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Financial Institutions

Term Report

Submitted to: Tazeen Arsalan

Submitted by: Tabinda Khalid (10695) Hira Iftikhar (9850)

Letter of Acknowledgement
This report is the term assignment of Financial Institutions Course, taught by Mrs. Tazeen Arsalan at IoBM Karachi, during Fall Semester 2010.

In this assignment we were suppose to invest a total of Rs. 12 crores in a manner as profitable and practical as possible.

Basically this assignment is directed towards the objective of making students apply the concepts taught in the class to the real world scenario and get a hands-on experience of the Course Implications, practically.

For the accomplishment of this assignment we were required to design a portfolio of our investments, diversify our risks and earn high but practically possible returns.

Financial assets:
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset).

What is a financial asset?

A financial asset is an intangible representation of the monetary value of a physical item. It obtains its monetary value from a contractual agreement of what it represents. While a real asset, such as land, has physical value, a financial asset is a document that has no fundamental value in of itself until it is converted to cash. Common types of financial assets include certificates, bonds, stocks, and bank deposits. The financial assets That we are going to invest in, are as follows: UBL UNIFLEX ACCOUNT Engro Rupiya Certificate Certificate of Deposit

Where to deposit?

UBL has introduced a new checking account ideal for small investors, traders, businessmen and customers from middle income group.They can now afford an amazing rate of return plus value added benefits only available from the UBL UniFlex PLS Savings Account.

Amazing rate of return Convenience of a cheque book Power of Wallet VISA ATM / Debit Card Online Banking Facility

UniFlex Rates & Tenors: Four rate tiers are offered to UniFlex customers: Average balance of the month (Rs.) Rs. 0 - Rs. 10,000 Rs. 10,001 - Rs. 100,000 Rs. 100,001 Rs. 500,000 Rs. 500,001 Rs. 1,000,000 Rs.1,000,001 Rs. 10,000,000 Above Rs. 10,000,000 Proposed rate March 2011* 6.00% 7.00% 8.00% 9.00% 10.00% 11.00%

* Projected Rates will be announced monthly through UBL Deposits Projected Rate sheet Terms & Conditions All individual and joint account holders and sole proprietorships are eligible for the UBL UniFlex Account (scheme); Corporations and partnerships are ineligible for the scheme. Only one UBL UniFlex account per Computerized National Identity Card (CNIC) shall be allowed to be opened in UBL, regardless of the branch; no doubling shall be allowed even as joint account or sole proprietor. The Bank shall determine from time to time the rate of interest/return/profit payable on the account/deposit in accordance with the prevailing profit and loss sharing rules and regulations of the State Bank of Pakistan and the policies of the Bank which are subject to change from time to time and the account holder/depositor agrees to accept such rate of interests/return/profit at the time such change was made. Profit shall be calculated on monthly average balance and credited to account the following month on a monthly basis. The UBL UniFlex account cannot be overdrawn. Accounts that are closed in the middle of a month will not be eligible for any interest/return/profit for the broken period of that month. Wallet VISA card is optional; charges as per Schedule of Bank Charges (SOC). (Please apply on the regular Account Opening Form)

Regular checkbooks shall be provided as per Schedule of Bank Charges (SOC). Customer can conduct a maximum of three free of cost withdrawal transactions in a calendar month (inclusive of all instruments). These withdrawals include but not limited to Net banking, cash withdrawal by ATM, cash withdrawal over the counter, Inter Bank Funds Transfer (IBFT), clearing, collection, Online banking, Tez Raftaar, Tez Ibex, MT/DD/TT/PO/Online (UniRemote), RTC, etc. The Bank will charge a sum of Rs. 100/- per transaction for any withdrawal above the threshold of three debit transactions in one calendar month. However, there is no limit for credit transactions in a month. All single debit incidents to an account will be considered as separate transactions except deductions by the bank for charging service fee, Withholding Tax and Zakat deductions. All transactions, including the three withdrawals allowed will be charged as per the Schedule of Bank Charges (SOC). The UniFlex Account Holder shall be required to maintain the minimum balance requirement of Rs. 10,000/- during each calendar month. Service charges where the average balance during the month is less than Rs.10,000/- shall be applied as per the Schedule of Bank Charges (SOC). This was the first option we considered to deposit a cash of 2 crores out of 6 crores which were supposed to be invested in the financial assets. They are offering a rate of 11% with securing our principal and giving us freedom of withdrawals prior a weeks notice. It also granted us unlimited deposits. As most our withdrawals would be anticipated this seemed like a much better deal. We were also earning profit per day which also seemed better. Computation of return:

Amount to be invested Annual yield Monthly yield

= = =


20000000 = RS 2200000 (Gain) 183334

RS 20000000*11%

RS 20000000*11%/12 =RS

Engro Rupiya Certificate

The Engro Rupiya Certificate is Engro's initiative to give you the opportunity to save with a name you trust! This is the first in the series of financial products aimed at giving the profit on savings that customers deserve. With the upheavals in the equity markets and shrinking bank spreads, there are limited options available for us to invest in a reliable, hassle-free environment. With the launch of Engro Rupiya certificate, we can become a part of the Engro family and share its growth with an unmatched profit rate of 14.5% from the day we invest.

Reasons to invest in ENGRO:

Superior Returns

A fixed rate of return of 14.5% per annum is superior to most saving schemes. National Saving Schemes of similar tenor offer 12.1% which is 240 bps lower than Engro Rupiya Certificate. Bank Term Deposits also offer rates typically between 8 to 11% depending on the size of deposit whereas in Engro Rupiya you get 14.5% rate of return on investments as low as Rs. 25,000/-. Competitive Analysis

* Rates vary depending on the size of deposit Low risk

The product has been rated double AA rated by PACRA which denotes very high credit quality The ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

Engro Rupiya Certificates are secured against certain assets of Engro Corporation Limited. Convenience

Engro Rupiya Certificate makes investing your money convenient, easy, and profitable. You have the convenience to invest right from your doorstep They have also partnered with 11 leading Banks and have designated 2,500 branches all across Pakistan from where you can invest in Engro Rupiya. Returns start accumulating from Day 1. These returns are automatically deposited into your bank account every six months, leaving you with absolute peace of mind. There is no minimum holding period so your investments can be encashed anytime. Computation of return:

Amount to be invested Annual yield Monthly yield

= = =


20000000 = RS 2900000 (Gain)

RS 20000000*14.5%

RS 20000000*14.5%/12 =RS 241667

Certificate of Deposit
The Government of Pakistan introduced Defence Savings Certificate scheme in the year 1966. The scheme has specifically been designed to meet the future requirements of the depositors.This is 10 years' maturity scheme with built in feature of automatic reinvestment after the maturity. Who Can Invest . These certificates can be purchased by a single adult, a minor, two adults in their joint names with the options of payable to the holders jointly (Joint-A ) or payable to either (Joint-B). An adult can also purchase these certificates on behalf of a single minor, two minors jointly or himself/herself and a minor jointly. In addition to above individual investors, the following institutions are also allowed to invest in the scheme, subject to their registration under the relevant law for the time being in force: a. Registered Charities (Non-profit bodies). b. Public Sector Enterprises excluding Banks. c. Private Educational & Health Institutions. d. Employees Old Age Benefit Institutions (EOBIs). e. Private Corporate Sector registered with the SECP excluding Banks. f. Non-Bank Financial Institutions (NBFIs) excluding Insurance Companies. How To Purchase. These certificates can be purchased from any National Savings Centre (NSC), Pakistan Post Offices (PPO), Authorized branches of Scheduled Banks and State Bank of Pakistan (SBP) by filling in a prescribed form called SC-1, which is available at all the above offices of issue free of cost. Mode of Deposit. These certificates can be purchased by depositing cash at the issuing office or by presenting a cheque. The certificates shall immediately be issued on receipt of cash. However, in case of deposit through cheque the certificates shall be issued from the date of realization of the cheque after receipt of the clearance advice. What Is The Investment Limit.

The minimum investment limit is Rs.500/-, however, there is no maximum limit of investment in this scheme. What About Redemption. These certificates are encashable at par any time after the date of purchase. However, no profit is payable if encashment is made before completion of one year. What is the return. The average compound rate of return on maturity presently works to 13.55% p.a. For any other time period rates table is also available on website.

Tax & Zakat Status. At present, the profit earned is exempt from withholding tax, if the total investment in the scheme by the investor(s) does not exceed Rs.150,000/-. However, withholding tax @ 10% is deductible at source on the profit(s) earned if the total investment exceeds Rs.150,000/by the investor(s). The Zakat is collected at source as per rules. Computation of return:

Amount to be invested Annual yield Monthly yield

= = =


20000000 = RS 2710000(Gain)

RS 20000000*13.55%

RS 20000000*13.55%/12 =RS 225834

Non-financial assets:
An asset with a physical value such as land, property or some type of object. Unlike financial assets such as stocks and bonds, which are intangible, non-financial assets are physical and have values based upon their physical properties. The non-financial assets that we are going to invest in are as follows: Investment in gold Investment in dollar Investment in shares

Investment in Gold:
As we studied the past data we came to the fact that there has been a continuous growth in value of Gold so based on these findings we decided to invest in Gold. It is the safest place to invest especially in these uncertain economic conditions.

Bullion rates in Rupees per 10 grams KARACHI Gold (24-ct)(march 31 2011) Gold (24-ct)( march 31 2012) Rs. 45700 Rs 60000

We invested 2 crores in gold.

Computation of return:
COMMISSION CHARGED: 1 tola = Rs 300 5000 tola*300 = Rs1500000 DIFFERENCE: Rs 60000-Rs 45700= Rs 14300 Annual profit ( per 10 gm)= 14300 YIELD: 14300/45700*100= 31.3 % Gain: 31.3% x 2 crore( 2 0, 000,000) =RS 6260000 Net gain = 6260000-1500000 = Rs4760000

Investment in Palladium:
The second commodity which is also part of portfolio is Palladium. During this year, this commoditys price appreciates 20000 R.s20000 per tolla. In 2012 the prices are expected to increase to RS 25000.

Computation of return:

Amount invested= RS 20000000 Difference= 25000-20000 Yield = =rs 5000

5000/20000*100 = 25%

25% *20000000 = Rs. 5000000 (gain)

Investment in real estate:

240 sq yards double storey bungalow, KDA OFFICERS HOUSING SOCIETY

Location: Karachi, Sindh, Pakistan Street Address: KDA OFFICERS HOUSING SOCIETY. KARACHI Neighborhood: KDA OFFICERS HOUSING SOCIETY

We have purchased a 240 square yard, double story bunglow at KDA Officers Co-operative Housing. This investment is worth Rs. 2 c crores which includes all the costs including commission, capital tax and other documentation necessary. According to the estate agent, as the real estate price is expected to go up with the improving economy, the plot will be able to get sold out at Rs. 24500000

Costs associated with the purchase of property:

Government stamp duty:

This is also known as sale lease fees, transfer fee or registration fee. Stamp Duty is a tax that used to apply to all purchases of property or shares. Stamp Duty was payable on land and property transactions above a certain value up until December 2003. After 1 December 2003 it was replaced with Stamp Duty Land Tax. And now it has a fixed rate of 4% on the historical cost of property. NUF: NUF stands for non-utilization fund. It is a tax imposed on the acquisition of land on which the purchaser has no intention to construct for 1 to 3 year time period. It has an annual fixed charge ranging from Rs, 30004000 depending on the size of the property. NUF accounts for:o o o o

Safeguard against encroachment. Maintenance of plot area. Record keeping and security of information regarding concerned plots. De-vegetation and dewatering in case of rain (only for areas not yet handed over to CBC

Broker charges:

A broker is a person who acts as an intermediary between a buyer and a seller. He charges commission on the guidance. A broker has a fixed charge of 2% on the historical cost of the property.

Worth of the property Government duty NUF Broker fees Total cost = RS 1.85 crores (18500000) = 1.85*4% = RS 740000 = Rs 4000 = 1.85*2% = Rs 370000 = RS 19614000

According to the estate agent, as the real estate price is expected to go up with the improving economy, the plot will be able to get sold out at Rs.24500000 Calculation of return: proerty bought for Rs. 18500,000 Selling price as on Oct 31st 2011 = Rs. 24,500,000 Return = = 24.9%

Locker charges:
Bank Alfalah provides safe deposit locker facility to its customers for safe keeping of their valuables like documents, securities and jewellery etc. Important features of lockers facility are as follows:

Various sizes to choose from small, medium & large. Annual locker rent ranges from Rs.2,000/- to Rs.4,000/-. Locker rent is waived for customers maintaining a minimum deposit of Rs.2 million in current account or above US $25,000/- in a current account or US $50,000/- in a savings account.

Locker Rates The annual license fees of the following sizes of lockers will be as follows:

Locker Size Small Medium Large Key Deposit: Rs.2000/- (Refundable)

Charges Rs.2000/Rs.3000/Rs.4000/-

The license fees lockers will be payable in advance every year and no part of the same shall be refundable in any circumstances. We purchased a large locker of RS 4000 to deposit gold , palladium, Engro Rupiya Certificate and Certificate of deposit.

References: UBL Uniflex Account Certificate of Deposit Investment in gold Investment in Palladium Investment in Real Estate (UBL) (Quomi Bachat Scheme) (Amin Jewellers) (Amin Jewellers) (21st Century Estate Agency)