus the mark-up charged on PAD and other charges (mentioned on cost memo). Upon receipt of payment, when the documents are retired, they are given to the importer and he gets the consignment cleared from custom authorities (by submitting the Bill of Entry). This completes the whole transaction of Foreign Trade, carried out through a Letter of Credit.
A person cannot export any good unless he files a Form E (E stands for exports) with his application to the bank. The person must have the Sales Tax Registration Certificate.
Letter Of Credit
In simple terms a letter of credits is defined as a banks written undertaking given to the exporter for payment of a certain sum of money on behalf of the importer, provided the exporter tenders to the bank, or its overseas agents, the specified documents within a specified period in accordance with the terms of the undertaking. Documentary credits as they are called, L/Cs have been discussed in detail in the imports section.
Contract
A contract is defined as an agreement, certain and performable, made by competent parties, with their free consent for the lawful object, and lawful consideration, and if not expressly declared void. Another way to define contract is that it is a Mutual understanding between the buyer and the seller without the involvement of the L/C. involvement of a letter of credit. In this situation, trade is carried out based on a mutual contract between them.
exchange control mechanism of the State Bank of Pakistan. When an exporter receives an L/C, the next job is to get an E-form from the bank. After filling in the complete information about the goods to be exported, the exporter Brings the E-form to the bank for verification. The bank verifies the contents in accordance with the documents and not by physical checking. The E-form is a quadruplicate and contains the following information. The Commodity The quantity The price The port of shipment The port of destination Terms of shipment Export registration number
After getting the E-form verified from bank, the exporter starts preparing for his shipment. As the banks only deal in documents, so in order to receive the payment for his good to be exported, the exporter has to send certain documents to the L/C issuing bank via negotiating bank. These documents have already been discussed in import section. A very important step in the export process is to scrutinize the documents, before sending them to the issuing bank. It requires utmost care and attention of the bank officer. When the documents are presented in the bank, they are always scrutinized and they must be in accordance with the requirements stipulated on the L/C. Any deviation could result in rejecting the documents by the importer, hence causing loss to the exporter or even to the bank if the documents are to be negotiated.
WORK DONE BY ME
This section is based on my observation and experience and rotation during my internship at the Multan Road Branch of Summit Bank limited,Lahore. Some of the jobs that I performed or assisted in performing or overlooked in the various departments were;
I worked with Miss Sara in this department. She was often busy dealing with customers as in this department lots of customers use to come daily. But still she told me a lot about account opening procedure. She also briefed me how to use bank smart in account opening department. She use to be very polite with customers as his job requires this. She use to manage relationships with customers by providing them better services. Therefore, customers are pleased. In this department I worked for 15 days and in this span of time I learned different kind of accounts offered by bank, stamping leafs, entering of books in cheques book issue book and entries in system.
Then she told me about the operations of Accounts department. I learned weekly, monthly, bi-annually, annually and quarterly reports that are sent to main branch and head office and even to SBP. Most of these are prepared by system automatically. Two main functions performed by this department are daily activity checking, report generation. Main reports prepared are; Daily Advance And Deposit Position Daily Exchange Position Daily Fund Management Closing Reports
Monthly Budget Review Report Monthly Monitory Statement Monthly Performance Review Report Next she told me about remittances. Here I gained knowledge about inward clearing and outward clearing. She told me about following things; Demand draft (D.D) Pay order (P.O) Local remittances and outgoing remittances Schedule of bank charges for remittances
Interpretation
The return on equity measures return to both common and preferred stock holders. This ratio has increasing trend in this case, actually the purpose of calculating this ratio is to measure rate of return to the stock holders, and its increasing trend shows that the return rate is satisfactory. We see slightly increasing trend in this ratio that is from 20.37 to 25.72 from the year 2006 to 2007.
Interpretation
Capital Adequacy is the risk weighted assets to capital, calculated in accordance with State Banks guidelines on capital adequacy. This ratio compares the amount of eligible capital with the total of risk weighted assets (RWAs). Bank Alfalah monitors and reports its capital ratios under SBP rules which ultimately determines the regulatory capital required to be maintained by banks and DFIs. In case of this Bank, ratio has been increased from 2006 to 2007, which shows that the Bank Alfalah has eligible amount of capital as compared with total of risk weighted assets.
Interpretation This is the most important ratio of the entire profitability ratios. The return on assets is the real determinant of the profit. The ratio shows that company has increase in this ratio, but this increase is very nominal i.e. 0.67 to 1.04. Apparently it seems that company profitability increases. In this ratio apparently it seems that banks return on asset increases but it doesnt mean bank faces losses but it shows the loopholes in management. As assets and sales both increases in the year of 2007 as compare to 2006, banks management couldnt manage this increasing trend properly in 2006 but they manage increase in sales in 2007. Management fails to give as much increase in sale in 2006 as the ratio seems in the increase in assets but they stable their sales in 2007.
Interpretation
Earning per share is the amount of income earned on a share of common stock during an accounting period. Earning per share varies from the banks point of view because it receives much attention from financial community like investors and potential investors. Therefore banks annual report supposed to provide full report of earning per share. This ratio increases from the year 2006 to 2007, it directly mean banks earning per share increase, which is a very healthy sign for the company. To attract the investors company should be increase in this ratio.
Interpretation This stock holder return in terms of cash dividend shows that in year 2006 and 2007 the bank fails to give any cash dividend to its stock holders.
Interpretation
This stock holder return in terms of stock dividend shows that in 2006 the share holders has given 33.33% stock dividend but in year 2007 the bank give stock dividend of 30.00% to its stock holders which is less as compare to 2007. It is good sign to give stock dividend to share holders.
7. Shareholders equity
Shareholders Equity Years Amount[Millions] 2006 10573 2007 13767
Interpretation As compare to year 2006, in year 2007 the share holders equity increase which means that the investment in the bank increase, the increase in the number of investors increase their portion of equity in the bank.
Interpretation
An advance to deposits is also liquidity ratio. It shows the relationship and variation between the advances and the deposits. The trend is declining in 2006 but in 2007 it increases significantly. Mostly bank advances the loan on the basis of fixed and saving deposits. We see that in 2007 bank increase its advances significantly as compare to 2006, the main reason of this significant increase is that banks fixed deposits and saving deposits in 2007.
TREND ANALYSIS
During a year the banks profit before provision and tax stood at Rs. 6906 million compared to Rs. 3264 million the previous year registering an increase of 53%. This increase in profit is primarily attributable to overall increase in business volumes.
The above graph is about the values of deposits, advances, imports and exports in 2006 and 2007. There are increase in the value of deposits, advances, imports and exports in 2007 as compared to 2006. Increase in deposits exports are good for bank but increase in imports are not good.
Weaknesses
As I have thoroughly study the Banks management and financial there is no such major weak point but one point is that there liabilities are increasing from year to year and in 2005 it become very high as compared to the previous year. Another is Bank is decreasing which in my opinion is a weak point. Equity to total assets is decreasing from previous year.
Opportunities
As far as opportunities are concerned BAL-IBD is growing day by day and its profits are increasing it has an opportunity to develop more branches to expand the business. And there is acceptance of its services so Bank has to increase its services to meet its customers needs.
Threats
There is an increase in the debts of Bank so this can be a threat for the Bank and they should look upon this. Another is that debt ratios are increasing due to increase in debts and other banks have improved ratios so they have to look upon it.
1. BAL-IBD area location is not appropriate. It is far away from the main city. 2. BAL-IBD building is also not properly build and it doesnt meet the needs of the
Bank
3. Software security is not good. It is open to all restriction. Internal control is not
efficient. Use of Flash drive can cause virus in the system.
RECOMMENDATION
o ATM Machine is not working in the bank. ATM is need of the era. o BAL-IBD branch must be relocated. o There must be a training before the employees start working in bank. o Software need a greater security. o There is an ambiguous authority to utilize the software. o Account opening dept, has the authority to give reports and show customer o balance but the same function is also performed by foreign trade, credit and other depts. It shows that they have ambiguity in utilizing the software as it is open to all. o Marketing of Islamic banking products like:- Musharka etc. o Proper back up should be made available for existing employees. o In networking, no input control on data. o Floppy disk, USB should not be allowed, Uninstalled in systems. o Tests of employees should be conducted on Islamic banking. So that o employees should become aware of Islamic terms and their meanings. o IT professional must be hire. o Human Resource officer should be hired.
CONCLUSION
As I have studied and analyzed BAL-IBD I found out that this a good bank as its working, management is concerned. First of all the reason of this is that there is no directive style in the management of Bank Alfalah and which shows that there is decentralization in the Bank and every branch manager can take decision according to the situation. Bank Alfalah is providing their customers with wide range of services including online banking, phone banking and some of their new products in the pipeline, include ATM network Royal .etc shows that Bank Alfalah is taking good care of their customers. Bank Alfalah made heavy investments, towards enhancing its capabilities in the area of automation and technology. Bank Alfalah is well positioned to meet client needs, with improved competitive advantage. And from the financial and when I conduct comparative analysis with other banks I found that it is somewhat better than others, and from the analysis of previous year I concluded that it is improving and in 2007 profits are more than the previous year. So I can say that Bank Alfalah is performing very well.
Websites
www.summitbank.com.pk
ANNEXURE