Master of Business Administration Executive

Faculty / School

School of Business Studies (SBS)

Year of Award



Dr. Fawad Ahmad. Assistant Professor, Department of Finance

Project Type

MBA Executive Research Project

Access Type

Restricted Access

Executive Summary

Banks consider the relevant costs and risks associated with their operations when deciding the interest rates on loans and deposits. Funds Transfer Pricing (FTP) is a crucial element in banks' methodology for determining these interest rates. In Funds Transfer Pricing, the treasury department, or a Central Funding Unit (CFU) borrows funds obtained by the deposit raising units (one segment of a bank) and lends the funds onwards to loan generating units (another segment of the bank). In doing so, the CFU remunerates the deposit raising unit and charges a cost to the loan generating units. The rate at which CFU remunerates, and charges cost is called the FTP rate. FTP is an important tool for banks' performance management as it provides required control to senior management and allows them to steer financial performance which is key for survival of banks in the competitive Pakistani banking industry. FTP is also an excellent tool for performance and risk management but its application, limitations, and suitability of approaches in the Pakistani banking industry have not been studied. Therefore, the aim of our study is to investigate the FTP approaches used by banks in Pakistan and assess their suitability in risk management and performance management of their business units (Tumasyan, 2012). The objective of our study is to explore approaches used by banks in Pakistan for Fund Transfer Pricing, how suitable is the bank’s FTP approach (Interviewee perspective) in risk management and performance management of their business units and what limitations or challenges are banks facing in implementing the Match Maturity Approach. Our research methodology consists of qualitative approaches. To identify people with relevant experience we used convenience sampling method. During our discussion sessions, we used snowballing sampling technique to further identify appropriate candidates with expertise of FTP. Our sample size includes 12 interviewees from 6 banks in Pakistan. For our exploratory nature of research and theoretical saturation around the topic, this sample size is deemed suitable (Boddy, 2016). Our interviews were semi structured. We developed a structured questionnaire after studying academic research work on FTP. Among the 6 banks interviewed all banks were using an FTP approach. 2 banks were using the Multiple Pool Approach, 2 banks were using the Matched Maturity Approach and 2 banks were using Hybrid Approach. It was noted through our research that domestic banks are using less advanced approaches due to the simplicity in understanding and implementation. In comparison, multinational banks in Pakistan are using more advanced FTP approaches mainly due to inheriting the same from their head office operations and multinational banks being generally more advanced in banking practices. For FTP approach to be effective for risk and performance management, current market rates with matching tenors should be used. Based on our industry research, we have observed that the Multiple pool approach is more suitable for banks which have short duration assets and liabilities. Short-duration assets and liabilities are those which have tenor less than one year. Banks that have complex operations and longer duration balance sheets should use the Matched Maturity Approach. This is most suitable for banks that are involved in long-term lending and financing. This is also in line with State Bank of Pakistan guidelines. To immunize the business units which are not well equipped to manage interest rate risk, banks should move toward matched maturity FTP approach to confine the interest rate risk within the CFU. Banks in Pakistan are not using FTP system proactively for strategy implementation. This can be done by alignment of FTP rates with banks’ strategic objectives. Further to closely align FTP rates and FTP pricing formula with business objectives, FTP pricing should be regularly reviewed in senior management meetings. Those banks in Pakistan industry who have started moving toward advanced approaches like Matched Maturity have started moving in step wise manner. Step wise manner that was observed during our research means banks are transitioning the FTP approach product by product. This is primarily because of lack of availability of sophisticated banking systems. Banks were also facing data quality issues during their transition stage. Another major challenge that banks experienced in Pakistan was installation of sophisticated banking system that can provide Matched Maturity Approach based FTP. Moving toward the advanced FTP approach needs considerable resources. Banks that are working on this project are treating it as a full-scale project that requires banking experts with specialization in accounting, risk management, treasury, data sciences and banking experience. The conclusion we derived from this research work are that Multinational banks in Pakistan are more advanced in their FTP approaches than local banks. Some large banks are in transition mode toward advanced FTP approaches and have started to deploy resources for these projects. FTP process is currently not being used to effectively manage interest rate risk, business unit-wise performance and balance sheet growth due to rudimentary FTP approaches and pricing techniques. This is evident from the disconnect between product pricing policies and FTP policy. Moving toward the advanced FTP approach needs considerable resources. This project requires banking experts with specialization in accounting, risk management, treasury, data sciences and banking experience. This project also requires budgetary resources due to heavy reliance on sophisticated banking system tools. Project also requires human resources due to requirement of data cleansing for migration to a new system. Awareness needs to be created among banks about importance and potential of FTP process for risk and performance management by SBP or Pakistan Banking Association.



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