Category: Bank

Singapore become the one of the world’s largest financial centers that provide a variety of products and services. This country also have created one of the most advanced banking system in the world. The banking sector is involved in a wide range of financial services including traditional lending and taking deposit as well as corporate and investment banking activities. Most of the bank in Singapore have different types of client which is consist of individuals, corporations or government agencies. All these banks provide retail banking, commercial banking and private banking services typically associated with the modern bank. Bank of Singapore have expand their business in global of the world include the foreign banks and also the Asian Pacific Region. As a well-known bank in the world, it is easy to bank of Singapore to dealing with the foreign bank that operated in Singapore especially involved the characteristics of the banking system.

One of journal has conducted a thorough examination of in-market mergers taking place between 1981 and 1986. He performed regression of the change in several performance measures on control variables and dummy variable differentiating banks that engaged in an in-market merger from those that did not (Rhaodes, 1993). (Madura & Wiant, 1994) studied abnormal returns of acquirers over a long period of time following the merger announcement. They find that average cumulative abnormal returns of acquirers in a sample of 152 deals taking place between 1983 and 1987 were negative during the 36-month period following the merger announcement (Madura & Wiant, 1994). Moreover, abnormal returns were negative in nearly every month. The empirical work on the European market regarding this issue is the recent work by (Cybo-Ottone, Alberto , & Murgia, 1996). They analyzed 26 mergers of European financial services firms as a whole and not just banks taking place between 1988 and 1995 in 13 European banking markets. Their results are qualitatively similar to much of the analysis conducted on American banking organizations.

One of the characteristics of the Singaporean banking system is liberalization in the financial system of the domestic banks. Definitely that liberalization is an important milestone in achieving the country’s long-term vision to have an efficient, resilient and dynamic financial sector. This liberalization is also expected to contribute to the process of transforming the Malaysian economy into the next stage of development. MAS have introduce a five-year liberalization package started on May 1999. The process include issue a new category of full banking licenses that known as Qualifying Full Bank (QFB) licenses to foreign banks, enlarge the number of restricted banks and furnish with offshore banks better flexibility in their currency (Singapore Dollar) wholesale business. In October 1999, the licenses was given to 4 large multinational banks which is ABN Amro, Banque Nationale de Paris, Citibank and Standard Chartered Bank. The primary aim of this liberalization is to consolidate and strengthen the Singapore’s positions in the local market (swee liang than) and be a dominant regional financial center. The chairman of the central bank, the Monetary Authority of Singapore (MAS) Lee Hsien Long (2001) notes that “…being big is no guarantee for success, as shown by the persistent difficulties of the Japanese banks over the last decade … But being a small bank is definitely a significant handicap”. This look like to recommend that the government feared the domestic banks that cannot endure the niche players, sizeable in the domestic market, even small by the international standards. Through this liberalization, the bank of Singapore sought to maintain the local ownership of banks. Furthermore, the existing cap of 40% of foreign ownership of local bank was maintained. Start in June 2001, the second phase of liberalization which is the restricted banks were classified bank as wholesale banks to improve competitiveness in retail banking. QFB were given more authorizations to establish more location, offer debt and special account services. Specifically, this liberalization has bring about main changes in the local banking scene.

Another features that manages to a clearly boundary for foreign banks to operate in Singapore in banking system is merger and acquisition. Bank of Singapore strengthen their local bank geographical presence through the merger and acquisition. The merger represents a transaction in which two companies agree to unify their operations relatively fairly because they have the resources and ability to create strong competitive advantage. A merger of two or more companies, generally by offering a shareholder a trustee in a company that is taking over in exchange for the surrender of their shares meanwhile acquisitions is a transaction in which one firm buys another firm with the intention of becoming more efficient using its core competencies by making the firm a subsidiary in its business portfolio or it is a obtaining to another company. Started in November 1998, bank of Singapore has bought cash-rich Post Office Savings Banks (POSB) from the Singapore Government for $1.6 billion, approximately 37% premium over POSB’s net tangible asset value, consolidating the DBS bank’s position as Southest Asia’s largest bank and the largest retail bank in Singapore. Meanwhile, in January 1998, DBS announced the acquisition of 50.3% of Thai Danu bank, for $182.34 million and having acquired a 3 % stake in 1989. In addition, on 11 April 2011, DBS has buy Hong Kong’s Dao Heng Bank for $10 billion in order to launch itself into a area powerhouse. The expected can gain from this is hoping instant diversification of business especially on asset and revenue side. Besides, it can be a platform for expanding into China.

ABSTRACT

With the success of the Bad bank concept in European and western countries it grabs the attention of global economies and becomes the most preferable solution for the Non-performing loans. Now Due to COVID 19 Pandemic Indian government also thinking of implementing Bad bank concept but is not easy as it seems in paper because there is no standard and uniform structure for bad bank. Different countries followed variety of methods which are suitable to their environment. This paper attempted to describe the concept of bad bank and the main aim of this study is to study the mechanism followed by various countries to implement the bad bank concept and offer few suggestions to India concerning the implementation of bad bank. For this researcher used secondary data and the result is that there is high success rate when there is private participation and independence from the government as it saves taxpayers money, gives freedom to perform well, and achieve its objective.

INTRODUCTION

The bad bank is in the headlines again. Now, with the COVID-19 pandemic threatening to create a bad loan tsunami. When all measures fail, there’s always the “Bad Bank” comes on. The idea is not new one and has been suggested by various people at different points of time. First in the year 2015 Asset Quality Review conducted by Reserve Bank under Governor Raghuram Rajan, which forced banks to recognise problem accounts as non-performing assets had sparked a debate on bad bank as a possible solution. The 2017 Economic Survey examined this idea and suggested the creation of a Public Sector Asset Rehabilitation Agency (PARA). The then interim Finance Minister Piyush Goyal also revived this idea in 2018, he set up a committee under PNB Chairman Sunil Mehta to study the feasibility of national Asset Reconstruction Company, or in other words, a bad bank. And recently in 2020 the IBA submitted its proposal to both RBI and central government to set up Bad Bank in two tier system.

REVIEW OF LITERATURE

Spyridon Repousis- “Bad Bank” Strategy in Greek Banking Sector and Receivables from Banks under Liquidation (2017)

Spyridon Repousis from University of Nicosia, Cyprus, published a research paper titled “Bad Bank” Strategy in Greek Banking Sector and Receivables from Banks under Liquidation in July 2017. In this research paper the researcher presents the “bad bank” strategy followed in Greek banking system to safeguard the stability during the current financial crisis.

Michael Brei, Leonardo Gambacorta, Marcella Lucchetta and Bruno Maria Parigi – Bad bank resolutions and bank lending (2020)

BIS Working Papers No 837 Bad bank resolutions and bank lending by Michael Brei, Leonardo Gambacorta, Marcella Lucchetta, and Bruno Maria Parigi published in January 2020. This paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks’ lending and a reduction in non-performing loans (NPLs). The major conclusion is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending as long as they combine recapitalisation with asset segregation.

STATEMENT OF THE PROBLEM

On paper the idea is simple, but its implementation is more complicated, perhaps the reason why this idea has only been toyed with and not implement by policymakers in India. A Bad bank is not a novel one and already so many countries implemented this concept but there is no standard and uniform structure of bad bank. So before implementing the concept it is important to know the best feasible structure to implement it. This paper helps to understand the different structures followed by different countries to implement the Bad bank concept; this helps to decide the best structure.

MEANING OF BAD BANK

A bad bank is a corporate structure which separates illiquid and high risk assets (Non-performing assets/loans) held by a bank or a financial institution, a group of banks or financial institutions. In addition to segregating the bad assets from the parent banks financial statements, a bad bank structure allows specialized management to deal with the problem of bad debts. The measure allows good banks to focus on their core business of lending while the bad bank can specialize in maximizing value from the high-risk assets. A bad bank is termed so simply because it holds bad loans, or non-performing assets (NPAs).

We can understand the concept with an example. Let’s say Bank X lends advances to several individuals and corporates in its regular course of business but later those borrowers defaulted for repaying, so Bank X accumulates more due amount of instalments and interest as time goes. It needs to keep some money as reserves against these accumulated dues (Non-performing loans) according to central bank rules. Now, this hurts a bank because large size of NPLs shows the ill-health or financial weakness of that bank and it weakens the bank X borrowing and lending ability and makes it difficult to conduct business.

In these circumstances, the bank X want to segregate its ‘good’ assets (loans which are being repaid as per schedule) from its ‘bad’ assets (which are in default, and it realises it will not be easy to recover) through the establishment of a bad bank. The segregation aims to allow investors to assess the bank’s financial health with greater certainty. As a result, Bank X will clean up its balance sheet and reduce its exposure to risky assets.

Therefore, a bad bank is expected to help the banks by purchasing all their bad assets, usually at a price below the book value of these loans, and manage those assets, to recover the money over some time and liquidate itself once its purpose fulfils.

Let see some bad bank structures followed by various countries

GRANT STREET NATIONAL BANK-US

To solve the NPLs problem, the bad bank concept was first introduced in back 1988 by US-based Mellon Bank by creating Grant Street National Bank by spinning off its capital, and five of its board members into it to hold its toxic assets.

Grant Street National Bank is not created as a normal bank to accept deposits from public, but to served the purpose of resolving or liquidating bad debt to recover as much money as it could, and was eventually liquidated itself a few years down the line after it had served its purpose.

Subsequently, countries like Finland, France, Sweden, Indonesia, Germany and several other countries implemented the idea.

THE HELLENIC FINANCIAL STABILITY FUND (HFSF) AND THE HELLENIC

DEPOSIT AND INVESTMENT GUARANTEE FUND (HDIGF)-GREEK

The Hellenic Financial Stability Fund (HFSF) was founded in July 2010 as a private legal entity and not belong to the public sector. It entrusted with administrative and financial autonomy, operates under the rules of the private economy, and is governed by the provisions of the founding law as applicable. Contribute to the maintenance of the stability of the Greek banking system for the sake of public interest, is the main objective of the HFSF.

The Fund shall operate under a comprehensive strategy for the banking sector and the Non-Performing Loans (NPLs) management, which is agreed between the Ministry of Finance, the Bank of Greece and the Fund, as revised from time to time.

The HFSF has its registered office in Athens and its duration by the decisions of the Minister of Finance, shall be up to 31 December 2022 and the duration may be extended, if deemed necessary for the fulfilment of its scope.

And it’s one of the objectives is to provide loans to the HDIGF for resolution purposes.

THE HELLENIC DEPOSIT AND INVESTMENT GUARANTEE FUND (TEKE/ HDIGF)

The Hellenic Deposit and Investment Guarantee Fund (TEKE) is the operator of the deposit guarantee and investment compensation schemes. It is a legal person governed by private law and is supervised by the Ministry of Finance. HDIGF is not a public entity or a government agency and is outside the narrow or broader public sector.

HDIGF is composed of three separate Schemes:

The HDIGF schemes are distinct from each other and are the available funds of each Scheme of HDIGF shall constitute separate property groups distinct from each other and shall be used exclusively for the fulfilment of the purposes of each Scheme.

TROUBLED ASSET RELIEF PROGRAM (TARP)-US

The TARP was established and run by the United States Treasury to stabilize the country’s financial system, restore economic growth, and reduce the effect of the wake of the 2008 financial crisis. TARP seeks to achieve these targets by purchasing troubled companies’ assets and stock.

The US government declared in December 2013 that its investments had earned more than $11 billion for its taxpayers. Actually out of $426.4 billion investment it recovered funds around $441.7 billion. The US government also declared that TARP saved more than one million jobs by preventing the American auto industry from failing, helped stabilize banks, and restored credit availability for both individuals and businesses.

THE NATIONAL ASSET MANAGEMENT AGENCY NAMA-IRISH

NAMA was established in 2009 by the Irish Government to solve the serious financial crisis in Irish banking. NAMA had been assigned with a very large balance sheet and has been given the task of managing that balance sheet right down to zero as soon as it is commercially practicable. It must recover at a minimum all of the expenditure incurred by it on acquiring loans, on advancing working capital and on its costs. In doing so, it will pursue all debts owed by its debtors to the greatest extent feasible.

NAMA’s strategy is not only concentrated with the disposal of property but also on investment in assets to make them more attractive to buyers and thereby increase their ultimate disposal value.

SAREB-SPAIN

SAREB (Spanish: Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria – English: Company for the Management of Assets proceeding from Restructuring of the Banking System) Spanish government bad bank, owned by government , it is established on 31/08/2012 for managing assets transferred by the 4 nationalized Spanish financial institutions (BFA-Bank, Catalunya Bank, NGC Banco-Banco Gallego and Bank de Valencia).

The law empowered the FROB (The Fund for Orderly Bank Restructuring) to transfer the impaired assets and assets which could be considered a threat to the viability of an institution to an asset management company (SAREB) .The main objective is to remove the assets from the balance sheets of the institutions to allow them to be independently managed. The AMC may issues bonds and securities recognising or giving rise to the debt. The law establishes that the assets are to be transferred to the asset management company without any need for consent from third parties. Before transfer, the Bank of Spain (central bank) will determine the value of the assets based on appraisal reports.

FROB held 45% shareholding of the financial institutions and Private shareholders own 55% of SAREB. SAREB performs as a bad bank, it acquires property development loans from Spanish banks in return for government bonds, primarily with an object to improving the availability of credit in the economy. Over the fifteen years years, SAREB has to dispose of all of its assets, its main aim will be to maximise its profitability. However, it does not have a banking license. SAREB equipped with legal benefits that don’t applicable to other Spanish limited liability companies, such as a preferential creditor for subordinated debt over other creditors.

SECURUM AND RETRIVA-SWEDEN

The financial crisis in Sweden evolved with huge losses reported by the country’s largest saving bank, Forsta Sparbanken, in 1991. Later, Nordbanken commercial bank also reported huge losses in which 71% of common stocks owned by the Sweden government. Sweden Government took full control over Nordbanken and separates the bank’s assets into two parts: the “good” assets were still within the bank while the “bad” assets were transferred to separate legal entity, an asset holding company, called Securum, established in 1992. Nordbanken and a government equity infused into Securum for the purchase of bad assets. A second “bad bank” was also created for Gota Bank when it failed in early 1992 and bad assets were transferred to the asset management company, called Retriva. The “good” assets of Gota Bank were auctioned off and bought by Nordbanken in 1993 with no payment to Gota. Securum’s primary aim was to liquidate the “bad” assets to maximizing recovery. Assets were successfully liquidated. Sweden also issued a blanket guarantee of all bank loans in the banking system, until July 1996 and benefited existing bank stockholders. Also, Swedish Central Bank provided liquidity by depositing large foreign currency reserves in troubled banks and by borrowing freely at no risk the Swedish currency. Government’s cash infusion limited to these two banks. Established guidelines for banks receiving government support such as a government member in board composition’s management, balance sheet restructuring targets and risk management. The final results were a relatively speedy recovery, a return to robust economic growth and banking crises were relatively short-lived.

RECENT PROPOSAL OF BAD BANKS BY INDIAN BANKING ASSOCIATION

Indian Banking Association (IBA) has submitted a proposal to both the Government and the RBI to establish a ‘Bad Bank.’

As per IBA estimates the ‘Bad Bank’ would require approximately Rs 10,000 crore of capital initially. The exact quantum of capital and amount of bad loans to be housed in the proposed ‘Bad Bank’ would only be finalised after discussions with the Government and Reserve Bank of India (RBI).

How Does ‘Bad Bank’ Work?

1. Banks will be able to demarcate its assets into good assets and toxic or bad assets.
2. Good assets are ones in which loans are repaid as per schedule, and defaulted ones are classified as toxic assets or bad assets.
3. Toxic assets can be removed from Banks books and transferred to Bad Bank which has the sole purpose of aiding the recovery of risky assets.
4. Hence the banks will clean up and reduce its exposure to risky assets.
5. Bad Bank will absorb all the toxic assets of banks at a price below the book value of these loans.

Bad Bank Structure – IBA Proposal

The ‘Bad Bank’ will be a 2-tiered structure.

Tier 1:

1. There will be an Asset Reconstruction Company (ARC) backed by the Government which would buy bad loans from banks and issue Security Receipts to the Banks.
2. As per RBI guidelines, ARC will hold Security Receipts of 15%.
3. Banks will get 15% of the cash and will hold 85% of Security Receipts. Hence it is called 15:85 structure.

Tier 2:

1. There will be an Asset Management Company (AMC).
2. AMC would be run by public and private bodies which includes banks as well.
3. Turnaround professionals.

FINDINGS

1. In most cases, bad bank was implemented by establishing government owed bad bank with fully government funding or partly government and partly privet funding.
2. It is more effective when the funding to purchase impaired assets from the originating bank is private.
3. Bad bank resolutions are only effective if they combine recapitalisation with asset segregation

SUGGESTIONS

1. It is advised to do banks recapitalisation with asset segregation as it reduces future NPLs and also increase loan growth.
2. It is advised to fund impaired asset purchase from private as it saves taxpayers money. In case of public funding, if anything went wrong the ultimate burden falls on taxpayers.
3. It is suggested to establish an independent institution to decide the purchase price. As it solves the conflict between buyer bank and seller bank.
4. Make bad bank free from political pressure.

CONCLUSION

The main aim of this study is to understand the different structures followed by various countries for Bad bank implementation. The main findings are that recapitalisation of banks with asset segregation gives better results and also country can save the tax payers money by private participation and make it free from political pressure. Conclusively, Bad bank continued to develop as most preferable measure for NPLs and countries welcoming it positively.

REFERENCES

1. http://www.hfsf.gr/
2. https://www.teke.gr/index.html#RESOLUTION@RESOLUTION
3. https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp
4. https://home.treasury.gov/
5. https://www.nama.ie/
6. https://www.cnbctv18.com/finance/iba
7. https://www.iba.org.in

Banking industry is growing dominantly over the other industry in Bangladesh. Among the all financial service industry, this banking industry contributes more than 80% of its total contribution to GDP. However, in Bangladesh, there are 59 scheduled banks. Among these, six (6) are state owned commercial banks, three (3) specialized banks, forty one (41) are commercial banks and nine (9) are foreign commercial banks.

Like all other industry around the world, employees are one of the fundamental key resources for any organization. To reach at the apex of its success, each organization should utilize its resource efficiently. So, it is an important factor for any organization which may lead any organization towards the success. Any organization may try to utilize its manpower by force. But, it cannot give the organization its hundred percent efforts. In such case, spontaneous workings is the required one which provides hundred percent of utilization of its manpower. Employees may engage in such spontaneous workings when they will be satisfied in their job.

Spontaneous work comes out when an employee have a positive feeling about its employer. Spontaneous work is very important for each and every organization because its success mainly depend on employee’s devotion towards organization. As banking industry is the backbone of the economy of our country, this study attempts to investigate the factors affecting employee performence of bank employees in Bangladesh.

In this study, the researcher tries to link the dependent variable to its independent variable. In this study, all variables are the followings:

Independent Variable: Employee Performance

Dependent Variable:

• Talent Management;
• Organizational Culture;
• Training and Development; and
• Remuneration and Performance rewards.

A well designed questionnaire is used to collect data for this study. The researcher has done a quantitative analysis using SPSS version 25 to find out factors contributing towards job satisfaction.

Background of the Study

In the previous years, one of the most attractive jobs for job seekers in Bangladesh is to be a banker in Bangladesh. But, recently, it is evident that most of the job seekers are choosing government jobs rather than all other jobs. That may be for the two reasons. One is for the increased salary structure for the government pay scale and another one is less job stress. In past, ambitious job seekers choose private job due to its handsome pay scale. Though job stress was high in private jobs more than the government jobs but it can be adjusted due to high remuneration. This research is aimed to address the factors for which job satisfaction arises and which leads to high employee performance.

However, the above description is to understand the matter why job seekers switch their attitudes in other job sectors. Generally job seeker switches their jobs due to the job dissatisfaction.

In Bangladesh, it is evident from the study that near about 37% university graduate are unemployed. Due to high unemployment rate, job seekers are bound to stay in such job. But, it should mention here that, by force workings may not give any industry fruitful results. As it recognized and acknowledged by worldwide that inefficient use of any organizations workforce may not give it any good result. We need to keep in mind that employee performance is the key to the success for today’s competitive age. So, the researcher is aimed to link such factors which lead to employee performance by satisfying workforce physical and financial needs.

Employee’s productivity is expected to be high if they are highly satisfied with their job. On the other hand, organizations will suffer much because dissatisfied employees are less committed to their organization. Human nature differs from individual to individual according to their fundamental wants, likings, qualifications, skills etc. That’s why it is very important to determine the factors affecting job satisfaction of bank employees (Kamal & Sengupta, 2008).

It is very useful for banks to identify the contributing factors of employee performance and measure the level of employees’ performance. Bank should lift up their employees’ efficiency, organizational culture, retention and commitment. Indeed, organizations should take good care of their workforce abilities and skills to guarantee their retention and engagement in the work place. This leads to assessing employees’ talents and capabilities to reach efficient work achievement (Yarnall, 2011).

Justification of the study

As the banking sector was an attractive sector for job seekers and now it has been interchangeably changed due to the job dissatisfaction. That means employees who are working in the banking sector due to not being able to get alternative job as employment is in high rate. Employees are not satisfied with the banking hours, recently the remuneration also. It is evident from some studies in Bangladesh that bankers are not satisfied due to various factors (Brazendra NathRoya, Md. Anowar Hossainb, Efat Jannat Shammic 2018). However, the study was in a regional area and lacking in appropriate measures and other policy used. The researcher here is trying to stands a relationship with dependent variable and tries to conclude in such stage which should be concentrated by banking sector to be effective in future.

An extensive review of the literature revealed that a great deal has been written about the relationship of talent management and business performance as well as the importance of organizational commitment for the realization of organizational and professional goals. However, very few studies were found which addressed the causes and effects on commercial bank employees’ performance. The previous research has been conducted mostly in the domain of occupational stress related to dimensions like job satisfaction ( Haider et al., 1986; Cochinwala & Imam, 1987), personality characteristics (Khurshid, 2008) and motivation (Andrabi, 2002; Mufti & Hassan, 1965).While, present study focus on talent management and employees performance; SEM with only commercial banks sector applied to achieve research objectives in the context of Bangladesh.

Problem Statement

In previous studies, it was reported that the number of employee’s are not capable enough to perform the task in an efficient manner in particular and due to which the employee performance in these banks was termed as one of the main causes of problem in banks inefficiency. Poor employees’ performance surfed as a problem and need to be address and what factors contribute and effect employees’ performance.

The study of Adnan M. Rawashdeh (2018) revealed that talent management is very substantial to the stayer of the banking sector in the extremely competitive business situation today. It’s of worth that banks would precede into consideration the subject of talent management, the detail that flexibility of talents is very high in today’s cross national and international border furious talent management such a essential issue to the business organizations specially those functioning in developing countries. Previous studies asserted a positive and significant effect of talent management practices on bank performance, and this study empirically confirmed that there is a linear relationship between talent management strategies (attracting, developing, retaining) and bank performance in Jordanian commercial banks. Bank management is advised to keep developing the attracting mechanism they have applied in order to cope with the changes in the business environment and stay competitive. Also, its advised to maintain developing the motivation system according to the labor market conditions and competitiveness in order to retain talented staff and to avoid labor turnover. As it should concentrate on the rewards mechanism as a main key to retain talents. The major limitation of this study is that the study asked for perceived data about actual talent management practices and performance measures, but the respondents might have given desired data, which made their banks sound good, as all of the respondents were line managers and human resource managers. The size of the study sample was relatively small. Consequentially, the researcher adjusted the study data analysis strategy by using the best valuable statistical methods such as means, standard deviation, and Cronbach’s alphas to deal with such small sample sizes. Future studies recruiting larger sample sizes are needed. Furthermore, prospective studies should effectively compare Jordanian bank performance with other banks in the Middle East based on these variables.

The objective of this study was to test the mediating effect of organizational commitment (oc) in the relationship between talent management, organizational culture, training and development, remuneration and performance rewards and commercial bank employee’s performance Bangladesh. However, an extensive review of the literature revealed that a great deal has been written about the relationship of talent management and business performance as well as the importance of organizational commitment for the realization of organizational and professional goals. However, very few studies were found which addressed the causes and effects on commercial bank employees’ performance. The previous research has been conducted mostly in the domain of occupational stress related to dimensions like job satisfaction ( Haider et al., 1986; Cochinwala & Imam, 1987), personality characteristics (Khurshid, 2008) and motivation (Andrabi, 2002; Mufti & Hassan, 1965).While, present study focus on talent management and employees performance; SEM with only commercial banks sector applied to achieve research objectives in the context of Bangladesh.

Research Objectives

This current study aims to explain the mediating role of work attitude in the relationship between Talent Management and Commercial Banks Employees performance in Bangladesh. In regard to this key purpose, the following specific objectives have been developed for this current study to ensure the structure and scope of this research will be on the right track and can be fulfilled at the end of the study:

1. To explore the relationship of independent variable with dependent variable.
2. To determine the level of talent management, organizational culture, training and development, remuneration and performance rewards and employee performance in Bangladesh’s commercial banking sectors.
3. To evaluate the relationship between the talent management, organizational culture, training and development, remuneration and performance rewards in Bangladesh’s commercial banks.
4. To examine the most significant predictor of employee performance of Bangladesh’s commercial banking sector.
5. To investigate the mediating effect of organizational commitment on the relationship between the talent management, organizational culture, training and development, remuneration and performance rewards in the commercial banks in Bangladesh.

Research Questions

In line with the objective of the study that are to be determined, there are several research questions that have been identified for the purpose of this study and to meet the criteria of fulfilling the set objectives. In regard to this, the study will thus attempt to complete the gap that exists within the works of Talent management practices, specifically in terms of Bangladesh’s commercial banks employees’ performance. Based on this idea, there are five major questions that have been specifically developed for the purpose of this study which are believed will be able to cater for each aspect that has been determined as the issue(s) to be investigated. The questions developed are the followings:

Significance of the Study

This research is to determine the relationship between the talent management, organizational cultures, job stress and employee performance in Bangladesh’s commercial banking sectors. The purpose is to offer significant recommendations that can help foster better working environment for the employees as well as helping the talent management within commercial banks in managing their skills to ensure better employees performance for the organization Although this study only focuses on the study of Bangladesh’s commercial banks’ employees performance, it is believed that the content of this research will also be applicable to other cases with similar scope of the study as the focus is basically the influence of the talent management, organizational culture, job stress on employees performance in commercial banks.

Practical Significance

Examining the relationship and influence of the talent management, organizational culture, training and development, remuneration and performance rewards within Bangladesh’s commercial banks and the employee’s performance within the Banking sector has been perceived to be essential for several purposes. First of all, the commercial banks in Bangladesh will be able to obtain the advantage from understanding the relationship and might be able to perform any modification or renewal to their current talent management practices and strategies based on the information that can potentially be obtained through this study in order to ensure more employees can be performed. Understanding the relationships between the talent management practices can also help to disclose the basic reasoning for the organization or not and further develop strategies that can help them better performance of their employees.

Apart from that, it is also crucial for this study to be conducted as it was believed that the content of this research will be able to open up new opportunities for future researches with the potential of using latest data possible. Not to mention that the limitations and restrictions that were and might be faced in this study can further be put into consideration when developing research in the future to ensure better focus and scope for the study being conducted. In addition to this, this research will also be able to let other researchers to further study this issue and of course continue to analyses the changes that might occurred for this exact situation in a different time period.

Limitation of the study

In case of Banking sector of Bangladesh, each bank’s culture is different from others. Specially, Government banks employee enjoys various advantage in comparison to others legally and illegally. However, the study was limited within few employees of each institution. The researcher here tries to concentrate on all the commercial banks. But, few employees’ opinion may not represent the actual culture of any bank. Another one thing, the culture of a bank within all the branches is not similar. It depends on the branch head and how his beliefs on management.

Yet, the study is taken into consideration only the opinion of bank employees and not the management. In such case, the employees of banks may comment in a way in which they will be better. As a nation, they do not ethically developed and judge only by the way in which they have own interest.

Summary

Summarising the content of this chapter, it basically offers the information necessary to help introduce the research topic by providing the background of the study as well as the significance in conducting it. In regard to this, the information provided will be the base for the structure of the next chapter and thus guiding the process of reviewing existing literatures. Additionally, this current chapter had also managed to offer information needed for this study as well as any other necessary information such as the aim and objectives as well as the questions for the research.

Executive Summary

Banks being the financial backbone of an economy affect the country’s monetary and fiscal policies. With the advent of globalization, more and more foreign banks coming down to India and vice versa, and banks are now exposed to a number of risks. Therefore, the entire banking system and its operations require close scrutiny and control.

Banks by the very nature of their business attract several types of risks, viz., credit risk, market risk (which includes interest rate risk, foreign exchange risk, and liquidity risk), operational risk, reputational risk, business risk, strategic risk, and systemic risk to cite a few. Banks are exposed to these risks because of the business of banking which they undertake, ‘banking’ means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order o otherwise. ‘banking company’ means any company which transacts the business of banking in India. This is also called the process of intermediation.

1. Introduction to case

The government announced the amalgamation of three banks — Bank of Baroda, Vijaya Bank, and Dena Bank — aimed at creating the country’s third largest bank with a business of Rs 14.82 lakh crore and over 9,600 branches across the country.

It has been recognized that having several banks that are majority-owned by the government, virtually doing the same business, and competing for the same pie of customers wasn’t a sensible strategy. It also meant a lower return on the capital employed by the government which has competing demands for funds, and growing competition. The government and banking regulator RBI have also emphasized the changing face of banking marked by technological changes; challenges to raising capital that the owner (the government) has to provide periodically; the need for consolidation in the sector and putting an end to fragmentation.

On a standalone basis, Vijaya Bank had strength in the South while Bank of Baroda and Dena Bank had a stronger base in Western India. That would mean wider access for both the proposed new entity and its customers. From the government’s and regulator’s point of view, the move will lead to a lower NPA (non-performing assets) ratio for the new bank compared to the NPA ratios of 11.04 % for Dena Bank, 5.40 % for Bank of Baroda and 4.10% for Vijaya Bank. What this could mean down the line is lower requirements of capital from the government and also the ability of a large bank, like the one proposed, to lend more on the strength of its higher capital base (12.25 %) and to expand the business, rather than being dragged down because of weak financials and being forced not to lend.

2. Introduction of banks

1.1 Bank of Baroda

Bank of Baroda (BoB) is an Indian multinational, public sector banking and financial services company. It is owned by the Government of India and headquartered in Vadodara, Gujarat. It has a corporate office in Mumbai, Maharashtra.

Based on 2017 data, it is ranked 1145 on the Forbes Global 2000 list. BoB has total assets in excess of ₹ 3.58 trillion (making it India’s 2nd biggest bank by assets), a network of 5538 branches in India and abroad, and 10441 ATMs as of July 2017.[10]The government of India announced the merger of Bank of Baroda, Vijaya Bank and Dena Bank on September 17, 2018 to create the country’s third-largest lender. The envisaged amalgamation will be the first-ever three-way consolidation of banks in the country, with a combined business of Rs 14.82 lakh crore, making it the third largest bank after the State Bank of India (SBI) and ICICI Bank.

The bank was founded by the Maharaja of Baroda, Maharaja Sayajirao Gaekwad III on 20 July 1908 in the Princely State of Baroda, in Gujarat.[12] The bank, along with 13 other major commercial banks of India, was nationalized on 19 July 1969, by the Government of India and has been designated as a profit-making public sector undertaking (PSU). As many as 10 banks have been merged with Bank of Baroda during its journey so far.

1.2 Dena Bank

Dena Bank was founded on 26 May 1938 by the family of Devkaran Nanjee, under the name Devkaran Nanjee Banking Company. It adopted its new name, Dena(Devkaran Nanjee) Bank, when it was incorporated as a public company in December 1939.

In July 1969 the Government of India nationalized Dena Bank, along with thirteen other major banks. It is now a Public Sector bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.

On 17 September 2018, The Finance Ministry of the Government of India proposed to merge three state-run banks — Vijaya Bank, Bank of Baroda, and Dena Bank — into a single bank. The amalgamated bank is to become the third biggest bank in India with a total business of more than ₹1,482,000,000,000 (US$21 billion). The boards of the three banks are to meet to consider the proposal.[9] The agenda behind the merger of the banks is to lower Non-performing assets. The Gross NPA OF the Bank of Baroda, Vijaya Bank, and Dena Bank is 12.4%, 6.9% and 22% respectively. The Dena Bank is currently operating under the Prompt Corrective Action (PCA) framework due to non-performing loans.

1.3 Vijaya Bank

Vijaya Bank is a public sector bank with its corporate office in Bengaluru, Karnataka, India. It is one of the nationalized banks in India. The bank offers a wide range of financial products and services to customers through its various delivery channels. The bank has a network of 2031 branches (as of March 2017) throughout the country and over 4000 customer touchpoints including 2001 ATMs.

Vijaya Bank was established by a group of farmers led by A. B. Shetty on 23 October 1931[7] in Mangaluru in Dakshina Kannada District of Karnataka State. Since it was established on the auspicious Vijayadashami Day, it was named ‘Vijaya Bank’.

During the economic chaos created by the Great Depression of 1927–30, Shetty approached leading Bunt personalities to start a bank with the objective of extending credit facilities at a lower rate of interest to enable the farmers to cultivate their lands and prevent them from falling into the clutches of money lenders. Accordingly, Shetty involved 14 Bunts and established Vijaya Bank on 23 October 1931. In the beginning, the bank had an authorized capital of ₹5 lakh and an issued capital of ₹2 lakh. The paid-up capital was ₹8,670.

3. Share Ratio in Merger

The share swap ratio of a three-way bank merger of Dena Bank and Vijaya Bank with Bank of Baroda (BoB) was announced on Tuesday, as they took a step closer to becoming the third-largest lender in India. Bob, the largest of the three banks, on Wednesday, said that shareholders of Vijaya Bank and Dena Bank could get 402 and 110 equity shares of BoB for every 1,000 shares they held.

The share swap ratio will hurt Dena Bank shareholders the most as they lose ₹ 4.80 per share because of the merger, followed by Vijaya Bank shareholders, who will lose ₹ 3 per share. The calculations are based on the closing market price on Wednesday. While BoB closed at ₹119.4 per share, Vijaya Bank and Dena Bank closed at ₹ 51.05 and ₹ 17.95, respectively.

The government owns 68.77% of Vijaya Bank, 80.74% of Dena Bank, and 63.74% of Bank of Baroda Foreign portfolio investors. (FPIs) hold 1.29% in Dena Bank, 4.91% in Vijaya Bank, and 10.35% in BoB. After the merger, the government will own 65.74% of the merged entity.

The share swap ratio is negative for both Vijaya Bank and Dena Bank. There could be a marginal negative reaction to both the stock prices now. On a net worth basis, it is more a negative ratio for Vijaya Bank,’ a banking analyst said on condition of anonymity. “Also, the share swap ratio for Vijaya Bank is lower than street estimates. However, it is definitely beneficial for the Bank of Baroda.’

4. Problem statement

The primary objective of this amalgamation is aimed at improving the customer base, consolidating the public-sector banking, and enabling the merged entity to compete at the global banking level. Amongst all the highlights, the deal is also likely to face certain hurdles in relation to its implementation process, employee retention, etc. Further, it will also have to integrate data of more than 100 million customers as well. With such a mammoth task at hand, the implementation phase of the merger may pose, for some, initial teething issues for the merged bank and the government. Further, multiple nationwide strikes have been organized by bank employee associations such as All India Bank Officers’ Confederation (AIBOC), All India Bank Employees Association (AIBEA), and Bank Employees Federation of India (BEFI).

A written petition is also pending with the Delhi high court, challenging the merger and alleging violations of banking regulations. Amidst such opposition, the Finance Minister and have recently asserted that pursuant to the merger, there will be no retrenchment and there will be no impact on the service conditions of the employees as well. The sporadic strikes are not only affecting the smooth operational functioning of the banks but are also impacting other industries as well. However, in light of the government’s assurances, the fate of such opposition needs to be seen. This amalgamation will present the Bank of Baroda as the global conglomerate in the banking sector aiming to achieve higher working efficiency, financial stability, and wider operationality. It will not only facilitate national and global outreach but will also integrate the public banking sector in India. Having said that, the realization of such an aim — the success and the efficacy of the consolidation will largely be contingent on the effective and smooth implementation of the merger.

5. Alternatives / Solution

Such massive consolidation is also expected to reduce the lending cost, the number of NPAs and increase the merged bank’s operational stability and profitability. The central government had, previously in 2017 as well, merged six banks into the State Bank of India, making it the largest banking conglomerate.

Post-consolidation, the Bank of Baroda will have a business of around Rs 15.4 trillion and advances and deposits market share of 6.9% and 7.4%, respectively. Further, considering the regional widespread presence of Vijaya Banka and Dena Bank, the Bank of Baroda will have pan India presence.

Dena Bank’s strength lies in its relatively higher access to low-cost current account saving account (CASA) deposits, while Vijaya Bank has good profitability and availability of capital for growth. Extensive reach and global network and offerings of BoB will translate into advantages in terms of market reach, operational efficiencies and the ability to support a wider offering of products and services, the statement says.

Every permanent and regular officer or employee of Vijaya Bank and Dena Bank will become an officer or employee and will hold his office or service in BoB such that the pay and allowance offered to the employees and officers of both the merging lenders should not be less favorable as compared to what they would have drawn in the current employer banks.

6. Challenges

The task at hand for the three men is a monstrous proposition. In any merger, the biggest challenge is that of personnel. While in the private sector, the easiest action for the management is to lay off people to derive cost savings that option does not exist for the three CEOs. There is 90,000 staff whose future has to be protected and concerns addressed. Integration of technology platforms and cultures of these organizations. Aligning the distribution of professionals in the merged bank and handling of human resources. As issues on seniority are structured and important in a public sector set-up, ensuring that there is harmony would be a challenge.

Rationalization of physical infrastructure. Dena Bank came under prompt corrective action of the RBI in May 2017 in view of its high Net NPA and negative RoA (return on assets). Bank of Baroda is the largest among the three and will take a hit on its asset quality. The other challenge is customer retention which we saw in SBI’s recent merger with its associate banks. For the banking system as a whole, things cannot change as the capital remains unchanged. The quantum of Gross NPA (GNPA) cannot change and will still have to be addressed. Mergers are not the panacea in the context of PSBs.

7. Conclusion

Without addressing the governance issues in the banks, merging two or three public sector banks may not change the architecture. Unless there is a change in the operating structures, mergers may not deliver the desired results in the long run. Giving the PSBs autonomy along with accountability.

Merged entities will require capital support from the government; otherwise, such a merger would not improve their capitalization profile. The merger will yield the desired results if these banks rationalized their branches, looked to reduce costs, and handled people issues well. RBI should continue to give banking licenses for more small finance banks as well as universal banks along with bank mergers.

Bibliography

Websites

1. https://www.business-standard.com
2. https://www.thehindu.com
3. https://economictimes.indiatimes.com
4. https://m.economictimes.com
5. https://www.bankofbaroda.com
6. https://www.vijayabank.com
7. https://www.denabank.com

A bank is a financial institution that accepts deposits and gives out loans. The development of any economy relies upon capital accumulation, which thus relies upon investment and a comparable measure of savings to coordinate with it. Banks collect the savings of the individuals in the economy and lend them out to businesses and borrowers for investment, hence the importance of banks in the economy.

Banks play a significant role in developing the economy. In as much as the financial market is broad, a well-functioning banking institution has the potency to improve the growth of a developing economy (IMF 2015) as cited in Tuyishime, R., Memba, F., & Mbera, Z. (2015). As indicated by Sani et al (2004), banks play the role of facilitating economic transactions between several domestic and international economic units; hence they improve trade, commerce, and industrial operations. Comparatively, to other countries in the sub-regions, Ghana`s banking sector appears to be very vibrant (Quartey and Mensah, 2015).

In the 21st century era, banking is being improved with the adoption of channels like Automated Teller Machines (ATM), credit and debit cards, web banking, and online cash transaction.

In Ghana, mobile banking is at an early stage with just a few grown-ups are having mobile accounts and the number of mobile-based financial transactions is still developing. While the presiding group of small and medium entities adopts the formal account, many of them depend on internal finance for the investment, with just around 23% having bank advance or credit extension. Private area credit to GDP is low at around 19% in 2014.

Banking over the years has satisfied its definition of safekeeping of clients’ funds and guaranteeing that the clients get the cash upon demand. Furthermore, this has been the essential function of banking similar as a raw material is for a business; to the banking establishment is cash.

The performance of the banking industry is essential, considering the tremendous role banks play in the economy. As already stated above, the financial intermediation of the banks has increased economic growth and development by providing credit facilities to both the public and private sectors of the economy.

As a result of the intense competition in the banking sector, most managers, and administrators of commercial banks have had their attention drawn to improving the mobilization of cash. In developing countries, banking systems have lacked in undertaking the necessary functions needed to facilitate growth and to perform the vital economic development functions required for speedy growth and capital increase efficiently. One major way of addressing this issue is by looking into maximizing deposits (Agu, 1994).

Deposit mobilization is the accumulation of funds from the public by financial institutions. This is an integral part of banking activity. Without deposits, banks cannot function. Deposits are considered an effective source of capital for the bank. The bank’s ability to loan more significantly centers on its deposit mobilization. Lending activities are the major source of funds for banks. Banks loan out deposits received, and the interest on these loans thus is their income. Hence, without a deposit, banks cannot function.

Since commercial banks rely on depositors’ funds, it is proposed that there exist a relationship between the banks to mobilize deposit and the measure of credit allowed to the clients. The productivity of playing out this capacity relies upon the degree of advancement of the monetary framework. Per Kasekende, (2008), countries with enhanced and efficient financial systems develop quickly, while an inefficient financial system takes the risk of failure.

In the current setting bank`s performance is assessed on several indicators, inculcating the deposit mix, and the quantum of low-cost deposits in the mix among others. In the current time of competition as well as the development of private and multinational banks, an ideal mix of deposits is an absolute necessity to survive. Since the premium paid forms a major burden on the bank, the globalization of low-cost deposits, like current accounts and savings bank deposits, is the earnest requirement for the bank.

Problem statement

Bank performance has been a topic of interest in finance and economics since the performance and growth of banks results in the economic growth of a country. Its study has become very relevant in the context of deposit mobilization theory. Deposit mobilization is an integral part of banking activity. Without deposits, banks cannot function. Deposits are considered an effective source of capital for the bank. The bank’s ability to loan more significantly centers on its deposit mobilization. Lending activities are the source of income for commercial banks. Commercial banks rely on depositors’ money as a source of funds. This fund is then used for lending activities. This proposes that there is a relationship between the financial institution`s effort to mobilize deposits and the measure of credit given to the clients. Without deposits, banks cannot perform literally. A higher measure of credit results in a higher rate of income for the bank, and a higher rate of income result in a high financial performance of banks. Since deposit forms the major source of bank capital, it has become very necessary to study it effect on the financial performance of commercial banks in Ghana banks.

The available literature about banks’ performance in Ghana mainly focused on the role of banks, how to improve savings efficiency, challenges of deposit mobilization, credit risk and profitability of banks, how inflation, interest rate, age of banks, and size of banks affect the performance of banks.

For instance, Bright Adu Gyamfi Antwi (2015), examined mobilizing deposits as the role of commercial banks in Ghana. According to him, This study reveals certain basic facts about commercial banks in Ghana in their struggle to mobilize greater domestic deposits. Firstly, Commercial banks’ deposits mobilization in Ghana from 2000 to 2004 indicates an upward trend, however, the present level of deposits as a ratio of the total amount of money in circulation is woefully inadequate. Secondly, the methods or the design of products and services, like initial deposits as a precondition for a bank account as well as ways of promoting products, have tended to benefit formal sector workers who earn regular income than the informal workers such as artisans, farmers, and other small-scale operators who are the majority.

Thirdly, the concentration of commercial banks in urban areas coupled with the insufficient instruments used for deposit mobilization make them battle the problem of how to effectively harness the volume of deposits left in the rural areas. Moreover, the attitude of bank personnel towards rural savers in Ghana has not been customer-friendly to entice more depositors.

Finally, even though there is a significant difference as far as the bank’s general deposit growth rate is concerned, in terms of the annual average deposit growth rate, there is no significant difference.

Quarshie Joseph (2011), examined how to improve the efficiency of Savings Mobilization in Ghana. According to him, The failure of the current system of mobilizing savings does not only lie with banking institutions but also with widespread perception in the informal sector that banks especially are 105 for some caliber of people (so-called high class in the society). This perception over the years can be said to have been fuelled by the concentration of banks tailoring their services to meet the needs of high-income earners (the urban rich). Sporadically the sheer interior decoration and clothes of personnel or clients in the banking hall intimidate potential savers in the informal sector. The path this research has chartered for mobilizing savings in the informal sector including the rural population will ensure that these excesses are mitigated,, especially within the framework where potential savers will carry out transactions at local Post Offices, Bank-licensed outlets, or mobile bankers in their communities, markets and other places of work, area or district revenue offices, just to mention a few.

Oduro Asamoah Joyce (2015) also examines the challenges of deposit mobilization at agricultural development banks. According to her research, evidence of Cumbersome Loan Applications, Poor Customer Service, Cumbersome Account Opening Requirements and Processes, Less functional modern ICT Facilities among others. The outcomes of such challenges are the inability of the bank to mobilize enough funds for their operations and also to support the development of the economy of Ghana. It is, therefore, necessary that pragmatic measures are adopted to regulate the efficiency and effectiveness of ADB in increasing the deposit mobilization of the bank.

John, A. et al (2017) also examined the credit risk, deposit mobilization and profitability of Ghanaian banks. The result of their findings unveils a positive relationship between credit risk, deposit mobilization, and profitability of Ghanaian banks.

Studies above have not taken into consideration deposit mobilization together with the financial performance of banks, while deposit mobilization is literally the greatest source of capital for commercial banks.

This research is conducted because of our interest in deposit mobilization and the financial performance of banks. Related research has not taken into consideration the deposit mobilization factors together with the performance of commercial banks and how it can be improved as means of increasing their financial performance in Ghana, whiles others have considered it in a very narrow light. After the gap in this area has been observed, we then decided to conduct our research on the topic of the effects of deposit mobilization on the financial performance of commercial banks in Ghana.

Main objective

The main objective of the research is to assess the effect of deposit mobilization on the performance of commercial banks in Ghana.

Specific objectives

• To examine the impact of deposit mobilization on the performance of commercial banks in Ghana.
• To examine the trend behavior of bank performance in the banking industry.
• To ascertain the level of deposit mobilization of commercial banks in Ghana.

Research Question

• What is the impact of deposit mobilization on the performance of commercial banks in Ghana?
• What is the trend behavior of bank performance in the banking industry?
• What is the level of deposit mobilization of commercial banks in Ghana?

Significance of the study

The significance of study has a great contribution to the existing knowledge around the effects of deposit mobilization on the financial performance of commercial banks in Ghana.

The study is used to know the effect of deposit mobilization on banks, enabling banks to develop and design strategies to improve upon deposit mobilization.

The other significance of this study is, serves as a basis for other researchers to use as a reference in investigating a similar project. Since studies conducted in this area are not sufficient, it will help other researchers by revealing issues for further research.

The study will also be of importance in many ways to policymakers, government, and other important stakeholders. These include; aiding in promoting Capital Formation, increasing Financial Reliance, and assessing the relationship between growth in banking and economic development.

Scope of studies

The study will center on the effects of deposit mobilization on the financial performance of commercial banks in Ghana. The proposed study will be based on Ghanaian Commercial Banks in the various selected region where information will be derived. Useful and needed data for the accomplishment of the study will be retrieved from these commercial banks. However, any useful material which will be needed to make the research work better will be employed.

Methodology

The aim of the research is to examine the effect of Deposit Mobilization on the financial performance of commercial banks in Ghana.

This study will employ the quantitative research design. Secondary sources will be used for data collection.

Secondary sources, ten years of annual reports and financial statements from 10 commercial banks, they include Barclays bank of Ghana Limited(ABSA), Agricultural Development Bank of (Ghana) Limited (ADB), Zenith Bank (Ghana) Limited, Access bank (Ghana) Limited, CALL Bank, Fidelity Bank, Ghana Commercial Bank, Prudential Bank Limited, Stanbic bank, and Societe Generale Ghana, as well as reports issued by the central bank, Article, Journals, books, and previous research works relevant to this topic will be applied. These banks were chosen because of the availability of materials to conduct the study.

Panel regression analysis will be used, using Return on Assets(ROA) of the banks as a basis of performance measurement being the dependent variable and deposits as the main independent variable.

The regression technique is a very important tool in econometrics. This technique is concerned with examining the relationship and linkages between a given variable and one or more other variables, that is, the change in one variable as a result of a corresponding change in another variable.

The regression model will modify as follows:

• ROA it= β0 + Depitβ1 + SIZEitβ2+ Infitβ3+ Growthitβ4 + µit……

Where ROA it represents the performance of the bank at time t, Debit represents the independent variable, deposit mobilization at times t, the control variable includes the Size of the bank proxied by SIZEit, Inflation proxied by Infit, Growth of the bank proxied by Growth. β0 is the intercept of the regression that is, the constant term, β1-β4 are the coefficient of variables and µit is the error term.

These variables will be chosen because they are majorly the key variables that could affect the performance of banks.

Organization of the study

This study is organized into five chapters. Chapter one will deal with the Introduction of the study. Chapter two will cover the reviews’ literature on both theoretical and empirical studies on the link between bank deposits and performance. Chapter three will elaborate on the methodology to be employed in carrying out the study. Chapter four will revolve around the findings from the study. Chapter five will cover the conclusion and recommendations about the findings.

Summary of literature review

Per Gockel and Brow (2007), the money deposited in a banking firm is very safe. Savings Accounts, Checking Accounting and money market accounts are the very places where deposits have been effectual. Per the banking conditions, the holder of the accounts must follow the same accepted procedure in case he wants to make deposits. The bank’s view on the deposit is perceived as a liability anytime the depositor makes the deposit.

It is factual, deposits are made only when a person opens an account, and this involves placing funds in the accounts for long-term use. To be able to make a proper deposit, the depositor should walk to the bank. Filling in a person`s details on the bank deposit slip, the person can also make a deposit. By adopting a wire transfer, or direct deposit plan, an employer can make a bank deposit.

Financial firms attempt to retrieve more deposits or funds, they give out a series of saving packages that are a channel to their targeted customer (Laura, Alfred, Sylvia, 2009). In giving out better-saving packages, it makes their client easily assess liquid products, or semi-liquid accounts or time deposits with a proportionally massive rate of interest.

According to Katang and Nui (2008) cited in Tuyishime, R., and Memba (2015), The approach of commercial banks is accepting deposits from individual clients and extending credits to different targeted groups. They accrue by retrieving a lot of interest from borrowers than paying interest to the clients whose deposits they accept.

In financial institutions that focus on banking, to induce more customers in saving more in the bank, they use the approach of deposit mobilization (Kazi, 2012). This money generated by the bank will be used in giving out loans to the customers in return.

Performance is a measure of how well an entity is. The quantitative and qualitative approaches used in assessing the well-being of an entity is termed the Performance measure. For the organization to attain success, they employ performance measures tools that are used to monitor progress in attaining the set objectives of the firm. Guest et. al (2003) explain performance as a result, of attainment sprouting out of the firm`s activities.

Oduro Asamoah Joyce (2015) also examines the challenges of deposit mobilization at agricultural development banks. According to her research, evidence of Cumbersome Loan Applications, Poor Customer Service, Cumbersome Account Opening Requirements and Processes, and Less functional modern ICT Facilities among others. The outcomes of such challenges are the inability of the bank to mobilize enough funds for their operations and also to support the development of the economy of Ghana. It is, therefore, necessary that pragmatic measures are adopted to regulate the efficiency and effectiveness of ADB in increasing the deposit mobilization of the bank.

John, A. et al (2017) also examined the credit risk, deposit mobilization and profitability of Ghanaian banks. The result of their findings unveils a positive relationship between credit risk, deposit mobilization, and profitability of Ghanaian banks.

Studies above have not taken into consideration deposit mobilization together with the financial performance of banks, while deposit mobilization is literally the greatest source of capital for commercial banks.

References

1. Aug, C. C. (1994). The role of commercial banks in mobilization and allocation of development in Nigeria. Savings and Development.
2. Bright Adu Gyamfi Antwi (2015). Mobilizing deposits as the role of commercial in Ghana.
3. Guest, D. E., Michie, J., Conway, N., & Sheehan, M. (2003). Human resource management and corporate performance in the UK. British journal of industrial relations, 41(2), 291-314.
4. John, A., Isaac, O. & Nathaniel, A. (2017) Credit Risk, Deposit Mobilization and Profitability of Ghanaian Banks.
5. Kasekende, L. (2008). Developing a sound banking system. In IMF Seminar, Tunisia (Vol. 37).
6. Kazi, A. M. (2012). Promoting deposit mobilization and financial inclusion. Journal of Marketing, 5.
7. Laura, E., Alfred, H., & Sylvia, W. (2009). CGAP Working on Savings Mobilization Comparative Analysis of Savings Mobilization Strategies (Vol. 30). Discussion Paper Series No.
8. Oduro Asamoah Joyce (2015). Challenges of deposit mobilization at Agricultural Development Banks.
9. Sani, R.M.; Abubakar, M.M. and Kushwaha, S.(2004). Economic Analysis of Crop Residue under Different Methods of storage in the Northern Guinea Savannah Ecological Zone of Nigeria. Journal of Research in Agriculture,1:17-20.
10. Tuyishime, R., Memba, F., & Mbera, Z. (2015). The effects of deposit mobilization on financial performance in commercial banks in Rwanda. A case of equity bank Rwanda limited. International Journal of small business and entrepreneurship research, 3(6), 44-71.
11. Quarshie Joseph (2011). Improving the efficiency of Savings Mobilization in Ghana.
12. Quartey and Mensah( 2015): Financial development and economic growth in Ghana.

Abstract

Bank regulation refers to the formulation and issuance by authorized agencies of specific rules and regulations, under governing law for the conduct and structure of banks (Harvey, 2012). This study, therefore, seeks to assess the effects of central bank regulatory requirements on the financial performance of commercial banks in Kenya. This study is aimed at establishing why despite the review of banking regulations by the CBK in 2013, some banks are still performing poorly while registering huge losses whilst others are performing well and making strides in the banking industry. This study shall specifically focus on the effects of: interest rate capping, liquidity management, credit risk management and a capital requirement on the financial performance of commercial banks. The study will employ a descriptive research design. Both primary data and secondary data shall be collected and analyzed. For primary data collection, the study shall target 30 key bank officials who will be randomly sampled and data collected by the use of a questionnaire. Secondary data shall be collected from the most recently published annual financial statements and banks supervision records at the Central Bank of Kenya. The data obtained will be cleaned; coded and statistical outputs generated using SPSS. Descriptive and inferential statistics will be employed to analyze the data. To determine the effects of central bank regulatory requirements on the financial performance of banks in Kenya, measures of central tendency, dispersion and multi-regression analysis model will be used.

Introduction

Background of the study

The current regulatory structure for banking services is not the result of any grand design or reasoned blueprint. Instead, it represents a set of accumulated responses to a long history of financial crises, scandals, happenstance, personalities and compromises among a broad and competing array of industry and governmental units (Markham, 2000). Regulations are aimed at ensuring the safe operation of financial institutions, set by both state and federal authorities.

Given the interconnectedness of the banking industry and its reliance on the national and global economy, it is important for regulatory agencies to maintain control over the standardized practice of these financial institutions. Well-established banking systems are important factors of functioning financial systems. These have been vividly proven by recent developments around the world. When banking or more generally, financial systems temporarily break down or operate ineffectively. The capacity of these firms to obtain funds necessary for ongoing existing projects and pursuing new endeavors is curtailed. Severe interferences in the intermediation process can even lead to a financial crisis and in some cases, undo years of economic and social development. Since 1980 more than 130 countries have experienced banking problems that have been costly to resolve and disruptive to economic development. This troublesome situation has led to calls for banking reform by national governments and such international organizations as the World Bank and the International Monetary Fund (Barth, Caprio & Levine,2001).

Central bank regulatory requirements for banking institutions refer to regulations and guidelines issued by the Central Banks that subject banks to certain requirements, restrictions and guidelines. Central bank regulatory requirements can also be defined as legal frameworks for financial operations. The regulations are a significant contributor to preventing or minimizing financial sector problems. The objectives of these regulations are: 1) to reduce the level of risk to which bank creditors are exposed (i.e. to protect depositors) 2) systemic risk reduction-to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures, 3) avoid misuse of banks to reduce the risk of banks being used for criminal purposes, such as laundering the proceeds of crime and to protect banking confidentiality credit allocation to direct credit to favored sectors hence to provide the best customer service in this competitive edge (CBK 2012).

In Kenya, commercial banks and mortgage finance institutions are licensed and regulated in accordance with the provisions of the Banking Act and the Regulations and Prudential Guidelines issued thereunder. As key players in the banking sector, commercial banks and mortgage finance companies are subject to regulatory requirements governing their prudential position and market conduct in order to safeguard the overall soundness and stability of the financial system. One of the statutory objects of the Central Bank of Kenya under the Central Bank Act (Cap 491) is the promotion of financial stability through the maintenance of a well-functioning banking system.

Banking institutions in Kenya are governed by two Acts; the Banking Act and the Central Bank of Kenya Act. According to Sonal, Anjarwalla and Khanna (2013), banking institutions in Kenya is governed under the Banking Act (Chapter 488, Laws of Kenya) and by the Central Bank of Kenya Act (Chapter 491, Laws of Kenya. CBK Act.). CBK is the main financial institution regulator in Kenya which came into operation since 1966 through the Act of Parliament, to carry out its functions free from any interference of individuals, groups of persons or politics. It is an independent body in its mandate (CBK, 2012).

Evidence shows that the absence of Central bank regulatory requirements in some key areas can lead to bank failures and systemic instability. Establishing sound, clear and easily monitored rules for financial activities both encourage managers to run their institutions better and facilitates the work of supervisors. A major weakness of some financial systems is the fact that various financial institutions, especially cooperatives and intermediaries in rural areas, operate completely outside prudential regulations. Some countries have one single general banking law, which tries to assemble all regulations, but in many countries, the operational issues are left to statutory notes, circulars or even simply the routine decisions of the supervisory institution. Various other laws can have an impact on the operation of financial institutions, e.g. company laws, securities laws, debt recovery laws and laws on liquidation and bankruptcy (Thumbi, 2014).

Kenya is currently using most aspects of Basel II; however, it is worth noting that the CBK has decided to incorporate certain features of Basel III in the Prudential Guidelines, particularly in relation to capital adequacy. Kenya is not a member of the Basel Committee on Banking Supervision, but the CBK does adopt and incorporate Basel standards when possible. The government of Kenya through its regulatory body, the Central Bank of Kenya, has introduced prudential regulations to guide commercial banks in conducting their business while cultivating a culture of fair competition in the industry. The introduction of prudential guidelines reflects Kenya’s continued efforts towards strengthening its banking environment so that she can achieve its goal under Vision 2030 to be an international financial stability country (Richard, Devinney, Yip & Johnson, 2009). However, despite the introduction of CBK prudential regulations 2006 governing commercial banks in Kenya, there are very few systematic studies that critically assess how regulations have affected the financial performance of commercial banks.

History of Central Bank Regulations

The term prudential regulation refers to central bank regulatory requirements that were first used in the 1970s in unpublished documents of Cooke committees (the precursor of Basel Committees on Banking Supervision) & the banking of England. But only in the early 2000s after two decades of the recurrent financial crisis in the banking industry in emerging markets, prudential approach to regulation and supervisory framework become increasingly promoted. This was done especially by authorities of the bank for International Settlement. A wider agreement on Central bank regulatory requirements relevance has been reached as a result of the late 2000s financial crisis( Clement,2010)

The history of U.S. banking regulation is written largely on the history of government and private response to banking panics. Implicitly or explicitly, each regulatory response is as result of a crisis which is presumed to be the model origin of banking panics. The founding father of US central bank strongly opposed to the formation of the central banking system,the fact that England tried to place the colonies under the monetary control of the bank of England. This was seen by many as the ‘last straw’ oppression which led to direct American Revolution war. The other who was strongly in favor of a central bank was Robert Morris a superintended of France who helped to open bank of Northern America in 1782. He has been called by Thomas Goddard as the father of the system of credit and paper circulation in the U.S. (Financial Stability Oversight Annual Report, 2003)

In the United Kingdom, the first UK Act to put banking regulation on a statutory footing was in 1979. Prior to 1977, there was no regulation of the sector. This was around the same time as EC Directive No 77/780 of 12 Dec 1977(1) intended to promote harmonization in financial services. This Act introduced the requirement for institutions to be licensed in order to accept deposits from the public. It made no attempt to define a bank or “banking business” and its provisions were applicable only to deposit-taking institutions. The 1987 Act significantly increased the BoE’s supervisory rule, including the power to vet shareholders of UK banks. There was an absolute prohibition on the accepting of deposits by a person in the course of carrying on a deposit-taking business, unless that person was an “authorized institution” in the words of the Act as per sec 67(2). Authorization could be revoked or restricted and the Bank had powers of investigation. It established a Deposit Protection Scheme, for the protection of customer accounts, into which the banks paid, which was replaced in 2001 by the Financial Services Compensation Scheme. It contained provisions for the controlled use of banking names and descriptions. An authorized institution was required to report to the Bank if it entered into a transaction relating to any one person as a result it was exposed to the risk of losses in excess of 10 percent of its capital. Regulation of overseas institutions based in the UK was also included in the Act (Clement, 2010).

Before US had a central bank, banks regulated themselves through established private clearing housing resembling the private central banks in other countries to provide both prudential supervision and prevent a local decline in the asset assisting that serves as bank reserve and money (Benston and Kaufman,1996). In the early 70s financial systems were characterized by important restrictions on market forces which included controls on the prices or quantities of business conducted by financial institutions, restrictions on market access and controls on the allocation of finance amongst alternative borrowers. However, in the mid-70s there has been a significant process of regulatory reform in the financial systems of most countries (Biggar & Heimler, 2005).

Prior to the 1980s, bank supervisors in the United States did not impose specific numerical capital adequacy standards. Instead, supervisors applied informal and subjective measures tailored to the circumstances of individual institutions. In assessing capital adequacy, regulators stressed factors such as managerial capability, and loan portfolio quality and largely downplayed capital ratios. Indeed, it is widely held that rigid adherence to fixed capital ratios would preclude the more comprehensive analysis of thoughts that was necessary to weigh the myriad of factors affecting a bank’s ability to sustain the losses. These statements exemplify a judgment-based, subjective; bank-by-bank approach to assessing capital adequacy. The convergence of macroeconomic weakness, more bank failures and diminishing bank capital triggered a regulatory response in 1981 when, for the first time, the federal banking agencies introduced explicit numerical regulatory capital requirements (Beatty & Liao, 2014).

Over the last thirty years, the mandate of central banks around the world has been progressively narrowed to the goal of price stability. This convergence was prompted by the chronic inflation that characterized most advanced economies in the 1970-80s and independent central banks anchored to an inflation target seemed to be the optimal institutional arrangement to the problem of inflation. However, the 2008-09 global financial crisis reopened the debate on central bank design (Alesina and Stella, 2010).

In Kenya, the first and most known milestone of CBK regulatory requirements was based on the Basel Accord of July 1988 which required the major international banks in a group of 12 countries to attain an 8% ratio between capital and risk-weighted assets from the beginning of 1992. Subsequently, the increasing range and sophistication of financial instruments made the limitations of the probably too simple design of the 1988 capital-adequacy framework become apparent. In 1997 the Basel Committee on Banking Supervision sought to enhance further banking supervision in both G10 countries and a number of emerging economies and it released a set of “Core Principles” which set out minimum requirements for banking (Thumbi, 2014).

In 1966, Kenya formed CBK under the Central Bank of Kenya Act. Since the amendment of the Central Bank of Kenya Act in April 1997, the Central Bank operations have been restructured to conform to ongoing economic reforms. There is now greater monetary autonomy. Section 4 of the Central Bank of Kenya Act states the core mandate of the bank as follows: the principal object of the Bank shall be to formulate and implement monetary policy directed to achieving and maintaining stability in the general level of prices; the Bank shall foster the liquidity, solvency and proper functioning of a stable market- based financial system; and the Bank shall support the economic policy of the Government, including its objectives for growth and employment. CBK prudential regulations 2006 for institutions licensed under the banking act were issued under Section 33(4) of the Banking Act, which empowers the CBK to issue guidelines to be adhered to by institutions in order to maintain a stable and efficient banking and financial system. The effective date for implementation of the regulations was 1st January 2006 (Njeule, 2013).

Financial performance of commercial banks in Kenya

Commercial banks propel the entire economy of any nation by transmitting monetary policy impulses to the economic system. During their operation, the banks face competition and other challenges that expose them to risks and therefore the need for bank supervision and regulations. Banking regulation plays a significant role in determining the cost of services of banks as if interests are unregulated it will create a great discrepancy from one bank to another. This aims at is for ensuring stability in the banking industry (Yona & Inanga, 2014).

Financial performance can be defined as how good is the organization performing at the end of the financial year results (Rutagi, 1997). Good financial performance is associated with an increase in profitability and growth. In banking sectors and other financial institutions, there are two important objectives; profit maximization and wealth maximization. In profit maximization, management uses all means available to them which can lead to an increase in firms’ profitability, while in wealth maximization management considers only decisions which will increase the value of the shareholders.

Performance measurement for commercial banks can be done by calculating ratios such as Return on Assets (ROA) and Return on Equity (ROE) as suggested by Murthy and Sree, (2003) and Alexandru et al., (2008). ROA indicates total profit from the bank assets after the deduction of all expenses and taxes. A higher ROA ratio indicates better performance and effective use of the assets while low ratio shows ineffective use of assets (Ross, Westerfield, Jaffe and 2005). 6

This study used ROE as a performance measurement since ROE is more important compared to another ratio because it shows the rate of return to the shareholders who are the owners of the business. ROE ratio is a good measure of performance efficiency because it discloses how much an organization has generated from the amount of money invested by the shareholders. The higher the ROE the better the performance and vice versa, Hassan (1999) and Samad (1999).

Statement of the problem

In recent decades, many countries have experienced banking problems requiring major reforms of the banking systems. The problems are largely due to domestic causes, such as weak banking supervision and inadequate capital. A key part of bank regulation is to make sure that firms operating in the industry are prudently managed(Berg, 2010) Thus, examining the effects of Central bank regulatory requirements in bank financial performance in countries is a critical area of inquiry.

Without sound measures of banking policies across countries and over time, researchers are constrained in assessing which policies work best to promote well-functioning banking systems and in proposing socially beneficial reforms to banking policies in need of improvement. This helps in explaining why the study of the effect of Central Bank regulatory requirements in bank financial performance in Kenya was needed. Various studies carried out on bank regulations across the globe have focused to mitigate the effects of economic crises and lead the stability of the banking system. Naceur and Kandil, (2009) studied the effects of capital regulations on the stability and performance of banks in Egypt for the period 1989-2004 in Egypt.

Despite the introduction of CBK prudential regulations in 2006 governing commercial banks in Kenya, there are very few systematic studies that critically assess how codes have affected the financial performance of commercial banks. These studies include The banking sector regulatory framework in Kenya: Its adequacy in reducing bank failure Obiero, (2002). Financial regulatory structure reform in Kenya and the perception of financial intermediaries in Kenya and Njeule (2013) studied the effects of Central Bank of Kenya Prudential Regulations on the financial performance of Commercial Banks in Kenya.

CBK 2006 regulation spelt out the guidelines and regulations to ensure that there is prudential management in the banking industry. Some of these guidelines relate to licensing of new institutions, corporate governance, capital adequacy requirements, liquidity management, risk classification and asset provisioning, foreign exchange exposure limits, and publication of financial statements among others. Neil’s (2013) study focused on CBK/PG/2 to CBK/PG/6(capital adequacy, liquidity management, risk classification of assets and provisioning, foreign exchange risk exposure and corporate governance) the study also analyzed one of the measures of performance referred to as the ROA. The study concentrated on CBK regulatory requirements two to five (corporate governance, capital adequacy, risk classification asset and provisioning and liquidity management) out of 22 in order to establish the effects of central bank regulatory requirements on commercial bank financial performance (ROA and ROE) in Kenya. The reason for the study to concentrate on these central bank regulatory requirements is that they are based on the CAMEL framework. CAMEL is a widely used framework for evaluating bank performance. The Central Bank of Kenya also uses the same to evaluate the performance of commercial banks in Kenya. Though some alternative bank performance evaluation models have been proposed, the CAMEL framework is the most widely used model and is recommended by Basel Committee on Bank Supervision and IMF also it. In all the studies cited, it was evident that the findings were conflicted with studies from different regions providing different conclusions. This study, therefore, sought to investigate the effects of central bank regulatory requirements on the financial performance of commercial banks in Kenya hence the research gap that the current study sought to fill. This study was built on the premise that the passage of time and the numerous and significant changes in the commercial banks’ operating environment have led to the different operating environments after the central bank regulatory requirements.

Objectives of the study

General Objective

The effects of central bank regulatory requirements on the financial performance of commercial banks in Kenya.

Specific objectives

1. To establish how interest rate capping affects the performance of Kenya Commercial Bank.
2. To establish the effects of capital requirements on the financial performance of commercial banks in Kenya.
3. To assess the effects of credit risk management on the financial performance of commercial banks in Kenya.
4. To determine the effects of liquidity management on the financial performance of commercial banks in Kenya.

Research Questions

1. How does interest rate capping affect the financial performance of listed commercial banks in Kenya?
2. What is the effect of liquidity management regulation on the financial performance of listed commercial banks in Kenya?
3. What is the effect of credit risk management regulation on the financial performance of listed commercial banks in Kenya?
4. Does capital requirement regulation affect the performance of commercial banks in Kenya?

Justification of the study

The findings of this study shall contribute more knowledge expansion concerning banks regulations and the performance of commercial banks in Kenya, after investigating the following three regulations, liquidity management, capital adequacy and credit risk management. The following among others will benefit more from the study:

Information is provided not only to the commercial bank’s management team only but also to financial institutions in general which offers almost similar services as banks. Management will use that information to know how regulations affect the operations of the organization and hence be able to identify the areas which are doing well or poorly then take appropriate action. Management of other financial institutions will find this research important and hence use it as a benchmark in performance improvement.

Central Bank of Kenya being a financial institution supervisor will be able to know how commercial banks are performing after the implementation of the new regulations and guidelines. That is, are they improving growth and the stability of the banks which is the main objective of formulation of those regulations or not. Other regulatory agencies such as Capital Markets Authority (CMA) and Kenya Bankers Association (KBA) will also asses the performance after the implementation of the new regulations.

A lot of government attention in the banking sector is on the vision 2030 achievement of Kenya being Centre of Finance in eastern and southern Africa. So, the Government of Kenya will benefit more from this study as it will know if the commercial banks in Kenya are performing towards that end.

Investors will also use this information to know how is their investments in banks being protected by the new regulations issued by the CBK, like in the case of capital requirement which can compensate them if the bank encounters performance problems. From that information, investors will be able to make right decision on whether to continue investing or leave that investment portfolio to another one.

This study will help academicians who want to know more about the effect of bank regulations on financial performance. Also, the information contained in this study will be used by other researchers who want to add more knowledge in this area.

Paper view

This report covers the digital transformational change that Metro Bank has launched as a part of the five core strategic initiatives to enable customers to provide a better customer experience and reduce operational cost and time by providing a digital self-serve means for Process Improvements. This is part of one of the strategic changes and five key focus areas which the Bank has set as core principles to become the UK’s best community bank and to overcome the loss in the previous year (2019) as a result of an error in accounting, and look to achieve this by 2024.

This issue was chosen as it is one of the contributors in driving the strategic initiatives which the bank focuses on and completion of this change will result in a significant increase in saving operational costs and increasing customer experience, hence retaining more customers which would further aid to profitability and bring the bank closer to achieve goals set through strategic initiatives. This report examines the progress over the change and issues faced by the Bank to proceed with the given change, given the situation with the Pandemic and its impact on the bank’s strategic growth plans.

Metro Bank was launched in July 2010 and was the first new high-street bank to be granted a license in the UK in more than 100 years. It offers a range of retail banking services to personal and business customers (including SMEs), and at the end of 2020 has 77 branches in and around Greater London and 2.1 million customers to date. (metro-bank-h1-2020-trading-update,2020) . It is a deposit-taking and lending institution that services retail (personal) and business customers in London and its wider commuter belt area. Metro Bank made its entry in the market believing that a new bank in the UK market will have a significant impact on customers by providing them a superior customer service experience and ease of day-to-day banking as compared to other high street banks, and also focused on providing good returns for the shareholders.

Metro Bank’s purpose is: ‘To create FANS At Metro Bank. We aspire to revolutionize UK retail banking by building a bank that puts our customers first.’ Its ambition is to become the UK’s best Community Bank by becoming deeply rooted within the communities that the bank serves and integrating with digital channels to serve better and faster. Metro Bank’s customer ethos states – ‘by meeting customer needs, we create more FANS.’ which perfectly aligns with its purpose. It is achieved through effective store(retail outlets) processes and by training employees(colleagues) to convert footfall in stores. (metro-bank-annual-report-2019)

Metro Banks’s strategy is based on building a strong brand, creating loyal customers, and offering its customers the best experience from their banking. Metro aims to implement this strategy through a customer-focused culture, retailer-type operations, and reliance on its customers telling their friends about their experiences, in order to attract more people to visit its branches.

2019 was a challenging year for Metro bank as the bank was in a loss due to an error in accounting and the founder CEO and chairperson stepped down after 10 years of visionary leadership and helping the bank reach this stage. The bank has adopted a new strategy to overcome the loss and keep the purpose and vision intact to become the UK’s best community bank. The refreshed strategy to become the UK’s best community bank is built on firm foundations: robust capital and liquidity; strong asset quality; simple balance sheet; sector-leading customer service underpinned by a strong culture and engaged colleagues; and customer account growth momentum. Metro bank aims to deliver a statutory RoTE of >8.5% by 2024. (metro-bank-annual-report-2019)

Metro Bank emphasized that outstanding customer service and convenience across a range of distribution channels will remain at the core of Metro Bank’s strategy. Being the UK’s best community bank means serving the local economy by focusing on the requirements of individuals and small businesses.

How Metro Bank’s Strategic initiatives are executed in form of five straightforward pillars or core principles are described below as stated in the Annual Report and Accounts 2019 (metro-bank-annual-report-2019) are:

1. Cost- Tight cost control through back-office efficiencies and organizational simplification. Metro Bank’s fixed costs make up a significant portion of its cost base, primarily due to the store network; this in time will deliver significant operating leverage and drive revenue. In the meantime, the bank has initiatives in place to ensure cost growth continues to moderate. New stores will become more cost-efficient and flexible in size, fit-out, and leasing terms. The bank will also streamline its back-office operations by relocating to cost-effective locations, modernizing contact-center technology, aiming to digitize automated services and reducing organizational layers across the bank.
2. Revenue Initiatives- Improve capability and meet more customer needs through better execution. Metro Bank intends to maintain and improve its leading customer service to both deepen existing relationships and attract new FANS with the aim of driving revenue and NIM growth. The current product offering will be enhanced and broadened, and the bank will invest in its colleagues and technology to enhance accessibility for customers. A limited number of new stores will be opened over the next few years, allowing Metro Bank to be embedded in more communities. Existing and new stores will benefit from the new marketing campaign which will raise awareness of Metro Bank’s award-winning service.
3. Infrastructure- Continued infrastructure investment to support the transformation. Metro Bank will continue to invest in technology, finance, and risk infrastructure to bring the physical and digital worlds together by providing FANS(customers) and colleagues(employees) ease of use and a better experience.
4. Balance Sheet Optimisation – Metro Bank will optimize its balance sheet and asset mix whilst focusing on risk-adjusted return on regulatory capital. In the short-term, tactical asset disposals will be considered, and in the longer term, a number of funding diversification options will be considered to deliver greater risk-adjusted returns on capital. The bank will seek a better-yielding asset book and improved returns on regulatory capital by rebalancing its lending mix towards areas such as specialist mortgages, SMEs, and unsecured loans.
5. Internal and External Communications- Clear and refreshed external and internal communications strategy. Metro Bank’s refreshed strategy will focus on providing colleagues, shareholders, and other stakeholders with a clear message. Internally, the Metro Bank PLC Preliminary Report 2019 4 banks will ensure colleagues have a clear understanding of its transformation plan and their role within this. Externally, the bank is re-evaluating guidance, KPIs, tone, and frequency of reporting.

Metro Bank has developed a set of strategic priorities with the ambition of becoming the UK’s best community bank’. ”Community banking means being embedded in the local communities that we serve, ensuring local decisionmaking, providing access to simple and straightforward retail, business banking, and corporate services that best meet the needs of residents and businesses in the surrounding area’. To build such a platform bank aims to reduce the growing costs and continue evolving customer proposition that delivers acceptable returns for their shareholders, to make a more meaningful investment in infrastructure, and optimize the balance sheets to generate the returns. It is evident that Metro Bank had identified the issues and strategic initiatives are being implemented to address these issues, however, to implement the change, the bank is keen to solve complex problems that come in way of management in terms of time, cost, and delivery, especially in light of covid pandemic where onboarding and training people is becoming a challenge. Problem-solving techniques are being applied to soft launch the products using SSM (Checkland (1999)), which will prove to be an efficient way to deal with the current situations and keep the progress of the strategic initiatives on track.

Financial Impact of COVID-19 The Bank has continued to provide support to its customers, communities, and colleagues, demonstrating the critical importance of community banking to the regions it serves. The Bank remains committed to SMEs and has extended more than £1.3 billion in government-backed business loans to over 33,000 customers, primarily BBLS1. The macroeconomic scenarios applied to the measurement of ECL at H1 remain appropriate and we continue to offer support to customers experiencing payment difficulty. The number of active payment deferrals reduced to less than 3.5% of the retail mortgage portfolio at the end of Q3, down from 16% in H1. (third-quarter-2020-trading-update).

Activity levels continue to gradually recover post-lockdown, with new account openings tracking higher at around 90% of pre-pandemic levels.- As stated in the Annual Report 2019. Given the uncertainty caused by the pandemic in the medium term, it is too early to establish if there is any impact on the 2024 financial targets. The strategic plan is still appropriate and supports the Bank’s ambition to be the UK’s best community bank. (metro-bank-h1-2020-trading-update,2020)

Leadership in Metro Bank focuses on a people-centric approach, the leader’s ability to inspire, excite, create strong values, and engage with their workforce. Vernon Hill, Founder, and Chairman at Metro Bank commented on the award received by Ex-CEO: “Craig lives and breathes the Metro Bank culture and I’m delighted that he’s been recognized by such a well-respected publication as HR Magazine. Not only does he create FANS of our customers, but our colleagues too.” Jenny Roper, Editor of HR Magazine added: “Being crowned our judges’ ‘Most People-Focused CEO of the Year is an incredible accolade given the tough competition in this category this year. Craig’s genuinely people-centered approach shone out.’ Putting people at the center of a business is something many leaders lay claim to, but not all do. But those that do put in the hard work to create genuinely people-first cultures reap the rewards many times over– as Metro Bank has done.’ Metro Bank Ex-CEO Craig Donaldson has been awarded ‘Most People-Focused CEO of the Year’ at HR Magazine’s prestigious HR Excellence Awards 2017.

2019 was undoubtedly a testing year for Metro Bank, with a financial impact due to various factors both external such as the Covid Pandemic, Brexit, and Climate Control, and internal factors such as losses incurred due to accounting errors and the stepping down of the founder CEO and chairman. Metro bank strives to deliver the very best customer service and foundation to deliver the new strategy by entering into the new journey set by the new leaders to revolutionize British banking.

Metro bank explains how it can become the UK’s best community bank and how they progress to achieve it using the four components of the business model described below:

• ‘Unique culture – Our colleagues deliver superior service and are at the heart of our people-people banking approach.
• Integrated Model – Our integrated model aims to combine delivery through physical and digital channels.
• Low-cost deposits – We seek to attract low-cost deposits through our service-led community banking model with specific emphasis on our core retail and SME franchise.
• Risk-adjusted returns – We seek to balance our lending mix through a broad yet simple product offering that is priced proportionate to risk.'(metro-bank-annual-report-2019).

Metro Bank’s inclusive culture attracts, welcomes, celebrates, retains, and develops fantastic people. and encourages colleague employees to bring the best they have when helping its customers and supporting each other at work. Metro Bank states that its unique culture which sets it apart. ‘Our focus on exceeding customers’ and colleagues’ expectations by delivering consistently great service creates an emotional attachment to our brand. Achieving this culture is dependent on attracting and retaining the right people. To ensure that Metro Bank remains a great place to work after the challenges and losses they faced in 2019 and a change in corporate governance and strategy bank assures to invest in people and culture to retain and attract key employees to help execute the Bank’s revised strategy.

Metro Bank’s ESG framework is about ‘Creating and maintaining FANS is at the heart of everything we do, so our approach to environmental, social, and governance (‘ESG’) policy at Metro Bank is simply about doing the right thing.’ (environmental-social-and-governance-supplement-to-annual-report-2018). Metro Bank focuses on putting FANS (customers) first, employees to make it a great place to work, and manage the impact on the environment, and being transparent on business activities, which perfectly aligns with the Culture at Metro Bank.

Daniel Frumkin, Chief Executive Officer at Metro Bank said:

‘In a challenging environment, Metro Bank has delivered a good performance with loan growth reflecting our support for government-backed lending schemes. We have made further progress against the strategic priorities we set out at the beginning of 2020, completing the acquisition of RateSetter in the quarter and launching new initiatives that enable us to meet more customer needs. The continued dedication of our colleagues and their focus on excellent customer service underpins our position as the UK’s best community bank.’

In conclusion, Metro bank shows as progressing well with strategic initiatives being on track whilst adapting to Covid. Cost initiatives are on track, the evidence is supported by facts that new stores are opened and cost discipline ‘Run the bank’ is up by 2% growth. Infrastructure initiatives on track despite the delivery of additional services in response to COVID-19. A strategic multi-year contract to deliver and transform Quality Engineering and Environment Services has been signed. Future digital enhancements are proposed for lower costs and greater flexibility and efficiency. Revenue initiatives are also on track, but NII and fees negatively impacted by COVID-19. (metro-bank-h1-2020-results-presentation). Metro Bank has benefited from modern IT infrastructure comprised of a limited number of systems that form a scalable, flexible, reliable, and secure platform. The platform includes the ability to open accounts in a matter of minutes and the opportunity to deliver valuable insights to customers across their accounts using real-time analytics accelerating the service proposition.

It is recommended that Metro Bank continues with its leadership approach and strategic initiatives with a transformational plan for its continued, long-term growth and profitability. It is also recommended that Metro Bank continue to invest in IT systems and infrastructure as it is doing currently to provide its FANS and colleagues a digital banking environment for a faster, safer, and more secure platform to perform day-to-day banking activities. Given the uncertainty caused by the pandemic in the medium term, it is too early to establish if there is any impact on 2024 financial targets.

References:

1. CMA, Retail Bank Marlet Study, Metro Bank Case Study, 2015, London: Crown copyright 2015
2. Available at: https:assets.publishing.service.gov.ukmedia555dc4fde5274a74ca000013Metro_Bank_case_study.PDF (Links to an external site.)(Accessed: 3rd Jan 2021)
3. Metro Bank PLC, metro-bank-h1-2020-trading-update.pdf, 2020, London: Metro Bank 2020
4. Available at: https:www.metrobankonline.co.ukglobalassetsdocumentsinvestor_documentsmetro-bank-h1-2020-trading-update.pdf (Links to an external site.)(Accessed: 3rd Jan 2021)
5. Metro Bank PLC, metro-bank-annual-report-2019.pdf, 2020, London: Metro Bank 2019
6. Available at:https:www.metrobankonline.co.ukglobalassetsdocumentsinvestor_documentsmetro-bank-annual-report-2019.pdf (Links to an external site.)(Accessed: 3rd Jan 2021)
7. Metro Bank PLC, metro-bank-h1-2020-results-presentation.pdf, 2020, London: Metro Bank 2020
8. Available at: https:www.metrobankonline.co.ukglobalassetsdocumentsinvestor_documentsmetro-bank-h1-2020-results-presentation.pdf (Links to an external site.)
9. (Links to an external site.)(Accessed: 3rd Jan 2021)
10. Metro Bank PLC, q3-2020—trading-update-metro-bank.pdf, 2020, London: Metro Bank 2020
11. Available at: https:www.metrobankonline.co.ukglobalassetsdocumentsinvestor_documentsq3-2020—trading-update-metro-bank.pdf (Links to an external site.)(Accessed: 3rd Jan 2021)
12. Nedonboard, Metro Bank and the call for improved corporate governance, 2019, London
13. Available at: https:www.nedonboard.commetro-bank-and-the-call-for-improved-corporate-governance (Links to an external site.)(Accessed: 3rd Jan 2021)
14. Metro Bank PLC, culture-diversity, 2020, London: Metro Bank 2020
15. Available at:https:www.metrobankonline.co.ukabout-usculture-diversity (Links to an external site.)(Accessed: 3rd Jan 2021)
16. Metro Bank PLC, Metro Bank’s Craig Donaldson named ‘Most People-Focused CEO’, London: Metro Bank 2017
17. Available at: https:www.metrobankonline.co.ukabout-uspress-releasesnewsmetro-banks-craig-donaldson-named-most-people-focused-CEO (Links to an external site.)
18. (Links to an external site.)(Accessed: 3rd Jan 2021)
19. Metro Bank PLC, ‘First Quarter 2020 Trading Update’, London: Metro Bank 2020
20. Available at:https:www.metrobankonline.co.ukabout-uspress-releasesnewsfirst-quarter-2020-trading-update (Links to an external site.) (Accessed: 3rd Jan 2021)
21. Fintechfutures, ‘Metro Bank signs tech partnership deal with Wipro’, London: Informa PLC 2020
22. Available at: https:www.fintechfutures.com202008metro-bank-signs-tech-partnership-deal-with-wipro (Links to an external site.)(Accessed: 3rd Jan 2021)
23. Fintechfutures, ‘Metro Bank’s founding chairman Vernon Hill steps down as non-exec director’, London: Informa PLC 2019
24. Available at: https:www.fintechfutures.com201912metro-banks-founding-chairman-Vernon-hill-steps-down-as-non-exec-director (Links to an external site.)(Accessed: 3rd Jan 2021)
25. Metro Bank PLC, ‘ENVIRONMENT, SOCIAL AND GOVERNANCE (ESG) REPORT 2018’, London: Metro Bank 2018
26. Available at: https:www.metro bank online.co.ukglobalassetsdocumentsinvestor_documentsenvironmental-social-and-governance-supplement-to-annual-report-2018.pdf (Links to an external site.)(Accessed: 3rd Jan 2021)

Banking Sector

The South African banking sector has undergone quite a lot of changes and developments over the years, more specifically its regulatory provisions. However, despite all the changes, the banking sector of the country still seems to be a stable and sound environment. The rise of the so-called ‘digital banks’ in South Africa have proved and demonstrated to be a huge part/ large contributing factor to such changes in the banking environment. We have seen new banking licenses issued over the years to entities that consider or rather call themselves the “branchless banks” or “digital banks”. More information on such entities shall be discussed below in this essay and the above-mentioned changes that have occurred in the banking sector.

The South African Reserve Bank regulates and supervises banks in the country, its purpose basically is to achieve a sound and effective banking system within the country in the interest of depositors of banks and the economy at large. The Reserve Bank also issues banking licenses to banking institutions and also monitors such institutions’ activities and regulations in terms of either the Banks Act or the Mutual Banks Act.

Banks play various role of payments and also that loan intermediary, in which it brings borrowers and lenders together. Such a loan intermediary role is said to can only be successful with proper interest rate risks, credit, and liquidity which will in most cases, be overseen by the South African Reserve Bank. Matters relating to solvency is regulated by Public Banking law while Private Banking law, which is divided between mutual banks, commercial banks and cooperative banks, provides legal certainty of rights and obligations arising from individual transactions.

The Banks Act does not expressly prescribe the different types of banks in the banking sector but it does define the business of a bank, and one can, from reading the such definition of the bank’s business, determine what a bank is. There are however various ways in which one categorizes or classifies the types of banks. The first way would be by distinguishing between banks that are regulated by The Banks Act (i.e. Commercial Banks which are regulated by The Banks Act ) and those regulated by other Acts (i.e. Mutual Banks which are regulated by the Mutual Banks Act ). A second way would be grouping or categorizing the banks that fall under the national payment system and those that don’t. The third way is to distinguish between retail and investment banking. Retail banking deals directly with small businesses and individuals, while investment banking deals with financial market activities. The fourth way is to distinguish between the different bank tiers, which I shall for the purposes of this assessment, get into greater detail.

In the first tier, we have Commercial/Retail banks, Investment banks, The Land and Agricultural Development Bank of South Africa, and The Development Bank of Southern Africa.

a) Commercial/Retail Banks

In South Africa, Commercial and Retail Banks are one in the same thing in the sense that they are similar and no distinction is drawn between them. Commercial/Retail Banks may be described as banks that typically act as payment intermediary services to their customers by taking deposits, making payments and making loans. These Banks aren’t to be confused with Investment Banks as they are also involved in investment banking, but this is not considered their main area of business. Commercial Banks generate their net income in the form of bank charges and interests generated usually through maturity loans they provide or give to their customers. The customers make deposits to the bank which such banks will convert to large maturity loans. An example of this type of bank in South Africa is Absa, Standard bank, Nedbank and the First National Bank.

b) Investment Banks

Investment Banks are banks that provide or assist individuals, companies and other entities such as the government to raise capital by assisting or acting as their agent in matters relating to securities. This type of bank also assists companies with mergers and acquisitions, trading/exchanging foreign exchange and commodities. As mentioned above this type of bank should not be confused with a commercial/retail bank because, unlike a commercial bank, an investment bank does not take deposits. They simply offer two categories of banking services to their customers, which are:

• Selling, trading, or promoting securities for cash or for other securities.
• Managing or advising their customers on their assets on behalf of pension funds or the investing public.

c) The Land and Agricultural Development Bank of South Africa

This is a state-owned financial development institution that was established in 1912 by the South African government to promote financial development in the agricultural sector of the country’s economy. It is not regulated by the Banks Act 94 of 1990, but rather the Land and Agricultural Development Act. This clearly shows that the Land Bank is exempt from the provision of the Banks Act or any other law governing banks unless of course other laws expressly provide for their application to the Land Bank.

d) The Development Bank of Southern Africa

The Development Bank of Southern Africa is also one of the state-owned financial development institutions of the country established in 1983 and was incorporated as a juristic person in 1997. The Banks Act has provided that it does not apply to the Development Bank, the Development Bank is therefore regulated by the Development Bank of Southern Africa Act. This is the type of bank that focuses largely on infrastructure projects in both the private and public sectors, with its main objective being to promote economic development and growth, the support of development projects in the region, and human resource development amongst others. We can basically conclude that this type of bank aims to improve the lives of the people in the country.

The second tier comprises of Mutual Banks, Co-operative Banks, and the Postbank of South Africa.

a) Mutual Banks

This is said to be a type of bank that caters for the lower-income segment of the market and is regulated by the Mutual Banks Act. The Banks Act does not apply to Mutual Banks. The clients/customers of this bank, by virtue of being customers, simultaneously become shareholders of such a bank and get to participate in the management of such bank’s affairs. This is how the bank attempts to involve the communities in banking because the Mutual Banks Act does make provision for what is called a local board for Mutual Bank branches. Such local branch however remains under the control and regulation of the directors of the mutual bank, who are also responsible for delegating rights and duties to the members of such local board. The Mutual Banks are required to have at least seven members who have subscribed their names to the proposal to governing of such mutual banks in which they are shareholders. This bank can grant loans and other credits on a national level as well as accept deposits

b) The Postbank of South Africa

The South African Postbank Limited Act, came into effect on 2011 July to regulate the Postbank as a savings financial institution that operates as part of or as a division of the Postbank, which is also incorporated as a legal entity and is a participant of the National Payment System. Section 2 of the Banks Act has provided that it does not apply to the Postbank. The Postbank encourages and attracts savings from people within the country and also performs services that are quite similar to those of commercial banks by taking deposits. Cash and other transactions such as withdrawals can be performed at the post office branch, or over the counter at any automatic teller machine.

c) Co-operative Banks

A cooperative bank is described as a bank in which its members have an underlying factor that in some way brings them together or classifies them to belong in the same group. This is, for example, a similar occupation or profession, people who have common membership in an association or reside within the same geographical area

The Co-operative Banks Act is one of the government’s attempts to promote access to financial services, particularly to those ‘low-income’ groups/communities who lack adequate access to banking and other financial services. From this it is quite clear that the Act aims to promote and advance the social and economic welfare of South Africans. Before this Act can apply to this type of bank it must first be ensured that the bank takes deposits, has more than 200 members and that it has deposits-holdings in excess of R1 million.

The third tier comprises of formal and informal financial institutions which provide services similar to those of the banks but with these institution, there aren’t strict requirements like those of the first and second-tier banks.

a) Village banks

A village bank is described as a form of an informal community bank organized and owned by its members, with an objective to provide financial services at a local village or community and to provide a link to a first-tier bank. The savings of such members are collected and deposited with an ordinary commercial bank. With this type of bank, a member will have access to credit services only when sufficient funds have been saved to be able to grant credit to such a member. Its members get rewarded in one or two ways; they either get the returns associated with their shares in the bank or they get the usual benefits derived from investing with an investment bank.

b) Dedicated banks

The regulatory bill on dedicated banks has not yet been passed into legislation. The bill has been drafted to improve access to essential banking services for low-income and traditionally disadvantaged people. Although this bank, as one of its purpose, is to lower the prudential requirements that are required for banks registered under the Banks Act or Mutual banks, it is also still expected as a bank to maintain a minimum capital such that the sum of its primary and secondary money, and its primary and secondary unimpaired reserve funds do not exceed an amount prescribed by regulation. Dedicated banks are also saving and loaning banks.

c) Stokvels

A stokvel is a credit and saving association which is in most cases used in local villages/disadvantaged communities. They provide services that are a bit similar to those of a bank in terms of savings and credit services. This is an informal organization and thus does not fall under the ambit of the Banks Act.

d) Mobile Banking Services

This is described as bank software developed by banks for their clients to use their cell phones as payment devices anywhere in world. These are referred to as mobile payments. There is currently no specific statute that specifically regulates mobile banking services, the legal regulatory framework for e-banking would be fitting to apply to mobile banking.

From this, it can be understood that banking law is an aspect of law that regulates the legal activities/relations of financial institutions. It comprises of private banking law, which regulates legal relationships banks have with individuals and public banking law, which regulates legal relationships banks have with organs of states having authority over banks e.g. The Registrar of Banks. Public international law can also be said to regulate the legal relationship between individuals, banks and the state because one of its purposes also includes ensuring that banking institutions are always in a position to honor their repayment obligations towards depositors and to provide and control effective payment methods in terms of foreign trades for instance. The sources of banking law include primary and secondary sources. The primary sources here include principles/ laws that are binding to courts as well as individuals who are bound by South African law. Unlike the primary sources, the secondary isn’t binding per se, however, the principles contained can be turned to by courts to help interpret or explain the primary sources where there is ambiguity.

Primary sources include Legislation, Judicial precedents and customs or trade usage to mention a few. In terms of Legislation, The Constitution of the Republic of South Africa, 1996 as the supreme law of the country regulates all other legislative provisions in the country. The Bill of Rights and fundamental rights contained in such constitution bind the legislative, executive, and all organs of state. This thus means that the bank as a juristic person is also subject to the provisions of the Bill of Rights. Matters relating to banks and their duty to abide by and conduct their businesses in a manner that is consistent with the Constitution can be found in the cases Chief Lesapo v North West Agricultural Bank and Bredenkamp v Standard Bank of South Africa Ltd to name a few. Judicial precedents may be described as decisions or judgments that have been made by judges before, which in most cases serve as an example that may be used or turned to, to solve a similar subsequent case before a court. Common law can also be used to regulate a legal relationship where certain legislation is absent. This is done by basically regulating the relationship by the terms contained in a contract of the parties involved in it and by the relevant provisions of contract law.

Secondary sources include International law, Customary International law, and Foreign municipal law. There are some provisions that are not contained in the Constitution of the country which are however binding on South Africa, others are just there assist in decision-making and guide us. The constitution does allow for the consideration of such international laws. The Constitution also provides that customary international laws have a force or can be effected in the country unless they are inconsistent with the Constitution or any other Act of parliament. In the Standard Bank Investment Corporation Ltd v Competition Commission, the judge had acknowledged that an Act in the matter that was before the court [section 1(3) of the Competition Act], had provided that foreign law could be considered in interpreting the act. This clearly shows that the application of foreign legal systems principles, can in allowing circumstances be acknowledged in solving an issue in South African law.

The statutory regulations of banks

1) The Banks Act

This Act is considered as one of the most important statutes that regulate in the South African banking sector. One of its main purposes is to protect the public from any losses that they might suffer due to negligence or a lack of solvency on the part of the bank and to also protect individuals from unfair competition between institutions that offer similar services. The Act provides/caters for public institutions/companies that take deposits from the public, however not The Reserve Bank, the Land Bank, the Development Bank of Southern Africa and the Mutual Bank amongst others. Apart from the above-mentioned duties, the Banks Act also deals with the appointment and powers of the registrar, the registration and cancellation of such banks, the functioning and controlling of banks etc. In terms of this Act, no one person can conduct the business of a bank unless such a person is registered as a bank and is a public company.

2) National Payment System

It has been said that one of the requirements for a stable and secure payment system, is that it should operate in a smooth, well-structured legal framework that clearly sets out the rights and obligations of parties without any ambiguity. This is done to safeguard against the risk of a loss that might occur because a contract could not be enforced or to guard against an application of a law that was unexpected. The National Payment System is supervised by the Reserve Bank Act.

3) The National Credit Act

In terms of the NCA in the banking sector, the Act requires that a person be recognized as a credit provider, and such registration is valid and enforceable throughout the whole country and also authorizes such person’s or company’s activities to be conducted anywhere within the republic. A certificate is issued upon registration and thus serves as prima facie proof of registration with the National Credit Act.

4) The Financial Advisory and Intermediary Services Act

The FAIS regulates certain financial advisory services and intermediary services that banks offer to their customers. This could be advice on a purchase the customer intends to make or an investment the client is set to make.

5) The South African Reserve Bank

The South African Reserve Bank was established by section 9 of the Currency and Banking Act and is also governed by the South African Reserve Bank Act. The Reserve Bank’s primary aim is to achieve and maintain a stable price of the country’s currency in the interests of the republic at large and its economic growth. The Act consolidates the laws relating to the South African Reserve Bank, and the country’s monetary system and also provides for matters connected thereto.

The changes therefore that the banking sector has undergone have made us see the banking sector as one of those sectors that will continue to grow and thus become a market that can be said not to have any boundaries. Digital solutions and low-cost operating models have made their way to the top of the business agenda, with non-traditional players pursuing these to also provide the best banking services/experience to their customers. Some examples of the trends that have developed in the banking sector that can be said to have a huge potential impact on the banking sector are the following: The emergence of digital solutions with lower-cost models launched by adjacent financial services players (e.g. Discovery), The emergence of the sector and industry-specific banks, closely integrated with broader supply chains, launched by non-financial services players (e.g. South African Post Office) and Ongoing transformation of the four universal banks to address changing customer, regulatory and technology needs. Another example is the African Bank which has been known for micro-lending. It is now on track to develop a fully digital transactional bank account, in a highly competitive market that is geared to give its customers a digitally-enabled bank account, which is also fairly priced and offers great products/services. These examples thus serve as indicators of a growing wave in the banking sector as players are realizing the advantage of integrating banking as part of their industry supply chain.

E-commerce has therefore become one of the biggest payment providers in the country and has provided hope for the local economy. All these years people’s focus had been on normal formal banking, preferring to physically go to the bank to process their transactions. A change has however been acknowledged since the hit of covid-19 and people had to adapt to the new normal. Almost everything is now done online. The pandemic has accelerated the adoption of e-commerce in a way that has never been seen before, and this also serves as an indicator that the digital world could take over at any given time if the circumstances allow it. This takes us back to the description the banking sector has been given- a market that knows no boundaries.

Beneficial State bank found in California is a community development bank. It was founded by Tom Steyer and Kat Taylor man and wife and the operation was started in the year 2007. The man aim of opening the bank was to providing entrance to financial services for all peoples, particularly the by tradition the underserved, as a considerable number of the population living around the area by then were living below poverty line.

For the last four years the bank it has enjoyed a normalized success in profit. Tom Steyer and Kat Taylor were the sole capital providers to the bank. 20% of the banks depended with the loan. Tom Steyer and Kat Taylor advocated for two views in order to change the banking methods. The views included depositors being viewed as citizens and not customers or beneficially. The second view was depositors be viewed as crowd funders due to their deposits. And indeed banking is the most potent known method of crowdfunding.

Organization structure in the bank

All the economic rights were deposited to the bank once the bank was fully registered and scrutinized to hold the voting stock and economic rights. The holding of the rights was done to ensure that the voting rights were based on profit maximization. The mindset of the pioneers Tom Steyer and Kat Taylor was to help and empower the underserved people in the community. Later the business will grow and will run on profit margins. Once the founders are not there the right to the economy will haunt this decision.

To mitigate such an issue, its profit margins will not be based using the other banks bottom-line. The rights in the foundation have to be distinguished from the economic rights of the bank. The bank is an individual business entity, and the foundation was mainly for charity programs. The foundation is prohibited by the law from operating on the interest framework. The bank is growing, and the people are growing their economic interest will grow therefore to some extent their will conflict with foundation.

Regulatory issue

The launch of the bank was done during the housing effervesce burst. And since the majority of the bankers were low-income earners could not be able to build a house from just the savings they had, they needed more support in terms of the loan. Majority of the capital that was running the bank was from credits, and the profit was directed to fund and sustain the foundation. This lead to a mortgage crisis.

The bank also believed in not being conservative about the regulators because the management believed in business values like access to the capital and fair lending. This was an accidental timing, and the bank had to make choices that will make them viable (Charbit, & Desmoulins, 2017). The bank was young and not much invested to be able to sustain such market waves. The regulation required merging or buying another community bank; this would lead to the death of one.

To resolve the issue the regulators could not allow community banks be imperiled by the uncertain business conducted by big banks forcing the small banks to collapse down at once. The idea of buying another bank was viable. Another solution was to make the foundation to operate on the independent ground. So that it could give the bank an opportunity to plough back the profit, the policy of community banking could be abolished to allow economic competitiveness between the Beneficial State Bank and other banks. A community-based bank is not entirely covered by state law. The conversion to a chartered bank increased its capacity to borrow as it was now aligned to the state laws.

The financial crisis

There was a financial crisis that ranged between 2007 and 2013. This was caused by the low capability of the Beneficial State Bank to borrow, and the depositors could not be able to raise enough money to sustain bank activities and still be able to lender loans to the community without failing to give out depositors their money (Ahmed, 2018). As a competitive advantage, Beneficial State Bank applied to get technical and financial assistance but to get this they needed chatter from the states.

In order to solve the crisis bank had to acquire the best person to help them run smoothly. The human resource must rhyme with the business vision and ideologies. The bank was forced to launch a summer internship program to enable them to run the institution with minimal wages and in return convert the wages to financial profit. The interns were guided by the experts.

The societal issue

The majority of the people in the society that the Beneficial State Bank operated were poor and were underserved when it came to matters of banking and access to finances. This is revealed by the fact that they were earning below the poverty line. The big aim of the bank was to make empower and serve them economically. The people were poor, and their needs superseded the bank and the foundation capacity. The author speaks about bringing interns into the field such that they could witness how community development banks are faced with challenges.

The bank by 2016 donated over $450 million and 87 percent of this money was used to mission-driven sectors. The missions were all aimed at making the lives of the people better. The money was rendered to community cooperates rather than individuals. The capacity of the people to repay loans is low. The people surrounding the bank are not able to build homes and rely on mortgage loans to do so. The depositors cannot sustain the bank, and the bank also has to rely on loans. The fact that the Taylors family remained the sole financier of the foundation and the bank reveals a poverty-stricken society.

The bank or the foundation alone can not solve the problem. There is a necessity for government intervention and other well-wishers. The government is responsible for job creation and support the ongoing project to reduce the poverty level. The society needs to be uplifted to standardize their lifestyles (Charbit, & Desmoulins, 2017). There is a need for the non-governmental organizations to support by funding community development banks like Beneficial State Bank. By helping them, they will be able to reach the majority. Groups and foundation should offer guarantor’s services to, though low, potential clients who want to better the life.

Growth capitalization issue.

Another issue that was experienced by Taylor was how to capitalize on growth. The bank required over $5 billion to meet the required regulatory needs. Considering the bank setting and non-interest capacity of the bank depositors such huge amount was not easy to raise. With the need to scale the bank mission they had to change the purpose of banking for good. The bank was small to have such capacity, and therefore there was a need for Taylor and the family to strategize for the better of the entire banking admin.

To mitigate the issue, Taylor implemented a resilient cost structure. That was able to meet the ongoing basis. They have also produced enough excitement and scale to appeal to talented and aligned human capital. They gathered sufficient attention to arousing the depositor base so that they maintain on a changed value proposition allied with the bank’s specified goals. In conclusion, entice equity capital. Another strategy adopted by Taylor was additional mergers and acquisition (M&A). Although the bank was able to grow organically, there was a need for supplement. This could only be achieved through M&A reinvestments.

The social impact of Beneficial banking

The Beneficial Banking model is explained below ( Figure 1) where the profits were distributed to the foundation and reinvested back to community for the sustainable environment

There was an issue on motivation factor. The morale of the depositors was low; this was not due to poor quality on banking services but was due to the quality of life the members were living. In order to make depositors constant clients there was a need to entice them. But the biggest challenge remained how to entice and motivate them. There is a need to enable capital creation in order to increase the bank’s profitable actions. Ever since the bank’s establishment in 2007, Taylor and Steyer had been the only investors in the bank and considering the matter they could not make it alone in the investment they required eternal investors.

To make this a reality they had to outline and define the ownership alignment. They looked for charitable vehicles from foundations and charitable organization and family offices. Taylor understood privatization by selling bank shares would ruin the brand. This was done with regulators requirement on the mind (Borovský et at., 2018). After consideration, Taylor settles on the following options that solved the issues on partnership and investors: perpetual non-cumulative non-voting convertible preferred stock, three-year put, capitalization, and voting, and buyback option.

Perpetual non-cumulative non-voting convertible preferred stock.

Any investor on this option was to operate on of Class C shares into a fixed number of them. He/she had no right to vote and was entitled to dividends after the five years on investment. This was a sure way of making sure that those who have invested are there to stay and were not motivated by self-interest or profit (Bundgaard et al., 2016). The duration of five years was enough period for the investment to be able to payback. Beneficial State Bank concluded that “This is a permanent returns instrument with an exchangeable feature that, while lower than the 5 percent characteristic non-profit disbursement verge, comprehensive downside safeguard with the put.

Three-Year Put

Three-year put entailed an investor receiving the right to a stated price in the incident that they wanted to terminate the contract after three years. As a result, the depositor would be sheltered against a deterioration on the worth of the investment at the termination of the put (usually five years). Expressing this new possibility increased supplementary governing deliberations from not just a bank perspective but a safekeeping perspective as well. All these options were made available to coerce and appeal investors to deposit with the bank with a mind of long-term investment. This resulted to essentially, the creation of own alternative by the couple, on the capital market. This was to enable submission to the “exceptionally inexorable short-term burden when they were right back into the activities that yield economic, short-term revenues at the cost of long-term values.

Capitalization and Voting

Under this option, the duo retained all the class A shares. Which permitted them to carry out effective voting regulation above the Bancorp. Beneficial State foundation had no rights to vote and held Class B shares. This structure was to allow Steyer and Taylor to maintain the prevailing ownership alignment, while also giving new-found venture capitalist the right to make decisions on matters of corporate policy

Buyback Option

The last option considered offering that would liquidity the requirement of investors wishing to exchange a percentage of their asset to money. As a portion of its capital strategy, the bank would deliberate a bonus guiding principle for common investors with economic rights. The members would also deliberate on the addition of a buyback package to offer liquidity for investors and to entice extra mission-aligned depositors.

Conclusion

Steyer and Taylor recognized the regulatory abstruseness and the uncertainty of it is yet to come with venerable passion. The prospect of raising outside capital would be the biggest challenge considering that they were running another charitable foundation and the bank was a community development based organization. Several issues affected the well-being if the bank. The major one being the low societal lives and high levels of poverty. The bank gave an opportunity to the unserved to experience banking services.

The following were the outstanding issues that affected the beneficial state bank. Organization structure in the bank as per regulatory requirements, a regulatory issue on minimum capital and infrastructure. The financial crisis due to non-interest running of the bank and the organization. The societal problem concerning the high rate of poverty. Growth capitalization issue as the mission was not to privatize the bank.

Several possible mitigations were put into place. They included the implementation of resilient cost structure, appealing to talented and aligned human capital mergers and acquisition (M&A) to raise the capital needed. The bank defined the ownership alignment to make it clear for the interested parties. Government appeal and also other foundations foundation. They looked for charitable vehicles from foundations and charitable organization and family office. To avoid selling banks shares.

References

1. Ahmed, M. B. (2018). KASB Bank Limited: Capital Shortage. Asian Journal of Management Cases, 15(1), 1-22.
2. Borovský, T., Doktorová, J., Gruber, E., Hrdlička, J., Jakubec, O., Míchalová, Z., … & Szende, K. (2018). Faces of Community in Central European Towns: Images, Symbols, and Performances, 1400–1700. Rowman & Littlefield.
3. Bundgaard, J., Tell, M., Jensen, S. B., Weber, K. D., Bjerksund, P., Stensland, G., … & Vilhelmsson, A. (2016). Trends in Financial Market Innovations: The Role of Taxes.
4. Charbit, C., & Desmoulins, G. (2017). Civic Crowdfunding.
5. Charbit, C., & Desmoulins, G. (2017). Civic Crowdfunding: A collective option for local public goods?. OECD Regional Development Working Papers, 2017(2), 1.
6. Figure 1. The social impact of Beneficial State Bank. Adapted from the Keeley, M., & Dunbar, M. F. (2016, July 05). Meet The Woman Beating the Big Banks At Their Own Game. Retrieved March 30, 2019, from https://consciouscompanymedia.com/sustainable-business/meet-the-woman-beating-the-big-banks-at-their-own-game. Reprinted with permission.
7. Keeley, M., & Dunbar, M. F. (2016, July 05). Meet The Woman Beating the Big Banks At Their Own Game. Retrieved March 30, 2019, from https://consciouscompanymedia.com/sustainable-business/meet-the-woman-beating-the-big-banks-at-their-own-game

Chapter one. Introduction

1.1 Background of the Study

Competitive advantage ensures that the firm survives and is placed in a prominent position in the market (Allan 2019). Thus, it is important for firms in an industry to develop competitive advantage over its competitors. According to De wit and Meyer (2010), a firm has a competitive advantage when it has the means to edge out and outsmart rivals when contesting for the favour and following of customers. Schermerhorn et al. (2014) says a competitive advantage comes from operating in successful ways that are difficult to imitate. Competitive advantage in banking sector as a broad concept deals with business re-engineering process (BRP) that will put the banks in a lead among other competitors within their sector (Agha, Alrubaiee & Jamhour, 2016). It specifically addresses what the banks have in stock that will achieve an advantage in the competitive market. In these stances, constructs like strategic planning, competitive intelligence, corporate social responsibility, innovation and creativity are used as synonyms to competitive advantage (Diab, 2014). On another hand, competitive advantage is seen as a performance construct that shows a phenomenon of organizational progress. In such cases, constructs like organizational performance, operational efficiency, financial performance, financial sustainability, organization creativity, and innovation (Perren, 2013) have also been used in describing competitive advantage (Prescott, 2014).

A competitive advantage can only be achieved and sustained after careful examination of strategy and the strategic management process. A strategy is the direction and scope of an organization over the long term, which achieves an advantage in a changing environment through its configuration of resources and competencies with the aim of fulfilling stakeholders” expectations (Johnson, Scholes, &Whittington, 2018). By strategy, managers mean their large-scale, future-oriented plans for interacting with the competitive environment to achieve company objectives.

The ability to outperform competitors and produce above-average profits lies in the pursuit and execution of an appropriate business strategy (Yoo, Lemak& Choi, 2016). The growth and diversity in the international business has brought about new challenges and heightened the competitiveness of firms across the globe and to remain relevant, firms have been forced to re-examine themselves internally in order to improve their performance. This has resulted in greater attention to analyzing competitive strategies under different environmental conditions. According to the resource-based view theory, the firm is regarded as a unit of resources and capabilities. The acceptance of this concept has prompted interest in identifying the nature of these various resources and in evaluating their potential to generate a competitive advantage (Lopez, 2015). Indeed according to Day and Lichtenstein (2016), many firms have spent vast amount of resources in order to improve their competitiveness and sustainability by looking at their internal processes.

A firm’s ability to seek and maintain a competitive advantage rests on its ability to acquire and deploy resources that are coherent with the organization’s competitive needs and as such, alignment requires a shared understanding of organizational goals and objectives by managers at various levels and within various units of the organizational hierarchy. However, most recent research suggests that firms may improve the value of their established competitive advantage through their strategic orientation, business structure and information technology (Stewart, 2017).

The concept of strategic fit began with the research of Skinner (1969). He suggested that companies should tailor their production systems to perform the tasks that were vital to corporate success and consistent with the corporate strategy (Wang and Shyu, 2008). Strategic fit, also referred as strategic alignment, has received significant attention in literature. Strategic fit has been conceptualized in various ways. This conceptualization implies that high level of strategic fit is advantageous; therefore, an organization’s fit should be maximized. The search for strategic fit has been a core concept in normative models of strategy formulation (Zajac et al., 2000). Strategic fit expresses the degree to which an organization is matching its resources and capabilities with the opportunities in the external environment. The matching takes place through strategy and it is therefore vital that the company have the actual resources and capabilities to execute and support the strategy. Dess and Lumpkin (2003) assert that the strategic fit process involves management of all other internal elements within an organization to ensure that the implementation process is successful. Miles and Snow’s classification of the strategic fit is as the following: Defenders: aiming at stability and defending a narrow range of products within a narrow market segment; Prospectors: searching for new product and market opportunities; Analyzers: seeking to minimize risk while seizing opportunities, a balanced approach and Reactors: inconsistent and unstable, simply reacting to the environment (Sadler, 2013).

Scholars of contingency theory argue that firms must have an alignment of internal-external resources, strategies and typical patterns in order to achieve successful results. For example, Powell (1992) emphasizes that successful results are achieved through fit between endogenous design variables such as organization structure and exogenous context variables such as environmental uncertainty and organization size routine. The importance of strategic fit is also underscored in resource-based view (RBV) study. According to the RBV viewpoint, firms generate profits to the extent that they accumulate rent-producing resources that, in addition to providing economic value, meet the tests of scarcity, imperfect imitability, and imperfect trade ability in factor markets (Barney, 1986a, b; Dierickx& Cool, 1989; Peteraf, 1990). The ability to align corporate resources to fit becomes important in order to meet these tests. Thus, the need to analyze effect of strategic fit on competitive advantage of commercial banks.

In addition, some scholars have been theorizing on the cognitive capabilities that can build a competitive advantage, whereas others have been calling for more empirical evidence for the role of individuals and their patterns of interaction (Coff&Kryscynski, 2014; Foss, 2014; Gavetti, 2015; Winter, 2013). In strategic management, the term ‘capability’ refers to the capacity to perform a function or activity in a generally reliable manner when called upon to do so (Helfat and Winter, 2014). The capacity to reliably perform an activity of some type implies only that a capability meets a minimum standard of acceptable functionality (Helfat et al., 2017). As Winter (2013) notes, how well a capability performs its intended function is a matter of degree. Capabilities develop in part through practice. As an individual or an organization gains experience performing an activity, the capacity to perform this activity again in the future tends to improve, particularly early in the development of a capability (ZolloandWinter, 2012)

Research in strategic management has most commonly analyzed cognition, including heterogeneity of cognition among managers, in terms of information structures and mental maps (Gary and Wood, 2014). Adner and Helfat (2013) recognized early on that some managers may have ‘dynamic managerial capabilities’ with which to build, integrate, reconfigure, and competitively reposition organizational resources and capabilities. Adner and Helfat (2013) also observed that manager cognitive capabilities depend in part on managerial cognition. To date, the cognitive underpinnings of dynamic managerial capabilities remain largely unexplored (Eggers and Kaplan, 2013). This study will focus on how cognition may help to explain why some top managers have more effective capabilities than others for choosing a strategy that fit in responding to the demands of an evolving environment

1.1.1 Global Perspective on Strategic Fit /Choice, Cognitive Capabilities, and Competitive Advantage

In Korea, Yin and Zajac (2004) in their study of fit between strategy and governance systems, posited that fit brings about superior performance and that it is significant. Loius and Francois (2007) from a contingency perspective, did a survey of 107 canadian manufacturers, analyzed data through correlation analysis and results indicated strategic fit has positive performance outcomes for manufacturing SMEs in terms of growth, productivity and financial performance, however the study considered only profile deviation perspective of fit.

In China, ShichunXu et al., (2006) did a study on multiple perspectives of strategic fit (moderation, mediation, profile deviation, and covariation) explored their effects on firm performance. Empirical results based on 206 MNCs supported the mediation, profile deviation, and covariation perspectives, but they failed to confirm the moderation perspective. in France, Amadi (2004) highlighted that in the manufacturing industry, the importance of strategic alignment is no longer an issue for debate, but rather a foregone conclusion. Unlike manufacturing strategy very few authors have contributed to strategic fit (or alignment) in domain of competitive advantage.

Narasimhan et al. (2010) investigated fit between strategic integration and manufacturing capabilities. Chi et al. (2009) studied the alignment between business environment characteristics, competitive priorities, supply chain structures, and firm in US textile industry. In Germany, Calantone et al. (2012) conclude that the strategic fit of marketing and operations opens up important two-way communications: marketing will know more about operations, and can also communicate credibly with operations about its needs (such as new product development and range of product offering). In Thailand, strategic fits reflects an outward-looking view of the fit between strategic choices and environment and strategic orientation as a strategic choice should lead the way firms get, allocate, and deploy resources to generate dynamic capabilities (Zhou and Li, 2017).

Bank in Italy, see strategic fit as values that direct and influence the activities of an organization and generate the behaviors intended to ensure its viability and performance (Hakala, 2011). In Thailand, Theodosiou, Kehagias and Katsikea (2012) indicated that the organization is maximizing its performance by implementing strategic fit with other orientations that are appropriate for its environmental conditions and organizational characteristics. Some scholars relate that with activities, such as describing strategic fit as principles that guide and impact the activities of an organization to renew an excellent behavior for preserving the organization and improving performance (Deutscher et al., 2016; Ho, Plewa& Lu, 2016)

Empirical evidence has documented the effects of managerial cognition on efforts directed toward strategic change. In his study of NCR, Rosenbloom (2010) demonstrated that managerial cognition, specifically the ways in which top management conceived of NCR’s business, had a critical impact on both NCR’s difficulty in transitioning to mainframe computers and its eventual success in doing so. Taylor and Helfat (2013) also found that the cognition of top management helped IBM in its successful transition to mainframe computing. In contrast, Tripsas and Gavetti (2010) documented that top management cognition, in terms of how executives conceived of their business, prevented Polaroid from successfully adapting as the camera industry shifted to digital imaging technology. Similarly, Helfat et al. (2017) documented the way in which the mindset of Rubbermaid’s CEO contributed to the company’s difficulty in adjusting to a changing marketplace. Additionally, in a study of the typewriter company Smith-Corona, Danneels (2014) showed that top management’s misunderstanding of which company resources had value, and of the potential application of company resources to new markets, contributed to the company’s demise

Based on the above past studies on Strategic Fit have been done in the developed world’ specifically focusing on firm performance (Loius and Francois, 2017; Yan and Zajac, 2014). Other studies have also focused on sectoral-level constraints, attributing the poor performance to reduced funding (Wangenge-ouma, 2018) and in-effective governance (Mwiria et al., 2016).

1.1.2 Local Perspective on Strategic Fit /Choice, Cognitive Capabilities, and Competitive Advantage

In Nigeria, Olufemi and Olayinka (2013) examines the impact of strategic fit on organizational performance in the African textile industry in Nigeria. However, there are cautions that being too customer-focused can lead to lack of focus and anecdotal evidence suggests that it may be better to ‘ignore your customer’ when developing new products. Building on the market orientation research stream, the authors examine the impact of three alternative strategic orientations—customer orientation, competitor orientation, and product orientation—on a variety of subjective and objective measures of performance in an organization, which is marked by high rates of innovation and largely unpredictable customer preferences. The results indicate that the association between strategic fit and performance varies depending on the type of performance measure used. However, the most unambiguous result is that a customer orientation exhibits a negative association with sale.

In Malaysia, Nasir and Mohd (2013) highlighted the importance of the concept of strategic fit or ‘strategic directions implemented by a firm to create proper behaviors for the continuous superior performance of a business. Similarly, in Ghana, Nasution et al, (2014) Strategic fit is related to the decisions that businesses make to achieve superior performance. Strategic orientation is an organization’s direction for reaching a suitable behavior in order to attain superior performance. Competitor and customer orientations are the most important for organizations to achieve long term success.

Locally there are related studies on Competitive Advantage and strategy alignment for example Asava (2009) study on Knowledge management for Competitive Advantage of Commercial Banks in Kenya, Kitua( 2009) studied The internet as a source of competitive advantage for Insurance Finns in Kenya, Muketi (2009) studied Technological Resources for Sustainable Competitive Advantage in manufacturing, Njeri (2009) researched on Direct sales strategy and Competitive advantage of Commercial Banks in Kenya, Nyatichi (2009) studied Competitive Strategies adopted by Multinational banks in Kenya, Kimari (2010) wrote about Sustainable competitive advantage in the mobile telephony sector in Kenya. Oori (2010) studied Strategies employed by Commercial Banks in Kenya to build Competitive advantage and Mbewa (2010) studied Factors employed by Barclays Bank of Kenya to achieve competitive advantage. ‘ From the studies on Competitive Advantage of Commercial Banks, it is found that Competitive advantage is important for survival of Commercial Banks. The studies also indicate that different strategies may be used by different commercial banks depending on their size, presence and market share. However no study has been carried out on effect of strategic fit on Competitive Advantage of Commercial Banks in developing countries.

1.1.2 Commercial bank of Kenya

As at 31st December 2012, the banking sector consisted of the Central Bank of Kenya as the regulatory authority, 43 commercial banks and 1 mortgage finance company, 5 representative offices of foreign banks, 8 Deposit-Taking Microfinance Institutions (DTMs), 2 Credit Reference Bureaus (CRBs) and 112 Forex Bureaus. Out of the 44 banking institutions, 31 locally owned banks comprise 3 with public shareholding and 28 privately owned, while 13 are foreign owned. During the year 2012, banks increased their branch network by 111, which translated to a total of 1,272 branches. The increase is an indication of increased provision of banking services. The banking sector registered an increase in staff levels by 1580 from 30,056 in 2011 to 31,636, representing an increase 15 of 5.3 percent. All the cadres of staff increased with the exception of supervisory level which reduced by 84. The banking sector was sound and stable and recorded improved performance in 2012 as indicated by total net assets which increased by 15.3 percent from Ksh 2.02 trillion in December 2011 to Ksh 2.33 trillion in December 2012, with the growth being supported by the increase in loans and advances. Customer deposits grew by 14.8 percent from Ksh 1.49 trillion in December 2011 to Ksh 1.71 trillion in December 2012. Pre-tax profit increased by 20.6 percent from Ksh 89.5 billion in December 2011 to Ksh 107.9 billion in December 2012. The growth was largely attributed to income generated by increased loans and advances coupled with regional expansion initiatives. However, the ratio of non-performing loans to gross loans increased from 4.4 percent in December 2011 to 4.7 percent in December 2012 (Central Bank of Kenya Bank Supervision Annual Report, 2012).

There are 43 commercial banks in Kenya. These banks have realized that increased competition in this industry dictates the development of strategies to compete so as to enhance performance. The strategies developed will also lead to the bank survivals. Banks without clear strategies will find it hard to survive in this market. The banking environment in Kenya has drastically changed due to government regulations and stiff competition. According to Dulo (2006), each bank should know how to venture into the market and thereafter form, guard and uphold its competitiveness.

1.2 Statement of the Problem

Competitive advantage comes from an ability to meet customer needs more effectively, with products or services that customers value more highly or more efficiently at lower costs. Meeting customer needs more effectively can translate into the ability to command a higher price, which can improve profits by boosting revenues. Meeting customer needs more cost effectively can translate into being able to charge lower prices and achieve higher sales volumes, thereby improving profits on the revenue side as well as the cost side. Furthermore if a company’s competitive edge holds promise for being sustainable (as opposed to just temporary), then so much the better for both the strategy and the company’s future profitability. What makes a competitive advantage sustainable, as opposed to temporary, are elements of the strategy that give buyers lasting reasons to prefer a company’s products or services over those of competitors – reasons that competitors are to nullify or overcome despite their best efforts(Thompson, Petraf, Gamble & Strickland, 2014).

The products offered by Commercial Banks are generic hence making the competition very stiff. In order for the firms to survive they need to employ a unique strategy which is difficult to imitate and is sustainable. In order to remain competitive Commercial Banks in Kenya over the years have structured their products to suite the market needs. We have also seen acquisitions like Commercial Bank of Africa acquiring ABN Amro Bank. Equatorial Commercial Bank acquiring Southern Credit Bank. Cfc Bank merged with Stanbic Bank to form CfCStanbic Bank all in a bid to strengthen their competitiveness. Commercial Banks have gone through phases as they try to ensure their survival: Barclays Bank closed several Branches upcountry only to try and tap into that market again. Building Societies like East African Building Society have evolved to a Commercial Bank. We have also had several Banks exit the market examples include Delphis Bank, chase bank, imperial bank, Dubai bank, Euro Bank. Kenya Post office savings bank, all which collapsed with Depositors funds. For Commercial Banks to survive, they need to ensure that they have identified a strategy which is right products and fit for the market and created a sustainable structure to support their competitive advantage.

Thus, the strategic fit could be relevant competitive advantage of banks in Kenya, however, Information on strategic fit and competitive advantage of banks is not known. In addition, studies document that top management cognitive capabilities are associated with heterogeneity of strategic fit efforts and outcomes. However, relatively little of this research has focused for indirect on direct of cognitive capabilities on competitive advantage ( Eggers and Kaplan, 2009 and Gavetti, 2012.). Thus this study focuses on moderating effect of cognitive capabilities that enable mental activities, elaborate on the heterogeneity of these capabilities, explain how they underpin dynamic managerial capabilities and assess their potential impact on competitive advantage of banks.

1.3 Research Objectives

1.3.1 General Objective of the Study

The general objective of the study will be to determine effect of cognitive capabilities on the relationship between strategic fit /choice and competitive advantage in Commercial Bank in Kenya

1.3.2 The Specific Objectives the Study

This research endeavored to achieve the following specific objectives:

1. To determine the effect of defender strategy on competitive advantage in Commercial Bank in Kenya
2. To determine the effect of prospector strategy on competitive advantage in commercial bank in Kenya
3. To determine the effect of analyzer strategy on competitive advantage in commercial bank in Kenya
4. To determine the effect of reactor strategy on competitive advantage in commercial bank in Kenya
5. To determine the moderating effect of effect of cognitive capabilities on the relationship between strategic fit (defender strategy, prospector strategy, analyzer strategy, and reactor strategy ) and competitive advantage in Commercial Bank in Kenya

1.4 Research Hypotheses

Based on the stated specific objectives, the following null hypotheses will be derived and tested.

1. Ho1 There is no significant effect of defender strategy on competitive advantage in Commercial Bank in Kenya
2. Ho2 There is no significant effect of prospector strategy on competitive advantage in commercial bank in Kenya
3. Ho3 There is no significant effect of analyzer strategy on competitive advantage in commercial bank in Kenya
4. Ho4 There is no significant effect of reactor strategy on competitive advantage in commercial bank in Kenya
5. Ho5a Cognitive capabilities does not significantly moderate the relationship between defender strategy and competitive advantage in Commercial Bank in Kenya
6. Ho5b Cognitive capabilities does not significantly moderate the relationship between prospector strategy and competitive advantage in commercial bank in Kenya
7. Ho5c Cognitive capabilities does not significantly moderate the relationship between analyzer strategy on competitive advantage in commercial bank in Kenya
8. Ho5d Cognitive capabilities do not significantly moderate the relationship between reactor strategy on competitive advantage in commercial bank in Kenya

1.5 Justification of the Study

This study seeks to establish the contributions and importance of its outcomes to a number of players in the banking industry.This research is significant in several ways and it contributes to the literature both in terms of theory and practice. By empirically investigating the effects of cognitive capabilities on the relationship between strategic fit and competitive advantage in Commercial Bank in Kenya, this thesis proposal anticipates: – that the following individuals, groups and institutions will benefit from the study findings

1.5.1 To Commercial Banks

Commercial Banks can be able to find out whether they have adopted the best strategy compared to theirpeer. They shall be able to find out what they are doing right and continue doing it or what they are doing wrong and what they need to do so as to give them an edge. Once the Commercial Banks identify the types of strategy fit and how they affect competitive advantage they shall be able to position themselves well within their environment

1.5.2 To the Investors

They will benefit directly because the study will enable investors devise strategies that will ensure the competitive advantage is sustained. This will translate to a high return on investment for the investors.

1.5.3 To the Government and policy makes

The government through its agencies like the central Bank of Kenya will also benefit because the findings of this study will help them in the formulation of policies to regulate the conduct of players in the banking industry in Kenya.

1.5.4 Competitors

They also stand to benefit from this study because it will reveal to them some of the determinants that have made some banks have a continued sustained advantage. They can learn from this and try to get hold to some of those sources and apply some of the strategies used by superiors banks so as to better compete in the banking industry in Kenya.

1.5.5 To theory, scholars, and academicians

This study will add to existing knowledge on types of competitive advantage enjoyed by Commercial Banks in a developing country like Kenya and how strategic fit affect competitive advantages. Scholar’s academicians and researchers can use the study as a reference point in evaluating moderating effect of cognitive capabilities on relationship between strategic fit and competitive advantage of Commercial Banks in Kenya. In general This study seeks to contribute further to this wealth of knowledge and find out other strategic fit that can be adopted to gain competitive advantage. Commercial banks and other organizations shall be able to borrow from these other factors while formulating their strategies.

1.6 Scope of the Study

The current study will only focus on effects of cognitive capabilities on the relationship between strategic fit and competitive advantage in Commercial Bank in Kenya. The study will target top management employees from the 47 commercial banks registered under Central Bank of Kenya. The study will choose four strategic fit dimensions based on Snow and Mill Model which includes analyzer strategy, prospector strategy, defender strategy and reactor strategy. The study will be conducted for a period of four months based on university postgraduate calendar.

Conceptual Framework

(Independent variables ence) (Dependent variable) (Moderating variable)(Cognitive capabilities) (H5aa) (H2) (H01) (Reactor strategy) (Competitive advantage) (Prospector strategy) (Defender strategy) (Analyzer strategy) (Figure 1: Conceptual Framework)(H5ca) (H5ba)(H05d)(H3)(H4)