1. BANK MANAGEMENT CHAPTER 1 INTRODUCTION

2. What is a Bank? 2  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”

3. FSA (2013) 3  Bank – a person which carries on banking business  “ banking business” means i. Accepting 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 and iv. Such other business as the Bank, with the approval of the Minister, may prescribe

4. The organization and structure of banks 4  Significant factors that affect banks organization:  Bank functions  Bank size  Government regulations

5. Cont… 5  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

6. Cont… 6  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

7. Cont… 7  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

8. Cont… 8  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 company’s board of directors serve on the bank’s board as well

9. Cont… 9  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

10. Recent trends in bank organization 10  More complex organizations  More services and facilities  More departments and divisions  Technology based  Convergence  Consolidation and geographic expansion

11. Cont… 11  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

12. Cont… 12 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

13.  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. 13

14. the geographic expansion of banking institutions have reached well beyond the boundaries of a single nation to encompass the whole planet Called as globalisation 14

15. BANK MARKETING 15  Marketing - refers to the need satisfaction of the institution’s 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.

16. Cont… 16  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

17. Organizational Form of the Banking Industry 17  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

18. Cont… 18 - 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

19. Branch Banking Organizations 19  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 bank’s computers etc

20. Cont… 20  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

21. Organizational Structure Branch 21 Branch Manager Assistant Manager Bank Officer Deposit Remittance Account Credit

22. 22 Organizational Structure Head Office Board of Directors Chief Executive Officer Head of Department Departments*

23. 23 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

24. Advantages of Branch Banking 24  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

25. Disadvantages of Branch Banking 25  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

26. Bank Holding Company Organizations 26  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 bankscompanybanks  Many holding companies hold only a small minority of the outstanding shares of one or more banks, thereby escaping government regulation

27. Organizational Structure 27 Bank Holding Companies Holding Corporation Main Bank Bank Subsidiaries Associated Business Non-bank Subsidiaries

28. Why Holding Companies Have Grown? 28  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

29. One-Bank Holding Companies 29  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

30. Cont… 30  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

31. Multibank Holding Companies 31  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

32. Advantages and Disadvantages of Holding Company Banking 32  Advantages:  Promote greater efficiency in banking by increasing a banking firm’s 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

33. Cont… 33  Disadvantage:  Reduce or eliminate competition between banks  Overcharging the customers  Being indifferent to local community needs  Take excessive risks

34. Conclusions concerning organization type and size 34 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

35. Cont… 35 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.

36. Cont… 36 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

37. Organizational Form of the Banking Industry in Malaysia 37 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.

38. THE IMPACT OF LIBERALIZATION & GLOBALIZATION ON BANKING SECTOR 38 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.

39. Liberalisation of Malaysian Financial Sector 39  Issuance of New Licences  Increases in foreign equity limits  Operational flexibilities

40. 40 Cont… 1. Competition 2. Technology transfer – virtual banking 3. Eliminates trade restrictions 4. Standardized basic product designs

41.  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 41

42.  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 42

43.  The safekeeping/certification of value role Safeguarding a customer’s 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 43