An Internship Report on Foreign Exchange Operations of Mercantile Bank Limited

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Introduction:

Bank is defined as a financial institution that collects deposits from various individual and organizations and provides loans to those who need it. But modern banks do not mean only the means of collecting and disbursing money to various entities. Rather it provides various services to various entities which facilitate their business operations. A foreign exchange operation of banks is one of those services that not only facilitates the business of businessmen but also contributes to the development of the economy as a whole. Foreign exchange is defined as the mechanisms by which the currency of one country is converted into the currency of another country. Foreign exchange is the means and methods by which rights to wealth in a country’s currency are converted into rights to wealth in another country’s currency. Foreign exchange department of banks plays significant roles through providing different services for the customers.

1.1. Background of the Mercantile Bank Limited (MBL):

Mercantile Bank Limited, incorporated on May 20, 1999 and commenced business on June 02, 1999, is now one of the most important entity in the banking industry of Bangladesh. With the passage of time it has expanded its number of branches and variety of services along with its core business of taking deposits and granting loans. Now MBL has emerged as a new

commercial bank to provide efficient banking services and to contribute socio-economic development of the country. Rising trend of the banks profitability over the last 8 years is also materialized. The MBL is committed to the delivery of the superior shareholders’ value. Foreign Exchange Department of the bank is one of the most important departments. Now it has become the backbone of the bank. With the aim to be the ‘Bank of choice’, it is operating in the industry with a team of devoted personnel to excel both their own career and the bank’s future.

1.2. Origin of the study:

This report is originated as the course requirement of the BBA program under the business studies faculty of Stamford University Bangladesh. Under this program students of every department of this faculty must go through an internship program of 3(Three) months duration. As practical orientation is an integral part of the BBA degree requirement, I was sent by the department of Finance to take real life exposure of the activities of banking financial institutions from July 16, 2009 to October 18, 2009.

1.3. Background of the Study:

Mercantile Bank Limited (MBL) is one of the risen Banks in Bangladesh. This year they have declared 40% dividend to their shareholders. This Bank has already 42 branches located in different places and also going to establish more branches.

The Internship program is an essential and mandatory of the BBA Program of Stamford

University Bangladesh. After completion of four years theoretical training, I got the opportunity as a practical exposure to business horizon through internship program. Mercantile Bank Limited is one of the well- reputed private commercial bank of Bangladesh with paid up capital of BDT

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1,798.68 (in million, 2008). Banks strong capital base allows it to make large chunk of advances to its corporate clients.

My internship supervisor and respected teacher Md. Ifte Kharul Alam, Assistant Professor & HOD Finance, Department of Business Administration, Stamford University Bangladesh, assigned me the topic “A study on the Foreign Exchange Operations of Mercantile Bank Limited.” I hope this report would able to portray the real picture of the operation of foreign exchange department of Mercantile bank Ltd.

1.4. Rationale of the Study:

This report is broadly organized into two broad parts. The first part (first 3 chapters) is an overview of the organization itself. The second part concentrates on the assigned topic “A study on the Foreign Exchange Operations of Mercantile Bank Limited.” Finally it includes the

evaluation of Foreign Exchange performance, findings, and recommendation to make understood the scope of overall Foreign Exchange with its constraints of MBL.

1.5. Objective of the study:

The objective of the study is to obtain an understanding of the practical banking activities and relate them with theoretical knowledge that I gained through the theoretical training in the university and from various documents of the bank. Beside this, the followings are the specific objectives which I will try to cover in my report:

1.5.1. Primary objective:

The primary objective of preparing this report is to represent the Mercantile Bank Limited and to have a clear conception about all of the essential parts of the internship program.

1.5.2. Secondary objective:

1. To give an idea about the evolution of the banking business. 2. To give an idea about the evolution of banking in Bangladesh. 3. To give an overview of the current Bangladesh economic scenario. 4. To give an overview of the MBL.

5. To give some idea about the international trade, different types of exchange rates, process of executing transactions relating international trade, accounting of these transactions, etc.

1.6. Scope of the study:

As I was sent to Mercantile Bank Limited, Main Branch, the scope of the study is only limited to this branch. The report covers its overall foreign exchange function. The report covers import, export and remittance activities about MBL. Besides it covers topic such as evolution of banking business, evolution banking business in BD, Bangladesh economy scenario, background of MBL has also been discussed.

1.7. Internship at Mercantile Bank Limited:

My Three months at the Mercantile Bank Limited as an internee had been the most enjoyable time of my life. Doing my internship at one of the leading private commercial banks in

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Bangladesh, I believe I have accumulated an experience unmatched to any other.

I was assigned to the project of “A study on the foreign exchange operations of Mercantile Bank Ltd.” as my project report. I am extremely happy to work in such a project. Though as a student of finance it was a new situation to me.

For the internship program the contact person of the head office sent me to the Main branch of the bank. My objective was to get a clear idea about the function of the foreign exchange of the branch. But my host supervisor sent me first to the Local Export department to have a

preliminary idea and to be acquainted with various types of local export bills and related matters; I worked there for 60 days and learned the procedure of issuance of pay order, demand draft (DD), and method of maintaining books for the above mentioned activities. Then I was sent to the clearing section, of worked there for 20 days and learned how inward and outward checks are cleared, how transfer delivery from one branch to another branch is made. After that, I was sent to the IT department of this branch. I worked there for 5 days. Here I learn how to give bank statement, Tax purpose statement. After that I was sent to the export section of the foreign exchange department of this branch. I work there for the rest of the period of my internship program. In the export section I mainly observed the export procedures, files and documents of different exporters, export proceed collection procedures and compliance of export procedures with the set rules of export policy and Bangladesh bank rules. Actually this period was my area of concentration and activities of this period is mainly focused in my report. I extended my best effort to collect as much information as possible to prepare my report. The working environment of this division of the Mercantile Bank Limited is conductive and friendly. The staffs are

specialized in their respective fields. Each of them works on their own and there is supervision from the top. The motivation of the staff, I believe comes from the very sense of responsibility for his or her work.

1.8.Limitations of the study:

On the way of the study, I have faced the problems that are given below that may be terms as the limitation or shortcoming of the

study-Short Time Period:

The first obstruct is time itself. Due to the time limit, the scope and dimension of the study has been curtailed. For an analytical purpose adequate time is required. But I got a short time period to prepare the report.

Data Insufficiency:

It was very difficult to collect data, because the branch of Mercantile Bank Limited is very large. But the data is very essential to prepare the report. All of the employees of this branch are very busy. For the time limitation they could not able to supply my topic related data.

Lack of Records:

Sufficient books, publications, facts and figures narrowed the scope of accurate analysis. If this limitation were not been there, the report would have been more useful and attractive.

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Most of the commercial banks have its own modern, rich and wealthy collection of huge and various types of banking related books, journals, magazine, papers, case studies, term papers, assignment etc. But the library of Mercantile Bank Limited is not well ornamented and decorated.

Lesser Experience:

Experience makes a man efficient. I do such kind of research activity for the first time. That’s why inexperience creates obstacle to follow the systematic and logical research methodology. 1.9. Methodology of the study:

The study requires a systematic procedure from selection of the topic to final report preparation. To perform the study the data sources are to be identified and collected, they are to be classified, analyzed, interpreted and presented in a systematic manner and key points are to be found out. The over all process of methodology is given in the following page in a form of flow chart that has been followed in the study.

A. Selection of the topic: The topic of the study was assigned by our supervisor. Before assigning the topic it was discussed with me so that a well organized internship report can be prepared. B. Identifying data sources: Essential data sources both primary and secondary are identified which will be needed to complete and work out the study. To meet up the need of data primary data are used and study also requires interviewing the official and staffs were necessary. The report also required secondary data. Information collected to furnish this report is both from primary and secondary sources.

i) The primary sources are:

Face to face conversation with the officers. Practical desk work.

Relevant files study as provided by the concerned officers. ii) The Secondary sources are:

Annual reports of MBL. Foreign exchange of MBL. Periodic reports of MBL.

Annual Reports of Bangladesh Bank (BB). Publications of Bangladesh Bank (BB). Publications of BIBM.

Office circulars of MBL. Publicly published documents.

Relevant books, newspapers, journals, etc. MTO recruitment materials of MBL.

Information kept by branch manager, operations manager in their own files.

C. Collection of data: Primary data are collected by using interviewing technique. The reports are an exploratory research and for qualitative survey open ended question were ask to the Bank official.

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D. Sampling:

Population: All the Branches of MBL located in everywhere in Bangladesh has been taken into consideration as population.

Sample: MBL, Main Branch, is the vital sample.

E. Classification, analysis, interpretations and presentation of data: some arithmetic and

graphical tools are used in this report for analyzing the collected data and to classifying those to interpret them clearly.

F. Findings of the study: The collected data were scrutinized very well and were pointed out and shown as findings. Few recommendations are also made for improvement of the current

situation.

G. Final report preparation: On the basis of the suggestions of our honorable faculty advisor some corrections were made to present the paper in this form.

CHAPTER- 2

Evolution of Banking Business 2.1. Evolution of Banking Business:

The word bank, which means a financial intermediary that collects deposits from savers and disburses loans to the fund seekers and acts as the principal medium of internal resources mobilization of an economy, is not the result of a short period. Instead, it has to pass through a very long period.

In the ancient age, people had to satisfy all of their needs by themselves. At this stage, there was no surplus production. Hence the concept of transaction was yet to be introduced. But, as the division of work took place in the society, there was surplus as well as deficit production in each society. This lead to the introduction of ‘BARTER SYSTEM’ in which commodities were exchanged for commodities directly. But this transaction system could not last for a long time for some problems such as,

1) Double coincidence of needs: this means the needs of two persons must meet the surplus that they have. For example, one person has some surplus rice and another person has some surplus cloths. If they the person with rice has the need of cloths and the person with cloth needs rice, only then the transaction will take place. But it was difficult.

2) Indivisibility of goods: all goods are not divisible and not of same worth. This caused a big problem for transaction. For example, a cow is not exchangeable for 1 meter cloth, neither it can be dividable in smaller units.

As a result, people had to think for a mechanism that would solve these problems and facilitate the transaction process. This resulted in the introduction of money in the form of stone, metals, bones etc.

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After the introduction of money, the volume of transactions increased to a great extent. People with surplus money started to feel insecure about their money. At that stage, goldsmiths, priests, businessmen were the most honorable and trusted people in the society. People started to keep their surplus money and jewelry deposited with them. They lent this money without any charge to those who needed money. This was the ‘transaction of utmost faith’. From here, the history of bank counts.

The previous discussion can be presented in the following diagram:

Figure 2.1: Diagram of evolution of banking business

After some time, businessmen started to charge some charges on those who took loan from them. It was the goldsmiths who introduced the ‘deposit slips’ in the history. Day by day, volume and complexity of transactions kept increasing, so as the concept of bank.

The banking systems of ancient age and the banking systems of modern age are two distinctively separate entities. The situations and flaws that resulted the banking systems in the present form are highlighted below:

As early as 2000 B.C., Babylonians had developed a system of bank. In ancient Greece and Rome the practice of granting credit was widely prevailed. ‘Traces of Credit by compensation and by transfer’ orders were found in Assyria, Phoenicia and Egypt before the system attained full development in Greece and Rome. The book of old Hindu saw giver, MANU, is full of regulations for governing credit. He speaks of judicial proceedings credit instruments were called for, interest on loans, on bankers, users and even of the renewals of commercial papers.

In Rome, bankers were called Argentarii. Some banks carried business on their own account and others were appointed by the Government to receive the taxes. Loan banks which lent money to the poor without any interest on the security of land for a period of 3 of 4 years were also common in Rome.

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The Bank of Venice, established in 1157, is supposed to be the most ancient bank. It was not a bank in the modern sense being simply an office for the transfer of public debt.

History shows the existence of a ‘Monte’ in the Florence in 1336 the meaning of ‘Monte’ is given in the Italian Dictionary 1959 as ‘a standing bank or mount of money, as they have in diverse cities of Italy’. Banbrigge, an English writer, speaks about ‘the three banks of Venice’ meaning the three public loans of Monte.

The beginning of the English banking may correctly be attributed to the London goldsmiths. They used to receive their customers’ valuables and funds for safety custody and issue receipts acknowledging the same. These notes, in the course of time, became payable to bearer on demand and hence enjoyed considerable circulation. In fact, the goldsmiths’ notes may be considered as the precursor of the bank note. The business of the goldsmiths got a rude shock by the ill treatment of the Government of Charles II, under the Cabal ministry. In the words of Bagehot; “It had perpetrated one of those monstrous frauds which are likewise gross blunders”. The goldsmiths used to deposit their reserve of treasure in the ‘Exchequer’ with the sanction and under the care of government. But Charles II shut down the Exchequer and paid nothing to the goldsmiths. However, the ruin of goldsmiths marks a turning point in the history of the English banking. It led to the growth of private banking and the establishment of the ‘Bank of England’. In the India, as early as Vedic period, banking existed in the crudest form. The bloods of Manu contain references regarding deposits, pledges and policy of loans and rates of interest. Truly, banking in those days largely meant money lending and they did not know the complicated mechanisms modern banking. This is true not only in case of India but also in case of other countries. The evolution of banking institutions became more and more organized as the time passed. In various periods, different amendments were made in different countries throughout the world. So, different countries have different contributions to the banking institutions to appear in the present form.

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Figure 2.2: At a glance-Evaluation in Banking Institutions in World According to Different Age 2.1.1. List of some important Ancient Banks:

Name of the Bank Place of Establishmen t Year of Establishmen t Remarks Shansi Bank China 600 B.C.

1st Bank in the World

Bank of Venice

Italy 1157

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Bank of San Georgio

Geneva 1178

Jointly established by traders

Bank of Barcelona

Italy 1401

Established by Govt. incentive

Risk Bank of Sweden

Sweden 1656

1st licensed Bank in World which issued notes

Bank of England

U.K. 1694

1st Central Bank in the World

Hindustan Bank

Calcutta 1700

1st commercial Bank in Indian subcontinent Bank of Prussia Germany 1765 1st Bank in Germany Bengal Bank India 1785

Ancient Bank of Indian Continent

Central Bank of India

India 1785

Ancient Bank of Indian Continent

Bank of France

France 1800

Central Bank of France

Bank of Calcutta

Calcutta 1806

1st Precedence Bank of India

Bank of Netherlands

Netherlands 1814

Central Bank of Owned by private owners but controlled by Govt. members

Bank of Norway

Norway 1817

Central Bank of Owned by private owners but controlled by Govt. law. National Bank of

Denmark Denmark 1818

Central Bank of Owned by private owners

Bank of Bombay

Bombay 1840

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Bank of Madras

Madras 1843

3rd Precedence Bank of India

Reichs Bank

Germany 1875

Central Bank of Germany

Bank of Japan

Japan 1882

Central Bank of Japan Owned by both private and Government owners.

Bank of Italy

Italy 1893

Bank of establish in private

ownership, which gets right to issue note at 1926

Switch National Bank

Switzerland 1907

Central Bank owned by both private and Government owners.

Federal Reserve

System U.S.A 1913

Central Bank of U.S.A

Impreial Bank of India

India 1920

Largest commercial Bank of India in the period

Bank of China

China 1928

Bank of establishment in private ownership, which was nationalized in 1949

Bank of Canada

Canada 1934

Central Bank of Canada, which was nationalized in 1949

Reserve Bank of India

India 1935

1st central Bank in Indian Subcontinent.

Habib Bank Ltd.

Bombay 1941

1st Muslim Bank in Indian subcontinent.

The Ban coda Brazil

Brazil 1941

Central Bank of Brazil owned by both private and Government owners.

State Bank of Pakistan

Pakistan 1948

1st Central Bank of Pakistan

National Bank of

Pakistan Pakistan 1949

1st Commercial and enlisted Bank of Pakistan

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Eastern Mercantile

Bank Chittagong 1959

1st Bank established in Bengali Ownership.

Table 2.1: List of some important Ancient Banks 2.2. Banking System in Bangladesh:

Bangladesh has a mixed banking system comprises of nationalized, private and foreign

commercial banks. Bangladesh Bank (BB) has working as the central bank of the country since the independence of the country. Its prime jobs include issuing currencies, maintaining foreign exchange reserve and providing transaction facilities of all public monetary mattes. BB is responsible for planning and implementing the government’s monetary policy

2.2.1. Banking Companies Ordinances:

The Banking Companies Ordinance was promulgated on the 7th June 1962. This has been adopted in Bangladesh and is applicable to the banking companies only. Nothing of this ordinance shall apply to a co-operative bank registered under the co-operative Securities Act (1912).

Main forms of business of Banking Companies o Borrowing, raising or taking up money.

o The lending or advancing of money either upon or without security. o Dealing in securities and investment.

o Other business as detailed in section 7. 2.2.2. Negotiable Instrument Act:

The Negotiable Instrument Act, 1881 is the legislative enactment of the Law relating to three classes of Negotiable Instruments namely: Promissory Notes, Bills of Exchange and Cheques, which are in common mercantile use in the monetary instructions. It came into force on 1st March 1882.

The law relating to negotiable instruments is not the law of our country or of one nation. It is the law of the mercantile world in general. It consists of “Certain principles of equity usages of trade, which general convenience and commonsense of justice had established to regulate the dealings in merchants and mariners in all the commercial countries of the civilized world”. 2.2.3. Categories of Banks:

In our country, there are four types of banks exists. Such as: 1. Central Bank.

2. Commercial Banks.

a. Nationalized Commercial Banks. b. Private Commercial Banks. c. Foreign Banks.

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4. Bangladesh Samabaya Bank.

Figure 2.3: Classification of Banks in Bangladesh 2.3. Economic Overview of Bangladesh:

During FY08 (July 2007 – June 2008), the Bangladesh economy maintained a strong growth underpinned mainly by robust growth in services and notable expansion in manufacturing activities, despite facing high and volatile oil prices in the international market. With a view to achieving higher economic growth, the Government and the Bangladesh Bank continued to adopt policies to support economic activities to the highest sustainable level, while maintaining a moderate Consumer Price Index (CPI) inflation. These policies contributed toward a strong real GDP growth of 6.5 percent in FY07, slightly lower than 6.6 percent of FY06. Economic growth was also aided by increased inflow of workers’ remittances from abroad and reasonable growth in exports.

In U.S. dollar terms, export earnings recorded a moderate growth of 15.8 percent, while the growth of import payments remained to a sustainable level at 16.6 percent. At the same time, remittances from non-resident Bangladesh nationals increased substantially by 24.5 percent. The country’s external current account balance continued to record a significant surplus with a substantial increase in remittances more than offsetting trade deficit and services deficit. A significant surplus in current account balance and a sharp rise in financial account surplus led to a sizeable surplus in the overall balance, which helped improve the international reserve position. Inflation was on uptrend during FY07 due mainly to rising import prices of fuel oil, metal, food grain and some other essentials in the international market coupled with problems in the

domestic supply chains like political turmoil in the first half of FY07; dislocation of market structure created by anti-hoarding drive and crackdown on corrupt business houses; and lower growth of crop production. Increasing domestic demand induced by high monetary and credit growth added to the uptrend in consumer prices. The annual average inflation increased to 7.20 percent in June 2007 from 7.16 percent in June 2006, while 12-month consumer price inflation on point to point basis increased over the same period to 9.20 percent. Total domestic credit grew by 14.5 percent, while credit to private sector increased by 15.1 percent in FY07.

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In more recent period, the economic situation of Bangladesh is like this:

The IMF expects that the real GDP growth of Bangladesh will be possible 5.5-6.0% in FY 08. The IMF has earlier projected the country’s GDP growth at 5.0-5.5% due to natural disasters and slowdown in economic activities due to factors like anti hording drive and negative growth in export during the first half of the fiscal year. Due to increase of export and strong Boro harvest, real GDP growth expected to be higher than anticipated earlier. IMF also suggested to improve the efficiency of the state owned commercial banks.

2.3.1. Exports: during July February, 2007-08 export increase by US$ 908.72 million or 11.33% to US$ 8932.59 million against US$ 8023.87 million during the same period of the previous year.

2.3.2. Import payments & Fresh opening of import LCs: During July-February, 2007-08, import payments increased by US$ 2327.20 or 21.04% to US$ 13387.90 million compared to US$ 11060.70 million during July-February, 2006-07.

Fresh opening of import LCs during July-February, 2007-08 increased by US$ 3887.33 million or 34.70% to US$ 15089.56 million against US$ 11202.23 million during July-February, 2006-07.

2.3.3. Remittances receipts: During July-March, 2007-08 remittances increase by US$ 1288057 million or 29.55% to US$ 5649.90 million against US$ 4361.33 million during July-March, 2006-07.

2.3.4. Gross foreign exchange reserves: Gross foreign exchange reserves of Bangladesh Bank stood lower at US$ 5302.46 million as of end March, 2008, against US$ 5978.60 million as of end February, 2008 due o ACU payment of US$ 733017 million on 6th March, 2008. However, this was higher than the US$ 4199.52 million reserves as of end March, 2007.

2.3.5. Inflation: The annual average rate of inflation increased to 9.79 in February, 2008 from 9.56% of January, 2008. The rate of inflation on point basis, however, decreased to 10.16% in February, 2008 from 11.43% of January, 2008.

2.3.6. Macro-economic trend:

This is a chart of trend of gross domestic product of Bangladesh at market prices estimated by the International Monetary Fund with figures in millions of Bangladeshi Taka. However, this reflects only the formal sector of the economy.

Year Gross Domestic Product US Dollar Exchange Inflation Index_(2000=100) Per Capita Income_{(as % of USA)}

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1995 1,594,210 40.27 Taka 78 1.12

2000 2,453,160 52.14 Taka 100 0.97

2005 3,913,334 63.92 Taka 126 0.95

2008 5,003,438 68.65 Taka 147

-Table2.2: Macro-economic trend

For purchasing power parity comparisons, the US Dollar is exchanged at 12.86 Taka only. Average wages in 2008 hover around $2-3 per day.

2.3.7. Economic target:

World Bank predicted economic growth of 6.5% for current year. Foreign aid has seen a decline of 10% over the last few months but economists see this as a good sign for self-reliance. There has been 18% growth in exports over the last 9 months and remittance inflow has increased at a remarkable 25% rate. Export was $10.5 billion in fiscal year 2005 exceeding the target export of $10.4 billion. Target export for current year is $11.5 billion. An estimated GDP growth of 6.7% was predicted for FY 2006.

Fiscal Year Total Export Total Import Foreign Remittance Earnings

2007-2008 $14.11b $25.205b $8.9b

2008-2009 $15.56b $22.00b+ $9.68b

2009-2010(Set Target) $17.6b N/A $10.87b

Table 2.3: Economic target CHAPTER- 3

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3.1. An Overview of Mercantile Bank Limited :

Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in modern society. It plays a liberalization of economic policies in Bangladesh. Mercantile Bank Limited emerged as a new commercial bank to provide efficient banking services with a view to improving the socio-economic development of the country.

Mercantile Bank has been incorporated on May 20, 1999 in Dhaka, Bangladesh as a limited company with the permission of the Bangladesh Bank; MBL commenced formal commercial banking operation from the June 2, 1999. The bank stood 15 branches all over the country up to 2001. The Authorized Capital of the Bank is 3000.00 million taka and the Paid-Up Capital is 1498.90 million taka as on December 31, 2007.The Bank provides a broad range of financial services to its customers and corporate clients. The Board of Directors consists of eminent personalities from the realm of commerce and industries of the country.

There are thirty Sponsors involved in creating MBL the Sponsors of the Bank have a long heritage of trade, commerce and industry. They are highly regarded for their entrepreneurial competence. The Sponsors happen to be members of different professional groups among whom are also renowned banking professionals having vast range of banking knowledge. There are also members who are associated with other financial institutions like insurance companies, leasing company’s etc.

Mercantile bank Limited continued its expansion program during the year ended as on December 31, 2007. Its core lending and deposit taking business have increased significantly. Rising trend of the banks profitability over the last 8 years is also materialized. The MBL is committed to the delivery of the superior shareholders’ value. With the aim to be the ‘bank of choice’, it is

operating in the industry with a team of personnel devoted to excel both their own career and the bank’s future.

3.2. Mission:

Will become most caring, focused for equitable growth based on diversified deployment resources, and nevertheless would remain healthy and gainfully profitable Bank. Mercantile Bank Limited aims to become one of the leading banks in Bangladesh by prudence, flair and quality of operations in their banking sector. The bank has some mission to achieve the organizational goals. Some of them are as follows as:

Mercantile Bank Limited provide high quality financial services to strengthen the well being and success of individual, industries and business communities.

Its aim to ensure their competitive advantages by upgrading banking technology and information system.

MBL intends to play more important role in economic development of Bangladesh and its financial relations with the rest of the world by interlining both modernistic and international operations.

MBL encourages investors to boost up share market. The bank creates wealth for the shareholders.

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It maintains high standard of corporate and business ethics.

Mercantile Bank Limited extend highest quality of services, which attracts the customers to choose them first.

The bank creates wealth for the shareholders.

The bank maintains congenial atmosphere for which people are proud and eager to word with Mercantile Bank Limited.

Mercantile Bank Limited intend to provide better benefits to their customers and good returns to their shareholders.

The bank intends to meet the needs of their clients and enhance their profitability by creating corporate culture.

3.2.1 Vision:

“Would make finest corporate citizen.” is the main vision of MBL. MBL dreams to become the bank of choice of the general public that includes both the consumer and the corporate clients. It has created a cadre of young professionals in banking profession which has helped boosting productivity in the bank.

3.2.2. Objectives:

3.2.2.1. Strategic Objectives:

• To achieve positive Economic Value Added (EVA) each year. • To be market leader in product innovation.

• To be one of the top three financial institutions in Bangladesh in terms of cost efficiency. • To be one of the top five financial institutions in Bangladesh in terms of market share in all significant market segments we serve.

3.2.2.2. Financial Objectives:

• To achieve a return on shareholders’ equity of 20% or more, on average. 3.2.3. Core Values:

3.2.3.1. For customers:

Providing with caring services by being innovative in the development of new banking products and services.

3.2.3.2. For Shareholders: Maximizing wealth of the bank. 3.2.3.3. For the employees:

Respecting worth and dignity of individual employees devoting their earnings for the progress of the bank.

3.2.3.4. For the community:

Strengthening the corporate values and taking environment and social risks and reward into account.

3.2.4. Business Philosophy of MBL:

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3.2.5. Nature of business:

Mercantile Bank Limited offer services for all banking needs of the customers, which include deposits, making loans and advances, discounting bills, conducting money transfer and foreign exchange transactions and performing other related services such as safe keeping, collections, issuing guarantees, acceptances and letters of credit.

3.2.6. Features of Mercantile Bank Limited:

There are so many reasons behind the better performance of Mercantile Bank Limited than any other newly established banks:

Mercantile Bank Limited has established a core Research & Planning Division comprising skilled person from the very inception of the bank.

Highly qualified and efficient professionals manage the bank.

The inner environments of the all branches of Mercantile Bank Limited are well decorated. Banking operations of the all branches of Mercantile Bank Limited have been computerized to provide the promptly & frequently customers service.

The bank has established correspondent relationship with 102 of foreign banks.

The bank has launched some financial products, which is not available in any other banks, like Ajebon Pension Scheme.

Mercantile Bank Limited provides attractive interest rate than the other financial institutions. The bank provides loan to the customers at lower interest with easy & flexible condition than the other do.

The bank frequent arranges customers meeting to achieve their valuable suggestions. Letter of Credit (L/C) commissions and other charges are very lower than the other banks. Profit earning is not the main aim of the MBL. The bank is responsible to maintain the social duties.

The bank is committed to provide the cherub amount within 30 seconds of submission the cherub.

3.2.7. Corporate information at a glance:

Name of the Bank Mercantile Bank Limited

Status Public Limited Company

Date of Incorporation May20, 1999 Date of Commencement June 02, 1999. Subscription for Shares October 21-22, 2003 Listed in Dhaka Stock Exchange February 16, 2004 Listed in Citation Stock Exchange February 26, 2004

Head Office 61, Dilute Commercial Area, Dhaka- 1000

Phone +880-2-9559333, 01711-535960

E-mail mbl@bol-online.com

Website www.mblbd.com

Chairman Md. Abdul Jail

Managing Director Dean Manipur Raman

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Number of Branches 42 Table 3.1: General Information of MBL SOURCE: www.mblbd.com

3.3. Ownership Structure:

The Board of Directors consists of eminent personalities from commerce and industry of the country. Mr. Md. Abdul Jail, the founder Chairman of the Board of Directors, is a businessman besides being an eminent personality of the country. The last Government had been pleased to induct him as a Senior Cabinet Minister with the portfolio of Commerce.

The Bank is manned and managed by highly qualified and efficient professionals. The chief Executive officer of the Bank is Mr. M. Taheruddin who has rich experience of managing both the nationalized and the private sector banks as Managing Director.

Mr. Lutfar Rahman Sarkar who born in 1935, initiated his banking carrier from Habib Bank Limited as a provisionary officer. Then he served as Managing Director in Agrani Bank, Sonali Bank, Islami Bank Bangladesh Limited and Prime Bank Limited. The Chief Adviser of the Bank is the former Governor of the Central Bank of Bangladesh. He brings with him a wealth of experience of managing both the public and private sector banks.

3.3.1. Board Committees of MBL:

Board of Directors who also decides the composition of each committee determines the responsibilities of each committee.

3.3.2. Executives Committees of MBL:

All routine matters beyond delegated powers of management are decided by or routed through the Executives Committee, subject to rectification by the Board of Directors.

3.4. Composition of the board:

Board of Directors, the apex body of the Bank, formulates policy guidelines, provides strategic planning and supervises business and performance of management while the Board remains accountable to the company and its shareholders. The Board is assisted by the Executive Committee and Audit Committee.

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Figure 3.1: Composition of the board

SOURCE: Adapted from MBL’s Annual Report 2008

3.5. Capital & Reserves:

3.5.1. Capital:

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The authorized capital of the bank was BDT 3,000.00 million of 30,000,000 ordinary shares of BDT 100 each as of December 31, 2008.

Table 3.2:

Authorized Capital

Source: Audited annual report of MBL, 2008. 3.5.1.2. Paid up Capital:

Paid-up Capital of the bank was BDT 1498.90 million of 14,988,983 ordinary shares of BDT 100 each as of December 31, 2008.

Table3.3: Paid-up Capital

Source: Audited annual report of MBL, 2008.

Year Taka(BDT in million)

2006 1200.00

2007 3000.00

2008 3000.00

2006 1199.12

2007 1498.90

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3.5.2. Reserve:

3.5.2.1

Statutory Reserve:

Table 3.4: Statutory Reserve

Source: Audited annual report of MBL, 2008.

3.5.2.2. Other Reserve:

Table3.5: Other Reserve

Source: Audited annual report of MBL, 2008. 3.6. Milestones in the development of the organization:

2007 726,729,402

2008 966,496,902

2007 24,864,349

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Figure 3.2: Milestones in the development of the organization SOURCE: Adapted from MBL’s Annual Report 2008

3.7. Management Structure of MBL:

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Figure 3.3 : Management Hierarchy

SOURCE: Adapted from MBL’s Annual Report 2008 3.8. Risk Management:

3.8.1. Credit Risk:

Credit risk is the potential that the borrower may not repay or fails to repay his/her debt

obligation. They are exposed to credit risk through traditional lending activities and transactions involving settlements between their counterparts.

• Objectives [[

Maintain a well-diversified asset portfolio within approved risk tolerance levels and earn a return appropriate to the risk profile of the portfolio.

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Skill appraisal officers first evaluate credit transactions for commercial and corporate loans. Credit Management Committee provides and independent assessment of all significant transactions, and a concurrence form this function is usually required to make a lending commitment to a customer. Their Audit and Inspection Division also reviews management processes in order to ensure that establish credit policies are followed. In addition, Credit Management Committee performs periodic reviews of significant and higher risk transactions. 3.8.2. Market Risk:

:

Market risk is the potential for loss from changes in the value of financial instruments. The value of a financial instrument can be affected by changes in interest rates, foreign exchange rates and equity and commodity prices. They are exposed to market risk when they enter into the

following transactions:

Loans and Advances (LDOs) Deposit with other Banks - Investment

- Treasury Bills - Bond

- Shares

Foreign Exchange Positioning • Objective

Identify, measure, monitor and report all market risk-taking activities, ensuring that exposures remain within approved risk tolerance levels and that the return from market risk activities is acceptable.

• Approach

They have established Asset Liability Committee (ALCO) to monitor their market risk activities. The primary risk measurement methodology is Repricing Gap and its sensitivity to interest rate changes. Reprising Gap over 12-month period stood at positive BDT 4251.76 million as at Dec 31, 2008. Reprising Gap as percentage of total assets stood at 14.72%, which is within the international standard of 20%. In the position, the Net Interest Income (NII) of the Bank may increase by BDT 42.52 million in case of 100 basis point increase in interest rate. However, in case of 100 basis point decease in interest rate, the NII of the Bank will go down by BDT 42.52 million.

Particulars Volume

Rate Sensitive Assets (RSA) 17656.56

Rate Sensitive Liabilities (RSL) 13404.80

Repricing Gap (RSA-RSL) 4251.76

Repricing Gap as % of Total Assets 14.72% For 100 basis point increase in interest rate 42.52

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For 100 basis point decrease in interest rate (42.52) Table 3.6: Repricing Gap: 2008

3.8.2. Liquidity Risk:

Liquidity risk is the risk that the Bank may fail to meet is obligation due to short of cash and/or cash equivalent assets. This situation may arise in the case of withdrawal of deposits, debt maturities and commitment to provide credit.

 Objective

Main sufficient liquid assets* and finding capacity to meet their financial commitments, under all circumstances, without having to raise funds at unreasonable prices or sell assets on forced basis.

 Approach

Their approach to liquidity management is to project liquidity requirements based on expected and stressed economic, market, political and enterprise-specific event. This enables them to ensure that they have sufficient funds available to meet their financial commitments even in times of crisis. Funds encompass both liquid assets on hand and capability to raise additional funds.Their large based of scheme deposits form individuals and strong capital positions provide a long-term stable source of funding. The primary risk measurement methodology is to monitor liquid asset ratios, deposits mix, core deposits as percentage of total deposits and net liquidity gap.

Figure 3.4: Liquidity Risk

Source: Annual report 2008 Mercantile Bank Limited.

 Liquid Assets =Cash + Balance with Bangladesh Bank + Deposit with other Banks+ Money at Call and Short Notice + Investments.

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3.8.3. Operational Risk:

Operational risk is the risk of loss resulting form inadequate or failed internal processes, people and systems or from external events.

 Objective

Operational risk is inherent in all business activities, and the management of these risks is important to the achievement of organizational goals. While operational risks can never be eliminated, these can be managed, mitigated and in some cases insured against to preserve and create value.

 Approach

Operational risk is managed through the establishment of effective infrastructure and controls. To this end, we have established a well-formulated framework that uses the strengths and

specialized knowledge of our lines of business. Our strategy is to maximize our ability to manage and measure operational risk through implementation of a framework that takes advantages of the best practices in the industry.

3.8.5. Credit Rating Report on MBL by CRISL:

Mercantile Bank Limited has been rated by Credit Rating and Information Services Limited (CRISL) on the basis of Financial Statements as on December 31, 2007. The summary of the rating is presented below:

Credit Rating and Information Services Limited (CRISL) has upgraded the rating of Mercantile Bank Limited to ‘A’ (pronounced as single A) from ‘A-’ (pronounced as single A minus) in the Long Term and ST-2 for the Short Term from ST-3. CRISL has

disclosed the said rating on March 9, 2008. The up gradation has been done in consideration with its financials such as improvement in asset quality, capital adequacy, stable source of

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fund, diversified product lines etc. Financial institutions rated in this category are adjudged to offer adequate safety for timely repayment of financial obligations.

The short-term rating indicates high certainty of timely payment, strong liquidity factors, good company fundamentals, easy access to capital market and risk factors are very minimal. The long-term rating is valid for only one year and short-term rating is for six months.

3.9. Human Resources Development:

In today’s competitive business environment, the quality of human resources makes the difference. The Bank’s commitment to attract high quality persons to work for it is reflected in the efforts of the Bank. In the face of today’s globalization, the Bank envisages to develop highly motivated workforce and equip them with latest skills and technologies. The Bank evolves human resources development strategy with a view to ensuring good working environment, a high level of loyalty and commitment, devotion and dedication on the part of the employees.

3.9.1 Mercantile Bank Foundation:

The Bank has set up Mercantile Bank Foundation for extending benevolent services to the society. The Bank contributes 1% of operating profit or Tk.4.00 million; whichever is higher, to Mercantile Bank Foundation every year. The Foundation has been established with following objectives:

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 Mercantile Bank Prize to 8(eight) eminent personalities of the country for the outstanding contribution in the fields of Economics and Economic Research, Bengali Language and Literature, Science and Technology, Education and Culture, Journalism, Sports, Research on Liberation War and Industry and Commerce.

 Interest free education loan for the meritorious but poor students  To conduct research on Bengali language and literature.

 Book purchase and Distribution Policy to encourage writers and publishers of the country.

 Interest free Loan to the unemployed educated people.

 Donation for handicapped artists, literature and distressed people.  Project for the development of shelter-less children.

3.10. Branch expansion:

The Bank commenced its business on June 02, 1999. The First branch was opened at Dilkhusha Commercial Area in Dhaka on the inauguration day of the Bank. The Second Branch was opened at Dhanmondi Residential Area, Dhaka on August 04, 1999. The Third Branch was opened at Kawran Bazar, Dhaka on September 06, 1999. The Fourth Branch was opened at Agrabad,

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Citation on November 06, 1999. Now, the total number of branches stood at 42 at the end August of the year 2009.

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Figure 3.5: Branch Network of Mercantile Bank Limited 3.10.1. Head Office and Branch Network:

Head Office

61, Dilute Commercial Area Dhaka-1000, Bangladesh Tel: +880-2-9559333, 01711535960 Fax: +880-2-9561213 Telex: 642509 MBLID BJ E-mail: mbl@bol-online.com Website: www.mblbd.com Branch Network Name Address

01. Main Branch Dhaka

02. Dhanmondi branch Dhaka

03. Kawran Bazar Branch Dhaka

04. Agrabad Branch Citation

05. Joypara Branch Dhaka

06. Banani Branch Dhaka

07. Rajshahi Branch Rajshahi

08. Naogaon Branch Naogaon

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10. Board Bazar Branch Gazipur

11. Nayabazar Branch Dhaka

12. Khatungong Branch Citation

13. Mohakhali Branch Dhaka

14. Mirpur Branch Dhaka

15. Ashulia Branch Savar

16. Uttara Branch Dhaka

17. Jubilee Road Branch Citation

18. Elephant Road Branch Dhaka

19. Motijheel Branch Dhaka

20. Madam Bibir Hat Branch Citation

21. Khulna Brach Khulna

22. Rangpur Branch Rangpur

23. Satmasjid Road Branch Dhaka

24. Jhilongja Brach Cox’s Bazar

25. O R Nizam Road Branch Citation

26. Bogra Branch Bogra

27. Chowmuhani Branch Noakhali

28. Konabari Branch Gazipur

29. Gulshan Branch Dhaka

30. Feny Branch Feny

31. Moulobhi Bazar Sylhet

32. Bijoynagar Dhaka

33. Mogbazar Branch Dhaka

34. Sataharnagar Branch Naogaon

35. Hemayetpur Branch Dhaka

36. Sapahar Branch Naogaon

37. Beanibazar Branch Beanibazar

38. Barisal Branch Barisal

39. Bhojeshwarbazar Branch Shariatpur

40. Comilla Branch Comilla

41. Green Road Branch Dhaka

42. Sheikh Mujib Road Branch Citation

Table 3.7: Branch Network

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3.11. An Overview of Main branch:

The main branch of Mercantile Bank Limited is located in the Motijheel commercial area. The total manpower of this branch is 118.The total number of the senior vice president is 10.As it is the main branch of the bank, the customer appearance in the bank is very high.

In the Mercantile Bank Limited, Main Branch, the people are mostly courteous, friendly in nature and eager to help despite the tremendous workload. Manpower is sufficient in the branch but there is no information booth for customer information. So as a new private bank, Mercantile Bank Limited is running steadily.

3.11.1. Department of Main Branch:  General Banking Division  Credit Division

 Foreign Exchange Division 3.12. Divisions of MBL:

1. General Banking & Deposit Management 2. Credit Department

3. Foreign Exchange Department General Banking & Deposit Management:

1. Account opening and KYC procedures. 2. Issuance of DD/TT/PO/FDR.

3. Interbank Transaction, OBC/IBC. 4. Account section.

5. Clearing Section. 6. IT Section. Credit Department:

1. Credit Proposals Processing Procedures.

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3. Overview on all returns. Foreign Exchange Department:

1. I. Cash L/C 1. Opening of L/C.

2. Lodgment of Import Bill. 3. Payment against Import Bill. 4. B/E Matching.

5. IMP Reporting.

1. II. BTB L/C

1. Export L/C Checking.

2. Opening of BTB L/C (Local/ Foreign/ EDF/ EPZ). 3. Lodgment and confirmation of maturity date. 4. Allowing of PC.

5. Payment against realization of Export Proceeds/ Forced Loan. 6. B/E Matching.

7. Reporting.

8. III. Export

1. Scrutinizing/ Negotiation/ Send on Collection. 2. Follow-up.

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3. Realization. 4. Reporting.

1. IV. Foreign Remittance Inward FDD. 1. FTT. 2. Others. Outward 1. Endorsement of Traveling. 2. Education/ Treatment/ Others. 3. Cash Rebate.

4. FC issuing. 5. FDD/ FTT etc.

3.13. Services Offered by MBL:

The Bank does believe that it has differentiated itself from other banks through its products and services. It is banking for the people to fulfill their needs conceptualizing product and services to meet their aspiration and expectations. The bank is proud to have exemplified the true concept as ‘Banglar Bank’. The Bank launched several financial products and services since its inception. Among them are:

3.13.1. Deposit Schemes

a) Family Maintenance Deposit (FMD): Objectives :

 Help the retired persons for investing their retirement benefits.  Create investment opportunities for Non-Resident Bangladeshi.  Explore investment opportunities for school, college, university etc.

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 Give investment opportunities for Trust; Foundation etc. Mode :

 Deposit a fixed amount of money for 05 (Five) years.

 Depositor will get a certain sum of money in each month proportion to his/her deposit during the entire tenure.

Benefits :

 Tenure of deposit is 05 (Five) years.

 Minimum amount of required deposit is TK.50, 000.00 or it’s multiple. Deposit Monthly Benefit (Amount in TK.)

1,00,000 1,000 2,00,000 2,000 3,00,000 3,000

Table3.8: Deposit under Family Maintenance Deposit (FMD) scheme B) Monthly Savings Scheme:

Objectives:

 Build up habit of savings.  Attract small savers.  Saving for rainy days. Mode :

 Monthly installments of various sizes. Benefits : Amount in TK Period Monthly Installment 250 500 1,000 Benefits

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5 Years 20,625 41,250 82,500 8 Years 40,375 80,750 1,61,500 10 Years 57,500 1,15,000 2,30,000 Period Monthly Installment 1500 2500 5,000 Benefits 5 Years 1,23,750 2,06,250 4,12,500 8 Years 2,42,250 4,03,750 8,07,500 10 Years 3,45,000 5,75,000 11,50,000

Table3.9: Deposit under Monthly savings scheme c) Pension & Family Support Deposit (PFSD):

Condition:

 Provides monthly income for retired person.

 Helps to meet monthly expenses after certain period of time.

 One person can deposit a certain sum in every month for certain tenure and after that period he/she can get monthly income.

Monthly Installment

10 Years 15 Years

Pension per month One time Pension One time

500 625 80,000 1,150 1,35,000

1,000 1,250 1,60,000 2,300 2,70,000

2,500 3,125 4,00,000 5,750 6,75,000

5,000 6,250 8,00,000 11,500 13,50,000

Table3.10: Monthly Installment of Pension & Family Support Deposit (PFSD) d) Monthly Benefit Scheme:

Under this Scheme; customer has to deposit a fixed amount of money for five years and in return he will receive benefits on monthly basis. Benefits start right from the first month of opening an account under Scheme and will continue up to five years when the depositor will get refund of his deposit.

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The ‘Quarterly Benefit Deposit Scheme’ will be maintained for a period of 3 (three) years and the minimum amount of deposit is BDT 50,000.00 (fifty thousand) or its multiples.

Example

Initial Deposit (BDT) Term Quarterly Benefit Payable (BDT)

50,000 3 Years 1,500

100,000 3 Years 3,000

200,000 3 Years 6,000

Table3.11: Initial Deposit under Quarterly Benefit Deposit Scheme f) 1.5 Times Benefit Deposit Scheme:

Under the ‘1.5 Times Benefit Deposit Scheme’ a deposit of minimum BDT 50,000.00 (fifty thousand) or its multiples will be received for a period of 42 months (3.5 years). On maturity after 42 months, 1.5 times of the deposited amount will be paid back to the account holder as per example given below:

Example

Initial Deposit (BDT) 50,000.00 1,00,000.00 5,00,000.00 Return after 42 months (BDT) with benefits 75,000.00 1,50,000.00 7,50,000.00

Table3.12: Deposit under 1.5 Times Benefit Deposit Scheme g) Double Benefit Deposit Scheme:

Objectives :

 Give maximum benefit.

 Help in meeting specific needs like education, marriage etc.  Deposit becomes double in six years.

Mode:

 Tenure of the deposit is 06(Six) years.

Amount of Deposit Period Amount Payable

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Table 3.13: Deposit under Double Benefit Deposit Scheme h) Special Savings Scheme:

Under this Scheme, depositor’s money will be more than three times in ten-year period. The main attraction of this Scheme is depositor can get his money back after one year and onwards with attractive benefits.

Objectives:

 Help in meeting specific needs like education, marriage etc. Mode:

 Deposit a fixed amount of money for any period up to 15 (Fifteen) years. Benefits:

 Triple of the amount deposited after 15 years.

 Minimum deposit shall be Tk.50, 000.00 or it’s multiple. Deposit Period Amount Payable at Maturity 1,00,000 15 Years 3,00,000

Table 3.14: Deposit under Special Savings Scheme

3.13.2. Credit Schemes:

a) Consumer Credit Scheme:

Consumer Credit is a relatively new field of collateral-free finance of the Bank. People with limited income can avail this credit facility to buy household goods including car, computer and other consumer durable.

Objectives:

 Help fixed-income people for buying household durable.  For the amount up to Tk. 1,00,000 the period is two years.  Interest rate will be charged quarterly rest.

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 Interest Rate 16.00%  Risk Fund 1.00%

 Supervision Charge (per year on outstanding balances) 0.25%  Application Fee BDT 200.00

Special Feature:

 The loan amount is directly credited to the customer’s account. b) Small Loan Scheme:

This Scheme has been evolved especially for small shopkeepers who need credit facility for their business and cannot provide tangible securities. The present maximum range of loan under the Scheme is Tk. 2,00,000.

Objectives:

 Extend credit facility to small shopkeepers.  Give collateral-free credit.

Mode:

 Maximum amount of loan Tk. 2,00,000.  Interest Rate 16.00%

 Risk Fund 1.00%

 Service Charge 0.25% per year on outstanding balances  Application Fee BDT 200.00

 Loan Limit BDT 2.50 Lac  Repayment period 3 years

 Interest rate will be charged at quarterly rate c) Lease Finance:

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This has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machinery, medical equipment, computers and other items, which may help them to be economically self-reliant. Terms and conditions of this credit have been made easier than before in order to help the potential entrepreneurs to acquire equipment of production and services and repay the liability gradually from earnings on the basis of “Pay as you earn.”

Objectives:

Assist and encourage entrepreneurs for acquiring capital machinery, medical equipment, automobiles etc.

Terms & Conditions:

 Lease period 3 to 7 years  Lease rent @ 16.00%  Risk Fund 1.00%

 Service Charge 0.25% per year on outstanding balances. Security:

 Primary: Ownership of fixed items.

 Collateral: Landed property, Bank Guarantee, ICB Unit Certificate etc. d) Doctors Credit Scheme:

Doctor’s Credit Scheme is designed to provide financing facilities to doctors, clinics and hospitals on easy terms.

Objectives:

 Help new F.C.P.S. or post-graduate doctors for setting up chambers and buying medical equipment.

 Help experienced doctors for refurbishing chambers and buying medical equipment.  Assist private clinics for acquiring modern medical equipment.

 Interest rate will be charged quarterly rest. Terms & Conditions:

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 Equity

1. For new doctor10%

2. For experience ddoctor15%

3. For Hospital, Clinic and Diagnostic Center 20%  Interest Rate 16.00%

 Risk Fund Tk. 1.00%

 Repayment period 5 years.. e) Rural Development Scheme:

Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through various incomes generating activities. This Scheme is operated through the rural branches of the Bank.

Objectives:

 Raise the standard of living of rural people.  Initiative to break the vicious cycle of poverty.  Enhance the purchasing power of rural people. 

Terms & Conditions:  Group Formation

1. 30 people in a group 2. 1 group leader

3. 6 sub-groups consisting 5 person each in a group 4. 1 sub-group leader in each sub-group

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Women Entrepreneurs Development Scheme has been introduced to encourage women in doing business. Under this Scheme, the Bank finances the small and cottage industry projects