Capital Management Bangladesh

CAPITAL MANAGEMENT

1. Capital is one of the most important elements of a financial institution.

-Capital protects the interests of customers, owners, employees and the general public.

- Capital refers to the funds contributed by the owners of a financial institution. In case of a bank, capital is mainly contributed by the stockholders, purchasers of bank's stocks. Another important component is "Annual Earning" which is reinvested in a bank (retained earnings).

-Capital and risk closely related.

Capital has six major roles:

(a) Cushion against loss and ensure profitability.

(b) Provides base to start-up business.

(c) Provides confidence to depositors and borrowers.

(d) Expansion of activities (branches, products).

(e) Regulator of growth and support for sustainability in the long run.

(f) Limits risk exposure, ensure confidence of public and regulator (regulatory reserves, deposit insurance system).

2. Major Risks:

(a) Credit risk

(b) Liquidity risk

(c) Interest rate risk

(d) Operational risk

(e) Exchange rate risk

(f) Crime risk( fraud, embezzlement, money laundering)

Credit/ lending risk is of utmost importance. This is divided into Business Risk and Security Risk.

(A) Business Risk: Whether the borrowing company can generate enough liquid to repay the loan. It consists of the Industry Risk and Company risk.

(a) Industry Risk: Relates with business affected by external reasons of the borrower and consists of (1) Supplies Risk and (2) Sales Risk.

(b) Company Risk: (i) Company (borrower) position risk (Performance risk and resilience risk), (ii) Management risk.

(B) Security Risk: When the realized value of the security does not cover the exposure of a loan (Principle+Interest)

3. Type of Capital:

(a) Common Stock: Par (face) value of common equity shares outstanding which carry a variable return in terms of dividend voted by Board.

(b) Preferred Stock: Par value of shares outstanding that