Most banks skip Fund Transfer Pricing policy

Most of the country's banks are yet to have any Fund Transfer Pricing (FTP) policy despite growing importance of the same in reducing the risk of liquidity shortfall, a recent industry-wide survey reveals.

Whereas almost all banks in the developed economies have a sound and effective FTP policy, only 42 per cent of banks in Bangladesh do possess an FTP policy, says the study conducted by the Bangladesh Institute of Bank Management (BIBM).

More alarmingly, it was also found that nearly 10 per cent treasuries of the banking industry in Bangladesh have no good idea about the FTP, the BIBM study concluded based on the responses from 33 banks of the country.

Meanwhile, only 33 per cent banks of Bangladesh are using dedicated software for fund transfer pricing whereas 67 per cent of them are using either off-line methods or core banking software for carrying out their FTP activities, the research has found.

The findings of the study were shared during a seminar on Sustainability Reporting Practices and Fund Transfer Pricing of Commercial Banks held in the city on Sunday.

"The research findings show that only 4 per cent of the banks use the Fund Transfer Pricing curve and online pricing calculator whereas 96 per cent banks do not use it", said Md Alamgir, an associate professor of BIBM.

"At the same time, around 14 per cent of the banks perform ex-ante calculation of contribution of a certain product by using FTP whereas the remaining 86 per cent of the banks do not follow the same", he added.

Mr Alamgir along with Md Abdul Halim of BIBM and Nahid Rahman of Bangladesh Bank (BB) conducted the study.

FTP, in its simplest form, is the process through which the treasury of a bank aggregates all funds centrally and then distributes them throughout all business units and branches.

Also known as IBT transaction, FTP remains an under-researched area in Bangladesh, although it is widely understood that banks in the country commonly use FTP.

The aforementioned BIBM research is one of the first studies on the FTP issue of banks in Bangladesh which found that 61 per cent of the banks are using the pooled FTP whereas only 9 per cent of them are using matched maturity. Meanwhile, 19 per cent of them use other types of FTP.

Deputy governor of Bangladesh Bank Abu Hena Mohd. Razee Hassan, who attended the seminar as the chief guest, said in order to reduce the risk of a liquidity shortfall, banks are increasingly looking to understand their liquidity exposure at product level, branch level and to steer their business into a more sound liquidity practice.

"This can be truly achieved through an internal pricing system or Fund Transfer Pricing", he added.

Meanwhile, the BIBM research findings also show that 62 per cent of the banks in the country accomplish their FTP operations manually whereas 38 per cent perform their FTP activities online.

It was also found that more or less, 85 per cent of the banks determine their transfer price with the help of a committee called ALCO while 15 per cent of them do not have any committee to determine it.

At the same time, only 23 per cent of the banks periodically disseminate data to business units about their contribution whereas the remaining 76 per cent do not.

"It is actually very difficult to have an effective FTP mechanism within the branch banking model that is predominant in the country. Rather, a more centralized system is more suitable for the growth of such FTP", said Ahmed Kamal Khan Chowdhury, Managing Director of Prime Bank Limited.

The BIBM research, in its recommendation, has called for ideal policy framework for Fund Transfer Pricing. These policies should provide a means of better resource allocation, the researchers said.

The policy framework, among other things, should ensure that internal fund transfer pricing should not lead to arbitrary gains or losses and the returns should be predictable, the study said.

The interest rate should be taken away from the business units and branches and should rather be in a central pool either in the treasury or in head office. It should also be managed by the treasury and ALCO, it added.

Executive Director of Bangladesh Bank Md Shafiqul Islam, Commissioner of Bangladesh Securities and Exchange Commission Dr Swapan Kumar Bala and Director General, BIBM Dr Toufic Ahmad Choudhury also spoke on the occasion.

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