BANK MANAGEMENT

CHAPTER 1
INTRODUCTION
 What is a bank?
2

 Can be defined in terms of:

 The economic functions it performs (transfer funds from savers to borrowers, making payments);
 The services it offers to customers (deposits, loans, etc); or
 The legal basis for its existence (banking definition according to the law)


“ A bank is any business offering deposits subject to withdrawal on demand and making loans of a
commercial or business nature”

FSA (2013)
 Bank – a person which carries a 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
 The organization and structure of banks
3

 Significant factors that affect bank organization:

 Bank functions
 Bank size
 Government regulations
 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…
4

 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
 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…
5

 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
 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
6

 More complex organizations

 More services and facilities
 More departments and divisions
 Technology based
 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
 Force bank managers to become more concerned with service
marketing activities and the reactions of their stockholders

 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
  Cont…

 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.

 The geographic expansion of banking institutions have reached well beyond the
boundaries of a single nation to encompass the whole planet
 Called as globalisation
 BANK MARKETING
8

 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.

 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
 Organizational Form of the Banking Industry
9

 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
 Cont…
10

 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
 Branch Banking Organizations
11

 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
 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
 Organizational Structure
Branch
12

Branch Manager

Assistant Manager

Bank Officer

Deposit Remittance Account Credit

 Organizational Structure
Head Office
13

Board of Directors

Chief Executive Officer

Head of Department

Departments*
 Organizational Structure
14

• 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
 Advantages of Branch Banking
15

 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
 Disadvantages of Branch Banking
16

 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
 Bank Holding Company Organizations
17

 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
 Organizational Structure
18

• Bank Holding Companies

Holding Corporation

Main Bank

Bank Subsidiaries Associated Business

Non-bank Subsidiaries
19

 https://www.maybank.com/corporate_new/my/en/w
orldwide/all-subsidiaries.page
?
20
 Why Holding Companies Have Grown?
21

 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 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
 One-Bank Holding Companies
22

 Bank holding companies control stock in just one bank

 The one bank companies frequently own and operate 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
 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
 Advantages and Disadvantages of Holding
Company in Banking
24

 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
 Disadvantage:
 Reduce or eliminate competition between banks
 Overcharging the customers
 Being indifferent to local community needs
 Take excessive risks
 Conclusions concerning organization type
and size
25

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.
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
3. 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.
4. 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
5. 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
 Organizational Form of the Banking Industry
in Malaysia
26

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: CIMB Group controls CIMB Bank, CIMB Islamic Bank, CIMB Investment Bank,
etc.
 THE IMPACT OF LIBERALIZATION &
GLOBALIZATION ON BANKING SECTOR
27

• 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.
 Liberalisation of Malaysian Financial Sector
28

 Issuance of New Licenses

 Increases in foreign equity limits
 Operational flexibilities

1. Competition
2. Technology transfer – virtual banking
3. Eliminates trade restrictions
4. Standardized basic product designs
29

 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
31

 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
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Financial System
Malaysia

Financial Financial
Institutions Markets

Money Market
Banking
& FOREX

Non-Banking Capital Market

Derivatives
Market

Offshore
Market