wahiddaudzai bok.doc

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CHAPTER1

INTRODUCTION OF THE STUDY

1.1 Background of the Study

This study is focused the Bank of Khyber Pakistan, which is the govt. bank,

owned by the KPK Provincial Govt.

The bank of Khyber become a schedule bank in the year 1994. The Head Office

is situated at 24-The Mall, Peshawar Cantt. KPK Pakistan. This bank has been

playing an important role for the development of different sectors in Pakistan

and especially in KPK. It has a network of 29 branches, which are located in

different locations of our country. Despite difficult economic conditions, like

lack of suitable lending opportunities, volatility of interest rate and equity prices,

the bank manages to show good results for every year.

An opportunity was created to understand the practical banking operations during

two months of internship in The Bank of Khyber. The Bank of Khyber is one of

the banks, which has agreed to provide internships under a special program,

which is being jointly conducted by the State Bank of Pakistan & IMS Peshawar.

Being an internee, I was deputed to The Bank of Khyber, Ashraf Road Branch in

Peshawar. This internship is also, one of the requirements of fulfilling a

BBA(Hons) degree.

1.2 Purpose of the Study

Being a student of business administration, especially of finance, the purpose of

conducting this study is to develop some insight into the working of banks, the

bank of Khyber specially here. More thoroughly, after some what understanding

the procedures of the Bank, the aim is to make a critical analysis of it and suggest

recommendations.


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1.3 Scope of the Study

The scope of this particular study confined to the Bank of Khyber Ashraf Road

Branch. More specifically, the operation department of the above mentioned bank

branch is the major emphasis of the study.

1.4 Methodology of the Report

The method of data collection are mostly based on personal observations and

experiences of actually working at the Bank. Dealings with customers, along with

general procedures involved were observed. Moreover, as the departments are

always bustling with activity, there was not enough time to carry out formal

interviews or surveys, the methods used for data collection are:

Primary Data

Observations Discussions with Bank officers.

Secondary Data

Manuals Annual Reports Information Memorandum Internet.

1.5 Scheme of the Report

The entire report is organized in the following manner.

Chapter one (already covered) gives the background of the study, the purpose ofthe study, the scope and methodology that is used to collect all the relevant data

and the scheme of the report itself.

Chapter two is about the organizational review i.e. the history of the bank of

khyber, mission statement, organizational structure and chart etc.


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Chapter three give the Ashraf road Branch overview where the Internship is

conducted. Chapter four is about the various financial products and services

offered by the Bank of Khyber.

Chapter five emphasis on the department of specialization i.e. operation

department and the various types of facilities given by it.

Chapter six covers the financial analysis of the bank

Chapter seven consists of the recommendations based on the findings from the

study.


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CHAPTER2

ORGANIZATIONAL REVIEW

2.1 The Bank of Khyber Pakistan

The Bank of Khyber (BOK) was established in 1991 under the act of the KPK

assembly its objectives included promotion of savings and investment in the KPK.

In 1994 it acquired the status of a scheduled bank that allowed it to open branches

outside KPK, become a member of the clearing house ,and engage in trade

finance activity. Advantages of scheduling have had a positive impact on the

Bank after adjustments to State Bank of Pakistan (SBP) requirements during

1995.

The bank has a paid up capital of Rs. 750 million out of which Rs. 652.5 million

has been provided by the government of KPK, while the remaining Rs. 97 .50

million has been contributed by DEG, a German Development Bank.

BOK is distinguished by the fact that it is not only a schooled commercial bank

but it also plays a role of a development agent, through systematic long-term

lending, specially to small and medium size business. Separate project financing

departments namely, long-term projects department and Micro Finance Unit has

been set up for this purpose. Several line of credit from international agencies

have been arranged by BOK for meeting the funding requirements of

development projects in KPK.

BOK has 29 branches with 23 in KPK and 2 at Karachi, one each at Islamabad,

Quetta, Lahore, and Muzzaffarabad, (Azad Jammu and Kashmir). The Bank has

630 well-qualified employees including 346 well-qualified officers, and it placesgreat importance on their professional achievements.


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Source: http://www.bankofkhyber.com.pk/bokeducation.htm.

2.2 Mission Statement

Mission, broadly stating, is the purpose for which an organization exists and why

should it compete in certain sectors and industries. Within mission, sometimes

stated as purpose, the organization addresses itself to what it intends to

accomplish both in the long and short run. Mission is a very broad statement of

organizational direction, and is normally summarized and documented in a

mission statement. In same way, the Bank of Khyber being an organization, has a

mission statement, as follow:

To excel as a quality service provider, in a supportive environment with a special

focus on micro-business and to exploit the indigenous resources, while

maintaining a highly motivated staff.

2.3 Main Objectives of the BOK

Objectives are the ends towards which activities are aimed. In fact these are the

results to be achieved. The bank of Khyber has certain objectives, which are as

follows;


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Mr. Muhammad Asif Director

Mr. Maqsood Ismail Director

Mr. Amjid Pervez Director

Source: The Bank of Khyber Annual Report 2010.

2.5 Organizational Chart

The BOK is a centralized organization in which little authority is given to the

lower levels of management.

The head office of BOK is divided into two divisions and each division has its

own set of departments, these two are:

Banking operation division Personnel and establishment division

There are also two other independent departments.

Long term projects Audit department

Long term projects (LTP) handles the investment proposals of huge industrial and

agricultural projects. Where as the audit department is responsible for having an

internal control.


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Organizational Chart

THE BANK OF KHYBER

Source: The Bank of Khyber Information Memorandum, 1998.

Organization

Board of Directors

Managing Director

Managing Committee

Long Term ProjectsResident Directors

AUDIT

Personnel & Establishment DivisionBanking Operation Division

Investment

Computers

M.B.D

P & E Deptt.

Public Relation

Deptt.

Branch Operations

Deptt.

Foreign Exchange

Deptt.

Credits Deptt.

Monitoring &

Recovery Deptt.

Branches

29

Accounts &

Treasury Deptt.


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Interview

The candidates who qualify the written test, are then called for interview, the

main purpose of the interview is to judge the personal qualities of the candidate.

Physical Examination

The selected candidate are required to bring a medical fitness certificate from any

registered medical practitioner, the main purpose of the certificate is to make sure

the physical fitness of the candidate at the time of appointment.

Appointment

The selected candidates receive their appointment letter through post at the

address they have given in the form. They are appointed for the period of one-

year as probationary office. At the time of appointment they have to submit the

following documents.

a) Bank secrecy bond, that they will not lack out secrecy to any one outside thebank.

b) Surety bond.c) Service agreement bond.Probation

The selection candidates remain under probation for the period of one year. They

receive pre entry training at Union Bank Academy Lahore as BOK does not have

its own training academy probationary office receive a fixed salary.

Confirmation

After the successful completion of the probation period the probation officers are

confirmed and their services are secured. For confirmation they have to pass a test

and fi they pass this test they are permanently recruited as office Grade-III.

B. TRAINING

A learning experience that seeks a relatively permanent change in an individual

that will improve his or her ability to perform on the job. Towards this main


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objectives training courses have been organized, intitating a self-development

process in order to accelerate organizational growth and to further improve the

banks level of expertise and efficiency.

C. TRAINING PROGRAM

The institute of Bankers in Pakistan (IBP) arranges training programs for all the

banks including the Bank of Khyber, to upgrade their management skills. IBP also

programs seminars, conferences and training programs for one to two or more

days.

IBP conducted three exams in the full service of a banker, part-I, part-II, and part-

III. It is called DAIBP (Diploma Associates Institute of Bankers in Pakistan). If a

banker clears all the papers in the first chance so he or she would get a cash prize.

After clearing Part-I, a lower grade officer is given the option of their taking the

cash prize or a promotion. In grade II only the cash prize is offered.

For improving the skills and knowledge of its employees, the management of the

BOK has on job training, job rotation and off the job training.

On- The-Job Training

On-the-job training is normally given by a senior employee or supervisor to thetrainee in order to enhance and polish the skills of his or her. The bank provides

the opportunity to take part in the courses and seminars conducted by the institute

of Bankers Pakistan and other professional institutes.

Job Rotation

Job rotation is defined as An alternative to job specialization that involves

systematically moving employees from one job to another.7

It enables the

employees to work on different positions and get an overall picture of the banks

operations.

Off Job Training

Off job training in BOK includes conferences, seminars, meetings and refresher

courses. This mode to training is done to enable employees to upgrade their


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knowledge to new developments in the banking profession and also to broaden

their outlook.

D. PROMOTION

Main criteria for promotion are the performance and skills of the individual,

though seniority is also taken into consideration but it is secondary importance.

BOK has defined perfect career paths for its employees and that staff gets

accordingly in their grades by way of transferring from one position to the others.

Promotions up to the Joint Director are approved by the MD on the

recommendations of the promotion committee. Promotion of officers to the post

of Director and above are approved by the Board of directors on the

recommendation of the MD.

To keep the employees motivated the MD may promote and officer out of turn

(who has not completed 3 years of services in the grade) up to 10% of those

eligible for promotion. Junior offices and officers who pass DAIBP part-1& II

have the option of promotion to the next higher grade or to get the cash award.

Normally employees are promoted to the next grade after 3 years but promotion is

totally based on 3 years performance of the employee.

e. Performance Appraisal

A formal assessment of how well an employee is doing his or her job.8

Performance appraisal is evaluating the performance of employees for a given

period of time. it is a systematic evaluation of the individual with respect to his

performances on the job and his potential for development. The performance of

employees at the BOK is appraised on the basis of annual confidential reports. A

proforma made by head office is sent to immediate superior for filling.

Increments are decided on the basis of these appraisal reports according to the

performance of the employees. These increments or appraisals play a very

important role in the development and encouragement of the staff.


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F. ALLOWANCES AND FRINGE BENEFITS

Allowances

House Rent Conveyance/maintenance allowance. Utilities allowance. Medical allowance

Benefits

Things of value other than compensation that an organization provides to its

workers. The BOK allows the following benefits to its executives and managersonly.

Residential telephone Entertainment allowance Bank car Residential facilities

G. DISCIPLINARY RULES

Discipline is a force that prompts individuals or groups to observe rules,

regulations and procedures that are demand to be necessary for the effective

function of the organization. Discipline; in ordinary conduct of affairs by the

members is to maintain harmony and peace in organization willingly. Following

are the examples of indiscipline.

Absence from duty Misconduct Disobedience with any lawful and reasonable order of the supervisor

i.e. transfers.

Fraud and forgeries Damage or loss (bank property) Sleeping while on duty


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Clearing Department

BOK along with their daily business activity also provides the facility of

collecting credit claims for customers i.e. when a customers deposits a cheque or

draft for collection which is of the some other bank. Then bank collects this

instrument for its customer through clearing and similarly in case of payment the

bank makes payment through clearing for the instruments (cheques or drafts)

which are given by its customer for his obligation fulfillment to customer of some

other bank. The function of clearing house system is operated by the State Bank

of Pakistan (SBP) if SBP has no office at a place then National Bank of Pakistan

(NBP) as a representative of SBP acts as a clearing house.

Credit Department

The bank is profit seeking institution. It attracts surplus balance from the

customer at low rate of interest and makes advances at a higher rat eof interest to

the individuals and business firms. Credit extensions are the most important

activity of all the financial institutions, because it is the main source of earnings.

Credit departments is one of the most sensitive and important department of the

bank. The major portion of the profit is usually earned through this department.

The job of this department is to make proposals about the loans, the credit

management division of head office directly controls all the advances.

Foreign Exchange Department

The foreign exchange means that the amount of any foreign currency that will

available in a market at any given time against or in exchange for a particular

countrys currency. This value of rate or exchange may show a stable, rising or

downward trend of position day to day and even at different times during the

same day.

Foreign Exchange Department is the main source of income for the commercial

banks as well as for the State bank. Commercial banks earn commission and

service charges through letter of credit and letter of guarantee. While the state

Bank collects with-holding tax for the supply of goods through letter of credit and


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govt. earns from stamps duties applicable to issuance bills of exchange in case of

L/C. it promotes the import and export business. It facilitate the local trade and

foreign trade.

Foreign Exchange Department deals with foreign currency accounts (FC A/C),

letter of credit (L/C) and letter of guarantee (L/G).


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4.3 Term Deposit Account (Rupee)

The BOK Rupee Term Deposit Account offers the dual benefit of attractive

returns with high liquidity. Options to take profit monthly, quarterly, bi-annually,annually or at maturity. Profit is accrued on a daily balance basis. There is no

penalty for premature enchasement. However in case of an early enchasement the

rate of the previous tender will be applied. The option of partial liquidity is

allowed i.e. with drawl to a certain percentage from the fixed deposit without

disturbing the remaining deposit is allowed.

Term or fixed deposits are accepted by BOK mature between onemonth to five years.

Profit on fixed deposits is paid on the maturity of deposits. Each fixed deposit account is considered as a separate contract.

4.4 Foreign Currency Account

All individuals including resident citizens, firms and corporate bodiescan open and maintain foreign currency savings and current accounts.

Formalities for opening FC accounts are similar to those of rupeeaccounts.

Facility is presently available in four major currencies i.e. US dollar($), Pound sterling, (L), deutsche mark (DM) and Japanese Yen (Y).

Foreign currency saving accounts are interest based. Interest rates arefixed by bank every month within the parameters given by SBP. The

rates so announced unchanged during respective month.

4.5 Khyber Monthly Scheme (KMS)

On KMS the BOK gives monthly interest on amount deposited with the bank.

This is a sort of fixed deposit and the customers will have to keep the deposits for

the five years.


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Be-Baha Mahana Amdani scheme

Three months 10.50% Six months 11.00% One year TDR 11.50%

Deposits from Banks/ Financial institutions

Deposits 1.50%

Source; BOK website; www.bok.com.pk

4.8 Consumer Financing

4.8.1 Fund Base Facilities

Fund base facilities are those which involve a cash disbursement at the time of

allowing the facility.

Running Finance

This is a working capital finance facility available for one year and renewed

subject to satisfactory utilization there of. Markup is charged on outstanding

balance.

Demand Finance

It is a term loan disbursed in lumpsum and repayable in 2 years in the form of

monthly or quarterly installments.


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Advance Against Salaries

This facility is available to government and semi-government employees up to

five gross salaries.

4.8.2 Non-Fund Base Facilities

The non fund base facilities are those in which the bank does not invest its own

funds rather its commitment is involved against which the bank chargers a certain

amount in shape of commission. These facilities are available in the form of letter

of credit and letter of guarantee.

Letter Off Credit

Letter of credit is required in the settlement of international trade some times local

transactions are also done through the letter of credit which are termed as inland

LCs.

Usually, there are four parties are involved in LCs.

1. Importer2. Exporter3. Importers bank4. Exporters bankLCs may be on sight or issuances basis. In sight based LCs, the importer has to

pay the amount upon payment of the value. In case of issuance LCs the exporter

extends credit to the importer. The documents are handed over to the importer

against his acceptance of the bill and assurance of payment on the maturity date of

acceptance.

Letter of Guarantee

The bank provides assurance to the beneficiary of the guarantee about the

satisfactory performance of a certain act by the applicant of the guarantee.

In the letter of guarantee three parties are involved i.e.

1. Bank (provider of guarantee)


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2. Applicant of the guarantee (Banks customer on whose behalf the bankissues a guarantee).

3. Beneficiary (in whose favor the guarantee is issued).The banks at the request of applicant issues the guarantee and charges

commission for its commitment from the applicant at the exposure is secured

against some security.


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CHAPTER5

OPERATION DEPARTMENT

5.1 ACCOUNT OPENING REQUIREMENTS AND

DOCUMENTATION

Account opening is the first step towards establishing Banker-Customer

relationship. Any individual, who has attained the age of majority and is of

sound mind can open and maintain his/her account. Two or more individuals may

open an account jointly. Similarly, business organizations such as sole proprietary

concerns, partnership firms, and limited liability companies as well as non-profit

organizations like clubs, trusts, societies, associations and NGOs etc, may open

their accounts.

The following requirements are necessary for opening an account.

Identification of the new customer. Ascertaining the genuineness of the stated occupation business of the

customer.

Determining the correct residential and permanent address. Completion of all relevant columns of the AOF. Proper completion of documentation.

Personal Accounts

Accounts opened by individuals in their personal capacity are termed as personal

or private accounts. A personal account may be a PLS saving or current account

in local currency or saving or current account in foreign currency. There is no

restriction as to number of accounts that an individual may have with the bank.


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Verification of Identity

a) Under recognized legal principles, banking conventions and SBPsprudential regulations (Regulation XI & XII), banks are required toinstitute effective procedures to ensure true identity of their customers.

b) Federal Ombudsman also, vide his ruling on a complaint, directed thebanks to retain a photocopy of the NIC with AOF of the person

desiring to open an account as well as of the introducer.

c) Account opening procedures at Bank of Khyber, therefore, have beenadopted to fulfill above requirements.

d) Authorized officers, therefore obtain NICs and photocopies of thenew account holder as well as of the introducer and then return the

originals after attesting the retained copies. Inquires are necessary to

avoid potential frauds and losses not only for our own bank but also to

save other banks and general public and to claim legal protection in the

case of any such happening.

e) The identity of an individual can also be established by obtaining acopy of their passport, driving license, or any other documents that

certifies the customers name, address, date of birth, citizenship,

photograph, and signature etc.

Introduction

a) Whether introduced by a customer or banker, proper introduction is amandatory requirement under SBPs BCD circular No. 29 of 1968.

b) Generally, new customers are introduced by the existing customers,Staff members themselves may introduce new accounts, provided they

know the new customer, his/her occupation and permanent residence

etc. and are otherwise satisfied with his/her past conduct or record with

respect to financial dealings and bank relationships.


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Following Steps Are Taken To Ensure Proper Introduction

a) Introductions from saving account holders for current accountsnormally discouraged. However, an introduction from a savingsaccount holder who is well know to the manager and whose account

has been well conducted may be accepted, under the managers

authorization.

b) Whether the introducer/referee accompanies the account holders to thebranch or not, he/she properly identified by an authorized officer under

his signature written across the rubber stamp reading Signature

Verified affixed in close proximity to the introducers signature. A

letter of thanks sent to the introducer. A copy of the letter retained in

the Account File.

Some Basic Information Regarding Account Opening Form & Procedures

The bank officer takes the interview of the customer to know hispurpose of account opening, identity and status.

The full name of the individual or the business is given as title to theaccount.

The permanent (Corresponding) address of the client is required in thisregard.

The account holder describes his occupation in definite and adequateterms. In case of employee the name and address of the employer is

noted on AOF.

Clear instructions are obtained regarding operations on the accountand for repayment of the balance in the event of the death of any of the

joint account holders and in case of single account holder.

Signatures of the account holders are taken on AOF and SS Card. An account in the name of minor may opened jointly with a parent

or guardian with the condition that account will be operated by the

guardian. No overdraft is allowed in a minors account.


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An illiterate person can open account with banks. This account willbe Photo account one photo is pasted on AOF and one is on SS Card.

Left thumb impression in case of male and right thumb in case of

female account holders is obtained in place of specimen signatures on

SS Card. Such a person will put his thumb impression in the cheque in

the presence of bank officer.

The married women can open bank account with banks. However,they cant bind their husbands for any debts or borrowings obtained

without their consent except necessities of life.

Joint Accounts: Two are more persons may open an account jointly.AOF & SS card are signed by all the parties. Special instructions are

required for the operation of account at the time of opening the

account. Similarly instructions regarding operation of account and

payment of balance to the survivors are required in case of the death of

one party or more.

Sole proprietor ship account is the individual account in the name ofbusiness concern.

All the partners of the Partnership firm will sign the AOF & SS cardand it is operated by any one or more partners.

The account of the company is opened on the resolution of the Boardof Directors, which nominates the persons authorized to operate upon

the account. The signs of all the members of the Board of directors

will be provided to the bank.

DOCUMENTS REQUIRED FOR ACCOUNT OPENING FOR

DIFFERENT PARTIES

Individual/Joint Accounts

a) Account opening form (AOF) and specimen Signature (SS) card.b) A copy of NIC (National Identity Card).


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Societies, Associations, Clubs Etc.

a) AOF & SS cards.b) Certified true copy of by laws/ rules and regulations.c) Certified true copy of the resolution by the society / association or

club, authorizing opening and operation of the account.

d) A list of members of the executive / managing committee.Local Authorities, Municipal Corporations Etc.

a) AOF & SS cards.b) Certified true copy of the statute under which the body was created by

governed.c) Mandate authorizing designated persons who would operate the

account.

5.2 Remittances

Funds transfer facility or Remittance of Fundsis one of the key functions of the

banks all over the world. Remittances through banking channels save time cost

less and eliminate the risks involved in physical transportation of money from one

place to another. Besides earning commission, banks also get much-needed short

term (cost free) liquid funds right from the receipt of value till final payment.

Any person who is of sound mind and can sign the application form as a

contracting party may make a remittance.

Customers, in order to remit money from one place to another, have a variety of

options or modes available to them according to their needs.

Types of Remittances

Remittances can broadly be classified as Outward and Inward remittances. When

a bank / branch instructs another bank/branch to effect a remittance or payment, it

is said to be effecting an Outward remittance. While when a bank/branch is

itself affecting a payment/disbursement at the instructions of another bank/branch,


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Payees Account only to avoid the possibility of dealing with instruments with

forged endorsements.

Main Characteristics

a) It is not negotiable under The Negotiable Instruments Act.b) Protection available to collecting bankers in case of promissory notes,

bills of exchange and cheques under the above mentioned Act is not

available in case of pay-orders.

c) It is issued by, drawn upon and is payable at the same branch of thebank.

d) Pay order is used as a substitute for demand draft within local/citylimits.

e) Being a bankers cheque, pay order is also used to make the banksown payments.

Basic Procedure In Case Of Issuance & Payment Of Different Remittances

Instruments

The remitting bank collects the actual amount of remittance plus the commission,

postage charges and tax amount if the tax form is not attached with the applicationform. these amounts may be collected by cash, Cheque or by authority letter

(given by the customer to debit my account for actual amount plus charges etc).

Application &Agreement of Test Cod

When TT & MT is issued then on the advice the special test code is applied. For

this purpose special test keys are provided to every branch and the HO also has. In

case of payment of TT & MT test is checked either it is agreed or not. If it is

agreed then customers A/C is credited or TTR is issued in case when thecustomer doesnt have the A/C with the bank.

When the amount of DD exeedsRs10, 000 then test code is applied toit.

Not over Rs ---------- only


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Duties of Paying Bank

The paying bank, in order to claim proper discharge.

Should make the payment according to the apparent tenor of theinstrument

Should act according to the instructions of the Collecting Bank Payment should be in good faith Should act expeditiously and without negligence Payment should be in the normal course of business.

Outward Clean Bills For Collection

Cheques and other instruments, which are drawn on other banks or BOK branches

in other towns/cities or countries (outside clearing or transfer delivery

arrangements), received for account of the banks customers, are lodged in

Outward Collections Register either as OBCs or FBCs. The procedure for

handling these bills is discussed below.

Initial Scrutiny

On receipt of bills for collection from the customers an initial scrutiny is

conducted with the following consideration.

Date

Cheques and other instruments should not be without a date, post-dated that is

bearing a future date or stale that is bearing an old date that is no more legally

valid or is outdated.

Payee

Payee should be a customer of the bank whose account is required to be credited

with the proceeds of collection. In case a customer wants to deposit a

cheque/instrument, which shows someone else as the payee, there should be an

appropriate endorsement by the named payee in favor of our customer.

Amount


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one a bank which acts as a collecting agent for some other bank is also

authorized to put its own special crossing.

In addition to the special crossing, the collecting bank has to give a

certificate/discharge on the reverse side of the cheque/instrument to the effect that

proceeds of the instruments will be credited to the payees account. A stamp

containing discharge is affixed as under:

Payees Account will be credited on realization.

For The Bank of Khyber

Manager Officer

In case, cheque or instrument is endorsed by the first payee in favor of another

person discharge will be as under:

First payees endorsement Confirmed,Second payees Account Will be credited on realization.

For The Bank of Khyber

Manager Officer

Another stamp known as OBC STAMP is also affixed on the face of th e

cheque/instrument, which indicates name of the collecting bank, OBC reference

number and date of lodgment for further reference. Form or style of an OBC

stamp may differ from bank to bank and even branch to branch, however,

contents remain the same. A specimen is given below.

The Bank of KhyberOBC NO. .DATED

Lodgment

After initial scrutiny and stamping, bills are lodged for collection by being

recorded in the OBC Register or by using an appropriate computer option. Anofficer authorized to authenticate who uses an appropriate computer option to

authenticate the transaction should authenticate the entry. Upon authentication,

the computer generates an accounting entry (Vouchers are manually passed where

the branch is not fully computerized.)


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ordinates clearing activity through its offices, called the Clearing Houses, set up

in big cities and towns. Where SBP does not maintain its own office, some other

bank, usually National Bank of Pakistan (NBP) performs this function. But the

clearing house facility is available only for cheques/instruments drawn on banks

situated within the same city/clearing house area.

First Clearing & Second Clearing

The business of the Clearing House is normally conducted in two sessions called

First Clearing and Second Clearing. During first clearing, receipts/payments are

adjusted arising out of cheques delivered and received against each other. In the

second clearing, cheques which could not be paid due to any reason, accompanied

with objection memo, are also handed over or received back form the member

banks and adjustments made accordingly.

Where There are no Clearing Houses

At places where there are no clearing houses or clearing arrangements, local

cheques drawn on other banks are presented for clearance through and authorized

representative under cash received/payment received discharge arrangement.

Under this arrangement the cheques/instruments have to be presented by anauthorized officer of a bank over the counters of the drawee/paying bank and the

cash so received is credited to the customers/beneficiaries accounts.

Outward Clearing

Cheques received by a bank from its customers to be collected from other banks

are considered to be in the Outward Clearing arrangement. The procedures and

considerations that apply to Outward Clearing are discussed below:

Initial Scrutiny

While accepting cheques for collection/clearing, the pay-in-slips and the cheques

and other negotiable instruments are properly scrutinized with respect to

following points.

Payee/beneficiary must be customer of the Bank.


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Appropriate accounting entries are passed for the Inward Clearingitems.

If there are any cheques/instruments to be returned unpaid, due to anyreason, appropriate computer entries are passed and it is ensured that

the original cheques/instruments returned unpaid are delivered to the

collecting bank in second clearing.

Returns After Clearing Hours

If a cheque or instrument is not returned in time (during second clearing) then it

cannot be returned through the Clearing House. The Branch concerned

immediately contacts the collecting Bank/Branch and requests them not to release

the funds against said collection item. The cheque/instrument in question along

with an objection memo is returned to the Collecting Bank through a special

representative/staff member. The Collecting Bank is requested to issue a Pay

Order in favor of the Bank for the amount of the cheques/instrument returned.


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CHAPTER6

FINANCIAL ANALYSIS

6.1 Financial Analysis

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm by properly establishing relationships between the items

of balance sheet and profit and loss account.

The analysis of bank statements is undertaken by analyst, depositors, regulatory

authorities, stockholders, borrowers, the bank management etc. A depositor is

interested in the solvency of the bank, i.e. The safety and availability of his funds.

The regulatory authorities desire to essure themselves that the banks are operating

in accordance with the requirements of the law and are in sound financial

conditions. Stock holders are interested in the general financial condition of the

bank and the earnings, the dividends, and the managements policy with reference

to the accumulation of surplus. The borrower is interested in knowing the extent

of available funds and the use that is made of the banks resources.

Financial ratio that relates two accounting numbers and is obtained by dividing

one number by the other.

6.2 ASSUMPTIONS

1. Ratios are calculated for three (3) years i.e. 1999, 2000 and 2001.2. All the figures are taken in thousands i.e. Rs. In thousands .3. Figures are rounded off up to 2 decimal points.

6.3 Financial Ratios

1. CASH RATIO

Cash ratio is the ratio of cash and its equivalents to current liabilities. It shows

that how much cash is available to cover the current liabilities.


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Cash Ratio =sliabilitieCurrent

Cash

Ratio for 1999 =737,769,11

000,818x 100 = 6.95%

For 2000 =592,042,14

907,389x 100 = 2.78%

For 2001 =407,146,15

424,810x 100 = 5.35%

Analysis

The cash ratio for the year 2000 decreased as compare to 1999. The exact

decrease is 4.17% and in the year 2001, the cash ratio increased. The exact

increase is 2.57%. This shows that bank has improved its liquidity in the year

2001 as compare to 2000.

2. RETURN ON ASSETS AFTER TAXES

This ratio is used in evaluating whether management has earned a reasonable

return on the assets under its control. It measures the over all effectiveness of the

available assets in generating profits.

Return on assets after taxes =AssetsTotal

after tax)(profitIncomeNet

Ratio for 1999 =097,200,13

554,38x 100 = 0.29%

For 2000 =007,356,15

375,157x 100 = -1.02%

For 2001 =792,228,17

040,231x 100 = 1.34%

Analysis

ROA ratio in 2001 is higher than that of 2000 i.e. There is a sufficient increase in

the ratio. This shows that the bank has efficiently managed its assets portfolio to

earn a reasonable return on total assets in the year 2001 as compare to 2000.


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For 2000 =489,861,1

412,017,2x 100 = 108.38%

For 2001 =917,877,1

195,715,1x 100 = 91.33%

Analysis

This ratio is high in 2000 as compare to 2001 and 1999. The exact decrease in

2001 is 17.05% as compare to 2000. This shows that bank has managed

efficiently its operation to earn total income with low total expenditure.

5. Operating Cost to Total Income Ratio

It shows the relationship between operating cost and total income. It tells us that

how much operating cost is incurred in generating total income.

Operating cost to total income =incomeTotal

costOperatingx 100

Ratio for 1999 =123,662,1

254,277x 100 = 16.68%

For 2000 =489,861,1

034,519x 100 = 27.88%

For 2001 =917,877,1

050,314x 100 = 16.72%

Analysis

In the year 2001, this ratio is decreased by 11.16% as compare to 2000. This

shows that the bank is efficient in its operation in the year 2001 and it generates

its total income with low operating cost.

6. Debt to Equity Ratio

This ratio shows the extent to which the firm is financed by debt.

Debt to equity ratio =equityTotal

s)liabilitie(totaldebtTotal


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Ratio for 1999 =311,307,10

654,277x 100 = 2.69%

For 2000 =253,332,12

034,519x 100 = 4.21%

For 2001 =946,122,14

050,314x 100 = 2.22%

Analysis

This analysis shows that operating cost to generate and operate the deposits was

high in 2000 while it was low in 1999 and 2001. There is 1.99% decrease in the

year 2001 is compare to 2000.

9. Interest Expense to Deposits

This ratio shows the relationship between interest expense and deposits. It tells us

about the interest expense paid on different types of deposits.

Interest expense to deposits =Deposits

expenseInterestx 100

Ratio for 1999 =311,7,30,10

140,321,1x 100 = 12.82%

For 2000 =253,332,12

378,498,1x 100 = 12.15%

For 2001 =946,122,14

145,401,1x 100 = 9.92%

Analysis

The interest expense to deposits ratio is decreasing in the previous two years. The

exact decrease in this ratio is 2.23% in the year 2001 as compare to 2000. This

shows that deposits of bank are increased in this period while the interest expense

is decreased due to reduction in the profit rates on various accounts.

10. Total Expenditure to Deposits

It reflect the extent to which total expenditure is incurred on deposits.


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Total expenditure to deposits =Deposits

eexpenditurTotalx 100

For 1999 =311,307,10

794,598,1x 100 = 15.51%

For 2000 =253,332,12

412,017,2x 100 = 16.36%

For 2001 =946,122,14

195,715,1x 100 = 12.14%

Analysis

Total expenditure to deposits ratio first increased in the year 2000 and then

decreased in the year 2001. The exact decrease is 4.22% in the year 2001 as

compare to 2000. This decrease is due to efficient control of cost by the banks

management.

11. Advances to Deposits Ratio

This ratio shows the relative extent to which deposits are lended in the form of

advances.

Advances to deposits ratio = Deposits

Advancesx 100

Ratio for 1999 =311,307,10

125,760,5x 100 = 55.88%

For 2000 =253,332,12

240,746,5x 100 = 46.60%

For 2001 =946,122,14

680,925,6x 100 = 49.04%

Analysis

In the year 2000 this ratio is decreased and in 2001, this ratio is increased the

exact increase is 2.44% in 2001 as compare to 2000. In the year 2001 this ratio is

49.04%. This means that this year 49.04% deposits are lent in form of advances.


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6.6

INDEX ANALYSIS

THE BANK OF KHYBER

BALANCE SHEETS

AS AT DECEMBER 31,

Assets

Regular (Rs. In thousands) Index Analysis (%)

1999 2000 2001 1999 2000 2001Cash and balances with treasury banks 818,000 389,907 810,424 100 47,67 99.07Balances with other banks 697,512 602,264 1,153,708 100 86.34 165.40Money at call and short notice 3,000 460,000 200,000 100 1533.33 666.67Lending to financial institutions - 4123,503 926,000 100 - -Investments 4,858,310 2,894,786 5,712,887 100 59.58 117.59Advances 5,760,125 5,746,240 6,925,680 100 99.76 120.23Capital work in progress 2,568 - - 100 - -Others assets 907,421 1,010,438 1,297,689 100 111.35 143.01Operating fixed assets 114,641 110,828 113,635 100 96.67 99.12Deferred taxation 11,520 18,041 88,769 100 156.61 770.56Total assets 13,200,097 15,356,007 17,228,792 100 116.33 130.52

Liabilities and owners equityBills payable 64,798 42,615 82,975 100 65.77 128.05Borrowings from financial institutions 1,397,628 1,667,724 940,486 100 119.33 67.29Deposits and other accounts 10,360,311 12,332,253 14,122,946 100 119.65 137.02Liabilities against assets subject to finance leases 8,245 2,148 28 100 26.05 0.34Other liabilities 704,278 865,236 1,107,345 100 122.85 157.23Provision for staff retirement gratuity 8,932 - - 100 - -Total equity 708,905 446,031 975,012 100 62.92 137.54Total liabilities and equity 13,200,097 15,356,007 17,228,792 100 116.33 130.52


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2. Investments (Rs. In 000)

Interpretation

There is increase in investments in a year 2001, i.e. Rs. 5,712,887 from Rs.

2,894,786 in the year 2000. The net increase is 97.35%.

3. Advances (Rs. In 000)

Interpretation

There is increase in the advances in the year 2001; i.e. Rs. 6,925,680 from Rs.

5,746,240 in the year 2000. The net increase is 20.53%. This increase is in

advances is due to increase in loans, cash credits, running finance are etc.

4858310

2894786

5712887

0

1000000

2000000

3000000

4000000

5000000

6000000

1999 2000 2001

Years

Investments

5760125 5746240

6925680

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

1999 2000 2001

Years

Advances


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6. Markup/interest earned (Rs. In 000)

Interpretation

There is decrease in the markup/interest earned in the year 2001; i.e. Rs.

1,728,599 from Rs. 1,732,140 in the year 2000. The net decrease is 0.20%.

7. Markup/interest expensed (Rs. In 000)

Interpretation

There is decrease in markup/interest expensed in the year 2001; i.e. 1,401,145

from 1,498,378 in the year 2000. The net decrease is 6.49%.

1242217

1732140 1728599

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

1999 2000 2001

Years

Markup/interestearned


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8. Fee, Commission & Brokerage Income (Rs. In 000)

Interpretation

There is decrease in the fee commission and brokerage income in the year 2001;

i.e. Rs. 44,300 from 44,999 in the year 2000. The net decrease is 1.55%.

9. Administrative Expenses (Rs. In 000)

Interpretation

There is increase is the administrative expenses in the year 2001; i.e. Rs. 234,145

from Rs. 208,212 in the year 2000. The net increase is 12.46%.

61156

44999 44300

0

10000

20000

30000

40000

50000

60000

70000

1999 2000 2001

Years

Fee,

Comm

&

BrokerageInco

me


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10. Profit/(Loss) after Taxation (Rs. In 000)

Interpretation

There is sufficient increase in profit after taxes in the year 2001; i.e. Rs. 231,041

while there is loss in they year 2000, i.e.157,375.

-157375

231041

38554

-200000

-150000

-100000

-50000

0

50000

100000

150000

200000

250000

300000

1999 2000 2001

Years

Profit/Loss

afterTaxatio


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CHAPTER7

FINDINGS AND RECOMMENDATIONSThe Bank of Khyber is a new emerging bank and it is trying to get the market

share in the presence of national and foreign banks. It has played an important

role in certain areas, but there always exists some room for improvement. The

following findings and recommendations are based on personal observations and

analysis. The given recommendation will help to cope the problems being faced

by the bank and will enhance the efficiency and performance of the BOK.

1. DecentralizationIn the BOK the decision making process is centralized. Decisions are

taken by top management. Staff at middle and lower level do not participate in

decision making process. Decisions taken by top level are implemented on all the

levels of organization. An entirely centralized decision making is not conducive

for proper work environment because it reduces the interest and loyalty of the

employees towards the organization. Due to this the communication cost

increases and it causes delays in banking operations because of which ultimately

customers suffer.

Due to this facts some authority and responsibility should be delegated at the

branch level i.e. there should be decentralization. It will improve the working

condition and employees will be more confident. It may result the best and

prompt improvement of the overall banks operations.


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6. Proper Checking

There is no proper checking and observation system on the entrance of Asraf

Road branch. For safety purposes there should scanning checking and should

install special checking instruments in the main entrance.

7. Branch Net Work

The BoK has 29 branches all over Pakistan and Azad Kashmir. 23 of the total

branches are located in KPK. And there is only one branch for the whole of

Punjab province located in Lahore. For Sindh province there are two branches

both located in Karachi and similarly one branch for whole Azad Kashmir and

one for Islamabad. This branch network is too small to compete with other banks.

The branch network should be improved and number of branches should increase

to reach and provide services to maximum number of customers.

8. Product Line

The product line of the BoK is narrow. It provides few services and financial

products to its customer.

The bank should increase its product line and should introduce the Automatedteller machines (ATM) facility in the Ashraf road Branch which is in process. car

financing, credit and home financing scheme etc to attract new customers and

retain the existing loyal customers.

9. Promotional Activities

BoK is a new bank as compared to others. From marketing point of view every

new organization must pay more attention to the promotional activities. The BoK

management does not care about this important issue. The BoK should start a

heavy promational campaign to atract more and more customers. For this purpose

both the print as well as electronic media should used. In this age of competition

the BoK should adopt the policy of marketing penetration through a heavy

promotional and advertisement campaign. The BoK can distribute diaries,


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calendars and brochures for promotion. And it should give ads on TV and news

papers.

10. Marketing DepartmentIn to day world of tough competition an organization has to undergo an intensive

marketing campaign to win customers. The BoK does not have a marketing

department. In branches the marketing task is given to branch manager who has

no time to carry out the marketing activities. The BoK should establish a

marketing department so that is could improve the image of the bank. In this

manner, the bank will attract more and more customers. The customers need to be

convinced.

11. Meritorious Recruitment

In the BoK mostly recruitment are done through recommendation of the

employees or connecting play an important role in recruitment decisions.

Recruitment should be strictly on merit basis with no other favor given to any

candidates. Selection should be on the basis of test and interview as like in

Muslims commercial bank Ltd (MCB) and other banks etc. this will ensure the

entry of competent and worthy employees in to the bank.

12. Shortage of Employees

Shortage of employees increases the work load on existing employees and

ultimately reduces the output and motivation level of employees. To overcome

this problem job descriptions should be revised and grouped together in order to

create new jobs. The Ashraf Road branch specifically faces the problem of

employees shortage. Recruitment should be done in order to fill out these new

vacancies. This way the work load on employees will be reduced, operations will

be stream lined and employees will feel comfortable in performing their duties.


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13. Scholarship Programs for Senior Employees

Scholarship programs should be designed for senior employees and branch

managers. The BoK should get into contract with top foreign universities. Every

year the bank should finance and send their senior managers for further education

abroad. After completion of higher education the employees will be in a better

position to attain the strategic objectives of the bank and increase the over all

business and profitability portfolio of the bank.

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