Appendix A
BANK ALFALAH LIMITED – BANGLADESH BASEL II DISCLOSURES UNDER PILLAR-III BASED ON 31 DECEMBER 2011 These qualitative and quantitative disclosures have been made in accordance with Bangladesh Bank BRPD Circular no. 10 dated 10 March 2010 and BRPD Circular no. 24 dated 3 August 2010. The purpose is to comply with the requirement for having adequate capital and the Supervisory review process under Pillar II. These disclosures are intended to assess information about the Banks exposure to various risks. 1 Capital Adequacy Ratio - As per BASEL II In terms of aforesaid Circular, available capital of the Bank is Taka 4,726,843,656 (Core capital Taka 4,641,622,449 and Supplementary Capital Taka 85,221,207) as against a minimum capital requirement of Taka 4,000,000,000 or 773,244,707 (10% of RWA as per Basel-II) whichever is higher at the close of business on 31 December 2011 thus resulting in surplus capital of Taka 726,843,656 at that date. Details are shown below: a) Core capital (Tier I) Fully Paid-up Capital/Capital Deposited with Bangladesh Bank (BB) Statutory Reserve Non-repayable share premium account General Reserve Retained earnings Minority interest in Subsidiaries Non-Cumulative irredeemable Preferences shares Dividend Equalization Account Deductions from Tier-1 (Core Capital): Book value of Goodwill Shortfall in provisions required against classified assets irrespective of any Deficit on account of revaluation of investment in AFS category Any investment in TFCs of other banks exceeding the prescribed limit Other if any Total Eligible Tier-I Capital b) Supplementary capital (Tier II) General Provision for Unclassified loans & Off Balance Sheet (Limited to 1.25% of RWA) Assets revaluation reserves All other preference shares Perpetual subordinated debts Exchange equalization account Revaluation reserves of Securities (Upto 50% of the revaluation reserves) c) Additional supplementary capital (Tier III) Short-term subordinated debt A. Total Eligible Capital Total assets including off-Balance Sheet items 4,726,843,656 15,429,025,473 85,221,207 85,221,207 BDT 4,542,869,945 98,752,504 4,641,622,449 4,641,622,449

1

Appendix A
Total risk-weighted assets (RWA) 10% of RWA B. Total required capital (10% of RWA or 4,000,000,000 whichever is higher) Capital Surplus / (Shortfall) [A-B] Capital adequacy ratio 2. Market Discipline Disclosures As per Bangladesh Bank guidelines, the Bank has migrated to Basel-II framework as on 31 March 2009 under parallel reporting regime to existing BRPD Circular No.10 dated 25 November 2002. From 1 January 2010 Basel II regime has started and the guideline on RBCA (Risk Based Capital Adequacy) has come into force with its subsequent supplements/revisions. Under Pillar-III of the framework, Bank’s “Basel-II Disclosures” as on 31 December 2011 are as under: Capital Management The objective of managing capital is to safeguard the Bank’s ability to continue as a going concern, so that it could continue to provide adequate returns to shareholders by pricing products and services commensurately with the level of risk. It is the policy of the Bank to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholder’s return is also recognised and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. Goals of managing capital The goals of managing capital of the Bank are as follows: • To be an appropriately capitalized institution, considering the requirements set by Bangladesh Bank. • Maintain strong ratings and to protect the Bank against unexpected events; and • Availability of adequate capital at a reasonable cost so as to enable the Bank to operate adequately and provide reasonable value addition for the shareholders and other stakeholders. Risk Management The Bank has in place an approved integrated risk management framework for managing credit risk, market risk, liquidity risk and operational risk as evidenced by its Board approved “Risk Management Policy” and “Risk Management & Internal Control” manual. Following is the governance structure and important policies on Risk Management of the Bank: • The Board of Directors through its sub-committee called ‘Board Risk Management Committee’ (BRMC) oversees the overall risk of the Bank. • RMD is the organisational arm performing the functions of identifying, measuring, monitoring and controlling the various risks and assists the Apex level committee and the various sub-committees in conversion of policies into action. • An independent risk review function exists at the Bank in the form of Internal Audit Group that reports directly to the Board Audit Committee. • The Bank has extensively pursued the implementation of Basel II in the Bank. In order to meet the requirement, many steps have been taken by the Bank. Progress has been made in implementation of Risk based Pricing & Approval Grids in the Bank. Moreover, in order to enhance data integrity and the reliability regarding MCR (Minimum Capital Requirement) calculation, automation of CAR 7,732,447,073 773,244,707 4,000,000,000

726,843,656 61.13%

2

Appendix A
(Capital Adequacy Ratio) calculation is in process and is functional in significant branches of the Bank. Moreover, for Pillar 2 disclosures ICAAP exercise is conducted. As a policy the reporting line of the risk management function has been kept completely independent of the businesses divisions and Credit Group.

•

In terms of RBCA guidelines on Basel-II framework, the Bank has adopted the Standardized Approach for Credit Risk, Standardized (rule based) Approach for Market Risk and Basic Indicator Approach for Operational Risk. In addition to regulatory capital requirement of computation as per Pillar-I, the Bank also assess Interest Rate Risk, Equity Risk, and Foreign Exchange Risk on a regular basis to assess adequacy of the capital available as a cushion to withstand shocks from business environment adversities. In view of the above context, following disclosures are made by the Bank in terms of RBCA: 1. Assets 2. Credit Risk 3. Market Risk 4. Operational risk 5. Maintenance of Regulatory Capital 6. Capital Adequacy 7. Internal Capital Adequacy Assessment Process (ICAAP) 1. Assets Bank's assets comprises of cash, balance with other banks, investments in treasury bills and bond, investments in share portfolio, loan and advances, physical assets and other assets. Loans and advances represented 46% of total assets of the Bank. The classified loan ratio was 1.69% indicating efficient asset management of the Bank. Nature of Assets Assets of Bank Alfalah are categorized as per the following: • Banking Book Asset • Trading Book Asset In general, banking book assets comprise assets and liabilities, which are contracted basically on account of relationship or for steady income and statutory obligations and are generally held till maturity. On the contrary, trading book assets refer to the book of financial instruments held with the intention for short-term trading. It refers to those assets held primarily for generating profit on short-term differences in prices/yields. Banking book and trading book assets represent 97.56% and 2.4% respectively of the total assets. Followings are the major components of the earning assets and non-earning assets for the bank: Earning Assets • Loans & advance • Investments in securities • Money at call & short notice • Balance with other banks and FIs Non-Earning Assets: • Cash in hand • Balance with Bangladesh Bank for CRR maintenance • Fixed Assets • Other assets Assets are monitored under the purview of ALCO on a regular basis to cope with unexpected risk. Assets are classified as per the directive of the Bangladesh Bank. Classified assets are the Default Loans in respect to which recipient/beneficiary fails to make timely payment of interest or principal as per the agreed schedule for

3

Appendix A repayment. Bank categorized classified loans in following three (03) categories following the Bangladesh Bank guidelines: • Sub-standard • Doubtful • Bad debts / Bad Loans Addition/Reduction of Classified Assets Classified loans stood at BDT 9.85 crore as on 31 December 2011 whereas it was BDT 9.29 crore as on 31 December 2010 representing an increase of BDT 0.56 crore. This represents management’s effective measures for restricting the same at a reasonable level. BDT A. Banking Book Assets 1. Cash in Hand and Balance with BB (Excluding FC) 677,372,644 2. Capital with BB 4,542,869,945 3. Claims on Other Banks 690,558,794 a. Balance with other banks 10,558,794 b. Money at Call & Short Notice 680,000,000 4. Investment (HTM) 298,850,602 a. Government 68,742,502 b. Qualifying (banks, etc) 220,000,000 c. Others 10,108,100 5. Loans and Advances 5,840,804,946 a. Classified 98,542,485 SMA SS 20,842,587 DF BL 77,699,898 b. Unclassified 5,742,262,462 6. Risk Weighted Assets 6,132,071,568 a. Below 100% RW 776,502,553 b. 100% RW 2,254,754,722 c. Above 100% RW 3,100,814,292 7. Rated Status 6,132,071,568 a. Rated Assets 1,775,998,613 b. Unrated Assets 4,356,072,954 8. Other assets (Including Fixed Assets) 614,310,027 A. Total Banking Book Assets (1+2+3+4+5+7+8) 12,664,766,958 B. Trading Book Assets 1. FC held in Hand 2,142,391 2. FC held in BB and Nostro Account 310,677,448 3. Investment (Trading) a. Govt. (Part of Govt. HTM, if held above the required SLR amount) b. HFT c. AFS (if any) 312,819,838 B. Total Trading Book Assets (1+2+3) 12,977,586,797 Total Assets (A+B)

4

Appendix A

2. Credit Risk Credit Risk Management processes encompasses identification, assessment, measurement, monitoring and control of the credit exposures. In the Bank’s experience, a key to effective credit risk management is a well thought out business strategy. The Bank’s focus over the coming years will be to further enhance risk models, processes and systems infrastructure, in line with its ambition to bring maximum sophistication to risk management function. The Bank, as per Central Bank Guidelines, has migrated to Basel II as on March, 2009 with the standardised approach. For credit risk, procedural manual has been developed, which also incorporates a comprehensive system of cross-checks for data accuracy. Simultaneously, processes have been set for fine-tuning systems & procedures, information technology capabilities and risk governance structure to meet the requirements of the advanced approaches as well. At Bank Alfalah Limited, the management has laid down the road-map to move towards the implementation of Basel-Il advanced approaches, which shall provide a sophisticated platform for prudent risk management practices. The Credit Risk Management comprises of the Credit Risk Department that looks after all the aspects of credit risk and conducts portfolio analysis and stress testing on a regular basis. The Head of Credit Risk Department reports to the General Manager (GM) - Risk Management Division. Credit Risk Management Committee has been set up to ensure implementation of the credit risk policy/strategy/credit plan approved by the Board and to monitor credit risk on a bank-wide basis and ensure compliance with limits approved by the Bank. The Bank has built-up and maintained a sound loan portfolio in terms of well-defined Credit Policy approved by the board. Its credit evaluation system comprises of well-designed credit appraisal, sanctioning and review procedures for the purpose of emphasising prudence in lending activities and ensuring the high quality of asset portfolio. As part of prudential practices the Risk Management Division conducts pre-fact validation of major cases from integrated risk point of view. The Bank manages its portfolio of loan assets with a view to limit concentrations in terms of risk quality, geography, industry, maturity and large exposure. Internal rating based portfolio analysis is also conducted frequently. A sophisticated Internal Credit Rating System has been developed by the Bank, which is capable of quantifying counter-party risk in accordance with the best practices. The system takes into consideration qualitative and quantitative factors of the counter- party and generates an internal rating vis-à-vis anticipated customer behaviour. The system is continuously reviewed for best results in line with the Bangladesh Bank’s guidelines for Internal Credit Rating. Moreover, the system is backed by secured database with backup support and is capable of generating MIS reports providing snapshot of the entire portfolio for strategising and decision making. The System now also has the capability to auto generated alerts on accounts showing weakness in financials and hence requiring a more vigilant monitoring. The Bank has also developed Facility Rating System in line with Central Bank guidelines. The implementation on System, which will generate ratings of transactions and provide estimated LGD (Loss Given Default), will take place in due course. The adherence to Risk-appetite statement approved by the Board is monitored by RMD. Further the compliance of regulatory & internal limits is also monitored and any deviations are ratified from the competent authorities. Credit Monitoring Division (CMD) keeps a watch on the quality of the credit portfolio in terms of its strengths, weaknesses and vulnerabilities, and identifies weakening accounts relationships and reports it to the appropriate authority with a view to not only arrest deterioration but also to pre-empt any regulatory classification. CMD maintains a Watch list of such accounts which IS generated on quarterly basis and is also reviewed by RMD.

5

Appendix A

A Centralized Credit Administration Division under Operations Group is working towards ensuring that terms of approval of credit sanctions and regulatory stipulations are complied, all documentation including security documentation is regular & fully enforceable and all disbursements of approved facilities are made only after necessary authorization by CAD. Special attention is paid by the management in respect of Non-performing Loans (NPL). Special Asset Management Department is functional and handles this responsibility in compliance with the regulatory requirements. The Risk Management Division also monitors the NPL portfolio of the Bank and reports the same to BRMC. Proactive credit-risk management practices in the form of Integrated Bank-wide Risk Management and Internal Control Framework, adherence to Basel II accord, constitute the important risk management measures the bank is engaged in for mitigating these exposures. The current focus is on augmenting the Bank’s abilities to quantify risk in a consistent, reliable and valid fashion which will ensure advanced level of sophistication in the Credit Risk measurement and management in the years ahead. Credit Risk - General Disclosures Basel II Specific Bank Alfalah Limited is using The Standardized Approach (TSA) of BB Basel II accord for the purpose of estimating Credit Risk Weighted Assets. Under TSA Banks are allowed to take into consideration external rating(s) of counter-party’s) for the purpose of calculating Risk Weighted Assets. A detailed procedural manual specifying return-based formats, methodologies and processes for deriving Credit Risk Weighted Assets in accordance with the BB Basel II Standardized Approach is in place and firmly adhered. Disclosures for Portfolio Subject to the Standardized Approach & Supervisory Risk Weights in the IRB Approach-Basel II Specific External Ratings Bangladesh Bank Basel II guidelines require banks to use ratings assigned by specified External Credit Assessment Agencies (ECAIs) namely CRAB, CRISL, ECRL, NCRL, Moodys, Fitch and Standard & Poors. The Bank uses these ECAIs to rate its exposures denominated in Bangladeshi currency on certain corporates and banks incorporated in Bangladesh. The Bank uses external ratings for the purposes of computing the risk weights as per the Basel II framework. For exposures with a contractual maturity of less than or equal to one year, short-term rating given by approved Rating Agencies is used, whereas for long-term exposure with maturity of greater than one year, long-term rating is used. Where there are two ratings available, the lower rating is considered and where there are three or more ratings the second - lowest rating is considered. Disclosures With Respect to Credit Risk Mitigation for Standardized & IRB Approaches-Basel II Specific Credit Risk Mitigation Policy The Bank defines collateral as the assets or rights provided to the Bank by the borrower or a third party in order to secure a credit facility. The Bank would have the rights of secured creditor in respect of the assets/contracts offered as security for the obligations of the borrower/obligor. Collateral Valuation and Management As stipulated in the BB Basel II guidelines, the Bank uses the comprehensive approach for collateral valuation. Under this approach, the Bank reduces its credit exposure to counterparty when calculating its capital requirements to the extent of risk mitigation provided by the eligible financial collateral as specified in

6

Appendix A the Basel II guidelines. In line with Basel II guidelines, the Bank makes adjustments in eligible collaterals received for possible future fluctuations in the value of the collateral in line with the requirements specified by BB guidelines. These adjustments, also referred to as ‘haircuts’, to produce volatility-adjusted amounts for collateral, are reduced from the exposure to compute the capital charge based on the applicable risk weights. Types of Collateral taken by the Bank Bank Alfalah Limited determines the appropriate collateral for each facility based on the type of product and counterparty. In case of small and medium enterprises financing, fixed assets are generally taken as security for long tenor loans and current assets for working capital finance usually backed by mortgage. In case of working capital facilities for large corporate relationships, facilities are also being allowed against creation of charges over current & fixed assets of the respective companies to mitigate any eventuality. For project finance, security of the assets of the borrower and assignment of the underlying project contracts is generally obtained. Other security such as cash collateral, TDRs, charges on receivables are also obtained by the Bank. Moreover, in order to cover the entire exposure Personal Guarantees of Directors are also obtained by the Bank. The valuation of the properties is carried out by an approved independent valuation agency. The decision on the type and quantum of collateral for each transaction is taken by the credit approving authority as per the credit approval authorization approved by the BoD. For facilities provided as per approved product policies, collateral is taken in line with the policy. Types of Eligible Financial Collateral For credit risk mitigation purposes, the Bank considers all types of financial collaterals that are eligible under BB Basel II accord. This includes Cash /TDRs, Gold, securities issued by Government of Bangladesh such as T-BilIs & T-Bonds, certain debt securities rated by a recognized credit rating agency, and guarantees from certain specified entities. In general, for Capital calculation purposes, in line with the BB Basel II requirements, the Bank recognizes only eligible collaterals as mentioned in the BB Basel II accord. In addition to collaterals, Guarantees also secure the transactions by reducing credit risk. Where guarantees are direct, explicit, irrevocable and unconditional banks may consider such credit protections in calculating capital requirements through a substitution approach e.g., lower rating/risk weight of guarantor than the counterparty will lead to reduced capital charges. Credit Concentration Risk Credit concentration risk arises mainly due to concentration of exposures under various categories viz, industry, geography, and single/group borrower exposures. Within credit portfolio, as a prudential measure aimed at better risk management and avoidance of concentration of risks, the BB has prescribed regulatory limits on banks’ maximum exposure to single borrower and group borrowers. Moreover, in order to restrict the industry concentration risk, BAL’s annual credit plan spells out the maximum allowable exposure that it can take on specific industries. Additionally, the newly developed Internal Rating System allows the Bank to monitor risk rating concentration of counterparties against different grades/scores ranging from 1—12 (1 being the best and 10—12 for defaulters). Total Exposures of Credit Risk 1. Funded a. Domestic b. Overseas 2. Non-Funded a. Domestic b. Overseas BDT 12,890,073,063 12,890,073,063 1,623,264,381 1,623,264,381

7

Appendix A
3. Distribution of Risk Exposure by Claims a. Claims on Sovereigns and Central Banks b. Claims on other Official Entities c. Claims on Banks and Securities Firms d. Claims on Corporate (Medium Enterprise loans to be shown separately) e. Claims included in the retail portfolio & small enterprises (consumer loan to be shown separately) f. Claims secured by residential property g. Claims secured by commercial real estate h. Other Categories: – Past due Loans / NPL – Off-Balance Sheet Items 4. Credit Risk Mitigation a. Claims Secured by Financial Collateral b. Net Exposure after the Application of Haircuts. c. Claims Secured by Eligible Guarantee Maturity wise Classification of Loans and advances : With a residual maturity of Re-payable on Demand Not more than 3 months Over 3 months but not more than 1 year Over 1 year but not more than 5 years Over 5 years Country-wise Classification of Loans and advances: Inside Bangladesh Conventional Banking Current Finance Term Finance Credit Card Staff Loan Trust Receipts General Investments etc. Morabaha (LPO) Trust Receipts Own acceptance Purchased Payment against documents Morabaha Manual Staff Morabaha 5,399,467,951 2,348,233,363 2,492,752,487

280,011,193 20,291,800 1,721,806,866 98,542,485 1,623,264,381

3,734,056,510

BDT 2,185,519,687 3,070,145,242 585,140,016 5,840,804,945

2,015,667,763 953,512,065 3,730,116 256,389,946

1,193,645,824 153,517,489 70,864,900 40,761,848 23,887,551

8

Appendix A
Out side Bangladesh 4,711,977,502 Bills purchased and discounted (Morabaha export bills) : Inside Bangladesh Out side Bangladesh 1,128,827,443 1,128,827,443 5,840,804,945 Maturity wise Classification of Bills Purchased and discounted: Re-payable:Within 1 month Over 1 month but less than 3 months Over 3 months but less than 6 months 6 months or more

152,212,885 889,116,889 87,497,669 1,128,827,443

Sector-wise Classification of loans and advances: Sector Agriculture, forestry, hunting and fishing Automobile and transportation equipment Chemical and pharmaceuticals Cement Sugar Construction Electronics and electrical appliances Financial institution Garments (Knit and woven) Housing Information technology and telecom Iron and steel Footwear and leather garments Paper, printing and packaging Power/electricity, gas, water, sanitary Wholesale and retail trade Exports and imports Transport, storage and communication Textile, yarn and spinning Services Others Total Amount 473,962,000 87,979,000 445,491,000 44,100,000 114,574,000 426,178,000 65,267,000 480,820,000 83,576,000 304,820,000 628,186,000 133,710,000 108,433,000 153,039,000 1,322,936,000 26,934,000 446,707,000 100,450,000 393,642,945 5,840,804,945 Composition 8.11% 1.51% 7.63% 0.76% 1.96% 7.30% 1.12% 8.23% 1.43% 0.00% 5.22% 10.76% 2.29% 1.86% 0.00% 2.62% 22.65% 0.46% 7.65% 1.72% 6.74% 100.00%

Grouping of Loans and advances as per Classification Rules of Bangladesh Bank: Sector Amount Composition

9

Appendix A
Unclassified: Standard including staff loan Special Mention Account (SMA)

5,715,181,224 27,081,236 5,742,262,460

97.85% 0.46% 98.31%

Classified: Substandard Doubtful Bad or loss Total Maintenance of Specific Provision

20,842,587 77,699,898 98,542,485 5,840,804,945

0.36% 0.00% 1.33% 1.69% 100.00%

Bank follows BB guidelines regarding loan classifications, provisioning and any other issues related to Non Performing Loan (NPL). Bank’s internal credit guidelines also directs on managing of NPL, loan provisioning review procedure, debt write-off, facility grading, reporting requirements, interest recognitions. While dealing with NPL, bank’s decision is always complied by local rules and regulations as well as group guidelines which are more conservative than the local regulations. Banks assume that a certain percentage of loans will default or becomes low-paying. Specific provision for all classified loan i.e. Sub-standard, Doubtful, and Bad Loss are maintained by the bank as per Bangladesh Bank guideline. In the year Bank provided BDT 1.87 crore for specific provisions. Policies and processes for maintaining specific provision Bank mainly maintained specific provision against classified loan accordingly to Bangladesh Bank BRPD Circular No.05 “Master Circular-Loan Classification and Provisioning” dated June 05, 2006 and other guideline time to time issued by the Bangladesh Bank. Banks maintained specific provision at the following rates in respect of classified Continuous, Demand and Fixed 1. SMA 5% 2. Sub-standard 20% 3. Doubtful 50% 4. Bad/Loss 100% Approach for Calculating Capital Charge for Operational Risk At the time of determining Gross Income for calculating operational risk, specific provision and other items are grossed up with Net Profit. BDT A. Gross Non Performing Assets (NPAs) 1.69% Non Performing Assets (NPAs) to Outstanding Loans & Advances B. Movement of Non Performing Assets (NPAs) 1. Opening Balance 2. Additions 3. Reductions 4. Closing Balance C. Movement of Specific Provisions for NPAs 1. Opening Balance (after adjustment of Tk.1,000,000) 2. Provisions made during the period 3. Write-off

92,850,414 5,692,071 98,542,485

22,707,432 -

10

Appendix A
4. Write-back of Excess Provisions/Prov. Reversed 5. Closing Balance 3. Market Risk Trading book consists of positions in financial instruments held with trading intent. A capital charge is applicable for financial instruments which are free from any restrictive covenants on tradability in line with Basel-II guidelines issued by Bangladesh Bank. Generally, investments in ‘Held for Trading’ portfolios are focal parts of the Trading Book. In addition, positions should be valued prudently. Bank has a comprehensive Treasury and Investment Policy which inter alia covers assessment, monitoring and management of all the above market risks. Bank has defined various internal market risks and is computing the capital requirement as per standardized approach of Basel II. Methods used to measure Market risk Bank defines market risk as the risk of loss in on-balance sheet and off-balance sheet positions arising from movements in market prices. Under market risk management, interest rate risk, equity price risk and foreign exchange risks are monitored. Bank adopted Standardized (rule based) Approach for measuring Market Risks. Interest Rate Risk The possibility of a reduction in the value of a security, especially T-Bill & T-Bond, resulting from a rise in interest rates. This risk can be reduced by diversifying the durations of the fixed-income investments that are held at a given time. Foreign Exchange Risk The Bank has fixed maximum daylight and overnight exposure for foreign exchange exposures in various currencies. Also, stop loss limit and single deal limits are in place for monitoring the forex operations of the Dealers. Market Risk Management system Bank has well defined Risk Management Policy, Investment Policy, Asset Liability Management Policy etc. which covers important areas of market risk management. Policies and processes for mitigating market risk Detailed policies are operational for Investment Management, Asset Liability Management and Market Risk Management, which deal in detail the various strategies and processes for monitoring Market Risk. In order to deal with the market risk issues, the Bank has in place a Treasury and Investment Policy. The policy details the various tools and guidelines for market risk identification, market risk measurement and risk mitigation. Bank has constituted Asset Liability Management Committee to oversee the Risk Management and ALM functions in the Bank and monitor the progress in its implementation. Besides these following tools are used for market risk management / mitigation: (a) Delegation of Powers- Bank has well-defined discretionary powers for different level of authorities of the Bank for taking investment decisions. (b) Prudential Limits - Various limits such as exposure limit, stop loss limits, duration etc. have been fixed. (c) Asset Liability Management Committee (ALCO) - Under Risk Management architecture of Bank (3,999,500) 18,707,932

11

Appendix A
ALCO committee of executives is constituted and is monitoring management of liquidity and interest rate risk. ALCO support group of executives / officers is constituted to support ALCO. The capital requirements for: 1. Interest Rate Risk 2. Equity Position Risk 3. Foreign Exchange Risk 4. Commodity risk 4. Operational risk Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputation risk. Policies and processes for mitigating operational risk Bank has put in place the following measures to control and mitigate operational risks: Instructions, circulars, job descriptions, training programs etc. including Operational and Other Manuals Delegation of financial powers at various levels of officers for different type of financial transactions Inputs on operational risk are included in the relevant training programs Bank obtains insurance coverage for potential operational risks A system of prompt submission of reports on frauds is in place BDT 47,157,568 BDT 3,302,994 4,824,620 8,127,614

Capital requirements for Operational Risk 5. Maintenance of Regulatory Capital

Bank Alfalah Limited Bangladesh capital structure consists of Tier-I and Tier-II capital. The regulatory capital is broadly classified into three categories - Tier-I, Tire-II and Tier-III. Tier-I capital includes paid-up equity capital, statutory reserves, other disclosed free reserves, capital reserves and innovative perpetual debt instruments (Tier-I bonds) eligible for inclusion in Tier-I capital that comply with requirement specified by Bangladesh Bank. Elements of Tier-II capital include revaluation reserve, general provision and loss reserve, upper Tier-II instruments (upper Tier-II bonds) and subordinate debt instruments (lower Tier-III bonds) eligible for inclusion in Tier-II capital. The use of Tier III capital (short term subordinated debt) is limited only for part of the explicit capital charge for market risks. The Bank does not have any Tier-III capital. As on 31st December 2011 the Bank has a paid up capital of BDT 454.29 crore. The computation of the amount of Core (Tier I) and Supplementary (Tier II and Tier III) Capitals shall be subject to the following conditions: 1. Eligible Tier II plus Tier III capital shall not exceed total Tier I capital. 2. Fifty percent (50%) of Asset Revaluation Reserves shall be eligible for Tier II i.e. Supplementary Capital 3. A minimum of about 20% of market risk needs to be supported by Tier I capital. Supporting of Market Risk from Tier III capital shall be limited up to a maximum of 250% of a bank’s Tier I capital that is available after meeting credit risk capital requirement 4. Up to 50% of Revaluation Reserves for Securities shall be eligible for Supplementary Capital.

12

Appendix A
5. Subordinated debt shall be limited to a maximum of 30% of the amount of Tier I capital and shall also include rated and listed subordinated debt instruments/bonds raised in the capital market Core capital (Tier I) Fully Paid-up Capital/Capital Deposited with BB Statutory Reserve Non-repayable share premium account General Reserve Retained earnings Minority interest in Subsidiaries Non-Cumulative irredeemable Preferences shares Dividend Equalization Account BDT 4,542,869,945 98,752,504 4,641,622,449 Deductions from Tier-1 (Core Capital): Book value of Goodwill Shortfall in provisions required against classified assets irrespective of any Deficit on account of revaluation of investment in AFS category Any investment in TFCs of other banks exceeding the prescribed limit Other if any Total Eligible Tier-I Capital Supplementary capital (Tier II) General Provision for Unclassified loans & Off Balance Sheet (Limited to 1.25% of RWA) Assets revaluation reserves All other preference shares Perpetual subordinated debts Exchange equalization account Revaluation reserves of Securities (Upto 50% of the revaluation reserves) Additional supplementary capital (Tier III) Short-term subordinated debt A. Total Eligible Capital 6. Capital Adequacy The Bank is subjected to the capital adequacy guidelines stipulated by Bangladesh Bank, which are based on the framework of the Basel Committee on Banking Supervision. As per the capital adequacy guidelines, the Bank is required to maintain a minimum CAR 10.00% with regard to Credit Risk, Market Risk and Operational Risk. Subsequently this minimum CAR changed by Bangladesh Bank vides BRPD Circular No.10 dated March 10, 2010 as follows: Period January 01, 2010 to June 30, 2010 July 01, 2010 to June 30, 2011 July 01, 2011 to ongoing CAR % 8% 9% 10%

4,641,622,449

85,221,207 85,221,207 4,726,843,656

Bank has adopted Standardized Approach for Credit Risk, Standardized (rule based) Approach for Market Risk and Basic Indicator Approach for Operational Risk for computing CAR.

13

Appendix A

A) Amount of Regulatory Capital to meet unforeseen loss BDT Amount to meet Credit Risk Amount to meet Market Risk Amount to meet Operational Risk. B) Some additional capital over MCR maintained by the banks C) Capital Adequacy Ratio 7. Internal Capital Adequacy Assessment Process (ICAAP) Bank Alfalah defines capital as the resources necessary to cover unexpected losses arising from discretionary risks, being those which it accepts such as credit risk and market risk, r non-discretionary risks, being those which arise by virtue of its operations, such as operational risk and reputational risk. The supervisory review process team defines the Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP is an integral part of bank’s capital planning and risk assessment infrastructure. The purpose of the ICAAP framework is to provide guidance of the risk assessment and reporting process to be followed when considering the amount and type of capital the bank should maintain to support its business strategy. ICAAP is a key component of BASEL Il’s Pillar 2 supervisory review process by which supervisory review process team examines both the regulatory and economic capital viewpoints on a forward Looking basis, and ensure the following: • • • remains sufficient to support the projected risk profile; exceeds formal, minimum regulatory requirements; would remain sufficient in a projected economic downturn that is more severe than the current economic condition. 7,179,595,244 8,127,614 47,157,568 726,843,656 61.13%

Based on the above approach the bank has developed a draft ICAAP, a key component of risk and capital management framework using risk appetite and stress testing matrices. The draft has already been submitted to the Bangladesh Bank. Bank Alfalah identifies and manages the risks it faces through defined internal control procedures and stress testing. It assesses and manages certain of these risks via the capital planning process. Risks assessed via capital and those that are not, are compared below: Risk assessed via capital Credit risk Market risk Operational risk Interest rate risk in the banking book Risk not explicitly assessed via capital Liquidity risk Reputational risk Sustainability risk Credit Concentration risk Strategic risk

As part of the Basel II implementation, Bangladesh Bank had launched the mandatory stress testing on banks from June 2010 to locate the condition of overall financial position of each bank under difficult circumstances. As per directive of Central Bank, the bank conducted stress testing based on “Simple Sensitivity and Scenario Analysis” in which the bank analyzed the balance sheet duration gap and several type of risk such as interest rate risk, exchange rate risk, credit risk, equity price risk, liquidity shock etc.

14