Management and risk control of financial institutions

Hierarchy of management

Management and risk control of financial institutions institutions

A Thesis Presented By

A Thesis Presented To The Committee on Academic Degrees In Partial Fulfillment of the Requirements For a Degree with Honors Of M.Com

Business School, The University of Lahore (January, 2010)

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DEDICATION Dedicated to my beloved parents and those friends & teachers who helped me with their precious ideas regarding this study

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Acknowledgement I am so grateful to Almighty Allah for helping me in the completion completion of  this task. I am too thankful to my parents who brought me at this stage and supported me in every walk of life and I would like to thank our respec respecte ted d teac teacher her Sir Sir Usman Usman saeed saeed for his his role role play played ed in our  studies and I am sure that their work will prove itself as an asset in our practical life and it will have a lot of benefits for us in our future concerns.

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Table of Contents   Table of Contents ............................................................................................. 4 Chapter NO (1).................................................................................................6 Introduction ................................................................................................ 6 Chapter NO ( 2)................................................................................................ 8 Literature review........................................................................................8 Chapter NO (3)....................................................... 13 Management ............................................................................................ 13 Levels of Management by (Robert Anthony) .................................................. 15 Strategic management: ...........................................................................15 Quality management:..................................................................................... 17 Identifying a problem

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Goals.............................................................................................................. 20  Types of goals ......................................................................................... 20 Functions of management .............................................................................21 Planning and performance ............................................................................. 22   Types of plans..........................................................................................22  Types of departmentalization .........................................................................24 Learning ......................................................................................................... 27 Measuring actual performance ...................................................................... 29 Comparing actual performance against standard ................................... 29 Chapter NO (4)....................................................... 31 Risk ......................................................................................................... 31  Types of risk ............................................................................................ 32 Mitigation of Operational risk ...................................................................... 34 Market risk .................................................................................................... 40 Examples of market risk:.........................................................................41 ................................................................................ 41 Chapter No (5)................................................................................................41 Financial institutions................................................................................41 Basic functions ........................................................................................ 44

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Hypothecation ............................................................................................... 47 Chapter No (6)..........................................................................47 Risk control of financial institutions .......................................... 47 Risk management plan...................................................................................49 Risk reduction................................................................................................ 50 Chapter NO (7)............................................................................................... 51 Stock markets.......................................................................................... 51 Introduction of the KASB securities limited : .................................................. 52 Principal Purpose for the Offer:................................................................ 53 Future Prospects ............................................................................................ 53 Risk Factors .................................................................................................... 54 Chapter NO(8)................................................................................................ 57 References..................................................................................................... 58

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Chapter NO (1) Introduction

Risk control of financial institutions is a big term which behind a very big meaning in its nature. It means to measure and manage the risk of financial institutions. The risk  management is a term describing by a wide variety of techniques typically starts rather automatically in different business lines within a financial institutions. To compare these techniques however one has to come up with on overall standard to measure risk. Risk is a concept that is given different definitions. Risk is a unacceptable lass which you have to bear. Risk concerns the expected value of one or  more future events technically the value of those results may be positive or negativity. However general usage tends focus only on potential harm that may arise from a future event which may occur either from incurring a cost or by failing to attain some  beneficial. Means risk is expected result of future results or the result of these events may be positive or negative. You don’t know about certainty or uncertainty you only estimate but you cannot estimate the exact true situations you know the word the higher risk higher profit butt we can not know our gain or loss. However general usage tends occur only on potential harms that may arise from a future event. Which we have to bear by bearing a cost or sometimes we can not attain benefits that we expected from the business. The risk management can be considered the identifications and assessment of risks. Risk from comes from certainties in financial markets , project frailer ,legal liabilities credit risk accidents natural causes and disasters as well as deliberates attacks from on adversely. The strategies to manage the risk include transferring the risk to another party avoiding the consequences of a  particular risk. Management is that cording works activities. So that they are complete the work effectively and efficiently. The risk management is a protestations process is followed where by the risk with the greatest loss and greatest possibilities of  occurrence a loss is handled first and risk which lower probability of occurrence of  loss are handled in descending order. The process can be very difficult and balancing

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 between risks and with a high probability of occurrence can offend be mishandled means if risk is controlled in prior period the risk can be a higher risk. Intangible risk  management identifies a new type of a risk that has a100%probobilities of occurring   but is ignored by the organization due to a lake of identifications abilities. For  example when deficient knowledge is applied to situation a knowledge risk  materializes. Relationship risk occurs when ineffective collaboration occurs process engagement risk may be an issue when ineffective operational procedures are applied these risks directly reduces the productivity of knowledge workers decrease cost effectiveness. Professionally services quality reputations bond value and earnings qualities resources spent on risk management could have been spent on profitable activities. The ideal risk management minimizing spending while reductions of the negative effects of risk. Financial institutions provides services for its clients or  members probably the most important financial services provided by financial institutions is activity as financial intermediaries most financial institutions are usually regulated by gorvtment. There are three types of financial institutions. Deposits these institutions include banks credit unions, trust companies and mortgage loan, trust companies and mortgage loan companies. Insurance companies and  pensions funds, brokers, underwriters and investment funds.

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Chapter NO ( 2)

Literature review

Morton (1990) explored that overall objective of regulating of financial sectors should be to ensure that the system factions effectively in helping to transfer and allocate resources across time and space under conditions of uncertainty .however actual regulation attempts to accomplish several objects beyond facilitating the efficient allocation of resources in fact at least four relations for financial regulation may be defined safeguarding the financial system against the systematic risk protecting consumers for enhancing the efficiency of financial system and achieving a wide range of social objectives .He also explores the systematic risk may be defined as the risk of sudden unaccepted event that damage the financial system. Such shocks means such type of losses originate inside or  outside the organization and may include the sudden failure of a major participation in the financial system a technological breakdown or payments or a political shock. such events can disrupt the normal functioning of financial markets and institutions by disturbing mutual trust that lubricates most financial tranactions.He also explored that competition policy not only by the concern to protect consumers from monopolistic   pricing but the basic aim of these markets forces to enhance the efficiency of the allocation within the financial sector and the financial rest of the economy. He also explored the consumers of the financial services practically unsophisticated consumers have to face to difficulty to evaluate the quality of financial information and services  provided to them means unsophisticated faced problems about the evaluation financial information such as prices of different products purchase and sale of securities and services provided to them. many financial institutions must often be made in the current  period in exchange for benefit that are promised means such as debentures and securities are soled in the stock market and different companies sell their securities through different banks and financial institutions. The question is that when these sold in current  period but their benefit is for future period so consumers faced difficulties about their  financial information and services provided to them. 8

Herring and Litan (1995) explored that reserve requirement means why companies maintains reserve requirements and capital requirements and liquidity requirements means (cash securities debentures and bonds etc) designed to insure that firms face loss during their business periods .The reserve requirement an d capital requirement will be able to honor its liabilities to its customers means they will be also in a position to complete the liabilities of their customers and safe guard the systemic risk. He also explored Government also make policies for socials development of country. Most of the countries subsidize financing for export sometimes through special guarantee such as in Pakistan through credit guarantee scheme because exports are made through private traders so these private traders feel hesitation to start exports business because they feel risk to before the start of export business because they consider the point in their mind if  their export their products in foreign countries the traders of foreign countries cannot make payments of their products so to remove this risk the Government of Pakistan has take an action and started the export guarantee scheme. In this scheme the Government give guarantee to traders to start the business the Government is responsible for their  every risk if the foreign traders cannot make payment so through this scheme the traders are honored and exported are encouraged besides this many other steps have been taken  by the Government to increase the exports such export bonus scheme, trading corporation of Pakistan played very important role for increasing the exports of Pakistan.finaly many members of the organizations for economic corporations and development have imposed repotting requirements on banks and some other financial in an effort to combat money laundering associated with the drugs trade and organized crime. Means there is a lake of  consensus amongst even the developed countries about with criminal. Money laundering is the conversations of profits derived from illegal activities into financial assets with consequently appear to have leg mate assign. Many countries of organization for  economic corporation and development have imposed repotting requirements on banks. Such as in Pakistan only money laundering measures have been taken by the Government. Specific emphasis on the policy knows your customer. Antimony laundering unit established at stat bank. The Government of Pakistan has passed antimony laundering act. Replacement of money changes by exchange companies.

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Blakt al (1975) explored that a sudden unanticipated withdrawn of deposits that funds longer term illiquid loans can give raise to instability means illiquid loans can give rise to instabilities in the economy. Means if loans are made to traders they buy stock and keep it black when these are storage of stocks in the markets. They make monopoly and sell things at high prices the consumers had pay high costs so inexpedient allocations of  recourses results from instability and effects economics growth and instability in banking system can understand confidence in the financial system and disrupt role in facilitating the efficient allocation of recourses.Latin etol(1987) explored that insured deposits be invested only in start team treasury bills or closed substitute banks would also issue non guaranteed financial instruments such commercial paper such as cheque. bill of exchange letter of credit securities treasury bills to funs conventional bank loans. Just as finance companies and learning companies and how do they explored that if banks were to hold not only short term treasury bills but also other assets they are regulatory traded on well organized markets and can be marked to market daily. This could be implemented in two ways the secure depository approach in which institutions would be required to form separately incorporated entities taking insured deposits approach in which institutions would be required to form separately incorporated entities taking insured deposits and holding only permissible marketable asset. Bestonetal(1989) explored that capital requirement for secure depositing would be set to reduced the insolvency between daily markets to markets points. This is also protect the deposit insuring agency from loss.Kawomoto (20001) explored that the enterprise risk management is overall risk of  the organization are managed in aggregate result then independently. Risk is also viewed as a potential profit opportunity rather than as some thing simply to be minimized or  eliminates means the higher risk the higher the profit. He also explored that the level of  decision making under enterprise risk management is also shifted from the insurance risk  manager. who would generally seek to control risk to that chief executive officer a board of directors who whold be willing to embrace profitable risk opportunities means they take a risk of those besides this the control management mostly take a risk of those  business which have profitable risk opportunities. he also explore that the risk first risk  management text presentably titled risk management and the business was published in 1963 after six years of development by Robert in this text the objective management is to

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maximize the productive effectively of the enterprise. The basic purpose of this text was that risks should be managed in a comprehensive manner and not simply insured. Financial risk s begins to be dressed much later and by a separate business segment of  most organizations this field also developed own terminology and techniques for  addressing risk. Independently of those that used in traditional risk management Smith and Witt (1985) explored that most of the companies face financial risk as a result of  failure to manage their hazard risks effectively. He explored that in it has been estimated in 1970 that financial risk because an important source of uncertainty for firms and hence this time tools for handling financial risk were developed these new tools allowed financial risks to be managed in such a ways that pure risks had been managed for  decades. D, Arey (1999) explored that fixed income assets and investment which has  been made in foreign currency and operating results are moistly affected by inflation and foreign exchange rates represents probabilities in a business they represented speculative risk. Means when big traders save stocks for future selling their stock in such time when there is shortage of that product they saved in a stock. But by occurrence of deflation and  people had no money to buy the set prices and substitute also available suddenly their  estimation is wrong they have to face a risk. This risk is called speculative risk. Smithson, (1998) explored that the basic tools of financial risk management are forward contracts. These contracts all termed derivatives since their values derived from some other  instruments value farward contract are entered into today in which the exchange will take   place at some future. The terms of the contract price the date and the specific characteristics of the underlying asset all are determined when the contract is made no money changes hands when the contracts is initiated. At the specified date each party is obligated to consummate the transaction since each forward contract is individually negotiated between the two parties there is considerable flexibilities regulatory the terms of the contract. He explored that the future contract were developed to address the credit risk and liquidity concern of forward contract. Similar to forwards and futures are interred in to today for on exchange that will take place out some future date. The terms of contract are determined when the contract is entered in to and no money changes hands when the contract is initiated. However there are server significant differences  between forward and future contracts. Molnar (2000) explored that when disaster strikes

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the company will suffer a loss to its property means when any unlucky incident takes  places in a company the company will suffer a loss to its property but the higher volume of telephone traffic that typicality follows a major disaster will help offset this loss. he also explored that enterprise risk management involves so money different aspects of an organizations operations and integrates of wide variety of different types of risks no  person is likely to have the expertise necessary to handled this entire real in most of cases team approach is used with the keep of a team drawing on the skills and expertise of a number of different areas. Including traditional risk management financial risk  management and management information system, auditing, planning and line operations the use of team approach through, does not allow traditional risk managers to remain in focuses only on hazard risk means traditional managers does not focus only hazards risk. He also explored that for team effectiveness each area will have to be understand the risks and the approach of the other cases besides this the other areas besides this the team leader will needs to have a basic understanding of the steps involved in the entire process and all the methods involved in to contract the risk factors mostly understand by the team leader because all success depends upon the team leader.Ackerman (2001) explored the steps of enterprise risk management these are the steps which has been explained by Ackerman identify the

questions identify the risk. Risk measurement Formulate

strategies to limit risk. Implement strategies. Monitor results and repeat. Means fist of all the question should be identified what type of risk occurs such as hazard risk traditional risk financial risk and what are the measures have been taken when risk occurs and offer  this prepare strategies means prepare strategies means prepare long term planning to limit the risk, or to control the risk and when these strategies are prepared implemented them and monitor the results and respected them means every step to control the risk has  been respected to know that what method which gives useful result deposits it. ARI (2001) explored the steps which have been taken by the risk control manager to control the risk Identifies risk on our enterprise basis measure it formulates strategies and tactics to limit. Execute those strategies and tactics means he explored that to control the risk the control risk manager have to identify the risk on enterprise basis means identifies the risk  according to the nature of the business and measure it means which type of volume the risk occurs in business and formulates strategies means strategies are prepped according

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to the volume and nature of the risk and apply these strategies and then the results. Smith and wilfored (1995) explored on entire chapter to motivating financial risk management as a value enhancing strategy, He also describe the approaches accepting the notion that the volatility of performance has some negative impact on value of the firm leads managers to consumer risk mitigations strategies there are three generic types. Risk can  be eliminated or avoided by simple business practices. Risk can be transferred to other   participants and risk can be transferred to other participants and risk can be activity managed at the firm level. Means risk can be eliminated or avoided by simple business  practices means in every small type business practices means in every small type of risks  big risk can be eliminated easily risk can be transferred to other participants means if a team is prepared to control the risk the team leader should inform the every team member  he explain the risk can be the activity manage day a firm level.

Chapter NO (3) Management

Getting things done by the people selecting, training and motivating the people. The   business manager is also resource manager. How uses all the recourses to produce maximum output without wasting them.

Business resources Business resources are as follows

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Financial resources

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Human rescores

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Material recourses

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Information resources

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Technology resources

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Another definition of management is that coordinating work activities so that they are completed efficiency and effectively with other people. Management means to complete the organization work effectively and efficiency.

Efficiency: Efficiency means getting maximum output from minimum inputs or resources.

Resources: means money, equipment, asset etc. Effectiveness: It means doing the work and perform activity in the right way it will help the organization to achieve its goals.

Goals; They are objectives of the organizations that should be most specific and smart. Another definition In all business and organization activity the management is the act of getting people together to achieve the desired goal and objectives.

Michmccrimmon (2007) explored that management is the organizational function that like investment. Get thingseffciently and effectively to gain the best return on all resources which we can use. It means management is a faction where we invested capital and get profit to use the all recourses effectively and efficiently. He also explored that management is an organizational factions, like sales, marketing or finance. It does to manage the people. We can manage our self with the help on management and done our  work that is assign to us very well. Its means that we do our job in a well organized and well manner. He also explored that management is like investment where manager have resources to invest their time and human resources. The goal of management is to get the best return on such recourses by getting things done efficiency and effectively.

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Levels of Management by (Robert Anthony) •

Top management/ strategic management

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Middle management/ technical management

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Operational management/ functional management

Strategic management:

Strategic management purely concern with developed of strategic as well as instructions for the functionality. The strategic management can control the whole organizations and make plan and strategy for organizations its functions is to make strategy and plan for present and future  period the strategic management play a vital roll for the success of the business and to manages the organization and also make the goals to achieve the objective of the organization.

Middle management: Middle management is concerned with work allocation according to strategy means they needs to play tasks by understanding the qualification experience of operational manager so that they can disturb the work according. Its means middle management can divide the person according to their skills, knowledge and experience and divide to their  region for planning the task or for doing work on these methods and goals that is a given  by the strategic management.

Operational management: Operational management is operating with work. Its means the management that is works on tactics that is given by the middle management and play the tasks or work.

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Strategy: It is the general statement of long term objective and goals and methods by which those objectives can be achieved.

Strategic planning: Strategic planning is the process of formulation and evaluations and selections of  appropriate most suitable adoptable strategy out of all possible options or substitute for  making long-term plan to achieve the target and goals. its means strategic planning is the  process of build and judge the options that is related and suited and that is uses and help full for making long-term plan and for making goal that is used to achieve the target of  the organization

Levels of strategies:

There are three levels of strategies

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Corporate level Business level Operational level

Corporate level: Corporate level is concerned with entire or whole the business strategy which covers entire the business as a whole. Corporate level strategy comprises all the basic factions or  module of a business in detail (it is concerned with head office) its means the strategy that is cover the whole business or the strategy that is made in main office by top level management is called the corporate strategy.

Business level The strategy for a specific area or region or a product is called business level strategy. It means the strategy that is different in all regions or area is called the business level.

Operational strategy: Operational level is concerned with the factions or the departments.

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Quality management:

it is a philosophy of management driven by continual improvement and responding to customer needs and expectations. Its mean the customers needs and improve the quality of goods. Quality management is improve and expand the quality of products of  organizations product and services internally and externally .It is the objective of an organizations to control the cost and to provide the best quality products at lower cost. It is competitive advantage of organizations. In organizations effectiveness and efficiency are due to the decision and the actions of the managers. It means the decisions of the top level management is depend upon the performance of the business a good managers anticipate change, explit opportunities, correct the poor performance and leads the organization towards the goals of the organization.

 Decision

A decision is a choice from two or more alternatives. It means to select one or more reliable goals from two or more than two alternatives. The top level management make decision about their organization goals, They make decision that new market developed and what product or services to be offered. Although decision making is typically describes as choosing among alternatives. It is a set of eight steps that include identify the problem, selecting an alternative, and evaluating the decisions, effectiveness.        

Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternatives Implementation of the alternatives Evaluating decision effectiveness

Identifying a problem Decision making process starts with the existence of problem or more specifically its mean before decision making we identify the problem of the organization.

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Identifying the decision criteria When a manager has defined a problem the decision criteria is important to resolving the  problem that must be defined or identified. The manager must determine what’s relevant For making decision

Allocating weights to the criteria The criteria that we define in decision making criteria are not equally importance. The decision makers must weight the items in order to give them the correct priority in the decision.

Developing Alternatives It requires the decision maker to list of alternatives that could resolve the problem.

Analyzing alternative: When the alternatives have been defined or identified a decision maker must critically analyze each of alternatives.

Selecting an alternative: In this step the decision maker choose the best alternative from among those considered.

: Implementation the alternative It is concerned with putting the decision into action. This involves conveying the decision to those affected by it and getting their commitment.

Evaluating decision effectiveness:

The last step in the decision making process involves evaluating the outcome of the decision to see if the problem had been resolved.

Decision making conditions:

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There are three conditions managers may face as they make decisions certainty, risk and uncertainty.

Certainty: A situation in which a manager of the organization can make accurate decision because all outcomes are known.

Risk: A situation in which the decision maker is able to estimate the certain outcomes or  results.

Uncertainty A situation in which a decision maker has neither certainty nor reason probability estimates available.

Decision making styles The four making styles are

Directive style A decision making style in which the decision maker characterized by low level of  tolerance for ambiguity and a rational way of thinking. This is used for make fast decisions and focus on the short run. The minimum information and alternatives.

Analytic style

A decision making style characterized by a high to level tolerance for ambiguity and more information before making decision.

Conceptual style

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A decision making style characterized by a high tolerance for ambiguity. It is very broad in their outlook and look at many alternatives. This decision making style is focus on the long run and are very good at finding solution of the problem.

Behavioral style A decision making style in which decision makers work well with others. They are concerned about the achievements of those around them and are receptive to suggestions from others they often use meeting to communicate although they try to avoid conflict acceptance by others is important to this decision making style.

Goals Describe outcomes for individual, groups or entire organizations its means that goals objective, mission statement and objective of the organization it is important for  organization to achieve its goals. The goal of the organization should be smart and specific it must be measurable and attainable.

Types of goals

There are two types of goals • •

Stated goals Real goal

Stated goals Official statement of what an organization says and what it wants it various stake holder  to believe its goals. Its means what is the mission and statement of the organization. However stated goals which be found in an organizations charter, annual report public statement made by managers.

Real goals Goal that an organization acutely peruse as defined by the actions of its markets. Its means the actually or in real term that is defined and also action on these goal. its means when we make the goal and how we can implement it and how we can work on it and what result is taken from it if the goal is not very well implemented and achieved it is very difficult for an organization to run the business in well manner so the goal must be  prepaid effectively and efficiently. 20

Functions of management Batsman Snell (2007) explored that the position that managers provide in planning, organizing, leading and controlling. It is necessary for a business the manager must organize these functions to reach ands achieve the organization goals.

Planning Planning is a logical thinking though goals and making decision as to what needs to accomplished in older to reach the organization objectives. The managers use it for  forecast or future planning and decide to take an action. He also explored that the  planning is the first step of management and it is essential to facilitate and control the variable decision making process. Planning is involve define the organizations goals, establishing an overall strategy of the organization for achieving the organizations goals and developing a comprehensive set of   plans to integrated the organizational work. Formal planning means the goals of the organization must be specific and defined the   period to covering the goals. These goals are written and shared with organizational members and specific action programs exist for the achievement of these goals.

Purpose of planning

Planning provides direction, reduces uncertainty, minimize waste and set the standards used in controlling. Its means planning the goal s of the organization must be specific and defined the period to covering the goals these goals are written and shared with organizational members and specific action programs exist for the achievement of these goals. Planning provides direction, reduces uncertainty, minimizes waste and set the standards used in controlling. It means planning is a process to get maximum out with minimum resources means cash stock etc. planning provides direction to managers and no mangers alike when employees know where the organization or work unit is going and what they must contribute to reach goals, can coordinate their activities, cooperate with each others. Do what it takes to accomplish those goals without planning, departments and individuals might work at cross purposes, preventing the organization from moving efficiently towards its goals. It means what manager takes place to accomplish those goals and what activity they perform.

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Planning and performance

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Planning is an association with higher profits, higher return on assets and other   positive financial return. The quality of planning process and its approaches implementation of the plans contributes more too high performance. Its means the main objectives of planning is to earn high profit and contribute higher performance of the organization.

Types of plans Following are the types of plans •

Strategic plan

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Operational plan

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Long term plan

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Short term plan

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Specific plan

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Directional plan

Strategic plan

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Plans Plans that that apply apply to the entire entire organi organizat zation ion or whole whole organi organizat zation ion it establ establish ished ed the orga organi niza zati tions ons over overal alll goal goalss and and seek seek the the posi positi tion on of the the orga organi niza zati tion on it term term of  environment of the organization is called the strategic plan.

Operational plans

Plans that specify specify or describes describes the detail that how we can achieve achieve overall overall goals. It is the methods to achieve the goals or objectives of the organization operational plan mean how we implement the plan in to the organization is called operational plan.

Long term plan Plans with a time frame beyond three or five years. Long term plan means the plan for  more than one year is called long term plan.

Short term plan Plan that is made for one year or less than one year is called short term plan. p lan.

Specific plan The plan plan that that is clearly clearly define defined d every every plan should should be clearl clearly y define defined d it should be understandable and in easy to lean it is called the specific plan.

Organizing The Bestm The Bestman an,, snel snelll (2007 (2007)) is explo explore red d that that the the orga organi nizi zing ng is achi achiev eved ed thro through ugh management staffing and setting the training for employees. For acquiring the resources and organizing the work is called the organizing.

Organizational structure The formal arrangement of job with an organization is called organizational structure.

Organizational design When When mana manage gerr chan change ge the the stru struct ctur uree of the the orga organi niza zati tion on they they are are enga engage ged d the the organi organizat zation ional al design design.. The organi organizat zation ional al design design is the proces processs that that is involv involves es in decisions about six key elements. Work specializations. Departmentalization, chain of  command, span of control, centralization and a nd decentralization and formulation.

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Work specialization The degree to which tasks in an organizations are divided into separate job also known as division of labor. It means divided the work in to separate duties.

Departmentalization The basis by which jobs are done in grouped together. It means the divided of job in to group group of people people not individual individual person. person. For example example in collag collages es and univer universit sities ies the groped are made for making project. It means corrective activity of two or more people not individual person.

Types of departmentalization

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Functional departmentalization

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Product departmentalization

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Customer departmentalization

Functional departmentalization departmentalization The function that is performed by the grouped of people or group of employee is called the Functional departmentalization.

Product departmentalization departmentalization Grouped perform perform them jobs by product line. It means each major product area is placed placed under the authority a manager who’s responsible for everything having to do with that  product line.

Customer departmentalization departmentalization Grouped jobs are done on the basis of common customer. Its mean make the product and   provides the services according to the customer needs and customer behavior. Some  people can not perform work individually in very well. So the management can make group of these people to enhance the work or tasks.

Chain of command

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It is a authority that extends from upper level of organization to lower level and clarifies who report to whom. it is responsible.

o

Authority

The right inherent in a position to tell the people are employee what to do and to expect them to do it.

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Responsibility

The obligations or expectation to perform the duties that is assigned them by the management is called responsibility.

Unity of command The management principal or rules that each person or employee should be report to there work only one manager.

Span of control Span of control the number of employee that a manager can be managed with efficiency and effectively.

Centralization The degree to which decision making is concerned at a single point in the organization,

Decentralization The degree in which the lower level employee provides input and actually decision making.

Formulation The degree to which jobs with in the organization are standardized and to which employee behave is guided with rules and procedures of the organization.

Leading: 25

Allen G.(1998) explored that if managers can motivate to their works to fulfill the goal of  the company and out-perform their competitors. They also have day to day control with work and leads their using open communication and able to them to give the direction individually as well as with in teams department and divisions. The management aims to inspire the subordinates or employees to solve the p roblem. Alien Gemmy (1998) explored that the quality of leadership is that ‘A leader can be a manger but a manager is not necessary a leader. He also explored that ‘A leadership is a power of the people to take actions towards the goals of the company. The Bestman,snell (2007) Explored that leadership involves the interpersonal characteristics and skills of a managers position that includes communications and close contract with team members it means leadership is a quality to inspire or motivate the  people. 

Personality

The unique combination of psychological characteristics that effect how a person react and interact with other. It means the personality of leader is inspirable. His personality inspire to other.

Attitude Evaluative statement either favorable or unfavorable concerning objects people or events. A leader show favorable attitude toward its employee or team. The behavior of leader  show the cencerty towards its teams and goals.

Behavior 

The action of the people towards a leader. The action or perception of the people toward its leader must be positive, favorable and trustable.

Perception

The process of organizing and interpreting sensory impression in order to give meaning to the environment. Its means a leader can motivate and inspire the people so the 26

 perception of the people toward a leader should be sincere and also give an impression on them.

Learning Any relatively permanent change in behavior that occurs as a result of experience. Its means the permanent change in the behavior of people or team on the basis of results or  experience or knowledge.

Types of leaning There are two types of learning Operant conditioning Social leaning • •

Operant conditioning A type of learning in which desired behavior leads to a reward or prevents a punishment. In this theory we learn the behavior of the people we lean what people want and get something that they want and avoid from those who they not want in I this study we  judge are see the desired of the people about things and their behavior.

Social leaning It is a theory of leaning that says people can lean though observation and experience the leader. Its means people can lean and judge the leader on the basis of observations so the  personality of a leader must be inspire the people though his knowledge and experience.

Controlling

Allen G (1998) explored that control are placed on employees by requiring the completion of daily work and responsibilities and guidelines, by possibility taking dispensary action when it is necessarily. Managers and supervisor given a work for  evolution and for the assessment of performance and take collective action on it. Ha also explored that evaluation step is takes place on regularly or daily basis.

what is control? The process of monitoring the activities of people or employees to ensure that they are completed the work or tasks as planed and correcting any significant deviations.

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Types of control There are three types of plan that is described as follow

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Market control Bureaucratic control Clan control

Market control An approach to control the emphasized the use of internal markets mechanisms to eatables the standard used in the control system. Its means to control the market mechanisms is set some standard and make some polices and procedures that is used to control the market system.

Bureaucratic control An approach to control the organizational authority and relies on admistrative rules and regulations, procedures and polices.

Clan control Clan control an approach that is used to control the employee behavior towards the organization culture such as its rules, tradition, polices procedures etc.

Control process Three steps is including in process measuring actual performance, comparing actual   performance against a standard and taking managerial action to correct deviations or  inadequate standards.

a) Measuring actual performance  b) Comparing actual performance against standard c) Taking managerial action

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Measuring actual performance To detriment how we manage or measure the actual performance the information that is collect about it its means for measure the performance the sources will used observation, report and written report.

Comparing actual performance against standard The acceptable parameters of variance between actual performance and standard

Taking managerial action The final step in control process is managerial action. Managers can choose among tree  possible courses of action. i. ii. iii.

i.

They can do nothing They can correct the actual performance. They can revise the standards

They do nothing

Doing nothing is fairly self explanatory.

ii.

Correct actual

Correct actual means to correct the problems .it means the source of performance variation is unsatisfactory work the manager must correct the unsatisfactory work.

iii.

Revise the standard

It’s the standard that needs attention on their goal. See standard to raise the sales. So they set the goal controlling to their standard and then work 

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Hierarchy of management

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Chapter NO (4)

Risk 

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Risk is as the effect of uncertainty on objectives whether positive or negative. Risk  management considered risk is come from certainly in financial markets project familiar, legal accidents natural causes and disasters as well as deliberate attacks from on adversary. Risk concerns the expected value of one or more than one results or one or more than one future events. Risk is an unexpected loss which you have to bear.

Types of risk 

a) Operational risk   b) Enterprise risk  c) Financial risk  d) Credit risk  e) Market risk 

Operational risk  The loss that is occurring to failed the internal or external system of the organization. The risk that is occurs due to the internal and external events of the organization.

Its means this risk is occurring due to inefficiently or ineffectively used the resources. Such as if the organization system failed the loss is occurring. If the employee can not work properly then loss is also occur. Other definitions The risk or loss resulting form inadequate or failed internal process people and system or  from external events. Its also include the strategic risk. Loss that is arising due to week  strategy and week planning U.S department described the risk 

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• • • •

Accept risk when benefits out weight the cost Accept to unnecessary risk  Anticipate and manage risk by planning Make risk decisions at the right level

Accept risk when benefits out weight the cost Its means to accept the risk at that limit which meets our cost if we take a very high risk. We may be getting higher benefit but we suffer a loss we have lost our every thing.

Accept to unnecessary risk  Accept no unnecessary risk means the risk which results from loss or the doubt in our  mind that it will give us a lower benefit. We can not accept it.

Managed the risk  The risk can be managed with decision making, assessment the risk with the help of  management planning to use the all rescores with effectively and efficiently.

Make the decision at right level The management should make plan to control the risk with right way to assess the risk  and then make some standard rules and polices to control the risk. The manager must assess the example risk when he make plan and then managed it in a right way with effectively and efficiently and the manager should accomplished the mission or objective effectively and safely

Examples of operational risk  Computer failure; • Mistakes in record-keeping; • Poor compliance of members/employers with earnings declaration and contribution  payment; • Inaccurate allocation of expenses between branches; • Inadequate staffing to maintain operations satisfactorily, for example because of  Recruitment problems or uncompetitive salaries; • Strikes and other staff unrest; • Weak management; • Fire, earthquake, hurricane or flood compromising the head office; • Fraudulent transactions; • Hostile hacking into the main computer database; • Failure to implement an element of the legislation; benefit • Failure to warn insured persons of an impending change in coverage or accrual; • Unexpected fiscal liabilities;

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• Litigation

challenging disability award decisions; • Failure of risk controls on delegated authorities; • Poor risk management est.

Mitigation of Operational risk  It is a continuous process which includes risk assessment risk, decision making and implementation of risk controls which result in acceptance, mitigation or avoidance of  risk. Operational risk management can therefore be considered or described the identification, assessment and prioritization of the risk. It is the act of minimize, monitor  and control the probability of uncertainty in financial markets, project failures, legal abilities, credit risk accidents, natural causes and disaster as well as risk management standards have been developed including the management. It means to set standard and make procedures and polices to control the risk. The Navy (U.S) that critics the risk management in four steps model. There are three condition of assessment i. ii. iii.

i.

Task leading Additive condition Human factors

Task loading

It refers to the negative effect of increase the work or task and what effect on the   performance of the worker. For example if an organization can increase the working hours so what effect on employee performance.

ii.

Additive condition

It aware the situation of a communicative effect of variable. its means we can aware the effect of change then what effect on our assessment.

iii.

Human factors

Its is refer that limitation of the ability of the human bod y and environment. Such as if we can increase the working hours so the employee’s performance might be week because they feel tied situation. The environment of work and the nature of the job also depend upon the perform of the employee.

Balance your resources Balance the resources this means to evaluate all information, labor, equipment martial recourses,

Communication with right people 34

Use the right style communication style gets the specific results from a specific situation. Its means our communication style is always right the other person can impress with you. For listing your communication and he also easily understand your talk or your speech. Always use easy wording

Take action and monitor the change We can evaluate and rewired the mission to see that is completed well. To make plan for  future performance improvement.

Credit risk  Credit risk is a commitment to repay debt or bank loan default occurs when borrow can not future the financial obligation. Such as they can not pay interest on loans. In the event of default, if lender or banks suffer a loss. They will not receive all the payments  promised to them.

Measurement of credit risk  For the measurement of credit risk the credit risk premium. It is the difference between interest rate that a firm pays when it borrows and the interest rate on a default free security.

Who is affected by credit risk ? Credit risk affects any party making or receiving a loan payment a debt payment some example bound issuers, bound investors and commercial bank.

Bound issuer  Bound issuer are effected by the credit risk because there cost is depend upon on the default borrower who issuer the debt may face risk in future.

Bound investor  Bound investor also suffers the credit risk. They reduced the uncertainty to increase their  credit premium.

Commercial banks 35

Bank also expected to risk that borrower will may default on their loan the credit risk is highly suffered by the banks because they mostly issue loans to the industries where the chance of insolvent is higher.

Credit swap Credit swap is used to reduce the credit risk. It is mostly used by the banks who credit risk is higher because they granted learning to the industries or firm where the chance of  insolvent is higher.

Credit derivatives The largest risk of using credit derivative is operational risk. Operational risk is that when trader use speculation instead of hedging.

Counter party Second of credit risk is the counter party risk. It means the risk in which transaction id default. Transactions mean the thing dealing with two is more persons. Koyologue and Hicknan (1998) explored credit risk is a techniques from three séance Finance, economics and actual sciences into a single framework.

There are three basic components.

• • •

Treatment for joint default behavior  Conditional default Distribution for independent

Default risk means when we enter into a contract with other party and at the expiry date the other party can refuse to pay the money is called the default risk. He also explored that the default component of portfolio credit risk and concentrate a loss distribute and change in value of distribution. Metorn (1974) explored that firm defaults when the value of asset of a companies comes to down to its liabilities. The credit risk default means once a company become the insolvent when they are continuously suffering loss and come to that stage when its asset value fall down to its liabilities then the directors sells the asset of the company and to overcome its liabilities.

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J.P .Margans is explored that the problem to the distribution of return of most financial assets the distribution of daily return of any risk factor would in resulting typically show the significant amount of positive. This leads to further trail and occurring much more frequently then would be predicted by norms distribution which would leads to an under  estimation of var.

Examples of credit risk  When the customer of the bank can not pay the money it is called credit risk defaulter  when lending is on boom the bank take exec vie risk. When lending on the boom the asset side of the bank balance sheet is likely to cause the bank risky project. Reinhart(1999) is argue that recently the banking sector face the problem that the asset side of bank balance sheet is increase than liability side due to increasing in non  performing or non receiving loans it is the worldwide problem that is faced by banks. For  example in the period of Niwaz Shareef Government the cousins of Niwaz Shareef can take loan millions rupees from Habib bank limited and can not pay back so Habib bank  can face millions of rupees credit loss.

Mitigation of credit risk  For mitigation of credit risk the banks maintain the reserve criteria. Different bank  demand some securities for lending of money as a reserve such as pledge moorage and hypothecations five methods are also used by banks (1) Modifications of deposit insurance pricing structure to remove miss-pricing; (2) Modifications of the insurance contract; (3) Changes in insolvency resolution mechanics; (4) Elimination of uncertainties about the quality of the federal de posit guarantee; and (5) Changes in responsibilities related to the lender-of-last-resort function

Financial risk  The risk that a company will not have adequate cash flow to meet financial obligations. The risk that a firm will be unable to meet its financial obligations. This risk is primarily a function of the relative amount of debt that the firm uses to finance its assets. A higher   proportion of debt increases the likelihood that at some point the firm will be unable to make the required interest and principal payments. Financial risk is the additional risk a shareholder bears when a company uses debt in

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addition to equity financing. Companies that issue more debt instruments would have higher financial risk than companies financed mostly or entirely by equity. Financial risk management is a process that entails companies setting up guidelines to define their policy on accepting financial risk. Individuals that work in financial risk  management do not make investment decisions for a company. Instead, those individuals create the guidelines that the risk-takers must follow when analyzing investments they are considering for the company.

Examples of financial risk: Central banks, reserve banks and commercial banks faces the financial risk because commercial bank gives the loans to borrowers and charge interest on loans so they face the financial risk if their customer can not pay back the loans and they become insolvent. for example if the state bank can make policy to collect money on lower rates of interest and then depositor can not deposits the money then bank can not lend the money. Commercial banks also face the financial crises so some time they can not meet their  obligation accordingly. For example, the customer may become insolvent and unable to  pay the contract fees; the service provider may cease to carry on business; or either party may have insufficient funds to support an indemnity.

Financial risk mitigation: Value-at-Risk (VaR) is a widely used measure of financial risk, which provides a way of quantifying and managing the risk of a portfolio as a key component of the management of market risk for many financial institutions. It is used as an internal risk management tool, and has also been chosen by the Basel Committee on Banking Supervision as the international standard for external regulatory purpose. Recent years, non-bank energy traders and end-users have begun to use VaR. Now the majority of major oil companies and traders are using the VaR method for risk measument.There are many approaches to measuring VaR. Any valuation model for computing VaR simply represent of a possible reality or a possible outcome, based on certain probability and confidence percentage parameters. VaR measures the worst expected loss over a given time horizon with a certain confidence – or probability – level. VaR allows management to see the probable risk their company is taking, or, in the case of companies hedging There are two methods to mitigates the financial risk  o Hedging using correlation of stock/ CAPM o Using derivative

The most commonly and frequently used methods is CAPM its means portfolio or  correlation between two financial assets. Financial assets mean stock, debt etc. and derivatives means equity stock or share capital etc.

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It is a practice that is created by the financial instrument (bill of exchange, letter of credit etc) it is required to manage can be quantitative and qualitative. It is focus on hedge using financial instutrument. Financial risk prescribed trust a firm should take on a project when it want to increase share holders when we applied financial risk management it implies that the manager of the firm should not hedge the risks that an investor can hedge them self at some cost it mean when we give the loan to any person. We can demand to hedge his property for security. The firm manager perform the very of the share holder  using financial risk management techniques.

Enterprise risk : According to the Casualty Actuarial Society (CAS), enterprise risk management Is defined as: "The process by which organizations in all industries assess, control, exploit, finance and monitor risks from all sources for the purpose of increasing the organization's short and long term value to its stakeholders." A risk defined as a possible events or circumstances that can have a negative effect on the enterprise its impact can be on the very existence the recourses (Haman and capital) and product or customers of the entries as well as external impact on security such as on security market or the environment in the financial institution, enterprise normally through the combination of interest rate risk credit risk. Market risk and Operational risk.

Examples of enterprise risk: Remember that your investment actually own p pace of your business it is depend upon how they invest you give up central region so you have to aware when you agree to take an investor debt financing institution and banks only expect there loan rapidly. The bank  also gives many facilities to its customer. Such as on line transfer of money overdraft facility.

Mitigations enterprise risk : Its means hoe risk will be managed and plan how we make plan and include task, responsibility, activity and budget. Enterprise risk management is simply a practice of  systematically selecting cost effectiveness approaches to minimize the cost and maximized the quality of tour product. It is also competitive advantage of the firm to reduce the cost and improve the qualities of product the firm should focus on customer  needs and devolved the product according to customer need and demand. It is necessary to make effective plan and implement on the organization and evaluate the plans. Communication is also necessary to reduce the risk of the business communicator  involved how to reach the intended audience response to the communication etc the main goal of the communicating is to improve collective and individual decision making. To 39

manage the risk we can implemented the control and set the standard and procedures. The risk management of enterprise is used for threat to realization to the organization.

Market risk  Market risk is defined as the possibility of losses owing to unfavorable market movements. Such losses occur when an adverse price movement causes the market to market revaluation of a position to decline. It can be due to a large number of risk factors, including fluctuations in interest rates, exchange rates, equity prices and Commodity prices, as well as changes in volatility of these rates and prices that affect The values of options or other derivatives, as well as changes in correlations between Those risk factors. Market risk and Asset and Liability (ALM)-risk are narrowly related. Both types of  Risk is defined as ‘the risk of adverse movements in market factors (such as asset prices, foreign exchange rates, interest rates) and their volatilities and correlations’. The term market risk is typically used by banks and refers to trading, usually a short term Activity, and focuses on changes in market/fair value. The term ALM risk is used by both  banks and insurance firms and relates to the consequences of changes in market factors for all asset and liability items of the balance sheet. In banks ALM risks typically refers to interest rate risks in banking books with a focus mostly on accrual earnings where long term assets are funded by short term liabilities. Insurance companies face the opposite  problem. Typically the liabilities are longer than the assets and the asset portfolio may include some equity investments. Furthermore, both banks and insurance companies have increased ALM risks due to embedded options in their assets and liabilities. Its means the risk that is occurs due to inflation or deflation in the economy when the prices of goods increase and interest rate increase and the value of money decreased. The most suffer the market risk the speculators that speculate that the prices are increase in future and they gain profit but unfortunately the prices of goods comes to down due to the deflation so he suffer or bear the loss this type of loss is called the market risk when we can do the transaction with foreign country the exchange rate is use it is also effect on the market  prices the changing in the exchange rate also cause the market risk. Click and plumm (2005) explored that for the traction with foreign country. The problem is that to convert the local currency in to foreign currency from the most perception of the investors the common currency that is used for foreign trade is U.S $ some of the movements in stock price indse3x may be reflect their foreign exchange he describes that the listed company the local currency is preferable in comparison with foreign currency. The researcher control the exchange rate variations to remove the hesitation of the investors and the listed company which involves in foreign trade and use the exchange rate on daily basis.

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Examples of market risk: Market risk means changing in prices of shares foreign exchange, according to financing of my analysis. I have come to know that efficiency in stock market is not strong enough. This is all because of indicators but strong rules. The main reason of economy down towards politically instability uncertainty investors avoid to invest the money in financial  project. In Pakistan all indicators method interaction we need extra rules and regulations

Mitigations of market risk: It is mitigation that is used to control the market risk. Such mitigation that takes contingent claims whose financial settlement is depend upon uncertain variables. The methods that are used to reduce the market risk with risk sharing agreement. For example for selling of share through public offering risk the third party is involve such as bank to reduces the risk we can hedge the price risk by purchasing a financial contract that pays different between some settlement price and market price. If the price of the shares goes down the payoff from this contract and loses are occur due to decline of share so we contract the option. So fluctuation prices with long term contract due to fluctuating of   prices. Development of market instruments, markets and institutions for risk trading and risk sharing. Such development should be viewed as “Market Engineering” which builds on the “physics” of markets explored by social sciences (including economics) but focuses on the harnessing of market forces and human behavior to achieve a desired outcome. Create mechanisms for transforming involuntary private risks to voluntary risk so as to empower individual choice. Without individual choice market based risk mitigation is not possible. Remove regulatory and institutional impediments to the exercise of individual risk  Preferences. Develop decision analytic methodologies that integrate expert risk assessment with market based pricing of risk (e.g. decision theory, real option theory, financial engineering methods) Develop pricing and portfolio analysis methods for valuation and optimization of risk  mitigation options.

Chapter No (5) Financial institutions

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Sklos pieme (2001) explored that financial institutions provides services for its clients or  members probably the most important financial service provided by financial institutions is activity as financial intermediaries most financial institutions are usually regulated by government tree types of financial institutions Deposits: these institutions include banks credit union, trust companies and mortgage loan companies. Insurance companies and pension fund Brokers, underwriters and investment funds •

• •

Financial institutions provide service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitates the flow of money through the economy. To do so, savings are pooled to mitigate the risk brought to provide funds for  loans. Such is the primary means for depository institutions to develop revenue. Should the yield curve become inverse, firms in this arena will offer additional fee-generating services including securities underwriter ting, and prime brokerage. Financial institutions exist to improve the efficiency of the financial markets. If savers and investors, buyers and sellers, could locate each other efficiently, purchase any and all assets costless, and make their decisions with freely available perfect information, then financial institutions would have little scope for replacing or mediating direct transactions. However, this is not the real world. In actual economies, market participants seek the services of financial institutions because of the latter's ability to provide m arket knowledge, transaction efficiency, and contract enforcement. Such firms operate in two ways. They may actively discover, underwrite, and service investments made using their own resources, or merely act as agent for market  participants who contract with them to obtain some of these same services. In the latter case, investors assemble their portfolios from securities brought to them by these same firms. In light of the two ways in which institutions may operate in the financial sector, several issues immediately arise. First, when and under what circumstances should these firms use their own resources to provide financial services, rather than offering them through a simple agency transaction? Second, to the extent that such services are offered through the use of the institution’s own resources, how should it be managing its portfolio so as to achieve the highest value added for its stakeholders.ting, and prime brokerage?

Intermediating involves the simultaneous issuance and purchase of different financial claims by a single financial entity. It occurs when an institution purchases one type of financial instrument for  its own account and finances the transaction by issuing a claim against its own balance sheet. Three types of such financial intermediation activity are common. These are i)

insurance underwriting whereby the issuer assumes the policy's contingent liability,

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ii)

loan underwriting, whereby the intermediary uses its own resources in extending credit to a borrower, and

iii)

Security underwriting which involves buying securities as principal to distribute to investors.

Financial Institution's balance sheet is different from a non-Financial firm; consider how an industrial firm wields capital machinery (asset) and the loans (liabilities) it used to finance that asset. The line is blurred in Financial Institutions, which must hold deposit accounts (liabilities) to fuel the issuance of loans (assets). The same accounts are considered loans as they are held in ownership not of the bank, but of the individual client The overall of regulation of the financial sector should be ensure that the system can perform the function efficiently and effectively in helping deploy, transfer and allocate the resources means cash, securities, asset etc across the time and space under the condition of uncertainty. Hewer  actual financial regulation attempts to accomplished many objectives beyond facilitating the efficient allocate of resources. There are four broad retinal for financial regulation may be identified

• • • •

Safeguarding the financial system against system risk. Protecting consumer from opportunistic behavior  Managing the efficiency the financial system Achieving the broad range of social objectives.

Its means safeguarding the financial or organization system to control the risk we should implement the control on the system to protect from uncertain events for example to protect the information and personal data for theft or illegal used the firms used the login and password to control the system risk some time system m ay be damaged and theft so companies can implement the plan to control the system risk. Customers also are the asset of the company so it is duty of the company to protect the customer  and try to provide the best services and to know the nature of the customer and then make product according to the demand of the customers. It is the responsibility of the company to manage the system efficiency and affectivity for the  betterment of the system. Its means provides the services and doing the work for the purpose of social welfare such as  banks provides the services and doing work for social welfare such as provides the loans to the  people and deposits the and provides the services to the people. Its means these institution accept money from the public for safe custody which will repayable on demand by cheque or by drafts and these institutions making loans to other people means by taking deposits from public and making commercial loans to industrial sector, against sector  institutions trust companies means financial institution accept ornaments important documents in a bank on trust business. Bank demand some amount for these services financial institutions also called mortgage loan companies. Banks advances loan against immovable property. Means

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against land building or the completion of property the immovable property con be retuned to the customer  A bank is a financial institution which deals with money and credit. it accepts deposits from individual firms and companies at a lower rate of interest and gives at higher rate of interest to those at which it lends forms the source of its profit. A bank thus is a profit earning institute, according to crowthe, “A bank is a firm which collect money from those who have it spare. It lends money to those who require it” In the words of Mr. Parking, “a bank is a firm that takes deposits from house holders and firms makes loans to other households and firms”

Webster’s dictionary (1974) defines the word “bank” as “a body of persons whether  incorporated or not who carry on the business of banking”. Definition by judiciary “ the words banking may bear different shades of meaning different period of history and their meaning may not be uniform today in countries of  different habits and different degree of civilization. It was said that there were two characteristics usually found in bankers today. a) they accept deposits of money from and collect cheques for their customers and  place them to their credit  b) They honor ceruse or order drawn on them by their customers when presented fore payment and debit the customs accounts accordingly. In the court of appeal the majority of judges identify certain absolute characteristics usually found in banking business. a) keeping some form of current and running account for the entries of customers credit and debit   b) The acceptance of money from and collection of cheiques for customers and  placing them to the customers credits. c) The honoring of chequies and orders drawn on them the banks by its customers when presented for payment and debiting customers account accordingly.

Functions of a bank  A commercial bank performs a variety of functions. These functions are classified under two main heads • •

Basic functions Secondary functions

Basic functions

The basic functions of a commercial bank are a) accepting of deposits and

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 b) advancing of money

i.

Accepting of deposits

The first important function of a bank is to accept deposits from these who can save but cannot make profitable use of their savings themselves. In order to attract the savings from different persons and institutions the bank maintains the following three types of  accounts. Such as current account, saving account and fixed deposits account

ii.

Making loans

The second major function of a commercial bank is to make loans businessmen traders, exports, households etc. These loans are made against documents of title of the goods marketable securitioes personal securities of the borrowers at etc of all the functions of a modern bank advancing and lending is buy for the most important .the advances comprises a very large portion of a banks total assets .the assets of the bank the strength of the bank prelemi judged by the soundness of its advances. The lending of the money may be in any of the following farms such as loans cash credit overdraft discounting of   bills Secondary Functions The secondary functions of a bank are classified as Agency functions •

•

Utility functions

Agency functions Banks act as a agent of their customers in various ways as collection of cheques collection of dividends purchase and sale of securities execution of standing instructions And acting as trustee or executor 

General utility services The bank perform a number of other general services to its clients which are summed as foreign exchanges business act as referee, issue of travelers cheque supply of trade information export promotion cell, advise on financial maters and save custody of  valuable

Sources of bank funds 45

A bank is a business firm. Its main aim is to earn profit. In order to achieve this objective it provides the services to the customers. it offers a variety of interest bearing obligation. .These obligations are the sources of funds for the bank and are shown on the liability sides of the balance sheet if a commercial bank. The main sources which supply funds a to a bank are as follows • •

Banked own funds Borrowed funds

Bank own funds nks own funds are mainly three types reserve funds and portion of undistributed profit Borrowed funds The bank borrowing deposits ,bank collects the three types of deposits current demand deposits and fixed and time deposits the larger will be its funds for employment and so higher are its profit. Borrowing from central bank, other sources and deposits

Modes of lending A lien is the right to retain property in its possession till its (bankers due are cleared. Lien gives a person only a right to retain the possession of the goods and not the power to sell. Thus lien is a) A right of retaining property belonging to the debtor   b) Till all dues due to the borrower are cleared.

Pledge A pledge is a contract where by a goods is deposited with the lender as security for  repayment of the loan. The delivery of goods may be made by transferring the goods from the owners go down to a bankers go down or the keys of the owners go down be handed over to the lender. The delivery of documents of the title relating to goods also creates a valid pledge. The person delivering the goods as security is called the pledger. The person to whom the goods is delivered is known as pledge.

Mortgage A mortgage is the transfer of an interest in a specific immovable property for the purpose of securing the money advanced by way of way of loan, an existing or future debt. The

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 person in whose interest the property is transferred is known as mortgage. The person who transfers an interest in property against a debt is called mortgagor.

Hypothecation Hypothecation is defined as a legal transaction whereby goods may be made available as security for a debt without transferring property or the possession to the lender. The advance of loans against goods without taking their possession is very risky on two main grounds. As the goods are in possession of owner, the borrower may take the goods without informing the bank. The bank does not have a legal claim as it does not have a valid charge over the goods. •

•

Chapter No (6)

Risk control of financial institutions Risk management is a protestation process is followed by the risks with the greatest loss and the greatest probability of occurring are handled first and risks with lower probability of occurrence and lower loss are handled in descending order. Impractical the process can  be very difficult and balancing between risks with high probability of occurrence but lower loss versus a risk with a high loss but lower probability of occurrence can often be mishandled means if risk is controlled prior big risks can be controlled but if risk is not controlled in prior period the risk can be a higher risk. Intangible risk management identifies a new type of risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identification ability. For example when deficient knowledge is applied to situation a knowledge risk materializes. Relationship risk occurs  process engagement risk may be an issue when ineffective operational procedures are applied these risks directly reduced the productivity of knowledge workers decrease cost effectiveness. Profitability services quality reputation brand value and earnings quality. Recourse spent on risk management could have been spent on more profit availabilities. The ideal risk management minimized spending while minimizing the reduction of the negative effects of risk. WaterhouseCoopers (PWC) in (2007) explored that key management in the financial services sector believed a focus on compliance has produced better relationships with regulators, a better relationship among customers, better and timelier data on internal   performance and improved returns relative to risks taken. Considerations While the 47

 benefits are numerous, concentrating on risk management in the financial sector can also lower profitability and reduce efficiency. Risk management in financial institutions must figure out a way to concentrate on all major business-related risks. He also explored that managers believed community relationships, attracting and retaining talent, the cost of  risk management, and competitive pricing have all suffered as a consequence of an increased focus on regulatory risk. Jene, mecking and Santo, mero in (1976, 1984) that risk is an essential ingredient in the financial sector, and that some of this risk will be borne by all but the most transparent and  passive institutions. In short, active risk management has a place in most financial firms. They exposure that if management is going to control the risk that is according in the business or  organization. The management must be established and set of the procedures to obtain or to achieve the goals or objectives. in the financial institution this is referred as a firm level risk  management system. The goals are objectives of a firm are to measure and manage the risk which is assessed and identified by the management. The firm applies the four step procedures to measure and manage the risk of a firm. These steps are defined (i) Standards and reports (ii) Position limits or rules (iii) Investment guidelines or strategies and (iv) Incentive contracts and compensation

In general these tools and techniques are established or used to define the risk accurately. It is helped or encourages the decision makers to manage and control the risk with manners that is consistent with management goals and objectives.

Standard and reports The steps of these control and techniques are to the setting the standard and financial reports. They also explored that it is essential for management to understand the risk effectively and then must be managed or absorbed the risk. The standardization of financial reporting is the next ingredient. Obviously, outside audits, regulatory reports, and rating agency evaluations are essential for investors to gauge asset quality and firm-level risk. These reports have long been standardized, for better or worse. However, the need here goes beyond public reports and audited statements to the need for management information on asset quality and risk posture. Such internal reports need similar standardization and much more frequent reporting intervals, with daily or weekly reports substituting for the quarterly GAAP periodicity.

Position Limits and Rules A second step for internal control of active management is the establishment of position limits. These are imposed to cover exposures to counterparties, credits, and overall position concentrations relative to systematic risks. In general, each person who can commit capital has a well defined limit. This applies to traders, lenders, and portfolio managers. Summary reports to Management shows counterparty, credit, and capital exposure by business unit on a periodic  basis. In large organizations with thousands of positions maintained and transactions done daily, accurate and timely reporting is quite difficult, but perhaps even more essential.

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Investment Guidelines Third, investment guidelines and strategies for risk taking in the immediate future are outlined in terms of commitments to particular areas of the market, the extent of asset-liability mismatching or the need to hedge against systematic risk at a particular time. Guidelines offer firm level advice as to the appropriate level of active management - given the state of the market and the willingness of senior management to absorb the risks implied by the aggregate portfolio. Such guidelines lead to hedging and asset-liability matching. In addition, securitization and syndication are rapidly growing techniques of position management open to participants looking to reduce their exposure to be in line with management's guidelines. These transactions facilitate asset financing, reduce systematic risk, and allow management to concentrate on customer needs that center more on origination and servicing requirements than funding position.

Incentive Schemes To the extent that management can enter into incentive compatible contracts with line managers and make compensation related to the risks borne by these individuals, the need for elaborate and costly controls is lessened. However, such incentive contracts require accurate position valuation and proper cost and capital accounting systems. It involves substantial cost accounting analysis and risk weighting which may take years to put in place. Notwithstanding the difficulty, well designed compensation contracts align the goals of managers with other stakeholders in a most desirable way. In fact, most financial debacles can be traced to the absence of incentive compatibility, as the case of deposit insurance illustrates. Bable and santomero (1997) is explored that the financial institutions indicate that risk  management which is not the inherent features of institutions engaged in managing risky asset  portfolios. So it is argued that if the financial institutions is done work well at least to evaluate the underlying asset and its value. The challenge is to manage the value of firm and its risk is defined or clear in concise or understandable or every way. However some time the management can not manage the risk to use the methods and techniques.

Risk management plan Select appropriate controls or countermeasures to measure each risk. Risk mitigation needs to be approved by the appropriate level of management. For example, a risk  concerning the image of the organization should have top management decision behind it whereas IT management would have the authority to decide on computer virus risks. The risk management plan should propose applicable and effective security controls for  managing the risks. For example, an observed high risk of computer viruses could be mitigated by acquiring and implementing antivirus software. A good risk management  plan should contain a schedule for control implementation and responsible persons for  those actions.

Methods that is used to control the risk  The ISO (31000) the risk management is to identify the potential risk (risks are the events that cause problem) hence risk identification can start with problems or with the source means (risk sources it may be internal or external system that is used to managed the risk 

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such as charting, common risk checking, taxonomy based risk identification and objective base risk identification.

Assessment of risk  Once we have identified them they must be assessed as to their potential severity of loss and its probabilities of occurrence. The assessment is make by best educated and by knowledgeable persons. The difficulty in the assessment process is determined the rate of  occurrence the statistical information are not available.

Potential risk treatment Once risk has been identified and assessed than following techniques is used to manage the risk 

• • • •

Avoidance (eliminate) Reduction (mitigate) Sharing (outsource or insure) Retention (accept and budget)

Risk avoidance We can not perform the such activity or we avoided from such activity that could carrying risk such as we have not entering in business to avoid the risk and we also avoid from probability of earning profits.

Risk reduction Its means introduced methods that reduced the chances of loss. Introduce met Modern software development methodologies reduce risk by developing and delivering software incrementally. Early methodologies suffered from the fact that they only delivered software in the final phase of development; any problems encountered in earlier phases meant costly rework and often jeopardized the whole project. By developing in iterations, software projects can limit effort wasted to a single iteration. Holds that reduced thee chances of loss.

Out sourcing 50

Out sourcing means we reduced the chances of loss we contract e with other party to do activity or provided services for example a company may or heavy goods or customer.

Risk retention Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or  catastrophic that they either cannot be insured against or the premiums would be infeasible.

Sharing of risk  The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that you can transfer a risk to a third party through insurance or outsourcing. In practice if the insurance company or contractor go bankrupt or end up in court, the original risk is likely to still revert to the first party. As such in the terminology of practitioners and scholars alike, the purchase of an insurance contract is often described as a "transfer of risk." However, technically speaking, the buyer of the contract generally retains legal responsibility for the losses "transferred", meaning that insurance may be described more accurately as a post-event compensatory mechanism. For example, a personal injuries insurance policy does not transfer the risk of a car accident to the insurance company. The risk still lies with the policy holder namely the person who has been in the accident. The insurance policy simply provides that if an accident (the event) occurs involving the   policy holder then some compensation may be payable to the policy holder that is commensurate to the suffering/damage.

Chapter NO (7) Stock markets

Stock markets is a public market for the trading of company stock and derivatives at an agreed prices, these are securities that is listed on stock exchange as well as there only traded privately means stock market is a market where we purchase and sale of securities such as shares debentures bounds etc.

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Risk in stock markets According to one common phrase, when there is no risk, there is no gain. This verdict is true for all those businesses where you make some kind of investment. Investing in stocks is both risky and unsure. It is all about taking chances and making commitments regarding the money you are putting for the business. There are many people in the stock  trading business that are making calculated decisions. They work with statistics while investing on stocks as they know how to deal with the shares at the right time. They are aware that holding the stocks long enough and then releasing them wisely at a favorable market condition can be really fulfilling. You cannot however say that everybody is safe and sound till the end of the investment. With the fluctuations in the market prices, even the professional investors seize with  panic and shocks. They usually tend to make unwise and rushed decisions in the fury of  market confusions that ends up as a hasty loss. The term risk depends on the person as well. It varies from person to person. Higher risking investment might seem easy to somebody and challenging to somebody else. With age, experience, financial liabilities, knowledge of market trends and risk sustaining capability you can determine the ability of a person. Market risks can be the ones that you might confront. It includes poor functioning of the stocks that you brought from the market but due to the general market condition being good, your stock might be getting appreciated. Industry risks in which a certain industry gets exaggerated regardless of the general market performance. Regulatory risks that involve menace affiliated with a company that is bound by certain conditions and laws. Business risks take in account of the individual functioning of the company like its  products, strategies, market share, work force, management, etc. In order to avoid any of  such risk factors being involved in the investment plan while trading stocks, one should take in consideration all the techniques and tactics to carry out the best stock trading  program.

Introduction of the KASB securities limited : KASB securities (khadim Ali Shah Bukhari Limited) it is a company that is approved by the Exchange commition of Pakistan.(SECP) as required under section 62, sec 57 and under the ordinance of 1984. The KASB capital limited has been obtained for the issue circulation and publication of this Offer for Sale Document. It is listed with Karachi stock  exchange limited and it is offering the share and sells the shares. The register office of  KASB securities is in Karachi. The company shall stand provisionally listed for trading and for quotation of its shares on stock exchange. In May 8, 2003. The KASB securities limited was merged with the KASB bank limited was swapped with the shares of KASB  bank limited. KASB securities limited was owned by KASAB bank limited. .

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Principal Purpose for the Offer:

The purpose of this Offer is to invite the general public to subscribe to the Company’s shares for broadening the ownership base, exposure to the group and further  strengthening the capital market.

Interest rate policy  None of the holders of the issued shares of the Company have any special or other interest in the property or profits of the Company other than as holders of the ordinary shares in the capital of the Company.

Dividend Policy The rights in respect of capital and dividends attached to each ordinary share would be the same. The Company in a general meeting may declare dividends but no dividends shall exceed the amount recommended by the Directors. Dividend, if declared in the general meeting, shall be paid according to the terms of the provisions of the Ordinance. The Directors may from time to time pay to the members such interim dividends as appear to the Directors to be justified by the profits of the Company. No dividends shall be paid otherwise than out of the profits of  the Company for the year or any other undistributed profits. No unpaid dividend shall bear interest or markup against the Company.

Management Structure KASB Securities’ senior management and investment professionals have diverse   backgrounds with extensive industry experience. KASB Securities has a dynamic, streamlined and entrepreneurial organizational structure with a management team with several years of experience in the industry.

Future Prospects KASB Group is planning international expansion. KASB Securities Limited believes there is an immense amount of untapped potential in regional countries where KASB Securities Limited can leverage its international network to attract a larger client base. In addition, KASB Securities Limited plans to grow its business through the branches of  KASB Bank. KASB Securities will have a trained professional at every KASB Bank   branch offering to all customers the bouquet of services that KASB Securities offers. With the expected increase of the number of KASB Bank branches from 35 to 73, KASB Securities will have a presence in more than 15 major cities in Pakistan. Furthermore, KASB Securities intends to focus on generating repeat business from high growth clients. KASB Securities will leverage its unique capabilities to ensure it can continue to work  with clients as their products and services evolve. As KASB Securities continues to expand the range of products it offers, it is expected that the share of brokerage business from existing clients will increase. Besides, KASB Securities plans to launch a new

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nationwide marketing campaign for KASB Direct that will make KASB Direct a house hold name across Pakistan. With the rise in the literacy rate, per capita income and increase in capital markets awareness online trading has a growing market that is largely untapped to date. Moreover, KASB Securities will keep leveraging its relationship with Merrill Lynch to increase its foreign and local clients. This relationship has been an extremely successful one for both KASB and Merrill Lynch and with the current political scenario improving it is expected that through Merrill Lynch KASB will be able to attract a higher number of international clients.

Risk Factors The Offerer wishes to highlight the following major risk factors, which may affect the  profitability of the Company:

Business Risk  The Company’s performance outlook, market activity and the larger economic picture influence the price of a stock. When the economy is expanding, the outlook for many companies will be good and the value of their stocks should rise. The opposite is also true. Usually, the greater the potential reward, the greater would be the risk. For small companies, startups, resource companies and companies in emerging sectors, the risks and potential rewards are usually greater. Performance of the Company may also be affected due to unexpected shortfalls in the information technology infrastructure and inadequate risk management by the back office.

Business risk Mitigates The Company is expected to mitigate the impact of business risk by employing adequate risk management measures to ensure that exposures remain within prudent limits. In addition, disaster recovery plans should help mitigate the impact of risk arising from failure of information technology infrastructure. Corporate governance measures shall also be employed to further facilitate this effort.

Operational Risk  Being one of the largest domestic equity brokerage houses itself serves as an inherent source of operational risk due to potential of frauds and natural disaster. Increase in online transactions will further increase operational risk.

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Operational risk Mitigates Management is aware of the need to significantly enhance controls. The Risk  Management and Compliance Department effectively addresses this concern by maintaining a comprehensive system of internal controls, establishing systems and  procedures to monitor transactions, positions and documentation, maintaining key backup   procedures and undertaking regular contingency planning. Improvement in quality of  staff, regular training and accountability will ensure high standards of risk management will continue to be maintained.

Regulatory Risk  Changes in regulatory framework, both domestic and overseas, may have an effect on the  profitability of the Company.

Regulatory risk Mitigates KASB Securities Limited has mitigated the risk by managing its operations in accordance with the risk management guidelines of SECP. The company has in place a strong Risk  Management and Compliance Department that monitors the compliance with the regulatory requirements along with monitoring any pre emptive violations of the regulatory parameters. This minimizes the risk and maintains compliance with regulatory framework .

Competition Risk  The profitability of KASB Securities Limited may be affected due to risk of increasing competition from other domestic and foreign brokerage houses.

Competition risk Mitigates: KASB Securities Limited is well positioned to successfully compete in the brokerage industry due to its wide market presence and brand recognition, large client base and strong sponsor support. KASB Securities Limited managed to achieve high profitability levels in 2007 despite the increase in competition. The Company has also invested in superior technology thereby improving the service quality offered to clients.

Inflation Risk  The Company is open to inflation risk like that of the whole economy. Inflation risk may  be translated to erosion of values at the exchange, but commissions on brokerage are not expected to be affected in a major way. However, there is a possibility that the value of  assets or income of the Company will decrease as increasing inflation shrinks the  purchasing power of the Pakistan Rupee.

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Interest rates Mitigates The expected inflation is not going to be a serious risk to the operations of the Company. The Company is well placed to manage its inflation risk due to effective risk  management, future expansion plans in international markets and introduction of  innovative products.

Price Risk  This is the risk that the share price of the Company will decline due to bearish trends at the Karachi Stock Exchange. In additions to that, this risk can get amplified if the Company fails to sustain its impressive growth.

Price risk Mitigates This risk is mitigated by impressive growth performance of the Company. KASB’s expansion of its brokerage services will ensure that the growth momentum is maintained and the share price offers an attractive return to potential investors.

Interest Rates Risk  Increase in inflation and 150 bps increases in discount rates by the State Bank of Pakistan (“SBP”) has resulted in the increase of interest rates. KASB Securities Limited has redeemable capital on its book and the recent increase in the benchmark interest rates may affect the Company’s cost of funding adversely.

Interest rates risk Mitigates The Company has shown an impressive growth over the last few years and is expected to continue the top line growth in future as well. The impact of profitability is directly linked with the operating cash flow of the Company. Hence we do not see any major risk  to the Company’s bottom line profitability due to recent increase in interest rates.

Liquidity Risk  This is the risk of the Company failing to settle its liabilities due to inadequate availability of liquid assets.

Liquidity risk Mitigates The Company has a paid-up capital of PKR 1,000,000,000. The Company’s cash per  share value is expected to be PKR 23/- per share by December 31, 2008.

Capital Market Risk  56

The shares of KASB Securities will be listed on the KSE and the shareholders of the Company will be able to sell or buy shares only through the members of the KSE subsequent to the Offer. Price of shares will depend on the stock market behavior and  performance of the Company. Hence, price may rise or fall and result in increase or  decrease in the value of shares to a great extent.

Capital market risk Mitigates: The Company has performed well over the past five years which is evident from its increasing revenues and profitability. The Company is likely to perform well in the future due to its growing client base, strong brand name, experienced management and use of  superior technology. Improvement in overall performance of the Company will result in higher returns to investors and a higher share price.

Under Subscription Risk  This is the risk that the OFS may get under-subscribed on account of lack of investor  interest.

Under Subscription Risk Mitigates The issue price is attractively priced at PKR 67.5/- per share. The Company has an impressive brand image. The probability of under-subscription is therefore considered low. In our opinion, all material risk factors with respect to this issue have been disclosed and that nothing has been concealed

Chapter NO(8) Conclusions:

implementing firm wide risk management practices entitles a significant commitment of management and financial institution resources. It is focus on central business of the organization where review of lending trading and intermediation with a risk management perspective. In this process many guidelines and principles must  be maintained for successful implementation of organizational level risk management

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  practices. Participation agreed that financial system continue face the significant challenges from regional economy to down word. Participations concluded on the need to continue reforming the internal best participant in these area including with the supported   participants analyze that global financial crises might be effect financial system supervision and regulation in the region going forward in particles improve regulation and standing information disclose is important the IMF supervision also gives advices on how changing in the global crises. Investors of investing in variances types of financial markets. It is important to understand the degree of risk. The most investors that offer  more return and also asses the degree of risk. If the default risk is occurs in financial asset was sold. Identifying potential risks are about events that cause problem hence assessing the risk it is important to identifying the risk before it management. At the end the risk  management is very important for every business if the risk is managed at the start so it is not cause problem but it is not managed so that if may cause different method for  managing the risk such as banks. The bank managed the credit risk with maintained the resources or securities such as pledge mortgage and hypnotization. Others institution also used different techniques to control the financial risk such as sharing of risk transferring of risk to others organization of risk to others organization avoid ness of risk etc. the management should identifying and mitigates these risk carefully with using the above techniques.

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