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BANK MANAGEMENT

CHAPTER 1
INTRODUCTI
ON

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

FINANCIAL SERVICES ACT


(2013)

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 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
5

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
6

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
7

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

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
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Recent trends in bank


organization

More complex organizations


More services and facilities
More departments and divisions

Technology based

Convergence

Consolidation and geographic expansion


10

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
11

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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onvergence
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

onsolidation 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

the geographic expansion of


banking institutions have
reached well beyond the
boundaries of a single nation
to encompass the whole
planet - Known as
GLOBALISATION

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Organizational Form of the Banking


Industry
nit Banking (Localized Banking)
- One of the oldest kinds
- provides services and operates without any
branches anywhere. Offer all services from one
office (due to restrictive branching laws)
- 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
15

Cont
ranch Banking
- Offer full range of services from several
locations

ank 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 (branches scattered all over the
country and even outside)
Likely to offer limited services through a
supporting network of drive-in windows,
ATMs, computer electronically linked to the
banks computers etc

17

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
Eg: 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
Insurance & Takaful
Branch Banking

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Advantages of Branch
Banking
G
reater operating efficiency
I
ncreases the availability and convenience of services
(can be extended to small towns and rural areas)
S
timulates faster economic growth as branch banks
tend to make more loans available
L
eads 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 (spreading of risk)
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Disadvantages of Branch
Banking
igher operating costs
Setting up new full-service branches
seems to be a costly way to grow
ranch banks do not seem to earn
higher average profits than other
banks
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Bank Holding Company


Organizations
corporation chartered for the purpose of holding
the stock (equity shares) of at least one bank
bank holding company is a company that
controls one or more banks
any 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

Bank Subsidiaries

Associated Business
Non-bank Subsidiaries

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Why Holding Companies Have


Grown?

reater ease of access to capital markets in raising


funds
A
bility to use higher leverage (more debt capital
relative to equity capital) than nonaffiliated banking
firms
T
ax advantages in being able to offset profits from one
business with losses generated by other firms that are
part of the same company
A
bility to expand across state lines and national
boundaries
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One-Bank Holding Companies


ank holding companies controlled stock in just
one bank
he one bank companies frequently owned and
operated one or more nonbank business
hese nonbank businesses must offer services
closely related to banking that also yield
public benefits such as availability of
financial services or lower service prices
27

Cont
T
he 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)
T
he 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


ank holding companies controlled stock in
more than one bank
anks acquired by holding companies are
referred to as affiliated banks
anks that are not owned by holding
companies are known as independent banks
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Advantages and Disadvantages of


Holding Company Banking
dvantages:
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
isadvantage:
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.
33

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
Two 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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BANK MARKETING
arketing - refers to the need satisfaction of the
institutions clients.
nvolves
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.
36

Cont
ank 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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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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Liberalizations of Malaysian
Financial Sector
ssuance of New Licenses
ncreases in foreign equity limits
perational flexibilities

39

Cont
1.
2.
3.
4.

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

40

he 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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