Treasury Management

Asset liability management Capital adequacy management Investing and funding activities

Asset liability management

ALM seeks to manage the balance between risk and return by maintaining a positive spread between the interest rates on earning assets and the interest cost of funds.

The target results of ALM are to achieve the following:

Protect the shareholders and depositors. Maintain sufficient liquidity to cover cash flow requirements, and invest idle liquidity profitably. Manage the interest rate gap to maximize earnings within risk limits. Generate attractive foreign exchange earnings within risk limits. Price products to support asset and liability management and maximize the MFIs earnings.

Liquidity risk

Deposit-mobilizing MFIs must maintain minimum liquidity levels at their branches.Liquidity is measured by comparing the shortest-term assets to total assets or deposits.

Goals of liquidity management

Honoring all cash commitments on a daily and ongoing basis. Complying with central bank minimum reserve requirements. Avoiding the cost of unplanned and expensive borrowing. Minimizing the cost of forgone earnings on idle cash. Maintaining cash balances at the branches that neither exceed the maximum insured limit nor result in excess idle cash.

A liquidity policy should do the following:

Specify who is responsible for liquidity management in the MFI. Clarify the scope of authority and signatory powers assigned to the liquidity manager. Define acceptable liquidity instruments as well as the size of transactions and signature requirements. Describe the general methodology for liquidity planning. Include a set of operating parameters that reflect the level of liquidity risk the MFI is prepared to accept.

The operating parameters may include the following:

Minimum and maximum limits for holdings of cash assets at head office and branches Minimum and maximum levels of vault cash. Maximum percentage of available credit lines that the liquidity manager is allowed to borrow.

Interest rate risk

Interest rate risk arises when interest rates on assets and interest rates on liabilities are mismatched, both in rates and terms. 0-30 31-90 Asset 80 100 Liabilities -100 -80 Difference -20 20

Foreign exchange risk

Foreign exchange risk occurs when an MFI holds cash or other investments or debt in foreign currency.

Capital Adequacy management

Risk asset Ratio = Qualified Capital/ Weighted risk based asset Capital: I) Paid up capital Disclosed reserve Perpetual non cumulative Preferred share

Investment and funding activities