Chapter 1

Introduction
Banks are financial intermediaries that operate as depository institutions. They maintain deposits;
and make loans. The checkable deposits portions of the economy’s money supply are directly
controlled by them. As financial intermediaries, banks match up lenders and borrowers, using
deposits for loans. Banks are also accountable to maintain liquid checkable deposits that are used
as money for the economy.

Bank liquidity is one of the most important factors that should be considered while studying the
banking sector. Liquid assets of a Bank include mainly cash, deposits which are collected from
people and institutions in various forms. One of the main challenges to a bank is ensuring its own
liquidity under all reasonable conditions. The fundamental task of any bank is to keep the value
of the assets equal to the value of the liabilities. The bases of this problem are a reflection of the
characteristics of the banking business. The banker holds a few assets and at the same time owes
very large sums to the public in the form of time and demand deposits. The demand deposit carries
the obligation to pay cash whenever it is requested. It is essential that the resources of the bank
provide demand deposits at all time. Failure to remain in a position to meet all claims as they are
presented loses confidence of its customers. Banks try to ensure that they have sufficient liquidity
to meet all relevant regulatory requirements and to reduce the likelihood that liquidity falls below
these thresholds.

Liquidity is described as the degree to how fast an asset or security can be bought or sold in the
market without affecting the asset price. Bank needs liquidity because they always cannot control
the timing of their needs for funds. Cash is the most liquid asset which can be used easily and
immediately. Certificates of deposit are less liquid than cash because there is usually a penalty to
convert them into cash before their maturity date. In general, liquidity management consists of two
interrelated parts. First, management must estimate fund’s needs, which is based on deposit
inflows and outflows and varying levels of loan commitments. The second part of liquidity
management involves meeting liquidity needs.

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Banks face two central issues regarding liquidity. Banks are liable for managing liquidity creation
and liquidity risk. Banks create liquidity to help depositors and companies for staying liquid, for
companies especially when other forms of financing become difficult. Liquidity risk are managed
to ensure the banks own liquidity so that the bank can continue to serve its function. Banks balance
between its own liquidity and its role as a liquidity creator, especially in times of financial distress
or crisis.

A bank’s liquidity situation will be affected by much more than just the reserve of cash and highly
liquid securities, particularly in a crisis. The time limit of its less liquid assets will also matter as
some of them may mature before the cash crisis passes, thereby providing an additional source of
funds. The requirement to pay back demand deposits at any time that the depositor wants is the
biggest contingent commitment in most cases.

The Basel Committee has emphasized on developing a greater understanding of the way in which
banks manage their liquidity on a global, consolidated basis in the supervision of liquidity. Banks
has come with new ways of funding their activities and managing their liquidity with the help of
recent technological and financial innovations. In addition, a declining ability to rely on core
deposits, increased reliance on wholesale funds has changed the way banks view liquidity. All of
these changes have also resulted in new challenges for banks.

The formality and sophistication of the process that is used for managing liquidity depends on the
size and sophistication of the bank, as well as the nature and complexity of its activities. While the
report focuses on Islamic bank, the principles have broad applicability to all banks. Specifically,
crucial elements of strong liquidity management at a bank of any size or scope of operations are
good management information systems, analysis of net funding requirements under alternative
scenarios, diversification of funding sources, and contingency planning. The report has been
undertaken with consideration of this fact.

1.1 Scope and Objectives

The scope of the study is very broad. It covers many aspects of bank liquidity like cash, different
types of deposits, bills payable, and borrowings from other banks and financial institutions and off
balance sheet activities. It also covers the processes of managing liquidities.

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The main objective of the study is to focus on liabilities of bank and to cope up with corporate
environment and also gathering knowledge from the expert who are leading and making strategic
decisions to enhance the growth of a financial institution. The objectives of the report can be
summarized as follows:

The objectives of the study are:

• To give an overview of theoretical development and previous studies.

• To focus and highlight the banking system of Bangladesh.
• To analyze the framework of liquidity management of National Bank Limited (NBL).
• To get enough understanding about liquidity management.
• To estimate the liquidity need of National Bank Limited (NBL).
• To analyze the liquidity statement of National Bank Limited (NBL) by using some
statistical techniques.

1.2 Methodology
The objective of the report is to find out the liquidity management process of the National bank
Limited. For preparing this report secondary data has been used. The study has been performed
based on the information extracted from the different sources collected by using a specific
methodology. This report is analytical in nature. Discussion with the staffs of selected commercial
banks have generated benchmark information for the study as a comprising tool and enhanced it
towards a holistic point of view. I have also received important instructions from my project
supervisor.

Sources of the Data:

Source of Data of this Study can be divided into two categories:

Research Design:
A thesis study was conducted aiming to manage the liquidity from National Bank Limited.
Quantitative data were collected through questionnaires & Financial Statements of NBL.
Individual interviews of the different staffs who are involving in liquidity management were
conducted to obtain qualitative data.

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Sample selection:
Secondary sources:

 Annual reports of National Bank Limited (NBL) of the year 2013, 2014, 2015, 2016,
2017
 Related files study provided by the officers concerned
 Official website of National Bank Limited (NBL)
 Bank record
 Different books, articles etc. regarding liabilities management.

Data Collection:
Data were collected within a certain time. Qualitative data were collected through focus group
and in-depth interviews. Since workplace violence is a sensitive issue, the privacy, confidentiality,
and safety of the subjects were protected throughout the processes of qualitative data collection.
Most of the individual interviews were conducted at the participant’s workplaces. For the
quantitative data I contacted the relevant authorities for permission to collect data.

1.3 Limitations of the Report

Every study has some limitations. I faced some usual restrictions during the course of my
preparation for the report. The major limitations are as follows:

• There were not huge guidelines about liquidity management of the bank.
• Lack of knowledge: I believe I don’t have enough knowledge about how to prepare a
report on this sort of analysis. So I have faced some problems by this side.
• Scarcity of primary data: I mainly depended on the secondary data in order to prepare
the whole report. So the report has some shortage of information from primary data
source.
• Lack of strong analytical ability: In order to insure the maximum quality of the report
strong analytical ability is needed. So my lack of strong analytical ability created some
limitations.

I hope that my respected teacher and internship supervisor will overlook the limitations and
overview the report with a positive view.

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 Chapter-2

Theoretical Development

In this chapter, I have given an overview of the theoretical development and previous studies about
liquidity management.
Liquidity describes the degree to which a security or an asset can be quickly bought or sold in the
market without affecting the asset's price and the availability of funds, or assurance that funds are
going to be available, for honoring all cash outflow commitments (both on- and off-balance sheet)
as they fall due. Cash inflows, supplemented by assets which are readily convertible to cash or
through the institution’s capacity to borrow generally met these commitments. There might arise
the probability of illiquidity if principal and interest cash flows associated with assets, liabilities
and off-balance sheet items aren’t matched.

Liquidity Management
Cash and liquidity management is concerned about predicting the company’s cash which is
required to operate its businesses and then to manage the group wise cash flows, short-run
borrowings and cash in the most efficient manner to make sure that cash requirements can be met.
IT and communications systems assist in pooling cash internationally and used to best advantage.
Funding and liquidity needs have a connection with understanding and managing working capital
and the payments and cash reporting systems to best advantage. The liquidity position of a bank
can be analyzed by evaluating some ratios.

Measurement of Liquidity
Liquidity ratios are used to identify a company's ability to pay off its short-terms debts obligations.
It is a category of financial metrics. The higher the value of the ratio the larger the margin of safety
the corporation possesses to cover short-run obligations. Some of the liquidity ratios are given
below:

Current Ratio: Liquidity ratio that assesses a company's ability to pay short-run obligations The
ratio provide an idea of the company's worth to repay its short-run liabilities (debt and payables)

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with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more
ability the company has paying off its obligations. The formula of Current Ratio is:
Current Ratio=Current Assets/Current Liabilities.

Total debt-to-asset: A measurement which is used to estimate a company's financial risk to

determine what quantity of the company's assets is financed by debt is known as total debt-to-asset
ratio. The ratio is calculated by adding short-run and long-run debt and then dividing by the total
assets of the company.
Total Debt to Total Assets=(Short term debt+ Long Term Debt)/Total Assets

Importance of Liquidity Management

Managing liquidity is a necessary component in the safe and sound management of all financial
entities. Sound liquidity management includes managing assets and liabilities (on- and off-balance
sheet) efficiently, both as to cash flow and concentration, to make sure that cash inflows have an
acceptable relationship for balancing cash outflows. A method of liquidity planning is required to
support this which predicts potential future liquidity requirements by taking changes in economic,
regulatory or other operating conditions into account. Such planning requires distinguishing
known and potential cash outflows and weighing alternative asset/liability management strategies
to make sure that the organization has sufficient cash inflows to meet the requirements.

Objectives of Liquidity Management

The objectives of liquidity management are:
To honor all cash outflow commitments (both on- balance sheet and off-balance sheet) on an
ongoing, daily basis
To maintain public confidence on the bank
To avoid raising funds at market premiums or through the forced sale of assets; and
To satisfy statutory liquidity and statutory reserve requirements
To meet loan demand
To meet administrative expenses in various sectors like payment of salary, rent, electricity
charge, telephone bill etc.
To resolve economic fluctuations as banks are highly dependent upon the current economic
situation.

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Sound Practices for Managing Liquidity in Banking
A perpetual viability of any banking organization is the capability to increase funds in assets and
meet obligations as they become due. However, the individual bank is transcended by the
importance of liquidity since a liquidity shortage at a single organization can have systemic
repercussions. The management of liquidity is thus among the essential activities operated at
banks. Over time, a declining ability is seen to depend on core deposits and an increased reliance
on wholesale funding. Banks are provided with recent financial and technological innovations with
new ways to fund their activities and to manage their liquidity, however recent turmoil in
international financial markets has posed new challenges for liquidity management. In these cases,
there are some necessary practices for managing liquidity in banks that are indicated below:

Developing a structure for managing liquidity

Measuring, observing and monitoring net funding requirements
Managing market access
Contingency plan
Foreign currency liquidity management
Internal controls for liquidity risk management
Public disclosure in improving liquidity

Liquidity of a Bank
Liquidity means how quickly an asset can be converted into cash without affecting the value of
the asset. The most liquid asset is money in cash form. Assets that normally can be sold after a
long and comprehensive search for a buyer are treated as illiquid. Liquidity is differentiated by a
high level of trading activity. Assets which is easily bought or sold are called liquid assets which
are also known as "marketability". There has no specific liquidity formula to be used; but in general
liquidity is calculated by using liquidity ratios. Invest in liquid assets is more safe than illiquid
ones because it’s easier for an investor to get money out of the investment. Assets which are easily
converted into cash include money market securities. For banks and large institutions, liquidity
management is about getting a large return on cash that they might be required at short notice.
They do it by borrowing and lending between each other by using either money market securities

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or deposits and loans - in what is called the interbank market. Just as the interbank market permits
commercial banks to involve in liquidity management, Central Banks also use money markets for
managing their reserves, and in doing thus can have an effect on the prevailing money market
rates. This is generally achieved by handling the one market section over which they have direct
control, the Treasury bill market.
High liquidity suggests there is a handsome amount of cash as interest rates are low, and so capital
is easy to attain. However, there might require a liquidity glut to be developed if there is really
excessive amount of money looking for too few investments. This is normally a precursor to a
recession, as a lot of capital becomes invested in unhealthy ventures. As the ventures go defunct
and don't pay out their promised return, investors are left holding unworthy assets. Often a panic
may ensue, causing withdrawal of investment money. This is what occurred throughout the 2007
Banking Liquidity Crisis. Bank lending finances investments in relatively illiquid assets, but it
fund its loans with mostly short term liabilities. SO, one of the most challenging task to a bank is
ensuring its own liquidity under all reasonable conditions.

Liquid Assets of a Bank: An asset that might be converted into cash quickly and with minimal
loss to the price received. To be a liquid asset it requires an established market with sufficient
participants for absorbing the selling without materially impacting the price of the asset. Most
stocks, money market instruments and government bonds include liquid assets. Cash and other
financial assets which banks possess, can easily be liquidated and paid out as part of operational
cash flows. Cash, government bonds and money market funds are examples of core liquid assets.
Banks typically use forecasts to measure the amount of cash that account holders will be in need
to withdraw, but it is necessary that banks don’t over-estimate the amount of cash and cash
equivalents required for core liquidity because unused cash left in core liquidity can’t be managed
by the bank to earn high returns.

Cash in hand: Quantity of cash of a bank, that stays in hand of that bank to meet
recent needs. Normally, bank keeps sufficient money in hand and liquidity risk is
minimized.
Items within the process of collection: Some quantity of money which is kept in the
process of making cash.

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 Reserve in Bangladesh Bank: Each schedule bank has reserve requirement wherever
every bank keeps 5.5% cash on his total capital to the central bank. If a bank is in need
of money, he can withdraw money from BB’s reserve amount.
Balance with other banks: Each commercial banking concern has an account in other
commercial banks as customer. If a bank requires money, he can withdraw money from
the account. As a result, risk of liquidity is minimized.
Figure-1

Liquid Assets of a bank

Cash in hand

Items within the process of collection

Reserve in Bangladesh Bank

Balance with other banks

Characteristics of Liquid Assets:

There are three characteristics found in liquid assets that are ready market, stable price and
reversible.

a) Ready Market: A liquid asset should have a ready market so that it might be converted into
cash without delay.
b) Stable Market: Liquid asset should have a reasonable stable price so that no matter how

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quickly the asset should be sold or how large amount the sale is the market is deep enough to soak
up the sale while not a big decline in worth.
c) Reversible: The seller may recover his or her original investment with very little risk of loss.

Liquidity Management by Banks: Steps and Principles

In order to retain the customer base the banks must adopt a liquidity/investment policy to be able
to repay to depositors on demand. Incase bank deploys its maximum funds in loans/investment
without caring for the requisite amount of liquidity to able to meet the immediate financial
requirements particularly towards demand depositors, it may tarnish its image which can be a fatal
event for any bank.

Yes if a bank under the fear of protecting its image to be able to meet all the demand requirements
instantly keeps a large portion of its funds in liquid form either in cash with itself or deposits with
the Central Bank i.e. RBI without earning sufficient returns or at low level of interest, naturally
may face a situation of loss.

Investments by banks are its assets and demand and term deposits are liabilities. Derived from
above discussion it may be observed that an investment policy of a Bank should be a balanced
approach for managing its assets and liabilities. In case of enhancing or increasing assets without
taking into account the proportion of liabilities may bring more profit or income but the bank may
likely fail in meeting its obligations.

In reverse position of quantum of liquidity is more than the required limit it may be a cause of
losses. It may please be understood that Profitability and Liquidity stand against each other and
are required to be managed in a planned manner.

Steps in Cash and Liquidity Management:

For cash and liquidity management by banks following steps are adopted:

1) Cash:

Cash is complete liquidity consisting of cash in hand held by the bank itself or deposited with
Central Bank (RBI). The quantum of cash to be kept by a bank is regulated by statutory

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requirements known as SLR (Statutory liquidity Ratio) and CRR (Current Reserve Ratio). In
addition to rules and regulations the practical experience of bankers also play a vital role in
deciding the quantum of cash to be kept as cash in hand. Any idle cash kept earns no income.

It is therefore every bank adopts a system of complete cash management and investment
management in order to measure and manage the liquidity needs. Measuring liquidity is a ticklish
task and mostly gauged by Assets and Liability management system.

(2) Investments:

Investment by banks is largely regulated by specific guidelines as discussed above in portfolio

management. Likewise cash management is also subject to SLR and CRR norms.

(3) Loans and Advances:

Commercial Banks function as financial intermediaries. They mobilise funds through various
deposit schemes and a large portion of these funds are deployed as bank credit in various sectors
of economy. In a way banks also function like trustee of savings and idle funds of the society.

The quality of the credit portfolio decides their efficiency of discharging their duty. In providing
loans to different sectors of society is best suited method of managing excess cash by banks as this
sector is more secure than making investment in capital market.

(4) Inter Relationship of Cash, Liquidity, Asset and Liability Management:

If the management of cash, liquidity and liabilities are put under one umbrella it would be seen as
a process where all of them are inter linked and no single item can be managed separately without
having look on other items.

Following brief description about these items may help to understand the position:

(A) Asset and Liability Management: It is a process of effectively managing a bank portfolio
mix of assets, liabilities and when applicable off-balance sheet contracts. This process

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 involves two primary financial risks, interest rate and foreign exchange, and directly relates
to sound over all liquidity management.
(B) Interest Rate Risk: It is the process of the exposure of a bank’s financial condition to
adverse movements in interest rates. Changes in interest rates can have significant impact
on a bank earnings as well as the underlying economic value of a bank assets, liabilities
and off balance sheet items.
(C) Liquidity: The ability to fund all contractual obligations of the bank. Notably lending and
investment commitments and deposit withdrawals and liability maturities, in the normal
course of business that is the ability to fund increases in assets and meet obligations as they
come due.
(D) Liquidity Management: It is an on-going process to ensure that cash needs can be met at
reasonable cost in order for a bank to maintain the required level of reserves with RBI
(CRR) and to meet expected and contingent cash needs. Required CRR/SLR with the RBI
should not be considered to be a routine source of liquidity.
Good management information systems, analysis of net funding requirements under
alternative scenarios, diversification of funding sources, and contingency planning are crucial
elements of sound liquidity management.
(E) Liquidity Risk: It is a risk of loss to a bank resulting from its liability to meet its needs for
cash or from inadequate liquidity levels, which must be covered by funds, at excess cost.
(F) Net Funding Requirements: The liquid assets necessary to fund a bank cash obligations
and commitments going forward determined by performing a cash flow analysis, all cash
inflows against all cash outflows, to identify potential net shortfalls.

Principles of Liquidity Management:

The Bank for International settlements’ Basel Committee on Banking Supervision in its document
No. 69 February, 2000 has provided principles and details of key elements for effective
management of liquidity.

Banks should formally adopt and implement these principles for use in overall liquidity
management process:

A. Banks must develop a structure for liquidity management:

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 1. Each banks should have an agreed strategy for day-to-day liquidity management. This
strategy should be communicated throughout the organization.
2. A Bank Governing board should approve the strategy and significant policies related to
liquidity management. The governing board should also ensure that senior management of
the bank takes the steps necessary to monitor and control liquidity risk. The Governing
Board should be informed regularly of the liquidity situation of the bank and immediately
if there are any material changes in the bank current or prospective liquidity position.
3. Each Bank should have a management structure in place to effectively execute the liquidity
strategy. This structure should include the on-going involvement of members of senior
management. Senior management must ensure that liquidity is effectively managed, and
that appropriate policies and procedures are established to control and limit liquidity risk.
Banks should set and regularly review limits on the size of their liquidity positions over
particular time horizons.
4. Banks must have adequate information systems for measuring, monitoring, controlling and
reporting liquidity risks. Reports should be provided on a timely basis to the banks
governing board, senior management and central bank. (In case of India Reserve Bank of
India)
B. Banks must measure and monitor net funding requirements:
1. Each bank should establish a process for the ongoing measurement and monitoring of net
funding requirements.
2. Banks should analyze liquidity utilizing a variety of scenarios.
3. Banks should frequently review the assumptions utilized in managing liquidity to
determine that they continue to be valid.
C. Banks should Manage market access:

Each banks should periodically review its efforts to establish and maintain relationships with
liquidity holders, to maintain the diversification of liabilities, and aim to ensure its capacity to sell
assets.

D. Banks should have contingency plans:

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Banks should have contingency plans in place that address the strategy for handling liquidity crises
and which include procedures for making up cash flow shortfalls in emergency situations.

E. Banks should manage their foreign currency Liabilities:

1. Each bank should have measurement, monitoring and control system for its liquidity
positions in the major currencies in which it is active. In addition to assessing its aggregate
foreign currency liquidity needs and the acceptable mismatch in combination with its
domestic currency commitments, a bank should also undertake separate analysis of its
strategy for each currency individually.
2. Subject to analysis undertaken, a bank should, where appropriate, set and regularly review
limits on the size of its cash flow mismatches over particular time horizons for foreign
currencies in aggregate and for each significant individual currency in which the bank
operates.
F. Each bank must have an adequate system for internal controls over its liquidity risk
management process. A fundamental component of the internal control system involves
regular independent reviews and evaluations of the effectiveness or enhancements to
internal controls are made.
G. Each bank should have in place a mechanism for ensuring that there is an adequate level
of disclosure of information about the bank in order to manage public perception of the
organization and its soundness

Estimating Liquidity Needs

The first step in any analysis of bank liquidity is the estimation of liquidity needs. These needs
primarily arise from deposit withdrawals and loan demands (including off-balance sheet
commitments) and to estimate them, the bank must forecast the level of future deposit and loan
activity. Although loan growth generally will not exceed deposit growth in a community,
differences can arise temporarily, especially in urban areas. There are two methods of estimating
liquidity needs. They are described below:

A. Sources and Uses of Funds Method: One method of estimating future liquidity needs
is to develop a sources and uses of funds statement. To do this, bank management must

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 evaluate potential future changes in its individual assets and liability accounts. For
example, the loan portfolio can be divided into its component parts-commercial and
industrial loans, residential real estate loans, consumer loans, agricultural loans, and
other loans. The demand for funds by businesses and individuals in these different
lending areas are estimated from past loan histories and future economic projections.
Commercial and industrial loan demand, for instance, would be influenced by the
production and growth of the business sector in the past and future. Similarly, deposit
levels are influenced by economic and competitive market conditions. As interest rates
rise, corporate treasurers move funds out of demand deposits and into interest bearing
assets and therefore, banks will tend to experience increasing competition for deposit
funds from nonbank financial service companies such as money market mutual funds.
As an example, Table 1 gives a hypothetical sources and uses funds statement for a
bank overall six-month period. The expected increase in total loan demand and
subsequent decline is a common seasonal trend in agricultural banking. When loan
demands increase, deposit balances often decline, as many bank customers obtain both
deposit and loan services from the same bank. Decreases in loan and increases in
deposits are sources of funds; conversely, increases in both loans and deposit
withdrawals are uses of funds. Subtracting deposit changes from loan changes provides
an estimate of liquidity needs. In regard to sources and uses of funds, it should be
recognizes that there are discretionary items versus nondiscretionary items, based on
the ability of management to control the flow of funds. Deposit withdrawals are
nondiscretionary because the bank cannot control depositors’ activities; loans are
discretionary for the most part due to the fact that management can play an active role
in their quantity.

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 Table-1
Estimating Liquidity Needs based on a Sources and Uses of Funds Statement

End of Estimated Estimated Estimated Changes Estimated

Month Total Loans Total Liquidity
Deposits Loans Deposits Need

December 68,000 85,000 - - -

January 70,000 90,000 2,000 5,000 (3,000)
February 79,000 86,000 9,000 (4,000) 13,000
March 89,000 83,000 10,000 (3,000) 13,000
April 96,000 78,000 7,000 (5,000) 12,000
May 95,000 79,000 (1,000) 1,000 (2,000)
June 88,000 80,000 (7,000) 1,000 (8,000)
Source: Benton E. Gup& James W. Kolari, “Commercial Banking, The Management of Risk”

B. Structure of Deposits Method: Another way to estimate liquidity needs is the

structure of deposits method. The basic idea of this approach is to list the different types
of deposits that the bank is using to acquire funds and then assign a probability of
withdrawal to each type of deposit within a specific planning horizon. High risk, or
unstable, deposits require substantial liquidity to support them, whereas low risk, or
stable, deposits require relatively less liquidity. Core funds represent deposits of loyal,
local depositors and tend to be relatively stable. A strong and positive relationship
typically exists between the bank and these depositors. Non core deposits tend to be
unstable sources of funds, as these depositors are likely very price sensitive and
influenced primarily by the interest rate on their funds. If other competing banks post
higher interest rates, these funds can rapidly be withdrawn and thereby cause liquidity
demands on the bank. As a simple example, suppose that bank management structured
its deposit sources as shown in table 2. The bank has relatively low amounts of short
term and long term deposits. The major deposit source is medium term small time and
savings deposits, which are relatively stable components of core deposits. In this case
liquidity demands from deposit withdrawals should be fairly modest. This same
structuring method may be applied to non deposit funds sources also, particularly if
these sources are important to the bank. In any application the evaluation of the
probability of withdrawal or volatility of various sources of funds must be determined
on a case by case basis.

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 Table-2
Deposit Sources
Probability of Expected Withdrawal(in
Amount Held(in Withdrawal in Next millions)
millions) Three Months
Short-term (unstable):
Demand deposits 4 .90 3.6
Other transaction 12 .70 8.4
accounts
Medium-term:
Small time and 50 .30 15.0
savings deposits
Long-term (stable):
Large time deposits 15 .20 3.0
Expected deposit 30
withdrawals

Optimum Bank Liquidity

Banks always try to maintain optimum level liquidity. The management of the bank must
ultimately face whether the liquidity ratio is optimal. Optimal liquidity is achieved by balancing
risks and returns. Higher liquidity prevents banks to invest in higher earning assets to generate
more return and it also increases cost of maintaining liquidity. At some point an optimum liquidity
level is reached at which liquidity costs are minimized. Because of reliance on forecasted needs
and sources, a reasonable margin error should be considered. Greater uncertainty increases the cost
of maintain liquidity. As such optimum quantity of liquidity needs is increased by uncertainty. So
there should be an optimum return between liquidity and profitability.

Figure-3

Optimum Bank Liquidity

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 Source: Benton E. Gup& James W. Kolari, “Commercial Banking, The Management of Risk”

Previous Studies
In this report, there are substantial researches which have been made with regard to bank liability.
Among them,
Eljelly (2004) mentioned Liquidity is the ability of a deposit money bank to pay its short-term
obligations to its depositors and creditors. He also argued that the crucial part in managing working
capital is required maintaining its liquidity in day-to-day operation to ensure its smooth running
and meets its obligation.
Bhunia, (2010) argues that Liquidity plays a significant role in the successful functioning of a
business firm. A firm should ensure that it does not suffer from lack-of or excess liquidity to meet
its short-term compulsions. A study of liquidity is of major importance to both the internal and the
external analysts because of its close relationship with day-to-day operations of a business.
According to Raheman et el, (2007) dilemma in liquidity management is to achieve desired
tradeoff between liquidity and profitability and Zeng Lin (2012) stated the following definition in
his research: for a commercial bank, the source of liquid funds are mainly customer deposits, non-
deposit service income, loans due for repayment by the customers, assets sold by the bank and
bank’s borrowed funds from the money market; and the liquid funds are ready to be used to fulfill
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the demand for customer withdrawal, demand for bank loans, loan demand besides repayment of
loans and demand for investment.
Francis, (2007) argues that, the stability of commercial banks as whole in the economy depend on
proper asset liquidity management structures. Better liquidity management has the tendency to
absorb risks and shocks that commercial banks can face. Moreover, liquidity management is the
perquisite condition for the efficiency and growth of commercial banks. Liquidity management in
commercial banks is determined by the ability of the banks to retain capital, absorb loan losses,
support future growth of assets and provide return to investors. The largest source of income to
the bank is interest income from lending activity less interest paid on deposits and debt. For a bank
to attain the same objectives it has to ensure proper liquidity management, including liquidity risk
management, interest rate risk management and credit risk management.
According to Metwally(1997), Liquidity refers to the ability of the bank to meet up deposit
withdrawals, maturing loan request and liabilities without setback. Banks defends its customers
aligned with troubles of liquidity by captivating in financial liabilities that can be drained on
demand, on the added side of the balance sheet, offering dedicated lending services. The
arrangement of balance sheets banks usually illiquid loans are financed by extremely liquid
deposits.
Vento and Ganga (2009) said that liquidity in financial market has multiple connotations. Liquidity
signifies the aptitude of a financial firm to keep up all the time a balance between the financial
inflow and outflow over time.
Ghannadian and Goswami (2004) observed the performance of an Islamic banks and how Islamic
banking scheme can offer liquidity and support in the process of money creation from side to side
contribution transactions accounts and found that in all developing economies investing funds on
basis of profits and losses is an attractive choice for the banks.
Gabbi (2004) emphasized about the reliance of risks on organization’s place in the market. The
study explained that liquidity risk can be controlled in the course of practices that are severely
connected to the scale and scope of financial measures, seeing as large banks are capable both to
manage additional market information and to influence monetary policy functions.
Sawada (2010) investigated that in the times of crises, due to the liquidity shock persuaded by the
depositors, banks increase their cash holdings by selling their securities in the financial market,
not by liquidating their loans. As they adjust their portfolio dynamically through selling and buying

19 | P a g e
their securities in financial market.
Anurag and Priyanka argues that, the commercial banking sector plays an important role in
Mobilization of deposits and disbursement of credit to various sectors of the economy. A sound
And efficient banking system is a sine qua non for maintaining financial stability.

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 Chapter 3

Overview of the Banking System of Bangladesh

In this chapter, I have focused on the banking system and have given an overview of the banking
system of Bangladesh.

Bangladesh is a third world country with an underdeveloped banking system, particularly in terms
of the services and customer care. A strong banking system is critical to economic growth and
development in a developing country like Bangladesh. A set of acts, laws, regulations and
guidelines have been enacted and promulgated time to time since Bangladesh Bank’s
establishment which helped Bangladesh bank to perform its role as a central bank particularly, to
control and regulate country’s monetary and financial system.

The financial system of Bangladesh is comprised of three board fragmented sectors:

1. Formal sector
2. Semi-formal sector
3. Informal sector

Formal Sector: The formal sector includes all regulated institutions like Banks, Non-Bank
financial institutions, Insurance companies, capital market intermediaries like brokerage houses,
merchant banks etc. Now, banks in Bangladesh are mainly of two categories:

1. Scheduled Banks are banks that get license to operate under Bank Company Act, 1991
2. Non-scheduled Banks are established for special and definite objective and operate under
the acts which are enacted to meet up those objectives. All functions of scheduled banks
cannot be performed by these banks.

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The semi-formal sector : Semi formal sector includes those institutions which are regulated otherwise but
do not fall under the jurisdiction of Central Bank, Insurance Authority, Securities and Exchange Commission or
any other enacted financial regulator. This sector is mainly represented by Specialized Financial Institutions like
House Building Finance Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay Bank,
Grameen Bank etc., Non Governmental Organizations (NGOs and discrete government programs.

The informal sector includes private intermediaries which are completely unregulated.

Figure-2
Financial System of Bangladesh

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 Source: Bangladesh Bank

Money Market
The money market consists of banks and financial institutions as intermediaries, 20 of them are
primarily dealers in treasury securities. Interbank clean and repo based lending, Bangladesh
Bank’s repo, reverse repo auctions, Bangladesh bank bills auctions are primary operations in the
money market.

3.2 Taka Treasury Bond Market

The taka Treasury bond market is comprised of primary issues of treasury bonds of different
maturities (2, 5, 10, 15 and 20 years) and secondary trade through primary dealers. 20 banks which
are working as primary dealers participate directly in the primary auction. Other bank and non-

23 | P a g e
bank investors can take part in primary auction and in secondary trading through their nominated
primary dealers.

3.3 Deposit Insurance System

A sound and competitive banking system is necessary to a nation’s economic strength. Every
scheduled bank plays a significant role as the medium of funds from depositors to consumers and
investors as well as in the transmission of monetary policy. So public confidence is a very crucial
issue in banking sector. Deposit insurance system is the key element to maintain confidence and
to promote financial stability through increasing saving in the banking sectors. It is a measure to
protect bank depositors, in full or in part, from losses caused by a banks inability to pay its debt
when owning.

3.4 Core Policies of Central Bank

Core Policies of Central Bank are-

1. Monetary Policy: Bangladesh Bank declares the monetary policy by issuing monetary policy
statement twin (January and July) in a year. The tools and instruments for implementation of
monetary policy in Bangladesh are bank rate, open market operation, and repurchase agreements
and reverse Repo, statutory reserve requirements.

2. Reserve Management Strategy: Bangladesh Bank maintains the foreign exchange reserve of
the country in different centuries for minimizing the risk that emerges from widespread fluctuation
in exchange rate of major currencies and very irregular movement in interest rates in the global
money market. A separate department of Bangladesh Bank performs the operational functions
considering investment guided by investment policy set by the Bangladesh Bank’s investment
committee and headed by a deputy governor. The underlying principle of the investment policy is
to ensure the optimum return on investment with minimum market risk.

3. Interest Rate Policy: Under the financial sector reform program a flexible interest policy was
formulated. According to that, banks are free to charge/fix their deposit and lending rates other
than export credit. At present, there is no interest rate cap on lending for banks except pre-shipment
export credit and agricultural lending. Yet, banks can differentiate interest rate up to 3%
considering comparative risk elements involved among borrowers in the same lending category.

24 | P a g e
4. Capital Adequacy for Banks: Basel-3 has been introduced in Bangladesh with a view to
strengthening the capital base of banks with a goal to promote a more resilient banking sector. The
Basel 3 regulation will be adopted in a phased manner starting from January 2015, with full
implementation of capital ratios from the beginning of 2019. Now, scheduled banks in Bangladesh
are instructed to maintain minimum capital to risk weighted assets ratio 10% whichever is higher.
In addition to minimum CRAR capital conversation buffer of 2.5% of the total risk weighted assets
is being introduced which will be maintained. Besides the minimum requirements all banks have
a process for assessing overall capital adequacy in relation to their risk profile and a strategy for
maintaining capital at an adequate level.

3.5 Current Bank Deposit and Credit

Table-3

Deposits held in Deposit Money Banks

(TK In Millions)
Items December November December Percentage Change
2018 2018 2017 December December
2018 over 2018 over
November November
2018 2017
Demand 1100763 1043611 1039701 5.48 5.87
Deposits
Time 8999047 8873293 8222092 1.42 9.45
Deposits
Total 10099810 9916904 9261793 1.84 9.05

Source : Statistics Department, Bangladesh Bank.

Note: * Excludes Inter bank Deposits and Government Deposits.

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 Table-4
Bank Credit

(TK In Millions)
Items December November December Percentage Change
2018 2018 2017 December December
2018 over 2018 over
November November
2018 2017
Advances 9326783 9146447 8126155 1.97 14.77
Bills(Import 277837 276059 318201 0.64 -12.69
and Inland
Bills)
Investments 1756223 1795805 1638051 -2.17 7.21
Total 11360843 11218311 10082407 1.28 12.68
Source : Statistics Department, Bangladesh Bank.

Note:

1. Advances include Loans &Advance, Money at Call, Balances & R. Repo with NBFI's &
Accrued Interest.
2. Investments include Treasury Bills, Treasury Bonds, Share & Securities with accrued
interest.

3.5 Central Bank Regulation in Liquidity Management

Bangladesh bank has the specific guidelines regarding statutory reserve which ensures the
minimum liquidity position of the bank and also safeguards the depositors. Every Commercial
Bank has to maintain 6% CRR with Bangladesh Bank and 5.5% SLR. And every scheduled
conventional bank must have to keep at least 19.5% statutory liquidity reserve and 6% cash reserve
ratio. National Bank Limited maintains excess amount SLR and CRR beyond the actual
requirement.

26 | P a g e
3.6 Central Bank’s Liquidity Management Framework
The liquidity management of a central bank is defined as the frame work, set of instrument and the
rules the central bank follows in steering the quantity of bank reserves to manage their price (i.e.
short term interest rates) continuously with its final goals.(e.g. price stability). It presents a basic
theory of liquidity management in a very framework of substantial reserve requirement and
averaging, looking on the relationship between quantities (Central bank balance sheet items) and
overnight rates and the involved signal extraction problems. Some components of a normative
theory of liquidity management are recommended. The sales , purchase and rediscount of bill of
exchange and promissory notes drawn on and payable in Bangladesh are included in the activity
of the bank. The bank acts as the lender of last resort for the government as well as for the country’s
scheduled banks. All scheduled banks are required to maintain a minimum reserve with the
Bangladesh Bank. All Islamic banks are required to maintain 5.5% statutory liquidity ratio on time
and demand liabilities and a minimum credit balance with the Bangladesh Bank at 6.50% on time
and demand liability on fortnight basis and 6.00% on daily basis.

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 Chapter-4

Empirical Analysis

In this chapter, I have made an attempt to analyze the liquidity position of National Bank Limited
(NBL). For this purpose, I have used different mathematical tools and techniques.

4.1 Current Assets of National Bank Limited

Current assets are all assets that a person can convert readily to cash to pay outstanding debts and
cover liabilities without having to sell fixed assets. It includes cash on hand, bank accounts and
marketable securities that are not tied up in long-term investments. The current assets of SIBL are:

1. Cash
2. Balance with other banks and financial institution
3. Placement with banks and financial institution
4. General Investment
5. Investment in shares and securities

4.2 Current Liabilities of National Bank Limited

Current liabilities are a bank's debt or obligations payable within one year. Current liabilities
appear on the bank's balance sheet and include short-term debt, accounts payable, accrued
liabilities and other debts. Essentially, these are bills that are due to creditors and suppliers within
a short term. Normally, banks withdraw cash or liquidate current assets to pay their current
liabilities. The current liabilities of SIBL are:

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 01) Placement from banks and other financial institutions.

02) Deposits and other accounts.

03) Other liabilities and provision.

Table-5

Cash Position

Year Cash % Changes

2017 22,628,888,704 7.65%
2016 21,020,835,955 12.01%
2015 18,766,874,352 5.35%
2014 17,813,280,687

The following chart depicts that from 2014 the cash position of NBL is increasing. It is a good
sign for the commercial bank. But increased cash flow utilization in profitable sources is a
challenge for NBL. The increased cash flow may be come from opening New Account. The bank’s
Century Accounts & DPS is higher comparing with other Bank because their interest rate is higher
about 9% for Century Account where other banks give 6% to 7%.

Cash
25,000,000,000

20,000,000,000 22,628,888,704
21,020,835,955
18,766,874,352
15,000,000,000 17,813,280,687

10,000,000,000

5,000,000,000

0
2017 2016 2015 2014

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 Table-6

Balance with Other Banks

Year Balance with other Banks % Changes

2017 7,446,025,979 143.34%

2016 3,059,969,383 -63.22%

2015 8,318,634,416 135.26%

2014 3,535,896,025

From 2014-2017 the balance with other banks are fluctuating. It is highest in 2015 but in 2016 it
lower after that in 2017 again it’s range is up warding.

Balance with other Banks

9,000,000,000
8,000,000,000
7,000,000,000
6,000,000,000
5,000,000,000
4,000,000,000
3,000,000,000
2,000,000,000
1,000,000,000
0
2017 2016 2015 2014

Table-7

Deposits

Year Deposits % Changes

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 2017 272,771,315,415 13.03%
2016 241,329,876,862 8.65%
2015 222,112,905,248 9.26%
2014 203,296,182,435

Deposits of the bank are following increasing trend throughout 4 years. Increased deposit is a sign
of healthy liquid position but utilization of funds is also important to ensure profitability. The
increased cash flow may be come from opening New Account. The bank’s Century Accounts &
DPS is higher comparing with other Bank because their interest rate is higher about 9% for Century
Account where other banks give 6% to 7%.

Deposits
300,000,000,000

250,000,000,000

200,000,000,000

150,000,000,000
100,000,000,000

50,000,000,000

0
2017 2016 2015 2014

Table-8

Net Liquidity Gap

Year Net Liquidity Gap % Changes

2017 40,370,822,938 11.51%

2016 36,202,874,856 7.88%
2015 33,557,964,916

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This chart shows that net liquidity gap is gradually increasing over the years. It is defined as a gap
of liquid assets and volatile liabilities of SIBL should figure out a way to bridge the gap from
convenient source.

Net Liquidity Gap

45,000,000,000
40,000,000,000
35,000,000,000
30,000,000,000
25,000,000,000
20,000,000,000
15,000,000,000
10,000,000,000
5,000,000,000
0
2017 2016 2015

Net Liquidity Gap

4.3 Estimated Liquidity Needs of SIBL

National Bank Limited estimates liquidity from its deposits inflows and outflows and varying
levels of investment. Deposits are affected by movement of interest rate related to other financial
institutions. Here, we show estimated liquidity needs of NBL through sources and uses of funds
methods.

I) Sources and Uses Method:

This method consists of the following steps:

a. Forecasting changes in loan demand.

b. Forecasting changes in deposit demand.
c. Adjusting the forecasts for various factors.
d. Finding out surplus and deficit.
Factors that affect deposit of a bank:

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i. Increase in national income: Deposit increases as national income increases. As we know
national income is the summation of consumption, investment, and government expenditure.
The equation is shown below: Y=C+I+G. Here, savings is embedded in investment portion.
The more income a person has, the more he has to consume and save. Eventually Savings turn
into investment flow through financial intermediaries such as banks, non-bank financial
institutions, insurance company etc.
GDP growth rate averaged 5.76% from 1994 until 2017. For the year 2017, it expanded 7.39%.
From that trend, it can be reasonably forecasted that people will have saving at increasing
manner provided that GDP growth prevails. So, increase in GDP will affect deposit of NBL
positively.

ii. Expansion of Banking Facility: Banking facilities in Bangladesh is also increasing.

Several newer banks get license for establishment. Hence, competition is getting fierce
among the competitors. As the saver has many more option to deposit, there is competition
among the peer banks to convince the customer to deposit with them.
iii. Increase of Banking Habit: It is for our greater hope that majority of the poor people of
Bangladesh get excess to financial service through microcredit financial institution such as
BRAC, Grameen Bank etc. Newly emerged mobile banking service of Brac Bank that is
BKash has been successful to include people in the banking activities. Credit card is used
as an alternative of cash. So, it can be concluded that deposit will grow as people's banking
habit is increasing. It has been reported in the last annual report that deposit grows at
13.03% and investment grows at 18.36% per year. Based on the average growth rate of last
5 years and historic pattern I have estimated the loan & Advances (uses of funds) and
deposits (Sources of funds) of NBL. Then applying the sources and uses of funds method,
surplus and deficit are calculated

The table shows that the bank will have need for liquidity in the upcoming years as it investment
growths more than the deposit growth. NBL follows a conversion principle in trading off between
liquidity and profitability. But if it continues to hold some growth rate for investments and
deposits, liquidity of the bank will be hampered.

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 Sources and Uses of Fund Method
Year Estimated total Estimated total deposit Estimated Estimated Liquidity need
loan changes in loan Changes in
Deposit
2018 294,085.719 308,313.423 45,618.569 21,314.399 24,304.170
2019 348,079.857 348,486.662 53,994.138 40,173.239 13,820.899
2020 411,987.318 393,894.474 63,907.462 45,407.812 18,499.650
2021 487,628.190 445,218.924 75,640.872 51,324.450 24,316.422
2022 577,156.726 503,230.950 89,528.536 58,012.026 31,516.510

Liquidity need
35,000.000
30,000.000
25,000.000
20,000.000
15,000.000
10,000.000
5,000.000
0.000
2018 2019 2020 2021 2022

4.4 Structure of Deposit Method

Structure of deposit method is one of the liquidity estimating methods. NBL classifies its deposits
according to

a. Short Term: Current deposits.

b. Medium Term: Saving deposits and Term deposits.
c. Long Term: Fixed deposits.
Probability of deposits is considered based on historical experience. High risk or unstable deposits
require substantial liquidity to support them, whereas low risk or stable deposits require relatively
less liquidity.

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This method consists of the following steps:

a. Listing the different types of deposits.

b. Assigning a probability of withdrawal to cash.
c. Finding out the amount of withdrawal by multiplying deposits into probability of
withdrawal.
Table-12

Estimation of liquidity using probability of withdrawal method

Year Deposit Deposit amount Probability of Withdrawals

withdrawal
2018 Short Term 0.9

Medium Term 0.6

Long Term 0.4
Expected
Withdrawal
2019 Short Term 0.9

Medium Term 0.6

Long Term 0.4
Expected
Withdrawal
2020 Short Term 0.9

Medium Term 0.6

Long Term 0.4
Expected
Withdrawal
2021 Short Term 0.9

Medium Term 0.6

Long Term 0.4
Expected
Withdrawal
2022 Short Term 0.9

Medium Term 0.6

Long Term 0.4
Expected
Withdrawal

35 | P a g e
4.5 Meeting Liquidity Needs
National Bank uses two types of liquidity available to meet potential liquidity requirements - asset
management and liability management.

 Asset Management: NBL meets its liquidity needs by using near cash assets, including net
funds sold other banks, money market securities and asset backed securities.
Role of asset liquidity:-
i. Serve as alternative sources of funds: When interest rate is high to meet
liquidity needs bank sells treasury securities rather than issuing certificate
of deposit (CD).
ii. Serve as a reserve: If financial market loss confidence on bank safety and
soundness, it is likely that borrowed funds become inaccessible. In this case
bank depends on its liquidity reserve to run its operation if there arises
liquidity needs. Asset liquidity is a reserve to forestall problems that
threaten bank solvency.

Primary Reserve:

Most primary reserves are cash assets held to satisfy legal reserve requirements Cash Reserve
Ratio (CRR) and Statutory Liquidity Reserve (SLR) have been calculated and maintained in
accordance with the section 33 of the bank company’s act 1991. NBL has been maintaining its
CRR and SLR according to policy.

Secondary Reserves:

These are near money financial instruments that have no formal regulatory requirements and
provide and additional reserve of liquid assets to meet cash needs.

Principle of Financial Market Instruments:

Bank uses treasury bills and treasury bonds and price bonds for meeting immediate liquidity needs.

36 | P a g e
Aggressive liquidity Approach

Although timing securities to mature in order to meet liquidity need is the most common approach
to managing liquidity, there may be an opportunity to take advantage of yield curve relationships
by using an upward sloping and expected to remain at the same level in the near future, the
purchase of long term securities would not only offer higher yields than shorter term securities but
also could offer the realization of capital gains if they were sold before maturity to meet the
liquidity needs.

Year 2013 2014 2015 2016 2017

Deposit Ratio 0.780296749 0.850801624 0.838221065 0.869884285 0.9108991
Investestment to 0.293465443 0.269978118 0.268595463 0.251381553 0.221205257
Deposit Ratio

Total deposits are 91.09% of total assets which are increasing slightly over the years. The higher
the total deposit ratio, the lower is the liquidity risk because deposits are less sensitive to a change
in interest rates or a minor deterioration in business performance. Approximately 30% of all
deposits are distributed as investment which is gradually decreasing over the years.

2013 2014 2015 2016 2017

Deposits 193642.97 203296.18 222112.91 241329.88 272771.32
loans &
Advances 151098.98 172964.72 186179.72 209929.07 248467.15
Deposit Ratio 0.7803 0.8508 0.8382 0.8699 0.9109

37 | P a g e
 Deposits
100.00%
91.09%
90.00% 86.99%
85.08% 83.82%
80.00%
78.03%
70.00%
2013 2014 2015 2016 2017

Particulars 2013 2014 2015 2016 2017

Deposits 193642.97 203296.18 222112.91 241329.88 272771.32
Investments 56827.52 54885.52 59658.52 60665.88 60338.45
Investment to Deposit
Ratio 0.293465443 0.269978118 0.268595463 0.251381553 0.221205257

Investestment to Deposit Ratio

35.00%
29.35%
30.00% 27.00% 26.86% 25.14%
25.00% 22.12%

20.00%
15.00%
10.00%
5.00%
0.00%
2013 2014 2015 2016 2017

38 | P a g e
4.6 Liability Management
An alternative approach to liquidity management is to purchase the funds necessary to meet
liquidity needs. The primary advantage of liability management is that assets can be shifted from
lower earning money market instruments to higher earning loans and longer term securities. The
downside risks of liability management relates to:

a) The increase in cost of funds if interest rates rise

b) The increase in the expense to interest rate risk
c) The increase in financial risk
d) The increase in capital market risk

NBL borrows short term funds and invests in long term funds. But it involves-
i. Financial Risks- Financial risk is the increases in the vulnerability of earnings per share that is
associated with an increase in the debt with the proportion of total assets.
ii. Capital market risks- Now a day’s non-bank financial institutions offer higher for saving.
SIBL needs to provide higher yield to attract people.

iii. Fund Management of Liquidity: Management of liquidity is best handled by combining asset
liquidity and liability liquidity which has come to be known as funds management approach. Funds
management involves comparing total liquidity needs with total liquidity sources. Ratios used to
understand current liquidity position includes-

a) Loans/Deposits
b) Loans/Non-deposit Liabilities
c) Unencumbered liquid assets/Non-deposit Liabilities
d) Near-cash assets/Large-denomination liabilities

4.7 Performance Analysis

In order to have a better understanding I have analyzed the performance of the bank. Financial
ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be
used to analyze trends and to compare the firm’s financial to those of other firms as well as to
interpret strengths and weakness of a firm.

Return on Equity:

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Return on equity (ROE) is the amount of net income returned as a percentage of
shareholders equity. Return on equity measures a corporation's profitability by revealing how
much profit a company generates with the money shareholders have invested. The formula for
ROE is:

ROE = Net Income/Shareholders' Equity

Year ROE
2013 9.14%
2014 10.45%
2015 12.74%
2016 15.96%
2017 12.27%

A rising ROE of NBL suggests that the bank is increasing its ability to generate profit without
needing as much capital. It also indicates how well a bank's management is handling the
shareholders' capital. In other words, the higher the ROE of the bank the better. But in 2017 ROE
is decreasing but comparing with other 4 years ROE condition is satisfying.

ROE
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2013 2014 2015 2016 2017

40 | P a g e
Return on Asset:

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is
at using its assets to generate earnings. Return on assets is displayed as a percentage and its
calculated as:

ROA = Net Income / Total Assets

Year ROA
2013 0.96%
2014 1.08%
2015 1.43%
2016 1.90%
2017 1.43%

The ROA figure gives an idea of how effective the bank is in converting the money it invests into
net income. The higher the ROA number, the better, because the bank is earning more money on
less investment. Though the ratio is not increasing over the years, it is in a relatively stable position.

ROA
2.00%

1.50%

1.00%

0.50%

0.00%
2013 2014 2015 2016 2017

Earnings per share:

41 | P a g e
Earnings per share (EPS) is the portion of an organization's profit allocated to each outstanding
share of common stock. Earnings per share serves as an indicator of a company's profitability. EPS
is calculated as:

EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares

Year EPS
2013 1.36
2014 1.55
2015 1.95
2016 2.35
2017 1.98

A higher EPS means that the bank is profitable enough to payout more money to its shareholders.
The EPS range of NBL is between1% to 3%. The EPS is up warding but in 2017 it is slightly
decreasing.

EPS
2.5

1.5

0.5

0
2013 2014 2015 2016 2017

42 | P a g e
Debt to Equity Ratio:

The debt/equity ratio is a leverage ratio that represents what amount of debt and equity is being
used to finance a company's assets. It is considered a key financial metric because it indicates
potential financial risk. The debt/equity ratio is calculated as

Debt to equity ratio= Total liabilities/Total shareholders' equity.

Year Debt To Equity (times)

2013 8.83
2014 8.51
2015 7.39
2016 7.44
2017 7.69

Banks carry greater debt amounts because the money they borrow is also the money they lend. To
put it another way, the major product that banks sell is debt. The Debt to Equity ratio of National
Bank Limited is fluctuating. In 2013 it is highest 8.83times then other years it is decreasing.

43 | P a g e
 Chapter-5

Summary and Conclusion

Finally it can be said that liquidity management is one of the most essential part of all banks. Like
other banks, NBL also gives emphasis on this section. Through properly handling this section a
large problem is solved which is holding customer confidence. On this the image of the bank is
highly correlated.

Banks face two central issues considering liquidity. Banks are accountable for managing liquidity
creation and liquidity risk. Liquidity creation helps depositors and companies for staying liquid,
for companies especially when other form of financing is difficult. Banks can ensure its own
liquidity by managing liquidity risk so that the bank can continue to serve its function. Banks own
liquidity is affected by many factors and in turn the amount of liquidity are also affected they can
create. These factors have a varying degree of influence on the balance between liquidity risk and
liquidity creation, or a bank’s liquidity management.

A bank’s balance sheet plays a central role in their balancing of liquidity risk and creation. A
bank’s liabilities include all the banks sources of funds. Banks have three main sources of funds:
deposit accounts, borrowed funds, and long term funds. The amounts and sources of funds have
an clear effect on how much liquidity risk a bank has and how much liquidity it can make. The
easier a bank can access funds the less risk it has and the higher amount of funds it holds the more
liquidity it can create, if willing to do so.

Bangladesh bank has particular instructions regarding statutory reserve which establishes the
minimum liquidity position of the bank and also protects the depositors. Every Islamic Bank has
to maintain 6.5% CRR with Bangladesh Bank and 19.5% SLR. The liquidity management of a
central bank is defined as the frame work, set of instrument and the rules the central bank follows
in steering the quantity of bank reserves to manage their price (i.e. short term interest rates)
continuously with its final goals.(e.g. price stability).

Throughout the report it is seen that liquidity management position is strong and satisfactory. But
SIBL should give more importance in adopting competitive strategy and employee efficiency. If
the employees are satisfied then the banks’ performance will be more spontaneous and smooth and

44 | P a g e
consistent. Though NBL is a huge collector of deposit, it should be more careful about its
investment opportunity.

Activities of the asset liability management of the bank depend on proper liquidity planning & in
matching of assets liability gap despite the existence of volatile money market. From the above
analysis we have seen that NBL is maintaining a good liquidity position. It always maintains SLR
and CRR above the requirement ratio. So it never faces any liquidity crisis. But in spite of NBL
has some short comings in the liquidity management.

National Bank Ltd. has been able to establish its own presence with a continued expansion geared
by increasing acceptance by the people. To continue this dynamic expansion NBL needs to adopt
modern strategy in every banking department to cope with the competitive banking sector. As
NBL maintains significant growth in investment, it should emphasize more on collection of deposit
to maintain optimum liquidity. It should expand lines of communication to make sure that the
timely dissemination of the liquidity & funding policies & procedures to all individuals involved
in the liquidity management process. It should also monitor economic & other operating conditions
to forecast potential liquidity needs.

45 | P a g e
 References

 Benton E. Gup & James W. Kolari, Commercial Banking, 3rd Edition.

 www.socialislamibank-bd.com/
 Annual Reports of SIBL
 www.investopedia.com
 www.bb.org.bd
 Abuzar M.A. Eljelly, (2004) "Liquidity ‐ profitability tradeoff: An empirical
investigation in an emerging market", International Journal of Commerce and
Management, Vol. 14 Issue: 2, pp.48-61
 M.M. Metwally, (1997) "Differences between the financial characteristics of interest‐
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