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BANK MANAGEMENT

CHAPTER 1
INTRODUCTION

What is a Bank?
Can be defined in terms of:
The economic functions it serves
The services it offers its customers
The legal basis for its existence

A bank is any business offering deposits


subject to withdrawal on demand and
making loans of a commercial or business
nature
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BAFIA (1989)

Bank a person which carries on banking


business
banking business means
i. Receiving deposits on current account,
deposit account, savings account or other
similar account
ii. Paying or collecting cheques drawn by or
paid in by customers
iii. Provision of finance or
iv. Such other business as the Bank, with the
approval of the Minister, may prescribe
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The organization and


structure of banks
Significant factors that affect banks
organization:
Bank functions
Bank size
Government regulations

Cont
Bank size
Differences in bank size will lead to greater
differences,
in the way banks are organized
In the types and variety of financial services
each bank offers in the markets that it
serves

Cont
Small banks:
Heavily committed to attracting smaller,
consumer-oriented deposits and making
consumer installment and small business
loans
Heavy involvement in consumer loans and
deposits
Often called as retail bank

Cont
Small banks (community banks)
Close contact between top management and
the management (and staff of each division)
Significantly impacted by changes in the local
economy
Limited opportunity for advancement or for the
development of new banking skills
Have close relationship with their customers

Cont
Large banks
The organization chart is more complex
Most banks are owned and controlled by a
holding company whose stockholders elect a
board of directors to oversee the bank and
nonbank businesses allied with the same
holding company
Selected members of the holding companys
board of directors serve on the banks board
as well
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Cont
Key problem span of control
More diversified (geographical and by product)
to withstand the risks of a fluctuating economy
Rarely dependent on the economic fortunes of a
single industry or even single nation
More stable due to their greater capacity to
accept the risks of entering new markets and
their potentially greater access to capital and
managerial talent

Recent trends in bank


organization

More complex organizations

More services and facilities


More departments and divisions
Technology based
Convergence
Consolidation and geographic expansion

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Cont

Most banks today are:


Market driven and sales oriented
More alert to the changing service
demands of their customers and to the
challenges posed by bank and nonbank
competitors
Forced bank managers to become
more concerned with service marketing
activities and the reactions of their
stockholders
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Cont
Computer-based systems and electronic
service delivery
Growing numbers of people with
computer skills
Bank operations are more efficient
Greater opportunity for planning new
services and new service delivery
facilities

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Convergence
service proliferation and greater competitive
rivalry among financial institutions have led to a
powerful trend convergence
Convergence movement of businesses across
industry lines
Banks broaden their business by venturing into
other product lines
Consolidation geographic expansion
fewer number of banks, but much larger service
providers.
example, the number of bank declines but the
size of assets and deposits increases.
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the geographic expansion of banking


institutions have reached well beyond the
boundaries of a single nation to encompass
the whole planet
Called as globalisation

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BANK MARKETING
Marketing - refers to the need satisfaction of
the institutions clients.
Involves
identifying the needs of the customers
developing products to suit their needs or
modifying the existing products accordingly.
the need for foreseeing wants of the customers in
future and developing suitable products of their
requirement.
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Cont
Bank marketing consists of
identifying the most profitable markets now
and in the future;
assessing the present and future needs of
customers;
setting business development goals and
marketing plans to meet them
managing the various services and promoting
them to achieve the plans
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Organizational Form of the Banking


Industry
Unit Banking
-

One of the oldest kinds


Offer all services from one office
Still common in U.S. banking today
One reason for the comparatively large number
of units banks is the rapid formation of new
banks
- Many customers still prefer small banks, which
get to know their customer well
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Cont
- Branch Banking
- Offer full range of services from several
locations

Bank Holding Companies


- A corporation chartered for the purpose of
holding the stock of one or more banks

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Branch Banking Organizations


As unit bank grows larger in size establish
branch banking
Offer the full range of banking services from
several locations, including a head office and
one or more full service branch offices
Likely to offer limited services through a
supporting network of drive-in windows,
ATMs, computer electronically linked to the
banks computers etc
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Cont
Each branch may have their own management
team with limited authority to make decisions on
customer loan application and other facets of
daily operations
Ex: branch bank manager may be authorized
to approve a customer loan of up to
RM100,000. Larger loan requests must be
referred to the head office for final decisions
Senior management of a branch banking is
usually located at the head office

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Organizational Structure
Branch
Branch Manager
Assistant Manager
Bank Officer
Deposit

Remittance

Account

Credit

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Organizational Structure
Head Office
Board of Directors
Chief Executive Officer
Head of Department
Departments*
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Organizational Structure
Example of departments:
Islamic Banking
Corporate Banking
Retail Banking
Electronic Banking
International Banking
Information technology and management
information system
Finance and administration
Risk Management
Branch Banking
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Advantages of Branch Banking


Greater operating efficiency
Increases the availability and convenience of
services
Stimulates faster economic growth as branch banks
tend to make more loans available
Leads to fewer bank failures as a branch bank is
less dependent on the volume of business from a
single industry or single local market area

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Disadvantages of Branch Banking


Higher operating costs
Setting up new full-service branches seems to
be a costly way to grow
Branch banks do not seem to earn higher
average profits than other banks

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Bank Holding Company


Organizations
A corporation chartered for the purpose of
holding the stock (equity shares) of at least one
bank
A bank holding company is a company that
controls one or more banks
Many holding companies hold only a small
minority of the outstanding shares of one or
more banks, thereby escaping government
regulation
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Organizational Structure
Bank Holding Companies

Holding Corporation
Main Bank

Associated Business

Bank Subsidiaries
Non-bank Subsidiaries

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Why Holding Companies Have


Grown?
Greater ease of access to capital markets in
raising funds
Ability to use higher leverage (more debt capital
relative to equity capital) than nonaffiliated banking
firms
Tax advantages in being able to offset offset profits
from one business with losses generated by other
firms that are part of the same company
Ability to expand across state lines and national
boundaries
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One-Bank Holding Companies


Bank holding companies controlled stock in just
one bank
The one bank companies frequently owned and
operated one or more nonbank business
These nonbank businesses must offer services
closely related to banking that also yield public
benefits such as availability of financial services
or lower service prices

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Cont
The principal advantage for bank holding
companies entering non-bank lines of business
is the prospect of diversifying sources of
revenue and profits (reduce risk exposure)
The holding company form permits the legal
separation between banks and non-bank
businesses having greater risk, allowing these
different firms to be owned by the same group of
stockholders
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Multibank Holding Companies


Bank holding companies controlled stock in
more than one bank
Banks acquired by holding companies are
referred to as affiliated banks
Banks that are not owned by holding companies
are known as independent banks

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Advantages and Disadvantages of


Holding Company Banking
Advantages:
Promote greater efficiency in banking by
increasing a banking firms size and by adding
to competitive rivalry in the industry
Strengthen individual banks against failure
Offer the public more services more
conveniently than independent banks
More profitable than banking organizations
that do not form holding companies
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Cont
Disadvantage:
Reduce or eliminate competition between
banks
Overcharging the customers
Being indifferent to local community needs
Take excessive risks

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Conclusions concerning
organization type and size
1. The profitability of a bank is not determined
primarily by how it is organized; the quality of its
management and the economic conditions in its
market area appear to be far more important to
its success
2. Small banks of any organizational type can
compete successfully with large banks, provided
they aggressively seek to preserve their profits
and market share. Economies of scale from bank
growth appear ton be limited to banks of
relatively modest size
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Cont
3. Branch banks and banks affiliated with holding
companies have greater protection against
failure than small unit banks. They also tend to
offer more services than unit banks and
operate more offices per unit of population,
thus providing more convenient services
4. The prices charged and deposit interest rates
paid by banks do not appear to depend greatly
on how each bank is organized but rather on
the amount of competition the bank faces, the
strength of market demand for bank services,
and the rate of inflation.
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Cont
5. The public receives about the same quality of
banking services and pays about the same for
them under branching, holding company, or
independent unit banking systems
6. The types of banking organizations serving the
public do not appear to be a key factor in the
growth and development of the economy,
though greater branching activity seems to
accelerate economic growth

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Organizational Form of the Banking


Industry in Malaysia
2 organizational forms commonly
applied in Malaysia are:
1. Branch banking
2. Bank holding companies
- A corporation that controls, through share
ownership, 50% or more of one or more banks.
- Example: Bumiputra Commerce Holdings
Berhad controls CIMB Bank, CIMB Islamic
Bank, CIMB Investment Bank, etc.
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THE IMPACT OF LIBERALIZATION &


GLOBALIZATION ON BANKING SECTOR
Liberalization relaxation of previous
government restrictions, usually in areas of
social or economic policy.
Globalization gradual evolution of markets
and institutions such that geographic
boundaries do not restrict financial
transactions.

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Liberalisation of Malaysian Financial


Sector
Issuance of New Licences
Increases in foreign equity limits
Operational flexibilities

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Cont
1.
2.
3.
4.

Competition
Technology transfer virtual banking
Eliminates trade restrictions
Standardized basic product designs

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The banking institutions today has to adopt many


roles to remain competitive and responsive to
public needs. Among the principal roles include;
The intermediation role
Transforming savings into loans
The payment role
Carrying out payments for goods and
services on behalf of customers

The guarantor role


Standing behind their customers to pay off
customer debts when those customers are
unable to pay
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The risk management role


Assisting customers in preparing financially for
the risk of loss to property, persons and
financial assets
The investment banking role
Assisting corporations and governments in
raising new funds, pursuing acquisitions and
exploring new markets
The savings/investment adviser role
Aiding customers in fulfilling their long-range
goals for a better life by building and investing
savings
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The safekeeping/certification of value role


Safeguarding a customers valuables and
certifying their true value
The agency role
Acting on behalf of customers to manage and
protect their property
The policy role
Serving as a conduct for government policy in
attempting to regulate the growth of the
economy and pursue social goals

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