Define ALCO and its formation structure. Discuss the role and responsibility of ALCO for performing leading of a bank. Or what is ALCO? What are the major responsibilities of ALCO

 Asset and Liability Committee (ALCO): The Asset and Liability Committee (ALCO) is responsible for balance sheet risk management. Managing the assets and liabilities to ensure the maximum level of structural balance sheet stability and optimum profitability is an important responsibility of the ALCO.

ALCO is the group primarily responsible for the asset liability and risk management of a bank ALCO's job is to devise broad strategies for handling a bank's many competing needs over the long run and to monitor and manage its interrelated risk exposures on a daily basis.

As a consequence, the ALCO is the focal point for coordinating the bank's many activities to accomplish its operating objectives formation of ALCO. Asset-Liability Management Committee (ALCO) is the core unit of a financial institution. So, it is the basic need to form an ALCO to balancing the Asset-Liability Management.

The ALCO will set a standard limit on borrowing in the short-term markets and lending long-term instruments that controls over the financial risks and external events that may affect the bank's asset-liabilities position. It manages the risks to acceptable level by monitoring and sets the competitive prices between assets and liabilities to maintain the liquidity position of the company. Without an ALCO, a commercial bank may lose all positive financial opportunities and the bank must be faced by different types risk as like as financial crisis. So that it shouts to be formed a ALCO for each commercial bank to manage the vulnerable financial position.

 As per BB guideline, the committee consists of the following key personnel of a bank:

- Chief Executive Officer/Managing Director - Head of Treasury/Central Accounts Department

- Head of Finance

- Head of Corporate Banking

-Head of Consumer Banking

- Head of Credit

- Chief Operating Officer/Head of Operations

 The committee calls for a meeting once every month to set and review strategies

Role and Responsibilities of ALCO: According to the Risk Management Guidelines issued in February 2012 by Bangladesh Bank, the major responsibilities of ALCO are as follows

o   Ensure that the bank's measurement and reporting systems accurately convey the degrees of liquidity and market risk.

o   Monitor the structure and composition of bank's assets and liabilities and identify balance sheet management issues that are leading to underperformance,

o   Decide on the major aspects of the balance sheet structure, such as maturity and currency mix of assets and liabilities, mix of wholesale versus retail funding deposit mix, etc.

o   Decide on how to respond to significant actual and expected increases and decreases in required funding.

o   Review maturity profile and mix of assets and liabilities.

o   To comply with the local central bank regulations in respect of the bank's statutory obligations as well as thorough understanding of the risk elements involved with the business.

o   Understanding of the market dynamics i.e. competition, potential target markets etc.

o   Provide inputs to the Treasurer regarding market views and update the balance sheet movement.

o   Articulate interest rate view of the bank and decide on balance sheet strategy.

o   Approve and periodically review the transfer pricing policy of the bank.

o   Evaluate market risk involved in launching new products.

o   Review deposit-pricing strategy and review liquidity contingency plan for the bank.

Briefly describe the three pillars of Asset Liability Management

 ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the market risk of a bank. It is the management of structure of balance sheet (liabilities and assets) in such a way that the net earnings from interest is maximized within the overall risk-preference (present and future) of the institutions. The ALM functions extend to liquidly risk management, management of market risk, trading risk management, funding and capital planning and profit planning and growth projection.

The three main pillars of ALM are:

The ALM process rests on three pillars:

i.                   ALM Information Systems

o   Management Information Systems

o   Information availability, accuracy, adequacy, and expediency

ii.                 ALM Organization

o   Structure and responsibilities

o   Level of top management involvement

iii.              ALM Process

o   Risk parameters

o   Risk management

o   Risk policies and tolerance levels.

o   Risk identification

o   Risk measurement

Together, these pillars ensure that a financial institution can maintain stability, optimize its financial performance, and meet its long-term obligations while mitigating potential risks associated with asset and liability mismatches.

What are the advantages and disadvantages of asset liability management? Or what are the Pros and Cons of Asset Liability Management?

Implementing ALM frameworks can provide benefits for many organizations, as it is important for organizations to fully understand their assets and liabilities.

·   One of the benefits of implementing ALM is that an institution can manage its liabilities strategically to better prepare itself for future uncertainties.

·     Using ALM frameworks allows an institution to recognize and quantify the risks present on its balance sheet and reduce risks resulting from a mismatch of assets and liabilities. By strategically matching assets and liabilities, financial institutions can achieve greater efficiency and profitability while reducing risk.

·   When assets and liabilities get matched properly, it leads to higher efficiency, increased profitability, and a reduction in risk for financial institutions.

The difficulties in putting in place a suitable framework are one of the drawbacks of ALM.

·     There is no universal framework that can be used by all organizations due to the stark disparities between them. Companies would therefore need to create a special ALM framework to record certain objectives, risk levels, and regulatory limitations.

·   ALM is a long-term plan that incorporates projections and datasets that are prospective.

·    ALM is a long-term strategy that involves forward-looking projections and datasets. The information may not be readily accessible to all organizations, and even if available, it must be transformed into quantifiable mathematical measures.

·    Last but not least, ALM is a coordinated procedure that manages the overall balance sheet of an organization. It calls for extensive departmental cooperation, which can be difficult and time-consuming.

Finally, ALM is a coordinated process that oversees an organization's entire balance sheet. It involves coordination between many different departments, which can be challenging and time- consuming.

Define ALM (Asset Liability Management) and its importance

 Asset Liability Management (ALM) can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. It refers to using assets and cash flows to lower the firm's risk of loss due to not paying a liability on time. Liquidity is an institution's ability to mort its liabilities either by borrowing or converting assets.

Apart from liquidity, a bank may also have a mismatch due to changes in interest rates as 04 banks typically tend to borrow short term (fixed or floating) and lend long term (fixed or floating). Well-managed assets and liabilities can help you grow ones business profits. This process is used to determine the risk on bank loan portfolios and pension plans. It also includes the economic value of equity.

 Asset/liability management is a long-term strategy to manage risks.

 · Asset/liability management reduces the risk that a company may not meet its obligations in the future.

· The success of bank loan portfolios and pension plans depend on asset/liability management processes.

·  Banks track the difference between the interest paid on deposits and interest earned on loans to ensure that they can pay interest on deposits and to determine what a rate of interest to charge on loans.

A comprehensive ALM policy framework focuses on bank profitability and long term viability by targeting the net interest margin (NIM) ratio and Net Economic Value (NEV), subject to balance sheet constraints Significant among these constraints are maintaining credit quality, meeting liquidity Risk needs and obtaining sufficient capital.

Asset Liability Management (AML) The primary goal of ALM is to ensure that the institution's assets generate enough income to cover its liabilities while managing and mitigating various risks.

Here are key aspects of ALM and its importance:

Interest Rate Risk Management:

ALM helps financial institutions manage interest rate risk, which arises from differences in the maturities and interest rate sensitivities of their assets and liabilities. By aligning the interest rate profiles of assets and liabilities, institutions aim to minimize the impact of interest rate fluctuations on their net interest income.

 Liquidity Risk Management:

ALM is crucial for managing liquidity risk, ensuring that an institution has sufficient funds to meet its short-term obligations. It involves maintaining a balance between liquid assets and liabilities, preparing for unforeseen liquidity needs, and having contingency plans for liquidity crises.

 Profitability Optimization:

ALM aims to optimize profitability by strategically allocating assets to generate maximum returns while considering the cost and structure of liabilities. This involves identifying profitable business lines, managing interest spreads, and optimizing the overall financial performance of the institution.

 Capital Adequacy and Regulatory Compliance:

ALM helps financial institutions maintain adequate capital levels to meet regulatory requirements. By aligning assets and liabilities appropriately, institutions can ensure compliance with capital adequacy ratios mandated by regulators, promoting financial stability and soundness.

 Credit Risk Management:

ALM involves assessing and managing credit risk associated with the assets held by the institution. This includes evaluating the creditworthiness of borrowers and monitoring the quality of the loan portfolio to prevent excessive defaults that could impact the institution's financial health.

 Balance Sheet Structure and Composition:

ALM helps in designing and structuring the balance sheet to achieve a desirable mix of assets and liabilities. This includes diversifying the asset portfolio, managing the funding mix, and optimizing the overall risk-return profile of the institution.

 Market Risk Management:

ALM addresses market risk arising from fluctuations in interest rates, exchange rates, and other market variables. Financial institutions use various risk management tools to hedge against adverse market movements and protect the value of their portfolios.

 Strategic Planning:

ALM plays a vital role in the strategic planning of financial institutions. It helps in setting long-term goals, determining the optimal asset-liability structure, and aligning the institution's activities with its strategic objectives.

 Customer Relationship Management:

By effectively managing assets and liabilities, financial institutions can offer competitive products to customers, maintain customer trust, and build long-term relationships. This is especially important in attracting and retaining depositors and borrowers.

 In summary, ALM is essential for the overall financial health, stability, and sustainability of financial institutions. It provides a framework for managing various risks, optimizing profitability, and ensuring compliance with regulatory requirements, contributing to the institution's long-term success in a dynamic financial environment.

Assets and Liabilities Management (ALM) is the practice of managing risks that arise due to mismatches between assets and liabilities of a bank'--Explain this comment in relation to deposits and loans of a bank

 Assets and Liabilities Management (ALM) is a strategic process that banks use to manage and mitigate risks arising from the mismatch between their assets (loans and investments) and liabilities (deposits and borrowings). The comment mentioned in questions highlights the importance of ALM in relation to deposits and loans of a bank. Here's an explanation of how ALM relates to deposits and loans:

1. Maturity Mismatch: One aspect of ALM involves managing the maturity mismatch between assets and liabilities. Banks typically have longer-term assets, such as loans, mortgages, and investments, which have longer durations before they mature or generate cash flows. On the other hand, liabilities, such as customer deposits, may have shorter durations as depositors can withdraw funds on demand or at short notice. This maturity mismatch can expose the bank to liquidity risk, as it needs to ensure it has sufficient funds to meet depositors' demands while maintaining a profitable loan portfolio.

 2. Interest Rate Risk: Another dimension of ALM is managing interest rate risk. Banks typically earn interest income from loans and investments while paying interest on deposits and borrowings. Interest rates can fluctuate over time, and a significant change in interest rates can impact a bank's profitability and net interest margin. If a bank's interest-earning assets are more sensitive to interest rate changes than its interest-bearing liabilities, it may face a risk of reduced profitability. Effective ALM involves monitoring and managing this interest rate risk to optimize the bank's net interest income.

 3. Liquidity Management: ALM also encompasses liquidity management, which involves ensuring that a bank has sufficient liquidity to meet its obligations as they arise. Deposits play a crucial role in providing a stable source of funding for a bank's lending activities. If a bank faces significant deposit withdrawals or is unable to attract sufficient deposits, it may experience liquidity shortages. Managing the liquidity risk involves maintaining an appropriate balance between liquid assets (cash, short-term investments) and illiquid assets (long-term loans, investments) to meet deposit withdrawals and other funding needs.

 4. Capital Adequacy: ALM considers the capital adequacy of a bank in relation to its assets and liabilities. Adequate capital ensures that a bank has a buffer to absorb losses and maintain solvency in the face of unexpected events or adverse market conditions. Capital adequacy regulations, such as the Basel III framework, prescribe minimum capital requirements for banks based on the risks they face. Effective ALM involves assessing the risk profile of the bank's assets and liabilities and ensuring that the bank maintains appropriate capital levels to support its operations.

 In summary, ALM focuses on managing the risks associated with the mismatch between a bank's assets and liabilities, specifically in relation to deposits and loans. It involves addressing maturity mismatch, interest rate risk, liquidity management, and capital adequacy to ensure a bank's financial stability, profitability, and ability to meet its obligations. By effectively managing these risks, banks can optimize their balance sheet and enhance their overall risk management framework.

What is contingency funding plan? Describe use and scope of contingency funding plan.

 A Contingency Funding Plan (CFP) is a liquidity management tool that links the stress test results and other related information as inputs to the CFP governance, decision framework, and menu of contingent liquidity actions. It's a critical component of a financial institution's risk management strategy, developed to ensure that the institution has sufficient liquidity to continue operations in the event of a crisis or unexpected event.

 The use and scope of a CFP are as follows:

       i.            Liquidity Crisis Management: A CFP is essentially a liquidity crisis management instrument. It outlines the actions that the institution will take to raise additional funds, such as issuing new debt or tapping into credit lines and the steps that the institution will take to conserve cash and reduce spending in the event that funding becomes scarce.

     ii.            Address High-Impact Low-Probability Events: Institutions manage low-impact and high-probability events as part of their business-as-usual (BAU) funding and liquidity risk management activities. On the other end, they use CFPs to address high-impact low- probability events.

  iii.            Develop and Implement Financial and Operational Strategies: Institutions use CFPs to develop and implement their financial and operational strategies for effective management of contingent liquidity events.

  iv.            Integration with Broader Risk Management Frameworks: Similar to enterprise risk management (ERM), capital management, and business continuity and crisis management, CFP is an integrated part of an institution's risk management and the broader risk management framework.

     v.      Early Warning Indicators (EWIs): Early warning indicators (EWIs) are tools that organizations can use to identify potential financial crises or emergencies before they occur. Under a CFP, early warning indicators can be used to identify potential funding shortfalls and trigger the invocation of the CFP before the crisis becomes severe.

It's always recommended to consult with a financial advisor or professional for more specific insights.

What is a contingency funding plan? What are the essential characteristics and elements of a CFP? What are the elements of a typical Contingency Funding Plan

 A contingency funding plan (CFP) is a financial management tool that outlines a company's strategy for managing unexpected events or disruptions that could impact its liquidity. A CFP is designed to ensure that a company has sufficient cash reserves or access to funding to meet its financial obligations during times of stress or uncertainty.

·   The CFP should distinguish between bank-specific and general market liquidity situations, and have appropriate responses to each situation.

·   The CFP should define responsibilities and decision-making authority so that all personnel understand their role during a problem situation.

·    The CFP should identify the sequence that the bank will mobilize and commit key sources of funds for contingent needs. The degree of uncertainty as to the magnitude, timing, and availability of recourses may call for different priorities in different situations.

·  The CFP should identify other actions necessary in the event of an unexpected contingency.

·  The CFP should assess the potential for funding erosion (magnitude and rate of outflow) by source of funds under different scenarios.

·   The CFP should assess the potential liquidity risk posed by other activities, such as asset sales and securitization programs.

A CFP typically includes several key elements:

1. Risk Assessment: A CFP starts with an assessment of the risks that could impact a company's liquidity, such as natural disasters, economic downturns, or regulatory changes.

2. Trigger Events: A CFP identifies specific trigger events that would activate the plan. For example, a trigger event could be a significant decline in revenue or an unexpected increase in expenses.

3. Contingency Funding Strategies: A CFP outlines various contingency funding strategies that a company can use to meet its liquidity needs during times of stress. These may include accessing credit facilities, selling assets, or drawing down cash reserves.

4. Funding Sources: A CFP identifies potential sources of funding that a company can access during times of stress, such as lines of credit, bank loans, or asset sales.

5. Action Plan: A CPP includes a detailed action plan that outlines specific steps that a company will take to manage its liquidity during times of stress. This may include reducing expenses, accelerating collections, or negotiating with vendors and suppliers.

6. Monitoring and Reporting: A CFP establishes a process for monitoring and reporting on the company's liquidity position during times of stress. This helps to ensure that the plan is being implemented effectively and allows for adjustments to be made as needed.

 Overall, a CFP is an important tool for managing liquidity risk and ensuring that a company can meet its financial obligations during times of uncertainty or disruption. By anticipating potential risks and developing a comprehensive contingency plan, companies can better protect their financial health and minimize the impact of unexpected events

Define Structural Liquidity Profile (SLP) as per BB Circular:

 Structural Liquidity Profile (SLP) is a concept used by the Bangladesh Bank (BB) to assess the long-term liquidity position of banks and their ability to withstand changes in market conditions.

The SLP is a measure of the maturity profile of a bank's assets and liabilities and provides an indication of the bank's ability to meet its obligations over time.

As per the BB guidelines, the SLP is calculated by comparing the maturity profile of a bank's assets and liabilities and analyzing the gaps or mismatches between the two. The SLP calculation takes into account all assets and liabilities on the bank's balance sheet, including loans, deposits, investments, and other sources of funding.

The SLP is calculated by dividing the bank's assets and liabilities into time buckets, usually ranging from less than 1 month to more than 5 years. For each time bucket, the bank calculates the total amount of assets and liabilities maturing within that period and then compares the two to determine any gaps or mismatches.

The SLP analysis provides the bank with information on its overall liquidity position and helps it to identify any potential vulnerabilities or areas of risk. Based on the SLP analysis, the bank can take steps to manage its liquidity risk, such as adjusting the maturity profile of its assets and liabilities, diversifying its funding sources, and implementing effective risk management practices. Overall, the Structural Liquidity Profile (SLP) as per BB is an important tool used by banks to assess their long-term liquidity position and manage their liquidity risk effectively. The SLP helps banks to ensure that they have adequate liquidity to meet their obligations over time and maintain financial stability.

 

How to calculate Wholesale Borrowing Guidelines (WBG) of NBFI as per BB circular?

The calculation of the Wholesale Borrowing Guidelines (WBG) as per the BB circular involves the following steps:

Step 1: Determine the Eligibility Criteria: the first step is to ensure that the NBFI meets the eligibility criteria set by the BB circular. The eligibility criteria include maintaining a minimum capital requirement, complying with prudential norms on capital adequacy and asset classification, and maintaining a track record of profitability and regulatory compliance.

Step 2: Determine the Borrowing Limits: the WBG sets limits on the amount of wholesale funding that NBFIs can raise from a single lender or group of related lenders. The limits depend on the NBFI's Net Asset Value (NAV), as follows:

·        For NBFIs with NAV up to Tk. 100 crore: The borrowing limit is up to 10 times the NBFI's NAV or Tk. 500 crore, whichever is lower

·        For NBFIs with NAV above Tk. 100 crore: The borrowing limit is up to 15 times the NBFIS NAV or Tk. 1,000 crore, whichever is lower.

Step 3: Determine the Concentration Limit: The WBG also sets concentration limits to reduce the risk associated with borrowing from a single lender or group of related lenders. The concentration limit for NBFIs is set at 30% of the NBFI's total borrowing

Step 4: Determine the Compliance with the WBG Finally, the NBFI needs to ensure compliance with the WBG and submit periodic reports to the Bangladesh Bank on their wholesale borrowing activities. The reports should include details of the NBFI's borrowing from different sources, concentration risk, and compliance with the WBG.

Basically, WB covers call borrowing, Short Notice Deposits from banks and financial institutions, placement received with maturity less than 12 months, commercial papers/similar instruments, and overdrawn Nostro accounts.

The WB Limit should be capped at 80% (for Non-Primary Dealers banks) and 100% (for Primary Dealers banks) of the bank's eligible capital on a fortnightly average basis with a maximum of two deviations (not more than 90% and 110% of the eligible capital for Non-PD and PD banks respectively) in a particular fortnight.

The eligible capital determined under Basel III for any quarter will be applicable as eligible capital until it is determined for the next quarter. The above limit shall be considered as an aggregate limit for banks having dual businesses (i.e. both conventional and Islamic banking operations) In summary, the calculation of the Wholesale Borrowing Guidelines (WBG) as per the BB circular involves determining the eligibility criteria, borrowing limits, concentration limits, and compliance requirements for the NBFL

Describe the Wholesale Borrowing Guidelines (WBG) of NBFI as per BB circular.

 Wholesale Borrowing Guidelines (WBG) is a set of guidelines developed by the Bangladesh Bank (BB) to regulate the borrowing activities of Non-Bank Financial Institutions (NBFIs). The guidelines are intended to ensure that NBFIs are able to access wholesale funding sources in a prudent and sustainable manner, without compromising the financial stability of the system. The main features of the WBG as per the BB circular are:

 1. Eligibility Criteria: The BB circular requires NBFIs to meet certain eligibility criteria before they can access wholesale funding sources. These criteria include maintaining a minimum capital requirement, complying with prudential norms on capital adequacy and asset classification, and maintaining a track record of profitability and regulatory compliance.

2. Limits on Exposure: The WBG sets limits on the amount of wholesale funding that NBFIs can raise from a single lender or group of related lenders. These limits are intended to reduce the concentration risk for both the lender and the borrower.

3. Risk Management: The BB circular requires NBFIs to have a robust risk management framework in place to manage the risks associated with wholesale borrowing. This includes a clear policy on the use of funds, adequate systems and controls to monitor and manage risks, and regular reporting to the board of directors and regulatory authorities.

4. Disclosure and Transparency: The BB circular requires NBFIs to disclose information on their wholesale borrowing activities in their financial statements, including the names of the lenders, the terms of the borrowing, and the risks associated with the borrowing.

5. Reporting Requirements: The BB circular requires NBFIs to submit periodic reports to the Bangladesh Bank on their wholesale borrowing activities, including details of their borrowing from different sources, concentration risk, and compliance with the WBG.

 Overall, the Wholesale Borrowing Guidelines (WBG) as per the BB circular are an important regulatory framework that helps to ensure that NBFIs are able to access wholesale funding sources in a sustainable and responsible manner. The guidelines help to reduce the risks associated with wholesale borrowing and promote financial stability in the system.

 

Why AD Ratio is different for Islamic Bank in Bangladesh?

 Banks play a pivotal role in mobilization and allocation of resources in an economy. Deposits and advances are termed as inflow and outflow, i.e. the funds of the banks. The loans and advances are deployed by the commercial banks based on the deposits after maintaining statutory requirements prescribed by Bangladesh Bank (BB) from time to time.

Hence, the Advance Deposit Ratio (ADR) is considered as a barometer of progress of all financial institutions. ADR is the ratio of total advances to total deposits, where advances comprise all banking advances. Deposit comprises all demand and time deposits excluding bank deposits and additional net borrowing.

A high ADR shows that banks are generating more credit from their deposits and vice-versa. The outcome of this ratio reflects the ability of the bank to make optimal use of the available funds. ADR of commercial banks has great significance. Primarily, it is a measure of the utilization of funds by the banking system. This ratio is an important tool of monetary management.

The ADR or IDR of all banks has been increased to 87 percent from the existing 85 percent for conventional banks and 92 percent from the existing 90 percent for Shariah-based Islamic banks as per BB circular. AD Ratio is different for Islamic Bank due to following reasons

    ·        Liquidity.

·        Valuation of Bank's Assets.

·        Credit Creation and Monetary Policy.

·        Financial Stability.

·        The Ownership of Banks.

·        Lack of Capital Market and Financial Instruments.

·        Insufficient Legal Protection.

·        Increased Cost of Information.

·        Imitation of conventional finance.

·        Profit and Loss Sharing and its problems.

 

Give the reasons Why Islamic banking has become popular in the world. What are the negative sides of traditional banking?

 Islamic banking or Islamic finance or share-compliant finance is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economies. Some of the modes of Islamic banking/finance include Mudarabah (Profit-sharing and loss-bearing), wadiah (safekeeping), Musharaka (Joint Venture), Muabahah (Cost-plus), and Ijara (leasing).

 Islamic banking popularity in the world: Islamic banking has gained popularity for several reasons, reflecting a growing global interest in alternative financial systems that adhere to Islamic principles. Here are eight reasons why Islamic banking has become popular:

 1. Ethical and Sharia-compliant principles: Islamic banking operates in accordance with Sharia, Islamic law, which prohibits activities such as charging interest (usury of "riba" engaging in excessive uncertainty (gharar), and investing in businesses that involve prohibited goods or services (e.g. alcohol, gambling) Many individuals appreciate the ethical and socially responsible nature of Islamic finance.

2. Financial inclusion: Islamic banking promotes financial inclusion by providing services that are accessible to a wider range of people, including those who may be excluded from conventional banking due to religious reasons or ethical concerns. This inclusivity aligns with the principles of justice and fairness in Islam.

 

3. Risk-sharing and fairness: Islamic finance emphasizes the concept of risk-sharing. In Islamic banking, both profits and losses are shared between the bank and the customer in various financial arrangements. This approach is seen as more equitable and fair compared to conventional banking, where the burden of losses often falls solely on the borrower.

 4. Asset-backed financing: Islamic finance is typically asset-backed, meaning that transactions must be linked to tangible assets or services. This ensures that the financial system is grounded in real economic activities and discourages speculative practices, contributing to a more stable and sustainable financial system.

 5. Social justice and wealth distribution: Islamic finance aims to promote social justice and wealth distribution. Through zakat (obligatory almsgiving). Islamic banks contribute to the welfare of society by redistributing wealth to those in need. This emphasis on social responsibility resonates with individuals seeking a more equitable economic system.

 6. Long-term stability: The prohibition of speculative and excessively risky transactions in Islamic banking contributes to long-term economic stability. The focus on ethical and sustainable business practices is believed to reduce the likelihood of financial crises and promote economic resilience.

 7. Global demand and market growth: The demand for Islamic financial products has increased globally, leading to the expansion of Islamic banking services and institutions. Many countries with significant Muslim populations, as well as non-Muslim-majority countries, have recognized the potential benefits of Islamic finance and have facilitated its growth.

 These factors, among others, have contributed to the global popularity and growth of Islamic banking as a viable and ethical alternative in the financial industry.

 Innovation is also one of the factors driving the growth of Islamic finance. A few years back, the Islamic bond market was small and Sukuks were five years or less. Lately bonds with long-term offers, perpetual bonds, and hybrid capital issues that allow a mix of debt and equity launched by Islamic banks have started attracting more and more investors.

 Negative sides of traditional banking:

    ·        Operating expenses. Move to offices at certain times.

·        Slow processes.

·        High commissions.

·        Low stimulus to savings.

·        Lack of permanent ATM network.

·        Limitations in online or virtual banking

·        Conducting interest-based Banking

What is AD Ratio and how it is being calculated?

Advance Deposit Ratio (ADR) is considered as a barometer of progress of all financial institutions. ADR is the ratio of total advances to total deposits, where advances comprise all banking advances, except foreign currency (FC), held against export development fund (EDF), refinance, and offshore banking unit (OBU) exposure. Deposit comprises all demand and time deposits excluding bank deposits and additional net borrowing.

A high ADR shows that banks are generating more credit from their deposits and vice-versa. The outcome of this ratio reflects the ability of the bank to make optimal use of the available funds. ADR of commercial banks has great significance.

Primarily, it is a measure of the utilization of funds by the banking system. This ratio is an important tool of monetary management. The magnitude of the said ratio indicates management's aggressiveness to improve income through higher lending.

 The formula for calculating AD ratio is as follows:

ADR=Total Loans and Advances or Investment/ (Total Time and Demand Liabilities Interbank Deposit Surplus + Bond Surplus**)

 * Interbank Deposit Surplus Deposit from other banks -Deposit with other banks (if -ve then (0) Bond Surplus Total amount raised from issuing bond-Total investment in the bond of other banks (if-ve then 0).

 ADR for Islamic banking operation of conventional banks: Conventional banks having Islamic banking business have to calculate and maintain ADR separately for conventional banking and Islamic banking operations. ADR for Islamic banking operations is the same as that of Islamic Shariah-based banks.

 It is important to adjust AD ratio limit with the changing condition of banks' assets and liabilities. The Management of the bank should inform the board regarding AD ratio in every meeting so that the board may make quick decisions necessary to adjust the ratio.