TREASURY DEPARTMENT OF DAWOOD ISLAMIC BANK

SUBMITTED TO: COURSE: MANAGEMENT SECTION: SUBMITTED BY:

SIR SALMAN SARWAT TREASURY AND FUND

B MUHAMMAD KHURRAM ALISP09-MM-0042

0057

M JAWAD ANJUM

FA07-BBSP10-MB-

TARIQ ALI KHAN 0240 DATE: April 30, 2011

MUHAMMAD ALI JINNAH UNIVERSITY KARACHI

ACKNOWLEDGEMENT

All praises are for Allah Almighty who bestowed potentially upon us to accomplish this report successfully. This report is a Treasury Department Of Dawood Islamic Bank. This has been prepared as a part of the course requirement for TREASURY AND FUND MANAGEMENT. The material compiled and presented in this report is a result of hard work.

We also have sense of gratitude to Honorable teacher Mr. SALMAN SARWAT for his generous initiation and guidance in writing this project report. Without his encouragement and guidance this project would not have materialized.

TABLE OF CONTENT

ROLE OF TREASURY FUNCTION IN TODAYS WORLD SCOPE OF TREASURY MANAGEMENT KEY TREASURY CHALLENGES INTRODUCTION OF DIBL TREASURY DEPARTMENT OF DIBL FUNCTIONS OF TREASURY DEPARTMENT STRUCTURE OF TREASURY DEPARTMENT REPORTING SYSTEM TRANSACTION FLOW RISK MANAGEMENT

ROLE OF TREASURY FUNCTION

Introduction For finance and treasury functions, the agenda is changing fast. Change is being forced with rapid economic developments, globalizing industries and competition, new technologies and revolutionary changes in the regulatory environment. As well as responding to these forces, finance and treasury functions are under pressure to add value to the organization through their operations and contribute to achieving strategic goals. With significant developments that have taken place in the financial markets in the recent years affecting volatility in exchange rates and accentuating liquidity constraints, corporate have started paying closer attention to the treasury and foreign exchange (forex) management. Corporate treasury function is playing a pivotal role in financial risk management; exposure management and the use of hedging strategies are now all seen as essential requirements The concept of corporate treasury is defined through a comparison of traditional and emergent roles. The management accountants main task in cementing the treasurys strategic role is: A. to facilitate communications and understanding of strategic possibilities; B. to aid implementation through the use of diagnostics, and C. The development of gap and sustaining strategies. These emerging strategies are linked by one fundamental objective i.e., to attract and retain competitively sought-after investor capital or, in other words, increase shareholder wealth. In a world where investor capital has more choice and mobility than ever before, the key to corporate survival and growth lies in organizational change initiatives that will contribute directly to the economic value of the firm and its ability to satisfy the financial return requirements of its investors. Increasingly, treasury and treasury management practices are being aligned with and integrated into, the business strategies of organizations. It should not be surprising to see corporate treasury and treasury strategies involved in organizational change. Therefore, whilst ensuring the effective management of all forms of risks, treasury managers must also be able to use and apply financial products in order to maximize profit. With the ever-increasing range and complexity of financial instruments available, treasury managers must constantly update their skills in order to effectively undertake their crucial duties.

SCOPE OF TREASURY MANAGEMENT FUNCTION

In todays context, the scope of treasury management function is quite vast, and it continues to expand, as can be seen from the following listing 1. Cash and Liquidity Management
Cash flow dynamics, cash flow forecasting, cash flow valuations Short-term funding investment Cash Management: transactions, pooling and netting Working Capital Management Using Debt Instruments International Economics and International Finance International Financial Markets and Instruments Foreign Exchange: Swaps and Forwards Vanilla and Exotic Foreign Exchange Options Interest and Currency Risks Interest Rates: Forwards, Futures and Options. Interest Rate Swaps and applications Managing Currency Risks with Forward, Futures, Options and Swaps. Understanding of macroeconomic policies Understanding of how macroeconomic policies affect prices and costs in the economy Current scenario and future outlook for India and globally Role in accounting policy formation e.g. Forex transactions, Mutual Fund Investments, etc. Formation of Policies and Processes (Investment, Forex Management, Accounting, etc.,) Accounting Policies on recognition of Treasury Transactions Accounting Standards on various foreign exchange techniques under US and Indian GAAP

2. Foreign Exchange Risk Management

3. Financial Risk Management

4. Macroeconomic Policy Environment

5. Other aspects in Treasury Management

Taxation issues, e.g. Withholding tax on interest paid on overseas borrowings, treatment of capital gains/loss on investments, etc.

THE KEY TREASURY CHALLENGES

The world is increasingly global in level of connectivity and every day the pace of information moves faster than the one before. Treasury is at the heart of the organization and directly challenged by these external forces. The challenges include the following (extracted from Accentures Brochure on Treasury management services): Expanding risk coverage The range of risks that the treasury function is now expected to cover has expanded. As well as traditional risks such as foreign exchange, funding, liquidity and counterparty risk, the treasury function is increasingly likely to manage commodity price risk, insurance and pension risks.

Ensuring the policy is still relevant The treasury policy is the road map for the treasury function and it must keep pace with overall business strategy ensuring that the appropriate risks are identified, the right processes are in place for managing and mitigating those risks and that roles and responsibilities are clearly defined and communicated. Performance reporting Reporting and measuring performance is often seen as an additional burden on the overstretched treasury department. Well thought out metrics and indicators, along with a robust reporting framework, can not only be used to measure the performance of the function, but can also help drive high performance. Reducing the risk of operational errors The treasury function frequently manages complex, high-value transactions

under tight time constraints, which can create the potential for operational errors leading to significant financial loss. An operational risk framework that captures, categorizes and analyzes loss events is pertinent to both the banking and corporate world.

Achieving a clear view of the global cash position Organizations operate on a progressively global basis. As a result it becomes increasingly challenging to manage a central view of all banking arrangements. Depending on the relative autonomy of different business units, it may not always be practical simply to rationalize all global accounts. Other cash management methods-such as payment factories and in-house banking- may offer a more successful solution.

Enabling timely and accurate cash flow forecasts Having an accurate and timely view of the global cash position is vital for effective cash flow planning, and requires effective communication between business units. The treasurer may also provide valuable input into the longer term forecasting and budgeting processes and must work closely with the finance function. Meeting strategic plans Creating a funding program that is sufficiently flexible and responsive to achieve strategic objectives requires the corporate treasury function to make sure that its knowledge and understanding of the group business plans are consistent with the level, diversity, nature and maturity of the debt program it has in place. Optimizing Return on Investment With far more options available than simple bank deposits, the treasury function has to ensure that it is using the right instruments and investment methods that can fit both the risk profile and the required level of returns within the appropriate time frame.

About Dawood Islamic Bank Ltd

Dawood Islamic Bank Limited (DIBL), Pakistan's sixth full-fledged Islamic commercial Bank officially commenced its operations on Friday, April 27, 2007. DIBL has a strong Shariah Board headed by renowned scholar Prof. Mufti Munib-UrRehman as the banks Shariah Advisor. DIBL has a vision to be the best provider of customer centric Shariah compliant products and services in Pakistan. To help our customers to succeed financially and to promote economic and social progress in Pakistan through innovative Shariah compliant products. Our aim is, to first create wealth and then help our clients to manage it. DIBL currently has 50 online branches country-wide, delivering the highest level of customer service and innovative Islamic finance solutions. DIBL offers an internet banking solution, e-connect, an easy way for customers to access their account details, with comfort, security and at any time round the clock. DIBLs Al-Mustaqeem ATM card offers its customers the convenience of accessing their funds through the countrys ever expanding 1 Link and MNet ATM networks. Additionally the Al-Mustaqeem card can be used as a debit card allowing customers facility to pay at 8000 MNet Point of Sales outlets throughout Pakistan.

The bank has a diversified range of Shariah Compliant funded and nonfunded products and services catering to the needs of individual and corporate customers. The bank offers investment and corporate advisory services also.

MANAGEMENT
The Management Team of DIBL comprises of experienced managers who have been associated with the corporate and financial sectors locally or overseas particularly in the field of Islamic finance. We are proud to have as our management team:

Pervez Said President & CEO Taimur Afzal Group Head Consumer Banking Ayaz Wasay Group Head Treasury & FI Mushtaq Riaz Mirza Group Head Corporate & SME Saifudidn Shafi - Group Head Operations & IT Seemin Shafi Group Head of HRD Ihsan Ullah Ihsan Chief Risk Officer Naushad Kamil Head of Internal Audit Sohail Sikandar Chief Financial Officer. Aamir Ali Head of Compliance & Control.

Wajiha Mehdi Company Secretary/Internal Legal Counsel. Brig. (R) Asif Alvi Head of Administration, Security & Fraud Control

FINANCIAL SUMMARY

BRANCH NETWORK

TREASURY DEPARTMENT OF DAWOOD ISLAMIC BANK

Treasury according function to the is practiced guidelines

prescribed by the Shariah advisor of the bank. It manages the liquidity position of the bank and caters to the needs of the branches and customers for their funds requirements in all currencies. Rates in all currencies are provided to Branch/Customers with in shariah guidelines for the booking of trade related transactions as well as for the mobilization of deposits. In additions, treasury also facilitates customers who seek advices about the future outlook on the various currencies on a regular basis (without any commitment & obligation).

Under the shariah approved modalities of Musharakah /Murahaba & Mudaraba, Treasury has the ability to access the interbank money market with both Islamic as well as conventional financial institutions. Treasury also manages the statuary requirements with the central bank and also looks after the activities of its off shore accounts. DIBL will conduct FCY Commodity Murabaha transaction for their FE 25 US $ depositors with international banks Soon, treasury will provide shariah compliant investment opportunities in capital market that provides halal income ultimately to its customers

TREASURY DEPARTMENT OF DAWOOD ISLAMIC BANK

Retail Banking Corporate Banking Islamic Finance

Retail Banking

Al-Mustaqeem Deposits Al-Mustaqeem Auto Finance Al-Mustaqeem Housing Finance

Corporate Banking

Export Finance Fund Based Product Non Fund Based Product Al-Musharaka Trade Finance Al-Murahabah Trade Finance

Islamic Finance

Ijarah Ijarah with Diminishing Musharaka Mudarabah Murabahah Musharakah Qard Wakalah Salam

FUNCTIONS OF TRESURY DEPARTMENT

Treasury is profit centre of the bank and the primary objective of the profit centre is to earn the profit by investing in different products allowed by SBP. The main functions of the treasury consist of three markets which are as follows 1) Money Market: Primary objective is to maintain CRR 5% of demand liability and SLR 14% of demand and time liability and invest the surplus funds in money market instrument like Sukuks. (SUKUK an Islamic financial certificate, similar to a bond that complies with Sharia. the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.) 2) Forex market: Primary objective is to maintain NOP by netting of assets and liabilities (FE 25 deposits) and earn exchange gain on foreign gain on foreign exchange transactions. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. 3) Capital Market: Investment in stock market shares within the limits prescribed by SBP. The total investment in shares of Islamic banks shall not exceed 35% of their equity. Shares will also include units of all forms of Mutual funds excluding NIT units till its privatization.

STRUCTURE OF TREASURY DEPARTMENT

Treasury depends on three segments which are as follows

1)

Front office:
Headed by treasurer Next to treasurer is chief dealer And every desk i.e. MM, FX and equity is headed by their respective heads

2)

Middle office:
Headed by Chief risk office

3)

Back office:
Headed by Head of treasury operations

FRONT OFFICE ACTIVITIES

The bank needs to optimize its cash flows in order to ensure that shortfalls are fully funded, and any surpluses are invested in order to maximize its returns. Doing the deal is classed as front office, where as the reconciliation of payments is back office

The front office is literally the bank's interface with the market. The front office coordinates and handles all the needs of the bank and its clients with respect to hedging and financing.

Investment, position management trading, arbitrage

Front-Office information systems:

Electronic listing and trading systems Position-keeping systems often specialized for certain financial instruments (derivatives, fixed-income products, stock markets, etc.) Transverse systems: risk monitoring, liquidity forecasting

MIDDLE OFFICE ACTIVITES

Produces the risk management reports and checks for compliance with internal limits. Tends to be link with the back office. Thus manual dealing slip are collected by middle office staff for onwards transmission to the back office. Check that dealing slips are completed correctly and the settlement instructions are proper. Queries from the back offices on deals would be filtered through the middle office

BACK OFFICE ACTIVITIES

The back office sees to accounting records, compliance with government regulations, and communication between branches. The back office monitors the post-market processing of transactions: confirmation, payment, settlement and accounting. Example - In banking, the back office includes a strong IT processing system that handle position keeping, clearance, and settlement

On all levels, the efficiency of the information system is defined by its ability to process transactions automatically and in a secure manner: the byword is

STP (Straight through Processing): the transaction is processed straight through. In other words, the transaction is processed with little or no manual intervention.

DETAIL OF TRANSACTION FLOW

All the transactions executed by front office must be settled by back office. Whenever deals executed by front office they will prepare the deal tickets which will be signed by the authorized signatories and will be forwarded to back office, then back office will be responsible for the settlement of transaction front office can initiate the deal but they are not allowed to sign the cheques, transfer the funds or receive the funds and confirmations from the counter parties.

PRODUCT OF TREASURY DEPARTMENT

Treasury deals in many types of products but must be allowed by SBP. Some of which are identified as follows 1) Short term lending to financial institutions through different modes 2) Short term borrowing from financial institutions through different modes. 3) Sukuk 4) Equity shares 5) Foreign currencies 6) Hedging against future contracts of foreign currencies 7) Import / Export deals of customers to earn foreign exchange gain. 8) Future contracts

REPORTING SYSTEM

Front office headed by the treasurer and responsible for the all

the investments and exposure and treasurer reports to the CEO directly. Middle office headed by Chief Risk officer who also independently

report to CEO. Back office headed by the Head of Treasury operations who

reports independently to Operations Head/ Group Head Operations.

These three segments independently reports to their respective heads and independent from each other due to the strong control, segregation of duties and for the prevention of frauds.

HOW TREASURY DEPARTMENT MANAGES RISK

Treasury department manage their risk with the help of risk department to manage the risk of treasury every bank have a separate and independent risk department who manage the risk of the treasury investments and provide the limits and parameters in which treasury have to restrict them and are not allowed to go beyond that limits.

UNIQUE RISK IN ISLAMIC BANK

DAWOOD ISLAMIC BANK manages risk through fifteen principles of risk management Guidelines for IBIs (Islamic Banking Institutions) The principles contained in these Guidelines are designed to complement the current risk management principles issued by the Basel Committee on Banking Supervision (BCBS) and other international standard-setting bodies.

Fahad Jawaid | Assistant Manager Treasury Operations| Head Office Dawood Islamic Bank Limited, 2nd Floor, Trade Centre, I.I.Chundrigar Road, Karachi +92-21-32637174-5 Ext: 2510 -Dir +92-21-32272458| +92-21-32272465