RISK MANAGEMENT PROJECT
FINAL REPORT
Bank Al-Habib
Table Of Contents
Executive Summary....................................................................................................................................... 2
Introduction .................................................................................................................................................. 3
Risk Management Framework ...................................................................................................................... 3
Basel Capital Adequacy: Standardized Approach ......................................................................................... 5
Challenges ................................................................................................................................................. 6
Key Benefits.............................................................................................................................................. 6
Risk Mitigation Plan ...................................................................................................................................... 7
Operational Risk ....................................................................................................................................... 7
Key Benefits.......................................................................................................................................... 8
Operational Risk-Disclosures Basel II Specific .................................................................................... 8
Credit Risk ................................................................................................................................................ 9
Market Risk............................................................................................................................................. 10
Foreign Exchange Risk ....................................................................................................................... 10
Equity position Risk ............................................................................................................................ 11
Yield / Interest Rate Risk in the Banking Book (IRRBB) - Basel II Specific .................................... 11
Interest rate / yield risk in the banking book – Basel Specific ............................................................ 11
Key Benefits........................................................................................................................................ 12
Risk Limitations: .......................................................................................................................................... 12
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Bank Al-Habib
Executive Summary
Bank AL Habib Limited is a banking company. The Bank operates through Retail banking,
Commercial banking, Retail brokerage and geographical segments. Its Retail banking consists of
retail lending, deposits and banking services to private individuals and small businesses. The
retail banking activities include provision of banking and other financial services, such as current
and savings accounts, and credit cards to individual customers, and small and medium
enterprises (SMEs). Its Commercial banking represents provision of banking services, including
treasury and international trade-related activities to corporate customers, multinational
companies, and government and semi government departments and institutions. Its Retail
brokerage activities include the business of equity, money market and foreign exchange
brokerage, equity research, and corporate financial advisory and consultancy services. It operates
in four geographic regions: Pakistan, the Middle East, Asia Pacific and Africa. This report
focuses primarily on the profitability of the stock markets of Pakistan using Banking Sector
listed in Karachi Stock Exchange as a case study Bank-Al-Habib.
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Bank Al-Habib
Introduction
Bank AL Habib (BAHL) operates throughout Pakistan with a network of 500+ branches and
over $6 Billion in Assets. It also has overseas operations in Hong Kong, Seychelles and
Malaysia. The Bank wanted to implement a comprehensive risk management solution to address
local regulatory guidelines in each of its four jurisdictions.
The Bank acquired Oracle Enterprise Risk Management and engaged Consulting and
Implementation Services from Tec logic. The Project covered two phases: The first phase
targeted implementation of the Basel III requirements and the deployment of modules for
managing Market Risk and Operational Risk. In the second phase, the Bank is implementing
Asset and Liability Management and Liquidity Risk Management.
Risk Management Framework
The Bank always had a risk management framework commensurate with the size of the Bank
and the nature of its business. This framework has developed over the years and continues to be
refined and improved. A key guiding principle of the Bank is to treat the depositors’ money as a
trust which must be protected. Therefore, the Bank aims to take business risks in a prudent
manner, guided by a conservative outlook. Salient features of the Bank’s risk management
framework are summarized below:

Credit Risk:
Credit risk is managed through the credit policies approved by the Board; a well-defined credit
approval mechanism; use of internal risk ratings; prescribed documentation requirements; post3
Bank Al-Habib
disbursement administration, review, and monitoring of credit facilities; and continuous
assessment of credit worthiness of counterparties. The Bank has also established a mechanism
for independent, post-disbursement review of large credit risk exposures. Decisions regarding the
credit portfolio are taken mainly by the Central Credit Committee.

Market Risk:
Market risk is managed through the market risk policy approved by the Board; approval of
counterparty limits and dealer limits; and treasury & investment policy; and regular review and
monitoring of the investment portfolio by the Bank’s Asset Liability Management Committee
(ALCO). In addition, the liquidity risk policy provides guidance in managing the liquidity
position of the Bank, which is monitored on daily basis by the Treasury and the Middle Office.
Decisions regarding the investment portfolio are taken mainly by ALCO.

Operational Risk:
Operational risk is managed through the audit policy, the operational risk policy, the compliance
policy & programme, IT and IT security policies, human resource policy, consumer protection
framework, and outsourcing policy approved by the Board, along with the fraud prevention
policy, consumer grievance handling policy; operational manuals and procedures issued from
time to time; a system of internal controls and dual authorization for important transactions and
safe-keeping; a Business Continuity Plan, including a Disaster Recovery Plan for I.T.; and
regular audit of the branches and divisions.
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Bank Al-Habib
Basel Capital Adequacy: Standardized Approach
Financial institutions can accelerate their Basel Capital Adequacy compliance initiatives with the
Oracle Financial Services Regulatory Capital solution.
BAHL’s requirement for Capital Adequacy calculation were quite extensive and challenging
given the number of jurisdictions and the fact that the Bank has both Conventional and Islamic
banking operations. The following is a list of the major requirements of BAHL:

State Bank of Pakistan Jurisdiction – Basel Capital Calculation:
o BAHL – Basel III (Stand-alone and Consolidated)
o BAHL – Basel III (Stand-alone and Consolidated) for Islamic Banking Operations
o AL-Habib Capital Market Basel III (Stand-alone)

Seychelles Jurisdiction – Basel I Capital Calculation

Malaysia & Hong Kong Jurisdictions – Basel Capital Calculation: Basel III (Stand-alone)
Furthermore, the Bank asked the following approaches/ requirements to be implemented:

Implement the Oracle Reconciliation Framework to help the Bank reconcile its figures
from operating systems (Core Banking, Treasury, Cards etc.) with the Bank’s General
Ledger

Credit Risk Mitigation with Simple and Comprehensive approaches

OEM and CEM approaches for off-balance sheet market related instruments

Maturity and Duration approaches for Market Risk general charge calculations

Configuration of look through approach for investments in mutual funds
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Bank Al-Habib

Separate runs for AFS portfolio by considering it a part of trading book

Configuration of rules for determination of reciprocal cross holdings

Configuration of State Bank of Pakistan’s mandatory stress testing scenario for Credit
and Market Risk

Capital adequacy reports for Basel I and III for each Jurisdiction
Challenges
Implementation of Basel Regulatory Capital is always a challenge, both from business and technical
standpoint. Some of the key challenges faces in the implementation are highlighted below:

For BAHL, multiple approaches, multiple jurisdictions and multiple runs complicated the data
requirements considerably.

Basel III rules are vast in number and each jurisdiction has used its discretion to evolve its
regulatory guidelines. Multi-jurisdiction implementation therefore requires very deep
understanding of the regulations.

Since the Oracle solution has pre-built rules based on BIS regulations, a careful analysis is
required to cater for the differences in rules across jurisdictions.

The reporting requirements for Basel III are extensive with a large variety of required disclosures.
Identifying these elements, finding out the appropriate data and data sources requires a lot of
involvement with different stake holders.
Key Benefits

Provides credit, market and operational risk measurement in accordance with Basel III guidelines
and fully customized to the local regulatory requirements
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Bank Al-Habib

Basic, standard and advanced internal calculation options are pre-built and delivered in an
advanced data warehouse-based framework for consistency, accuracy and extensibility
Risk Mitigation Plan
The Bank has a risk management framework commensurate with its size and the nature of its
business. The Board of Directors has approved risk management policies covering key areas of
activities for the guidance of management and committees of the Board, management
committees, and Divisions / Departments of the Bank. This section presents information about
the Bank’s exposure to and its management and control of risks, in particular the primary risks
associated with its use of financial instruments.
This section presents information about the Bank’s exposure to and its management and control
of risks, in particular the primary risks associated, estimate impacts, and define responses to
risks.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and
systems or from external events. This definition includes legal risks but excludes strategic and
reputational risks. Bank classifies operational loss / near miss events into seven loss event types, which
are Internal Fraud, External Fraud, Employment Practice & Workplace Safety, Client, Product &
Business Practice, Damage to Physical Assets, Business Disruption & System Failure, and Execution,
Delivery & Process Management.
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Bank Al-Habib
The Bank’s operational risk management framework, as laid down in the operational risk policy, permits
the overall risk management approach to evolve in the light of organisational learning and the future
needs of the Bank.
BAHL Operational Risk Management is responsible for identifying, measuring, reporting and monitoring
operational risks for the entire group at a branch and department level.
Prior to this, BAHL had an internally developed solution that mostly catered to Loss Data Management.
The rest of the framework was manual in nature with no concept of risk repositories, automated linkages
between different functions and follow up procedures for notification and tracking.
Key Benefits
BAHL has obtained the following benefits from the implementation of the solution:

Work with an enterprise-wide view of all operational risk data to ensure a single, consistent view.

Eliminate redundant efforts and inconsistent results through a common, pre-built operational risk
application.

Identify measure and mitigate all types of operational risks across the entire business.

Confirm that the enterprise is optimally insured and identify cost saving opportunities through
over-insured risks.

Establish and maintain controls to keep operational risk levels aligned with financial risk appetite.

Work on regular assessments of both risks and controls.
Operational Risk-Disclosures Basel II Specific
The Bank uses Basic Indicator Approach to calculate capital charge for operational risk as per Basel
regulatory framework. This approach is considered to be most suitable in view of the business model of
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Bank Al-Habib
the Bank which relies on an extensive network of branches to offer one - stop, full – service banking to its
clients. The Bank has developed and implemented an Operational Loss Database. Operational loss and
"near miss" events are reviewed and appropriate corrective actions taken on an ongoing basis, including
measures to improve security and control procedures. Key Risk Indicators have also been developed
along with thresholds which are being closely monitored for breaches. Risk Evaluation exercise is carried
out for new products, processes and systems or any significant change in the existing product, processes
and systems as per the operational risk policy of the Bank.
Credit Risk
Credit risk is the risk of loss arising from failure by a client or counterparty to meet its
contractual obligation. It emanates from loans and advances, commitments to lend, contingent
liabilities such as letters of credit and guarantees, and other similar transactions both on and off
balance sheet.
The objective of credit risk management is to keep credit risk exposure within permissible level,
relevant to the Bank’s risk capital, to maintain the soundness of assets and to ensure returns
commensurate with risk.
The Bank lends primarily against the cash flow of the business with recourse to the assets being
financed as primary security. Collaterals in the form of liquid securities, tangible securities, and
other acceptable securities are obtained to hedge the risk, as deemed appropriate. Main types of
collaterals taken by the Bank include charge on stock - in - trade, receivables, machinery,
mortgage of properties, pledge of goods, shares and other marketable securities, government
securities, government guarantees, bank guarantees, cash margins and bank deposits.
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Bank Al-Habib
The Bank uses the Standardized Approach to calculate capital charge for credit risk as per Basel
regulatory framework, with comprehensive approach for credit risk mitigation.
Market Risk
Market risk is the risk of loss arising from movements in market rates or prices, such as interest
rates, foreign exchange rates, and equity prices.
The Bank takes positions in securities for the purpose of investment and not to run a trading
book, except to a very limited extent (maximum of Rs. 300 million) for trading in equities. As
regards foreign exchange positions, the purpose is to serve the needs of clients. Except as
aforesaid, the Bank does not engage in trading or market making activities.
Oracle Financial Services Market Risk Management Solution enables Banks to quantify and
manage risk arising due to movement of risk factors such as interest rates, equity prices and
exchanges. The application supports volatility estimation of these risk factors using EWMA and
GARCH methods. The application facilitates risk managers with critical risk measures such as
VaR, CVaR, Component VaR, Marginal VaR, and Incremental VaR. It also provides simple and
Kupiec Back-testing approaches to gauge the accuracy of VaR predicted by VaR Model.
Foreign Exchange Risk
Foreign exchange risk exposures of the Bank are controlled through dealer limits, open foreign
exchange position limits, counterparty exposure limits, and country limits. The Bank manages its
foreign exchange exposure by matching foreign currency assets and liabilities within strict limits.
The net open position in any single currency and the overall foreign exchange exposure are both
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Bank Al-Habib
managed within the statutory limits as prescribed by SBP as well as the internal limits set by the
Bank itself.
Equity position Risk
The Bank’s policy is to take equity positions for investment purposes and not to run a trading
book, except to a very limited extent (maximum of Rs. 300 million) for trading in equities.
Equity position risk of the Bank is controlled through equity portfolio limits, sector limits, scrip
limits, and future contracts limits. Direct investment in equities and mutual funds is managed
within the statutory limits as prescribed by SBP as well as the internal limits set by the Bank
itself.
Yield / Interest Rate Risk in the Banking Book (IRRBB) - Basel II Specific
Interest rate risk exposures of the Bank are controlled through dealer limits, counter - party
exposure limits and (when necessary) type - of - instrument limits. Outright purchase and sale of
securities are also approved by ALCO. Duration and modified duration of various types of debt
securities as well as their entire portfolio are also calculated, and the impact of adverse change in
interest rates on the market value of the securities is estimated.
Interest rate / yield risk in the banking book – Basel Specific
The Bank holds financial assets and financial liabilities with different maturities or repricing
dates and linked to different benchmark rates, thus creating exposure to unexpected changes in
the level of interest rates. Interest rate risk in the banking book refers to the risk associated with
interest - bearing financial instruments that are not held in the trading book of the Bank.
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Bank Al-Habib
Key Benefits
After Implementation of Market Risk, BAHL is capable of performing the following tasks on a
daily basis:

Estimation of volatility measure such as variance – covariance, volatility, mean etc. for
all risk factors relevant to bank by using EWMA and GARCH methods by taking into
account correlation for all risk factors .

Calculation of VaR measure such as portfolio VaR, Component VaR, Conditional VaR,
undiversified VaR on configured portfolio using Historical Simulation, Analytical and
Monte Carlo simulation over 1-day horizon on 95% and 99% confidence level.

Cash-flow generation for instrument level and risk factor asset-asset class-maturity level.

Net present Value calculation for OTC instruments.

Profit or Loss of the portfolio against the portfolio value as on the current day for all
portfolios.
Risk Limitations:
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