Professional Documents
Culture Documents
K. G. Balachander
V. Santha
Bala Shanmugam
K. G. Balachander and V. Santha are Lecturers, Center for Multimedia Banking, Mul-
timedia University, 63100, Cyberjaya, Malaysia.
Bala Shanmugam is Director, Banking and Finance Research Unit, Monash Univer-
sity Malaysian Campus, No. 2, Jalan Kolej, Bandar Sunway, 46150 Petaling Jaya,
Selangor, Malaysia (Email: bala.shanmugam@busit.monash.edu.my).
Address correspondence to Bala Shanmugam.
Journal of Asia-Pacific Business, Vol. 4(3) 2002
http://www.haworthpressinc.com/store/product.asp?sku=J098
Ó 2002 by The Haworth Press, Inc. All rights reserved. 69
70 JOURNAL OF ASIA-PACIFIC BUSINESS
INTRODUCTION
Malaysia is still far away from the notions of a cashless society. Conse-
quently physical cash becomes the most fundamental resource necessary
for the successful and continued operations of banks. However, as pointed
out by Daniel and Baxter (1999), most banks in Malaysia and in Asia have
paid very little consideration to cash management. Thus, while banks
were willing to spend millions of dollars for the latest technology and
business process reengineering to augment revenues and minimize costs,
they have obviously turned a blind eye toward issues relating to minimiz-
ing costs of holding cash (vault).
The general practice among banks in Malaysia is for the head office of
each bank to specify a blanket vault cash management policy, which does
not take into account factors such as location of the branches and
day-to-day variations in the supply and demand for cash into account
(Hamid, 1998). Thus, there is great likelihood that the vault cash manage-
ment policy of these banks may be far from optimal and hence wasteful.
This practice would, no doubt, affect the profitability of banks since the
degree to which banks optimize their vault cash holding has revenue and
cost implications.
This study is basically contemporary in nature rather than futuristic and
hence focuses in analyzing seasonal variations and trends in the daily de-
mand for and supply of cash at commercial banks. To this extent, it must
be appreciated from the beginning that one of the greatest stumbling
blocks to research of this nature is the availability of data.
This study is thus based on data from a small sample of ten bank
branches located in the Klang Valley–a region not atypical of urban Ma-
laysia. The paper first provides a discussion of the Malaysian banks’ cash
management issues. Second, trends in the demand for cash at Malaysian
banks are analyzed. Third, the seasonal variations in the withdrawals and
deposits of these banks are analyzed. The final section presents the con-
clusions and recommendations.
line of defense against deposit withdrawals and the first source of funds to
turn to when a customer comes up with an unexpected request for cash
(Glaze, 1999).
In the banking business, availability of cash is an extremely important
aspect of customer service. Inadequate cash availability can lead to cus-
tomer dissatisfaction and hence loss of customer goodwill (De La Rue,
1999). There would also be the costs of inter-bank borrowings to meet the
banks’ liquidity needs. In the case of automated teller machines (ATMs),
there would also be the loss of interchange fees. Thus, inadequate cash
availability in a bank would not only have implications for bank costs but
also bank revenues. However, though a 100% availability would imply
never running out of cash, the cost of maintaining such high levels of cash
can be prohibitive. In short, there is a trade-off between liquidity and prof-
itability for banks.
The demand for cash at any bank or branch or even service center
would be unique depending on its geographical location and customer
base (GMT, 1999). Furthermore, the demand patterns may be quite erratic
due to trends, seasonal effects, structural shifts, public holidays and spe-
cial events. Thus, there is a need for dynamic demand forecasting that
takes these factors into consideration in an effort to determine the optimal
cash to be held at each bank on a daily basis. In this context, a general rule
of thumb blanket policy for all banks would certainly be inappropriate
(Tan, 1998).
Allen (1998) examined the daily vault cash holdings in the Eighth Dis-
trict banks in the United States to determine whether the observed
amounts of vault cash held by these banks are consistent with the funda-
mental assumptions of a one-sided (S,s) inventory decision rule. The (S,s)
model first developed by Scarf (1960) simply represents an upper limit of
vault cash (S) and a lower limit or replenishment signal (s) which are de-
termined based on the intra-day profile of withdrawals and deposits as
well as the costs associated with shipments and the opportunity costs of
stocking out. Allen’s (1998) findings based on 1997 data appeared to sup-
port the idea that banks in the Eighth District (U.S.) have not been manag-
ing vault cash holdings very closely. Within the context of the (S,s)
inventory model, the variance of net withdrawals and/or the penalty asso-
ciated with running out would have to be very high to justify the levels of
vault cash balances held by these banks.
When deciding how much cash to order or to clear, a model which is cus-
tomized for each location and takes account of information such as cost fac-
tors, carrier parameters, demand patterns and other physical constraints needs
72 JOURNAL OF ASIA-PACIFIC BUSINESS
Allen (1998) had used the ratio of commercial bank vault cash to de-
mand deposits as a proxy for the depositors’ or public demand for cash.
High values of this ratio may indicate either high depositors’ demand for
currency or a conservative cash management policy on the part of the
commercial banks. On the other hand, low values of this ratio may either
indicate low depositors’ demand for currency or a more prudent cash man-
agement policy on the part of commercial banks.
As can be seen from Table 1 and subsequently illustrated in Figure 1,
the vault cash of Malaysian commercial banks as a percentage of demand
deposits appears to indicate a downward trend. This may indicate a de-
cline in the demand for cash or currency on the part of the Malaysian pub-
lic or an increasingly prudent cash holding policy on the part of
commercial banks. The former would appear to be a more plausible expla-
nation, in view of the developments which have been taking place in the
Malaysian economy. Research by Budhiraja and Latiff (1998) stated the
growing importance of information technology in the banking industry
has helped to reduce the need for carrying much cash and for banks to
maintain a large vault space. Technological advancements and innova-
tions in the area of information technology and telecommunications are
reshaping consumer behaviour and payment systems, which tend to devi-
Balachander, Santha, and Shanmugam 73
Year Cash at Demand Vault Cash Year Cash at Demand Vault Cash
Commercial Deposits as a Commercial Deposits as a
Banks (RM (RM Percentage Banks (RM (RM Percentage
million) million) of Demand million) million) of Demand
Deposits Deposits
(%) (%)
Source: Money and Banking in Malaysia (1994), BNM Monthly Statistical Bulletin (2000)
ate from extensive use of cash (Suganthi et al., 2001). This is clearly repre-
sented by the increasing use of credit cards, charge or debit cards and, of
late, smart cards by Malaysian consumers.
In addition, businesses’ need for large volumes of cash for salary pay-
ments too have been reduced via the banking services where employee
salaries are credited directly into their accounts and withdrawals are made
based on needs by the employees from automated teller machines
(ATMs). Automated teller machines have also reduced the precautionary
74 JOURNAL OF ASIA-PACIFIC BUSINESS
FIGURE 1
Vault Cash-Demand Deposit (%) Trends in Vault Cash as a Percentage of Demand Deposits
14
12
10
8
6
4
2
0
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
Year
demand for cash since ATMs are widespread and operate almost 24 hours
a day. This finding certainly has implications for commercial banks’ vault
cash management policies. If the demand for cash is actually decreasing,
then the obvious question that arises is whether the cash held at banks are
actually optimal or are they far beyond requirements resulting in idle cash
and hence wasteful utilization of a useful resource.
SEASONAL VARIATIONS
IN BANK WITHDRAWALS AND DEPOSITS
In relation to cash withdrawals and deposits at commercial banks, the
seasonal variations can be classified as day of the week variations, month
of the year variations and time of the month variations. In this context, the
deposits and withdrawals pattern over the week can be expected to vary
according to the day of the week. Furthermore, since Malaysia is a land of
numerous festivities occurring in various months of the year, the banking
business activities can also be expected to vary according to the month of
the year. Finally, the consumer behavioral patterns in relation to deposits
and withdrawals may vary at different periods of the month and thus the
time of the month can also influence these cash flows. The seasonal varia-
tions in the demand for and supply of cash at commercial banks would
certainly have implications for the efficient vault cash management of
these institutions. Each one of these seasonal components will thus be an-
alyzed in the following sections.
Balachander, Santha, and Shanmugam 75
The day of the week effect on the withdrawals and deposits are ana-
lyzed by using the one-way ANOVA technique. This analysis basically
involves the testing of the following hypotheses for the withdrawals and
deposits, respectively.
The result of the one-way ANOVA test on the day of the week effect on
commercial bank withdrawals is presented in Table 2. The results indicate
a p-value of 13.6%, which is greater than the 5% level of significance.
Therefore, the null hypothesis is not rejected and it can be concluded that
there is no evidence of differences in the mean daily withdrawals among
the six days of the week. Thus, the results show an absence of a significant
day of the week effect on the withdrawals at these sample branches.
The results of the one-way ANOVA test on the day of the week effect
on commercial bank deposits is presented in Table 3. The results indicate
a p-value of greater than 5% level of significance. Therefore, the null hy-
TABLE 2. Summary of ANOVA Test Results for the Day of the Week Effect on
Withdrawals
TABLE 3. Summary of ANOVA Test Results for the Day of the Week Effect on
Deposits
TABLE 4. Summary of ANOVA Test Results for the Month of the Year Effect on
Withdrawals
Months January February March April May June July August September October November December
January 2397544.55 2376509.43 244316.68 272838.64 152406.22 224944.13 2473355.07 2382695.05 2458815.60 2512275.37 2334579.42
February 397544.55 21035.12 641861.23 670383.19 549950.77 622488.68 275810.52 14849.49 261271.05 2114730.82 62965.12
March 376509.43 221035.12 620826.11 649348.08 528915.65 601453.56 296845.64 26185.62 282306.17 2135765.93 41930.01
April 2244316.68 2641861.23 2620826.11 28521.96 291910.46 219372.55 2717671.75 2627011.74 2703132.28 2756592.05 2578896.10
May 2272838.64 2670383.19 2649348.08 228521.96 2120432.42 247894.51 2746193.71 2655533.70 2731654.24 2785114.01 2607418.07
June 2152406.22 2549950.77 2528915.65 91910.46 120432.42 72537.91 2625761.29 2535101.28 2611221.82 2664681.59 2486985.65
July 2224944.13 2622488.68 2601453.56 19372.55 47894.51 272537.91 2698299.20 2607639.19 2683759.73 2737219.50 2559523.55
August 473355.07 75810.52 96845.64 717671.75 746193.71 625761.29 698299.20 90660.01 14539.47 238920.30 138775.65
Septem- 382695.05 214849.49 6185.62 627011.74 655533.70 535101.28 607639.19 290660.01 276120.54 2129580.31 48115.63
ber
October 458815.60 61271.05 82306.17 703132.28 731654.24 611221.82 683759.73 214539.47 76120.54 253459.77 124236.18
November 512275.37 114730.82 135765.93 756592.05 785114.01 664681.59 737219.50 38920.30 129580.31 53459.77 2177695.94
December 334579.42 262965.12 241930.01 578896.10 607418.07 486985.65 559523.55 2138775.65 248115.63 2124236.18 2177695.94
significant at 5%
77
78 JOURNAL OF ASIA-PACIFIC BUSINESS
FIGURE 2
Withdrawals Deposits
H0: mW, Monday = mW, Tuesday = ... = mW, Saturday H0: mD, Monday = mD, Tuesday = ... = mD, Saturday
H1: Not all mW's are equal H1: Not all mD's are equal
Where Where
FIGURE 3
Withdrawals Deposits
H0: mW, January = mW, February = ... = mW, December H0: mD, January = mD, February = ... = mD, December
H1: Not all mW's are equal H1: Not all mD's are equal
Where Where
people are spending less in order to save for the coming festive seasons of
Christmas, New Year, Chinese (Lunar) New Year and the Hari Raya
(Muslim) festivals in December and January.
The results of the one-way ANOVA test on the month of the year ef-
fects on commercial bank deposits are presented in Table 6. The p-value
of smaller than 5% level of significance indicates that there is evidence of
significant monthly seasonal effects on deposits.
This result can also be seen in the time series plot of the mean monthly
deposits in Figure 5.
A comparison of Figure 4 and Figure 5 reveals a great deal of similarity
between the pattern of mean monthly withdrawals and mean monthly de-
posits which is maximized in May and minimized in November.
Balachander, Santha, and Shanmugam 79
TABLE 6. Summary of ANOVA Test Results for the Month of the Year Effect on
Deposits
FIGURE 4
1400000
1200000
1000000
800000
RM
600000
400000
200000
0
Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98
Month
FIGURE 5
3000000
2500000
2000000
RM
1500000
1000000
500000
0
Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98Sep-98 Oct-98 Nov-98
Month
80 JOURNAL OF ASIA-PACIFIC BUSINESS
Table 7 presents the results of the ANOVA test for the time of month
effect on bank withdrawals. The results indicate a significant time of
month effect on withdrawals. The plot of the mean withdrawals for the
three time periods in Figure 6 indicates a sharp decline in withdrawals dur-
ing the middle of the month. The withdrawals are high during the end of
the month because it is the period in which salaries are credited into one’s
account. However, the withdrawals would be much higher at the begin-
ning of next month because the salaries are only credited towards the very
end of the month.
Table 8 presents the results of the ANOVA test for the time of the
month effects on bank deposits. The results indicate a significant time of
the month effect on deposits. The plot of the mean deposits for the three
time periods, which is shown in Figure 5, indicates a sharp decline in de-
posits during the middle of the month. This might imply that deposits are
made basically at the start and end of the month when salaries and receiv-
Balachander, Santha, and Shanmugam 81
TABLE 7. Summary of ANOVA Test Results for the Time of the Month Effect
on Withdrawals
FIGURE 6
1200000
1000000
800000
RM
600000
400000
200000
0
Beginning Middle End
Time of the Month
ables are collected. This is similar to the pattern observed for withdrawals
(see Table 8 and Figure 7).
TABLE 8. Summary of ANOVA Test Results for the Time of the Month Effect
on Deposits
FIGURE 7
1800000
1600000
1400000
1200000
1000000
RM
800000
600000
400000
200000
0
Beginning Middle End
Time of Month
true in the case of deposits. With regards to the month of the year effect,
both the withdrawals and deposits were found to exhibit similar signifi-
cant trends with the largest amount of both withdrawals and deposits oc-
curring in May. This coincides with the school holidays which appear in
this month.
Finally, in relation to the time of the month effect, both withdrawals
and deposits appear to be high at the beginning and end of the month.
Moreover, these variations were found to be significant for both the cases
of withdrawals and deposits. The above findings imply that commercial
banks’ daily cash flows are not uniform but do indicate systematic and
regular fluctuations which can be traced and hence be used for predictive
purposes.
Now, the paper commenced with the assertion that rule of thumb blan-
ket vault cash management policies would not be optimal, especially if the
commercial banks’ withdrawals and deposits are uncertain and exhibit
systematic variations or seasonal effects. In the presence of such seasonal
variations, a more dynamic forecasting model will be required for effi-
cient vault cash management. Thus, by analyzing the seasonal variations
Balachander, Santha, and Shanmugam 83
REFERENCES
1. Allen S. (1998), “How Closely do Banks Manage Vault cash?” Federal Reserve
Bank of St. Louis, Vol. 80, Issue 4, July/August, pp. 43-54.
2. Ashford, Duncan (2000), “Optimising Cash and Liquidity Management in Asia
Pacific,” HSBC Global Payment and Cash Management, January 28.
3. BNM (1995), Money and Banking in Malaysia, Bank Negara Malaysia, Kuala
Lumpur.
4. Budhiraja, Sudeep & Abdul Raof Latiff (1998), “IT Evoluation in Banking,” News
Straits Time Press (Malaysia) Berhad, Malaysia Business, Banking, January 1, pp. 20.
5. Daniel, E. and Baxter, B. (1999), “Cash Handling Strategies for Banks in Asia.”
Banker’s Journal Malaysia, No. 116, January, pp. 47-52.
6. De La Rue (1999), “Cash Handling Costs Asia-Pacific Millions, Research Re-
veals,” M2 PRESSWIRE, Coventry, February 15, available at http://proquest.umi.
com/pqdweb?TS=9529...Fmt=3%Sid=9&Idx=7&Deli=1&RQT=309&Dtp
7. Glaze, Gordon (1999), “Cash Demand and Liquidity Risk Issues and Year 2000,”
Readiness Cash Demand and Liquidity Risk Issues and Year 2000 Readiness, available at
http://ww.aba.com/aba/static/GR_cashY2K.html
8. GMT Press, “GMT’s CashMaster Increases Profitability by Reducing Cash Bal-
ances,” available at http://gmtcorp.com/subpages/p060297.html
9. Hamid, Hamisah (1998), “It Takes 21 sen to process every RM1 Cash Transac-
tion,” News Straits Times Press (Malaysia) Berhad, Business Times (Malaysia), August
12, pp.18.
10. Levine, David M., Berenson, Mark L. and Stephan, David (1999), “Statistics for
Managers using Microsoft Excel.” Second Edition, Prentice Hall, United States, pp.
604-649.
11. Scarf, Herbert E. (1960), “The Optimality of (s,S) policies for the Dynamic Inven-
tory Problem.” Proceedings of the First Staford Symposium on Mathematical Methods in
the Social sciences, Stanford University Press, United States.
12. Suganthi, Balachandher and Balachandran (2001), “Internet Banking Patronage:
An Empirical Investigation of Malaysia,” Journal of Internet Banking and Commerce,
May 2001, vol. 6, no. 1.
13. Tan, Clarissa (1998), “Cost of Handling Cash in Singapore Tops $650m A Year,”
Business Times (Singapore), June 25.
14. Wrase, Jeffrey M. (1998), “Is the Fed being swept out of (Monetary) control?” Business
Review-Federal Reserve Bank of Philadelphia, November/December, available at
http://proquest.umi.com/pqdweb?TS=9528...Fmt=4&Sid=1&Idx=3&Deli=1&RQT=309&
Dtp