DEFINITION

Liquidity is the availability of funds, or assurance that funds will be available, to honour all cash outflow commitments (both on- and offbalance sheet) as they fall due. These commitments are generally met through cash inflows, supplemented by assets readily convertible to cash or through the institutions capacity to borrow. The risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off-balance sheet items are mismatched.

LIQUIDTY MANAGEMENT PROGRAMME

Managing liquidity is a fundamental component in the safe and sound management of all financial institutions. Sound liquidity management involves prudently managing assets and liabilities (on- and offbalance sheet), both as to cash flow and concentration, to ensure that cash inflows have an appropriate relationship to approaching cash outflows. This needs to be supported by a process planning which assesses potential future liquidity needs, taking into account changes in economic, regulatory or other operating conditions. Such planning involves identifying known, expected and potential cash outflows and weighing alternative asset/liability management strategies to ensure that adequate cash inflows will be available to the institution to meet these needs. The objectives of liquidity management are: 1. honouring all cash outflow commitments (both on- and offbalance sheet) on an ongoing, daily basis; 2. avoiding raising funds at market premiums or through the forced sale of assets; and 3. satisfying statutory liquidity and statutory reserve requirements. Although the particulars of liquidity management will differ among institutions depending upon the nature and complexity of their operations and risk profile, a comprehensive liquidity management programme requires: establishing and implementing sound and prudent liquidity and funding policies; and developing and implementing effective techniques andprocedures to monitor, measure and control the institutionsliquidity requirement and positions

Liquidity Policies in Banks

Sound and prudent liquidity policies set out the sources and amount of liquidity required to ensure it is adequate for the continuation of operations and to meet all applicable regulatory requirements. These policies must be supported by effective procedures to measure, achieve and maintain liquidity. Operating liquidity is the level of liquidity required to meet an institutions day-to-day cash outflow commitments. Operating requirements are met through asset/liability

management techniques for controlling cash flows, supplemented by assets readily convertible to cash or by an institutions ability to borrow. Factors influencing an institutions operating liquidity include: cash flows and the extent to which expected cash flows from maturing assets and liabilities match; andThe diversity, reliability and stability of funding sources, the ability to renew or replace for regulatory purposes an institution is required to hold a specific amount of assets classed as liquid, based on its deposit liabilities. Generally, undue reliance should not be placed on these assets, or those formally pledged, for operating purposes other than as a temporary measure, as legally they may not be available for encashment if needed. In assessing the adequacy of liquidity, each institution needs to accurately and frequently measure: and liabilities, both on- and off-balance sheet; by cash inflows over a specified period of time, maturing or liquefiable assets, and cash on hand; the extent to which potential cash outflows may be supported by the institutions ability to borrow or to access discretionary funding sources; and The level of statutory liquidity and reserves required and to be maintained.

Essentially, operating liquidity is adequate if the institutions approaching cash inflows, supplemented by assets readily convertible to cash or by an institutions ability to borrow are sufficient to meet approaching cash outflow obligations. In this context, because the timing and amount of these cash flows are not completely predictable because of risks such as credit defaults, and events including honouring customer drawdowns on credit commitments, deposit redemptions, and prepayments, either on mortgages or term loans, sound and prudent liquidity policies must deal with this uncertainty by carefully controlling the maturity of assets, ensuring assets are readily convertible to cash, or securing sources to borrow funds. Liquid assets should have the following attributes: diversified, residual maturities appropriate for the institutions specific cash flow needs; minimal credit risk. Holding assets in liquid form for liquidity purposes will often involve some loss of earnings capacity relative to other investment opportunities. Nevertheless, the primary objective with respect to managing the liquid asset portfolio is to ensure its quality and convertibility into cash.

The Banks liquidity management:

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Liquidity in the market is greatly affected by flows between the government and the banking system as previously outlined. This includes transactions between the government and banking system as well as between the Bank and the banking system.9 When the government makes disbursements to the private sector (eg in the form of social welfare payments, tax refunds, or salaries to public servants) and this exceeds the cash it receives from the private sector10 (eg: in the form of tax payments, fines or fees for government services) on any given day, this results in an increase in liquidity of the banking system. Conversely, liquidity is reduced when the government receives more cash from the private sector than it distributes. These fluctuations in liquidity could have an impact on interest rates and monetary conditions unless neutralised by open market operations. The Bank needs to know the value of the payments the government and the Bank expect to receive and pay out on any given day. The Bank does this by forecasting liquidity based on information provided to it by the Government and the larger government departments (such as the Ministry of Social Development, the Ministry of Health, and the Ministry of Education). The flows between the government and the banking system, together with flows between the Government and the Bank, are generally large, although flows between the Government and the Reserve Bank do not affect the banking system. Total government revenue and expenditure on any given day averages around $450 million. Other large periodic government flows include maturing government securities such as treasury bills (typically around $650 million) and bonds (around $2,500 million). While the value of transactions is large, there are regular patterns to the flows. For example, PAYE tax is due on the 5th and 20th of each month, and pension payments occur every second Tuesday. The regularity of these payment dates helps to provide greater certainty for liquidity forecasts, thereby facilitating effective liquidity management. The Government assists the Bank by ensuring that the government departments responsible for approximately 95 per cent of the governments receipts and payments provide the Bank with forecasts of their transactions in a timely manner. The Banks responsibility is to review both the accuracy of the timing of these flows and then calculate the net impact on the banking system. Consequently, the Bank maintains a fairly close dialogue with some of the government departments in order to maintain a reasonably accurate and complete understanding of the magnitude and timing of cash flows.

Liquidity Management Techniques

Liquidity management means holding cash in the right amounts to benefit a business. Holding cash helps a business take care of emergent expenses or opportunities that would otherwise be unavailable if cash is tied up in other nonliquid assets. A company can improve its liquidity by selling property, increasing sales or cutting costs to build its store of cash.

Identification

Liquidity management involves techniques used by business management professionals to ensure a business has the cash it needs. Paying attention to the cash a business has on hand can help guard the business against additional expenses caused by a lack of available assets for payment. The idea of liquidity management is to balance how much cash a business has available with how much the business needs to have. If a business is holding too much saved cash as liquid assets, the extra money could be disbursed to stockholders, used to buy back company stock, or applied to build or improve the company.

Types
Financial assets come in two types: liquid and nonliquid. According to Marvin Chester at the University of California Los Angeles, nonliquid assets are sometimes called viscous assets. A business needs liquid assets on hand to help it cope with emergencies or to make business negotiations that need to be settled with cash.

Scope
Though the practice of liquidity management mainly revolves around managing the cash the company keeps on hand for emergencies, liquid assets also include the balance of checking or savings accounts owned by the business, as well as any outstanding credit, debit or check card payments that have not been disbursed to the business. Generally, nonliquid assets include difficult-to-sell holdings such as land, buildings and equipment.

Expert Insight
Some financial professionals, such as Debra Pankow, Family Economics Specialist at North Carolina State University, consider assets that are easily converted into cash, such as stocks and mutual funds, to be forms of liquid assets. Others, like Chester, contend that liquid assets only include assets that can be used as reliably as money in trade situations. Under Pankow's view of liquid assets, assets for a farmer might include chickens for sale because the farmer can sell the chickens for cash quickly, but Chester's definition would probably exclude chickens as liquid assets because they would be unlikely to be accepted in exchange for nonfarmingrelated services, such as a medical visit, for example. Considerations Because liquidity to one business may be different from liquidity for another business, part of liquidity management means taking into account the specifics of the business and what constitutes a liquid asset in that industry. Business specifics such as the size, volume of sales and type of product or service can affect the definition of

liquidity for each business. While low-volume businesses move product slowly and may not be able to sell products on hand quickly enough to call them liquid assets, a store that does a high-volume of sales can quickly and reliably turn a product into a cash payment, which provides a degree of liquidity to the business.

Board and Senior Management Oversight

Effective oversight is an integral part of an effective liquidity management program. The board and senior management should understand their oversight responsibilities.

Board of Directors
The board of directors should establish the associations tolerance for liquidity risk, set liquid requirements, and approve significant policies related to liquidity management. The board should also ensure senior management takes the necessary steps to monitor and control liquidity risk. The board should understand the nature and level of the associations liquidity risk, and management should inform the board regularly of the liquidity position of the association.

Senior Management
Senior management should establish policies, procedures, and guidelines for managing and monitoring liquidity to ensure adequate liquidity at all times. Policies should include internal controls. In addition, senior management should review the associations liquidity position on a regular basis and monitor internal and external factors and events that could have a bearing on the associations liquidity. Senior management should also prepare contingency funding plans. Senior management should review periodically the associations liquidity strategies, policies, and procedures.

Policies and Procedures

A savings association should have clearly defined policies and procedures for managing liquidity. The board of directors has ultimate responsibility for the adequacy of policies and procedures; senior management has responsibility for their design and implementation. Polices and procedures should include the following: An Delineated lines of responsibility. Identification of individuals or committees responsiblefor managing and monitoring liquidity risk. overall liquidity strategy. The liquidity strategy should define the general approach the savings association will follow in managing liquidity, including various quantitative and qualitative targets. The liquidity strategy should cover specific policies on the composition of assets and liabilities, including policies on investment in illiquid securities and the use of wholesale funding. There should also be a written strategy for addressing temporary and long-term liquidity disruptions. A process for measuring and monitoring liquidity. Although associations can use a number of procedures for measuring and monitoring liquidity, the most effective procedures involve pro-forma cash flow projections. These range from simple calculations to complex models for projecting cash inflows and outflows over different planning periods (time bands) to identify cash shortfalls and surpluses in future periods. While

liquidity measures based on balance sheet ratios are useful in measuring an associations current liquidity position and in monitoring trends in liquidity, management should focus its attention on forward looking, pro-forma measures of liquidity. Quantitative guidelines and limits to ensure adequate liquidity. Guidelines and limits will vary depending on the nature of an associations operations and circumstances. Associations could set guidelines, for example, on the size of cash flow mismatches over specified time horizons. Because of the subjective nature of the numbers in pro-forma cash flow projections, associations may find it impracticalto establish precise risk limits or precise rules for addressing cash flow mismatches projected to occur in future periods. Nevertheless, an association should make an effort to define its tolerance for cash flowmismatches and should establish strategies for addressing them. Associations can also tie limits to balance sheet ratios

Askari Commercial Bank Limited

INTRODUCTION TO BANK :
Askari Commercial Bank Limited (ACBL) works as a Unit of Army Welfare Trust was established for the Welfare of Army Officials. The office of Army Welfare Trust is situated at AWT Plaza, Rawalpindi. AWT offers the AWT Saving Scheme to the army officials only. AWT has its units as under: 1. 2. 3. 4. 5. 6. 7. Askari Associates. Askari Leasing. Askari General. Private Business. Textile Mills. Cement Industry. Askari Commercial Bank.

Incorporated in Pakistan on October 09, 1991. The bank obtained business commencement certificate on February 26, 1992 and started operations form April 1, 1992, as public limited company, and has since expanded into a nation-wide presence of 51 branches, supported by a network of online ATMs. The Bank is listed on the Karachi, Lahore and Islamabad Stock Exchanges and the initial public offering was over subscribed by 16 times. Askari Commercial Bank is scheduled Commercial Bank and is principally engaged in the business of banking as defined in the Banking Companies Ordinance 1962. Askari Commercial Bank limited continues to scale new heights in all areas of its operations. The safety and security of depositors funds, high productivity and optimum use of technology are the hallmarks of its corporate strength. While capturing the largest market share amongst the new banks, Askari has provided good value to its shareholders. Share price of ACBL has remained approximately 12% higher than the average share price of quoted banks during the last four years. Askari Bank is principally engaged in the business of banking as defined in the Banking Companies Ordinance, 1962. as at December 31, 2002 the Bank had total assets of PKR 70.313 billion, with over 250000 banking customers.

Askari Bank is the only bank with its operational Head Office in the twin cities of RawalpindiIslamabad, which have relatively limited opportunities as compared to Karachi and Lahore. This created its own challenges and opportunities, and forced us to evolve an outwardlooking strategy in terms of our market emphasis. As a result, we developed a geographically diversified assets base instead of a concentration and heavy reliance on business in the major commercial centers of Karachi and Lahore, where most other banks have their operational Head Offices. Multan is a cotton city, so to get the export market of cotton ACBL open its branch in Multan in December, 1994. In a short span of time this branch increase their business remarkably. In 2001 this branch gets the trophy of highest profit for the year 2001. This branch has highest deposits and advances as compare to other banks working in Multan. Now recently this branch gets the trophy of highest imports for the month of July 2003 as compare to all the branches of Askari Commercial Bank working in Pakistan.

Awards & Achievements

Over the years, ACBL have received several awards for the quality of our banking service to individuals and corporate. ACBL have been declared The Best Bank in Pakistan by the Global Finance magazine for the years 2001 & 2002. Also, ACBL have been given the Best Consumer Internet Bank award for Pakistan by the same magazine for the year 2002. in 1994, 1996 and 1997, ACBL received Euro money and Asia money awards. Askari has A1+ rating for short-term obligations the highest possible for the category, while the long-term rating stands at AA. Askari Bank won the prestigious Best Presented Annual Accounts awards for 2000 and 2001 from the Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management Accountants of Pakistan, for the services sector. For the past four years, ACBL have received prizes from the South Asian Federation of Accountants for The Best Presented Annual Accounts for the financial sector, in the ASSRC region. Over the years, Askari Bank has proved its strength as a leading banking sector entity, by achieving the following firsts in Pakistani banking. 1. 2. 3. 4. First Pakistani Bank to offer on-line real time banking on a countrywide basis. First Bank with a nation-wide ATM network First Bank to offer Internet Banking services First Bank to offer E-Commerce solutions

The Vision
To be the Bank of First Choice in the Region

The Mission
To be the leading private sector bank in Pakistan with an international presence, delivering quality service through innovative technology and effective human

resource management in a modern and progressive organizational culture of meritocracy, maintaining high ethical and professional standards, while providing enhanced value to all our stakeholders, and contributing to society

Core Values
The intrinsic values, which are corner stones of our corporate behavior, are: 1. 2. 3. 4. 5. Commitment Integrity Fairness Team-work and Service

Corporate philosophy
Inspiring Relationships From knowing our customer requirements to understanding employee needs, from utilizing modern technology to making responsible social contributions, from enhancing stake-holders value to practicing corporate ethics We are continuously and consistently striving to address newer challenges with a single motivation: the power to inspire and be inspired

Liquidity Management
Liquidity risk management safeguards our ability to meet all payment obligations when they come due. Our liquidity risk management framework has been an important factor in maintaining adequate liquidity and in managing our funding profile during 2010. Liquidity Risk Management Framework The Management Board defines our liquidity risk strategy, and in particular our tolerance for liquidity risk based on recommendations made by Treasury and the Capital and Risk Committee. At least once every year the Management Board will review and approve the limits which are applied to the Group to measure and control liquidity risk as well as the Banks long-term funding and issuance plan. Our Treasury function is responsible for the management of liquidity and funding risk of Deutsche Bank globally as defined in the liquidity risk strategy. Our liquidity risk management framework is designed to identify, measure and manage the liquidity risk position of the Group. Treasury reports the Banks overall liquidity and funding to

the Management Board at least weekly via a Liquidity Scorecard. Our liquidity risk management approach starts at the intraday level (operational liquidity) managing the daily payments queue, forecasting cash flows and factoring in our access to Central Banks. It then covers tactical liquidity risk management dealing with access to secured and unsecured funding sources. Finally, the strategic perspective comprises the maturity profile of all assets and liabilities (Funding Matrix) and our issuance strategy.

Our cash-flow based reporting system provides daily liquidity risk information to global and regional management. Stress testing and scenario analysis plays a central role in our liquidity risk management framework. This also incorporates an assessment of asset liquidity, i.e. the characteristics of our asset inventory, under various stress scenarios as well as contingent funding requirements from off-balance-sheet commitments. The monthly stress testing results are used in setting our short-term wholesale funding limits (both unsecured and secured) and thereby ensuring we remain within the Boards overall liquidity risk tolerance.

Short-Term Liquidity
Our Group-wide reporting system tracks all contractual cash flows from wholesale funding sources on a daily basis over a 12-month horizon. The system captures all cash flows from unsecured as well as from secured funding transactions. Wholesale funding limits, which are calibrated against our stress testing results and approved by the Management Board, express our maximum tolerance for liquidity risk. These limits apply to the respective cumulative global cash outflows and are monitored on a daily basis. Our liquidity reserves are the primary mitigant against stresses in shortterm wholesale funding markets. At an individual entity level we may set liquidity outflow limits across a broader range of cash flows where this is considered to be meaningful or appropriate.

Unsecured Funding
Unsecured funding is a finite resource. Total unsecured funding represents the amount of external liabilities which we take from the market irrespective of instrument, currency or tenor. Unsecured funding is measured on a regional basis and aggregated to a global utilization report. As part of the overall Liquidity Risk Strategy, the management board approves limits to protect our access to unsecured funding at attractive levels.

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Stress Testing and Scenario Analysis

We use stress testing and scenario analysis to evaluate the impact of sudden stress events on our liquidity position. The scenarios we apply have been based on historic events, such as the 1987 stock market crash, the 1990 U.S. liquidity crunch and the September 2001 terrorist attacks, liquidity crisis case studies and hypothetical events. Also incorporated are the lessons learned from the latest financial markets crisis. They include the prolonged term money-market and secured funding freeze, collateral repudiation, reduced fungibility of currencies, stranded syndications as well as other systemic knock-on effects. The scenario types cover institution-specific events (e.g. rating downgrade), market related events (e.g. systemic market risk) as well as a combination of both, which links a systemic market shock with a multi-notch rating downgrade. Under each of these scenarios we assume that all maturing loans to customers will need to be rolled over and require funding whereas rollover of liabilities will be partially impaired resulting in a funding gap. In addition we analyze the potential funding requirements from off-balance sheet commitments (e.g. drawings of credit facilities and increased collateral requirements) which could materialize under stress. We then model the steps we would take to counterbalance the resulting net shortfall in funding. Countermeasures would include the Groups unencumbered business asset inventory, the available long cash balance (over and above cash balances which form an integral part of our existing clearing and settlement activities), as well as our strategic liquidity reserve. The asset liquidity analysis thereby forms an integral piece of stress testing and tracks the volume and booking location within our consolidated business inventory of unencumbered, liquid assets which we can use to raise liquidity via secured funding transactions. Securities inventories include a wide variety of different securities. As a first step, we segregate illiquid and liquid securities in each inventory. Subsequently we assign liquidity values (haircuts) to different classes of liquid securities. The liquidity of these assets is an important element in protecting us against short-term liquidity squeezes. In addition the bank maintains sizeable cash balances, primarily with central banks, which are held in excess of the collateral which is required to support our clearing activities in euro, U.S. dollars and other currencies around the globe. As a separate countermeasure we hold a dedicated strategic liquidity reserve containing highly liquid and central bank eligible securities in major currencies around

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the world to support our liquidity profile in case of potential deteriorating market conditions. The volume of the strategic liquidity reserve is the function of expected stress result. Size and composition are subject to regular senior management review.

The most immediately liquid and highest quality items within the above three categories are aggregated and separately identified as our Liquidity Reserves. These Reserves comprise available cash and highly liquid government securities and other central bank eligible assets. As of December 31, 2010 our Liquidity Reserves exceeded 145 billion. Stress testing is fully integrated in our liquidity risk management framework. We track contractual cash flows per currency and product over an eight-week horizon (which we consider the most critical time span in a liquidity crisis) and apply the relevant stress case to all potential risk drivers from on balance sheet and off balance sheet products. Beyond the eight week time horizon we analyze on a quarterly basis the impact of a more prolonged stress period extending out to twelve months, together with mitigation actions which may include some change of business model. The liquidity stress testing provides the basis for the banks contingency funding plans which are approved by the Management Board. Our stress testing analysis assesses our ability to generate sufficient liquidity under extreme conditions and is a key input when defining our target liquidity risk position. The analysis is performed monthly. We use stress testing and scenario analysis to evaluate the impact of sudden stress events on our liquidity position. The scenarios have been based on historic events, such as the 1987 stock market crash, the 1990 U.S. liquidity crunch and the September 2001 terrorist attacks, liquidity crisis case studies and hypothetical events. Also incorporated are new liquidity risk drivers revealed by the latest financial markets crisis: prolonged term money-market freeze, collateral repudiation, limited fungibility of currencies, stranded syndications, systemic knock-on effects and further liquidity risk drivers such as intraday liquidity risk. As of year-end 2009 we also have introduced a scenario which combines a systemic market shock with a multi notch rating downgrade. Under each of these scenarios we assume that all maturing loans to customers will need to be rolled over and require funding whereas rollover of liabilities will be partially impaired resulting in a funding gap. We then model the steps we would take to counterbalance the resulting net shortfall in funding. Countermeasures would include the banks long cash balance and unencumbered asset inventory as well as our Strategic Liquidity Reserve.

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Stress testing is fully integrated in our liquidity risk management framework. We track contractual cash flows per currency and product over an eight-week horizon (which we consider the most critical time span in a liquidity crisis) and apply the relevant stress case to all potential risk drivers from on balance sheet and off balance sheet products. Beyond the eight week time horizon we analyze on a quarterly basis the impact of a change of business model out to 12 months. The liquidity stress testing provides the basis for the banks contingency funding plans which are approved by the Management Board. Our stress testing analysis assesses our ability to generate sufficient liquidity under critical conditions and has been a valuable input when defining our target liquidity risk position. The analysis is performed monthly.

SWOT ANALYSIS
SWOT (Strength, Weaknesses, Opportunities & Threats) analysis of ACBL is described below:

Strength:
ACBL has got a well-developed on-line system in most of its branches. Remittance Department is working very efficiently in transferring the funds of people due to this system. The bank has also started ATM facility in most of its branches. 24-hour banking is new trend in Pakistan and ACBL has also taken apart in this trend. One distinctive feature of the bank is that it is the only bank working for the welfare of army officers, which was established by Army Welfare Trust. The productivity of the bank is very good. Bank is providing a high quality service to its customers. ACBL have strength that most of the imports & exports which are done in Multan are handle by ACBL Multan.

Weaknesses:
ACBL has lesser number of branches as compared to many other branches. Due to this problem, army officers can not avail the benefits of their own bank. The human resource department is not performing the function of selection and recruitment very effectively. Selection process is not on merit due to which competent persons cannot be selected. Bank is not introducing new products and new saying schemes. Bank should boost the product development and increase the range of facilities offered for customers.

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Bank is weak in its credit management. Bank should lend to very sound parties and increase its payment rate.

Opportunities:
Govt. is taking very bold steps to promote IT in Pakistan. ACBL has an opportunity to improve in technology. Stock exchange is very volatile and takes immediate effect. So, in the time of crises, conservative investors return to saving deposits. ACBL is surrounded by many competitors. It has an opportunity to do aggressive marketing to increase its business.

Threats:

ACBL has many competitors, which are continuously increasing its products and marketing aggressively. It may cause its customers to shift to competitors. Some other banks have competent taskforce, which is also a threat for ACBL. Because human resource is the most valuable resource. Pakistan India relations often create a war danger. This chance of war may cause army officer and their families to increase the frequency of withdrawals, which would decrease deposits. In Multan Imports & Exports business are done on seasonal basis. Which effect the whole business of ACBL Multan.

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