Credit Risk Management of Social Islami Bank Limited

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Research methodology of the study

1.0 Sources of Information

Information collected to furnish this report is both from
primary and secondary in nature. The secondary information was collected from
the different publication, and books. For collecting books and periodicals we have
used the following sources:

1.1 Methodology of the Report

The following methodology will be followed for the study. Both
primary and secondary data sources are used to generate this report. It also
includes some face to face interviews.

1.2 Primary sources of data:

1.3 Secondary sources of data:

The secondary data sources are annual reports, manuals, and
brochures of Social Islami Bank limited and different publications of
Bangladesh Bank. To identify the implementation, supervision, monitoring and
repayment practice- interview with the employee and extensive study of the
existing file was and practical case observations were done.

Company Profile




Social Islami Bank Ltd started its
operation on the 22nd November, 1995 as a second Generation Islami Bank in
close co operation and assistance of some renowned personalities of the Islamic
world. HE Dr.Hamid Al Gabid ,Former Sectary General of OIC and  Prime Minister of Niger ,H E Dr Abdullah Omar
Nseef , Deputy Speaker of Saudi Shura Council 
and Ex –Secretary General of Rabeta Al –Islami  H E Ahmed 
M Salah  Jamjoom, Former Commerce
Minister of Saudi Government, H.E. Prof. Dr. Ahmad E1-Naggar (Egypt)
participated to this noble endeavor as sponsor shareholders. Targeting poverty,
Social Investment Bank Ltd. is indeed a concept of 21st century participatory
three sector banking model in one: in the formal sector, it works as an Islamic
participatory Commercial bank.  

The formal corporate sector, this Bank would, among others, offer the
most up-to date banking services through opening of various types of deposit
and investment accounts, financing trade, providing letters of guarantee,
opening letters of credit, collection of bills effecting domestic and
international transfer, leasing of equipment and consumer durables, hire
purchase and installment sale for capital goods, investment in low-cost housing
and management of real estates, participatory investment in various industrial,
agricultural , transport, educational and health projects and so on.

In the Non-formal non-corporate sector, it would, among others, involve
in cash Waqf Certificate and development and management of WAQF and MOSQUE
properties, and Trust funds.


Bank was incorporated as a Public Limited Company in Bangladesh in the year
1995 under Companies Act, 1994. This Bank is one of the interest-free Shariah
based Bank in the country and its modus- operandi are substantially different
from those of other conventional Banks. The Bank by Banking Companies Act, 1991
and directives as received within the stipulations laid down Companies
directives as received from time to time from Bangladesh Bank provides all
types of commercial banking services. Besides as a matter of’ policy the Bank
conducts its business on the principles of Mudaraba, Musharaka, Murabaha.
Bai-Muazzal & Hire Purchase transaction approved by Bangladesh Bank. The
Bank is listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange
limited as a publicly traded company.The Bank carries its banking activities
through twenty-eight branches operating as per Islamic Shariah in the country.

Social Investment Bank Limited was Problem bank in
October 2005 on the Back drop of Bangladesh Bank and subsequent failure to make
good the adjusted capital short shortfall, provisional shortfall and downsize
the higher purchase of classified investment. To overcome this situation, the
bank adopted strategic plan that include increase in efficiency, establishment
of transparency, efficiency and accountability in all spheres of banking

2.3 Mission

  • High quality
    financial services the latest technology.
  • Fast, Accurate
    and Satisfactory customer service.
  • Optimum return
    on shareholders’ equity.
  • Introducing
    innovative Islamic Banking products.
  • Attract and
    retain high quality human resources.
  • Empowering real
    poor families and create local income opportunities.
  • Providing
    support for social benefit organizations – by way of mobilizing funds and
    social services.

2.4 Vision

Social Islami Bank Ltd started its
journey with the concept of 21st Century Islamic participatory three sector
banking model: i) Formal Sector- Commercial Banking with latest technology; ii)
Non-Formal Sector – Family Empowerment Micro-Credit & Micro-enterprise
program and iii) Voluntary Sector – Social Capital mobilization through CASH
WAQF and others. Finally, “Reduction of Poverty Level” is our Vision,
which is a prime object as stated in Memorandum of Association of the Bank with
the commitment Working Together for a Caring Society



  1. Be one of the best banks of Bangladesh.
  2. To introduce fully automated systems through integration of
    information technology.
  3. Achieve excellence is customer services and superior to all
  4. Cater to all differentiated segment of retail and wholesale
  5. Be a high quality distributor of product and services.
  6. To ensure an adequate rate of return on investment.
  7. To maintain a healthy growth of burins with desired image.
  8. To ensure optimum Utilization of all available resources.


The authorized capital of the bank is Taka 4000
million, whereas paid-up capital of the bank stood at Taka 1309.88 million as
at 31st December 2008 compared to Taka 1119.55 million of 2007.



Capital base consisting of tire I & II of the
bank as on 31st December 2008 stood at Tk. 2168.30 million as against Tk.
1870.94 million as on 31st December 2007. The Comparative position of Capital
Base of the year 2008 and 2007 is given below for kind information:

(Fig. in
million Taka)




1. Paid up









4.1 %
provision on Unclassified Investment









Capital Adequacy Ratio




Tier –I Capital Ratio (Requirement 5.00%)




Risk Weighted Capital Adequacy Ratio (RWCAR)





Shareholders Fund to Investment (Loan &





Since deposit is the life blood of the bank, we drew
-up series of action plan, both short term and long term to raise the deposit
base of the bank in line with the directives of the Bangladesh Bank. The short
-term action plan included launching of special drives like deposit
mobilization months during April -.June. As a bduring result of continuous
evaluation and monitoring we could significantly improve the liquidity position
as well as deposit mix in 2008. The following graph shows the deposit mix of
the bank:

The investment portfolio of the Bank was propelled
efficiently in 2007 as per directives of Bangladesh Bank. The total investments
of the Bank stood at Tk. 19951.30 million in various sectors as at 31st
December, 2008 against Tk.16440.26 million of 2007 registering a growth by
21.36% that signifies the confidence of the clients on the Bank. The increase
in investment by Tk. 351 1.04 million as compared to 2007 was due to expansion
of business. We are now concentrating our efforts to increase quality
investments to facilitate the investment earnings. It is mentionable here that
the assets quality of some of our Branches have deteriorated since 2004
resulting in the increase of classification but we have successfully maintained
required provision against classified investment as depicted in the Audit
Report. To overcome the situation, we launched special drives to recover the
sticky and, classified investments. The following graphs show the year wise
position of investment:


SIBL has a very strong Correspondent Banking network
around the globe. The Bank has SWIFT Bi-lateral Key Exchange (BKE) arrangements
with over 300 renowned Banks and 2200 branches around the world. We are capable
to carryout International Trade & Foreign Exchange Business with most of
the global trading regions. We have 22 Nos. Nostro Accounts with different
correspondent Banks. We earn profits and rebates on overseas business through
these accounts.


In recent times, corporate governance has been
considered most essential aspect for efficient management of a business house.
SIBL gives much emphasis on the corporate governance in promoting a sound
management. The objective of the Bank is to comply with all regulatory
requirements, ensure equitable treatment of all stakeholders.


Foreign Exchange Business stood at Tk. 33363.30
million in 2008 against Tk. 23903.80 million of 2007. The break-up of this
foreign exchange business as under:


The Bank has distributed Tk. 2071.31 million among
the Mudaraba


Depositors as profit M 2008 as against Tk.1705.05
million in 2007. Profit to the depositors for the year 2008 has been paid at
the following rates:

Mode of

Profit rate
for 2008

Profit rate
for 2007

1. Nludaraba Term Deposits:

a) 36 Months



b) 24 Months



c) 12 Months



d) 06 Months



e) 03 Months



e) 01 Month



2. Mudaraba Savings A/C: (MSD)



3. Mudaraba Notice Deposit A/C:



4. Mudaraba Scheme Deposit:

a. Mudaraba Monthly Profit Deposit



b. Mudaraba Millionaire Savings Scheme



c. Mudaraba Education Deposit Scheme



d. Mudaraba Special Deposit Pension
Scheme (10 Years)



e.   Mudaraba Special Deposit Pension Scheme
(5 Years)



f. Mudaraba Monthly Savings Scheme



g. Mudaraba Bashsthan Savings Scheme



h. Mudaraba Hajj Savings Deposit



i. Cash Waqf



j. Mudaraba Lakhopati Deposit Scheme



k. Mudaraba Double Benefit Deposit



1. Mudaraba Marriage Savings Scheme



m.   Mudaraba Moharana Saving Scheme (10



n. Mudaraba Moharana Saving Scheme (5





Assets have been shown at cost less depreciation as
per BAS-16 “Property, Plant & Equipments”. Depreciation has been
charged on reducing, balance method except motor vehicle; which has been
charged on straight-line method. Depreciation on addition of assets has been
charged from the date of purchase. Rate of depreciation are as under:


Rate (%)







Mechanical Appliance


Motor Car




Analysis and Findings Credit Risk
Management of SIBL



The word credit comes from the Latin
word “Credo” meaning we believe it is a lender’s trust in a person’s firm’s or
company’s ability or potential ability and intention to repay. In other words,
credit is the ability to command goods or services of another in return for
promise to pay such goods or services at some specified time in the future. For
a bank, it is the main source of profit and on the other hand, the wrong use of
credit would bring disaster not only for the bank but also for the economy as a

The objective of the credit
management is to maximize the performing asset and the minimization of the
non-performing asset as well as ensuring the optimal point of loan and advance
and their efficient management. Credit management is a dynamic field where a
certain standard of long-range planning is needed to allocate the fund in
diverse field and to minimize the risk and maximizing the return on the
invested fund. Continuous supervision, monitoring and follow-up are highly
required for ensuring the timely repayment and minimizing the default. Actually
the credit portfolio is not only constitute the banks asset structure but also a
vital factor of the bank’s success. The overall success in credit management
depends on the banks credit policy, portfolio of credit, monitoring,
supervision and follow-up of the loan and advance. Therefore, while analyzing
the credit management of SIBL, it is required to analyze its credit policy,
credit procedure and quality of credit portfolio. 

3.2 Credit Policy of SIBL

One of the most important ways, a
bank can make sure that its loan meet organizational and regulatory standards
and they are profitable is to establish a loan policy. Such a policy gives loan
management a specific guideline in making individual loans decisions and in
shaping the bank’s overall loan portfolio. In Social Islami Bank Limited there
is perhaps a credit policy but there is no credit written policy.

3.3 Credit Principles

In the feature, credit principles
include the general guidelines of providing credit by branch manager or credit
officer. In Social Bank Limited they follow the following guideline while
giving loan and advance to the client.

Credit advancement shall focus on the
development and enhancement of customer relationship.

The conduct and administration of the
loan portfolio should contribute with in defined risk limitation for
achievement of profitable growth and superior return on bank capital. Interest
rate of various lending categories will depend on the level of risk and types
of security offered.

3.4 Global Credit Portfolio limit of SIBL

The features which deals with how
much total deposits would be used as lending the proportion of long term
lending, customer exposure, country exposure, proportion of unsecured facility
etc. the most notable ones are:

The aggregate of all cash facility
will not be more than the 80% of the customers deposit  Long term loan must not exceed 20% of the
total loan portfolio.

Facilities are not allowed for a
period of more than 5 (Five) years.

3.5 Types of Credit

Credit may be classified with
reference to elements of time, nature of financing and provision base.

3.6. Classification on the basis of time:

On the basis of elements of time,
bank credit may be classified into three heads, viz.

Continuous loans:

These are the advances having no
fixed repayment schedule but have a date at which it is renewable on
satisfactory performance of the clients. Continuous loan mainly includes
“Cash credit both hypothecation and pledge” and

Demand loan:

In opening letter of credit (L/C),
the clients have to provide the full L/C amount in foreign exchange to the
bank. To purchase this foreign exchange, bank extends demand loan to the
clients at stipulated margin. No specific repayment date is fixed. However, as
soon as the L/C documents arrive, the bank requests the clients to adjust their
loan and to retire the L/C documents. Demand loans mainly include “Payment
against Documents,” “Loan against imported merchandise (LIM)” and
“Later of Trust Receipt”.

Term loans:

These are the advances made by the
bank with a fixed repayment schedule. Terms loans mainly include “Consumer
credit scheme”, “Lease finance”,” Hire purchase”, and
“Staff loan”. The term loans are defined as follows:

• Short term loan: Upto 12 months.

• Medium term loan: More than 12 months & up to 36 months 3.5.2

The objectives of this loan are to provide essential household durable to
the fixed income group (Service Holders) and other eligible borrowers. Car
loan, loan for house renovation, vacation loan, marriage loan and loan for
household equipment well as entertainment products are governed by personal
loan program. The Total amount of loans along with the duration in which these
loans taken, need to be repaid is given below:

Type of

Amount (Tk) Lac


1. Vehicle

Up to 7.00

4 to 5 years

2. Household items

for Businessman


2 years

3.Household items

for Service holders

Up to 3.00

2 to 3 years

4. Others

Special Considerations

Special Considerations

Personal loan is given under personal guarantee of the borrower and another
third parson known to the borrower. As this loan is collateral free the rate of
interest is little bit high such as 15% to 18%. There is also a processing fee
of 1.5% taken at the time of disbursement of the loan.

3.7. Qualitative Judgment Basis of Classification

Beside the
above-mentioned objective criteria,Social Bank Limited has other few
qualitative judgment classified or not on the basis of the above mentioned
objective criterion but if there is any doubt or for classifying the loan and
advance. This judgement totally depends on the Branch Manger and or the Head
office credit division. Whether any continuous credit, demand loan, fixed term
loan are uncertainty as regarding their recovery then the loan can be
classified on the basis of the Qualitative Judgment. The qualitative factors
that are considered in Social Bank Limited are as follows: Borrower sustains a
loss of capital significant decrease in the value of the security. Incorrect
information supplied by the borrower or bankruptcy of the borrower.

 Credit is rescheduled frequently or the rules of rescheduling are
violated or a suit is filed for the recovery of the credit. Last year the
classification of the loan and advance of SOCIAL ISLAMI BANK LIMITED were like this.

Table: Classification
position last three years. Tk in million
















Litigation: If after
rescheduling the loan and or failed to negotiate with
Ø the delinquent client, SIBL go for
taking legal action against the delinquent client to recover the loan.

3.8 Provisioning

Specific Provision: Head
office credit division prepares a list of credit accounts, which are considered
to be totally or partially be unrecoverable & keeps a provision against the
outstanding loans. ate of Provisioning OCIAL ISLAMI BANK LIMITED in the time of loan provisioning to get
the real picture of the income mainly follow the Bangladesh Bank guideline. The
rate of provisioning used in SIBL is summarized in the following table.

Table 4: Rate of provisioning


Short Term
Agriculture credit. 

All other credit

Rate of Provisions

Unclassified (UC)



Substandard (SS)






Bad or Loss



3.9 Credit Appraisal

The functions of
commercial banks to collect deposit from the common people and to invest
deposited money in different sectors for overall development of the economy of
the country. So the banks have to be very much careful in credit appraisal. The
person who is primarily held responsible for appraising a loan proposal in
Social Bank limited is called the credit officer.

The most important
measure of appraising a loan proposal is safety of the project. Safety is
measured by the borrower and repaying capacity of him. The attitude of the
borrower is also an important consideration; liquidity means the inflow of cash
into the project in course of its operation. The profit is the blood for any
commercial institution.

3.10 Overall Portfolio

term means managing total exposure on different clients, in different
industries of product or service, enjoying different types of facilities. The
management may take into consideration the following

 Market shares of different clients within
Dhaka industry, sizes of different industries within country of operation.

Relationship personnel should have
fair idea of the market sizes in the country of operations at least. He/ she
should follow the strategy of the senior management to maintain total
exposure on each industry within limit defined by such strategy.

Exposure on individual client should
also be planed.

Quality of portfolio should also be
determined by classification policy and should try to improve it.

Cross financing clients within the
portfolio may result in higher control.

Change in strategy /policy of
portfolio should be executed by increase or decrease of exposure in specified

Steps Involved in Credit Processing

3.11.1 Application for loan:

Applicant applies for
the loan in the prescribed form of bank. The purpose of this forms is to
eliminate the unwanted borrowers at the first sight and select those who have
the potential to utilize the credit and pay it back in due time.

3.11.2 Getting Credit information:

Then the bank collects credit information about the
borrower from the following ources:

1. Personal nvestigation

2. Confidential report from other bank/ Head office/Branch/Chamber
of commerce

3. CIB report from central bank

3.11.3 Scrutinizing and Investigation:

Bank then starts examination that whether the loan applied
for is complying with its lending policy. If comply, than it examines the
documents submitted and the credit worthiness. Credit worthiness analysis, ie analyses
of financial conditions of the loan applicant are very important. Then bank
goes for Lending Risk Analysis (LRA) and spreadsheet analysis, which are
recently introduced by Bangladesh Bank. According to Bangladesh Bank rule, LRA
and SA is must for the loan exceeding Dhaka core.

If these two analyses reflect favorable condition and
documents submitted for the loan appears to be satisfactory then, bank goes for
further action.

3.11.4 Existing process of handling loans:

The process of sanctioning loans is as follows: Character

The outcome of
analyzing the character is to have overall idea about the integrity,
experience, and business sense of the borrower. Two variables;
Interaction/interview, and Market Research are used to analyze the character of
the borrower.

1. Interaction/interview:
the indicators are

a) Prompt and
consistent information supply, information given has not been found false
(Willingness to give information).

b) CIB also
reveals business character.

c) Willingness to
give owns stake/equity & collateral to cover.

d) Tax payer.

2.  Market

a) Information on
business is verified.

b) Dealing with
supplier and or customer as supplier is also a kind of lender; he payment
character can also be verified. Capital

For identifying the
capital invested in the business can be disclosed using the following

Financial Statements

b) Receivable, Payable, statements to practically assess
the business positions. Net worth through financial statements or from
declaration of Assets & Liabilities. Capacity

Capability of the
borrower in running the business is highly emphasized in the time of selecting
a good borrower. As the management of the business is the sole authority to run
the business that is use the fund efficiently, effectively and
profitably.  The indicators help to identify the capacity of the borrower. Collateral

Make sure that there is
a “second way out “of a credit, but do not allow that to drive the credit
decision. Cash Follow:

Cash flow is the vital
factor that is used to identify whether the borrower will have enough cash to
repay the loan or advance. Cash keeps the liquidity to ensure repayment. The
relationship managers try to identify the annual cash flow from the submitted
statements. Communication:

Share credit objectives
and credit decision making both vertically and laterally within the bank.

Lending Risk Analysis (LRA): Modern Technique Of Credit

The Financial Sector Reform Project (FSRP) has designed the LRA
package, which provides a systematic procedure for analyzing and quantifying
the potential credit risk. Bangladesh Bank has directed all commercial bank to
use LRA technique for evaluating credit proposal amounting to Tk. 10 million
and above. The objective of LRA is to assess the credit risk in quantifiable
manner and then find out ways & means to cover the risk. However, some
commercial banks employ LRA technique as a credit appraisal tool for evaluating
credit proposals amounting to Tk. 5 million and above. Broadly LRA package
divides the credit risk into two categories, namely. Business risk Security

A detail interpretation
of these risks and the procedure for evaluating the credit as follows

3.12.1 Business risk:

It refers to the risk
that the business falls to generate sufficient cash flow to repay the loan.
Business risk is subdivided into two categories.

3.12.2 Industry risk.

The risk that the
company fails to repay for the external reason. It is subdivide into supplies
risk and sales risk.

3.12.3 Supplies risk:

It indicates that the
business suffers from external disruption to the supply of imputes. Components
of supplies risk are as raw material, Labor, power, machinery, equipment,
factory premises etc. Supply risk is assessed by a cost breakdown of the inputs
and then assessing the risk of disruption of supplies of each item.

3.12.4 Company risk:

This refers to the risk
that the company fails for internal reasons. Company risk is subdivided into
company position risk and Management risks.

3.12.5 Company position

Within an industry each
and every company holds a position. This position is very competitive. Due to
the weakness in the company’s position in the industry, a company is the risk
for failure. That means, company position risk is the risk of failure due to
weakness in the companies position in the industry. It is subdivided into
performance risk and resilience risk.

3.12.6 Performance

This risk refers to the
risk that the company’s position is so weak that it will be unable to repay the
loan even under Favor able external condition. Performance risk assessed by
SWOT(Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, Cash
flow forecast analysis and credit report analysis (i.e. CIB repot from
Bangladesh Bank).

3.12.7 Management risk:

The management risk
refers to the risk that the company fails due to management not exploiting
effectively the company’s position. Management risk is subdivided into
management competence risk and integrity risk.

Management integrity risk:

This refers to the risk
that the company fails to repay the loan amount due to lack of management
integrity. Management integrity is a combination of honesty and dependability.
Management integrity risk is determined by assessing management honesty, which
requires evaluating the reliability of information supplied and then management

3.12.9 Security risk:

 This sort of risk
is associated with the realized value of the security, which may not cover the
exposure of loan. Exposure means principal plus outstanding interest. The
security risk is subdivided into two major heads i.e. security control risk and
security cover risk.

3.12.11 Security
control risk:

This risk refers to the
risk that the bank falls to realize the security because of bank’s control over
the security offered by the borrower i.e. incomplete documents. The risk of
failure to realize the security depends on the difficulty in obtaining favorable
judgment and taking possession of security. For analyzing the security control
risk the credit office is required to verify documentation to ensure security
protection, documentation completeness, documentation integrity and proper
insurance policy. He/she also conducts site visit to verify security





This section details
fundamental credit risk management policies that are recommended for adoption
by all banks in Bangladesh. The guidelines contained herein outline general
principles that are designed to govern the implementation of more detailed
lending procedures and risk grading systems within individual banks.

4.1.1 Lending

All banks should have
established Credit Policies (“Lending Guidelines”) that clearly outline the
senior management’s view of business development priorities and the terms and
conditions that should be adhered to in order for loans to be approved. The
Lending Guidelines should be updated at least annually to reflect changes in
the economic out look and the evolution of the bank’s loan portfolio, and be
distributed to all lending/marketing officers. The Lending Guidelines should be
approved by the Managing Director/CEO & Board of Directors of the bank
based on the endorsement of the bank’s Head of Credit Risk Management and the
Head of Corporate/Commercial Banking. (Section 2.1 of these guidelines refers)
Any departure or deviation from the Lending Guidelines should be explicitly
identified in credit applications and a justification for approval provided..
The Lending Guidelines should provide the key foundations for account
officers/relationship managers (RM) to formulate their recommendations for
approval, and should include the following:

Business Types
: Banks should outline industries or
lending activities that are discouraged. As a minimum, the following should be

– Military Equipment/Weapons Finance

– Highly Leveraged Transactions

– Finance of Speculative Investments

– Logging, Mineral Extraction/Mining, or other activity
that is

– Ethically or Environmentally Sensitive

– Lending to companies listed on CIB black list or known

– Counter parties in countries subject to UN sanctions

– Share Lending

Taking an Equity Stake in Borrowers

Lending to Holding Companies

– Bridge Loans relying on equity/debt issuance as a source
of repayment.

Loan Facility Parameters: Facility parameters (e.g., maximum size, maximum
tenor, and covenant and security requirements) should be clearly stated. As a
minimum, the following parameters should be adopted:

– Banks should not grant facilities where the bank’s
security position is inferior to that of any other financial institution.

For example, export documents negotiated for countries like

4.1.2 Credit Assessment & Risk Grading Credit Assessment

A thorough credit and risk assessment should be conducted
prior to the granting of loans, and at least annually thereafter for all
facilities. The results of this assessment should be presented in a Credit
Application that originates from the relationship manager/account officer
(“RM”), and is approved by Credit Risk Management (CRM). The RM should be the
owner of the customer relationship, and must be held responsible to ensure the
accuracy of the entire credit application submitted for approval. RMs must be
familiar with the bank’s Lending Guidelines and should conduct due diligence on
new borrowers, principals, and guarantors. It is essential that RMs know their
customers and conduct due diligence on new borrowers, principals, and
guarantors to ensure such parties are in fact who they represent themselves to
be. All banks should have established Know Your Customer (KYC) and Money
Laundering guidelines which should be adhered to at all times. Credit
Applications should summaries the results of the RMs risk assessment and
include, as a minimum, the following details:

– Amount and type of loan(s) proposed.

– Purpose of loans.

– Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)

– Security Arrangements

In addition, the
following risk areas should be addressed:

– Borrower Analysis. The majority
shareholders, management team and group or affiliate companies should be
assessed. Any issues regarding lack of management depth, complicated ownership
structures or intergroup transactions should be addressed, and risks mitigated.
Industry Analysis. The key risk factors of the borrower’s industry should be
assessed. Any issues regarding the borrower’s position in the industry, overall
industry concerns or competitive forces should be addressed and the strengths
and weaknesses of the borrower relative to its competition should be identified.

– Supplier/Buyer Analysis. Any customer or
supplier concentration should be addressed, as these could have a significant
impact on the future viability of the borrower.

– Historical Financial Analysis. An analysis of a
minimum of 3 years historical financial statements of the borrower should be
presented. Where reliance is placed on a corporate guarantor, guarantor
financial statements should also be analyzed. The analysis should address the
quality and sustainability of earnings, cash flow and the strength of the
borrower’s balance sheet. Specifically, cash flow, leverage and profitability
must be analyzed..

– Mitigating Factors. Mitigating factors for
risks identified in the credit assessment should be identified. Possible risks
include, but are not limited to: margin sustainability and/or volatility, high
debt load (leverage/gearing), overstocking or debtor issues; rapid growth,
acquisition or expansion; new business line/product expansion; management
changes or succession issues; customer or supplier concentrations; and lack of
transparency or industry issues.

Security: A current valuation of
collateral should be obtained and the quality and priority of security being
proposed should be assessed. Loans should not be granted based solely on
security. Adequacy and the extent of the insurance coverage should be assessed. Risk

All Banks should adopt
a credit risk grading system. The system should define the risk profile of
borrower’s to ensure that account management, structure and pricing are
commensurate with the risk involved. Risk grading is a key measurement of a
Bank’s asset quality, and as such, it is essential that grading is a robust
process. All facilities should be assigned a risk grade. Where deterioration in
risk is noted, the Risk Grade assigned to a borrower and its facilities should
be immediately changed. Borrower Risk Grades should be clearly stated on Credit
Applications. The following Risk Grade Matrix is provided as an example.  The more conservative risk grade.

The Early Alert Process
should be completed in a timely manner by the RM and forwarded to CRM for
approval to affect any downgrade. After approval, the report should be
forwarded to Credit Administration, who is responsible to ensure the correct
facility/borrower Risk Grades are updated on the system. The downgrading of an
account should be done immediately when adverse information is noted, and
should not be postponed until the annual review process.

Approval Authority, Segregation of Duties & Internal

4.1.3 Approval Authority

The authority to
sanction/approve loans must be clearly delegated to senior credit executives by
the Managing Director/CEO & Board based on the executive’s knowledge and
experience. Approval authority should be delegated to individual executives and
not to committees to ensure accountability in the approval process. The
following guidelines should apply in the approval/sanctioning of loans:

Credit approval
authority must be delegated in writing from the MD/CEO
& Board (as appropriate),
acknowledged by recipients, and records of all delegation retained in CRM .Delegated
approval authorities must be
 reviewed annually by MD/CEO/Board. The credit
approval function should be separate from the marketing/relationship management
(RM) function. The role of Credit Committee may be restricted to only review of
centralized within the CRM function.
Regional credit centers may be established, training and experience to carry
out their responsibilities effectively. As a minimum, approving executives
should have:

– At least 5 years experience
working in corporate commercial banking as a relationship manager or account

– Training and
experience in financial statement, cash flow and risk analysis.

– A thorough working
knowledge of Accounting.

– A good understanding
of the local industry market dynamics.

– Successfully completed an assessment test demonstrating adequate knowledge of
the following areas:

o Introduction of
accrual accounting.

o Industry / Business
Risk Analysis

o Borrowing Causes

o Financial reporting
and full disclosure

o Financial Statement

o The Asset
Conversion/Trade Cycle

o Cash Flow Analysis

o Projections

o Loan Structure and

o Loan Management.

4.1.4 Segregation of

Banks should aim to segregate
the following lending functions:

– Credit Approval/Risk

– Relationship

– Credit Administration

The purpose of the
segregation is to improve the knowledge levels and expertise in each
department, to impose controls over the disbursement of authorized loan
facilities and obtain an objective and independent judgment of credit

4.1.5 Internal Audit

Banks should have a
segregated internal audit/control department charged with conducting audits of
all departments. Audits should be carried out annually, and should ensure
compliance with regulatory guidelines, internal procedures, and Lending
Guidelines and Bangladesh Bank requirements.



The appropriate organizational structure must be in place to support
the adoption of the policies detailed in Section 1 of these guidelines. The key
feature is the segregation of the Marketing Relationship Management function
from Approval Risk Management Administration functions. Credit approval should
be centralized within the CRM function. Regional credit centers may be
established, however, all applications must be approved by the Head of Credit
and Risk Management or Managing Director /CEO /Board or delegated Head Office
credit executive.

4.2.2. Credit Risk Management (CRM)

Oversight of the bank’s
credit policies, procedures and controls relating
 to all credit risks
arising from corporate/commercial/institutional banking, personal banking,
& treasury operations.

Oversight of the bank’s asset quality. Directly manage all
Substandard, Doubtful
 & Bad and Loss accounts to maximize
recovery and ensure that appropriate and timely loan loss provisions have been made.
To provide advice/assistance regarding all credit
matters to line management/ RMs.To ensure that lending
executives have
 adequate experience and/or training in order
to carry out job duties effectively.

4.2.3. Credit Administration:

To ensure that all
security documentations comply with the terms of
 approval and is

To monitor insurance
coverage to ensure
 appropriate coverage is in place over assets
pledged as collateral, and is properly assigned to the bank.

To control loan
disbursements only after
 all terms and conditions of approval have been
met, and all security documentation is in place.

To maintain control
over all security

To monitor borrower’s
compliance with covenants and
agreed terms and
conditions, and general monitoring of account conduct/performance.

4.2.4..Internal Audit/Control

Conducts independent inspections annually to ensure compliance
with Lending
Guidelines, operating
procedures, bank policies and Bangladesh Bank directives. Reports directly to
MD/CEO or Audit committee of the Board PROCEDURAL GUIDELINES.

This section outlines of the main procedures that are needed to ensure
compliance with the policies contained in Section 1.0 of these guidelines.

4.3.1 Approval Process

The approval process
must reinforce the segregation of Relationship Management/ Marketing from the
approving authority. The responsibility for preparing the Credit Application
should rest with the RM within the corporate/commercial banking department.
Credit Applications should be recommended for approval by the RM team and forwarded
to the approval team within CRM and approved by individual executives. Banks
may wish to establish various thresholds, above which, the recommendation of
the Head of Corporate/Commercial Banking is required prior to onward
recommendation to CRM for approval. In addition, banks may wish to establish
regional credit centers within the approval team to handle routine approvals.
Executives in head office CRM should approve all large loans.

The recommending or
approving executives should take responsibility for and be held accountable for
their recommendations or approval. Delegation of approval limits should be such
that all proposals where the facilities are up to 15% of the bank’s capital
should be approved at the CRM level, facilities up to 25% of capital should be
approved by CEO/MD, with proposals in excess of 25% of capital to be approved
by the EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO.

Credit Application Recommended
by RM/ Marketing

Zonal Credit Officer

Head of Credit & Head
of Corporate Banking (HOBC)

4.3.2 Credit

The Credit
Administration function is critical in ensuring that proper documentation and
approvals are in place prior to the disbursement of loan facilities. For this
reason, it is essential that the functions of Credit Administration be strictly
segregated from Relationship Management/Marketing in order to avoid the
possibility of controls being compromised or issues not being highlighted at
the appropriate level. Credit Administration procedures should be in place to
ensure the following: Custodial

Loan disbursements and
the preparation and storage of security
 documents should be
centralized in the regional credit centers.

Appropriate insurance
coverage is maintained (and renewed on a timely
basis) on assets pledged as collateral.

Security documentation
is held
under strict control,
preferably in locked fireproof storage. Compliance

All required Bangladesh
Bank returns are submitted in the
correct format in a timely manner.

Bangladesh Bank circulars/regulations
are maintained centrally, and advised to all relevant departments to ensure

All third party service
(values, lawyers,
insurers, CPAs etc.) are approved and performance reviewed on an annual basis.
Banks are referred to Bangladesh Bank circular outlining approved external
audit firms that are acceptable.

Credit Monitoring, Credit Recovery Process of SOCIAL ISLAMI

4.3.3 Credit Monitoring

To minimize credit losses,
monitoring procedures and systems should be in place that provide an early
indication of the deteriorating financial health of a borrower. At a minimum,
systems should be in place to report the following exceptions to relevant
executives in CRM and RM team:

4.3.4 Credit Recovery

The Recovery Unit (RU)
of CRM should directly manage accounts with sustained deterioration (a Risk
Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT accounts
graded 4-5 to the RU for efficient exit based on recommendation of CRM and
Corporate Banking. Whenever an account is handed over from Relationship
Management to RU, a Handover /Downgrade Checklist should be completed.

The RU’s primary functions are

Determine Account Action Plan/Recovery Strategy

Pursue all options  to maximize recovery, including placing
customers into receivership or liquidation as appropriate. Ensure adequate and
timely loan loss
provisions are made
based on actual and expected losses.

Regular review of grade 6 or worse accounts.

The management of
problem loans (NPLs) must be a dynamic process, and the associated strategy
together with the adequacy of provisions must be regularly reviewed. A process
should be established to share the lessons learned from the experience of
credit losses in order to update the lending guidelines. Account
Transfer Procedures

Within 7 days of an
account being downgraded to substandard (grade 6), a Request for Action (RFA)
and a handover /downgrade checklist should be completed by the RM and forwarded
to RU for acknowledgment. The account should be assigned to an account manager
within the RU, who should review all documentation, meet the customer, and
prepare a Classified Loan Review  Report (CLR) within 15 days of the
transfer. The CLR should be  approved by the Head of Credit, and copied to
the Head of Corporate Banking and to the Branch/office where the loan was
originally sanctioned. This initial CLR should highlight any documentation
issues, loan structuring weaknesses, proposed workout strategy, and should seek
approval for any loan loss provisions that are necessary.

Facilities are
withdrawn or repayment is demanded as appropriate. Any
 drawings or advances should be restricted, and
only approved after careful scrutiny and approval from appropriate executives
within CRM.

CIB reporting is updated according to
Bangladesh Bank guidelines and the borrower’s Risk Grade is changed as
appropriate. Incentive

Banks may wish to
introduce incentive programs to encourage Recovery Unit Account Managers to
bring down the Non Performing Loans (NPLs). The table below shows an indicative
incentive plan for RU account managers:

as a % of Principal plus interest

Incentive as % of

recovery amount

If CG 7-8

if written off

to 100%



t0 75%



to 50%





A banker can not sleep well with bad debts in his
portfolio. The failure of commercial banks occurs mainly due to bad loans,
which occurs due to inefficient management of the loans and advances portfolio.
Therefore any banks must be extremely cautious about its lending portfolio and
credit policy. So far SIBL has been able to manage its credit portfolio
skillfully and kept the classified loan at a very lower rate —thanks goes to
the standard and stringent credit appraisal policy and practices of the bank.

But all things around us are changing at an accelerating rate. Today is not
like yesterday and tomorrow will be different from today. Given the fast
changing, dynamic global economy and the increasing pressure of globalization,
liberalization, consolidation and disintermediation, it is essential that
Social Islmi bank limited has a robust credit risk management policies and
procedures that are sensitive to these changes.


To improve the risk management culture further, Social
Islami bank limited should adopt some of the industry best practices that are
not practiced currently. The

  should have a clear written lending guideline. The
Ø guideline should
include Industry and Business Segment Focus, Types of loan facilities, Single
Borrower and group limit, Lending caps, Discouraged Business Types, Loan
Facility Parameters and Cross boarder Risk.

 It should adopt a credit grading system All
facilities should be assigned a risk grade. And the borrowers risk grades
should be clearly stated on credit application.

Approval authority should be delegated to individualØ executives rather than Executive
Committee/ Board to ensure accountability. This system will not only ensure
accountability of individual executives but also expedite the approval process.

 All lending functions should be segregated in the
following way:

* Credit Approval / Risk Management

* Relationship Management / Marketing

* Credit Administration

The segregation of duties will improve the knowledge levels
and expertise in each department.

 The organization structure should have to be changed
to put
Ø in place the
segregation of the Marketing/ Relationship Management function from Approval /
Risk Management / Administration function.

 The responsibilities of the key persons of the above
function must also be clearly specified.

An Early Alert Account system should be introduced to have adequate
monitoring, supervision or close attention by management.( An early Alert
Account is one that has risk and potential weaknesses of a material nature)

There should be a Recovery Unit to manage directly accounts with sustained
deterioration. To encourage Recovery Unit incentive program may also