Secret Sauce

Certified Banking Operation (CBO) - 2023

Copyright © Kaplan 2019. All rights reserved.

TABLE OF CONTENT

TABLE OF CONTENT

Topics:

Topic 1 – Banking Products & Practice ……………………………………………………….… 3

Topic 2 – Retail and Corporate Banking ……………………………………………….……….. 6

Topic 3 – Banking and Corporates Law ………………………………………………………... 11

Topic 4 – Bank Risk Management ……………………………………………………………… 18

Topic 5 – Trade Finance …………………………………………………………………………... 23

Topic 6 – Treasury & Investment ……………………………………………………………..…. 29

2
Topic 1 – Banking Products & Practice

Topic 1 – Banking Products & Practice

Module 1.1 – Introduction to Banking

Banking • Source of funds – individuals, business houses, organizations.

• Investment of funds – Loans, securities, mortgage
• How banks make money - They give 0.75% to the depositor as interest and
charges 5% from borrowers, thus make money by keeping the 4.25%
Universal • Universal banking engages in diverse kind of business-like investment
Banking Vs. services, savings, loans, functioning as a financial supermarket.
Commercial • Commercial banking just accepts deposits and make loans.
Banking • It also provides credit facilities, payment and withdrawal facilities, credit
creation and safe custody.

Module 1.2 – Account Opening

Account • KYC is key to account opening as it makes future transactions trouble free,
Opening combats money laundering, complies with UAE central bank requirements on
Considerations AML, develops long lasting relationship with banks and identifies cross selling.
• Account holder has to give authority to open account. Identity is verified by
passport or identity card or utility bills.
Types of • Current/ Checking Account – Withdraw money on demand.
Deposit • Savings Account – Makes a habit of small savings among people.
Accounts • Fixed Deposit Account – Money deposited for a fixed period of time. Penalty
on premature withdrawal.
• Call Deposits – Account for investment funds that offers advantage of both
savings and current account.
• Other accounts include:
• Illiterate Account – For a person who cannot read or write. Usually thumb
impression is used for any activity.
• Minor Account – for people below the age of 21 according to Hijra calendar
or 20 yrs 5 months by Gregoria calendar. Usually, a parent or guardian is in
charge of the operations in the account.
• Joint Account – For two people who have equal share unless agreed
otherwise. Bank stops withdrawal in case of death/loss of legal
competence of a joint account holder to the extent of share of the
deceased. Examples are husband and wife, father and son, partners.

3
Topic 1 – Banking Products & Practice

Module 1.3 – Account Closure

Considerations • Happens at the request of the customer.

• At the discretion of the bank due to frequent return of cheques.
• When required by law due to mental incapacity of customer or death.
• Accounts can be closed due to money laundering concerns which require prior
approvals from authorities.

Module 1.4 – Money Laundering

Money • Process of turning ‘dirty’ money (derived from criminal activities) into money
Laundering which appears to be from legitimate origins.
• 3 stages to Money laundering:
• Placement: introduction of dirty money in the system.
• Layering: moving the placed money around in order to make it difficult for
authorities to link the placed funds with the ultimate beneficiary of the money.
• Integration: Ultimate beneficiary appears to be owning legitimate funds.
• Anti-money Laundering (AML) provisions require firms to report suspicious
transactions at placement and layering stages. Keep adequate records which
prevents integration stage and to report suspicious activity to regulatory
authority.
• AML’s procedures and law helps to detect and report suspicious activity.
• Terrorist Financing – ‘dirty money’ goes for terrorist financing as well and it
important for all companies to keep adequate records for their customers to
avoid any such activities.

Module 1.5 – Negotiable Instruments

Negotiable • Instruments of credit that are transferrable from one person to another.
Instrument • Features are:
• Transferability – easily transferred by endorsement or delivery.
• Good Title – The title of the holder is not affected by the defective title of the
transferor.
• Right to Sue – Holder can sue the person who is liable to make payment, if
needed.
Types of instruments
• Bills Of Exchange – An instrument in writing containing unconditional order,
signed by the maker. Basically directs a certain person to pay a certain sum to
a certain person who is the bearer of the instrument.
• Promissory Notes – Instrument in writing containing unconditional
undertaking, signed by the maker to pay a certain sum of money to the bearer
of the instrument or to the order of a certain person.

4
Topic 1 – Banking Products & Practice

Cheques • An unconditional order to pay a certain sum of money to the person who is
mentioned on the cheque.
Types of cheques.
• Bearer Cheques - When the words “or bearer” on the face of the cheques is not
cancelled. Can be transferred from one person to another and can be encashed
without endorsement.
• Order Cheques - When the words “or bearer” is cancelled and in place “or
order” is written. Person whose name is mentioned further endorses on such a
cheque.
• Crossed Cheques - Two lines are drawn on the left-handed upper corner of
the cheque.
Types of Crossing Cheques
• General Crossing - Cheque bears two parallel transverse lines without any
words written between them across its face. If the cheque is crossed the
payment cannot be made.
• Special Crossing – When the name of a specific bank is written in the space
between the 2 parallel lines, it means special crossing which means the bank
should pay the exact bank which is specially crossed.
• Endorsement - Writing a person’s name on the back of the instrument for the
purpose of negotiation.
• Two types are General and Special endorsement.
• Date of issue is very important on a cheque as it shows how long It has been
in circulation and whether or not it has become stale.
• UAE law says any cheques which are more than 6 months old are called stale
cheques.
• Post Dated Cheques is a cheque paid before the date of issue. It becomes a
bank liability if these cheques are issued.
• A cheque become dishonouring if there are insufficient funds, signature is
different, cheque is stale, etc.
• Any damages due to forged signature or clever alteration is handled by the
paying bank and is their liability.
• Collecting banker is liable if customer suffers loss due to banks negligence or
collects a forged endorsement.
• Cheque Truncation is a new system in UAE banking. It is a cheque clearance
and settlement between banks based on electronic data. Helps in reducing
frauds and also in reconciliation.

5
Topic 2 – Retail & Corporate Banking

Topic 2 – Retail & Corporate Banking

Module 2.1 – Retail Banking Products

Retail Banking • Retail Banking is the offering of financial services to individual or personal
customers. (sometimes services to SME Customers)
• Loans to Retail customers should not exceed AED 2 million in aggregate per
customer for all other loans and AED 10 million for residential mortgage loans,
as per CBUAE.
Retail Banking • There are five types of product and services: Deposits, Loans, Non-Banking
Product & products, Banking services, Alternative channels.
Services
Deposit • Products are: Current accounts, Savings Bank Accounts, Fixed Deposits,
Products Target Deposits, Call Deposits, Foreign Currency Fixed Deposits.
Current • For business Purposes, professionals and companies.
Accounts • Funds can be withdrawn on demand which is used for settling transactions.
• Unlimited Deposits & Withdrawals and only residents can open the account.
• No interest charges and cheque book is issued.
• Generally not for minors and overdrafts are allowed.
• Maintained in Foreign and Local Currencies and withdrawal Slip is allowed.
• Bank may charge fees for the services offered.
Savings Account • For savings purpose - by individuals.
• Can be opened for employees, minors, senior citizens and illeterates.
• Unlimited deposits but limited Withdrawals.
• No cheque book issues, but ATM is given.
• Fee charged for more than allowed withdrawal.
• Interest is Paid and no overdrafts allowed.
• Non-residents can also open and generally maintained in local and foreign
currency.
Fixed Deposits • Offers a fixed interest rate (higher than CA & SA), for a fixed amount and term.
or Term • Generally payment only on specific periods.
Deposits • Interest rate for each period is different from bank to bank and overdraft can be
taken.
• Penalty for making a payment outside specific periods.
• Minium term is 7 days and maximum is 5 years. (depends bank to bank)
• Nomination can be done and not an operating account so no cheque or ATM.
• Loans can be granted against fixed deposit.
Target deposits • Offers a fixed interest rate (same as FD), for a fixed amount and term.
or Recurring • Contributes a fixed amount of monthly savings for a certain period to arrive at a
Deposits pre-determined target amount.
• Main objective is to develop regular savings habit among the public.
• Paid only on maturity and no penalty.
• Interest rates do not change and on maturity the plan is ceased.
• Loan can be given against target deposits.

6
Topic 2 – Retail & Corporate Banking

Call Money • Can be taken by Corporate or individua clients.

deposits • Minimum amount of deposit is USD 10,000 and is maintained in both local and
foreign currency.
• Interest bared on daily basis. (may change daily)
• The account can be there for an unspecified period but before withdrawal a
notice must be given. No cheque book or ATM since it is non-operational.
• Withdrawal notice should be given 2 working days or 7 days in advance.
Foreign • Fixed-income investment for keeping foreign currency.
Currency Fixed • Earns interest but comes with currency exchange rate risk.
Deposits • Can’t be withdrawn until the term is up.
• Used by investors to diversify or hedge against foreign currency movements.

Module 2.2 – Retail Banking Loan Products

Retail Loans • Types of retails loans are: Personal Loans, Auto Loans, Mortgage Loans,
Overdrafts, Credit Cards
Personal Loans • For personal use and is usually 20 times Gross Monthly Salary.
• Repayment in maximum of 48 EMIs
• No security, hence called unsecured loan.
Auto Loans • For purchase of a car. Usually, 80% of the Car’s invoice Value.
• Repayment in maximum of 60 EMIs and car is mortgaged to bank. (Secured
Loan)
Mortgage Loans • For purchase of residential property, with maximum being 10 million
• Requirements depends on bank to bank.
• Loan to value – UAE National – 80% and Expats – 75%.
• Repayment up to 25 years.
• The property is the collateral. (Secured Loan)
Overdrafts • Unsecured revolving loans. No ficed number of repayments and amount
depends on salary (bank to bank)
• Repayment is either in full or parts over time.
Credit Cards • Issuer – Banks, Mater, Visa
• For shopping or online purchases. It is an unsecured loan which works like an
overdraft.
• Limit is decided by bank and interest rates vary from 0-3% per month. (High
interest rate)
• Repayment in full amount monthly or minimum amount – 5% of outstanding.

Module 2.3 – Non-Banking Products “Insurance”

7
Topic 2 – Retail & Corporate Banking

Why Insurance? • To cover risk with respect to financial loss.

• Premiums paid every year.
• Insurance company compensates for the loss.
• Usually taken for medium-long term.
• Two types – life insurance, non-life insurance.
Life Insurance • Covers risk for the death of an insured individual. Family members get an
assured amount.
• Covers illness like cancer, kidney failure, etc.
• If death does not happen, it helps achieve financial goals like education,
marriage of kids, etc.
• Used in tax planning and provides a source of funds during retirement.
• Three types: Whole life, Term life, and endowement policy.
• Whole Life - Up to the age of 100.
• Term Life - pays only if death occurs during the term. Lowest premium.
• Endowement Policy – For a term like 10 yr or 20 yr. Builds up cash value
hence premium is highest.
General • Insures anything other than life. Protects against loss or damage like – loss by
Insurance fire, theft, etc.
• Examples – car, home, property, travel, liability, and health insurance.
Life Insurance • Critical Illness rider - policy holder gets financial benefits on being diagnosed
Riders with critical illness.
• Disability Rider – Receives benefits on being afflicted with disability.
• Accidental death benefit rider – receives benefits on accident leading to death.
• Term rider – Offers monthly income to nominee on death of life assured.
• Waiver of premium rider – Not required to pay future premiums on policy in the
event of an accident or mishap.

Module 2.4 – Non-Banking Products “Investments”

Investment • Pools of investment combining into a large fund also known as unit trust or
Products mutual funds.
• Purpose is to get better return than bank deposits.
• Usually invests in stocks, bonds, and currencies.
• Nominal charge and the fund handled by a manager who reduces risks by
having a diverse portfolio.
Types of • Types of mutual funds are:
Investment • Money Market Funds: Earns a rate of return comparatively higher than bank
Funds deposits. Short term interest bearing money market instruments like bank
deposits, commercial papers, government bills. Investors are usually low risk
bearers.
• Bonds fund: Earns a stable income from interest and the bond coupons and
make profit from trading the bonds. Instruments are corporate bonds &
treasury bonds. Investors are usually risk-averse and moderately conservative
who want stable return over long term.

8
Topic 2 – Retail & Corporate Banking

• Income Fund: investment in bonds that pay coupons and dividend paying
equity shares. Moderate risk with good monthly returns.
• Balanced Funds: Purpose is to get capital appreciated over long term.
Investment in stocks and bonds with a high level of risk expecting high returns.
• Equity Funds: Purpose is to get capital appreciation and higher return than
inflation over long term by investing in a portfolio of stocks. High risk tolerance
in investors.
• Investments with high return usually comes with higher risk.
(bond<<equity)

Module 2.5 – Retail Banking Services

Retail Banking • Services are:

services • Cheque Collection Services – banks collect cheques of other banks for free
and charges a fee for international banks.
• Drafts and Manager Cheques – Used by the bank and is payable at the bank’s
branch or correspondent banks.
• Inward and Outward TT Remittances – Banks make and receive SWIFT
transfers, a secure messaging system to transfer money worldwide.
• Standing Orders – Banks pay the insurance or utility company at the request of
the customer, when in need.
• Direct Debit Facility – Consumers can make regular, automatic payment from
their bank accounts.
• Locker Facility – Bank offers safe deposits on lease to their customers for a
fee.
• Smart Cards or Pre-Paid cards – Funds are stored as electronic information
and can be used by customers to use their funds.
• Debit cards – Customers can access their bank accounts from anywhere to
use it for their needs.

Electronic Money (E-money) – All smart cards or debit cards are e-money.

Module 2.6 – Corporate Banking

Products offered • Trade Finance products – Collections, letters of credit, bill discounting, etc.
to Corporates. • Credit Products – Bilateral loans, syndicated loans, project financing, leasing
etc.
• Risk Management Products – Forward contracts, options, futures, swaps.
• Transaction Products – Cheque collection services, CMS services, Escrow
Mgmt services, Payment services.
Corporate Loans • Sales – Verifying customers.
• Credit Approval - Based on the rating of the business. 5 Cs of Credit –
Capacity, character, collateral, capital, and conditions

9
Topic 2 – Retail & Corporate Banking

• Principles of credit approval – Know your customer, purpose of borrowing,

source of repayment and security.
• Types of financial statement – Balance sheet, income statement, statement
of retained earnings and statement of cash flows.
• Ratio Analysis: some types of ratios are:
• Liquidity ratio measures the firm’s ability to meet current obligations.
• Leverage ratios show the proportion of debt and equity in financing firm’s
assets.
• Activity ratios reflect the firm’s efficiency in utilizing the assets.
• Profitability ratios measure overall performance of the firm.

Module 2.7 – Collaterals

Secured Vs. • Secured Loans: Type of loan that is backed by collateral, which is an asset or
Unsecured property that the borrower provides to the lender. If there is a default, the
Loans lender has the legal right to seize the collateral and sell it to cover the debt.
• Unsecured Loans: Higher interest rates than secured loans as there is more
risk for the lenders due to lack of collateral. Lenders depend on the financial
stability of the borrower.
Loan Collaterals • Types of collaterals are automobiles, real estate, valuables, plant & machinery,
investments, insurance, deposits.
• A good security should be reasonably stable, title of the security should be
easily transferable, easily enforceable, and preferably in the same area of
jurisdiction.
• Third party guarantee is a promise from one party to another for the payment
of debt of a third party in case of a default.
Mortgage • It is a contract between the borrower and lender.
• Mortgagor remains the legal owner of property, but the mortgagee has the
rights to enforce the security, such as selling it, in case of default in loan
payments.
Debentures • Refers to long term debts or loans made by a borrower. Not issued by
individual persons, rather financially strong companies, or groups such as
corporations and governments. It can be secured by a fixed or floating charge
and can be realized in case of default of payment.
• Stocks and shares can also be used at collateral and can be transferred in the
name of the lender in case of a default in payment.
Deposits • Safe and highly liquid form of security.
• Set-off: is the combining of debit and credit accounts for settlement of a debt.
• Lien: Right of the banker to retain other’s property until a debt is paid.
• Pledge: when lender takes actual possession of assets until the debt is not
paid back.

10
Topic 3 – Banking and Corporates Law

Topic 3 – Banking and Corporates Law

Module 1: Introduction to Business and Banking Law
• Banks Faces a lot of Risks so laws will be used to reduce the risk.
Why Banks need • To ensure TRUST in Banking System
laws? • Banks require standardization.
• Banks deal with people and offer them services
Natural Vs. Legal • Natural Persons: Individuals
Persons • Legal Persons: Companies (also can be called Juridical persons)
• concerning the Central Bank, The Monetary System and Organization of
Central Bank Banking
Law • The Central Bank Law defines the role of the Central Bank of UAE.
• It deals with oversight and licensing of Banks
Commercial
• Concerning Commercial Companies
Companies Law
Civil Code • Concerning Civil Transactions.
Commercial
• Concerning Commercial Transactions
Code
Transaction • Every interaction between the Bank and the persons is called a Transaction.
Customer of a • is a person who has entered into a contract with a banker for opening of an
bank account in his or her name

Module 2: The Banker Customer Relationship

Bank and Customer Relationships

Relationship Bank Customer

Debtor – Creditor Relationship Debtor Creditor

Principal – Agent Relationship Agent Principal

Bailment Bailee Bailor

Lessor and Lessee Lessee Lessor

Pledge Pledgee Pledger

11
Topic 3 – Banking and Corporates Law

Debtor – • The creditor (the customer) must demand payment.

Creditor • The creditor must demand the payment at the right time and place.
Relationship • The creditor must make the demand for payment in a proper manner /form
• The banker acts as an agent of the customer (principal) by:
Principal – Agent 1- Buying and selling securities on his behalf
Relationship 2- Collection of cheques, dividends, bills, or promissory notes on his behalf
3- payment of insurance premium, electricity, and gas bills etc
• An agent is a person who acts on behalf of another person (principal).
• The agent represents his principal.
The Law of
• The agent enters into a contract on behalf of his principal.
Agency
• There is a fiduciary relationship between the agent and the principal -
(relationship based of trust and confidence)
• Is a contract whereby the bailor authorizes another person to take care of his
Bailment property and whereby that other person is obliged to take care of the
property and to return the thing itself
• Banks lease / hire lockers to their customers and give them the right to enjoy
Lessor - Lessee
such property during the specified period against a fixed remuneration.
• Is used when the bank takes actual possession of any movable assets.
Pledge • In case there is default by the borrower, the pledgee has a right to sell the
goods in his possession and adjust its proceeds towards the amount due.
Mortgage • Is a loan in which an immovable property (real estate) is used as collateral.

Module 3: Rights and Duties of a Banker

• Rights:
Are generally written into laws. Based on this, people can very easily
Rights Vs. Duties challenge or defend their rights in the court of law.
• Duties:
Are defined as things that are to be completed or be followed by an individua
• Set-off clause:
Rights of a
is a legal clause that gives a lender the authority to seize a debtor's deposits
Banker
when they default on a loan.
• The Bank will ensure security of the customer’s information.
• Exceptions are:
Duties of a
1- To professional advisers and service providers of permitted parties
Banker
2- To any court or tribunal or regulatory or governmental agency
3- To agencies authorized by customer
Duties of an • Must act in good faith and for the benefit of the principal.
agent • Must make full disclosure of material facts relating to the agency

12
Topic 3 – Banking and Corporates Law

• Must not disclose or misuse confidential information.

• must not make secret profit over and above his agreed remuneration.
• Actual authority:
Authority of an May be express or implied.
agent • Apparent authority:
The kind of authority the agent seems to have as appears the third parties.
• Is a legal document in which a competent adult individual (the principal)
Power of authorizes another competent adult individual to conduct certain businesses
Attorney (POA) on the behalf of the principal.
• A POA becomes void on death of the principal.
• A- General Power of Attorney:
Unlimited in scope, permits the named individual to act as a legal
representative in relation to financial matters until such time as it is revoked.
Types of Power
• B- Specific Power of Attorney:
of Attorney
may restrict the scope of that person’s powers to a single type of contract or a
single transaction.

• A Mandate is a specific authority in writing given by the account holder

(principal) to the bank to allow another person (mandate holder or agent) to
operate the specific account on his behalf.
Bank Mandate
• It can be revoked by the principal by informing the bank.
• In case of a joint account all the parties to that account must authorize the
delegation of power to an agent.
Claim about • In case of denial and lack of legitimate excuse, legal action for the rectification
erroneous
of the current account shall not be heard in regard to entries made one year
entries in
accounts after the date of receipt of the statement of account.

13
Topic 3 – Banking and Corporates Law

Module 4: Classification of Contracts

• Simple contract: may be express or implied.

A- On the basis • Formal contract: requires a special form or method of creation such as formal
of nature of
the contract writing with a special seal attached.

• Express contract: is one in which the agreement is made in words spoken or

B- On the basis written.
of mode of
• Implied contract: is one in which the agreement is made by action and
creation
conduct of the parties
• Bilateral contracts:
Two parties enter into an agreement where both parties promise to do
C- On the basis
something.
of formation
• Unilateral contracts:
- Many Offerees
Offeror Vs. • Offeror: the person who makes the offer (promisor)
Offeree • Offeree: The person to whom the contract was made (Promisee)
Contracts of • Terms and conditions within the contract should be non-negotiable.
Adhesion • The Contract of Adhesion can be concluded if those conditions are satisfied.
Voidable The option of The non-binding
Void contract Valid contract
contract conditionality contract

if there is a
is a contract
Enforceability of condition that
is a contract is a contract which at the
Contracts benefit of the such party may
which cannot which can be option of one
option of cancel it without
be enforced enforced in party can be
conditionality mutual consent
under the law law. held to be
or an order of the
void.
court

• Factors that can result in an agreement becoming defective.

Duress Misrepresentation Mistake
is pressure exerted upon a
is where someone believes
person to coerce that occurs when a person
that a fact was true when
Vitiating factors person to perform an act makes an untrue assertion
in fact it was not.
in a Contracts they ordinarily would not of fact (omission of fact)
(Erroneous belief)
perform

14
Topic 3 – Banking and Corporates Law

By By By impossibility of
By Breach
performance agreement performance
A breach of contract occurs
where a party fails to perform
one or more of his contractual
obligations.

The parties
A- Actual breach: occurs when a
A contract to a contract
Dissolution of a party fails to perform one of his
will normally may decide Death or incapacity
Contract obligations under the contract
be discharged to terminate of one of the
(Discharge) when it is due.
by the contract parties
performance by mutual
B- Anticipatory breach:
agreement
where one of the parties to the
contract declares his intention
of not performing the contract
before the due date of
performance

• Damages: Monetary compensation

• Liquidated damages: sum specified in the contract representing the actual
Remedies for loss.
breach of a • Penalty: sum specified at the time of formation of the contract
Contract • Specific performance: an order by the court to the party in breach to carry
out the promise.
• Injunction: is the order of the court restraining a person from doing some act
Agreement Vs
• Every contract is an agreement, but every agreement need not be a contract.
Contract
• Offer and Acceptance
• The offer:
- may be express or implied.
- may be made orally or in writing.
Essential - when accepted becomes a binding agreement?
elements of a
- Revocation means taking back or withdrawal of an offer.
Contract
• Invitation to an offer is not an offer.
• Acceptance must be certain.
• Acceptance must be unconditional.
•
• Offer: is a proposal that receives in exchange, a consideration
Offer Vs Promise
• Promise: is a proposal that has no consideration

15
Topic 3 – Banking and Corporates Law

1. Offer.
2. Acceptance.
3. Intention to create legal relationship
4. Consideration (Obligations)
Essential 5. Free and genuine consent
Element of a
6. Capacity of the parties
Contract
7. Lawful purpose
8. Certainty of meaning
9.Possibility of performance
10.Form & Perfection

Module 5: UAE Commercial Companies Law

1- Companies in oil & gas industry

Business entities 2- Foreign banks – no local sponsor required but registration required
excluded from 3- Companies in any of the Free Zones
provisions of
4- Any other company excluded from the provisions of the CCL by a
New CCL
resolution of the Cabinet Ministers
• Joint Liability Company:
- Two or more partners who are natural persons.
- The management of the company shall be undertaken by all the
partners.
• Simple Commandite Company:
- Consists of one or more joint partners
- Silent partners are allowed but shall not have the capacity of a trader.
• Limited Liability Company:
Types of - Consists of at least 2 partners to a maximum of 50 partners.
Companies
• Private Joint Stock Company:
under CCL
- Minimum of 2 shareholders Maximum - 200 shareholders
• Public Joint Stock Company:
- The shares are freely transferable provided 51% shares are always
held by UAE nationals.
• Holding Company:
is a Joint Stock Company or a Limited Liability Company that establishes
subsidiaries inside the State or abroad.
• Investment Company
• Free Zone Establishment:
Free Trade
- Limited Liability Company formed by only one shareholder, either
Zones
individual or non-individual

16
Topic 3 – Banking and Corporates Law

• Free Zone Company:

- Minimum of 2 and maximum of 5 founders who can be individuals
or non-individuals or a combination of both.
Rate of National
• at least 51% of the share capital of the company.
Contribution

17
Topic 4 – Bank Risk Management

Topic 4 – Bank Risk Management

Module 1
• Cash Reserve Ratio (CRR) → Controls Credit Creation
CBUAE • Credit Regulations → Mitigates Credit Risk
Regulations to • Capital Adequacy Regulations → Reduces Leverage
protect • BASEL 3 Liquidity Risk Regulations → Mitigates Liquidity Risk
Depositors • Credit Deposit ratio → Mitigates Liquidity Risk
• AML/CFT Regulations → Prevents Financial Crime
What is The
• Is the chance of a loss or the uncertainty of loss or negative outcomes
Risk?
Expected loss • Expected loss: The losses that we might anticipate.
and unexpected
• Unexpected loss: Is the risk, the amount that deviates from expected loss
loss

Financial Risks

Market Risk Liquidity Risk Credit Risk Interest Rate Risk

chance that the
Chance of loss to
fluctuations in Bank may not be The Chance that
the Bank due to
Financial Market able to be able to borrowers may not
fluctuations in
prices meet its repay the loans
interest rates
commitments

Non-Financial Risks

Risks That Banks Operational Compliance Reputational Strategic Business

Legal Risk
face Risk Risk Risk Risk Risk
the potential
- Human arises from of negative The
Errors the Chance the potential publicity chance of
Risks
- System of a Loss to that regarding an not being
associated
Errors the Bank in unenforceable institution's able to
with a
- Process the form of contracts, business attract
bank’s
Errors fines or lawsuits, or practices customers
strategy
- External sanctions adverse that can and
Events judgments affect its business
reputation

Module 2

18
Topic 4 – Bank Risk Management

• The level of risks that the bank is willing to assume, the unexpected losses
Risk Appetite
that are willing to expose themselves to is called risk appetite.
Risk • Is the process by which a Bank ensures that the level risk exposures of the
Management Bank is within its risk appetite
1- Risk Identification:
Identify the nature and type of risks.
2- Risk Assessment:
Consists of two stages: Risk measurement & Risk Appetite
Risk measurement:
is a methodology to estimate the quantum of risk exposure or unexpected
loss faced by the Bank.
Risk Appetite:
is the decision of the Top Management on how much of a particular risk can
be accepted by the Bank.

3- Risk Treatment:
The risk treatment methods normally adopted are abbreviated as TARA.

T A R A
Transfer of Risk Avoidance Reduction of risk Acceptance of Risk
Risk of Risk
Management
Risk is They are avoided Risk Reduction or Risk Risks that have low
Process
transferred Mitigation is resorted probability of
through purchase to, to bring risk occurrence and low
of Insurance exposures up to the loss impact can be
policies level of risk appetite. accepted without
mitigation
Existing risk = Inherent
Risk

Risks remaining after

Inherent risk is
mitigated is called
Residual Risk

4- Risk Monitoring:
To track identified risks through Key Risk Indicators ( KRIs)-whether they have
increased or reduced

Module 3:

19
Topic 4 – Bank Risk Management

Credit Risk
• Default Risk:
Chance that the borrower may not repay loan.
• Concentration Risk:
Credit Risk
risk arising out of too much credit exposure to one borrower.
• Migration Risk:
When credit risk of the borrower worsens than the earlier level
• Qualitative: Credit rating is an assessment of the creditworthiness of a
Measurement of
borrower-Credit rating agency.
Risk
• Quantitative: Risk weighted assets (RWA) = Loan Amount x Risk Weight ( RW)
• CREDIT POLICY
• LOAN INTEREST RATE
Credit Risk
• LIMIT ON LOAN AMOUNT
Mitigation
• LOAN COVENANTS
• COLLATERAL SECURITY
• Loan reviews
Credit Risk
• On-site visits
Monitoring
• Key Risk Indicators-External & internal
Market Risk
✓ Foreign Exchange Risk
Market Risk ✓ Equity Risk
arises from ✓ Commodities Risk
✓ Interest Rate Risk
Treasury
Is the only Department that can originate Market Risk
Department
• is measured by Long Position or short position, whichever is larger.
Measurement • Long Position exists when you buy an asset.
• Short Position exists when you sell.
• Internal Controls
Mitigation of • Segregation into Front Office, Mid Office and Back Office
Risk • Prohibition of off market trading
• Recording telephone conversations
• Mark-to-Market: Trading positions are evaluated at day’s closing prices to
Monitoring estimate daily profit and loss.
• Periodic Evaluation of Trader’s performance.
Liquidity Risk
• Funding Liquidity Risk: Inability to meet commitments-Lack of funds.
Identification of
• Market liquidity Risk: Inability to sell investments for generating funds.
Risk
• Options Risk: Risk of deposits being withdrawn before their maturity dates.
Measurement of
• Liquidity Gap Statement or Maturity Mismatch Monitor-For each period
Risk

20
Topic 4 – Bank Risk Management

• Net inflow or outflow is the Liquidity gap.

• More inflows than outflows = Positive gap
• More outflows than inflow= Negative gaps
• Diversification of Deposit Base
• Liquidity gap limits
Mitigating
• Provision of Liquid assets
Liquidity Risk
• Liquidity Contingency plan
• Capital Adequacy

Module 4:

Operational Risk
• The risk of loss resulting from inadequate or failed internal processes, people
Identification
and systems, or from external events
• Qualitative: Number of branches/personnel/customers/Borrowers
Measurement
• Quantitative: Actual Reported loss or near misses
• Internal Fraud:
Unauthorized Activity, Theft and Fraud by staff
• External Fraud:
Theft and fraud, Systems Security breach by outsiders
• Employment Practices & Workplace Safety (EP&WS):
Employee Relations, Safe Environment, Diversity and Discrimination
• Client, Products and Business Practices:
Operational Risk
Violation of guidelines, Breach of privacy, Misuse of confidential information,
Types
Money laundering, Product defects, Wrong Advice to customers
• Damage to Physical Assets:
Natural and Man-made disasters
• Business disruption and system failures:
Hardware, Software, Telecommunications, Outage
• Execution, delivery and process management:
Miscommunication, errors, Missed deadline, Delivery failure, Wrong reporting
• application of “Internal Controls”
Risk Mitigations • Internal controls are policies, procedures and rules implemented by a
company
Objectives of • Protect assets.
Internal Controls • Ensure records are accurate.
under COSO • Promote operational efficiency.

21
Topic 4 – Bank Risk Management

• Encourage adherence to policies, rules, regulations, and laws.

• Directive – explain how to do something.
• Preventative – built to prevent an error from occurring.
Internal Controls
• Detective – To detect and error.
tools
• Corrective – used with detective controls to recover from the consequences
of undesired events.
Manual Controls • Manual Controls-Require action to be taken by employees.
Vs. Automated • Automated control-Built into network infrastructure and software
Controls applications such as passwords
• Divide responsibilities between different employees so one individual doesn’t
Segregation of
control all aspects of a transaction.
Duties
• Reduce the opportunity for an employee to commit and conceal errors
• Oversight- Board and Top Management
Three Lines of • First line of Defense → Operations team
Defense • Second Line of Defense → Risk Management, Internal Controls, Compliance
• Third Line of Defense → Internal Audit
Security of • Restrict access to assets-Physical and logical controls.
Assets • Perform physical inventory of assets
Business • Plans to quickly re-start the business due to stoppages caused by External
Continuity Plans
Events
(BCP)

Module 5:
C-Capital Adequacy
A-Asset Quality
M-Management quality
CAMELS
E-Earnings
L-Liquidity
S-Sensitivity to Market Risk
• Concealment: it is an offence for a person to conceal or disguise criminal
property
Money • Arrangements: assistance given to a money launderer is an offence
Laundering • Acquisition: use and possession – `acquiring, using or having possession of
Crimes that
criminal property is an offence
bankers are
exposed to • Failure to report: not reporting a suspicion on account of a red flag is an
offence- Concealment is with knowledge, failure to report is about suspicion.
• Tipping off: Informing the customer that he is under suspicion

22
Topic 5 – Trade Finance

Topic 5 – Trade Finance

Module 1: Introduction to Trade Finance
• The basic Economic concept of buying and selling is called trade.
What is Trade
• refers to the exchange of goods and services

International International Trade Domestic Trade

Trade Vs.
Buying and selling of goods & services Buying and selling of goods & services
Domestic
outside one’s own country. within the country
Trade

Benefits of • Increase the horizon of available products.

International • promotes economic efficiency.
Trade • Fosters political cooperation among nations, promoting peace and stability.
• Refers to financial instruments and products that are used to facilitate
What is Trade international trade and commerce.
Finance • It refers to the funds that help fill the payment gap created between the supply
of the goods and the receipt of the same by customers.
Benefits of • Exporters face payment risk while importers face supply risk
Trade Finance • Trade finance helps in reducing these risks

Contract between the Seller and Buyer agreeing to the sale/

Sales Contract
purchase of goods and the terms of the sale
It is a legal document between the supplier and the
Commercial Invoice customer that clearly describes' the sold goods, and the
Documents amount due
Exchanged This is a demand for payment made by Seller on the buyer
Bill of Exchange
between Buyer to pay immediately or at a future date
and Seller This is the proof that the goods have been shipped by
Bill of Lading
seller.
It protects and covers goods for loss, damage, or delay.
Cargo Insurance
Without cargo insurance, all cargo is handled, stored, and
Policy
carried at the owner’s risk

23
Topic 5 – Trade Finance

Documentary
Advance Payments Letter of Credit Open Account
Collections
• Secure for Exporter
• Equally Secure for • Secure for Exporter • Riskier for Exporter
• Riskier for Importer
Both • Riskier for Importer • Secure for Importer

Seller may not ship

Seller may receive Seller may not Seller is exposed to
goods even after
payment but may make a shipment or payment risk it’s the
receiving
not ship goods may supply sub- Riskiest mode of
Methods of documentary
subsequently standard goods settlement for Seller
Settlement in credit
International Buyer may receive Documents not Goods may be Safest mode of
Trade substandard good accepted by Buyer substandard settlement for buyer
Documents may
not conform to the
Only strong buyers
Used only by the terms of
Seller has to find and when goods are
strongest exporters Documentary
another buyer or not in much demand
or when goods are credit and Bank
call back the goods can use this mode of
in great demand may not honor
settlement be used
documentary
credit

Module 2: Documentary Collection

• occurs when a seller instructs his bank to forward documents related to the
Documentary
exporting of goods or services to the buyer’s bank, then requesting them to
Collection (DC)
present these documents to the buyer for their payment.
Documents against Documents against Documents against Acceptance pour
payment (D/P) acceptance (D/A) a letter of AVAL
undertaking
the collecting bank the collecting bank The Buyer gives a Like the D/A.
releases the is permitted to letter of Acceptance will be
documents to the release the undertaking to pay guaranteed by the
Types of DC buyer only upon documents to the at a future date acceptor’s Bank.
full and immediate buyer against (promise to pay), Aval is the
cash payment acceptance when, the Bank will guarantee given by
(signing) of a hand over the Bank
usance bill of documents
exchange.

24
Topic 5 – Trade Finance

Module 3: Documentary Credits

• A Documentary Credit or a Letter of Credit (LC) is an undertaking by a bank to

What are make payment, provided the terms of the LC are met.
Documentary • It is an irrevocable assurance given by the Buyer’s Bank at the request of the
Credits buyer, to the Seller, to pay, if the seller ships the goods and submits documents
evidencing shipment.

Issuing Bank Beneficiary Confirming Bank Nominated bank

Bank that makes an is the exporter or guarantees is another Bank,
Parties to a assurance of seller in whose payment of LC in nominated by the
Documentary
payment at the favor LC is issued case the Issuing Issuing Bank, to pay
Credit
request of the Bank fails to make the LC.
applicant (Buyer) payment

• LC is usually advised through an Advising Bank

• Advising Bank earns a fee but is not liable for LC payment.
Issuance of LC • Confirming Bank is liable to the Beneficiary for payment of LC.
• Confirming Bank or Issuing Bank must pay if documents are in order.
Nominated Bank may pay.
Rules for
Documentary • Documentary Credits are governed by UCP 600
Credits
• Bill of Exchange
• Commercial Invoice
• Packing List
MAJOR • Certificate of Origin
DOCUMENTS in
• Inspection Certificate
LC
• Cargo Insurance Policy
• Transport Documents
• Consular Invoice
• An ocean bill of lading serves both as:
Transport
❑ a receipt for the cargo
Documents
❑ as a contract for transportation between the shipper and the carrier.
• Autonomy or Independence: The assurance given by Issuing Bank is
The three irrevocable.
fundamental
• Doctrine of strict compliance: The exporter must respect the written terms “to
principles of
letters of credit the letter”.
• LC deals in documents not goods

25
Topic 5 – Trade Finance

Back-to-Back Standby LC of
Red Clause LC Transferable LC Revolving LC
LC Credit
letter of credit allows an Single L/C When a LC Is a special kind
with advance intermediary that covers prohibits of LC that
payment), the ( First multiple- transferability, guarantees
seller can Beneficiary) to shipments the payment to
request an transfer a letter for a period intermediary Beneficiary on
advance for an of credit to a (say one uses Back- non-payment by
agreed amount supplier (Second year) toBack LC to Applicant
from the Beneficiary), in transfer the LC
correspondent whole or in part. to supplier
bank of the
Types of LC
Issuing Bank
The LC cannot Instead of The SBLC is payment
be transferred arranging a Intermediary on non-
by Second new L/C for asks his Bank performance by
beneficiaries each to issue a fresh applicant.
separate new LC in place Issued under
shipment, of the Primary UCP 600 or ISP
the buyer LC 98
establishes a
L/C that
revolves
(renews)

Module 4: Incoterms and Bank Guarantees

• These are internationally accepted commercial terms defining the respective

Incoterms roles and responsibilities (including costs) of the buyer and seller in the
arrangement of transportation and other obligations
Delivery in Seller’s country

• EXW (EX-WORKS):
the seller delivers when it places the goods at the disposal of the buyer at the
seller’s premises. The seller has no other responsibilities after this.
Rules for Any
Mode of
• FCA (FREE CARRIER):
Transport
the seller delivers the goods to the carrier, or another person nominated by
the buyer at the seller’s premises, or another named place.

26
Topic 5 – Trade Finance

• CPT (CARRIAGE PAID TO):

that the seller delivers the goods to the carrier, or another person nominated
by the seller at an agreed place, and that the seller must contract for and pay
the costs of carriage necessary to bring the goods to the named place of
destination.

• CIP (CARRIAGE AND INSURANCE PAID TO)

Delivery in Buyer’s country
• DAP (DELIVERED AT PLACE):
the seller delivers the goods to the buyer ready for unloading at the named
place of destination. The seller bears all risks involved in bringing the goods to
the named place.

Rules for Any • DPU (DELIVERED AT PLACE UNLOADED):

Mode of
the seller delivers the goods to the Buyer at the place of destination and also
Transport
unloads the consignment.

• DDP (DELIVERED DUTY PAID):

the seller delivers the goods to the Buyer, cleared for import, ready for
unloading at the named place of destination.
• FAS (FREE ALONGSIDE SHIP):
the seller delivers when the goods are placed alongside the vessel (e.g., on a
quay or a barge) nominated by the buyer at the named port of shipment.
After that all risks and costs pass on to Buyer.

• FOB (FREE ON BOARD):

the seller delivers the goods on board the vessel nominated by the buyer at
the named port of shipment. After that risk passes on to Buyer
Rules for sea
and inland
waterway • CFR (COST AND FREIGHT):
transport: the seller delivers the goods on board the vessel nominated by buyer. The
seller must contract for and pay the costs and freight necessary to bring the
goods to the named port of destination.

• CIF COST INSURANCE AND FREIGHT:

the seller delivers the goods on board the vessel nominated by Buyer. The
seller must contract for and pay the costs and freight and insurance,
necessary to bring the goods to the named port of destination
• is an irrevocable undertaking given by the Bank (Guarantor) at the request of
Bank
the Applicant to pay a certain some of money to the Beneficiary on the non-
Guarantees
performance of the Applicant.

27
Topic 5 – Trade Finance

• Applicant: one who requests the Bank to issue a Guarantee.

Parties to a Bank
• Guarantor: or Issuing bank.
Guarantee
• Beneficiary: Party in whose Favor guarantee is issued.
• Bid Bond Guarantee:
Issued in lieu of tender fee for bidding on projects.
• Performance Guarantee:
issued to cover for non-performance of applicant.
• Advance Payment Guarantee:
issued as security for advance payment given by beneficiary to Applicant.
• Retention Guarantee:
Beneficiary usually retains a certain portion of the final bill to protect against
defects.
Types
• Shipping Guarantee:
Guarantee to ships’ captain for release of goods without Bill of lading
• Payment Guarantee:
A payment guarantee ensures payment to the exporter if the importer does
not fulfil its payment obligations.
• Financial Guarantee:
ensure timely payment of financial dues.
• Maintenance Guarantee:
Guarantee to ensure that applicant will perform Maintenance obligations

28
Topic 6 – Treasury & Investment

Topic 6 – Treasury & Investment

Module 6.1 – Introduction to Treasury & Investment

Investments • Current commitment of dollars for a period of time in order to derive larger
future payments that will compensate the investors for.
Types of investments
• Real Investments – Tangible Assets
• Financial Investments – Paper or electronic form
There are two types of investors:
• Institutional Investor – Banks are also institutional investors. They invest in
financial assets made by the Treasury department.
• Retail Investor – individuals and nonprofessional investors who buy and sell
securities.
Bank Treasury • Treasury of the Bank is the profit centre which trades in financial assets(foreign
Department exchange and derivatives), lending and borrowing funds (all currencies), and
buying and selling (financial assets to customers).
• Treasury has three departments: Treasury Sales, Investment Management and
Investment Advisors
• There are different types of market risks: foreign exchange risk, equity risk,
commodity risks, interest rate risks.

Module 6.2 – Financial Markets

Financial • Any marketplace where buyers and sellers participate in trade of assets such
Markets as equities, bonds, currencies and derivatives.
Types are:
• Primary Market – markets where new financial instruments are sold for first
time.
• Secondary Markets – Called stock exchanges and investors purchase
securities from other investors.
• Exchange markets – On exchange is physical marketplace where brokers
and dealers handle trades for their customers. Settlement is centralized. Over-
the-counter (OTC) is developed among dealers who communicate with each
other via telephone and electronic trading systems.
• Financial intermediaries includes, Bank which raises funds by borrowing,
Investment companies manage the money, and investment bankers handle the
sale of new securities.
Other types of financial markets:
• Foreign Currency: Allows currencies to be exchanged.
• EURO Dollar Market: US Dollar deposits placed in bank outside USA are
called Euro Dollars
• Euro Bond Market – Debt instrument denominated in a currency other than
the home currency.

29
Topic 6 – Treasury & Investment

• International Stock Markets – Companies sell shares in international stock

markets.

Module 6.3 – Money Markets

Money Markets • Market for short-term lending and borrowing or trading of short-term debt
instruments.
• Maturities are less than 1 year.
• Instruments include:
• Treasury Bills – Debt obligation backed by the US government within a 1-year
maturity.
• Commercial paper – short-term debt instrument issued by a corporation,
typically for working capital and meeting short-term liabilities.
• Repos – A repurchase agreement is a short-term borrowing for dealers in
government securities.
• Foreign exchange – interbank lending and borrowing in dollars outside the
home country is called Euro Dollars.

• Direct investments – investors directly buy shares and bonds.

• Indirect investments – Investors make investments through mutual funds or
companies.
Day Count • The day count convention regulates how the parties are to calculate the
Convention amount of interest payable at the end of each interest or other period.
• Commonly expressed as fraction. Numerator is the convention for the number
of days in the period. Denominator is the convention for the number of days in
the year (often 360 or 365).
• Euro Dollars interbank market operates as actual/360, whereas Pound Sterling
interbank convention is actual/365.
• AED works on actual/360 rule.

Module 6.4 – Capital Markets

Capital Markets • A market for trading long term assets or raising capital. Equities & Bonds are
typical financial assets.
• Primary Markets: new bonds and shares are issued.
• Secondary Markets: Trade happens through exchanges. Example: NYSE,
LSE, DFM, ADX.
Equity Vs. Debt • Equity – Ordinary shares or common stocks. Fractional owners of the
company that issue the equities. Returns come from dividends and capital
gains.
• Bonds – Debt instrument where the issuer promises to pay the investor a
periodic interest payment and the principal at a specified date in the future.
Terminology • Par Value/ Face Value – Principal amount of bond which is repaid on maturity.
with Bonds • Tenor/maturity period – period after which bond is repaid.

30
Topic 6 – Treasury & Investment

• Coupon Payment – Periodic interest amount that is paid.

• Coupon Rate – Interest rate at which coupon is paid.
• Price – The price at which the bond is bought or sold.
Yield To Maturity (YTM) – Expected return on the bond if held till maturity. It is an
interest rate.
• YTM higher than the Coupon rate – Price of the bond will be at discount to
par value.
• YTM is lower than Coupon rate – Price of bond will be at a premium to par
value.
Types of Bonds • Government Bonds – Treasury bills, notes, and bonds.
• Corporate Bonds – Issued by private companies.
• Municipal bonds – Debt of state and local governments. Interest received is
tax free at federal level.
• Junk Bonds – Issued by private companies with poor credit rating.
• Coupon Bonds – Bond that pay interest periodically.
• Zero Coupon Bonds – Bonds that do not pay coupons.
• Floating rate bonds – Bonds whose coupon payments vary according to a
benchmark like LIBOR.

Module 6.5 – Derivatives

Derivatives • Financial contracts that are derived from underlying assets like equities, bonds,
foreign exchange and money market funds and commodities.
• Right to buy or sell an underlying asset in the future with or without obligation
represents such derivatives.
• Hedging – This technique is employees by portfolio managers to reduce risk.
• Speculation – Involves assuming additional risk (betting) in an effort to make,
or increase, profits.
Types of • Forward Contract – one party agrees to buy, other to sell, a physical asset or
Derivatives security at a specified price on a specified date in future. OTC traded.
• Future contract – It is a forward contract that is standardized, and exchange
traded. They are traded in secondary market.
• Option – Provides its buyer the right to enter into a transaction involving an
underlying asset at a future date. Call option gives the right to buy the asset at
a predetermined price. Put option gives the right to sell the asset at a
predetermined price. American options can be exercise on or before the due
date whereas European options can be exercised only on the due date.
• Swap – Series of forward contracts. One party agrees to pay fixed interest rate
and agrees to receive floating interest rate in exchange. Eg: Fixed rate vs
LIBOR
• Forward Rate Agreement – It allows a company to fix the interest cost of a
specific amount of borrowing, at a specific rate, from a specific time in the
future, for a specific period. So, when companies expect interest rates to rise,
buy FRA to be protected.

31